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vincingly challenges the argument that the biases of Book Reviews render their views on economic issues no more credible than those of the general public. He next considers explanations for The Myth of the Rational Voter: why mistaken views inform the typical voter’s deci- Why Democracies Choose Bad Policies sions. Because of the extremely low probability that the by outcome of an election will turn on one vote, voters Press • 2007 • 276 pages • $29.95 have little motivation to become well informed. This has become known as rational ignorance—voters are Reviewed by Dwight R. Lee rational to remain ignorant on most, if not all, issues n one sense, The Myth of the they’re voting on. But Caplan doesn’t think the concept IRational Voter makes a strong case of rational ignorance adequately explains voting behav- for democracy. Bryan Caplan, pro- ior. He argues that rationality requires updating one’s fessor of at George beliefs in response to new evidence or arguments. Even Mason University, argues that 1) by this minimum standard, however, most voters are citizens accurately communicate irrational because they have emotional attachments to their preferences to politicians their political views that make them resistant to oppos- through voting; 2) politicians are ing evidence. This is “” because, responsive to those preferences, Caplan explains, it’s subject to the law of demand.The except that 3) when voter preferences are particularly higher the personal cost of irrationality, the less irra- misguided, politicians will often exert leadership and tional people will be. Unfortunately, the arithmetic of enact policies that deviate somewhat from the citizens’ voting eliminates the personal cost of holding and preferences in socially beneficial ways. But if this is cor- expressing silly beliefs at the polls. So they persist. rect, why does Caplan subtitle his book Why Democra- If most people don’t take the time to become cies Choose Bad Policies? He quickly dispels any informed and their views were random, then informed confusion by letting us know that he believes that while voters would determine the outcomes of elections. But democracy gives citizens most of what they want, most most voters are misinformed in the same way—accord- of what they want is nonsense. ing to the four biases. And with no cost to expressing Caplan discusses four systematic biases in most citi- those biases at the polls, rational irrationality results in zens that lead to harmful policies.These are 1) an anti- voters consistently choosing bad policies. market bias, 2) an antiforeign bias, 3) a make-work My brief review cannot do justice to all the insights bias, and 4) a pessimistic bias. In order, people underes- Caplan pulls from the notion of rational irrationality. I timate how much we benefit from what they see as the particularly appreciated his answer to the question, why uncoordinated pursuit of self-interest and profit; are aren’t policies even worse than they are? Caplan puts suspicious of foreigners and skeptical of claims that we forth a compelling reason for believing that politicians benefit from dealing with them; applaud the creation of often ignore the expressed wishes of their constituents jobs and lament the loss of jobs regardless of the value for the constituents’ own benefit. He also does a nice being produced; and concentrate on economic prob- job responding to the criticism that economists are a lems while underestimating economic successes. bunch of “market fundamentalists.” But couldn’t the typical voter be correct in his biases The only nit I would pick with Caplan is that I and economists wrong in overwhelmingly seeing them think he tries to draw too much of a distinction as errors? Caplan devotes his longest chapter to address- between rational irrationality and “expressive voting” as ing this question with creative use of data from the Sur- developed by Loren Lomasky and Geoffrey Brennan in vey of Americans and Economists on the Economy. I their 1993 book Democracy and Decision. Brennan and won’t attempt to explain Caplan’s analysis, but he con- Lomasky use the arithmetic of voting to explain why

THE FREEMAN: Ideas on 42 Book Reviews people express support for feel-good proposals at the Koch thinks and usually creates successful long-run polls even when aware that they’ll be worse off if those company outcomes. His vision includes running an proposals pass. Caplan praises Democracy and Decision, entrepreneurial meritocracy,a fused and team acknowledging that expressive voting and rational irra- effort, and shrewd reinvesting of earnings for growth. tionality aren’t mutually exclusive, but he distinguishes He has been phenomenally good at that, and this book between the two by claiming that expressive voters is all about his that has made it possible. “know that feel-good policies are ineffective.” Most He calls his system Market-Based Management expressive voters as envisioned by Brennan and (MBM), a unique scientific approach to business Lomasky, however, surely believe the proposals they management rooted in what our author describes favor are worth feeling good about. How common is it as “the Science of Human Action.” The system has to feel good about voting for a proposal you believe is five