ON LIBERTY November 2003 Vol. 53, No. 10

FEATURES

8 The Economics of Spam by Christopher Westley

10 Business Under German Inflation by Ludwig von Mises

14 Healers Under Siege by Doug Bandow

19 Understanding "Austrian" Economics, Part 2 by Henry Hazlitt

24 Rent-Seeking: A Primer by Sanford Ikeda

29 Grutter v. Bollinger: A Constitutional Embarrassment by George C. Leef

33 Global Warming: Extreme Weather or Extreme Prejudice? by Christopher Lingle 37 The Fallacies of Distributism by Thomas E. Woods, Jr.

4 FROM the PRESIDENT—-The Great German Inflation by Richard M. Ebeling ««««

17 THOUGHTS on FREEDOM—Oblivious to the Obvious by Donald J. Boudreaux

27 PERIPATETICS—Canute's Courtiers Were Wrong by Sheldon Richman

35 OUR ECONOMIC PAST— How the Federal Government Got into the Ocean-Shipping Business by Robert Higgs

47 THE PURSUIT of HAPPINESS—-People Before Profits by Walter E. Williams

DEPA RT/V\ E NTS 2 Perspective—Weighing In by Sheldon Richman

6 Massive Foreign Aid Is the Solution to Africa's Ills? It Just Ain't So! by William Thomas

42 Book Reviews Adam Smith's Marketplace of Life by James R. Otteson, reviewed by Robert Batemarco; The Great Tax Wars: Lincoln to Wilson—The Fierce Battles over Money and Power that Transformed the Nation by Steven R. Weisman, reviewed by Burton W. Folsom, Jr.; Pieces of Eight by Edwin Vieira, Jr., reviewed by George C. Leef; Terrorism and Tyranny: Trampling Freedom, Justice, and Peace to Rid the World of Evil by James Bovard, reviewed by Richard M. Ebeling. Published by The Foundation for Economic Education IDEAS Irvington-on-Hudson, NY 10533 Phone: (800) 960-4FEE; (914) 591-7230 PERSPECTIVE ON LIBERTY Fax: (914) 591-8910; E-mail: [email protected] FEE Home Page: www.fee.org Weighing In President: Richard M. Ebeling Last spring the Arkansas legislature passed Editor: Sheldon Richman a law requiring schools to compute each stu­

Managing Editor: Beth A. Hoffman dent's body mass (using the Body Mass Index, BMI) and record it on report cards. Editor Emeritus Paul L. Poirot The BMI generates a number based on a per­

Book Review Editor son's height and weight, and is supposed to George C. Leef indicate something about one's health. How­

Columnists ever, it's been criticized for not distinguish­ Charles W. Baird Robert Higgs ing between fat and muscle. A few years ago Donald J. Boudreaux Lawrence W. Reed Stephen Davies Russell Roberts the government revised the index, and 30 Burton W. Folsom, Jr. Thomas Szasz million people woke up overweight. Accord­ Walte. Williams ing to the Center for Consumer Freedom Contributing Editors (www.consumerfreedom.com/game_fatchart Doug Bandow Dwight R. Lee .cfm), the new BMI has these people as over­ Norman Barry Wendy McElroy Peter J. Boettke Tibor R. Machan weight or obese: Sylvester Stallone, Arnold James Bovard Andrew P. Morriss Schwarzenegger, Bruce Willis, Michael Jor­ Thomas J. DiLorenzo Ronald Nash Joseph S. Fulda Edmund A. Opitz dan, and me (5 feet, 7 inches, and 158 Bettina Bien Greaves James L. Payne pounds). John Hospers William H. Peterson Raymond J. Keating Jane S. Shaw For Ideas on Liberty the issue, of course, is Daniel B. Klein Richard H. Timberlake Lawrence H. White not the questionable validity of the BMI; it's the propriety of a law requiring agents of the Foundation for Economic Education state, government teachers, to keep track of Board of Trustees, 2003-2004 the body mass of students who are com­ David Humphreys Paige K. Moore Chairman Secretary pelled to attend school. Frederick C. Foote Dan Grossman At FEE it's our policy not to tell the gov­ Vice Chairman Treasurer ernment how to run its schools. We just think no one should be forced to attend or Henry M. Bonner Jane M. Orient, M.D. pay for them. Nevertheless, the Arkansas law Lloyd Buchanan Tom G. Palmer Walter LeCroy Andrea Millen Rich is instructive. Education historians have long Roy Marden Sally von Behren known that government did not get into edu­ Kris A. Mauren Guillermo M. Yeatts cation because the private sector couldn't handle it. The education market was vibrant Ideas on Liberty (formerly The Freeman: Ideas on Liberty) is pub­ lished by The Foundation for Economic Education, Inc., Irvington- and accessible to rich and poor in the days on-Hudson, NY 10533. FEE, established in 1946 by Leonard E. before "public education." Government got Read, is a non-political, educational champion of private property, the free market, and limited government. FEE is classified as a 26 USC itself involved because it was the obvious 501(c)(3) tax-exempt organization. way to conduct grand social engineering. Copyright © 2003 by The Foundation for Economic Education. Permission is granted to reprint any article in this issue, provided The American architects of the Prussian- credit is given and two copies of the reprinted material are sent to inspired "common school" promised to cre­ FEE. The costs of Foundation projects and services are met through ate a new and improved society—to eradi­ donations, which are invited in any amount. Donors of $39.00 or cate crime and sin—by replacing the more receive a subscription to Ideas on Liberty. For delivery outside the United States: $54.00 to Canada; $64.00 to all other countries. influence of vicious, slothful parents with Student subscriptions are $10.00 for the nine-month academic year; that of enlightened state-trained educators. $5.00 per semester. Additional copies of this issue of Ideas on Liberty are $4.00 each. Physical fitness was part of the program, Bound volumes of The Freeman and Ideas on Liberty are available along with a curriculum of social studies that from The Foundarion for calendar years 1972 to 2001. The magazine is available in microform from University Microfilms, 300 N. Zeeb portrays expanding government power as Rd., Ann Arbor, MI 48106. benign and the voluntary sphere as ever threatening.

2 This matter confirms another warning of one thinks of Ludwig von Mises, the great those (notably Thomas Szasz) who see dan­ theorist and an adviser to FEE founder ger in the union of health and state. "We are Leonard E. Read. In the second installment facing a crisis in this country and in of a classic reprint, legendary economic jour­ Arkansas with obesity," State Senator Sue nalist Henry Hazlitt explores the contribu­ Madison said. "I realize this is seeming like tions of Mises and later generations of Aus­ a huge invasion of privacy but there is a con­ trian writers. cern because of the health crisis and to some The term "rent-seeking" is often used in extent that crisis will be [borne] by the tax­ discussions of public policy from a free- payers in the future." market perspective. Sanford Ikeda con­ Everyone who believes that government tributes a primer on subject. can pay for medical care without serious The U.S. Supreme Court had handed down consequences for liberty can now take stock. landmark decisions on affirmative action at All kinds of restrictions on our freedom and state colleges and universities. George Leef privacy—and all impositions on our chil­ provides a tour of the court's reasoning. dren—can be defended as ways to save the Even though little is known about what taxpayers money. Fiscal responsibility has causes climate change, an awful lot of people been enlisted in the cause of statism and col­ "know" what to do about it. Christopher lectivism. That was the rationalization for Lingle advises caution. the states' suits against the tobacco industry. A group of critics of laissez faire called It will be used to justify suits against fast- themselves "distributists." Concerned with food restaurants and who knows what else? the insecurities in the marketplace, they The moral: there is no innocuous use of offered a philosophy with some surface aggressive force. appeal. Thomas Woods goes beneath the surface. Columns this month: Richard Ebeling Spam may be okay for breakfast, but few looks back at the German hyperinflation. people want it flowing into their computers Robert Higgs examines the federal govern­ all day. Must we look to government to save ment's venture into the shipping industry. us? No, says Christopher Westley. Donald Boudreaux looks at population fal­ Ludwig von Mises, in a 1946 reprint, ana­ lacies. Walter Williams praises the social role lyzes the effect of the Great German Inflation of profit. And William Thomas, hearing the on business. argument that Africa's future depends on For some strange reason, the people who handouts from wealthy Americans, replies, make life-saving drugs are under assault. "It Just Ain't So!" Doug Bandow asks us to consider what This month's book reviewers meditate on things would be like without the pharma­ Adam Smith, the income tax, money, and ceutical companies. the war on terrorism. When one thinks of Austrian economics —SHELDON RICHMAN

3 ftp** ^C3^ Cl'il^ni ^Ez^* ft f M dZ."ft ^C2z^jr*ni Cl' by Richard M. Ebeling IDEAS ON LIBERTY NOVEMBER 2003

The Great German Inflation

ighty years ago this month, on Novem­ During the four years of war, from 1914 ber 15, 1923, the Great German Infla­ to 1918, the total quantity of paper money tion came to an end when the monetary created for government and private-sector printing presses were finally shut down. spending went from 2.37 billion to 33.11 EThe German people had gone through nine billion marks. By an index of wholesale years of ever-greater monetary expansion, prices (with 1913 equal to 100), prices had ever-more soaring prices, the financial increased more than 245 percent (prices failed destruction of much of the society's middle to increase far more due to wartime con­ class, a massive misdirection and squander­ trols). In 1914, 4.21 marks traded for one ing of the country's productive capital in an dollar on the foreign exchange market. By illusionary economic boom, and the ruin of the end of 1918, the mark had fallen to 8.28 much of Germany's social fabric. The infla­ to the dollar. tionary madness ended in a virtual total col­ But the worst was to come in the five years lapse of the German mark. following the war. Between 1919 and the The German inflation began—as many end of 1922 the supply of paper money in other inflations have begun throughout his­ Germany increased from 50.15 billion to tory—through the government's turning to 1,310.69 billion marks. Then in 1923 alone the printing press to finance its war expendi­ the money supply increased to a total of tures. Almost immediately after the start of 518,538,326,350.00 billion marks. By the World War I, on July 29, 1914, the German end of 1922 the wholesale price index had government suspended all gold redemption increased to 10,100 (still using 1913 as a for the mark. Less than a week later, on base of 100). When the inflation ended in August 4, the German Parliament passed a November 1923, this index had increased to series of laws establishing the government's 750,000,000,000,000. The foreign-exchange ability to issue a variety of war bonds that rate of the mark decreased to 191.93 to the Reichsbank—the German central bank the dollar at the end of 1919, to 7,589.27 to —would be obliged to finance by printing the dollar in 1922, and then finally on new money. A new set of Loan Banks was November 15,1923, to 4,200,000,000,000.00 created to fund private-sector borrowing, as marks for one dollar. well as state and municipal government bor­ During the last months of the Great Infla­ rowing, with the funds for the loans simply tion, according to Gustav Stolper, "more being created by the Reichsbank. than 30 paper mills worked at top speed and capacity to deliver notepaper to the Reichs­ Richard Ebeling ([email protected]) is the president bank, and 150 printing firms had 2,000 of FEE. His latest book is Austrian Economics and presses running day and night to print the the Political Economy of Freedom (Elgar). Reichsbank notes."

4 But these statistical figures do not tell the process again, he found that the costs of human impact of such a catastrophic col­ resources and labor had also dramatically lapse of a country's monetary system. In his increased. What had looked like a profit was book, Before the Deluge: A Portrait of not enough to replace the capital used up Berlin in the 1920s (1972), Otto Friedrich earlier. writes that "By the middle of 1923, the The distorted relative-price signals during whole of Germany had become delirious. the inflation resulted in misallocations of Whoever had a job got paid every day, usu­ capital and labor in various investment pro­ ally at noon, and then ran to the nearest jects that were found to be unsustainable store, with a sack full of banknotes, to buy and unprofitable when the monetary anything that he could get, at any price. In debauchery finally came to an end. Thus a their frenzy, people paid millions and even "stabilization crisis" followed the inflation, billions of marks for cuckoo clocks, shoes as capital and investment projects were left that didn't fit, anything that could be traded uncompleted because of a lack of available for anything else." The price of a cup of cof­ real resources, and workers faced a period of fee would double in the time that a customer unemployment as they discovered that the took to drink it in a cafe. jobs the inflation had drawn them into had Food supplies became both an obsession now disappeared. The consumption of capi­ and a currency. The breakdown of the tal and the misuse of resources and labor medium of exchange meant that the rural during the years of inflation left the German farmers became increasingly reluctant to sell people with a far lower real standard of their agricultural goods for worthless paper living, which only years of work, savings, money in the cities. Urban dwellers streamed and sound new investment could make up back to the countryside to live with relatives for. in order to have something to eat. Anything Unfortunately, Germany's economic and everything was offered and traded recovery in the middle and late 1920s turned directly for food to stave off the pangs of out to be an illusion as well. A game of hunger. financial musical chairs was played out, in which Germany borrowed money from the Illusionary Boom United States to pay off reparations to the victorious Allied powers, as well as to fund a The inflation generated a vast and illu­ vast array of municipal public-works pro­ sionary economic boom. In his classic study, jects and government-sponsored business The Economics of Inflation (1931), Con­ investment activities. These all came crash­ stantino Bresciani-Turroni detailed how the ing down, too, when the boom of the 1920s inflation distorted the structure of prices and turned into the Great Depression of the wages, generating paper profits that created 1930s. It also set the political stage for Adolf a false conception of wealth and prosperity. Hitler's rise to power in 1933. Austrian economist Ludwig von Mises was The current confidence that inflation the first one to emphasize this aspect of the seems to be a nonexistent or minor problem inflationary process. (See Mises's 1946 is an illusion also. The same political ideas analysis on page 10.) As the selling price of and institutions that resulted in such mone­ a manufactured good was pushed far above tary madness in the past still exist in the the cost of production, profits appeared world today. Only a change in political- huge. But when the manufacturer went back economic ideas can assure that it does not into the market to begin his production happen again. •

5 ONIDEA LIBERTS Y NOVEMBER 2003

Massive Foreign Aid Is the Solution Having been a counselor on conversion to capitalism to ex-communist governments to Africa's Ills? (most notably Russia), Sachs is now director of a sustainable-development center called "The Earth Institute" at Columbia Univer­ sity. He is also an adviser to UN Secretary General Kofi Annan. He has become a lead­ It Just Ain't So! ing opponent of the free market and a cheer­ leader for foreign aid. His thinking seems to follow this general line: Capitalism and tech­ nology are good things, but any real resident Bush traveled to Africa in July. progress in the world calls for international Those sympathetic to the President might governmental solutions. In the case of epi­ Psay he went to show his charitable con­ demic disease in Africa, Sachs's preferred cern for the problems of Africa and his sin­ solution is massive funding for the Geneva- cere care for the downtrodden of the world. based "Global Fund to Fight AIDS, Tuber­ But a less rose-tinted view might have shown culosis and Malaria," to the tune of up to an unprincipled but skillful political machine $8 billion per year from the United States bolstering its image among centrist "liber­ alone. als" and gamely trying to chip away at the An aunt of mine who was an unrecon­ Democratic Party's lock on black voters. structed New Dealer used to say to me: "The Whatever the motivations of the adminis­ problem with the poor is that they don't tration, the trip brought the partisans of have money." This seems to be Sachs's view American engagement in Africa out into the of the needy in Africa: the only thing that media spotlight. The president had thrown a keeps them sick is a lack of medicine, and bone to the foreign-aid community with his they only lack medicine because they are surprising endorsement of a $3 billion-a- poor. Sachs puts it this way: "If rich coun­ year package of AIDS-fighting measures for tries contributed a total of around $25 bil­ Africa in his State of the Union address. Far lion per year [to fight disease in the Third from sated with this forced donation from World], the increased investments in disease U.S. taxpayers, the international aid bureau­ prevention and treatment could prevent cracies have finally gotten a taste of red around eight million deaths each year in meat, and they want more. poor countries throughout the world." How much more? One of the most My aunt was right that the poor lack notable calls for aid for Africa that emerged money. Any poor person could be made from this time was "A Rich Nation, a Poor richer—at least temporarily—by a handout. Continent," an op-ed by economist Jeffrey And Sachs is right that in African countries Sachs in the New York Times. Sachs where AIDS runs rampant, the sick lack sketches the truly terrible conditions in medicines and too many don't practice safe which many Africans live: life expectancy "is sex. Enough medicine and education could less than 50 years in most of Africa, and less have a real impact, extending lives and than 40 years in some of the AIDS-ravaged encouraging people to act more prudently. countries. Until the pandemics of AIDS, But Sachs is wrong to think that Africa's tuberculosis, malaria and other killer dis­ problems are essentially medical or financial. eases are brought under control in Africa, He is wrong to emphasize charity at the economic development and political stability expense of focusing on the real needs of will remain crippled." Africa: rational culture, justice, and capital-

