THEFREEMAN IDEAS ON LIBERTY

FEATURES

276 Henry Hazlitt: Journalist ofthe Century by Llewellyn H. Rockwell, Jr. The inspiring legacy of"the economic conscience ofour country and our nation." 282 H. G. Wells in Russia by Martin Gardner Remembering Wells' long-forgotten 1920 book, Russia in the Shadows. 288 "Zero Inflation": A Flawed Ideal by George A. Selgin Proponents presume a stationary economy. 290 Pearl Jam vs. Ticketmaster: A Holy War on Reality by Charles Bilodeau Rock bands, middlemen, and ticket prices. 296 Spending Money Freely by Lawrence H. White There is more at stake in electronic funds transfer than simply convenient payment methods. 300 Phones and Freedom by Marty Mattocks In telecommunications as elsewhere, a free market is the most fertile arena for human progress. 304 Live Freely, Live Longer by Max More Liberating life extension research from growing government control. 307 Two Insights for Business Ethics by Douglas B. Rasmussen Individual rights and human moral well-being. 309 Rights versus "Rights" by Tibor R. Machan Exploring the nature ofnegative and positive rights. 313 Bilingual by Choice by James M McCaffery Parents, not government, should determine the language training of children. 316 Rolling Back the Imperial Congress by Ralph R. Reiland Free markets and limited government are the key to prosperity. 318 John Stuart Mill's Immortal Case for Toleration by Jim Powell The legacy of On Liberty. 322 The Story of a Movement by Peter J Boettke Karen Vaughn's Austrian Economics in America.

COLUMNS

Center NOTES from FEE-Woeful Bankers by Hans F: Sennholz 294 IDEAS and CONSEQUENCES-The Right Direction for Welfare Reform by Lawrence W Reed 311 A MAITER of PRINCIPLE-In Praise of Pain by Robert James Bidinotto 327 ECONOMICS on TRIAL-Did the Gold Standard Cause the Great Depression? by Mark Skousen

DEAARTMEN~ .'

274 Perspective-Roger Clites, Donald Kagan, Thomas L. Martin 335 Letters to the Editor 329 Book Reviews -Hayek on Hayek: An Autobiographical Dialogue edited by Stephen Kresge and LeifWenar, reviewed by Robert Batemarco; -The New Unionism in the New Society: Public Sector Union in the Redistributive States by Leo Troy, reviewed by Charles W Baird; -Race and Culture: A World View by Thomas Sowell, reviewed by John W Robbins; -Education and the State: A Study in Political Economy, Third Edition by E. G. West, reviewed by Julio H. Cole. THEFREEMAN IDEAS ON UBERTY PERSPECTIVE Published by The Foundation for Economic Education Destructive Achievement Irvington-on-Hudson, NY 10533 Phone (914) 591-7230 FAX (914) 591-8910 Twenty-five years ago I met a nineteen­ President: Hans F. Sennholz Managing Editor: Beth A. Hoffman year-old man who liked to brag that he had Guest Editor: Lawrence H. White "tom up" seven cars. Apparently that was Editor Emeritus the only noteworthy thing that he had ever Paul L. Poirot Lewisburg, Pennsylvania done. Today he would be forty-four years Book Review Editor Robert Batemarco old, assuming he is still alive. Recently I Marymount College, Tarrytown, New York Assistant Editor wondered what had happened to him and Gregory P. Pavlik Columnists what he is now doing. Robert James Bidinotto Is he still tearing down the achievements Staff Writer, Reader's Digest Lawrence W. Reed ofothers? Ifso, how does he justify it? How Mackinac Center for Public Policy Midland, Michigan does he "get away" with it? Mark Skousen . Rollins College, Winter Park, Florida Might he be a member of the political Contributing Editors Charles W. Baird establishment that limits the amount ofland California State University, Hayward that farmers may cultivate? Might he be Doug Bandow Cato Institute, Washington, D.C. blocking the work of loggers, or of coal E. Calvin Beisner Covenant College, Chattanooga, Tennessee miners, or any of uncounted other produc­ Peter J. Boettke New York University tive individuals? Donald J. Boudreaux Clemson University At least the young man was honest about Clarence B. Carson American Textbook Committee what he did. He said that he "tore up cars." Wadley, Alabama His specialty was overwhelming transmis­ John Chamberlain Cheshire, Connecticut sions but anything that would disable a car Thomas J. DiLorenzo Loyola College, Baltimore, Maryland satisfied him. He knew that what he did was Joseph S. Fulda New York, New York destructive, was counterproductive, and he Roger W. Garrison Auburn University made no bones about it. Bettina Bien Greaves Resident Scholar, FEE Unfortunately, the advocates of various Robert Higgs causes and the elected officials and bureau­ The Independent Institute, Oakland, California John Hospers crats who assist the advocates claim to be University ofSouthern California Tibor R. Machan -- guided by nobler motives. But their coun­ Auburn University Ronald Nash terproductive actions are often far more Reformed Theological Seminary Maitland, Florida harmful to the economy, and particularly to Edmund A. Opitz Chatham, Massachusetts others, than was the warped young man who James L. Payne Sandpoint, Idaho tore up cars as a way of satisfying his need William H. Peterson to· achieve. Washington, D.C. Jane S. Shaw Unless the car wrecker caused an acci­ PERC, Bozeman, Montana Richard H. Timberlake dent that involved someone else---and, for­ University ofGeorgia Lawrence H. White tunately, he had not at the time I met University ofGeorgIa him-the damage which he caused affected The Freeman is the monthly publication of The Foundation for Economic Education, Inc., Irvington-on-Hudson, NY 10533. FEE, primarily his own property and·economic established in 1946 by Leonard E. Read, is a non-political, educa­ well-being. tional champion of private property, the free market, and limited government. FEE is classified as a 26 USC 501(c)(3) tax-exempt Those who seek to limit the productive organization. Copyright © 1995 by The Foundation for Economic Education. actions of others may appear to be less Permission is granted to reprint any article in this issue, except "H.G. Wells in Russia" and "John Stuart Mill's Immortal Case for Tolera­ deserving ofour condemnation but, in real­ tion," provided appropriate credit is given and two copies of the reprinted material are sent to The Foundation. ity, they actually do far more total damage The costs of Foundation projects and services are met through donations, which are invited in any amount. Donors of$30.00 or more than did the car wrecker. receive a subscriptionto The Freeman. Student subscriptions are$10.00 for the nine-month academic year; $5.00 per semester. Additional This is not to excuse the young man. It is copies ofsingle issues ofThe Freeman are $2.00. For foreign delivery, simply to point out that seemingly respect­ a donation of$40.00 a year is suggested to cover mailing costs. Bound volumes ofThe Freeman are available from The Foundation able people who claim that they are acting for calendar years 1972 to date. The Freeman is available in microform from University Microfilms, 300 N. Zeeb Rd., Ann Arbor, MI48106. with good motives, even sacrificing for the 274 PERSPECTIVE benefit of others, are often either hypocrit­ The Blessings of Earthquakes? ical orelse are fooling themselves when they act in ways that destroy far more than did A January New York Times article cited the young man who "tore up cars." experts who claimed that the Kobe earth­ -ROGER CLITES quake could give a boost to a Japanese Professor Clites teaches at Tusculum Col­ economy struggling to recover from a long lege in Tennessee. recession. Henry Hazlitt has passed on, but I imagine he would have said, "There you go The Role of the West again using the 'broken-window fallacy.' " "The broken-window fallacy, under a Americans do not share a common ances­ hundred disguises, is the most persistent in try and a common blood. They and their the history ofeconomics," Hazlitt observed forebears come from every comer of the in Economics in One Lesson. The fallacy is earth. What they have in common and what "solemnly reaffirmed" daily by editorial brings them together is a system oflaws and writers and''professors ofeconomics in our beliefs that shaped the establishment ofthe best universities" who see "almost endless country, a system developed within the benefits in enormous acts of destruction" context of Western Civilization. It should with its consequent stimulation of produc­ be obvious, then, that all Americans need tion. to learn about that civilization if we are to Of course, what makes the fallacy so understand our country's origins, and share initially tempting is that the "experts" are at in its heritage, purposes, and character.... least right in the first conclusion that there The assault on the character of Western will be more business for the construction Civilization badly distorts history. Its flaws industry. But this new activity arises at the are real enough, but they are common to opportunity cost oflost business elsewhere, almost all the civilizations known on any which will not occur because money is continent at any time in human history. redirected toward reconstruction. As Haz­ What is remarkable about the Western her­ litt put it, the experts "see only what is itage and what makes it essential is the immediately visible to the eye" while ne­ important ways in which it has departed glecting the invisible costs to the rest ofthe from the common experience. More than economy. any other it has asserted the claims of the Hazlitt was right. Resist the temptation individual against those ofthe state, limiting ofthe broken-window fallacy! If the fallacy its power and creating a realm of privacy is accepted, we should then be prepared to into which it cannot penetrate.... accept bombing campaigns as part of the It has produced the theory and practice of next fiscal stimulus package! the separation ofchurch from state, thereby -THOMAS L. MARTIN protecting each from the other and creating Dr. Martin is an Associate Professor a free and safe place for the individual ofEconomics at the University of Central conscience. At its core is a tolerance and Florida in Orlando. respect for diversity unknown in most cul­ This item is an adaptation ofhis letter to tures. One ofits most telling characteristics the editor, the New York Times, published is its encouragement ofcriticism ofitselfand January 25, 1995. its ways. Only in the West can one imagine For more on Henry Hazlitt's enduring a movement to neglect the culture's own influence, see page 276. heritage in favor of some others. -DONALD KAGAN (Excerpts from an address to Yale Univer­ sity freshman class, September 1, 1990)

275 THEFREEMAN IDEAS ON LIBERTY

Henry Hazlitt: Journalist of the Century by Llewellyn H. Rockwell, Jr.

enry Stuart Hazlitt wrote brilliantly of his earliest works were unsigned and Hand presciently for more than eight uncollected. Hazlitt himself once estimated decades on culture, government, econom­ that he had written 10 million words, and ics, and political affairs. He warned against that his collected works would run to 150 deconstructionism, against Freudianism, volumes. and against the attack on reason. He cen­ Yet he lost every prominent job he ever sured the income tax, central banking, the held-literary editor at The Nation, top New Deal, Keynesianism, socialism, war editorialist at the New York Times, weekly socialism, price controls, unionism, the wel­ columnist at Newsweek-because he re­ fare state, and deficits. fused to bend or compromise. Like one ofthe great Romans he admired, Family circumstances prevented him he had more than knowledge and talent. He from getting a complete formal education, had a vigorous will, strong moral convic­ so he read all the classics of ancient and tion, and supreme courage. He was never modern literature on his own initiative, discouraged, and never slackened in the while working in jobs that offered very low fight. pay. His lifetime bibliography-recently com­ Harry Hazlitt was born on this day, one piled by Jeff Tucker*-includes a novel, a hundred years ago, in Philadelphia. His trialogue on literary criticism, two large father died when Henry was a baby, and treatises on economics and moral philoso­ when he was six, his mother enrolled him in phy, several edited volumes, some sixteen Girard College, a home for''fatherless white other books, and countless chapters, arti­ boys" set up by a local philanthropist. His cles, commentaries, reviews-more than mother remarried and they moved to Brook­ 6,000 entries in all-and even so, this figure lyn when Henry was nine, where he at­ cannot include everything, because so many tended public schools. His earliest ambition wasto become a psychologist''like William James," but his family's financial situation Mr. Rockwell is president of the Ludwig von forced him to give up that idea. Mter a year Mises Institute in Auburn, Alabama. This speech was delivered at a Mises Institute Conference and a half at City College, he had to look for commemorating Henry Hazlitt, held on Novem­ a way to earn money. ber 28,1994, in New York City. Late in life, he told the story of his job *Henry Hazlitt: A Giant of Liberty (Auburn, search to an interviewer, not passing up the Ala.: Ludwig von Mises Institute, 1994), 158 opportunity to explain something about la­ pages. bor economics: 276 277

I had no skills whatever. So I would get a book appeared. The Way to Will Power was job, and I would last two orthree days and a defense of individual initiative against the be fired. It never surprised me or upset deterministic claims of Freudian psycho­ me, because I read the Times early in the analysis. morning, went through the ads, and I'd Hazlitt's reputation as a writer and practically have a job that day. This thinker had grown, thanks also to his re­ shows what happens when you have a free views and essays on authors as diverse market. There was no such thing as a as Garet Garrett, Spinoza, Santayana, minimum wage.... There was no such Mencken, and Bertrand Russell. A 1927 thing as relief, except maybe ... a soup essay entitled "Bertrand Russell's Uni­ handout. ... [T]here was no systematic verse" attracted the attention ofthe British welfare. You had a free market. And so I author, who, at the time, was widely con­ usually found myselfat ajob the next day, sidered (probably incorrectly) to be the most and I'd get fired about three or four days brilliant man alive. afterthat. ... I didn't have the skills. But Russell so admired the young journalist's each time I kept learning something, and talent that he and his publisher asked Hazlitt finally I was getting about $3 or$4 a week. to write the philosopher's official biography. This was at the same time that he was Hazlitt spent much of 1928 and 1929 inter­ systematically reading the ancient and mod­ viewing Russell in New York. One day, ern classics. "At some point I decided that however, Russell announced: "You know, I wanted to be a newspaperman," he ex­ I have had a very interesting life. I think I'd plained, "because it was the only way I like to do my own autobiography." could see to get into writing. " At the age of 20, when he finally got a job at the Wall At The Nation Street Journal as a stenographer, he had already finished his first book, Thinking as a In the meantime, the editors of The Na­ Science, which was published in 1915. tion had noticed Hazlitt's work and hired His first book, like everything he ever him as literary editor. "The Nation was wrote, made a strong argument and made it pretty much a leftist magazine then, as it has well. "Idon't think it's worthwhile," he told always remained," he explained to an in­ an interviewer late in life, "if you haven't terviewer. "One of the reasons they took made up your mind, to write a piece saying, me on was that they wanted me not only to 'Well, on one hand, but on the otherhand.' " write and handle the book reviews but to be able to write editorials on economic sub­ The "Essential Qualities" jects." And his work there was extraordi­ nary. He wrote on contemporary literature Whatever Hazlitt wrote, it was always in as a springboard to his own rich observa­ clear and virile English. He adhered to the tions on philosophy, culture, history, eco­ rule he set out for himself: "aim first at the nomics, and politics. essential qualities-coherence, clarity, pre­ He condemned modem education for for­ cision, simplicity, and brevity. Euphony getting the classics and laughed at Marxian and rhythm are ofcourse also desirable, but attempts to read polylogism into the great they are like the final rubbing on a fine piece works of the ancients. No matter how offurniture-finishing touchesjustified only shoddy the rest of the magazine, Hazlitt's if the piece has been soundly made." prose shone through: always provocative, In 1916, he left the Wall Street Journal to always tightly written, and always worth write editorials for the New York Evening reading. While there, he penned an early Post, then wrote the monthly newsletter of refutation of literary deconstructionism, the Mechanics and Metals National Bank, The Anatomy of Criticism. It is still a fas­ and later worked for the New York Evening cinating work on standards in literature. Mail. While at the Mail in 1922, his second But he never lost his interest in econom- 278 THE FREEMAN • MAY 1995 ics. And from time to time, the editors less to say, The Nation's editors sided with allowed him space in the economic and the socialists. Hazlitt, suddenly condemned political section ofthe magazine. One ofhis as a reactionary, was out. His adherence to first articles in the area appeared in 1931. principle had led to his ouster. It was called "Rubber Money and Iron In the early thirties, the literary set also Debts," a phrase which pretty much sums turned against H.L. Mencken, founding ed­ up the era. He carried with him a passion for itorofthe American Mercury, because ofhis sound money the rest of his life. opposition to the New Deal. When Mencken If you want to read a magnificent attack decided to tum the journal over to a new on the New Deal abandonment of the gold editor, he named Hazlitt, calling him the standard, look at "Shall We Devaluate the "onlycompetent critic ofthe arts that I have Dollar? Parts 1 and 2," which appeared in heard of who was at the same time a March 1932 in The Nation. Or take a look at competent economist, ofpractical as well as his classic attack on socialist George Soule, theoretical training." And, Mencken added, which appeared two months later. Even "he is one of the few economists in human better, take a look at his defense ofhoarding history who could really write." True to his at the height of anti-hoarding hysteria in indefatigable spirit, Hazlitt's first article, March 1933. "The Fallacies of the N.R.A.," was an Hazlitt was not trained as an economist, implicit attack on the entire American Left, although few scholars were as familiar with including The Nation. the relevant literature. He was inspired initially by the writings ofPhilip Wicksteed, The Times Years a disciple ofearly Marginalist William Stan­ ley Jevons, and later by the works of Her­ Hazlitt was only the editor for a short bert Spencer. while, before he decided to go back into Over the course ofhis life, Hazlitt became newspaper work. In those days, even the more and more opposed to government New York Times was not as left wing as it is intervention in the economy, and time and today, and the paper hired Hazlitt to write again he refused to give in to pressure from editorials and review essays, which he did publishers and editors to change his views. from 1934 to 1946. The first time he was squeezed out of a Appearing almost daily, his editorials prestigious job was in mid-1933, when he covered an extraordinarily wide range: the squared off with Louis Fischer on the cause dangers of economic controls, the evils of ofthe Depression. Fischer took the position abandoning the gold standard, the stupidity that events confirmed the Marxian theory of of Blue Eagle planning, the idiocy of pro­ economic crisis under capitalism. Hazlitt, tectionism, the evils of wartime price con­ though unfamiliar with the totality of the trols, the fraud ofSocial Security (he was its Austrian theory of the business cycle, ar­ original prophet of doom), the glories of gued that the Depression was caused by G.K. Chesterton, the fallacies ofKeynesian loose credit and subsequent interventions in economics, the futility of foreign aid, the the labor market. importance ofa free marketin securities, the It was a rigorous and free-wheeling de­ hazards of an inflationary monetary policy, bate. But the other editors must have real­ the ill-effects ofunionization, and much more. ized how important it was to the future of During this time, he met the emigre econ­ government policy and the fate of progres­ omist Ludwig von Mises, whose work Haz­ sivism itself. So at the end of Hazlitt's last litt had admired. Hazlitt and Mises became piece, they wrote the following: "The dis­ fast friends, and Mises thrilled to Hazlitt's cussion in the foregoing articles of the editorial blasts against government plan­ causes ofthe present economic debacle and ning, and often consulted Hazlitt on edito­ possible ways out will be commented upon rial matters and contemporary politics. It is editorially in a forthcoming issue." Need- said that Hazlitt even prepared, at Mises' HENRY HAZLITT: JOURNALIST OF THE CENTURY 279

request, a version of Human Action as a into a free market-at a time when most journalist would have written it. Mises people thought socialism was the unstoppa­ thanked him, but rejected most of the ble wave of the future. changes. Hazlitt enjoyed his years at the Times, yet While at the Times, Hazlitt did whatever as with his previous positions, he eventually he could to hold back the tide ofstatism. He came under pressure from the publisher to maintained for 12 years a rapid-fire daily compromise himself. Hazlitt had taken on assault against the central state. Whether Keynes' plans to reconstruct the monetary warning against devaluation or economic system after the war, and predicted world­ embargoes against Japan, which helped lead wide inflation in the decades ahead. The to Pearl Harbor, he emerges as a true prophet. Times, however, was moving to the Left, Scholars who look back at this period and so wanted to endorse the Bretton through the eyes of the New York Times Woods agreement, including the World editorial page might expect to find 100 per­ Bank and International Monetary Fund. cent support for Franklin D. Roosevelt. But "Now, Henry," Times publisher Arthur they are shocked. For Hazlitt-against al­ Sulzberger said to him, "when 43 govern­ most all elite opinion-was at work against ments sign an agreement, I don't see how FDR. When the American Left discovered The Times can any longer combat this." this, they arranged for his departure. "All right," Hazlitt said, "butin that case But while there, he did a fantastic amount I can't write anything further about Bretton of good. We know FDR received daily Woods. It is an inflationist scheme that will reports on New York Times opinion. So did end badly and I can't support it." Hazlitt his so-called "brain trust." How much did was not fired immediately, although at one Hazlitt hold them back? How much worse point, management threatened to put a dis­ would the New Deal have been? The same claimer under his editorials. Soon after, he could be asked after the war. Whatever was squeezed out, but landed a job with steps were taken away from price controls Newsweek, and became one of the most and unionization could be due in part to his influential financial writers in the country. influence. His weekly "BusinessTides" column was In 1938, before he had met Mises, Hazlitt enduringly popular. Surveys of the reader­ wrote a review of Mises' Socialism, calling ship invariably showed that many subscrib­ it the most devastating analysis of the sys­ ers took the magazine solely to read this tem ever written. He became so enthralled column. I was among them. with the economic calculation debate that While at Newsweek, his Economics in later in the same year he negatively re­ One Lesson appeared. As one of the most viewed various responses to Mises, includ­ influential books on economics everwritten, ing Polish socialist Oskar Lange's. It could it has sold nearly one million copies and is be said that it was Hazlitt who fully intro­ available in at least ten languages. Hazlitt duced Mises to American audiences. Later argued that government intervention fo­ he followed up with reviews of Human cuses on the consequences that are seen, Action, Bureaucracy, and many others. And and ignores those that are not. These include six years after he first reviewed Socialism, wealth not created and even destroyed by he reviewed Hayek's Road to Serfdom, and regulation, inflation, and taxation. In 1947, gently criticized Hayek's concessions to the he wrote Will Dollars Save the World?, a social democracy that Hazlitt had spent his book attacking the Marshall Plan, which he life fighting. saw as an international welfare scheme. The His studies on the calculation debate subsequent history of U.S. foreign aid became a novel nearly 15 years later, titled shows just how right he was. The Great Idea, and later, Time Will Run In1950, Hazlitt took on additional respon­ Back. And talk about prescience! It con­ sibilities to become editor, along with John cerned how to transform a socialist system Chamberlain, of the fortnightly magazine 280 THE FREEMAN • MAY 1995

Henry Hazlitt (1894-1993) The Freeman. He continued writing for The Now recall that during this time, he was Freeman after its acquisition by the Foun­ still writing a weekly column for Newsweek, dation for Economic Education in the mid­ and speaking all over the country, meaning fifties. Some of his best articles published he was already busier than most academics. there were later collected into FEE's The But after 20 years, another parting occurred Wisdom ofHenry Hazlitt. in 1966. As Kenneth Auchincloss, managing In 1959, Hazlitt came out with The Failure editor, wrote years later, "At the time he ofthe "New Economics," an extraordinary was writing, there were readers-and per­ line-by-line refutation of John Maynard haps even some Newsweek editors-who Keynes' General Theory. And though it was must have considered him old-fashioned, panned by the American academic journals out of touch with the times. But Henry at the time, it enlivened a growing move­ would never have considered trimming his ment favoring free markets over state plan­ opinions to the patterns of the day." ning. It continues to be an essential re­ After he left Newsweek, he wrote a pop­ source. A year later, Hazlitt collected a ular weekly column for the Los Angeles series ofscholarly attacks on Keynes as The Times, which was syndicated around the Critics of Keynesian Economics, also still country. Then he embarked on some new very useful. books. In the mid-sixties, Hazlitt tumedhis at­ He wrote Man vs. the Welfare State, tention to the ethical basis of capitalism. which demonstrated that welfare promotes Thus his book The Foundations ofMorality , what it pretends to discourage. This was which he called his proudest achievement. 20 years before Charles Murray's Losing HENRY HAZLITT: JOURNALIST OF THE CENTURY 281

