VOLUME 59, NO 9 NOVEMBER 2009

Features 8 Health Care’s Muddled Incentives by Arnold Kling 12 Government Motors by Michael Heberling 16 The “I Hate the Poor” Act of 2009 by Christopher Westley 20 The Mystique of Hedge Funds by Warren C. Gibson 23 Old, Bold Futility by William R.Allen and William Dickneider 27 The Great Writ Then and Now by Wendy McElroy 32 Stealth Expansion of Government Power by Murray Weidenbaum Page 27 35 Art Needs No State Subsidies by Bruce Edward Walker

Columns 4 Ideas and Consequences ~ Child Labor and the British Industrial Revolution by Lawrence W.Reed 18 Thoughts on Freedom ~ Science Fiction and Economic Fiction by Donald J. Boudreaux 25 Our Economic Past ~ Rutherford B. Hayes and the Financing of American Prosperity by Burton Folsom, Jr. 39 Give Me a Break! ~ Competition by John Stossel 47 The Pursuit of Happiness ~ Rule of Law versus Legislative Orders by Walter E.Williams Page 18 Departments 2 Perspective ~ Two Decades Since the Fall by Sheldon Richman 6 World War II Ended the Great Depression? It Just Ain’t So! by Richard W.Fulmer

Book Reviews 41 How Much Money Does an Economy Need? Solving the Central Economic Puzzle of Money, Prices, and Jobs by Hunter Lewis Reviewed by Lawrence H.White 42 Forgotten Founder, Drunken Prophet: The Life of Luther Martin by Bill Kauffman Reviewed by Joseph R. Stromberg 43 Montessori, Dewey, and Capitalism: Educational Theory for a Free Market in Education by Jerry Kirkpatrick Reviewed by Terry Stoops 45 The Left, The Right, and The State Page 41 by Llewellyn Rockwell Reviewed by George C. Leef Perspective Two Decades Since

Published by the Fall The Foundation for Economic Education Irvington-on-Hudson, NY 10533 n November 9, 1989, the Berlin Wall effec- Phone: (914) 591-7230; E-mail: [email protected] tively ceased to exist. Remember the www.fee.org sequence: Communist Hungary started letting President Lawrence W.Reed O people pass into Austria and to freedom. Captives of the Editor Sheldon Richman Managing Editor Michael Nolan Soviet bloc left in droves. East Germans, too—thousands Book Review Editor George C. Leef of them.The Hungarian government tried to stanch the Columnists flow, but the dam had been breached.With one dictator Charles Baird David R. Henderson having resigned, a panicky East German regime began Donald J. Boudreaux Robert Higgs making concessions, hoping to mollify the people.They Stephen Davies John Stossel would not be placated. Thousands—and in one case, a Burton W.Folsom, Jr. Thomas Szasz Walter E.Williams million—took to the streets, shouting, “We want out!” Things were getting out of hand. So, on November 9, Contributing Editors Peter J. Boettke Dwight R. Lee the government fumblingly announced it would lift James Bovard Wendy McElroy travel restrictions to West Berlin and West Germany. It Thomas J. DiLorenzo Tibor Machan was all over but the demolition. Joseph S. Fulda Andrew P.Morriss Bettina Bien Greaves James L. Payne I don’t know why it seems so much longer ago that Steven Horwitz William H. Peterson we saw those inspiring celebrations, when East Berlin- John Hospers Jane S. Shaw ers, joined by their countrymen from the western side, Raymond J. Keating Richard H.Timberlake Daniel B. Klein Lawrence H.White danced on the wall while others whacked at it with axes and sledge hammers.The crowds, the singing, the joyful Foundation for Economic Education cries of “Freedom!”, the sections of wall toppling—I Board of Trustees, 2008–2009 remember watching the scenes on television with my Wayne Olson, Chairman then-six-year-old, Jennifer. If you can watch them on Lloyd Buchanan Walter LeCroy William Dunn Frayda Levy YouTube today without tearing up, I don’t know what Jeff Giesea Kris Mauren to say. Ethelmae Humphreys Roger Ream It’s hard to believe that today’s 19-year-olds were Edward M. Kopko Donald Smith born into a world without a Berlin Wall and 17-year- The Foundation for Economic Education (FEE) is a olds were born into a world without the Soviet Union. nonpolitical, nonprofit educational champion of When my generation was growing up, the Iron Curtain individual liberty, private property, the free market, and constitutionally limited government. and USSR seemed like permanent fixtures of life. The Freeman is published monthly, except for combined Yes, we really did have air-raid drills in school. (Looking January-February and July-August issues. Views expressed by back, I can see they were insidious, ridiculous prop- the authors do not necessarily reflect those of FEE’s officers aganda stunts.) Some of us wished, at most, for what and trustees. To receive a sample copy, or to have The Freeman come regularly to your door, call 800-960-4333, or e-mail was called peaceful coexistence. Others thought “we” [email protected]. could roll “them” back. War—which a few, amazingly, The Freeman is available on microfilm from University Microfilm actually welcomed—would have been catastrophic International, 300 North Zeeb Road,Ann Arbor, MI 48106. Copyright © 2009 Foundation for Economic Education, beyond imagination.We dared not hope for a bloodless except for graphics material licensed under Creative Commons dissolution of totalitarianism. Yet that, more or less, is Agreement. Permission granted to reprint any article from what we got. this issue, with appropriate credit, except “Competition.” Those of us who believe in full individual liberty Cover: Post office photo by Daniel Case, used under Creative Commons Attribution ShareAlike 3.0. have been dismayed to learn that revulsion with dicta-

THE FREEMAN: Ideas on Liberty 2 PERSPECTIVE: Two Decades Since the Fall torship does not equate to a wholehearted embrace of our problems are caused by government’s creation of freedom. None of the former Soviet-bloc countries has perverse incentives up and down the line. thoroughly foresworn state-capitalist welfarism, and The government owns large shares of Chrysler and some have traveled only a short distance along the road General Motors, which is a sign of how things are from serfdom. Central planning is dead as an ideal, but going these days. Michael Heberling analyzes this ven- the regulatory state lives, as does what Thomas Szasz ture into socialist ownership of the means of produc- calls the Therapeutic State.This is disappointing, but it tion. Christopher Westley follows up with the story of would be difficult for a resident of the United States to Cash for Clunkers, or how the government won friends criticize others for failing to resist overbearing govern- by sticking it to the poor. ment. The longing for security, combined with the Most people—and politicians—have no idea what absurd notion that only ignorant and force-wielding hedge funds do, but they are sure the government bureaucrats can provide it, dies hard. should control them.Warren Gibson guides us through The fall of the Iron Curtain has been heralded as the the thick of high finance. failure of socialism, but this is a more complicated mat- So you think the government can create jobs? Then ter. Strictly speaking, there has been much less socialism Houdini must have been able to exit a locked trunk in the world than it might appear since Lenin gave it up without trickery. William Allen and William Dicknei- for the New Economic Policy in 1921. Remember, der have their doubts. Marx envisioned the abolition of the market, including If the government could shut you away without money and exchange.The economy was to be centrally having to justify its conduct, no enumerated right planned—literally. But when the Bolsheviks tried it, would be worth a thing. That’s why habeas corpus is they ended up, as Trotsky said, “staring into the abyss.” called the Great Writ, as Wendy McElroy explains. Lenin was savvy enough to back away from oblivion Government was big on January 19, but it’s growing and reintroduce aspects of the market, including a gold bigger still—in ways most people don’t even realize. ruble. What followed for the next seven decades was a Murray Weidenbaum is keeping score. heavily bureaucratized, de facto quasi-market economy, Composer Quincy Jones thinks there should be a existing in a world of prices in which The Plan was cabinet department to promote the arts. Don’t bet adjusted ex post to reflect reality and black-market against it. Bruce Edward Walker discusses this urgent “corruption” kept things going. Ludwig von Mises “necessity.” could not have been surprised. Our columnists have found some interesting things Such an economy was doomed to fail, but perhaps to tell you about. Lawrence Reed traces the end of with a little less intervention and a dollop of political child labor in Britain. Donald Boudreaux thinks about freedom, it might have muddled through a bit longer. Star Trek. Burton Folsom pays some attention to Presi- The market can put up with a lot of harassment, which dent Rutherford B. Hayes. John Stossel shows health- means people can resourcefully get around a lot of care “reform” won’t produce competition. Walter government obstacles when they want to. Look at the Williams explores the rule of law.And Richard Fulmer, U.S. economy. incessantly running into the assertion that World War II ended the Great Depression, retorts,“It Just Ain’t So!” * * * Reviewers assay volumes on money, a neglected The late summer and early fall were dominated by Antifederalist, education, and libertarian political what is prejudicially called healthcare “reform.” Statist philosophy. analysts dominated the public discussion. A rare excep- —Sheldon Richman tion was Arnold Kling, who in this issue explains that [email protected]

3 NOVEMBER 2009 Ideas and Consequences Child Labor and the British Industrial Revolution

BY LAWRENCE W. REED

rofound economic changes took place in Great Hammonds proceeded to treat the two classes as Britain in the century after 1750. This was the though no distinction between them existed at all. A Page of the Industrial Revolution, complete with deluge of false and misleading conclusions about capi- a cascade of technical innovations, a vast increase in talism and child labor has poured forth for years as production, a renaissance of world trade, and rapid a consequence. growth of urban populations. “Free labour” children were those who lived at Where historians and other observers clash is in the home but worked during the day in factories at the interpretation of these great changes. Did they repre- insistence of their parents or guardians. British histo- sent improvement to the citizens or did these events rian E. P. Thompson, though generally critical of the set them back? Perhaps no other issue within this factory system, nonetheless quite properly conceded realm has generated more intellectual heat than the that “it is perfectly true that the parents not only one concerning the labor of children. Critics of capital- needed their children’s earnings, but expected them to ism have successfully cast this matter work.” Ludwig von Mises, the great as an irrefutable indictment of the Austrian economist, put it well capitalist system as it was emerging in A deluge of false when he noted that the generally nineteenth-century Britain. deplorable conditions extant for The many reports of poor working and misleading centuries before the Industrial Revo- conditions and long hours of difficult conclusions about lution, and the low levels of pro- toil make harrowing reading, to be ductivity that created them, caused sure. William Cooke Taylor wrote at capitalism and child families to embrace the new oppor- the time about contemporary reform- tunities the factories represented: ers who, witnessing children at work labor has poured forth “It is a distortion of facts to say that in factories, thought to themselves, for years. the factories carried off the house- “How much more delightful would wives from the nurseries and the have been the gambol of the free kitchen and the children from their limbs on the hillside; the sight of the green mead with play. These women had nothing to cook with and to its spangles of buttercups and daisies; the song of the feed their children. These children were destitute and bird and the humming of the bee.” starving. Their only refuge was the factory. It saved Of those historians who have interpreted child labor them, in the strict sense of the term, from death by in industrial Britain as a crime of capitalism, none have starvation.” been more prominent than J. L. and Barbara Ham- Private factory owners could not forcibly subjugate mond. Their many works have been widely promoted “free labour” children; they could not compel them to as “authoritative” on the issue. work in conditions their parents found unacceptable. The Hammonds divided the factory children into The mass exodus from the continent to increasingly two classes: “parish apprentice children” and “free capitalist, industrial Britain in the first half of the nine- labour children.” It is a distinction of enormous sig- nificance, though one the authors themselves failed Lawrence Reed ([email protected]) is the president of FEE.This column was utterly to appreciate. Having made the distinction, the adapted from an article he first wrote in 1976.