6 ism. And he, along with the Bush adminis­ dangerously out of kilter when a few hun­ tration, is wrong to think that wealthy coun­ dred people in the United States command tries or wealthy people bear a responsibility more income than 166 million people in for the health or welfare of others to whom Africa." they are unconnected by any significant ties. The world is out of kilter, but not in the My aunt ignored the fact that lasting way Sachs means. Americans who have poverty has roots in culture and incentives. earned great wealth through their productiv­ Handouts don't eliminate poverty; too often ity are not vultures who prey on the poor. they help entrench the habits that perpetuate The world's poor are generally poor or sick poverty. For his part, Sachs ignores the fact or hungry for reasons that have nothing do that Africa's crisis has roots in gangster pol­ with the businesses that make Americans itics, irrationalism, and collectivism. No rich. In fact, having nothing to do with African country ranks among the 35 freest in American-style capitalism tends to keep peo­ the world, as objectively measured in Eco­ ple poor, and it is corrupt, intrusive govern­ nomic Freedom of the World 2002. In fact, ments that keep them out of contact with the several countries in Africa are among those free market. (It is no accident that some of with the least economic freedom and the the best health care in Africa is that provided most capricious legal environment. These by big corporations for their local employ­ include Zimbabwe, Guinea-Bissau, and both ees.) What is out of kilter is the political cul­ Congos. It is no accident that these are some ture of Africa, not the fact that Americans of the poorest and most miserable countries and other mostly free people can acquire or in the world. It is misgovernment—not AIDS possess great wealth. or any other disease—that has ruined these There is nothing wrong with people giving countries. When Sachs urges support for the some of their money away to help others. Global Fund, he is calling, in effect, for But when they do so, be they richer or the support of a new hyper-bureaucracy of poorer, they should make sure that they are foreign-aid experts and for open-ended sup­ really helping those in need, and not just port of the very regimes that are to blame for throwing good money after bad into the pit Africa's crisis. It precisely to accommodate of cultural and political corruption. The rich corrupt and ineffective regimes that the certainly do not owe the world an apology Global Fund is at pains to describe itself as a for what they have, and they are not respon­ funding supplement to existing government sible for all the terrible problems that people programs. find themselves in. The health situation in Africa is a terrible shame. But the shame is not America's. A Matter of Morality —WILLIAM THOMAS Ultimately the case here is moral. Sachs ([email protected]) wants the top 400 earners in the United Senior Fellow for Objectivist Studies States to give up 10 percent of their income The Objectivist Center to the Global Fund. He argues "our world is Poughkeepsie, New York

7 IDEAS ON LIBERTY NOVEMBER 2003

The Economics of Spam

by Christopher Westley

hat's the matter with the Internet? mer of 2002. It is now approaching 50 per­ I used to love it, at least the part of cent of all e-mail traffic. Spam makes up 70 it that brought e-mail. One of the to 80 percent of all incoming e-mail to W highlights of my day used to be America Online's servers and 40 percent to Outlook Express's friendly tone announcing Earthlink's network. that another e-mail had arrived in my The economics of spam explain its perva­ inbox. Then I would stop what I was doing siveness. Once a spamming system is set up, to see which friend or colleague was check­ the marginal cost of sending an unsolicited ing in, or what requested information had e-mail is virtually zero. As a result, the small­ arrived. est of response rates can make the process Those were my glory days of e-mail. I miss profitable. The rule of thumb is that while them. Nowadays, it seems that for every ten old-fashioned junk mail sent via the post e-mails I receive, eight are unsolicited sales office requires a response rate of 1 in 100 to pitches, also known as spam. And of those be profitable, spam mail requires a response eight, half offer samples of crude and rate of 1 in 100,000. This greatly increases dehumanizing porn. As a result, I never check its appeal as a marketing tool. my e-mail when my children are nearby. For instance, a recent story in the Fort Though I once wrote in praise of e-mail, I Worth Star-Telegram reported on an Inter­ now consider it a mixed bag. A couple of my net marketer who mailed ten million e-mails friends have forsworn it entirely, having a day offering eavesdropping software for decided that the costs outweigh the benefits, $40. His annoying efforts result in 50 orders and it is hard not to agree that they have a a day, allowing him to earn $700,000 a year. point. There have always been the good and Not bad for a response rate of only the bad aspects of e-mail, but it seems that 0.000005 percent. Following the law of sup­ lately, based on my own inbox and my ever­ ply, his success only signals other spammers growing list of filtered terms, the bad aspects to enter the industry, which is an extremely seem to be trumping the good. easy process. Anyone with a computer and My experience reflects the national trend. an e-mail account can enter. According to the Wall Street Journal, the The result is a reduction in the appeal of amount of spam as a proportion of all e-mail an otherwise remarkable medium. After all, on the Internet increased by 350 percent how many people would watch TV if the between the summer of 2001 and the sum- networks only showed commercials? The disgust is growing, and the politicians are Christopher Westley ([email protected]) teaches listening, as evidenced by a recent "Spam economics at Jacksonville State University. Forum" conducted by the Federal Trade

8 Commission and several bills working their right to solicit their wares. In fact, their pay­ way through both houses of Congress. This ment could result in zero-price e-mail and is a bad combination of events. web access for the non-marketers who use It is bad because solutions to problems the system, thus funding it much like broad­ such as these are ineffective, cannot be legis­ cast television networks. The provider of lated, and will result in enriching offshore such intranets could regulate who spams and enterprises. In the aftermath of 9/11, the how much. Such a solution is technologically government has made clear its desire to reg­ feasible now, although not yet practical. But ulate many forms of communication, partic­ if the costs continue to increase, market con­ ularly e-mail. The spam explosion provides a ditions could easily change to allow such a useful foil to justify such regulation on the system to come about. basis that spam is simply another variant of There are also many unique and clever market failure requiring state oversight. ways that markets are responding to spam Besides being incompatible with a free problems today. One company, SpamArrest society, these responses are also incompati­ (http://spamarrest.com), intercepts all e-mail ble with market theory that teaches us that that is sent to its subscribers, requiring the world in which we live is dynamic, not senders to visit a web page and click a box static, and that it takes time for resources to allowing the e-mail to be sent to its final des­ respond to problems that may hinder soci­ tination. The genius of this process is that it ety. The market does not fail when the price requires senders to follow through on their of gasoline spikes, causing us to reallocate e-mails by doing something only humans can our gasoline usage until entrepreneurs do. Such efforts would place a serious crimp respond to the change in price by redirecting in the work of the e-mail marketer men­ resources to gasoline production. Indeed, it tioned above. is the government that fails when it inter­ Other companies offer free services such venes in this process, frequently causing the as SpamGourmet's (www.spamgourmet. problems to persist needlessly. com). They allow subscribers to submit faux For the same reason, we needn't assume e-mail addresses to companies that are likely that the current spam scourge must neces­ to try to sell them to e-mail marketers. The sarily be the norm, thus overruling whatever users specify how many e-mails they wish to advantages we otherwise might have from e- receive in response, after which they are mail and justifying government intervention. "eaten." Since the firms never see users' real In fact, there is no way anyone can know e-mail addresses, they never make it on how the nature of e-mail will change over e-mail marketing lists. the next five years. But the assumption that There are a myriad of other approaches today's bad conditions will persist indefi­ too numerous to list here. The fact that no nitely certainly does not square with practi­ one will use e-mail if current trends con­ cal experience in most every sphere of life. tinue is enough to guarantee that some solu­ Although the modern state depends on such tions will be found. Just as markets provide assumptions, they go beyond naivete to enter sufficient regulation to maximize transac­ the realm of the nonsensical. tions, so will they provide tools necessary for e-mail services to maximize satisfied Problems Create Solutions customers. As long as the state does not intervene in this corrective process, the Indeed, the problems themselves create the glory days of e-mail will return. It will be as necessary conditions for entrepreneurs to safe, effective, and beneficial as it was in offer various solutions. One can envision the years past. problems resulting in the creation of private Now excuse me while I clear out my intranets, in which spammers pay for the inbox. •

9 ONIDEA LIBERTS Y NOVEMBER 2003 Business Under German Inflation by Ludwig von Mises

aper money inflation and credit expan­ symptoms. Nothing is done to end the root sion never fall upon a people like an act cause, i.e., the increase in the quantity of of God. They are always the outcome money and the expansion of credit. of a deliberate policy. The governments The truth is that the propensity to inflate Pand the parties in power take recourse to is nowadays greater than it ever was before. inflation because they consider it as a bless­ It is only that the advocates of inflation and ing or at least a minor evil when compared credit expansion have resorted to new termi­ with the effects either of cutting down pub­ nology. They call the thing expansionism, an lic expenditure or of choosing other methods easy money policy, unbalanced budgets, or of financing. This applies to both peace and functional finance. The British paper which to war. Inflation as such does not contribute inaugurated in 1943 the action which anything to winning battles. It does not pro­ resulted in 1944 in the Bretton Woods agree­ duce arms and other equipment. It is merely ment explicitly declares that the aim of the one of the methods available for financing new international institution is to bring the huge expenditure caused by war. The about "an expansionist pressure on world other methods are taxation and borrowing trade." It expects that this expansionist pol­ from the public (and not from the commer­ icy will perform "the miracle ... of turning cial banks). If a government prefers inflation, a stone into bread." it must not plead as an excuse that there was The idea that monetary and credit expan­ no other way left. sion make business good, create "full Of course, the term inflation has fallen employment," and bring general prosperity into disrepute. All governments and all polit­ was the essence of the ideas of Mercantilism. ical parties emphatically announce that their The fallacies implied were utterly exploded main concern is to fight this dreadful thing by the economists whom the Prussian His­ called inflation. In fact they are not fighting torical School and their modern followers, inflation, but only its symptoms and neces­ Keynesians and the American advocates of sary consequences, namely the rise in prices. unbalanced budgets, disparage as orthodox. And this struggle is doomed to failure pre­ A new systematic analysis and thorough cisely because it is merely a tampering with refutation of the defects of the doctrine of expansionism certainly is not needed. Those Ludwig von Mises (1881-1973) was the foremost interested in such a critical examination are Austrian economist of the twentieth century, an referred to the writings of Professor B. M. adviser to FEE, and the author of Human Action. This is the major part of an article originally pub­ Anderson, of the late Professor Edwin Kem- 1 lished in the Commercial and Financial Chronicle, merer,! ! and of many other brilliant Ameri­ March 7, 1946. can economists. The goal of this article is

10 m mmm MARK

ften IflNer Mantua ZoAun® genomimn.

A 20,000,000 mark (August 1923) merely to stress an aspect of the problems terdam at 100 guilders, at that time by and involved which is often neglected. It seems large the equivalent of 240 marks. The price expedient to exemplify the issue with the of the stock dropped and the German sold it case of the German inflation of 1914-1923, at 90 guilders. This involved in gold a loss of the classical expansionist experience of our 10 percent. But in the meantime the price of century. the guilder in Berlin had risen from 2.40 to 3 marks; 90 guilders represented now 270 A Mark Is Always a Mark marks. The German capitalist made in marks an apparent gain of 30 marks or 12.5 Among the gravediggers of the German percent. However, the average Germans and people's prosperity and the German cur­ their spokesman Bendixen were not shrewd rency, Friedrich Bendixen occupies an emi­ enough to see things in the right light. With nent place. He was a bank manager and the them a mark was still a mark. They smilingly author of many books and articles dealing pocketed an alleged gain. with monetary matters. His prestige and his The same phenomenon presented itself in influence on the course of the Reich's finan­ every branch of international economic rela­ cial policy were enormous. tions. The champions of expansionism When in the first World War the mark's assign to rising foreign exchange rates the purchasing power declined and concomi­ power of stimulating export trade. It was tantly foreign exchange rates went up, Ben­ this idea that impelled many European coun­ dixen trumpeted that this was a rather fortu­ tries in the inter-war period to devalue their nate event. For, he said, it made it possible domestic currencies. for the Germans to sell their holdings of for­ Such a devaluation at one stroke makes eign securities at a profit. foreign exchange rates rise. But domestic Let us consider an example. A German commodity prices and wage-rates lag for owned on the eve of the war a Dutch secu­ some time behind the rise in foreign rity which was traded on the bourse of Ams­ exchange rates. In the interval, before the

11 Ideas on Liberty • November 2003 price structure on the domestic market to provide the means for the replacement of becomes adjusted to the new state of mone­ industrial equipment worn out in the process tary conditions, some export projects, which of production. Failure to provide such funds were unprofitable before, appear seemingly adequately makes the profits appear larger profitable. The exporter makes an apparent than they really are. If such apparent surplus profit—in domestic currency—although he profits are dealt with as if they were real may sell at a lower price in foreign currency. profits, the result is capital consumption. As But what really goes on is that he gives the German business was slow in discarding the domestic products away at a price which old custom of writing off annually a fixed enables him only to buy a smaller quantity percentage of the original costs of equip­ of foreign products. It is true, the nation ment, it virtually reduced the amount of cap­ whose currency has been devalued exports ital invested. more during this interval, but it gets in With the rapid progress of inflation more exchange only less or, at least, not more than and more businessmen began to comprehend previously for a smaller quantity exported. that their methods were suicidal. They This is what the economists have in mind started what was called "the flight into real when speaking of "apparent" gains. These values" (Flucht in die Sachwerte). They gains are the result of false reckoning and began to reinvest the apparent profits in self-deception. their plants. It did not matter for them whether these investments were reasonable The Huge Inflationary Profits or not. Their only concern was to get away from the mark at any cost. Later events have of Business evidenced that a great part of the invest­ It is asserted again and again that German ments made in the years of the inflation by business flourished in the years of the great the German banks and the independent busi­ inflation. In fact, the annual reports of the ness concerns were malinvestments. German big German corporations and the big Ger­ business emerged from the trial of the infla­ man banks showed fat profits, and high div­ tion period financially weakened. The big idends went to the stockholders. (The Ger­ German banks were already in 1924 on the man banks were not merely banks, but at the verge of insolvency. same time holding companies owning a con­ Of course, the Germans, steeped in the trolling part of the common stock of many monetary fallacies of Bendixen and Knapp,l2J manufacturing corporations.) were not aware of this fact. Neither were the However, these gains were often apparent foreign bankers and investors shrewd only, a mere product of the fact that the enough to judge correctly the plight of the businessman's economic calculation employed German big banks and of many of the big the mark as a common denominator. When German business concerns. In the twenties translated into a less fluctuating foreign cur­ foreign loans to the Reich, the member rency, for instance, into dollars, they revealed states, the municipalities and to the banks themselves frequently as losses. and big business amounted to about 20 It did not matter for German business billion Reichsmarks. Besides, foreigners whether prices in gold and in dollars were ris­ invested $5 billions directly in German busi­ ing or falling. Prices in marks were rising ness. This huge inflow—against which repa­ whatever the movement of prices on the world ration payments of about $10.8 billions had market was. The sale of the products and to be held—disguised for a few years the inventories netted big paper profits because frailty of the big banks. When the depression prices in marks were soaring ceaselessly. ended foreign lending to Germany, the col­ A second source of paper profits was pro­ lapse of the banks could no longer be vided by insufficient writing off of deprecia­ delayed. It occurred in 1931 as the payoff tion. The goal of laying aside a portion of both of inflation and of ignorance of funda­ the annual earnings in a depreciation fund is mental economic issues.

12 Business Under German Inflation

The belief that a sound monetary system can once again be attained without making substantial changes in economic policy is a serious error. What is needed first and foremost is to renounce all inflationist fallacies. This renunciation cannot last, however, if it is not firmly grounded on a full and complete divorce of ideology from all imperialist, militarist, protectionist, statist, and socialist ideas.

—LUDWIG VON MISES

"Stabilization of the Monetary Unit—From the Viewpoint of Theory" (1923), reprinted in On the Manipulation of Money and Credit

One of the reasons why public opinion duced: it lived on its capital. The greater misconstrued the economic consequences of part of the apparent profits was eaten up the German inflation was the emergence of a either by the speculators and businessmen class of inflation profiteers. themselves or by the Government which col­ The profiteers were those speculators who lected under the misleading label of income were quicker to realize the true meaning of and corporate taxes funds which were in the inflationary boom than were the man­ fact taken away from the capital invested. agers of the banks. The interest rates The wastefulness of municipal administra­ charged by the banks, although high when tion was so outrageous that even Schachtl3! compared with normal conditions, were could not help criticizing it. Many labor ridiculously low when compared with the unions succeeded in raising nominal wage stock exchange profits a speculator could rates above the rise in commodity prices. earn on a market at which prices skyrock­ They booked the resulting rise in real wage eted on account of the inflation. No matter rates as "social gains." In fact, these work­ what stock he bought, the speculator netted ers shared in the capital consumption. They a gross profit which exceeded by far the thus contributed to a later fall in the pro­ interest he had to pay to the lending bank. ductivity of labor and thereby of market As long as the inflation went on there was no wage rates. risk for him in embarking upon bull transac­ Germany dumped cheap exports on the tions with borrowed money. world market. It happened again and again that German manufactures, produced out of Germany Financially Wrecked by imported raw material, were exported at the Inflation prices which—when calculated in dollars— did not even cover the price of the raw mate­ The inflation favored the debtors at the rials contained. Yet, the German exporter expense of the creditors. It made a very small was convinced that he had made a good group of smart speculators rich. It impover­ deal. ished the immense majority of the nation. A great many of the investments made The losses of the losers by far surpassed during the critical years were malinvest- the total amount of the gains of the profi­ ments. ... • teers. The per capita wealth of the Germans was reduced, in spite of the fact that they 1. See Benjamin M. Anderson, Economics and the Public Welfare: A Financial and Economic History of the United had succeeded in unloading a part of their States, 1914-1946 (Princeton: D. Van Nostrand Company, losses on the shoulders of foreign capitalists, Inc., 1949) and Edwin W. Kemmerer, The ABC of Inflation (New York: McGraw-Hill, 1942). especially American and Swiss. 2. Georg Friedrich Knapp, author of The State Theory of The excess of inflation losses over inflation Money (1924 [1905]). 3. Hjalmar Horace Greeley Schacht, German financier who gains stemmed from three different sources: held a number of positions in German government, 1923-1943, The nation consumed more than it pro­ including president of the Reichsbank and minister of economy.

