THEFREE IDEAS ON LIBERTY

52 Lessons in a Supermarket CONTENTS John A. Baden and Ramona Marotz-Baden FEBRUARY Voluntary transactions lead to peaceful interaction. 1989 54 Growth Controls and Individual Liberties VOL. 39 Jonathan Sandy and Dirk Yandell NO.2 The personal and economic costs of government control of private property. 57 Why Is There a Drug Problem? George C. Leef Seeking answers to a complex question. 60 "What Do You Want to Be?" Margaret Bidinotto Encouraging children to make choices. 62 Responding to the Oil Shock: The U.S. Economy Since 1973 Rodolfo Alejo Gonzalez and Roger Nils Folsom Rational and nonrational responses to the energy "crisis." 66 The Entrenchment of the State Matthew Hoffman Why has no major Communist government ever been overthrown from within? 69 Blockading Ourselves Cecil E. Bohanon and T. Norman Van Cott What th~ blockade of Confederate ports teaches about protectionism. 71 Popper, Hayek, and Classical Liberalism Jeremy Shearmur Which form of social organization would best enable us to learn from our mistakes? 74 Islamic Capitalism: The Turkish Boom Nick Elliott Individual effort points the way to a prosperous future. 76 Markets and Morality Peter J. Hill The moral advantages of a social system that holds individuals accountable for their actions. 80 Taxation Versus Efficiency Richard Jones How taxation discourages the advantages of specialization. 82 Myths of the Rich Man Joseph S. Fulda The market process assures us that society will never be at the mercy of one malevolent monopolist. 84 Book Reviews The second volume in The Life ofHerbert Hoover by George Nash. Equity and Gender by Ellen Frankel Paul. The Theory ofFree Banking: Money Supply Under Competitive Note Issue by George A. Selgin. THEFREEMAN IDEAS ON LIBERTY PERSPECTIVE

Published by The Foundation for Economic Education Irvington-on-Hudson, NY 10533 Justice and Charity President of What is justice? The first thing to remember the Board: Bruce M. Evans is that justice is blind. We have been trying to Vice-President: Robert G. Anderson tell people that for a great many centuries. There leaps to mind the famous statue ofJustice Senior Editors: Beth A. Hoffman Brian Summers with scales held high and sword in hand, and blindfold over the eyes. Justice does not dis­ Contributing Editors: Bettina Bien Greaves criminate. It does not see whether one is ofhigh CarlO. Helstrom, III Jacob G. Hornberger or low class, rich or poor, black or white, work­ Edmund A. Opitz ing or not working. It does not see one's na­ Paul L. Poirot tional origin. It does not detect one's religion. It treats all men alike and all men equally. That is The Freeman is the monthly publication of The the essence of justice. The statue would also Foundation for Economic Education, Inc., remind us by the sword that it is enforced by the Irvington-on-Hudson, NY 10533 (914) 591­ 7230. FEE, founded in 1946 by Leonard E. coercive power of the state. The principal busi­ Read, is a nonpolitical educational champion of ness of the state, of law and of government, is private property, the free market, and limited the enforcement ofjustice, the protecting of the government. FEE is classified as a 26 USC 501 (c) (3) tax-exempt organization. Other officers rights of all people equally. of FEE's Board of Trustees are: Thomas C. On the other hand, charity is not based on Stevens, chairman; Ridgway K. Foley, Jr., vice­ coercion, nor is it blind. Charity is discriminat­ chairman; Paul L. Poirot, secretary; H.F. Langenberg, treasurer. ing and voluntary. If you remove the voluntary aspect of charity, it ceases to be charity. What The costs of Foundation projects and services would you think if, after Robin Hood had are met through donations. Donations are invited in any amount. Subscriptions to The Freeman placed his sword at the throat of some rich man are available to any interested person in the and deprived him of his purse and scattered his United States for the asking. Additional single coins to the poor, that rich man told his friends copies $1.00; 10 or more, 50 cents each. For foreign delivery, a donation of $15.00 a year is how charitable he had been to the poor? There required to cover direct mailing costs. was no charity in what happened on the rich man's part-not a penny's worth! If you take Copyright © 1989 by the Foundation for Economic Education, Inc. Printed in U.S.A. away the voluntary aspect of charity, it be­ Permission is granted to reprint any article in comes despoliation. It is legal plunder. It is rob­ this issue, provided appropriate credit is given bery, not charity. Confusing justice and charity and two copies of the reprinted material are sent to The Foundation. has produced something called "social justice," the basis for the welfare state. Social Bound volumes of The Freeman are available justice is having a tremendous negative impact from The Foundation for calendar years 1969 to date. Earlier volumes as well as current issues upon the economic well-being of this country. are available on microfilm from University You cannot have charity or justice when you Microfilms, 300 North Zeeb Road, Ann Arbor, forcibly take money from A and give it to B. MI48106. You have not charity because it was not freely The Freeman considers unsolicited editorial willed. You have not justice because you are submissions, but they must be accompanied by a not treating A and B alike but are taking from stamped, self-addressed· envelope. Our author's guide is available on request. one and giving to the other. The rights of each have not been protected, but stripped. -excerpted from "The Bible and Economics," a sermon by Dr. D. James Kennedy, Coral Ridge Ministries PERSPECTIVE

The Decline of result is not peace but rather perpetual conflict over the distribution of the loot. It is time to Moral Consciousness eliminate, not reduce or make more efficient, The great tragedy of the welfare state has government welfare, social security, food been the decline of moral consciousness among stamps, loan guaranties, subsidies, licenses, the. American people in the twentieth century. import restrictions, educational grants, and all The use of the political process to provide spe­ other means by which some people use the po­ cial, privileged benefits to certain classes of litical process to gain at the expense of others. people is now considered to be as American as Only by standing firm against the immoral apple pie. The common belief is that since the nature of the welfare state can we hope to raise welfare system is now an ingrained part of the moral consciousness of our fellow citizens. American life, people should simply accept its -JACOB G. HORNBERGER legitimacy and direct their efforts to making the system function more efficiently. This degeneration in moral consciousness can be found even in some of the most free­ The Insanity of Inflation market oriented people in the country. I re­ Sanity consists in limitation; the inordinate is cently attended a conference whose purpose always insane and always ends in destruction. was to promote an improved understanding of Because inflation is indeed inordinate, it too has the free enterprise system. One keynote speaker a certain insanity about it and naturally it tends at the conference·proudly attributed his business to end in an explosion of destruction, a nihilist success to a Small Business Administration act with money. The insanity of inflation leaves loan. Another keynote speaker called for a a mark of insanity on society; it changes a good closer partnership in business development be­ society into one which, so long as inflation tween businessmen and politicians. lasts, is wholly and fraudulently unjust. All evil Neither speaker even remotely suggested that is a breach of order, but only some evil is a the use of the political process to feather a per­ breach of order with unlimited effect; inflation son's nest is morally wrong. Equally tragic, the is an unlimited monetary and economic evil. talks appeared to be well-received by the audi­ -WILLIAM REES-MOGG ences, almost as if the listeners were comforted The Reigning Error by this "practical approach" to free enterprise. We should never be ashamed or embarrassed to speak out against the immoral actions of our own government. How else can we hope to Reader's Digest Reprints eradicate the evil which pervades the entire po­ litical system? To remain silent in the face of Free Trade Article wrongdoing not only constitutes cowardice, it "The Political Economy of Protectionism," also is an implied acceptance of enshrined po­ by Thomas J. DiLorenzo, has been reprinted in litical immorality. the February 1989 Reader's Digest. This article The only legitimate functions of law are the originally appeared in the July 1988 issue of protection of life, liberty, and property and the The Freeman. preservation of peace. We have permitted the We have extra copies ofthe Digest version of politicians to pervert law by using it to direct Professor DiLorenzo's article. Please write to lives, limit liberty, and plunder property. The FEE, stating the quantity you'd like. 52 THEFREEMAN IDEAS ON LIBERTY Lessons in a Supermarket by John A. Baden and Ramona Marotz-Baden

ozeman, Montana, a town with 30,000 diverse as ranchers who survived the dust bowls people, contains a modest supermarket of the 1930s, refugees of the counterculture of B that offers valuable lessons. This store the 1960s who look like they are in a time warp, has tens of thousands of items of various sizes Park City blondes from Dallas summering at and brands, generic labels, and bulk products. Big Sky, and neo-Spartan hedonists of all ages Competition for the consumer's dollar occurs who bounce among Montana's ski slopes, among this and other stores, among brands white-water rivers, and mountain trails. We within the store, and among different products find them all in Albertson's at the University within individual brands. Mall. Information regarding consumer preferences Individuals representing all of these diverse toward items in this huge mix of products is types shop cheek to jowl, sample ice cream and continuously generated by a simple procedure. fajita strips in the aisles, and peacefully shuffle People make decisions, a process with which through the check-out lines at the supermarket we are all familiar. Consumers take their selec­ located between the Bonanza Steak House and tion of products to the check-out line. There, Yogi's Vegetarian Bakery. The stores and sup­ check-out clerks tally the price and automati­ pliers who fail to satisfy are passed by in favor cally enter information about the sale on the of those who offer more attractive products. store's computer by passing the product's bar This selection of winners is determined by code across a scanner. voluntary transactions. The losers gradually Among the stores in Bozeman, as elsewhere, lose shelf space. Ultimately they either improve the shopkeepers compete in offering differing their products or lose out and pass from the mixes of service and economy. Even the check­ scene. The consumer really is sovereign. The out lines vary in lengths and the degree of ser­ market registers his preferences and automati­ vice. Each self-interested grocer seeks to attract cally makes the adjustments which harmoni­ and satisfy consumers holding varying degrees ously reconcile demand with supply. of wealth, economic sophistication, nutritional This process is quite remarkable. It demon­ knowledge, and body-type preference associ­ strates that the market is best understood as a ated with differing food groups. system which organizes information with truly Competition responds to differing consumer amazing efficiency and effectiveness. At root, preferences for health, economy, convenience, the market is a social arrangement which effi­ and vanity. In these stores we see people as ciently generates information about peoples' Dr. John Baden is Chairman of the Foundation for Re­ wants and reservations while providing incen­ search on Economics and the Environment (FREE), with tives to heed the preferences of others. It is a offices in Dallas, Texas, and Bozeman, Montana. Dr. Ra­ mona Marotz-Baden is a Senior Associate ofFREE and a system which economizes on the information Professor at Montana State University. required to make rational decisions. 53

fully coexist. In Bozeman we find a substantial number of hard-core vegetarians. They can shop peacefully and amicably with rancher and logger meat eaters who consume vegetables only as a concession to their health. Bozeman is also a national center for teeto­ taling Seventh-Day Adventists. The supermar­ ket accommodates their preference for nonalco­ holic wine, and they shop harmoniously with those whose nightly ritual includes a bottle of ({jf\fj)~/p; French wine. This peaceful interaction occurs The recent well-intended but thoroughly pa­ only because all transactions are voluntary. thetic Soviet efforts at economic reform offer a Imagine the uproar ifthe decisions to permit the valuable lesson. The Soviet Union's failing at­ selling of wine were determined in the political tempts to mimic the market's ability to respond arena. to consumers' wants demonstrate the impor­ Nearly all analysts who have seriously stud­ tance of allowing buyers and sellers to commu­ ied the free market agree that the market pro­ nicate freely. They also teach us how difficult it motes efficiency, diversity, and innovations is to coordinate economic activities when peo­ which respond to consumers' changing prefer­ ple are not allowed to communicate. ences. Few, however, appreciate the degree to Price controls prohibit buyers and sellers which private property rights and free exchange from communicating their true preferences with foster harmony and peace. This set of social one another. Thus, price controls are best un­ arrangements renounces coercion as a means derstood as a form of censorship. Fortunately, for making choices. These arrangements enable they are rarely found in their worst form in people who feel strongly about such issues as American supermarkets. That is why these vegetarianism or prohibition to coexist con­ stores work so well. structively with people holding antithetical Despite their success in meeting citizens' de­ VIews. mands, however, supermarkets are often criti­ This great benefit of market exchange is of­ cized. Some people object to products with a ten neglected or underrated. Essentially, mar­ lack offiber, some to products with an excess of kets economize on that most scarce resource, sugar. Some oppose plastic packaging or adver­ love in the Christian sense of the term. tisements that appeal to children. What if the stocking of a grocery store were In this setting offered by a free and open determined politically? Think of the fights be­ market system, each can satisfy his wants with­ tween vegetarians and meat eaters; the teetotal­ out imposing his preferences on others. In this ers and those who enjoy wine with dinner; the manner, diversity, freedom of choice, and in­ granola organics. who argue against pesticides novations are all encouraged. In this imperfect and the farmers who find chemicals useful; the world, we can hardly ask for anything more. populists who are strongly opposed to corporate Yet, there is another huge advantage we nor­ agriculture and those with an interest in these mally take entirely for granted. firms; employed mothers who want the stores Surely the store in the mall provides a model open 24 hours a day, seven days a week, and for efficiently responding to diverse and rapidly the fundamentalists who believe they should be changing preferences. But this efficiency, mar­ closed on Sunday. velous though it is, is only the minor miracle. Fortunately, we have pretty much kept these The,benefits of harmonious interaction fostered decisions out of the, political arena. People by market exchange in accordance with the rule make decisions and exercise their consciences of willing consent are even greater. instead of imposing their preferences by using Market exchange, subject to willing partici­ the force of the state. Peace, progress, and ef­ pation by full-facultied individuals, permits ficiency are the result we have learned to ex­ people with radically differing views to peace- ~ct. D 54