Ground. Then he wrote The Conquest of ances, but what we mainly risk is merely our Poverty showing us how to get out of the popularity, the danger that we will be called welfare mess. In it he refuted such schemes nasty names." as Milton Friedman's negative income tax, "We have a duty to speak even more and urged immediate abolition of welfare. clearly and courageously, to work hard, and His last complete book was published in to keep fighting this battle while the strength 1984, when Hazlitt was 90 years old. It was is still in us.... Even those ofus who have a collection-the only one then in print-of reached and passed our 70th birthdays can­ the best writings of the Stoic philosophers not afford to rest on our oars and spend the Seneca, Epictetus, and Marcus Aurelius. rest of our lives dozing in the Florida sun. An unfinished manuscript of what would The times call for courage. The times call for have been his last book sits in his collection hard work. But ifthe demands are high, it is at Syracuse University. It is a skeptical look because the stakes are even higher. They are at animal rights. His last published scholarly nothing less than the future ofhuman liberty, article appeared in the first issue of the which means the future of civilization." Review ofAustrian Economics, the journal The great voice of Henry Hazlitt, "the co-published by the Ludwig von Mises In­ economic conscience ofourcountry and our stitute. nation," is now stilled. But thisjoumalist of the century will not be forgotten. In a time The Future of Liberty dominated byprevaricators and planners, in a nation still threatened by statism, Hazlitt's Thirty years ago tonight, a group of written legacy, will continue to inspire writ­ friends gathered in this city on the occasion ers and scholars. ofHazlitt's 70th birthday. It was only weeks We need more economists like Henry after Lyndon Baines Johnson had been Hazlitt, who are willing to write in defense elected, and these freedom lovers were offree enterprise, and do so in plain English saddened at the state ofthe world, but at the and to adhere to principle, whether analyz­ same time ready to fight. Ludwig von Mises ing history, theory, or present policy, re­ paid tribute to his "distinguished friend." gardless of the personal cost. "In this age at the great struggle in favor of If we win, as Mises said, we can in part freedom and the social system in which men thank Henry Hazlitt. Yet Hazlitt has never can live as free men, you are ourleader. You gotten his due. And we know why: because have indefatigably fought against the step he was right-right about the New Deal, right by step advance of the powers anxious to about Keynes, right about the attack on rea­ destroy everything that human civilization son, right about the welfare state, right about has created over a long period of centuries. inflation, and right about the morality of ... You are the economic conscience ofour capitalism. Our age cannot tolerate that. country and of our nation." "Every friend The intellectual establishment has too much of freedom may today, in this post-election invested in the present failure to admit who month, be rather pessimistic about the fu­ the real prophets of this century are. ture. But let us not forget that there is rising Henry Hazlitt, although he made a pro­ a new generation ofdefenders offreedom. " found difference in our age, seemed some­ "If we succeed," Mises said to Hazlitt, "it times to be from another time. He had the will be to a great extent your merit, the fruit breadth and gravitas of a Cicero, the moral ofthe work that you have done in the first 70 force of a Tacitus, and like his beloved years of your life." Stoics, lived a life of honor and principle. Hazlitt then reflected on his life, and in so The ancient republic of Rome would have doing painted a dark picture of the state of cherished him. So should we. And if we human liberty. Yet "none ofus is yet on the restore the American republic, his bust torture rack; we are not yet in jail; we're should someday stand in our Senate, among getting various harassments and annoy- those of our greatest men. D THEFREEMAN IDEAS ON UBERlY

H. G. Wells in Russia by Martin Gardner

oday's college students, preoccupied and Theory ofBolshevism is the more per­ T with everything except a liberal educa­ ceptive ofthe two books, but it is still in print tion, have only the dimmest awareness of and widely known. Here I shall focus on the how many famous writers, artists, and book by Wells, Russia in the Shadows, thinkers around the world were once under because it has been almost totally forgotten. the magic spell of Communism. They have It deserves to be read today for three rea­ no conception of how many bright, attrac­ sons: its vivid account of Russian chaos tive young people in American universities following the first world war, its portrait during the 1930s called each other "com­ of Lenin, and its insights into Wells' early rade," exulting in the delusion that they opinions of Marx and the future of Russia. were part of a vast, inevitable Revolution Wells made three visits to Russia. The destined to overthrow an evil capitalism. first, accompanied by Maurice Baring, was The Soviet Empire has now crumbled, in 1914, just before the outbreak of war, to Communist parties are dissolving, the old see his old friend Maxim Gorky. Gorky's tricolor Russian flag has replaced the ham­ secretary and mistress was then the Count­ mer and sickle, statues of Lenin have been ess Benckendorff, formerly Moura Zak­ toppled, and Marxist ideology is dead ex­ revskaya. She had been planted on Gorky cept in the atrophied brains ofa few elderly as a government spy. But Moura had told die-hards around the globe. As history takes Gorky this. Admiring her straightforward­ this unexpected turn, it is good to remember ness, Gorky did not seem to mind. that from the beginning-not just among In 1920, when Wells returned to Russia, conservatives but among democratic social­ Gorky (a personal friend ofLenin) arranged ists-there were many who saw clearly that for Moura to be Wells' guide and inter­ Marxism was a weird mystique set forth by preter. Although there is no hint of it in an egotistical crank. Wells' book, he fell passionately in love with In 1920, three years after the Bolsheviks her. The full story ofthis beautiful and witty seized power, two of England's most influ­ woman has yet to be told, although Anthony ential writers, Bertrand Russell and H. G. West, Wells' illegitimate son by Rebecca Wells, made trips to Moscow to converse West, devotes many pages to her in his with Lenin. Each recorded his negative biography of Wells. "My father could not impressions in a book. Russell's Practice reason himself out of his intoxication with her, and however little future his passion might seem to have, he went home with it Martin Gardner is a science writer, author of burning in him." some fifty books about science, math, philoso­ phy, and literature. His best known book is The Wells' account of his 1920 trip first ran Annotated Alice. He was the editor ofthe math as a series of articles in London's Sunday department ofScientific American for 25 years. Express, instantly boosting that paper's cir- 282 H. G. WELLS IN RUSSIA 283 culation by 80,000. Hodden and Stoughton ernment for Russia. Small in number, the brought the series out as a book in 1920, the Bolsheviks had been able to take over dur­ same year that Russell's book appeared. ing the confusion that followed six years of Wells went first to S1. Petersburg (later war because they were the only party with renamed Petrograd, then Leningrad, now a clear vision. Its leaders, Wells believed, back to St. Petersburg) to renew his friend­ were fanatical but honest. He acknowledged ship with Gorky. Since 1914 Moura had their brutalities, but suspected that a Red been imprisoned several times by the Bol­ Terror, inspired by hate, was the only way sheviks, and was now forbidden to leave order could have been restored. Petersburg to return to her children in Russell, whose visit to Russia preceded nearby Estonia. Wells', found Gorky dying along with Rus­ Petersburg, Russia's second largest city, sian culture. Wells chides Russell for this. was in a state of almost total ruin. The old Russell had simply caught Gorky with a bad Czarist order had collapsed because ofwhat cold, then his imagination led him into a Wells called its "inherent rottenness." The "dark and purple passage." Although Bolsheviks had snatched power from the Gorky was a great admirer of Lenin, Wells democratic but indecisive Mensheviks. found him bitter toward the Communist There had been much killing to establish Party, and strong in his respect for Western order and there was a crude rationing sys­ science and literature. Now thanks to Bol­ tem for food and goods. Everywhere was shevik efforts to prevent counterrevolution­ evidence of a "vast irreparable break­ ary forces, Russian art, literature, and sci­ down. " Shops were closed, clothes were ence had almost disappeared. Eminent shabby, roads were terrible, houses had scientists were without funds or access to been torn down for firewood. A black mar­ Westernjournals. "The crude Marxist phi­ ket flourished, though occasionally a profi­ losophy," Wells wrote, "which divides all teer was caught and shot. Men were un­ men into bourgeoisie and proletariat, which shaven only because they had no razor sees all social life as a stupidly simple blades. Hospitals had broken down. Medi­ 'class war,' had no knowledge of the con­ cines were unavailable. Everybody looked ditions necessary for the collective mental sick and sad. People stood for hours in long life." queues to get bread. Wherever Wells Amazingly, only in plays and operas did looked, and he was allowed to roam freely, pockets of the old culture persist. "When he saw nothing but decay and desolation. one faced the stage, it was as if nothing had Over and over again Wells insists that this changed. " Another hopeful sign was the decay was not the product of Bolshevism government subsidy for a vast encyclope­ but the cause. "It was not Communism dia, though how would it be distributed? which built up these great, impossible cities, Wells granted that the Bolsheviks were but capitalism. It was not Communism that basically honest, but they were also naive plunged this huge, creaking, bankrupt em­ and simpleminded. Astonished to find them­ pire into six years ofexhausting war. It was selves in power, they were without plans European imperialism. Nor is it Commu­ or ideas. "Marx the Prophet and his.Sacred nism that has pestered this suffering and Book" provided no leads. Although Marx perhaps dying Russia with a series of sub­ had given a good factual account ofthe evils sidized raids, invasions and insurrections, ofunfettered capitalism, he offered no blue­ and inflicted upon it an atrocious blockade. prints for what would replace it. All he did The vindictive French creditor, the journal­ was intimate vaguely about the new para­ istic British oafare far more responsible for dise that would eventually result after a these deathbed miseries than any Commu­ temporary socialist phase had withered nist. " away. Communism, wrote Wells, was like a The Communist Party, Wells stressed, magician who had lost his rabbit and could was at the moment the only possible gov- produce nothing from his hat. 284 THE FREEMAN • MAY 1995 An Active Hostility objection to Marx has changed to a very active hostility. Wherever we went we Toward Marx encountered busts, portraits, and statues In a chapter titled "The Quintessence of of Marx. About two-thirds of the face of Bolshevism" Wells slashed away at Marxist Marx is beard, a vast solemn wooly un­ ideology in two memorable paragraphs: eventful beard that must have made all normal exercise impossible. It is not the It will be best if I write about Marx sort of beard that happens to a man, it is without any hypocritical deference. I a beard cultivated, cherished, and thrust have always regarded him as a Bore ofthe patriarchally upon the world. It is exactly extremest sort. His vast unfinished work, like Das Kapital in its inane abundance, Das KapitaI, a cadence of wearisome and the human part ofthe face looks over volumes about such phantom unrealities it owlishly as if it looked to see how the as the bourgeoisie and proletariat, a book growth impressed mankind. I found the for ever maundering away into tedious omnipresent images of that beard more secondary discussions, impresses me as and more irritating. A gnawing desire a monument ofpretentious pedantry. But grew upon me to see Karl Marx shaved. before I went to Russia on this last occa­ Some day, if I am spared, I will take up sion I had no active hostility to Marx. I shears and a razor against Das Kapital; I avoided his works and when I encoun­ will write The Shaving ofKarl Marx. tered Marxists I disposed of them by asking them to tell me exactly what people Marxism, Wells wrote, was a cult that constituted the proletariat. None ofthem appealed to energetic young men and knew. No Marxist knows. In Gorky's flat women who were aware of capitalism's I listened with attention while Bokaiev excesses and who longed for a new order. discussed with Shalyapin the fine ques­ They would have become Marxists ifMarx tion of whether in Russia there was a had never lived. Wells recalls his own proletariat at all, distinguishable from the youth. Denied an education, he had worked peasants. As Bokaiev has been head of long hours in a detestable shop which he the Extraordinary Commission ofthe Dic­ would have gladly burned down if he had tatorship of the Proletariat in Petersburg, not assumed it was overinsured. Marxism it was interesting to note the fine difficul­ spread like fire around the world not be­ ties ofthe argument. The "proletarian" in cause Marx was wise but because capitalism the Marxist jargon is like the "producer" was "stupid, selfish, wasteful, and anarchis­ in thejargon ofsome political economists, tic. " who is supposed to be a creature abso­ Marx saw a "great conspiracy against lutely distinct and different from the human happiness concocted by a mysteri­ "consumer." So the proletarian is a figure ous body ofwicked men called capitalists." put into flat opposition to something Wells saw these tycoons as "no more than called capital. I find in large type outside a scrambling disorder of mean-spirited and the current number of the Plebs, "The short-sighted men. " Marxism, with its con­ working class and the employing class spiracy mania and revolutionary ardor have nothing in common." Apply this to offered an illusory hope for a quick fix. a works foreman who is being taken in a Unfortunately, the Bolsheviks had no ex­ train by an engine-driver to see how the perience in running a giant nation. Wells house he is having built for him by a found their incompetence amazing, their building society is getting on. To which ignorance profound. Repeatedly he was of these immiscible does he belong, em­ asked, "When is the social revolution going ployer or employed? The stuff is sheer to happen in England?" nonsense. Every intelligent Bolshevik, wrote Wells, In Russia I must confess my passive is bothered by the fact that the revolution H. G. WELLS IN RUSSIA 285 happened first in Russia. According to Marxist, he told his listeners. He was a Marx, it was to occur in advanced capitalist "collectivist." He wished Russia well, but countries-first in England, then France, assured them that in England any movement and Germany, and finally in America. In­ toward socialism would be peaceful, the stead, it happened in Russia where there product ofeducation, not class hatred. The was no specialized working class at all. speech was reported fairly in Pravda. The Russian factories were worked by peasants meeting .ended with everyone singing the who came and went from villages. There Internationale. Wells realized that in no way was no proletariat, in Marx's sense, to unite was the meeting democratic. It simply rub­ with the workers ofthe world. Slowly dawn­ berstamped what it had been told. It was ing on the minds of Bolsheviks was the like "a big bagful ofmiscellaneous wheels" "chill suspicion" that what happened in compared to an "old-fashioned and inaccu­ Russia was not a Marxist revolution at all, rate but still going clock." but only the capture of a derelict ship. Wells tried to convince Russian leaders Wells Meets Lenin that in England there were at least 200 different classes, and the only class-con­ The sixth chapter of Wells' book, titled scious proletarians he knew were a small "The Dreamer in the Kremlin," describes band of Scotch workers under the leader­ Wells' chat with Lenin. He found Moscow ship of a gentleman named MacManus. in less disrepair than Petersburg. Its Wells was amused by the repeated scoldings churches were open. Ten thousand crosses that came by wireless to British labor lead­ glittered in the sunlight, and kissing icons ers because they refused to behave like was still a flourishing industry. A sign out­ Marx said they would. They ought to be side one church said, "Religion is the opiate Red. They were just yellow. of the people." It had little effect, Wells In Wells' eyes "never was there so ama­ observed, because most ofthe people in the teurish a government." Their preposterous street could not read. ideology was doing irreparable damage to After a long irritating wait, Wells was science and art. The teaching of chemistry ushered through a labyrinth ofpassageways was actually forbidden unless it was Marxist and guards to Lenin's sanctum. Wells was chemistry. Art and literature were sup­ surprised at how small Lenin was. He had pressed if not politically correct. expected to find a doctrinaire Marxist, but Wells visited a school selected by the found him nothing of the sort. He had a government. When children were asked pleasant, quick-changing, brownish face, what Western writers they liked best, Wells' lively smile, and a habit of screwing up one name dominated! "Suchcomparatively triv­ side of his face because of defective vision ial figures as Milton, Dickens, Shakespeare in one eye. Speaking excellent English, ran about intermittently between the feet of Lenin asked the inevitable question. Why is that literary colossus." Wells was furious. there no social revolution in England? The next day he visited a school of his own Wells in turn wanted to know what Lenin choice and found it far superior. There were planned to do with the mammoth country he no Wells books in its library. None of the found on his hands. There were huge plans. children had ever heard of him. The cities would become smaller, all Russia At a meeting of Petersburg leaders he would be electrified, agriculture would be heard himself repeatedly praised. They seized by the state and modernized. "Come urged him to write fairly about Russia; not back," he said, "and see what we have done to emulate Russell who had accepted their in ten years." Wells was favorably im­ hospitality then gone home to write harsh pressed. In spite of Lenin's cumbersome criticism. To avoid mistranslations, Wells Marxist baggage, Wells believed that "this wrote down his speech and had it carefully amazing little man" might actually succeed translated before he gave it. He was not a in revitalizing Russia. 286 THE FREEMAN • MAY 1995

H. G. Wells lecturing on Soviet Russia. Wells stressed his faith in evolutionary Communists for its attacks on Marx, and by socialism. Lenin disagreed. Capitalism was conservatives for its tolerance of the Rus­ incurable. It had to be totally overturned. sian experiment and for its admiration of Their argument ended indecisively, but they Lenin. Winston Churchill, who correctly parted warmly. Wells and his Russian­ perceived Communism as a growing cancer, speaking biologist son G. P. ("Gip") who blasted Wells' book in The Daily Express had accompanied him on the trip returned to (December 5, 1920), followed by Wells' Petersburg, then on to Revel to catch a ship reply. Churchill and Wells had long been at home. Wells left convinced that Western odds. Wells would later caricature him as nations should do all they could to provide Rupert Catskill in his science fantasy Men aid, especially food to prevent a looming Like Gods (1923). Arch-conservative Henry famine during the coming winter. If Russia Arthur Jones was so enraged that he bar­ were to collapse again, Bolshevism might be raged Wells with abusive letters which he replaced by a new ideology and a dictator­ later published as a book My Dear Wells ship worse than Lenin's. Such a collapse, (1921). Wells feared, could spread westward, and "possibly all modern civilization may tum­ Wells' Defective Vision ble in." Leon Trotsky, in his biography of Lenin, Who today can fault Wells for seeing wrote that several years after Wells' visit clearly through the shams of Marx, and for Lenin had said of Wells, "Ugh! What a his fears that Bolshevik fanaticism would narrow petty bourgeois he is! He is a phi­ stifle Russian science and culture? But there listine! Ugh! What a philistine!" Anthony are three glaring defects in his book. West, in his biography ofhis father says that Wells was curiously unimpressed by the he thinks Trotsky fabricated Lenin's remark absence of democracy in the new Russia. out of whole cloth. Not once did he ask Lenin if there were Although Russia in the Shadows sold well plans for free elections and secret ballots. in England, it was bitterly denounced by Wells had never been keen on allowing H. G. WELLS IN RUSSIA 287 uneducated people to vote, preferring in­ usual Marxist bromides. American capital­ stead a state governed by an appointed elite ists were simply making a few trivial con­ of scientists and technicians. Perhaps he cessions to stay in power. They would never bought the Bolshevik notion that a democ­ give up without a workers' revolt that would racy ofsorts operated in Russia as decisions totally overthrow them. made by low-level party cells filtered up­ Wells' last full-length novel, Babes in the ward to the Kremlin. There is no excuse for Darkling Wood (1940), was about the dis­ Wells not realizing that without a vigorous enchantment of two young Stalinists, a democracy, and a press free to criticize, change of heart triggered by Stalin's inva­ there could be no guarantee that a tyrant sion of Finland. Hard as it is to believe, would not gain total control, as indeed one Wells still clung to his view that Stalin was did. a sincere, essentially decent fellow who was Nor did Wells show an awareness that a caught in the coils of a worthless ideology. free-market economy, combined with pri­ By 1940 many books had accurately de­ vate property, is a far more efficient way to scribed Stalin's terror-the millions of in­ produce food and goods than a command nocents he had shot or sent to die in the economy that stifles initiatives and regulates Gulag-but Wells either had not read them with a clumsy, easily corrupted bureau­ or he knew about them and did not believe cracy. As a democratic (of sorts) socialist, them. His last great outburst ofanger, Crux Wells shared Marx's indictment of unre­ Ansata (1943) was directed not against the strained capitalism, but he did not under­ crimes of Stalin, but against what he con­ stand, as even democratic socialists do to­ sidered the crimes of Roman Catholicism. day, that a modern economy must be When Wells died in 1946, soon after the first founded on free markets. atom bomb fell on Japan, he had given up Finally, as an atheist himself, Wells was hope that humanity could save itself from not appalled by Lenin's efforts to eliminate wars that would plunge it back to barbarism. Christianity from Russian culture and estab­ Many of Wells' prophecies were eerily lish atheism as a state "religion." Wells accurate. As early as 1914, in his science­ should have realized that efforts to stamp fiction novel The World Set Free, he de­ out religious faith, especially in a culture as scribed a second world war beginning in deeply pious as Russia, would only alienate the forties in which "atom bombs" were the masses and increase their hostility to­ dropped from planes. The one great event he ward the government. As we now see, the totally failed to see was the abrupt collapse Russian people are hungry as ever for the in the U.S.S.R. ofits entire Marxist-Engels­ right to worship God, and flocking back by Leninist-Stalinist heritage. the millions to their newly opened churches. As I write, Russia is back in shadows Some Russian leaders are even daring to end strangely similar to those Wells encountered their speeches with "God bless you"! in 1920. Its economy is in chaos, famine is This is not the place to cover the history again a threat, and help from the West is of Wells' growing realization that nothing desperately needed. As in 1920 its leaders good would ever come from the Russian have only the vaguest plans for restructuring experiment, and that universal suffrage was a shattered empire along democratic and essential for the health of any nation. In free-market lines. It is one ofthe magnificent 1934, during his three-hour conversation and ironic surprises ofhistory that this great with Stalin, Wells tried to persuade Stalin culture, after 74 years of brutal Communist that Roosevelt's New Deal was the begin­ dictatorship, is now eager to construct a ning in America of a movement toward political and economic system of the very socialism, and that the world's two great sort that Marx regarded as something so superpowers should seize the chance to malevolent that it had to be destroyed ut­ work together for a world socialist state. terly by workers of the world who had Stalin countered, as had Lenin, with the nothing to lose but their chains. D THEFREEMAN IDEAS ON UBERTY

"Zero Inflation": A Flawed Ideal by George A. Selgin

ately a consensus has formed among in theory. But the truth is otherwise. In fact L policymakers that a stable price level or the zero inflation ideal is largely dogma, "zero inflation" should be the goal of mon­ founded upon the unrealistic assumption of etary policy. Federal Reserve Chairman a stagnant or stationary economy where the Alan Greenspan has recently expressed productivity of labor and capital never sympathy for this view, long favored by changes. some other members of the Fed Board of In such a stationary economy, price sta­ Governors. A few years ago the House bility goes hand-in-hand with stability of Subcommittee on Domestic Monetary Pol­ total spending, or "aggregate demand," icy introduced a Joint Resolution that would measured in dollar terms. Economists gen­ have required the Fed to achieve and main­ erally favor stability of money spending tain zero inflation within five years. Today, because it allows the typical producer tojust Congress is considering amending the 1978 recover his money costs of production, Humphrey-Hawkins Act so as to make avoiding depression on one hand and over­ achievement ofzero inflation the sole object expansion of industry on the other. Thus of monetary policy. stability of "aggregate demand" avoids de­ Zero inflation is, to be sure, a more viations of real output from its "natural". realistic goal for monetary policy than such level. But zero inflation implies stability of things as "full employment" or economic spending only in a stationary economy. In a "fine-tuning." Nevertheless, it is far from growing economy with more to be bought, being the ideal policy its advocates proclaim stability of money spending requires falling it to be. prices. In an economy where productivity is declining, stability ofspending requires that Price Stability or prices generally rise. Because they overlook Stability of Spending? the reality of changing productivity, propo­ nents ofzero inflation wrongly conclude that The zero inflation norm goes back to the benefits ofstable spendingcan be had by classical economics and has inspired count­ keeping the price level constant. less monetary-reform proposals during the last 100 years. One would think that such a Debtor-Creditor Justice longstanding ideal must be solidly grounded Dr. Selgin is AssistantProfessor ofEconomics at A popular argument for zero inflation is the University ofGeorgia and the author ofThe that unanticipated price-level movements Theory of Free Banking. lead to unfair transfers of wealth. When 288 "ZERO INFLATION": A FLAWED IDEAL 289 prices rise unexpectedly, debtors gain at the system's ability to allocate resources. Be­ expense of creditors because loans are re­ cause it takes time and effort to make paid in dollars having less purchasing power money-price adjustments, changes in the than when the loans were originally made. relative values of different goods should be When prices fall, creditors profit at the signaled with as few money-price changes as expense of debtors. Zero inflation, it is possible. Otherwise the risk is great that claimed, would prevent such unjust trans­ incomplete or incorrect price adjustments fers. will lead to economic waste. Proponents of Although the argument is valid for a static zero inflation claim it would allow the price economy, a zero inflation policy enforced system to do its job with a minimum of in the face of changing productivity would money-price changes by eliminating any itself lead to unjust redistribtions ofwealth. need for general price changes to offset Any overall change in productivity implies changes in the supply of or demand for a change in real income for the economic money. community taken as a whole. Distributive This argument, too, is only valid for a justice then becomes, not a matter ofavoid­ static economy: When productivity ing "windfall" transfers of wealth, but one changes, a change in the general price level of deciding how an increase or decline in is not only consistent with, but essential to overall wealth should be shared. Imagine the efficient working of the price system. the consequence of an unanticipated, all­ Such a price-level change merely reflects around doubling of productivity in the changes in real costs ofproduction. Suppose United States. A halving of product prices for instance that the cost ofproducing com­ would, here as when productivity is con­ puters falls to halfits former value, while the stant, double the real burden represented by cost of producing other goods remains un­ each dollar ofdebt. But most debtors would changed. The relative price of computers be compensated by a doubling of their real needs to fall below its former level. If the earnings. Creditors, in turn, would enjoy a public continues to spend the same amount higher real return on their loans. But their ofmoney on computers, buying proportion­ gain would merely reflect a pro rata share of ately more units as the money price falls, the similar gains being enjoyed by the rest of needed relative price adjustment is easily society. To deprive creditors of their share made by halving the money price of com­ by stabilizing the price level would be arbi­ puters, leaving other money prices un­ trary at best. changed. Money spending would remain Moreover, a zero inflation policy that stable with no need for any increase in would be arbitrary when productivity is money supply. A zero inflation policy, in improving could lead to disaster were pro­ contrast, to keep the average level ofprices ductivity to fall significantly. Zero inflation constant, would require a monetary injec­ would then require a forced contraction (via tion to enhance spending so that the price of tight money) ofspending to offset the normal computers falls by less than one-halfand all tendency for the prices of scarcer goods to other prices rise slightly. The zero-inflation rise. Debtors would find their real income policy clearly places a greater burden upon reduced, but the amount of real income the price system, with greater opportunities needed to repay each dollar ofdebt would be for misdirection of resources. unchanged. Few people would call the re­ Likewise, the best way to handle a/all in sulting rash of defaults and bankruptcies output, ·like an OPEC-inspired cut in oil "just." production, is to allow the fall to be reflected in higher prices. Manipulating the money Helping Prices Do Their Job stock to keep prices from rising would reduce the price-system's ability to convey Another argument for zero inflation is that useful information about the true state of price-level changes interfere with the price resource scarcity. 290 THE FREEMAN • MAY 1995