THE FREEMAN: Ideas on Liberty 4 Child Labor and the British Industrial Revolution teenth century strongly suggests that people did indeed bad. Such capitalist achievements as air conditioning find the industrial order an attractive alternative. And and high levels of productivity would in time substan- there’s no credible evidence suggesting that parents in tially ameliorate working conditions, however. The these early capitalist days were any less caring of their evidence in favor of capitalism is thus compellingly offspring than those of precapitalist times. suggestive: From 1750 to 1850, when the population of The situation, however, was much different for Great Britain nearly tripled, the virtually exclusive choice “parish apprentice” children. Close examination reveals of those flocking to the country for jobs was to work that the critics were focusing on these children when for private capitalists. they spoke of the “evils” of capitalism’s Industrial Rev- Conditions of employment and sanitation were best, olution.These youngsters, it turns out, were under the as the Factory Commission of 1833 documented, in the direct authority and supervision not of their parents in a larger and newer factories. The owners of these larger free labor market, but of government officials. Most were establishments, which were more easily and frequently orphans; a few were victims of negligent parents or par- subject to visitation and scrutiny by inspectors, increas- ents whose health or lack of skills kept them from earn- ingly chose to dismiss children from employment ing sufficient income to care for a rather than be subjected to elaborate, family. All were in the custody of arbitrary, and ever-changing rules “parish authorities.” As the Ham- Child labor was on how they might run a factory monds themselves wrote, “[T]he first employing youths. The result of leg- mills were placed on streams, and the relieved of its worst islative intervention was that these necessary labour was provided by the attributes not by dismissed children, most of whom importation of cartloads of pauper needed to work in order to survive, children from the workhouses of the legislative fiat, but were forced to seek jobs in smaller, big towns. . . . To the parish authori- by the progressive older, and more out-of-the-way ties, encumbered with great masses of places where sanitation, lighting, and unwanted children, the new cotton march of an ever safety were markedly inferior. Those mills in Lancashire, Derby, and Notts who could not find new jobs were were a godsend.” more productive reduced to the status of their coun- Though consigned to the control capitalist system. terparts a hundred years before—that of a government authority, these chil- is, to irregular and grueling agricul- dren are routinely held up as victims tural labor or, in the words of Mises, of capitalist greed. But as historian Robert Hessen “to infest the country as vagabonds, beggars, tramps, writes, those very children “were sent into virtual slav- robbers, and prostitutes.” ery by a government body; they were deserted or Child labor was relieved of its worst attributes not orphaned pauper children who were legally under the by legislative fiat but by the progressive march of an custody of the poor-law officials in the parish, and who ever more productive capitalist system. Child labor was were bound by these officials into long terms of unpaid virtually eliminated when, for the first time in history, apprenticeship in return for bare subsistence.” Indeed, the productivity of parents in free labor markets rose to the first act in Britain that applied to factory children the point where it was no longer economically neces- was passed to protect these very parish apprentices, not sary for children to work to survive.The emancipators “free labour” children. and benefactors of children were not legislators or fac- Though it is inaccurate to judge capitalism guilty of tory inspectors but factory owners and financiers.Their the sins of parish apprenticeship, it would also be inac- efforts and investments in machinery led to a rise in curate to assume that free labor children worked under real wages, to a growing abundance of goods at lower ideal conditions in the early days of the Industrial Rev- prices, and to an incomparable improvement in the olution. By today’s standards their situation was clearly general standard of living.

5 NOVEMBER 2009 World War II Ended the Great Depression? It Just Ain’t So!

BY RICHARD W. FULMER

n his 2008 book, The Return of Depres- sion Economics and the Crisis of 2008, IPaul Krugman writes: “The Great Depression in the United States was brought to an end by a massive deficit- financed public works program, known as World War II.” He has since repeated this bon mot in a number of columns and television appear- ances. Like Keynes, Krugman lets his fond- ness for flippant, pithy sayings get in the way of regard for long-run economic pros- perity. (Keynes famously remarked that “In the long run we are all dead,” ignoring the fact that in the long run others are alive.) It is true, as the graph shows, that the country’s gross domestic product rose sharply during the war. But GDP measures only the total monetary value of over 10 percent of the population, served in the armed production while ignoring what is actually produced. It forces. Living, and sometimes dying, in a foxhole was is just a number, a number that would be no different if not an improvement over stateside life—even life dur- consumer goods were produced and sold or if the gov- ing the worst of the Depression. Back in the States ernment set the workforce to making mud pies and living standards also dropped (though not as dramati- then purchased those pies for a like sum. Yet what is cally) as consumer goods, including food and gasoline, produced makes all the difference. The point of an were rationed. economy is to improve people’s lives by producing goods and services they want and need. Bridges to Nowhere But Recovery? During the war the P in GDP largely consisted of rugman, however, is interested in jobs rather than the munitions needed to defeat the Axis powers.While Kproduction. He wants the government to spend these weapons were necessary to win the war, they did massive amounts of money and is relatively indifferent nothing to provide food, clothing, and shelter. Despite as to how the money is spent: “Let the government all the production increases that came with the war, the Richard Fulmer ([email protected]) is a senior fellow American people were materially worse off while it with the Institute for Energy Research and co-author (with Robert L. lasted. Some 15 million American men and women, Bradley, Jr.) of Energy:The Master Resource.

THE FREEMAN: Ideas on Liberty 6 W orld War II Ended the Great Depression? IT JUST AIN’T SO! borrow money and use the funds to finance public spirit that we’ll do whatever it takes to turn things investment projects—if possible to good purpose, but around; if what has been done so far isn’t enough, that is a secondary consideration—and thereby provide do more and do something different, until credit jobs, which will make people more willing to spend, starts to flow and the real economy starts to recover” which will generate still more jobs, and so on.” (www.nybooks.com/articles/22151). This indifference is a logical outcome of his belief that the war ended the Great Depression. If, as Krug- The Don Ho School man thinks, the economy was rescued then by expend- orld War II forced Roosevelt to concentrate on ing huge amounts of resources to build weapons that Wa single area of production: weapons.This focus disappeared overseas, then we would be that much bet- was maintained for the duration of the war and ter off now if the government spent a similar amount of resulted in a sustained economic bubble. Without resources on things that have even marginal utility— a similar attention-focusing crisis, however, current say, bridges to nowhere. If the bridges provide any government attempts at stimulus will simply result in long-term economic benefit at all, that would just be economic effervescence—tiny bubbles inflating and icing on the cake. bursting as the winds of politics shift Economically, however, World War lawmakers’ attention. Call it the Don II did not spark a recovery so much as The inability of the Ho School of Economic Thought. it created a financial bubble—not in Obama adminis- The inability of the Obama Internet stocks or housing but in administration’s deficit spending to munitions. Once the war was over, tration’s deficit spark economic recovery may be the bubble collapsed along with the masked for a time by the Fed’s con- demand for aircraft carriers and B-17 spending to spark tinued expansion of the money sup- bombers. economic recovery ply. Inflation could resurrect the The war’s outbreak necessitated housing bubble, providing a brief two policy changes, though, that did may be masked for a uptick in the economy, but such poli- aid the postwar recovery. First, Presi- time by the Fed’s cies cannot be maintained for long. dent Roosevelt stopped his incessant What the country needs is not attacks on business. As Amity Shlaes continued expansion more economic bubbles—tiny or points out in The Forgotten Man, FDR of the money supply. otherwise. It needs sustained eco- needed big business to produce the nomic growth. That will come by tanks, planes, and ships required to strengthening the private sector, not defeat Hitler and his allies. Second, he ended his erratic, by strengthening government.The best way to do this is trial-and-error experimentation. Before the war the to reduce government spending, which crowds out the stated strategy of FDR and his Brain Trust was to try private kind, and to enact long-term tax cuts. one program after another until they found something Contrary to popular belief, the “public works pro- that worked. This resulted in perpetual market churn gram” known as World War II did not end the Great that made long-term planning and investment espe- Depression; it ended the New Deal.The end of the war cially risky if not impossible. Another result was the brought federal spending and tax cuts and the repeal of creation of myriad tiny, short-lived bubbles. Jobs were the Smoot-Hawley tariffs. All these changes combined created in various locations and in various crafts only to to pull the nation’s economy out of its long and painful disappear when the government lost interest and shifted slide, and all could have been made without the war. its gaze. Similar changes made now could restore the world’s Yet Krugman elsewhere prescribes this same strategy economy without the massive human suffering that, in of experimentation for today’s financial woes: “The their absence, is all but inevitable. Inevitable, yet so point of all this is to approach the current crisis in the avoidable and so unnecessary.

7 NOVEMBER 2009 Health Care’s Muddled Incentives

BY ARNOLD KLING

n the topic of health care, what empirical more socialized in other developed countries. However, observations are reliable? Unfortunately, whether this is the case depends on how one classifies Omany “facts” come freighted with a great private health insurance. deal of ideological baggage.Those skeptical of markets, About 12 percent of personal medical expenditures who favor a large role for government in health in the United States is paid out of pocket, which care, tend to empha- is slightly below that size statistics that of nearly all other disparage the Ameri- developed countries, can healthcare sys- including Canada. tem. For supporters Where the United of markets, it is States differs signifi- tempting to try to cantly from other fight back by finding countries is in how data that reflects well the remaining 85–90 on American health percent of health- care. care expenditure is I think that the financed. About half best strategy is to that remainder is arrive at the most financed by private accurate understand- health insurance, ing, even if it means with the other half that America’s health- paid for by govern- care system does not ment programs, such come out looking Might as well; you’re not paying for it. as Medicare and Wikimedia Commons: KasugaHuang superior. Medicaid. In other This article will summarize empirical observations developed countries, healthcare spending is mostly that I consider important in looking at the U.S. health- financed out of a government budget. care system. First, I look at international comparisons. Arnold Kling ([email protected]) is the author of Crisis of Abundance: Next, I look at the implications of studies that compare Rethinking How We Pay for Health Care, published by the Cato health care in different regions within the United States. Institute. His most recent books are Unchecked and Unbalanced: How the Discrepancy Between Knowledge and Power Caused the Differences Across Countries Financial Crisis and Threatens Democracy (Hoover Institution) and (with Nick Schulz) From Poverty to Prosperity: Intangible Assets, eople often speak as if the healthcare system is rela- Hidden Liabilities and the Lasting Triumph Over Scarcity Ptively free-market in the United States and much (Encounter Books). He blogs at www.econlog.econlib.org.