dimensions: socially harmful? It no doubt happens. A woman voter, • Vision: Determining where and how the business for example, might feel good voting for a woman can- can create the greatest long-term value. didate even if convinced she favors bad policies, but this • Virtue and Talents: Helping ensure that people is surely an exceptional situation.To the extent that it’s with the right values, skills, and capabilities are hired, true, it makes the theory of expressive voting more retained, and developed. general than the theory of rational irrationality. • Knowledge Processes: Creating, acquiring, sharing, That’s a minor quibble. Caplan has written a won- and applying relevant knowledge, and measuring and derful and readable book—one generating new and tracking profitability. impressive insights into political behavior. • Decision Rights: Ensuring the right people are in the right roles with the right authority to make deci- Contributing editor Dwight Lee ([email protected]) is Ramsey Professor at the Terry School of Business, University of Georgia. sions and holding them accountable. • Incentives: Rewarding people according to the The Science of Success: value they create for the business. (He turns Marx How Market-Based Management Built the around by proposing the maxim “From each according World’s Largest Private Company to his ability, to each according to his contribution.”) by Charles G. Koch What Koch has done is to take key insights about Wiley • 2007 • 201 pages • $22.95 what works for an economy and apply them to his business ventures. The MBM prowess of our author on Reviewed by William H. Peterson the firing line is in outthinking and so staying ahead he Science of Success and its of competition, thanks in part to a team of profound T remarkable author bring to manager-thinkers bent on creating “the greatest long- mind a sonnet strategy of Shake- term value.” By establishing a corporate climate that speare:“Let me not to the marriage rewards efficiency and innovation—as the larger econ- of true minds omy should do—Koch has seen his enterprises grow Admit impediments.” and prosper. Meet then corporate thinker, His ideas did not emerge out of a vacuum. Koch entrepreneur, investor, hard-headed cites as particularly important two great books whose visionary,and impediment overcomer, Charles G. Koch. authors were both closely associated with FEE. One Koch, CEO of Koch Industries, Inc., with his rule of was F.A. Harper’s Why Wages Rise; the other, Ludwig highly principled direction, has built the world’s largest von Mises’s Human Action. private firm, a mainly energy enterprise of 80,000 Harper’s book is hailed for spotting the causes employees and $90 billion in annual sales, one that of real, sustainable wage gains. The main cause, invested $21 billion in 2005 to purchase the publicly said Harper, lies in ongoing capital creation, which traded paper and wood giant Georgia Pacific. raises marginal productivity and enables producers

43 MARCH 2008 Book Reviews to bid more for labor and talent. That’s been the history good tips on investing and managing; you can also read of markets and rising living standards over the last his book for a coherent philosophy combining great 300 years. economic insights with the challenges of business. In Human Action Mises showed how a market soci- Contributing editor William Peterson ([email protected]) is the 2005 ety, based on private rights and tightly limited winner of the Schlarbaum Award for Lifetime Achievement in the Study of government, yields civility, peace, and prosperity. Koch Liberty given by the Ludwig von . quotes Mises, whose writings helped inspire the MBM methodology:“The market determines who shall [have what property and who shall do what work]. None of Overdose: How Excessive Government Regulation these decisions is made once and for all; they are revo- Stifles Pharmaceutical Innovation cable every day. The selective process never stops.” by Richard A. Epstein That fact challenges our author constantly. Press • 2006 • 271 pages • $30.00 No one picks winners all the time, though. In an Reviewed by George C. Leef appendix, Koch lists over 40 businesses exited by his firm. Included are tankers, drilling rigs, Canadian ver the course of his distin- pipelines, service stations, and telecommunications. Oguished career in the law, That is much exiting, and in most cases from profitable Professor has done operations. But why quit a profitable business? Because as much as anyone to show how profitability is not enough. Profitable investments can bad laws and regulations are harm- tie up precious capital otherwise available for better ful, both to and to the returns elsewhere, precluding creating “the greatest fabric of society. He has tackled a long-term value.” wide array of subjects, from the Koch here reminds us that opportunity cost is the misinterpretation of the Constitu- value of the best alternative that must be forgone to tion to the attack on property rights, and with his cur- undertake any investment. So he counsels that “we rent book, Overdose, Epstein applies his talents to the must look forward rather than backward” when extremely important topic of pharmaceuticals. He gives calculating that cost in the face of ever-new dynamic the reader a comprehensive look into the process of conditions