Growth Controls and Individual Liberties by Jonathan Sandy and Dirk·Yandell

fundamental freedom in the United The fundamental flaw in the argument for States is the ability to travel, and to growth control is the perception that housing A move and live wherever an individual growth causes a regional expansion. In fact, the finds the greatest opportunities. However, this reverse is true. A strong regional economy at­ freedom is increasingly coming under attack. tracts new residents. New homes are built by Although no policies exist that directly regulate developers in response to this increase in de­ movement, more subtle restrictions are emerg­ mand. Restrictions on building during an ex­ ing. Potential entrants to many regions face lim­ pansion will result in a deliberate shortage of its in the form of housing shortages brought housing and will do nothing to solve regional about by residential growth controls. problems. The argument in support of growth controls Policies that reduce the housing supply sim­ is that rapid population growth reduces the ply do not address the quality of life concerns ,'quality of life" of existing residents. Mem­ that are purported to be the major issues. bers of existing communities often fear change, Growth controls are offered as a blanket solu­ and want to protect themselves from the risks of tion for such diverse issues as traffic, inade­ new development. New residents require new quate sewage facilities, overcrowding of all homes that lead to changes in the character ofan types, the deterioration of air quality, and the existing community. Growth control propo­ loss ofopen spaces. In fact, growth controls can nents argue that unregulated growth is the cause increase all of these problems if development of crowding at beaches, parks, and· public fa­ shifts out from the controlled area. cilities. Unregulated growth is also blamed for Traffic provides a good illustration. Can any­ traffic congestion, reduced air and water qual­ one deny that traffic congestion results from the ity, the loss of open space, and the destruction improper management of our highways? If of the natural environment. roads were operated in private competitive mar­ The proposed solution is to place a morato­ kets, drivers would pay some price for the ser­ rium on residential building permits as though vice. This price would reflect the demand for houses were the fundamental cause of all road use so that it would be highest during growth-related problems. In extreme cases a prime driving times. The prices would give municipality may even set a legal population drivers and firms the incentive to spread driving limit, forbidding entry by law. The shortcom­ out across the day, reducing traffic congestion. ings and inefficiencies of such growth controls Rather than focusing directly on the traffic are numerous. problem with incentives, however, many met­ ropolitan areas are proposing growth controls as Professors Sandy and Yandell teach economics at the School of Business Administration, University of San the solution. When a city restricts housing de­ Diego. velopment it causes. developers to build on un- 55 regulated land on the urban fringe. New home goal of all prosperous countries is to provide buyers have no choice but to move farther from adequate and affordable housing for its citizens. the central business district. The result is longer A variety of policies have been enacted in the daily commutes and a loss of open space. The United States to support this goal. Housing sub­ intent is to reduce traffic. The result is just the sidies for the poor and elderly, FHA and VA opposite-more traffic and the attendant in­ mortgage subsidy programs, and the tax deduct­ crease in air pollution. ibility of mortgage interest are all designed to promote home ownership. Growth control pol­ Controls Lead to Higher Prices icies are in direct conflict with these goals, since they increase prices and preclude many Of course, growth controls have a more ob­ from home ownership and upward mobility. vious consequence: higher housing costs and The state of housing in many socialist coun­ rents. The more severe and broad the controls, tries is dismal. It is not unusual to wait five the higher the prices. Building restrictions limit years for the chance to rent a single room in a the supply of homes without reducing demand, government housing project. Parents in many increasing competition for available houses. Eastern bloc nations will place the name of a Higher prices reduce the ability of low- and newborn child on the official state housing middle-income families to afford a home. Rent­ waiting list so that the child will have a chance ers find that rents rise as housing prices climb, of obtaining a small apartment when he or she and that a larger percent of income must be paid grows up and marries. Housing is regulated by for housing. It becomes more difficult for rent­ the state, and families often must share small ers to acquire a down payment, and upward units in crowded housing complexes. mobility suffers. Rent control serves as an analogy in the Those who own more than one house, on the United States. Trying to rent in controlled areas other hand, will gain. They will receive both is a difficult task. It inevitably includes long capital gains and higher rental income from waiting lists (and occasionally kickbacks or their investment property. Those with only one other non-price allocation methods). The con­ house may gain depending on the details of the trolled rent makes investment in apartments un­ growth control policy. For example, many such attractive, so the quality and availability of policies define environmentally sensitive areas rental units decline. The lesson is obvious: con­ as off-limits to future construction. Owning a trolling housing markets yields serious and det­ house adjacent to such an area will result in rimental consequences. above-normal appreciation. Despite this, housing markets in the U. S. are For other families who own only one house already highly regulated. Zoning regulations the net result of a growth control policy is not and building codes restrict the quantity and clear. There will be an increase in capital gains, quality of housing. Environmental impact re­ but this may not translate to an increase in a ports and planning studies require years of re­ family's standard of living. All houses in the view before some developments are authorized, region will increase in value, so capital gains and substantially increase the cost of building. will always be tied up in housing, even if the Even so, the market has had some flexibility to family moves within the city. The only way to respond to the demands of consumers about the cash out the capital gains is to move out of the types and locations of housing that are pre­ region. ferred. Willing buyers and sellers have been Renters, who as a group contain a large pro­ allowed to make mutually beneficial ex­ portion of poor, young, and minority families, changes. The result is an increase in freedom clearly are made worse off, so growth control and well-being. policies are regressive. Further, these policies Growth controls change all that. Developers are at least somewhat discriminatory given the are simply not allowed to respond to the desires demographic characteristics of renters. of consumers. Instead, local bureaucrats deter­ It is ironic that growth controls are increasing mine every aspect of new developments, in­ in popularity when one considers that a major cluding who can build, what can be built, when 56 THE FREEMAN. FEBRUARY 1989 it can be built, and what facilities must be in­ market. To the extent that current owners will cluded in the development. not encounter the higher housing prices, they Housing markets play a major role in the are correct. Other costs do exist, however. The U.S. economy, and the past success ofthe U. S. house to which they aspire, for example, may housing market is striking. New residential con­ never be built. Residents may become less mo­ struction expenditure represents nearly five per­ bile and find moving within the city difficult. In cent of Gross National Product, and over four addition, the local economy may suffer. Higher percent of the labor force is employed in resi­ housing costs can reduce the willingness of dential construction. In 1985, about 64 percent firms to locate in the area. Future employment of American households owned their own opportunities fall as a result. home. Growth controls threaten this success. Developers and landowners have their prop­ Controls also reduce the freedom ofpeople to erty rights denied when control of building is move and live where they hope to find the great­ passed to government. Landowners will no est opportunities. A simple example shows this longer be able to determine the most efficient clearly. Consider the declining cities in the use of their land, and the market-determined Northeast or Midwest from which people are timing of development is altered. exiting in large numbers. This outward migra­ When property rights are given up they may tion .has significant negative economic conse­ never be recaptured. A government bureau­ quences. Local economies are stagnating and cracy must be put into place to administer the the tax base is eroding. These cities would be controls, and will exercise all rights concerning better off if businesses and residents were not development. Politically, a return to the prior leaving. Should they mandate that no one may state of a freer housing market is unlikely for leave so that the remaining residents can main­ several reasons. Everyone who owned a home tain their quality of life? This is obviously ab­ prior to the controls has the incentive to main­ surd, and would be seen as a blatant attack on tain the controls to protect his capital gains. personal freedom and civilliberties. Yet growth Everyone who purchases after the controls has a control is really the same thing. vested interest in continuing them. Local poli­ Another example can be used to show that ticians will not give up their expanded role in growth controls are not in the best interests.of housing. In short, once adopted, growth con­ society collectively. Suppose all people are ini­ trols are very unlikely to be repealed. tially suspended in time with no location. All It is clear that appointed or elected officials families will be randomly assigned a residence will have neither the necessary information nor location. If we initially had no location, would the incentives to effectively and efficiently con­ we ever agree to growth controls? The answer is trol development. The results are economic in­ clearly no. We could get assigned to an unde­ efficiency, the creation of deliberate shortages sirable area and be unable to move to our pre­ of housing, more control over individual rights, ferred location. and no guarantees that the negative aspects of Simply put, the political process that insti­ growth will ever be addressed. The personal tutes growth controls excludes the desires of all costs and economic costs of growth controls potential entrants. The final policy is an "us may prove to be exceedingly high. D against them" state where the "us" are current homeowners and the "them" consists of every­ REFERENCES one else. Bernard J. Frieden, "The New Regulation Comes to Suburbia," When people in a region are asked to vote on The Public Interest, Spring 1979, pp. 15-27. growth control policies they must consider ob­ Richard F. Muth, "National Housing Policy," in The United States in the 1980's, ed. by Peter Duignan and Alvin Rabushka vious trade-offs. Foremost is the question of (Stanford, Calif.: Hoover Institution Press, 1980), pp. 343-366. how much freedom they are willing to give up Jonathan Sandy, "City Deserves a Fate Better Than Growth Controls," San Diego Business Journal, June 13, 1988. to obtain capital gains on their residences. Lawrence Smith, Kenneth Rosen, and George Fallis, "Recent Existing homeowners may feel that they can Developments in Economic Models of Housing Markets," Journal ofEconomic Literature, March 1988, p. 30. shift all costs resulting from a building freeze to Dirk Yandell, ed., San Diego's Future Directions? (San Diego, renters and potential entrants to the housing Calif.: San Diego Union-Tribune/University of San Diego, 1987). 57

Why Is There a Drug ProbleIn? by George c. Leef

any people in the United States reg- Almost everyone knows that drug use is ex­ • . ularly use "recreational" drugs. But pensive and debilitating-a threat to one's M. drug use is not recreation at all. It is health, job prospects, and family relationships. a foolish type of escapism. Perhaps there are a few who begin using drugs Now, there is nothing necessarily wrong with in the mistaken belief that it is just a harmless escapism. We all do it when we read novels or pleasure which they can quit at will, but they listen to music or go to the movies. Drug use, must be a very small minority. The typical drug however, is virtually always harmful to the one user begins and continues his habit knowing who engages in it, and is frequently harmful to that the long-range consequences of his actions others who are victimized by drug users. There will be decidedly negative. is as much agreement as one ever finds in this Now, why would anyone risk losing the country with the proposition that we confront a chance to live a long, healthy, and happy life in serious drug problem and that we need to do exchange for some immediate pleasure? I can something about it. think of two possible answers. First, someone Most of the discussion about the drug prob­ who thinks he has no chance to live such a life, lem has been about proposed solutions. But, as and who faces immediate problems which seem is so often the case, most ofthe "solutions" fail very severe, might think that taking drugs is to analyze and deal with the causes of the prob­ desirable. Second, someone who is very lem. Attempting a solution before you know the present-oriented in his decision-making, ignor­ causes is usually a waste of time and money, ing or heavily discounting future consider­ and often makes things worse. So, what I intend ations, might be taken in by the blandishments to do in this essay is to venture some thoughts of the drug pusher. What I conclude is that drug on this subject: Why are so many people choos­ use will rise as the number of people who fall ing to use drugs? into the above two categories (which are not Let us first keep in mind that drug use is an mutually exclusive) rises. individual matter. It is a misuse of language to Throughout most of our history, drugs have say that the United States has a drug problem. been legal, but use has been minimal. So, why "The United States" does not and cannot take has drug use risen so much in the last two de­ drugs. What we should say is that a large num­ cades? I submit that the answer, or a major part ber ofpeople in the United States use drugs, and of it at least, must be that we have more people that their use leads to serious harm to them­ in the country who are prone to make the deci­ selves and often harm to others. We should fo­ sion to use drugs. That is, there are more people cus on the problem at an individual level and who are very short-sighted or who view life ask: Why do so many people make the stupid with despair or indifference. and self-destructive decision to take drugs? Why are there more people who fall into these categories? Historically, the United States George c. Leefis Associate Professor ofLaw and Econom­ ics atNorthwood Institute, Midland, Michigan, and adjunct has been the premier land of hope and oppor­ scholar with the Mackinac Center. tunity. Millions ofpeople have immigrated here 58 THE FREEMAN. FEBRUARY 1989 for that reason. The work ethic has been excep­ Let us also keep in mind that people with tionally strong here. The vast majority ofAmer­ little education are ill-equipped to cope with the icans for the last two centuries have accepted problems which life inevitably presents. When the idea that the proper.way to live your life is a well-educated person confronts a problem, he to work hard, save, and improve yourself so is usually able to use his mind to analyze it, that you and your family may have a more pros­ figure out what information he needs, obtain it, perous future. That ethic is missing in any drug and then use it. But the poorly educated person user. If we can figure out why the work ethic is doesn't have those abilities, and is apt to try to in decline, we will have made a big step toward escape from his problems rather than to deal understanding why there is a drug problem in rationally with them. That escape, of course, this country. includes turning to drug use. Furthermore, for the ill-educated, job oppor­ tunities are very scarce. The high school drop­ Seeking an Answer out or the graduate who can hardly read a set of instructions isn't likely to be able to find and I doubt that I know the entire answer, but I hold a job. The absence of discipline, cooper­ believe that I know some parts of it. ation, and courtesy, which are also learned as First, we should look at our system of edu­ part of a sound education, makes it harder still cation. As a professional educator, I see proof for the ill-educated to keep a job. Idleness and every day that our primary and secondary boredom lure many into drug use. schools are failing to prepare young people for Second, I think that the growing welfare state the challenges of a competitive world. The hor­ is also part of the explanation of our drug prob­ ror stories about our educational collapse are lem. The concept ofwelfare (now often referred true. Many students graduate from high school to as the "safety net") says that you'll be taken today with the most feeble reading, writing, and care of without regard to your actions or lack of reasoning skills. (The large numbers who drop actions. Welfare encourages, especially in the out are even worse off.) In many schools, stan­ poorly educated, a feeling of indifference and dards are so low, and the dogma that a student's irresponsibility. A child who sees one or both of self-esteem is sacred is so pervasive, that pass­ his parents doing little or no work and just ing is virtually automatic. In this pathetic envi­ barely making ends meet at the government's ronment, little is taught, little is expected, and expense is apt to conclude that life will be the little is learned. same no matter what you do. And it is people One lesson, however, is learned all too well: like that who are most prone to the short-lived You don't have to try to get by. Young people escape which drugs offer. The huge expansion who see that there is no penalty for failing to of the welfare state during the "Great Society" work, to plan, and to exercise personal disci­ of the mid-1960s corresponds closely with the pline will want and expect the rest of life to be onset of the drug problem. Temporal correla­ that way. That is the mind-set of the drug tions don't necessarily demonstrate causality, user-short-sighted, indifferent, illogical. but I am convinced that there is a connection A good education does more than just teach here. specific skills and facts. It also inculcates cer­ Third, I believe that some aspects of our na­ tain habits of mind which make the use of drugs tion's economic policy are to blame for the rise (and many other forms of destructive, anti­ in drug use. Because of a plethora of laws and social behavior) unthinkable. A good education regulations, it is very difficult today for a poorly teaches one not only how to use his mind, but educated person to obtain employment. Sixty also to appreciate it as his primary tool for suc­ years ago, even an illiterate immigrant could cess in the competition oflife. It should come as get a job rather easily. Of course, his wages no surprise that many young people who have would be low at first, and he wouldn't have an education in name only are attracted to mind­ guaranteed job security or any fringe benefits, less diversions, of which drug use is the most but that is exactly why an employer could afford harmful manifestation. to give him a chance. WHY IS THERE A DRUG PROBLEM? 59