Many economists recognize the need to desirable ends sought by proponents ofzero allow money prices to reflect changing out­ inflation, and would do so regardless of the put conditions in particular industries. Yet state of productivity. Under stable spend­ they refuse to extend theirlogic to situations ing, sustained improvements in productivity involving general changes in productivity. would necessitate falling prices; but these They imply that doing so involves a fallacy would not involve the bad side-effects usu­ of composition. But where lies the fallacy? ally associated with deflation. On the other They do not say. hand, falling output would cause "inflation" ofthe price level, but without the pernicious effects of inflations stemming from exces­ If Not Zero InBation, What? sive money injections. Finally, because money supply changes are more closely Instead of aiming for zero inflation, a related to spending changes than to price­ desirable monetary policy would stabilize level changes in the short run, a spending total dollar spending, as measured by the target would be easier to enforce than a money value of GNP or (more appropri­ price-level target. ately) sales of final goods and services. Zero inflation has its merits as a rough­ Money GNP stability is automatically ap­ and-ready policy goal. It is certainly better proximated by a regime offree banking with than the inflationary chaos that prevails in a fixed stock of bank reserves. If a central most fiat money regimes. But as a policy bank controls the money supply, it could be ideal it leaves a lot to be desired, and is assigned the goal ofstabilizing money GNP. plainly inferior to a goal of stable Stable spending would achieve all the really spending. []

Pearl Jam Vs. Ticketmaster: A Holy War on Reality by Charles Bilodeau

he lawsuit initiated last spring by the matter? To find out, let's look at some ofthe T rock band Pearl Jam against Ticketmas­ charges against Ticketmaster in the context ter has once again brought antitrust laws of antitrust laws. into the limelight. Time magazine has called In a memorandum filed with the Antitrust the legal battle "Rock 'n' Roll's Holy Division of the U.S. Department of Justice War.,,1 According to Pearl Jam, Ticketmas­ on May 6, 1994, Pearl Jam asserted that ter is intending to monopolize the ticket Ticketmaster has a "virtually absolute mo­ service industry. What is the truth of the nopoly on the distribution of tickets to concerts." What constitutes a "virtually Mr. Bilodeau received a bachelor of science absolute" monopoly? Patent law creates in geography from Florida State University in monopolies (single sellerpositions) in inven­ 1992. tions and innovations; copyright confers PEARL JAM VS. TICKETMASTER: A HOLY WAR ON REALITY 291 monopolies in literary/artistic works. Pearl antees is money spent to insure that the Jam has a legal monopoly on any songs and show will be performed. performances they create, as they should. The question to ask yourself (as an arena­ Does Ticketmaster have a similar monopoly rock fan) here is: What would I rather have? on tickets? No. Ticketmaster had competi­ Fifty extra cents in your pocket is of little tion, but its rivals could not manage to use to you when accompanied by a ticket compete. to a show that has been canceled because According to Rolling Stone magazine, the venue couldn't meet its guarantees. Ticketron, the largest competing ticket ser­ Ticketmaster likely started these loans and vice sold out to Ticketmaster in 1991, after promotion subsidies in response to people losing millions of dollars a year from 1988 who complained after shows were canceled, on. 2 Why would Ticketron lose millions of Le., to better serve the same people Tick­ dollars a year, while Ticketmaster turned a etmaster is now charged with ripping off. profit? Ticketron must have operated less These policies for insuring that concerts efficiently. In ticketing, as in any contested will be performed are construed as "anti­ market, the companies (or company) that competitive" because a small-scale ticket survive will be the ones who best cut costs, service might be unable to duplicate them. find new markets, and plan long-term. In Yet everyone benefits: the fans, the per­ other words, the survivors will be the ones formers, and the venue. Is this somehow who make the best business decisions. Un­ unfair? derstanding this is vital to understand the "anti-competitive" practices that Pearl The "Physical Fallacy" Jam's suit hopes to stop. What are these "anti-competitive" prac­ The article contains an interesting state­ tices? The Rolling Stone article by Neil ment by one ofPearl Jam's guitarists, Stone Strauss and Tom Dunkel provides some Gossard: "Our band, which is determined examples: "Ticketmaster, it's claimed, to keep ticket prices low, will always be in keeps ticket sales organized and revenue conflict with Ticketmaster." To judge the high. This is often at the expense of fans, truth-value ofthat statement, a discussion of however. The service charges that Ticket­ the "physical fallacy" is in order. master adds to tickets range from $3 to $6 The basic point is that economic value and can add more than 30 percent to a doesn't just depend on a good's physical ticket's face value." The suggestion here, features; value can also depend on where that Ticketmaster's activities make fans or when the good is available. By bringing a worse off, involves an economic fallacy. good from the producer to the consumer, a The error, known to economists as the middleman can add value to that good "physical fallacy,"3 is examined below. despite the fact that the middleman has not The article goes on: "One reason these changed (added anything to) its physical surcharges are so high is because Ticket­ shape. Let's consider what value Ticket­ master pays a small fee to venues or pro­ master might be adding to the tickets they moters for every ticket sold in order to convey. maintain its exclusive contracts with them. When a rock band goes on tour, they have ... Ticketmaster has even loaned promot­ to be selective about the types ofvenues and ers money to meet the guarantees ofstadium number of sites they will play. It would be acts and has given money to venues for as unsuitable for Pearl Jam, a band with a promotion and marketing.... Several re­ large national following, to play at local cent lawsuits call Ticketmaster dividends nightclubs as it would be for a local garage to venues 'kickbacks.'" Ticketmaster, in band to play at Madison Square Garden. other words, is securing long-term arrange­ Pearl Jam typically plays big-city arenas ments. The money Ticketmaster loans or (such as the homes of NBA teams). Small­ gives to arenas or promoters to meet guar- city venues would offer the band less of a 292 THE FREEMAN • MAY 1995 chance to recoup expenses. As well, touring we haven't even considered the wear-and­ can be a grueling thing. There is a limit on tear on her old Toyota. the number of shows any group can per­ Sure, not everyone lives 75 miles from the form, before touring's effects start to show closest Pearl Jam venue. But almost every­ up on stage. Some cities, then, will have to one lives closer to a Ticketmaster location be avoided. than to such an arena. The ticket company, Imagine a hypothetical Pearl Jam fan in fact, sees to that. Ticketmaster places its who lives in Bakersfield, California. Sup­ outlets in malls, music stores, and other pose that Pearl Jam has decided to tour once right-on-the-way places, precisely so that again, but not to perform in Bakersfield, most people will find its service charges because the population of Bakersfield is worth paying. A trip to Ticketmaster, ser­ too small, and they are going to playa vice charge included, is less costly than a number of shows at the Forum in Los trip to the arena box office. Angeles 75 miles away. Our hypothetical fan, Suzy, is a teenager who works part Economies of Scale time at the Taco Bell near the mall for minimum wage while going to high school. If you believe that having "competition" She is a dedicated Pearl Jam follower, and from other ticket services would drive down would not think of missing them. If Ticket­ the price of Ticketmaster's fees, you are master did not exist, and the only source of wrong. Why? Economies of scale. Ticket­ tickets to the Pearl Jam concert was the master was able to "monopolize" ticket Forum box office, what options would Suzy sales because they were the most efficient have? She could wait until the night of a in utilizing economies of scale. Their larger show and drive down to L.A., but if all the network ofoutlets operates at lower cost per shows had sold out beforehand, she would ticket sold than smaller firms could manage. either have to pay a scalper's price or drive (If not, smaller firms could spring up to sell home disappointed. Her only other option Pearl Jam's tickets.) An antitrust ruling for securing a ticket is to drive to the box against Ticketmaster would work against office to get tickets at the first chance the efficiencies that economies of scale al­ possible. low. What is involved here? Not only the Antitrust laws are at war with economic hassle ofhaving to drive 150 milesjust to get reality. The only way that Ticketmaster tickets (and drive again the night of the could have allowed the "little guys" to show), but whatever else Suzy could have remain in business would have been to raise done with the time it took to get to L.A., get their fees to match the inefficiencies ofthese to the Forum, and wait in line (remember "little guys." Such "price fixing" is no that the Forum box office is now the only favor to consumers, and is also illegal in the source for tickets) and drive back to Bakers­ screwy world of antitrust. So what were field. How long would this take? Even at the Ticketmaster's options? Keep prices artifi­ best times for driving, three hours mini­ cially high and be sued under antitrust mum; with L.A. traffic and the wait in line statutes for "price fixing," or make use of added in, possibly four. What does this economies of scale and be sued under those mean for Suzy? Suppose she takes time off same antitrust laws for "intending to mo­ from her job to make the ticket run, sacri­ nopolize." Ticketmaster is only the latest ficing $4.25 an hour. Multiply $4.25 an hour firm caught in the arbitrary, contradictory by four and you get $17. Add $5 for gasoline world of antitrust, for no other reason than and you get $22. This is the value Ticket­ that they were and are the best in the master adds by making tickets available at business. Suzy's favorite record store (Tower A coercive monopoly, Le., a seller whose Records) in Bakersfield. Even ifTicketmas­ potential competitors are excluded by gov­ ter charges her $6, Suzy has saved $16. And ernment force, can raise prices and limit PEARL JAM VS. TICKETMASTER: A HOLY WAR ON REALITY 293 quantities with impunity. The post office is etmaster's service while dictating to Tick­ a good example. But Ticketmaster is not etmaster what fees Ticketmaster can re­ backed by the government, and competitors ceive, despite the fact that Ticketmaster could enter the field if they had a better makes its profit by decreasing the cost of method or organization. The methods of tickets relative to individual ticket buyers. "coercion" described by complainants What can Pearl Jam do to keep the tickets against Ticketmaster are not coercion at all. cheap? They could take a lesson from the Ticketmaster has a right not to deal with Lollapalooza tour, and lower their own base anyone it does not wish to. What if arenas ticket price. Farrell's tour had six bands, an refuse to book certain bands because they average ticket price of only $25, and it still are afraid that Ticketmaster won't do busi­ made money during a recession. How? By ness with them? I cannot think of a more not playing expensive venues. It was a tour telling sign that a business firm has its act of fairgrounds, where facilities, and corre­ together than that people fear the loss ofits spondingly venue fees were modest. Even if services. And if the owners/managers are Pearl Jam takes along an opening act, it is afraid that Ticketmaster will not do business unlikely that they would have more than one with them, doesn't that mean Ticketmaster third the number of musicians of Lollapal­ is leaving room for the "little guys"? ooza, so the gate will not have to split as Consider what will happen ifantitrust law many ways. Ticket scalping-the result of is used to break up Ticketmaster. Remem­ unsatisfied demand at the intended price­ ber that Ticketmaster's largest competitor can easily be reduced by simply adding more (the one with the largest economies ofscale) shows, until the market is saturated. Unlike was losing millions of dollars a year trying the Forum, where there is no chance of to compete. What does this mean? Millions adding another show if the Knicks are play­ of dollars a year in extra fees will have to ing the Lakers the next day, a fairground can be paid to compensate for the inefficiencies easily add dates as the initial shows sell out. of lack of scale. If Ticketmaster's "kick­ Pearl Jam does have alternatives to mak­ backs" to promoters (to insure that shows ing an arena tour and using Ticketmaster's take place) are ruled illegal, the number of service. They have exercised one ofthem by show cancellations will rise. What will hap­ not touring. If t\tey truly want to provide a pen if another recession hits? In 1991, the show at a low cost to their fans, they have concert industry was devastated. There options there, too. It is in both Ticketmas­ were only two rock tours that year (that I ter's and Pearl Jam's best interest to realize can remember). One was Guns 'n' Roses, exactly what they do for each other. Tick­ arguably the most popular rock band in the etmaster could not exist without entertain­ world at that time, the other was Perry ers, and Pearl Jam (and fans and venue Farrell's Lollapalooza tour. It is no coinci­ managers) are better served by Ticketmas­ dence that Ticketron finally gave up and sold ter than by anyone else who has appeared. their remaining assets to Ticketmaster in It remains to be seen, whether Pearl Jam will 1991. It is also significant that no potential actually learn this before their fans desert competitor has (to my knowledge) stepped them for bands that do tour. D forward since the suit began, saying that they could do a better job than Ticketmas­ 1. "Rock 'n' Roll's Holy War," Time, June 20, 1994, pp. ~-4~ . ter. An antitrust suit ruling against Ticket­ 2. Neil Strauss and Tom Dunkel, "Exploding Tickets," master will mean lost jobs. Rolling Stone, August 11, 1994, pp. 29-30. 3. See J. D. Gwartney and R. L. Stroup, Economics: Kelly Curtis says that, "All [Pearl Jam] Private and Public Choice (New York: Harcourt Brace Jo­ wants to do is to be able to tour with a cheap vanovich, Inc., 1990). The term "physical fallacy" was intro­ duced by Thomas Sowell in his Knowledge andDecisions (New ticket price.,,4 This is not what Pearl Jam York: Basic Books, 1980), pp. 67-72. wants to do. Pearl Jam wants to use Tick- 4. "Rock 'n' Roll's Holy War," op. cit. Ideas and Consequences by Lawrence W. Reed

The Right Direction for Welfare Reform

ne of America's greatest strengths has for able-bodied, single adults. What has Oalways been its extensive network of happened since is a case study ofthe private private efforts to solve personal, family, and sector cleaning up after a government mess. community problems. When it comes to In the mid-Michigan town of Harrison, a dealing effectively with such social con­ group of concerned volunteers wanted to cerns, government is not by a long shot the help former GA recipients by easing their only game in town. transition to productive self-reliance. These Indeed, given the expensive quagmire volunteer efforts created a unique privately that government is widely conceded to have funded assistance center called Hard Times created with welfare programs, private ef­ Cafe. forts are providing a beaconfor progress and Every Thursday afternoon, former GA reform. As management expert Peter recipients and other needy people, ranging Drucker has put it, agencies in the private in age from 18 to 63, gather at St. Athanasius sector''spend far less for results than gov­ Church for a hot meal, companionship, and ernments spend for failure. " What America innovative counseling-all designed to in­ needs, he says, is "a public policy that still new incentives for gaining control of establishes the nonprofits as the country's their lives. They share their concerns in an first line of attack on its social problems." atmosphere oftrust and respect. They learn Private, nonprofit agencies are spear­ thinking, planning, and organization skills, heading an unprecedented number of local as well as good work habits. programs to combat hunger, illiteracy, home­ They also earn "Hard Times Dollars," lessness, welfare dependency, drug use, teen which are redeemable in personal needs pregnancy, and other social problems. The items from soap to toothpaste. Recipients secret to the success of such programs is earn the goods, donated by churches and accountability, since they are run by local businesses, by displaying' positive work people who are closest to the problems and habits while performing designated commu­ have a strong incentive to manage resources nity service work. They do carpentry, main­ wisely and get the job done. Michigan is tenance, and gardening work; they plant home to two new and innovative programs trees; and they help out at a local YMCA that deserve special attention. camp. With sufficient "dollars" they can In October 1991, the State of Michigan even obtain vouchers for rent, house pay­ ended its General Assistance (GA) program ments, taxes, utilities, transportation, and medical needs, funded through privat~ Dr. Reed, economist and author, is President of The Mackinac Center for Public Policy, a free grants. market research and educational organization The government welfare system requires headquartered in Midland, Michigan. people to constantly affirm their inability to 294 295

meet their personal and family needs. Hard small scale, non-bureaucratic nature, local Times Cafe does just the opposite: it infuses knowledge, and personal relationships, a "can-do" spirit of independence and re­ neighborhoods, families, churches, and vol­ wards positive, pro-work attitudes. The proj­ untary associations can respond rapidly, ect's organizers report remarkable success. accurately and in a more acceptable manner Meanwhile, in Grand Rapids, another to local and individual needs in ways that locally conceived program is helping people large, formal institutions such as govern­ rebuild their lives. Faith, Inc., is a non-profit ment agencies cannot." organization started by Heartside Area Min­ Welfare programs operated by govern­ istries to help the homeless get jobs, train­ ment may well be the most unpopular ofall ing, and counseling. government initiatives-criticized by the During the daytime, Faith's director, social scientists who observe the effects, Verne Barry, seeks out homeless people, disdained by the taxpayers who pay the welfare recipients, and otherwise discour­ bills, and even unloved by many of the aged individuals from the area and offers people who collect the benefits. Thirty years them a chance to help themselves. In the and billions ofdollars after Lyndon Johnson evening, Faith, Inc., uses a portion of a fired the first shot in the War on Poverty, the 100,OOO-square-foot manufacturing ware­ enemy has won. The poverty rate has been house owned by Hope Network (a work essentially flat to slightly higher ever since. facility for the developmentally disabled), A new consensus seems to be emerging from which is normally closed after 4 p.m. Faith among those who work closely with the employees teach these individuals, "whom poor: welfare has made worse the very everyone else has written off," to perform problems it was intended to cure, and cre­ light assembly and packaging jobs-real ated a few new ones along the way. work needed to fill orders for private con­ Private initiatives like Hard Times Cafe tracts awarded to Hope Network. At the end and Faith, Inc., stand in stark contrast to of the week, each employee receives a their government counterparts that perpet­ paycheck, many for the first time in years. uate poverty, undermine the work ethic, Faith ensures each individual receives break up families, and promote illegitimacy. counseling from a variety ofprivate organi­ Unlike private efforts that stress character zations in order to improve their work habits building, one-on-one mentoring, and a spir­ and lifestyles-and overcome substance itual dimension, the impersonal public dole abuse· and emotional problems. With very does nothing to resolve the behavioral pov­ limited resources, Faith has helped several erty that keeps millions in demoralizing hundred people get off public assistance, dependency. In the words of John Fund of either fully or partially, and many have the Wall Street Journal, "Ask yourself: If moved on to higher paying, steady jobs. you had a financial windfall and wanted to The key to Faith's success, according to help the poor, would you even think about Barry, is that its clients work. He questions giving time or a check to the government?" government programs which spend millions The present welfare system has produced ofdollars annually to teach and train people such disastrous consequences that it's hard "how to work" in lieu ofthe real thing. "At to imagine how a radical overhaul could do Faith, we don't send them to 'assessment worse. The remedy is privatization-fami­ school' for six months to decide what career lies assuming responsibility for their loved they would like," he said. "We help them ones, churches meeting the needs of their start working immediately. It's essential to flock, neighbor helping neighbor, private enhancing their self-worth." organizations assisting those who ' 'fall The experience of Hard Times Cafe and through the cracks." Faith, Inc., adds credence to this comment True welfare reform may actually mean from Marc Bendick of the Washington, learning to trust ourselves again. That would D.C.-based Urban Institute: "Through their indeed be revolutionary. D THEFREEMAN IDEAS ON UBERTY

Spending Money Freely by Lawrence H. White

n the last year, I have begun to buy things self-service photocopier didn't take coins, I without using coins, paper money, a paper money, credit cards, or even a debit credit card, or a checkbook. You may begin card. Instead I put a plastic card bearing a to do likewise next year, or you may have magnetic strip on its back into a reader, begun a few years ago, though neither ofus which displayed in glowing yellow digits could have done it ten years back. I've how many dollars-worth the card "car­ actually learned two new ways to pay. ried." (On an earlier occasion I had pur­ I bought a bag of groceries last week by chased the card from a nearby machine, swiping my "debit" card (the same card I which had "loaded" the card with the dollar use at an automatic teller machine, orATM) amount ofpaper money and coins I put into through a small card-reader-mounted right the machine. When the card balance gets next to the little check-writing platform for low, it can be topped up at the same ma­ people who still use checks-and keying in chine.) I watched the yellow number go my four-digit PIN (personal identification down by .07 with each copy produced. In number). I thereby electronically autho­ the future a single prepaid card, probably rized a transfer of funds, from my bank carrying a microchip rather than a magnetic account to the supermarket's, equal to the strip, may be usable in a wide variety of $25.96 being displayed on the cash register transactions. Imagine the convenience if as my total bill. In a matter of seconds­ the same card were accepted by photocopy before my groceries were completely machines, soda machines, pay telephones, bagged, in fact-the cash register spit out and even by the cash registers in ordinary my itemized receipt to signal that the pay­ retail shops. Imagine if the card balance ment was good. Last summer I used a could be topped up at an ATM-or even service station along the interstate with at your home computer-by transferring similar card-readers and receipt-printers funds from your bank account. Such "smart mounted by and wired to its gasoline pumps, cards," as the idea is known, would amount allowing any debit-cardholder to buy gaso­ to a bank-issued currency, a modern equiv­ line at any hour without any station em­ alent of the private banknotes·that circu­ ployee having to be on duty to process the lated before governments monopolized the payment. Before too long, just about every issue of currency. point of sale that takes credit cards will probably also take debit cards. New Ways to Pay: Yesterday I used a second novel way of The Advantage paying at a nearby copy shop. The shop's Dr. White teaches economics at the University These new payment methods are spread­ ofGeorgia, and is a contributing editor to The ing. Smart card systems have been intro­ Freeman. He is this month's guest editor. duced in Denmark, Singapore, and Eng- 296 297 land. l Here in the United States, retailers users at the start of 1995, and to have been are finding card-readers increasingly cheap growing at the amazing rate of10percent per to install, and growing numbers of custom­ month. 3 Like many in academia and busi­ ers are discovering the advantages ofdebit ness, I often spend an hour a day reading and and prepaid cards. In a world where people sending e-mail and newsgroup postings. The are increasingly in a hurry, they speed the Internet was originally non-commercial, act of paying-no need to have the right but with tens ofthousands ofbusiness firms change or to wait for change in return, no now connected, plenty of business is al­ need to write out a check, no need to stop at ready being done bye-mail. Those who''log the bank counter or ATM to get more cash. on" to the "Net" or "go on-line" daily are Paying by debit card or smart card will often natural candidates for convenient on-line be more convenient than paying with cash. retail shopping, and commercial Internet A debit card is even better than cash or a sites have begun to appear. On-line cata­ smart card in at least two respects: using a logs-fast becoming "virtual shopping debit card keeps your money in your bank malls" - have long been a staple ofProdigy, account, where it is both more secure from Compuserve, America On Line, and the theft and earns interest, right up to the other proprietary networks. moment it is spent. But how to pay for an item selected from Some observers are skeptical that pay­ your computer screen? For some transac­ ments methods will change dramatically any tions, you might want to send a credit card time soon. What happened to the predic­ number bye-mail. I have actually renewed tions a decade ago that soon everyone would a magazine subscription this way, but I had be banking electronically by home com­ to worry about my number being inter­ puter? Actually, home banking is now fi­ cepted by a computer''hacker." The profit nally growing in popularity, for several rea­ motive is now hurrying to the rescue: Mi­ sons. Touch-tone phone-banking services, crosoft and Visa, the software and credit­ along with ATMs, have acclimated people card giants, have recently announced ajoint to electronic banking; home computers and project to develop a user-friendly way to modems (devices to transmit computer in­ encrypt (encode) and decrypt credit-card formation over telephone lines) have gotten numbers sent over e-mail to assure security cheaper; home banking software has gotten in such transactions. easier to use; and increasing numbers of For other transactions, a way to "pay households are subscribing to on-line ser­ cash" over the Internet would be a winner. vices like Prodigy that include electronic Several firms are now developing systems home banking and bill-paying among their for "digital cash" or "e-money," most offerings. 2 Hundreds ofthousands ofpeople notably DigiCash, founded by cryptography now make hundreds of millions of dollars (code-making) expert David Chaum. These worth of monthly payments electronically systems allow an electronic funds transfer by typing and mouse-clicking at their home to be launched from a personal computer computers. (I'm not yet one ofthose people, as easily as from a supermarket's debit­ but check back with me in a few years.) card-reader. An even more dramatic development in the last few years, with possibly profound Privacy Concerns implications for the payments system, has been the growth of the Internet, the decen­ There is, however, a potentially large fly tralized worldwide network of interlinked in the ointment of these new payments computers across which users send elec­ methods. Unlike a paper-money or prepaid­ tronic mail ("e-mail"), post messages to card transaction, a credit-card or debit-card "newsgroups" for public discussion, and transaction typically lacks privacy. Using browse for and download information. The electronic deposit transfer or a credit card Internet is estimated to have had 30 million (either in person or via computer), like 298 THE FREEMAN • MAY 1995

