THEFREEMAN IDEAS ON LIBERTY

FEATURES

652 The Central Economic Fallacy of the Century by Steven Yates The futility-and danger-ofgovernment planning. 654 Aid to Owners of Dependent Enterprises by Charles W Baird Ending corporate welfare as we know it. 656 The Socialist Dream Lives by K. 1. Billingsley The U.N. refuses to face reality. 660 Global Interventionism and the Erosion of Domestic Liberty by Ted Galen Carpenter How U.S. f9reign policy has harmed the nation economically, socially, and politically. 666 The Seven~eadly Sins ofHigh Taxes by Christopher Lee Confiscatory levies work much mischief. 671 TV Taxes by Raymond J. Keating Stay tuned as Big Brother continues to meddle. 673 How Fair Is "Fair Housing"? by George C. Leef There's nothing fair about coercing property owners. 676 Technology and the Work Force: Work Will Not End by Donald K. Jonas Probing the hype and reality ofthe social pessimists. 679 Business and Morality in a Free Society by Edward W Younkins Capitalism creates an environment in which virtue can flourish. 681 The Minimum Wage by Kevin Sohr and Walter Block Rising rates hurt poor, young, and unskilled workers. 683 Loved to Death: America's Unresolved Health-Care Crisis by Michael J. Hurd Why "compassionate" government can't meet all our health-related demands. 686 Electrical Utilities: The Final Deregulatory Frontier by Doug Bandow How competition could transform an industry. 693 Edward Coke-Common Law Protection for Liberty by Jim Powell The legacy ofa great English jurist.

COLUMNS

Center NOTES from FEE-Juvenile Delinquency by Donald J. Boudreaux 658 IDEAS and CONSEQUENCES-Educating the Difficult by Lawrence W Reed 669 POTOMAC PRINCIPLES-elosing Special Interest Government by Doug Bandow 705 ECONOMICS on TRIAL-Great Turnabouts in Economics by Mark Skousen

DEPARTMENTS

650 Perspective-Dennis L. Peterson; V. Orval Watts; Leonard E. Read 707 Book Reviews -Everybody Wins! A Life in Free Enterprise by Gordon Cain, reviewed by Robert L. Bradley, Jr.; Dynamics of the Mixed Economy: Toward a Theory of Interventionism by Sanford Ikeda, reviewed by E. C. Pasour, Jr.; Everything for Sale: The Virtues and Limits of Markets by Robert Kuttner, reviewed by Raymond 1. Keating; A Sacred Union of Citizens-George Washington's Farewell Address and the American Character by Matthew Spalding and Patrick Garrity, reviewed by George C. Leef. THEFREEMAN IDEAS ON LIBERTY PERSPECTIVE Published by Public School Failures, The Foundation for Economic Education Irvington-on-Hudson, NY 10533 Homeschool Successes Phone (914) 591-7230 FAX (914) 591-8910 E-mail: [email protected] Once almost unheard-of and usually rele­ FEE Home Page: http://www.fee.org gated to the province ofeducational quackery President: Donald J. Boudreaux and political or religious radicalism, the Managing Editor: Beth A. Hoffman Guest Editor: Doug Bandow homeschooling movement has in the last few Editor Emeritus years blossomed into a serious educational Paul L. Poirot Lewisburg, Pennsylvania option. A recent study by the National Home Book Review Editor Education Research Institute and the Home­ George C. Leef Adjunct Professor of Law and Economics, school Legal Defense Association demon­ Northwood University Editorial Assistant strates just how serious an alternative it has Mary Ann Murphy become. Conducted by researcher Dr. Brian Columnists Doug Bandow D. Ray, the report made a number ofstartling Cato Institute, Washington, D. C. finds: Lawrence W. Reed Mackinac Center for Public Policy Midland, Michigan • The number of students being home­ Mark Skousen schooled across the nation is between Rollins College, Winter Park, Florida Contributing Editors 1,103,000 and 1,348,000. Charles W. Baird California State University, Hayward • The total number of homeschoolers Peter J. Boettke Manhattan College equals the public school enrollments of the Clarence B. Carson states ofAlaska, Delaware, Hawaii, Montana, American Textbook Committee Wadley, Alabama North Dakota, Rhode Island, South Dakota, Thomas J. DiLorenzo Loyola College, Baltimore, Maryland Vermont, and Wyoming combined. Joseph S. Fulda New York, New York • Homeschoolers outperform public Bettina Bien Greaves school students by 30 to 37 percentile points Resident Scholar, FEE John Hospers on all subjects on standardized achievement University of Southern California tests. Tibor R. Machan Auburn University Ronald Nash • Whether the parents ever held a teaching Reformed Theological Seminary certificate had virtually no impact on student Edmund A. Opitz Chatham, Massachusetts scores. Even homeschooled students whose James L. Payne mothers never finished high school scored 55 Sandpoint, Idaho Jim Powell percentile points higher than public school Westport, Connecticut William H. Peterson students in similar circumstances. Adjunct Scholar, Heritage Foundation, Washington, D. C. • Homeschoolers scored between the 82nd Sheldon Richman and 92nd percentiles regardless of their fam­ The Future ofFreedom Foundation Jane S. Shaw ilies' incomes. PERC, Bozeman, Montana Richard H. Timberlake • Students scored at the 86th percentile University of Georgia whether states imposed strict or minimal The Freeman is the monthly publication of The Foundation for Economic Education, Inc., Irvington-an-Hudson, NY 10533. FEE, regulations. established in 1946 by Leonard E. Read, is a non-political, educational champion ofprivate property, the free market, and limited government. FEE is classified as a 26 USC 501(c)(3) tax-exempt organization. • Homeschooling parents pay an average Copyright © 1997 by The Foundation for Economic Education. of $546 per year, whereas the average per­ Permission is granted to reprint any article in this issue, except "Edward Coke," provided credit is given and two copies ofthe reprinted material pupil expenditure by public schools is $5,325, are sent to FEE. The costs of Foundation projects and services are met through dona­ excluding all capital costs. tions, which are invited in any amount. Donors of $30.00 or more receive a subscription to The Freeman. Student subscriptions are $10.00 for the nine-month academic year; $5.00 per semester. Additional copies of this • Homeschoolers' test scores tend to in­ issue of The Freeman are $3.00 each. For foreign delivery, a donation of crease the longer they are homeschooled, $45.00 a year is suggested to cover mailing costs. Bound volumes of The Freeman are available from The Foundation for going from the 59th percentile for those who calendar years 1972 to date. The Freeman is available in microform from University Microfilms, 300 N. Zeeb Rd., Ann Arbor, MI 48106. have been homeschooled for one year to the 650 PERSPECTIVE

92nd percentile for those who have been intend to continue doing so through grade 6 homeschooled for seven years. or less; 89 percent plan to homeschool • More than half (53 percent) of all home­ through grade 12. schoolers visit a library at least once or twice Inshort, homeschooling not onlyworks, but a month; 38 percent of them make three to is helping to erode the public school monop­ five visits a month. oly. The more this message gets out, the more • The average homeschooled child is in­ serious will become the homeschooling op­ volved in 5.2 community activities, such as tion. volunteer work, classes outside the home, -DENNIS L. PETERSON group sports, and church. An astounding 98 percent are involved in two or more activities. • Only six percent of homeschoolers, in Mr. Peterson is a homeschooling parent and a contrast to 62 percent of public school stu­ frequent contributor to The Freeman, Teach­ dents, watch three hours or more oftelevision ing Home, and other periodicals. each day. A copy of the complete study, Strengths of Their Own-Home Schoolers Across Amer­ • About 61 percent of homeschoolers are ica: Academic Achievement, Family Charac­ in grades K-6, more than 18 percent are in teristics, and Longitudinal Traits, may be grades 7-8, and almost 20 percent are in obtained from the National Home Education grades 9-12. Research Institute, P. O. Box 13939, Salem, • Three percent of homeschooling parents Oregon 97309, (503) 364-1490.

Forty Years Ago in The Freeman . ..

Leonard E. Read: "Change is a law of allliv­ Millions of us would forsake society's most ing things. That which is not growing is corrosive pastime-meddling in the affairs of atrophying; that which is not progressing others-meddling not only through the polit­ is retrogressing; that which is not emerging ical apparatus, but personally. Millions of us is regressing. The authoritarian act, or even could then concentrate on the wholly reward­ thought, is time off from growth, progress, ing venture offreeing ourselves from our own emergence. One cannot be attentive to the fears, our own superstitions, our own imper­ inner self while exerting coercion on others. fections, our own ignorance. The individual The person who has me on my back holding human spirit, neglected while we play the me down is as permanently fastened on top of futile and authoritarian game ofimposing our me as I am under him. To me, at least, this wills on others, cries out for its freedom." explains why Lord Acton was right when he said, 'Power tends to corrupt and absolute JI: Orval Watts: "Every human being's progress power corrupts absolutely.' depends on the amount of effort that he "For any person to become aware of how himself exerts in pursuit of good purposes. little he knows-not a very difficult attain­ "Among the essential conditions for this ment-is a sure way to reduce the number effort are the opportunities, the risks, and of authoritarians by one. Who knows? The even the obstacles, of freedom." awareness might even catch on. And, if it did? -NOVEMBER 1957

651 THEFREEMAN IDEAS ON LIBERTY

The Central Economic Fallacy of the Century by Steven Yates

he late Murray N. Rothbard once pub­ The logical end result, as Ludwig von Mises T lished a major article titled "Ten Great has shown in great detail, is socialism. Economic Myths." Included on Rothbard's Economic micromanagement has been de­ hit list were the notions that deficits are the veloping at a steadily increasing pace since the cause of inflation and that economists can Progressive Era, which initiated the social­ accurately forecast the future. One myth that activist view of government-that only gov­ he didn't cite dominates Washington today: ernment can effectively address social prob­ that the economy can be successfully "man­ lems like poverty. Progressivism began a new aged" from some central point. This idea round of interventions in an economy in underlies, directly or indirectly, all of the which major industries were already well others Rothbard mentions. subsidized. Federal Reserve manipulation of Unfortunately, society's intellectual, polit­ the currency-namely massive credit expan­ ical, and economic "mainstream" still accepts sion followed by deflation-caused the stock what should be called the Central Economic market crash of 1929 and the Great Depres­ Fallacy ofthe Twentieth Century. The "main­ sion. Then Franklin Delano Roosevelt's in­ stream" just doesn't get it. Thus, we continue terventionist policies deepened rather than to see a basic progression. First, government relieved the economic crisis. (See, for in­ subsidizes x or regulates y to correct for some stance, Rothbard's America's Great Depres­ government-diagnosed problem z. Unwanted sion.) side effects result, and z, assuming it exists, World War II gave an entire generation of often grows worse. Government intervenes young men and women something to do when again to fix the side effects and redouble its there were few jobs at home. But what would efforts to battle z. More undesirable side veterans do when they returned home? The effects result. And the process continues, with federal government quick-fixed the problem government growing inexorably as interven­ with the G.1. Bill, creating a new national tions accumulate. More and more of the myth: everyone should go to college. Colleges, economy is micromanaged through increas­ rearmed with massive quantities of federal ing webs of subsidy, regulation, and quick fix. and state dollars, became universities and opened their doors to more and more people. The supply of college graduates in the labor Dr. Yates is adjunct research fellow with the Acton market soared. Soon advanced degrees began Institute for the Study ofReligion and Liberty and the author of Civil Wrongs: What Went Wrong with to decline in value. Affirmative Action (San Francisco: ICS Press, Here we see perhaps the worst feature of 1994). the Central Economic Fallacy: massive over- 652 653 production in certain areas and equally sig­ far, these efforts do not question the Central nificant shortages in others. (The Soviet econ­ Economic Fallacy. For government needs to omy was only the extreme case of this end, not reorganize welfare, and at the same phenomenon.) In the United States, the time dismantle the subsidies and regulations growth of university graduate programs has making jobs so hard to come by. led to a glut of Ph.D's, many of whom are The Central Economic Fallacy has given unable to find desired academic employment. the country a soaring national debt and myr­ This situation has now spread to the hard iad job-destroying regulations, diminished the sciences and includes people such as Alan value of higher education, inflamed racial Hale, co-discoverer ofthe much-watched Hale­ turmoil and other social divisions, pushed Bopp comet. On the other hand, labor short­ taxes upward, devalued the currency ("infla­ ages have developed in a variety of occupations tion"), increased the population of chronic not requiring a college degree: carpentry, ma­ dependents, and worsened crime. In fact, as sonry, and other skilled trades best learned documented by James Bovard in Lost Rights, through the apprenticeship and therefore not the federal government now undertakes many amenable to the assembly-line approach taken activities more worthy of a police state than a by government-supported schools. free society. At the same time, our nation The welfare system is another consequence faces serious moral and cultural crises, threat­ ofthe Central Economic Fallacy. The War on ening its very foundations. Poverty, one ofthe mainstays ofthe 1960s, has For decades, critics of the Central Eco­ failed. It left an entire generation with a sense nomic Fallacy have been ignored or dismissed ofentitlement and destroyed families by mak­ out of hand. But so disastrous have been its ing fathers superfluous. Overall, the system consequences that even fans of expanded rewarded a range of irresponsible conduct government have a difficult time denying that and encouraged dependency, reducing recip­ the Central Economic Fallacy has run its ients' need to mature, set goals, and become course. That anything as complex, intricate, productive members of society. Sons, in partic­ and constantly changing as the American ular, lacked responsible role models. An unful­ economy in the 1990s can be micromanaged filled sense of entitlement helped generate from a central point is the overwhelming folly resentment and encouraged criminal violence. ofour time. We have no alternative but to get Dimly aware that something is wrong, the rid of it. And we have to do so while recog­ federal government is now desperately ma­ nizing that many leaders in academia, busi­ neuvering to cut at least some of its depen­ ness, the media, and politics may never get dents loose through "welfare reform." Thus it. D

THE DURELL INSTITUTE is pleased to offer The Contributions ofMurray Rothbard to Monetary Economics edited by Clifford F. Thies featuring the seven papers presented at our October 1995 Rothbard conference paperback $5.95

"The conference's wide-ranging and open-minded consideration ofMurray's work is a fitting tribute to his own unbridled search for the truth. " -u.S. Congressman Ron Paul, MD

Durell Institute, Shenandoah University 1460 University Dr., Winchester, VA 22601 THEFREEMAN IDEAS ON LIBERTY

Aid to Owners of Dependent Enterprises by Charles W. Baird

here is widespread support for ending What Should Government Do? Twelfare, and for nudging, or pushing, welfare recipients into self-sufficiency In a totalitarian state there is no private through employment. Congress even voted to realm of human action. Every aspect of life is end Aid to Families with Dependent Children subject to political control. Even if the people (AFDC), though President Clinton and the who wield public authority are democratically Republican Congress have since backped­ elected, government can be totalitarian. aled. In a free society, however, government is However, there has been no similar attempt constitutionally restricted to a set of enumer­ to eliminate what might be called Aid to ated powers-Le., government is limited. Far Owners of Dependent Enterprises (AODE). from having total control, government is kept All three levels of government-federal, in its cage precisely so most human action will state, and local-are in the game. The federal occur in the private realm. There, individuals government currently spends more than $65 are left to pursue their own ends, free from billion a year on what both Representative government interference, as long as they do John Kasich and Ralph Nader call "corporate not coerce or attempt to coerce others. Every welfare." State and local governments spend incursion by government into private affairs, billions more under the euphemism of "in­ no matter how well-intentioned, is a threat to dustrial development incentives." liberty. AODE is such a threat. For example, the federal government sub­ All private enterprises should be free to sidizes commercial ads for companies like succeed or fail on their own. When an entre­ the Gallo Winery in foreign countries. The preneur gets an idea, it is up to him to state of California recently sold a former assemble the necessary resources and turn his hospital to Sun Microsystems Computer Co. idea into action neither assisted nor burdened for less than one-half of its fair market by government. Success or failure should be value. Both Oakland and San Francisco determined by the value consumers place on have given subsidies to privately owned the product or service. The coordination professional football teams to construct and between producers and consumers evident in upgrade stadiums. a market economy emerges spontaneously out ofthe production-and-exchange activities of millions of individuals, all trying to do the best they can with the limited resources and Dr. Baird is director ofthe Smith Center, California knowledge they have. Prices of inputs and State University, Hayward. outputs, and the profits and losses that result, 654 655 are signals that direct individuals into the terminated and taxes cut accordingly. For most socially beneficial activities. Any gov­ example, eliminating just half the business ernment interference with this market pro­ subsidies in the federal budget would free up cess, beyond enforcing the rules of voluntary enough money to completely eliminate the exchange, distorts those signals, and thereby federal capital gains tax. impedes, or even cripples, the process. Reductions in regulations, except those All government agencies are staffed by which proscribe coercion, are always desir­ human beings. The sum of the economically able. States that try to lure businesses by relevant knowledge possessed by separate offering better regulatory environments de­ individuals in an economy is always far serve applause. Even regulatory breaks for greater, and more accurate, than the sum of only specific firms warrant support, since once such knowledge possessed by individual bu­ a state starts lifting the regulatory burden, reaucrats in any government agency. Thus, even for one firm or one industry, interstate while markets do not generate perfect out­ and inter-local rivalry will encourage the comes, governments inevitably make far more practice to spread. mistakes than do markets. Of course, such competition bothers some analysts. For instance, Melvin Burstein and What to Do? Arthur Rolnick, economists at the Federal Reserve Bank of Minneapolis, have urged AODE takes at least four forms: tax breaks, Congress to use the Commerce Clause of the financial aid, regulatory relief, and protection Constitution to outlaw interstate competition against competition. General tax breaks ap­ aimed at attracting investors. They argue that plying to all firms are always desirable. Amer­ the cost of such "economic war among the icans are overtaxed: federal, state, and local states" takes money away from legitimate taxes consume over 40 percent of national public goods. But the set of legitimate public income. All taxes-income, sales, excise, goods on which states should spend more death, capital gains, property, and payroll money is either empty or nearly empty. More­ (and any I have omitted)-shouldbe reduced. over, the original intent of the authors of the But they should be reduced for everyone, not Commerce Clause was to knock down state just for a specific firm or a specific industry. interferences with free movements of goods, For example, the federal government gives services, and resources among the states. The tax breaks worth $500 million a year to one good aspect of state (and local) AODE is producers of ethanol, a corn-based substitute to lower taxes and regulations, thereby en­ for gasoline. Seventy percent of that goes to couraging interstate mobility of goods, ser­ one company-Archer Daniels Midland, a vices, and resources. Congress ought to exer­ $10 billion agribusiness. This is AODE at its cise its legitimate Commerce Clause powers worst. Of course, people like Ralph Nader to encourage states to generalize the tax and and Robert Reich who criticize business tax regulatory incentives they now offer to par­ breaks really only want to increase taxes. So ticular firms and particular industries. This targeted tax breaks should be eliminated only would promote interstate commerce. if the resulting revenue increase is handed Another form of AODE is protecting spe­ back to taxpayers through general tax cuts. cific competitors against competition. For Killing the $500 million ethanol boondoggle example, the federal government imposes could finance a small reduction in, say, the steel import quotas to protect domestic pro­ payroll tax. ducers from foreign competition. This one Financial aid to specific firms and specific item costs the American economy around $7 industries-whetherin the form ofdirect cash billion a year in the form of higher prices for payments, below-market interest rates on steel and products produced with steel. The loans, or direct payments for training of state of California regulates the amount of employees-by any level of government is land that can be used to produce navel never justified. All such subsidies should be oranges in order to shield incumbent growers 656 THE FREEMAN • NOVEMBER 1997 from competition and limit price competi­ this worthy idea to be misused to increase tion. New York City prohibits private vans government intervention. End the subsidies. and jitneys from competing with city­ Convert specific tax breaks to general tax franchised and/or city-owned, monopoly reductions. Convert specific regulatory breaks transit systems. None of these restrictions to widespread regulatory relief. Finally, get all are justifiable, since they benefit the few at governments out of the business of protecting the expense of the many. Such policies are, particular competitors and into the business to quote economist Dwight Lee, "malice in of protecting competition. In short, rebuild plunderland." the Founders' original wall of separation In sum, we should end corporate welfare as between the public and private realms of we know it. However, we should not permit human action. 0

The Socialist Dream Lives by K. L. Billingsley

he United Nations development agency true to the socialist faith, even without the Trecently rated nations on how they com­ billions in annual Soviet subsidies. bat poverty, thereby providing valuable lessons While other Latin American nations turned in economics, politics, and even diplomacy. to democracy and capitalism, Cuba not only At the head of the list stands Trinidad and rejected the free-market reforms but cracked Tobago, a tiny Caribbean nation noted mainly down on private activity and political dissent. for tourism. The islands' economy cannot Alone in the hemisphere Cubans suffered provide enough jobs for its citizens, who rationing and true deprivation. By Cuban emigrate in search of work. How the U.N. statistics, the country's GNP has fallen by developers came up with Trinidad as the about 20 percent, with the true figure likely model poverty fighter remains mysterious but much worse. The average Cuban worker, their second-place ranking, Cuba, provides according to the island's government, earns some clues. 203 pesos a month, which at official rates Before the demise of the Soviet Union, the translates to about $140 per y~ar. Marxist-Leninist Cuban regime of Fidel Cas­ For a time they had used various walls in tro, the world's longest-running dictator, Havana as a posting board for classified ads. fought even the communist reforms of glas­ But when this proved too popular, Cuba's nost and perestroika. The USSR duly passed communist government banned the practice into history and its Eastern Bloc colonies as a "vestige ofcapitalism." Most recently, the began throwing off their chains, trading the regime has declared Havana off-limits to crackpot theories of Karl Marx for the free­ those streaming in from the countryside in market economics of Ludwig von Mises and search of work and food. Contrary to what Friedrich Hayek. But in Cuba, Fidel remained the regime's foreign apologists maintain, the U.S. embargo does not explain the island's plunge into an abject poverty rival­ K L. Billingsley is a journalism fellow at the Center ing that of Haiti. for the Study ofPopular Culture in Los Angeles. There is nothing the United States makes THE SOCIALIST DREAM LIVES 657 that Cuba cannot freely buy from other na­ ity," and "narrowing the differences between tions, which have lately been investing in genders and social classes," along with "re­ Cuba in defiance of U.S. policy. Canada's forming trade policies," areas in which Cuba Sherrit International Corporation has in­ apparently ranks high. But those countries vested $675 million in Cuba. Of the annual that have increased national wealth and ac­ $10,000 Cuba gets for each Sherritworker, the tually lifted people from poverty have done so government keeps $9,784, a tax rate of 97 by the very means rejected by Cuba, the free percent. Yet Cubans, now desperate to sur­ market, individual responsibility, privatiza­ vive, line up for the jobs. tion, and low government regulation. Any sober analysis reveals Cuba as a de­ If the U.N. truly wanted to help nations lift stroyer of wealth and a creator of poverty. A their citizens from poverty, it would advance regional economic power before Castro, the these proven measures and oppose the statist regime has caused its citizens to flee by the dictatorships. Instead, the U.N. offers tired thousands, often risking their lives to do so, political and bureaucratic solutions, proving leaving loved ones behind. That should come once again that the socialist dream can thrive as no surprise because Marxism-Leninism is even when the evidence against it stands history's greatest creator of poverty, misery, stronger than ever. and mass death. Nations that are barren of For the world's poor that is a tragedy and liberties are also barren of groceries. Yet the there seems little reason American policy­ United Nations development agency ranks makers should support an international bu­ Cuba ahead of Chile, Singapore, and Costa reaucracy which rewards dictatorships for Rica, which far outstrip it in wealth. having created poverty while downgrading According to the U.N., nations can elimi­ productive democracies that have created nate poverty by "combating gender inequal- wealth. 0