Today, the poorly educated run up against consequences. The laws I have mentioned, minimum wage laws. If their labor isn't worth rather than making life better for people, have the minimum wage (plus employer Social Se­ harmed the lives of many. curity contributions and other government­ Even if there were no drugs at all, a nation mandated costs), they won't be hired. More­ with large numbers of ill-educated, indifferent, over, ' 'anti-discrimination' , statutes raise the and unemployable people would experience se­ possibility that an employer will face a lawsuit rious problems. If these people didn't tum to if he dismisses a worker. The unhappy worker drugs, they would surely tum to some other may charge discrimination even if the employ­ vice. A completely successful war on drugs­ er's decision was made strictly on merit, and which is probably impossible no matter what may win if the employer can't persuade the level of effort-would simply lead to other court that he had a good business reason for his problems we'd have to wage war on. action. The drug problem is not the disease itself, but These laws make it more costly and risky for one of the symptoms of a disease. The drug a ·business to hire people with few skills, and problem will go away when we again have a thus opportunities for gainful employment are nation in which no one has any desire to take restricted. The number of people prone to drug drugs. The problem lies in the demand for use is further increased. drugs, so that is where we must look for the In Losing Ground, Charles Murray argues solution. that the "welfare problem" is rooted in socio­ If my analysis is correct, curing the disease logical changes which made welfare depen­ will necessarily include the restoration of a dency easier and more acceptable from the mid­ sound educational system. People who are well 1960s on. The same is true, I maintain, about educated-Dr at least not badly educated-will our current drug problem. The decline of qual­ see the utter irrationality ofdrug use and abstain ity education, the rising availability of welfare from it. Precisely how we can best go about benefits, and rules which militate against the restoring a sound educational system is the hiring of unskilled people have changed the so­ topic for many other essays, but I doubt that any cial environment for millions. Where previ­ significant progress will be made so long as 0usly young people almost universally had rea­ education is publicly financed and run. son to hope for a better future and possessed the Solving the drug problem will also necessi­ mental acumen to bring it about, today a tragi­ tate changing our welfare system so that it cally large number are unable to read, write, doesn't breed indolence and hopelessness. That and think well enough to take advantage of the is much easier said than done. And we will need limited opportunities open to them. Quite a few to open up our labor market so that even those of our problems have their roots in this change with few skills will have a chance at finding in the social environment. The drug problem is jobs. one of the most serious. I don't know if these changes by themselves are sufficient to eliminate the drug problem, but Market Interferences I am confident that they would reduce it greatly. Without making these changes, it is doubtful The common thread in these three factors that significant progress can be made. which lead to increased drug use is that they are People in the free market movement have interferences with the natural order of the free been advocating privatization of schools, wel­ market. Public schools are a non-market phe­ fare reform, and repeal of labor market inter­ nomenon, as are the welfare system and restric­ ferences for years, and despite impeccable ar­ tions on freedom in the labor market. Nobody guments have made little headway against wanted these institutions to foster a drug prob­ determined opposition from powerful special­ lem, but I believe that they have contributed interest groups. We may be more successful in significantly to it. At work here is the law of overcoming that opposition if we can show how unintended consequences. Laws which interfere much is at stake-a United States without a with the free market have negative unintended serious drug problem. 0 60

"What Do You Want to Be?" by Margaret Bidinotto

"W hat do you want to be when you look forward to that magical day when they will grow up?" is a question my get to "pick for real. " daughter, Katrina, has heard countless times from adults unsure of how to Making Choices start a conversation with a six-year-old. Like most children her age, she has a different an­ Human beings need to make choices, to func­ swer for each questioner-artist, dancer, tion and thrive as their nature designed them to teacher, bus driver, actress, mother, store do. Liberty is the only condition under which owner-you name it, she's going to be it. legitimate decisions can be made. But for lib­ We adults smile to ourselves at the infinite erty to survive, people must expect-and, more variety and scope of our children's ambitions. importantly, want-to make choices. The indi­ But we sometimes fail to realize that an idea vidual who does not expect to make choices, or vital to the existence of liberty is taking root in who does not want to do so, is in no position to their young minds-an idea that we instill al­ defend liberty, or his own individual humanity. most accidentally, and then spend years inad­ It is ironic, then, that this country, full of vertently destroying. opportunity, has so many well-intentioned nay­ "What do you want to be?" is not a universal sayers. Doting aunts tell a young person, "you question. Many if not most societies have been can't do that," while concerned uncles grum­ structured for sons to follow in their fathers' ble, "nobody's done that before." Exasperated footsteps, while daughters repeat the lives of teachers tell him to "get serious and grow up, ', their mothers. Individuals have few choices to as his parents lecture him to "come down to make and rarely expect any. Even in the early earth and be realistic." years of this country, choices, if not ambitions, By the time he is in his late teens, a person were often severely limited by the primitive has heard enough adult -exhortations to convince conditions of the society. But with ever­ him that his goals and ambitions were foolish increasing wealth and well-being, men's op­ and nonsensical. By the time he is in his early tions grew, and "What do you want to be?" twenties, he's been exposed to enough adults became a valid and meaningful question. complaining about their "lot" in life, shirking By asking !bem what they want to be, we their work, playing the lottery, and griping create in children the expectation that they will about their "lousy luck," to be convinced that choose their own roles in life. Lacking matu­ life is just a crapshoot with overwhelming odds. rity, children seldom fix upon one goal; but It is the rare individual who makes it to adult­ then, rarely do they question the belief that they hood with his youthful ambitions intact. someday will. Their observations of what ap­ Most would agree that it would be the height pear to be fascinating adult occupations bring ofcruelty to tell a starving child, "just step into out a natural eagerness to be involved, and they this room and you'll have all you can eat"­ Margaret Bidinotto is a free-lance writer in New Castle, only to have him walk into an empty room. No Pennsylvania. one would be surprised ifthe child became cyn- 61

ical or bitter. Nor should it come as surprise will absolve their guilt and offer to relieve them when young people, once promised a rich diet of the personal responsibility of deciding their of unfettered choice, become cynics when own fate. Finally, in time, they will work to force-fed the thin gruel of pragmatism and de­ relieve others of that same burden. terminism. The next time a breathless six-year-old bub­ These young cynics can only look back on bles enthusiastically about his plans to be "a their childhood ambitions with nostalgic long­ doctor, then a veterinarian, and then a singer, ', ing and, eventually, pain. They will feel some­ check your amusement and offer him warm ap­ what guilty as a small reproachful voice inside proval instead. Share you own dreams and am­ tells them they should have stuck to their goals; bitions with the next teenager you encounter but as time progresses, they will convince and encourage him to strengthen, not repress, themselves that they "couldn't help it," that his own interests. Tell him to close his ears to circumstances rule their lives, and that they the voices preaching pragmatism and determin­ don't want to make their own decisions. Then, ism, and ask him instead: "What do you want they will eagerly embrace any collective that to be?" 0 62

Responding to the Oil Shock: The U.S. EconolDY Since 1973 by Rodolfo Alejo Gonzalez and Roger Nils Folsom

n 1981 the price of crude oil peaked at $36 ers responded rationally to the energy "crisis" per barrel; today it is less than half as high. while policy makers, particularly the monetary Meanwhile, prices in general have risen al­ authorities, did not. I 1 most 30 percent. The price-setting power of In terms of aggregate economic output, en­ the Organization of Petroleum Exporting Coun­ ergy is a complementary resource to both labor tries (OPEC) cartel clearly has waned as oil and real capital (including other natural re­ consumers reduced their oil use, as the end of sources). The shocks that decreased the avail­ oil price controls encouraged oil production in ability of oil to the U. S. in the 1970s must have the U.S. (the second largest producer in 1987, greatly decreased the (marginal) productivity of producing less than the Soviet Union but more labor and also capital at that time. In contrast, if than Saudi Arabia), as non-OPEC countries labor and the owners of real capital both be­ such as Britain, Norway, and Mexico greatly lieved that the energy crisis was temporary, and expanded their oil output, and as OPEC's mem­ that energy would once again be plentiful, the bers surreptitiously produced above their OPEC oil shocks may not have significantly depressed quotas and discounted below OPEC prices. Oc­ the expected future opportunities for labor and casional intermittent truces in this economic capital in the 1980s. warfare still twitch the oil markets from time to Workers and capitalists may have been un­ time, as will the end of the Iran-Iraq war, but impressed by the argument-advanced by many OPEC's power is much diminished if not totally energy "experts" in the 1970s-that the rise in gone. oil prices was a sign of dwindling worldwide In the face of these developments, neither energy sources. Instead, they may have realized Keynesians .nor monetarists have been able to that high oil prices almost certainly would in­ supply a consistent explanation for the macro­ duce energy conservation and the discovery and economic behavior of the U. S. economy since development of new oil supplies not controlled the first oil shock in 1973. Nevertheless, the by the cartel, and might stimulate the develop­ main economic events of this period can be ex­ ment of alternatives such as solar power. Ifthey plained by assuming that private decision mak- correctly perceived the energy situation as a temporary disruption caused by the OPEC car­ Professor Gonzalez teaches in the Department ofAdminis­ trative Sciences at the Naval Postgraduate School. Profes­ tel, they should have assigned a high probabil­ sor Folsom teaches in the Department ofEconomics at San ity to a recovery of energy supplies in a not­ Jose State University. Although solely responsible for the too-distant future. views expressed here, as well asfor any errors, the authors greatly appreciate comments by J. Paul Leigh, Tim Sass, Cartels rarely prevail for long against com­ and David Saurman. petitive market forces that move investment to 63

Thus the oil supply contractions of the 1970s and the resulting decline in productivity had a negative effect on real national output and in­ come, which was magnified by rational deci­ sions to shift the sale of labor and the use of plant capacity to an expected more productive future. Given the expectation that after the tempo­ rary oil shortage was over, supplies oflabor and capital would be higher than during the short­ age, households must have believed that their current income was substantially below what it would be in later years. Therefore, consump­ tion spending was relatively buoyant, leading to a steep decline in the savings rate measured against current national output and income. the activities expected to be most profitable. Moreover, even if a profit-maximizing oil cartel Inflation and Recession had a perfect and unassailable monopoly, it would not reduce oil production permanently, The supply of money-which government but would merely shift production to the future. policy has largely insulated from market If we suppose that the suppliers of labor and forces-did not adjust quickly enough to the capital anticipated the return of more plentiful slowdown in real economic activity. In fact, the energy supplies, and responded rationally to the Federal Reserve encouraged the banking system difference between existing and expected future to provide more money than the public was opportunities created by the oil crisis - and by willing to hold, in an apparent attempt to induce government policies that were at least partly more economic growth than was compatible 2 reactions to the oil crisis - by reallocating with the reduced supplies of oil, labor, and cap­ labor effort, leisure, and capital use over time, ital. The result was a rise in the inflation rate, as then the economic history of the U. S. in the the public tried to exchange excess money for 1970s and first half of the 1980s could read as goods. and services. With stagnant output and follows: 3 high spending levels, the worsening inflation The demand for labor decreased with the fall decreased the public's willingness to hold in its productivity, but real wages did not fall money even more. significantly because workers did not expect the By the end of the 1970s, accelerating infla­ oil crisis to last, and therefore they were reluc­ tion had so impaired public confidence in the tant to accept real wages lower than those they government's willingness to exercise monetary expected in the future. Instead they accepted discipline that there was talk of a flight from unemployment and greater leisure, expecting to money and possible hyperinflation. This pro­ increase their labor supply to above-normal lev­ cess continued until the Federal Reserve els in the future, when energy supplies and la­ abruptly decreased the money supply growth bor productivity had returned to normal. rate and induced the 1981-82 recession, which Decreased productivity also reduced the de­ lasted until sharply lower inflation rates finally mand for capital, and owners of capital re­ changed the expectation that inflation would get sponded in the same general way that workers worse and worse. Unfortunately, the Federal did. Capital depreciation increases with use, so Reserve reduced the money supply growth rate rather than accept lower returns, capital owners so erratically that it took unnecessarily long for opted for a lower rate of depreciation and people to realize that monetary policy had in greater excess capacity, expecting to use the fact changed. saved capacity in the future, when capital again Meanwhile, Ronald Reagan's 1980 Presiden­ would earn high returns. tial campaign suggested tax cuts that promised 64 THE FREEMAN. FEBRUARY 1989 long-run benefits but that inevitably generated increased substantially, to prepare for the ex­ short-run uncertainty: whether a tax cut would pected higher productivity of capital after the be adopted at all, what its detailed provisions return of normal oil supplies and prices. 5 But would be if adopted, and how long it would last because of the decreased saving by households before the next major tax change. As occurs and dissaving by government, this increase in with any tax cut proposal, the uncertain promise real investment had to be financed by a large of lower tax rates encouraged people to shift change in the international flow of financial economic activity to the future, when marginal capital, so that the U.S. would have a large net tax rates might be lower (and almost certainly inflow instead of its usual net outflow. Real not higher), and when the best way to structure interest rates in the U. S. rose very high in order business decisions from a tax standpoint would to attract this· net inflow of financial capital, be less obscure. which showed up statistically as a very large Unfortunately, these unavoidable incentives U. S. international trade deficit. The capital in­ to postpone productive economic activity were flow increased the foreign demand for invest­ compounded by the fact that the Economic Re­ ment assets in theU.S., raising the international covery Tax Act adopted in August 1981 phased demand for dollars and consequently lifting the its tax rate reductions so that they did not be­ dollar's international exchange rate value to un­ come fully effective until January 1984. Also, precedented heights. there were continual serious Congressional pro­ posals to repeal or modify much or all of the An Inflow of Capital 1981 tax cut, particularly its investment incen­ tives, as occurred in the Tax Equity and Fiscal The net flow of capital was from the rest of Responsibility Act adopted in late 1982. People the world into the U.S., rather than the reverse, were encouraged to postpone economic activity because the rise in the demand for investment not only until 1981, but also until the lower relative to domestic savings was more pro­ marginal tax rates became fully effective and nounced in the U.S. than elsewhere. Although the details of the 1982 tax act (and the associ­ the oil shocks affected the whole Western ated Internal Revenue Service regulations) be­ world, oil was a more important productive in­ came clear. Thus, fiscal policy contributed to put in the U.S. (Oil input per dollar of Gross the economy's below-capacity output between Domestic Product was, and is, much higher in the 1979 and 1981-82 recessions, and worsened the U. S. than in Europe and Japan.) Conse­ the length and severity of the 1981-82 reces­ quently, the oil shocks decreased productiv­ sion. ity-and contracted national income and sav­ During this period of low productivity and ing-more in the U. S. than in other important relatively high desired spending, many house­ centers of economic activity, while the need holds were credit-constrained and unable to and willingness to invest in preparation for a borrow as much as they wished. These house­ greater abundance of oil was also higher in the holds pressed for the Federal tax cuts discussed more oil-reliant U.S. above, for state and local tax cuts (for example, Other things equal, high real interest rates Proposition 13 in California and Proposition raise the time value of money and encourage oil "2.5" in Massachusetts), and for continued ex­ production out of existing fields, but simulta­ pansion of transfer payments and other govern­ neously discourage oil exploration investments ment spending, and were unwilling to let gov­ (along with other real investments). Thus the ernment pay for increased defense spending by high real interest rates of the. early and middle significant reductions in nondefense spending. 1980s hit the major oil producing states such as In short, these households-unable because of Texas, Louisiana, and Oklahoma particularly their credit constraints to dissave as much as hard, by driving oil prices even lower than they they wished for themselves-pressed for gov­ would have dropped otherwise and by decreas­ ernment dissaving. The U.S. government defi­ ing oil exploration below even the levels that cit exploded. 4 would be expected as a result of very low oil After 1982 the demand for real investment prices. RESPONDING TO THE OIL SHOCK 65

