VOLUME 59, NO 7 SEPTEMBER 2009

Features 8 Human Action, 1949: A Dramatic Episode in Intellectual History by Israel M. Kirzner 12 Human Action: The 60th Anniversary by Bettina Bien Greaves 16 Human Action: The Treatise in Economics by Peter Boettke 19 What Human Action Has Meant to Me: Reflections of a Young Economist by Peter T.Leeson 22 The Case for Capitalism by Henry Hazlitt 28 A Triple Whammy for Austrian Economics by Sanford Ikeda 31 In Defense of Ideology by Mario J. Rizzo 34 Transforming America: The Bush-Obama Stimulus Programs by Randall G. Holcombe Page 16 39 The Myth of Unregulated Tobacco by Bruce Yandle

Columns 4 Ideas and Consequences ~ In the Grip of Madness by Lawrence W.Reed 26 Our Economic Past ~ The Rise of Big Business and the Growth of Government by Robert Higgs 42 Give Me a Break! ~ Competition Would Save Medicine, Too by John Stossel 55 The Pursuit of Happiness ~ EFCA and Compromise by Charles W.Baird Page 26 Departments 2 Perspective ~ Human Action as a Work of Art by Sheldon Richman 6 Saving Is Killing the Economy? It Just Ain’t So! by Steven Horwitz 44 Capital Letters

Book Reviews 50 New Deal or Raw Deal? How FDR’s Economic Legacy Has Damaged America by Burton Folsom, Jr. Reviewed by Robert Higgs 51 The Gridlock Economy: How Too Much Ownership Wrecks Markets, Stops Innovation, and Costs Lives by Michael Heller Reviewed by Art Carden 52 The Complete Idiot’s Guide to Global Economics by Craig Hovey with Gregory Rehmke Reviewed by George C. Leef 53 One Nation Under Debt: Hamilton, Jefferson, and the History of What We Owe Page 50 by Robert E. Wright Reviewed by David L. Littmann Perspective Human Action as a Work of Art Published by The Foundation for Economic Education hat can one say briefly about Human Action? Irvington-on-Hudson, NY 10533 When it was being written and people Phone: (914) 591-7230; E-mail: [email protected] www.fee.org Wwould ask what it was to be about, the answer given among Mises’s students was: Everything. President Lawrence W.Reed Editor Sheldon Richman Indeed. Managing Editor Michael Nolan From the setting forth of praxeology as the a priori Book Review Editor George C. Leef science of human action, to the description of the mar- Columnists ket’s operation, to the explanation of the business cycle, Charles Baird David R. Henderson to the proof that rational central planning is impossible, Donald J. Boudreaux Robert Higgs Mises’s work is nothing less than a work of art. It faith- Stephen Davies John Stossel Burton W.Folsom, Jr. Thomas Szasz fully captures the elegant orderliness of social reality that Walter E.Williams grows out of the logic of human action. I could go on, Contributing Editors but instead I will reprint here, slightly edited, what I Peter J. Boettke Dwight R. Lee wrote in these pages nine years ago. I can’t improve on it. James Bovard Wendy McElroy If I had to pick my favorite sentence in all of Mises’s Thomas J. DiLorenzo Tibor Machan Joseph S. Fulda Andrew P.Morriss Human Action (a daunting task in a 900-page book), it Bettina Bien Greaves James L. Payne would be this one:“The fact that my fellow man wants John Hospers William H. Peterson shoes as I do does not make it harder for me to get Raymond J. Keating Jane S. Shaw Daniel B. Klein Richard H.Timberlake shoes, but easier” (p. 673 of the Third Revised Edition). Lawrence H.White That sentence may seem rather pedestrian compared to Foundation for Economic Education all the sentences Mises used to establish the science of praxeology (human action) and to spin out its countless Board of Trustees, 2008–2009 implications for economics. But it’s a perfect example of Wayne Olson, Chairman Lloyd Buchanan Walter LeCroy how Mises showed that untutored intuitions about William Dunn Frayda Levy social interaction are often wide of the mark. Jeff Giesea Kris Mauren There is an old school of thought, widely identified Ethelmae Humphreys Roger Ream Edward M. Kopko Donald Smith with the Reverend Thomas Malthus, but actually quite older, that held the opposite of Mises’s position. Begin- The Foundation for Economic Education (FEE) is a ning with the undeniable assumption of scarcity, that non-political, non-profit educational champion of individual liberty, private property, the free market, school believed the human race was doomed to misery. and constitutionally limited government. Population would grow until it strained the carrying The Freeman is published monthly, except for combined January-February and July-August issues. Views expressed by capacity of the environment; then starvation, disease, the authors do not necessarily reflect those of FEE’s officers and conflict would set in and scale back the numbers. and trustees. To receive a sample copy, or to have The Freeman This process was assumed to be more or less the perma- come regularly to your door, call 800-960-4333, or e-mail [email protected]. nent fate of mankind. The Freeman is available on microfilm from University Microfilm How could it not be? Growing numbers of people International, 300 North Zeeb Road,Ann Arbor, MI 48106. would be vying for limited resources. Life had to be Copyright © 2009 Foundation for Economic Education, except for graphics material licensed under Creative Commons poor, nasty, brutish, and short—though not, as Hobbes Agreement. Permission granted to reprint any article from had it, solitary. this issue, with appropriate credit, except “Competition Would Save Medicine,Too.” Mises was surely not the first to see it otherwise, but Cover: Detail from portrait of Ludwig von Mises by George V. he was second to none in spelling out why the pes- Augusta, 1971. simists are wrong. He first seemed to concede their

THE FREEMAN: Ideas on Liberty 2 PERSPECTIVE: Human Action as a Work of Art point, then zeroed in on what they missed.“The char- economics department in the United States; and Peter acteristic mark of the ‘state of nature,’” Mises wrote,“is Leeson, visiting professor at the University of Chicago irreconcilable conflict. The means of subsistence are and one of the rising stars of Austrian economics. scarce and do not grant survival to all . . . .The source Finally, the Human Action tribute winds up with Henry of conflict is always the fact that each man’s portion Hazlitt’s 1949 Newsweek column about the treatise. curtails the portions of other men.” Hazlitt had much to do with introducing Mises to What saves man from the dismal existence of wild American readers. animals? The division of labor, the first topic taken up I hope you enjoy the photo spread of Mises reflecting by Adam Smith in The Wealth of Nations. As Mises his close association with FEE. put it, “What makes friendly relations between human Also in this issue, Sanford Ikeda registers his discon- beings possible is the higher productivity of the tent with economics reporting in the newspapers, espe- division of labor. It removes the natural conflict of cially the way the definitions squeeze out any place for interests. For where there is division of labor, there is Austrian economics. no longer question of the distribution of a supply not Barack Obama would have us believe he is ushering capable of enlargement.” Mises drives home the point: in a post-ideological age, where preconceived notions “Because many people or even all people want bread, are equated with dogmatism. Mario Rizzo cautions clothes, shoes, and cars, large-scale production of these that to throw out ideology is to throw out something goods becomes feasible and reduces the costs of important. production to such an extent that they are accessible at The last year of Fed expansion, bank nationalizations, low prices.” “stimulus” spending, and bailouts has put the American The upshot is that because of the productivity spe- economy even deeper into the arms of the State. In fact, cialization makes possible, the rest of the animal king- Randall Holcombe says, these measures and precedents dom holds few lessons for mankind. Anyone who have fundamentally changed the U.S. economy. believes government’s role is to temper the market with Congress has decreed that tobacco will no longer go cooperation needs to learn that lesson. The market unregulated. Unregulated? Are those folks in Washing- is cooperation. ton joking? Bruce Yandle relates the long history of tobacco regulation. * * * Here’s what our columnists have whipped up: To celebrate the 60th anniversary of the publication Lawrence Reed wants to know who bailed out whom of Mises’s Human Action, we’ve brought together several over the last year. Robert Higgs looks at big business’s high-powered contributors, spanning several genera- role in the emergence of American statism. John Stossel tions, all with a special connection to the man and the imagines what would result from a truly competitive groundbreaking book: Israel Kirzner, who earned his healthcare system. Charles Baird looks at the Employee Ph.D. under Mises at New York University and who is Free Choice Act. And Steven Horwitz, reading claims regarded as the dean of Austrian economics; Bettina Bien that saving is keeping the economy in recession, Greaves, a retired FEE staff member who was Mises’s responds,“It Just Ain’t So!” close friend, attended his NYU seminar, and compiled This issue’s reviewers scrutinize books on the New a bibliography of his work; Peter Boettke, a leading Deal, ownership, global economics, and debt. member of the “third generation” of American Aus- Readers react to past articles in Capital Letters. trian economists and professor of economics at George —Sheldon Richman Mason University,which has the most Austrian-oriented [email protected]

3 SEPTEMBER 2009 Ideas and Consequences

In the Grip of Madness

BY LAWRENCE W. REED

“ hank God we had the federal government last In the name of taking care of us in our old age, we are week to bail out the private sector!” saddled with no less than $6 trillion in Social Security T That’s what a rather statist friend of mine payouts over the next 75 years—for which there are no declared a year ago as the economy tanked, almost glee- presently earmarked funding streams. According to Brian ful that the financial crisis seemed to be proving how Riedl of the Heritage Foundation, the unfunded obli- much we all need a massive federal establishment to gations for the new federal prescription drug program, both regulate and rescue us. enacted under President Bush, total another $8 trillion. Never mind the federal government’s own indispen- On and on it goes.The private sector has an awful lot sable role as an enabler in the crisis, from its reckless of bailing out to do in the coming decades. I shudder to monetary policy to its jawboning banks into making think how deeply we taxpayers will have to dig in the dubious mortgage loans. Never mind the long-term not-too-distant future to pay the bills of our benevolent, danger of its assumption of colossal new obligations and compassionate, and forward-thinking government. the moral hazard in the message its intervention sends. Since Barack Obama took office in January 2009, My response to my friend was of a the federal government has spent a more narrow focus. “Thank God we On and on it goes. full billion dollars every single hour. have the private sector to bail out the Before his term is half over, federal federal government not just last The private sector spending will have doubled in just a week, but every week!” I exclaimed. decade. The deficit in one year’s Think about it. Taxes on the pri- has an awful lot of budget is now as large as the entire vate sector pay a majority of the fed- bailing out to do in budget in George W. Bush’s first year eral government’s bills. For most of as president, 2001—and I thought not the rest, the government borrows by the coming decades. very long ago that the spending spree selling its debt obligations, mostly to he and the Republicans gave us private-sector entities—including banks, insurance would be tough to beat! The flood of red ink is now companies, and individuals. adding to the national debt to the tune of about $4 bil- The federal government is the world’s biggest taxer lion every day. At well over $11 trillion, that debt and the world’s biggest debtor. If those of us in the pri- amounts to $37,000 for every living American. vate sector didn’t pay our taxes or didn’t buy Washing- Too Big to Succeed? ton’s paper, the feds would have gone belly-up decades ago. We’ve rescued Washington to the tune of tens of We’re told by the wise planners in Washington that trillions of dollars over the years. A big difference certain private firms are “too big to fail.” So we’re between Washington’s bailing out the private sector and handing big chunks of them over to the government. the private sector’s bailing out Washington is that the The question we all should be asking ourselves is private sector has to work, invest, employ people, and this: Are we trusting our economy and our lives to a produce goods to come up with the cash. It can’t create government that is too big to succeed? it out of thin air like Ben Bernanke can. Once upon a time in America, most citizens Our friends in Washington have blessed us with expected government to keep the peace and otherwise future burdens almost too astronomical to comprehend. Lawrence Reed ([email protected]) is the president of FEE.

THE FREEMAN: Ideas on Liberty 4 In the Grip of Madness leave them alone.We built a vibrant, self-reliant, entre- portion of our personal income, its tax and regulatory preneurial culture with strong families and solid values. burden consumes at least five times what it did just a We respected property and largely kept the spirit of the century ago. But to the majority on the Potomac, gov- Eighth and Tenth Commandments against coveting and ernment is nowhere yet big enough. This is madness stealing. We understood that government didn’t have writ large. anything to give anybody except what it first took from somebody and that a government big enough to give us Stick to the Knitting everything we want would be big enough to take away Remember In Search of Excellence, the 1982 best- everything we’ve got. We practiced fiscal discipline in selling management book by Tom Peters and Robert our personal lives and expected noth- Waterman? One of its salient points ing less from the people in the gov- is that an organization gets off track ernment we elected, or we threw The federal when it no longer “sticks to the knit- them out. ting.” When it allows its mission to But somewhere along the way we government is not blur and stretch far beyond its found- lost our moral compass. And just like God. It can’t even be ing design, when it becomes dis- the Roman Republic that rose on tracted by endless and dubious new integrity and collapsed in turpitude, a good Santa Claus. responsibilities, its core competency we thought the “bread and circuses” It’s no Mother Teresa evaporates. It will fail to do what it the government could provide us is supposed to do, because it’s doing would buy us comfort and security. either.The fact is, the too much of what it’s not supposed We gave the government the bigger government to do. responsibility to educate our children, It may come as a surprise to those though government can never be gets, the more it starts who see aspirin made in Washington counted on to teach well the main as the cure for every ailment, but ingredients of a free society—liberty to look like Moe, the federal government is not God. and character—or just about anything Larry, and Curly. It can’t even be a good Santa else, for that matter.We asked the gov- Claus. It’s no Mother Teresa either, ernment to give us health care, wel- because on those occasions when it fare, pensions, college education, and farm subsidies, does some good it usually costs an arm and a leg and and now our politicians are bankrupting the country to sends a big part of the bill to generations yet unborn. pay the bills.This welfare state of ours has become one The fact is, the bigger government gets, the more it big circle of 305 million people, each with his hand in starts to look like Moe, Larry, and Curly. the next fellow’s pocket. Accentuating the madness of the present day, the This is a government whose reach even before cover of Newsweek declared last March, “We are all the financial crisis scarcely left an aspect of American socialists now.” life untouched, from the cradle to the grave and the Pardon me, but I’m not about to sign on to a volume of our toilet-bowl water in between. As a proven flop.

5 SEPTEMBER 2009 Saving Is Killing the Economy? It Just Ain’t So!

BY STEVEN HORWITZ

n the midst of the current recession, many of the consumption, which means lower profits and fewer job oldest fallacies in economics are making a come- opportunities in the places where we used to be spend- Iback. In a column titled “Why Saving is Killing ing those consumption dollars. the Economy” (CNNMoney.com, February 12), senior So far, the analysis is not necessarily wrong, just writer Chris Isidore repeats one of the oldest: that the incomplete. A full analysis would then ask, “What key to economic recovery or growth is consumption happens to the portion of people’s income no longer and that saving retards that process. Isidore states that being devoted to consumption?” What exactly do we the increases in savings that accompanied the onset of mean by “saving?” If people are “saving” by simply the recession might make sense to each individual increasing their holdings of currency (say under the household but are collectively problematic “when what storied mattress), then the critics have a point. Those the economy needs most is for consumers to be spend- resources are being withdrawn from the larger econ- ing more freely.” omy, and to that degree they will reduce conventional But the view that consumption is measures of economic well-being. “stimulative” while saving is harmful Of course, those increased currency is almost the exact opposite of the Many of the oldest holdings will improve the well-being truth if the goal is to generate sustain- fallacies in of their owner, as he or she is now able economic growth. Savings is holding wealth in the preferred form what makes long-term growth possi- economics are of currency. ble. It just ain’t so that more consump- This isn’t how it usually goes, tion is what is needed in a recession. making a comeback. though. Most saving takes the form of financial instruments, including An Incomplete View everything from basic checking accounts to the fanciest his particular fallacy is essentially a version of the investment tools. If people are keeping higher checking Tmore general fallacy identified by Frédéric Bastiat account balances or putting more in savings accounts in the nineteenth century: an inability or refusal to “see or money market mutual funds, then that wealth is not the unseen.” Consumption has easily observable effects withdrawn from the economy. It is simply channeled on the economy.We see people spending on new cars elsewhere than into consumer goods. Financial institu- or televisions, and we understand how that means tions that accept such deposits lend them to customers larger profits for firms and more opportunities for who invest in their businesses.This is the process of cre- employment. So it comes as no surprise that people ating the capital that is the sine qua non of sustainable, would think that an increase in saving, defined as the long-term economic growth. portion of our income we do not devote to consump- tion, would be bad for the economy. If we are increas- Steven Horwitz ([email protected]) is the Charles A. Dana Professor ing our saving, we are presumably reducing our of Economics at St. Lawrence University.

THE FREEMAN: Ideas on Liberty 6 Saving Is Killing the Economy? IT JUST AIN’T SO!

In Bastiat’s terms, we see the lost expenditures at investment spending. He argues that is precisely what is the retail store, but we mostly don’t see the “backdoor” happening right now. way the savings are channeled to other businesses. If true, the fault lies not with the saving habits of the More precisely, an increase in the savings rate repre- public, but with whatever is causing the banks to hesi- sents a change in consumers’ time preferences: They tate. Blaming the public for “saving too much” is are saying they are less interested in current con- wrong, as Isidore himself notes in claiming that “a high sumption and more interested in future consump- savings rate is not a bad thing for the economy.”The tion. The beauty of financial markets is that they problem, he argues, is people doing it now when banks translate that change in preferences into a change in won’t lend.Why then are banks reluctant to lend? the flow of resources. Those investments will take One answer is that at the onset of the crisis the time to become consumption goods, but that’s what Federal Reserve System decided to pay interest on consumers want. the reserves banks hold in their accounts at the Fed. Combined with very low rates of return on other Saving Creates Growth assets, this made sitting on both the public’s increased o contrary to Isidore’s arguments, restricting con- savings and the Fed’s newly injected reserves a better Ssumption does not hamper economic growth. choice than lending. In the long run, economic growth Moreover, the combination of requires saving and the creation of bailouts, quasi-nationalizations, and new capital goods. An increase in the policy zig-zagging might be making For savings to contribute to lenders more uncertain about the growth this way, financial intermedi- savings rate represents future and less likely to lend. What aries must function properly.The fal- a change in economic historian Robert Higgs lacy that increases in saving will has termed “regime uncertainty” was frustrate growth finds its most recent consumers’ time responsible for the length of the theoretical statement in Keynes, par- preferences. Great Depression and might be a key ticularly in his assumption that the reason why banks might lend less financial system cannot translate sav- than in the recent past. Isidore and ings into investment. In contrast to the classical and others never consider that, in the words of economist Austrian economists, who believed that interest rates Roger Koppl, “Keynesian policies can create a Keyne- would coordinate the supply of savings and the demand sian world”—that is, bad policy can break the link for investible funds, Keynes argued that saving was a between savings and investment. In any case, blaming function of income, and investment was driven by the savers misses the real problem. the “animal spirits”—that is, people’s psychology and And there might not be a problem anyway: A num- expectations. As a result, there was no reason to think ber of economists have disputed the claim that banks that increases in saving would make their way back into have stopped lending. Even at the height of the crisis in the economy as investment. Indeed, savings was a “leak- October, economists at the Minnesota Fed found no age” from the expenditure stream made up of con- evidence that banks had stopped lending to individuals sumption, investment, and government spending. or nonbank entities. More recent data from the winter But Keynes was wrong about how markets, espe- show that while the rate of lending growth had slowed, cially financial markets, work—at least when they are the total quantity of loans to individuals and firms was left to themselves.As Isidore’s article points out, if banks steady, if not growing slightly. So theory aside, the are reluctant to lend out the funds that savers are sup- empirical reality since September does not support the plying, increases in saving will not get translated into claim that savings is counterproductive.