~ The government will no longer dictate what your children learn. ~ You can easily send your children to a school that values independent thought and For FREE Information freedom. (Including a copy of the Proclautlont ~ Teachers won't be ambushed by bureaucratic rules and fads. call1oII..free 1..11'.."'..1176, orwrHI: ~ You'll live in a society where the poor are better educated. Separatfott of School ,.StaR Allattee ~ Your state and local taxes will be cut nearly in half. +571 N. first -S10' frattO, CA 9'7%6 3,131 parents, community leaders, teachers, scholars, and religious leaders www.sepschooLorg Juive already signed our "Proclamationfor the Separation ofSchool and State," including: Imad-ad-DeanAhmad•JohnBaden•Sam Blumenfeld •John Blundell·David Boaz·BarbaraBranden •Steve Buckstein Doug Casey • Alex Charuen • Ed Crane • Steve Dasbach • William A Dunn •M Stanton Evans • John Thylor Gatto Bettina Bien Greaves • Jacob Hornberger • Ethelmae Humphreys • Robert D Kephart • HF Langenberg Rabbi Daniel Lapin • J Stanley Marshall • Steven W Mosher • Ron Nash • Gary North • Marvin Olasky • Ron Paul Howard Phillips • Robert Prechter, Jr· Charles Rice • Sheldon Richman • Art Robinson • Hans Sennholz Fred Smith (eEl) • George H Smith • Joseph Sobran • Richard Stroup • David Theroux • Herb Titus • Jeffrey Thcker ~------~KG West • Perry Willis • Jarret Wollstein Ideas and Consequences by Lawrence W. Reed

Educating the Difficult

,~Jhenever the issue of "school choice" ucating a student vary widely, depending in Y' comes up for discussion, somebody in­ large part on the nature of the disability evitably will claim that the private sector can't category served, and may also include the cost be trusted to serve.the kids who are, for one of medical care and transportation. reason or another, difficult to educate. Gov­ Examples include Sobriety High in Edina, ernment schools are depicted as democratic, Minnesota, which educates 9th through 12th­ egalitarian institutions that take on all com­ grade students in recovery from chemical ers, including the toughest cases. Private dependency. The famed Boys Town, based in alternatives are alleged to be inherently elitist Nebraska, directly cares for more than 27,000 organizations that "skim the cream" and leave boys and girls each year in 14 states and the the challenging kids to their courageous and District of Columbia. The Helicon Shelter altruistic public counterparts. This perspec­ Education Program, a division of Children's tive is pure myth. Comprehensive Services, provides certified The fact is that children who are troubled, teachers, materials, curriculum, and academic neglected, learning or emotionally disabled, record-keeping on site at 27 emergency fos­ or otherwise have special needs are often not ter-care shelters throughout the state of Ten­ well served in the conventional public school nessee. setting. They need help from nongovernmen­ According to a study from the Reason tal sources, from people who know that you Foundation in Los Angeles, about half of the don't have to be a civil servant to be either civil nation's children who suffer from traumatic or a servant. brain injuries are placed in private settings. The private sector, including private sec­ Students with Serious Emotional Disturbance tarian schools, religious schools, nonpublic (SED) account for 40 percent of the disabled agencies, and homeschools, offers a wide students enrolled in nonpublic schools. Pri­ variety of education programs for this diffi­ vate-sector institutions are providing educa­ cult-to-educate population. When public tion for the mentally retarded, the autistic, the schools or agencies cannot serve a particular deaf and blind, and those with orthopedic student, they sometimes contract with a pri­ impairments as well. Some of these institu­ vate-sector body to do the job. The Directory tions decline government support, but many for Exceptional Children lists roughly 3,000 do not. special-education schools and facilities in the Roman Catholic Church organizations private sector nationwide. Their costs of ed- alone operate nearly 200 schools throughout the United States specializing in educating Lawrence W Reed, economist and author, is presi­ dent of the Mackinac Center for Public Policy, a childrenwith disabilities. Among them are the free-market research and educational organization St. Lucy Day School in Pennsylvania for headquartered in Midland, Michigan. children with visual impairments; the Mary 658 659

Immaculate School in Toledo, Ohio, which paired hearing, and even the trauma of sexual serves learning disabled and children affected abuse. by crack cocaine; and St. Coleman's Home in Starr Commonwealth, an Albion-based or­ New York for children with autism and emo­ ganization with six Michigan sites, has been tional disturbance. serving children and families since 1913 as a According to Tom Bushnell, president and private-sector alternative for violent, trou­ director of the National Challenged Home­ bled, and dispossessed children. It raised schoolers Associated Network, some 30,000 more than $15 million from private sources in American children with disabilities are home­ a recent year. schooled. Says Bushnell, who personally St. Peter's Home for Boys in Detroit, homeschools a blind daughter, a child with operated by the Episcopal Diocese of Mich­ Down's syndrome, and a child with cerebral igan, provides residential care and schooling palsy, "Sometimes it's easier to do it yourself for boys between ages 11 and 19 who require than fight. When you have to go to an IEP placement outside their homes. The Home's (Individualized Education Plan) meeting and mission is deeply rooted in an emphasis on the face a multidisciplinary team of six or eight dignity of each individual that arises out of professionals, it's stressful. It's you against the explicit ethical standards. world. Parents get tired offighting." And, says Our Lady of Providence Center in North­ Bushnell, parents sometimes worry that the ville admits mild, moderate, and severe cases adversarial relationship with the public ofdevelopmentally disabled girls over the age schools will affect the quality of care the of 10 and women under 40 in its residential schools give their child. "Would you want program and school. Its acclaimed programs someone who you had to fight in an IEP that teach self-help and work skills alongside meeting to put a catheter into your child?" spiritual values have benefited hundreds since The Reason Foundation report quotes an­ 1957. other homeschooling parent, Devorah Wein­ The problems these and other private in­ mann. After the local public school psychol­ stitutions are solving are often problems no ogist refused to allow Weinmann's learning­ government organization would be equipped disabled daughter to start school one grade to address with maximum effectiveness, even level below her age group, this dedicated if it were legal for it to try. Those situations, mother opted to do the job herself and which require spiritual guidance and restora­ explained her decision this way: "She (her tion of moral values rooted in a religious daughter) had been through five [foster care] context, are simply beyond the reach ofpublic placements by the age offour-and-a-half. She employees. went through hell and back to become fairly Difficult-to-educate students present mul­ secure. [The schools] weren't looking at her as tiple challenges to educators and policy­ an individual. ... She would just be shuffled makers. The public schools serve the majority along until she failed. I said, 'I'm not doing of these students, but they do not educate this.' " everyone. Often in partnership with public In Michigan, private-sector help for diffi­ schools and public agencies, but sometimes cult-to-educate children is a story crying to be operating entirely on their own through ex­ told. A report from the Mackinac Center for clusively private support, nonpublic schools Public Policy is now helping to tell it. For and organizations are meeting the special example: the Manor Foundation in Jonesville needs of a great number of students. As is both a residential school and a treatment Americans continue to debate the direction facility that admits children with problems of education reforms, they should not sell that include pervasive development disorder, short the achievements of these private early infantile autism, schizophrenia, im- institutions. 0 THEFREEMAN IDEAS ON LIBERTY

Global Interventionism and the Erosion of Domestic Liberty by Ted Galen Carpenter

"Perhaps it is a universal truth that the loss ton has linked America's security to that of of liberty at home is to be charged to pro­ the other hemispheric nations through the vision against danger, real or pretended, Rio Treaty and has done the same with from abroad." Western Europe through NATO. It has ne­ -JAMES MADISON TO THOMAS JEFFERSON gotiated multilateral pacts such as ANZUS May 13,1798 (with Australia and New Zealand) and con­ cluded bilateral security treaties with such here is a tendency of many people to nations as Japan, South Korea, and Pakistan. T.separate domestic and foreign issues. For Such formal arrangements, however, do instance, many supporters of the free market not fully measure the extent of U.S. obliga­ advocate government activism abroad. But tions in the world. The Truman Doctrine, categorizing issues as "foreign policy" or promulgated in March 1947, pledged the "domestic policy" can be artificial and mis­ United States to assist other nations confront­ leading. Developments in one arena fre­ ing either external aggression orsubversion by quently interact with and affect developments "armed minorities." Washington attached no in the other. Most analyses of this phenom­ discernible geographic limits to that promise enon have focused on how domestic attitudes of assistance, and it served as the explicit or and interests influence the style and sub­ tacit basis for U.S. involvement in numerous stance of foreign policy. Less attention has Third World struggles throughout the Cold been paid to the opposite phenomenon­ War. In the late 1950s, the Eisenhower Doc­ the impact offoreign policy aims or require­ trine committed the United States to "secure ments on domestic institutions and prac­ and protect the territorial integrity and polit­ tices. Yet that feedback may ultimately have ical independence" ofMiddle Eastern nations a more important impact on the health of from "any nation controlled by International American liberties. Communism." The so-called Carter Doctrine, The foreign policy of the United States has proclaimed in early 1980 following the Soviet obviously changed dramatically since "isola­ invasion of Afghanistan, made the United tionism" held sway at the end of the 1930s. States the gendarme ofthe Persian Gulf. That Over the past half century, the republic has commitment, which was fulfilled on a grand acquired and maintained a host of global scale during the Persian Gulf crisis of 1990­ political and military commitments. Washing- 1991, remains in effect. In addition to the presidential doctrines, the United States has Ted Galen Carpenter is vice presidentfor defense and informal but real security arrangements with foreign policy studies at the Cato Institute. Israel and several other countries. 660 661

All told, the United States is committed to they emerged because of national mobiliza­ help defend dozens of nations. Moreover, tions to fight the two world wars. Moreover, growing U.S. involvement in peacekeeping the New Deal and the Great Society were operations authorized by the U.N. Security explicit attempts to replicate in peacetime the Council (most notably in Somalia) and "out of mobilization of human talent and natural area" operations conducted by NATO (as in resources that had occurred during wartime. Bosnia and Macedonia) is likely to increase the total. That expansion of obligations is Enhanced State Power most evident in the Clinton administration's Remains plan to enlarge the membership of NATO to include several Central European nations­ Even when the nation terminated its war and perhaps someday most East European mobilizations, a sizable residue of enhanced nations as well. Five decades after the dawn of governmental power always remained. Man­ the Cold War, and more than six years after ifestations of that "wartime" authority would the end of that bitter rivalry, U.S. foreign later surface during peacetime-often in un­ policy remains interventionist on a global expected ways. For example, President Rich­ scale. ard Nixon based his 1971 executive order This policy has had a pervasive impact on imposing wage and price controls on an the Republic's domestic affairs. In ways both obscure provision of the Trading with the obvious and subtle it has transformed the Enemy Act of 1917, enacted during the early nation economically, socially, and politically. days ofWorld War I but still in effect decades Some of those changes are unarguably posi­ later. tive. Concern about how America was per­ These surviving wartime powers have also ceived throughout the world-especially in been an important factor in the permanent the emerging nations of Asia and Africa, in expansion ofthe size and scope ofthe political which the United States was competing with state. One "temporary" measure enacted dur­ the Soviet Union for influence-was a signif­ ing World War II was the withholding provi­ icant factor impelling political leaders to sion ofthe federal income tax. That device has abolish the legal framework of racial segre­ had the insidious effect of disguising the true gation in the 1950s and 1960s. The odious Jim tax burden on most Americans by "painlessly" Crow system probably could not have en­ extracting the money from their payroll dured in any case, but the fact that it was a checks before they get an opportunity to see liability to American foreign policy undoubt­ (and use) those funds. For such taxpayers the edly hastened its demise. category ofgross salary or wages is little more Other domestic changes caused or at least than a meaningless bookkeeping entry on facilitated by Washington's policy of global their payroll check stubs. interventionism, though, have been far less One suspects that citizens would be decid­ benign. The early twentieth-century social edly less willing to carry their current bloated critic Randolph Bourne observed that "war is tax burden if they had to write annual or the health of the state," by which he meant quarterly checks to the IRS. Indeed, it is likely that governmental power inexorably ex­ that there would have been a massive tax panded at the expense of individual freedom revolt long before the federal government during periods of armed conflict. Robert began consuming more than a quarter of the Higgs's seminal work, Crisis and Leviathan: nation's gross domestic product. It seems Critical Episodes in the Growth ofAmerican more than a coincidence that the two groups Government (1987), documented that obser­ that are not subject to the anesthetic of vation, showing how many of the powers now withholding taxes (sole proprietors and inde­ routinely exercised by the federal government pendent contractors) have most militantly were not acquired during such spasms of opposed high taxes. A wartime innovation has domestic "reform" as the Progressive Era, the thus become an important permanent build­ New Deal, and the Great Society. Instead, ing block of the leviathan state by continuing 662 THE FREEMAN • NOVEMBER 1997 to conceal the real tax burden from most timony to that fact. There are also restraints Americans. on commerce that would have been unthink­ able only a few decades ago. Embargoes have Perpetual Crisis been imposed on trade with certain countries deemed to be adversaries of the United Bourne's observation about war being the States-including such a mortal threat to health of the state is not sufficient, however. American security as Burma. In addition to It is not only an actual state ofwar that creates such formal sanctions, there exists a variety of the regimentation and massive violations of restrictions on the export of technologies that civil liberties he feared. An atmosphere of the government decides (often arbitrarily) perpetual crisis and preparation for war can could have military applications or national produce the same result. The creation of a security implications. The tug ofwar between national security state to wage the Cold War the Clinton administration and the business produced many of the same domestic prob­ community over encryption policy is only the lems and distortions associated with periods most recent example. of actual combat in earlier eras. America has An interventionist foreign policy has not been essentially on a war footing for more only facilitated the expansion of federal gov­ than half a century, and the result has been a ernmental power at the expense ofthe private significant erosion of liberty. Perhaps most sector, but has also produced ominous ominous, the end of the Cold War has not changes within the federal government itself. produced a retrenchment in either the na­ The conduct offoreign affairs during the Cold tion's foreign policy or pervasive garrison­ War enhanced the power of the executive state mentality. branch to an unhealthy degree. Fulfilling There are numerous examples of undesir­ global obligations placed a premium on the able changes in America's domestic system reliability of Washington's commitments as brought about by Washington's global inter­ well as the speed (and often the secrecy) of ventionist foreign policy. Waging the Cold execution. The procedural demands of an War led to the creation of a large and interventionist foreign policy are fundamen­ expensive military establishment. Despite the tally incompatible with the division ofrespon­ end of the Cold War, military spending (cur­ sibilities and powers set forth in the Consti­ rently $268 billion a year) consumes nearly tution and generally adhered to throughout four percent ofAmerica's GDP. U.S. military America's history. Extensive congressional outlays dwarf those of other industrialized participation in the foreign policy process countries. For example, Japan spends just $45 involves the possibility ofdelay, the disruption billion and Germany a mere $30 billion. Each of national unity, and the creation of doubts American must pay more than $1,000 a year about the nation's constancy. to support the military; the burden for each German is about $260 and for each Japanese The Imperial Presidency about $240. That huge disparity is one tangi­ ble measure ofthe financial costs ofsustaining Maintaining a global interventionist policy a foreign policy based on maintaining U.S. has led inexorably to the emergence of an global "leadership" and responsibility. "imperial presidency." Chief executives have In addition, government continues to guide grown accustomed to using the military ac­ the American economy in the name of na­ cording to their personal definitions of the tional security, much as it would during a national interest, frequently without even the wartime mobilization. In marked contrast to semblance ofcongressional consent. The con­ the pre-World War II era, the national secu­ gressional war power, stated in clear and rity apparatus wields considerable economic concise terms in the Constitution, has become power. The emergence of multibillion-dollar moribund. Harry Truman's unilateral deci­ defense firms whose principal (and, in some sion to commit more than 300,000 U.S. troops cases, sole) customer is the Pentagon is tes- to the Korean conflict in 1950 remains the GLOBAL INTERVENTIONISM 663 most brazen episode of the imperial presi­ has evolved as an indispensable corollary of dency, but it was hardly the only one during global interventionism. As Washington's the Cold War. Nor has such executive usur­ overseas commitments have grown, so too has pation of the congressional authority over the scope of information-including much matters ofwar and peace abated now that the that is essential to any public debate on Cold War is over. The Clinton administra­ foreign policy options-concealed from the tion's dispatch of20,000 U.S. troops to Bosnia American people and even their congres­ as part of a multilateral peacekeeping and sional representatives. nation-building mission confirms that the im­ Interventionism has not only encouraged perial presidency is alive and well. foreign policy elitism and secrecy, but has also The consequences of interventionism are promoted a pervasive intolerance of alterna­ not confined to changes in the nation's polit­ tive views on national security issues. Too ical and economic systems. Individual citizens often, dissent has been viewed as synonymous find their liberties circumscribed in a variety with disloyalty. The McCarthy era in the early of ways. Throughout most of our history, and mid-1950s was the most infamous exam­ Americans routinely exercised the right to ple of an intolerant loyalty crusade, but it was travel outside the country without having to hardly unique. Precedents for what became beg permission from Washington. That has known as McCarthyism were established dur­ changed dramatically during the past half ing and immediately following World War I as century. Foreign travel and participation in well as the period just before American entry events held in other nations are no longer an into World War II. Moreover, the Truman inherent right of American citizenship; such administration utilized the politics of loyalty activities are often used as pawns to serve even during the earliest stages of the Cold foreign policy objectives. Certain countries War to quash dissent. are declared off-limits to U.S. citizens if The practice of smearing and harassing Washington deems it in the national interest, foreign policy critics did not expire with the and ostensibly nonpolitical events such as the junior senator from Wisconsin. The FBI, the Olympic Games have become tools of diplo­ CIA and other intelligence services, and even macy. Americans whom the government elements of the military conducted sophisti­ brands as threats to national security are cated programs to spy on, disrupt, and dis­ subjected to passport revocations and various credit opponents of the Vietnam War. And forms of harassment. they usually did so with the full knowledge and approval of high-ranking officials in the John­ Undermining Foreign Policy son and Nixon administrations. Disclosure of Debate such tactics led to reforms designed to prevent a repetition, but events during the Reagan The garrison-state mentality fostered by an years indicated that those changes were interventionist policy leads to practices that largely ineffectual. Evidence surfaced that undermine both the legitimacy and the fea­ opponents of the administration's Central sibility of debate on defense and foreign America policy were routinely harassed by policy issues. Indeed, policymakers habitually agents of the Customs Service and the FBI regard public or congressional scrutiny as an upon returning from trips to that region. Even obstacle to be avoided or removed. To thwart more disturbing were revelations that the FBI such oversight, they have sought to maintain secretly investigated the Committee in Soli­ a monopoly of information by misusing the darity with the People of El Salvador secrecy classification system. Information that (CISPES) for more than two years despite a contradicts official versions ofevents or might dearth of evidence that the group was en­ cast doubt on the wisdom, legality, or morality gaged in any unlawful activities. Congres­ ofa presidential policy is kept from the prying sional allies of the Bush administration eyes of potential critics. The cult of secrecy smeared critics of the Persian Gulf War as surrounding defense and foreign policy issues apologists for Saddam Hussein. 664 THE FREEMAN • NOVEMBER 1997 Managing the News government enjoyed the luxury of exercising absolute control over information about a Because dissent is often equated with dis­ signHicant and controversial military opera­ loyalty, the national security bureaucracy has tion. In so doing, it established a tempting waged a determined effort to co-opt, intimi­ precedent for an exclusionary policy to be date, and exclude the press on foreign policy invoked in similar-and perhaps far larger issues, since members of the news media who and more prolonged-interventionist enter­ question the logic of policy decisions or the prises. Indeed, when U.S. forces invaded veracity of officials raise doubts about the Panama in December 1989, the techniques wisdom of U.S. globalist strategy, thereby used in Grenada were applied again, albeit in sowing division among the American people. a slightly more subtle fashion. Reporters were That is especially true of those individuals delayed and kept away from the scenes of who dare to penetrate the veil of secrecy and military action and were instead given guided reveal evidence that might discredit that strat­ tours of such important sights as Panamanian egy. dictator Manuel Noriega's pornography col­ During both world wars and the first two lection. decades of the Cold War, the government Government manipulation of the media primarily sought to enlist the press as an reached its apogee during the Persian Gulf instrument of the nation's foreign policy, and War. Military officials herded reporters into did so with considerable success. (Although organized pools monitored by "public affairs" officials preferred to stress co-option, even in personnel and barred them from attempting those periods the threat of intimidation, ex­ to reach front-line areas on their own. Mean­ clusion, and outright censorship lurked in the while, correspondents were fed a steady diet background.) As the press became more crit­ of briefings (i.e., propaganda) by the military, ical of U.S. policy during the Vietnam War, replete with videotapes showing the clean-kill confrontation increasingly replaced co­ capabilities of smart bombs and other high­ option. During the Nixon administration, re­ tech U.S. weaponry. The press corps became porterswho published stories based on leaked little more than a transmission belt for the classified information were threatened, to­ Pentagon's version of events. Consequently, getherwith their sources, with prosecution for the American public saw astonishingly little of espionage. The alleged authority for such the bloody reality of the war (especially the prosecutions was a statute, passed in the extent of Iraqi casualties) and learned even initial stage of World War I, that was aimed less about the complex roots ofthe Gulf crisis. at preventing spies from giving militarily rel­ The politics of loyalty, the pervasive cult of evant information to enemy governments. A secrecy, and governmental attacks on the campaign to treat embarrassing disclosures as press all have one thing in common. They a form of espionage re-emerged during the have the effect (and perhaps the intent) of Reagan and Bush administrations, and the hobbling public debate on both the substance government scored an ominous legal victory and the execution of U.S. foreign policy. A by successfully prosecuting defense analyst strategy of global interventionism, to be ef­ Samuel Loring Morison for the "crime" of fective, requires domestic unity and con­ leaking classified information, not to a foreign formity. Those requirements run directly government, but to Jane's Defence Weekly. counter to the values of political pluralism In addition to resurrecting that technique and unfettered debate so essential to the of intimidation, the national security bureau­ maintenance of a democratic system. An cracy found an ingeniously effective method interventionist foreign policy promotes the of stifling hostile press coverage of military growth of a centralized and remote political operations. When the United States invaded structure, creates economic regimentation, the tiny Caribbean nation of Grenada in the and undermines a variety of civil liberties, autumn of 1983, the Pentagon simply barred especially freedom of expression. the media. For more than 48 hours, the Another ugly manifestation of interven- GLOBAL INTERVENTIONISM 665 tionism was the policy of conscripting young Defense Highway Act. It is surprising that Americans into the military and sending them the sponsors of Medicare didn't fashion off to fight in distant wars. That infringement their bill as the "National Defense Elderly on their liberty was exacerbated by the fact Care Act." that most of those struggles were murky Not only has the national security justifi­ geopolitical conflicts that bore little if any cation been cynically used to defuse opposi­ relevance to America's vital security interests. tion to mundane welfare state and traditional Many of the unfortunate conscripts returned pork-barrel initiatives, the rhetoric ofwar has home maimed in body or mind; many others come to dominate the national discourse to an failed to return at all. unhealthy degree. We have seen the "war" The military draft became an important metaphor used promiscuously, including Lyn­ device to sustain an interventionist strategy in don Johnson's War on Poverty, Jimmy Cart­ both world wars and throughout the most er's Energy War, the war on drugs, and more virulent stages of the Cold War. It also recently "wars" on cancer and illiteracy. Lan­ became the quintessential symbol of the do­ guage matters, and the fondness for such mestic regimentation that global interven­ rhetoric is a revealing and disturbing indicator tionism promotes. It is no coincidence that ofhow deeply the garrison-state mentality has ardent global interventionists are usually become entrenched. among the most relentless supporters of ef­ The adverse domestic consequences of forts to restore conscription, either directly or global interventionism raise serious questions in the guise ofa more comprehensive national about the future of individual liberty in the service system. United States. At the dawn of the Cold War, social commentator Garet Garrett warned "For the Security of the that America could not indefinitely remain a Nation" republic at home while taking on the trap­ pings of empire abroad. He noted a funda­ Perhaps the most corrosive domestic effect mental contradiction between the desire to ofWashington's interventionist foreign policy play the role of global policeman and the has been on national attitudes. Americans objective of maintaining long-standing Amer­ have come to accept governmental intrusions ican traditions of limited government, free in the name of "national security" that they enterprise, and individual liberty. Garrett's would have ferociously opposed as blatant warning is even more applicable today. Amer­ power grabs in earlier eras. Politicians grad­ icans are rapidly reaching the point where ually learned that the fastest way to overcome they must confront a stark choice. Either the opposition to schemes to expand the state was United States will adopt a more circumspect to portray initiatives as necessary for the role in the world in order to preserve domestic security of the nation. Sometimes such rea­ freedom, or that freedom will continue to soning has been exceedingly strained. The erode (perhaps beyond the point of recovery) statute that first involved the federal govern­ to satisfy the requirements of a globalist ment in elementary and secondary education foreign policy. That choice will determine not was titled the National Defense Education only how the United States is defended but Act. Similarly, the legislation funding the whether this country retains the values and interstate highway system was the National principles that make it worth defending. 0 THEFREEMAN IDEAS ON LIBERTY