writing a check, generates a trail. Your Are bank customers actually eager to pay bank's orcard company's computer ends up cost-covering prices for privacy features with a list not only of how much you've of this sort? I don't know. The market will spent, but of where you spent it. The same tell us, assuming that government does not list could be constructed by combining the interfere. Some federal authorities have sug­ information held by all the vendors from gested that they would object to a com­ whom you bought. This list is potentially pletely untraceable version ofsmart-card or available to the IRS or to other government debit-card payment, because it might be agencies who may want to commandeer it. used to hide transactions they want to tax or Ifyou don't have a contract with your bank prohibit. To be consistent, such authorities and vendors expressly forbidding it, the list should also object to the availability of is potentially available to credit bureaus or untraceable $100 bills. Chillingly, some do. junk-mail firms who may want to buy the information. The privacy issue understand­ Keeping the Government ably concerns many people who are per­ Off-Line fectly law-abiding citizens. Fortunately, computing and crypto­ What role does the government need to graphic experts like Chaum are working to play to orchestrate the shift to new pay­ develop methods for anonymous electronic ments methods? None whatsoever. Govern­ payments. One set ofmodels for anonymous ments ofthe past, after all, played no role (or payments uses the "smart card" method no constructive role) in the transitions from (the funds to be transferred have already barter to commodity money, from raw me­ been downloaded onto a smart card or tallic money to coins (though ancient des­ personal computer); an alternative set uses pots later discovered profits in monopoliz­ electronic deposit transfer either by debit ing the mints and in debasing the coins they card or by personal computer. For an ex­ produced), from coins to banknotes (though ample of the deposit-transfer type, suppose government-sponsored central banks later I wish to pay you $100 anonymously without monopolized their issue and diluted their using physical currency. (I might be stand­ value as well), from currency to deposit ing at your cash register, or I might be home transfer, cash to credit cards, checks to at my computer looking at your invoice on debit cards, orlocally to nationally accepted my screen.) By merely typing in my PIN, or ATM cards.5 The shift to electronic pay­ clicking on a "pay" button on my computer ment methods is taking place already, with­ screen, I send a cryptographically "signed" out the Federal Reserve having taken any (or PIN-authorized) and numbered (you official position or promulgated any rules on have assigned the number) message to my digital cash or smart cards. Private ATM bank that instructs my bank to transfer $100 networks and credit-card networks already to an account (whose name is encoded) at exist to set interconnection standards where your bank. My bank reads the "signature," new standards are needed. and knows the message is genuine. My bank Debit cards, being just a paperless sub­ can't read the recipient account name, so stitute for checks, don't raise any important doesn't know to whom the money's going regulatory issues. But won't private (only to which bank). Your bank can't read banknote-like smart cards, being a new my signature (which my bank may have privately issued form of money, need regu­ removed), so doesn't know from whom the lation once they catch on? Don't they money came (only from which bank, and in threaten an inflationary avalanche of elec­ favor of which account). You read the tronic money? Absent central bank restric­ transaction number to know the payment tions, what will limit the quantity of smart­ came from me (though you might not know card-loaded "dollars" commercial banks my name).4 You then hand me the goods, or can create? The answer to the first two ship them to my private post office box. questions is no, because the answer to the SPENDING MONEY FREELY 299 third is that a bank's obligation to convert about privacy should also find an offshore card-balance dollars to scarce reserve dol­ foreign bank attractive for its lesser propen­ lars (physical currency or account balances sity to surrender its records to domestic at the clearinghouse) on demand naturally authorities. limits the number of card-balance dollars a Just as a variety of old and new forms of bank will find it prudent to create given the payment are available today, old-fashioned size of its reserves.6 payment methods like cash and check­ There is more at stake for you and me in writing can be expected to persist well into electronic funds transfer than simply more the twenty-first century. There they will convenient payment methods. One major coexist with smart cards, debit cards, per­ potential advantage of electronic funds sonal-computer-Iaunched deposit transfer, transfer via personal computer is that it may and perhaps other new electronic methods give ordinary consumers affordable access of payment. If and when Prodigy, Com­ to offshore banking. With direct deposit of puserve, and Internet sites begin offering paychecks, and with old-fashioned cash offshore banking services, things should available at ATMs whenever we want it, few really become interesting. An exodus of ofus really need to visit our banks in person retail banking business from the regulated anymore. Why not keep your account at a sectorto a free banking sectorwill shrink the reputable foreign bank (perhaps a branch of fiefdom of federal banking authorities. Let a major Swiss bank) in the Bahamas or the us hope the authorities accept that fate Cayman Islands? Such an offshore account gracefully. 0 is perfectly legal (though a U. S. bank's offshore branch is prohibited from directly 1. For an account of recent and possible future develop­ doing business with American citizens or ments see Steven Levy, "E-Money (That's What I Want)," Wired (December 1994), pp. 174ft'. firms), but not worth the trouble for most 2. David C. Churbuck, "Let Your Fingers do the Bank­ individuals or small businesses today. If an ing," Forbes (19 August 1991), pp. 122-24. 3. "So Much for the Cashless Society," The Economist offshore bank were linked to the clearing (26 November 1994), pp. 21-23. system and to an onshore ATM·network (or 4. In Internet lingo, this method preserves privacy by using the two banks as semi-anonymous "remailers" of different if access to physical cash were irrelevant parts ofthe payment message. Privacy could be increased even because all cash-like payments could be further by having a clearinghouse relay the message so that neither bank even knows the identity ofthe other bank. For an made by debit card or smart card), more of enlightening explanation of how the necessary encryption us could begin enjoying the advantages of method works (such that my computer can encode a message that only the intended recipient's computer can decode), see offshore banking that big-money players and Hal Finney, "Protecting Privacy with Electronic Cash," Ex­ large firms have enjoyed for years. Offshore tropy #10 (Winter/Spring 1993), pp. 8-14. 5. Forbriefaccounts ofhow these practices emerged in the banks pay higher interest on deposits be­ market see George A. Selgin and Lawrence H. White, "The cause they are free from the taxes on deposit Evolutionofa Free Banking System," Economic Inquiry, vol. 25, no. 3 (July 1987), pp. 439-57. balances that the U.s. government levies in 6. The theory ofthe natural limit to banknote volume under the form of reserve requirements, deposit "free banking" applies equally to smart-card balances. See George A. Selgin and Lawrence H. White, "How Would the insurance "premiums," and taxes on bank Invisible Hand Handle Money?," Journal ofEconomic Liter­ earnings. Individuals who are concerned ature, vol. 32, no. 4 (December 1994), pp. 1718-49.

Available from FEE. .. Bankers and Regulators he seventeen essays in this volume, all selected from earlier issues of The Freeman, examine in detail the failure of regulation and offer Thope for a return to sound banking, The collection includes, among others, articles by Hans F. Sennholz, Ken S. Ewert, E.C. Pasour, Jr., Kurt Schuler, Richard M. Salsman, and Lawrence H. White. 176 pages, indexed, $14.95 paperback THEFREEMAN IDEAS ON UBERTY

Phones and Freedom by Marty Mattocks

fter a recent departmental meeting at The wheels inside my head began turning as A work, my boss asked a colleague and the conversation drifted off to other topics. me to stay and discuss progress on a com­ Yes, how can companies like thesejustify mon project. After we had dispensed with the expenditure of billions of dollars to the business at hand, the discussion moved duplicate something that is already there? on to new topics and an open-ended ques­ I was intrigued by the sentiment I had just tion and answer period. In this relaxed heard-genuinely and honestly expressed­ atmosphere I asked my boss to bring me up one of those attitudes that are the real root to date on what was outlined on the black­ causes behind much of what goes on in our board behind him: a recent proposal by an world. alternative long-distance provider for cut­ I am not being judgmental. We all have ting our telecommunications costs. We are first impressions that often are out of our mutually responsible for providing technical mouths before being processed by our support to a relatively large company with brains. But as I gave my colleague's honest its own telephone switch and so I am curious query more thought I began to see in a to learn all I can about this dynamic field. microcosm much ofthe wisdom and many of He went over the physical layout of the the benefits of the free market philosophy, company's equipment and services, high­ along with the disadvantages of its alterna­ lighting the advantages and improvements tive. Let me explain. that had been made over the competition's current approach. This was one of the "big The Benefits of Competition three" long-distance companies and a siz­ able investment of billions of dollars had In our community-within one block­ been made in building transmission towers there are two supermarkets, each with its and installing sophisticated state-of-the-art own bakery and deli and aisles upon aisles equipment and software, all for the purpose offoods in every shape and form. Within the ofacquiring new customers in order to make same block are three banks, each offering a profit. At this point, my colleague made competitive rates on certificates ofdeposit, an interesting statement-one of those re­ home equity loans, and checking accounts. marks that grabs your attention but you These enterprises compete against one an­ don't know why until you think about it other for customers and must do so at the later. He said, "I don't know how these right price and by providing the best value companies can justify all this duplication of for that price. They all have expenses which equipment," or something along that line. include the cost of their property, equip­ Mr. Mattocks, a telecommunications specialist, ment, labor, and advertising. The more resides with his family in Bellefonte, Pennsylva­ efficient a firm's system of providing goods nia. and services at the lowest possible cost, the 300 PHONES AND FREEDOM 301

greater its profit and chance ofsurvival. The the Iron Curtain fell, it was discovered that joint pressures of price competition, cost much ofthe U.S.S.R.'s telecommunications containment, and creativity in providing infrastructure had not been upgraded for new goods and services to attract and keep many decades. customers all result in lowerprices and more readily available goods and services for the Market Forces at Work entire community. If we were to complain that all this ex­ Gas stations, convenience stores, hard­ pense was unnecessary-or, more fashion­ ware stores, and fast-food restaurants are ably, that the duplication was environmen­ other businesses where we see these same tally wasteful-we would be shooting market forces at work. Despite the advan­ ourselves in the foot. If we were to grant tage of being able to eat Mexican, pizza, only one supermarket owner, orone banker, burgers, chicken, or fish, each a different the exclusive privilege of providing these night of the week, it is natural to wonder, goods and services (or worse yet have a "Where is the saturation point?" Perhaps government grocery store or a government the· answer is in a simple equation: where bank), he would no doubt get rich (charging supply is greater than demand, or where a monopoly prices) and lazy (less incentive good return can no longer be received from for more efficient operations). Prices would the capital investment necessary to compete be higher and there would be less attention profitably. Or even simpler yet: where there to consumer convenience as we all went to are too few paying customers. The more do business at the same place (services entrepreneurial among us defy the satura­ would not be as readily available). tion point daily, thinking of ways to create Boris Yeltsin, the maverick Muscovite new demand for their products and services. who championed political freedom in Russia They offer their wares at better prices, in the late eighties, comments in his book provide them more conveniently, make Against the Grain, about his first trip to an them better quality or with new added value American supermarket. "When I saw those that no one had thought of before. shelves crammed with hundreds, thousands Though not as readily visible, there exists ofcans, cartons and goods ofevery possible a market for long-distance services, whose sort, for the first time I felt quite frankly sick participants are influenced by the same with despair for the Soviet people. That forces as the grocery store owner and the such a potentially superrich country as ours banker. Since the divestiture of AT&T's has been brought to a state ofsuch poverty! Bell System in 1984, Sprint and MCl's It is terrible to think of it. ,,1 He had expe­ increasing participation in the national tele­ rienced firsthand the alternative to "not phony market has had effects similar to being able tojustify all that duplication," the those we have discussed in local retail alternative to the one supermarket/one bank markets. Long-distance rates have dropped per community concept that had been im­ an average of 40 to 45 percent,3 and every plemented in his native Russia. He carne to day we hear of new, gee-whiz services this conclusion: "Ifone accepts the private available over our plain old telephone ser­ ownership of property then this means the vice line. collapse of the main· buttress that supports In fact, industry analysts point out that the state's monopoly ofproperty ownership "during the last decade, the lessons and ... we soon realize that we are practically benefits of long-distance telephone compe­ the only country left on earth which is trying tition have begun to echo in the local tele­ to enter the twenty-first century with an communications marketplace. Business us­ obsolete nineteenth-century ideology; that ers have begun to appreciate and demand we are the last inhabitants of a· country more choices for vendor diversity, for net­ defeated by socialism."2 It should have work reliability, and cost savings. Other come as no surprise to find out that when states including Washington and Maryland 302 THE FREEMAN • MAY 1995 have joined New York in authorizing local customers don't care whether we use telephone service competition.,,4 Like MCI TDMA, CDMA (communications technol­ and Sprint ten years ago, two new compet­ ogies/protocols) or spaghetti. They only itors in providing local dial-tone service are care that we provide them with the services Metropolitan Fiber Systems (MFS) and they need, when they want them, and at a Teleport Communications Group (TCG). price they can afford. ,,10 Two other consult­ MFS currently has networks in 18 cities and ants and telecommunications industry ana­ an additional 13 under construction. TCG lysts stated it in similar terms, "The more has service available in the New York met­ competitors there are in a market, the more ropolitan area with seven other states tar­ competitive the market will be, which will geted for expansion.5 bring down prices and increase service qual­ These established players are now look­ ity";11 and, "Business users are likely to ing over their shoulders at some major new benefit from improved quality and reduced and potential entrants. Cable companies, prices. ,,12 Dr. Joseph S. Kraemer, Manag­ cellular/wireless alliances, and long-dis­ ing Director of EDS's Communications In­ tance companies interested in saving on dustries Consulting practice, notes that "in access charges they must pay to local Bell response to competitive threats, local ex­ operating companies are beginning to enter change carriers (LEC's) are rapidly imple­ the playing field. Time Warner (whose entry menting new services, cutting costs, im­ into the Rochester, New York, market has proving productivity and accelerating the been called the most significant step so far deployment ofnew technology, all ofwhich 6 in promoting local competition ), Cox Ca­ benefits the LEC's customers. ,,13 ble, Viacom, and TCI are cable companies Cries can nonetheless be heard for gov­ that could offer phone services.7 AT&T is in ernment intervention, regulation, and a re­ the process ofacquiring McCaw Communi­ turn to the good old days. Kraemer has cations, the largest cellular service provider identified a number of regulatory attitudes in the United States. MCI has invested more and actions that "could either delay or stop than a billion dollars in Nextel, a special local exchange competition." He adds: mobile radio company that uses a technol­ "Without a credible competitive threat, the ogy to compete with cellular. Sprint has incentive to continue to improve productiv­ formed an alliance to bid for personal com­ ity and accelerate technology deployment munications services .licenses, and merged will be eliminated. ,,14 Turning the table with Centel to provide cellular services.8 around, the regional Bell operating compa­ MCl's Metro subsidiary is building a met­ nies have rightfully asked to be freed from ropolitan area network in Atlanta to com­ the restrictions preventing them from com­ pete for local phone service there, part ofits peting in the cable and long-distance mar­ plan to spend two billion dollars this year kets. constructing fiber-optic networks in the 20 In all the talk about an "information largest U.S. cities.9 And low earth-orbiting superhighway" and the "national informa­ satellites may also become part of the tele­ tion infrastructure" the key question is: Will communicating landscape in the future. it be public or private? Here again we see a replay of a monopoly's or government's "The End User as King" sluggishness versus the speed of the free market. Vice President Gore has been an With all these companies stumbling over outspoken proponent of government inter­ themselves to provide the least expensive, vention and in 1991 proposed spending two most efficient, most ingenious system of billion dollars of taxpayers' money for re­ providing local phone service, whom do you search and upgrades in hopes ofchanneling think will benefit? In an article entitled, private investment activity. Informed critics "The End User as King," industry pioneer said this top-down approach would create a Craig McCaw is quoted as having said, "Our very elegant network "but it may be obso- PHONES AND FREEDOM 303

lete by the time it's deployed. ,,15 In a typical truth will win out in the end. We will do week's telecommunications news, the pri­ better to cooperate with it than to endure vate sector announces plans and demon­ the hard lesson learned by nations that strates prototypes, while the White House ignore the simple yet profound principles of says it will take slightly longer than previ­ freedom. D ously expectedjust to name the members of a task force. 16 A perceptive letter to the 1. Boris Yeltsin, Against the Grain (New York: Summit editor in one trade magazine stated, "I am Books, 1990), p. 255. not the least bit interested in having the 2. Ibid., p. 262. federal government take the lead with re­ 3. David Buerger, "It'sTime for Competition in the Local Loop," CommunicationsWeek, April 19, 1993, p. 70. gard to the information highway. The agony 4. Paul Keleher, "Local Exchange Competition: Are Users Ready for Another Divestiture?" , Telecommunications, and confusion in corporate information sys­ December 1994, p. 45. tems during the last decade in dealing with 5. Robert O'Brien and Dolores Kazanjian, "Competitive mainframes, PCs, workstations, networks, Access Providers Enter Local Dial Tone Market," Telecom­ munications, October 1994, p. 17. etc., will be dwarfed by the problems ac­ 6. Annie Lindstrom, "Rochester Telephone to Open companying federal leadership. ,,17 Competition," CommunicationsWeek, May 23, 1994, p. 103. 7. Dr. Joseph S. Kraemer, "Local Competition." In A host of companies are vying for cus­ "Changing Ground Rules for Network Access," a supplement tomers in the potentially lucrative market to Business Communications Review, September, 1994, p. 8. 8. Ibid., pp. 7, 8. currently dominated by online services pro­ 9. Mary Thyfault, "MCI Details Local Plans," Informa­ viders Compuserve, Prodigy, and America tionWeek, May 2, 1994, p. 18. 18 10. Charles F. Mason, "The End User as King," Wireless, Online. PC software giant Microsoft now Sept.lOct. 1994, p. 64. offers online commerce with its Microsoft 11. John Rendleman, "MCI Reaches Out to Grab Share of Local Service," CommunicationsWeek, date unknown. Network online service, and giants IBM 12. Annie Lindstrom, "LoomingLocal-loop Battle is Good and (once again) MCI have respectively News for Users," CommunicationsWeek, April 19,1994, p. 59. 13. Kraemer, op. cit., p. 10. launched their IBM Global Network and 14. Ibid. marketplaceMCI offerings with e-mail, elec­ 15. Peter Coy, "How Do You Build an Information High­ way?" Business Week, September 16, 1991, p. 108. tronic software distribution, and multimedia 16. Annie Lindstrom, "NIl: Gov't Delay, Private Sector on-line catalogs and ordering systems. 19 Advances," CommunicationsWeek, December 20, 1993, p. 49. 17. Jules Jacquin, "Feds Keep Out!", InformationWeek, Whether in supermarkets, banking, or tele­ February 14, 1994, p. 6. communications, a free market unhampered 18. Clinton Wilder, "Prodigy in Two Parts," Information­ Week, December 19, 1994, p. 20. by government intervention is the most 19. Clinton Wilder, "Microsoft Going Online," Informa­ fertile environment for human progress and tionWeek, November 28, 1994, p. 15; Joe Paone, "IBM Creates Its Own Internet," Midrange Systems, September 16, 1994, p. for the best allocation of scarce resources. 1; John Rendleman, "Collaboration Objective of Network­ Temporary setbacks notwithstanding, this MCI," CommunicationsWeek, September 19, 1994, p. 1.

Attention Teachers and Professors! Recent Issues of THEFREEMAN for Classroom Use erel sac.hance to introduce students to The Freeman at little cost to you or your school. We are offering cartons of back issues of The Freeman H for the modest charge of $10.00 per carton (within the United States) to help defray our shipping and handling charges. Each carton contains over 100 copies. Payment must accompany order. THEFREEMAN IDEAS ON UBERTY

Live Freely, Live Longer by Max More

he founders ofthe United States valued aspects of the aging process. Drugs such T "life, liberty, and the pursuit of happi­ as Deprenyl and Hydergine reportedly slow ness." Life-healthy and long life-makes the rate of brain aging, helping to maintain possible everything else we value. Without youthful sharpness and quickness of life we cannot enjoy liberty or pursue hap­ thought. The hormone DHEA is thought to piness. It's also true that without liberty­ assist in keeping body fat at youthful levels freedom from government and bureaucratic and strengthens the vulnerable immune sys­ control-we will have shorter lives, and tems of older people. Substances such as poorer health while we live.. If we do away melatonin and thymosin may also help in the with the government's growing control over fight against aging. Reports indicate that research into life extension and its treat­ elderly volunteers given human growth hor­ ments, we'll see faster progress towards the mone gained considerable muscle mass and longest, healthiest lives ever enjoyed by strength, their skin thickened, and their humans. immune systems partially returned to their youthful power. Extending Healthy Life As we continue to unravel the complexi­ ties of our genetic code at an accelerating We humans have long dreamed of pre­ rate, we may find ways to intervene in venting aging and its associated diseases. As programmed cellular death. This cellular molecular biology has matured over recent death has prevented even the healthiest decades, the dream shows growing signs of human beings from living more than 120 becoming reality. Methods already exist for years. In principle, nothing stands in the extending healthy human life to 120 or 140 way of our being able to intervene in this years, though currently this involves a tough biological process. We just need more un­ low-calorie diet. Potential life-extending derstanding and better interventive tech­ substances are being studied, and we are nology. beginning to find aging controls in ourgenes. What of those who will not live long If we can master these, we may be able to enough to see these dramatic advances? prevent and reverse aging, allowing all ofus Even they may have a chance. In the prac­ to remain physically and mentally vital. tice of "cryonics," as soon as a person has Even today, various nutrients, drugs, hor­ been declared legally dead (while practically mones, and diets may be able to halt or slow all of their cells are yet alive), the body is filled with protective chemicals and gradu­ Mr. More is editor ofExtropy and President of ally cooled to extremely low temperatures. Extropy Institute. He has studied at Oxford University andis currently completing a doctoral At the temperature of liquid nitrogen dissertation at the University ofSouthern Cali­ (-320°F) all biological activity halts. The fornia. person can then wait for years, until cures 304 The Foundation for Economic Education Irvington-on-Hudson, New York 10533 Tel. (914) 591-7230 Fax (914) 591-8910 May 1995 Woeful Bankers n old Christian saying warns us Settlement Procedures Act, the not to make money our god, for Expedited Funds Availability Act, the A it will plague us like the devil. Electronic Funds Transfer Act, the Based on this maxim, a few economists Financial Institution Reform, Recovery, admonish us not to place politicians in and Enforcement Acts, the Equal Credit charge of our money, for they will Opportunity Act, the Flood Disaster plague us worse than the devil. Protection Act, the Home Mortgage Most Americans take heed of the first Disclosure Act, and various environmen­ warning, but few pay attention to the lat­ tal acts. ter. Unaware of the dire consequences of The "war on drugs" gave occasion to political control over money, they the Bank Secrecy Act which forces appointed "monetary authorities" and bankers to reveal all major deposits and authorized them to issue and regulate withdrawals to the banking authorities their money. The Federal Reserve Act of and call their attention to suspicious 1913 established a central bank with transactions. Failure to comply is called seven governors who in time were to "structuring" and is punishable with become the regulators and overseers of fines and imprisonment. In other words, the monetary system. In 1933, the feder­ failure to snitch on their depositors is a al government expropriated the people's serious crime. A number of bank tellers gold coins and replaced them with and supervisors are lingering in federal Federal Reserve notes. In the same year penitentiaries paying for their crimes. it organized the Federal Deposit There is no bank secrecy in the sense of Insurance Corporation (FDIC) which customer privacy; bank secrecy now was followed by the Federal Savings and means the very opposite: secret report­ Loan Insurance Corporation (FSLIC). ing to the authorities. The directors of both government agen­ The authorities scrutinize every aspect cies assumed responsibility for and con­ of the lending process. Bankers are trol over the people's bank deposits, forced to observe the prescribed proce­ Since then a myriad of special laws dures in all details. Phone calls from has tightened the political grip on the customers about home loans must be banking industry. There are the laws logged, the marital status recorded; loan regulating Truth in Lending, Truth in limits and waiting periods must be Savings, Fair Housing, the Community observed. What used to be a half-page Reinvestment Act, the Real Estate application form has grown to a multi-page form designed to meet gov­ regulators themselves undoubtedly will ernment edicts. applaud the concentration movement as Banking regulations are crushing the it simplifies and reinforces their control banking industry. Last year (1994) a over the industry. small-town banker received 2,945 pages The trait and type of banking person­ of new regulations, amendments, and nel is likely to change. Men of character, proposed regulations. For six long integrity, and independent judgment weeks five regulators conducted "com­ will give way to two types which thrive pliance examinations," busily comparing in all kinds of command systems: the books and records with more than ten servants and bondsmen who obey all thousand pages of regulations and orders and the villains who corrupt all searching for violations. The"compli­ orders. The number of banking scandals ance examinations" followed the major is bound to multiply in the coming annual"safety-and-soundness" exami­ years. nations. While banking itself is bound to linger The Community Reinvestment Act and wane, related industries offering forces bankers to give special considera­ deposit and loan services will grow and tion to individuals who belong to minor­ fill the void - provided they escape the ity groups. It compels bankers to grant banking regiment. The "money market" loans on the basis of race, gender, and offering treasury bills, commercial paper, national origin rather than credit worthi­ certificates of deposit, and other instru­ ness. The U.S. Department of Justice ments beckons for deposits; mutual always stands ready to lend support to funds and brokerage funds offer special the regulators who may mete out stu­ checking account advantages. Yet, all pendous fines. Their threat alone is this banking ersatz will not take the enough to make all bankers quite sub­ place of old-fashioned banks; the regula­ servient. tors who sit in judgment of what every Bankers live in constant fear of crimi­ sector of the capital market may do will nal prosecution for violations of banking not allow it. Political control over regulations. Minor infractions such as money tends to be comprehensive. overdrafts on an executive's checking Harassed by regulators and prosecu­ account call for draconian penalties. tors, some bank customers may seek Minor deviations from a regulator's refuge abroad. Since the disintegration interpretation of a regulation may be of the Soviet system emerging markets penalized severely. Facing their regula­ all over the world are begging for funds, tors, most bankers stand at attention, offering many attractions and high stammering "Yes, Sir," or "No, Sir," "I returns for capital fleeing from U.S. reg­ am truly sorry, Sir," "We will follow your ulators. instructions immediately, Sir." The greatest difference between rich Under such conditions it is not diffi­ countries and poor countries is not so cult to reflect on the future of American much the quality and effort of labor nor banking. In the coming years, the num­ the abundance of natural resources, but ber of banks (now about 11,000) is likely the size and vitality of the capital market to shrink through mergers, syndications, in which private banks playa pivotal cartelization, and other combinations. It role. U.S. banking laws all.d regulations takes large law and regulation depart­ are straining to create the very condi­ ments to specialize in the intricacies of tions so characteristic of poor countries. banking law and engage with the regula­ tors and their prosecutors. Million-dol­ lar fines per day are likely to crush most banks except for the giants such as Citicorp with $213 billion in assets or Bank of America with $180 billion. The Hans F. Sennholz A Special Invitation Spring Dinner Meeting featuring Robert James BidinoUo speaking on "Criminal Justice?" Sunday, May 21, 1995 5:00 P.M. Tarrytown Hilton Tarrytown, New York You are cordially invited to join the trustees, staff, and friends of the Foundation for Economic Education for this exciting event. Robert James Bidinotto, Staff Writer for Reader's Digest and Freeman columnist, is the editor of FEE's nationally acclaimed book, Criminal Justice? The Legal System versus Individual Responsibility. Mr. Bidinotto's speech begins at 5:00 P.M., followed by refreshments and dinner. $45.00 per person; $300 for a table of eight. Reservations required. Contact Janette Brown no later than May 15. Telephone (914) 591-7230; fax (914) 591-8910.