7 SEPTEMBER 2009 Human Action, 1949: A Dramatic Episode in Intellectual History

BY ISRAEL M. KIRZNER

great book, it has been remarked, is like a great The Intellectual Drama of Human Action castle. It can be viewed from many different he term “drama” may seem out of place in regard A angles, each offering a unique perspective. Tto a serious tome on the foundations of a serious Viewing Ludwig von Mises’s monumental work from discipline. But Human Action is no ordinary work. It is the vantage of 2009 permits one to see with great clar- a work which, at the time, was seen as written in starkly ity one fascinating aspect of the book—the sheer drama uncompromising fashion, articulating a particular of its emergence at the time that it appeared. This is a worldview and a particular understanding of econom- theme on which I have touched more than once over ics—at a time when that worldview and that under- the years. I am grateful for the present opportunity to standing were thought to have been articulate this theme in somewhat decisively nudged off the professional greater detail. stage. The book came to be summarily Some 13 years ago (in the May 1996 dismissed, and subsequently ignored, as Freeman, which celebrated the first 50 the last gasp of a dying intellectual tra- years of public service splendidly con- dition. But this judgment was griev- tributed by the Foundation for Eco- ously mistaken. nomic Education), I dwelt on the Human Action was not a work merely pivotal role played by FEE in uphold- presenting, once again, the ideas of an ing the flag of Austrian economics. I earlier tradition.The book in fact repre- dwelt especially on the role it played sented, we must point out, a dramatic (most importantly by providing Mises revision, a dramatic deepening of the with a congenial “base”) in nurturing insights of the Austrian school. Pre- the Austrian economics tradition dur- cisely when the Austrian economics ing decades in which the professional tradition was widely seen as virtually reputation of the school was at its very dead, as material only for treatises on lowest. That paper focused, in part, on the history of economic thought— the contribution of the Foundation to precisely at that time that very tradi- the subsequent revival of Austrian economics in this tion brilliantly produced a sparkling, fresh, funda- country. The present note complements that earlier mentally new interpretation of its central tenets. Six piece by focusing on the altogether dramatic char- decades later we can see how Mises’s revision and rein- acter of the long-run impact of this magnum opus of Mises, a work that anchored everything which Israel Kirzner is professor emeritus of economics at New York University Mises was to write under FEE auspices, and to which and did his doctoral work under Ludwig von Mises. Professor Kirzner is the author of many books in the Austrian tradition of economics, among the Austrian economics revival is, unquestionably, to them Competition and Entrepreneurship; Perception, Opportunity, be attributed. and Profit; and The Meaning of Market Process.

THE FREEMAN: Ideas on Liberty 8 Human Action, 1949: A Dramatic Episode in Intellectual History terpretation inspired a revival of serious academic and developments in welfare theory, econometrics, and scholarly interest in Austrian economics. Seen from this mathematical economics. The physical dispersal of perspective, the 1949 publication of Human Action must the circle of Vienna economists who had attended surely be recognized as a dramatic episode in the his- Mises’s famed privatseminar as a result of the political tory of economics. turmoil of the times certainly contributed to the impression that the Vienna tradition was no longer The Decline of Austrian Economics, 1932–1945 a live component of modern economic thought. t the outset of the 1930s the Austrian school of (Mises himself had left Vienna for Geneva in 1934.) Aeconomics was recognized on the continent, in Although Mises published Nationalökonomie in Geneva the United Kingdom, and in the United States as an in 1940 and Hayek published The Pure Theory of important component of contemporary academic eco- Capital in 1941, the economics profession paid virtually nomics. For young scholars from America visiting the no attention to these works. By the end of World European academies at that time, an invitation to War II, with Mises a refugee in New York and without present their work at a seminar at the University of a regular academic position, the outlook for the future Vienna was a highly valued profes- of the Menger-Böhm-Bawerk tradi- sional achievement. In Britain, Lionel tion seemed bleak indeed. Robbins, the most prominent econo- Precisely when the Moreover, it can be argued, cer- mist at the University of London, pub- Austrian economics tain aspects of the developments in lished his 1932 classic, An Essay on the mainstream economic theory dur- Nature and Significance of Economic Sci- tradition was widely ing the ’30s—despite their overall ence, replete with insights and citations thrust away from the path of Aus- the author had culled from the Aus- seen as virtually dead, trian theory—may well have seemed trian literature and from his visits to it brilliantly produced to erode the case for a distinctive Vienna. In that same year Robbins Austrian presence. In its early years invited the brilliant young Friedrich a sparkling, fresh, the Austrian school had gained its Hayek (a close associate and protégé of fundamentally new distinctiveness from its pioneering Mises) to join the London faculty in a challenge to the dominance of the prestigious professorship. And Hayek’s interpretation of its German Historical School. But by appearance on the British academic the 1930s, that war (on behalf of the scene had an almost dramatic impact central tenets. legitimacy of abstract economic the- on British economics discussion, espe- ory) had been decisively won; all the cially in regard to capital and monetary theory. major schools of European economic thought were on Yet just a few short years later, it seemed, this success the side of the Austrians in regard to the role of pure had evaporated.The advance of economic theory in the theory. And in 1932 Mises himself had written to the ’30s (advances related in particular to the work of Piero effect that all “modern” schools of economic thought Sraffa and John Maynard Keynes, to theories of imper- subscribe to the same set of economic principles, albeit fect and monopolistic competition, to the theories of in different languages and with different modes of socialist economics, and to sophisticated advances in exposition. Mises himself, it seems clear, had (in 1932) mathematical economics) seemed to have left the not recognized the gulf that (as would later become Austrians far behind. They were seen to have amply clear!) separated the dominant Anglo-American been defeated by Keynes (in regard to macro- mainstream from the economics that Mises himself economic issues), by Frank Knight (in regard to capital identified with the Austrian tradition. So a number of theory), and by Oskar Lange and by Abba Lerner (on Mises’s disciples (including, perhaps, Fritz Machlup, the possibility of efficient socialist economic planning), Gottfried Haberler, and Paul Rosenstein-Rodan) might and to have failed to keep pace with the exciting be excused for thinking that what was important to the

9 SEPTEMBER 2009 Israel M. Kirzner

Austrian tradition was by now (the ’30s) well-accepted declaration of theoretic independence—a declara- in mainstream economics. There was no intellectual tion spelling out explicitly what had hitherto (at least profit, such Austrians came to believe, to be gained by in Mises’s view) been implicit in earlier neoclassical insisting on the distinctiveness of the Austrian label. (and particularly in Austrian) market theory. (See Frank M. Machovec’s Perfect Competition and the Transformation The Socialist Calculation Debate and the of Economics.) Mises-Hayek Revolution This explicit articulation constituted a dramatic, et if the immediate post-World War II scene revolutionary deepening and extension of existing Yappeared so wholly inhospitable to a distinctive Austrian theory.That it came to inspire the late-twenti- Austrian economics, both Mises and Hayek were in fact eth-century revival of Austrian economics, although working, independently but along parallel paths, ignored and overlooked when it was first published, is toward a revolutionary reinterpretation of their intel- in large part what made the publication of Human lectual heritage. (This note is, of course, focusing on Action an episode of intellectual drama. Mises’s classic work of 1949. But it would be a serious mistake to fail to note that the “drama” we have seen in Market Process Versus Market Equilibrium the appearance of Mises’s book had its parallel in the hat the socialist economic-calculation debate appearance of Hayek’s 1948–49 volume of essays, Indi- Wtaught Mises, I believe, is that it is necessary, vidualism and Economic Order. I have elsewhere discussed in order to promote economic understanding of the complementarity between those what the market system achieves, to two contributions in “Ludwig von replace expository emphasis on Mises and Friedrich von Hayek: The Human Action was a attainable market equilibrium pat- Modern Extension of Austrian Sub- defiant declaration terns with an emphasis on the char- jectivism,”republished as chapter 7 in acter of the processes of equilibra- my The Meaning of Market Process: of theoretic tion. (For an exhaustive exploration Essays in the Development of Modern independence. tending to support this assertion, Austrian Economics.) see Don Lavoie’s Rivalry and Central The “socialist economic calcula- Planning: The Socialist Calculation tion debate” that raged in the prewar decade had, it Debate Reconsidered.) seems reasonable to believe, induced the revolutionary This latter emphasis reveals the essentially entrepre- revisions in their understanding of markets.The uncrit- neurial character of the market process and underscores ical acceptance by the economics profession of the the role of dynamic competition (as against the state of so- Lange-Lerner thesis—that socialists can plan efficiently called “perfect competition”) in this entrepreneurial by modeling their plan after general equilibrium condi- process. (In Hayek’s work a parallel shift of emphasis tions (postulated by mainstream theorists as governing was being articulated: namely, a replacement of a world competitive market systems)—taught Mises and Hayek of imagined perfect mutual knowledge by a world in that their own understanding of how markets work which the market “learning” process tends continually differed fundamentally from that of their neoclassical to expand the scope of mutual knowledge—subject, of colleagues. Mises, in particular, now realized that main- course, to the continual disruptions generated by stream neoclassical theorists do not subscribe to the exogenous changes in demand patterns, resource avail- same understanding of the economic principles gov- abilities, and so on.) The writers who believed that cen- erning markets to which Austrian economists (or, tral planners could emulate market efficiency had at any rate, he) subscribe. Mises wrote Human Action overlooked, in Mises’s view, the subtle processes of to articulate with utmost conviction his refusal entrepreneurial discovery, through which alone one to accept that mainstream neoclassical interpretation could postulate any systematic tendencies toward of how markets work. Human Action was a defiant market equilibrium.

THE FREEMAN: Ideas on Liberty 10 Human Action, 1949: A Dramatic Episode in Intellectual History

By focusing on the entrepreneurial process at work ning to discover Mises’s work and to recognize the in markets unhampered by governmental obstacles to sparkling freshness of his ideas. The economics profes- competitive entry, Mises offered much more than a sion—or at least some of its more daring and inde- reinterpretation of traditional price theory. His insights pendent-minded graduate students—were at the same offered a brilliant new understanding of the meaning time beginning to take note of and to acknowledge of market competition and thus also a revolutionary the stultifying irrelevance of much of what was perspective on the theory of monopoly. Mises’s under- being taught in mainstream graduate departments. standing of the market process implied not only the The downfall of Keynesian economics during the rejection of mainstream orthodoxy in the theory of latter decades of the century focused renewed atten- socialism, but also far-reaching implications for the the- tion on the foundation of microeconomics. In Human ory of antitrust policy and, more generally, for the the- Action more and more young scholars rediscovered ory of government regulatory policy. ideas that enabled them to make For many years this new emphasis sense of the complex world that in Misesian-Austrian economics was By the 1960s and ’70s economic science is supposed to completely ignored. In the immediate help us understand. The downfall post-World War II decade the focus of younger students and of the Soviet Union focused professional attention was not on the scholars were attention on the profound truths precise formulation of the foundations about socialism to be extracted from of microeconomics, but on the extent beginning to discover the Misesian foundations. That to which microeconomics must, in Mises’s work and to downfall taught many that the the real world, be superseded, as a mainstream of the profession, which practical matter, by Keynesian macro- recognize the had for decades defended the possi- economic considerations. Moreover, bility of socialist economic efficiency the increasing sophistication of math- sparkling freshness and had contemptuously dismissed ematical economics, and its applica- of his ideas. those who had challenged that tions in the elaboration of the possibility, was simply and inglori- ambitious Walrasian general-equilib- ously wrong. rium theoretic enterprise, combined to make Mises’s The modest revival of interest in the Austrian eco- ideas seem old-fashioned, elementary, and even primi- nomics tradition over the past four decades has high- tive. As is now well-known, these were decades lighted, in my opinion, the drama inherent in the first (stretching from after the 1921 publication of Knight’s appearance of Human Action.This work was the coura- Risk, Uncertainty and Profit until William Baumol’s pio- geous manifesto of a scholar of incorruptible integrity neering work almost half a century later in the resur- who, close to the seventh decade of his life, contributed rection of the entrepreneurial role) in which a brilliantly fresh articulation of economics truths.That mainstream economic theory almost completely lost this work was ignored for decades and only subse- sight of the entrepreneur. quently won recognition (albeit modest), adds to the intellectual drama of this episode in the twentieth-cen- The Drama of the Austrian Revival tury development of economic thought. Speculation ut Mises’s great work was not destined to be buried concerning the future influence that may yet be exerted Bforever under this deafening silence. By the 1960s by this towering work only enhances the excitement and ’70s younger students and scholars were begin- sparked by this drama.

11 SEPTEMBER 2009 Human Action:The 60th Anniversary

BY BETTINA BIEN GREAVES

e are celebrating the 60th anniversary of a sätze der Volkswirtschaftslehre (Principles of Economics).The great book, Human Action:A Treatise on Eco- book opened his mind to a new way of thinking, a Wnomics, by a learned man and a clear completely different approach to economics from that thinker: the Austrian economist Ludwig von Mises. It of either Marxism or historicism. As he wrote later, it presents Mises’s understanding—after long years of “made an ‘economist’ of me.” study and thought—of how the market economy func- As Menger presented it, economics is a science of tions. It is a major contribution to human knowledge. reason and logic, the study of the actions of men, their Interventionist ideas dominated Europe when Mises ideas, and the means they use to accomplish their cho- was a young man. He wrote later that when he entered sen ends. Menger’s book dealt with the economizing indi- the university in 1900, he was “a thor- vidual as a universal phenomenon ough statist [interventionist].” Unlike Once Mises realized —that is, his principles apply to most of Mises’s fellow students, he was everyone at any time. We all act on not a Marxist; he had studied the that economics was a the basis of our own subjective values works of Marx, Engels, and Lassalle, science and that in the effort to acquire things we found them incomprehensible and so consider important for “our contin- was “consciously anti-Marxian.” subjective value and ued existence and development (life At that time the teachings of Gus- and well-being).”We try to use what tav Schmoller’s Historical school of marginal utility were we have to get what we want as expe- economic state science prevailed in the bases for all ditiously and economically as possible, the German universities.According to given the time and circumstances. Schmoller, the only scientific method economic theory, his Once Mises realized that economics for the sciences of human action was interest turned from was a science and that subjective value history, the study of the past from and marginal utility were the bases for which economic theory was to be history to economics. all economic theory, his interest abstracted. Moreover, Schmoller’s turned from history to economics. school did not really deal with scientific problems but Subjective value theory explained that voluntary was dedicated instead to the glorification and justifica- exchanges improved the situation of both parties to a tion of Prussian policies and Prussian authoritarian trade. One man’s gain was not another man’s loss; government. Thanks to Mises’s intense interest in rather, both parties expected to benefit. In the absence historical knowledge, he never accepted historicism, of force, fraud, or human error, they did.Then ipso facto having rejected this view of economics even as a high school student. Contributing editor Bettina Bien Greaves ([email protected]) was a longtime FEE staff member, resident scholar, and trustee. She attended During his Christmas vacation in 1903, Mises’s sen- Ludwig von Mises’s New York University seminar for many years and is ior year at the university, he read Carl Menger’s Grund- a translator, editor, and bibliographer of his works.

THE FREEMAN: Ideas on Liberty 12 Human Action: The 60th Anniversary in a free-market world, conditions would continually that in a socialist society without private property,there improve and people would become better off, richer, could be no market prices and without market prices, more peaceful, and more prosperous. But the market the task of the government’s central planners would be then was by no means free. Almost all European gov- like trying to steer a ship without a rudder—chaos! ernments forcefully interfered with it, regulating and In Mises’s earlier book, The Theory of Money and controlling their economies to a considerable extent. Credit (1912), he pointed out that by lowering the The Austrian government controlled rents, restricted interest rate asked of borrowers, banks could expand imports, and inflated the money supply to subsidize the credit, create more “money” to lend, make borrowing railroads and food producers. Germany’s socialistic pol- easier, and thus stimulate businesses artificially. He icy would culminate in an almost completely con- explained later that the German government itself had trolled economy in World War I and later in Hitler’s been responsible for its runaway inflation in 1923 by National Socialism. In the Soviet Union the commu- printing money to spend and to lend. Only much later nists destroyed the market and private property. did Mises realize that unexplained economic crises Mises reasoned that if in a free-market society, were due not to market failure, but to the artificial where peaceful social cooperation prevailed, the volun- reduction of interest rates—by banks and by govern- tary actions and choices of individuals ments—that caused a “boom” by tend to coordinate the actions of all inducing businesses to borrow more market participants, improve produc- Mises felt the need than they would have otherwise and tion, and contribute to peace and then later a “bust,” when their proj- prosperity, then interference through to integrate all the ects, which turned out to be malin- force or threat of force hampered and vestments, made losses. disrupted that process. Mises was a teachings of the serious and conscientious student.The Austrian school into A Comprehensive Treatise more he studied and thought, the ises had written books on more he realized that future peace and a comprehensive Mmoney, inflation, the trade prosperity depended on promoting an treatise on cycle, and socialism, as well as articles understanding of good free-market on practically every aspect of eco- ideas and opposing bad government- economics. nomics.Yet he felt the need to inte- interventionist ideas. As a high school grate all the teachings of the Austrian student he had adopted as his motto a school—subjectivism, the division of phrase from the Latin poet Virgil:“Do not yield to the labor, monetary theory, international trade, pricing, bad, but always oppose it with courage.” Hence he competition, monopoly, savings, investment, and determined not only to improve his own understanding more—into a comprehensive treatise on economics. of economics but also to fight interventionist ideas by Mises’s activities with the Austrian Chamber of Com- explaining their harmful consequences and by teaching merce in Vienna occupied him almost full-time. How- sound economic ideas in the classroom, lectures, semi- ever, anticipating the rise of socialism in Austria and of nars, books, and articles. Hitler in Germany, Mises accepted a teaching position at the Graduate Institute of International Studies in Early Development Geneva, Switzerland, in 1934. His teaching schedule in n his 1922 book, Socialism, Mises followed Menger in Switzerland was not strenuous, and he finally had time Iexplaining how money developed out of barter as a to devote to the book on economic theory he had trading commodity and became society’s medium of been contemplating for some time. He began shortly exchange. Without such a common denominator, after he arrived in Geneva, and he kept on writing in traders would be unable to calculate consumer demand, between his other obligations—teaching, getting mar- production costs, and selling prices. Mises pointed out ried (his wife-to-be had managed to get out of Vienna