The Seven Deadly Sins of High Taxes by Christopher Lee

By justice a king gives stability to the land, but government operations would outweigh its he who imposes heavy taxes ruins it. costs. But government is now far too large, -PROVERBS 29:4 and is generating more costs than benefits. (New American Bible) A 1995 International Monetary Fund study concluded that every one percent rise in taxes na free society government has an impor­ cuts GDP output per worker by about two I tant but limited role to play. Adam Smith, percent. In the same year Congress's Joint for instance, acknowledged the necessity of Economic Committee estimated a dead­ providing national defense, maintaining law weight cost of40 cents per dollar ofadditional and order, implementing a system of weights government spending. An earlier analysis and measures, as well as defining and pro­ published in the March 1985 American Eco­ tecting property rights. Further, he advocated nomic Review figured the deadweight cost per government provision of goods for which dollar of tax to be between 20 and 50 cents. there were substantial positive spillovers, Not surprisingly, high-tax U.S. cities are losing though experience has led many modern jobs to low-tax cities and high-tax states are classical liberals to question the appropriate­ losing jobs to low-tax states. Similarly, coun­ ness of this role. Even in Smith's vision, tries with highly interventionist governments however, the ultimate public good is a nur­ are growing more slowly than countries with turing environment within which voluntary less state intervention. exchange can flourish. Government should be The perceived benefits of government are umpire and rule maker, not participant, in the well understood. The distorting effects of economy. taxes are generally less visible. These could be Of course, to perform any of these func­ called the seven deadly sins of high taxes. tions government requires taxes. All taxes are costly, since they divert resources from other 1. Favoring leisure over work. useful purposes. Moreover, most taxes distort the economy. The deadweight costs associ­ Few people would work as hard as they do ated with the tax wedge are a fact of life. If for as long as they do except for the fact that government were to concentrate on its proper they receive payments which can be ex­ objectives, it is likely that the benefits of changed for goods and services. Most would consume more leisure if its price were lower, Dr. Lee is associate professor of economics at St. just as they would consume many other goods Ambrose University College ofBusiness, Davenport, if their prices were lower. Iowa. The price of leisure is the income forgone 666 667 when one does not work~ In a mythical no-tax income stream. If he was indifferent before, world in which one could earn $10 per hour, he will choose the vacation now. As a conse­ $10 would also be the price of an hour of quence, high taxes reduce the opportunity leisure. But taxes change that. With a 30 cost of consumption relative to investment, percent marginal tax, the price of leisure reducing the capital stock and ultimately artificially falls to $7 because that is all one economic growth. gets to keep after taxes. This increases the consumption of leisure. Yet it is work that 4. Reducing respect for the is necessary to create wealth (which, iron­ law. ically, ultimately makes more leisure possi­ ble). The size of the economic pie is arbi­ When government concentrates on its core trarily reduced. functions, taxes are relatively low and the benefits are clear. As a consequence, tax 2. Work takes inefficient forms. evasion is minimal. But as government grows, it tends to operate increasingly for the benefit A capitalist economy is a positive-sum of one group at the expense of another. game. As a result offree exchange, the size of People feel less moral imperative to pay their the economic pie is continually increasing. taxes. Some lobby for "loopholes" and other One reason for this is the phenomenon of tax breaks. Others creatively "interpret" the economic specialization. People tend to spe­ law. And higher tax rates increase the finan­ cialize in those activities in which they have cial return on avoidance and cheating. the greatest comparative advantage, thereby Today, Money magazine estimates that tax increasing their output. They then obtain the resistance denies the government $150 billion other things that they desire through ex­ annually. It is not a much larger step from tax change. evasion to broader disregard of the law. Yet Consider an accountant in a mythical zero­ stricter enforcement measures both tax world. Ifhe earns $25 an hour, he will hire threaten individual liberty and consume other people to mow his lawn, paint his house, valuable economic resources: as a result, the and perform similar tasks so long as they size of the economic pie is again made charge less than $25 an hour. But taxes change smaller. this. With a 50 percent marginal tax, the accountant ends up earning only $12.50 for 5. Encouraging the every additional hour of work. Instead of development of t~e hiring a painterwho charges, say, $15 an hour, underground economy. the accountant will paint his own house. In this example, this results in a loss ofeconomic A related impact of higher taxes is the output to society of $10 an hour. people's desire to put commercial transac­ tions "off the books." It has been estimated 3. Favoring consumption over that the following percentages of services are supplied by the underground economy and investment. escape taxation. Consider an individual living in our myth­ ical tax-free world who is attempting to decide Lawn and garden maintenance 90 percent whether he or she should invest $10,000, and Domestic help 83 percent thereby earn $700 per year forever, or spend Child care 49 percent the $10,000 on a vacation. He cannot decide Home repair/improvements 34 percent between the two because, in the language of Laundry/sewing services 25 percent economics, he is indifferent. Appliance repairs 17 percent Taxes change that. Suppose a tax of 50 Car repairs 13 percent percent on marginal income is imposed. Now Haircutslbeauty services 8 percent a $10,000 investment will generate only a $350 Catering 8 percent 668 THE FREEMAN • NOVEMBER 1997

It is, ofcourse, difficult to estimate the total 7. Fostering envy. output of the underground economy. Esti­ mates range from 4 to 25 percent of GDP. An egalitarian society will also be a poor Even 10 percent would represent $700 billion. society. No society has yet found a way to Moreover, nations with higher tax rates, such induce individuals to work hard, invest in as Italy, have even larger underground econ­ human capital, and engage in enterprises for omies. uncertain profits if they are unable to earn a Commercial activity hidden from the tax differential return. But these are all essential collector represents a drag on the economy. It elements ofwealth creation. In short, unequal takes an effort to remain undetected. Pay­ income distributions are necessary for eco­ ments must be "washed" or otherwise hidden nomic growth which benefits all people, poor from view. Double sets of books must be and rich alike. (Of course, the poor in the maintained. Often vendors are unable to United States today are poor only relative to maintain permanent retail establishments or the rich in the United States. Compared to advertise normally. In addition, respect for people through human history, the poor are the law again is reduced. Indeed, the very rich indeed.) nature of such secret activities, and the like­ In a market economy one can, with con­ lihood of coming into contact with others siderable conviction, maintain that income is engaged in similarly illegal activities, may not "distributed" in the sense that social facilitate the expansion into genuine criminal planners use that term. Income is earned enterprises. through a combination of hard work, imagi­ nation, and faith in one's ideas and in the 6. Encouraging nonproductive future. Eighty percent of those who make up rent-seeking. the Fortune 500 list represent "new," not inherited, wealth. As such, the money belongs One can acquire resources from one an­ to those who earned it and should not be other through voluntary exchange or coercive forcibly redistributed by government. Even if transfer. Voluntary exchange is a positive­ the rich have a duty to give to the poor, other sum game, increasing the wealth of everyone people have no right to steal, acting either as involved. Coerced transfers, however, make individuals or collectively through government. everyone worse off. The case of theft is But when the government starts to make obvious: not only are resources devoted to widespread wealth transfers both directly by commit crimes and defend against crime, taxing and spending and indirectly by regu­ but goods are taken away from those who 1ating' it inflames envy. In such a world, many value them the most and use them most people believe that they have a claim not only . efficiently. to a portion ofthe nation's overall wealth, but Forced transfers through the political pro­ to the wealth of anyone earning more than cess-what goes on in Washington every them. Society risks slipping back into the day-have a similar impact. As government jungle described by Thomas Hobbes in Levi­ collects, and hands out, more money, various athan, in which work is in vain because the groups have a greater incentive to try to fruits thereofwill be taken from the producer. become a beneficiary of government largess When properly constrained, government and to protect their wealth from the at­ can be a productive institution. Even then, it tempts. of others to gain from coerced should perform its functions with utmost transfers. Practical evidence of this effect is efficiency and minimal economic distortion. the steady move of corporations and asso­ But we have gone well beyond the point of ciations to Washington, D.C., the growth in positive marginal benefits and that improve­ the number of lobbyists, and the steady ment now requires a much smaller government. increase in campaign contributions and In deed as well as word we need to resolve that spending. "The Era of Big Government Is Over." 0 Potomac Principles by Doug Bandow

Closing Special Interest Government

he federal governmentwas originally con­ dent declined to do so, he did pressure the Tceived as an institution with limited, enu­ parties to reach an agreement. Moreover, he, merated powers. However, over time interest like his predecessors, had no principled ob­ groups and politicians cooperated in vastly jection to using his power, having ended the expanding federal powers. Indeed, Congress earlier strike against American Airlines as it has routinely conferred political status upon began. influential interest groups, such as labor, by Here, as elsewhere, government has me­ creating their own cabinet departments. tastasized beyond any conceivably appropri­ The Bureau of Labor was established in ate role. Labor relations are a private matter. 1884, from which sprung the Department of Government should act only as impartial Commerce and Labor in 1903, only to split arbiter, preventing either side from using into two separate departments in 1913. Today violence to achieve its ends and providing the the Department of Labor runs a national framework for adjudicating disputes-are unemployment insurance system, regulates both sides living up to their contract? But employment hours and wages, offers a questions as to whether workers join or are hand to unions under the guise of monitoring represented by a union, and what terms employee-employer negotiation, conducts employees and employers agree on, should training programs, and generally oversees the not be answered by government. workplace. Of course, the Labor Department was not It should come as no surprise that orga­ created out of a principled desire to solve nized labor has sought a formal beachhead in problems. Rather, it was essentially a payoff to government. After all, business enjoys mani­ labor unions. The bias was most evident fold subsidies from the Department of Com­ during the New Deal, though many of those merce, whose primary function is to enhance laws live on. Losers are not just companies corporate profits. But even many private firms faced with government-backed unions, but today see the federal government as a kind of workers who don't want to support a union. negotiator-in-chief when it comes to other Individual choice has never been seen as a companies' labor disputes. During the United virtue by government. Parcel Service strike, the Chamber of Com­ The Labor Department has not limited merce called on President Clinton to order the itself to regulating employment relations. It workers back to work and the company back grabbed a growing piece of the welfare state to the negotiating table. Although the Presi- when Washington's crusades like the War on Poverty created new government programs Mr. Bandow, a nationally syndicated columnist, is a seniorfellow at the Cato Institute and the author and hither and yon. Although the old Health, editor of several books, including Tripwire: Korea Education, and Welfare picked up the ma­ and U.S. Foreign Policy in a Changed World. jority ofwelfare programs, Labor got ahold of 669 670 THE FREEMAN • NOVEMBER 1997 a host of employment-related initiatives, benefits employees and employers alike-and ranging from job training to voluntarism. penalizes blameless companies for transgress­ It is perhaps here that Congress should ing rules designed to give organized labor an start. The agency's training programs have, in unfair boost in representation elections. Con­ the main, proved to be abject failures. Scores gress should, among many other things, end of government efforts have had only minimal exclusive representation by one union, restric­ success in providing workers with more re­ tions on labor-management cooperation, and munerative and permanent work. And that the requirement that firms hire union orga­ should come as no surprise, since government nizers as employees. has no incentive to narrowly tailor public Especially important is statutory enforce­ initiatives to individual needs. Congress ment of the 1988 U.S. Supreme Court deci­ should leave training to workers and employ­ sion, Communications Workers ofAmerica v. ers. Beck, which grants workers the right to a Unemployment insurance discourages not refund of any union dues used for political only work, but also private savings to cushion purposes. One of the first acts of the Clinton a period ofjoblessness. Congress should abol­ administration was to repeal federal rules ish the program or, as second best, leave it requiring that unions give an accounting to with the states. One of the virtues of feder­ their members. As a result, most labor unions alism is allowing different communities to today flout the law, collecting dues with the handle problems like unemployment differ­ implicit aid of the federal government for use ently. in partisan political campaigns. Congress should also roll back federal Congress should also dismantle the Occu­ regulation ofthe labor market. The minimum pational Safety and Health Administration wage destroys jobs, since it prices out ofwork (OSHA). Despite imposing annual costs es­ anyone who lacks sufficient education, expe­ timated to run between $11 billion and $34 rience, and skills to earn the minimum. Were billion on the economy (the agency's nitpick­ this not the case, the government could make ing regulation is legendary), there is no evi­ everyone rich by imposing a minimum of$100 dence that OSHA has improved U.S. work­ or $1,000 an hour. Similar in effect is the place safety. The rate of employee fatalities Davis-Bacon Act, which requires the payment has been falling for six decades, and is affected of union-scale wages for federally funded more by insurance requirements and tort construction projects. litigation than by OSHA. (After all, it is not Restrictions on overtime and other work good business for companies to end up with conditions are equally misguided. Employees dead workers.) At the same time, there has and employers should be free to bargain over been little drop in workplace injuries since the the terms of their employment. Different creation of OSHA. The most realistic assess­ workers are likely to prefer different packages ment of the maximum benefit of OSHA ofbenefits; there is no reason for Washington regulation is about $4 billion, which falls to decide, say, the overtime pay rate, or under somewhere between one-third and one-ninth what circumstances companies can instead of the cost imposed by the agency on the U.S. offer comp time. economy. Repeal, not reform, is warranted, Similarly, the government should not be in leaving workplace safety constrained by a the business of promoting labor unions or variety of more cost-effective mechanisms, aiding corporations. Early in its history Wash­ including private lawsuits and market pres­ ington favored the latter; more recently it has sure. leaned towards the former. But, again, federal Such tasks as collecting statistics and fig­ regulation, though justified as helping work­ uring the rate of inflation (Bureau of Labor ing people, actually interfereswith the right of Statistics), could be transferred to the Census employees to choose the employment condi­ Bureau. Oversight of private pensions (Pen­ tions they prefer. At the same time, restrictive sion Benefit Guarantee Corporation) could regulations bar workplace flexibility-which be shifted to the Treasury Department, with TV TAXES 671 the agency stripped of its role as guarantor­ interest groups desiring to benefit from that which poses multibillion dollar liabilities for expansion of political power. The Labor De­ taxpayers-and focused instead on ensuring partment is an example of a government that private companies fulfill their contracts bureaucracy that should not exist: a wasteful to former employees. amalgam of special-interest subsidies and The federal government has grown dramat­ officious government interference. This ically and inexorably because politicians de­ would be a good place for Congress to begin siring to expand their power have joined with paring government back to its essentials. 0 lVTaxes by Raymond J. Keating

hristmas arrived early for TV broadcast­ their new, free-of-charge channels to send out Cers this year. Way back in March the digital signals oftheir commercial TV service, federal government played Santa Claus. currently delivered through less efficient an­ Over a four-day period, from March 31 to alog signals; some frequencies will be left for April 3, Washington gave away the proverbial subscriber-paid services. Broadcasters will si­ store to the nation's over-the-air television multaneously send out their analog and dig­ broadcasters. A major step by the Federal ital signals for about the next decade, after Communications Commission (FCC)-taken which the old signal will end, with that section per a Democratic White House and Repub­ of the spectrum supposedly returned to the lican Congress-and a decision by the U.S. government for auction. Supreme Court will both prove quite costly In effect then, over the coming decade the for taxpayers, consumers, and the U.S. Con­ broadcasters, backed by the federal govern­ stitution. It is corporate welfare run amok. ment, will push consumers to buy new digital Broadcasters were handed tens of billions TV sets or set-top converters for their old ofdollars worth ofbroadcast spectrum, free of TVs. This amounts to a TV tax on consumers, charge. potentially running into hundreds of dollars Earlier this century, the government as­ for converters and thousands of dollars for serted the right to manage the spectrum, the digital televisions. At the same time, were the airwaves over which television, radio, and spectrum auctioned off, rather than given other forms of communication are transmit­ away, billions of dollars in revenues could be ted. This year the federal government flexed collected and used to retire a bit ofthe federal its industrial-policy muscles, decreeing that government's outstanding debt. Indeed, at American consumers should watch digital­ this point Washington's lone goal should be to quality television (with its purported better extract itself from any involvement in the picture and sound) whether they want to or broadcast spectrum-but for safeguarding not. Broadcast television stations will use property rights-and the best means to do so would be to auction off the entire spectrum, Mr. Keating serves as chief economist for the Small Business Survival Foundation and is the author of allowing the marketplace, not government, to New York by the Numbers: State and City in decide the future of over-the-air telecommu­ Perpetual Crisis (Madison Books). nications. 672 THE FREEMAN • NOVEMBER 1997

As for the promise by broadcasters to stations was considered as an issue by the eventually return their old spectrum, don't Court, while the First Amendment (i.e., free hold your breath. If consumers resist paying speech) and the Fifth Amendment (i.e., tak­ the TV tax and stay with their old televisions, ings) were discounted. the broadcasters could keep all of their spec­ In the case of must-carry, the federal gov­ trum for some time. Eitherway, it's a lose-lose ernment has decided that a local broadcast proposition for taxpayers. station must be seen by cable TV subscribers over other stations such as C-Span and ESPN. The Must-Carry Rule Of course, this law violates private-property rights, interfereswith the superiorworkings of Meanwhile, also in March, the Supreme the free market, and overrides what consum­ Court struck another blow for industrial pol­ ers may actually demand. icy and the TV broadcasters by upholding a Government should neither be guiding 1992 federal law mandating that cable televi­ the development of television technologies, sion systems carry local broadcast stations, nor ensuring the economic viability of local i.e., the must-carry rule. In the continuing, broadcasters. If only we could click off gov­ perverse "tradition" of judicial activism, the ernment officials, who insist upon ignoring Court utilized, as Justice Sandra Day the free market and the U.S. Constitution, as O'Connor put it in her dissent, "a highly easily as we turn off the often moronic tele­ dubious economic theory" to uphold the law. vision shows the broadcasters offer over the The economic viability of local broadcast airwaves. D r------.HThe most exc,jting new intellectual journal in many years. -WILLIAM NISKANEN, Chairman, Cato Institute ... 'Tlte INDEPENDENT REVIEW is the new, quarterly journal de- I .1. voted to the political economy of liberty. Transcending the all- too-common politicization and superficiality inpublic policy de­ bate, The INDEPENDENT REVIEWis superbly written, provoca­ tive, wide-ranging, and based on solid scholarship. Featuring path-breaking studies by many of the world's finest economists and other scholars, The INDEPENDENT REVIEWboldly chal­ lenges the collectivization and bureaucratization of our world. Probing the most difficult and pressing of social and economic questions, articles range across economics, political science, law, history, philosophy, sociology, and related fields. Edited by Robert Higgs, The INDEPENDENT REVIEWfeatures in-depth examina­ tions of current policy issues viewed in comprehensive historical, :::::.:: : :.".:.:;! ethical, and economic perspectives. Undaunted and uncompro- ...... l1li mising, this is the journal that will pioneer future debate! "Excellent, diverse and wide-ranging." Figures. Tables. Annual Index. 600 Pages per Volume -IRVING LOUIS HOROWITZ Professor of Sociology, Rutgers University Individual Subscription: $27.95/year • $52.95/2 year "T~~~:~~;1~f[;~;;~\~1~ft~g~~ademy Institutional Subscription: $49.95/year • $94.95/2 year "Excellentf"-JULIAN SIMON International orders add $28 per subscription for shipping Professor of Economics, Univ. of Maryland i Z~ENT· INSflTUTE

The Independent Institute, Dept. 6T, 134 Ninety-Eighth Avenue, Oakland, CA 94603 ~------~ THEFREEMAN IDEAS ON LIBERTY

How Fair Is "Fair Housing"? by George C. Leef

wning property used to mean that you Their only damage was having devoted a small Ohad the right to do with it as you pleased. amount of time to applying for his apartment. You could sell it, rent it, or give it away. You Nevertheless, the misnamed American Civil could also refuse to do so. Some people might Liberties Union and a bevy of "fair housing" be disappointed by your decision, but all they groups joined in. could do was to search elsewhere for what So far, two courts have ruled in favor of they wanted. There was no legal recourse for Hoffius, but the case is now on appeal to the having been told "No." Michigan Supreme Court. Even if he ulti­ But now there is. Thanks to federal and mately prevails, he will have lost, since de­ state "housing discrimination" statutes, fending the suit has cost him thousands of would-be purchasers and renters can collect unrecoverable dollars. (The law allows the damages if they can show that the owner plaintiff to recover attorneys' fees if he wins, "discriminated" against them, which means but not the defendant.) But Hoffius has been they were told "no" without what the govern­ fortunate. In California, Evelyn Smith lost a ment regards as a good enough reason. The similar case when the California Supreme government now casts a long and ominous Court decided that forcing landlords to rent to shadow over the housing market. It is one unmarried couples did not put a "substantial more slash in the death of a thousand cuts burden" on landlords' religious freedom. being administered to property rights in Many housing "discrimination" cases are America. Just ask John Roffius. brought (or threatened) each year. Often, Hoffius owns several apartments in Jack­ they are instigated by organizations like the son, Michigan. He was approached by an Fair Housing Center of Metropolitan Detroit unmarried couple who wanted to rent one of (FHCMD). The budget for FHCMD comes his units. Re declined to do so on religious largely from the federal government, aug­ grounds, stating that he believed it was wrong mented by some private donations. It adver­ for a couple to live together out of wedlock. tises for individuals who have "suffered dis­ He couldn't stop them from cohabiting, but he crimination" and, after learning about their could prevent them from doing so on his experiences, usually sends in "testers." If property. So he thought. "discrimination" is found, then an FHCMD The couple filed suit, seeking damages of attorney contacts the owner to say that they $10,000 each. Of course, they were not really will file suit unless the owner settles. harmed. John Roffius took nothing of theirs. In the case of Darby v. Heather Ridge Apartments, the plaintiffs alleged racial dis­ crimination. The Darbys, a black couple, Mr. Leef is president of Patrick Henry Associates, East Lansing, Michigan, and the director of FEE's sought to rent an apartment, but were in­ Freeman Society discussion clubs. He also serves as formed that no units would be available for book review editor of The Freeman. more than a month. However, white appli- 673 674 THE FREEMAN • NOVEMBER 1997

cants were told that there were units imme­ There was no evidence the complex treated diately available. The plaintiffs sued and won whites and blacks differently, only that its $450,000 in damages. advertising seemed to convey a preference for Racial discrimination like this is both im­ whites. The arbitrator ordered the company moral and irrational. However, just because to shell out $469,000 over the next three years an act is immoral and irrational doesn't mean to hire a "manager of affirmative marketing," anyone has been directly harmed (in con­ retain a consulting firm to help devise an trast to more nebulous emotional hurt). "affirmative marketing plan," include an Except for the loss of some time, the Darbys "Equal Housing" logo in all advertising, and were no worse off than if they had never pay FHCMD $100,000. stopped at Heather Ridge. But they hit the One can have sympathy for the objectives of jackpot with a jury that "wanted to send a groups like FHCMD even while· abhorring message." their methods. Housing discrimination is of­ fensive, but it is a rare phenomenon simply Lawsuits Abound because it usually proves costly to the one practicing it. If a landlord has a vacant apart­ That the law is simply viewed as a tool for ment and turns away decent, paying tenants enrichment is evident from Lawson v. Paragon because of something he doesn't like about Properties, in which a black couple applied for them, he loses revenue. There are nearly apartments at two different complexes. always others in the marketplace who are Within days, they had been accepted at one, happy to rent to those who were rejected. but the other took three weeks to reject their "Fair housing" centers would perform a more application. Rather than simply move in valuable service if they assisted people who where they'd been accepted, the Lawsons encountered discrimination to bypass it, by filed suit against the other complex and finding places where they would likely be wound up with an award of $17,500. In cases accepted. like this, the law seduces people into needless, Unfortunately, however, discrimination wasteful litigation. suits hold out the prospect of great windfalls Another fount of lawsuits is the legal ob­ for plaintiffs, attorneys, and "fair housing" ligation not to discriminate against people centers. Why do something peaceful but not who have "disabilities" and need "accommo­ very profitable when you can use the law to dation" in housing. In Herzberg v. Plymouth shake down property owners? Heritage Apartments, Cindy Herzberg sought to rent an apartment. But she needed an Persuasion, Not Force access ramp to the unit for her wheelchair. The owner said Ms. Herzberg would have to Housing activists might respond that only pay for the ramp, which would cost some the threat of lawsuits will change attitudes. $1,700. Herzberg cried "discrimination!" and Possibly so, although persuasion and positive the case wound up before a mediation panel incentives are usually more effective than that decided it was unreasonable ofthe owner force. In any case, an important part of not to want to spend $1,700 in constructing freedom is tolerating those who do not share the ramp. The mediators tacked on an extra our values and beliefs. People have no more $10,000 in damages to teach the owner to be a right to use force to make people have the more sensitive. "right" attitude toward prospective tenants Sometimes advertising provides the excuse than to make people have the "right" attitude to sue. In 1996, FHCMD won an arbitration toward the Social Security System, opera, or award of $569,000 against the owners of immigration. Henry Ford Village in Dearborn. For more Instead, those committed to "fair housing" than two years, FHCMD had monitored the should use noncoercive means to accomplish advertising of the Village. Among hundreds their ends. If, for example, they have evidence of ads, only one showed any nonwhite people. that a landlord discriminates in ways they HOW FAIR IS "FAIR HOUSING"? 675 deem to be inappropriate, they could publi­ why should they be allowed to take the easy cize this fact and organize a boycott. But doing route of a lawsuit? so requires persuading other people to coop­ Like so many other pieces of statist legis­ erate with you, and that is more difficult than lation, the "fair housing" laws are misnamed. convincing a few jurors to indulge in vicarious There is nothing fair about coercing people generosity. Moreover, those adamantly op­ who have simply decided to contract in ways posed to any kind of housing discrimination that some other people find objectionable. If could cooperate to buy "bad" landlords out of all "fair housing" statutes were repealed, then not only their property, but the business housing activists would have to use their own entirely. If activists aren't willing to put up time and money to assist those for whom they their own money to achieve their objective, express so much concern. 0