13 IDEAS ON LIBERTY NOVEMBER 2003

Healers Under Siege

by Doug Bandow

he Food and Drug Administration has While the American people have yet to approved a drug to combat non- agree with Al Gore's grotesque comparison Hodgkin's lymphoma. That's good of the drug makers to the tobacco companies Tnews for cancer patients in America and "big polluters"—there is little that he and around the world. But you wouldn't would not say to win a vote—they are know it, given the vicious political campaign increasingly turning on an industry that has being directed against the pharmaceutical done so much to improve their lives. Harris industry. Interactive reports that those who believe the America's drug makers are under attack. drug makers are doing a good job of serving Congressmen would like to cut prices, and consumers fell from 79 percent to 57 percent the expansion of Medicare will encourage from just 1997 to 2001. Uncle Sam to regulate drug access and prices Yet new pharmaceuticals are responsible directly. for almost half the reduced mortality from State legislators are debating their own different diseases between 1970 and 1991. draconian price-control schemes. The media, Columbia University's Frank Lichtenberg such as the PBS show "Frontline," have tar­ figures that every new drug approved during geted the drug makers. Trial attorneys, left- that time saves over 11,000 life-years annu­ wing activists, and state attorneys general ally. And the benefits continue. He estimates are filing lawsuits charging pharmaceutical that fully 40 percent of the increase in aver­ firms with everything from racketeering to age life span between 1986 and 2000 is due fraud. to new drugs. This assault is not new. Drug companies "Three decades ago medical technology have been under pressure for a decade. was rather primitive by today's standards," When the Clinton administration attempted says Dr. E. M. Kolassa of the University of to nationalize American health care, it Mississippi School of Pharmacy. "Today, sought to demonize the drug makers, as well physicians have at their disposal medications as most doctors and hospitals. and technologies that provide for the imme­ Unfortunately, years of demagoguery diate diagnosis and treatment of most of the advanced for political profit are having an disorders that affect modern man." impact. Public opinion of the industry has Hundreds of new drugs are in develop­ been falling sharply. ment for cancer, heart disease, strokes, Alzheimer's, infectious diseases, and AIDS. Contributing Editor Doug Bandow is a syndicated columnist and the author and editor of several Consider the last: Two decades ago there books. He is co-editor of Wealth, Poverty and was no treatment for AIDS. By 1987 there Human Destiny (ISI, 2003). was one drug, AZT. Now there are 74 anti-

14 The real cost of pharmaceuticals is not making the pill that patients swallow. It's the research that goes into developing the pill—as well as the other 9,999 substances that never made it to market. The pill's price also has to cover the cost of running the company and complying with burdensome FDA requirements.

AIDS drugs available and another 100 in ought to be. Everyone ought to be rich and development. beautiful. Everyone ought to be paid a mil­ Similarly, pharmaceuticals offer the best lion dollars a year for working ten hours a hope of combating any future outbreak of week. Everyone ought to have a Mercedes at SARS, which has killed over 700 people. In a Yugo price. Everyone ought to have a fact, the quickest solution is to find an exist­ mansion for the price of a shack. And every­ ing medicine that works. Laboratories are one ought to have all of the pharmaceuticals currently screening some 2,000 approved now available, but for less money. and experimental drugs to see if they are use­ Unfortunately, pharmaceuticals do not ful in fighting SARS. Gurinder Shahi, a doc­ appear outside company doors every morn­ tor in Singapore, explains: "Given how little ing as manna from heaven appeared in the we know about SARS and the reality that it Promised Land for the ancient Israelites. is killing people, it is justified for us to be Instead, firms review numerous plausible daring and innovative in coming up with substances: of every 5,000 to 10,000 solutions." checked, 250 make it to animal testing. Daring innovation is most likely to come About five reach human trials. in a competitive, profit-driven market. After Only one gets past the Food and Drug all, today's medicines exist only because Administration (FDA) onto the market. That there is a bevy of sophisticated pharmaceuti­ one has to pay for the research costs of the cal companies devoted to finding drugs to other 5,000 to 10,000. It isn't easy. heal the sick. Thus the real cost of pharmaceuticals is Isn't this serving consumers well? not making the pill that patients swallow. Ah, but prices are high. Too high, in the It's the research that goes into developing view of myopic, vote-seeking politicians. the pill—as well as the other 9,999 sub­ "There's no question that prescription drugs stances that never made it to market. The cost too much in this nation," claims Sena­ pill's price also has to cover the cost of run­ tor Jim Jeffords of Vermont. ning the company and complying with bur­ Why, yes. They only save lives. Extend densome FDA requirements. our life spans. Moderate our pain. Control The Tufts Center for the Study of Drug our nausea. Eliminate our need for surgery. Development estimates that companies Treat our allergies. spend nearly $900 million over a ten- or 15- Why should we have to pay for such prod­ year period to develop each drug. America's ucts? The outrage. The horror. Drugs should major research firms alone spent $32 billion be free. Or at least a lot cheaper. on R&D last year. Nevertheless, some politicians would con­ If Life Were Different trol prices directly. For instance, legislators in Maine want to impose prices they think are It would be nice if they were, of course, fair, and are threatening retaliation if any but people who believe prices can be low­ company tries to pull out of the market in ered legislatively are living in the world as it response. Washington State already demands

15 Ideas on Liberty • November 2003 superdiscounts for some of its programs. (The country is not full of profit-minded tort But government can only confiscate the attorneys.) Imposing Canadian (or Mexican, drug makers' existing inventory. It can't or Afghan) prices in the United States would force them to keep making drugs to be con­ mean the drugs would not be developed in fiscated in the future. the first place. Adopting Canadian- or European-style Politicians also are pushing a range of use controls will result in a Canadian- or restrictions—formularies, reference pricing, European-style drug industry and patient and more. Yet every attempt to stop people access. These countries do their best to free from using new medicines endangers their ride on America, but their pharmaceutical health and threatens to increase health costs industries are weak and getting weaker. elsewhere. For instance, Frank Lichtenberg Moreover, their ill citizens have far less estimates that replacing 1,000 older pre­ access to important medicines. A group scriptions with newer drugs raises pharma­ called Europe Economics points out ceutical costs by $18,000, but cuts hospital that patients often wait years for life-saving costs by $44,000. products. Everyone in America has a stake in lower­ Still, America's political air is filled with ing health-care costs. But they also have a other alleged panaceas, such as reimporta­ stake in maintaining quality health care. If tion of drugs from Canada. Yet prices are the pharmaceutical industry succumbs to the lower there because the government imposes demagogic campaign against it, we will all price controls and litigation costs are less. suffer the painful consequences. •

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16 Thoughts on Freedom by Donald J. Boudreaux IDEAS ON LIBERTY NOVEMBER 2003

Oblivious to the Obvious

"Ironically, the birth of a child is registered as a reduction in national income per head, while the birth of a farm animal shows up as an improvement."

—PETER BAUER (1991)

ach passing year makes me more and including the world's richest, the Bill and more aware of human beings' astound­ Melinda Gates Foundation—devote billions ing capacity for overlooking the obvi­ of dollars to the cause of population "con­ ous. I have in mind here not those parts trol." Eof reality that can be understood only with Population Connection (formerly Zero specialized training—say, professional econ­ Population Growth), a chief proponent of omists' knowledge that the elasticity of a policies to limit population growth, demand curve isn't its slope. Nor do I have announces on its website: "We want people in mind aspects of reality that can be known everywhere to join our cause so that, only through experience—say, the reality together, we can make the world better, that French chardonnays taste very different safer, and less-crowded." U.S. Representa­ from California chardonnays, or that the tive Carolyn Maloney of New York says Boston Red Sox are destined never again to that slowing population growth is required if win a World Series. we are to "stop hunger and preserve our Instead, I refer here to aspects of reality world's resources." that are vivid, overwhelming, and plainly in But no evidence exists to support a belief everyone's sight. Nevertheless, many people in the dangers of large or growing popula­ remain oblivious to this reality. tions. Indeed, all the evidence, most of which My chief example is the continuing, is plainly in view of everyone, is that more widely held belief that population is the people mean more prosperity for everyone. enemy of material prosperity. Newspapers, Probably the richest 23 contiguous square magazines, and water-cooler conversational­ miles on the planet is Manhattan. It is also a ists routinely pronounce, as if it were as pal­ speck of earth that is among the world's pable as gravity, that a large and growing most densely populated, with each square population of human beings implies wide­ mile, on average, packed with 67,000 resi­ spread poverty and misery. Foundations— dents. More than 1.54 million people live on Manhattan and some 2.12 million people Donald Boudreaux ([email protected]) is chair­ work there—all amidst the millions of visi­ man of the economics department of George tors who flock to that island every year. Mason University and former president of FEE. According to conventional belief, Man-

17 Ideas on Liberty • November 2003 hattanites should be among the earth's most commercial society, the wealthier they destitute and wretched peoples. Yet despite become. the fact that Manhattan has no forests, A high density of human population farms, pastures, fisheries, or mines, per- clearly does not cause poverty; a low density capita income there is a sky-high $73,000. of human population clearly does not make Compare Manhattan to the 46,907 square people prosperous. Manifest evidence of miles that are Mississippi, a state boasting a these facts surrounds us. And yet the pre­ great deal of fertile farm land, bountiful vailing belief of many people—including lakes and rivers, and thick forests. Missis­ top officials in governments, at the United sippi is also blessed (if conventional belief is Nations, in academia, and in foundations—is valid) with a human-population density less that higher population densities entail lower than 1/1000th that of Manhattan (61 Mis- material welfare for the average person. sissippians per square mile compared to Why? This is not, after all, a case in which 67,000 Manhattanites per square mile). the evidence is ambiguous, complex, or According to conventional belief, Mississip- sparse. pians should be much wealthier than Man­ One reason for the continuing oblivious­ hattanites. But instead they're much poorer. ness to the obvious fact that prosperity is not Per-capita income in Mississippi is less than threatened by dense human population is the $16,000, a mere 22 percent of that of Man­ stubborn failure to recognize the crucial hattan. insight that the ultimate resource is the Also according to this same conventional human mind. belief, Russia should be among the wealthi­ Wealth is not automatically produced by est countries on earth. It has vast forests, nature and then "distributed" for consump­ rich mineral deposits, plentiful inland and tion to passive peoples. Wealth—all wealth; coastal waters, and great expanses of arable every bit of it—requires for its creation land—and its population density is only a active and rational human involvement. third that of Mississippi: 22 people per Without creative human minds and effort, square mile. But per-capita income in Russia no wealth would exist. Even the most fertile is a meager $7,700. land would yield no crops; rivers and oceans Manhattan is far richer than Mississippi would yield no fish; forests would yield nei­ and Mississippi is far richer than Russia. ther lumber nor game animals. No minerals, Here are two additional examples. Each no chemicals, no cloth, no shelter, no paper, square mile of Hong Kong holds, on aver­ no steel, no medicines, no wine, no M-Life— age, 15,966 residents; per-capita income nothing—would exist without human there is among the world's highest at creativity, effort, and peaceful interaction. $24,506. In stark contrast, Ethiopia is It follows that more creative human sparsely populated, with each square mile beings mean more, not less, prosperity. And holding, on average, 157 people. Ethiopia's as all the great economists from Adam Smith per-capita income is among the world's low­ through F. A. Hayek, Peter Bauer, Julian est at $600. Simon, and Vernon Smith repeatedly remind us, humans are remarkably creative and pro­ Does Wealth Cause Poverty? ductive only when, and always when, they are free to bargain and exchange with each Don't think that the wealth of the devel­ other. oped world comes at the expense of the less- So places such as New York City and developed world. Empirical study upon Hong Kong are wealthy because they are empirical study shows that the poorest parts densely populated with free people. Places of the world are those without substantial such as Ethiopia and Russia are poor contacts with advanced commercial soci­ because they have so few free human minds. eties. The greater a people's contact with No fact is more sure and more obvious. •

18 IDEAS ON LIBERTY NOVEMBER 2003 Understanding "Austrian" Economics, Part 2 by Henry Hazlitt

fter the passing of its three in 1940, but was not published in Mises's founders—Carl Menger, Friedrich own rewritten English version until 1949. von Wieser, and Eugen von Bohm- Bawerk—Austrian economics fell for Mises on Human Action Aa long time into eclipse. It was not so much refuted as neglected. English-speaking econ­ Though there is now a gratifying number omists began devoting themselves to such of able young American economists writing matters as mathematical treatment of prob­ in the Austrian tradition, Human Action still lems of "general equilibrium." The Austrian stands as the most complete, powerful, and view was revived mainly by one man, an unified presentation of Austrian economics Austrian by birth as well as an "Austrian" in any single volume. Mises always gener­ by conviction—Ludwig von Mises (1881- ously acknowledged his indebtedness to his 1973). He made his influence felt both by his predecessors. He recalled in a short autobi­ written works and by his oral teachings. ography (Notes and Recollections, 1978) Among his early distinguished students and that around Christmas 1903 he read followers were Gottfried Haberler, Fritz Menger's Principles of Economics for the Machlup, Oskar Morgenstern, Lionel (sub­ first time. "It was the reading of this book," sequently Lord) Robbins, and, most influen­ he wrote, "that made an 'economist' of me." tial of all, F. A. Hayek. It would carry me to too great length to Ludwig von Mises was prolific, but his itemize and explain all the contributions to principal contributions were made in three economics that Mises made, and I will con­ masterpieces. These were The Theory of tent myself with mentioning only two. He Money and Credit, first published in German was the first to prove that it was impossible in 1912, Socialism: An Economic and Socio­ for socialism to undertake "economic calcu­ logical Analysis, also first published in Ger­ lation"; and he made one of the most impor­ man in 1922, and Human Action, which tant contributions of any economist toward grew out of a first German version appearing solving the problem of "the trade cycle." Because Mises so uncompromisingly Henry Hazlitt (1894-1993) was a prominent eco­ rejected government interventionism in all nomic journalist, author of many books, including its forms, he acquired the reputation of a Economics in One Lesson, a founding trustee of "laissez-faire extremist" during most of his FEE, and a frequent contributor to The Freeman: lifetime, and was scandalously neglected by Ideas on Liberty. This article appeared in the February 1981 issue. It was originally commis­ the majority of academic economists. But sioned by the Silver and Gold Report, Newtown, because Hayek elaborated his own ideas in Connecticut. a more conciliatory form, his writings

19 Ideas on Liberty • November 2003

attracted more attention from the academic fessor Ludwig world, and he leapt into prominence in 1931 M. Lachmann with his own contribution to the theory of [1906-1990]. the trade cycle, Prices and Production, along Though he is lines similar to Mises's. The result is entitled one of the to be called the "Mises-Hayek" theory. most original Hayek is also a prolific writer, but though and profound he has written volumes on money, on the among living trade cycle, on inflation, and on The Pure Austrian Theory of Capital (1941), he has never economists, attempted a comprehensive book on eco­ his work has nomic principles. Of late years he has turned not yet nearly his attention mainly to the realms of politics, achieved the Ludwig Lachmann (1906-1990) ethics, and law, and has written profound recognition it and widely discussed treatises on The Con­ merits. Among his principal books are Capi­ stitution of Liberty (1960) and a three- tal and Its Structure (1956; republished in volume work on Law, Legislation and Lib­ 1978), The Legacy of Max Weber (1971) erty, completed in 1979. He has been more and Capital, Expectations, and the Market widely influential in his own lifetime than Process (1977). His writings are notable for was Mises, and was awarded the Nobel their emphasis on the role of expectations Prize in Economics in 1974. and for their thoroughgoing application of a Today's zealous group of younger "Aus­ "radical subjectivism." trian" economists, though all acknowledg­ Restrictions of space permit me merely to ing their great debt to Mises, do not treat his list the names of half a dozen of the now- Human Action as the final word on the sub­ increasing group of important "Austrian" ject, but are exploring a whole range of eco­ economists: S. C. Littlechild, Gerald P. nomic problems with a new vigor. Murray O'Driscoll, Jr., Mario J. Rizzo, Hans Rothbard [1926-1995], a student of Mises, Sennholz, Sudha R. Shenoy, and Lawrence produced a two-volume treatise, Man, Econ­ H. White. But so arbitrarily short a list must omy, and State (1962), along Misesian lines, omit a number of names unjustly. with notable clarity of exposition, and mak­ The "Austrian" economists, more consis­ ing important contributions of his own, tently than those of any other school, have pointing out the fallacies, for example, in the criticized nearly all forms of government prevailing theories of "monopoly price." intervention in the market—especially infla­ Israel M. Kirzner (b. 1930), professor of tion, price controls, and schemes for redistri­ economics at New York University, another bution of wealth or incomes—because they former Mises student, although he has not recognize that these always lead to erosions undertaken a comprehensive book of "prin­ of incentives, to distortions of production, to ciples," has explored individual problems in shortages, to demoralization, and to similar five separate volumes: The Economic Point consequences deplored even by the origina­ of View (1960), Market Theory and the tors of the schemes. But personal value judg­ Price System (1963), An Essay on Capital ments of government policy are of course (1966), Competition and Entrepreneur ship not an essential part of Austrian theory. (1973), and Perception, Opportunity, and The present vigorous Austrian School is Profit (1979). His work is distinguished by not content merely to keep re-expounding great scholarship, systematic thoroughness, the principles developed by Menger and and precision of statement. He has brought Mises, but is addressing itself constantly to further illumination to every problem he has new problems, or a more thorough probing dealt with. of old ones. This is dramatically evident in a Finally, no reference to individual writers recent volume, New Directions in Austrian would be adequate that did not include Pro­ Economics (1978), edited by Louis M.