to beat. bringing a new drug to market, carefully detailing the Our author also says that individuals, nations, and numerous obstacles the federal government puts in the organizations such as Koch Industries should seek their way at each stage. “comparative advantage” in a world of changing tech- Epstein concludes that, far from protecting con- nology and markets, and so concentrate on producing sumers, current regulation of the drug industry unnec- goods and services in which each “has the greatest essarily drives up costs and impedes development. relative superiority” (my italics). This is the stuff of What we need, he argues, is a consistent policy of liber- Econ 101, but it’s amazing how many high-ranking alization. But he ominously suggests that instead we are people in the business world seem to forget basic eco- apt to venture even further into the morass of political nomic principles. meddling with this vital industry. Relativity, teamwork, benchmarking, capital cre- Americans today live longer, healthier lives due in ation, capital maximization, improving talent or human large measure to the wonderful advances in drugs over capital, insighting-outlooking macro-micro profit cen- the past century.Most people assume that such progress ters, and, above all, ever achieving that rising value cre- just happens automatically, but Epstein shows that ation—all mark Koch’s MBM road to success. pharmaceutical progress cannot be taken for granted. Charles G. Koch defines “the science of liberty” as: It depends on property rights, incentives, and freedom. “How societies can best achieve long-term peace, civil- Unfortunately, drug companies are tempting political ity, and prosperity.” You can read his book for a lot of targets and a large number of people seem to think that

THE FREEMAN: Ideas on Liberty 44 Book Reviews these golden geese will continue laying eggs no matter would be shared among all injured claimants if the case how they’re treated. Epstein takes us through intellec- were proved. Epstein cautions that there is no perfect tual-property issues, R&D issues, pricing, marketing, solution here, but we need to find the best alternative safety,and liability issues, always detailing the ways gov- to our badly flawed system. ernment policy works against the interests of people Epstein concludes with a devastating critique of the who benefit from (or could benefit from) drugs. faddish demands that the federal government socialize Some of his analysis will probably be familiar to the entire market for drugs. “Relentless populism has Freeman readers. We learn, for example, that the Food led to recriminations and sanctions that have already and Drug Administration’s testing regime does more crippled the industry,”he writes. The best course for us harm than good by screening out many potentially to follow, Epstein shows, is to remove the many legal beneficial drugs from legal use in America because they obstacles to drug safety and innovation. haven’t been proven safe and effective to the satisfaction Overdose should be on your reading list if you want of agency officials. Those officials tend to err on the to be able to combat the incessant cries from the anti- side of caution since, from their point of view, the capitalist crowd that “Life could be so much better if visible harm that occurs when someone is hurt by tak- only the government would do X,” where X in this ing an approved drug is far worse than the invisible case is controlling or even taking over the pharmaceu- harm that occurs when people can’t obtain a drug that tical companies.You should read Overdose if you want could save them. While this line of analysis has been to combat the view that the government should control made many times, Epstein elucidates it with particular or take over the pharmaceutical companies. Just as the clarity. Noting that some drugs the FDA blocks could works best in all other industries, so would be lifesavers, he writes, “If there were ever a life-and- it in this one, if only the politicians would let it. death situation where collective choice is inappropriate, this one is it.” George Leef ([email protected]) is book review editor of The Freeman. Other aspects of Epstein’s case against the regulatory Knowledge and the Wealth of Nations: status quo will probably be less familiar. His lawyerly A Story of Economic Discovery analysis of the swamp of tort liability faced by drug by David Warsh companies gets at the heart of the matter. The United Norton • 2006 • 426 pages • $27.95 hardcover; States has trashed the law of in this area, $16.95 paperback leaving firms entirely at the mercy of tort lawyers and Reviewed by Donald Boudreaux their well-honed expertise in jury selection and manip- ulation. “The one conclusion that clearly stands out,” he work that launched eco- Epstein writes, “is that no legal system can afford to Tnomics as a distinct discipline try complex matters before a jury even one time, is Adam Smith’s An Inquiry Into the let alone ten thousand times.” He suggests several Nature and Causes of the Wealth of ways of improving on the current situation, which Nations. Note well the title, espe- greatly resembles a game of Russian roulette for the cially the first eight words that typ- drug companies. ically are left off when people One way would be to establish specialized courts mention this book. and expert juries as the venue for trials over pharma- That great Scottish scholar ceutical liability, thus minimizing the chances for plain- inquired into the nature and causes of prosperity. tiff attorneys to sway juries of common people with Worded only slightly differently, Smith asked, “What junk science and emotional appeals. Another would be causes economic growth?” His inquiry brilliantly iden- to bypass tort litigation and have all cases of alleged tified as the chief proximate cause of prosperity the consumer harm due to a drug be handled by a special division of labor. The jack of all trades becomes a mas- federal prosecutor, with a cap on total damages that ter of none. So a world full of jacks is poor. But let each