Once the expectation of lower oil prices had massive revision of the tax code, encouraged dramatically-albeit unsteadily-come true, people to postpone productive economic activ­ the results were quite straightforward: con­ ity. Tax uncertainty lasted at least until the new firmed expectations of much lower oil prices tax law was enacted in late 1986 (numerous expanded economic output and greatly reduced important regulations still remain to be written), unemployment, excess capacity, real interest and lower tax rates did not become fully effec­ rates, the government budget deficit, and the tive until January 1988. And now we face new size of the trade deficit relative to Gross Do­ uncertainties about the tax and other economic mestic Product, and dropped the international policies to be adopted by President Bush and the value of the dollar. The most recent data sug­ Congress elected in 1988. In addition, adjusting gest that our trade deficit has begun to decline to lower oil prices involves some costs: as re­ not only relative to Gross National Product, but sources are reallocated, some activities contract also absolutely. before others expand. Here ends our history. Note that our initial The economy is in transition. We need only assumption, that actors in the U.S. economy to enjoy the supply-side benefits that will con­ expected the oil shortages and resulting declines tinue to come as the economy adjusts to lower in productivity to be temporary, plays a key role oil prices and lower effective marginal tax in explaining most of the significant features rates. This prediction, of course, assumes that (also known as "problems") of the U.S. econ­ our legislators and monetary authorities will re­ omy in the 1970s and early 1980s: slow real frain from actions that would derail the current economic growth, severe inflation, high unem­ economic expansion. 0 ployment, excess capacity, low savings rates, huge government budget deficits, extraordinar­ 1. As measured by the Gross National Product Implicit Price Deflator, which rose from 94.0 in 1981 to 121.8 at the end of the ily high real interest rates, large trade deficits, second quarter of 1988. In contrast, the "crude petroleum" com­ and a very high exchange-rate value of the dol­ ponent of the Producer Price Index fell 58 percent, from 109.6 in 1981 to 46.0 at the end of the second quarter of 1988. lar. 2. The U.S. government could have taken steps, such as price Given the steady improvement in the V.S. decontrol of natural gas, to moderate the decrease in energy avail­ ability. Instead, the government decreased the supply of U.S. oil by economy since 1982, there is no need to raise continuing existing price controls (introduced by the Nixon admin­ taxes in order to deal with the government bud­ istration as a general anti-inflationary measure in 1971) on oil and petroleum products, and in 1980, by imposing windfall profit taxes get deficit, which after peaking in fiscal 1986 on domestic oil producers. then dropped by 30 percent. Nor is there any 3. Our history reads as if there were a single oil shock to the U. S. economy in the early 1970s when in fact there was an initial shock need to impose inefficient protectionist mea­ with the Arab-Israeli war of 1973, followed by a partial recovery of oil supplies, and a second shock following the Iranian revolution in sures in order to reduce the trade deficit. Higher 1979. But to treat each shock separately would add substantially to taxes (whether on personal or corporate in­ our history's length without altering its substance. come, oil, or energy), or higher trade barriers, 4. Our analysis of household behavior builds on two ideas: first, that consumption depends primarily not on transitory income fluc­ would in fact be counterproductive. tuations but on expected permanent or "life-cycle" income; second, The impatient may argue that because the im­ that credit constraints can significantly alter households' abilities to spend as much as would be appropriate given their expected perma­ provement in the U. S. economy since 1985 has nent or "life-cycle" income. The first of these ideas was introduced been not only steady but also slow, our opti­ by Milton Friedman (A Theory of the Consumption Function, Princeton, 1957), and then in a series of papers by Franco mism is too reminiscent of Pollyanna's. But the Modigliani, Richard Brumberg, and Albert Ando (see, for example, sluggishness of the economy since 1985, as in Modigliani's "The Life Cycle Hypothesis of Saving, the Demand for Wealth, and the Supply of Capital," Social Research 33, 1966). 1980-82, can be explained easily within the The modifications necessary to incorporate credit constraints into framework of this paper. In May 1985, after these expected permanent "life cycle" income models are being developed by Thayer Watkins, in papers that have not yet been digesting angry criticisms of V.S. Treasury tax published. 6 5. Some real capital investments undoubtedly were delayed as reform proposals issued in late November investors waited to see whether Congress would respond to the 1984, the Reagan administration seriously pro­ government budget deficit by repealing the lower tax rates enacted posed massive tax law revision and lower rates. in 1981 and raising taxes even more than they were raised in 1982. 6. See Charles E. McClure, Jr. and George R. Zodrow, "Trea­ The promise of lower future marginal tax rates, sury I and the Tax Reform Act of 1986: The Economics and Politics together with the enormous uncertainties gener­ of Tax Reform," Journal of Economic Perspectives, 1 (Summer 1987), pp. 37-58. The same issue contains a number of related ated by very different alternative proposals for papers. 66 The Entrenchment of the State by Matthew Hoffman

ikhail Gorbachev's new themes for It is wrong, however, to conclude that the the Soviet Union, glasnost (open­ failures of the stated goals of socialism, and the M ness) and perestroika (reform), and resulting public dissatisfaction with the system, their scant but widely publicized concrete man­ are the causes of the reformation movement ifestations, have caused a great stir in the West. currently under way in the Soviet Union. In Speculation about what has caused the Soviet reality, the popularity of an entrenched Com­ leaders to attempt such changes varies widely, munist government is not a factor in its behav­ but one of the most popular theories is that they ior. To such governments, public opinion is ir­ are desperate: their empire is crumbling from relevant, because it is for all practical purposes within, and if they do not change their system impossible for the populace to rebel success­ and relax controls, they will lose their power fully against their rulers. In fact, no major Com­ completely. munist government has ever been overthrown To classical liberals, this line of reasoning is from within. To discover why this is so, we appealing, for it is consistent with the principles must analyze the system. of the free market. The lack of productivity in­ centives, supplied in a private property order by The Use of Terror the availability of profit, as well as the ineffi­ ciency ofa vast, corrupt, bureaucratic system of One of the principal ways a Communist to­ economic management devoid ofthe benefits of talitarian regime maintains its grip on the pop­ monetary calculation, will cripple the economy ulace is the unconstrained use of terror. of any socialist nation. As Ludwig von Mises The Bolshevik Party, for instance, had only wrote, "In the face of the ordinary, everyday an estimated 200,000 members when it over­ problems which the management of an econ­ threw Russia's Kerensky regime in 1917.2 omy presents, a socialist society would stand Aleksandr Kerensky was a member of the So­ helpless, for it would have no possible way of cialist Revolutionary Party, which had the sup­ keeping its accounts. ,,1 port of vast numbers of peasants, and received The theoretical unworkability of socialism is, 58 percent of the vote in the elections of the without a doubt, consistent with socialist expe­ Constituent Assembly, a congress elected by rience. To dispute this would be to contradict universal suffrage. 3 The Bolsheviks quickly the implications of almost all available data abolished the Assembly, but the fact remained gathered from numerous failures of socialism that the majority was clearly against them. around the world. How, then, did they maintain their power? A short lull followed the Bolshevik: coup, but Mr. Hoffman is a senior in the media department of the High Schoolfor the Performing and Visual Arts in Houston, preparations to consolidate their power began Texas. almost immediately. On December 20, 1917, 67

Lenin established the Cheka, a secret police or­ After a Communist government secures con­ ganization designed to "combat counterrevolu­ trol over a people, it usually sets out to con­ tion, speculation, and sabotage.' ,4 struct the utopia it has promised them. This of­ Several months later, after a failed assassina­ ten satisfies the socialistic intellectuals who tion attempt directed at Lenin, the Central Com­ may have been spared in the initial purges, as mittee resolved that, "To the white terror ofthe well as the masses, who often believe the party enemies of the Workers' and Peasants' Govern­ line. Many are convinced that their economic ment the workers and peasants will reply by a and political hardships are merely temporary, mass red terror against the bourgeoisie and its and will fade away as the Communist paradise agents. ,,5 evolves. In the new atmosphere offear and lofty With this decree, the Cheka was unleashed promises, dissent tends to abate. The govern­ upon the population, indiscriminately arresting ment then will attempt to implement its poli­ and torturing thousands of people, especially cies' which usually include the complete aboli­ intellectuals. They paralyzed the country with tion of private industry and free trade, the fear, eliminating trust by creating false resis­ collectivization of farmlands, and bureaucrati­ tance organizations, and extracting "con­ zation of the economy. fessions" from victims at any cost. 6 In China, after the initial purge and the end of The Cheka, today called the KGB, has grown the Korean War, the government set out to do over time, and now penetrates every sphere of all these things, as did the Soviet Union after its Soviet society. It contains hundreds of thou­ Civil War. The Soviets enacted programs such sands, if not millions, of people and maintains as "War Communism" and the "New Eco­ a vast network of informants. 7 Dissidents are nomic Policy" (which allowed limited private regularly arrested by the KGB and tortured in enterprise), and finally settled on their system mental institutions. 8 The country is held in an of five-year plans. Mao Tse-tung attempted iron grip of fear. "the Great Leap Forward," the failure ofwhich The use of terror to consolidate power has ultimately led him to unleash the "Cultural been adopted by many, if not all, Communist Revolution. " regimes. The Chinese Communists, after prom­ None of these policies stimulated the econo­ ising to maintain private property and free en­ mies of the two countries or improved the citi­ terprise in 1949, began in 1950 a program of zens' standards of living. However, they did mass terror against property owners and put the economies under strict central control, "counter-revolutionaries," in which millions exercised through immense bureaucracies. To­ died. 9 The Khmer Rouge annihilated approxi­ day, for example, the People's Republic of mately one-third of the Cambodian people dur­ China has approximately ten million govern­ ing their four-year reign. to ment officials. 12 George Orwell, who ironically was a social­ Governments of such size and economic ist, had a keen understanding of the ability of power are not overthrown. The only coups that totalitarians to maintain their power, despite a take place do not result from mass uprisings, lack of popular support. He modeled the work­ but from struggles within the bureaucracy. Vik­ ings of his futuristic police state in 1984 after tor Suvorov, a defector from the Soviet Army, the Bolsheviks, who practiced most of the re­ describes gigantic hierarchical factions within pressive measures that Orwell's imaginary Oce­ the government, supported by a system of ania used. Orwell has the novel's antagonist interdependency. 13 These struggles may lead to state: "Obedience is not enough. Unless [a government manipulation of the general popu­ man] is suffering, how can you be sure that he lace, often using mob psychology. is obeying your will and not his own? Power is When Stalin wished to collectivize Soviet in inflicting pain and humiliation. Power is in farms in the late 1920s and early 1930s, he met tearing human minds to pieces and putting them with great resistance from the upper class of together again in new shapes of your own peasants (the kulaks) as well as the vast middle choosing. ',11 class (the seredniaks). Both groups had nothing 68 THE FREEMAN. FEBRUARY 1989 to gain from the collectivization of their lands. tics of the totalitarian nations that facilitate the However, the lower class, called bedniaks, entrenchment of power. were quite poor and favored the plan. Our government continues to send its tenta­ Stalin turned the bedniaks against the other cles deeper and deeper into the nation's eco­ groups, allowing them to attack the other peas­ nomic life. The federal, state, and local gov­ ants and take what they would. A great civil war ernments employ almost 16.7 million people, erupted in the rural areas of the Soviet Union, about 7 percent of the entire population! 17 and Stalin used the opportunity to force the col­ The collectivization and factionalization of lectivization. In doing so, he caused a famine our society continue, as special interest groups that killed between 5 and 10 million people. vie for coercive privileges, power, and govern­ Yet, they did not rebel against the government ment largess. Today, 90 million Americans de­ itself. Stalin had transformed a statist imposi­ pend on the government for support. 18 tion into a conflict between groups. 14 In addition, the state controls our children's When the paranoid Stalin perceived the intellectual development through compulsory growing power of his rivals, he began to elim­ education laws, public schools, and school li­ inate them one by one, in numerous assassina­ censing. The regulation of thought is essential tions and bogus trials. In order to consolidate to the entrenchment of the state. his personal control of the state, he engineered If we do not wish to meet the Orwellian fate the Great Terror, which resulted in millions of of the citizens of the Communist nations, we deaths. Under these horrible political condi­ must halt the growth of our government, and tions, the people did not rebel. reverse the coercive, collectivist trends that Similarly, with the failure of Mao Tse-tung's threaten to deliver us to a potentially eternal "Great Leap Forward" in China, various fac­ tyranny. Walter Cronkite wrote in his preface to tions within the government suggested revising 1984: "It has been said that 1984 fails as a policies in order to cope with the economic prophecy because it succeeded as a warning. problems of the country. Mao perceived this as Well, that kind of self-congratulation is, to say a direct threat to his power, and struck at his the least, premature. 1984 may not arrive on enemies within the party by unleashing the time, but there's always 1985. ,,19 0 "Great Proletarian Cultural Revolution" in 1. Ludwig von Mises, Liberalism (Irvington-on-Hudson: The which children and teenagers were organized in Foundation for Economic Education, 1985), p. 72. ,'Red Guard" groups, and told to annihilate 2. Robert E. Elson, Prelude to War (New York: Time-Life Books, 1976), p. 45. anything "traditional," "luxurious," or 3. Ibid., p. 53. ,'revisionist. " They swept over the country in 4. William R. Corson and Robert T. Crowley, The New KGB (New York: William Morrow and Company, 1985), p. 31. what may have been the most phenomenal orgy 5. Edward H. Carr, The Bolshevik Revolution 1917-1923, vol. 1 of destruction in history, and successfully (New York: W. W. Norton and Company, 1952), pp. 151-183. 6. Corson, pp. 41-42. purged the party ranks of anti-Maoists. The 7. John Barron, KGB Today: The Hidden Hand (New York: economy was left in ruins. The people, how­ Berkley Books, 1985), p. 385. 8. Ibid., pp. viii-ix. ever, did not rise up against the government. IS 9. H. E. Chen, The Chinese Communist Regime (New York: As the antagonist in 1984 said: "It is time for Frederick A. Praeger, 1967), pp. 3-4. 10. "A Mass Murderer's Exit," Maclean's (September 16, you to gather some idea of what power means. 1985), p. 22. The first thing you must realize is that power is 11. George Orwell, 1984 (New York: New American Library, 1949), p. 220. collective." 16 12. Encyclopaedia Brittanica, 1986, vol. 16, pp. 57-58. 13. Viktor Suvorov, Inside the Aquarium (New York: Berkley Books, 1986), pp. 81-82. 14. Basil Dmytryshyn, USSR: A Concise History (New York: Charles Scribner's Sons, 1984), pp. 170-171. Entrenchment in the 15. Anne F. Thurston, Enemies ofthe People (New York: Alfred A. Knopf, 1987). United States 16. Orwell, p. 218. 17. U.S. Department of Commerce, Statistical Abstract of the Because of the growth of government power United States (Washington D.C., 1987). 18. Hans F. Sennholz, Debts and Deficits (Spring Mills: Liber­ in the United States during the last century, tarian Press, 1987), p. 11. America has acquired some of the characteris- 19. Orwell, p. 3. 69