20 Understanding "Austrian" Economics, Part 2

Spadaro, with contributions from eleven try to stipulate the conditions of "general writers. Professor Spadaro himself, in his equilibrium." concluding essay, outlines some of the still unresolved problems that Austrians ought to explore. In some sense, however, practically Equilibrium a Useful Concept, all eleven contributions do the same thing. Though Never a Reality I have heard it said (by an economist of another school) that there is no such thing as Now "general equilibrium" is defined by Austrian economics; there is only good eco­ these economists (when it ever is) in highly nomics or bad. But in the same way we could abstract and obscure phrases; but for laymen say that there is no such thing as Ricardian it might be defined as a condition in which economics, Marxist economics, Keynesian all the tens of thousands or millions of com­ economics, and so on. This sort of statement, modities and services are being turned out in though true in one sense, is false in another. the exact quantities and proportions in It is fallacious in implying that if anything is which they are relatively wanted by produc­ classified in accordance with one characteris­ ers or consumers, so that there are no tic, it cannot be classified in accordance with "shortages" or "surpluses." All prices reflect any other. It is like saying that there are no costs, and there is no more profit in making such persons as Americans or Japanese; there one commodity than any other. (In fact, are only men and women. Those who call there is no "pure" profit at all.) These econ­ themselves "Austrian" economists give them­ omists admit that at any moment this condi­ selves this label because of its historic origins; tion does not exist, but they contend that but they happen also to believe that its fun­ there is a constant long-run tendency toward damental theses are true, and offer more equilibrium, because when there is an promise than any other for further progress unusual profit in turning out some one prod­ in economic science. uct, producers will turn out more of it, and Perhaps something should be said about when there is a loss in turning out some the chief differences today between Austrian other product, producers will make less of it, economics and what we may call "ortho­ or transfer to making something else. dox" or "mainstream" economics. The diffi­ Now the concept of equilibrium (or much culty here is that "mainstream" economics better, the Mises concept of an "evenly itself would be hard to define. Economists rotating economy") can have great useful­ are still divided into a number of recogniz­ ness as a tool of thought. We are often bet­ able "schools"—neoclassicists, Keynesians, ter able to analyze the problems of change the Chicago school, the Lausanne school, if we begin with the fictitious assumption and so on. The limits of space forbid me to of a state of affairs in which certain changes go into the distinguishing doctrines of each are hypothetically eliminated. But this is a of these schools. But one outstanding differ­ purely imaginary construction, a useful ence of the Austrians from all of these lies in fiction. It should never be confused with their method of reasoning. The Austrians reality. emphasize methodological individualism. While a true "equilibrium" between the That is, they not only begin by emphasizing marginal cost of production and the market human actions, preferences, and decisions, price of any one commodity is a condition but individual actions, preferences, and ini­ that is seldom reached, even momentarily, a tiatives. Mainstream economists are con­ "general equilibrium" in the relative produc­ cerned with "macroeconomics," with aver­ tion, supply price, and demand price of all ages and aggregates; and those of the commodities and services is a condition that Lausanne school, trying to reduce economics is never reached, even for an instant of time. to an "exact" science, and therefore seeking The concept itself is extremely nebulous. to quantify everything, are obsessed with Neoclassical economists seem obsessed complicated mathematical equations that today with setting up complicated algebraic

21 Ideas on Liberty • November 2003 equations stipulating the conditions of equi­ main Austrian librium or functional relations under "per­ theses once fect competition" and the like, but it is diffi­ again, this time cult to specify precisely what their x's and not in my own y's stand for. They cannot refer to physical words or in quantities, because you cannot add apples to Menger's, but horses, or a ton of gold watches to a ton of in those of two sand. One might add or compare quantities prominent living times prices, but what would be the meaning [1981] "Austri­ of the total, or any of the parts that make it ans." up? The price, even of one commodity, dif­ "Beginning in fers from hour to hour, place to place, and the 1870's in transaction to transaction. The value of the Vienna, Aus­ currency itself fluctuates and constantly tria," writes Pro- Israel Kirzner changes its exchange ratio with commodi­ fessor Kirzner, ties. If we simply add or compare "values," "the school was distinguished by its empha­ then we must recognize that values are sis on the subjective elements in economic purely subjective. They are impossible to analysis, on the significance of time in pro­ measure or to total because they differ with duction processes, and on the role of error each individual. and uncertainty in economic phenomena" If we pass over these fundamental difficul­ (his italics). ties, where do we arrive? Even if we assume The summarization by Professor Lach- that there may be a persistent long-run ten­ mann is remarkably similar: "The first, and dency toward general equilibrium, we must most prominent, feature in Austrian eco­ admit that there is also a persistent short-run nomics is a radical subjectivism, today no and long-run tendency toward the persis­ longer confined to human preferences but tence of disequilibrium. extended to expectations. . . . Secondly, Aus­ This is not only because there is a ten­ trian economics displays an acute awareness dency of entrepreneurs, in increasing or of the many facets of time that are involved reducing production in response to market in the complex network of interindividual and profit signals, to overshoot the mark, relations. ... In the subjective revolution of but because individual entrepreneurs, so far the 1870's the first step in the direction of from making merely automatic responses, subjectivism was taken when it was realized are constantly gaining new knowledge, alert that value, so far from being inherent in to new opportunities, changing methods and goods, constitutes a relationship between an reducing production costs, improving prod­ appraising mind and the object of its ucts, innovating—turning out entirely new appraisal" (New Directions in Austrian products or inventions. And consumers too Economics, pp. 1-3). are constantly learning, changing tastes, and All the rest of Austrian economics follows demanding new products to meet new from these basic insights. Let me conclude wants. So Austrian economists seldom speak with my own opinion that any economic of market equilibrium, but of the market analysis that fails to embody such insights process. cannot be entirely sound. My own suspicion is that the enormous attention now being devoted to stipulating Recommended Reading the mathematical conditions of "general equilibrium" is a pursuit of a will-o'-the- Those who have no previous acquain­ wisp, of questionable help in solving any real tance with Austrian economics, and would economic problem. like a short and simple text written along But space forbids me to go into too many Austrian lines, might begin with Essentials detailed contrasts. Let me sum up briefly the of Economics by Faustino Ballve (126 pages; 22 Understanding "Austrian" Economics, Part 2

Irvington-on- Human Action, by Ludwig von Mises (907 Hudson, N.Y.: pages, first published in 1949 [fourth edi­ Foundation for tion, FEE, 1996]). Some may find this diffi­ Economic Edu­ cult reading. A very clear two-volume work cation). A more written thirteen years after Human Action advanced . . . by a student of Mises is Murray N. Roth- introduction bard's Man, Economy, and State [Ludwig (1979), specifi­ von Mises Institute, 987 pages]. cally explaining For the reader interested in the latest the Austrian developments in Austrian economics I can point of view, highly recommend two books: One is The is The Fallacy Foundations of Modern Austrian Econom­ of the Mixed ics, edited by Edwin G. Dolan, which con­ Murray Rothbard (1926-1995) Economy, by tains contributions by half a dozen writers Stephen C. Lit- [1976, 238 pages, out of print]. The other is tlechild [out of print]. New Directions in Austrian Economics, Surprisingly, the original Principles of edited by Louis M. Spadaro (1978), 239 Economics, first published in 1871 by Carl pages, with contributions by eleven writers Menger, the founder of Austrian economics [out of print]. (328 pages), still makes an excellent, very Most of these foregoing books have readable, and not too technical introduction already been mentioned in the text. The to the school's basic principles. reader may also profitably consult others Of course, the authoritative and most mentioned there, especially the volumes by complete work on modern Austrian theory is Kirzner and Lachmann. •

AUSTRIAN ECONOMICS: A BRIEF BIBLIOGRAPHY Peter J. Boettke, ed., The Elgar Companion to Austrian Economics (Brookfield, Vt.: Edward Elgar, 1994) Raimondo Cubeddu, The Philosophy of the Austrian School (London/New York: Routledge, 1993) Richard M. Ebeling, ed., Austrian Economics: A Reader (Hillsdale, Mich.: Hillsdale College Press, 1991) Richard M. Ebeling, ed., Human Action: A 50-Year Tribute (Hillsdale, Mich.: Hillsdale College Press, 2000) Richard M. Ebeling, Austrian Economics and the Political Economy of Freedom (Northampton, Mass.: Edward Elgar, 2003) Roger W. Garrison, Time and Money. The Macroeconomics of Capital Structure (London/New York: Routledge, 2001) Bettina Bien Greaves, ed., Austrian Economics: An Anthology (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1996) Randall G. Holcombe, ed., 15 Great Austrian Economists (Auburn, Ala.: Ludwig von Mises Institute, 1999) Israel M. Kirzner, ed., Classics in Austrian Economics: A Sampling in the History of a Tradi­ tion, 3 Vols. (London: William Pickering, 1994) Israel M. Kirzner, Ludwig von Mises (Wilmington, Del.: ISI Books, 2001) Alexander H. Shand, Free Market Morality: The Political Economy of the Austrian School (Lon­ don/New York: Routledge, 1990) Karen I. Vaughn, Austrian Economics in America: The Migration of a Tradition (New York: Cambridge University Press, 1994)

23 IDEAS ON LIBERTY NOVEMBER 2003

Rent-Seeking: A Primer by San ford Ikeda

eaders of Ideas on Liberty often come time or all at once in a lump sum, doesn't across references to the term "rent- merely move a product around from one seeking." Usually from the context it's person to another. (In fact, land doesn't even plain that it refers to something unde­ do that because it isn't movable, except near R places like the San Andreas fault, where sirable, but what exactly is it? The idea of rent is an old one in econom­ occasionally it is.) But what rent does help to ics. In mainstream economics it refers to a do is encourage the transfer of land owner­ payment to the owner of a fixed factor of ship from a less-profitable use to a more- production over and above its "opportunity profitable use—from, say, a housing devel­ cost," that is, what it could fetch in its next opment to agriculture, if growing crops will most profitable use. In the case of land, for fetch a higher profit than building houses on example, any payment to the owner of a par­ the land. In this way, the transfer, and thus ticular parcel beyond the cost of, say, clear­ the rental payment, is part of a process that ing and leveling it or for its "permanent and increases wealth. indestructible qualities" was traditionally Here it's important to realize that produc­ considered rent.1 tion in economics has nothing necessarily to There are those, including nineteenth- do with the physical transformation or century social critic Henry George, who movement of things, but rather with the cre­ believe that such payments are wasteful ation of value, which is subjective in nature. because (1) they could have been spent to For instance, if John and Mary, without bring other goods into existence, such as either one using force or fraud, trade owner­ houses or food, instead of being used merely ship of an apple and an orange, both neces­ to transfer ownership of an already existing sarily expect to feel subjectively better off as commodity from one person to another, and a result (or else at least one of them would­ (2) they do nothing to increase the supply of n't agree to the trade) because each will be the fixed factor. Does this mean that the pur­ giving up something he or she values less for suit of rent is a bad thing because it's waste­ something he or she values more. The net ful? No, not in this case. gain in subjective value that each one feels Let's examine the first argument. A pure constitutes newly created wealth. In devel­ rental payment for a fixed factor such as oped societies this is how most wealth is land, whether it's paid in increments over produced, by free trade. Likewise, the consumers of food generate Sanford Ikeda ([email protected]) is for the landowner a greater excess of rev­ an associate professor of economics at Purchase enue over cost than do potential consumers College, 5UNY. of the houses that could have been built on 24 the land. Rent is a fixed payment to the spending resources to acquire land rent or owner for using the land in a more valuable any other privately acquired rent. Tullock is way, in terms of willingness to pay. referring to those activities that destroy How does anyone know which use is most wealth. Nevertheless, people sometimes feel valuable in this sense? No one can know for uncomfortable with the free market because certain, but the entrepreneur-owner of the they're unable to differentiate profit-seeking land has a strong incentive to decide cor­ from (bad) rent-seeking. rectly who should have the ultimate use of it, According to the principle of human consumers of food or of housing, because he action that Ludwig von Mises used as the stands to earn a profit for making the right starting point of economics, man acts in choice and suffer a loss for the wrong choice. order to improve his situation as he sees it. Resources that entrepreneurs spend in seek­ One of the important lessons taught by ing rent, insofar as they improve their Mises, and later many of the adherents of chances of making wealth-increasing deci­ the Public Choice school of political econ­ sions, are not wasteful. omy, who follow in the footsteps of Tullock The second argument against rent is that and James Buchanan, is that while the prin­ rents don't increase the supply of land. ciple of human action is universal, the par­ However, economists think dynamically (or ticular actions chosen, and the consequences at least they should), and that means taking that follow from them, depend crucially on into account what happens over time as the the "rules of the game." unknowable future becomes the partially If the rules say that the acceptable way to known present. From this perspective it's improve your situation is to provide a prod­ possible to view the rent that a particular uct or service that consumers would be will­ tract earns for its owner as something that ing to pay more for than the opportunity could very well induce other profit-seeking cost of the resources used, then that's what entrepreneurs to invest in the clearing or fill­ you'll tend to do. In that case, if you're cor­ ing in of more land when working space rect, and if you can out-compete your rivals becomes scarce enough. That is, rent can in the market for those consumers' dollars, serve as an incentive to produce more space then your actions will have added wealth to in which further valuable work can take society. This is profit-seeking. place. On the other hand, if the rules say that it's So, from the point of view either of effi­ okay to use political means—the govern­ ciently allocating existing working space or ment's authority to initiate violent aggres­ of creating new working space, rent aids in sion and fraud—to contrive rents by pre­ the creation of wealth. venting others from competing with you or by forcibly taking the wealth of others, peo­ Rent-Seeking Defined ple will naturally tend to spend valuable resources trying to gain access to them. This Where then does the bad connotation of is rent-seeking. rent-seeking come from? But unlike profit-seeking, rent-seeking Gordon Tullock, one of the pioneers in doesn't create wealth, it merely transfers it the theory of rent-seeking, has defined it as from one party to another. Whoever wins "the use of resources for the purpose of rents by using political means may be better obtaining rents for people where the rents off, but others, potential competitors, but themselves come from some activity that has more importantly consumers, will be made some negative social value."2 decidedly worse off. The latter will pay We've seen how rents generated in the free higher prices, get poorer quality, or have market have a positive "social value," insofar fewer choices because political means are as we can agree that creating wealth is a good quite effective in discouraging rival entrepre­ thing.3 Thus no negative connotation would neurs. The results of rent-seeking also stifle attach to free-market rent-seeking, that is, the competitive discovery process, so that