June 3 Round Table serve June 3 for our Saturday evening Round Table with Dr. Mark Skousen. His topic: An Economic Outlook: Are We in an Age of ~gnorance or Enlightenment? Don't miss this stimulating evening, which begins at 5:00 with a reception and dinner, and then goes on to a lively discus­ sion session. Charge: $40 per person per event; certain discounts are available. Coming Seminars at FEE Austrian Seminar (by invitation) July 9-14 First Summer Seminar July 23-28 Second Summer Seminar August 13-18 Call or write: Dr. Barbara Dodsworth, 30 South Broadway, Irvington-on-Hudson, NY 10533; (914) 591-7230. Op-Ed Update he Foundation for Economic Education continues to expand in its efforts to spread the message of liberty. Part of our important work is our newspaper editorial pro­ Tgram. Special versions of our best Freeman articles are appearing in newspapers across the country-and around the globe. You can help us to monitor our work. If you see one of our articles in your paper, drop us a line or give us a call. Classics from von Mises, Read, and Hazlitt

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Sale Ends June 30, 1995 305 have been found both for what killed him sions become centralized and heavily regu­ and for the aging process itself. The work­ lated. Progress in halting aging slows as ability ofcryonics is controversial, but even politicians and interest groups block some in its current state of development it may kinds ofresearch. Jeremy Rifkin's Founda­ offer a chance ofpostponing our old enemy, tion on Economic Trends, for example, has death. used the government to try to prevent var­ Try to extend your lifespan through med­ ious kinds of biotech research. On the free ical technology and you'll quickly discover market, any peaceful idea can find funding that the government acts as though it owns and proceed if it shows sufficient promise, your life. If we each individually own our but in a politically controlled regime new bodies and minds, you would think we ideas have to fight entrenched interests and would be free to evaluate any longevity­ their political allies sitting on numerous extending treatments, and assume the ac­ committees and regulatory agencies. companying risk ~nd responsibility. Yet Much regulation in the life extension government agenci~s, such as the Food arena comes from the FDA. Other civilized and Drug Administration (FDA), and groups countries get by just fine without any equiv­ with government-gr~~ted privileges (such alent to this agency, and enjoy access to as state-licensed M.~. 's, whose lobbying thousands of beneficial drugs and treat­ group is the American Medical Associa­ ments years before Americans. For ten tion), claim the authority to make our years following 1962 (when the FDA gained choices for us. They treat us as children, new powers), not one of the hypertension constantly needing the protection of the drugs available in Europe was approved in nanny State. Not only does this insult us, the United States. The delay before intro­ but government control, compared to free ducing beta blockers may have resulted in choice in free markets, does badly at en­ 10,000 unnecessary deaths annually. To de­ couraging new and effective life extension velop, test, and gain approval ofa new drug, technologies. companies must spend hundreds ofmillions ofdollars and wait eight to ten years. Since The Government Chokehold 1962, the cost of developing new drugs has increased 50 times faster than inflation and Government involvement in life exten­ approval time has quadrupled. 1 This isn't sion means b~th funding and regulation. likely to change: Regulators tend to be Research funding by the state means fund­ over-tough because if they approve a drug ing by taxation. Two major problems arise that later causes problems, the blame falls from tax-funding oflife extension research. on them. They receive no balancing benefit First, since taxes are compulsory, unlike from rapid approval. 2 consumer purchases or venture capital in­ The FDA started out small with limited vestments, the recipients have little incen­ powers, but has grown enormously. Cur­ tive to perform well. If your company is rently it's attempting to make vitamins and funded by taxes, you need not be so con­ protein components (amino acids) into pre­ cerned with cost-effectiveness (remember scription items. A few years ago, when one the $500 military screwdriver?). With Japanese manufacturer produced contami­ money coming not from customers but from nated supplies ofthe amino acid tryptophan, taxpayers via the political system, you the FDA seized the chance to ban all sales needn't worry about whether your proposed of tryptophan. This supposedly temporary product is cost-effective. Second, since action has never been reversed. As a result, state funding is brokered by politicians, it many thousands ofpeople with sleeping and will reflect the strength of interest groups mood problems have gone back to using far and lobbying skills. These have little con­ more dangerous tranquilizers, some dying nection to the most promising research. of accidental overdoses or suffering side Whenever the state involves itself, deci- effects. 306 THE FREEMAN • MAY 1995

The FDA uses SWAT-style raids on vi­ the slower such research proceeds and the tamin suppliers who dare to offer "unap­ more it costs. Ifwe allow the free market to proved" information about products they operate, subject only to reasonable liability sell. The FDA has been working towards rules rather than bureaucratic regulations establishing a monopoly on information and political maneuvers, innovation will about drugs and nutrients. If you make accelerate. When people are free they can claims (no matter how well scientifically experiment in many directions simulta­ supported) that the FDA hasn't sanctioned, neously. Companies can more quickly offer you may find yourselfheld at gunpoint while the results of their research to customers. your office is stripped. FDA agents even The incentive to bring products quickly to threatened to shut down a newsletter printer market will be balanced by caution due to for the Life Extension Foundation, an or­ liability for inadequate testing. ganization frequently critical ofthe agency. Rather than all treatments having to con­ Some problems caused by the FDA and form to state-approved levels of safety, other agencies come from an unwillingness individuals will be free to decide for them­ to recognize life extension as a legitimate selves how much to risk for the expected aim ofmedicine. According to the prevailing benefits. We own our lives and are respon­ medical view, enforced by the privileged sible for them. Decisions about our health medical establishment in league with the and longevity belong to us, not to politicians FDA, medicine should cure disease but not and bureaucrats who don't know us. The improve our health or capabilities beyond more Americans are shielded from making what's normal. Treatments which may al­ their own decisions like infants, the more low us to live longer, or better than normal, irresponsible and helpless they will become. are not even candidates for approval. A Granted more freedom, we will also gain possibly life-saving practice as unusual as more responsibility. Some of the products cryonics has even more difficulties with the tried by even well-informed people in a free state. Cryonics has been banned outright in market may be ineffective or harmful. But British Columbia, while California agencies progress requires trial and error, and a did all in their power to make it impossible system that restricts experimentation re­ for cryonics organizations to operate. (The stricts the growth of knowledge. government bureaucrats finally lost in the Each of us is faced with the difficult courts.) Terminal patients may not legally challenges of aging and death. Let's not let be cryonically suspended voluntarily before the state reinforce the death-dealing tenden­ clinical death, even though this may greatly cies of nature by restraining human intelli­ improve their chances of eventual restora­ gence from tackling the problem of degen­ tion to life. erative aging. D

Freer Markets, Longer Lives 1. See Milton Friedman, Free To Choose (Orlando, Fla.: Harcourt, Brace, Jovanovich, 1990), p. 206. 2. Sam Peltzman, "Regulation of Phamaceutical Innova­ The more involved government becomes tion" (Washington, D.C.,: American Enterprise Institute, in life extension research and development, 1974). THEmEEMAN IDEAS ON UBERTY

Two Insights for Business Ethics by Douglas B. Rasmussen

usiness ethics does not stand by itself. It supposed in our very understanding ofcap­ B depends in large measure on the insights italism and our notion of free or voluntary of political philosophy and ethics. Of exchange. course, it is not possible to do everything at once, and works in business ethics cannot The Role of Rights be expected to deal with more general ques­ tions about the ultimate normative dimen­ In order to understand the ethical per­ sions of capitalism, much less with the spective from which the terms" capitalism" fundamental nature of morality and moral and "profit" derive their particular mean­ reasoning. Nonetheless, it is important to ing, the concept of "rights" should be note two fundamental political and ethical considered. "Rights" are a moral concept, insights that are crucial to appreciating the but they are different from other moral ethical significance of capitalism. concepts. They have a unique function. To begin with it should be understood that Their function is not to directly secure the "capitalism" is not a mere descriptive term. moral well-being ofindividuals. Rather, their It has a normative dimension. For example, function is to protect the self-directedness of "Murder Incorporated" is not regarded as individual human beings and thereby secure a business firm in a capitalistic system. It is the liberty under which individual human something criminal. One does not have the moral well-being can occur. 1 right to offer murder as a service that can be Rights provide guidance in the creation, bought. This "service" is not allowed to interpretation, and evaluation of political/ operate. Similarly, the term "profit" does legal systems. They protect individuals from not mean merely a return on an exchange being used by others for purposes to which that is over costs; it also involves a certain they have not consented. Rights are used to type of exchange, namely a free or volun­ determine fundamentally what ought to be tary exchange. The gunman's offer, "Your a law. They provide the normative basis to money or your life," is, for example, not law, but they do not, like the virtues, pro­ considered a free or voluntary exchange­ vide individuals with any guidance regard­ even though one would prefer remaining ing what choices to make in the conduct of alive to losing one's money. The problem their daily lives. with such an "exchange" is, ofcourse, that The idea that''no one's purposes or goals the gunman does not have the right to take moral precedence over the purposes demand from you either your life or your and goals ofany other person in a way that money in exchange for the other. Thus, would justify the complete or partial sub­ there is an ethical perspective that is pre- ordination of any individual to any other individual orto any group ofindividuals,,2­ Dr. Rasmussen is Professor of Philosophy at more simply put, that there are no natural St. John's University in New York City. moral slaves or sovereigns-is expressed 307 308 THE FREEMAN • MAY 1995 in the claim that individuals have rights. is not necessary to assume that the funda­ Smith's having a right in this sense legally mental principle of human conduct and obligates others to abstain from initiating relations within capitalism is sheer greed or physical compulsion, coercion, or interfer­ hedonism. Further, it is not necessary to ence against Smith. assume that in order for capitalist activities It should be emphasized that the protec­ to be morally defensible what is good for a tion against being used for purposes to person must be simply a matter of taste. It which one has not consented is understood is quite possible to understand the activities to proscribe the nonconsensual use of the of business people within capitalism as be­ product of one's labor. As Robert Nozick ing motivated by the pursuit of more than has said: merely wealth or pleasure. People can be Seizing the results of someone's labor is understood as pursuing their moral well­ equivalent to seizing hours from him and being or fulfillment. In other words, the directing him to carryon various activi­ human moral good could be something ob­ ties. If people force you to do certain jective, and yet the diverse activities of work, or unrewarded work, for a certain persons operating within capitalism be con­ period of time, they decide what you are sistent with the attempt to achieve the good. to do and what purpose your work is to Human moral well-being need not be serve, apart from your decisions. This viewed as something abstract, impersonal, process whereby they take this decision or uniform in order to be objective. Rather, from you makes them part-owner of you; the human good could be objective and it gives them a property-right in you. Just nonetheless be concrete, personal, and vari­ as having such partial control and power able. Though there are generic virtues that ofdecision, by right, over an animal or an abstractly define the human good, what they inanimate object would be to have a amount to in the concrete situation for any property right in it.3 individual human being varies. This does not mean that what is good for any person is Government's proper function is to imple­ simply a matter oftaste or that there are no ment and enforce laws that protect the lives, right or wrong choices, but it does mean that time, and resources of persons from being it would be a mistake to think that what is used without their consent. good for someone in some concrete situa­ Capitalism is a socioeconomic system tion can be determined merely from some based on the recognition ofindividual rights. armchair. It is thus only against the political/legal Ifhuman moral well-being is both real and backdrop provided by individual rights that pluralistic, this has great importance when a moral evaluation of the activities of cre­ it comes to morally assessing capitalist ac­ ating wealth and exchanging goods and tivities. It allows one to see the ethical services within a capitalist system can be importance ofa socioeconomic system that properly made. protects and permits individuals in using their practical insight toward achieving their Morality and Moral Reasoning good in contingent and particular cases. We need to consider the nature of moral­ This is especially so if it is true, as it ity and moral reasoning. When it comes to certainly seems to be, that human moral making an accurate moral assessment of well-being involves the creation, mainte­ capitalist activities, it is crucial that a certain nance, and use of wealth in fulfilling ways. understanding of the moral good of human The judgments exercised by persons as beings be considered. Otherwise the moral producers and consumers are then related to significance of capitalism, as distinct from the central intellectual virtue of practical the political/legal significance, will not be reason of which Aristotle speaks in his appreciated. ethical works. 4 Contrary to what is sometimes thought, it There is a parallel between an argument RIGHTS VERSUS "RIGHTS" 309 that Mises and Hayek used to show that Here then are two insights-one from socialist economies could not efficiently co­ political philosophy and one from ethics­ ordinate the production and exchange of that make a crucial difference as to how one goods and services and an Aristotelian ar­ morally evaluates the activities of persons gument against rationalistic accounts of the within a capitalistic socioeconomic system. good life. Just as central planners do not The idea that individual rights provide the have access to the contingent and particular basis for a political/legal context that pro­ facts that individuals do in exercising the tects the exercise of practical reason by "entrepreneurial insight" that moves free individuals and the idea that the human good markets toward equilibrium, so too specu­ is objective, but individualized, are funda­ lative insight into the nature of the human mental. It is important for anyone taking up good is not sufficient for a person's well­ issues in business ethics not to forget the being to be achieved. Practical insight is import of these ideas-as well as others needed, and this insight can only be used by from political philosophy and ethics-for that individual, no one else, in confronting at the understanding of capitalism. D the time of action the contingent and par­ ticular facts of his or her life. Such insight cannot function from an abstract perspec­ tive in finding the "mean" that is appropri­ 1. See Douglas B. Rasmussen and Douglas J. Den Uyl, Liberty and Nature: An Aristotelian Defense ofLiberal Order ate for· the individual. Thus, there is a (La Salle, Ill.: Open Court, 1991) for a defense of individual creative role for the individual to play in rights. 2. Eric Mack, "The Ethics of Taxation: Rights Versus discovering the individuative content that Public Goods," in Dwight R. Lee, ed., Taxation and Deficit gives reality to the good life philosophers Economy (San Francisco: Pacific Research Institute for Public Policy, 1986), pp. 489-490. abstractly describe. It is the practical insight 3. Robert Nozick, Anarchy, State and Utopia (New York: of individual human beings, not only in the Basic Books, 1974), p. 172. 4. See Douglas B. Rasmussen, "Capitalism and Morality: creation of wealth but in achieving their The Role of Practical Reason," in Robert W. McGee, ed., unique form of the human good, that a Business Ethics & Common Sense (Westport: Conn.: Quorum Books, 1992), pp. 31-44. Yet, also see Douglas J. Den Uyl, The system based on political and economic Virtue ofPrudence (New York: Peter Lang, 1991) as well as liberty helps to make possible. Liberty and Nature.

Rights versus "Rights" by Tibor R. Machan

or the past 200 years or so a debate has John Locke and others to bolster certain F ensued in political philosophy, on the hidden goals, not because these rights ac­ issue of what sorts of rights human beings tually exist.) What the rights versus have. This is not the debate about whether "rights" debate is about is whether human we have rights at all, which is different. beings have rights other than negative rights (Some hold that rights were identified by not to be killed, assaulted, kidnapped, or robbed. Negative rights, not to be intruded Dr. Machan is Professor of Philosophy at Au­ upon, are what Locke, the major seven­ burn University, Alabama. His latest book is Private Rights and Public Illusions, from Trans­ teenth-century individual rights theorist, ar­ action Books. He is a contributing editor ofThe gued we all possess by nature. That is, we Freeman. require certain social conditions when we 310 THE FREEMAN • MAY 1995 form communities, because of the kind of however, drastically different from those being we are. We require the respect ofour advocated by many big-government theo­ negative rights. rists. Many of the amendments are simple In response to Locke and his students, elaborations, for more specialized cases, of critics argued that the rights Locke identi­ the basic negative rights everyone possesses fied are only some ofthose we possess. They by nature. The''right to vote" is an appli­ maintained that we also have what are called cation of the right to liberty to the area of "positive" rights: others must not only political action: government may not prevent refrain from killing, assaulting, kidnapping, an adult citizen from fully participating in the or robbing us but owe us services such as political system. The right to be free from welfare, health care, and education. The slavery is a simple corollary of the negative point isn't that it is decent and morally right to liberty, as is the right to be free from proper for others to help us when we are involuntary servitude. Just how different such in need. Rather they can be forced to pro­ amendments are from those proposed by vide us with what they can to help-their advocates of positive rights can be appreci­ work, their earnings, the fruits of their ated when we consider that all positive rights talents-just as others may be forced to imply involuntary servitude. If one is forced desist from murdering or assaulting us. to make provisions for the health care, social The recent debate in the United States security, or related needs of others, one is about government-supplied health care il­ forced to serve them, plain and simple. lustrates the conflict between these two The debate is important but one must be views of rights. Negative rights theorists careful not to misunderstand it. Basic neg­ argue that individuals ought to strive for ative rights need at times to be spelled out living properly, for flourishing in voluntary in some detail, made applicable to new areas association with each other, while positive ofhuman conduct and problem-solving. For rights theorists argue that individuals natu­ example, the right to freedom of speech­ rally belong to each other, as parts of an which spells out the right to liberty for organic body. While Locke put on record communication-may need to be developed the former theory, Karl Marx, who thought further in light of the growth of the elec­ little ofrights, spawned this alternative view tronic communications "superhighway." of social relations. He declared that "The The right to own property had to be devel­ human essence is the true collectivity of oped further to clarify ownership ofportions man," meaning we are essentially "species of the electromagnetic (broadcast) spec­ beings," parts ofthe larger organic body of trum. It can be shown, by careful logical humanity. Others proceeded to soften this reasoning, that these refinements follow hard-line collectivist position into the milder from our basic negative rights. sounding positive rights theory. Positive rights, however, violate ourbasic Some misunderstand the nature of posi­ negative rights, place us in servitude to tive rights, thinking that they simply arise others, and therefore can only be fraudu­ out of an elaboration of negative rights. lently presented as things derived from our When columnist George Will noted a while natural rights. We should be on guard when ago that one official in our government those who wish to solve social problems leaned toward authoritarianism by inventing advocate unjustified power for the govern­ positive rights, ones not listed in the U. S. ment by distorting the rights we all have. We Constitution, someone criticized him along have only negative rights. Positive "rights" these lines: "[T]he Constitution has been are deceptive inventions that capitalize on amended in the past to include the 'right' to the soundness of the theory of negative vote for African-Americans, women and rights for dangerous purposes, leading, in­ 18-year-olds, as well as the right to be free deed, to the subversion ofthe original func­ from slavery and involuntary servitude." tion of the concept of basic individual The amendments the critic mentions are, rights. 0 A Matter of Principle by Robert James Bidinotto

In Praise of Pain

n recent months, we have heard daily grants" onto state governments. School I alarms concerning legislation proposed lunch subsidies are actually scheduled to by the new Congress. rise, and likewise be sent to governors to Babies will starve, modem Chicken Lit­ administer. Ditto, spending on the elderly: tles warn, because teenage mothers will be all that will decline is the rate ofincrease in deprived of "their" food stamps. Little projected spending. As for public broadcast­ children in schools will go hungry, because ing, the only portion of its budget targeted the new Scrooges on Capitol Hill will rob for trimming is the meager 14 percent sup­ them of "their" school lunches. The elderly plied by federal taxpayers. Clearly, Barney will lose "their" Medicare and Social Se­ is in no danger of extinction. curity. Opera enthusiasts will lose tax­ You'd never know this judging by the subsidized encounters with Wagner and cries ofimpending doom echoing across the Puccini, and pre-schoolers the daily inspi­ land. Yet despite the claims ofthe Compas­ ration ofBarney the Dinosaur, all because of sion Lobby, few redistributionist programs plans to close down "their" local public are on any politician's chopping block; even broadcasting stations. fewer will be gone when the political dust Never mind that none of this unearned settles. As I anticipated in my January largess is truly''theirs." Nevermind that no column, most ofthe modest reforms passed one has a right to that which he has not by the House are being bottled up in the produced-that no one can lay legitimate Senate. claim to goods and services belonging to The block-grant approach symbolizes the others-that all of those ' 'entitlements', weakness of the proposed reforms. Instead entail legalized plunder ofthe taxpayers. In ofending programs that plunder Peter to pay addition, none of the claims by special Paul, Congress is proposing only that Paul interests is even true. receive the loot from his governor, rather Babies won't starve, because welfare pro­ than his congressman. The apparent''prin­ grams aren'tgoing to end: they're only going ciple" here is that robbery is more efficient to be dumped by Washington in "block if done at the local level. As revolutions go, this one is boringly Mr. Bidinotto, a StaffWriterfor Reader's Digest, bloodless. In fact, many self-styled revolu­ is a long-time contributor to The Freeman and tionaries are trying to keep it absolutely lecturer at FEE seminars. painless-when a little pain is exactly what Criminal Justice? The Legal System Versus Individual Responsibility, edited by Mr. Bidi­ recipients of the unearned need to experi­ notto and published by FEE, is available at ence right now. $29.95 in cloth and $19.95 in paperback. Yes, you read that correctly. 311 312 THE FREEMAN • MAY 1995