Blockading Ourselves

by Cecil E. Bohanon and T. Norman Van Cott

lockading enemies is a standard wartime The adverse economic effects ofthe blockade ••. tactic. The objective, of course, is to on the South were twofold. First, the blockade Bprevent an adversary from trading with made imported goods less available, so that the other countries. At the same time, warring na­ Confederacy had to eliminate certain uses to tions try to keep their own seaports open. In which imports heretofore had been put. The re­ light of this centuries-old wartime tactic, it is sources the Confederacy previously had been curious that nations at peace regularly blockade using to pay for these imports had to be redi­ themselves by pursuing policies which restrict rected to less-preferred goods. Second, the im­ imports. The irony of nations turning a wartime ports that did slip through the blockade came at weapon on their own citizens during peacetime a greater cost. More costly imports meant the has escaped attention in the flood ofrecent com­ Confederacy had to send more of its production mentary on international trade. to foreigners as exports to obtain these imports. One might object to this wartime/peacetime Today's media pundits sing the praises of ex­ eontradiction on the grounds that it is an imper­ ports and consistently denigrate imports. Fortu­ fect analogy. Note, however, that the goals of nately for the North, Abraham Lincoln and his wartime blockades and peacetime import re­ Secretary of the Navy, Gideon Welles, knew strictions are similar in that both seek to prevent better. The purpose of the blockade from the foreign goods from entering a particular mar­ North's point of view was to reduce the Con­ ket. Logical consistency implies that if wartime federacy's access to imports. Admittedly, the blockades hurt enemies, peacetime restrictions North also tried to prevent Confederate exports hurt our own economies. Alternatively, if when, for example, it intercepted cotton-laden peacetime restrictions improve a nation's eco­ ships bound for England. But these export in­ nomic strength, wartime blockades are treason­ terruptions served the North's interest only be­ ous. cause they reduced the Confederacy's ability to pay for imports. The North surely would have been willing to permit Confederate exports, A Lesson from U.8. History provided it could have completely eliminated During the U.S. Civil War, the North block­ Confederate imports. Popular wisdom aside, aded the major seaports ofthe South. Historians exporting without importing is counter to a na­ generally agree that the South's economic tion's well-being; it reduces the availability of strength was sapped by the blockade. Entering goods and services to the inhabitants. and leaving Confederate seaports became more From the time of Adam Smith and David costly, usually requiring the skills of blockade Ricardo, economists have carried the torch for runners. free trade. It is common to hear people say that Professors Bohanon and Van Cott teach in the Department economists have won all the formal debates on ofEconomics at Ball State University, Muncie, Indiana. the subject, but have been steady losers in the 70 THE FREEMAN. FEBRUARY 1989

egy would be to encourage neutral nations to trade with your enemies. Indeed, why not sub­ sidize your own citizens' trade with enemy na­ tions, since it supposedly saps your enemies' economic strength? Any schoolchild, of course, can see the folly of this logic. Such policies risk national disas­ ter, which in this case translates into personal disaster for the policy-makers. For this reason, political arena. Curiously, economists have not the lessons of Smith and Ricardo necessarily trumpeted the fact that governments' wartime loom large in the calculations of wartime poli­ actions are consistent with the free-trade doc­ ticians. When viewed in this perspective, the trines of Smith and Ricardo. Perhaps the econ­ contradiction becomes more understandable. omists' reticence reflects what Milton Fried­ At the risk of belaboring the wartime/ man, in The Optimum Quantity ofMoney and peacetime imagery, the contradiction is similar Other Essays, describes as a tendency among to the foxhole religious conversions that occur economists "to discard war years as during every war. Soldiers under heavy fire abnormal. ', promise God they will "walk the straight and We submit, however, that government offi­ narrow" if God will get them out of their pre­ cials' wartime actions should not be over­ dicament. Once safe, however, they return to looked. Indeed, the contradiction between their their "backsliding" ways. So it is with govern­ wartime and peacetime actions can be explained ment officials and international economic pol­ in terms of the first principles of economics. icy. Peace reduces their personal costs of acting These same principles suggest, moreover, an contrary to national economic efficiency. important consideration if the dream of free trade is to become a reality. Raising the Costs Why do government officials behave as they do? The personal benefits and costs to politi­ Aside from pointing out the logical inconsis­ cians obviously playa key role. Peacetime im­ tency of protectionist rhetoric, what does the port restrictions benefit politicians because they foregoing tell us? Perhaps the salient point of can confer privileges on domestic industries the contradiction relates to how personal costs that are facing foreign competition. Politicians influence government policy-makers. This in bear little personal cost because consumers tum suggests that the path to reform of interna­ harmed by the restrictions are spread through­ tional economic policy must go beyond merely out the economy and are too unorganized to be explaining the economics of trade, ·as desirable politically important. Politicians cover their as this may be. That is, essential to international tracks with rhetoric to the effect that imports economic reform is the idea that peacetime pro­ "weaken the economy," "deter economic tectionism must be personally more costly to growth, " and "destroy jobs." government policy-makers. It is quite likely

However, if one believed this political rhet­ that reform along v these lines encompasses oric, one would never suggest a wartime block­ changes that are of a quasi-constitutional or ade. Quite the opposite-a better wartime strat- constitutional nature. 0 71

Popper, Hayek, and Classical Liberalism by Jeremy Shearmur

arl Popper, who turned 86 years old edge. In Popper's account, science is the this past July, is justly famous for his product not of induction, but of a process of K work in the philosophy of science. As conjecture and ofrefutation. Science, which for a young man, Popper was inspired by the way Popper is probably mankind's greatest cultural in which Einstein called into question the ideas achievement, always remains conjectural in its of Isaac Newton. Einstein put forward a theory character, and human beings are seen as ines­ that, if true, explained why Newton's work had capably fallible. been so successful. From Einstein's theory, All this also led Popper to a more general however, there could also be deduced conse­ view of our condition. Popper sees human be­ quences that differed from those of Newton's ings, like other animals, as involved in prob­ theory; predictions that could be put to the test. lem-solving. We have various inbuilt expecta­ Now Newton's Principia was possibly the tions and mechanisms by which we interpret the best-confirmed scientific theory of all time. Al­ world around us. But our expectations and our exander Pope, when composing an epitaph for interpretative mechanisms are fallible. We need Newton, wrote: to learn by trial and error. Unlike animals, how­ ever, it is possible for man, using the descrip­ Nature and Nature's laws lay hid in night, tive and argumentative functions of his lan­ God said: Let Newton Be! and all was light. guage, to construct a world of culture, outside It would scarcely be an exaggeration to say of himself, in which he is able to externalize, that, as more and more impressive confirma­ and thus to criticize, his knowledge. By this tions of Newton's work were discovered, a ma­ means, as Popper has often said, men differ jor problem for philosophers became: How can from the animals, because it is possible for man we explain that, on the basis of experience, we to let his theories die in his stead. have knowledge oftruths such as Newton's the­ Popper is also well-known for his writings on ory. political philosophy, notably his The Open So­ Popper reflected on the character of Ein­ ciety and Its Enemies. In this work, written dur­ stein's achievement, and was led to a new ac­ ing the Second World War, Popper drew upon count of the development of scientific know1- themes from his philosophy of science. He crit­ Jeremy Shearmur was educated at the London School of icized those who, like Plato, wished to claim Economics, University of London, where he worked for power on the grounds that they had access to eight years as Assistant to Professor Sir Karl Popper in the secure knowledge. And he criticized those like Department ofPhilosophy. His Ph.D. dissertation was on the political thought ofF. A. von Hayek. He is currently a Marx who had allowed their essential humani­ Senior Research Fellow at the Institutefor Humane Studies, tarianism to be channeled into directions that George Mason University, Fairfax, Virginia 22030. were hostile to the Open Society, because they The author would like to thank Sheldon Richman and Pamela Shearmur for their comments on an earlier version held false theories of knowledge and of history. ofthis paper. Popper's Open Society contains much detailed 72 THE FREEMAN. FEBRUARY 1989 critical discussion of both Plato and Marx. In But is it the case that the logic of Popper's addition, it contains Popper~s own picture of an argument points toward one rather than another Open Society. Popper is here concerned with form of social organization? I believe that, per­ the freedom and well-being of all citizens. He haps despite the views of the younger Popper, pictures a democracy as functioning very much the logic of his argument points toward a form in the spirit of the scientific community. Poli­ of social organization in which the market plays tics, for Popper, is a matter of our discovering a major role, and politics a rather restricted one. problems and putting forward tentative solu­ I would thus suggest that the best way of mak­ tions to them. Just as in science, we should then ing use of Popper's ideas about politics would hold our conjectures open to criticism-to feed­ be through those ideas that have been advocated back and critical responses from all citizens­ by his old friend, Friedrich Hayek. so that we can most effectively discover where Popper and Hayek have influenced one an­ things are going wrong. other in many ways. Hayek has told us that his views on science were importantly changed as a Learning from Our Mistakes result of his contacts with Popper. And Pop­ per's political writings seem to bear the mark of When Popper was writing, he considered that Hayek's work (notably in his appreciation of the big issue after the war would be the defense the importance of markets and of a legal frame­ of the ideals of a free society against those who work for government action). 4 There are certain called them into question, from the left and common themes to their writings. Both see hu­ from the right. Today, however, we may look man freedom and well-being as of the greatest to Popper's work with a different question in importance. They both see all human beings as mind. What form of social organization would fallible, and give great weight to the idea that, best enable us to learn from his insights about in designing social institutions, we should put a human fallibility and the need for us to learn premium upon our ability to learn. They both from our mistakes? believe that, in an affluent society, we have an Considered from this perspective, Popper's obligation to help those who need it. And they work does not fit too easily within the usual both recognize the importance of our being able approaches to politics. Popper, when writing to change governments through elections, The Open Society, showed great sympathy for rather than only by force. working people. He had no time at all for con­ There are differences between them, how­ servatives who felt that working people were ever. Hayek views the market and a liberal con­ unfit for citizenship, and he was also critical of stitutional order as a mechanism, by which in­ the policy of "laissez faire. " At the same time, dividuals can learn by trial and error. For Popper strongly emphasized the importance of Popper, learning by trial and error in social af­ markets and of the government's acting only fairs is made more the responsibility of govern­ through a legal framework. ment. Politicians and civil servants would diag­ Bryan Magee, at one time a member of the nose our problems and offer solutions to them. British Labour Party, has argued that "the Democratic politics is regarded as a mechanism young Popper worked out what the Philosoph­ by which they may learn that they have got ical foundations of democratic socialism should things wrong. be. ,,1 And Popper has been hailed as a kind of But which is the most effective means secular patron saint of social democracy by a through which we can learn in the realm of number of leading political figures, especially social affairs? Let us contrast the behavior of in West Germany. 2 Magee himself notes that the entrepreneur and of the politician. Popper's own views have changed and that he The entrepreneur wishes to discover if he is would now describe himself as a liberal in the wrong. Ifhe has backed a bad idea, he will want "old-fashioned" sense. And Popper, in his au­ to discover this as quickly as possible and aban­ tobiography, has said that "if there could be don it, because a bad idea will lose him money. such a thing as socialism combined with indi­ He cannot peddle his bad ideas to people, be­ vidual liberty,I would be a socialist still.,,3 cause they will buy his ideas-his goods----only POPPER, HAYEK, AND CLASSICAL LIBERALISM 73 ifthey consider them worthwhile. And while no masters-whether politicians or civil ser­ one likes to discover that they have made a big vants-in what respect they have got things mistake, the entrepreneur has every incentive to wrong, or what in our view the trade-offs abandon old failures and to move on to new and should be between, say, expenditure on one better ideas. He also has every incentive to try thing or another, and letting us keep our money out bold and daIing ideas. There is nothing in our own pockets. wrong with his doing so, for only those citizens The lesson in all this, it seems to me, is that who choose to adopt his idea will share the risk. we should put into the hands of government And there are excellent mechanisms to tell the nothing that we can organize by other means. entrepreneur when he has made a mistake. And we should also be reluctant to take from Contrast with this the politician. When did individuals the power of deciding what they you ever hear a politician who still had an elec­ want and to give it to anyone else. Once that tion to fight admit that he had made a serious power is shifted, we move decisions away from mistake? And if he did admit it, would he ever our most effective mechanism of accountabil­ be allowed to forget it? Unless he was very ity: accountability to individuals in the market­ lucky, it would dog him to his grave. Indeed, place. politicians typically die with their mistakes. Many years ago, Friedrich Hayek came to the And so--they seldom admit they are wrong. If conclusion that it was not socialism (in which they are wrong, they will attempt to cover it up. he had believed as a young man), but institu­ And if they are in power, they will be able to tions in the tradition of classical liberalism that use the mechanisms of government to force would do most for the well-being of his fellow their errors onto the rest of us, while telling us citizens, especially the poor. It seems to me that that they are successes. Above all, politicians it is the tradition of classical liberalism, as ex­ are interested in power: and thus, in democratic emplified by Hayek's work, that also offers us countries, in their popularity, and in not saying the best institutional model for putting into anything out of tum. After spending over a year practice Karl Popper's insights about our need as Director of Studies of a public policy insti­ to learn by trial and error in political and social tute, I was still amazed by the unwillingness of affairs. 0 politicians to say what they really felt about anything, even in private conversation. In a country in which government plays a 1. Bryan Magee, Popper (London: Fontana Books, 1973), p. 84. 2. Cf. G. Luehrs et al. (eds.) Kritischer Rationalismus und So­ major role, much ofthe power is in the hands of zialdemokratie, I and II (Berlin and Bonn-Bad Godesburg, 1975, civil servants. Civil servants, while usually 1976). 3. Karl Popper, Unended Quest (London: Fontana Books, 1976), dedicated to their work, are creatures of rou­ p. 115. tine. And there simply do not exist mechanisms 4. It is largely in this context that Popper refers to Hayek in his notes to The Open Society and Its Enemies. for assessing whether most of what government 5. If this seems an exaggeration, I would suggest the perusal of actually does should be undertaken at all, let the discussion of rationality and decision-making in any standard text on policy making in the public sector, such as Christopher Ham alone whether it is being undertaken effec­ and Michael Hill, The Policy Process in the Modern Capitalist State tively.5 (Brighton: Wheatsheaf Books, 1984) or Brian Hogwood and Lewis Gunn, Policy Analysis for the Real World (Oxford: Oxford Univer­ Above all, it is difficult for us to tell our sity Press, 1984). 74