25 Ideas on Liberty • November 2003 consumers are less likely to become aware of firm or union is not. Like private property, more efficient methods or better providers.4 the rule of law serves to protect individuals Thus the resources that competitive rent- against arbitrary government interventions, seekers spend in their quest for these politi­ and as such it's one of the pillars of personal cally created rents are indeed wasted because liberty, limited government, and the free they are used to produce an outcome in market. which nothing of value is created. Indeed, Rules of the game that beget rent-seeking rent-seeking of this kind destroys wealth. are clear violations of the rule of law because they arbitrarily privilege some at the expense of others. This in turn gives people an incen­ Rent-Seeking Versus the Rule of Law tive to spend resources either to associate themselves with the winners or distance So far we've seen that rent-seeking is themselves from the losers. The desire to undesirable because it's wasteful. In addi­ capture politically generated rents is a fun­ tion, however, because it usually takes the damental motive for interventionist breaches form of restrictions on competition or on the of the rule of law. At the same time, rent- use of property rights, the desire to gain seeking tends to prevail to the extent that cit­ rents through political power distorts the izens permit government to violate the rule operation of the market process. Such dis­ of law. A politico-economic system that tortions, especially as they impinge on inter­ strictly observes the rule of law would per­ est rates and the prices of goods and services, force ban rent-seeking. make it harder for consumers and producers The difference between profit-seeking and to plan for the uncertain future, increasing rent-seeking is akin to that between peaceful their chances of error. trade and armed robbery. Both require time, But an even more serious problem at the energy, and skill, but one creates wealth level of social norms is that rent-seeking while the other destroys it; one encourages tends over time to encourage growing num­ peaceful cooperation, the other undermines bers of ordinary people to engage in it, it. • trying to acquire political power either to gain advantages over the less powerful or 1. Ludwig von Mises and Murray Rothbard defined rent dif­ as redress against the mounting advantages ferently, as simply the payment for the services of any durable commodity. Since this primer is concerned with explaining the and political power of others. It thereby sets meaning not of rent itself but of rent-seeking, which is based on into motion a troubling dynamic that over mainstream-economics concepts, it would not be appropriate to address these differences here. On this see Ludwig von Mises, time progressively erodes respect for the rule Human Action, 4th rev. ed. (Irvington-on-Hudson, N.Y.: Foun­ of law, limited government, and private dation for Economic Education, 1996 [1949]), pp. 635-37, and Murray N. Rothbard, Man, Economy, and State (Los Angeles: property. Nash, 1970 [1962]), p. 249. 2. Gordon Tullock, Gordon Brady, and Arthur Seldon, Gov­ The rule of law binds the government by ernment Failure (Washington, D.C.: Cato Institute, 2002), rules that are fixed and announced before­ p. 43. 3. Tullock uses the term "social" value, but he is simply hand, and are not intended to benefit or referring to the new wealth that each individual experiences, harm any particular persons or groups. For viewed as a whole. If economists try to suggest anything more than this by the term, they're probably making a big mistake. example, a rule that forbids anyone from 4. Any attempt to compete with those protected by such engaging in fraudulent advertising is in privilege is a challenge to the power of the state. As a matter of fact, because political rent-seekers rely on the government's accord with the rule of law, whereas a rule authority to initiate aggression and fraud their gains essentially granting a monopoly privilege to a particular come from robbery at gunpoint.

26 Peripatetics by Sheldon Richman IDEAS ON LIBERTY NOVEMBER 2003

Canute's Courtiers Were Wrong I hortly after the northeast blackout a All but two did so. When the price freeze New York Times headline blared: expired, prices rose, which has upset cus­ "Under Deregulation, Montana Power tomers. An organization of single mothers SPrice Soars." The story explained that even sued the state in federal court, claiming "Montana residents used to pay some of the the legislation is unconstitutional because, lowest rates for power in the Northwest, but the Missoulian reported, it "caused or will now, some lawmakers lament, they pay cause huge power rate increases that deprive among the region's highest. What happened? the women of the basic necessities of life." Mainly deregulation." (A district court judge dismissed the suit.) The story went on: "Montana Power Rather than dwell here on the misleading executives argued six years ago that state use of the word "deregulation," let us focus residents would benefit from paying compet­ on the proposition that rising retail prices itive rates for electricity and natural gas. As per se indicate that that something is amiss. market rates have gone up, though, the resi­ This belief rests on a usually unspoken, but dents have had to bear the cost, critics of nevertheless consequential premise that deregulation say." prices ultimately are arbitrary and can be Although the article acknowledged that controlled by government with impunity. "So far Montana has not experienced the This in turn is part of a deeper fallacy: the kind of supply problems that plagued Cali­ proposition that economic laws do not exist fornia in recent years," the strong impres­ and that the belief that they do is a supersti­ sion was left that rising prices are a grave tion limiting man's collective power to indictment of deregulation. arrange his social life. It's an old misconcep­ The historic blackout again demonstrated tion, a throwback to pre-economics. As that the word "deregulation" is subject to Ludwig von Mises wrote in Epistemological as many interpretations as a Rorschach Problems of Economics, inkblot. California is said to have embraced deregulation, but this is true only if the word When men realized that the phenomena means something other than the removal of of the market conform to laws, they regulation. In Montana, legislation was began to develop catallactics and the the­ passed in 1997 to allow a choice of retail ory of exchange, which constitutes the electricity providers. Retail prices were heart of economics. . . . The development frozen for two years, and electricity co-ops, of economics . . . did more to transform which serve half the state's homes, were human thinking than any other scientific allowed to opt out of the new arrangement. theory before or since. Up to that time it had been believed that no bounds other Sheldon Richman ([email protected]) is editor of than those drawn by the laws of nature Ideas on Liberty. circumscribed the path of acting man.

27 Ideas on Liberty • November 2003

It was not known that there is still some­ part without being subject to a prodigiously thing more that sets a limit to political ingenious mechanism. This mechanism is the power beyond which it cannot go. Now it object of study of political economy."4 was learned that in the social realm too What does this theorizing mean? It means there is something operative which power that regardless of motives, if the government and force are unable to alter and to which puts a ceiling on prices, there will be unsat­ they must adjust themselves if they hope isfied demand—shortages (other things to achieve success, in precisely the same being equal). If the government puts a floor way as they must take into account the under prices, there will be unsold goods— laws of nature. [Emphasis added.]1 surpluses (again, other things equal). If a minimum wage is legislated, there will be Thus economics—the identification of the surplus labor—unemployment. It's the law. regularities that constitute the market The story of the control of electricity process—stood in the way of the sheer will prices is classic. For the last few decades, the of the ruler. He could command, but if he demand for electricity has been rising. Think contravened the laws of economics he could about how many new uses people have for not bring about the results he wished. electricity: computers, modems, VCRs, DVD "Thus," Israel Kirzner wrote, "the idea that players, cordless telephones, video-games, there exist in society 'laws' which operate and more. But while this demand was rising, regardless of the will of the rulers was a gen­ regulators often thwarted the industry's abil­ uinely revolutionary idea."2 And, Mises ity to meet that demand with greater supply. added, "Whoever wished to combat liberal Meanwhile, retail prices were strictly con­ economic policy was compelled to challenge trolled by the authorities. the character of economics as a science. Ene­ Prices are signals. They communicate vital mies arose against it for political reasons."3 information about the state of resources, goods, and services. Changes in those signals indicate changes in prevailing conditions— "A Prodigiously Ingenious and stimulate remedial action: conservation Mechanism" by consumers and new supplies and alterna­ tive products from entrepreneurs. The idea The German Historical School of the late that anything good can come from distorting nineteenth century was one of those oppo­ or squelching those signals is astounding in nents of liberalism that rejected economics. its lack of wisdom. It's equivalent to believ­ It held that only specific historical episodes ing that a person with a fever can be helped could be described, and that no universal by placing his thermometer in ice water. Yet laws regarding human action existed. Carl that is the policy that has often been fol­ Menger, founder of the Austrian school, lowed with electricity (and so many other defended economics against the historicists. things). Mises did the most to systematize the "sci­ The would-be regulators may not want to ence of human action" (which he called hear it, but King Canute the Great's courtiers "praxeology") and to free it from its earlier were wrong. He couldn't really "command tentative empirical mooring. But one can the tides of the sea to go back." • find hints of the Misesian approach in the writings of Frederic Bastiat and others. Bas­ 1. Ludwig von Mises, Epistemological Problems of Eco­ nomics (New York: New York University Press, 1976 [I960]), tiat saw spontaneous regularity all around. p. 3. "We should be shutting our eyes to the facts 2. Israel M. Kirzner, Ludwig von Mises (Wilmington, Del.: ISI Books, 2001), p. 72. if we refused to recognize that society cannot 3. Mises, p. 4. present such complicated combinations in 4. Frederic Bastiat, Economic Harmonies (Irvington-on- Hudson, N.Y.: Foundation for Economic Education, 1996 which civil and criminal law play so little [1870]), p. 5.

28 IDEAS ON LIBERTY NOVEMBER 2003 Grutter v. Bollinger A Constitutional Embarrassment by George C. Leef

" A ^ animals are created equal—but to a simple rule like "admit the academically M\ some are more equal than others." best students possible." Instead, social inter­ mjk So goes the crucial line in George ventionists delight in trying to engineer a • M Orwell's classic Animal Farm. The student body that is "diverse" and have con­ Supreme Court's recent decision in Grutter vinced themselves that doing so is both v. Bollinger makes one think of that line, noble and immensely beneficial. since it gives constitutional approval to the policies used at many colleges and universi­ The Problem of ties that group applicants by race and treat certain groups as "more equal than others." Government Education Racial preferences can't be used too overtly, I would not care in the least if any private the Court said, but they are acceptable, and college or university wanted to use racial if one takes the rhetoric of the decision seri­ preferences to assemble a student body that ously, it would seem that the nation would it regarded as having the ideal mix of peo­ be in a terrible state if colleges and universi­ ple. They should be free to discriminate on ties didn't use them. the basis of race—or religion, musical Grutter has been wildly cheered by most tastes, family background, political views, of the higher education community and acceptance of vegetarianism, or anything social interventionists generally. By "social else—if they want to. The trouble occurs interventionists," I refer to those who believe when government-funded institutions adopt that virtually every aspect of society can be such preferences. We can blissfully ignore improved by the application of their wis­ the choices of private institutions that can dom, whether it's the housing market, health neither tax nor control us. When dealing care, preparation for retirement, or anything with government, however, people cannot else. Social interventionists are never content escape its power and are entitled to expect to leave processes alone if they can take over that they will not be treated differently from and direct them. When it comes to universi­ others, or compelled to support institutions ties, student admissions can't just be left up that do. George Leef is director of the Pope Center for This is one of the vast number of contro­ Higher Education Policy and book review editor of versies that would never arise if government Ideas on Liberty. did not undertake activities that go outside

29 Ideas on Liberty • November 2003 its proper sphere of protecting individual Justice Sandra O'Connor's opinion rights. Governments do not need to run col­ wheeled out one of the most frightful con­ leges and universities. Voluntary action is cepts in constitutional jurisprudence—com­ quite capable of providing us with all the pelling state interest. When government various educational opportunities we might wants to do something that the Constitution desire. If the market for education were forbids, it argues that there is a "compelling allowed to function and the government state interest" that the Court should recog­ exited the field, the heated political disputes nize, and that it's permissible for govern­ over admissions, textbooks, curriculum, and ment to violate the Constitution because of so on, would cease. The discrimination-in- that interest. Sometimes the Court "inter­ admissions battle is just one more reason prets" the Constitution to get around why the entire government education empire unwanted limitations on the power of gov­ should be privatized. ernment, and sometimes it finds that a As long as we have government-run uni­ "compelling state interest" overrides them. versities, however, we should hold them to The result is the same. Our rights and liber­ the law. The Fourteenth Amendment forbids ties erode. the states from denying any citizen the equal In this case, the compelling state interest is protection of the laws. Enacted just after the the "education benefits" that are supposed Civil War in an attempt to head off a regime to come from having a "diverse" student of official discrimination against former body. That conclusion, backed up by noth­ slaves and free blacks, the Fourteenth ing more than some dubious research and Amendment has come to mean generally the testimony of university officials who that government may not treat some citizens want to be able to discriminate, is the linch­ better or worse than others based on irrele­ pin of the Court's opinion. vant characteristics, such as ancestry. When The last time the Supreme Court dealt a government college or university adopts a with the issue of racial preferences in admis­ policy that establishes different admission sions was the Bakke case in 1978. There, a criteria for applicants depending on what badly divided Court wound up holding that their race is (or is claimed to be—people states could not use racial quotas, but that learn to game the system by saying that their race might be considered as a "plus factor" lineage to a distant ancestor puts them in a in individual instances. A line in Justice favored group), it is certainly not treating all Lewis Powell's opinion that preference advo­ people as legal equals. cates were quick to seize on was that univer­ sities might have an educational interest in "Diversity Is Educationally Beneficial" having a racially diverse student body. That soon became the new justification for racial So how did the Supreme Court evade the preferences. They weren't being used to rem­ equal-protection clause to arrive at the con­ edy past discrimination (as the older "affir­ clusion that racial discrimination in univer­ mative action" argument went), but were sity admissions is permissible, provided that being used to obtain the benefits of diversity. it's done in an "individualized" manner? (In But was there anything to Justice Powell's the companion case, Gratz v. Bollinger, the speculation? To make the "diversity is edu­ Court held that the University of Michigan's cationally beneficial" argument work when undergraduate admissions policy was imper­ it was sued by several white applicants who missible because it automatically gave black, had been rejected despite having significantly Hispanic, and American Indian applicants stronger academic records than the minority 20 points toward the 150 needed. That was students who were accepted, the University too much favoritism. So the meaning of the of Michigan needed some evidence. It had two cases is that racial preferences are all one of its faculty members, Professor Patri­ right, but don't be so blatant as to use a cia Gurin, conjure up a study that arrived at point system.) the desired conclusion. There were signifi-

30 Grutter v. Bollinger: A Constitutional Embarrassment

cant educational benefits to having a more students from racially preferred back­ "diverse" student body, she proclaimed. grounds? If schools couldn't or didn't Most people would assume, on hearing practice such discrimination, would "cross- that conclusion, that the study irrefutably racial understanding" become unattainable? demonstrated that students learn their chem­ Would it be impossible to find "leaders with istry, calculus, history, and so on better legitimacy"? when the student body is "diverse." Whether that would be a "compelling state interest" How Much "Diversity" Do We Need? is debatable, but the purported benefits were not of that sort. Rather, they were extrapo­ If the reason for believing that educational lated from student surveys probing their atti­ benefits follow from student-body diversity tudes on such things as their level of intellec­ is weak, the reason for believing that those tual confidence, whether they have friends of benefits depend on reaching some particular different ethnicities, and whether they're number of minority students is nonexistent. "good listeners." That's all this decision Suppose that Michigan admitted students rests on, a very rickety support for a consti­ solely on the basis of academics. There tutional holding. would still be some racial diversity—and The Gurin study has been subjected to plenty of diversity of other kinds. Students withering scrutiny. For example, Professors would still interact with a diverse faculty Thomas Woods and Malcolm Sherman con­ and live in a diverse world. To defend its clude in a paper written for the National desire to reach a certain level of "minority Association of Scholars that "there is no evi­ representation," the university used what dence that campus racial diversity has any amounted to a quota system. But why not educationally significant effect, direct or just accept whatever degree of racial diver­ indirect, on any of the academic and civic sity would come from admitting the most outcome variables that the University of qualified students? Michigan has discussed." Moreover, there The university answered there had to be a is evidence pointing the other way that is at "critical mass" of minority students so that least as persuasive—that the fixation on they wouldn't feel "isolated." For that racial quotas in education leads to divisive- proposition no evidence exists. Do we know ness, polarization, and deviation from the that, for example, black students won't university's educational mission. speak up in class unless it contains a certain Nevertheless, Justice O'Connor accepted number of other black students? No. The Michigan's feeble argument whole. Then she very idea is both insulting and risible. We magnified those dubious "educational bene­ aren't talking about first-graders here. We're fits" molehills into a Himalaya Range of talking about young adults, and there is no social improvement, saying that universities reason whatsoever to assume that young need to be able to racially engineer their stu­ adults from these groups have much to add dent bodies so we can have "cross-racial to the educational environment, but won't understanding" and to "cultivate a set of add it unless they have several other students leaders with legitimacy in the eyes of the "like themselves" in the classroom. citizenry." Alas, the absurd "critical mass" argument This is a non sequitur of breathtaking pro­ found favor with a majority of the justices. It portions. Are we really to believe that so is hard to believe that this flimsy justification much hangs on the ability of universities to for discriminatory admission policies is any­ reject some white and Asian students with thing other than a constitutional fig leaf, a stronger academic profiles in order to get fiction designed to hide the fact that the Court has decided that preferential policies *Thomas E. Woods and Malcolm J. Sherman, "Is Campus Racial Diversity Correlated with Educational Benefits?" National are a good thing and universities should be Association of Scholars, April 4, 2001. The executive summary, allowed to use them, no matter what the with a link to the full report, is online at www.nas.org/reports/ umich_diversity/um ich_execsum.htm. Constitution says.