THE LINK A HOMESCHOOL new s p a p_e_, _

Vol. 3, Issue 1 A national publication - Circulation: 10,000

Receive A write to this address and John Taylor Gatto, Sam The Link - INDEX - Vol. 3, Issue 1 mention the Freeman: Blumenfeld, David & Schoolteacher's Intuition by John Taylor Gatto Page 4 Free Copy The Link 587 N. Ventu Mien Colfax, Pat & Day lorial Page by Mary Leppert Page 5 Park Road, S\Jite F-911, TIre Link Reviews by TIre Link Stiff Page 6 The Link is an eclectic Farenga, Richard "Little 81Velous Math by Alice Rohan Page 7 Newbury Park, CA Bear" Wheeler, Visual ccreditation of ISPs by Jackie Orsi Page 8 homeschooling omeschool Climate Change by Marilyn Mosley Page 10 91320. Manna '$ Art Workshop information newspaper eighin' In (Legal News &. Sundry) Page 12 featuring writers such Coming & much more. Families Great Document Series Page 14 with children are oreign Language by Donna Fatur08 Page 17 as John Taylor Gatto, . With VISUQ/ Manna by Sharon JdJus Page 20 David & Micn Colfax June, 1998 welcomed to the beautiful nnon~ Room· APlacefor Kids byLennonLeppert Page2S campus of Cal Lutheran Sound Words &. Others by Gary Grammar Page 27 and homeschooling The Link's 2nd Annual iIIermium Moments by Arielle Gorin Page 28 parents. It is a full "kid comfortable" Univ., making this a great e Colfax Comer by The Colfaxes Page 33 resource place for all Homeschool "getaway" for the entire homeschoolers, Conference in Southern family. Watch for more regardless of life­ California! Featured speaker information and philosophy or religion. will be such great registration forms in To receive a free copy speaker/thinkers as future issues ofThe Link. THEFREEMAN . IDEAS ON LIBERTY

Technology and the Work Force: Work Will Not End by Donald K. Jonas

n his recent provocative book The End of rule. These stories of personal tragedy echo I Work, Jeremy Rifkin joins a growing chorus the events of a century ago as Americans left of social pessimists who argue that advanced the farm for the factory. At that time, William technology leads to a concentration ofwealth Jennings Bryan, the Democrats' nominee for in the hands of "the elites" followed by President in 1896, cried, "Burn down your wholesale unemployment for the masses. cities and leave our farms, and your cities will Some critics contend that if we continue our spring up again as ifby magic, but destroy our pattern of adapting technological advances to farms, and the grass will grow in the streets of thework force, in thevery near future all work every city in the country." Populists tried in will literally end. vain to hold on to the agrarian lifestyle by In fact, these techno-pessimists are wrong. resisting the relentless march ofindustrializa­ Rather than ending, work is evolving. New tion. technologies are changing the skill require­ Their attempt failed miserably. Whereas in ments of workers, not making workers obso­ 1790 farmers comprised 90 percent of our lete. population, by 1900 they accounted for just 38 The technocratic straw man constructed by percent; today, just over two percent ofAmer­ these critics ofthe absorption oftechnology is icans are farmers. But this decline did not comical in its simplicity. Technology does not, represent an "end to work," and grass does in and of itself, destroy jobs. Nonetheless, we not now grow in our city streets. Although are inundated with heartbreaking stories of many farmers have felt the pain ofjob loss, the individuals pushed out of the job market, new opportunities presented by the growing usually by ruthless corporate villains intent on industrial age amply compensated for these using advanced technologies to cut jobs. short-term dislocations. Today one sees strik­ One such indictment was Donald Barlett's ing parallels between the dislocated farmer at and James Steele's "America: Who Stole the the turn of the twentieth century and the Dream?", which ran in newspapers across laid-off industrial worker at the dawn of the America during the late summer of 1996. The 21st century. Both cases involve immediate ten-part series relied on anecdotal stories of but short-term discomfort for many in the technologically displaced workers. Invirtually work force while the displaced workers adapt every case, Barlett and Steele used a down­ to the new and more profitable opportunities sized worker to "prove" their unsubstantiated made available by technological change. Numerous social theorists have tried to Mr. Jonas is the Herman Kahn Fellow at the Hudson describe this social change, calling it a "post­ Institute, in Indianapolis, Indiana. industrial age," an "information age," and 676 677 even a "postmodern era." In today's society carriage-making industry: between 1909 and knowledge and the ability to process infor­ 1919, carriage-making employment fell from mation have become central to one's eco­ 70,000 to 26,000. Employment in the new nomic success. Workers who do not measure automobile industry, however, soared from up to this standard can experience significant 85,000 to 394,000, far outstripping the job anxiety and pains. Nevertheless, the evidence losses in the displaced carriage industry. soundly contradicts the apocalyptic ramblings • Employment in the telegraph industry of Rifkin and his associates who fear that peaked at 87,000 workers in 1929 and then advanced technologies will destroy all jobs. declined to a mere 24,000 workers by 1970. As these writers spread their fatalistic vi­ Did those jobs just disappear? Glance over to sion of America's future work opportunities, the telephone industry, which by 1970 had one should note that we've been hearing this created 536,000 new jobs. refrain repeatedly for hundreds of years. It is useful to probe a bit deeper into the "Technology" (alongwith its partner in crime, thoughts of the modern technological pessi­ "globalization") gets blamed for destroying mists. Consider: the labor market. But as Perry Pascarella has argued, "Technology is created by humans to 1. Hype: Jeremy Rifkin claims that "The assist us in our work ... technology makes no ranks of the unemployed and underemployed promises of improving our lives. But it does are growing daily in North America." give us the economic power to improve our Reality: It is simply untrue that unem­ lives in economic dimensions." ployment is rising in America. Alan Reynolds Throughout the course ofhistory new tech­ reports that unemployment due to job loss is nologies have been introduced to the econ­ very near a record low, approximately 2.5 omy that drastically change how we work. percent, and is as low as it was at the peak of Consider these brief examples, cited by Mi­ past cycles in 1979 and 1989. The overall chael Rothschild in Bionomics: unemployment rate remains very low and in • Gutenberg's movable type press in 1440 recent years the U.S. economy has created is often hailed for democratizing information more jobs than it has displaced. Since 1991 the and spreading religion to the masses. From a U.S. economy has lost 14 million jobs and techno-pessimist viewpoint, however, Guten­ created 15.5 million new ones. berg's invention was hell on the scribe busi­ ness, reducing it by 98 percent in a few short 2. Hype: Rifkin also contends that "While years. But this technological advancement some new jobs are being created in the U.S. opened up previously undreamed-of oppor­ economy, they are in the low-paying sectors tunities for work. and generally temporary employment." • The invention of the "power loom" in Reality: During recent years most ser­ Britain in the early 1800s allowed steam­ vice-sector job growth has occurred in higher­ driven machines to mass-produce cloth. The paying managerial and professional-specialty hand-loom operators displaced by this new jobs. Further, according to the Bureau of technology, fearful for their livelihood, at­ Labor Statistics (BLS), most ofthe net growth tempted to stop technological progress by (68 percent) in full-time jobs between Feb­ destroying these new machines. The Luddites, ruary 1994 and February 1996 occurred in job as they became known, would have prevented categories paying above the median wage. the labor-saving power loom from improving Most of these jobs were in occupations in the the efficiency of British cloth manufacturing, top third of wage levels. increasing production, lowering prices, and opening up new markets. 3. Hype: Peter Cappelli in his 1997 book • The internal combustion engine, while Change at Work argues that "It has been very creating thousands of new jobs in the nascent difficult for displaced workers to find new jobs automobile industry at the beginning of the since the mid-1980s." twentieth century, wreaked havoc on the Reality: According to recent statistics, 678 THE FREEMAN • NOVEMBER 1997 most displaced workers who lose their jobs 6. Hype: Rifkin argues that "Men and quickly end up making more money than women who just a few short years ago were before. An August 1996 Federal Reserve taking home wages in excess of $30,000 con­ survey found that fired executives and man­ sider themselves lucky to find jobs as janitors agers were finding jobs with the same or or security guards for $5 an hour. For them better salaries in an average of 2.8 months and their families, the post-World War II in 1996, down from 3.2 to 3.3 months in past dream of being part of the middle class is years. over." Reality: Citing the University of Mich­ 4. Hype: Donald Barlett and James Steele igan's Panel Survey on Income Dynamics contend that after the American worker, the (which has tracked the individual earnings of "biggest loser has been the small business over 50,000 Americans since the late 1960s), owner. Unlike multinational corporations Federal Reserve Bank of Dallas economist that have closed factories and shifted produc­ W. Michael Cox finds that wages for Ameri­ tion abroad to take advantage ofcheap labor, ca's workers are actually rising. Cox notes that small companies seldom have that option. only five percent of those who started out in These businesses are being squeezed out." the lowest income bracket in 1975 remained Reality: Small businesses are a major in this bottom tier by 1991. Furthermore, source of employment in America's informa­ approximately four out of every five Ameri­ tion-age economy. The Small Business Ad­ cans in this lowest bracket had made it into the ministration notes that businesses with fewer middle class, and 30 percent of these individ­ than 500 employees represent 54 percent of uals vaulted into the highest income bracket all American jobs. Small business firms by the early 1990s. today account for more than 70 percent of It is true that earnings for thosewith at most all job growth in the American economy. a high-school diploma have fallen, which Cognetics, a Massachusetts market research suggests that low-skilled people face tremen­ firm, estimates that there are roughly dous challenges that will become even more 300,000 U.S. companies with fewer than 50 daunting. But the techno-pessimist interpre­ employees that are growing at better than 20 tation of the economic statistics is one-sided. percent per year. The terrifying claim that computers are elim­ inating jobs is simply not supported by the 5. Hype: Rifkin says that "The fact is that evidence. while less than one percent of all U.S. com­ The typical pessimistic analysis argues that panies employ 500 or more workers, these big American workers are being permanently left firms still employed more than 41 percent of behind as businesses automate production all the workers in the private sector at the end facilities through the introduction of ad­ of the last decade. And it is these corporate vanced computers and other sophisticated giants that are re-engineering their opera­ technological tools. As computers become tions and letting go a record number of more integrated into the American work employees." force, the argument goes, workers will be­ Reality: Despite the highly publicized come less necessary. layoffs by large companies such as AT&T, big It is too early to argue such a point, firms in general are not firing as many em­ however, especially in light of history. A ployees as many critics think. A recent survey major, transforming_ tool like the computer by the American Management Association may take years to become fully integrated into (AMA) found that although two-thirds of the economy. Paul David of the Center for 1,003 major companies surveyed in 1995 had Economic Policy Research at Stanford Uni­ gone through at least one work force reduc­ versity figures that it took more than 50 years tion since 1989, two-thirds ofthese 1,003 firms to fully assimilate the shift from steam to employed as many or more workers in June electromechanical technology, which began 1995 as in January 1990. almost a century ago. Some of the most BUSINESS AND MORALITY IN A FREE SOCIETY 679 beneficial impacts of electromechanical tech­ short- and long-term economic future. Exist­ nology, especially in terms of increased work ing government policies currently pose a opportunities, did not arise until nearly two­ barrier to the market process of "creative thirds of the way through the transition. destruction" that will create new work oppor­ Workers acted on their incentive to retrain for tunities in the new economy. There are many jobs in the newly altered economy, just as they wide-ranging proposals, from regulatory re­ had done during previous economic revolu­ form to competitive educational changes, tions. Similarly, today's computer revolution that we should seriously consider as we exit is restructuring, not destroying, the work the industrial age in order to raise Ameri­ force. ca's growth rate above its currently sluggish Of course, these pessimists believe that, levels. even with massive retraining and re­ We live in a rapidly changing, globally education, there will not be enough high-tech competitive technological marketplace. Soci­ jobs to go around. But Perry Pascarella argues ety is in the midst of a major transformation that pessimism is "an easy game to play" away from the industrial age into the infor­ because technological disaster always seems mation age. There is real value in peeking into to be just around the corner. Social critics the future. But the technological pessimists have forever warned of a coming technolog­ are using glasses that are too intellectually ical catastrophe, be it a nuclear mishap, an biased to yield results that even approach environmental disaster, or some other cata­ practical reality. Although nothing is certain, clysmic event. But we're still here. one prediction is likely to come true: work has Admittedly, not all is rosy for America's not ended. D

Business and Morality in a Free Society by Edward W. Younkins

ew would deny that capitalism is the most ment. In addition, business success not only F productive and efficient economic sys­ requires but also rewards virtuous behavior by tem, especially after the collapse of Soviet participants in the market. Communism. But some critics still contend that capitalism is not a moral system. Morality Requires Freedom Yet morality is impossible unless one is free to choose between alternatives without out­ All human beings have natural rights either side coercion. Since capitalism is based on endowed by their Creator or inherent in their freedom of choice, it provides the best envi­ nature, and have a moral obligation to respect ronment for morality and character develop- the rights ofothers. Natural rights impose the Dr. Younkins is professor ofaccountancy and busi­ negative obligation not to interfere with ness administration at Wheeling Jesuit University, someone else's liberty. Thus, it is morally Wheeling, West Virginia. illegitimate to use coercion against someone 680 THE FREEMAN • NOVEMBER 1997 who does not first undertake the use offorce. enables individuals to cultivate their talents, The role of government, as recognized by abilities, and virtues. Thus, capitalism, the America's founders, is to protect man's nat­ best system for wealth creation, permits indi­ ural rights. viduals to spend less time on physical con­ This kind offreedom involves far more than cerns, leaving them more time to engage in simple democracy. It demands a protected higher pursuits. private sphere within which an individual can pursue his freely chosen norms, actions, and The Moral Responsibility of ends without the arbitrary intervention of Businessmen others. And this freedom is necessary for individual morality. At the same time, the achievement of There can be no morality without respon­ prosperity tends to reward moral behavior. sibility and no responsibility without self­ Businesses-more particularly, their owners, determination. Responsible self-determina­ managers, and other employees-have moral tion implies rationality, honesty, self-control, obligations. They must respect the natural productiveness, and perseverance. In order to rights of other individuals, which includes provide the maximum self-determination for honoring contracts, not engaging in fraud, not each individual, the state should be limited to using coercion against others, and honoring maintaining justice and defending against representations made to the local community. internal or external coercion, thus protecting Moreover, businessmen should not support life, liberty, and property. government economic interventions, such as A social system such as capitalism is a price supports, tariffs, and subsidies, even system of relationships and cannot be moral though doing so might result in higher profits. or immoral in the sense that a person can To do so would involve the use of coercion, be-only individuals can be moral agents. one step removed. However, a social system can be moral in its Living up to these virtues will aid business­ effects if it promotes the possibility and like­ men in the pursuit of profit. The free market lihood of moral behavior by individuals who rewards polite, cooperative, tolerant, open, act within it. It follows, then, that there is a honest, realistic, trustworthy, discerning, cre­ moral imperative to create a political and ative, fair businessmen. Lying to and cheating economic system that permits the greatest other businesses, misleading consumers, and possibility for self-determination and moral mistreating workers all have serious adverse agency. Capitalism is that system. consequences. In the long run, profitable Capitalism is itself only a means and re­ businesses tend to be operated in accordance quires its individual participants to decide on with the basic ethical principles most people the ends to be pursued. No economic system hold dear. can make people good. The best that an Under capitalism a business transaction economic system can do is to allow people to takes place by mutual agreement for per­ be good. But morality and virtue require that ceived mutual advantage. Through voluntary individuals be free to be immoral and of bad exchange buyers and sellers can promote their character. Only when an individual has choice own interests only by serving the interests of and bears responsibility for his actions can he others. By protecting individual choice, cap­ be moral. Capitalism, more than other eco­ italism not only generates enormous wealth, nomic systems, allows the exercise ofindividual but also creates an environment in which free will. Thus, though capitalism cannot guar­ virtue can flourish. In the end, capitalism is antee a moral society, it is necessary for one. not only the most productive and efficient Human development usually requires more economic system. It is also the most moral than material wealth. However, prosperity economic system. D The Foundation for Economic Education Irvington-on-Hudson, New York 10533 Tel. (914) 591-7230 Fax (914) 591-8910 E-mail: [email protected]

November 1997 Juvenile Delinquency

overnment brings out the kid in all stations be lifted. "Oh, no!" cried the of us. This truth is key to political woman, "that would be disastrous! People Gunderstanding. here don't know how to pump their own Nanny-state activities are government's gasoline. They'd spill it all over the place!" best-known way of babying its citizens. As it happens, my wife hails from New States insist that drivers buckle up; the Jersey. Until she moved to Virginia at the Clinton administration never tires of scold­ age of 26, she had never before filled her ing cigarette smokers and tobacco compa­ own gasoline tank. Sure enough, the first nies; Congress now dictates the amount of time she tried to gas up at a self-service time that women must remain in the hos­ pump in Virginia, she squeezed the pump pital after giving birth, as well as the handle before inserting it into her gasoline amount of water that we free citizens are tank. The result was quite a mess-and, allowed to have in our toilet tanks; and the with fresh gasoline sprayed all about until Americans With Disabilities Act hovers the shop attendant washed it away, also over us like a diabolic schoolmarm made quite dangerous. paranoid by the mistaken belief that her My wife (who now regularly, and charges act with no purpose in life other expertly, refuels her car herself) learned than to commit malicious injustices to the how to pump gasoline the hard way. Had handicapped. These are only a few of the she grown up in a state that trusted its citi­ tens of thousands of instances of how our zens to pump their own gasoline, she nanny state abuses and insults us. would never have squeezed the pump But the nanny state's frightfulness handle before popping it into her tank. doesn't end with these particular abuses New Jersey's prohibition on self-service and insults. Its pernicious effects run much gasoline stations prevents people from deeper. In particular, the more we relin­ gaining useful experience. In its own quish decision-making responsibility to (thankfully small) way, this prohibition government, the more childlike we keeps people from fully growing up. become. While the nanny state stunts personal Consider the response of aNew Jersey growth, the political process encourages woman to my suggestion that New Jer­ childlike behavior in a less obvious and sey's prohibition on self-service gasoline more pernicious way. A mark of immaturi- ty is the inability or unwillingness to make costs or harmful side effects. But because sound decisions-failure to weigh careful­ Santa forgets each child's request as soon ly the present and future benefits and costs as the child leaves, the child on Santa's of available alternatives. Because children knee is in a harmless fantasyland. cannot be trusted to make sound decisions, But suppose that all the shopping-mall adults don't give them much decision­ Santas tallied up the wishes of all the kid­ making responsibility. dies and then tried to make these wishes Why don't parents let eight-year-olds come true. Society would be awash in toys, decide how to spend the family income? desperately short on many of life's necessi­ Because with eight-year-olds in charge, the ties, and drowning in debt! family would vacation for months on end Citizens in a voting booth are much like at Disney World-and be broke in short children on Senator Santa's knee. Enter the order. When spending their parents' voting booth and vote for the candidates money, eight-year-olds ignore the costs promising the greatest amount of wiz­ and long-run consequences of extended ardry! Because your vote is not decisive, stays with Mickey Mouse, focusing only you suffer no personal repercussions in the on the immediate thrills of such vacations. voting booth of using your ballot to express People who consistently act in ignorance all sorts of fantasies. Of course, every other of long-run consequences are rightly voter is in an identical position. called /Ichildish." Thus, democratic elections encourage By this criterion most voters behave voters to behave irresponsibly in the vot­ childishly. Citizens in the voting booth ing booth, just as sitting on Santa's knee help decide a multitude of important encourages little children to rattle off long issues. Should Congress increase subsi­ wish lists of toys. But unlike shopping­ dies to farmers? Should the federal gov­ mall Santas, voting booths tally up voters' ernment fund high-tech research? Should dream-world requests and pass these the state government pay for a fancy requests onto government. Politicians try domed stadium to attract an NFL fran­ in vain to satisfy these unsatisfiable chise? The idea of democracy is that citi­ requests. zens, by voting, collectively make such Compare democratic voting with pri­ decisions. vate decision-making. Perhaps a car buyer But citizens have no incentives to make dreams of owning a car that gets 100 mpg, mature decisions in the voting booth. packs herds of horsepower, and is safe as a First, voters are typically asked to tank. Automakers will supply such cars to decide how to spend other people's buyers willing to pay the price. But money. Just as children have no trouble because such cars must be paid for by each spending mom and dad's money, voters individual buyer, no buyer indulges these have no trouble voting for pet projects to costly fantasies. Each buyer settles for a be financed largely by others. less fanciful car because each buyer prefers Second, no single vote counts; no sin­ to save the extra money it would cost to gle vote decides the outcome of an elec­ buy the fantasy automobile. tion. So, no matter how a voter votes-no Such rational weighing of costs and matter how absurd, unrealistic, or benefits is the mark of maturity. Pathetical­ destructive a voter's wish may prove to ly, democratic voting encourages too many be-the fact that no single vote counts otherwise mature adults to behave like means that no single voter incurs any spoiled brats propped on Santa's knee. material cost of voting in whatever way strikes his fancy. Imagine a child on the knee of a shop­ ping-mall Santa. Because it costs the child nothing to request truckloads of play­ things, the child asks for everything that Donald J. Boudreaux pops into his mind, giving no thought to President Thanksgiving Book Sale "In gratitude that God, not the government, controls the weather. ... And in gratitude that there is still more freedom than authoritarianism. ..." -Leonard E. Read (1898-1983)

Freeman Classics Series Edmund A. Opitz The Morality of Capitalism Religion: Foundation of the The moral foundation of the private Free Society property order. An anthology of Reverend Opitz's 209 pages, $14.95 sale $10.95 eloquent essays and articles. 272 pages, $14.95 sale $11.95 Freeman Library Series The Farm Problem Leonard E. Read The policies which continue to plague Seeds of Progress American agriculture. Twenty-five inspiring essays by FEE's 134 pages, $9.95 sale $5.95 founder. 128 pages, $8.95 sale $6.95 Perry E. Gresham With Wings as Eagles Benjamin A. Rogge A dynamic book for those who want Can Capitalism Survive? to live longer, be happier, and Wise essays exploring the nature of accomplish more. freedom, economics, the business 163 pages, $5.95 sale $4.95 system, and the labor market. 330 pages, $19.95 sale $12.95 Henry Hazlitt The Conquest of Poverty Hans F. Sennholz Capitalist production, not government Money and Freedom programs, has been the real conqueror A critical analysis of central banking, of poverty. legal tender laws, and popular 240 pages, $16.95 sale $13.95 monetary doctrines. 102 pages, $9.95 sale $6.95 Charles C. Heath The Blessing of Liberty Mary Sennholz Classic principles articulated in an Faith and Freedom: A Biographical easily understandable and memorable Sketch of J. Howard Pew fashion. The life story of the builder of Sun Oil 207 pages, $8.95 sale $6.95 Company and Grove City College. 179 pages, $9.95 sale $6.95 Ludwig von Mises Economic Freedom and Andrew Dickson White Interventionism Fiat Money Inflation in France An anthology of essays and articles The classic history of the French edited by Bettina Bien Greaves. hyperinflation from 1790 to 1796. 264 pages, $14.95 sale $11.95 125 pages, $7.95 sale $4.95

Sale ends November 28,1997. 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, NY 10533. Visa and MasterCard telephone and fax orders ($10 minimum) are welcomed: (800) 452-3518; fax (914) 591-8910. Announcing a New Printing of Cliches of Politics edited by Mark Spangler

UCliches of Politics is the best briefanthology ofeconomic principles available today. It is an important book that couldn't come at a more critical time in our history." -George Roche, President, Hillsdale College

Political intervention attracts support in subtle and alluring ways. Today's politicians and their constituents at least pay lip service to freedom and free enterprise. Government action is advo­ cated only to "fix" perceived flaws in the mar­ ket economy, and public spending is proposed merely to "compensate" for deficiencies in the private sector. Cliches of Politics is an indispensable tool for understanding and defending the case for limited government and the free market.