Islamic Capitalism: The Turkish Boom by Nick Elliott

nce dismissed as the "sick man of In Istanbul, children are everywhere. Turkey Europe," Turkey is now building a is still emerging from a Third World culture, in Oprosperous future. The Turkish econ­ which children are a valued part of the family omy has been growing at a faster rate than that economy. They go to work in the family busi­ of any other country in the OECD (Organiza­ ness, and they provide for their parents in old tion for Economic Cooperation and Develop­ age. In Istanbul, young children work in shops, ment)-including Japan, Great Britain, and the sell packets of postcards to tourists, sell bird­ United States. The Turks seem to have evolved seed to visitors who want to feed the pigeons, or a successful union of Islam and capitalism, not learn the trade of shoe-blacking. always a comfortable mix. To the visiting Briton, the sight of a small My own impressions were formed on a recent child cleaning shoes clashes with the taboos we trip to Istanbul, during which I witnessed the have constructed around "child labor." In Brit­ frenetic commercial activity that is fueling the ain we have legislated to make children attend Turkish economy. Istanbul is a city with a fast school until the age of 16. We force children to pace, a whirlwind of people hurrying about be taught about kings and queens and glacial their business, working hard. striations, and to go on cross-country runs. For a country that is still relatively poor, it is Many of the children who pass through the sys­ a surprise to find no beggars. Instead, everyone tem pick up little in the way of useful knowl­ works, in whatever niche he can find. To the edge or values. Western eye, some of these jobs appear very In Istanbul, children start learning early how menial: outside the railroad station a row ofmen the world works. They learn the rewards ofhard crouch over jars of polish, offering to shine work and application. They learn something shoes. Everywhere men and boys squat beside about the pressures and pleasures of indepen­ flagons, with a drink of cold water for sale. To dence and responsibility. The sight reminded the Turk, these simple jobs are a way to make a me of the bootblack hero in Horatio Alger's living; and all of these people in their small Ragged Dick. ways are contributing to the economic expan­ Younger Turks have realized that a large part sion. of their future will depend on working with for­ Turkey needs a booming economy to support eigners from the West. Many of the young chil­ a booming population. The current population dren have learned the benefits of being able to of52 million may reach 75 million by the end of sell in more than one language. Stopping at a the century. postcard shop in Istanbul, I was surrounded by a group of small boys who asked me where I Mr. Elliott works for the Adam Smith Institute, a free­ was from, and proceeded to tell me in fluent market think tank in London. He is a regular contributor to the journal Economic Affairs, published by the Institute of English what I could buy. When a German Economic Affairs. stopped to look, they spoke to him in German. 75

These boys had learned their skills from finding the trappings of Western materialism. A con­ a use for them in everyday life. trast it may be, but it is also a compliment to the Istanbul is a city that bridges two continents, tolerance ofTurkish society. Turkey remains an in more than the geographical sense. On Tur­ Islamic country-a member ofthe Islamic Con­ key's eastern border is Iran, the focus ofa world ference Organization-but Turkish society re­ fundamentalist revival, a movement for vigor­ tains a flexibility that can admit deviation. It is ous and uncompromising imposition of Holy marked by an openness that has never been Law. In Istanbul women cover their faces, and more valuable than today. the wailing from the mosques resonates around From the East, Turkey must incorporate the the city, part of a culture that stretches across pull of the fundamentalist revival, popular in Islamic Asia. Yet modem Turkey is founded universities. From the West come the attrac­ upon the ideas of Kemal Atatiirk (1881-1938), tions of liberalism and permissiveness. Poten­ who sought to make Turkey a secular republic. tially a conflict of values that could fracture The Turks are serious about their religion, but their society, this meeting of East and West is recognize that it has its place. more likely to be the making ofmodem Turkey. One reason why Moslems are sometimes sus­ Turkey can find prosperity and status as the picious of capitalism is that it can disrupt the go-between in trade and international relations. Islamic pattern of society. Capitalism entails an Some Turks frown upon the changes that extension of choice, as its foundation and as its have accompanied new riches. In Britain some result. By making available new arrays of ma­ observers already have started to lament the loss terial goods, it tempts the Moslem with Western of the "simple life" in Turkey. Their fears are values. Capitalism pays no respect to hierar­ groundless: Turkish culture is too deep to be chies of power. It allows individual people to subsumed by Western life. To most Turks the live independently of government, and dis­ future must be an exciting prospect, in a country perses power to the many. It opens up new net­ gaining respect and influence. works of communication, beyond the critical Many Third World governments have foun­ supervision of the guardians of Holy Law. dered in their attempts to modernize their coun­ Where Islam is imposed as a rigid code of uni­ tries by pursuing false ideas to unworkable con­ formity, capitalism is a threat. clusions. Turkey is one of the better examples, In Istanbul, alongside the mosques are shops a country where progress is succeeding by be­ selling Japanese cameras. In amongst the sym­ ing left to evolve through the efforts of individ­ bols ofa traditional and ancient culture you find uals. 0 76

Markets and Morality by Peter J. Hill

n terms of sheer ability to provide goods thereby creating a market. This market process and services, most people would agree that is not mandated by anybody and requires only a I capitalism wins hands down when com­ well-defined and enforced system of private pared with alternative economic systems such property rights in order to exist. as socialism. Even so, many critics of private Inherent in capitalism is the ability to: pro­ property and markets prefer a more socialistic vide freedom of choice, encourage cooperation, system or at least one that places more power in provide accountability, create wealth for large the hands of the government. They argue that numbers of people, and limit the exercise of although capitalism delivers the goods in a ma­ excessive power. terial sense, it doesn't deliver them morally. That is, capitalism doesn't satisfy certain basic Freedom of Choice standards of justice. This article challenges that position by exam­ A market system assumes very little about ining several areas where moral issues weigh in the ideal way to organize economic life. Other on the side of the marketplace. This is not an societies may mandate cooperatives, or com­ argument that a society based on free markets is munes, or cottage industries, or they may pro­ the same as a moral society; people can behave hibit them. But a system of private property morally or immorally in a free market system offers a wide range of possible forms of orga­ just as they can in other systems. However, nization. If cooperatives are desirable, they can capitalism does have a number of moral be used; but other forms for organizing produc­ strengths that are lacking in other economic sys­ tion are also permissible. And, in fact, the in­ tems. dividual who wishes to ignore the market or Although the "market" is often considered construct alternative institutional arrangements an alternative to central planning or state own­ is perfectly free to do so. ership· of the means of production, it is not a Throughout history certain groups have cho­ rigid institutional order like socialism or com­ sen to operate largely outside the market. One munism. What we call capitalism or a free­ such group, the Hutterites, lives in the northern market society is a society based upon private Great Plains of the United States and Canada. property rights. Individuals may own, buy, and The more than 200 Hutterite agricultural colo­ sell property (including their own labor) if they nies have been remarkably successful in main­ do not do so fraudulently, and they are free to taining their identity and expanding their popu­ do what they want with their property as long as lation. Yet they are far from capitalistic. All they do not harm others. Individuals may de­ property within the Hutterite colony, except the cide to exchange their property with others, most basic personal items, is owned in com­ mon. All income is shared equally within the Peter J. Hill is George F. Bennett Professor ofEconomics colony, and no wages are paid for labor. at Wheaton College (Illinois) and a Senior Associate ofthe The Hutterites were able to establish their Political Economy Research Center (PERC) in Bozeman, Montana. This article was originally published as part of colonies without prior approval from anyone in the PERC Viewpoints series. society. No committee, government agency, or 77 group of well-meaning citizens had to meet and flict. People who disagree with the board's de­ decide if the Hutterite lifestyle should be al­ cision march, write letters to the newspaper, lowed. The freedom to choose such alternatives lobby, hire lawyers, and, in general, become is unique to a free-market society. quite exercised. This is almost inevitable when In contrast, a centrally planned society does highly emotional issues are involved since any not grant freedom to those who want to engage collective decision, including one made by ma­ in market transactions. It limits voluntary trade jority vote, is likely to be contrary to the wishes in the interest of some other goal, and undoubt­ of a minority. Thus, the decision-makers are in edly would constrain groups like the Hutterites a no-win situation. If the board allows creation­ if the people in power disliked the Hutterites' ism to be taught, evolutionists will be irate. If form of organization. they decide to teach evolution, creationists will be outraged. Cooperation vs. Conflict In contrast, consider the decision to be veg­ etarian or carnivorous. There are individuals A free-market, private-property system usu­ who feel every bit as strongly about this issue as ally is labeled competitive. Yet one ofthe major those involved in the origins-of-mankind de­ advantages of the market system is that it en­ bate. Nevertheless, there is little chance that a courages cooperation rather then mere compe­ decision about diet will generate public contro­ tition. Competition does exist in a market-based versy. Diet is not determined by a collective system, but competition is prevalent in any so­ decision-making process, so people can interact ciety in which scarcity exists. rather peacefully about it. The person who be­ In the marketplace successful competitors co­ lieves that avoiding meat is healthier or morally operate with, or satisfy, others in the society. In correct can pursue such a diet without arguing order to succeed in a private property system, with the meat eater. Advocates of a meat diet individuals must offer a "better deal" than their can find producers and grocery stores eager to competitors. They cannot coerce people to buy satisfy their desires. In fact, vegetarians and the their products or services. They must focus meat eaters can shop at the same stores, pushing their creative impulses and energy on figuring their carts past each other with no conflict. It is out ways to satisfy others. The person who does the absence of collective decision-making that this best is the one who succeeds in the market. permits this peaceful proximity. Thus, participants in a market economy­ The social harmony that results from a mar­ buyers and sellers~ontinually look for areas ket order should be of great interest to those of agreement where they can get along, rather concerned with moral issues. People of very than concentrating unproductively on the areas different cultures, values, and world views can of disagreement. live together without rancor under a system of In contrast, under a collective order, rewards private rights and markets. A market order re­ frequently come from being as truculent and quires only minimal agreement on personal uncompromising as possible. With collective goals or social end-states. decision-making those in stronger political po­ In contrast, alternative institutional orders are sitions have little reason to look for areas of more oriented toward centrally determined agreement; generally, they have a better chance goals. The very existence of such orders re­ to succeed by discrediting the opposition to jus­ quires a more general agreement on what is tify their own position, compromising only "good" for society. A centrally planned system when others are strong. not relying on willing exchange of work for pay A good example of the dissension caused by must direct individuals to labor to achieve cer­ collective decision-making is the controversy tain ends, and those ends are not necessarily the over teaching the origins of mankind. School same as workers or consumers would choose boards-which must make collective deci­ freely. For instance, in the Soviet Union very sions-generally have to decide to teach either little freedom is allowed in occupational choice, that human beings were created or that they and once one has been assigned a job it is very evolved. Such decisions are fraught with con- difficult to move to a different one. 78 THE FREEMAN. FEBRUARY 1989