31 Ideas on Liberty • November 2003

What is really at the core of the enthusi­ worker ever thinks, "It's a really good thing asm among social interventionists for racial that Michigan's law school maintains a crit­ preferences in higher education (and else­ ical mass of black students." Most of us are where) is, I believe, a peculiar feature of their interested in ourselves individually, not as way of looking at the world. That feature is group members. If top colleges chose their what we may call groupthink, the tendency students just on academic ability, hardly to evaluate phenomena not from the stand­ anyone would pay the slightest attention— point of individuals, but of groups. Group- except, of course, groupthinkers. thinkers don't much worry about whether Interventionists are good at convincing laws and procedures treat individuals fairly. themselves that their meddling is terribly Instead, they worry whenever they see that a important. Despite mountains of evidence group which they perceive as having some­ that programs such as rent control, Social how suffered in the past is not advancing as Security, and "public education" are harm­ rapidly as they think it should. Whenever ful, one almost never hears them say, "That that's the case, groupthinkers don their was a bad idea; we should have just left well social interventionist robes and try to make enough alone." In this case, interventionists things better. are just certain that their well-intentioned Because the average incomes of blacks, racial blending on campus is essential for a Hispanics, and American Indians are below host of wonderful outcomes. But their the national average, groupthinkers believe protestations that the use of racial prefer­ that these groups have to be helped. ences is necessary are no more convincing Enabling more of such students to get into than are interventionist statements on the top colleges and professional schools, they need to allow them to do other things their assume, must be a benefit to the group, so way—the "need" for a national health-care it's a good policy to follow. Never mind that system, for example. They habitually exag­ most students who benefit from racial pref­ gerate the benefits of their policies and erences come from fairly affluent families, ignore the costs. and never mind that the correlation between Sir Henry S. Maine observed in his book having attended a prestige school and suc­ Ancient Law that "the movement of the cess in later life is quite weak. As long as progressive societies has hitherto been a minority-group representation is up at places movement from status to contract." That is, like the University of Michigan, groupthink- progress required the abandonment of social ing interventionists are happy. organization in which a person's rights Former Harvard president Derek Bok has depended on his class, and adoption of the said that it just wouldn't do "to have an all- idea that everyone should be equally free to white university." (Chinese, Japanese, Kore­ negotiate for whatever he wants in life. ans, Indians, and others may be surprised to Maine was right. By giving its blessing to learn that, for admissions purposes, they're government use of racial preferences in edu­ "white.") That statement perfectly symbol­ cation, the Supreme Court has taken a step izes the groupthink outlook. Bok frets over backward, a reversion toward the time when the group mixture of the student body, the law said, "Tell me who you are, and then apparently believing that the rest of America I'll let you know how you will be treated." does, too. That's bad enough, but we also have to But does the composition of the student worry that Grutter will spawn more govern­ body at Harvard or Michigan or anywhere ment action in the future, based on the else matter to people who aren't obsessed assessment that the Court may call any fool­ with group identity? I think not. I strongly ish interventionist notion a "compelling doubt that a Mexican landscape worker ever state interest" if backed up by some dubious thinks, "American is all right because Har­ "research" and fervent wishful thinking. vard has a quota for students with Spanish- All in all, a bad day's work at the Supreme sounding surnames" or that a black auto Court. • 32 IDEAS ON LIBERTY NOVEMBER 2003 Global Warming: Extreme Weather or Extreme Prejudice? by Christopher Lingle

xtreme weather is making headlines. building of slums or suburban housing in Record summer temperatures in Europe flood plains. Similarly, air conditioning and a large number of heat-related allows more people to live comfortably in deaths in India joined news about severe areas subject to hurricanes and cyclones. Eflooding in Bangladesh, China, and Sri In its report, the WMO notes that global Lanka. And an unusual number of tornados averages for land and sea surface tempera­ in the United States have been reported. tures in May are the second highest since For its part the UN World Meteorological records began in 1880. However, tempera­ Organization (WMO) suggests that global tures in the upper atmosphere were not warming is linked to these events. It also reported. This is no slight oversight. For declared that extremes in weather and cli­ global warming to be truly global, atmos­ mate are setting new records and the number pheric temperatures would also have to be of such extreme events has been rising. (The rising. But there is no evidence that air tem­ Bush administration plans to spend $103 peratures have risen to match the reports of million to study global climate change.) rising ground temperatures. But these reports raise many questions. As Consider the fact that surface tempera­ the director of the WMO admitted, the tures have been increasingly recorded in results reflect the fact that monitoring and urban areas or airports that have much more communication of weather conditions are concrete and asphalt than they had even a better than ever before. It turns out that the few decades back. All other things constant, only certainty is that reporting of extremes is it would be surprising if temperatures taken more common, even if the extremes are not. in such "hot spots" did not increase. As it is, little attention is paid to the fact Such alternative explanations tend to be that some of the vulnerability to extreme ignored. And so it has become an article of weather arises from changing human popu­ faith that burning fossil fuels increases lation patterns. Over the years, foreign aid greenhouse gases (GHG) that lock in heat and emergency disaster relief encouraged the and cause global warming. Contrary to conventional wisdom, scien­ Christopher Lingle ([email protected]) is profes­ sor of economics at Universidad Francisco Marro- tific understanding of climate change guin in Guatemala and global strategist for remains quite unsettled. In particular, it is eConoLytics.com. not clear that observed global warming

33 Ideas on Liberty • November 2003 trends are significant or relevant to the long- which we can be certain, in exchange for term survival of life on earth. Nor is it clear uncertain benefits. Our incomplete under­ that attempts to reduce greenhouse gases standing of the climate system raises ques­ will offset other factors that influence cli­ tions over the effectiveness of local or mate. Indeed, there is a strong correlation regional responses to perceptions about between sunspot activity and temperature global climate change. variations. Since global climate history reveals wide In all events, GHGs are not the only pos­ fluctuations over the earth's life, it is impor­ sible source of warming trends and not nec­ tant to choose an appropriate time frame for essarily the most important. Weather and reference to allow for reasonable compar­ climate patterns depend on influences from isons. Most climate models used by the oceans and other water systems, the vari­ IPCC cover the last 1,000 years of climate ability of solar radiation, volcanic aerosols, variation. However, most of the data are and greenhouse gas emissions, as well as estimates because surface temperature data clouds and water vapor, just to name a few. have been recorded for only about 150 The UN Intergovernmental Panel on Cli­ years. And weather balloon readings have mate Change (IPCC) considers at least 12 been collected for 30 years, while satellite conditions that could change climate. Of readings span less than 20 years. these, only greenhouse gases have come It turns out that greenhouse politics suf­ under the close scrutiny of the scientific com­ fers from a tendency to exaggerate. Environ­ munity. Uncertainty over the influence of the mental activists use worst-case scenarios that other conditions means that they could reflect their own biases to raise funds to sup­ worsen the warming trend or reduce it or port their causes. Politicians have a vested cancel it out completely. interest in citizens' believing in catastrophic A report released by the United Nations scenarios that make it easier to levy new identified a two-mile-thick "Asian Brown taxes, since guilt or uncertain risks make Cloud" that is blamed partly on greenhouse them more willing to surrender more of their gases. However, an examination of the income. effects of this enormous blanket of haze While the perceptions of the general pub­ found that it counteracts global warming lic are influenced by these biases, rising by shading land areas that it covers. So, it incomes also lead to increased demand for turns out that sometimes GHGs can induce higher environmental quality. Politicians cooling. and bureaucrats have tended to respond by This is not the only beneficial property of imposing stricter environmental regulations, GHGs. It is also overlooked that CO2, one with violations receiving ever wider media of the most infamous carbon-based GHGs, coverage. In turn, there has been a misper- is actually plant food that is converted into ception that environmental quality is wors­ oxygen. ening when it may actually be improving or perhaps remaining unchanged. Certain Harm, Uncertain Benefits Even if global temperatures are rising, we do not really understand why. Neither do Meanwhile, most economic analyses indi­ we know if nor how soon the worst-case cate that mandating reductions in green­ scenarios might occur. Even their ultimate house gases will cause significant harm of consequences remain uncertain. •

34 Our Economic Past by Robert Higgs IDEAS ON LIBERTY NOVEMBER 2003 How the Federal Government Got into the Ocean-Shipping Business

omeone who maintains that the rela­ tion, proposed as early as August 1914 that tions between government and business to alleviate the crisis the U.S. government in the United States during the past cen­ should be authorized to regulate shipping Stury have been essentially fascistic could rates and to operate competing vessels on its find no better example than ocean shipping. own account. President Woodrow Wilson Here we observe all the requisite elements of strongly supported this plan, writing in Sep­ economic fascism: government-authorized tember 1914, "The idea in the proposal is and -supervised cartels, the semblance of pri­ not that the government should permanently vate property rights without the substance, embark in these things, but that it should do and the ever-present rationale of preparation the immediate and necessary thing"—a clas­ for or actual engagement in warfare. sic example of diving into quicksand.2 Because many ships historically have been The Wilson administration's proposal met capable of serving both commercial and substantial opposition in Congress—Senator naval or military purposes, the government Elihu Root declared it to be "a measure of always has had an interest in the ocean- state socialism which, if established, will shipping business—between 1848 and 1858, inevitably destroy individual liberty"—and for example, the federal government paid both Wilson and McAdoo devoted much three shipping lines more than $11 million in time and effort to gaining its approval.3 Pro­ subsidies1—but the government's actions in ponents urged that the government's mer­ relation to the building and operation of chant ships would serve also as naval auxil­ merchant vessels remained ad hoc and tran­ iaries and thus contribute to national sitory prior to World War I. After enactment security. In promoting the proposal McAdoo of the Shipping Act of 1916, however, the began to emphasize the national-security government became deeply and permanently aspect, having learned from experience, he involved. later wrote, that "people as a rule are far The onset of war in 1914 created an more interested in fighting, and in prepara­ immediate severe shortage of ocean-shipping tions for fighting, than they are in any con­ services, which only grew worse with the structive commercial or industrial effort."4 passage of time and the sinking, diversion, Finally, whatever had restrained Congress or internment of ships. Shipping rates from projecting the government into the increased enormously. Treasury Secretary shipping business gave way before the com­ William Gibbs McAdoo, a leading Progres­ bined weight of the extraordinary shipping sive with no fear of government interven- costs, the lure of lucrative trading opportu­ nities, and the growing national insecurity. Robert Higgs ([email protected]) is senior fellow at the Independent Institute (www. After two years of politicking, spearheaded independent.org), editor of The Independent by Wilson, McAdoo, and their fellow Review, and author of Crisis and Leviathan. Democrats in Congress, a shipping bill was

35 Ideas on Liberty • November 2003 passed, and the President signed it into law during the interwar years, however, and the on September 7, 1916. government's ventures incurred chronic This law created the U.S. Shipping Board losses, which the taxpayers had to cover. and empowered it to regulate the rates and Many of the ships rested at anchor—rusting practices of waterborne common carriers in monuments to government ineptitude and foreign and interstate commerce and, waste. through a subsidiary, to acquire, construct, No salvation lay just beyond the horizon, and operate merchant vessels. The sub­ however. In 1936 a new Merchant Marine sidiary, known as the Emergency Fleet Cor­ Act authorized the U.S. Maritime Commis­ poration, was created on April 16, 1917. sion to assume the Shipping Board's func­ During the war, executive orders, amend­ tions and set in motion another round of ments to the act, and related legislation government subsidies, ship construction, greatly extended the government's authority and cartelization. When World War II over the ocean-shipping industry. Govern­ began, the War Shipping Administration ment agencies gained the power to acquire took complete control of all private shipping vessels by requisition, commandeering, and operations, while the Maritime Commission seizure; to assign cargoes and routes; to plunged into a massive ship-construction regulate not only shipping and shipbuilding program that dwarfed its World War I but also the wages, hours, and working antecedent, then left the government at the conditions of laborers in those industries; end of the war in possession of a gigantic and even to build residential housing, stores, fleet of unemployed and, for the most part, and transport systems for them. By the unemployable vessels, including thousands autumn of 1918 "government control of of poorly constructed, slow-moving Liberty merchant shipping in American service was ships. absolute."5 Statutes enacted in 1950, 1961, and 1984 The Emergency Fleet Corporation's ship­ repositioned deck chairs on the government's yards had just begun to operate at a high shipping Titanic. Nowadays an independent rate when the war ended. Interested parties regulatory agency called the Federal Mar­ pressed the government to keep building, itime Commission oversees the cartels, while however, and it did so, in disregard of the the Maritime Administration (in the Depart­ long-term consequences, producing far more ment of Transportation) channels taxpayer in 1919 than it had produced in 1918. Alto­ money into the pockets of favored parties by gether, between 1917 and 1922, the govern­ means of subsidies to shipbuilders and ship­ ment built more than 2,350 ships (hundreds ping lines, loan guarantees for construction of them nearly worthless wooden vessels) at and repairs in U.S. shipyards, and mainte­ a cost of more than $3 billion—approxi­ nance of the National Defense Reserve Fleet, mately one-tenth of the entire financial cost among other boondoggles.7 • of the war.6 1. Burton W. Folsom, Jr., Entrepreneurs vs. The State (Reston, Va.: Young America's Foundation, 1987), p. 14. Ship Sale 2. Wilson to O. G. Villard, September 4, 1914, quoted in Richard Sicotte, "Economic Crisis and Political Response: The The government now found itself in pos­ Political Economy of the Shipping Act of 1916," journal of Economic History, December 1999, p. 871. session of thousands of ships no longer 3. Root to C. W. Wilson, February 4, 1915, quoted in ibid., needed for composing, in the words of a p. 862. 4. William Gibbs McAdoo, Crowded Years (Boston: wartime slogan, "a bridge of ships" across Houghton Mifflin, 1931), pp. 311-12. the Atlantic. The Merchant Marine Act of 5. Edmund E. Day, "The American Merchant Fleet: A War Achievement, A Peace Problem," Quarterly Journal of Eco­ 1920 authorized selling the ships to U.S. nomics, August 1920, p. 591. firms on easy terms and provided for subsi­ 6. Ibid., pp. 592-93; U.S. Shipping Board reports cited by Sicotte, p. 861. dies to private operators. It also approved 7. See "Maritime Administration" and "Maritime Commis­ the operation of government shipping lines. sion, Federal," in A Historical Guide to the U.S. Government, ed. George Thomas Kurian (New York: Oxford University The shipping business remained depressed Press, 1998), pp. 379-83.

36 IDEAS ON LIBERTY NOVEMBER 2003

The Fallacies of Distributism by Thomas E. Woods, Jr.

n certain disaffected pockets of the politi­ A family possessed of the means of pro­ cal left and right, more and more voices duction—the simplest form of which is can be heard on behalf of an economic and the possession of land and of the imple­ social system known as distributism. ments and capital for working the land— According to the celebrated Catholic writers cannot be controlled by others. Of course, G. K. Chesterton and Hilaire Belloc, who various producers specialize, and through popularized the idea in the early twentieth exchange one with the other they become century, that social system is best in which more or less interdependent, but still, "productive property" is widely dispersed each one can live "on his own": each one rather than concentrated. They contend that can stand out, if necessary, from pressure the market order undermines community life exercised against him by another. He can and introduces an intolerable level of insecu­ say: "If you will not take my surplus as rity and anxiety into the economic life of the against your surplus I shall be the poorer; ordinary person. They would, therefore, but at least I can live."1 limit business competition and implement a system of punitive taxation against firms For Belloc, then, the great advantage of dis­ that had attained what these writers consid­ tributism is that it gives the household a sig­ ered excessive economic concentration. nificant measure of independence. A new I do not for a moment doubt the good will introduction to his Essay on the Restoration and pure intentions of those who support of Property describes his view of "economic distributism, and indeed I count some of freedom" as something that "comes from the them among my friends. My own view is possession of sufficient productive property, that if someone wishes to live in relative self- such that a man need not depend upon his sufficiency and to retreat, to a degree, from employer for a wage, but has rather to depend the division of labor, that is his decision. upon himself and his land, craft, tools, and What I wish to do here is to suggest that the trade for his sustenance."2 Belloc acknowl­ purported advantages of distributism, as edges in passing that of course anyone selling well as the alleged iniquities of the market, to others is in some way dependent on those have both been greatly exaggerated. others, thereby conceding that risk and uncer­ Let us consider Belloc's fundamental claim tainty are unavoidable aspects of life rather for distributism. As he sees it, distributism than unique to a system of economic freedom. brings freedom: If the price and quality of his goods do not remain sufficiently competitive, he is surely Thomas Woods ([email protected]) holds a Ph.D. in history from Columbia University and is bound to lose business. However, Belloc assistant professor of history at Suffolk Commu­ points out, the family can nevertheless live on nity College (SUNY) in Brentwood, New York. its own, even if buyers refuse to purchase its