13 SEPTEMBER 2009 Bettina Bien Greaves shortly after the Nazis arrived in 1938), and lecturing at E. Read was supportive of the effort. A FEE secretary international meetings. He wrote in longhand, submit- helped type the final manuscript, and Read committed ting his manuscript page by page to be typed. Finally,in FEE to purchasing 500 copies to assure its publication the spring of 1940, thanks to Mises’s determination and by Yale University Press. persistence, the manuscript for Nationalökonomie, an all- Human Action (1949) is organized along similar encompassing 756-page book on economics, was in the lines to Nationalökonomie. But it is a very different hands of the publisher. book, longer than the German original (889 pages) By then, World War II had begun. Germany had with fewer references to European history. Instead overrun and occupied Austria, Poland, Holland, Bel- Human Action is illustrated with incidents of interest gium, Norway, and France, and attacked Russia. Mises’s to American readers. For instance, it cites Margaret situation in Switzerland, as a “stateless citizen” after the Mitchell’s Gone with the Wind, the U.S. experiment Nazis occupied Austria, had become uncomfortable. with Prohibition in the 1920s and 1930s, and General Friends of Mises arranged for him to be issued a non- Billy Mitchell, ardent advocate of air power in the quota U.S. visa, and he made plans to 1930s, who was demoted and court- leave Switzerland. The publication of martialed for criticizing the military, Nationalökonomie was announced in In Human Action then posthumously rehabilitated the Tribune de Genève on June 16–17, Mises starts at the and honored. 1940. With the Nazis in control of most of Europe, 1940 was an unpro- very beginning. Beginning at the Beginning pitious time for launching on the Human beings act. n Human Action Mises starts at the European market a new German- Ivery beginning. Human beings act. language free-market-oriented book. Why? Because they Why? Because they are not neutral Though depressed by the war and are dissatisfied in with respect to their situation; they sorry to leave Switzerland, Mises was are dissatisfied, uneasy in some undoubtedly proud and pleased to be some respects and respects, and have an idea about carrying with him in his luggage, how to improve their condition. when he left for the United States on have an idea about All actions are, by definition, pur- July 4, a copy of his newly published how to improve posive—that is, aimed at ends. This treatise on economics. is the subject of economics. Eco- Mises and his new wife arrived in their situation. nomics is not a study of the physical New York on a hot and muggy August production of material things; that 2, 1940. It took some time for Mises to feel settled in the is physical science, mechanics, or technology. Econom- United States. But by 1944 he had written and had pub- ics is not a study of what men did in the past; that lished two English-language books (Omnipotent Govern- is history. It is not a study of why men act; that is ment and Bureaucracy). In 1946 he became economic psychology or, Mises’s term, thymology. It is not the adviser to FEE. study of unconscious bodily functions (digestion, breathing, the beating of the heart, the involuntary Hazlitt’s Suggestion reflexive responses of the human body to stimuli); that round this time, FEE trustee Henry Hazlitt, eco- is physiology. Anomic journalist, author of the popular Economics Humans act based on subjective evaluations, so sub- in One Lesson, and a close friend and supporter of jective value theory is crucial for understanding all eco- Mises, suggested that Nationalökonomie be translated nomic phenomena. Men have values, wants, and into English. Mises disagreed, saying it should be preferences. Some things are more important to them rewritten in English for an American audience. So than others. They seek to trade things they have that Mises set to work. FEE founder and president Leonard they value less for things they value more. They are

THE FREEMAN: Ideas on Liberty 14 Human Action: The 60th Anniversary uneasy, dissatisfied, so they strive to exchange their Human Action: An Economic Treatise represents the present situation for another. Mises explained that culmination of Mises’s life-long effort to present a prices are ratios reflecting the relative subjective values comprehensive economic theory of the operations of buyer and seller expressed in money terms at the of an unhampered market plus a description of how instant of exchange. Thus economics is not a study of government interferes with and obstructs social coop- material things or monetary statistics, but of decisions, eration and market activities. It is a sober, scientific ideas, choices, values, and the purposive actions of book, not a diatribe. human beings. It is our relatively free market that has produced the From this point of view, Mises cornucopia of goods and services we described the workings of the mar- enjoy today; it has increased our ket. Production, the division of By describing in knowledge of the world, improved liv- labor, exchanges, wages, money, sav- Human Action the ing standards, and supported an ever- ings, and trades all stem from the increasing population. By describing in decisions, choices, purposive actions, workings of a society Human Action the workings of a society ideas, and personal subjective values based on social cooperation, the divi- of economizing individuals as they based on social sion of labor, and private property, bid and compete with one another cooperation, the Mises believed he presented the to improve their respective situa- guideline for maintaining a free- tions. Similarly, Mises explained division of labor, and market economy. He also believed he supply, demand, competition, unem- private property, explained how this trend toward ployment, monopoly, domestic and plenty, peace, and prosperity can be international trade, and more as out- Mises believed he disrupted by government interven- comes of the actions and interactions presented the tions. He concluded: of valuing individuals, each doing “The body of economic knowledge their best under the circumstances to guideline for is an essential element in the structure seek their ends. of human civilization; it is the founda- In Human Action Mises also ana- maintaining a free- tion upon which modern industrialism lyzed government interventions into market economy. and all the moral, intellectual, techno- the market—taxes, price controls, logical, and therapeutical achievements price supports, inflation and credit of the last centuries have been built. It expansion, special privileges and subsidies to some and rests with men whether they will make the proper use special costs to others, trade restrictions, monetary of the rich treasure with which this knowledge pro- expansion and contraction, war, and so on. Such gov- vides them or whether they will leave it unused. But if ernment interventions inevitably have unintended con- they fail to take the best advantage of it and disregard its sequences, such as increased costs, distorted production, teachings and warnings, they will not annul economics; higher prices, idle resources and unemployment. they will stamp out society and the human race.”

15 SEPTEMBER 2009 Human Action: The Treatise in Economics

BY PETER BOETTKE

“ ext week we will discuss the master’s tried to absorb the material, I missed much more than I work.” So stated Dr. Hans Sennholz to comprehended. N close his graduate seminar during my jun- But what I did comprehend changed my life. ior year at Grove City College. I had owned a copy It was that experience more than any other that of Human Action since my freshman year, but the made me realize I wanted to be an economist—not just book was too daunting for me an advocate for the free market. to really study it. I preferred to A year later I applied, and was read Henry Hazlitt’s Economics accepted, to law school, but in One Lesson or Ludwig von decided to defer that and attend Mises’s Planning for Freedom,or graduate school in economics Sennholz’s own The Age of Infla- instead. Studying economics in tion. But I had read those works the way Mises described the disci- thoroughly. And by this time I pline in Human Action seemed the had already taken a year-long appropriate path. history-of-thought course at Over the next year I worked to Grove City, in which I read clas- clear up my misunderstandings of sics such as Adam Smith’s The Mises by reading Murray Roth- Wealth of Nations,J.B.Say’s Trea- bard’s Man, Economy, and State and tise in Political Economy, and John Percy Greaves’s Mises Made Easier. Stuart Mill’s Principles of Political Then in the second semester of Economy. I also had read Mises’s my senior year I reread Human Socialism and F. A. Hayek’s The Action for a senior project for Road to Serfdom. Sennholz on the methodenstreit Because I was a serious stu- (the Austrians’ battle with the dent of free-market economics, German Historical school over Sennholz invited me to join his the legitimacy of economic the- “graduate seminar,” which met Poster available at www.libertymaniacs.com ory) and the relationship between on Wednesday nights and read Mises and Max Weber. the classics. That year we read Carl Menger’s Principles A year later, when I started graduate school at and Investigations and Eugen von Böhm-Bawerk’s Capi- George Mason University, Professor Don Lavoie tal and Interest. So on Sennholz’s orders I picked up my Contributing editor Peter Boettke ([email protected]) is a professor in the copy of Human Action and went to the library every economics department at George Mason University, the deputy director of night until I had read the book cover to cover.Thanks the James M. Buchanan Center for Political Economy, and a senior research to my undergraduate mind and the speed with which I fellow at the Mercatus Center.

THE FREEMAN: Ideas on Liberty 16 Human Action: The Treatise in Economics impressed me when, in an undergraduate course, he but it does lay out the economic theory of factor pric- held up Human Action and said to the students,“This is ing, the principle of comparative advantage in the allo- the greatest book ever written in economics. I love this cation of labor, and the international division of labor book.”I understand what Lavoie meant. For the past 20 and the gains from specialization and exchange. years I have had the good fortune to be able to use Human Action is not exclusively any one of these Human Action in at least one Ph.D. course every year. things precisely because it is all of these and more. Mises wrote economics not as a series of specialized No Substitute topics, but as an integrated whole grounded in the con- o the American student of economics, Rothbard’s sistent and persistent study of the logic of purposive Tpresentation in Man, Economy and State might be human action. more straightforward than Human Action, and Israel In my view there have been two great defining Kirzner’s discussion in Competition and Entrepreneurship characteristics of economics since its birth as a disci- picks up more naturally than Human Action from where pline in the eighteenth century: the market economy’s intermediate price theory leaves off. self-regulating capacity (the invisible But to the serious student of Austrian hand) and self-interest (rational economics, there is no substitute for a Mises wrote choice). Self-regulation was the great thorough reading of Human Action. discovery of the Schoolmen of Sala- Even Hayek’s Individualism and Eco- economics not as a manca, the French Physiocrats, and nomic Order is best read as a comple- series of specialized the Scottish Enlightenment philo- ment to Mises’s great work, certainly sophers. The Austrian school of not as a substitute if you hope to topics, but as an economics represents the modern understand not only Hayek’s thought integrated whole refinement of this classical theory of and argument, but also how markets spontaneous order. Mises inherited it actually work and why government grounded in the from Smith, Say, Menger, and Böhm- cannot effectively regulate, let alone Bawerk and developed the argument plan, a modern economy. consistent and further. The unhampered market Since it was first published, Mises’s persistent study of economy corrects itself through price great work has been misunderstood. It adjustments; losses, which weed out is not primarily a work in methodol- the logic of purposive imprudent decision makers; and prof- ogy; it simply lays out the method- human action. its for prudent decision makers. In ological foundations at the beginning. the process the market directs scarce It is not primarily a work about the resources into wealth-creating activi- failures of government and the superiority of the mar- ties and general prosperity.Through relative prices and ket economy, though that is a logical conclusion to profit-and-loss accounting, individuals’ exchanges and draw from the work’s analysis of interventionism and innovations align technology and resource availability socialism. It is not primarily a work in market theory with consumer preferences. and the price system, though it does place a priority on entrepreneurship and the quest for profit and the disci- Coordination of Consumption and Production pline of loss. It is not primarily a work dealing with ne sign of Mises’s genius is that his demonstration money,capital, and interest, but it does devote consider- Oof this harmonization was more thorough than able time to the coordination of economic activities any before him. He showed how purposive action through time and devotes considerable space to the within the institution of private property coordinates nature of money and capital and the role played by consumption desires and production plans according to interest. Finally, Human Action is not focused on the the least-cost methods of production. The private- wages of workers or the pattern of international trade, property market economy mobilizes individual initia-

17 SEPTEMBER 2009 Peter Boettke tive and enables people to rationally calculate the alter- vate property, freedom of contract, monetary stability, native uses of scarce resources. Consumers, buying and and fiscal responsibility, the process of rational eco- abstaining from buying, create profits and losses that nomic calculation is thwarted. guide business decisions and coordinate economic plans Adam Smith articulated the idea of the invisible through time. hand, but it was Mises who explained how the market Mises’s work on rational economic calculation pro- economy actually works. Human Action is Mises’s fullest vided the decisive argument against socialism, but and finest statement of that explanation. it also explains the foundation of the market order. To put it bluntly, Human Action is the greatest work in The free market enables calculation, socialism makes it economics in the twentieth century. It is the treatise impossible, and interventionism distorts it.Without pri- in economics.

THE FREEMAN: Ideas on Liberty 18 What Human Action Has Meant to Me: Reflections of a Young Economist

BY PETER T. LEESON

remember well when I discovered Human Action. rarely did in those days when I completed a book: I I remember because it has had the profoundest opened up to page one and began reading it again. Iinfluence on my development as an economist not Over the next year I read Human Action many only up to that point, but also since then. times—exactly how many times, I don’t remember. But I first read Human Action when I was in high school. it got to the point where I could, in a matter of sec- At the time I was very much interested in, and influ- onds, flip to most any decent-sized passage I sought in enced by, supply-side economics. One of the supply- the book without looking at the table of contents or siders I was reading (maybe it was George Gilder or index. In the years that followed I read Human Action Paul Craig Roberts?) referenced Ludwig von Mises’s some more, and then again.As I learned more econom- treatise, which I subsequently picked up. ics—from Mises’s other works and My first days with the book were those of other economists—and tough going, to say the least. I needed learned more in general, I came to bet- a dictionary and an encyclopedia of ter understand those parts of Human philosophy by my side to make sense of Action that I formerly found impene- the first few chapters, which discuss trable and developed a better grasp of Mises’s method. I made it through the those parts of the book I had under- methodological discussion but under- stood only weakly before. stood little of it. Fortunately, I didn’t As is probably clear from my let that stop me from continuing with description, I found, and still find, the book, the rest of which I found Human Action an endlessly rewarding somewhat easier to digest. and illuminating book. In my opinion In the days and weeks that followed I The author with his Human Action it is the most important book on eco- read Human Action with a dedication I’d collection. nomics of the twentieth century and never applied to a book before. I kept careful notes in quite possibly the most important book in economics, the margins and faithfully followed the footnotes. I felt period. For this reason I’ve studied it more closely than enlightened with every sentence and could hardly wait I’ve studied any other book; and I believe that who I for the next one to enlighten me further.The sense of am as an economist and how I approach economics intellectual excitement I felt the first time I read the has been shaped more by Human Action than by any book is a feeling I hope every person experiences in his other book. or her life. If the number of copies of Human Action in my I encountered a few passages I found extremely dif- library is any indication, this is certainly true. My first ficult to understand and more than a few I didn’t Peter Leeson ([email protected]) is a visiting professor of economics at the understand at all. But what I was picking up struck me Becker Center on Chicago Price Theory at the University of Chicago and as so important and penetrating that I did something I author of The Invisible Hook.

19 SEPTEMBER 2009 Peter T. Leeson copy was the blue, soft-cover, third edition. Since then world: Peter Boettke.The chance to further my study of I’ve acquired over a dozen other copies of the book— Human Action and Mises’s work more generally under enough for multiple copies of every edition—including Pete’s tutelage made George Mason’s draw irresistible. my prized possession: a first edition signed by Mises And, similar to my experience studying Human Action himself, which was given to me by my mentor, Peter under Professor Ebeling, my experience studying the Boettke, when I completed my Ph.D. Perhaps unusu- book under Pete not only met my wildly optimistic ally, Human Action was my “gateway book” to Mises’s expectations but in fact surpassed them. other works. After Human Action I read Socialism, The I have had the great fortune of teaching Austrian Theory of Money and Credit, Liberalism, and then others. I economics at the undergraduate and Ph.D. levels at loved and learned much from them all, but none more George Mason. (This academic year I’m visiting at the than Mises’s magnum opus. University of Chicago.) In my undergraduate course Human Action is the only text. Each semester I hope Charting an Educational Course some student will “discover” Mises’s treatise as I did became so enamored with Mises’s ideas through years ago, and that Human Action will have the same IHuman Action that I chose where I would pursue my life-altering effect for him or her as it has had for me. undergraduate education on the basis My graduate Austrian course of which school would allow me to focuses on journal articles outside the be closest to these ideas and learn The way I got here Austrian literature, but also includes more about them. In this sense Human Human Action. Even where the book Action charted my formal educational was through Mises’s doesn’t figure explicitly in a given course. Human Action.Every lecture, it looms large indirectly Hillsdale College, my alma mater, is through the influence it has had over home to Mises’s personal library. (I year I read Human my thinking about whatever the dis- spent unhealthy amounts of time sit- Action again, and cussion may be. ting at Mises’s desk in the Mises Room in Hillsdale’s library in a failed every year I learn Constant Influence effort to absorb some of his bril- something new. y career as an economist has liance.) At the time I was choosing a Monly just begun. But it’s no college, Hillsdale was also home to exaggeration to say that the way I got one of the world’s foremost Mises and Human Action here was through Mises’s Human Action. Every year I experts, former FEE president Richard Ebeling, who read Human Action again, and every year I learn some- occupied the Ludwig von Mises Chair. Between Mises’s thing new.Some of my research explicitly draws on and personal library and Professor Ebeling I was sold on relates to this book. (See, for instance, “Was Mises Hillsdale. And I was not disappointed.The opportunity Right?” with Pete Boettke in the Review of Social Econ- to learn more about Mises, Austrian economics, and omy, 2006.) Most of it does not. But this doesn’t mean Human Action in particular, under the mentorship of Human Action isn’t actively influencing this work. Its Richard Ebeling, proved every bit as outstanding as I influence is alive and well in all of my writing in at least could have imagined. two ways. In the same way that Hillsdale was the only college First, since Human Action permeates my thinking as that made sense for me, given my passion for Mises and an economist, in one sense, every paper I write is the Human Action, so George Mason University’s doctoral result of this book. Second, the particular themes I program was the only one that made sense for me. focus on, most notably private institutions of gover- George Mason was (and is) home to the man who, nance and self-enforcing exchange, are, in my mind, together with Israel Kirzner, defines modern Austrian attempts to build on and extend the Austrian research economics and is the leading Austrian economist in the program Mises identifies and elaborates in Human

THE FREEMAN: Ideas on Liberty 20 What Human Action Has Meant to Me: Reflections of a Young Economist

Action.As I’ve written elsewhere, I take the twin themes Taking its inspiration from this central insight, my of spontaneous order and social cooperation under the work investigates the institutional mechanisms that division of labor as central to Mises’s project in Human make social cooperation under the division of labor, per Action, and these themes motivate my work. the Ricardian Law of Association, a reality. Confronted In Human Action, Mises highlights what he calls with obstacles to their realization of mutual benefits of the “Ricardian Law of Association,”which is at the core exchange—most notably the absence of exogenously of this motivation. As Mises describes it (Chapter 8, given and enforced rules of social order—what do indi- Part 4): viduals, whose reason shows them the potential for immense gains from social cooperation, do to make it The law of association makes us comprehend the possible for them to exploit this potential in practice? If tendencies which resulted in the progressive intensi- we can answer this question posed by Mises’s insight in fication of human cooperation. We conceive what Human Action, we can advance our understanding not incentive induced people not to consider themselves only of how individuals actually achieve social cooper- simply as rivals in a struggle for the appropriation of ation under the division of labor, but also how they the limited supply of means of sub- do so without command. sistence made available by nature.We realize what has impelled them and Human Action offers Guiding Light permanently impels them to consort uman Action thus offers me a with one another for the sake of me a kind of guiding H kind of guiding light for cooperation. Every step forward on pursuing economic research. It lays the way to a more developed mode light for pursuing out a pure logic of choice and of the division of labor serves the economic research. deploys this logic in the context interests of all participants. In order of alternative institutional arrange- to comprehend why man did not ments to illuminate the economic remain solitary, searching like the animals for food consequences of those arrangements and shed light and shelter for himself only and at most also for his on their emergence. To me, this is what economics consort and his helpless infants, we do not need to is about. have recourse to a miraculous interference of the As I look forward to the future I see Human Action Deity or to the empty hypostasis of an innate urge figuring as prominently in my life and thinking as it did toward association. Neither are we forced to assume when I was a teenager. Certainly my passion for it that the isolated individuals or primitive hordes one remains undiminished. I have no doubt it will take my day pledged themselves by a contract to establish mind to new and exciting places, as it has since I dis- social bonds. The factor that brought about primi- covered it years ago. I eagerly anticipate the new intel- tive society and daily works toward its progressive lectual experiences I’ll have, areas of study I’ll enjoy, intensification is human action that is animated by thinkers I’ll interact with and learn from, and academic the insight into the higher productivity of labor relationships I’ll form.And I’ll owe it all to Ludwig von achieved under the division of labor. Mises’s Human Action.