Another reason that a system based on pri­ tion have come about primarily through the cre­ vate property rights encourages social harmony ation of wealth, not by taking from others. is that it holds people accountable for what they Under a set of well-defined and enforced do to others. Under a private property regime, a property rights, the only transactions people en­ person who injures another or damages' anoth­ gage in are "positive-sum" or wealth-creating er's property is responsible for the damages, transactions, those that occur because all parties and courts enforce this responsibility. The mere to the transaction believe they will be better off knowledge that damage must be paid for leads as a result. In a society where people have se­ people to act carefully and responsibly. When cure rights to their property, they will exchange people are accountable for their actions, indi­ property only voluntarily, and they will do so vidual freedom can be allowed. only when they see the potential for improving In contrast, a centrally planned system holds their situation. The people they are dealing with individuals far less accountable. Although in will do the same-engage in transactions only theory the government is charged with enforc­ when they expect to be better off as a result. ing people's rights, rights in such a system are A zero-sum world, where one accumulates ill-defined and the government can and does more wealth solely by decreasing the wealth of respond to the wishes of powerful people with others, occurs only in the absence of property little regard for the rights or wishes of the pow­ rights. In such a world people-either by them­ erless. Even in democracies, if government has selves as brigands and thieves or through the the power to grant favors, powerful groups try use of governmental power~an obtain com­ to use the government to take what they want. mand over resources without obtaining the con­ What they take may have been worth far more sent of the owners of the resources. to those from whom it was taken. Some critics argue that many market transac­ tions are not voluntary, that some people are Zero-Sum vs. Positive-Sum forced by circumstances to enter into transac­ Views of the World tions they don't want. For instance, they argue that an employer is exploiting workers by hiring Many objections to private property hinge on them at the lowest possible wage. Yet in a so­ income distribution. Well-intentioned people ciety in which people act voluntarily, without often think that it is unfair for some to live in coercion, the acceptance of such an offer means luxury while others have very little. I am sym­ that no better wages are available. Indeed, the pathetic to the view that the affluent are morally employer is expanding the opportunities for the obligated to share their wealth with those who unfortunate. A law mandating a $4.00 mini­ have less. But that doesn't mean that the state is mum wage, for example, actually decreases the the appropriate agency for such redistribution. opportunities for those whose work is worth A significant number of people who object to only $2.00. the relative position of the wealthy do so be­ The only way a government-as opposed to cause of a basic misapprehension about where the private sector, which acts through voluntary wealth comes from. They believe that those giving~an help these people is to give them who live in luxury do so at the expense ofothers wealth that it takes from someone else. Yet the who live in poverty. In general this is not true. fact that wealth usually has been created by its The world is not zero-sum. That is, the owners, not taken from others, weakens the wealth of the world is not limited so that it has moral case for such redistribution. A person to be divided up among everybody, with some whose creative effort adds to the stock of wealth people getting more and others getting less. without decreasing the well-being of others While wealth can be obtained by taking it from would seem to have a moral ·claim to that new others, wealth also can be created by properly wealth. motivated human action. When that happens, Moreover, under a private property system wealth represents a net addition to the well­ that relies on the market process, net additions being of a society. The significant increases in to wealth roughly reflect how much one has per capita wealth since the Industrial Revolu- added to the wealth ofother people. In a market MARKETS AND MORALITY 79 system, the only way to become wealthy is to ments exist, some people will be more powerful please others, and the way to become very than others. The relevant issue is not what set of wealthy is to please the masses. Henry Ford rules keeps people from having any control over catered to the masses with his automobile, sat­ others, but rather what institutions best limit the isfying their need for relatively cheap transpor­ accumulation of power. tation, and he became immensely wealthy. In History is replete with examples of the mis­ contrast, Henry Royce chose to serve only those use of coercive power in the hands of the state. with high incomes by producing an expensive One should therefore be suspicious of institu­ automobile, and he did not become nearly as tional arrangements that rely upon massive con­ rich. To penalize people who carry out actions centrations of power in the hands of the state, like Henry Ford's by forcibly taking large even though the explicit goal is to correct for amounts of their income seems perverse. injustices in the private economy. Societies Unfortunately, the mistaken zero-sum view without private property rights concentrate of the world is quite prevalent. Many partici­ large amounts of power in the hands of a few, pants in discussions about Third World poverty and that power traditionally has been badly believe that if only the wealthy nations weren't abused. so well off, the poor nations would be richer. A strong case can be made for an institutional Although it certainly is possible that some ofthe order under which the state enforces clearly de­ wealth of some people has been taken from oth­ fined rules that keep people from imposing ers, this is not usually the case. And if such costs on others without their consent, but one in takings occur, the solution is to move to a re­ which the state is also limited in terms of the gime that protects people's rights to their prop­ costs it can impose on individuals. A society erty. where the government is responsible for defin­ Ironically, the view that the world is zero­ ing and enforcing property rights, but where its sum often makes conditions worse. Proponents role is also constitutionally limited, represents a of the zero-sum view usually favor Im;ge-scale viable combination. Such a system fragments political reallocation of rights. Such realloca­ power and restrains people from imposing costs tion encourages, indeed requires, that every­ on others without their consent. body enter the fray. War is expensive whether it occurs on the battlefield or in the halls of Con­ Conclusion gress. When government has the ability to hand out numerous favors, many citizens compete A private-property, market system has much for these favors, while others lobby vigorously to recommend it. A system is more moral if it to retain their assets. Typically, the net result is holds individuals accountable for their actions less wealth remaining after reallocation than be­ and encourages them to help others than if it fore reallocation. allows them to impose costs on others without their consent. Power This is not to argue that a market system can serve as a replacement for a society in which The gravest injustices in the history of man­ people act on the basis of moral conscience. kind have occurred when some people have had Individual morality certainly will enhance cap­ excessive power over others. This power some­ italism, as it would any system. Honesty, com­ times has been economic and at other times po­ passion, and empathy make our world more liv­ litical, but in either case the ability to control able whatever the institutional arrangement. others' choices has caused enormous suffering. Capitalism is not inimical to these qualities. What sorts of institutions best fragment power When alternative economic systems are evalu­ and prevent some people from holding too ated within a moral framework, sound reasons much sway over the lives of others? emerge for favoring private property rights and This question must be answered in the con­ markets. Markets and morality can serve as text of a realistic understanding of how the useful complements in maintaining a just so­ world operates. Whatever institutional arrange- ciety. [] 80

Taxation Versus Efficiency

by Richard Jones

dam Smith appreciated specialization. months each, a cabinet maker for two months, In The Wealth ofNations. he cited the a plumber for a month, an electrician for a A example of pinmakers. By Smith's es­ month, a painter for a month, and a roofer/floor timate an eighteenth-century pinmaker could mechanic for a month. Twelve months of labor produce, working by himself, fewer than 20 for $30,000. pins a day. However, by dividing the tasks in­ As a hard-working baker, Bob earns $30,000 volved in pinmaking, and with the aid of some a year. Over the past five years he has saved the specialized tools, 10 pinmakers could tum out $30,000 to pay for the materials. Now you 48,000 pins a day-or about 4,800 per worker. would suppose that since he earns $30,000 a In our day a skilled plumber can assemble year, he can work a year, give the builders that pipes more efficiently than a carpenter. Not $30,000 and have his new house paid for. only does he have more experience at his job, Right? he has specialized tools. By the same token a Wrong. carpenter can frame a house more efficiently Of his $30,000, Bob must tum over approx­ than a surgeon. And that surgeon can perform a imately half to Federal, state, and local govern­ heart bypass operation better than a mechanic. ments in direct and hidden taxes. He' faces sales And the mechanic can ... well, you get the taxes, property taxes, excise taxes, Social Se­ idea. Specialization increases efficiency. Effi­ curity taxes, amusement taxes, state and Fed­ ciency increases productivity. Productivity in­ eral (and perhaps even city) income taxes­ creases abundance. indeed taxes on virtually anything you can think All this should be obvious to anyone. of. By the time Bob finishes paying his direct Well, almost anyone. It doesn't seem so ob­ and indirect taxes he has about $15,000 of his vious to those who tax us. $30,000 left. Consequently, after taxes it will Consider an example. Bob the Baker wants take him two years, not one, working as a baker to build a new house. His plans call for a rela­ to pay the workmen to build his house. tively modest structure costing $60,000. Going But suppose Bob is pretty handy with tools. by a rule of thumb, Bob knows that half of the He has learned a little bit about carpentry, $60,000 will go for materials, the other half for plumbing, and wiring. The roofing and flooring labor. The $30,000 for labor represents twelve he can figure out when he gets there. By his months' work, say that of three framers for two estimate Bob can build the house by himself in Richard Jones is a winemakerlwriter who built his own 18 months. That's six months more than the house in Sapello, New Mexico. combined labor of his specialists. Bob figures 81

that he can quit his job as a baker, spend 18 teen months of work went into building a house months building his house, then go back to which should have consumed only twelve work baking the last six months of the second months of labor. Six months of lost production year and come out $7 ,500 ahead (after paying means that fewer goods are produced. The $7,500 in taxes on his $15,000 income). economy suffers a net loss. Bob stashes his bread pans and shuts down Whether taxation discourages the employ­ his ovens. He saws and nails and plumbs and ment ofcarpenters or mechanics, ofelectricians wires for 18 months. His house· is finished. or plumbers, the results will be the same. The Compared to hiring specialists to do the more taxation discourages the advantages of work, Bob not only has his new house, but an specialization, the fewer goods will be pro­ extra $7,500, too. Everything's okay, right? duced. High taxes might appeal to some people, Well, it may be as far as Bob is concerned, but they would seem plain foolish to the keen but what about the economy as a whole? Eigh- mind of Adam Smith. 0 82

Myths of the Rich Man by Joseph S. Fulda

hen privatization is contemplated for water will lose its potability, the pipes will be­ such necessaries as potable water or come rusty, and the whole system will become W the streets, the discussion is often worthless; the streets will fall into disrepair and clouded by fear of what "the rich man" who require endless reconstruction. Certainly that is provides the resources might or might not do. not how the rich man acquired his wealth! The rich man might acquire all the drinking But, still, what if? All that will happen is that water and let no one else drink, or all the streets large holdings ofreal estate will be converted to and let no one emerge from his house. Or the streets and reservoirs by others, rich or poor. As rich man might charge a small fortune for a long as free entry-competition-is allowed, glass of water or an afternoon walk on the the rich man who has but will not market spites streets, with none to stop him, since he is the only himself and will lose his fortune. Someone owner. The rich man, it is further feared, might else will see the need, convert his property to provide no water and build no streets. If the the now-more-marketable use and take the rich state does not provide for us by marketing these man's erstwhile profits away. resources, perhaps no one will, and society will Nor can the rich man buy up all the streets or perish. reservoirs and charge arbitrarily large sums for These fears are little more than myths. After these necessaries. As he raises the price, con­ all, there are plenty of other things we need­ version of other resources to these purposes be­ food, clothing, shelter-and yet none of the comes more attractive. Furthermore, substi­ fears people have of the rich have materialized tutes, once far too expensive even to be in any free market system. Economics teaches contemplated let alone developed, begin to be­ us why these fears are fallacious, and since they come attractive as well. All it takes is one per­ are nevertheless so prominent in discussions of son with a vision-be he rich or poor-and the privatization among the general public, it is consumer demand for a water-substitute or a well to review those teachings here. street-substitute will be satisfied. As Julian Si­ Society is not at the mercy of the malevolent mon demonstrated in The Ultimate Resource, rich man controlling its necessities. A man who the human mind, throughout history, has been holds vast reservoirs of water or large parcels of uniformly able to find alternatives which satisfy land and makes no economic use of it out of the very same need as some resource previously spite (and it is fear of spitefulness that is behind thought to be indispensable. this myth) will soon find the management costs Finally, we must remark that the situation of his properties causing him to lose all. The itself-a malevolent rich man monopolizing all but providing none, or providing only at impos­ Joseph S. Fulda is an assistant professor ofbiomathemat­ ical sciences at the Mt. Sinai School of Medicine and re­ sibly steep prices-is most artificial. People are sides in Manhattan. not like that. Besides, empirical studies have 83 shown that as capitalist society progresses, the homeowners and shopkeepers on the block, in distribution of resources and funds for capital small lots. Or perhaps workers would acquire tends to become more diffuse and mobile. It is streets in their neighborhood with their union therefore doubtful on both psychological and pension funds, an investment linked to the gen­ economic grounds whether (without state grants eral economic performance of the area, much of monopoly power or the equivalent) the sce­ like stocks or bonds. I repeatedly say narios that underlie the myths of the malevolent "perhaps," for no one can know just how the rich man could ever come to pass. But the free­ market arrangements for, say, water and streets dom-lover may rest assured that even if such would work out. concentrations of wealth and malice somehow But work out they would-the price system did befall society, all that would occur is ad­ guarantees it. As water and streets become justment-the redistribution and reallocation of scarcer their prices will rise. As prices rise, the natural resources, capital, labor, and entrepre­ opportunities available for entrepreneurs will neurial talent-nothing worse than a temporary become increasingly irresistible. In a society inconvenience for the masses, coupled with with an economy in which everyone is free to special opportunities for those who would tum take advantage of the available opportunities, the situation to their advantage. one need not worry about the do-nothing rich Nor does society, to consider the opposite any more than the spiteful rich. fear, depend on the beneficence of the rich man Again, of course, the situation is artificial. to provide its necessities. Were none of the rich Those with the most capital acquired their interested in providing water or streets, the poor riches by taking advantage of opportunities, not aspiring to become rich would provide, al­ by ignoring them. But even if somehow the rich though perhaps not in large quantities mediated will not provide, things will work out as new through big corporations. entrepreneurs replace the old rich and exercise Perhaps water would be sold by local ven­ their resolve to provide and thus be provided dors. Perhaps streets would be owned by the for. []

IDEAS ON LIBERTY Promoting COlDpetition y competition, I refer to a situation that exists when the basic rules of the free society are observed - when everyone possesses the B basic rights of private property and freedom of contract. Compe- tition is not a mode of conduct that anyone has to promote institutionally. It develops naturally and necessarily among persons who are free to pursue their own interests. Whatever one's personal interest or objective may be - businessman, sculptor, or preacher - the consequence of pursuing it puts him in competition with all who share that objective. That being the case, preoccupation with promoting competition is at best a diversion of effort which could have been used to protect private property and freedom of contract. -SYLVESTER PETRO 84

A REVIEWER'S contradictory White House career of Hoover, NOTEBOOK the "chief," at some later date. We have al­ ready had a remarkable account from his pen of Hoover's pre-1914 days as a mining engineer all over the world, from the Australian "out back" to Burma, Siberia, and northern China at the time of the Boxer Rebellion. Hoover was a The Life of great competitor then. He made his million, dominating his ventures in silver and other met­ als from a London office, and was ready for Herbert public service when the outbreak ofwar came in August of 1914. Nash's current installment of the Hoover Hoover saga is called The Life ofHerbert Hoover: The Humanitarian, 1914-1917 (New York: Norton, 497 pp., $25.00). It is a wonderfully researched by John Chamberlain story of a venture in practical benevolence that belies Hoover's outward demeanor of cold­ hearted efficiency. In the beginning, when he was setting up his CRB, or Commission for Relief in Belgium, "FOOd will win the war." So we were Hoover was threatened with competition from told in 1917 by Herbert Hoover, who the Rockefeller Foundation. The Swiss also had was just home after a three-year period ideas ofgetting into the act. But Hoover insisted of feeding Belgian and French civilians who on a monopoly. He couldn't quite have it all his were trapped in back of the contending Allied own way. The Spanish diplomat Villalobar and and German armies. Accordingly I signed up to the Belgian banker Emile Francqui dogged him work on a school farm in Windsor, Connecti­ for three years. There had to be an agency in­ cut, where I did my bit by shingling a hen house side Belgium to help distribute food in German­ roof and chopping stumps out of a field destined occupied territory. But by February of 1915 the for com. At the age of fourteen I was sure that British Admiralty and the Germans, with Hoover was a man for the ages. French concurrence, agreed that only a Hoover I was not so certain at a later age, when could properly coordinate tens of thousands of Hoover, as President, couldn't contend with people on several continents in saving what he called "the Mississippi Bubble of 9,000,000 Belgians and a much smaller number 1927-29." We forget that Hoover, in the White of Frenchmen from starvation. House, pioneered many ofFranklin Roosevelt's The tens of thousands in the Hoover organi­ New Deal devices. His Reconstruction Finance zation included volunteer fund-raisers in Amer­ Corporation tried to save weak banks, his Fed­ ica, Australia, Canada, Great Britain, Italy, and eral Reserve Board bought millions of govern­ Spain; farmers, bankers, accountants, shippers, ment notes in the open market, his Farm Board and grain merchants in the U. S.; the crews and tried to prop up wheat prices. His excuse was owners of dozens of cargo ships crossing the that he had to compete with Europe in a world oceans to British ports and Rotterdam in Hol­ that had lost touch with Adam Smith. Roosevelt land; diplomats in Madrid and Berlin and Le beat him at the polls in 1932, partly by a prom­ Havre; stevedores operating 600 tugs and ise to balance the budget. Then Roosevelt pro­ barges along canals from Rotterdam into Bel­ ceeded to double Hoover's New Dealism in gium, where 40,000 volunteers stored the food spades. in regional warehouses for distribution to hun­ George H. Nash, the able historian of Amer­ gry people in more than 2,500 communes. ican conservatism, is doing a multi-volumed Hoover, says Nash, appeared to sense the life of Hoover. He will be wrestling with the epic actualities of his endeavor as early as OTHER BOOKS 85