37 Ideas on Liberty • November 2003 surplus goods. They can live on what they they are as a result of forces beyond their themselves produce. At heart, then, Belloc's control; an ineluctable process of wealth promise of security amounts to the distributist concentration brought about by capitalism family's ability in the last resort to retreat has deprived them of the possibility of own­ altogether from the division of labor and live ing "productive property" and avoiding the in a condition of self-sufficiency. dependency that the wage relation implies. Yet the advantages of the division of labor But the fact is, many people clearly prefer to are so clear that relatively few people have be wage earners rather than business own­ found Belloc's proposal attractive enough to ers. Belloc and his followers are free to insult have actually attempted to adopt it. Practi­ such people by calling them "wage slaves"— cally anyone in the United States today who the distributists' favorite slur—but they have possesses the requisite knowledge and modest made an entirely rational choice. And it is a capital can acquire farmland and chase after choice. As Fr. James Sadowsky observes, the kind of self-sufficiency Belloc advocated. Producing their own necessities and in posses­ The fact is that in the nineteenth century, sion of the means of production, so to speak, when workers had far less disposable such a family would be utterly independent of income than their counterparts today, a employers or anyone else. They would proba­ remarkable number of them became capi­ bly also enjoy a standard of living so talists. It is all too often the unwillingness depressed and intolerable as to throw the to restrict consumption, a grasshopper rationality of the entire enterprise into ques­ attitude, that prevents workers like me tion. This certain outcome probably accounts from becoming capitalists. In our day we for why the overwhelming majority of people see especially among immigrants from choose to take their chances within the divi­ Asia what is, for us, an amazing willing­ sion of labor, balancing the risks from which ness to defer present consumption. We this earthly life is never entirely secure against find these people living initially in condi­ the unparalleled wealth and comfort they can tions that we should judge to be enjoy by not retreating into semi-autarky. absolutely impossible. Yet before we Even granting the distributist premise that know it, they are operating successful smaller businesses have been swallowed up businesses.3 by larger firms, that it is always preferable for a man to operate his own business rather As for the alleged insecurity with which than to work for another is by no means workers must live, those who work for obvious. It may well be that a man is better wages in fact enjoy a kind of security that is able to care for his family precisely if he does simply not acknowledged at all by distrib­ not own his own business or work the back- utists—namely, that the worker receives his breaking schedule of running his own farm, pay whether or not the goods toward whose partially because he is not ruined if the enter­ production he contributes ever sell. It may prise for which he works should have to be many months or years before they make close, and partially because he doubtless it to market at all. During all that time, enjoys more leisure time that he can spend instead of suffering the anxieties and uncer­ with his family than if he had the cares and tainties of the independent craftsman or responsibilities of his own business. Surely, shop owner, the worker consistently earns therefore, we are dealing here with a matter his wage. He need not wait until—if ever— for individual circumstances rather than his product is actually sold in order to reap crude generalization. his benefit. While Karl Marx claimed that any differ­ Deprived of Property ential between capitalist profit and wages paid to labor constituted "surplus value" The way distributists portray the situa­ and exploitation, the Austrian economist tion, the wage earners of today are where Eugen von Bohm-Bawerk attributed such 38 The Fallacies of Distributism

differentials to the time factor involved: worker is a uniquely reprehensible aspect of rather than having to wait, say, the full year modern society rather than an inevitable that must ordinarily elapse before the prod­ aspect of life that has been with us since the uct on which he has worked is sold, the beginning of time. Were peasants in pre- laborer can be paid immediately. Since pre­ industrial France—who were, it should be sent goods are preferred, other things equal, recalled, among the freest, most independent to future goods, the capitalist is entitled to peasantry in Europe—free of "hand-to- his profit since he compensates his workers mouth uncertainty"? (Try telling that to a in the present for the production of goods fourteenth-century mother who has just lost that will be sold only in the future. The her fourth child before his first birthday, worker, on the other hand, prefers a lesser lives one bad harvest away from starvation, amount in the present to the greater amount and resides in nearly intolerable squalor.) As he could have received in the future had he late as the eighteenth century, all travelers been willing to wait that long. He is clearly commented on the appalling conditions of benefited by the wage relation.4 the French peasantry and the shockingly To be sure, the worker does labor under dilapidated state of rural housing. The same the very real uncertainty that he may lose his held true for many who sought employment job. But this is inevitable due to technologi­ in a trade. A Norman parish priest described cal improvements, changing tastes, new the situation in 1774: methods of production, and the like. The advent of the automobile meant that car­ Day laborers, workmen, journeymen and riage manufacturers would have to shift into all those whose occupation does not pro­ some other line of production. The introduc­ vide for much more than food and cloth­ tion of fax machines and electronic mail ing are the ones who make beggars. As must have cut into the business of couriers young men they work, and when by their and package delivery. The net result of these work they have got themselves decent changes is greater abundance and a higher clothing and something to pay their wed­ standard of living, as fewer resources are ding costs, they marry, raise a first child, now necessary to accomplish our ends, have much trouble in raising two, and if a thereby freeing up resources for the produc­ third comes along their work is no longer tion of goods that prior to these technologi­ enough for food, and the expense. At such cal advances we could not have enjoyed. a time they do not hesitate to take up the What would the distributists have us do beggar's staff and take to the road.5 about these benign phenomena? Shall we establish a board of economic commissars to Taking up the beggar's staff and taking to dictate which improvements will be permit­ the road: that is what was left to them. To ted and which not? No one has a property say, therefore, that the free market led to the right in a job. Put another way, no one has a destruction of some previously existing, har­ right to demand that society continue to monious community life is simply to defy compensate him for performing a task peo­ historical testimony. How could "commu­ ple no longer require, whether he is a laborer nity" exist when people were starving and or a shop owner. An economy based on the forced to take to the road for sustenance? In division of labor does not tolerate such a what way is the alleged "independence" of self-centered, anti-social attitude. Instead, it farmers and craftsmen in evidence here? encourages us to satisfy the needs of our These appalling conditions applied at times fellows. to as much as one third of the French popu­ lation—some eight million people.6 Life Is Always Uncertain Nevertheless, Belloc claims that "the twin evils of Insecurity and Insufficiency" are Moreover, it is profoundly misleading to inevitably associated with capitalism. "The suggest that the "uncertainty" of the modern main body of citizens, the Proletariat, are 39 Ideas on Liberty • November 2003 not sufficiently clothed, housed and fed, and superiority of economic freedom all but even their insufficient supply is unstable. impossible to deny, and the amazing abun­ They live in a perpetual anxiety."7 This was dance which we owe to such a social order not even true at the height of the Industrial no longer a matter of serious dispute, we are Revolution, let alone in the early twentieth now told that even to think in such terms century when Belloc was writing.8 Practi­ reveals an excessive attachment to the things cally everyone acknowledges that the free of this world. market has created a greater abundance of The net result of all of the obstacles to necessities than previous ages could have prosperity inherent in distributism must be a dreamed possible. Imagine what the thirteenth- far poorer society. Now Belloc and his fol­ century peasant, the exemplar cited by so lowers are free to argue that impoverishment many distributists, would have thought of a is a small price to pay for economic inde­ society in which life expectancy was not 35 pendence. But they have no right to accuse but 75, where everyone in society enjoyed anyone of moral perversity for remaining dozens of changes of clean clothes, inexpen­ unconvinced. Yes, there is "insecurity" in a sive food, shelter with amenities like heating free society, in that no one has a right to and air conditioning—the list could go on a demand that his fellow men continue to pay long, long time. The only way one could him for performing a task they have indi­ claim that capitalism actually brought about cated they no longer require. This is a fea­ a retrogression of the physical well-being of ture of any economic system—unless we the poorest would be if he were entirely guarantee every business owner a share of ignorant of the conditions of the past. the market regardless of his abilities, cour­ tesy toward the customer, and responsive­ ness to the needs of society. At the same More to Life time, the "insecurity" of the free society is Faced with this point, distributists fre­ more than compensated for by the unique quently shift to the rhetorically effective security enjoyed by members of such a soci­ argument that there is more to life than ety vis-a-vis members of a distributist soci­ material possessions, and that economic ety, in the form of fantastic, unheard-of lev­ relations should be such that man is enabled els of wealth, the benefits of the division of to enjoy and cultivate higher tastes and labor, and the large-scale social cooperation virtues. This is a straw man, of course, since it makes possible. An eleventh-century serf hardly anyone arguing in favor of the mar­ enjoyed a great deal of job security, but few ket suggests that material possessions are envy him his position. ends in themselves or bring the highest kind Every one of the agricultural revolutions of fulfillment. Furthermore, it is precisely the through which the Western world has passed wealth that the market creates and the since the ninth century has involved the leisure it makes possible that make the introduction of new farming implements, enjoyment of higher things practicable in the methods, or fertilizers whose net result has first place. A man living at the level of bare been that fewer people are needed to pro­ subsistence is not likely to be able to culti­ duce the same amount of output. Naturally, vate an interest in opera, or Renaissance these advances meant the displacement of painting, or nineteenth-century literature. some people, as the economy adjusted to Indeed, the objection of materialism only new circumstances. Would Belloc have per­ reveals the incoherence of the anti-market mitted any of these agricultural revolutions position, which began as an argument that to occur? After all, they led to a great deal of the market systematically exploited and what Belloc calls insecurity. But they also impoverished the laborer. When the over­ made possible the sheer survival of far more whelming weight of the evidence shows this people, now that food could be more readily opinion to be ludicrously at odds with real­ produced. The same is true of any innova­ ity, the accusation shifts ground. With the tion that increases the productivity of agri-

40 The Fallacies of Distributism cultural labor: it makes possible a consider­ reform their conduct of affairs, they lose able increase in population. Can this consid­ their wealth. No investment is safe for­ eration be weighed against Belloc's desire for ever. He who does not use his property in stability? We are not told. serving the consumers in the most efficient Moreover, it is not clear what precisely is way is doomed to failure. There is no so "secure" about deliberately spurning the room left for people who would like to material benefits of the division of labor, enjoy their fortunes in idleness and which are not inconsiderable, in favor of the thoughtlessness. The proprietor must aim kind of self-sufficiency that Belloc describes. to invest his funds in such a way that prin­ As Belloc and other distributists have said, cipal and yield are at least not impaired.9 the self-sufficient man, while certainly bene­ fiting from specialization and exchange with What more salutary check against arbi­ others, can if necessary rely on himself alone trariness could exist than that? The state, on for the things he needs. That is certainly the other hand, which Belloc proposes to use true, but that would make Robinson Crusoe to establish and maintain his own system, is one of the most secure men who ever lived, insulated from the consequences of arbitrari­ since he was in no danger (until Friday came ness, since it never has to pass any such along, that is) of being lured into the temp­ market test. In fact, the worse a government tations of the division of labor and thereby agency performs, the higher its budget tends finding himself in a state of interdependence to be the following year. This is one reason with his fellows. so many of us are loath to entrust our well- The man who relinquishes so many of the being to such an institution. benefits of the division of labor, moreover, Let us count our blessings. Thanks to invites a level of insecurity with which the industrial society, few of us live in fear of so-called "wage slave" of capitalism need dying of the countless diseases since tamed never be confronted. What does Belloc's iso­ by medical science. We enjoy sanitary condi­ lated farmer do during a drought? By the tions, personal comforts, and opportunities time normal channels of trade are hastily that the greatest kings of Europe could reopened, it may be too late. What consola­ scarcely have imagined. Half of our children tion will such a family be afforded by reas­ do not die by age five. People are free to con­ suring themselves at such a time that at least sider these things trivial or unimpressive if they are not "wage slaves"? Who in the pre­ they wish, but the judgment of mankind sent United States suffers from such fears? appears to run in the other direction. • Belloc would use state policy to keep large manufacturers in check. But in the market­ 1. Hilaire Belloc, Economics for Helen (London: J. W. Arrowsmith, 1924), p. 125. place a crucial check already exists against a 2. Editors of IHS Press, "Introduction," in Hilaire Belloc, An wealthy manufacturer: he will be able to Essay on the Restoration of Property (Norfolk, Va.: IHS Press, 2002 [1936]), p. 12. maintain his wealth only to the extent that 3. James A. Sadowsky, "Capitalism, Ethics, and Classical he makes prudent investments and continues Catholic Social Doctrine," This World, Fall 1983, p. 123. 4. Eugen von Bohm-Bawerk, Capital and Interest, 3 vols., to satisfy the needs of his fellow man. This is trans. George D. Huncke and Hans F. Sennholz (South Holland, what Ludwig von Mises meant when he said 111.: Libertarian Press, 1959), vol. 1, p. 269; see also Hans- Hermann Hoppe, The Economics and Ethics of Private Prop­ that ownership of the means of production erty (Boston: Kluwer Academic Publishers, 1993), pp. 96-97. "is not a privilege, but a social liability": 5. Olwen H. Hufton, The Poor of Eighteenth Century France, 1750-1789 (Oxford: Oxford University Press, 1974), p. 11. Capitalists and landowners are compelled 6. William Doyle, The Oxford History of the French Revo­ lution (Oxford: Oxford University Press, 1989), p. 14. to employ their property for the best pos­ 7. Belloc, Essay, p. 28. sible satisfaction of the consumers. If they 8. Thomas E. Woods, Jr., "A Myth Shattered: Mises, Hayek, and the Industrial Revolution," Ideas on Liberty, November are slow and inept in the performance of 2001, pp. 42-44. their duties, they are penalized by losses. If 9. Ludwig von Mises, Human Action, Scholar's Edition (Auburn, Ala: Ludwig von Mises Institute, 1998 [1949]), they do not learn the lesson and do not p. 308. I owe this reference to Professor Jeffrey Herbener.