THE FREEMAN: Ideas on Liberty 8 Health Care’s Muddled Incentives

Private health insurance in the United States, like This additional spending is not inherently problem- government health insurance, insulates the consumer atic. Indeed, one would think that it is a good thing that from the cost of medical care. Strong regulatory and tax we can afford to spend so much on medical care. incentives induce businesses to include a large health Unfortunately, another fact about international health- insurance component in employee compensation. care comparisons is that outcomes differ very little Looking at how private health insurance operates in between the United States and other countries. One this country, and why it takes the form it does, I detect can find higher survival rates in the United States for considerable influence from government policy. It is people with some forms of cancer, but overall, life hard to tell what kind of insurance, if any, would expectancy does not appear to be better here. emerge in a market unaffected by government subsi- The combination of higher spending with equiva- dies, taxes, and regulations. lent health outcomes suggests that the U.S. healthcare Overall, I would argue that on the demand side, system is relatively less cost-effective than that of the United States healthcare system is essentially social- other countries. One can think of many possible rea- ized. The fact is that close to 90 percent of health- sons for this. care spending is paid for by third Perhaps healthcare providers earn parties, which means that individuals higher rents in the United States. in this country generally experience a Perhaps private health insurance socialized process for obtaining med- Private health absorbs much higher overhead than ical services. insurance in the government health insurance. The United States deviates most Perhaps in the United States people from socialized systems on the supply United States, like make extravagant use of medical side.What I believe is most distinctive government health procedures that have high costs and about the U.S. healthcare system is low benefits. that it combines fee-for-service com- insurance, insulates In my view,the evidence to support pensation for healthcare providers the consumer (1) or (2) is very weak. Suppose we with fairly unlimited access to medical were to take away the profits of private services.This means that supply is lim- from the cost of health insurance companies and drug ited neither by rationing nor by companies. Also eliminate the excess of absence of compensation nor by any medical care. what doctors are paid relative to the fixed government budget. Notwith- median salaries of other workers com- standing considerable regulation of pared to that ratio in other countries, medical practice, the supply of health care is relatively after adjusting for differences in specialization and unsocialized. hours worked. Overall, the effect on total healthcare The combination of socialized demand and rela- spending would be small. I like the way David Goldhill tively unsocialized supply explains one of the key facts puts it:“For fun, let’s imagine confiscating all the prof- about health care, which is that the United States its of all the famously greedy health-insurance compa- spends far more on health care than other industrialized nies.That would pay for four days of health care for all countries. We spend close to 17 percent of GDP on Americans. Let’s add in the profits of the 10 biggest it, while other countries generally spend just over 10 rapacious U.S. drug companies. Another 7 days. Indeed, percent. Because our GDP per capita is also higher confiscating all the profits of all American companies, in than other countries’, the differences in healthcare every industry, wouldn’t cover even five months of our spending are even more dramatic in terms of absolute health-care expenses.” (“How American Health Care dollars per capita. We spend almost twice as much per Killed My Father,” The Atlantic, September 2009.) person on health care as many other industrialized On the other hand, one can document dramatic countries. increases over the past 30 years in what I call “premium

9 NOVEMBER 2009 Arnold Kling medicine,” meaning medical procedures that use physi- under private health insurance are small. Relative to cal and human capital intensively. Among doctors, the other countries, we seem to have the same large dis- number of specialists per capita has increased sharply.As crepancy in spending per person among our elderly an example of the use of physical capital, we now do population as we do in our younger population.This is more than 50 million CT scans and 25 million MRIs consistent with the thesis that the institutional factors per year. that make America different are on the supply side (eas- We will see below that there is strong evidence ier availability of treatments) rather than on the demand that Americans make extravagant use of medical proce- side (the financing mechanism).America is an outlier in dures with high costs and low benefits.Thus the rise of terms of spending both among people insured privately premium medicine also coincides with a rise in waste- and among people insured by government. ful spending. There is considerable controversy over what the regional differences in health spending—without corre- Differences Within the United States sponding differences in outcomes—imply about the ne of the most important findings in healthcare value of medical care. At one extreme, George Mason Oresearch is that within Medicare there are large University economist Robin Hanson argues that we regional variations in spending with no could dramatically cut medical care difference in outcomes for similar without adverse implications for patients. The studies directly measure Americans make health (“Cut Medicine in Half,” the amount of medical services Cato Unbound, September 10, 2007, received, such as the number of doctor extravagant use of www.tinyurl.com/2ursu9). visits per week. Thus there can be no medical procedures On the other hand, some econo- doubt that the quantity and type of mists point to the tremendous value medical services consumed, not prices with high costs and of improvements in health and or administrative expenses, account for low benefits.Thus the longevity in recent decades. If the the large differences in spending across value of health improvements over regions. Finally, the studies carefully rise of premium the past 30 years exceeds $1 million control for patient characteristics, so medicine also per person (as Kevin Murphy and that the absence of difference in out- Robert Topel argue), then how can comes is a reliable finding. coincides with a rise our medical services not be cost The studies of regional differences effective? (Kevin Murphy and offer clear and compelling evidence in wasteful spending. Robert Topel,“The Value of Health that large variations in the utilization and Longevity,” NBER Working of medical services can be associated with no differ- Paper No. 11405, June 2005.) ences in health outcomes. If this is true across regions The discrepancy between the way health care looks within the United States, then, in the absence of some if we examine differences across regions or over time striking piece of evidence to the contrary, I think it is can be explained in a number of ways. One hypothesis reasonable to take it as true across countries as well. is that the big improvements in health and longevity Again, it points to Americans’ use of medical proce- that we have observed over the years are due to factors dures with high costs and low benefits as the best largely unrelated to premium medicine: better nutri- explanation of why the United States spends more on tion, less physical labor, better prenatal and postnatal health care than other countries without seeing corre- care, vaccinations, and antibiotics. spondingly better outcomes. Another hypothesis is known as the “flat-of-the- The differences in Medicare spending across regions curve” theory. The idea is that medical care offers are striking. In contrast, the differences between the diminishing returns.The marginal benefit of the most way American medicine works within Medicare and useful treatments is high. However, as one adds more

THE FREEMAN: Ideas on Liberty 10 Health Care’s Muddled Incentives and more spending, the marginal benefit declines. Whether you waste your money on ineffective medical People nonetheless keep undergoing treatments as treatments or on other consumer goods is of none of long as they can hope for any marginal benefit, no my business.Wasteful healthcare spending is a collective matter how small. This means that they consume problem only because we have collectivized so much of along the “flat of the curve,” where the marginal ben- what we spend. efit is close to zero. In spite of the large presence of private health- Hanson thinks medical treatment can be harmful insurance companies, one should view the American as well as helpful. He explains the observation that healthcare system as largely socialized on the demand higher spending is not associated with better outcomes side. Healthcare “reform” could entrench this socialized by suggesting that more treatment system even more by inducing or improves outcomes for some patients requiring more people who are but worsens outcomes for others, with Wasteful healthcare currently uninsured to obtain poli- a net effect near zero. (“Showing That spending is a cies that insulate them from the costs You Care: The Evolution of Health of their medical care. (For more on Altruism,” Medical Hypotheses, Volume collective problem the difference between insulation 70, Issue 4, 724–742.) only because we have and true health insurance, see chap- What is puzzling is we know there ter 5 of my book, Crisis of Abundance: is considerable research and innovation collectivized so much Rethinking How We Pay for Health in medical treatment.We also are con- of what we spend. Care, Cato Institute.) fident that at least some of these inno- One wonders what might vations are successful. For Hanson’s emerge were the government to view to be correct, there would have to be as many refrain from subsidizing or regulating health insurance. harmful innovations as helpful ones. One wonders If other consumers were like me, then the insurance why we do not then observe the market gradually fil- market would be captured by companies offering tering out the harmful innovations and retaining only policies that pay off only in the case of extreme the successful treatments. catastrophic illness. However, if other Americans I should point out that in a market system, it would were like me, we would not have elected leaders who be of no concern to me whether other Americans champion so much government involvement in health spend their money on health care wisely or not. care.

11 NOVEMBER 2009 Government Motors

BY MICHAEL HEBERLING

If Washington owns it, it just can’t keep its hands off. Decades of high labor costs, foreign competition, —Senator Lamar Alexander extensive government regulation, and burgeoning legacy costs steadily reduced GM’s market share to wenty-five years ago President Reagan told today’s 19.1 percent. A shrinking market means that auto workers in Orion, Michigan, “You’ve legacy costs will skyrocket and become unsustainable. Tdemonstrated when the chips are down, what Mark Perry at the University of Michigan–Flint people can do working together freely, rather than at estimates that the ratio of retired GM auto workers the dictates of some central planner or bureaucratic (plus surviving spouses) to active UAW members mandate of government. I happen to believe the last was 4.61 to 1 in 2007. Given the state of Social Secu- thing your industry rity, in which fewer needs is the federal workers support a government bring- growing retiree pop- ing in outsiders to ulation, the phrase tell you how to run “As GM goes, so a business.” goes the nation” Fast-forward to seems about right. 2009: President Given the plum- Obama fires GM meting market share chief Rick Wag- (averaging 0.85 per- oner, the company cent every year), one files for bank- would think at some ruptcy, a govern- point one of the ment-appointed GM chiefs would auto task force calls have taken drastic the shots, and the action to turn things federal government around. One would now owns 61 per- think wrong. There cent of the new GM. was no financial incentive to do so. Since the GM How did we get to this point and what can we board continually rewarded failure with mega-million- expect from Government Motors? dollar bonuses (similar to the practice at AIG), why In its heyday in the early 1980s, GM employed bang heads to reduce labor rates or eliminate duplicate nearly 350,000 workers at 150 assembly plants. It also had a 43.8 percent share of the market. Unfortunately, Michael Heberling ([email protected]) is president of the Baker the good times did not last. College Center for Graduate Studies in Flint, Michigan.

THE FREEMAN: Ideas on Liberty 12 Government Motors product lines? GM’s management apparently decided to Who Are the Bondholders? simply stay the (downward) course, collect their golden ronically, if we look closely at who these bondhold- parachutes, and hope that the inevitable wreck came on Iers really are, they don’t seem so ominous, threaten- the next guy’s watch. ing, or evil.As an investment, bonds are unexciting, but When time finally ran out for GM in 2008, only they are considered much safer than stocks. While two equally bad options appeared to be left for bonds don’t pay that much, the returns are steady. For management: bankruptcy or government bailout. As this reason, they are popular among retirees and work- it turned out, there was a third, even more horrible ing families.This was especially true in the case of GM option: a government bailout bankruptcy. When you bonds. According to bond analyst Shelly Lombard, crawl in bed with the government, it’s not a pretty “That’s because unlike most companies that issue debt sight. After the Bear Stearns, AIG, Freddie Mac, in large denominations, GM sold many bonds with face and Fannie Mae debacles, it became clear that govern- values of as little as $25.That made them very attractive ment money brings some unattractive conditions, to average Americans.” According to the Washington including micromanagement, the government’s agenda, Times,mom-and-pop investors directly accounted for and political favoritism. 25 percent of the total. Large banks and investment To oversee the restructuring of GM (and the other firms had the rest. But even here, small investors were a auto bailout recipient, Chrysler), the government estab- major player through their mutual funds and 401(k) lished a 24-member Auto Task Force, including Obama retirement plans. Financial-restructuring authority cabinet members and White House officials. None had Evan Flaschen said:“The story that hasn’t been told is, any experience in the auto industry. Steven Rattner, an this isn’t GM’s union retirees versus the bondholders. investment banker, was appointed task force leader. It’s retirees versus retirees.” According to Neil King of the Wall Street Journal, Rat- The government’s treatment of the GM bondhold- tner “ranked among [New York’s] biggest fund-raisers ers was simply disgraceful. Investor’s Business Daily said for Democratic candidates.” the sordid affair “underscores why GM should have One of the biggest hurdles for the task force was to been allowed to undergo a normal bankruptcy—not reduce GM’s $172.8 billion in liabilities and reallocate the politically rigged one that the government forced $82.29 billion in assets to produce a leaner, more com- down all of our throats. A regular bankruptcy would petitive company. In normal bankruptcy the secured have given GM bondholders first call on its assets. debt is paid off first, followed by unsecured debt. Any- Instead, they literally had money stolen from them.” thing left over goes to the stockholders. Unfortunately, At a time when we are trying to restore faith in our in this case the GM stockholders came up short. In fact, financial system, the government chose to run there was not even enough to pay off all the unsecured roughshod over the investor class.This near-term polit- debt holders. The U.S. government and UAW came ical expedient will have long-term negative conse- out on top. The chart on the next page shows how quences. Other corporations will have a much harder the debt issue was finally settled. time raising capital by selling bonds. If American It should come as no surprise that one of the four investors get stiffed by the government, how will parties, the (unsecured) bondholders, balked at the potential foreign investors view this shabby treatment? proposed settlement terms. While they were second Could they be next? in the debt held, they came in last with only 10 per- cent of the common stock, no preferred stock, and Let the Micromanaging Begin no cash. For their objections, they were pummeled hile many people might say GM did not really by the mainstream media and politicians. What sin Whave a business model for the past 25 years, can did the bondholders commit? They were guilty of we expect the new one at Government Motors to be “greed” and of being “speculators.” This clearly any better? After all, there are now 535 members on the explained their unwillingness to negotiate in good faith. de facto board of directors, each making political rather