21 SEPTEMBER 2009 The Case for Capitalism

BY HENRY HAZLITT

here has just been published by the Yale Uni- “labor economies” or “business forecasting” so often versity Press a book that is destined to become go astray. Ta landmark in the progress of economies. Its So far is Mises’s approach from that of the specialist title is Human Action, and its author is Ludwig von that he treats economics itself as merely part (though Mises. It is the consummation of half a century of the hitherto best-elaborated part) of a more universal experience, study, and rigorous thought. science, “praxeology,” or “the science of every kind of No living writer has a more thorough knowledge of human action.” This is the key to his title and to his the history and literature of economies than Mises, and 889 comprehensive pages. yet no living writer has been to more Mises is so concerned to lay foun- pains to take no solution of any prob- dations of his work with unassailable lem on faith, but to think out each I know of no other solidity that he devotes the first 142 solution, step by verified step, for work, in fact, which pages to a discussion of “epistemolog- himself. The result is a work of great ical” problems alone.This is apt to dis- originality written in a great tradi- conveys to the reader courage all but the most serious tion. Although it builds on what was so clear an insight students of the subject. Yet there is sound in the classical economists and nothing pretentious or pedantic in on the revolutionary revision of into the intimate Mises’s writing. His sentences and Menger, Böhm-Bawerk, Jevons, interconnectedness vocabulary are as simple and clear as Clark, and Wicksteed, it extends his profundity and closely woven beyond any previous work the logical of all economic logic will permit. Once his more unity and precision of modern eco- abstract theoretical foundations have nomic analysis. phenomena. been laid his chapters are models of I know of no other work, in fact, lucidity and vigor. which conveys to the reader so clear an insight into the Outstanding among his many original contributions intimate interconnectedness of all economic phenom- are his “circulation credit” theory of business cycles, ena. It makes us recognize why it is impossible to study which emphasizes the harm of cheap-money policies, or understand “collective bargaining” or “labor prob- and his demonstration that partial socialism is parasitic lems” in isolation; or to understand wages apart from prices or from interest rates or from profits and losses, Henry Hazlitt (1894–1993), founding vice president of FEE and or to understand any of these apart from all the rest, or Freeman contributor, was a popular economics writer who worked for the the price of any one thing apart from the prices of Wall Street Journal and New York Times, and then, from 1946 other things. to 1966, wrote a column for Newsweek. He was the author of Economics in One Lesson,The Failure of the “New Economics,” It makes us see why those who specialize merely in and many other books.This article is from his September 19, 1949 “monetary economies” or “agricultural economies” or Newsweek column.

THE FREEMAN: Ideas on Liberty 22 The Case for Capitalism on capitalism and that a complete socialism would Human Action is, in short, at once the most uncom- not even know how to solve the problem of eco- promising and the most rigorously reasoned statement nomic calculation. of the case for capitalism that has yet appeared. If any This book is in fact, as the publishers declare, the single book can turn the ideological tide that has been counterweight of Marx’s Das Kapital, of Lord Keynes’s running in recent years so heavily toward statism, General Theory, and of countless other books recom- socialism, and totalitarianism, Human Action is that mending socialization, collectivist planning, credit book. It should become the leading text of everyone expansion, and similar panaceas. Mises recognizes infla- who believes in freedom, in individualism, and in the tionism under its most sophisticated disguises. He ability of a free-market economy not only to outdis- demonstrates repeatedly how statist interventions in the tance any government planned system in the produc- market economy bring about consequences which, tion of goods and services for the masses, but to even from the standpoint of those who originally advo- promote and safeguard, as no collectivist tyranny cated the interventions, are worse than the state of can ever do, those intellectual, cultural, and moral values affairs they were designed to improve. upon which all civilization ultimately rests.

23 SEPTEMBER 2009

Our Economic Past The Rise of Big Business and the Growth of Government

BY ROBERT HIGGS

ost people learn about the relation between programs, regulatory agencies, and so forth that, in the rise of big business and the growth of effect, allowed them to wield the government’s coercive Mgovernment in the form of what amounts to power in the service of propping up their cartels, sup- a morality play. In the most widely disseminated ver- pressing competition, and maintaining excessive profits. sion, presented in nearly every American history text- The classic exposition of this interpretation is Gabriel book, the emergence of big business (playing the role of Kolko’s The Triumph of Conservatism (1963). the devil) is said to have given rise to a variety of evils Unfortunately,although these morality tales contains and abuses—monopoly power, pollution, exploitation grains, or even big chunks, of truth, each leaves out a of workers, and so forth. Matthew Josephson tells this great deal of important, relevant evidence. In short, story in rousing (if not scrupulously factual) style in his reality was much messier than either interpretation 1934 classic, The Robber Barons. The masses are said to suggests. It is difficult to read deeply researched books have cried out for relief such as Robert H.Wiebe’s and to have pressed their Businessmen and Reform political representatives (1962), Morton Keller’s to enact protective legis- Affairs of State (1977), and lation. Thus emerged, Martin J. Sklar’s The most markedly during Corporate Reconstruction the Progressive, New of American Capitalism, Deal, and Great Society 1890–1916 (1988) and periods, a profusion of cling to any simple inter- government programs, pretation of the relation- regulatory agencies, and ship between the rise of direct government par- big business and the ticipation in economic growth of government. life (divine intervention, Big business is a lot less uniform than it initially appears. Part of the difficulty as it were), which served arises from the vastness to shield the public from and complexity of the the otherwise crushing weight of brutal laissez-faire U.S. economy.A multitude of organized interest groups capitalism. emerged to lobby the various levels of government. A competing tale, popular among many libertarians Although the federal government became increasingly and some left-radicals, presents the rise of big business weighty in the overall mix of interventions, the states as leading directly to satanic endeavors. This version and the large cities continued to play important maintains that the big businessmen, however virtuous roles—for example, such outright socialism as appeared they might have been at the outset, ran into trouble in the United States arose primarily at the municipal because of rampant competition among the emergent big firms.To suppress this irksome, profit-sapping mar- Robert Higgs ([email protected]) is senior fellow at the Independent Institute (www.independent.org), editor of The Independent Review, ket phenomenon, they used their wealth diabolically to and author of Neither Liberty nor Safety: Fear, Ideology, and the influence or bribe lawmakers to create government Growth of Government (Independent Institute).

THE FREEMAN: Ideas on Liberty 26 The Rise of Big Business and the Growth of Government level, especially for so-called public utilities, such as The giant corporations, which in many cases had electricity and gas production, and local mass transit, become large in order to exploit new technologies and such as streetcar service. organizational structures that offered economies of No serious scholar denies that businessmen played scale and scope, entered increasingly into competition important parts in creating the interventionist state. with the multitude of smaller firms serving previously “But who,” Wiebe asks, “are the businessmen? Some- fragmented local or regional markets. Firms threatened times they appear to be a handful of particularly by the big interstate sellers sought protection by successful and powerful men [Murray Rothbard appealing to their local and state governments. For this emphasized especially the kingpins in the “Morgan reason, among others, local and state intrusions into ambit”]. At other times the community presumably market relations grew markedly in the late nineteenth includes everyone from the chairman of U.S. Steel to century. The potential and actual mobility of firms, the corner grocer, without information on how,if at all, however, helped to contain these interventions, because their thoughts and actions differ.” Wiebe is more companies pressed too hard simply left the jurisdiction. impressed by the businessmen’s differences and rivalries At the same time, the big firms’ owners, harassed by than by their agreements. For example, the big New dozens of state governments and their rapacious politi- York bankers, notwithstanding their obvious clout, cos, began to see the wisdom of federal regulation. Per- often had to contend with dissident bankers in major haps, they reasoned, they might stand a better chance of financial centers such as Chicago, Boston, Philadelphia, escaping from meddlesome, costly, and fluctuating state St. Louis, and San Francisco, who did not relish being and local regulations if instead they dealt with a single, overshadowed by the Wall Street titans—which is one national, regulatory body.Such an agency might also be reason (among several) why the Federal Reserve Act used to keep the big firms’ own interstate competition of 1913 created not a single central bank but twelve in check, thereby maintaining their returns. regional banks. As both small and big businessmen organized and Wiebe concludes: “Among those prominent in the pressed for favorable government interventions, other movements for a regulated economy were businessmen groups increasingly entered the fray, defensively if and farmers after greater profits, politicians in need of not offensively: Farm, labor, professional, and academic an issue, journalists in search of a story, a new class of associations formed and sought expanded govern- economic and administrative specialists looking for ment measures. The nineteenth century’s dominant ways to utilize their knowledge, and clergymen hoping ideology, a distinctly American version of laissez to re-establish morality in industrial America.” faire, seemed increasingly unable to restrain this grasp- In substantial part, what made the big business ing for economic advantage via enlarged government (“trust”) question so politically salient in the late nine- power. teenth and early twentieth centuries was not so much Because ideology and political movements develop the increasing size of the leading firms as it was the reciprocally, the pervasive reactions to the rise of big emergence of a national (that is, interstate) market fos- business around the turn of the twentieth century gave tered by the development of new technologies of trans- rise not simply to a proliferation of newly organized portation and communication, especially the railroads interest groups seeking government protection of (themselves described as “the first big business”) and threatened positions; it also prompted intellectuals, both the telegraph. When the scope of business had been independents and “hired guns,” to develop new ration- local or at least predominantly intrastate for nearly all ales for more active government.Thus Progressivism as firms, government action in relation to business took ideology developed concurrently with Progressivism as place primarily on the local or state scene. As the politico-economic practice, each aspect reflecting the national market came to characterize more and more changing socioeconomic opportunities and hazards businesses activities, established business-government created by the rise of big business and its repercussions relations became unstable and began to break down. throughout the economy.

27 SEPTEMBER 2009 A Triple Whammy for Austrian Economics

BY SANFORD IKEDA

hey say that when economic times are good Blaming the Free Market: Orthogonal Mindsets businesses can get away with sloppy practices. irst is the all-too-common bromide that the free TIn the intellectual world, however, it seems that Fmarket is wholly or at least primarily responsible sloppy thinking prevails in desperate times and impor- for the current economic mess. There is no need to tant distinctions get thrown out the window. attack this notion here, owing to the numerous articles A good example of this appeared recently in a that have already been published within the last year, March 4 New York Times article titled “Ivory Tower including in The Freeman, thoroughly refuting this Unswayed by Crashing Economy” (www.tinyurl.com/ fallacy. bnesly). Reporter Patricia Cohen suggests that in spite As I’ve debated the issue in various public forums of the apparent failure of the free market in housing over the past few months, I’ve realized that there are and finance in 2008, supporters of two widely held and mutually exclu- the free market have been surpris- sive views on how the situation came ingly slow to change their minds. In the intellectual about and therefore on the best way “Free market theory, mathematical to fix the problem. models and hostility to government world, sloppy One is that to get the economy out regulation still reign in most econom- thinking prevails in of slump, it’s necessary to understand ics departments at colleges and uni- how and why we got to where we versities around the country,” the desperate times and are. Identifying the causes of the story said. important distinctions widespread poor judgment that pro- To begin with, this reveals a naïve duced this mess requires that we view of how intellectual paradigms get thrown out the look for changes in the “rules of the shift in the academy. Does the game” that gave investors the incentive reporter expect that professors would window. to create it. Then, having understood so quickly abandon long-cherished that, we must change the incentive beliefs or that in a few short months structure so as not only to revive the economy in a way they would be summarily replaced by professors consistent with sound economic principles but also to with “better” ideas? (It may be too much to expect ensure that we don’t wind up back here ever again. of someone evidently unfamiliar with university (Since this has been addressed elsewhere, it is not my tenure to be familiar with the concepts of Thomas concern here.) Although consistent with several schools Kuhn.) of thought, one might call this the “Austrian view.” That aside, there were three other things that both- ered me about this article because they reflect serious Sanford Ikeda ([email protected]) is an associate professor of untruths that have been spreading into the larger public economics at Purchase College, SUNY, and the author of The Dynamics discussion in the wake of the Panic of 2008. of the Mixed Economy:Toward a Theory of Interventionism.

THE FREEMAN: Ideas on Liberty 28 A Triple Whammy for Austrian Economics

The other perspective sees markets as dominated by Austrian economics, which most people who have the irrational drives and psychological proclivities of heard the term associate with “free-market economics,” private investors. It’s therefore a waste of valuable time does not reject mathematical methods when appropri- during a crisis to search for the causes of perverse ate, such as doing economic history or illustrating incentives because all incentives are in a sense perverse economic principles of supply and demand. But math- or at least potentially so. ematics is most applicable in describing situations in One popular version of this blames the housing which all plans are coordinated and no discoveries are and financial bubbles of the recent past on an epi- left to be made—that is, in an “equilibrium.” demic of “greed.” It argues that a psychological shift Now economic regularities, such as prices, do occurred under the apparently more market-friendly emerge, and we can say some valuable things about the regimes of the 1980s and 1990s that intensified context—the rules of the game, if you will—in which investor avarice and prompted irresponsible lending we can expect them to do so and why. But the highly and borrowing. Since private investment is the source complex processes in which this happens are not use- of the problem, the solution lies in massive govern- fully described as an equilibrium. ment spending to stimulate confidence and restart Real markets are, somewhat paradoxically, both the economy. (It is not my intent to critique this orderly and unpredictable: orderly because entrepre- view here.) I will call this the “animal neurial alertness to profit opportuni- spirits” view, after John Maynard ties within a given market tends to Keynes, who made the expression The Austrian and reconcile inconsistencies among the popular. plans of individual buyers and sellers; The interesting thing is that, Keynesian approaches and unpredictable because there is no because each side approaches the pres- aren’t “opposed”— perfect guarantee that any profit ent situation from such divergent per- opportunity will be discovered. spectives, neither really understands each side simply The bottom line is that Austrian the other. The approaches aren’t doesn’t “get” the economists in general are highly skep- “opposed” but “orthogonal”—the tical of attempts to mathematically debate is really never joined, and each other. model real markets, especially for the side simply doesn’t “get” the other. purposes of prediction. The high- powered mathematics used by finan- “Free-Market Economics” = Mathematical cial analysts to evaluate complex derivatives and assets Economics? built on securitized mortgages, for example, are now econd, and what I find just as disturbing and even seen as fundamentally flawed precisely because of the Smore puzzling as an Austrian economist, is the way oversimplifications (relative to the reality to which they the reporter tacitly equates what she calls “free-market are applied) they had to incorporate to make them economics” with mathematical economics, and in par- mathematically tractable. (The work of Nassim ticular the mathematical economics of equilibrium- Nicholas Taleb brings this out.). obsessed neoclassical economics.This is something I’ve Lumping Austrian economics with other “free mar- encountered a lot lately. It surprises me because, of ket” approaches (leaving aside the appropriateness of course, the truth is in most ways just the opposite. this term) that use these dubious mathematical tech- Standard economics bristles with mathematics. I niques thus strikes me as bizarre. routinely tell my undergraduates who express an inter- est in getting a Ph.D. in economics to double-major in Reasoning from a False Premise mathematics, or at least take as many electives as they inally, because for Cohen free-market economics can in calculus, statistics and probability, and linear Fequals neoclassical mathematical economics, the algebra. only alternatives she mentions in the article naturally

29 SEPTEMBER 2009 Sanford Ikeda are those that are anti-market. That is, if free-market spirits, but in the rules of the game that gave rise to economics is mathematical economics and if mathe- perverse incentives? Unfortunately, Cohen never asks matical economics failed, then we must abandon free- these questions, but the answer is in the affirmative: market theory.“There are a handful of departments that Austrian economics. have welcomed alternative theorists, Economists during an economic like the University of Massachusetts, crisis are as popular as weathermen Amherst; the University of Massachu- Fighting the public during a hurricane. And so, like many setts, Boston; the University of Utah; conflation of of my colleagues, I’ve been doing and the University of Missouri, more speaking before public audi- Kansas City (where the Heterodox Austrian economics ences in the past several months, try- Economics Newsletter is published),” with the mainstream ing my best to clarify the situation. Cohen states. I’ve found, however, that there’s much The prevailing heterodoxy at these is one thing Austrians hostility not only to the idea of free departments places them in opposi- markets, but also to economists in tion to free markets. can do to help turn general, and even much skepticism Is there an economics that doesn’t the intellectual about whether economics is a science. proclaim the virtues of mathematical Fighting the public conflation of virtuosity? Does that economics battle around. Austrian economics with the main- appreciate the ability of the entrepre- stream whenever the opportunity neurial-competitive process to generate social order arises is one thing Austrians can do to help turn the and cooperation? Does that economics therefore search intellectual battle around. This is an instance in which for the causes to the present situation, not in animal methodological issues need to take center stage.

THE FREEMAN: Ideas on Liberty 30 In Defense of Ideology

BY MARIO J. RIZZO

here have been many statements recently to the In the first place, this point of view is not new. effect that we should not let “ideology” or I cannot trace here the full extent of its intellectual T“philosophy” stand in the way of solving our roots—they are deep and wide—but we can find economic problems. Indeed, the Obama administration it in such essays, relevant to our current concerns, (like the previous Bush administration) is keen to per- as “The End of Laissez Faire,” (1926) by John May- suade us to drop all this prejudice and to go after each nard Keynes. problem—banking, stimulus, and so forth—on its own Keynes believed that one of the most important terms. We should examine each solution on its own functions of economics is to determine what belongs merits. to the State’s agenda and what does President Obama’s inaugural not. “The important thing for Gov- address includes an apparent attack The Obama ernment is not to do things which on ideology: administration is keen individuals are doing already, and to do them a little better or a little What the cynics fail to under- to persuade us to worse; but to do things which at stand is that the ground has shifted present are not done at all.” Keynes beneath them—that the stale politi- drop all this prejudice was referring to decisions that fall cal arguments that have consumed us and to go after each outside of the sphere of the individ- for so long no longer apply. The ual, “to those decisions which are question we ask today is not whether problem—banking, made by no one if the State does not our government is too big or too stimulus, and so make them.” small, but whether it works. . . . Actually, the sphere to which forth—on its Keynes referred is the aggregate out- Furthermore, Christina Romer, own terms. comes of individual decisions. He did the chairperson of Obama’s Council not have much confidence in the of Economic Advisers, is often spontaneous order of the market. He described as a non-doctrinaire economist who simply fol- rejected what he thought were the “metaphysical or lows the data wherever they may lead. general principles upon which, from time to time, lais- What appears to be a sensible idea to turn our sez-faire has been founded.” So, “[w]e cannot settle on problems into purely technical ones is, on the con- abstract grounds, but must handle on its merits in detail trary, profoundly unscientific and, more generally, . . . to determine what the State ought to take upon anti-intellectual. itself to direct by public wisdom. . . .” This is a big subject and deserves comprehensive Mario Rizzo ([email protected]) is an associate professor of treatment. Let it suffice here to make a few crucial economics and co-director of the Austrian Economics Program at New York observations. University.