Have YOU Bought Any of These Politicians offer endless excuses for Cliches ofPolitics? expanding their own powers, while * "We have a right to this service." restricting our personal liberties. * "There ought to be a law!" But are their claims valid? * "The free market ignores the Here, dozens of thinkers dissect poor." more than eighty common"cliches * "If we had no Social Security of politics." They subject familiar many people would go hungry." notions about government to * "Government should create and withering logical, economic, and protect jobs." Constitutional examination. * "Foreign imports destroy jobs." The result: a bold challenge to the * "Private enterprise leads to conventional wisdom that may pollution." forever change the way YOU think * "Society is to blame, not 1." about our system of government.

Cliches ofPolitics is a revised edition of FEE's popular Cliches ofSocialism. Mark Spangler updat­ ed and incorporated many of the original Cliches and enlisted the writing talents of more than thirty additional writers and scholars to complete this new edition.

Published by The Foundation for Economic Education, Inc. 30 South Broadway, Irvington-on-Hudson, NY 10533

ISBN 0-910614-96-2 • 314 pages, indexed • paperback $14.95 Visa and MasterCard orders: (800) 452-3518 THEFREEMAN IDEAS ON LIBERTY

The Minimum Wage by Kevin Sohr and Walter Block

he second stage of the minimum-wage sylvania held its rate constant. In a study T increase approved by Congress last year published in 1994 Card and Krueger con­ recently took effect. What will the impact be cluded that employment in New Jersey's fast­ on the economy and particularly on unskilled food industry actually rose after the wage workers? Economists have long argued that hike. In contrast, industry employment fell in minimum wage increases cut employment, Pennsylvania. How can this be? The Card­ particularly of minorities and teenagers. But Krueger study leads us to believe that em­ supporters ofthe minimum wage, now backed ployers demand more labor as its price rises. by some economists, claim that government­ Such counterintuitive findings require a legislated wage hikes do not necessarily lead deeper look. to less employment, and may even create The Card-Krueger model's method of data more jobs for the unskilled. So does the gathering has been widely questioned. Via minimum wage benefit or injure workers? phone surveys, the team interviewed manag­ Traditionally economists have maintained ers from 321 fast·food franchises in New that the free market establishes the wages for Jersey and 78 in Pennsylvania. This is a very all workers so that they receive the value of small number of firms to use as evidence for their output. If Sam is earning $2 an hour such significant findings. Also, the informa­ while generating $2.50 worth of goods and tion given by stores may not be accurate. services for Firm X, then Firm Y would have Burger King managers are not statisticians or an incentive to offer Sam $2.01 per hour. Firm even bookkeepers; the study should have Xwould then counterwith $2.02 and the cycle employed repeat interviews by a second set of would continue until Sam was paid $2.50 an researchers. hour. No firm would bid higher because he Moreover, while the law went into effect on was simply not worth it. What happens when April 1, 1992, the interviews regarding the the minimum wage is set by law at $3.00? impact of the legislation were conducted According to classical economists, Sam will between November 5 and December 31 of lose his job. that year. By using such a limited window, just But David Card (now at the University of seven to nine months after the implementa­ California, Berkeley) and Alan Krueger of tion ofthe law, Card and Krueger did not give Princeton University have challenged the tra­ the market sufficient time to develop alterna­ ditional model. In 1992 New Jersey increased tives, such as automation, to low-skilled labor. its minimum wage while neighboring Penn- (Had they conducted interviews on April 1, their results would have shown zero impact.) Mr. Sohr is a student, and Dr. Block a former Milton Friedman rightly argues that "It takes professor, at the College of the Holy Cross in Worcester, Massachusetts. Dr. Block is now chair of time for firms ... to shift to ways of doing the department of economics and finance at the things which place less reliance on unskilled University of Central Arkansas. labor." 681 682 THE FREEMAN • NOVEMBER 1997

Yet another possible fault with their find­ the mInImum wage law probably does the ings is the actual significance ofthe minimum­ Negroes the most harm." Each increase in the wage increase. At the time of the hike, minimum wage has been followed by an two-thirds of the restaurants were already immediate widening of the unemployment paying more than the minimum. In these rate gap between black and white teens. Prior cases the market had already provided lower­ to the 1949 increase the two rates were skilled workers with high wages. virtually identical; immediately a gap was Moreover, even ifemployment did increase created. Every subsequent increase led to a in the fast-food industry when the minimum dramatic increase in non-white unemploy­ wage rose, this result is still not necessarily ment while the white level stayed relatively good for society. Economists David Neumark stable. and William Wascher have found that an The problem is not racism, but lack of increased minimum wage will decrease the employment skills. Friedman explained that number of teens enrolled in high school and black "youngsters are less productive than raise the proportion who are unemployed. white youngsters. They tend to have a lower Why this paradoxical result? The higher min­ level of education, a lower level of skill." This imum encourages more skilled teens to drop being the case, any given level of mandated out, while making it more likely that those wage is likely to trap more black than white who were already working will lose their jobs. youth. The dramatic conclusions of the Card­ The one advantage low-skilled workers Krueger project contrast sharply with its poor might have over their skilled counterparts is quality. Observes economist Robert Barro: price competition, offering to work for less. "An annoying feature of the Card-Krueger But the minimum wage makes such an offer research is their eagerness to use their find­ illegal. Thus, the minimum wage hurts those ings to discredit the law of demand.... It whom it is intended to most help: unskilled shows extraordinary arrogance to use tenuous laborers. empirical evidence ... to proclaim the first Given its disastrous consequences, why documented case in which demand curves fail does the minimum receive so much support? to slope down. A more reasonable view is that It preys on people's good intentions. Voters the demand curve is just fine, and the Card­ think: Poor people are not making much Krueger empirical analysis needs repairs." money. How can we help them? Mandate that Moreover, the minimum wage is not an their bosses pay more. When a politician equal opportunity destroyer. Teens in general opposes an increase, people hear "Iwant poor suffer more from this law than do adults. Each people to earn less money." succeeding increase in the minimum wage has The minimum wage keeps rising. The im­ negatively impacted teenage unemployment pact.will continue to be to hurt poor, young, rates. Just as the minimum wage attacks the black, and unskilled workers. Despite the young more than the old, it also harms blacks highly publicized study by Card and Krue­ more than whites. Observed Milton Friedman ger, the economic evidence overwhelmingly more than three decades ago: "Of all the laws indicates that the minimum wage destroys on the statute books of this country, I believe jobs. D THEFREEMAN IDEAS ON LIBERTY

Loved to Death: America's Unresolved Health-Care Crisis by Michael J. Hurd

he Canadian health-care system ofsingle­ Medicare and Medicaid, over 40 percent ofall T payer, socialized insurance is in trouble. health-care expenditures. This massive infu­ Yet Congress and the president continue to sion of cash into what were originally unreg­ push the American system in the same direc­ ulated fee-for-service programs fueled de­ tion. mand for medical services, and thus inflated As Canada's national government slashes prices. Second, Washington allows tax write­ spending on medical care in order to reduce offs to businesses for health insurance, but the deficit, local provinces are reducing med­ does not tax workers for the benefits. Conse­ ical staff. In Ontario, pregnant women are quently, employers have tended to provide being sent to Detroit because no obstetricians comprehensive insurance. are available. Specialists of all kinds are in Thus the vast majority ofhealth care is paid short supply. Patients have to wait eight weeks for by a third party. Doctors do not have to for an MRI, ten weeks for referral to a worry if they are charging too much; the specialist, and four months for heart bypass health insurance company (or the govern­ surgery. ment, in the case ofthe elderly and poor) will Does this sound like the utopian care pick up the tab. Patients do not have to shop Canadian politicians promised their constit­ carefully based on prices. Imagine if a third uents? The hard truth is that socialized med­ party picked up the tab for any other com­ icine is destroying health care in Canada. modity-such as groceries, rent, television Most Americans do not understand thatwe sets, or automobiles. Prices would skyrocket are headed down a similar path in this coun­ because the consumer would feel no pressure try. The same mistaken economic and philo­ to spend carefully. sophical ideas that created socialized medi­ While the insurance companies and gov­ cine in Canada are leading to semi-socialized ernment, which are paying the bill, cannot medicine in the United States. The increase in shop for the consumer, they can place controls managed care, bureaucracy, waiting lists, and on the patient's freedom of choice. In the expense is largely the fault ofthe government. 1980s, Medicare officials began to set price In its zeal to "compassionately" meet all of controls ("Diagnostic Related Groups," or our health-care demands, the government is DRGs) on treatments for the elderly. In the loving us to death. 1990s private health insurance companies How? First, the government pays, through followed suit, by expanding Health Mainte­ nance Organizations (HMOs) and other Dr. Hurd is a psychologist/author residing in Mary­ forms of managed care that often arbitrarily land. decide who may and may not receive treat- 683 684 THE FREEMAN • NOVEMBER 1997

ment. Yet there was no alternative to such The basic principles of economics would cost-saving steps, since without some kind of work no differently in the medical market­ controls the price of medicine would rise ever place than in any other. The fact that higher. In that case there would have been medical treatment can be a matter of life or pressure on the government to take over death does not prevent economic principles altogether, yielding something akin to the from operating. On the contrary, the life­ Canadian system: monopolistic, post office­ or-death nature ofmedical treatment makes style medical care. it all the more urgent that the government Yet the growth of. managed care has re­ allow the marketplace to function ratio­ sulted in American patients encountering nally. problems similar to those faced by Canadi­ Restoring the marketplace requires aggres­ ans-waiting lists for appointments, arbitrary sive free-market reforms. This means adjust­ treatment decisions made by bureaucrats ing the tax law to end the subsidy for expensive rather than by physicians, and new price and comprehensive insurance. Moreover, Medi­ treatment controls in government programs care should be privatized. One possibility such as Medicare. Today the United States would be to maintain the program for the teeters on the brink of a Canadian-like sys­ current elderly, offer a phase-out option uti­ tem. lizing medical savings accounts (akin to IRAs) for the middle-aged, and inform young people A Free Market in Medicine: that they will be responsible for saving for old­ The Unknown Ideal age medical care. How did we get to this point? And, more Socialist Principles Remain importantly, how can we reverse course and prevent a plunge into the disaster that The problem is not just getting people to Canada now faces? The answer is real understand economics, however. Despite the capitalism. collapse ofcommunism throughout the world, Patients would be free to pursue any treat­ and the failure of welfare-state democracies ment they wanted. They would also be re­ in Western Europe, American politicians of sponsible for payment, encouraging them to all stripes still insist that more government select the best price available among compet­ control over health care is needed. ing medical providers and hospital insurance How can this be? In a recent Canadian carriers. survey, the majority of respondents stated Doctors and hospitals would be free to that their socialized system, for all its prob­ charge what they believed their services were lems, reflected their collective "generosity worth; but they would also have to compete in and compassion," and gave them at least one a marketplace where they risked losses if they clear claim to being "morally superior" to the charged significantly more than their compet­ United States. Imagine! A socialist system itors or more than what most people were that provides-indeed, even mandates-pain, willing to pay. Patients, shopping as informed suffering, inefficiency, and stagnation is con­ consumers in the marketplace, would do the sidered to be morally superior to a capitalistic cost-cutting that the HMOs and government system which (when allowed to function with­ bureaucrats currently do far less efficiently. out interference) promotes competition, Just as capitalism (or, more specifically, the technological superiority, affordability, and law of supply and demand) succeeds in individual respect. In other words, it is making food, computers, and other goods better for everyone to have mediocre (or widely available at prices everyone can worse) medical care, as is the case in .afford, so too with medicine and hospital­ Canada, than it is for there to be any ization insurance-if only the government variation in care. Unfortunately, Ameri­ would get out of the way and let the cans, too, are increasingly choosing this marketplace work. same ethical perspective. LOVED TO DEATH: AMERICA'S UNRESOLVED HEALTH-CARE CRISIS 685

The "Right" to Health Care currently underway in the United States over whether HMO doctors should tell their This attitude is reflected in the belief that patients when they are being denied supe­ health care is a "right." Dr. Ted Rumble, an rior treatment.) A significant number said orthopedic surgeon in Toronto who is coop­ they would have more peace of mind simply erating with the doctors' protest movement in not knowing. Psychologists call this "deni­ Canada, summed up the issue: "The public al." doesn't want a high quality medical system, it wants a free system." My own experience Doctors Fight Back: suggests that Rumble's statement applies as Medicine's Last Chance much to the United States as to Canada. Many people resent the fact that they cannot In the midst of the Canadian health-care have something for nothing, particularly med­ crisis (and the growing American one) there ical care. In a way, who can blame them? exists one hopeful development: the protest Government health policies already make of Canadian doctors against the socialized nearly everyone dependent on a third party. system. More and more doctors are refusing So many American adults feel that their to accept new referrals. They are pressuring medical care should just be available­ the government to reduce what it takes from somehow-as if health care grew on trees. them for alleged "administrative costs." They The result is a refusal to deal with reality. have also fought the government's attempt to The mere fact that health care, or whatever force urban Toronto doctors out of their else, for that matter, does not grow on trees practices into more rural areas farther north. is irrelevant. "There ought to be a law" to Some 700 doctors fled Canada for the United make the desired good or service grow on States last year, more than twice the number trees. Of course, politicians are always de­ who emigrated ten years ago. If Canadian lighted to participate in the charade, if it physicians can find the courage to fight irra­ means advancing their short-term interests. tional and unjust government mandates, then This is evident in Canada, where frustrated perhaps American doctors-who still enjoy citizens don't want to replace the socialized more freedom than their Canadian counter­ system with a free market, but rather, to parts-can muster the same courage. increase government's power to limit "unnec­ Doctors must not be afraid to point out that essary" medical visits. In a word: rationing. capitalism delivers the goods. Because it re­ The childish attachment to the idea of gov­ spects the rights ofthe individual, it is the only ernment medicine, in Canada and elsewhere, proper, humane, and moral social system. appears at times almost mystical. A New York Moreover, great medical care would never Times reporter has described the "sacred have been possible in a society that did not place in the shrine of Canadian values" its respect the rights ofdoctors. When told about citizens seem to hold for its disastrous medical a patient's refusal to pay for his services, Dr. system. Similar sentiments are obvious in Aaron Shutt, a fictitious surgeon in the CBS Great Britain, where former Prime Minister television series "Chicago Hope," stated: "It's Margaret Thatcher could implement no real not about money. It is about respect. Surgery reforms in the socialized medical system, is my art. It's my craft. It's mine to sell; it's despite its obvious failures. mine to give away. People ... think it's free for Incredibly, the Canadian survey actually the taking. Well, it's not. And I'm going to do found people divided over whether doctors something about it." should tell patients that their treatment may It's time for all doctors to do something not be the best available. (A similar debate is about it. D THEFREEMAN IDEAS ON LIBERTY

Electrical Utilities: The Final Deregulatory Frontier by Doug Bandow

P into the 1970s electrical utilities were sure is growing to transform the entire indus­ Uone of the least likely candidates for try through competition. Observes Elizabeth deregulation. The industry was littered with Moler, chairman of the Federal Energy Reg­ local and regional government enterprises ulatory Commission, "The future is here, and and state and federal subsidies. Private power the future is competition." companies were thought to be "natural mo­ nopolies" and therefore were established as The Electricity Market monopoly franchises regulated by govern­ ment commissions. The public interest was Monopoly provision of power was not in­ thought best served by suppressing competi­ evitable. Early power companies, which date tion and guaranteeing a set rate of return. to 1879, relied on public streets to transmit Since then the world has changed greatly. electricity. Many municipalities granted com­ In the United States controls have been lifted peting franchises. In 1905, however, New or reduced in the airline, banking, broadcast­ York and Wisconsin began the shift toward ing' citrus, energy, natural gas, oil, rail, tele­ government control. What Robert Bradley of communications, telephone, and trucking in­ the Institute for Energy Research terms "the dustries. The move to freer markets has been cumulative march ofregulation" reflected the even more significant abroad, affecting not reigning Zeitgeist of the Progressive Era, only Third World states but also the one-time with its belief in public management. communist empire. The formal justification was that competi­ Moreover, states, the federal government, tion was wasteful. Electrical generation and and foreign nations have begun to apply the transmission, it was said, was a "natural same principles to power generation. A test monopoly." In fact, regulation turned into a group of New Hampshire residents has been happy meeting point for activists philosoph­ bombarded with offers from some 30 different ically predisposed to government control, if power producers as part of aNew Hampshire not ownership, and businessmen who pre­ pilot program; bills have dropped by an av­ ferred guaranteed returns to the vagaries of erage of 15 to 20 percent. Potential savings the marketplace. Research indicates that reg­ from full competition could range up to 40 ulation was first imposed where electrical percent. Merely a one cent per kilowatt-hour rates and producer profits were lowest­ drop would save $28 billion nationally. Pres- suggesting vigorous competition. The result Doug Bandow, this month's guest editor, is a senior of regulation was to raise both. fellow at the Cato Institute and the author of The The ultimate outcome of this shift from Politics of Envy: Statism as Theology. competition to regulation was a mixture of 686 687 government enterprises, government-subsi­ producers could produce energy for sale to dized cooperatives, and regulated monopoly utilities. In 1994 the California Public Utility franchises. As early as 1882 municipalities had Commission voted to take the logical next begun to establish their own utilities. Federal step of retail competition. A number of power generation began in 1909, after Pres­ states are now proceeding with plans to test ident Theodore Roosevelt ended private ac­ retail wheeling. Some of the same ideas cess to public waterways. In 1933, Congress have been advanced overseas, particularly created the Tennessee Valley Authority, in Europe. which combined federal power with economic Even industry executives, many of whom development and pork-barrel politics. Also remain fearful ofsuch changes, recognize that important are rural cooperatives, which were deregulation is coming. Exactly what form originally established to bring power to Amer­ that should take for utilities remains highly ica's less developed areas. controverted. Nevertheless, the end point is But still most important are the investor­ clear: market forces should be allowed to owned utilities (IODs). The IODs were determine the generation and provision of granted geographically exclusive franchises power. and subjected to extensive state review, usu­ ally by an independent commission whose Government-Owned and members were appointed in some states and Subsidized Power elected in others. Nevertheless, state author­ ities had trouble controlling interstate power The first step in any deregulation program transfers and regulating multi-state holding should be to level the energy playing field. companies. In response to these perceived While IODs have, at least until recently, problems, Congress passed legislation autho­ benefited from their status as protected mo­ rizing the Federal Power Commission to nopolies, they have faced competition from regulate interstate transmission of power. public and quasi-public entities with even The process worked relatively smoothly greater advantages. Government-subsidized until the so-called energy crisis of the 1970s. power comes in several forms. In large part this reflected the fact that until One is the roughly 1,800 municipally owned then electricity prices had been generally utilities across the nation, which account for falling or rising only slowly. That changed in about 15 percent ofpower distribution. Local the 1970s, however. Rates began to move public systems typically charge less than their upward with successive oil price shocks. Com­ private equivalents, but this reflects govern­ pliance costs with the Clean Air Act, passed ment favoritism, not economic efficiency. Be­ in 1970, and other environmental regulations ing exempt from most state and federal taxes, significantly affected the cost and pace of new municipals face an overall tax burden about plant construction. Rising interest rates had a one-seventh that of IODs. particularly injurious impact on the capital Municipalities also can issue tax-exempt intensive electricity industry. Higher electric­ bonds, which require lower interest rates. ity charges sparked public opposition. Many states provide subsidized credit, further As the existing industry structure shud­ advantaging municipals. The federal govern­ dered, some regulators and politicians began ment provides preferential access to power to look at the possibility of relying on market generated by its power-marketing authorities, forces. By the end of the 1980s, proposals for which sell power for 2.5 cents per kilowatt­ deregulation were percolating in more than hour, barely 40 percent of the national aver­ 20 different states. Congress passed the En­ age. Finally, urban systems are usually exempt ergy Policy Act of 1992, which allowed the from regulation by state commissions. These Federal Energy Regulatory Commission generous subsidies go to wealthy cities like (FERC) to require IODs to "wheel" bulk Aspen and Los Angeles. power (wholesale to other utilities) on their Similar in certain ways are the 900 coop­ transmission lines. Thus, independent power eratives (owned by their customers), which 688 THE FREEMAN • NOVEMBER 1997 account for about eight percent of the coun­ als to allow comparable private power devel­ try's energy demand. They are also generally opment. Although no longer the recipient of exempt from state and federal taxes and annual appropriations, the TVA can still receive preferential access to federal power. borrow at below-market rates through the Moreover, they have their own federal Federal Financing Bank. It is also not subject agency, the Rural Utility Service, formerly the to the same taxes as are IOUs. Rural Electrification Administration (REA), Similar in purpose, if somewhat more lim­ with no purpose in life other than to transfer ited in scope, were five other regional enter­ taxpayer resources to the co-ops. prises, known as power marketing adminis­ Even when the REA was created in 1935 trations (PMAs). The first was the Bonneville the agency's primary justification was pOliti­ Power Administration, created in 1937 to cal. Although only 12 percent of American provide power to the Northwest. Here again farms then had electricity, IOUswere steadily the federal government financed power con­ expanding service in rural areas. The REA struction and operation and offered preferential became a political behemoth constantly in access to its cut-rate power to public utilities or search of new tasks to fulfill, expanding into private cooperatives. Today the PMAs encom­ phone service, and, briefly during the Carter pass 129 power plants and produce about six administration, cable television. Unfortu­ percent of the nation's electricity. nately its activities have come at high cost: as As America moves toward a competitive much as 40 percent of its roughly $43 billion system, cities should simply sell off their loan portfolio may have to be written off. public power systems-collectively worth an The agency has lost all pretense ofpurpose. estimated $17 billion. These systems, along Today more than 99 percent of farms have with the co-ops, should be stripped of their electricity. Co-ops now largely serve urban preferential treatment, both exemption from and suburban America. Indeed, supposedly taxes and access to federal power. rural co-ops service exotic Hilton Head Island All ofthe federal enterprises should also be and elite Vail, as well as the suburbs of privatized. Doing so could bring in between Atlanta, Dallas, and Washington, D.C. $20 billion and $40 billion. At the very least, All told, it has been estimated that munic­ Congress could begin privatizing individual ipal and cooperative utilities receive about dams and plants and circumscribing the op­ $8.7 billion worth of government aid every eration of the PMAs. It certainly should cut year. Looking at the subsidies from a different off new taxpayer subsidies-$312.5 million perspective, the federal government alone is last year. The PMAs should sell their power forgoing revenues-taxes on municipalities/ at market rates, which could bring in up to co-ops and their investors, and charges for $3.6 billion. Congress should cut off the federal power-of about $8.4 billion annu­ PMAs' subsidized borrowing, worth about ally. State and local governments are yielding $1.2 billion a year. up a similar $2.7 billion in revenue. The rates of municipals and cooperatives would have to Subsidies to Alternative rise by 17 percent and 16 percent, respec­ Producers tively, without the subsidies. The federal government runs six major The so-called energy crisis of the 1970s power generation and distribution systems. sparked federal interest in both alternative Created first, in 1933, was the Tennessee sources of power and conservation. Support Valley Authority, which was to provide power at times veered toward fanaticism-federal to citizens within its own region. Congress controls over office temperatures, massive financed the construction and initial opera­ subsidies for uneconomic energy sources like tion ofwhat has become a multi-billion-dollar synthetic fuels, and more. A more moderate system. Again, the initiative was pre­ manifestation ofthis sentiment was the Public eminently a political move, since the federal Utilities Regulatory Policy Act of 1978 government had consistently rejected propos- (PURPA). ELECTRICAL UTILITIES: THE FINAL DEREGULATORY FRONTIER 689