13 NOVEMBER 2009 Michael Heberling

Party (Percent of Debt Owed): Bankruptcy Settlement: $107 billion (100%)

1. U.S. Government 61.8% of the common stock $50.5 billion (47.2%) $8.8 billion in preferred stock 2. UAW’s VEBA Trust Fund 17.5% of the common stock $20 billion (19%) $6.5 billion in preferred stock $2.5 billion note $10 billion directly to trust fund 3. Canadian Government 11.7% of the common stock $9.5 billion (9%) $1.7 billion in preferred stock 4. Bondholders 10.0% of the common stock $27 billion (25%)

than economic decisions. The recent bizarre treatment Given that the government is now a majority of the GM dealerships illustrates this point. shareholder in the auto industry, expect even more GM planned to eliminate about 2,400 of its 6,000 green micromanaging. It has already started. Energy dealerships. What should have been a pure business Secretary Steven Chu, who is on the task force, recently decision has, unfortunately, gotten wrapped up in poli- said that the Obama administration is thinking about tics. Those dealers slated for closing have appealed to requiring all new cars to run on E-85 gas (85 percent Congress for help. According to CNN, “The push by ethanol). This mandate will cost the auto industry $1 the dealers to reverse the cuts has garnered strong billion a year. It is worth noting that E-85 gas is avail- bipartisan support, especially from powerful Democra- able at less than 2 percent of the gas stations nation- tic Leaders Financial Service Committee Chairman wide. Barney Frank and House Majority Leader Steny In deciding where to build the new green com- Hoyer.” So far, the Automobile Dealer Economic pact cars that will save the company, the new GM Rights Restoration Act of 2009 has 250 House and 26 considered the “community impact” and “carbon Senate cosponsors. The bill is designed to “re-open footprint” of the production facility. Ironically, it ulti- profitable dealerships and restore basic fairness.” mately settled on the Orion, Michigan, plant where The elite class has known all along that the real Reagan had disavowed central planning a quarter problem at GM was that it built too many SUVs and century earlier. light trucks and not enough of the fuel-efficient cars President Obama has said that his decision to take that consumers really want. It now appears that at the a majority stake in GM was unavoidable and that it new Government Motors environmental considera- would be temporary. This remains to be seen. How- tions will trump business considerations. Congress and ever, we have been down this road before. In 1971, the various regulatory agencies, such as the EPA, have the federal government became the majority share- been micromanaging the auto industry in the “green” holder in Amtrak. This too was unavoidable and was direction for decades with their ineffective and deadly to be temporary. Amtrak has been a ward of the Corporate Average Fuel Economy (CAFE) program. state ever since; costing the taxpayer $2.6 billion a The new CAFE standard calls for all cars and trucks to year to operate. get 35.5 mpg by 2016. No GM vehicle currently meets I fear that the new slogan in America will be,“Is this the new standard. any way to run an auto company?”

THE FREEMAN: Ideas on Liberty 14 15 NOVEMBER 2009 The “I Hate the Poor”Act of 2009

BY CHRISTOPHER WESTLEY

o I was shaving the other day,and the man on the But that wasn’t what caused me to move the razor morning talk radio show was on a roll. Cash for from my face. That had to do with all of the talk about SClunkers was being temporarily shut down, or Cash for Clunkers being such a good program. It so declared the PR flack in the Department of Waste clearly wasn’t, or at least it shouldn’t have appeared so that administers the program, and Talk Show Guy to anyone who remembers the basics of college eco- thought this taught great lessons. “This was a good nomics. From this perspective, there is so much wrong program! I really liked it!” the self-described conserva- that it’s hard to know where to start. tive drawled over and over. “But if the guv-mint can’t Cleaning Up manage a good program Inventories, Not the worth $1 billion, why does Environment anyone think it can manage irst, let’s dispense with a single-payer health care Fthe notion that this system they say will cost $1 bill had anything to do trillion?” with improving the envi- Cash for Clunkers, of ronment. Getting people course, was the popular into cars that get better term for the Car Allowance mileage often leads them Rebate System, which to drive more, negating any benefit from the funded down payments of A clunker, according to the U.S. government. up to $4,500 for new cars Falk W. Müller switch.What’s more, scrap- if older-model cars were traded in and destroyed. The ping hundreds of thou- program was temporarily discontinued and then offi- sands of “clunkers” en masse while encouraging cially ended after barely a month of operation. Around production of new cars to replace them isn’t exactly an 700,000 vehicles were purchased as a result of the pro- environmental blessing either. gram, according to government and industry statistics. The real purpose of the program was to help car It wound up costing $3 billion. dealers sell off the excess supply of 2009 vehicles that Talk Show Guy was right, I thought, careful not to consumers weren’t buying at the prices dealers pre- cut myself. When you offer $3 billion in free money to ferred to charge. Giving people free money to put people, why was anyone shocked that they went for it? toward a down payment was a way for Congress to pay And if you offer free health care to a supposedly narrow back a powerful lobby that produced an unsustainable segment of the population that cannot now access it, why do economic planners create budget projections Christopher Westley ([email protected]) teaches economics at Jacksonville that assume healthcare demand will remain static? State University.This article first appeared at www.fee.org.

THE FREEMAN: Ideas on Liberty 16 The “I Hate the Poor” Act of 2009 level of output during the Fed-fueled boom. It’s remi- its surely won, as did those individuals who otherwise niscent of those New Deal programs—like the Agricul- would have gone without cars. And let’s not forget the tural Adjustment Act—that also tried to thwart falling banks and finance companies that now have loan assets prices by destroying perfectly good and usable products on their books.You can be sure the members of Con- that otherwise would have lowered prices. In the 1930s gress who voted for this bill will remind dealers of their people rioted when the government forced farmers to generosity in directing other people’s money their way pour perfectly good milk down sewer drains. No one’s in this old-fashioned shell game. rioting today because now the government is more And it is a shell game, because the losers here are the richly compensating those who own the property poor and the lower middle class—the very groups in being destroyed. (For a fascinating, contemporary the most precarious economic shape 18-plus months account of the Agricultural Adjustment Act and other into the Great Recession. They suffer in two ways. New Deal programs, see journalist John T. Flynn’s The First, as primary consumers in the used-car market, Roosevelt Myth.For a more recent account, see Amity they will see supply shrivel. Many cars that qualified for Shlaes’s The Forgotten Man: A New History of the Great Cash for Clunkers still had long lives ahead of them. Depression.) The poor will also pay in the form of higher prices resulting from the inflation that will be required to Bootleggers and Baptists, Dealers and Greens finance the program. The government is broke, with hat we have is a situation tax revenues falling while spending Wdescribed by Clemson Uni- This program sticks soars at levels even higher than those versity economist Bruce Yandle’s associated with the profligate Bush “Bootleggers and Baptists” theory for it to those members administration. In terms of cost, Cash the growth of government. Accord- of society least able for Clunkers is at least twice as ing to Yandle, government often expensive as its New Deal inspira- grows because two otherwise oppo- to manage in tion, the Agriculture Adjustment Act. site groups are able to join forces to hard times. This program will be paid for, at pass legislation that neither would some time, with monetary inflation have been able to get passed individually. His example furnished by our not-so-independent central bank, and applied to groups that supported alcohol prohibition: we will pay for it in the form of higher prices.This is The bootleggers benefited from the outlawing of their why inflation is a tax, and a regressive one at that. “legitimate” competition, and religious groups Indeed, when I first read about Cash for Clunkers, I opposed liquor sales as a matter of morals.When both thought it should have been named the “I Hate the groups joined forces, legislation became far more likely Poor”Act of 2009 because—you can be sure—this pro- to pass. gram sticks it to those members of society least able to Applying Yandle’s theory to the clunker program, manage in hard times. In the end they will find main- the bootleggers were car dealers who faced low con- taining economic autonomy all the harder, making it sumer demand and sales revenues at current prices, more likely they will become dependent on govern- while the Baptists were environmentalists who believed ment in the future. The cynic in me wonders if this that older-model cars insult mother earth.The prospect might be the actual intent. of an old-car trade-in program unites both groups. Nonetheless, Talk Show Guy thought this was a Cash for Clunkers certainly had its share of winners good program. He liked it! I bet he got a good deal on and losers. Car dealers who experienced summer prof- a new car, too. Hope he enjoys his ride.

17 NOVEMBER 2009 ThoughtsAuthor Name on Freedom

Science Fiction and Economic Fiction

BY DONALD J. BOUDREAUX

homas Macaulay Boudreaux, age 12 and my One example occurs in the 1984 Star Trek movie only child, is a huge fan of Star Trek. Actually, The Voyage Home. In that film, Captain Kirk and his Teven an italicized “huge” doesn’t quite capture crew travel back in time to 1984 San Francisco to cap- the extent of Thomas’s fascination with, and knowledge ture a humpback whale.These whales had gone extinct of, the franchise. From Captain Pike through Mr. Spock by the twenty-third century and the good Starfleet to Ensign Sato,Thomas knows and loves anything and captain and his crew have reason to try to restore everything Star Trek. the species. So in August I took Thomas to Las Vegas for the While in the twentieth century a zoologist informs year’s biggest Star Trek convention. Attending that Mr. Spock that the hunting of whales is threatening three-day event caused me to reflect more seriously the species’s existence. On hearing this comment, than I have yet done on the late Gene Roddenberry’s Mr. Spock volunteers that “to hunt a species to extinc- master creation. tion is illogical.” First and foremost, Star Trek is indeed entertaining. Not at all.When property rights are poorly defined Led by Thomas, I myself have become something of and enforced—either because technology is inadequate a Trekkie. (Star Trek:The Next Generation is my favorite to the task or because government interferes—valuable series, although I like each of the five resources often are overused. Most series quite a lot.) As Brent Spiner famously, poorly defined property (the actor who plays Data) noted at Mr. Spock rights often lead to a “tragedy of the the convention, Star Trek is, above commons.” Because the open oceans all, an action-adventure show—and should learn some are not owned by anyone, and there’s action and adventure galore. economics. because a whale doesn’t become any- But here are some other observa- one’s property until it is captured, no tions. one has any incentives to preserve I easily forgive a sci-fi series such as Star Trek for whale stocks so that whales can sustainably reproduce. being sketchy about how today’s known truths of the They are “overfished.”This result is quite logical. Mr. laws of the natural world are harnessed by future Spock should learn some economics. humans to make extended space exploration possible. Another example of economic ignorance in Star For example, it’s not clear just how artificial gravity is Trek occurs in a third-season episode of Enterprise. It is, created and maintained so uniformly on Starfleet ves- again, an error committed by a logic-worshipping sels, and it’s certainly a stretch to assume that the Milky Vulcan who travels back in time with the ship’s captain. Way galaxy is filled with lots of “M-class planets”— In that episode, Subcommander T’Pol and Captain planets with an atmosphere, temperature range, and Jonathan Archer visit early twenty-first-century Amer- gravitational force nearly identical to Earth’s. ica.As they drive through a California town,T’Pol asks To quibble about such artistic liberties, however, the captain if humans of that era were aware that they would be to miss the larger, more interesting picture. But I cannot forgive the many economic errors made in Donald Boudreaux ([email protected]) is a professor of economics at the series. These errors don’t merely stretch known George Mason University, a former FEE president, and the author of economic truths; they dispense with them altogether. Globalization.