31 SEPTEMBER 2009 Mario J. Rizzo

1. Ideology as a Presumption someone says: “By and large the free market is best, eynes is rejecting any presumption that the “results among all the feasible alternatives, at promoting human Kof human action but not of human design” (F.A. welfare.” Is this ideology? I think most people would Hayek citing Adam Ferguson) are beneficial. He seems say it is. What is it based on? Well, for some people it to be saying that we can operate without any presump- may be a religion or faith of sorts. But then its negation tions at all; we can simply look at each “problem” on its can be as well. However, it need not be a faith. own merits and make an individualized decision in I think that for almost all economists who subscribe each case. But a presumption is not an arbitrary belief; to the statement, it is a generalization based on evi- it is not “metaphysical” in the sense that it is completely dence.The evidence is in the form of a general way of impervious to new evidence. A presumption is a belief looking at the world—a framework or research pro- we accept until sufficient evidence to the contrary is gram that is supported in many specific cases. Note that forthcoming. the statement itself goes beyond the individual specific cases. It However, evidence is rarely definitive or over- must go beyond them to deal with new problems and whelming. We need to begin from somewhere. The new events. It must function, in a specific application, as Bayesian statisticians say that we begin a conjecture about novel situations. with prior probabilities and then Looked at in this way,“ideology” is update them with new evidence. A presumption is useful in scientific discourse. In fact, I Prior probabilities are only slightly suggest it is indispensable. How else modified with incremental evidence. not an arbitrary can we approach new problems when These priors function in a manner belief.A presumption the likely outcome of our search for similar to a presumption. So, for specific evidence is inconclusive? example, a person may think that a is a belief we accept large urn contains 95 percent red balls until sufficient 3. Ideology as a Window on and 5 percent blue ones—say, because Indirect or Long-Run someone he thought reliable told him evidence to the Consequences so. But if he starts drawing balls from contrary is ne of the difficulties attendant the urn and keeps getting blue ones, Oupon looking at each problem he will soon revise downward his esti- forthcoming. and each solution individually is the mate of the proportion of red balls, tendency to ignore indirect or long- although drawing only one blue ball run effects. For example, we were will not affect his estimate very much. told, “Consider the ‘problem’ of insufficient home- ownership, and just solve it.” So this was done. A solu- 2. Ideology as Scientific Framework or Research tion of subsidized homeownership and very low inter- Program est rates was put into effect. Should we not have cared n the realm of scientific hypotheses, even the “falsifi- about the longer-run effects of such policies? It would Icationist” Karl Popper accepted a principle of tenacity, have been impossible to predict when and to what which had it that hypotheses are not to be dropped in extent problems would have occurred. So many face of just any conflicting evidence. No hypothesis will thought it was foolish to worry.Those who did worry have 100 percent of the evidence in its favor. (A falsifi- were dismissed as dogmatically anti-Fannie/Freddie cationist is a scientist or philosopher who believes that and anti-flexible Fed policy.And here we are. data can count against a theory and enough such data Ideologies stress the interconnections among poli- can refute it. However, he is careful never to say that cies and problems. They may point us in the direction data can definitively prove a theory.) of the general principle implied by a policy and hence Is this rational? It depends, in part, on the nature of the implicit rationalization of further policies. They the prior probabilities or the prior hypothesis. Suppose may make us alert to unintended changes in incentives

THE FREEMAN: Ideas on Liberty 32 In Defense of Ideology in related problem areas, especially when this worsening tical Economy, Chapter II). The science is the technical of other problems has happened time and again. They aspect: causes and effects. The ethics involves the show us that when the State intervenes there is more standards that are applied to determine whether a than just some pinpointed technology involved. state of affairs is good or just. And the art involves the sometimes intuitive judgments of how to apply the 4. Ideology as Shortcut for Rationally Ignorant science to get (or allow) the outcomes policymakers People (Most of Us) want. ost people are not scientists, economists, or intel- An ideology can serve as a rough guide to ethical Mlectuals. They are not testing hypotheses. They considerations. For example, some people believe that it have other things to do.They are often is immoral to “reward” people for rationally ignorant. How can they make irresponsible economic behavior. up their minds about public policy? Ideologies stress the Maybe a policy wonk disagrees Many, though not all, are ideological. interconnections because he thinks that systemic They choose a set or complex of beliefs effects are all that matter. Is the citi- that comports best with their observa- among policies and zen to be faulted for acting or eval- tions and experience. For them, too, it problems. uating on the basis of her belief, is not rational to give up the worldview regardless of the wonk’s opinion? In because some (few) observations seem general, the belief makes good sense. to conflict. Forgive some of them who are not willing As a long-run rule of behavior, the idea that economic to throw away long-held beliefs on the say-so of a pres- actors should bear both upside and downside risk would ident whom most never heard of two years ago. have saved us, for example, from the Fannie/Freddie overexpansion in the first place as shareholders would 5. Ideology as an Ethical Framework not have believed in implicit guarantees. Is this an idea ublic-policy questions are not simply technical we want people to give up without resistance? I do not Pquestions. They involve ethical issues. The econo- think so. mist John Neville Keynes (the father of John Maynard Ideology is okay. It is fine to be ideological. It is Keynes) divided economics into science, ethics and indispensible to effective analysis of the world. Just art. (See J.N. Keynes’s The Scope and Method of Poli- make sure that the ideology makes real sense.

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33 SEPTEMBER 2009 Transforming America: The Bush-Obama Stimulus Programs

BY RANDALL G. HOLCOMBE

eorge W. Bush’s and Barack Obama’s “stimu- Federal Reserve Policy lus” programs will permanently transform the wo fundamental elements of Federal Reserve pol- GAmerican economy.The market-based system Ticy changed in 2008:The Fed began making loans that has produced unprecedented prosperity relies on to nonbank financial institutions and buying financial profit and loss, which rewards individuals and firms that assets other than securities issued by the U.S.Treasury. add value to the economy and penalizes those that The Fed was established in 1913 primarily to lend detract value. The various stimulus programs under- money to member banks based on their assets that mine that system. could be used to pay off the loans. Until 2008 the only My discussion will focus on four firms the Fed would lend to were distinct components of the 2008-09 member commercial banks. Then the stimulus: Federal Reserve policy, In 2008 the Fed Fed began making loans to nonbank the Troubled Asset Relief Program financial institutions. It did so to pro- (TARP), the Obama stimulus spend- began making loans vide those firms with liquidity, but in ing package, and the bailouts of doing so it broke with precedent in automobile and financial firms. to nonbank financial two ways. First, it made loans to firms Because there is a temptation to institutions and that were not members of the Federal stereotype political parties, labeling Reserve System, and second, it made the Democrats the party of big buying financial loans based on questionable assets, run- government and the Republicans assets other than ning the risk that the borrowers might the party of limited government not be able to repay the loans. and fiscal conservatism, it is worth securities issued by The second major change was that emphasizing that these policies the U.S.Treasury. the Fed bought financial assets not were bipartisan.The Federal Reserve issued by the Treasury—so-called toxic policies came during the Bush assets held by private banks and other administration and under Fed firms. The true value of the assets was Chairman Ben Bernanke, a Bush appointee. TARP questionable, so the Fed risked losses. The Fed can was implemented by Bush and his Treasury Secre- afford to take those losses, however. The biggest prob- tary Henry Paulson, and the bailouts of auto- lem with this change in policy is that by buying some mobile and financial firms were initiated in the assets rather than others, the Fed was supporting some Bush administration. firms over others. My message is one of hope and change. The change is the four stimulus programs.The hope is this: I hope I am wrong about the permanent negative effects Randall Holcombe ([email protected]) is the DeVoe Moore Professor of these programs will have on America. Economics at Florida State University.

THE FREEMAN: Ideas on Liberty 34 Transforming America: The Bush-Obama Stimulus Programs

For example, it bought assets from AIG, an insurance Japanese industrial policy is no longer held in such company, to keep it from failing and ultimately has high regard, but the Federal Reserve’s recent actions taken over ownership of AIG with an 80 percent equity have it engaging in the same type of industrial policy. interest. The Fed also purchased assets of questionable Having set that precedent, the long-run effects are value from investment bank Bear Sterns to facilitate its likely to be pernicious. Unless the Fed firmly repudi- acquisition by JPMorgan Chase. Meanwhile, investment ates its industrial policy,clearly saying it made a mistake bank Lehman Brothers went into bankruptcy and that won’t be repeated, financial firms will take the failed.Why save Bear Sterns but not Lehman Brothers? same risks, believing the Fed will step in to help if the The Fed also initiated the Term Asset-Backed Securities market turns against them. Loan Facility (TALF) to make loans to holders of vari- Many think that to avoid a repeat of the 2008 melt- ous types of securities.TALF borrowers do not have to down, the government should more tightly regulate the be banks. financial markets. President Obama has proposed a These two new policies are problematic because major overhaul of the regulatory apparatus.Yet financial they constitute an “industrial policy.” I am not ques- firms are already among the most highly regulated tioning the effects of these policies. Hindsight will firms in the nation, and it is implausible to think that provide a better answer. Rather, I am the problems were the result of too questioning the precedent that the poli- little regulation. If anything, they cies create for future Fed involvement Market discipline is were the effect of too much govern- in the economy. far superior to ment involvement in those markets. The Fed has now established the Market discipline is far superior precedent of making loans to firms that, government to government regulation because at its discretion, it deems worth sup- regulation because firms that choose losing strategies porting, based on assets of questionable will and should be allowed to fail. value.That puts the Fed in the position firms that choose This would give every firm an of picking winners and losers in the incentive to choose profitable strate- economy. Similarly, by choosing to buy losing strategies will gies and would weed out those “toxic assets” only from some sellers it and should be that do not. The Fed’s industrial is supporting some investors while let- policy moves in the opposite direc- ting others fend for themselves. Again, allowed to fail. tion, so more regulation would the Fed is picking winners and losers. change nothing. Its conduct is much like what the Japanese govern- ment has done for decades. In the 1980s that govern- TARP ment, coupled with Japanese banks, directed assets to n September 2008 Bush Treasury Secretary Henry the firms they viewed as most important to the econ- IPaulson announced that the financial markets had omy. This industrial policy was hailed by many frozen. Lending had ground to a halt, he said, and banks observers as giving the Japanese economy a growth would not even lend to each other because their “toxic advantage. In the early 1990s the booming Japanese assets” called into question their solvency.Paulson asked real-estate market collapsed, much as the U.S. market Congress to pass emergency legislation providing him did in 2006-08, and many Japanese banks were left $700 billion to buy up those assets, creating liquidity in holding assets of questionable value, collateralized with the financial sector so that normal lending activities mortgages with higher face values than the mortgaged could resume. TARP, approved on October 3, 2008, property. Rather than allow insolvent banks to fail, provided the money and gave the secretary the discre- the Japanese propped them up, maintaining their tion to spend it as he saw fit. precarious positions, and the Japanese economy has Paulson claimed the money was needed immedi- stagnated ever since. ately to prevent a collapse of the financial system. How-

35 SEPTEMBER 2009 Randall G. Holcombe ever, none of the TARP money went toward buying ing bill. In fact, the spending is largely for items toxic assets. Instead the Treasury used the money to Obama campaigned on. Much of it will occur after purchase equity interest in banks—that is, to partially 2009 and so does not qualify as a stimulus for a nationalize many banks. depressed economy. Paulson also pressured the nine largest banks to take A lot of the alleged stimulus money was directed the TARP money whether they needed it or not toward sectors that were holding up relatively well dur- because if only some took the money, they would be ing the recession, such as healthcare and state and local stigmatized as weak, which could further undermine governments. Government employment was steadier their financial positions. So now the federal govern- than private-sector employment when the bill was ment is the owner of a substantial share of the Ameri- passed and can be expected to do even better with the can banking industry. money. Directing money toward relatively strong sec- Some of the strings attached to that money did not tors is hardly the best way to stimulate the economy, appear until after the government already bought into even though it does further the goals that Obama those banks. Obama and Treasury campaigned on when he was running Secretary Timothy Geithner wanted for president. to regulate the pay of bank execu- It is difficult to Even the economic analysis under- tives, claiming that the federal gov- lying the stimulus program can be ernment, as part-owner of those identify the features called into question. The Keynesian banks, should limit excessive pay.As a that make it a idea is that by running budget deficits result, many recipients of TARP and increasing government spending, money are anxious to repay it and to stimulus bill rather aggregate demand will be increased, buy back the stock the federal gov- than just a big pushing the economy toward prosper- ernment now owns. But the federal ity. Of course, to spend that money, government has put roadblocks in the spending bill. In fact, the government must first borrow it way of banks that want to get out from elsewhere in the economy. from under the burdens that come the spending is There’s no free lunch. Moreover, if with TARP. The government likes largely for items increasing government spending and that control. One fear that Geithner running large budget deficits really expressed is that if some banks escape Obama campaigned lead to prosperity,the economy would the strings attached to TARP, they on. have been in nirvana by 2008. When might raise executive pay, leading the Bush was elected in 2000 the federal better bank execs to leave the TARP- budget was in surplus, and for Bush’s encumbered institutions for the higher pay at those eight years government spending and the budget deficit banks that are free of TARP. (Some banks have started continually increased, which by Keynesian logic should to pay the money back.) have produced a robust and maybe overheated econ- omy, not an economy mired in recession. The Obama The Obama Stimulus Package stimulus package was simply a continuation, on a much mmediately after his election, Obama pushed hard grander scale, of the eight years of Bush fiscal policy, a Ito get Congress to pass a nearly $800 billion spend- policy of continually increasing government spending ing bill to stimulate the economy, which some claimed and continually increasing budget deficits. was mired in the worst recession since the Great The Obama stimulus package was really just a big Depression. While history will judge whether the spending bill that did not offer much stimulus, but that recession was that severe, the rhetoric served to pass will saddle the economy with bigger government from the bill. However, it is difficult to identify the features now on, hindering economic growth, slowing the that make it a stimulus bill rather than just a big spend- recovery, and reducing prosperity.

THE FREEMAN: Ideas on Liberty 36 Transforming America: The Bush-Obama Stimulus Programs

Bailouts advantage. Under Obama’s bankruptcy plan for General n addition to bailing out many failing banks and Motors, the government will control 60.8 percent of Iother financial firms, Bush and Obama also used tax- the company, with 17.5 percent for a United Auto payer money to bail out Chrysler and General Motors. Workers trust fund. Bondholders could wind up with a Bear in mind that when Obama campaigned for office 10 percent equity interest in the company. and gasoline prices spiked above $4 a gallon, he advo- On the surface this appears quite unfair to bond- cated a windfall profits tax on oil companies.That idea holders, whose bonds had a face value of $27 billion. fell by the wayside as prices fell in 2009, but these two Some bondholders objected, rightly saying that the policies provide a chilling example of how to under- claims of holders of secured debt should come before mine the very foundation of the market:When compa- the claims of the firm’s employees in any bankruptcy nies are successful and profitable—like oil companies proceeding. But while some bondholders objected, in 2008—single them out for extra taxes, and when many did not—because they were recipients of companies are unsuccessful and TARP money and therefore effec- unprofitable—like auto companies in tively under government control. 2009—single them out for govern- If firms take resources TARP recipients JPMorgan Chase, ment subsidies. and combine them Citigroup, Morgan Stanley, and Gold- One need understand only the man Sachs owned about 70 percent most basic of economic principles to into products that are of Chrysler’s debt. The government see how pernicious these policies are. less valuable than supported them with bailout money If firms in an economy can take and then bullied them to give up resources and combine them into the resources they their assets to the UAW. products that are more valuable than The pernicious consequences go the resources they started with, they started with, they are well beyond these transactions. How are adding value to the economy and harming the econ- will this affect other union-heavy should be rewarded. In a market companies when they try to raise economy they are—through profits. omy and they should money in the bond market? The If firms take resources and combine be penalized. In a precedent is set for employees to them into products that are less valu- move ahead of secured-debt holders able than the resources they started market economy they in bankruptcy proceedings. Debt with, they are harming the economy are—through losses. finance will become much more dif- and they should be penalized. In a ficult for firms with unionized labor market economy they are—through forces. One critic argued that the losses. Profit and loss are essential to the operation of a favoring of the UAW over bondholders amounted to market economy and provide the signals and incentives shaking down lenders for the benefit of Obama’s polit- that have led to the remarkable economic progress that ical supporters, which is corruption and abuse of has characterized America (hampered as the economy is power. We would have done better to let the market by government). and the bankruptcy court determine the fate of The bailouts began as loans to Chrysler and General Chrysler and GM. Motors, which the firms had no chance of being able to pay back. The administration’s way of addressing this Fundamental Transformation has been to negotiate to convert those loans into an hen we step back and look at the bipartisan equity interest in the firms, thus nationalizing the auto- Wefforts to rescue the economy from recession, mobile companies in a manner similar to how TARP those changes represent a fundamental transformation has nationalized banks.The federal government carries in the nature of the American economy. In the longer a big stick and is in a position to use that stick to its run Obama wants to substantially increase govern-

37 SEPTEMBER 2009 Randall G. Holcombe ment’s role in health care, which is already largely in abandoned; and a more deregulated economy led to government’s hands with Medicare, Medicaid, SCHIP two decades of growth and prosperity.At least some of (health insurance for children), and the regulations that the credit for this, as well as much of what happened in govern healthcare providers and pharmaceutical com- Margaret Thatcher’s England, must be attributed to the panies. Obama has also stated his intention to further power of ideas emanating from Milton Friedman and regulate the energy industry to limit emissions and to other free-market thinkers. shift production toward renewable energy sources. His Similarly, in the 1940s socialism seemed such an cap-and-trade initiative would impose billions in costs attractive alternative to American capitalism that F.A. on the economy and would effectively dictate the tech- Hayek wrote The Road to Serfdom, arguing that social- nologies by which energy is produced. ism was that road, and Joseph Schumpeter, in Capital- Few commentators are looking at ism, Socialism, and Democracy, lamented the long-run implications of these that in democracies people could changes, focusing instead on how Now we stand on vote away their freedoms and that the much the proposed Obama deficits people who benefited the most from will increase the national debt or on the brink of the most a free economy were unwilling to how the Federal Reserve’s increases in significant erosion of defend it. Yet America prospered. the monetary base will impact infla- When the Berlin Wall collapsed in tion in coming years. the market economy 1989, followed by the demise of the since the New Deal, Soviet Union in 1991, there was Déjà Vu All Over Again every indication that everyone would have described the changes. My with few dissenters. recognize that market allocation of Ihope is that I am overestimating resources is better for everyone than their long-run impact. Indeed, the government planning. nation has found itself in similar situations before. In Now we stand, two decades later, on the brink of the 1970s we faced economic stagnation, rising unem- the most significant erosion of the market economy ployment, and rising inflation, which soared into the since the New Deal, with relatively few dissenters. In a double digits.There were government-mandated price few short centuries markets have taken much of the controls and frequent lines at the gas pumps as a result world’s population from subsistence to remarkable of shortages caused by those price controls. There was prosperity and continuing economic progress. Are we every reason to be pessimistic, but in the 1980s the really ready to abandon that system and replace it with Reagan administration turned many of those things something similar to what resulted in the collapse of around. Tax rates were slashed; the price controls were the Soviet Union?