Utilities were required to buy energy from special "lifeline" rates, subsidized by other "qualifying facilities," co-generators and in­ ratepayers. Environmentalists have been as­ dependent producers that met specific crite­ suaged by the requirement that utilities offer ria, at the "avoided costs" of building new mandatory energy audits, subsidize energy generating facilities or purchasing elsewhere, conservation, and the like. the interpretation ofwhich was largely left to Unfortunately, mixing purposes (energy state regulatory commissions. Today the con­ production and poverty relief) almost always tribution of co-generation remains modest, gives the worst of both worlds-more costly while that of other non-utility generators has service and worse policy-making. For in­ become significant. stance, utilities have no more responsibility Although the law forbade commissions than supermarkets to lower their prices for from setting prices higher than the "avoided lower-income people. Moreover, hiding pov­ cost" of additional generation capacity, they erty alleviation in utility rates distorts public had significant discretion in deciding what decision-making. constituted avoided costs, and some set un­ Mandatory energy conservation also makes realistically high prices. Among the QFs that no sense. There is no energy shortage; sup­ sprang forth were "windfarms," solar power plies of recoverable petroleum reserves, for projects, and small hydro systems across the instance, have been increasing. The crisis of country. Many of these contracts live on, with the 1970s reflected perverse government pol­ long-term prices set well above market rates. icy, not lack ofenergy. Nor is there any reason The result is to inflict high-cost energy on that the consumer who desires an audit­ IOUs, costs which must be passed on to which will, of course, primarily benefit him or consumers. All told, Resource Data Interna­ her-should not pay for it. Or a utility, tional, Inc., figures that PURPA will inflate believing such a program to offer a financial utilities' costs by $37 billion through the year or competitive advantage, could offer such a 2000. Some estimates run higher. service gratis. States should drop their man­ PURPA should be repealed. There is no dates and the federal government should reason to continue requiring utilities to pur­ avoid imposing its own. In short, deregulation chase inefficient, wasteful, high-cost energy. should mean deregulation. The only issue is whether to grandfather in existing QFs. Some $40 billion has been Holding Company Regulation invested in independent power projects across the country, a substantial portion of which In 1935 Congress passed the Public Utility would be a risk without government protec­ Holding Company Act (PUHCA). The legis­ tion. However sympathetic their case-they lation broke up large holding companies that did, after all, make their investments in reli­ controlled multiple utilities. The basic justi­ ance on the existence of PURPA-vesting fication for the Act reflected more New Deal property rights in an existing regulatory re­ ideology than genuine economic problems. gime risks imposing losses on even more Observes Richard Gordon of Pennsylvania innocent parties (in this case, consumers and State University: "The evidence suggests, utilities) and ossifying whatever system hap­ however, that the holding company develop­ pens to exist (since the compensatory costs ment process was one ofcompetition to effect are potentially so high). what seemed a badly needed rationalization of the then-prevailing structure." PUHCA Promoting Other disassembled economical operations and en­ Social Objectives couraged other, less economical integration. Equally important, the statute hampered fu­ One method politicians use to win votes at ture integration, forcing IOUs to rely on other people's expense is to require utilities to voluntary cooperation, which, though often promote a variety of social objectives. For successful, lacked the legal certainty offormal instance, concern about the poor has led to integration. 690 THE FREEMAN • NOVEMBER 1997

The law makes no more sense today and Nevertheless, legislators are unlikely to should simply be repealed. If utilities are leave IOUs with even a temporary unregu­ going to be subject to competition, they need lated monopoly. Thus, most proposals for the freedom to structure themselves to best moving to retail wheeling would expand gov­ meet the new competition. ernment control by mandating that utilities carry power for their competitors. In the short The Electric Grid term (until the construction of alternative distribution facilities), retail competition is The development of a national transmis­ possible only through regulation. However, sion network, or grid, has helped make an such regulation would amount to a takeover electricity free market possible. Within the of the utilities' resource, effectively an exer­ larger regional networks (east, west, and cise in eminent domain by government which, Texas) exist smaller networks and power under the Fifth Amendment, should require pools of cooperating utilities. This electricity compensation. (Such an action would not superhighway is, ofcourse, privately owned by necessarily meet the current court test of the the IaUs. However, their ownership is often Fifth Amendment, which allows a plethora of recognized only in the breach. PURPA allows de facto takings through regulation.) QFs, essentially competitors of the private The issue is not the cost to the individual utilities, to request that FERC require one or utilities involved, though wheeling is not free. more utilities to wheel their power. Later There is a more basic question: the right to legislation did the same thing for additional property, which requires a legal ability to independent power producers. In 1996 FERC exclude others. Forcing 10Us to transmit issued two orders further opening up trans­ electricity on behalf of others, particularly mission lines to competitors. their competitors, obviously circumscribes the A move to retail wheeling would likely right of utilities to their transmission systems. extend this control far further. This is not an For such a violation, or "taking" (if only economically inevitable outcome of deregu­ partially) at the hands of government, they lation-the market could be left to develop deserve compensation. Moving to a free mar­ with IOUs in full control oftheir transmission ket means just that, and one important aspect facilities, which would obviously limit compe­ of which is to respect private property, even tition until alternative grids were established. that owned by utilities. But alternatives would arise, absent the ex­ isting government monopolies: already cable "Stranded Costs" TV, gas, and phone companies, railroads and other enterprises own significant rights of Although competition would prove enor­ way. In fact, William Niskanen of the Cato mously beneficial to consumers, its impact is Institute suggests that the government not likely to be less benign on existing producers. mandate access, and instead allow utilities to The most important problem of reconciling charge the market price for transmission; the old order with the new is the treatment of provide "the same access to public rights of past utility generation investments which way that have been granted to the utilities"; were to be paid off through regulated utility and allow other companies with their own rates in coming years. rights of way, such as railroads, to develop The basic difficulty is quite simple: invest­ transmission facilities. Major consumers and ment decisions made in a system of guar­ groups of consumers would also have an anteed contracts for wholesalers, protected incentive to develop their own grids. monopoly for retailers, and political interfer­ Moreover, a range of academic research ences by legislators and regulators, will not raises serious questions about the ability of necessarily be the same as the best decisions regulation to ultimately have much impact on in a free market. As a result, warns a study by industry profits or services. Competition is a the Edison Electric Institute: "if utility rates much better protector of consumer interests. were 'brought to market' immediately by ELECTRICAL UTILITIES: THE FINAL DEREGULATORY FRONTIER 691 competition, some costs associated with gen­ case more difficult. Although industry regu­ eration investments, purchased power com­ lation is pervasive, it usually has not been mitments and other deferred costs would be structured to so consistently encourage high­ 'stranded'." cost capital investment. Government limits on In fact, stranded costs occur throughout the profit-taking also raise issues not present with economy in the sense that competition and simple restraints on competition. Since IOUs technological innovation constantly make were denied the ability to make potentially some investments uneconomic. These are lucrative returns on those investments when almost always uncompensated. However, regulated, they reasonably argue for recovery stranded costs that result from changes in or mitigation of the losses as government lifts government policy, such as deregulation, raise the regulation. On the other hand, however additional issues. After all, investors in com­ unfair deregulation might seem in such a case, petitive markets understand the risk of change the IOUs and. their investors always knew better than investors in regulated industries. that the law and rules could change. Indeed, Estimates of the value of utility assets that the 1970s should have brought that lesson would be "stranded," and not likely to be home to some degree, since once-routine recovered, once prices are competitively set, rate increase proceedings became increas­ range from $20 billion to $500 billion, with ingly contentious. A fair bottom line would $100 to $160 billion the most common. In suggest showing some sympathy for the an industry with $175 billion in shareholder utilities' position, but leaving them with the equity, even a partialwrite-down would result majority of the downside risk for their in significant shareholder misery. It would investments. also have a major impact on investors holding Another issue involves particular obliga­ utility bonds. tions imposed on the industry but not new Not surprisingly, the IOUs argue on behalf competitors. For instance, to maintain ofrecovery ofstranded costs. They mix equity PURPA in an otherwise deregulated market and efficiency arguments, grounded in what would force utilities to pay above-market prices economists William Baumol and J. Gregory for energy, hardly a prescription for effective Sidak call an "implicit regulatory compact." competition. Similar are energy consetvation That is, utilities agreed to invest in exchange programs, low-cost "lifeline" initiatives, and for the promise ofa reasonable rate ofreturn. other money-losing initiatives now imposed on Although utilities understandably desire utilities but for which the costs have been full coverage for investments devalued by recoverable when competition is banned and deregulation, as a general principle it is nei­ rates are regulated. As argued earlier, govern­ ther fair nor practical to turn regulatory ment should end its forced exactions. Ifnot, the expectations into property rights. The very utilities desetve compensation. pervasiveness of regulation makes fiscally Inshort, distinctions should be drawn based infeasible any uniform attempt to compensate on responsibility (utility decision or regula­ for regulatory expectations. Nor would it tory change) and potential for mitigation seem appropriate to dump that burden on (also by utility or government). The presump­ consumers who were the very people paying tion shouldbe that in caseswhere government artificially high prices in the past. Indeed, the caused or failed to mitigate the stranded costs basic principle might be termed: he who lives (like PURPA), they are recoverable. Where by the sword dies by the sword. Thatis, investors the stranded costs were caused or not miti­ who put money into a regulated industry must gated by industry, the presumption would be understand that the regulations are artifacts of only limited reimbursement. government policy and not property rights. The utility market, especially with the ad­ That means they can be changed. And those vent of wholesale retailing, is a national one. changes are a risk of the investment. Over the years Congress has intruded in a Nevertheless, the utility industry presents number of ways. Thus, deregulation requires some special circumstances that make the at least some action at the national level. 692 THE FREEMAN • NOVEMBER 1997

Whether Washington should establish the technology, the electricity sector is facing basic framework or draft the detailed blue­ revolution rather than reform. At such a time print for deregulation is less clear. At one every government statute, regulation, and level, it makes sense to provide for a consis­ preconception should be put into play. What­ tent development of the national electricity ever the exact transition, the ultimate goal marketplace. Thus, the case for federal pre­ should be a deregulated free market of the emption is strong. sort that characterizes most of the rest of the Nevertheless, federalism is an important economy. Said Alvin Duskin of U.S. Wind­ principle. Although today honored more in power: "There has to be some solution to the the breach than in practice, there is a princi­ regulatory process that doesn't include more pled argument for devolving policy decisions regulation." and shrinking the power ofthe Leviathan now The prescription of a free market does not centered in Washington. In this case the mean that government should design the federal government might bar barriers to market. Only by freeing up both consumers interstate commerce (such as excessive "exit" and producers will we likely reach the most fees for current customers to switch utilities), efficient end-point. But getting from here to but allow states to impose a variety of regu­ there, wherever it is, will not be easy. The lations (such as DSM programs and stranded policy ideal is relatively simple: repeal most cost recovery) on any company serving everything. Politics is likely to get in the way, residents. Allowing states to test different of course, and compromise is inevitable. But policy options would be particularly helpful there's no reason for pre-emptive surrender, in cases where the best policy outcome is offering supposed deregulation measures that unclear. would impose new restrictions. Deregulation's time has come. Then the Where Do We Go from Here? American people will eventually enjoy the benefits offreedom when they turn on the light The electricity industry is almost certainly or heat just as they do now when they purchase heading into a period ofunparalleled change. the lamps and furnaces which run on Given changing demand, economics, and electricity. 0

At What Price Will The Gold Standard Return?

1797 Half Eagle 5.00 • Quality U.S., Latin American Gold Piece Uncirculated and world rare coins for Price History aggressive or conservative 1957 -$700 portfolios. 1967 - $3,800 1977 - $9,500 • Collection building expert. 1987 - $30,000 1997 - $137,500 • Buying, selling, trading.

Tom Pilitowskl 6278 North Federal Hwy, #369, Ft. Lauderdale, Florida 33308 U.S. Toll Free: 1-800-524-6321 • Tel: 1-954-979-2640 • Fax: _1-954-979-2624 THEFREEMAN IDEAS ON LIBERTY

Edward Coke-Common Law Protection for Liberty

by Jim Powell

hy were civil liberties first secured in arguments based on precedents, which one W England? might think would mean that if he couldn't One important reason was the develop­ cite precedents he didn't have a case. But he ment of common law principles and prece­ was the best at discovering precedents for dents independent of a ruler. Edward Coke liberty. If at times he claimed that precedents (pronounced "Cook") was more responsible went back farther and proved more than they for this than anybody else. Murray N. Roth­ actually did, he was almost always right about bard called him a "great early seventeenth fundamental principles. century liberal." Winston S. Churchill ob­ His Reports and Institutes did much to give served that "His knowledge of the Common the English a coherent constitution. Even his Law was unique." Historian George Macaulay rival Francis Bacon conceded: "Had it not Trevelyan considered him "one of the most been for Sir Edward Coke's reports ... law by important champions of our liberties." F.A. this time had been almost like a ship without Hayek referred to him as "the great fountain ballast; for that the cases of modern experi­ of Whig principles." ence are fled from those that are judged and Coke had a gift for expressing common law ruled in former times." principles in unforgettable ways. "The com­ Although Coke embraced conventional re­ mon law," he wrote, "is the best and most ligious beliefs, he did much for religious common birth-right that the subject hath for toleration. As Chief Justice of common law the safeguard and defense, not merely of his courts, he worked to keep many cases out of goods, lands and revenues, but of his wife and ecclesiastical courts that sentenced religious children, his body, fame and life.... No man dissenters to be tortured, imprisoned, or ecclesiastical or temporal shall be examined burned. He appointed Puritan ministers to upon secret thoughts of his heart.... the the churches he owned. He hired an indepen­ house of an Englishman is to him as his dent-minded secretary named Roger Wil­ castle." liams, who went on to establish Rhode Island As a lawyer and judge, Coke worked with as a sanctuary for religious toleration. At Coke's death, his personal library included Mr. Powell is editor of Laissez Faire Books and a major Puritan writings of the previous half senior fellow at the Cato Institute. He has written for century. the New York Times, the Wall Street Journal, Coke was more than a jurist; he deserves Barron's, American Heritage, and more than three dozen other publications. Copyright © 1997 by Jim much credit for the emergence of represen­ Powell. Thanks to Charles M. Gray for reviewing this tative government. Under Queen Elizabeth I, article. Parliament was a cipher for the monarch. 693 694 THE FREEMAN • NOVEMBER 1997

Members of Parliament lacked the ideologi­ no trace ofgray but had begun to recede at the cal vision as well as practical experience to temples, accentuating the height of his fore­ provide effective opposition or leadership. In head. Coke's eyebrows were heavy and 1621, 1624, 1625, and 1628, Parliament spear­ smooth, his complexion somewhat swarthy; headed attacks against the ministers ofJames there were few lines to his face. His eyes, I and Charles I. Parliament articulated con­ large, dark, and brilliant, bore the watchful stitutional principles and took initiative in look of a man ambitious and self-contained." formulating policy. Coke certainly wasn't the Coke, to be sure, was often a difficult only important figure in these parliaments, character. "Pedant, bigot, and brute as he but he framed the issues, served on more was," historian Thomas Babington Macaulay parliamentary committees, delivered more wrote in his essay on Bacon, "he had qualities committee reports and speeches than any­ which bore a strong, though a very disagree­ body else. He did much to secure the principle able resemblance to some of the highest that ministers must be accountable for their virtues which a public man can possess....He actions-a critic remarked that Coke "would behaved with gross rudeness to his juniors at die if he could not help ruin a great man every the bar, and with execrable cruelty to prison­ seven years." His ideas helped inspire the ers on trial for their lives. But he stood up revolution which, two decades later, toppled manfully against the King and the King's Charles I. favourites. No man ofthat age appeared to so "Coke's great influence both in the Com­ little advantage when he was opposed to an mons and in Parliament as a whole is easily inferior, and was in the wrong. But, on the explained," according to Wesleyan University other hand, it is but fair to admit that no man historian Stephen D. White. "His extensive of that age made so creditable a figure when governmental experience both in and out of he was opposed to a superior, and happened Parliament and his formidable legal reputa­ to be in the right." tion naturally brought him respect from other Edward Coke was born with law in his members. He had held many high offices in blood, February 1, 1552, in Mileham, Norfolk, both central and local government. . .. He England. His father, Robert Coke, was a had participated in every meeting of Parlia­ lawyer practicing in London and Norfolk. His ment since 1589, had served as Speakerofthe mother, Winifred Knightley, was the daughter Commons in 1593, and was an expert on of an attorney. parliamentary precedents and procedure. After attending the Norwich Free Gram­ And his published writings and his years as a mar School for seven years, Coke entered judge and legal officer of the crown had Trinity College, Cambridge, and was four established his reputation as the most emi­ years there. Destined for a legal career, he nent legal authority of the era." began studying at Clifford's Inn in 1571 and Coke has had an enormous influence in the next year transferred to Inner Temple. America. Coke's principal legacy: the inde­ These were guilds where young men went to pendence of the judiciary and the principle acquire knowledge ofcommon law that would that judges may overturn statutes which are be needed for professional practice. Common contrary to the Constitution. law was the law applying to everyone. It included Saxon legal customs, standard com­ An Imposing, Difficult Man mercial practices for resolving disputes, par­ liamentary statutes, judicial decisions and, Biographer Catherine Drinker Bowen yes, some royal decrees. In addition, there noted that "Coke stood out above a crowd, a were treatises going back several hundred noticeably handsome man, tall, big-boned, years, written by respected judges like Henry inclined to spareness. His face was oval and a Bracton, Anthony Fitzherbert, John Fortes­ trifle long; between mustache and pointed que, John Glanville, and Thomas Littleton. short beard the lower lip showed full and red. Students ofthe common law had to learn "law Dark hair, cut even with the ears, had as yet French," the language of common law plead- EDWARD COKE-COMMON LAW PROTECTION FOR LIBERTY 695 ings, and Latin, the language in which medi­ Coke, meanwhile, prospered as a vigorous eval court records were kept. Coke began a defender of royal prerogative and enforced lifelong practice ofarising at 3:00 A.M. so that laws against religious dissenters. His wife he could gain several hours for learning more died, and he soon remarried Lady Elizabeth about law before the day began. Hatton, granddaughter of Lord Burghley and Coke started practicing law in 1578. He niece of Robert Cecil, the most influential spent a lot of time in Coventry, Essex, Nor­ minister of Queen Elizabeth and, for a while, wich, and London, and he always had a of her successor, James I. This second mar­ notebookwhich he filled with his observations riage was rocky, but it brought him even more about courtroom proceedings. He was to property. continue recording his observations for more Coke, unlike Bacon, was critical of patents than four decades-they became the basis of of monopoly which the government had is­ the published works that secured his reputa­ sued since 1552 to generate revenue. The tion. patents were issued for mechanical inven­ When Coke was 30, he married 17-year-old tions, chemical processes, and other things. Bridget Paston, who descended from a There were many complaints because patents wealthy Suffolk family and came with a dowry ofmonopoly benefited a few individuals at the of £30,000. He developed ties with Lord expense of everybody else. Coke handled Burghley, a councilor to Queen Elizabeth. some of the most important cases against After a succession of minor positions, he was monopolists. As he explained, "it appeareth appointed Solicitor General by Queen Eliz­ that a man's trade is accounted his life, abeth in 1592. She named him speaker of the because it maintaineth his life; and therefore House ofCommons the following year, and in the Monopolist that taketh a man's trade, 1594 chose him over Francis Bacon to be taketh away his life." attorney general. England had the lowest taxes in Europe, but toward the end of her reign Elizabeth Francis Bacon needed more revenue. After the Spanish Armada was smashed in 1588, Spain built Bacon and Coke were to be rivals for nearly more ships for another possible attack on three decades. Bacon, nine years younger England, requiring new English defenses. than Coke, was the son of an Elizabethan Elizabeth was at war with France, too. Bacon courtier, the Lord Keeper of the Great Seal. recognized the danger oftaxation. In 1593, he Bacon's father died before he could buy his remarked: "wee breed discontentment in the son an estate, so he had to work for a living. people and in a cause of Jopardie her Maj­ He learned law at Gray's Inn, then pulled esties saftie must consist more in the love of political strings and got elected to Parliament her people then in their welthe." in 1584. He urged religious toleration for loyal citizens, but otherwise he was a thorough­ The Ascension of James I going government man. As a consequence, he acquired estates and secretaries, including Elizabeth died on March 24,1603, and was Thomas Hobbes, who later distinguished succeeded by the 37-year-old James VI of himself as a theoretician for political abso­ Scotland, who became James I of "Great lutism. Britain"- he revived the name from early In his lucid essays (first edition, 1597), medieval times. Elizabeth, he soon discov­ Bacon expressed admiration for Machiavelli's ered, left a pile of debts. "My lord treasurer," political writings and declared that govern­ wrote one official in September 1603, "is much ments shouldn't be judged by the moral disquieted how to find money to supply the standards that apply to ordinary people. Ba­ King's necessities." This official found "all con made clear his distrust of Parliament and means shut up ofyielding any relief." London his belief in political absolutism. He approved bankers twice refused to loan the government of war because it promoted a strong state. any more money, claiming they had suffered 696 THE FREEMAN • NOVEMBER 1997 big losses because ofthe plague, but Venetian diction was to protect England against foreign ambassador Nicolo Molin reported: "ill-will is enemies, but the "New Impositions" were for also suspected as the cause." revenue, and Parliament's approval was re­ A monarch was supposed to pay the cost of quired. maintaining his palace and retainers with "It is odd, indeed," noted biographers hereditary income, while Parliament financed Hastings Lyon and Herman Block, "that national defense and wars. But James asked Bacon, the philosopher, should have failed to Parliament-taxpayers-to help cover his ex­ apprehend what Coke, the legist, apparently travagant royal household expenses. did see: namely, that if the enforced loans, The king's personal habits made his polit­ benevolences and monopolies were permit­ ical problems worse. "James was a loutish ted, the King would have a nearly complete savage," wrote historian Paul Johnson. system of extra-Parliamentary taxation, and "When hunting, he liked to plunge his bandy Parliament would soon become an unneces­ legs into the stag's bowels.... He delighted in sary assembly, with a consequent corruption getting the young court ladies drunk, and of the State into tyranny." seeing them collapse in vomit at his feet. He would sit there, laughing.... Everything Chief Justice· of the Court of James did, and everything he omitted to do, Common Pleas was certain to evoke protest." Attorney General Coke made his reputa­ In June 1606 James appointed him Chief tion as a tough prosecutor in three sensational Justice of the Court of Common Pleas, which trials. First came the Earl of Essex, an adven­ mostly handled private actions between citi­ turer who had blundered in Ireland, dis­ zens. This was a position where Coke would obeyed Elizabeth's orders, and burst into her have to do the king's bidding or be dismissed. private quarters (1601); Walter Raleigh, who The "New Impositions" didn't generate allegedly plotted against James (1603); and enough revenue, and soon James issued a writ Guy Fawkes and his fellow Catholic conspir­ which forced people in England's seaports to ators who dug a tunnel for 35 barrels of equip his fleet. (Elizabeth had issued such a gunpowder under Westminster Palace, which writ but there was more political support for they hoped to blow up when the King and it because she faced the Spanish Armada.) royal family gathered for the opening of Coke authored the "Protestations from the Parliament (1605). Coke caused quite a stir as House of Commons," which declared, in part, he repeatedly underscored key points, dis­ that "from the time of Magna Carta the played his eloquent Latin, picturesque En­ liberties, franchises, privileges and jurisdic­ glish, and formidable knowledge of legal tion of Parliament are the ancient and un­ precedents. doubted birthright and inheritance of the Bacon and Coke were at each other's subjects of England." This outraged James. throats. Parliament turned down James's re­ Coke clashed with the king on fundamental quest for more revenue, and he attempted an issues. "The state of monarchy," James main­ "end run" around Parliament by doubling tained, "is the supremest thing upon earth. tariffs, an idea backed by Bacon. James's For Kings are not only God's lieutenants upon "New Impositions" meant that imports were earth and sit upon God's throne, but even by subject to the delay and expense of being God himself they are called Gods ... for they inspected twice. John Bates, an importer of exercise a manner or resemblance of divine Venetian currants, tried to evade the "New power upon earth." James, like Elizabeth, Impositions" and was brought before the considered judges to be agents of the crown. Court of the Exchequer. It ruled that tariff They certainly weren't supposed to render policy was the king's jurisdiction, not Parlia­ independent decisions. ment's. The House of Commons named a English common law was a murky field, and commission to look into the matter. Coke was Coke made the most ofit when countering the the point man. He insisted the king's juris- king. Judicial decisions weren't systematically EDWARD COKE-COMMON LAW PROTECTION FOR LIBERTY 697 based on precedents, because it was difficult cated in 1765-an intrinsic authority in the to determine what the precedents were. "Ar­ courts of justice." gument from decided cases, though frequent Bacon, whom James had named Solicitor and persuasive," noted English constitutional General in 1607, considered the king legibus law scholar Charles M. Gray, "did not dom­ solutus-above the law. Lord High Chancel­ inate courtroom dialogue. Prior decisions lor Ellesmere, the highest judicial official, were sometimes followed by judges who pro­ declared Rex est lex loquens-"the king is the fessed not to agree with them, but they were law." sometimes rejected for reason or simply ig­ Bacon advised James, in Peacham 's Case, to nored." try influencing court decisions by presenting On November 13,1608, there was an epic judges with the allegations in a case and confrontation between James and Coke. asking their opinion before trial. Edmund James described judges as "shadows and Peacham was a Puritan minister who criti­ ministers." Coke replied that "the King in his cized a bishop's religious intolerance, for own person cannot adjudge any case ... but which he was brought before the High Com­ that this ought to be determined and adjudged mission. As Bacon reported to the king, in some Court ofJustice, according to the law "Upon these interrogatories, Peacham was and Custom of England." examined before torture, in torture, between James countered "that he thought the law torture, and after torture; nothing could be was founded upon reason, and that he and drawn from him, he still persisting in his others had reason as well as the Judges." obstinate and inexcusable denials and former Coke: "God had endowed his Majesty with answers." Coke wouldn't cooperate with Ba­ excellent science and great endowments of con, saying that "taking of opinion is not Nature. But his Majesty was not learned in the according to the custom of this realm." Coke Laws of his Realm of England; and Causes considered it unfair to present judges with which concern the Life, or Inheritance, or allegations when neither a defendant nor Goods, or Fortunes of his Subjects are not to defense counsel were present for cross­ be decided by natural Reason but by the examination. Bacon told James that Coke's artificial Reason and Judgment of Law, "over-confidence, doth always subject things which requires long Study and Experience to a great deal of chance." Peacham died in before that a man can attain to the cogni­ prison. zance of it." In Bonham's Case, Coke ruled that the James was outraged, as one observer re­ common law stood above Parliament. The ported: "his Majestie fell into that high in­ case involved Dr. Thomas Bonham, jailed dignation as the like was never knowne in him, for practicing medicine without a certificate looking and speaking fiercely with bended fist, issued by the Royal College of Physicians. He offering to strike [Coke]." filed suit for false imprisonment. Coke ob­ Meanwhile, Coke labored to share his served that according to the Royal College's knowledge of common law. He had begun statute of incorporation, it pocketed half the issuing an annual Report on cases in 1600, and fines from violators like Bonham. This, he he continued until 1616. The prefaces were in noted, meant the Royal College was both a English, texts in "law French," and pleadings party and judge in every action. Citing a in Latin. "Anything that could be gleaned in common law principle, Aliquis non debet esse Westminster, London Guildhall or the circuit judex in propria causa [Nobody should be courts in the counties he set down in his own judge in his own cause], Coke ruled: "in many form and fashion, adding comment, aside, cases the common law will control acts of comparison," noted biographer Bowen. "No Parliament and some times adjudge them to law reports had hitherto been half so com­ be utterly void; For when an Act of Parlia­ prehensive; Coke must have lived and walked ment is against common right and reason, or and sat and talked with notebook in hand. At repugnant, or impossible to be performed, the once the books became-as Blackstone indi- common law will control it and adjudge such 698 THE FREEMAN • NOVEMBER 1997