THE FREEMAN: Ideas on Liberty 18 Science Fiction and Economic Fiction were running out of oil. She goes on to observe that oil In addition to having the Ferengi costume look did in fact finally run out in 2161. clownish and filling Ferengi mouths with sharp, ugly T’Pol’s claim is ludicrous. First, there is no evidence teeth, Star Trek writers have composed a set of strictures that we are running out of oil. As MIT economist that the Ferengi allegedly follow. Called “The Ferengi Morris Adelman wrote in 2004 (the year after that Rules of Acquisition,” these 286 pieces of allegedly episode was filmed), known reserves of oil recently capitalist wisdom are mostly absurd. Consider: reached an all-time high. Second, if and when oil does Rule #1: “Once you have their money . . . never become much more scarce than it is today,its price will give it back.”Any businessperson who refused to return rise—and will keep rising as oil becomes more scarce. money to a dissatisfied customer would not be in busi- This higher price will both cause consumers to econo- ness for long. Competitors more accommodating to mize on oil and oil-based products, and prompt entre- consumers would outcompete such ignoramuses. preneurs to redouble their efforts to Rule #2: “Never allow family to find suitable substitutes for oil. stand in the way of opportunity” and At some point, the cost of extract- Rule #21: “Never place friendship ing additional oil buried deep within above profit.” No doubt a few capital- the earth’s crust will exceed the value ists are sociopathic in this way—just of doing so—not only because this as, no doubt, so too are a few politi- cost will be very high but also cians. But how many businesspeople because alternative sources of energy do you know who would wittingly will be more attractive. sacrifice their families’ and their friends’ best interests even for the Merchants of Menace smallest economic gain? erhaps most annoying of all, Rule #27: “There’s nothing more Pthough, is the portrayal of the dangerous than an honest business- Ferengi.These are a merchant class of man.” Really now. Anyone who humanoid aliens, appearing most knows anything about capitalist reality prominently in the series Deep Space knows that dishonest businesspeople Nine.Wikipedia describes the Ferengi eventually are caught—not so much as “ultra-capitalist”—and it’s pretty If businesspeople in a free market were like by the law but rather by consumers the “ultra-capitalist” Ferengi, they’d go broke. clear that the Star Trek writers would Mary Harrsch who prefer to deal with honest busi- see that description as accurate. nesspeople. Dishonest business dealings But accurate it certainly is not. are a sure recipe for business failure. The Ferengi are obsessed with profit, and so Star Trek Rule #52: “Never ask when you can take.” This writers portray them as crass, often-cheating, mean- rule is one for thieves, not merchants and producers. spirited, oily characters. Those few Ferengi portrayed It is indeed a rule consistently followed by politicians sympathetically are ones, such as Rom, who mysteri- but not by businesspeople. ously don’t share the Ferengi obsession with pecuniary Nevertheless, my complaints to the contrary, now gain. (Star Trek fans: I realize that the portrayal of Quark that I am finished composing this column, I will boldly is more nuanced, but it doesn’t come close to negating go into the family room to watch an episode of Star my interpretation.) Trek with Thomas!

19 NOVEMBER 2009 The Mystique of Hedge Funds

BY WARREN C. GIBSON

edge funds are controversial these days. commodity futures, and sophisticated derivatives Though it’s unlikely that the average citizen thereof. Some try to anticipate global political or Hor the average congressman could say just economic events, while others seek opportunities in what hedge funds do, many are certain they must be specific industries or companies. reined in by additional regulation because they can— Hedge funds are like mutual funds in some ways. A and do—cause widespread damage to our financial mutual fund sells shares to investors and uses the pro- system. Almost everyone takes it for granted that ceeds to buy stocks or bonds (usually).A fund’s income regulation of some sort is the solution, ignoring the and realized capital gains are distributed to sharehold- possibility that at least some of the problems are actu- ers, while unrealized capital gains are reflected in higher ally caused by regulation. mutual fund share prices. Like mutual funds, hedge What is a hedge fund? The name implies hedging, a funds are typically open-ended, meaning they can sell strategy that reduces risk. If you bet on several horses in shares to new investors from time to time or repurchase a race, you are hedging your bets— them from existing shareholders. spreading your risk.You can buy gold There the resemblance ends. Any- to hedge against inflation.You can sell Most present-day one can buy mutual fund shares, but interest-rate futures to hedge the risk hedge funds don’t do hedge fund shares are generally avail- that rising interest rates would pose to able only to “qualified investors,” your bond portfolio. much hedging, but defined by an annual income of at least The first hedge fund was created in $200,000 and financial assets of 1949 by Alfred Jones. He believed he the name persists. $1,000,000. Withdrawals of capital are could pick stocks that would out- only permitted at limited times. Shares perform and those that would underperform the over- cannot be offered or advertised to the general public, all market. But Jones didn’t know where the overall which can be an advantage because it may make investors market was going, so he would buy his expected out- feel that they are gaining entrée into an exclusive club. performers and sell short the expected underperform- Hedge fund managers are more lightly regulated ers. He thereby insulated his portfolio from general than mutual fund managers.They are allowed to charge market moves, which would affect about half his hold- performance-based fees, for example, which is forbid- ing positively and half negatively. den to mutual fund managers. Though management Most present-day hedge funds don’t do much hedg- fees vary widely, hedge fund managers typically retain ing, but the name persists. Instead, they engage in a 20 percent of any gains.This gives them some “skin in bewildering variety of trading methods, including buy- the game,” which presumably motivates them to do ing on margin (using borrowed funds) and selling short (selling borrowed assets so as to profit from a price Warren Gibson ([email protected]) teaches engineering at Santa Clara drop). They trade stocks, bonds, options, currencies, University and economics at San Jose State University.

THE FREEMAN: Ideas on Liberty 20 The Mystique of Hedge Funds well for their investors. However, they do not share in what LTCM was doing with it until it was too late. fund losses. Hedge funds typically charge short-term They were awestruck by the reputations of the LTCM redemption fees to discourage short-term trading and partners, two of whom had shared the 1997 Nobel maintain a stable asset base. Prize in economics. Had LTCM been allowed to go Perhaps the biggest difference between the two fund under, its example would have tempered risky behavior classes is that hedge funds are free to take very large by others. If uninsured depositors at these banks had risks, while mutual fund managers are constrained also lost money, they too would have gotten a valuable against “excessive” risk-taking. wakeup call. Instead, a brick was added to the house that came to be called the “Greenspan put.” It said: Go Stupidity in the Hedge Fund Business ahead and take risks. If you win you collect the profits. ong Term Capital Management (LTCM) was a If you lose, we’ll cover you. Lhedge fund that collapsed in spectacular fashion in 1998. The immediate cause was the Russian bond Hedge Funds: Bane or Boon? default, but, more fundamentally, s it wise to take high risks as hedge LTCM relied too much on sophisti- Ifunds do? For most people, no. For cated computer models and extreme Hedge fund shares those whose resources are large use of leverage, meaning almost all its are generally available enough that they can afford to lose capital was borrowed.When the Russ- some capital and who enjoy the thrill ian government defaulted on its only to “qualified of the chase, perhaps yes.We all have bonds, it set off a chain of events that different temperaments and different LTCM’s models had indicated was investors,” making circumstances. A free society respects essentially impossible. These events investors feel that these differences and does not stop its produced huge losses that took the members from taking risks nor shield fund to the brink of default, threaten- they are gaining them from the consequences. ing big losses for its lenders, including entrée into an As long as there is no fraud, hedge some of the largest and most influen- funds, like other market participants, tial New York banks. So the Federal exclusive club. produce social benefits. They provide Reserve Bank of New York came to market liquidity, the lubrication that the rescue, arranging a $3.6 billion bailout, a sum that makes markets work well. Successful funds help move cap- seems quaint by today’s bailout standards. The same ital to where it is most needed and help move prices in “systemic risk” argument that we hear today went anticipation of future events. Unsuccessful funds go out of around then: A default on those loans, it was said, business sooner or later, and investors in failed funds learn would be an intolerable shock to the financial system. to be more careful about whom they select to handle their “Too big to fail” was the reason;“too well-connected” money. was perhaps more accurate. But regulation brings unintended consequences, Even though the fund eventually recovered without many of them harmful to the people they are supposed losses to the bailout guarantors, the LTCM failure rep- to protect. Absent regulation, it is unlikely there would resents a missed—and golden—opportunity. Had the be a separate category called hedge funds, distinct from fund been allowed to fail, and had the big banks taken mutual funds. their losses, it would have struck some well-deserved Unfortunately, in January the President’s Economic fear into the hearts of fund managers, investors, and Recovery Advisory Board, headed by Paul Volcker, especially bankers. Our current financial crisis might called for registration of hedge funds and public disclo- have been less severe as a result. LTCM was very secre- sure of their holdings. Fund managers will likely resist tive about its strategies, and the bankers who loaned disclosure, which can damage their mystique and invite money to the fund likely knew next to nothing about free riders.The board report addressed not only hedge