THE FREEMAN: Ideas on Liberty 38 The Myth of Unregulated Tobacco

BY BRUCE YANDLE

n June 22, President Obama signed the John Cohn, a lung-disease specialist at Thomas Family Smoking Prevention and Tobacco Jefferson University Hospital in Philadelphia said, OControl Act (FSPTCA), a law that gives the “It’s sort of like asking the police commissioner to U.S. Food and Drug Administration (FDA) regulatory regulate prostitution.” Perhaps Cohn anticipates agency authority over tobacco products. The law requires the capture of the sort typically seen in Washington. FDA to develop a new tobacco-regulation center with Matthew Myers, president of the Campaign for all related costs to be covered by fees paid by the indus- Smoke-Free Kids, a leading lobbyist for the law, took a try.Among other things, the FDA will regulate nicotine more optimistic but still somewhat guarded position. content, which cannot be increased, ban flavored ciga- “You can stay with the status quo, with industry con- rette sales (except for menthol-flavored products), and trolling the level of nicotine in products and companies regulate marketing practices, eliminating the use of deciding what health claims to make. Or you can give such words as “light” or “low tar” unless it can be control to an agency with a history of scientific expert- shown empirically that the words are associated with ise in regulating products.This fills an important gap.” products that provide health benefits. Empowered to regulate industry marketing prac- All Bark tices, the FDA must develop warning labels that must his somewhat tepid celebration was prompted by cover 50 percent of the side space on cigarette pack- Tuncertainty about how the FDA would really ages.The labels must draw from a catalogue of congres- manage its new authority.There is also the feeling that sionally sanctioned phrases that include: this statute, like many others, had a title that sounded more powerful than the content justified. The word WARNING: Cigarettes are addictive. WARNING: “prevention” in the title sounds rather dramatic, but the Tobacco smoke can harm your children. WARN- teeth in the law itself are more like baby teeth than ING: Cigarettes cause fatal lung disease. WARN- fully mature incisors. (Consider, for example, the ING: Cigarettes cause cancer. WARNING: exception made for menthol-flavored cigarettes.) Cigarettes cause strokes and heart disease. WARN- The politicians’ commentary that followed the law’s ING: Smoking during pregnancy can harm your passage was much more boastful and self-congratula- baby. WARNING: Smoking can kill you. WARN- tory. Senator Edward Kennedy, long an advocate for ING: Tobacco smoke causes fatal lung disease in more government control of the industry and sponsor nonsmokers. WARNING: Quitting smoking now of the Senate version of the law, exclaimed, “Miracles greatly reduces serious risks to your health. still happen. The United States Senate has finally said ‘no’ to Big Tobacco.” As dramatic as this all seems, this extension of FDA Bruce Yandle ([email protected]) is Alumni Distinguished Professor of powers received a somewhat mixed response from the Economics Emeritus, Clemson University, and Distinguished Adjunct medical and health-advocate communities. Professor of Economics, Mercatus Center, George Mason University.

39 SEPTEMBER 2009 Bruce Yandle

Had Congress really said no? authorities in Massachusetts Bay prohibited settlers In a way, Kennedy misstated what had actually from planting tobacco except in small quantities used happened. The Senate had not entirely said no. Indeed, for medicinal purposes. (Kennedy’s position follows an the biggest of big tobacco, Altria Group, the producer historic Massachusetts tradition.) Health interest groups of market-leader Marlboro, had lobbied long and hard have a long history of activism as well. The focus was for the bill’s passage. Altria’s two major competitors, on cigarettes. There were several hundred anti- Lorillard and Reynolds Tobacco, saw the law as giving cigarette leagues in the United States with more than Marlboro, with its market share locked and a lead in 300,000 total members by the turn of the nineteenth developing no-nicotine products, an unfair advantage. century. As is often the case, the Senate picked a winning horse Twenty-six states banned the sale of cigarettes to and rode it. The Senate said yes to one and no to minors by 1890, and 16 states totally prohibited ciga- two others. rette sales by the end of 1909. World War I is said to With Kennedy unable to lead the battle for his bill have been a stimulus for cigarette consumption. As a due to illness, Senator Christopher Dodd assumed lead- result of extensive lobbying by tobacco producers, by ership. Not quite as dramatic in his comment as 1927 all of the state bans on sales to minors were Kennedy, but in a way equally inaccurate, Dodd said, repealed. As bans declined, state taxes appeared, begin- “For more years than anyone can count, we’ve had an ning in 1921 in Iowa and spreading to nearly all states industry that’s gone basically unregulated.” by 1960. Politicians learned that tobacco products were a mother lode for tax revenues.There Unregulated Tobacco? were no more total bans. t is true that tobacco products have The biggest of big The FDA was explicitly denied Inot been regulated by the FDA, authority to regulate tobacco when though the agency has attempted to tobacco, Altria Group, Congress passed the Pure Food and do so almost since its 1906 founding. Drug Act of 1906, which created the But after decades of regulation by lobbied long and agency. Just before passing the act, the Federal Trade Commission (FTC), hard for the bill. nicotine, then listed as a drug, was the Federal Communication Com- removed from the U.S. pharma- mission (FCC), and Congress itself, copeia. This assured the FDA could hardly anyone who has followed the not regulate nicotine as a drug. Since industry would say it has gone “basically unregulated.” 1906, when amending the FDA act and related legisla- Instead, some would argue that it was regulation that tion, Congress has consistently rejected proposed defined the industry’s trade practices and, by doing so, amendments to grant FDA regulatory powers. Congress maintained the industry’s high profits and expanded the regulated the industry itself. sale of products in just those markets Tobacco-Free While scientific data may have been lacking, popular Kids and others worry about. (See John Calfee’s “The recognition of the harms from smoking showed up in Ghost of Cigarette Advertising Past,” Regulation, expressions that developed for cigarettes and related ail- Nov.–Dec. 1986.) ments: coffin nails, smoker’s cough, gasper, wheezer, How could this be? Consider the following capsules lung duster. Yet a 1938 Consumer Reports article on that come from a long tobacco saga (these and more smoking and health indicated no scientific evidence of can be found in Bruce Yandle, et al., “Bootleggers, harm from smoking. Nevertheless, marketplace recog- Baptists and Televangelists: Regulating Tobacco by Liti- nition of health problems led the tobacco companies to gation,” University of Illinois Law Review, 2008): go on the attack: “Not a cough in a carload” and Almost from the start, tobacco products were regu- “Remember Juleps, forget your cough” (Chesterfield); lated. The first government efforts to control tobacco “Not a single case of throat irritation due to smoking” consumption date at least to 1629, when the colonial (Camels); and “Why risk sore throats?” (Old Gold).

THE FREEMAN: Ideas on Liberty 40 The Myth of Unregulated Tobacco

In 1950 the FTC issued cease-and-desist orders and mandated that all cigarette packages bear a milder against major cigarette companies on all health-effect statement:“Warning:The Surgeon General Has Deter- advertising.The commission found that all popular cig- mined that Cigarette Smoking Is Dangerous to Your arettes were harmless for healthy smokers. On these Health.” The ban on radio and TV advertising ended grounds, comparative health claims—“less smoker’s the public-health messages required by the FCC, which cough,” for example—were prohibited. Later, when had been shown to cut cigarette consumption, and cigarette producers introduced filters and began to reduced most of the $200 million annual advertising advertise levels of tar and nicotine, the FTC struck cost for existing tobacco products.The ban also made it again. In February 1960 the FTC announced that it had more costly for new entrants to gain market share. negotiated a voluntary agreement with the tobacco In 1998, 46 state attorneys general negotiated a set- companies to cut all tar and nicotine claims from ciga- tlement with tobacco producers after several successful rette advertising. The agency heralded the “industry- state suits against tobacco companies based on recover- government cooperation.”The FTC action brought to ing the cost of Medicaid payments for tobacco-related an end health-effect advertising that had led to a sharp illnesses. The settlement yielded payments to the states decline in tar-weighted cigarette sales and the demise that totaled $200 billion, which converted to an average of some of the stronger cigarette brands. annual payment to each state of $180 million in perpe- In 1964 the Surgeon General reported a causal con- tuity. To generate the revenue the tobacco producers nection between smoking and lung cancer, chronic were allowed to collude and raise prices, doubling the bronchitis, and coronary disease. It also stated that “ciga- wholesale price of cigarettes. Total sales volume went rette smoking is a health hazard of sufficient importance down. Profits went up. In effect the tobacco firms in the United States to warrant appropriate remedial became well-paid tax collectors for the states. The action.” Immediately, the FTC initiated proceedings to settlement also contained a rich set of regulations regulate cigarette advertising. In a final proposed rule, the that affected the marketing of tobacco products to FTC called for all cigarette packages to carry this warn- youthful consumers. ing: “Cigarette Smoking is Dangerous to Health and May Cause Death from Cancer and Other Diseases.” Industry-Serving Regulation Congress intervened, sharply rebuked the FTC, and in o, there is no evidence to suggest that tobacco has 1965 passed the Federal Cigarette Labeling and Adver- Nuntil now been “an industry that has gone basi- tising Act that required a milder warning: “Caution: cally unregulated.” But there is ample evidence that Cigarette Smoking May Be Hazardous to Your Health.” tobacco regulation has served the interests of the indus- The FTC was banned from further meddling for at least try and the politicians that broker favors to the industry. four years. Meanwhile, consumers of tobacco products, who are generally a lower-income population, have been denied Cigarette Regulation May Be Fatal to New Entrants the benefits of competitively determined product infor- n May 1969 the FTC attempted to require all ciga- mation; they also have unwittingly become major Irette advertising to warn that “Cigarette Smoking is sources of revenue for state politicians, who generally Dangerous to Health and May Cause Death from Can- provide more benefits to higher-income than lower- cer, Coronary Heart Disease, Chronic Bronchitis, Pul- income consumers. monary Emphysema, and Other Diseases.” Once again, One can only speculate about what might have hap- Congress countered and passed the Public Health Cig- pened had the FTC not outlawed health-effects adver- arette Smoking Act of 1969, which banned all cigarette tising and had the industry not become one of the advertising on electronic media after January 1, 1971, more regulated industries in America.

41 SEPTEMBER 2009 Give Me a Break!

Competition Would Save Medicine,Too

BY JOHN STOSSEL

ompetition so regularly brings us better stuff— and has Dr. Dyke see her.They discuss the blockages in cars, phones, shoes, medicine—that we’ve her heart, the operation, the risks. And now they’re Ccome to expect it. We complain on the rare supposed to haggle over the price as if he were selling a occasion the supermarket doesn’t carry a particular ice- rug in a souk? ‘I’ll do three vessels for $30,000, but if cream flavor.We just assume the store will have 30,000 you take four, I’ll throw in an extra night in the items, that it will be open 24/7, and that the food will ICU’—that sort of thing? Dyke shook his head. ‘Who be fresh and cheap. comes up with this stuff?’ he asked.” I take it for granted that I can go to a foreign coun- I do. Adam Smith did. Market competition is what’s try, hand a piece of plastic to a total stranger who brought us most of what’s made life better and longer. doesn’t speak English . . . and he’ll rent me a car for a week. Later,Visa or MasterCard will have the account- The Free-Rider Benefit ing correct to the penny. ut the doctors have mastered the anti-free-market Compare: Governments can’t even count votes Bsneer: Markets are good for crass consumer goods accurately—or deliver the mail efficiently. like washing machines and computers, but Yet now, somehow, government health care is too complicated for will run auto companies and people to understand. guarantee us health care better That’s nonsense.When you than private firms? And the buy a car, must you be an public seems eager for that! expert on automotive engi- If you think it’s mainly neering? No. And yet the the political class and worst you can buy in mainstream media that are America is much better clueless, listen to the doc- than the best that the Soviet tors. Dr. Atul Gawande, in an bloc’s central planners could otherwise interesting New Yorker produce. Remember the Tra- article on health-care costs, dispar- bant? The Yugo? They disap- ages medical savings accounts and peared along with the Berlin high-deductible insurance. First, he Central planning produced the Trabant. What kind Wall because governments never of healthcare is it likely to produce? serve consumers as well as market explains the theory behind this German Federal Archive proposal to cardiologist Lester competitors do. Dyke: Maybe 2 percent of cus- “[People would] have more of their own money on tomers understand complex products like cars, but they the line, and that’d drive them to bargain with you and guide the market—and the rest of us free-ride on their other surgeons, right?” Gawande comments,“He gave me a quizzical look.” The doctors then dismiss the idea with a sneer. John Stossel is co-anchor of ABC News’“20/20” and the author of Myths, Lies, and Downright Stupidity: Get Out the Shovel—Why “We tried to imagine the scenario. A cardiologist Everything You Know is Wrong, now in paperback. Copyright 2009 tells an elderly woman that she needs bypass surgery by JFS Productions, Inc. Distributed by Creators Syndicate, Inc.

THE FREEMAN: Ideas on Liberty 42 Competition Would Save Medicine, Too effort. When government stays out, good companies thousands of 60-, 40-, and 20-year-olds, the minority grow. Bad ones atrophy. Competition and cost-con- who pay closest attention. scious buyers who spend their own money assure that Word about where the best values were would all the popular cars, computers, etc. are pretty good. quickly get around. Even in nursing homes, it would The same would go for medicine—if only more of soon be common knowledge that hospital X is a ripoff us were spending our own money for health care. We and that Y and Z give better treatment for less. see quality rise and prices fall in the few areas where People assume someone needs to be “in charge” for consumers are in control, like cosmetic and Lasik eye a medical-care market to work. But no one needs to be surgery. Doctors constantly make improvements in charge.What philosopher F.A. Hayek called “sponta- because they must please their customers. They even neous order” and Adam Smith called “the invisible give out their cell numbers. hand” would make it happen, just as they make it hap- Drs. Dyer and Gawande don’t understand markets. pen with food and clothing—if only we got over the Dyer’s elderly woman wouldn’t have to haggle over foolish belief that health care is something that must be price before surgery.The decisions would be made by paid for by someone else.

43 SEPTEMBER 2009 Capital Letters

Did World War II Help End the postwar prosperity reflected the “release” or “liquida- tion” of such assets accumulated during the war. The Great Depression? assets that one party sold, another party acquired, and in Much as I admire Robert Higgs’s work, I suggest nearly all cases both parties to the transaction were clarifying two points he makes in the October 2008 Americans, so no assets were “released” from the overall Freeman. Higgs says that World War II did not end the U.S. economy. Great Depression; genuine prosperity did not return Professor Yeager’s claim that the war-spawned liquid until after the war. But the Depression did give way to financial assets, by “continuing in circulation,” “lubri- wartime full employment. Saying so does not deny that cat[ed] transactions in goods and services” and thereby war is hell, as General Sherman said, and a hell of a way “helped restore production and employment” requires to end a depression. more space for discussion than I have here. Whatever Higgs downplays how money and other liquid assets my skepticism, however, I would think twice about created during the war contributed to postwar prosper- debating this question with a monetary theorist of Pro- ity. He notes that holdings of them “did not decline at fessor Yeager’s eminence. all after the war.” But they did not need to decline to have their effect.Their continuing in circulation, lubri- cating transactions in goods and services, helped restore production and employment. Did the Framers Have Economic Higgs’s understanding of why the “Great Duration” Motives? dragged on through the 1930s, while not the whole In his essay in the July-August Freeman, Professor story, deserves to be widely shared. Burton Folsom, Jr., undertakes to demolish Charles A. Beard, “[t]he first historian to challenge the motives of —LELAND B.YEAGER the Founders” as men “primarily in the Constitution- Auburn University (Emeritus) writing business to protect their ‘property interests.’” Beard allegedly did this in aid of making a partially Robert Higgs replies: “discredited” Constitution into something to be I do not dispute Professor Yeager’s point that “full “changed as the Progressives saw fit.” Further, Forrest employment” returned during the war. I insist, how- McDonald is supposed to have decisively refuted Beard, ever, that this employment be kept in proper perspec- when in fact he demonstrated the complexity of the tive. The government’s withdrawal, mainly by issues and the limitations of Beard’s categories. conscription, of almost 20 percent of the labor force But if Beard stressed fund-holders excessively, he into the military and its acquisition of war-related also described a coalition that also included merchants, goods and services, which occupied another 20 percent manufactures, and land speculators. If he went wrong of the labor force, had everything to do with the disap- on a few individuals and made the relation between pearance of unemployment. This employment situa- interests and ideas seem rather mechanical (a boon to tion was extraordinary in many ways and could not his critics), his broad reading can be sustained. Indeed, have been sustained for long without wrecking the much of Beard’s case was first made by former Antifed- economy. eralists like John Taylor. Beard might have done better My point about the liquid assets that “did not to follow their lead more rigorously. decline at all after the war” was intended only to Broadly speaking, Federalists had in mind protecting explode the simplistic, but oft-embraced, myth that their present and securing their future interests by estab-