Act to be void." This was the most contro­ James took offense: "We are an old and versial decision he ever rendered. experienced king, needing no such lessons." James asserted his power by issuing proc­ Coke rose to defend the Petition: "I never lamations that he insisted had the force of spake but mine own conscience. The privi­ law. In September 1610, Coke presented his leges of this House is the nurse and life of all view of these proclamations to the Privy our laws, the subject's best inheritance. If my Council, which had the responsibility of ad­ sovereign will not allow my inheritance, I must vising the king on executive, judicial, and fly to Magna Carta and entreat explanation of financial business and seeing that the king's his Majesty. Magna Carta is called Charta will was done. "All indictments," he observed, libertatis quia liberos tacit. ... The Charter of "conclude with the words, Against the law and Liberty because it maketh freeman. When the custom of England, Contra legem et consue­ King says he cannot allow our liberties of tudinem Angliae; or against laws and statutes, right, this strikes at the root. We serve here for Contra leges et statuta. But I never heard an thousands and ten thousands." indictment to conclude, Contra regiam proc­ James fumed, "The House of Commons is lamationem; against the king's proclamation." a body without a head. The members give Coke went on to review the legal history of their opinions in a disorderly manner. At their royal proclamations. Accordingly, the Privy meetings nothing is heard but cries, shouts, Council resolved "That the King by his proc­ and confusion. I am surprised that my ances­ lamation cannot create any offense which was tors should ever have permitted such an not an offence before, for then he may alter institution to come into existence. I am a the law of the land by his proclamation in a stranger, and found it here when I arrived, so high point; for if he may create an offence that I am obliged to put up with what I cannot where none is, upon that ensues fine and get rid of." imprisonment. Also .the law of England is James dissolved Parliament the following divided into three Parts: Common Law, year, and Coke stood alone against the king. Statute Law, and Custom; but the King's He issued two rulings that limited the discre­ Proclamation is none of them." tionary power of the High Commission. Coke issued "prohibitions" aimed at James snapped that the rulings were "of a curbing the power of.ecclesiastical courts, nature extraordinary and showing more the especially the High Commission, which im­ perverseness of [Coke's] spirit than any other prisoned individuals for preaching Noncon­ prohibitions." James summoned Coke and formist doctrines. A prohibition ordered the several like-minded judges to explain them­ ecclesiastical courts not to proceedwith a case selves. Coke endured a three-day interroga­ if there was any reason it might belong in a tion. common law court. Coke defended his pro­ hibitions by showing how they had long been Chief Justice of the issued by common law courts. Moreover, he King's Bench explained how, during the past 60 years, the High Commission had expanded its power In 1613, Bacon had an idea for taming beyondwhat had beenspecified in any statute. Coke: promote him to Chief Justice of the James called Parliament in 1610 because he King's Bench, which handled criminal as well needed money, but Members drew up a as civil actions; and promise him a seat on the Petition of Grievances. Among the principles 12-member Privy Council. "Coke will there­ at stake: "there is none which they have upon turn obsequious," Bacon assured James. accounted more dear and precious than this, Coke became Chief Justice of the King's to be guided and governed by the certain rule Bench in October, but Bacon and James were of law, which giveth to the head and the in for a surprise. members that which of right belongeth to Conflict developed when James granted them, and not by any uncertain and arbitrary two income properties to the Bishop of Cov­ form of government." entry. The grant was contested by two men EDWARD COKE-COMMON LAW PROTECTION FOR LIBERTY 699 who claimed the property was theirs-this James summoned Parliament, which met became known as the Case of Commendams on January 13, 1621, the first time in seven (which meant the bishop could collect the years. James again needed money, and Mem­ income while having somebody else perform bers intended to negotiate about their griev­ whatever services might be required). Coke ances. and his fellow judges were about to conduct a Among other things, Parliament was intent hearing on the dispute when James ordered on limiting royal power by rooting out cor­ them not to proceed, because his prerogative ruption. The top target was Buckingham, who was at issue. Coke countered that "The stay had gained considerable influence with the required by your Majestywas a delay ofjustice king. After he had sent Walter Raleigh to and therefore contrary to law and the Judges' attack a Spanish settlement in SouthAmerica, oath." Bacon, who had become Attorney Buckingham did everything he could to ap­ General and a member of the Privy Council, pease the Spanish. For a half-dozen years, he denounced Coke, for behaving improperly. schemed to marry James's son Charles, heir to James stepped up the pressure. The judges the throne, to the Spanish princess. Since the relented, except for Coke who, a court re­ king still had unlimited sovereignty, it was porter noted, told the king "That when the presumed that a Catholic Queen would mean case should be, he would do that should be fit Catholic heirs, and Catholics could regain for a Judge to do." Coke was dismissed as control of England. Chief Justice. Buckingham pocketed bribes from those "Coke had not striven in vain," noted who wanted to get a government job, get a historian George Macaulay Trevelyan. "He monopoly, get out ofjail or advance a lawsuit, had enlisted the professional pride of the and he was summoned before the House of students of the common law against the rival Lords. He apologized for his brothers who systems of law specially favoured by the had taken bribes and avoided prosecution by Crown in the Star Chamber, the admiralty sheer political clout. The House of Commons and the Ecclesiastical Courts. He had turned turned to drafting a bill which would curb the minds of the young gentlemen of the Inns monopolies. ofCourt, who watched him from afarwith fear and reverence, to contemplate a new idea of Bacon's Downfall the constitutional function and ofthe political affinities of their profession, which they were The House of Commons then formed a destined in their generation to develop in a Committee for Inquiring into Abuses in the hundred ways, as counsel for England gone to Courts ofJustice. A trail ofdubious payments law with her King." led to Bacon's door. Coke soon emerged as Coke was so desperate to regain a high the leading inquisitor. The inquiry against position that he pressured his 14-year-old Bacon led eventually to the charge ofbribery. daughter, Frances, to marry John Villiers, the Coke objected to James's proposal that a impotent older brother of James's most in­ special commission should investigate the fluential adviser, George Villiers (later the charges, because it couldn't be counted on to Duke of Buckingham). Bacon filed a com­ recommend prosecution. Accordingly, Parlia­ plaint against Coke for riotous behavior. This mentbeganimpeachmentproceedingsforthe was surely the low point of Coke's career. first time in 160 years. It reported a growing Although he didn't get back his judgeship, he list of bribes. Since the bribes had been regained his position on the Privy Council. delivered in the presence of his servants, Apparently, the king and Buckingham still Bacon didn't mount a defense. "Condemn hoped that showing him some favor would and censure me," he wrote the House of undermine his independent spirit. Bacon was Lords-thereby offending the House ofCom­ subsequently appointed Lord High Chancel­ mons. lor, which made him the highest-ranking He was impeached, dismissed as Lord High person outside the royal family. Chancellor, fined £40,000, imprisoned in the 700 THE FREEMAN • NOVEMBER 1997

Tower of London, then banished from Lon­ The wedding took place at Notre Dame de don and the law courts. The historian Lord Paris, and Charles was represented by a Acton later remarked, "the Commons, guided stand-in, the Duc de Chevreuse, because of by the most famous English lawyer, Coke, the risk of Charles falling in the hands of a struck down Bacon, and deprived the Stuarts foreign power. Buckingham himself escorted of the ablest counsellor they ever had. Im­ the new queen back to England, biographer peachment and responsibility of ministers John BowIe reported, with "fifteen lords, remained." twenty-four 'knights of great worth', and far too many pages." Henriette Marie was ac­ Coke Imprisoned companied by her servants-a bishop and 28 priests. On December 18, James dissolved Parlia­ ment, and soon afterwards Coke was sum­ moned to appear before the Privy Council. Thirty Years War "You have forgotten the duty of a servant, the duty of a Councilor of State and the duty of Charles summoned Parliament in May a subject," he was told. Guards escorted him 1625 and faced mounting skepticism. For to a damp, bitter-cold, urine-soaked cell in the openers, Members were distracted because Tower of London. Denied access to books, he several thousand people a week were dying wrote Latin verses with pieces ofcoal. He was from plague in London. Buckingham had interrogated by the President of the Privy approved military adventures against France Council who reported: "I charge you there­ and Spain which were fiascos, convincing fore with treason. I have heard you, Sir many Members of Parliament that the previ­ Edward, affirm that by law he is a traitor who ous subsidy they approved was a mistake. goes about to withdraw subjects' hearts from Buckingham proposed more military adven­ their King." But after seven months of going tures, one to attack Spain and another to save through Coke's personal papers and investi­ the Protestant Elector of Palatine-which gating his affairs, crown officials concluded meant becoming embroiled in the conflict they couldn't find any evidence of wrongdo­ thatwould become known as the Thirty Years ing. He was released. No charges were ever War. Parliament voted for two small subsidies filed. and authorized Charles to spend customs The Parliament of 1624 came on the heels revenue only for a year. Charles was in trouble of a four-year business depression, and there because the Lord Treasurer reported the were a lot of complaints about monopolies. government didn't have any money or credit Coke led the attack against monopolies over left. Assuming Parliament would give him wool, brick-making, glass-making, salmon what he needed, Charles had drawn from his fishing, and the transcribing of wills. own resources to pay £136,000 for a subsidy to James died on March 27, 1625. He had Denmark, wages for British soldiers serving in achieved a long period of peace which en­ the Low Countries, and food and ammuni­ abled the English to prosper. But he left a tion for the British navy. "By the grace of debt of over £200,000. His 24-year-old son God," Charles remarked, "Iwill carryon the became King Charles I, and right away he war if I risk my crown." He dissolved began spending money at a reckless pace. Parliament. Then, as Buckingham had arranged, he mar­ Short of money, Charles resorted to con­ ried the 15-year-old French Catholic princess, scription. The government rounded up as Henriette Marie, who came with an 800,000­ many able-bodied men as they could find crown dowry; the idea here was that if there around the port towns. Reportedly many men wasn't going to be a marriage to promote paid bribes to avoid being conscripted. The peace with Spain, then there should be a government didn't spend money on army marriage to help secure an ally against Spain barracks, so it forced thousands of private if needed. individuals to feed and house the recruits. EDWARD COKE-COMMON LAW PROTECTION FOR LIBERTY 701

This, of course, provoked widespread resent­ lenge. But now on the Parliamentary side ment, and the result was martial law. The first force as yet was lacking." adventure, against Spain, was a fiasco which Needing money, Charles resorted to high­ Charles and Buckingham tried to cover up, handed revenue-raising measures, and on and by the end of the year Charles pawned March 27, 1628, Charles summoned Parlia­ some of his jewelry and silverware for more ment for the third time. money. Parliament was aboil over squandered Charles summoned Parliament again. In an money, conscription, billeting of soldiers in effort to undermine resistance, he appointed private homes, forced loans. Citing common his half-dozen most troublesome opponents, law precedents, Coke maintained that "the including Coke, as sheriffs, which kept them King cannot order any man arrested, because out of parliamentary proceedings for at least there is no remedy against him." Coke insisted a year. But this enabled a formidable orator, people could be legitimately imprisoned only John Eliot, to step forward as a leader. upon the order ofa judge. On March 21, 1628, Though he had befriended Buckingham as a Coke presented a bill which specified that no young man, he witnessed the return of one could be imprisoned more than three wretched British soldiers from one of Buck­ months without being brought to trial. The ingham's disastrous expeditions against House of Commons approved resolutions Spain, and he resolved to bring down the saying that nobody should be imprisoned Duke. Eliot declared that Parliament wasn't a unless the government cited the alleged tool of the king and that Members were crimes, and the writ ofhabeas corpus must not morally obligated to follow their conscience. be denied. He urged that Buckingham be impeached. The House of Commons approved the Asked for further subsidy, Members of the subsidies that Charles asked for, provided he House ofCommons began impeachment pro­ would agree to respect the liberties of En­ ceedings against Buckingham. Charles re­ glishmen. Charles resisted, and the House of sponded by ordering Eliot and another out­ Lords was reluctant to break with him. The spoken Member, Dudley Diges, imprisoned Lords eventually approved a declaration that in the Tower of London. But the Commons the Magna Carta remained in force and that charged Buckingham anyway, for failing to the king must not infringe on "any of his loyal suppress piracy in the English Channel, for people in the property oftheir goods orliberty choosing incompetent leaders of the Spanish of their person." But then the Lords hedged, expedition, for taking bribes and for scheming suggesting that "as touching his majesty's with Catholics. On June 12, 1627, Charles royal prerogative intrinsical to his sovereignty dissolved his second Parliament, saving Buck­ and entrusted to him from God ... in the case, ingham's skin. for the security ofhis Majesty's Royal person, "At the back of the Parliamentary move­ the common safety of his people, or the ment in all its expressions lay a deep fear," peaceable government of his kingdom, his explained Winston S. Churchill. "Everywhere Majesty shall find just cause, for reason of in Europe they saw the monarchies becoming State, to imprison or restrain any man's more autocratic. The States-General, which persons, his Majesty would graciously declare had met in Paris in 1614, had not been thatwithin a convenient time, he shall and will summoned again; it was not indeed to be express the cause of the commitment or summoned until the clash of 1789. The rise of restraint, either general or special." standing armies, composed of men drilled in Coke thundered: "Is the confirmation of firearms and supported by trains of artillery, the Great Charter a matter of grace? What had stripped alike the nobles and the common are just liberties? Who were the best of his people of their means of independent resis­ Majesty's predecessors? We see what advan­ tance. Rough as the times had been in the tage they have that are learned in the law in earlier centuries, 'bills and bows' were a final penning articles above them that are not, resource which few kings had cared to chal- how wise soever. What is intrinsical prerog- 702 THE FREEMAN • NOVEMBER 1997 ative? It is a word, we find not much in the Scholars traditionally wrote commentaries law. Intrinsical prerogative is not bounded on established authorities, and that's how by any law, or by any law qualified. Admit Coke proceeded with. his greatest work. He this intrinsical prerogative, and all our laws prepared commentaries on Thomas Little­ are out. This intrinsical prerogative it appears is ton's Treatise on Tenures, a fifteenth-century entrusted to the king by God. It is jure divino text about land law. "The ornament of the [divine law]. No law can take it away. His common law," Coke called it, "the most majesty can commit when he pleases." perfect and absolute work that ever was When the king continued to resist, Coke written in any human science, and as free proposed on May 8 that Parliament adopt a from error as any book that I have known to Petition of Right for the king's agreement on be written of any human learning." Coke "1. The personal liberty of the subject. 2. His covered about 500 years ofEnglish property propriety in his goods. 3. Unbilletting of law. soldiers. And 4. Silencing of martial law in His health declined in 1634. On June 9, he time of peace." asked for a pen and paper to affirm his Charles dispatched a letter to the Lords, religious faith. While he lay dying, the gov­ saying he must be able to imprison people ernment-"by order of his Majesty's Privy without filing specific charges. For 18 days, the Council"-issued a warrant to search his Lords tried to figure out how they could draft house for documents which might threaten something agreeable both to Charles and the the monarchy. Police took manuscripts for his Commons. Then Coke rose in the Commons Institutes and for two unpublished volumes of and spoke: "Let us palliate no longer. Ifwe do, Reports. Coke died at Stoke House on God will not prosper us. I think the Duke of Wednesday, September 3, 1634, around 11 Buckingham is the cause of all our miseries, P.M. A month later, he was buried in the and till the King be informed thereof, we shall church graveyard at Tittleshall, about six never go on with honor or sit with honor here. miles southwest of Fakenham, Norfolk, next That man is the grievance of grievances. Let to his first wife. us set down the cause of all our disasters and Charles trashed Coke's principles. He did they will reflect on him." everything he pledged not to do in the Petition On June 8, Charles met both Houses of of Right, and he refused to call another Parliament at 4:00 in the afternoon. Then he Parliament for 11 years. But the principles signified the words of approval which gave a had taken root. When the Long Parliament bill the force oflaw: "Soit droict fait comme est met in 1640, it arranged for publication ofthe desire." Institutes because they "contain many monu­ "We reach here," wrote Churchill, "amid ments of the subject's liberties." much confusion, the main foundation of En­ The Second Part of the Institutes appeared glish freedom. The right of the Executive in 1642. In this commentary on Magna Carta Government to imprison a man, high or low, and almost 40 other charters and statutes, for reasons of State was denied; and that Coke distilled the views he had promoted denial, made good in painful struggles, con­ throughout his public life. He believed indi­ stitutes the charter of every self-respecting vidual liberty was best protected by "due man at any time in any land. Trial by jury of process ofthe common law." He asserted that equals, only for offenses known to the law, if "Generally all monopolies are against this maintained, makes the difference between great charter, because they are against the bond and free." liberty and freedome of the subject, and against the law of the land." He affirmed that Coke's Greatest Work "The interpretation of all statutes concerning the clergy, being parcell of the lawes of the Coke retired to Stoke House in Stoke realme, do belong to the judges of the com­ Poges, Buckinghamshire, justwest ofLondon, mon law." where he completed his life work. The Third and Fourth Parts ofthe Institutes EDWARD COKE-COMMON LAW PROTECTION FOR LIBERTY 703 were published in 1644. The Third Part cov­ protected from arbitrary search and seizure. ered a variety ofcrimes. Coke defined a crime, They couldn't be held in prison unless formal explained the penalties, and covered the legal charges were filed, alleging violation of a law. history of it. Above all, the power of the monarch was The Fourth Part developed his familiar limited by Parliament which had achieved themes about the role of Parliament. supremacy. Ironically, this meant judges Coke urged his successors in the common couldn't overturn an act ofParliament. Judges law: "And you, honorable and revered judges could only rule that the government exceeded and justices, that do or shall sit in the high the powers granted by a statute-a situation tribunals or seats of justice, fear not to do which continues to this day. right to all, and to deliver your opinions justly The American Founders learned constitu­ according to the laws; for fear is nothing but tional principles from Coke. Thomas Jeffer­ a betraying ofthe succors which reason should son remarked that "Coke Lyttleton was the afford; and if you shall sincerely execute universal elementary book of law students justice, be assured of three things: first, and a sounder Whig never wrote nor of though some will malign you, yet Godwill give profounder learning in the orthodox doc­ you his blessing; secondly, that though trines of ... British liberties." Patrick Henry, thereby you may offend great men and favor­ John Adams, John Quincy Adams, John Jay, ites, yet you shall have the favourable kind­ Daniel Webster, and many other influential ness of the Almighty, and be his favorite; and Americans read Coke. Joseph Story, who lastly, that in so doing, against all scandalous became a Jeffersonian Supreme Court Jus­ complaints and pragmatic devices against you tice, wrote: "When I had completed the God will defend you as with a shield." reading of the most formidable work, I felt Coke inspired freedom fighters in England that I breathed a purer air and that I had and the American colonies. When Roger acquired a new power." Williams established Rhode Island, he re­ American constitutional historian Bernard flected in 1652: "how many thousand times Schwartz observed that "The influence of since I had the honorable and precious re­ Coke may be seen at all of the key stages in membrance of his person, and the life, the the development of the conflict between the writings, the speeches, and the example of Colonies and the mother country." that glorious light. And I may truly say, that Especially since the Constitution was rati­ besides my natural inclination to study and fied, an independent judiciary and judicial activity, his example, instruction, and encour­ review have become bedrock principles of agement have spurred me on to a more than American law. While judges have made plenty ordinary, industrious, and patient course in of bad decisions, at least they have the power my whole course hitherto." to strike down unconstitutional statutes, and By the time of the Glorious Revolution sometimes they do. This is a big advance from (1688), long-standing English grievances had the era when judges were everywhere intim­ been resolved. The monarchy had a Protes­ idated into doing what a ruler wanted. Elo­ tant succession. There was a considerable quent testimony to the vision, courage, and degree of religious toleration. People were devotion of Edward Coke. D These can keep you informed. Only this can keep you inside.

The balance ofpower has shifted. Conservative thought is now dominating the debate on Capitol Hill. Isn't it time you started reading a magazine with a direct link to this power base?

The Weekly Standard. The nation's only weekly journal of conservative opinion. The most quoted, clipped, and talked-about magazine in Washington. Your ticket inside the leading issues that shape our nation.

Edited by three ofthe most respected minds in politicaljournalism today. Bill Kristol, Fred Barnes and John Podhoretz have assembled a first-rate editorial team that includes prominent writers such as Charles Krauthammer, Brit Hume, FJ. O'Rourke, David Brooks, Andy Ferguson, and David Frum. Quite Simply, The Weekly Standard is driving the debate on Capitol Hill with analysis that is insightful, provocative, and very influential. Subscribe now and enter the inner circle ofnational politics. Special No-Risk Offer: Receive 6 FREE issues! Caul-800-711-8383 now and receive 6 issues of The Weekly Standard absolutely free. If you agree that this magazine is an essential part of your reading list, you'll receive 26 more issues (a total of 32) for four monthly payments of only $9.99 each - a SAVINGS OF 46% off the newsstand price. Ifnot, simply write "cancel" on the invoice, return it, and owe nothing. The six free issues ate yours to keep.

StaB JOIN US INSIDE.