21 NOVEMBER 2009 Warren C. Gibson funds but also any other “systemically significant” finan- information. It is harder for managers and investors to cial institution of any type, and the criteria by which find each other when important information is, in systemic significance is to be judged were left vague. effect, censored. Middlemen, such as financial planners To their credit the board members recognized that or trust officers, are left to fill the gap, which they do “a modest system of registration and regulation can relatively inefficiently. create a false impression of lower investment risk.” The rule forbidding mutual fund managers to The Hedge Fund Transparency Act (Senate Bill 344) charge performance-based fees again hurts the little was introduced shortly after the report was released. It guy by denying access to performance-motivated man- has been in committee ever since. It would cover pri- agers. It also drives up the fees that hedge fund man- vate equity funds and venture capital funds along with agers can charge by shielding them from mutual fund hedge funds. competition in this respect. Thus both hedge fund Market participants will very likely find ways to get investors and mutual fund investors come out on the around any new regulation or to co-opt it, as they gen- short end of this regulation. erally do. Regulators sometimes fail to catch the bad guys—see the Bernard Mad- Regulation: Rationale and Reality Why are people of off case—but they sometimes destroy usiness regulation almost invari- modest means good guys as well. Art Samberg has Bably starts with wide popular enjoyed a long career as a successful support. Most people assume big busi- forbidden to buy stock-picker. By 2001 he and a col- ness must be restrained lest it run league had built Pequot Capital Man- roughshod over the little guy. But hedge fund shares? agement into the largest hedge fund often, as in the Progressive Era a cen- The presumption is in the world, riding the technology tury ago, it is big business that actually wave up and later shorting it on the promotes regulation, expecting it to that they lack the way down. In 2001 the Securities and put smaller competitors or would-be knowledge and Exchange Commission began investi- competitors at a disadvantage. Often gating the firm for insider trading, regulators start out conscientiously sophistication but no charges were ever filed and dedicated to their jobs, but over time Samberg strenuously denies any familiarity can transform them into necessary for intel- wrong-doing. Guilty or not, by last advocates for those they regulate. ligent risk-taking. May the bad publicity had taken such Hedge fund regulation is no different. a toll that Samberg announced he Why are people of modest means would shortly liquidate his fund—sell forbidden to buy hedge fund shares? The presumption all its holdings and return cash to the shareholders. is that they lack the knowledge and sophistication nec- (Whether insider trading is something that should essary for intelligent risk-taking. Common folk must be really be forbidden is a subject for another time.) protected from themselves, lest they get in over their Regulation has many other drawbacks. But a badly heads. After all, we can’t have people gambling their neglected one is that government-imposed minimum rent money. (Unless, of course, they’re gambling on standards tend to become maximum standards. People state lottery tickets.) The regulation that was supposed take less care to understand what they’re getting into to protect small investors actually protects large with a regulated investment because they assume that investors by locking out their smaller competition. regulators have diligently vetted the offerings. All firms The prohibition on advertising by hedge funds (or getting a pass from the regulators tend to be treated other “private placements”) blocks potentially useful alike. That’s when trouble begins.

THE FREEMAN: Ideas on Liberty 22 Old, Bold Futility

BY WILLIAM R. ALLEN AND WILLIAM DICKNEIDER

n economic analysis and policy formulation, pro- to selected individuals, then fewer workers will produce fundity is not to be confused with complexity.And the butter that beneficiaries would have demanded. In Isimple logic is not the same as simplicity. Reliance either case, decreases in federal expenditures in one area in thought and communication on shortcut slogans and to finance increases in public works will not increase mottos yields not solution but fiasco. total employment. With employment slumping, many would have us Instead of curtailing other spending in order to believe in a simplistic “bold economic recovery increase expenditures on public works, government program.” With vast public-works projects to build might raise taxes and thereby curtail private consump- and rebuild so-called infrastructure—highways, bridges, tion and investment. With private spending down and sewers—we could allegedly create jobs. government spending up, private jobs are traded for We may have neglected our infra- public jobs, and total employment is structure. Perhaps we would be more not increased. productive if we invested more in The expansion of If, alternatively, government maintaining and expanding such basic finances the expansion of public capital. But the condition of our public-works jobs is works by enlarging its already enor- infrastructure commonly is not the likely to cause jobs mously swollen deficit, then it will central issue. The more immediate either have to borrow existing money question is whether government to contract elsewhere, or create new money to pay its spending would increase total with little net increased bills. If it borrowed existing employment. money from the community, govern- Public-works programs clearly change in aggregate ment would compete more intensely would directly create specific jobs. with businesses and households for But expansion of public-works jobs is employment. financial resources. More money likely to cause jobs to contract else- would then go to government and where, with little net change in aggregate employment. less to private firms and individuals. Government Other employment will contract because federal spending of borrowed funds would displace private expenditures on public-service jobs must somehow be spending of private funds. Again, some jobs are traded financed. If the federal government is to increase for others. spending for public works, then it must reduce other Finally, what if government financed its increased government expenditures or raise taxes or deficit- deficit spending by creating new money? In this spend. instance, spending need not fall in other areas, so new If government reduces spending for other programs, such as national defense, then fewer workers will pro- William Allen is emeritus professor of economics at UCLA.William duce guns. Or if government reduces transfer payments Dickneider is an independent economic analyst and consultant.

23 NOVEMBER 2009 William R. Allen and William Dickneider public-works jobs would not reduce other employ- relationship that existed over those decades is quite the ment—initially. But down the line, increased money opposite. Faster growth of employment has been associ- creation, if continued fast enough long enough, will ated with slower growth of federal spending, and slower raise prices. And higher prices—a pernicious form of growth (or reduction) of employment was more likely taxation—would threaten future productivity and when federal spending grew faster. employment. We would then obtain a bit more force- From 1929–33 government outlays increased by fed employment today at the expense of less employ- almost half—over 48 percent—while unemployment ment and more misery tomorrow. surged more than eightfold. Inflation is not a function solely of rapidly increasing In the New Deal period of 1933–39, government money stock, to be sure. The rate at which money is spending rose at an annual rate of over 12 percent, dou- spent—the velocity of monetary circulation—also bling in just six years, while employment increased at affects aggregate community expenditure. Velocity has only 2.5 percent. The unemployment rate was nearly trended downward over the last 25 percent in 1933, and was still decade and fell abruptly in late 2008, more than 17 percent in 1939. The which partially offset the rising No one has found then secretary of the Treasury amount of money. But in a period of a significant, acknowledged in 1939 the basic fail- substantial inflation, we will see both ure of the spending program. the amount of money and its rate of consistently positive In 1962–66 and in 1975–81, spending rise.When expenditure goes relationship between employment expanded at an annual up faster than the production of average of 2.2 percent in each goods—and it is vastly easier to create government spending period, but government spending money than to create goods—we have and total employment rose 6 percent in the earlier years and inflation. at more than double that rate in the No matter how government in the United States later period. finances it, greater spending for public From 2001 to the present, govern- works is not likely to increase the total or any other country. ment outlays have risen at an annual number of jobs significantly. Eco- rate of nearly 7 percent, while nomic thinking leads to this conclusion, but does his- employment has expanded at a measly 0.8 percent. In tory support it? the past year and a half, employment actually fell. No one has found a significant, consistently positive More Spending, No More Jobs relationship between government spending and total he economy is not a laboratory in which experi- employment in the United States or any other country. Tmentation readily yields conclusive evidence. But The reason is simple.The money spent by government we can look at how past government spending in gen- has to come from somewhere. Certainly, there are eral has related to total employment. things that can be done to promote a vigorous econ- Data for the last 80 years indicate that big increases omy. But it should be apparent that government can- in federal spending have not typically been associated not simply and surely spend us to rapidly expanding with large increases in employment. Indeed, the loose employment.

THE FREEMAN: Ideas on Liberty 24 Our Economic Past Rutherford B. Hayes and the Financing of American Prosperity

BY BURTON FOLSOM, JR.

utherford B. Hayes, America’s nineteenth greenbacks, which would not be redeemable in gold president (1877–1881), is generally dismissed until some future date.The flood of greenbacks caused Ras a minor, even below-average president. inflation and chaos—merchants wanted specie, not Matthew Josephson, the journalist-chronicler of the paper that someday might be redeemed. late 1800s, insisted that Hayes had “no capacity for . . . Many Americans, especially debtors who liked the large-minded leadership.”Other historians have written idea of repaying loans in inflated currency, welcomed him off as just another cipher among a string of forget- the greenbacks and wanted more to be printed. The table chief executives of the Gilded Age. problem with that, apart from serious inflation, was that But the truth is that Hayes was a strong and princi- foreigners were refusing to buy American debt, which pled leader of firm character, who, dur- raised the interest costs on the almost ing a critical time in history, shored up $2 billion that the Union borrowed to the country’s finances. His contribu- fight the war. tions to restoring American credit are In 1875 Congress had promised to worth noting today. redeem the greenbacks for gold in four Hayes was a small-town Ohio years and Hayes ran his campaign on lawyer until his Civil War exploits a pledge to fulfill that promise. “Low earned him a promotion to brigadier rates of interest on the vast indebtedness general and won him a congressional we must carry for many years,” Hayes seat after the war. After one term in said, “is the important end to be kept Congress, Hayes was elected three in view.” times as governor of Ohio. In 1876 he As president, therefore, Hayes pre- won the Republican nomination for pared to retire the greenbacks. He had president, and during the campaign budget surpluses every year in office, that followed he defeated Governor and he used these extra funds to help Rutherford B. Hayes Samuel Tilden of New York in a con- commons.wikimedia.org build up a gold reserve to pay off the troversial election. Tilden won the greenbacks. So effective was Hayes at popular vote, but Hayes won the electoral vote after a this task that when the official government redemption special commission awarded him the disputed states of date (January 2, 1879) came around, few people stepped Florida, South Carolina, and Louisiana. forward to get gold for their greenbacks. Confidence in U.S. credit was such that most people traded greenbacks Severe Inflation at face value with confidence that gold would be in the nce in the White House, Hayes withdrew north- Treasury if they ever wanted it. Oern troops from the South and thus ended Having solved the greenback problem, Hayes also Reconstruction. But the enormous financial debts faced a crisis with silver. From the beginning of U.S. from the Civil War still lingered. That war had been so costly that the Union could not secure the cash (that Burton Folsom, Jr. ([email protected]) is professor of history at is, specie) to fight it. Congress and President Lincoln Hillsdale College, author of New Deal or Raw Deal? How FDR’s covered expenses by issuing over $400 million in Economic Legacy Has Damaged America, and FEE’s senior historian.

25 NOVEMBER 2009 Burton Folsom, Jr. history, gold and silver coins (and bullion) had circu- Congress would even consider tampering with U.S. lated to pay debts, to conduct trade, and to transact coins that way. He promised to veto any “measure business. Silver of course is more plentiful than gold, which stains our credit.”When Congress passed the act and the ratio had been 15 or 16 ounces of silver to 1 anyway, Hayes vetoed it. Congress, however, overrode ounce of gold. The U.S. Treasury in fact minted coins Hayes with a two-thirds vote, and the Bland-Allison bill and traded the metals at 16 to 1 during much of the became law. 1800s. But that all stopped after the Civil War. The presence of these new silver dollars bothered The problem was that active mining in the Ameri- Hayes, but American credit remained strong through- can West was yielding much more silver than gold. out the world.The greenback problem was under con- Also, the demand for silver was down because the rest trol and the government continued to retire the Civil of the world was beating a path to a monometallic gold War debt through annual budget surpluses. In 1880, for standard. By the end of the 1800s, with silver prices example, federal revenue was $333.5 million, which down, it took about 32 ounces to buy one ounce of was $65.9 million—almost 20 percent—more than gold. The silver miners believed this devaluation of expenses. The biggest item in the federal budget was their metal was unfair. Those who favored inflation $95.8 million for interest on the debt. With diligence, were happy to agree: If the government would stabilize Hayes had renegotiated much of this debt from 6 to 5 the ratio at 16 to 1, debtors could repay in inflated sil- and sometimes 4 percent. ver dollars instead of gold. Flooding the market with In an effort to slash future expenses, Hayes began silver (fixed at 16 to 1) would have the efforts to make government bureau- same effect as running greenbacks off crats work more honestly and effi- the printing press. Sound currency and ciently. In the New York Customs Hayes was appalled at the persistent House, for example, some officials efforts of inflationists to tamper with sound character were extorting payments from the currency. “Expediency and justice were one and the importers and other officials were both demand honest coinage,” Hayes drawing salaries but doing almost no insisted. Sound currency and sound same to Hayes. work. Since President Grant, Hayes’s character were one and the same to predecessor, had suffered greatly Hayes. “A currency worth less than it from the shenanigans of dishonest purports to be worth,”Hayes observed,“will in the end government officials, Hayes tried extra hard to reform defraud not only creditors, but all who are engaged in the civil service and make sure government graft was legitimate business, and none more surely than those kept to a minimum. who are dependent on their daily labor for their daily Finally, Hayes showed balance in his administration. bread.” When, during a massive railroad strike in 1877, a state governor asked him to send in federal troops to pre- Free Silver serve order, Hayes obliged. But he would not use fed- he inflationists lobbied hard with their politicians eral troops to break the strike. Tfor what was called “free silver,” which was short Hayes was a constitutional president. He believed in for the free and unlimited coinage at the fixed ratio. an executive strong enough to veto bad legislation, but They couldn’t muster the votes, but they did support he did not want to expand executive powers beyond the Bland-Allison Act in 1878. what the Constitution specified. Congress was where Under that bill Congress would be obligated to buy laws needed to originate and where most political at least $2 million (and up to $4 million) worth of sil- debate needed to take place. ver and mint it into special dollars of almost one ounce. Politics to Hayes was not a career. After serving one Such “dollars” in 1878 contained only about 90–92 term as president, he happily stepped down and cents worth of silver, and Hayes was dismayed that returned to private life.