March of 1915. To a Belgian priest he wrote: to Britain Walter Hines Page and for others in "To beg, borrow and buy nearly $1,800,000 embassy headquarters; he "edited" materials worth of food every week; to ship it overseas for the Associated Press. With him, freedom of from America, Australia, the Argentine and In­ the press was freedom to manipulate the press. dia; to traverse three belligerent lines; to trans­ He did not butter up the young men who port it through a country with a wholly demor­ worked selflessly for him. The most he would alized transportation service; to distribute it say was a cool "well done." But his youthful equitably to over 7,000,000 people; to see that supporters loved him for his assumption that it reaches the civilians only and that it is adapted good men should make correct decisions as a to every condition from babyhood to old age matter of course. ... is a labour only rendered possible by the The British had always to be reassured that most steadfast teamwork on the part of all. ... the Germans weren't stealing neutral-intended We are under daily zealous surveillance of all food from the regional warehouses. There were the governments involved; ... we maintain an "angry egos" involved in the disputes about investigation department of our own ... and possible thefts. The relief of Belgium depended we have the right to demand the absolute con­ on German forbearance. This forbearance was fidence and support of our fellow country­ never total, but what there was of it sufficed. men." Hoover's one great disappointment was the Hoover, if he had written to the Belgian behavior of his good friend Lindon Bates, head priest again in 1917, would hardly have of the New York office. Bates feared Hoover changed a word in his estimation ofwhat he had was guilty ofinfringing the Logan Act and mak­ done. But the difficulties of traversing belliger­ ing foreign policy. No doubt he was. But ent lines were multiplied by the shifting attitude 9,000,000 people remained alive. D of the Germans in regard to submarine warfare. The sinking of the Lusitania, and the tum to unrestricted attacks on all shipping into British, EQUITY AND GENDER Dutch, and French ports, forced Hoover to fight by Ellen Frankel Paul the Germans to obtain respect for the symbol Transaction Books, Rutgers University, New Brunswick, NJ CRB on the sides of his ships. The matter was 08903 • 1988 • 192 pages • $24.95 cloth, $12.95 paper never really settled. Hoover's blunt ways of operating did not sit well with Brand Whitlock, the American am­ Reviewed by Clint Bolick bassador to Belgium. Whitlock understood Hoover's virtues, but couldn't regard the eter­ llen Frankel Paul's new book may be nal squabbling with Francqui over jurisdiction greeted with skepticism: Why do we inside of Belgium with equanimity. He came E need another book on "comparable almost literally to dislike Hoover. For his part, worth," when that theory is deader than a door­ Hoover thought Whitlock was something of a nail? weakling. He would have called him a wimp if The answer is simple: rumors of comparable he had known the word. worth's well-deserved demise are greatly exag­ Hoover had to get along with the French and gerated. Though presently discredited as a via­ British governments to get regular subsidies for ble discrimination theory in Federal litigation, his "practical institution. " But, although he as­ comparable worth is very much alive in state pired to play a big part in the Wilson adminis­ legislatures and in the hearts and minds of rad­ tration once we were in the war, he regarded ical feminist groups and their allies. most governments as obstacles to be shunted As .Paul notes, ten states have implemented aside. His way of dealing with governments in­ the results of comparable worth studies, and 20 volved him in undercover operations to plant have commissioned studies. Some states are stories in the press of two continents. He was a considering proposals to extend comparable master of what we would now call media sub­ worth to the private sector. And Congress is version. He ghostwrote articles for Ambassador considering imposing comparable worth at the 86 THE FREEMAN. FEBRUARY 1989

Federal level, at a potential cost of billions of Paul then turns to the progress of comparable dollars. In a new administration, comparable worth in the courts and legislatures, and finds worth advocates may gain even greater momen­ that while comparable worth has been dealt se­ tum. rious setbacks in the courts, it is winning the Of course, it's not called "comparable day in the legislative arena. The bulk of the worth" anymore, but rather the more benign­ book thus comprises a useful summary of the sounding "pay equity. " But scratch the veneer arguments pro and con and the futurt? prospects ofpay equity and the same old beast emerges: a for comparable worth. concept that, as Paul describes it, would destroy Paul concludes with her own views on the "the very foundation of our market-based eco­ issue, and comes down solidly in favor of the nomic system." market as the arbiter of salaries. Jobs do not Paul, who is affiliated with the Social Philos­ have inherent value apart from the market, she ophy and Policy· Center at Bowling Green State argues. She concludes that comparable worth University, has a superb ability both to take "depend[s] upon some rather dubious complex issues and translate them into English, assumptions" and "embrace[s] a view that is at and to take simplistic rhetoric and explain its odds with our American tradition, [is] unper­ serious ramifications. Since comparable worth suasive as an ideal, and incapable of being put is at once both deceptively simple and enor­ into practice without chaotic results." mously complex, Equity and Gender provides a But the bottom line for Paul is that compara­ vital tool with which to effectively defend the ble worth destroys the freedom of choice that market. the market provides. She observes that the Paul begins with a dispassionate and compre­ "women's movement in the late 1960s and 70s hensive review of the arguments in favor of emphasized women's capacity, women's ability comparable worth. She observes at the outset to perform jobs traditionally monopolized by that" '[e]qual pay for equal work' is not the men. Comparable worth sets a different agenda, objective of the comparable worth advocates, portraying women in an unflattering light that for that standard has been the law of the land enshrines their incapacity. Instead of encourag­ since 1963." Rather, they believe the market ing women to engage in new ventures, it con­ "is corrupted by discrimination, for nothing cedes that they will be secretaries, nurses, and else can sufficiently explain discrepancies be­ teachers for a long time to come and only asks tween women's wages and men's." that they be paid more." This discriminating "wage gap" can be re­ Nonetheless, Paul does not claim the moral dressed, the theory holds, by a scientific assess­ high ground for adversaries of comparable ment of the objective worth of jobs to employ­ worth. At the outset, Paul agrees with compa­ ers, ,''to which salaries would be calibrated. rable worth proponents that ultimately "justice Thus, Paul explains,. "comparable worth pro­ and equity must triumph over efficiency. " But vides the hope of a quick and easy fix for the she fails to make the point strongly enough that injustices foisted upon women by the in bargaining over wages, these values go hand marketplace. " in hand. While Paul seems to acknowledge that Paul then presents the arguments of compa­ purely utilitarian arguments are inadequate to rable worth opponents, which she observes are resist comparable worth, she does not present a primarily economic. The wage gap, they argue, compelling moral argument in favor of the mar­ is created by the combined impact of women's ket. job choices, expanding work-force options for What defenders of the market must do is to women, and entry by women into the labor expose comparable worth as a paternalistic the­ market in growing numbers. And, they add, the ory that assumes women are incapable of suc­ wage gap is diminishing as women gain more ceeding on the level playing field guaranteed by experience and enter traditionally male jobs. the present anti-discrimination laws. They must Moreover, they argue that comparable worth also show it to be an elitist concept, denigrating would be enormously expensive to implement, the value of blue-collar jobs. And they must thereby reducing America's ability to compete. raise the Orwellian specter of a commission of OTHER BOOKS 87

,'experts" determining wages in some mystical Here we have the "conventional wisdom," fashion and supplanting the will of individuals. accepted by virtually every politician and the Paul makes these points, but not graphically vast majority of professional economists. enough to recapture the terms of the debate. Money is different. Money cannot manage it­ These were the points I attempted to illustrate self. End of story. when I represented several female prison guards Enter, or should I say "re-enter," the Aus­ in opposing the American Nurses Association's trians. Standing firmly on the intellectual shoul­ unsuccessful comparable worth lawsuit against ders of Carl Menger, Ludwig von Mises, and the State ofIllinois in 1984-85. My clients were F. A. Hayek, George Selgin has boldly chal­ women who defied societal stereotypes and lenged the status quo in monetary theory. In his took on dangerous and unpleasant jobs in order recently published book, The Theory of Free to earn higher wages--<>nly to have a board of Banking, Professor Selgin argues that money experts conclude that entry-level secretaries will, and must, manage itself. were "worth" more than prison guards. Such a Ever since Menger, the founder of the Aus­ notion falls under the weight of its own absur­ trian school, wrote his Principles in 1871, Aus­ dity. trian economists have been highly critical of Tactics like these betray comparable worth as government involvement in the business of not a "women's" issue at all, but as an issue of money and banking. In Menger's view, money government control versus individual auton­ cannot be arbitrarily created by legislative fiat omy. The dignity and freedom of women re­ precisely because it came into being as the un­ quires the demise of comparable worth. Paul's intended consequence of individuals seeking to book, thankfully, provides a wealth of ammu­ better satisfy their wants. Money, to be ac­ nition to hasten that demise. D cepted widely, must be the product of voluntary exchange. (Clint Bolick is director ofthe Landmark Legal Ludwig von Mises refined and extended Foundation Center for Civil Rights in Washing­ Menger's monetary theory in The Theory of ton, and author of Changing Course: Civil Money and Credit, published in 1912. Employ­ Rights at the Crossroads [New Brunswick, NJ: ing his famous "regression theorem," Mises Transaction Books, 1988].) demonstrated that the value of money also evolves through a historical process of human interaction. According to Mises, the value of THE THEORY OF FREE BANKING: money today is linked to the "price" of money MONEY SUPPLY UNDER yesterday, and the expected value of money to­ COMPETITIVE NOTE ISSUE morrow will be based on the "price" of money by George A. Selgin today. When left alone by government, the value of money is both dynamic (responsive to Rowman & Littlefield, 81 Adams Drive, Totowa, New Jersey 07512· 1988 • 218 pages • $33.50 cloth ever-changing economic conditions) and stable (linked with the remembered past and an imag­ ined future). Reviewed by Matthew B. Kibbe Because of its historical continuity, money provides a reliable "unit" for economic calcu­ anks are in trouble. But an even greater lation, the means by which the millions of in­ , crisis lurks beneath the political surface, dividuals within a society are able to coordinate B on the university blackboards, and in their activities. This theoretical understanding the principles texts and academic journals. Con­ of the nature of money provided the Austrians sider the following argument, made recently by with a devastating critique of planning in gen­ David Warsh in the May-June 1988 issue of the eral and of central banking in particular. Harvard Business Review: "Money is funny Unfortunately, this rich tradition in monetary stuff. Like language, it has meaning only inso­ theory was all but forgotten in the turmoil ofthe far as people agree to share it. Unlike language, Keynesian revolution. Divorced from the plans however, it requires supervision." and purposes of individuals, monetary theory 88 THE FREEMAN. FEBRUARY 1989 was pushed deeper and deeper into the mystical of such a mechanical metaphor, the insight of world of Keynesian "macro-economics." The "monetary equilibrium" is clearly consistent intentions of individuals were replaced with with the Austrian understanding of money­ functional relationships between imaginary ag­ even more so than Selgin is willing to admit. In gregates--equations to be manipulated by gov­ The Theory ofMoney and Credit, Mises defined ernment officials to serve government ends. inflation as ' 'an increase in the quantity of The appearance of The Theory ofFree Bank­ money ... that is not offset by a corresponding ing signals a well-written, well-organized shift increase in the need for money. .. ." Further­ iri intellectual currents. Professor Selgin's book more, "deflation ... signifies a diminution of will shock some. I am delighted. the quantity of money ... which is not offset Soon after opening the book, the reader will by a corresponding diminution of the demand notice the quick precision ofSelgin's prose. Af­ for money...." ter a brief overview of a number of historical The difference between Selgin and Mises ap­ episodes of free banking, Selgin moves directly pears to be one of emphasis. We can quibble into a theoretical discussion of the evolution of over the proper interpretation of Mises on this money and banking. Here, Menger's influence point, but the fact remains that the real-world is strong and obvious. problem confronting Mises during the years he The second part of the book develops the wrote was the rampant inflation generated by notion of "monetary equilibrium," borrowed the central banks of both Europe and the United from economists such as J. G. Koopmans, States. Naturally, Mises emphasized the distor­ Gottfried Haberler, Fritz Machlup, and Dennis tive effects of an over-supply of money. But he Robertson. This is the idea that there is both a also saw the solution, arguing in 1949 in Hu­ demand for and a supply of bank notes which man Action that "free banking is the only must continually adjust toward a coordinated method available for the prevention of the dan­ equilibrium. gers inherent in credit expansion." According Selgin fuses the theory of monetary equilib­ to Mises, there was "no reason whatever to rium with the Austrian critique of central bank­ abandon the principle of free enterprise in the ing as developed by Mises and Hayek. Central field of banking. ', banking, they argued, is neither responsive nor Either way, the importance of Selgin's con­ stable. Besides the obvious political incentives tribution should not be underrated. Mises did, which discourage sound money management in fact, tend to neglect the importance of "the within a central banking system, central bank­ demand side" of money. With the publication ers simply cannot obtain the relevant knowledge of The Theory ofFree Banking, Selgin joins a required to match the supply of money with small but growing number of economists who money demand. seek to revive and extend the forgotten Austrian Only market competition and competitive tradition of free banking. I am thinking also of note issue, Selgin concludes, provide both the F. A. Hayek (Denationalization of Money), incentives and information necessary to main­ Hans Sennholz (Money and Freedom), and tain monetary equilibrium. Free banking is the Lawrence White (Free Banking in Britain). only monetary system that can properly adjust With books such as Selgin's, there is hope for to changes in the market demand for bank notes the future of ideas and our banking system. D without flooding the market with unneeded, un­ backed paper currency. Selgin reminds us that fractional banking, when disciplined by free (Matthew Kibbe is a doctoral student in eco­ competition, provides an altogether superior al­ nomics at George Mason University and afel­ ternative to centralized control and supervision. low at the Center for the Study ofMarket Pro­ While Mises might have objected to the use cesses.)