Don't get me wrong. I'm not endorsing her married, working neighbors must de­ the Stoic view that pain builds character. prive their own children to support hers. To Nor am I a Social Darwinist arguing for protect American bankers from stupid in­ "survival of the fittest." Pain and suffer­ vestments, American workers must raid ing are not ends in themselves, nor is the their own savings and cover the losses. To collectivist goal ofsocial purification a valid protect "family farmers" from the reality rationale for allowing harm to befall the of supply and demand, urban American weak. families must squeeze their own budgets and But pain and suffering do have a vital fund subsidies and supports. purpose. They are invaluable signals to us, Again, the welfare state doesn't eliminate warnings that something is amiss-that we pain and suffering: it merely transfers them need to change course. from one person to another. It's a measure Mistakes and irresponsible behavior un­ ofmodern corruption that this sordid policy avoidably lead to destructive consequences. is defended as embodying "compassion." Yet if we could not feel their impact, we'd But it's a curiously selective compassion: have no reason to alter harmful behavior. compassion only for the deserved suffer­ The experience ofpain warns us we're doing ing of the irresponsible and foolish, and something injurious. Pain is nature's invalu­ simultaneous indifference toward the un­ able teacher; without it, we could not sur­ deserved suffering of the responsible and vive, because we'd never be deterred from wise. self-destructive paths. A child learns not In truth, the Compassion Lobby's claim to put his hand on the stove, because it hurt to moral concern is fraudulent. There's the first time he did it. nothing compassionate in transferring pain Capitalism is a profit andloss system, one and suffering from those who caused it onto that rewards those who successfully pro­ those who didn't. It is cruel injustice. Yet duce valued goods and services, while pun­ that's the operative moral premise of the ishing those who fail to do so. Ifprofits were welfare state. guaranteed and automatic, and losses im­ Because people make mistakes, pain is possible, there would be no motive for always unavoidable. The question is, who anyone to produce the things we need. should bear it: those who cause it, or those Poverty and want soon would be everyone's who didn't? Likewise, the idea ofa painless fate. revolution is an oxymoron. Change is al­ That's· precisely the impact of welfare ways painful; but keeping our present wel­ statism. By trying to eliminate all suffering, fare state is also causing pain. Whose pain it obliterates all incentives and motives to should be our concern? act wisely. It buffers people from the inju­ For too long, in order to spare some the rious consequences oferror and irresponsi­ hardships of self-responsibility, we have bility, depriving them ofthe painful but vital been willing to' batter and burden millions lessons of life. It thus allows people to of decent, hardworking citizens. They are believe they can continue down destructive the real victims today, and their unjustified paths with impunity. suffering must end. But even if they are buffered from pain, To salvage the moral initiative we must the destruction they have caused doesn't have the courage to look the Compassion disappear: it's merely transferred onto oth­ Lobby directly in the eye, and refuse to ers. To spare some people painful lessons, blink. Rejecting their phony compassion, the welfare state forces innocent and re­ we must state bluntly: sponsible taxpayers to bear the pain and "It's high time you did feel some pain. suffering instead. Better you than those self-responsible peo­ To protect an unwed teenage motherfrom ple who have been too long compelled to experiencing any discomfort from her folly, support you· in your irresponsibility." D TREmEEMAN IDEAS ON LIBERTY Bilingual by Choice by James M. McCaffery

n the summer of 1992, I was a guest I put the paper down and went to my I lecturer in comparative law at a large class, where I tried an experiment with my private law school in Latin America. One students, the children of the nation's elite. morning before class, I read in a local When I asked what they thought ofbilingual newspaper that the newly appointed minis­ education, I got some very enthusiastic ter of education had decreed that Indian answers ~ All of them thought that learning children (defined as children who spoke an to read, write, and speak in English was very Indian language at home), who had previ­ important. Few knew no English; most had ously received all their public education in at least a reading knowledge ofEnglish; two Spanish, would now be instructed in Indian or three spoke it as well as I did (showing a languages through the sixth grade in order great effort on the part oftheir parents). All to preserve Indian culture and ease their ofthe students wanted their children to learn transition to Spanish. Ominously, the article English. They realized that their children mentioned that bilingual and multicultural would need English to succeed in the world experts from the United States had been beyond Latin America. consulted in this matter; there was no men­ When I mentioned to the students that I tion if anybody had asked the Indians for was talking about bilingualism of Spanish­ their opinion. I decided to do so myself. speaking learning an Indian language, the Shortly before, I had seen a report on students started to laugh. They figured that television about a conference at which Latin this was a strange form ofgringo humor, like American Indians had met to discuss their that ofthe American law professor who had mutual problems. Interestingly, the confer­ come the year before to lecture on animal ence was conducted in Spanish (with some rights in a country that has starving children Portuguese), the lingua franca among Indi~ in the streets ofsome cities. However, when ans from Mexico to Patagonia, whose native I insisted that there must be some benefit languages may be as mutually unintelligible they could derive from knowing an Indian as German is to Chinese. Even some Indian language, one young lady suggested that this languages that are seen as being a single might be useful since one could then have tongue (Quechua, for example) have dia­ Indian maids who spoke no Spanish, rather lects that vary as much as Latin-based than Spanish-speaking Indian maids who Spanish and Latin-based French do from command higher wages. Their contempt for each other. In rural markets I have seen the idea could not have been more patent. Indians, who are speaking an Indian lan­ Later that evening, I spoke with our guage within their group, start speaking teenage Indian maid about this subject. Spanish with another Indian from a different Although I did not notice an accent in the tribe. girl's Spanish, my wife assured me that the Mr. McCaffery resides in New Orleans and is maid had an "Indian" accent. The young considered a great guide to Mardi Gras. girl said that her family spoke an Indian 313 314 THE FREEMAN • MAY 1995 language both at home and with their neigh­ which used to be guided by the normal laws bors in her village far from the capital. But ofeconomics, common sense, and parental she had learned Spanish from radio, televi­ choice. As a young boy I grew up in the inner sion, the movies, and of course, in school. city ofone ofthe great northern urban areas She was now working for a while in the city ofthe United States. The immigrant flotsam to improve her Spanish, to see the world, and jetsam of Eastern Europe, speaking and to save up money for a dowry to better dozens oflanguages, ebbed and flowed into her marriage prospects when she returned that city after World War II. The Catholic home. Her brother had been drafted (will­ Church across the street had all but one ingly) into the Army, where young Indian Sunday service in Croatian. (The last time I men who were deficient in Spanish were put visited, all but one service was in English, into Spanish immersion classes. Those who showing the natural evolution of language already spoke Spanish improved their gram­ choice.) My family attended the English­ mar and pronunciation. The Indian girl said language Catholic Church several blocks that her parents were happy that she was away, which had been founded a century perfecting her Spanish in the big city and before by Irish immigrants (my father's that her brother was being schooled in people) and later inherited by German and Spanish in the Army. Indian parents wanted Polish immigrants (my mother's grandpar­ their children to get the best possible edu­ ents). Although my mother spoke Polish and cation, which meant speaking, reading, and German at home, she attended school to­ writing good Spanish: exactly how the elite tally in English without any ill effect. I viewed English for their children. attended grade school with children who Thus, both the rich parents of the ruling spoke German, Polish, Croatian, Hungar­ elite of the capital, who send their children ian, Romanian, Czech, and a dozen other to law school and make sure they learn languages or dialects at home. These boys English, and the poor Indian parents of a and girls all achieved native ability in Eng­ small village in a remote province, who want lish without any special government pro­ their children to master Spanish, have made grams to teach them the national language, rational choices about their sons' and now practically the world's language. daughters' language preparation. For gov­ A friend of mine, now a prominent sur­ ernment officials to override such decisions geon, grew up living with his parents and against the best interest of children and the both pairs of grandparents. His mother and wishes of the parents is an abuse. In Latin her family spoke Lithuanian; his father and America and in the United States it is an his family spoke Hungarian; the two sides increasing problem. ofthe family communicated in German. All five children knew these languages, yet Governmental Meddling spoke English as their primary tongue as a natural consequence of living in the United Consider the bizarre experience I had States. Nobody had to convince the kids to recently. I received notice that my six-year­ learn English; it was self-evident. No gov­ old son was being removed from his normal ernment program was needed to help them French classes, to be put in ESL (English as learn English. Common sense and self­ a Second Language) classes-without my interest did the job. permission-because my wife and I had Several years ago I read through a book truthfully told the school system that Span­ of short biographies of Americans who had ish is the language we normally use at home. won the Nobel Prize, looking for any com­ There was no suggestion that his English mon linguistic pattern. The only conclusion was in any way deficient. I reached was that speaking Yiddish as a How this came about is a story of how child seems to be a good indicator for mindless governmental meddling extends winning a Nobel Prize. Can it be seriously today even to the learning of language, argued that Yiddish-speaking students BILINGUAL BY CHOICE 315 would have won more Nobel Prizes had they parents, or at least with active parental not been put in English immersion but support. My own children speak English, instead had spent years in Yiddish classes to Spanish, and French (in approximately that ease their "transition" to English? order). However, this is a result of a con­ The great historic lesson from our past­ scious and reasoned decision by my wife (a that immigrant parents prefer, for good native speaker ofSpanish) and me, given the reason, to have their children educated in particular circumstances of our family and English immersion in school while preserv­ the unique resources available in New Or­ ing their native language at home or at leans. No bureaucrat, no matter how well church or synagogue-is ignored by the intentioned (most are-I am one myself), politicized public education apparatchik. could possibly weigh these factors as well as Immigrant parents today face increasing we, the children's parents can. coercion as they stubbornly try to avoid Our children attend a French-language bilingual or multicultural schemes. These school (grades K through 8) in New Orleans parents understand that their children's fu­ established by the French government, in ture lies with ability in English, not Bengali cooperation with the state of Louisiana or Vietnamese. The multicultural bureau­ and the Orleans Parish School Board. They cracy demands that immigrant children not are taught by teachers from France, using evade their instructional clutches since the same textbooks used in France. Except there can be no funding for the "problem" for the children of French citizens, entry to of bilingualism if there are no children suf­ the school is on a first-come, first-serve fering from lack of native-language instruc­ basis, with a line forming several days tion. Perversely, the funding for bilingual before registration. Thus, I spent a day education seems to come off the top of the waiting (and a night sleeping) in line to education budget, not the bottom, reducing register my child in French Immersion Kin­ the funds going into real education. dergarten six years ago. Since siblings of Recently I met a couple who had moved students in the program are automatically to Louisiana from another state. They told admitted, all of us in the line were there for me that they had been required by their the first time. previous school district to execute affidavits My fellow parents in line were a mixed that they spoke English at home. Parents lot-racially, ethnically, linguistically, and who admitted that they spoke a foreign economically. The first in line was a poorly language at home could not avoid being dressed black woman, seemingly without hassled and pressured by the multicultural much formal education, who had been in programmers. Father and Mother evidently line several days. She said that she had given do not know best-the educational estab­ up several days' pay (obviously a great lishment does. The parents most harmed are sacrifice for her) to be sure that her child got those with the least education and at the into the program since it was her daughter's lowesteconomic rung since parents who are only chance to get a quality education (her professionals are better able to fend off the child is one ofthe best students in her grade, bureaucrats. American or French). Many of the other Significantly, the federal government parents in line were immigrants or foreign does not practice the sort of bilingualism it exchange students who spoke languages preaches. The Department of Defense and other than French or English at home: the State Department employ''total immer­ German, Russian, Chinese, Portuguese, sion" to train their people in foreign lan­ Spanish, Polish, and Vietnamese, to men­ guages, just the way immigrant children tion a few. For them, like my wife and me, used to learn English. French would be a third language for their There is nothing wrong with teaching children, a responsibility all seemed to take children other languages. On the contrary, quite seriously. There were doctors, labor­ it is an excellent idea ifdone properly, by the ers, lawyers, waitresses, civil servants, ac- 316 THE FREEMAN • MAY 1995 tive duty military, and truck drivers in line ment is no respecter of parent's wishes or that night. children's best interests. Throughout the The proportion of French surnames was nation, but especially in California, children probably not out ofproportion to a random with Hispanic surnames whose families may cross-section of the population in the area. have spoken English for generations are Nobody seemed driven by ancestral genes being herded into bilingual Spanish pro­ to have their children study French, con­ grams, supposedly to help them adjust to trary to the tenet of the new government­ learning English. Just as logically (or illog­ imposed multiculturalism that ancestry ically), children with Irish surnames, such alone determines linguistic ability and pref­ as mine, should be incarcerated in Gaelic­ erence. immersion to help them better adapt to These people had made personal evalua­ learning English, Spanish, and French. tions of their children's and their families' Except in the rare case of children who unique environment, ability, and resources are literally wards ofthe state, the linguistic in such an endeavor. For example, it is training of children should be the matter understood by the non-French-speaking of familial and not governmental responsi­ parents that there will be a cost for private bility and choice. Parents quite naturally French tutors for their children. I spend want their children to do well in life and about $200 monthly for such tutors, a cost wish them to master the language of the that will surely increase as my children society in which they live, English in the continue French at a more advanced level. case of the United States. In any event No bureaucrat could possibly know the parents all overthe world wish their children parents' resolve and resources in such mat­ to learn English, the modern lingua franca ters, or gauge their resolve half as well as of mankind. I have noticed that French the first-come, first-serve system does in a families that are temporarily in New Orleans crude but effective way. Because their par­ strive to have their children master English ents are willing to bear the costs, the in the short time that they have in the United school's students are the children with the States. best opportunity to succeed in its French To rephrase Clemenceau, language train­ immersion program. ing ofchildren is too serious a thing to be left The official bilingual, multicultural move- to bureaucrats. The family knows best. D

Rolling Back the Imperial Congress by Ralph R. Reiland

top priority in the new Congress was to the private sector be mandated to build A approve legislation that requires mem­ wheelchair ramps while the disabled are told bers ofCongress to obey the same laws that to forget about easy access to the Imperial they pass for the rest of us. No longer will Congress. That's a revolutionary concept to the Ralph R. Reiland is Associate Professor of old guard on Capitol Hill. A few years ago, Economics at Robert Morris College and co­ a former Senate Democratic leader stated: owner ofAmel's Restaurant in Pittsburgh. "It's been said here many times tonight that ROLLING BACK THE IMPERIAL CONGRESS 317 we want to treat Senators the same as litigation explosion didn't want to face trial everyone else, that we want to have the by jury. Senate treated the same as the private sec­ Many Washington politicians never tor. Not a single Senator believes that. Not learned that a nation dominated by an arro­ a single Senator wants that." gant political class that creates an increas­ The senator was arguing that the hiring ingly intrusive government and sneers at the and firing decisions in a senator's office work of the private sector ends up with an should be exempt from civil rights laws. The abundance of misery (and a shortage of EEOC wouldn't be playing any quota games lumber). with victim groups in his office. Another We've reached the point where over half senator put it more bluntly: "The Senate is ofthe GDP ofthe United States is socialized no lumber yard." by the various levels ofgovernment through Those senators are gone now. They didn't taxes, transfer payments, and regulations. understand that most ofus value the houses Still, there's no shortage of politicians who we get from lumber yards more than push for more. They ignore the key eco­ we value the meddlesome laws and red tape nomic fact that the more market-oriented, we get from Congress. The senators didn't small government economies around the understand why the public ranks Washing­ world outstrip their statist counterparts by ton politicians below any otheroccupational virtually every measure. When the Berlin category, including lumber workers. At Wall was toppled, the per capita GDP in least the guys carrying plywood buy their capitalist West Germany was twice that of own stamps and don't confiscate part ofour socialist East Germany. paychecks by voting themselves midnight Today, South Korea's GDP is six times pay raises. that of North Korea. Taiwan's is more than The call to exempt the Senate from civil twenty times that of mainland China. rights legislation wasn't unique. Congress In 1993, for the first time, the United has exempted itself from the most far­ States had more people employed in gov­ reaching and important pieces of modern ernment than manufacturing. Making rules legislation: the Civil Rights Act of 1964, the was more important than making things. Freedom of Information Act of 1966, the Increasingly, the government became a col­ Age Discrimination Act of 1967, the Occu­ lection oflitigiously minded busybodies and pational Safety and Health Act of 1970, the self-righteous social engineers who prac­ Equal Employment Opportunity Act of ticed less and less restraint in their assaults 1972, Title 9 ofthe Higher Education Act of against private enterprise and personal lib­ 1972, the Rehabilitation Act of 1973, the erty. Privacy Act of 1974, the Age Discrimination What's springing to life now is the public Act amendments of 1975, the Ethics in backlash against the ceaseless growth of Government Act of 1978, and the Civil monitoring by government bureaucrats and Rights Restoration Act of 1988. the job-killing explosion of taxation, litiga­ With the Americans with Disabilities tion, and regulation. Making politicians in Act in 1990, Senator Charles Grassley of Washington subject to the rules and regula­ Iowa offered an amendment that said simply tions they pass is a meaningful first step that the ADA would apply to the Senate. toward pulling the nation out ofits statist rut Sam Gerdano, senior counsel to Grassley and returning to common sense. at the time, reported that he and the sena­ In November's election, the public tor were besieged by Capitol Hill law­ elected more businessmen and business­ makers who were worried that they might women than lawyers to the freshman class be sued for discrimination under the bill. of Congress. Let's hope they start running The amendment was defeated. The Lords of Washington, D.C., more like a lumber the Hill who created the world's worst y~. D THEFREEMAN IDEAS ON LIBERTY

John Stuart Mill's Immortal Case for Toleration by Jim Powell

ohn Stuart Mill's essay On Liberty (1859) philosopher of the nineteenth century, the j is the most famous work about toleration author of respected books on economics, in the English language. It is clear, concise, logic, and political philosophy, a prolific logical, and passionate. It defends tolera­ journalist, the editor of a widely followed tion-of thought, speech, and individuali­ journal of opinion, a friend of leading intel­ ty-as a practical means to promote happi­ lectuals in Europe and the United States. ness for the greatest number ofpeople. The People listened when Mill spoke about a book inspired generations ofclassical liberal vital issue. thinkers, and today it is probably the only Mill owed his influence perhaps as much historic work about toleration that most to his appealing personality as to his intel­ people ever read. lectualfirepower. He was a rational, posi­ Yet from the standpoint of liberty gener­ tive, generous man who sincerely loved ally, the philosophy behind On Liberty­ liberty. There is moral fervor in On Liberty, Utilitarianism-was a terrible failure. Mill even if he couldn't bring himself to justify and other Utilitarians relentlessly attacked liberty for moral reasons. He was far ahead the doctrine of natural rights, a moral basis of his time in insisting that women are for liberty which had provided the only entitled to equal rights with men-he en­ known intellectual barrier to tyranny. Nat­ dured more hostile criticism for his book ural rights, as explained by thinkers like The Subjection of Women (1869) than for Thomas Jefferson and Thomas Paine, de­ anything else he wrote. fined what governments could not rightfully Recalled classical liberal author John do. Neither Mill nor any other Utilitarian Morley who first met Mill several years after offered fixed principles to replace natural On Liberty was published: "In bodily pres­ rights. As far as Mill was concerned, Utili­ ence, though not commanding, at sixty he tarianism became a moral pleafor socialism. was attractive, spare in build, his voice low He didn't anticipate how socialist govern­ but harmonious, his eye sympathetic and ment power could unleash horrifying intol­ responsive. His perfect simplicity and can­ erance during the twentieth century. dour, friendly gravity with no accent of the Mill's opinion had to be reckoned with don, his readiness of interest and curiosity, because he was the most influential English the evident love of truth and justice and improvement as the standing habit of Mr. Powell is editor ofLaissez-Faire Books and mind-all this diffused a high, enlightening Senior Fellow of the Cato Institute. He has writtenforThe New York Times, The Wall Street ethos that, aided by the magic halo of Journal, Barron's, American Heritage, and more accepted fame, made him extraordinarily than three dozen other publications. impressive." 318 319 The Training of a Philosopher on an obscenity' charge: concerned about overpopulation, he had distributed birth Mill had humble beginnings. Not much is control information in a London park. Mill known about his mother, Harriet Barrow. was defiant, but his family and friends were His father James Mill went to the University scandalized. of Edinburgh on a scholarship for potential He launched his scholarly career, writing clergymen in the Scottish Church. But after articles for the Westminister Review, the graduation James rebelled against Church Utilitarianjournal which started publication doctrines and moved to London following in 1824, financed by Bentham and filled with the death of his mother and the bankruptcy articles by associates of both Mills. They ofhis father's meager shoemaking business. attacked ideas expressed in the Whig Edin­ Although James Mill wasn't particularly burgh Review as well as the Tory Quarterly qualified for anything, he was resourceful Review. and got himself a succession ofjobs editing Mill seemed to be fulfilling his dream. But small publications. His firstborn, John Stu­ after all the years of absorbing facts, con­ art Mill, arrived on May 20, 1806. centrating on his logical powers and without Two years later, when James Mill was 35, a close personal relationship, he suffered a he met the 60-year-old philosopher and legal nervous breakdown in 1826. He was 20. His reformer Jeremy Bentham. This eccentric severe depression continued for about six bachelor was quite a sight in an austere months, although nobody else seems to Quaker-cut coat, knee breeches, and white have noticed. In the spring of 1827, he read woolen stockings. Bentham had developed the memoir of a minor eighteenth-century the doctrine of Utilitarianism-government French playwright named Marmontel who policy should aim to help achieve the great­ talked about the death ofhis father, the grief est happiness for the greatest number of of his family, and how he discovered new people. Bentham promoted the expansion meaning for his life. Mill was moved to ofthe voting franchise, and he attacked the tears, reminding him that he really did have irrational, conflicting features ofBritish law. feelings. He began to read poetry. He flirted Bentham's zeal inspired James Mill to be­ with the ideas ofFrench socialists Comte de come a passionate political reformer. Saint-Simon and Auguste Comte. Mill decided to groom his eldest son as a rationalist philosopher who could guide the The Influence of next generation of political reformers. This Harriet Taylor involved an ambitious experiment in accel­ erated education at home. The curriculum In the summer of 1830, when Mill was 24, consisted mainly ofgreat books. John Stuart he had dinner at the home of London mer­ Mill started learning Greek when he was chant John Taylor and met his 22-year-old three. He learned Latin, arithmetic, algebra, wife, Harriet Taylor, who, it turned out, geometry, and political economy by the time shared these passions. According to one he was a teenager. acquaintance, she "was possessed of a In May 1823, when John Stuart Mill was beauty and grace quite unique oftheir kind. 17, he gained security for life-a six-hour­ Tall and slight, with a slightly drooping a-day administrative job at the East India figure, the movements of undulating grace. Company, arranged by his father who had A small head, a swan-like throat, and a been working there four years. John Stuart complexion like a pearl. Large dark eyes, Mill's starting pay was only £30 a year, but not soft or sleepy, but with a look of quiet he got promotions and had plenty oftime for command in them. A low sweet voice with intellectual pursuits. He was to work at the very distinct utterance emphasized the ef­ East India Company for 35 years. fect of her engrossing personality." Mill's first freelance effort to improve the Mill was enchanted. They became an world landed him in jail for a couple days item, with a resigned John Taylor's consent. 320 THE FREEMAN • MAY 1995