THE FREEMAN: Ideas on Liberty 26 The Great Writ Then and Now

BY WENDY MC ELROY

abeas corpus is a rarely invoked legal writ, or corpus is a privilege, does government have an obliga- document, widely considered to be the cor- tion to extend it to all people regardless of citizen- Hnerstone of individual liberty. Also known as ship? If it is extended only to citizens, are there The Great Writ, habeas corpus (ad subjiciendum) is Latin circumstances through which a citizen can lose the for “you may have the body” (subject to examination). “privilege”? Purely practical questions arise as well. The writ is a civil action with the force of a court For example, do constitutional constraints bind only order, which requires a custodian, usually the govern- the federal government and not the states? ment, to produce a detainee. Apart from rights theory and practical considera- The purpose is not to determine the detainee’s tions, another aspect of habeas corpus deserves atten- innocence or guilt but to evaluate whether the deten- tion because it explains why the writ is invoked so tion itself is lawful; that is, does it satisfy the standard set often in debate though so rarely in court: namely, its by the law of the land? If the impris- psychological impact. Habeas corpus onment is judged to be valid, the per- is a powerful concept that evokes son must submit to a trial or whatever Habeas corpus is strong emotions. This is largely procedure is prescribed. If the impris- viewed as a litmus because it is viewed as a litmus test for onment is invalid, the person must be whether a government is a dictator- released. In short, the government test for whether a ship. In his article “Habeas Corpus: cannot imprison you without just The Lynchpin of Freedom,” Jacob cause and due process. government is a Hornberger of the Future of Free- Although habeas corpus is not dictatorship. dom Foundation explains how habeas commonly raised as a legal challenge, corpus is the enforcement arm of all it has been mentioned with some fre- other rights. Using First Amendment quency in recent issues—from the prison at Guan- guarantees of free speech as an example, he writes, tanamo Bay, Cuba, to the detention of illegal immigrants to the FLDS ranch raid by Texas [H]ow is that provision enforced? Editors, critics, child-welfare services. Critics of these government and protestors would be languishing in some mili- actions claim that they erode the principle of habeas tary detention center....What good would it do to corpus. The word “unconstitutional” is often used point out that people have the constitutional right because the Constitution is the legal standard to speak their mind, criticize government policy,and that an imprisonment must ultimately satisfy in the petition the government for redress of grievances? United States. In the course of discussing such events, theoretical Wendy McElroy ([email protected]) is an author, the editor of questions about The Great Writ arise. Is it a natural ifeminists.com, and a research fellow for the Independent Institute in right or a privilege granted by government? If habeas Oakland, California.

27 NOVEMBER 2009 W endy McElroy

The president and the military would be in charge. a foundational document of the English Constitution. ...The doors to the cells would remain locked. The Petition detailed the specific liberties of freemen, The prisoners would be unconditionally subject to which legally constrained the king. For example, mar- whatever treatment their jailers wished to impose. tial law could not be declared during a time of peace, The prisoners would be prohibited from going to and prisoners could use habeas corpus to challenge the court to complain or to seek redress. That’s where legitimacy of their imprisonment. habeas corpus . . . comes in. The reinterpretation of Magna Carta had a pro- found impact on the American colonies, the charters Michael Zander, emeritus professor of law at the for which were drafted during this period. Indeed, London School of Economics, expands on the psycho- Coke may well have been one of the authors of the Vir- logical importance of the Great Writ: “Habeas corpus ginia Company charter.These charters guaranteed that has a mythical status. ...In reality it is no longer of colonists would enjoy “all the rights and immunities of great practical significance as there are today very few free and natural subjects.” Moreover, American revolu- habeas corpus applications, but it still rep- tionaries like Thomas Jefferson and resents the fundamental principle that James Madison were intimately familiar unlawful detention can be challenged by with Coke’s four-volume Institutes of the immediate access to a judge—even by Laws of England. When drafting their telephone in the middle of the night.” own documents to ensure liberty, the Thus, despite debate and periodic sus- Founding Fathers drew heavily on his pension by government, habeas corpus ideas. For example, the Third Amend- has endured within law because the idea ment of the Bill of Rights derives from of an authority having the power to the Petition of Right’s ban on billeting imprison someone without cause is troops. abhorrent to general sensibilities. The Founding Fathers also drew on the Habeas Corpus Act of 1679, which Historical Background passed Parliament during the reign of ccording to the eighteenth-century King Charles II and strengthened that Sir Edward Coke made habeas corpus Ajurist William Blackstone, the first legally and politically prominent. right against the power of the king. instance of the term “habeas corpus” commons.wikimedia.org When it crossed the Atlantic to Amer- appeared in 1305. But the concept is ica, however, habeas corpus underwent generally assumed to have been part of the common- a subtle but significant change. In England it was a law tradition at the time of Magna Carta. Signed in weapon against monarchy that originated in the 1215 by King John,Article 39 states:“No freeman shall “rights” of nobles and only later grew to embrace the be taken, or imprisoned, or disseized, or outlawed, or average person. In America it began as a core protection exiled, or in any way harmed—nor will we go upon or that every individual enjoyed against any governing send upon him—save by the lawful judgment of his authority. peers or by the law.” (The wording evolved over time.) The only specific reference in the Constitution Magna Carta assumed political and legal promi- occurs in the Suspension Clause (Article I, Section 9— nence in the early seventeenth century when it was “Limits on Congress,” Clause 2): “The privilege of the reinterpreted and used to advantage by the lawyer and writ of habeas corpus shall not be suspended, unless parliamentarian Sir Edward Coke. Coke was a passion- when in cases of rebellion or invasion the public safety ate advocate of common law over supreme monarchy; may require it.” he famously proclaimed in Parliament,“Magna Carta is Although the reference is brief, it is highly signifi- such a fellow that he will have no sovereign.” In 1628 cant that this particular protection of civil liberty is in he helped to draft the Petition of Right, which became the body of the Constitution while similar protections,

THE FREEMAN: Ideas on Liberty 28 The Great Writ Then and Now such as the right to trial by jury, occur only in the The first suspension came early in the Civil War appended Bill of Rights.There, the closest reference to through an edict in 1861, when an estimated 20,000 habeas corpus occurs in the Sixth Amendment, which Confederate sympathizers in Baltimore tried to block states a defendant must “be informed of the nature and the movement of Union troops to Washington, D.C. cause of the accusation.”Thus the explicit inclusion of John Merryman, an officer in the Maryland cavalry The Great Writ in the body of the Constitution sug- and a secessionist, was among the thousands arrested. gests its importance for the Founding Fathers. He petitioned for a writ of habeas corpus, which was Nevertheless, the constitutional guarantee was a fed- granted by Chief Justice Roger B. Taney—the same eral one and did not extend to those in state custody. Justice who presided over the Dred Scott case. Taney ordered the military to bring Merryman before the Habeas Corpus in the U.S. court; the military refused, citing Lincoln’s edict of sus- he most famous habeas corpus case in pre–Civil pension, Taney ruled that Lincoln’s suspension was TWar America was that of the slave Dred Scott, who unconstitutional because such a measure required an attempted to sue for his free- act of Congress. Lincoln basi- dom. An earlier and similar cally ignored the ruling and case in England would have continued to expand the terri- given Scott reason for hope. In tory throughout which habeas 1772 an African-American slave corpus was suspended. named James Somersett ran The second suspension away from his master while they occurred when Congress insti- were both in England. He was tuted America’s first national recaptured but sympathizers military draft in July 1862, obtained a writ of habeas corpus which incited widespread rebel- that required his captors to lion. On March 3, 1863, Con- produce Somersett in court gress passed the Habeas Corpus where he sued for and won Act, legitimizing Lincoln’s for- his freedom. This case set the mer suspensions and approving legal precedent that slavery any others he might make for was unlawful within England the duration of the war. proper. Lincoln suspended habeas corpus in 1862 to end resistance Lincoln’s earlier suspension to the draft; Congress legitimized it in 1863. Almost a century later Dred Graphic courtesy sonofthesouth.net. had been so broad as to allow Scott petitioned the U.S. federal local authorities to arbitrarily court for a writ of habeas corpus; it was granted and arrest anyone they personally considered to be disloyal later upheld by a court of appeals. Nevertheless, in or whose politics they simply disliked. Some of those 1857, in one of the most controversial cases in Ameri- arrested had done nothing more than criticize Lincoln. can history, the U.S. Supreme Court ruled against Scott Union General Henry Halleck famously arrested a seven to two.The court found that no slave or descen- Missouri man merely for saying,“[I] wouldn’t wipe my dant of a slave could be an American citizen and so ass with the stars and stripes.” Estimates of those Scott was not a “person” within the purview of the arrested range widely, but overall 10,000 to 15,000 Constitution. He did not possess the right of habeas were probably imprisoned and denied a prompt trial. corpus. The Habeas Corpus Act, however, limited the time a The writ continued to be intimately connected person could be held without trial and so removed one with slavery. During the Civil War, President Lincoln of the most contentious aspects of the imprisonments. suspended habeas corpus in both 1861 and 1862; it was It was not until 1866, with the court case ex parte not restored until 1866. Milligan, that the impropriety of the imprisonments