THE FREEMAN: Ideas on Liberty 44 Capital Letters lishing a mercantilist state that could help them make authorities sympathetic to Beard, but many other histo- money. If this involved “the transfer of tax dollars from rians (for example, Robert Brown, Lee Benson, and ordinary citizens,”well that is the nature of public debt. even Beard’s student Phillip Crowl) are critical of The key was the expectation that the new government Beard. could forcibly jack outstanding continental notes up Stromberg correctly focuses on the public securities toward their nominal value. This mattered to many as a key focus of debate. Would the new government, actors of the day, whatever the plight of Gorham, Mor- with its new constitution, repay the debts incurred dur- ris, and Few. The beneficiaries might not correlate ing the Revolutionary War or not? Naturally, Robert exactly with Federalists in conventions or elsewhere, Morris and others (McDonald estimates 20,000 holders but there would be a nice overlap. of public securities) wanted their money back with In addition, the question remains whether Ameri- interest. That was what the agreement was. Thus writ- cans were in any great need of a miraculous “founding” ing the new constitution was indeed controversial. in 1787. Professor Folsom assumes that the Constitu- Those who did not hold public securities had no tion cannot possibly be controversial.Yet conservative, incentive to foist a new system on the nation that made property-owning interests frequently have their reasons it easier to write into law new tax bills. Some of those for supporting bigger government. And broad powers, holders of securities ended up at the Constitutional once granted, find new uses. Convention and supported the signing of the Constitu- Beard’s hurried approach and simplifications hurt his tion. McDonald’s research is a breath of fresh air case, but there are many later quasi-Beardians who have because he shows that some of the holders of public corrected Beard on various details while sustaining securities opposed the Constitution, and others, like much of his reading, for example: E. James Ferguson, Morris, ultimately lost a fortune by supporting repay- The Power of the Purse (1961); Jackson Turner Main, The ment of the American debts. The Founders cannot be Antifederalists (1961); Robert Maguire and Robert reduced merely to a self-interested group of wealth Ohsfeldt, “Economic Interests and the Constitution: A holders promoting a new constitution to protect their Quantitative Rehabilitation of Charles A. Beard,” economic interests. Beard and the Progressives, when Journal of Economic History (1984), and “Self-Interest, they push the discussion in that direction, have over- Agency Theory,and Political Voting Behavior:The Rat- simplified the issue. ification of the United States Constitution,” American Economic Review (1989);Thomas Ferguson, Golden Rule (1995); and Jac C. Heckelman and Keith L. Dougherty, “Personalty and Interests at the Constitutional Conven- Does Utilitarianism Deserve tion: New Tests of the Beard Thesis” [online]. Bashing? In an otherwise meritorious article (“The ‘Risk’ of —JOSEPH R. STROMBERG Liberty: Criminal Law in the Welfare State,” September by e-mail 2008), Michael N. Giuliano parrots the tiresome old bashing of utilitarian ethics. (He sometimes says “conse- Burton Folsom replies: quentialism,” but since versions of utilitarianism make Mr. Stromberg and I are not in strong disagreement. up almost the entire set of consequentialist doctrines, I do think that Forrest McDonald “decisively refuted the distinction is unnecessary here.) “The main compo- Beard” and that Beard’s research errors on Gorham, nent of utilitarianism,” Giuliano writes, “holds that the Morris, and Few support that view. But I also agree rightness or wrongness of an action is determined with Stromberg that in refuting Beard, McDonald often purely by its consequences. . . . The law’s reach under “demonstrated the complexity of the issues and the the utilitarian mentality is predicated on the belief that limitations of Beard’s categories.”That part indeed con- the ends justify the means.” Unlike English and Ameri- stitutes much of McDonald’s argument. Stromberg cites can tradition, which recognized personal liberties

45 SEPTEMBER 2009 Capital Letters either preexisting or superseding government power, regretted the publication of his Deontology. Bentham’s “The ‘greatest happiness of the greatest number’ rule offhand remark about the greatest good for the greatest . . . declar[es] that the ends justify the means....The number, uncharitably interpreted, is indeed nonsense. trek toward greater utilitarianism was in avowed oppo- His faith in the great benefits that suitably instructed sition to the natural rights that . . . once ‘morally’ exon- legislators could achieve is, as we now see, gravely mis- erated the humblest citizen in defiance of the highest placed. Bentham was far from being the soundest of authority.” utilitarians, and it is just wrong to take him as defining Where does Giuliano get his notions about utilitari- what utilitarianism is all about. anism? Clearly not from the writings of such great Public policy is largely ethics, applied or misapplied. philosophers and economists as David Hume, John Stu- What, then, does Giuliano conceive of as the soundest art Mill, Henry Hazlitt, Ludwig von Mises, R.M. Hare basis for ethics? Principles of honesty, property, free- (and F.A. Hayek, who was a utilitarian despite evidently dom, and rights, as well as the distinction between good disliking that label). Nor from Aristotle, whose eude- and evil, are decisive for a good society and human monism foreshadows the soundest strands of utilitarian- happiness; but they are not irreducibly intuited ulti- ism. No, Giuliano seems to be thinking, at n-th hand, of mates: they can be explained and argued for. Would an extreme “act-utilitarianism” or “situation ethics,” Giuliano not argue for them? What grounds for them which would disregard principle and treat each case on could he find, other than ultimately utilitarian grounds? its own supposed merits.This caricature version, if ever Conceivably the authors of the policies that Giuliano actually advocated, has nowadays become no more than rightly condemns had the parrot-like misinterpretation a straw man for critics to blow down while claiming of utilitarianism at the back of their minds. That is no victory for their own favorite doctrines. excuse, however, for giving the misinterpretation fur- A sounder version, “rules” or “indirect” utilitarian- ther currency. ism, recognizes powerful reasons for respecting princi- ples, including those of natural or personal rights; and it —LELAND B.YEAGER distinguishes between good and bad personal charac- Auburn University (Emeritus) ters, thus incorporating “virtue ethics.” This version quite rejects recommending any specific behavior or Michael Giuliano replies: policy just because its intended good consequences are Professor Yeager’s response to my article suggested thought likely to outweigh any bad ones. Instead, it that the view of utilitarianism represented therein was a endorses enduring principles like those of Giuliano “caricature version” that “has nowadays become no himself, and precisely on grounds of utility, on the more than a straw man for critics to blow down.”The grounds that they are essential to “social cooperation,” article was referring to a certain species of utilitarianism as Mises said, the kind of society affording free individ- in order to provide one possible explanation, among uals the best prospects of achieving their various goals several, as to how the welfare state has lowered the in life—in a word, happiness. threshold of allowable risk such that more and more Like many of the critics whom he parrots, Giuliano behavior is elevated toward artificial criminality. takes Jeremy Bentham as his whipping boy. Not all but My reason for criticizing this “caricature” version of much that John Stuart Mill wrote deserves applause, utilitarianism, this version that is “indeed nonsense” including his essay on “Bentham” (1838). Mill under- according to Yeager, is that it is the version that stood Bentham’s distinctive personality. Bentham was legislators and other lawmakers so often adopt if only good at probing for the exact meanings, if any, of implicitly and independently of any actual theory. It is noble-sounding but possibly empty words and slogans. rarely sophisticated “rules” utilitarianism that is the He was good at probing for the rationale of inherited force behind legislative crusades. Bentham’s “over- institutions and legal technicalities. But Mill did not simplified test” involving “Pleasure-and-Pain, or the think much of Bentham as an original philosopher and Greatest Happiness,” as Hazlitt observed, could con-

THE FREEMAN: Ideas on Liberty 46 Capital Letters ceivably be applied in a blind “manner to all traditional greater concentrations of wealth” in the hands of a few, ethical judgments.” That much of our legislation I maintain that it is a suitable term for describing the follows a similarly sweeping rule was the true object of free-market private-property economy. my criticism. Clarence Carson was primarily an historian. But he Bentham was used as the example because these was a “classical” economist, not a Misesian or an “Aus- oversimplified tests are, in the most basic way, generally trian.” He did not understand modern, subjective-value, identified with utilitarianism applied in the more com- marginal-utility economics. mon situational and legislative settings. I had no inten- Along with Adam Smith and Karl Marx, Carson tion of suggesting that this was truly the best of accepted the “classical” separation of the factors of pro- utilitarianism as understood in an academic, philosoph- duction into three distinct categories—land, labor and ical sense. I am compelled to defer to the esteemed capital. Thus he defines capitalism in the Marxian Professor Yeager as to the best and most appropriately value-laden sense as a system of mass production that understood utilitarianism as that concept might be used uses “capital,” that is, tools and machines, together with before an academic background. “the exercise of government power,”forcing the “trans- My argument was hardly that, emanating from the ink formation of some greater or lesser portion of the and pen of Bentham, his ideas directly flowed through the wealth of a people into capital.” strands of history into the conscious minds of lawmakers. It is useless to argue about the definition of any Perhaps there might be a certain indirect relationship.The word.A writer, speaker, or economist can use any term point was simply that much of the criminal legislation at as he wishes, so long as he defines it and makes his issue (though I do not suggest a formalistic distinction meaning clear. Mises was wont to say that “An econo- between criminal and other enactments) was based on mist is no more willing to use another economist’s term transient public demands and outcries and limited by no than he is to use his toothbrush.” However, some defi- particular ethical judgment at all. nitions of words are more suitable than others. As Professor Yeager concluded his response with the Capital, as a concept, represents the calculation of observation that the lawmakers might have “had the the value of all capital goods in monetary terms. Capi- parrot-like misinterpretation of utilitarianism at the tal goods embrace not only industrial tools and back of their minds,” it is apparent that he essentially machines but all factors of production—produced and recognized my point, however clouded it may have semi-produced factors, nature-given factors (land and been by a semantically sweeping condemnation that natural resources), labor, time, and even techniques, had as its purpose a brief point in the essay.The utili- recipes, and ideas used in production.Thus capitalism is tarianism I referred to was not, excepting the point on a perfectly good word for describing the economic sys- Bentham, intended to generally diminish scholarly util- tem based on the use in production of “capital,” that is, itarian thought, but was instead focused toward the gar- capital goods. den-variety utilitarianism that often animates the Granted, the term “capitalism” was first actually used lawmakers creating the legal landscape we live in. by Karl Marx in a pejorative sense. However, I would argue that “capitalism” is a suitable word for describing the voluntary market system, process, or arrangement, of production, exchange and trade of privately owned Can the Word “Capitalism” Be property, accumulated capital. . . . Defined in this way, it Salvaged? is a neutral, non-value-laden term for describing the I should like to rescue the word “capitalism” from cooperative market system in which everyone depends the Marxians and [the late] Clarence Carson. In spite of on everyone else.... Carson’s claim in his “Capitalism: Yes and No” (reprinted in May) that it is a value-laden word describ- —BETTINA BIEN GREAVES ing an economic system that leads to “greater and by e-mail

47 SEPTEMBER 2009 Capital Letters

Does Deficit Spending Only Shift Finally, he states that “Deficit spending creates the occasion for coercive wealth transfers from future tax- Costs Forward? payers to future government bondholders. When the Roy Cordato’s June article, “Deficit Spending and bills come due, most of our children and grandchildren Future Generations: Not What You Might Think,” is will have part of their incomes coercively transferred confusing. He writes that “Every dollar the government through higher taxes to those who hold the Treasury spends has to come out of some existing person’s notes. Government debt makes our children less free.” pocket and therefore preempts the use of that dollar Government debts makes all of us less free today and somewhere else in the economy—not in the future, but tomorrow. Hence, to modify Cordato’s words, the here and now.” “handwringing . . . about passing on the cost of ‘stimu- Every dollar government spends does not come out lating’ our economy onto future generations is [not] of some existing person’s pocket. Dollars not coming misplaced.” Else why the “coercive wealth transfers from a pocket are those that the Federal Reserve Sys- from future taxpayers?”The reasoning is confusing. tem (FRS) gets off its printing presses.These printing- press dollars dilute the value of existing dollars —EARL ZARBIN (money-supply inflation).This is what I have learned by Phoenix,Ariz. reading The Freeman. If I have been misled or misun- derstand, I would like to know. Roy Cordato replies: As Cordato says, if government taxes and spends Thanks to Mr. Zarbin for his comments. First I want existing dollars, such dollars are unavailable for invest- to point out that I was not attempting to address all ment by private individuals. Printing-press dollars can- possible scenarios when it comes to deficit spending. not be available for use by private individuals unless the Instead I was addressing a particular argument; by dollars are given directly to them by the FRS (does this “borrowing now, taxing later—Congress and the Presi- ever happen?) or through the banking system, or by the dent are forcing future generations to pay for our prob- Treasury Department. lems. [They] are shifting the costs of this massive Cordato states that “The real costs of government spending scheme to our children.”I was basically trying spending, no matter how it is financed, are experienced to dispel the myth that the current generation is some- here and now.” But this can’t be completely correct, how free-riding, through deficit financing, on future else, as he says, we would not in the future have “coer- generations. I was not trying to suggest that there cive wealth transfers from future taxpayers to future were no costs to future generations. Indeed, I was government bondholders.” (Does “future government pointing to those costs in the last couple paragraphs, bondholders” presume debt has not been repudiated where I discuss the loss of freedom that will be experi- directly or through monetary inflation?) enced by our children and grandchildren. If this was If General Motors or Chrysler gets dollars col- not clear, I apologize. lected via taxation, that is one thing; if they get dollars In keeping my argument narrowly focused I was borrowed through Treasury bonds or notes, that is indeed assuming that the debt was neither monetized another, because repaying borrowed dollars requires nor explicitly repudiated. Of course this is not a realis- payment of interest along with, at some future time, tic assumption, particularly with respect to monetiza- the principal; if they get printing-press dollars, these tion, which is already occurring. Because of this I did will be spent as these companies choose (with bank- indeed overlook many issues that would arise in a situ- ruptcy court permission while in bankruptcy?) to ation where the Fed plays an active role in buying up spend them and then will begin circulating elsewhere the debt. in the economy, likely making more dollars avail- That said, I would like to defend the idea that even able for fewer, or no increase, in goods, causing price when the government spends newly created money it inflation. does indeed come from existing persons’ pockets. This

THE FREEMAN: Ideas on Liberty 48 Capital Letters is why inflation is often referred to as a tax. As the Fed effect it had on the public in their choice of banks. creates new money, the money that I am currently FDIC has tended to increase credit expansion and risk holding, as Mr. Zarbin rightly points out, is taking.Whether that is a good or a bad thing should be diluted—that is, worth less. In this sense new money left to the free market and not decided by government. that is spent is coming out of people’s pockets and, in As with any government regulation there is also a terms of real purchasing power, is preempting the use of tendency to expand the scope of regulation. FDIC, existing dollars in the economy.More importantly,gov- originally . . . a protection for the public in their bank ernment spending, regardless of where the money deposits, became a vehicle to enforce what officials comes from, preempts the use of real resources by the deemed to be socially desirable actions. Consider the private sector in the here and now. Real resources— FDIC enforcement of making loans in certain geo- labor, natural resources, capital, and so on—are bid away graphic areas (the [anti-]red-lining concept). Or con- from those who would direct their use in the absence sider the encouragement of lending to certain racial or of the government spending. This is true even if the social groups. Or the disfavor of lending practices that source of the revenues for that government spending is resulted in loan ratios being below a certain percent the printing press. This is why I felt comfortable considered desirable by the FDIC. And yes, they did in pointing out that “all current spending must come keep . . . figures on all three of the above and jaw- from current revenues and can only utilize current bone the bankers to meet what the FDIC consid- resources.” ered our social responsibility. The threat was that should an [uncooperative] bank want to establish a branch or expand its operation . . . the FDIC would . . . More on the FDIC consider the bank as not having met the standard of My compliments to Jeffrey Miron on the article public need. . . . concerning FDIC in the May Freeman. It is a correct explanation of the unintended consequences that —RAE C. HEIPLE develop when government attempts to cure a perceived Whitefish Bay,Wis. problem.As he discussed, the unintended consequences may be a greater problem than the original perceived problem. And he also discussed the possibility that the We will print the most interesting and provocative letters we perceived problem might not have been a problem receive regarding articles in The Freeman and the issues they were it not for a preceding government regulation. raise. Brevity is encouraged; longer letters may be edited because of space limitations. Address your letters to: The Free- I was president of a small bank in a small town for man, FEE, 30 S. Broadway, Irvington-on-Hudson, NY 10533; 25 years. I observed the effect FDIC had on the atti- e-mail: [email protected]; fax: 914-591-8910. tude, motivations, and decisions of bankers; and also the

49 SEPTEMBER 2009 the new interpretive sources he employs. Where Fol- Book Reviews som shines brightest is, first, in his appraisal of Roo- sevelt as a person and as a politician and, second, in his New Deal or Raw Deal? How FDR’s Economic demonstration of the extent to which the vaunted New Legacy Has Damaged America Deal was little more than a partisan political endeavor. by Burton Folsom, Jr. Roosevelt has always been renowned for his charm Simon & Schuster Threshold Editions • 2008/2009 • and charisma, and there is no gainsaying that many 318 pages • $27.00 hardcover; $15.00 paperback people were taken in by his ebullient self-confidence. Underneath this appealing surface, however, the real Reviewed by Robert Higgs Roosevelt was anything but attractive. Instead, he was ot everyone loved President callous, self-centered, manipulative, and chronically dis- NFranklin D. Roosevelt. Even honest. Having been an indifferent student, he was, in in 1936, when he enjoyed his most Folsom’s words,“no intellectual.”In particular, he knew lopsided electoral victory, almost little about economics and made scant effort to learn. 17 million voters cast their ballots Nevertheless, he pushed through his hugely unsettling for Alf Landon. During Roosevelt’s economic policies largely to serve political ends, justify- long presidency, he attracted vigor- ing his actions with the foolish idea that merely “trying ous literary critics, such as H.L. something” made sense even though he had no idea of Mencken, John T. Flynn, and Garet the economic effects this blind flailing would produce. Garrett. But the winners write the history, and for Folsom presents a valuable discussion of the great many years, the bulk of the writing about Roosevelt extent to which taxes were increased during the 1930s, and the New Deal amounted to little more than especially excise taxes—on alcoholic beverages, gaso- hagiography. line, cigarettes, radios, movie tickets, and many other Gradually, however, as the original Roosevelt idol- goods—that bore relatively heavily on lower-income aters aged and died, more-balanced appraisals began to people. From 1933 through 1936, federal excise taxes appear, and several good iconoclastic books have exceeded federal individual and corporate income taxes appeared recently, including: Thomas Fleming’s The combined, and during the following four years excises New Dealers’ War, Gene Smiley’s Rethinking the Great always brought in at least 40 percent of federal revenue. Depression, Jim Powell’s FDR’s Folly, and Amity Shlaes’s After 1935 Social Security payroll taxes diminished The Forgotten Man. Now we can add Burton Folsom’s poor people’s wages disproportionately. new book to the list. Especially from 1935 onward, Roosevelt plunged Folsom builds his discussion around what he calls into class warfare. He sought a variety of soak-the-rich “the Roosevelt legend,” the handiwork of historians taxes and got Congress to approve several of them, who idolize FDR, applaud the New Deal, and, if they including an economically damaging tax on corporate cavil at all, do so only to lament that the New Deal did retained earnings, a prime source of funding for new not create a socialist paradise. If Folsom does not give firms. He sent the IRS on punitive expeditions against this legend a knockout blow, he certainly thrashes it political opponents Huey Long and Hamilton Fish, severely, and no honest reader can come away from this newspaper publishers William Randolph Hearst and well-documented book with a positive view of FDR or Moses Annenberg, and former Treasury secretary his economic nostrums. Andrew Mellon, among others. At the same time, he Folsom presents a colorful overview of the eco- instructed the IRS to back away from investigations of nomic events of the 1930s, drawing on the latest revi- political favorites. The President also directed the FBI sionist literature to strengthen his critique of the New to investigate people he disliked. Deal, but readers who want a strictly economic Folsom gives an eye-opening account of various appraisal will probably do better by going directly to ways in which the Roosevelt administration used the