They spent time together in London and only purpose for which power can be right­ traveled through Europe together, scandal­ fully exercised over any member of a civi­ izing theirfriends. Forabout two years, Mill lised community, against his will, is to was her mentor, sharing his panoramic view prevent harm to others ... Over himself, ofWestern thought. Gradually, though, she over his own body and mind, the individual gained influence over Mill. She suggested is sovereign." Mill's "one very simple prin­ changes in his manuscripts, and he reflected ciple" became quite controversial. Adver­ her passion· for women's rights and social saries claimed everything an individual reform. might do affected others and therefore was His Principles of Political Economy potentially subject to government interven­ (1848) was a collaborative effort, and it tion. became the most influential economics book As expected, Mill based his case on "util­ of the nineteenth century. It was sophisti­ ity," rejecting natural rights and offering cated enough to satisfy the most rigorous practical reasons for tolerating unorthodox thinkers, yet it was written in plain lan­ opinions: "First, ifany opinion is compelled guage, understandable by almost everyone. to silence, that opinion may, for aught we Mill prepared the draft, she critiqued it, and can certainly know, be true. To deny this is he dutifully made changes which were sig­ to assume our own infallibility. nificant in later editions (there were four "Secondly, though the silenced opinion editions before she died, eight altogether). be an error, it may, and very commonly He eliminated his most serious objections to does, contain a portion of truth; and since socialism. the general or prevailing opinion on any John Taylor died in July 1849. Two years subject is rarely or never the whole truth, it later, Mill and Harriet Taylor decided to get is only by the collision of adverse opinions married, and he gave her; a written agree­ that the remainder of the truth has any ment foreswearing any special legal privi­ chance of being supplied. leges as husband. Alas, her health was frail. "Thirdly, even if the received opinion be In November 1858, she succumbed to tu­ not only true, but the whole truth; unless it berculosis. is suffered to be, and actually is, vigorously and earnestly contested, it will, by most of On Liberty those who receive it, be held in the manner ofa prejudice, with little comprehension or Mill had started writing On Liberty in feeling ofits rational grounds. And not only 1855. He and Harriet collaborated on it, and this, but, fourthly, the meaning of the doc­ after her death he worked to complete it. trine itself will be in danger ofbeing lost, or The book was published in February 1859, enfeebled, and deprived ofits vital effect on dedicated to her. Like most intellectuals, the character and conduct. .. ." Mill was mainly interested in freedom of Then Mill insisted that individuality ought thought and was much less concerned about to be tolerated even when eccentricities freedom of action, which required secure bother other people. First, he observed that private contracts as well as private prop­ cultivation of individuality is essential for erty. The book is an eloquent plea for well-developed human beings. Second, he toleration rather than a general defense of reminded readers that you never know liberty, as commonly supposed. Nonethe­ which individuals will contribute valuable less, the vigor ofMill'slanguage makes clear innovations. that he did value liberty for its own sake and Mill recognized that liberty cannot sur­ not just as one among many possible ways vive government takeover of the economy: to achieve a Utilitarian's conception ofhap­ "If the roads, the railways, the banks, the piness. insurance offices, the great joint-stock com­ "The object ofthis Essay," he wrote, "is panies, the universities, and the public char­ to assert one very simple principle ... the ities, were all of them branches of the JOHN STUART MILL'S IMMORTAL CASE FOR TOLERATION 321 government; if, in addition, the municipal taxes, nationalization of land, local gov­ corporations and local boards, with all that ernment takeover of gas companies and­ now devolves on them, became depart­ most astounding-universal military con­ ments of the central administration; if the scription. Utilitarian James Fitzjames employes of all these different enterprises Stephen went much further, advocating were appointed and paid by the government, an authoritarian government to forcibly and looked to the government for every rise improve human behavior by applying of life; not all the freedom of the press and Bentham's pleasure-pain principle on a popular constitution ofthe legislature would grand scale. During the twentieth century, make this or any other country free other­ intellectuals and mobs alike swept aside wise than in name." practical considerations as they plunged Yet, inexplicably, Mill didn't see that into socialism. government control is every bit as danger­ In later writings, Mill made clear that he ous as outright government ownership. For didn't think socialism or communism would example, while he opposed government work. For example, in Chapters on Social­ schools, he heartily urged that government ism, a partial draft of a book he started in compel all children to attend schools, set 1869, published posthumously by his step­ educational standards, conduct regular ex­ daughter in 1879, he recognized that social­ aminations to verify that standards are being ist policies don't give people any incentive met, and ifnecessary the government might to improve their performance. Mill dis­ have to provide education. Equally amaz­ missed talk about central planning. ing, this fabled Utilitarian, as devoted as While Mill presented a compelling prac­ ever to reason, failed to make a reasoned tical case for liberty, he avoided a moral case for government control. While he dis­ defense of liberty. Indeed, he made it clear paraged natural rights philosophers for bas­ that he believed socialists occupied the ing their views on ''self-evident" truths, moral high ground. Mill died on May 5, 1873, he claimed that government control of ed­ still trying to reconcile the seeming desir­ ucation·was "almost a self-evident axiom." ability ofsocialism with its evident dangers. Moreover, Mill took the puzzling position Despite critical limitations, Mill's essay that free trade could not be justified by his did much to stimulate continuing debate principles of liberty. about liberty. He expressed his practical Mill didn't come up with anything to take case more passionately than anyone else, the place of natural rights which clearly especially his declaration that there is a define human liberty and set specific, en­ significant sphere ofindividual action which forceable limits to government power. His should never be restricted by government. cherished principle ofutility turned out to be Mill's work survived his death and pene­ a slippery slope. trated mainstream opinion like few writings Without the anchor of natural rights, Mill about liberty before or since. For that, he found himself advocating steep inheritance achieved immortality. D Spread the Word! A year's subscription to The Freeman is a perfect birthday or thank-you gift for dis­ cerning relatives, friends, and neighbors. First gift (or your own new subscription or renewal): $30.00 Each additional gift $15.00 Call us at (800) 452-3518-or fax your order: (914) 591-8910. For orders outside the United States: $45.00 for the first subscription; $22.50 for each additional gift. THEFREEMAN IDEAS ON LIBERTY

The Story of a Movement by Peter J. Boettke

n June of 1974 in the little town of South deep affinity to Austrian economics-were I Royalton, Vermont, the modern resur­ also in attendance: John Blundell (now Pres­ gence ofAustrian economics began. George ident of Institute of Economic Affairs in Pearson, who had graduated from Grove London), David Henderson (Professor of City College and was then working with the Economics at the Naval Post-Graduate Institute for Humane Studies, initiated the School, and the editor of The Fortune En­ idea to bring together the three leading cyclopedia of Economics), Randall Hol­ active scholars in Austrian economics­ combe (Professor of Economics at Florida Israel Kirzner, Ludwig Lachmann, and State University, and the author of numer­ Murray Rothbard-to present a series of ous studies in public choice economics), and lectures to young faculty and graduate stu­ Svetozar Pejovich (Professor of Economics dents who had expressed an interest in at Texas A&M University and a pioneer in Austrian economics to the Institute. the economic analysis of property rights). The list ofattendees was truly impressive. The South Royalton lectures were pub­ Besides the lecturers, such senior luminar­ lished in 1976 as a volume entitled Founda­ ies within Austrian economics as W. H. tions ofModern Austrian Economics, edited Hutt and Henry Hazlitt were in attendance. by Ed Dolan. This volume became the major Even Milton Friedman dropped by for one introduction to Austrian economics for my evening-though Friedman never bought generation, that is, for those of us who the idea of a unique Austrian economics reached graduate school in the 1980s. The independent from other schools of neoclas­ success of the South Royalton conference sical economics. The younger generation of demonstrates how small events can have a participants included D. T. Armentano, major impact. Walter Block, Richard Ebeling, Roger Gar­ At the time of the conference in the rison, Jack High, Don Lavoie, Laurence summer of 1974, Austrian economics was in Moss, Gerald O'Driscoll, Mario Rizzo, Jo­ desperate shape. The towering intellect of seph Salerno, Sudha Shenoy, and Karen the modern Austrian school, Ludwig von Vaughn. Each of these individuals has sub­ Mises, had passed away in the fall of 1973. sequently made a name within the invisible His most senior intellectual heir, F. A. college of Austrian economists. Hayek, appeared to have lost interest in Other well known scholars and intellec­ economic theory long ago. The legacy of tuals-not exclusively associated with Aus­ Austrian economics rested in the hands of trian economics but whose work conveys a Israel Kirzner, Ludwig Lachmann, Murray Rothbard, Hans Sennholz, Percy Greaves, a Dr. Boettke teaches economics at New York University. He would like to thank Mario Rizzo few other professors scattered about small and Edward Weick for helpful comments on an colleges, the staffat FEE, some like-minded earlier draft. . individuals at foundations and institutes like 322 323

Guatemala is home to a Central American Austrian Economics in America: The contingent of Austrian school economists Migration of a Tradition by Karen I. (even a university where the main li­ Vaughn (New York: Cambridge Uni­ brary is the Ludwig von Mises Library!). versity Press, 1994), 198 pages $49.95 Throughout Eastern Europe and Russia, Austrian economists have emerged from the rubble of Communism. Vitali Naishul in Liberty Fund and IHS, and a rag-tag group Moscow, for example, is one of the most of undergraduate and graduate students. thoughtful scholars and political economists Twenty-one years later, Austrian eco­ on the Russian scene. Australia as well nomics is still not on the required reading list boasts a vibrant classical liberal movement at Harvard, but it has experienced great that has been influenced greatly by the growth in terms of thought and influence. works of Mises and Hayek. Formal instruction in Austrian economics Whereas twenty years ago there was no is no longer limited to Grove City College. journal or publisher eager to promote Aus­ Many colleges across the land now offer trian work, today we have the journal Re­ explicitly or implicitly Austrian courses at view of Austrian Economics and the re­ both the undergraduate and graduate level. search annual Advances in Austrian Some two dozen faculty at more than a Economics. There are Austrian book series dozen colleges and universities come imme­ with Kluwer Academic Publishers (The diately to mind, and no doubt many more Ludwig von Mises Institute), Routledge (the would figure on a complete list. Moreover, NYU Austrian Economics Program), and the Ludwig von Mises Institute, with its New York University Press (also the NYU summer "Mises University" program, FEE Austrian Economics Program). Austrian and the New York University Austrian works are not limited to these publishers or Economics Program with their joint Ad­ journals but can be found throughout uni­ vanced Seminar in Austrian Economics, versity press and academic press catalogues and IHS, with its Liberty and Society sem­ (Cambridge, Chicago, Blackwell, West­ inar program, continue to introduce and view, Edward Elgar), and across the eco­ cultivate student interest in Austrian schol­ nomic journals. arship. The growth of interest in Austrian ideas, The Resurgence of has spread well beyond the United States. Austrian Economics Two years ago a conference was held in the Netherlands dealing with the history of In a wonderfully written new book, Aus­ Austrian economics, and in January of 1995 trian Economics in America, Karen Vaughn another conference was held in the Nether­ tells the story of how all of this took place. lands dealing with contemporary Austrian Her task is not so much to tell the institu­ economics. In Germany, Austrian ideas tional and personal story of the resurgence have been influential in the development of of Austrian ideas, but rather to convey to an "evolutionary economics" promoted by other economists the ideas and problems Professor Urlich Witt of the University of (both theoretical and empirical) that came Freiburg. The head of the prestigious Max to define the resurgence in Austrian eco­ Planck Institut for the Study of Economic nomics in the 1970s and 1980s. Her story is Systems in Jena, Professor Manfred Streit, focused exclusively on the U.S. experience has explicit ties to the resurgent Austrian and not the international growth that has school. In Spain, Italy, France, New become evident within the past few years. Zealand, Austria, and England major intel­ She tells an exciting intellectual story of lectual figures are pushing out the Austrian a movement which had by 1974 been "re­ paradigm. In Brazil and Argentina there is duced" to a few professors and a band of a South American Austrian movement, and graduate students, who set about to make 324 THE FREEMAN • MAY 1995 a name for themselves and the ideas they Lachmann, Kirzner, Rothbard were committed to exploring. This is a story of the courage of convictions. Many of the In her book the Lachmann/Kirzner de­ younger scholars took their lumps over the bate takes center stage in the revival of years at the hands of the established aca­ interest in Austrian economics. The late demic traditions of economic scholarship Murray Rothbard plays a vital role in stim­ which were intolerant ofAustrian deviations. ulating the resurgence ofinterest in Austrian Vaughn accurately conveys the spirit of economics, but he quickly disappears from open inquisitiveness that has characterized the intellectual scene Vaughn is interested in the modern resurgence of Austrian ideas. analyzing (see pp. 93-100). This is because Ludwig Lachmann's great contribution to in Vaughn's account, Rothbard declined to modem Austrian economics was to "shake address Lachmann's. argument concerning the tree" so to speak. His willingness to the nature of equilibrium propositions push for the consistent development of within economics. Thus Rothbard-argu­ subjectivist ideas-wherever they might ably the most important intellectual figure lead-forcedthe younger generation ofAus­ in the eyes of the participants at the South trian economists to think hard for them­ Royalton Conference-is strangely periph­ selves about the meaning of market pro­ eral to the foundational internal debate cesses and the relationship of Austrian amongst Austrian economists on the impli­ economics to neoclassical economics. An cations ofconsistently pursuing the subjec­ unintended consequence of this pushing tivist paradigm. While in the late 1960s and by Lachmann was the continued refinement early 1970s the central characteristic of of the argument by Lachmann's colleague young Austrians· was their interest in the and main opponent on several issues of Rothbardian system (including his radical basic economic theory, Israel Kirzner. libertarianism), by the early 1980s modern Vaughn favors Lachmann's position in the Austrian economics was engulfed in a the­ debates over the implications ofsubjectivist oretical controversy in which Rothbard did thought for equilibrium propositions, and not really participate. over the relationship ofAustrian economics While Vaughn admits to her Lachman­ with neoclassical economics. As she states: nian sympathies, it is clear that her position "Despite the daunting nature of the task, I is as much influenced by her South Royalton ultimately side with the Lachmannians, student colleagues-Don Lavoie, Gerald who argue that if Austrian economics is to O'Driscoll, and Mario Rizzo-as by the have a future, it must lead to a complete troika of Professors Kirzner, Lachmann, recasting ofthe organizing principle ofeco­ and Rothbard. nomic theory. Otherwise, it seems inevita­ Vaughn has long endorsed Lavoie's work ble that the ideas of the new Austrians will in comparative systems (she had in fact either fade from view or be absorbed into anticipated Lavoie's argument somewhat in the neoclassical orthodoxy in ways that her 1980 paper in Economic Inquiry). It was Austrians will claim still miss the point" through her suggestion that Lavoieeventu­ (p.9). ally came to publish his dissertation on the It is important to stress that Vaughn, calculation debate as the seminal book Ri­ despite her conclusion concerning the long­ valry and Central Planning with Cambridge term viability of traditional Austrian eco­ University Press (see her own discussion of nomics, does not build a strawman out ofthe the issues surrounding the economic calcu­ more traditional Austrian position. She tries lation argument on pp. 38-61). But Vaughn to deal fairly with Kirzner's subtle under­ also reports in this book how much she has standing of market processes and the con­ intellectually benefited from her association tinual maturation ofthat understanding over with Lavoie on other issues (see pp. 127­ the twenty-year period she is studying (pp. 133). Lavoie's examination of the philo­ 101-103; 139-150). sophical "foundations" ofmodem Austrian THE STORY OF A MOVEMENT 325 economics in the mid-1980s, inspired by more extensively interviews with surviving Lachmann, led him to a position sharply members of Mises' seminar at NYU, or critical of neoclassical economics (in fact, examined the private papers of Austrian Lavoie has since abandoned the confines of economic scholars, to see how Austrian an economics department for the promise of economics was kept afloat during its dark a more intellectually viable interdisciplinary age of the 1950s and 1960s. That kind of social-theory program). Vaughn became in­ history of Austrian economics is yet to be creasingly aware of her own Austrianism written. and persuaded ofthe irreconcilibility ofthat Vaughn, a former president of the His­ position with neoclassical economic theory. tory of Economics Society, certainly O'Driscoll and Rizzo, through their co­ doesn't need a lesson in how to do a history authored book, The Economics ofTime and of economic thought (see her study on Ignorance, provide the other pillar for Locke or her various papers on Menger). Vaughn's understanding of where modern Her decision not to detail the institutional Austrian economics must go to develop history (though she does give each of these further (pp. 133-138; 162-178). O'Driscoll institutes mention and in doing so points the and Rizzo set out to explain what Austrian interested student in the right direction) was economics was to a wider professional au­ due to the nature of her project. Vaughn dience. Their book turned out to be a major wanted to tell the history of modem Aus­ reconstruction of Austrian economics, trian economics through its internal intel­ again inspired by Lachmann. Like others lectual debate rather than through its insti­ within the radical subjectivist camp ofAus­ tutional infrastructure and personalities. trian economics, Vaughn is particularly im­ She uses the history of the 1950s and 1960s pressed with their arguments concerning only to set the stage for the subsequent the potent implications for economic un­ debate (see pp. 62-91). derstanding of the passage of real time, in Vaughn's analysis ofthe potential tension contrast to the sterile treatment of time within Mises' theoretical system is ex­ within more mainstream models of eco­ tremely important in this regard. Mises' nomic life. Human Action presented the reader with a Vaughn readily admits that the theoretical system of thought which was at the same project she associates with modern Austrian time: (1) a radical subjectivist research pro­ economics-the project of developing an gram in economics that demanded a recon­ economics that will deal seriously with the struction of the entire corpus of economic passage of time and. the implications of our science (from methodology to capital theo­ ignorance-is still emerging. The promise of ry), yet was also (2) an example oforthodox a more realistic and relevant economics economics pointing out the errors in the largely remains to be fulfilled. But the ac­ "New Economics" of Keynes and the fal­ complishments made so far, in fields of lacies of Institutionalism and mathematical comparative systems, money and banking, market socialism. What was the connection law and economics, industrial organization, between Mises' consistent development of philosophical economics and pure theory, Carl Menger's subjectivism and his classical bode well for the continued fertility of a liberal political economy? How did Mises reconstructed Austrian economics. differ from other classical liberal econo­ Some readers may have problems with mists, such as the classical economics of this or that aspect ofthe story Vaughn tells, Adam Smith or the contemporary neoclas­ but they would miss the point. If Austrian sical economics of Frank Knight? Does the Economics in America had been an intel­ economic policy wisdom of classical eco­ lectual history ofmodern Austrian econom­ nomics hold after the theory has been re­ ics, then it could have explored more the constructed in light of the subjectivist and archives of institutes like FEE, the Volker marginalist revolution? Highlighting these Fund, IHS, and Liberty Fund, or employed potential tensions within Mises' Human 326 THE FREEMAN • MAY 1995

Action is a major contribution of Vaughn's of the functional significance of economic book and should stimulate further research calculation within capitalist processes of into the relationship between the theoretical production, as elaborated within Kirzner's economics and public policy of Mises. theory ofentrepreneurial discovery, offers a While Vaughn's intellectual task is to conception ofmarket coordination radically summarize the terms of a debate in eco­ different from neoclassical theory, yet pro­ nomic theory, she does go beyond the nar­ vides us with a coherent notion ofeconomic row confines of that project to enliven her order and an alternative standard of eco­ narrative. Being the excellent storyteller she nomic welfare from which to judge states of is, Vaughn gives the reader an excellent the world. Following Lachmann we must glimpse into the main personalities and in­ reconstruct economics along consistently stitutions in the history ofAustrian econom­ subjectivist lines, but as Lachmann himself ics. We get tasty tidbits concerning Mises' said, we must be thankful we have Mises' Vienna and NYU seminar, and firsthand work to aid us in this task. accounts of discussions in the Rothbards' Whatever side one takes on these issues, living room, in the hallways of various one must recognize the importance of conferences, and at the lunch table at Vaughn's book. One of the leading aca­ George Mason University. Stuffy scholarly demic publishers in the scholarly world has conventions may not approve, but this is published a book-length treatment of the interesting reading. The spice does not deter debates which animate modern Austrian from her scholarly project. Vaughn focuses economics. This is a major intellectual on her main task (and accomplishes it to my event, and should be celebrated by all those mind), and yet invites further research into who have an interest in Austrian economics. the history of the subject by expertly whet­ Twenty years after a conference in a little ting our appetite. There is great stuff in this town in Vermont, organized on a shoestring book, material to learn from, disagree with, budget and attended by a small group of and take as a motivation for further explo­ beleaguered professors and interested grad­ ration. uate students, Austrian economics is not Some may be concerned that Vaughn only alive and well, but thriving. sides with the radical subjectivist element Milton Friedman stated at that South within the Austrian movement. Here,I must Royalton conference that there was no such honestly state I am not the best criticaljudge thing as Austrian economics-only good of this issue because my intellectual sym­ economics and bad economics. Well, Fried­ pathies lie with radical subjectivism. Unlike man was right to an extent. But it turns out many of my colleagues within the radical that Austrian economics-seriously grap­ subjectivist wing of modern Austrian eco­ pling with the implications of time and nomics, however, I see within Kirzner's ignorance for economic science, rather than refinements to his market process theory focusing instead on ever more refined exer­ (refinements made in response to the work cises in constrained optimization-provides of Lachmann and of G.L.S. Shackle, and the foundation for a humanistic, logically James Buchanan) strong possibilities ofrec­ sound, and policy-relevant economics. In onciliation between radical subjectivist the end, that is Vaughn's conclusion and ideas and more traditional Austrian argu­ that is something which all the branches ments about the systematic nature ofmarket of modern Austrian economics can processes. In particular, the Misesian view celebrate. D In Memoriam John Chamberlain October 28, 1903-April 9, 1995 He laid down his pen and was gathered to his people. Economics on Trial by Mark Skousen

Did the Gold Standard Cause the Great Depression? "Far from being synonymous with stability, the gold standard itself was the principal threat to financial stability and economic prosperity between the wars." -Barry Eichengreen, Golden Fetters (1992), p. 4

erkeley Professor Barry Eichengreen of Western leaders who blundered repeat­ B has fueled the flames of anti-gold in his edly in re-establishing an international mon­ recent historical work, Golden Fetters: The etary system following the First World War. Gold Standard and the Great Depression, Their mistake was establishing a fatally 1919-1939 (Oxford University Press, 1992). flawed mixture of gold, fiat money, and Essentially, the author argues that (1) the central banking, known as the "gold ex­ internationalgold standard caused the Great change standard," instead of returning to Depression and (2) only after abandoning the "classical gold standard" that existed gold did the world economy recover. The prior to the Great War. book has beenpraised by colleagues, further Eichengreen rightly points out that the dampening enthusiasm for the precious mischief began during the First World War, metal as an ideal monetary system. when the European nations went offthe gold It should be noted at the outset that standard and resorted to massive inflation to Eichengreen, a Keynesian, is extremely pay for the war. Following the Armistice, biased against gold. In 1985, while teaching European nations desired to return to gold­ at Harvard, he edited a collection of essays convertible currencies, but they' created a entitled The Gold Standard in Theory and weak monetary system known as the "gold History (New York: Methuen, 1985), which exchange standard," where currencies were pretends to offer a "complete picture" of pegged primarily to the British pound and how an international gold standard would the American dollar rather than to gold operate, with pro's and con's. Yet he failed itself. The gold exchange standard created a to include a single article by a gold sup­ pyramid of paper claims upon other paper porter! His last chapter, "Further reading," claims, with gold playing a far lesser role. makes no reference to Mises, Hayek, Austrian economists, such as Ludwig von Ropke, Rothbard, Sennholz, Laffer, and Mises and F. A. Hayek, and the American other noted defenders of gold. So much for sound-money school, led by Benjamin objectivity and what MIT professor Peter Anderson and H. Parker Willis, recognized Temin calls''the best collection ofreadings that the fractional-reserve, fixed-exchange on the gold standard available today." gold standard was a recipe for disaster. They Despite his extensive research and his­ predicted an eventual economic crisis under tory, Eichengreen cannot crucify mankind the ,gold exchange standard. upon a cross ofgold. In reality, the blame for Monetary troubles worsened when, in the Great Depression must be laid at the feet 1925, Britain made the fateful error of peg­ ging the pound at the exchange rate that Dr. Skousen is an economist at Rollins College, Winter Park, Florida 32789, and editor ofFore­ prevailed before World War I at $4.86, casts & Strategies, one ofthe largest investment clearly an artificially high rate. As a result, newsletters in the country. For more information Britain suffered a deflationary depression about his newsletter and books, contact Phillips for the rest of the 1920s. Moreover, to help Publishing Inc. at (800) 777-5005. Britain return to gold at the prewar ex- 327 328 THE FREEMAN • MAY 1995 change level, the Federal Reserve pushed gold deserting some countries and piling down interest rates in 1924 and 1927, igniting up excessively in others .. ."1 Because of a fateful inflationary boom in the U. S. monetary stability under the prewar gold Eichengreen blames. the gold standard, standard, Milton Friedman and Anna J. but the real fault lies in Britain's national­ Schwartz conclude, "The blind, unde­ istic zeal to return to gold at an artificially signed, and quasi-automatic working of the high rate. A more sensible solution would gold standard turned out to produce a have been for all European nations, includ­ greater measure of predictability and regu­ ing Britain, to return to gold at a redefined larity-perhaps because its discipline was rate that recognized the increased supply of impersonal and inescapable-than did de­ money and price levels following the war. In liberate and conscious control exercised Britain's case, this would have meant a new within institutional arrangements intended exchange rate of approximately $3.50. to promote monetary stability.,,2 Eichengreen also blames the gold stan­ dard for the monetary crises ofthe 1920s and Was the Depression 1930s, but it was really a gradual movement away, from a genuine gold standard that Inevitable Under Gold? caused the economic debacle of the 1930s. Eichengreen and other gold critics have Eichengreen even admits that the prewar pointed out that in a crucial time period, classical gold standard worked well. He 1931-33, the Federal Reserve raised the writes, "For more than a quarter of a discount rate for fear of a run on its gold century before World War I... the gold deposits. Ifonly the U.S. had not been on a standard had been a remarkably efficient gold standard, the critics say, the Fed could mechanism for organizing financial affairs. " have avoided this reckless credit squeeze (p. 3) Eichengreen attributes exchange-rate that pushed the country into depression and stability and prosperity to international co­ a banking crisis. However, Friedman and operation, but the underlying reason was Schwartz demur, pointing out that the U. S. that industrial nations largely avoided infla­ gold stock rose during the first two years of tion and strictly linked their monetary policy the contraction. But the Fed reacted ineptly. to gold flows during this period. "We did not permit the inflow of gold to The classical gold standard required issu­ expand the U.S. money stock. We not only ers ofmoney to hold sufficient gold reserves sterilized it, we went much further. Our to handle the demands of anyone who money stock moved perversely, going down wished to redeem their currencies into law­ as the gold stock went Up.,,3 ful money. National banknotes and bank In short, even under the defective gold reserves were redeemable in gold coins or exchange standard, there may have been bullion at any time. For example, each gold room to avoid a devastating worldwide de­ certificate issued by the U. S. Treasury con­ pression and monetary crisis. tained the following declaration: "This cer­ How should we solve ourcontinuing mon­ tifies that there has been deposited in the Treasury of the United States of America etary problems? After recounting the cha­ TWENTY DOLLARS IN GOLD COIN payable to otic events between the world wars, Eichen­ the bearer on demand." Although the U.S. green opposes the strict discipline of gold. Treasury did not maintain 100 percent spe­ Amazingly, he calls for more international cie reserves for all its legal obligations under cooperation between central banks, which the classical gold standard, it did hold more even he admits is "weak soup for dinner at than 100 percent reserves to cover its gold the end of a bitter cold day." (p. 398) A certificates. much better solution would be to return the Auburn University economist Leland classical gold standard. D Yeager explains the virtues ofa fully-backed 1. Leland Yeager, "An Evaluation of Freely Fluctuating commodity standard: "Under a 100 percent Exchange Rates," quoted in Mark Skousen, Economics of a hard-money international gold standard ... Pure Gold Standard, 2nded. (Mises Institute, 1988), pp. 81-82. the government and its agencies would not 2. Milton Friedman and Anna J. Schwartz, A Monetary History ofthe United States, 1867-1960 (Princeton University have to worry about any drain on their Press, 1963), p. to. reserves. ... There would be no danger of 3. A Monetary History, pp. 360-61. 329