41 minded observer with no vested interest in the outcome of those actions would. This is BOOKS Smith's imaginary "impartial spectator." Following the dictates of this "impartial Adam Smith's Marketplace of Life spectator" is a kind of adjustment mecha­ by James R. Otteson nism driving us toward a moral consensus in Cambridge University Press • 2002 • 338 pages much the same way that following the price • $70.00 hardcover; $26.00 paperback system permits markets to clear—the better known "Invisible Hand." Reviewed by Robert Batemarco Smith sees this "impartial spectator" as able to permit us to strike a balance between ne of the puzzles confronting students benevolence and self-interest against a back­ of the history of economic thought is drop of justice. Whereas justice is the pre­ Othe apparent inconsistency of the two requisite for any kind of ordered society and masterworks of Adam Smith: The Theory of is thus always commanded by the impartial Moral Sentiments and An Inquiry into the spectator, benevolence, which goes beyond Nature and Causes of the Wealth of justice, is only called for contingently. As Nations. In the former, Smith gives an Otteson puts it, "Smith argued that the account of how benevolence plays a central impartial spectator approves of an ascending role in shaping individuals' moral sensibili­ degree of benevolence towards others in ties, while in the latter he contends that eco­ direct relation to our knowledge of and nomic prosperity can prevail with nary a familiarity with them." According to this trace of benevolence. "familiarity principle," behavior consistent James Otteson, associate professor of phi­ with the letter of the law that would be quite losophy at the University of Alabama, did proper in dealing with strangers would be not find conventional explanations of this scandalous if applied to family and friends. disparity satisfactory. Where most students Since we conduct most of our economic of this issue tried to explain why The Wealth transactions with strangers or near- of Nations differed from The Theory of strangers, the premises set forth in The The­ Moral Sentiments, Otteson looked for what ory of Moral Sentiments lead directly to the in the latter was the same as in the former. In conclusion that self-interest properly trumps Adam Smith's Marketplace of Life, his will­ benevolence in the economic realm depicted ingness to think outside the box led him to in The Wealth of Nations. Thus the two identify the common framework that inte­ books, rather than contradicting each other, grates both these works in their parallel share a common core. Otteson's original adjustment processes. contribution is to have identified that core In the economic order, most readers of and how Smith saw it playing out in the Ideas on Liberty are more than familiar with moral realm. Smith's notion that prices are guides to In making this contribution, he displays mutually beneficial exchanges and desirable virtuoso scholarship. Otteson assiduously allocations of resources. His vision of auto­ examines the points of view of others matic adjustment is central to modern eco­ who have studied this issue without ever nomics. In the moral realm, he used a paral­ letting the reader lose sight of his own argu­ lel construction to explain people's moral ment. Moreover, for nearly every question judgments. this thought-provoking work raised in the Otteson sees Smith starting from the mind of this reader, the author provided premise that people have an innate desire for a satisfying answer within a couple of their sentiments to correspond with those of pages. To top it off, Otteson spells out others, which he calls "mutual sympathy of what makes his inquiry more than a mere sentiments." To accomplish this, people exploration of arcane issues—namely, that must judge their own actions the way a fair- it gives us compelling "reasons to spread 42 human freedom as widely as possible." mative and he sprinkles his narrative with Not only will Smith scholars find much interesting biographical sketches of key fig­ food for thought in these pages, but the new­ ures in the tax debate. If you're interested in comer to the works of Adam Smith will not the historical battle over the constitutionality leave the table intellectually undernourished. and desirability of the federal income tax, The author lets his arguments build systemat­ Weisman's book covers it well. On the nega­ ically, almost in the manner of a programmed tive side, though, he is blinded by statist pre­ text, and provides recaps of his main points suppositions on the role of government and that leave no room for confusion. If Professor never seriously questions the conventional Otteson teaches the way he writes, his stu­ liberal/progressive view of American history. dents at the University of Alabama are getting At least he announces his biases at the more than their money's worth. beginning. "The income tax is ... a kind of One big question this work does not fully leveler," Weisman writes. "[I]t softened the answer is how reliable Smith's impartial edges of the distribution of wealth in the spectator is at yielding an ethic consistent interest of justice and fairness—and among with liberty. In an age where most people progressives, in the interest of maintaining a have been brainwashed into believing the certain level of social stability." The income opportunity to feed at the government tax, in Weisman's view, is "desperately trough is a God-given right, it is doubtful needed to underscore the idea of social jus­ that everyman's impartial spectator would tice in the distribution of rewards and sacri­ today recoil from participation in the plun­ fice in our society." With this framework, der disguised by a veneer of legality, as so Weisman depicts those who favored an many would have 150 years ago. So while income tax, especially a progressive tax, as Otteson has solved one interesting prob­ heroic and courageous; their opponents are lem, an even more important one awaits a labeled "ultraconservative" defenders of solution. • entrenched, selfish, and wealthy interests. It evidently never occurs to him that lusting Robert Batemarco is a vice president of a market­ ing research firm in New York City and teaches after the income of individuals in order to economics at Pace University. lavish it on politically driven programs might be the quintessence of greed. Weisman's narrow view of tax history The Great Tax Wars: Lincoln to Wilson— leads to three problems. The first is impre­ The Fierce Battles over Money and cise definitions. He talks constantly of the need for a "fair" income tax that targets Power that Transformed the Nation those with the ability to pay. But as an advo­ by Steven R. Weisman cate of a progressive tax, he never can say Simon & Schuster • 2002 • 419 pages • $27.00 with any precision what a "fair" top rate would be—7 percent (the 1913 rate), 77 per­ Reviewed by Burton W. Folsom, Jr. cent (the 1918 rate), or 100 percent (Presi­ dent Roosevelt's advocated rate in 1942 on he Great Tax Wars describes the 60-year all income over $25,000). battle (from Presidents Lincoln to Wil­ Weisman's second problem is that he is so r son) that led to the permanent federal anxious to show a need for an income tax income tax. As important as the income tax after the Civil War that he misses the dan­ is to explaining the rise of big government in gers to liberty that existed when the tax was the twentieth century, we have regrettably in place during the war. Weisman expresses few books on why and how the income tax no alarm that George Boutwell, the first came into existence. Weisman's book, there­ commissioner of the IRS, concealed revenue, fore, is welcome even though the author's thus creating a shortfall that undermined analysis is often unsatisfying. President Grant's case that the income tax On the positive side, his account is infor­ was no longer needed. The power to tax, as 43 Ideas on Liberty • November 2003 the Supreme Court insisted long before the then "dollars." Looking closely, you see the income tax, is the power to destroy: It was words "Federal Reserve Note" and "legal only another step to Franklin Roosevelt and tender." You have perfect confidence that his use of the IRS to investigate political you can exchange the pieces of paper for opponents such as Huey Long and William valuable goods and services. Whether those Randolph Hearst. The dark side of the tax paper bills have any constitutional validity bureaucracy had manifested itself long certainly does not cross your mind. The gov­ before the Sixteenth Amendment was ernment prints the stuff, so it must be legit, enacted, but Weisman turns a blind eye to it. right? The third problem with the book is that If, however, you have read Edwin Vieira's Weisman never views taxation as dynamic— monumental work on our monetary system, that is, lower tax rates can yield larger rev­ you would look quite differently on the enues. He stops his story at 1920, when the money in your wallet. With remarkable top rate was over 70 percent. What that breadth and depth of scholarship, lawyer misses is the Mellon tax cuts, which during and constitutional expert Vieira has given us the 1920s slashed all rates by about two- a treatise on, as the subtitle of this two-vol­ thirds and resulted in sharply increased rev­ ume work says, "The monetary powers and enue from the income tax—entrepreneurs, disabilities of the United States Constitu­ under the lower rates, were encouraged to tion." First published in 1983, this is a sec­ invent products, from radios to air condi­ ond, expanded edition, beautifully printed tioners. and bound. The author has woven together Finally, Weisman, who is a journalist with constitutional provisions, statutes, court the New York Times, makes a variety of his­ decisions, and his own sharp legal analysis torical errors. The top tax rate after the rev­ into an encyclopedic work on our monetary enue act of 1932 was 63 percent, not 55 per­ system that should be the starting point for cent; the top rate after Roosevelt's tax bill of anyone with an interest in the chasm 1935 was jacked up to 79 percent, not 75 between the system we now have and that percent. Also, Albert Fall was U.S. Senator which the Constitution ordained. from New Mexico, not Nebraska, as Weis­ What is the Constitution's definition of a man insists. "dollar?" For Vieira, that is the essential first The Great Tax Wars has some useful question. The answer, under Article I, Sec­ information on the history of a neglected tion 9, Clause 1, is that it is a coin contain­ subject, but readers must separate its history ing 371.25 grains of fine silver. How odd from its statist philosophizing. A recent and that seems. But that was the weight of the better book on the subject is W. Elliot most widely circulated coin in the colonies Brownlee's Federal Taxation in America. • and early United States. The coin was the Spanish milled dollar, commonly known as a Burton Folsom is Charles Kline Professor of History at Hillsdale College, and the author of The Myth of "Piece of Eight"—hence the title of the the Robber Barons, now in its fourth edition. work. Vieira writes that silver coins of 371.25 grains are the lawful foundation of our monetary system, "not any gold coin or Pieces of Eight base-metallic coin, let alone any paper cur­ by Edwin Vieira, Jr. rency, be it the first legal-tender United Sheridan Books • 2002 • 1,666 pages (two States notes (the "Greenbacks"), the later vols.) • $49.95 National Bank Notes, or today's Federal Reserve Notes. And, the Constitution never Reviewed by George C. Leef having been amended in this particular since 1788, that meaning remains legally control­ ake out your wallet and examine the rec­ ling today." tangular pieces of greenish paper in it. Or at least it should be. What Vieira sub­ T You'll probably first think "money," sequently shows is that the Constitution's 44 Books monetary strictures (like its strictures in so People who fancy themselves as "realists" many other areas) have been evaded and might snicker and say, "So what? We can't destroyed by politicians and that the go back to an antique system with people Supreme Court has chosen to turn a blind carrying around silver dollars to make their eye to the monetary shenanigans of Con­ purchases." Vieira's task here is not to set gress. The surprising conclusion of Pieces of forth the ways in which our monetary sys­ Eight is that there is no legal authority for tem could have evolved to suit modern com­ our present system of irredeemable fiat cur­ mercial needs without destroying the consti­ rency. Vieira maintains that "To introduce tutional base, but other scholars have done the FRN (federal reserve note) as a new- so. The problem is not that a modern econ­ paper currency in 1913, the government had omy is impossible without government mon­ to tie it by a right of redemption to the cir­ etary control, but that the politicians will culating money of that day, gold coin. And fight like mad to keep the power they have then, to transmogrify the FRN into a cur­ taken illegitimately. rency fit for limitless inflation, the govern­ Pieces of Eight is an indispensable work ment had to cut that tie to gold (and silver as for anyone who believes in upholding the well). ... If the FRNs were not 'dollars' Constitution. • when they explicitly promised to pay in George Leef is book review editor of Ideas on gold, they did not magically become 'dollars' Liberty. when they stopped promising to pay in any­ thing at all, and statutorily can be redeemed in nothing better than base-metallic coin." Terrorism and Tyranny: Trampling Inflation. There's the key. The Constitu­ Freedom, Justice, and Peace to Rid the tion gave the United States a monetary sys­ tem under which money could be coined by World of Evil the government, but not created out of thin by James Bovard air. Once they had been freed from the Con­ Palgrave Macmillan • 2003 • 440 pages stitution's restraints, politicians were able to • $26.95 spend money without the unpopular need to levy taxes. Furthermore, absent the mone­ Reviewed by Richard M. Ebeling tary mismanagement of our central bank— the Federal Reserve—our economy would ars have always seen a growth in state have been spared the boom-and-bust cycles power. Under the appeal of "national that we have endured at its clumsy hands. In W security" and "wartime emergency," the court of history, those who planned and individual liberties have been abridged or acquiesced in the destruction of the Consti­ abolished, property rights have been weak­ tution's monetary framework have much to ened or abrogated, accumulated wealth has answer for. been heavily taxed or confiscated, and free­ There is no part of this fascinating story dom of enterprise and trade have been that Vieira doesn't cover in penetrating severely constrained or completely placed detail. The precise meaning of the relevant under government control and planning. constitutional provisions, the several Most tragically, the young men of society Coinage Acts of the early 1800s, the First have been sent into battle, often under illu­ and Second Banks of the United States, the sions of national glory and a false sense of Supreme Court's blunder in sustaining the patriotism. Many of these young men do not constitutionality of legal tender U.S. notes, return home; others return with wounds that the institution of the Federal Reserve, leave them and their families ruined and Franklin Roosevelt's gold seizure, the sever­ scarred for life. ing of the final ties to redeemability in gold Court historians soon fill the pages of and silver—all that and far more is covered their books with versions of the war that in these volumes. present the political leaders of their country

45 Ideas on Liberty • November 2003 as Olympian-like gods, selfless beings who ously added to government's intrusive pow­ only thought and acted for "the good of the ers. The result of this and related legislation: nation." Every loss of personal freedom, greater wiretapping discretion, increased every abridgment of economic liberty, and asset-forfeiture authority, expanded privacy every expansion of government power is and property invasions, and reduced citizen rationalized away as having been necessary recourse to fight these violations of freedom. and indeed essential for the national interest And as always, Bovard makes these abstrac­ during that time of crisis. tions come alive with numerous examples of And when many of these freedoms are not how many ordinary, innocent people have fully restored when the wartime emergency been victimized in the spider's web of these ends, those same apologists for political new controls. power then babble on about "new times" He also offers an insightful and valuable and "changing circumstances" and a "less analysis of the U. S. government's concep­ simple world" that cannot afford the "lux­ tion of "terrorism." In essence, it amounts to ury" of human liberty to the same extent it any attempt, by any group, for any reason, existed in "days gone by." In the meantime, to take up arms against the existing govern­ freedom has been lost and government has ment in any country in the world. But the grown in power and control. problem is that in many parts of our world, Before these court historians and apolo­ governments are not democratic and are gists for state power can completely domi­ often in the hands of corrupt tyrants and nate the shelves in the bookstores, James violators of personal and economic liberty. Bovard has waded in to challenge the ratio­ Thus by the Bush Administration's definition nales for the most recent losses of freedom of terrorism, all the American Founding and to show the consequences. His new Fathers should be considered "terrorists" book, Terrorism and Tyranny, is like his since they took up arms against the "legiti­ many other exposes of government power mate" British government. and corruption: clear, dispassionate, factual, Bovard also effectively discusses what he and heavily documented. He is the Joe Fri­ calls the "bastardizing of freedom." In the day of political analysis: Just the facts, wake of 9/11, the U.S. government wrapped ma'am. And the facts will make your blood everything it did in an a version of George boil. Orwell's "newspeak." Political control Bovard begins by summarizing the extent became personal freedom; government to which the government's own foreign-pol­ intrusiveness became security in one's person icy and security incompetence set the stage and property; violations of the writ of for the tragic events of September 11, 2001. habeas corpus became protection of civil lib­ To cover up their own failures and create an erty; and trampling on constitutional image of "doing something," government restraints became preserving the American investigative agencies, even before the dust way of life. had cleared where the Trade Towers once Bovard does not deny the need for govern­ stood, undertook dragnets through Arab- ment to protect us from violent invaders, and American communities. Hundreds of people he strongly believes that those responsible for were rounded up and held for months with­ the events of 9/11 should be brought to jus­ out charges and without access to lawyers or tice. But he is deeply concerned that in the family members; some were physically name of securing life, liberty, and property, abused. Virtually all were found to have had that same government is destroying the free­ no contacts or connections with suspected doms it is supposed to protect. What will we terrorists. have gained if the "war on terrorism" costs The USA Patriot Act, Bovard explains, was us what made America great? • rushed through Congress with little critical thought about the extent to which it danger­ Richard Ebeling is president of FEE.

46 The Pursuit of Happiness by Walter E. Williams IDEAS ON LIBERTY NOVEMBER 2003

People Before Profits

hether it's Nation of Islam Minis­ valued uses, determined not by some tyrant ter Louis Farrakhan leading the but by ordinary people's wants and desires. Million-Man March, anti-WTO Let's discuss just a few examples. W (World Trade Organization) pro­ Remember when Coca-Cola introduced testers, or AIDS activists, we're frequently the "new" Coke? Pepsi president Roger treated to the chant demanding "People Enrico called it "the Edsel of the 80s," rep­ Before Profits." Since profit demagoguery is resenting one of the greatest marketing deba­ a deceptively appealing tool used by cles of the decade. Who made the Coca-Cola scoundrels everywhere, let's demystify the Company bring back the old Coke? Was it concept of profits. Congress, the courts, the President, or other Let's first get its definition out of the way. government officials who claim to have our Profits represent the residual claim earned by interests at heart? No way. It was the specter entrepreneurs. It's what's left after all other of negative profits (losses) that convinced costs—wages, rent, interest—have been Coca-Cola to bring back the old Coke. Thus paid. The entrepreneur is generally seen as one role of profits is to discover what con­ the person who takes risks, innovates, and sumers want. If producers make mistakes, makes decisions. It's important to recognize profits work to correct them. that profits are a cost of business just as are After the 1992 massive destruction caused payments to labor, land, and capital. If by Hurricane Andrew, South Florida stores wages, rent, and interest are not paid, labor, sold sheets of plywood for twice the price it land, and capital will not be offered; simi­ had sold for prior to the storm. Escalating larly, if profit is not paid, entrepreneurs plywood prices brought charges of price- won't be seen either. gouging and prosecutory threats. But look Roughly six cents of each dollar compa­ what higher prices and the potential for nies take in represent after-tax profits. By windfall profits did. Plywood destined to be far, wages are the largest part of that dollar, shipped to the Midwest, West, and North­ representing about 60 cents. As percentages east suddenly was rerouted to South Florida. of 2002 national income, after-tax profits Lumber mills increased production. Truck­ represented about 5 percent and wages ers and other workers worked overtime so as about 71 percent. Far more important than to increase the availability of plywood and simple statistics about the magnitude of other construction materials to Floridians. profits is the role played by profits, namely, Rising plywood prices meant something else. that of guiding resources to their highest- All that plywood heading south meant ply­ wood prices rose in other locations, thus dis­ couraging "less valued" uses of plywood, Walter Williams is the John M. Olin Distinguished Professor of Economics at George Mason Univer­ such as home-improvement projects. After sity in Fairfax, Virginia. all, rebuilding and repairing destroyed

47 Ideas on Liberty • November 2003 homes is a "higher valued" use of plywood. Many squander resources and produce a What caused these market participants to shoddy product, while administrators, do what was in the social interest, namely, teachers, and staff earn higher pay and sacrifice or postpone alternative uses for ply­ perks, and customers (taxpayers) are wood? The answer reveals perhaps the most increasingly burdened. Unlike other produc­ wonderful feature of this process: rising ers, educationists don't face the rigors of the prices and opportunities for higher profits profit discipline and hence they're not as encouraged people to do voluntarily what accountable. was in the social interest: help their fellow How about the U.S. Postal Service? They man recover from a disaster. also provide shoddy and surly services, but Profits also force producers to behave the management and workers receive themselves. If producers waste inputs, their increasingly higher wages, while customers production costs will be higher. To cover pay higher and higher prices. Again, wishes their cost, they'll charge prices higher than of customers can be safely ignored because what consumers are willing to pay. After a there's no bottom-line discipline of profits. while the company will make unsustainable Here's Williams's law: whenever the profit losses (negative profits) and go out of busi­ incentive is missing, the probability that peo­ ness. As a result, the company's resources ple's wants can be safely ignored is the great­ will become available to someone else who'll est. It's not just the post office and schools, put them to wiser use. This process is short- but delivery of police services and garbage circuited if government offers bailouts in the collection as well. If a poll were taken asking forms of guaranteed loans, subsidies, or people what services they are most satisfied restrictions on competitive products from with and those they are most dissatisfied abroad, such as tariffs and import quotas. with, for-profit organizations (supermarkets, Government "help" enables failing compa­ computer companies, and video stores) nies to continue squandering resources. would dominate the first list while nonprofit If we care about people's wants, rather organizations (schools, post office, and than beating up on profit-making organiza­ offices of motor-vehicle registration) would tions we should pay more attention to dominate the latter list. In a free economy, government-owned nonprofit organizations. the pursuit of profits and serving people are Government schools are a good example. one and the same. •

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