45 MARCH 2008 Book Reviews of those jacks specialize at performing a distinct task, Wealth of Nations, economics reporter David Warsh does and the same number of workers can produce a much a fine job of telling it. Although Romer is the central greater quantity of output than they could produce character in the book, Warsh’s summary of the eco- when each was a jack. nomic theory of growth from Adam Smith’s day to our A fuller account of this wealth-creation process, of own is wonderfully clear. Indeed, in my opinion this is course, must be told. Smith himself told much of it, as the best part. did David Ricardo and lots of—well, some—econo- And while I heartily recommend this book to mists over the past 230 years. those who are curious about what economists now say The sorry fact is that, for all its contributions to our about the causes of the wealth of nations, I must regis- understanding of economy and society, economics has ter a few complaints. only recently returned in a serious way to the Smithian My biggest complaint is of Warsh’s portrayal of the question of economic growth. For most of its history, economics profession. He portrays economists as being economics has revealed the logic of allocating a given more unified in our interest in pioneering ideas than stock of resources to satisfy a given set of consumer we really are. I remember well the attention Romer’s demands with a given stock of knowledge. The eco- important papers of 20-odd years ago received from the nomics of growth—or what came to be called develop- profession, but no more than a tiny handful of econo- ment economics—suffered. All too true was a remark mists eagerly awaited the next conference or paper dis- I heard the late Fritz Machlup make in 1981 at New cussing new-growth theory. Economics, for better or York University: “[D]evelopment economics attracts worse, is now a highly specialized discipline. It’s the the least developed economists.” too-rare expert in urban tax policy who has interest Unknown to Machlup and his students (and to most enough to follow exciting developments in labor eco- economists at the time), a turnaround was underway. nomics or even the economics of growth. Its leader was a young named Paul Romer Relatedly, Warsh makes the development of new- from the . Romer (now at Stan- growth theory appear to be much more self-conscious ford) is no typical Chicagoan. And what makes him than it really was. For example, some work of my least typical of that school is his recognition that exter- colleague — nalities exist and often matter. work critical of one of Romer’s papers—is mentioned Externalities are effects of voluntary activities that in the book as playing a noteworthy role in fashioning spill over onto persons who are not party to the agree- the emerging theory of development. When I asked ments that give rise to the activities. These effects can Cowen his thoughts on Warsh’s description of this be negative (as when a factory dumps soot on the work, he replied that he wasn’t really aware at the time homes of nearby residents) or positive (as when a light- (contrary to Warsh’s suggestion) that he was helping to house guides whatever ships pass by). So-called “new- advance new-growth theory. growth theory” builds on the latter by explaining how Warsh also jumps to conclusions too quickly. He capital goods and human capital not only increase writes, “The need for technology policy is the workers’ productivity, but also that this increase in pro- inescapable conclusion that emerges from” the new- ductivity often occurs at a faster rate as more capital growth theory. Well,here’s an escape: this theory, for all goods and human capital come into existence.That is, of its usefulness, is not also a theory of government. To the productivity of existing assets often increases as assume that politicians and bureaucrats can know these are combined with additional assets. Such assets, enough to craft an appropriate “technology policy,”and then, are said to produce “increasing returns”—which are trustworthy enough to carry it out, is a fantastic means that their rate of output (say, per worker) stretch—one that mars an otherwise useful book. increases when they are combined with other assets. Donald Boudreaux ([email protected]) is a professor of economics at The story of the development of new-growth the- George Mason University, a former FEE president, and the author of ory is not straightforward. But in Knowledge and the Globalization (Greenwood Press).

THE FREEMAN: Ideas on Liberty 46