The Weekly Standard is published 50 times annually. Please allow 3-5 weeks for delivery ofthe first issue. Cover price is $2.95. Rates are good only in the U.S.A. Economics on Trial by Mark Skousen

Great Turnabouts in Economics

"There is no harm in being sometimes leading spokesman for the Chicago School. wrong-especially if one is promptly found Simon taught thatbig business posed a serious out." problem in the United States and advocated -John Maynard Keynes the nationalization of railroads, utilities, and all other "uncompetitive" industries-all in a he gradual transformation of Paul Sam­ book ironically entitled Economic Policy for a T uelson from Keynesian to classical eco­ Free Society (University of Chicago, 1948). nomics (see my column in the September 1997 Stigler moved in a different direction, advo­ Freeman) is a major chapter in famous cases cating the breakup of "concentrated" big of economists changing their minds. businesses and punishment of companies en­ Nobody likes to admit he's wrong. You can gaged in collusion. He appeared before Con­ probably count on your fingers the number of gress in 1950 and proposed that U.S. Steel times scholars have renounced their theories Corporation be broken up. and switched positions. Most academics have By the early 1970s, however, Stigler had a tendency to cling to old dogmas, especially changed his mind. Influenced by the work of if they have built a reputation on a particular Aaron Director and Joseph Schumpeter and doctrine. We can only admire the scholar who a new theory of oligopoly, he found himself is willing to change when he is convinced by shifting his views. "What is still more embar­ the facts ora new theory. Ittakes a strong dose rassing is that I no longer believe the eco­ of courage and honesty to go against one's nomics I was preaching," he declared.1 Con­ vested interest, especially after publishing cluding that concentration did not necessarily books and articles on the subject. lead to monopolistic pricing, Stigler switched Three prominent economists have admit­ positions and actively opposed most antitrust ted error and changed their thinking, and we legislation. can learn much from their experience. Robert Heilbroner and George Stigler and Antitrust Socialist Planning George Stigler, the towering Chicago pro­ For most of his life, Robert Heilbroner, fessor and Nobel Laureate, was a firm de­ author of The Worldly Philosophers, a best­ fender of antitrust laws in the 1940s and selling history of economics, was a socialist. 1950s. He was influenced by Henry Simon, a Under the influence ofAdolph Lowe and the New School of Social Research, he became Dr. Skousen is an economist at Rollins College, Department of Economics, Winter Park, Florida enamored with Marxism. When the Polish 32789, and editor ofForecasts & Strategies, one of economist Oskar Lange assailed Ludwig von the largest investment newsletters in the country. Mises's attack on socialist central planning in 705 706 THE FREEMAN • NOVEMBER 1997 the 1930s, Heilbroner joined the rest of the profession and concluded that Mises was Editor's Note: Congratulations to wrong and socialism could work. Mark Skousen on his debut as a By the end of the 1980s, however, Heil­ columnist forForbes magazine. (See broner dramatically altered his views. In a the September 22, 1997 issue.) Mark stunning series of articles in The New Yorker, will continue to write his monthly he wrote that the long-standing debate be­ column for The Freeman. tween capitalism and socialism was over, and "capitalism has won."z In a follow-up article after the demise of the Eastern Bloc, he was Austria to England, and had been instrumen­ even more explicit: "Socialism has been a tal in translating and publishing Hayek's and great tragedy this century.... But collapse! Mises's works. He also wrote extensively No one expected collapse. . .. There is no about Austrian economics, including the illu­ doubt that the collapse marks its end as a minating The Great Depression (Macmillan, model of economic clarity."3 Furthermore, 1934). the debate between Lange and Mises had to However, he fell under the trance of John be re-examined in light of contemporary Maynard Keynes during World War II. In his events. "It turns out, ofcourse, that Mises was autobiography, he repudiated the Austrian right," declared Heilbroner. Needless to say, connection: "I shall always regard this aspect Heilbroner's change of heart did little to of my dispute with Keynes as the greatest endear him to the socialist camp. mistake of my professional career, and the book, The Great Depression, which I subse­ quently wrote, partly in justification of this Lionel Robbins and attitude, as something which I would willingly Austrian Economics see forgotten.,,4 I should hope that if Lionel Robbins were Not every event is positive for free-market alive today he would reconsider his views and economics. The most notorious example of see the Keynesian episode more of a "diver­ switching sides occurred when Lionel Rob­ sion" from sound classical economics (to use bins, a major proponent of the "Austrian" a term created by Leland Yeager) than as a school of free-market economics, converted "general" economic theory. 0 to Keynesianism in the late 1930s and early 1940s. In the United States, several promi­ 1. George J. Stigler, Memoirs of an Unregulated Economist nent classical economists had already (Basic Books, 1988), p. 99. changed views, especially Harvard's Alvin 2. Robert Heilbroner, "The Triumph of Capitalism," The New Yorker, January 23, 1989, p. 98. Note he wrote this article Hansen. But Robbins's conversion was infa­ before the collapse of the Berlin Wall and the Soviet Union. mous because, as chairman of the economics 3. Heilbroner, "Reflections After Communism," The New Yorker, September 10, 1990, pp. 91-2. department at the London School of Eco­ 4. Lionel Robbins, Autobiography ofan Economist (Macmil­ nomics, he had brought Friedrich Hayek from lan, 1971), p. 154. 707

when Cain put the company together and Occi­ dental bought it. (Cain did not want to sell, but too BOOKS many people stood to make significant wealth for the first time.) Soon after, Cain opened up his copy of the Wall Street Journal to find a full-page advertisement with a "thank you, Gordon Cain" Everybody Wins! A Life in Free surrounded by signatures from all 1,337 employees, Enterprise the lowest paid of whom had received a six-figure payout. by Gordon Cain While returns of this magnitude always reflect Chemical Heritage Press. 1997 • 342 pages. fortuitous circumstances, Cain clearly was doing $24.95 some highly innovative things that the incumbents (the asset sellers) were not. One innovation that Reviewed by Robert L. Bradley, Jr. simultaneously cut costs and enhanced corporate decision-making was to increase the involvement ofrank-and-file employees. This was accomplished n the surface, this autobiography describes using Edward Deming's "total quality control" Ohow an individual well past retirement age concepts and setting up employee stock ownership restructured major assets in the domestic chemical! and profit-sharing plans. By betting on the collec­ petrochemical industry through leveraged buyouts tive wisdom and drive of the on-the-spot employ­ (LBOs) to create several billion dollars of wealth ees rather than intermediate management, Cain for himself and many associates. This interesting had tapped into the same knowledge dynamo that and unique business history aside, Gordon Cain's "Austrian School" economists such as Ludwig von story has a much deeper message-how a "captain Mises and F.A. Hayek had conclusively shown of industry" working in a market setting where make market economics inherently more wealth­ political barriers and patronage do not apply can creating than centrally planned ones. create great wealth and opportunities for thou­ The double win of reduced management costs sands of people. and improved decision-making allowed Cain to As Cain notes in his introduction, the book was slash overhead from 15-20 percent of sales to inspired by the need to defend his honor against around 5 percent of sales and make innumerable the commonly portrayed notion that debt-financed process improvements. This endogenous improve­ buyouts in the 1980s benefited a few quick-buck ment, leveraged by debt financing, was powerfully artists at the expense of displaced workers and the joined by improved external factors driving the general good. He argues that the failure behind highly cyclic businesses he invested in. Cain re­ massive business restructuring is prior manage­ peatedly demonstrated that he understood where ment, not new management. Draconian layoffs and he was in the chemical-petrochemical price cycle abrupt change could have been mitigated by better better than the prevailing view. It is surprising, in managerial decisions and, in turn, more account­ retrospect, that so many companies would sell their able boards of directors. It is passive boards, Cain assets to Gordon Cain. contends, that can create the "Imperial CEO," an The crucial element that put Cain's entrepre­ example of that rare species called market failure. neurial vision into play was debt financing-and But even when the dirty work must be done, Cain hence his inspiration to offer a revisionist view of explains, a sound entrepreneurial vision can more the social beneficence of LBOs. Cain had very than offset the transition costs by empowering limited venture capital but a proven management remaining workers, freeing marginal workers and record. Before, this would not have been enough to other nonspecific assets to find more productive compete for corporate control. But in the early employment, and increasing output and lowering 1980s a new investment vehicle came ofage-high­ prices to benefit consumers. risk, high-return "junk" bonds to finance leveraged Cain orchestrated five major business restruc­ buyouts. Cain's success belies the widespread idea turings in the 1980s, all of them LBOs, that that "junk bonds" and LBOs were evil and fraud­ handsomely benefited himself, the institutional ulent. investors, over 100 key managers, and some 5,000 As unique as Cain's late success in business life employees who received several times their salary was his appreciation and support for consistent in stock participation. His largest deal, circa 1989, free-market public policies. While many business was his best. Cain Chemical increased 44 times in executives typically are strong supporters of the value for shareholders in the nine months between free-market economy in the abstract, very few 708 THE FREEMAN • NOVEMBER 1997 resist the temptation to actively court government developments in market process theory to provide favor as short-run business interests dictate. The an explanation of the tendency of the state to widely recognized "forest problem" of pervasive expand and contract-swinging back and forth special-interest interferences with the market is toward either more or less government control. really a "trees" problem of political opportunities The book draws heavily upon work by F. A. Hayek to individual businesses. Cain, a man "not com­ and Israel Kirzner-especially Hayek's notion of fortable in either political party," never found the spontaneous order and insights about the use himself in a business predicament of having to of knowledge in society and Kirzner's concept of exercise the political means to get ahead. And he entrepreneurial discovery and critique of equilib­ never forgot the lessons from a slim book he read rium analysis in mainstream economic theory. when it was published in 1944: Hayek's Road to Readers not familiar with the ideas of Mises, Serfdom. Now, with his newfound fortune, a per­ Hayek, and Kirzner will find this book to be a hard sonal lifestyle that has remained unchanged (ex­ read. cept for a private plane that he apologizes for in the Why is it, as Mises argued, that government book), and a quest to improve society in the near intervention tends to lead to outcomes that are term, he scoured the think-tank spectrum for inferior, as measured by the interventionist's own foundations supporting limited government and standards? Ikeda traces the unintended conse­ libertarian ideals. quences to three factors-dispersed knowledge Cain's story offers much useful insight and (discussed by Hayek a half century ago), radical experience about business restructuring, manage­ ignorance, and systemic complexity. The interac­ ment philosophy, and public policy. Cain's revi­ tion between government and market processes sionism casts fourth-and-Iong business restructur­ magnifies the problems created by dispersed ing in new light. Debt financing is shown to have a knowledge and radical ignorance as the relative human face after all. And thanks in part to Cain's size of the public sector increases. new competitive standard, America's chemical! Moreover, the act of intervention itselfweakens petrochemical industry remains a world leader the moral aversion or psychological resistance to today. Everybody Wins! is thus a powerful antidote statism, further contributing to the growth of the to many poisonous myths about capitalism. D public sector. In the case ofdirect income transfers, Mr. Bradley is president of the Institute for Energy for example, intervention fosters a mentality of Research in Houston, Texas. dependency and personal irresponsibility. Further government action is then taken to cope with intervention-spawned problems. When the results of interventionism become sufficiently per­ Dynamics of the Mixed Economy: verse, the mixed economy reaches the crisis stage and governmental officials must make a radical Toward a Theory of Interventionism move-either toward more or less intervention. by Sanford Ikeda Despite the contradictions and instability, Ikeda Routledge. 1997 • xiv+296 pages. $69.95 concludes that the mixed economy will tend to be the most prevalent form of political-economic Reviewed by E. C. Pasour, Jr. system and is likely to be more enduring than either pure collectivism or capitalism. What are the implications for controlling Levi­ n Dynamics of the Mixed Economy, a mixed athan? While the inner contradictions of interven­ I economy is defined as any political-economic tionism can be eliminated only by eliminating the system that lies between the extremes of laissez­ state, Ikeda holds out some hope for a less drastic faire capitalism and pure collectivism. In a critique approach-the minimal state. The inherent ten­ of interventionism published in 1929, Ludwig von dency of government to grow in the minimal state Mises found the mixed economy to be contradic­ can be overcome, he suggests, if the ideological tory, illogical, and inherently unstable. This find­ preferences of public choosers for limited govern­ ing, coupled with what we observe throughout the ment are sufficiently strong. world, poses what is referred to in this book as the Decision-makers in the political process face "Misesian paradox"- how can a mixed economy two kinds of problems: incentive problems, the subject to these grave defects continue to be the focus of public choice theory; and knowledge most widespread and persistent form of political­ problems, Ikeda's primary concern and that of economic system in the world today? Austrian political economy generally. In Dynamics Ikeda extends Mises's work in light of recent ofthe Mixed Economy, Austrian and public choice BOOKS 709

approaches are considered to be complementary In Everything for Sale, Kuttner conveniently but independent This position, however, cannot argues against his own perverse, ill-informed ideas withstand careful scrutiny. of what free markets are all about, forcing the The likelihood of increases or decreases in reader to plod through a field of straw men which government intervention at any particular time is the author delights in knocking down. The most not independent of the institutional framework. obvious of these straw men is his attack on perfect The kinds of political structures and procedures in competition. Kuttner wrongly asserts that market place, as emphasized in constitutional political proponents view the perfect competition model as economy (a public choice subdiscipline), can pro­ a reflection of market realities; then he shows that foundly affect both the amount of transfer-seeking markets are not perfectly competitive, proclaims intervention and the likelihood that political deci­ market failure, and calls for widespread govern­ sion-makers will act in ways consistent with the ment intervention. interests of the public-at-Iarge. In reality, of course, few if any, economists see Dynamics of the Mixed Economy contains a perfect competition as a reflection of actual mar­ wealth of insights on the perils and results of kets. Indeed, most freshman economics students government intervention-it also provides some quickly understand.this fact. As James Gwartney hope for advocates of a free society. A strong and Richard Stroup explain in their fine, market­ ideological commitment of public choosers to oriented textbook Economics: Private and Public limited government-preferences rooted in polit­ Choice, perfect, or pure, competition is an abstract, ical philosophy, morality, and religion-can pro­ simplified model whose purpose is to "help us vide an institutional framework conducive to pol­ develop the economic way of thinking." Beyond icies consistent with that goal. However, Ikeda is perhaps certain parts of the agriculture industry, silent on the really important question-how can this model has little direct application to the we achieve a consensus in favor of limited dynamic, day-to-day functioning of actual markets. government? [] However, the constant use of the perfect compe­ Dr. Pasour is prOfessor ofagricultural and resource tition model in economics instruction, I think, can economics at North Carolina State University, Ra­ confuse people outside the economics profession, leigh. and apparently, as exemplified by Kuttner, a few inside it as well. Kuttner also suffers from serious lapses in logic. Everything for Sale: The Virtues and Much of his case for continuing to regulate such markets as health care, banking, finance, labor, and Limits of Markets so on, rests on nothing more than the idea that by Robert Kuttner these markets have long been highly regulated. In Alfred A. Knopf. 1997 • 410 pages. $27.50 the case ofhealth care, for example, he goes so far as to assert inanely that true market reform "turns Reviewed by Raymond J. Keating out to require massive government regulation." All of the trite liberal views of the marketplace are given full voice in Kuttner's book. The author obert Kuttner's Everythingfor Sale carries the sees markets only producing winners and losers. He R subtitle The Virtues and Limits of Markets. seems incapable of grasping the fact the market Unfortunately, Kuttner sees few, if any, virtues and produces winners on both ends of each transac­ many limits when it comes to free markets. tion-both buyers and sellers are better off. Ofcourse, it will surprise few that Kuttner holds In Marxist fashion, Kuttner vastly discounts the this view. After all, he is a ubiquitous, outspoken critical aspect of individual freedom in the mar­ proponent of big government. Open a newspaper, ketplace, favoring bankrupt notions of class war­ a magazine, or turn on a public-policy-oriented fare and exploitation instead. And, of course, in television show, and chances are unusually high contrast to centuries ofeconomic progress through you will come across Robert Kuttner. free markets, the author believes that markets are In television sound bites and his rather short inherently short-term in outlook, yet offers no newspaper columns, Kuttner manages to sound evidence in support ofthis thesis. In addition, while naIve, misguided, misinformed, and even danger­ Kuttner criticizes free-market economists for ap­ ous, all at the same time. What Everything for Sale plying economic analysis to noneconomic decisions clearly demonstrates is that such cloudy thinking is (a criticism that may apply to some but certainly not a function of the medium, but lies at the core not the majority of such economists, despite what of big-government liberalism. Kuttner implies), he fails to consider the impor- 710 THE FREEMAN • NOVEMBER 1997

tance of incentives in his own analysis of straight­ ferson, Madison, Hamilton, et a!., but as for forward economic decisions. Washington, he is known almost entirely for his There is much in this book to identify the author deeds-defeating Cornwallis, presiding over the as an extremist when it comes to his opposition to Constitutional Convention, serving as the first free markets and in his support of government president-rather than for his words. What did he action. Consider the following statements: believe? • "Yet in a Keynesian sense the war [i.e., World A Sacred Union ofCitizens by Matthew Spalding War II] was stunningly efficient." (director of lectures and educational programs at • "Trust, civility, long-term commitment, and the Heritage Foundation) and Patrick Garrity the art ofconsensual deliberation are the antithesis (senior fellow at the Claremont Institute) helps to of pure markets, and the essence of effective answer that question by focusing on Washington's politics." most famous writing, his Farewell Address. The • "[W]e need the habits and institutions of a authors have produced a lovely volume that sheds strong democracy precisely to keep markets in their a great deal oflight on Washington's own character place and to provide resilience during those his­ and his hopes for a national character that would torical periods when the market goes haywire and emerge in his countrymen. There are many good makes ordinary people vulnerable to the appeals of biographies ofWashington, butfor a vision into the tyrants." workings of his mind, this book is an excellent • "In this century, the expansion of state con­ beginning point. straints on the market and the expansion of the The book is structured around the Farewell province of personal liberties have gone hand in Address, its history and meaning. Interestingly, hand." Washington did not actually deliver the address; Oddly, for the free-market reader, Everythingfor rather, he sent it to Philadelphia's American Daily Sale is at once both frustrating and encouraging. Advertiser, where it was published on September The book frustrates due to its misrepresentations 19, 1796. The message was the culmination of and misunderstandings of the workings and ben­ Washington's public life and in it he painstakingly efits ofmarkets. However, the book proves to be so expressed (the authors even discuss some of the intellectually bankrupt that it should encourage material he deleted and reproduce part of the those looking to advance economic freedom. Ifthis handwritten manuscript showing some excisions) is the best the opposition has to offer, free-market his counsel to the nation he had done so much to economics is in a much better position than many create. In fact, the Farewell Address is a lot like of us might previously have thought. D Washington himself in that many people have Mr. Keating is chiefeconomist for the Small Business heard of it, but few know much about it. Many Survival Foundation and author ofNew York by the politicians, for instance, can tell you that in it, Numbers: State and City in Perpetual Crisis (Mad­ Washington advised against foreign alliances and ison Books, 1997). interference in the affairs of other nations, but would be hard-pressed to relate any other idea contained in the Farewell Address. For their benefit, here is one. The problems of political parties and factionalism concerned Wash­ A Sacred Union of Citizens-George ington as much as did the dangers of foreign Washington's Farewell Address and the entanglements. In Paragraph 21 (the entire Ad­ dress consists of 50 paragraphs) he writes, "The American Character alternate domination of one faction over another by Matthew Spalding and Patrick Garrity sharpened by the spirit of revenge natural to party Rowman & Littlefield. 1996 • 217 pages. dissension, which in different ages and countries $27.95 has perpetuated the most horrid enormities, is itself a frightful despotism." How very true. Reviewed by George C. Leef Unfortunately, Washington did not immediately give a prescription for the avoidance of these evils, but elsewhere in the Farewell Address, Washing­ f all the Founders, George Washington is the ton extolled the virtues of just minding one's own Omost famous, but arguably the least well business. If the character of most if not all of the known. Washington's life is well chronicled, but people were to be formed around that simple when it comes to his thought, he is largely a mythic maxim, people would turn away from the seduction figure. People carefully study the writings of Jef- of politics. BOOKS 711

Washington also warned in the Farewell Ad­ unfailing Washingtonian support for minimalist dress against allowing even the slightest weakening government will, however, be disappointed. The ofthe Constitution's restraints upon governmental authors note that he favored the establishment of power, writing, "But let there be no change by a national university, for example, not seeing the usurpation; for though this, in one instance, may be long-run dangers of allowing the government to the instrument of good, it is the customary weapon become active in the provision of education. He by which free governments are destroyed. The also favored a national bank and held an ambiva­ precedent must always greatly overbalance in per­ lent attitude toward foreign trade, maintaining that manent evil any partial or transient benefit which the nation might develop better if the people the use can at any time yield." Alas, many members produced more of their own goods. Bastiat came of the Supreme Court have been willing to ignore along half a century too late to have enlightened Washington's counsel, if they know of it at all. The our First President on the folly of government Constitution's limits on government power have involvement in any of these areas. been shredded, thanks to the arrogance of justices A Sacred Union of Citizens is an intriguing who thought that achieving what they regarded as project, well executed. For Americans interested socially good results was more important than in learning more about the workings of George preserving the Constitutional plan of limited gov­ Washington's mind, this book is indispensable. 0 ernment based on a few enumerated powers and many unyielding restrictions. Readers who take up this book expecting to find Mr. Leefis the book review editor ofThe Freeman.

Back in Print! GOVERNMENT-AN IDEAL CONCEPT by Leonard E. Read New Introduction by Hans F. Sennholz

To Leonard Read, government was neither a manager of economic activity nor an almoner of gifts to the people, but a necessary instrument of social order. Its only basis is justice, not pity. Government is represented by agents who are expected to enforce and defend man's natural rights and protect him against wrongs of his fellowmen. But these agents should not do what the individual must not do. The agents of government should be men and women of integrity. Unfortunately, Read observed, political office tends to rob a person of modesty, humility, and integrity, which make it advisable never to accept a political office.

Leonard Read's eloquent discussion of the nature of government and a new beginning in freedom will endure as a principled work of great value. It is a guidepost for readers seriously interested in the limits of public regimen and the cause of liberty. 152 pages, indexed, paperback $12.95 A few years before Leonard E. Read authored this book, he created The Foundation for Economic Education. He was convinced that every generation must defend its freedom anew against the intellectual forces that seek through ever new devices to enslave it. Therefore, he dedicated his great strength and ability to the study and dissemination of freedom ideas. He managed the Foundation from its beginnings in 1946 until his death in 1983. Critica eVlew An interdisciplinary journal focusing on the effects of market and state on human well-being.

"An exciting corner in the great luarketplace of cOlupeting ideas. Most readers will usually find that Critical Review contains luuch to disagree with, but little that is boring, unilnportant, or anything other than stituulating or provocative." - Israel M. Kirzner "A breath offresh air for libertarian scholarship.... a tuuch needed outlet for truly critical expression within the libertarian acadeluy." - Chris M. Sciabarra "Already a lnajor force, it is well written and well edited; its scholarship is sound, and free froln the elnbarrassing lack ofsophistication that has plagued so l1luch classical-liberal scholarship and opinion.... I have never shown it to a colleague, left, right, or center, who wasn't ilupressed by it." - Stephen Cox "The l1l0St fascinating interdisciplinary journal in existence, it is especially ituportant for classical liberal scholars, since it encourages a realistic and elnpirically grounded, yet philosophically rigorous appraisal of different social systelns." - Peter J. Boettke

IN RECENT ISSUES (back issues available): F.A. Hayek Hayek's Critique ofModern Econolnics PctcrJ. Bocttkc Hayek's Econolnics and His Politics J~ffrcy Fricdman David Johnston, Stcven Lukes on Hayek's critique ofsocial justice Delnocracy and the Rule ofLaw Julict Williams Hayek's Conservative Liberalisln Ryszard Legutko The Non-Neutrality of the Market Gus diZercga Democracy vs. Truth Nationalism Capitalism and Happiness Communitarlanism Rational Choice Theory Individualism and Evolution

MANUSCRIPT SUBMISSION GUIDE AND BACK ISSUE LIST AVAILABLE UPON REQUEST ------.------Single issues $10, double issues $20. I-year (4-issue) subscriptions: $29 U.S., $35 foreign, $15 students with copy of 10, $54 institutions; add $15 for air mail. Send check,money order, or Visa/Me number and expiration date to: CRITICAL REVIEW, P.O. BOX 1254, Dept. 307L, Danbury,CT 06813, or fax credit card information to (203) 270-8105, or e-mail [email protected]. (issn 0891-3811)