owe my own independence [to the fact] that I cleared out of every country as soon as BOOKS they started using me for governmental service." Hayek relates that the most intellectually Hayek on Hayek: An Autobiographical stimulating period ofhis life was that part of Dialogue the 1930s he spent at LSE. It was there that edited by Stephen Kresge and Leif his work on the business cycle led him to Wenar prominence as the principal critic of John The University of Chicago Press. 1994.208 Maynard Keynes. When Hayek stood up to pages. $27.50 Keynes'customary attempt to intellectually steamroller younger colleagues, meeting Reviewed by Robert Batemarco him with serious arguments at every turn, he earned the respect of his nemesis. Despite .A. Hayek died in 1992 at the age of92. the close friendship that eventually devel­ F Most readers ofThe Freeman know ofhis oped between the two men, Keynes' intel­ writings on business cycles and political phi­ lectual evaluation of Hayek was no better losophy. But what ofHayek the man? Hayek than''Ofcourse he is crazy, but his ideas are on Hayek, a supplement to the planned 19­ rather interesting." volume Collected Works of F.A. Hayek, Hayek's view of Keynes was no more gives us insight into the life experiences and flattering. He describes Keynes as devoid of turn ofmind that shaped one ofthe premier any knowledge ofeconomic history, even of free-market economists of our time. economic theory other than Marshall's, yet Prominent among the economic concepts supremely confident that he knew more than Hayek brought to light was the idea of the anyone else. As Hayek put it, "He was so market economy as a "spontaneous order." convinced that he was cleverer than all the How fitting this was in light of the unfore­ other people that he thought his instinct told seeable events which impelled Hayek's ca­ him what ought to be done, and he would reer along the circuitous path it traveled. invent a theory to convince people to do it. " Attracted to economics by his experience in Not carrying the day over Keynes was not World War I, cured ofFabianism by Ludwig only one of Hayek's biggest personal dis­ von Mises, drawn to theorizing by his ex­ appointments, but also represented a col­ posure to Wesley Mitchell's "history with­ lapse of effective intellectual opposition to out theory," he ended up forsaking his the inflationary policies that have prevailed youthful fascination with biology. His early ever since. Ironically, Hayek believes that plan to straddle the academic and govern­ the combination of Keynes' sudden death, ment sectors was also derailed by external which accorded him a sort of secular saint­ events-his drawing the attention ofLionel hood that placed criticism of his ideas be­ Robbins and being offered a position at the yond the pale, and his own demonization London School ofEconomics, World War II among academic economists as a result of preventing his return to Austria, and the his Road to Serfdom, finalized Keynes' success of The Road to Serfdom, which at victory. Nonetheless, Hayek confides that the same time reduced his standing among his own belief in the Austrian Business professional economists and led to a posi­ Cycle theory he espoused was strengthened tion at the University ofChicago's Commit­ by subsequent events. tee on Social Thought. Hayek's migration At this point in his career, Hayek tired of from country to country kept him, for the macroeconomics and his professional work most part, out ofthe government sector. He turned to methodology and political philos­ was ultimately thankful for this, having ophy. Conceiving of economics as an em­ theorized "that all economists who serve in pirical science, he deviated from the prax­ government are corrupted as a result.... I eological approach pursued by his mentor, 330 THE FREEMAN e MAY 1995

Ludwig von Mises. However, he never must be under central control has never, to accepted the positivism dominant in the my mind, been denied by any sensible economics profession today, which teaches person"), for instance. that theories derived from false assumptions The narrative is, as one would expect are fine as long as they yield accurate from this type of book, somewhat frag­ predictions. Indeed, his failure to have even mented and occasionally repetitious. Still, attempted to rebut Milton Friedman's Meth­ the editors deserve our gratitude for weav­ odology of Positive Economics, which he ing together as well as they did this melange deemed "in a way ... quite as dangerous of scattered autobiographical notes and in­ a book," as Keynes' General Theory, was terviews into a coherent narrative. Their another major source of regret to Hayek. efforts have accorded us a glimpse into the In some ways, Hayek's method was his prolific mind of a man who, whatever his downfall. In contrasting the mental apti­ compromises, courageously opposed the in­ tudes ofBohm-Bawerk, "the absolute mas­ flationary, socialistic, and redistributive ter of his subject," and Wieser, "a slow spirit of his age. D thoughtful person, to whom nothing was In addition to editing the book review section of simple, ... who hated discussing anything The Freeman, Robert Batemarco is a marketing because he had to give a quick answer," analyst in New York City and teaches economics Hayek makes it clear that he himself more at Marymount College in Tarrytown, New York. resembled Wieser. He adds, "what original ideas I have actually had did not come out The New Unionism in the New Society: of an orderly process of reasoning." Public Sector Unions in the In discussing his own adolescent rejection Redistributive States ofthe Catholic faith into which he was born, Hayek opined that, "if someone really by Leo Troy wanted religion, he had better stick to what George Mason University Press e 1994 e 228 seemed to me the 'true article,' that is, pagese $42.50 Roman Catholicism. Protestantism always appeared to me as a step in the process of Reviewed by Charles W. Baird emancipation from a superstition ... which, once taken, must lead to complete eo Troy, Distinguished Professor of unbelief. " Surely, both Catholics and Prot­ L Economics at Rutgers University, has estants will take exception to different parts written much about the American union ofthis claim. I raise it, however, because of movement-its history, law, economics, a parallel I detect between his rejection of and future prospects. The focus ofhis work the religious orthodoxy of Catholicism and has been the changing nature of unionism the Austrian economic orthodoxy of prax­ here and in other advanced industrial coun­ eology. While in turning away from the tries, especially Canada. In New Unionism latter, Hayek never approached the total he has brought together the analyses of rejection of free-market economics, he did several papers he wrote in the 1980s and the move further in that direction than many early 1990s. This Js an important book, not people realize. This comes through in the just for those ofus who specialize in union­ transcript of a 1945 radio discussion of The ism, but for all who are concerned about the Road to Serfdom reproduced here. Free­ future course of American society. market purists will surely cringe at the Before I get into the substance of the concessions Hayek makes under the admit­ book, with which I enthusiastically agree, I ted pounding he takes from the other pan­ have some minor quibbles. The book con­ elists, one a socialist, the other aNew sists of six chapters, a bibliography, three Dealer: expressing support for a govern­ appendices, and three charts. Although the ment-guaranteed minimum income and cen­ book has a 1994 copyright, it is apparent that tral banking (''that the monetary system the six main chapters were written no later BOOKS 331 than mid-1992. Two appendices are reprints sector union decline was a uniquely Amer­ of articles Troy wrote in 1986 and in 1987. ican disease was debunked by Troy when, in The articles are germane to his theme, but 1990, he demonstrated that the foreign pri­ it would have been useful to update them. vate sector figures were grossly overstated Finally, the entire book suffers from an because they included unions that, in the abundance of typographical errors that United States, would be considered public should have been picked up when the manu­ sector institutions. When Troy applied the script was in proofs. The impression is that same definitions ofpublic and private union­ the production of the book, not its writing, ism that are used in the United States to was a careless, hurry-up job. foreign unionism, he discovered that private Troy's first sentence in Chapter 1 is, "A sector unionism has been declining in other New Society began to evolve during the past advanced industrial countries as much as it generation and its leading characteristic is has been here. Even pro-union academics the redistributive state." Those words now acknowledge that Troy is right on this were, to me, reminiscent of the opening point. sentence of the Communist Manifesto: "A But unionism isn't dead. Government specter is haunting Europe-the specter of employee unionism, the New Unionism, is Communism." The association is not as not only well established in America (only strained as it seems, for Troy's main theme seven states have failed to pass laws that is that government employee unionism promote the unionization of state and local (what Troy calls the "New Unionism") is employees), it is spreading and becoming the principal means by which a "New So­ more and more menacing to freedom. In cialism" has already taken hold, and is 1993, 37.7 percent of all government em­ spreading, in the United States. ployees were unionized. Troy expects that "Old Unionism" (collective bargaining figure to exceed 40 percent by the tum of between private sector employers and their the century. New Unionism already domi­ employees) has long been waning. It nates Old Unionism in Canada, Britain, reached its peak market share of36 percent France, and Italy, and Troy expects the in 1956. In 1993 the figure was 11.2 percent. same to happen here. Conventional labor academics and practi­ Most observers think ofgovernment sec­ tioners used to think of this as a uniquely tor unionism as merely an extension of American "disease" which they attributed private sector unionism. Troy doesn't to the resistance ofAmerican private sector agree. He uses the term New Unionism employers to unionization. As Troy ex­ precisely to suggest that government sector plains in the present book, this conventional unionism is a different, and much more wisdom was wrong on both counts. The dangerous, breed ofunionism. Forexample, decline ofOld Unionism is neither unique to Old Unionism and socialism were antago­ the United States, nor caused by employer nists. Old Unionism wanted to preserve the resistance to unionism. The decline is hap­ free enterprise system and redistribute in­ pening in all advanced industrial countries come from private sector employers to pri­ for two primary reasons. vate sectoremployees. In contrast, the New First, there has been a shift from heavily Unionism promotes what Troy calls the unionized, blue-collar manufacturing em­ New Socialism, or the redistributive state. ployment to largely union-free, high-tech The New Socialism recognizes that govern­ manufacturing and service employment. ment ownership ofthe means ofproduction Second, national and international markets creates poverty for nearly everyone, so it are becoming more and more competitive. advocates private ownership ofenterprises, According to Troy, these two forces will but it seeks the socialization of incomes. reduce the market share ofOld Unionism to New Socialism and its chief instrument, below 7 percent by the year 2000. New Unionism, seek to transfer income The old conventional wisdom that private from the private sector to the public sector. 332 THE FREEMAN • MAY 1995

The New Socialism seeks to create as much alternatives from developing. Moreover, dependency on government, and as large an government employers want the same army of unionized government employees things that government employee unions to carry out government programs and en­ want-bigger budgets, more responsibili­ force government regulations, as possible. ties, and more income transferred from the All in the name of "fairness." private sector to the public sector. That is New unionism was virtually nonexistent why government employers are so much until President Kennedy signed an execu­ more "cooperative" than private sector tive order in 1962 that authorized the for­ employers. It is in their direct self-interest to mation of federal employee unions with cave in to union demands. powers of exclusive representation and Troy is pessimistic about the future of mandatory good faith bargaining. After that, New Unionism and New Socialism. He state after state adopted similar laws, some considers such innovations as term limits, of which even forced government employ­ balanced budget amendments, tax caps, and ees to join, or at least pay dues to, govern­ privatization as possible countervailing ment employee unions. After all, unionists forces, but he doesn't seem to have much argued, a worker is a worker whether he confidence that such measures will be works in the private sector or for govern­ adopted, or, if adopted, that they will be ment. It is unfair for government workers very effective. The only cause for hope, it to be denied the same collective bargaining seems, is the phenomenon of municipal rights that private sector workers have en­ bankruptcy, such as New York City in the joyed since the passage of the National 1970s and again today. Such crises make the Labor Relations Act (NLRA) in 1935. perils of New Unionism obvious to anyone Troy convincingly argues that collective who looks. bargaining in the government sector is ac­ I am more optimistic than he is. Govern­ tually an attack on the sovereignty delegated ment failure and voter cynicism are now to government by the American electorate. widespread and growing. The failures ofthe When a government is forced to bargain, Old Socialism brought it down, I don't see exclusively, with a private organization on why the failures of the New Socialism will the determination of public policy, that not, eventually, do the same. In the mean­ government is no longer sovereign. It no time, books like this one are indispensable longer has a monopoly on the legal use of in the ongoing battle against socialism in all force. Government employee unions be­ its forms. D come a fourth branch ofgovernment whose Dr. Baird, a Freeman contributing editor, is a approval must be obtained before public professor ofeconomics at California State Uni­ policy can be fashioned and implemented. versity, Hayward and Director of the Smith With the growth of New Unionism, voters Center for Private Enterprise Studies. have to share what control over government they have with private organizations called government employee unions. Troy says that a collective bargaining agreement be­ Race and Culture: A World View tween a government employee union and a by Thomas Sowell government employer is like a treaty be­ tween two sovereign powers. New York: Basic Books. 1994. 331 pages. According to Troy the New Unionism $25.00 doesn't have to worry about eventually losing market share the way the Old Union­ Reviewed by John W. Robbins ism has. Government employment is largely immune to competitive market pressures. homas Sowell, a prolific economist and Government monopolizes its activities, and, T senior fellow at the Hoover Institution through regulation, prevents private sector in California, has written an important and BOOKS 333 heretical book on the relationship between quial sense: "a more scientific definition of race and culture-heretical, that is, as race is not attempted." Sowell argues that judged by the prevailing dogmas of social the preponderance of historical evidence science. does not support any theory of inherent Sowell states the obvious, which appar­ racial superiority or inferiority, whether the ently is not at all obvious to many social race be Black, Oriental, Semite, or Cauca­ scientists: there are significant differences sian. He cautions thereader against drawing among cultures; some cultures are in fact unwarranted conclusions from empirical ev­ superior to other cultures; and they are idence, especially statistics: "Vast differ­ superior because some values, skills, habits ences between the economic productivity of of thought and practice, and ideas are su­ peoples from different cultures do not imply perior. All these notions, Sowell says, are that these differences are permanent, much rejected by the social science establishment: less hereditary." "This book challenges many dogmas of More important than any "objective con­ so-called social science, as well as many ditions" are attitudes: "attitudes toward underlying assumptions about racial issues education, toward business, and toward and cultural differences." labor, especially so-called 'menial' labor." Based on extensive travel and research A poor attitude toward productive labor (the hundreds of notes run for 58 pages), has resulted in three-quarters of college Race and Culture is packed with informa­ graduates in India going to work for the tion about races, ethnic groups, migration, government. Schooling-I do not say edu­ conquest, intelligence, slavery, economics, cation-in many countries has imbued the politics, and history. It is indeed a "world graduates with what Sowell calls "a pas­ view," not in the sense of a Weltan­ sionate sense of entitlement." Sowell schauung, but in the sense that Sowell has scorns "self-flattering" ethnic studies, canvassed the world for evidence for his which he finds in many countries, not only thesis-an international view. He believes in the United States. that those who are preoccupied with race What requires explanation, Sowell says, relations in the United States have failed is not the disdain for labor one finds in most to study race relations throughout the world cultures, including Latin America (' 'Work is and recorded history, and thus entertain for dogs and Negroes" is a Brazilian say­ warped and distorted views. His book is a ing), but''the extremely high productivity of badly needed rebuttal to the social science a relative handful ofnorthwestern European charlatans who infest academia. nations and their overseas off-shoots, such In order that he not be misunderstood, as the United States and Australia." Sowell defines his terms immediately in the Sowell is at his analytical best in the preface: by "culture" he means "specific chapter "Race and Economics," explaining skills, general work habits, saving propen­ the economics of the nineteenth-century sities, and attitudes toward education and help-wanted ads that read, "No Irish need entrepreneurship-in short, what econo­ apply"; why the "vicious cycle ofpoverty" mists call 'human capitaL'" He warns us is a myth; why nineteenth-century Ameri­ that''the purpose ofthis book is not to offer can workforces were wholly Jewish or some grand theory explaining cultural dif­ wholly Gentile; and much more. Along the ferences" -and it does not-but to demon­ way he informs us of innumerable and strate the "reality, persistence, and conse­ fascinating details, e.g. , Japanese immi­ quences ofcultural differences." "Culture" grants at the turn of the century were more as Sowell defines it-notgenetic superiority prevalent in agricultural and domestic labor orinferiority, nor objective conditions, eco­ than blacks. nomic forces, or social structures-is what His book is very readable and his style is shapes peoples and history. epigrammatic at times: "The most danger­ Sowell uses the word "race" in a collo- ous kind ofignorance is the· ignorance ofthe 334 THE FREEMAN • MAY 1995 educated"; "The political mobilization of though West's masterful and no-nonsense envy"; "A society can be made ungovern­ study has long been an acknowledged clas­ able by the impossibility of satisfying those sic in its field, it has nonetheless been out of with a passionate sense of entitlement"; print for quite some time-too long, I should "Being wrong may be a free goOq for say, given the continuing topicality of its intellectuals, judges, or the media, but not theme. for economic transactors competing in the No one ever seems to be completely marketplace"; "Respect is earned, not con­ satisfied with the quality of education at ferred. It is not a door prize. Equal respect any given time. Perhaps that is in the nature is a contradiction in terms." of things. Too often, however, the tempta­ On slavery Sowell writes: "The biggest tion arises to invoke state intervention in story about slavery-how the ancient insti­ the educational market in order to improve tution, older than either Islam or Christian­ matters, since it is widely assumed that a ity, was wiped out over vast regions of the free market cannot be relied upon to pro­ earth-remains a story seldom told~" Sow­ duce private educational services of "ac­ ell reports how "the anti-slavery political ceptable" quality in socially "optimal" crusade [that] began among evangelical amounts. Thus, the state is called upon to Christians in eighteenth-century Britain" finance schooling (note that, as West points was wildly successful, even beyond the out, there is a difference between "educa­ dreams ofits founders, William Wilberforce tion" and mere "schooling"), usually in the and Henry Thornton. form of state-managed public school sys­ Sowell's concluding chapter, "Race and terns, for a variety ofreasons: among other History," is, unfortunately, his weakest. He things, public schools are expected to re­ seems fascinated by the influence of geog­ duce crime, produce good citizens, provide raphy on history, although he does not for equal opportunities, and promote eco­ endorse Montesquieu's geographical soft­ nomic growth. Quite a tall order! determinism. Despite ending weakly, Race West examines these and otherarguments and Culture is first-rate: readable, interest­ in painstaking detail, subjecting them to ing, timely, and important. D penetrating and relentless criticism, and Dr. Robbins is Director ofThe Freedom School generally concludes that they are either and Professor ofPolitical Philosophy at College lacking in cogency or based upon faulty ofthe Southwest, Hobbs, New Mexico. interpretations of the evidence. His meth­ odology is eclectic: rigorous theoretical analyses are complemented with careful historical research and a comprehensive Education and the State: survey of the relevant literature, including A Study in Political Economy an excellent chapter on the opinions of the Third Edition, Revised and Expanded classical economists, contrasting especially the views of Adam Smith and John Stuart by E. G. West Mill (it is well to recall, in this regard, that Liberty Fund. 1994. 364 pages. $14.00 West is also a leading Smith scholar, having cloth; $8.00 paperback written the biography Adam Smith-The Man and His Works). Reviewed by Julio H. Cole To be sure, most ofthe historical material is drawn from nineteenth-century British .G. West's Education and the State experience (this edition does, however, in­ Eis an important book on an important clude a new chapter on "The Political Econ­ subject. Liberty Fund has performed a valu­ omy of American Public School Legisla­ able service in sponsoring the expanded tion"), although this does not detract from third edition of this well known analysis of the book's relevance for other times and the economics of state education. Indeed, places. Similar problems are faced by vir- BOOKS 335 tually all societies: Should the state educate Serious thinking on educational policy at all? If so, is a publicly managed school reform cannot really begin until these ques­ system the best possible solution? Does tions are addressed openly and honestly. state education have unwanted and unin­ Education and the State is a bold attempt to tended side effects? In posing these ques­ face these issues. This handsome new edi­ tions I have beenparaphrasing West. Letme tion will help to provide the wide readership now quote him directly: "Has state educa­ it deserves. D tion become a 'necessary' institution simply because it is one of those institutions to Professor Cole teaches economics at Univer­ which we have become accustomed?" sidad Francisco Marroquin in Guatemala.

Letters to the Editor On Nuclear Power markets for the exciting technology they had Concerning Rodney Adams' "The First learned. Even in the nuclear industry, few people Atomic Age" and "Nuclear Power: Our Best have heard much about the Army's program orits Option" by Mike Oliver and John Hospers (Jan­ accomplishments. uary 1995): Both articles totally ignored the U.S. The main point in my article is that technical Army Engineer Reactor Group, formed in 1954 revolutions are led by promoters as much as they and in operation until 1974. This organization are by inventors, engineers, and technicians. The built, operated, and maintained small nuclear success ofa market economy depends on people power plants, both high and low enriched, pres­ who are free to be rewarded for the risks of surized-water, all over the world very success­ challenging the status quo. Market success also fully. They were in existence and operational at depends on those people being allowed to fail. the North and South Poles and in Alaska, Wyo­ Bureaucratic organizations rarely provide the ming, Virginia, and the Panama Canal Zone. This freedom necessary for true innovation. elite group of servicemen proved that small nuclear power plants could operate successfully Assent on Tacit Consent under the most arduous conditions. A good deal I was pleased to see the work of a fellow ofthe technology that companies such as GE and Montanan in your January 1995 issue. Bowen Westinghouse gained in nuclear power plants Greenwood's "Tacit Consent: A Quiet Tyran­ came from that program. ny" was very well reasoned and presented. The inability of our free enterprise system to The idea of tacit consent is, of course, detri­ develop further, what was already proven, will mental to a free government. For years the Left remain one of the great mysteries of our time. has been telling us, "Ifyou live here, and enjoy -DAVID E. GONIER (Retired, U.S. Army) the benefits ofthe state, then you agree to pay the Fredericksburg, Virginia taxes we levy to maintain that state." They've used the idea of tacit consent to justify taxes to Rodney Adams replies: which we would never actually consent. I have a great deal ofrespect for the technical My congratulations to The Freeman for your accomplishments of the Army in their reactor continuing good work, and your success at find­ program. Not only did the Army Engineer Re­ ing insightful new writers, especially local ones! actor Group successfully operate small pressur­ -SENATOR SHARON ESTRADA ized-water reactors in the locations Mr. Gonier Montana State Senate mentions, but they also built and operated the first closed-cycle nuclear heated gas turbine. ML-l, a 300 KW(e) machine designed to be transported to remote communications sites, is a We will print the most interesting and technical ancestor of the machine that Adams provocative letters we receive regarding Atomic Engines, Inc., is marketing. Freeman articles and the issues they raise. I must disagree, however, with his final com­ Brevity is encouraged; longer letters may ment. There is little mystery why the Army's be edited because of space limitations. technology was. never commercialized. No one Send your letters to: The Freeman, FEE, involved with the program, either from the mil­ 30 S. Broadway, Irvington-on-Hudson, itary or from the contractor organizations, ever New York 10533; fax (914) 591-8910. left their organization with the fire to develop new The press is filled with horror stories about higher education in America: college teachers and textbooks that attack Western civilization, administrators who enforce "politically correct" views, and college courses that have no intellectual or spiritual value.

The situation is alarming, but there is some good news about higher education in America. One college-The CSW Freedom School-is swimming strongly against the academic tide toward socialism. "The Freedom School is based upon an idea whose time has surely come. If men are to be free in any society and under any government, that freedom must be solidly based on enduring foundations. In identifying and setting forth these foundations, as well as teaching them to those willing to learn, The Freedom School is set on the right course." Dr. Clarence Carson Bestselling author and educator "To study the laws in nature and revelation, and to induce young minds to abide by these laws-that is the primary task of education. It is the great mission of The CSW Freedom School." Dr. Hans F. Sennholz President, FEE "The CSW Freedom School is unique in its effort to rethink higher education and offers a new generation of Americans the intellectual tools needed to restore American greatness." Former Congressman Ron Paul

Founded in 1962, College of the Southwest is a private, independent four-year liberal arts college based on Christian ideas and principles. College of the Southwest neither seeks nor accepts state or federal financing. It relies entirely on fees paid by students and gifts from those who understand and agree with its philosophy of education. The CSW Freedom School is a new and innovative program of classroom instruction, reading, lectures, conferences, and publications designed to produce free, humane, and civilized individuals.

If you are an adult concerned about the future of higher education in America, or if you are a student looking for a solid education, you will want to participate in building The CSW Freedom School. Please call or write us today for more information. Please send me more information about ~~ The Freedom School. ~ 0°1961.° Name _ The CSW Freedom School Address _ College of the Southwest 6610 Lovington Highway Hobbs, New Mexico 88240 (800) 530-4400