THE FREEMAN: Ideas on Liberty 50 Book Reviews billions of dollars of relief funds at its disposal for parti- compelling array of examples of the tragedy of the san political purposes. “If we probe deeply into Roo- anti-commons in practice, from conflicting rights to sevelt’s popularity,” he writes, “we almost always the electromagnetic spectrum to problems assembling discover the presence of patronage—the creating and the rights necessary to expand airports to the ways the manipulating of federal jobs to strengthen his polit- innovation is slowed by the need to assemble bundles ical support.” FDR did not invent patronage, but he of patents. greatly increased its scale. Heller, who teaches property-law courses at Colum- After Roosevelt tried to pack the Supreme Court in bia Law School, summarizes his point this way: “Grid- 1937, the New Deal began to sputter, and new pro- lock is a free market paradox. When too many people grams and taxes became more difficult to push through own pieces of one thing, cooperation breaks down, Congress. His attempt to “purge”uncooperative legisla- wealth disappears, and everybody loses.” I’m not con- tors in the 1938 elections failed, angering many sena- vinced that this is really a “free market paradox.” If tors and representatives in the process. “The president anything, gridlock is a state failure rather than a mar- became resented more than adored,” writes Folsom, ket failure. “and soon Congress was altering his legislation and The book’s main contribution to the literature on overriding his vetoes.”The 1937–38 “depression within property rights and institutions is to show that private a depression” cost the president even more support. ownership is a necessary but not sufficient condition Nonetheless, the bulk of the New Deal persisted. for the market to work its magic. When many people Indeed, much of it remains in effect today.Folsom con- have private property rights that allow them to exercise cludes:“The myth that these programs were once valu- veto power over more valuable projects, wealth dissi- able, that they helped end the Great Depression, and pates because bargaining is dominated by holdup prob- that they restored prosperity to the United States has lems. Russian privatizations, for example, split rights been enough to keep them going.” Moreover, once a across too many parties and erected veto points that program has been created,“bureaucrats within the pro- created anti-commons resources. gram flock to defend it, [and] those receiving benefits Heller offers a wide-ranging discussion of regulatory from the program strive to retain it.” pathologies leading to “gridlock,” particularly in the ways intellectual property is regulated in the biotech- Robert Higgs ([email protected]) is a senior fellow at the Independent Institute and author of numerous books, including Depression,War, and nology industry.He doesn’t, however, answer a question Cold War. I had throughout the book. If it’s clear, as he says, that regulation cannot keep up with innovation (as we’ve The Gridlock Economy: How Too Much Ownership seen in technology, medicine, and most recently high Wrecks Markets, Stops Innovation, and Costs Lives finance), why should we trust the state to regulate fur- by Michael Heller ther? As a Hayekian, I’m skeptical of the notion that Basic Books • 2008 • 259 pages • $26.00 regulators can have the information they need to get the market as it is to function as it does on the black- Reviewed by Art Carden board in economics 101. ithout private property Since outside observers can’t articulate a theory of Wrights, people have incen- rights or a structure of institutions that will “work” a tives to overuse an asset. Conflict- priori, it stands to reason that legal institutions should ing private property rights, on be flexible so as to allow for innovation across fields. the other hand, create a “tragedy While Heller looks for new ways to design institutions, of the anti-commons” in which perhaps we should find better ways to let these institu- resources are underused, according tions evolve. to Michael Heller. In The Gridlock Heller notes that “judicial and political battles are Economy, he treats the reader to a overtaking the academic research” and that Congress is

51 SEPTEMBER 2009 Book Reviews considering serious overhaul of the patent-law infra- The Complete Idiot’s Guide to Global Economics structure. But will that solve the “gridlock” problem? by Craig Hovey with Gregory Rehmke Why should we expect members of Congress to know Alpha • 2008 • 272 pages • $18.95 paperback and e-book how intellectual property in biotech should be struc- Reviewed by George C. Leef tured? We shouldn’t. I am afraid that Heller is too caught up in what James Buchanan calls “the romance or years the series of Complete of politics,” expecting politicians to solve problems of FIdiot’s Guide books has been a their own making. great commercial success, dealing It would be the height of folly for me as an econo- mostly with “practical” topics as mist in Memphis to presume to know how intricately varied as dog training and wedding detailed contracts in biotech firms should be struc- planning. Useful to be sure, but not tured, but we can see some of the pathologies of regu- exactly intellectually stimulating. lation in a dynamic economy emerging in high-tech The Complete Idiot’s Guide to Global enterprises. For example, Heller notes that the Federal Economics, by economist Craig Trade Commission arbitrarily dissolved the patent pool Hovey and former FEE staff member Gregory for laser eye surgery. He also points out a disturbing Rehmke, changes all that. Written for the intelligent trend that deserves further investigation: “In telecom, non-economist (easy reading, but clearly not for true competitors know that often the most profitable idiots) the book informs about the fundamentals of approach is not to innovate, but to stop others from international economics and dismisses numerous false investing.” He’s right. Patent law is often used in a beliefs. For libertarians it’s most encouraging to see rent-seeking fashion that burdens real innovators, but such a book reaching the mass market since the authors that has nothing to do with any market failure. Our have no patience for coercive interference with the system of intellectual property is a creature of the market order of production and trade. government. The big message of the book is simple: If you want Among the causes of gridlock Heller identifies is prosperity, leave people alone. The proper role of gov- antitrust law. He writes, “For biotech pooling to have ernment is to keep the peace; it should not dictate what any chance, Congress may need to create special should and shouldn’t be produced; it shouldn’t impose antitrust rules.”He seems not to see how such rules will tariffs or trade quotas; it shouldn’t interfere with the be hard to adapt to further innovations.And again, he is value of money; it shouldn’t give foreign aid or impede too trusting of politicians to tinker with legislation to the flow of workers from place to place. The reader solve a problem. Outright repeal of the antitrust laws who pays attention will end up with a better grasp of would be a much better move, solving numerous prob- global economics than the typical college economics lems all at once. major, whose professors often teach interventionist, There is much in The Gridlock Economy that could anti-market nonsense. be explored in greater detail, but these are directions for Almost immediately, Hovey and Rehmke drive further research rather than criticisms of the thesis. I home the crucial point that economic freedom works expect that the book will find its way onto reading lists far better than central planning—that is, domination across campuses worldwide. It offers much food for and control by government authorities. That’s because thought, but readers should think skeptically about knowledge is widely dispersed. Free markets tap into Heller’s eagerness to have politicians solve problems that knowledge while government authorities act in a that are mostly if not entirely of their own making, not state of ignorance and blindness. In a passage reminis- the free market’s. cent of Leonard Read’s famous essay I, Pencil, the authors state,“What is amazing in the modern world is Art Carden ([email protected]) teaches economics at Rhodes College in that we so easily benefit from vast knowledge distrib- Memphis,Tennessee. uted across the globe, from how to grow foods and

THE FREEMAN: Ideas on Liberty 52 Book Reviews spices, locate and mine minerals, cut and sew, design essential? No: Under the proper conditions for eco- and assemble, carve and shape, program and debug, and nomic growth (noted above), even very poor people all the vast range of skills that few of us possess but most can save, invest, and progress economically. Foreign aid, of us use in finished products every day.” by giving money to government officials, usually gets in Cognizant that many readers will have absorbed the way of progress. elements of what Ludwig von Mises called the anti- This book covers a lot of economic terrain and does capitalist mentality, the authors include numerous little so effectively. It would make enlightening reading for “Warning, Pothole Ahead!” features in each chapter to anyone who isn’t familiar with international economics deal with common misconceptions. For example, they (or economics at all) but wants to learn. confront the notion that profits are the evil conse- quence of greed and exploitation early on. They George Leef ([email protected]) is book review editor of The Freeman. observe that profit just means obtaining benefits in excess of costs:“The saint who helps shelter the home- One Nation Under Debt: Hamilton, Jefferson, and less and the cold-blooded bond trader both have prof- the History of What We Owe its in mind—that is, gains over and above the effort by Robert E.Wright they invest.” McGraw-Hill • 2008 • 256 pages • $27.95 hardcover; Perhaps the most persistent error in thinking about $15.37 Kindle global economics is the idea that trade between nations Reviewed by David L. Littmann needs to be balanced. Hovey and Rehmke attack that error at its roots, explaining, first, that trade really n his latest work, One Nation doesn’t take place between nations, but between people IUnder Debt, Robert E. Wright, who happen to reside on different sides of a national who has written extensively about border. If you think that individuals can and should debt and finance during the manage their own buying and selling, then there is no decades that marked America’s problem, no matter what aggregate trade statistics show. climb to economic preeminence, But what about the menacing “trade deficit”? Don’t carefully documents the evolution “we” lose jobs in the face of one? Relax, say the of U.S. dependability and integrity authors: “As much attention as is paid to job losses in the international investment resulting from imports, little notice is given to how this community.This reputation led to the acceptability of promotes the creation of new businesses, jobs, and U.S. financial markets and government bonds, especially wealth.” in critical periods of economic and military conflict. A favorite line of the anti-capitalists is that “global- Wright, curator for the Museum of American ization” is to blame for the poverty of underdeveloped Finance and author of 11 books, has dedicated years of nations. The authors show that’s pure bunk. Interna- research to the lives and times of those individuals who tional trade and cultural exchange do not keep poor bought, sold, and held the variable forms of U.S. debt people poor, but many formerly poor people have issuances of the day. Tedious as that might sound, it’s become pretty wealthy as a result of trade and cultural actually fascinating. By recounting the trading of early exchange. The crucial ingredients for economic U.S. government bonds, the author deepens the reader’s progress, including freedom, stable money, and the rule understanding of why people accepted the debt obliga- of law, are not indigenous to most “third world” coun- tions of a new nation without a track record for repay- tries. Hong Kong and Singapore, to cite just two exam- ment. In so doing,Wright destroys some myths, such as ples, are no longer poor thanks to globalization. that only relatively wealthy Americans purchased the The authors ask if foreign aid is necessary for poor new debt securities, that the debt was just held domes- countries to break out of poverty. When people are tically, and that debt securities were concentrated in poor, how can they save and invest? Isn’t foreign aid only a few states and urban locales.

53 SEPTEMBER 2009 Book Reviews

Wright sees a template for all successful economic cannot be pronounced; but it is impossible to believe growth in the evolution of U.S. dependability. He por- that there is not such a point.” Before leaving office as trays it as a baseball infield where home plate is the Treasury secretary in 1795, his final report on public government protection of life, liberty, and property. credit sought to rectify “and to prevent that progressive First base is the all-important financial system; second accumulation of debt which must ultimately endanger base is the entrepreneurial firm; and third base is the all government.”The danger, though, is not to govern- cadre of management expertise. The more solid each ment, but to the people.When politicians can borrow and base becomes, the easier it is for the nation to rack up spend without restraint, people’s liberty and property runs on the wealth scoreboard. are imperiled. And so it is with debt.America entered a century of Some of the Founders knew that, and Wright adds enviable growth in which federal bonds were regarded gravitas to his book by contrasting the Federalists’ advo- as outstanding investments. Thanks to Wright’s cacy of a centralized financial system with the stance of painstaking research, the midsection of the book fully the Antifederalists. One Antifederalist in particular, illustrates the lives and times of bondholders.We learn writing under the pen name Brutus, provided one of about the people who held the debt and why they the most sagacious, prescient, and potent predictions in bought and sold it.We learn how debt issuances helped American history when he warned in 1788 that the Revolutionary War veterans settle the frontier. We also federal government eventually would use the “neces- learn how modern the new American financial markets sary and proper” clause of the Constitution [last para- quickly became. It wasn’t long before “flight to quality” graph of Article 1, Section 8] to greatly extend its had become an international stamp of approval for powers, thereby subverting state authority. We would U.S. debt. have avoided many national disasters if people had All told, Wright contends that U.S. national debt heeded that warning. became a “national blessing” because we had a “non- Wright notes, “Unlike Adam Smith, Hamilton predatory” government.The debt system was workable believed that the issuance of bonds by government aug- and credible because Washington had not become the mented rather than destroyed capital.” Considering all-consuming leviathan it grew into during the twen- how much government in 21st-century America uses tieth century. debt to finance astounding amounts of wasteful spend- Wright does include warnings aplenty, explaining ing and the erosion of capital, I’d say Smith had the why public debt, while serving as financial cement and more realistic long-term vision. trust among people and nations, is also to be feared. He One Nation Under Debt provides valuable history on quotes Adam Smith: “When national debts have once the origin and development of U.S. fiscal affairs and been accumulated to a certain degree, there is scarce warns us about where we are headed.The author looks ...a single instance of their having been fairly and on our national debt as a good idea gone awry, but I completely paid.” believe that the better view is that Hamilton’s debt sys- Even Alexander Hamilton noted that there was a tem was a grave danger from the very beginning. tipping point beyond which additions to the national David L. Littmann ([email protected]) is senior economist debt would be deleterious:“Where this critical point is with the Mackinac Center for Public Policy

THE FREEMAN: Ideas on Liberty 54 The Pursuit of Happiness

EFCA and Compromise

BY CHARLES W. BAIRD

s proposed, the Employee Free Choice Act tion unless they get somewhere near 70 percent of the (EFCA) would 1) replace secret-ballot union targeted workers to sign. A representation elections with card-check certi- fication of unions as exclusive (monopoly) bargaining No Escape agents for workers in their workplaces; 2) impose com- orkers would have no such escape under the pulsory-interest arbitration on employers who do not WEFCA. Epstein writes that the NLRA was agree to a first union contract within 130 days; and 3) widely accepted because its infringement of individual increase penalties on alleged unfair labor practices by workers’ common-law freedom of contract was employers. Union bosses assert that EFCA is necessary thought to be adequately offset by democratic protec- because employers routinely break the law during pro- tions for workers—the very protections that EFCA longed representation elections, espe- would eliminate: the secret ballot and cially by firing pro-union workers. a ratification vote on collective- Passage by the House is certain, Workers can avoid bargaining contracts. Therefore, he but it may not pass the Senate in its union intimidation argues, EFCA may not withstand present form. As we will see, compro- constitutional scrutiny. mises that have been suggested are by signing union EFCA provides that a firm must just as indefensible as EFCA itself. begin bargaining with a union for a Legal scholar Richard A. Epstein cards and then voting first contract within ten days of a has laid out a convincing case against against the union card-check certification. Bargaining the first two provisions in a new then goes on for up to 90 days. If no Hoover Institution book (a draft pdf on a secret ballot. agreement is reached, the dispute goes version of which can be found at They would have into mediation for 30 days. If they still www.tinyurl.com/kqbhcc). Under don’t agree, the dispute is turned over card check, a union would become no such escape to an arbitration panel that has the the monopoly representative of all under the EFCA. power to impose a two-year “con- nonmanagerial workers in an enter- tract” on both parties. The terms set prise if 50 percent plus one of those by the arbitration panel would not be workers signed a card (or other piece of paper or peti- subject to judicial review or worker ratification. tion) indicating their support for such representation. The NLRA now imposes a duty on both parties to Signatures would be collected by union organizers who bargain in good faith over wages, hours, and other would likely remind any dissenters that the union terms and conditions of employment. But they are not knows where they and their families live. Under the forced to come to an agreement.They each can exit the current National Labor Relations Act (NLRA), signa- bargaining process and bear the consequences (strikes tures collected on authorization cards are used as the and lockouts). EFCA would eliminate the exit option. basis on which secret ballot elections are called.Work- In ordinary contract law bargaining must be voluntary. ers can avoid union intimidation by signing cards and then voting against the union on the secret ballot. Charles Baird ([email protected]) is a professor of economics Because of this unions now hesitate to request an elec- emeritus at California State University at East Bay.

55 SEPTEMBER 2009 Charles W. Baird

No one has a duty to bargain with anyone. Epstein says EFCA as currently written. Some congressional sup- the duty to bargain in good faith was widely accepted porters, and the union bosses they serve, have suggested because the exit option was preserved for both parties. compromises to get 60 votes to avoid a filibuster. All This is another reason why the EFCA may not with- would eliminate card check, shorten election cam- stand constitutional scrutiny. paigns, increase penalties on unfair labor practices, and The NLRA also regulates employer speech during impose “equal access” rules to force employers to allow election campaigns. Employers cannot threaten to pun- union organizers on company property during work ish workers for voting for unionization, and they can- times and to grant unions the same amount of time to not offer to reward workers who vote against argue for unionization as employers use to argue against unionization; but they can point out the possible haz- unionization. The CEOs of Costco, Starbucks, and ards of becoming union-impaired. EFCA would pro- Whole Foods have endorsed a compromise that hibit employer speech altogether. Epstein likens the includes all of the above and drops compulsory distinction between regulating and prohibiting arbitration. employer speech to the distinction in takings law Mandating a uniform, short election campaign arbi- between regulating the use of private property and trarily restricts the ability of employers to make their government occupation of private property. Actual case against unionization. Increasing employer penalties occupation of private property is subject to strict con- for unfair practices further inhibits free speech because stitutional scrutiny, and so, too, may be the prohibition it is not clear what speech would be considered unfair. of employer free speech. Whatever the degree of risk aversion among employers, In the mid-1950s over one-third of private-sector they would choose to speak less. workers were unionized. In 2008 only 7.6 percent Equal-access rules are especially problematic. For were. Unions say their decline is due to weaknesses in government to coerce employers to stand by while the NLRA, which permit employers to thwart attempts union organizers invade their property with the sole to unionize. However, according to NLRB data illegal intent of imposing harms on them during time they firings of union supporters occur in only 2.7 percent of have paid for seems to be an obvious government representation elections. Moreover, unions won 56.8 occupation of private property.Therefore it should be percent of elections in 2000–2008. In 2008 they won subject to strict constitutional scrutiny under the Fifth 63 percent. If employers had as much power over elec- Amendment. Unions already have extraordinary access tions as unions say, unions wouldn’t do nearly as well. to workers during election campaigns. Employers are Nor does it seem that employers try to wear workers forced to supply unions with the names and addresses down with prolonged campaigns.The average election of all workers within seven days of the notice of an campaign is less than six weeks. election. Union organizers may make unlimited visits Unions are losing members because the number of to workers’ homes, contact workers by phone as often elections held each year and the number of workers as they wish, and, unlike employers, make any promises involved in the elections are declining. Fewer and fewer they want to workers in pursuit of votes for unioniza- workers are interested in unions. Union decline has tion.The unions’ problem is not lack of access to work- nothing to do with employer misbehavior during elec- ers; it is lack of any service that workers want to buy. tions. Union election wins add fewer newly unionized The biggest problem with any EFCA compromise is workers than the number of workers they lose due to what, during the New Deal, came to be known as the the contraction of already union-impaired firms. camel’s-nose-under-the-tent strategy: First get what you can and then gradually grab the rest. Since Presi- Senate Support dent Obama seems determined to repeat and amplify lthough there are 60 Democrats in the U.S. Sen- the mistakes of Roosevelt, the only safe strategy against Aate, several of them have said they will not support EFCA is to kill it outright.

THE FREEMAN: Ideas on Liberty 56