29 NOVEMBER 2009 W endy McElroy themselves was put on trial. But the issue was legal- whether foreign “enemy combatants” were being istic and not based on civil liberty. The Supreme wrongfully detained. In response, the Defense Depart- Court ruled that applying military tribunals to civil- ment established Combatant Status Review Tri- ians in areas where civilian courts still operated was bunals—nonpublic hearings that reviewed whether unconstitutional. detainees met the criteria necessary to satisfy the desig- The post–Civil War period also resolved the issue of nation “enemy combatant.” These tribunals were whether the right to petition for habeas corpus was widely criticized as not fulfilling the requirements of purely federal or extended to the states.A Reconstruc- Rasul.For example, the Court had affirmed a detainee’s tion act established that those held in state prisons and right to be assisted by counsel, yet the tribunals did jails had the right to petition for a habeas review in not permit this. federal court; this meant the writ applied to every- To quell growing criticism over the Guantanamo one imprisoned in America. Since then, the majority detainees, Bush signed the U.S. Military Commissions of habeas petitions reviewed in federal court have Act (MCA) in October 2006. Congress stated its inten- come from state prisoners through state courts for tion “to authorize trial by military commission for vio- state crimes. This makes habeas corpus a rich area in lations of the law of war, and for other purposes.”The terms of the relationship between MCA explicitly abolished habeas federal and state courts and federal corpus rights for noncitizens. and state law. Boumediene—which consolidated with the earlier petition Al Odah v. Contemporary Implications United States (2002)—tested the con- istory seems arcane but it stitutionality of the MCA, specifically Hassumes a living, breathing sta- appealing to the clause in the Con- tus when courts rule based on stitution stating that the right to precedent. This was apparent in challenge detention “shall not be sus- what is arguably the most signifi- pended” except in cases of “rebellion cant development in habeas corpus or invasion.” In June 2008 the within the last decade: Boumediene v. Supreme Court’s 5–4 decision effec- Bush (2008). The case began with a tively struck down the MCA as an Camp X-Ray hosted George W. Bush’s attempt writ of habeas corpus submitted to to circumvent, then circumscribe, habeas corpus. unconstitutional denial of habeas the U.S. Supreme Court on behalf of commons.wikimedia.org corpus; the ruling also asserted the the foreign citizen Lakhdar Boume- jurisdiction of federal courts over such petitions diene, who was detained in the American military from Guantanamo detainees who had been tried under camp at Guantanamo Bay. the MCA. In November 2001 President Bush had asserted the authority of military commissions to try prisoners Theoretical Questions taken in Afghanistan or Iraq as “enemy combatants.” In long with history, theoretical debates have driven early 2002 he established Camp X-Ray in Guantanamo Athe evolution of habeas corpus. and claimed that since the camp is not on American The key theoretical debate concerns whether habeas soil, the prisoners had no rights under the Constitution corpus is an inalienable natural right that preceded the or the American legal system. Representatives of almost State or a privilege granted by government. An inalien- 200 detainees filed habeas corpus submissions over the able right is one that cannot be transferred or taken away. next three years. The Declaration of Independence, of course, In 2004 the Supreme Court heard the first of these embraced natural rights as the basis of liberty when it cases—Rasul v.Bush.The court’s landmark ruling found stated,“We hold these truths to be self-evident, that all that the American legal system had authority to decide men are created equal, that they are endowed by their

THE FREEMAN: Ideas on Liberty 30 The Great Writ Then and Now

Creator with certain unalienable Rights, that among makes it alienable and a privilege granted by govern- these are Life, Liberty and the pursuit of Happiness.” ment. Under certain circumstances defined by govern- If any right can be called “inalienable,” habeas ment, it can suspend habeas corpus, putting all other corpus must be included on that list. As noted earlier, rights at the pleasure of the authorities. the right not to be imprisoned unjustly is the found- Despite the contradictions and political maneuver- ation on which all others rest. Indeed, in the absence ing, the United States enshrined habeas corpus as a of habeas corpus, the rights of due process—includ- foundational right for every human being on American ing trial by jury and facing your accuser—become soil. meaningless. No external threat or internal problem can disman- The body of the Constitution contradicts both the tle the individual freedoms on which America was cre- Declaration of Independence and the Bill of Rights on ated. Only government and the American public can habeas corpus, however, because the Suspension Clause accomplish that.

A FEE Gift Annuity An Opportunity to Give and Receive FEE’s gift annuity program can help you: • Increase your income • Lower your taxes For more information and a free, no-obligation proposal call Krista Tverdak at 800-960-4333, or clip and mail the form below. YES, I want more information about FEE’s gift annuity program. ❏ Please send me more information. ❏ Please send me a sample proposal for a one-person gift annuity. ❏ Please send me a sample proposal for a two-person gift annuity. Birthdate(s) of above person(s) (1) ______(2) ______Name______Address ______City______State______Zip______Mail to: Krista Tverdak, 30 S. Broadway, Irvington-on-Hudson, New York 10533 FEE: Freedom’s Home Since 1946

31 NOVEMBER 2009 Stealth Expansion of Government Power

BY MURRAY WEIDENBAUM

he government of the United States spent the ties for failing to file information returns (such as Form year debating major new undertakings, ranging 1099) promptly and accurately, for example, will rise in Tfrom health care to climate change to energy a very complicated, three-tiered fashion. development to tax reform.Yet a far more fundamental On the expenditure side, the typical stimulus proj- shift, in the form of a rapid and pervasive expansion ect increases the power of government in private of government power over the private sector of the business decision-making. The bailout of the automo- economy, has been going on in stealth. Shifting eco- bile industry is really an inefficient method of financing nomic power from individual decision-makers to the union pension and health plans. The stockholders national government characterizes got zapped and the bondholders virtually every policy proposal being poorly treated. The taxpayers are left debated in Congress. Shifting economic holding the bag, especially consider- Take tax policy.A 131-page docu- ing the restrictions on importing the ment issued by the Treasury power from really fuel-efficient cars General (www.tinyurl.com/okwrer) goes way individual decision- Motors produces overseas. Appar- beyond recommending the extension ently, the new General Motors fac- of some of the expiring Bush admin- makers to the tory for building compact cars was istration tax cuts. For example, the fine national government chosen on the basis of “carbon foot- print contains more than a dozen ways print” and “community impact.” of discouraging American firms from characterizes virtually It is hard to keep a straight face doing business and investing overseas. when analyzing the Cash for Clunk- Supposedly minor technical changes every policy proposal ers program. For example, owners of also would have a severe impact. being debated in the biggest old “clunkers” got a For example, eliminating LIFO $3,500 credit for trading in an old (last in-first out) inventory accounting Congress. vehicle for a new one with an would raise business taxes over $60 improvement of just one mile per gal- billion in one decade.The Treasury also wants to revive lon. Surely, it would have saved energy if the Treasury four corporate environmental taxes that were elimi- had just mailed the $3,500 checks directly to Detroit! nated in 1969.There’s no relation between the tax bur- Of course, the Obama administration is making den these four taxes would impose on a company and some reductions in federal spending. It is reportedly the pollution that company generates. This bears an uneasy resemblance to Willie Sutton, who robbed banks because that was where the money was. Murray Weidenbaum holds the Mallinckrodt Distinguished University Professorship at Washington University in St. Louis, where he also serves as Inevitably a variety of technical tax provisions will honorary chairman of the Weidenbaum Center on the Economy, increase the paperwork burden on business.The penal- Government, and Public Policy.This article first appeared at www.fee.org.

THE FREEMAN: Ideas on Liberty 32 Stealth Expansion of Government Power imposing a 9 percent reduction in the budget for the assets over a given threshold. It also will have the power division in the Labor Department that polices fraud and to inspect the books of the advisers and to ensure com- other illegalities on the part of labor unions. As noted pliance by their clients. In addition, the power of the below, a simultaneous expansion of business-oriented SEC will be expanded by legislative proposals to give it antitrust enforcement is taking place. a more active role in guiding the compensation com- mittees of all public companies. The Business of America is Government Further, the Federal Deposit Insurance Corporation urning to regulation, one of Ralph Nader’s biggest will have new authority to take over and shut down Tdisappointments during his heyday as a “consumer financial institutions (not just banks) whose failure is advocate” was the failure of his proposal for a new deemed to pose “systemic risk.” Consumer Protection Agency. He should be a bit Viewed in their totality, these technical financial happier now: The administration’s financial regulatory changes would represent a historic expansion of gov- plan creates a powerful new Consumer Financial Pro- ernment. Sadly, there is little comfort in the Treasury’s tection Agency (CFPA). warning in its 88 pages of detailed proposals:“More can This new free-wheeling agency would take author- and should be done in the future.” Comparisons with ity now divided between the Securi- the New Deal of the 1930s are too ties and Exchange Commission (SEC) timid. Shades of Alexander Hamilton! and the Federal Reserve System. In a Viewed in their change guaranteed to cause confu- Business-Climate Change sion, the CFPA would share authority totality, these he complicated climate change with the Federal Trade Commission. Tbill that recently passed the The new regulatory agency would technical financial House of Representatives would dra- also have a mandate to give consumers changes would matically expand government power more economic education. Educators over the economy. Again, the fine find that especially scary. represent a historic print deserves far more attention than Moreover, the agency will have expansion of it has received. For example, buried its own money pot, independent of in the 1,201 pages of detail is a provi- the normal congressional appropria- government. sion authorizing the Department of tions process. It will be financed Transportation to require automotive directly by fees assessed on “entities manufacturers to produce vehicles and transactions” across the financial sector. that can run on methanol (wood alcohol), a fuel not The Treasury’s financial plan contains many other widely available. expansions of government power over business. The Other provisions, as expected, have little to do with Federal Reserve System would have new authority to the subject of global warming. For example, contrac- oversee any large financial entity whose failure the Fed tors on some energy projects must pay employees at thinks could generate “systemic risk.” The Treasury least the locally “prevailing wage.” This well-known would head a new Financial Services Oversight Coun- code means, in practice, paying higher union wage cil to “resolve” the inevitable jurisdictional disputes scales, thus letting unions set wages even for non- among federal agencies. A new Office of National union firms. Insurance is to be established in the Treasury to moni- Many federal departments are trying to climb tor “all aspects of the insurance industry,”a sector of the aboard the economic stimulus bandwagon.The Depart- economy traditionally under the province of state gov- ment of Justice wants to help out by showing that ernments. antitrust should be a “frontline issue” in the response The SEC will require the registration of all advisers to the problems facing the economy. Apparently, busi- to hedge funds and other private pools of capital with ness is not getting sued often enough. Incredibly, one

33 NOVEMBER 2009 Murray Weidenbaum new assistant attorney general views antitrust enforcers decades, abetted by lax monetary policies, are the key as “key members of the government’s economic recov- negative factors. The American public is likely to have ery team.” a long wait until the national unemployment rate gets When we step back and try to add back down to the 7.6 percent that up all the tax, spending, and regula- The Obama was reported when President Obama tory actions and proposals of the new took office in January 2009. Obama administration, the result is administration’s tax, One fundamental point deserves clear: a cumulative squeeze on private to be stressed. For the next several decision-making and a more slowly spending, and years, in the inevitable tension in growing economy in the years ahead. regulatory actions add public policymaking between eco- In the process, private businesses nomic prosperity and income redis- will be discouraged by a host of gov- up to a cumulative tribution, the American people can ernment policies from making major squeeze on private expect income equalization to get the new investments, especially long-term government’s priority over improve- investments with payoffs far in the decision-making. ments in people’s living standards.The future. The likelihood of higher taxes average American, at best, will receive and greater inflation resulting from the huge budget a more equal slice of an income pie that will be far deficits that are likely to arise in the next several smaller than the public expects.

THE FREEMAN: Ideas on Liberty 34 Art Needs No State Subsidies

BY BRUCE EDWARD WALKER

t’s feeding time again, and artists and cultural sounds cool, sure, but so does visualizing world peace groups are lining up at the trough. The bailout and (for some) levitating the Pentagon. And the claims Ipackage approved by Congress in February threw for spirituality are best left to the theologians. My heart another $50 million at the arts. For the better part leaps when I behold a rainbow in the sky, for example, of the past year, music impresario Quincy Jones but I’m afraid those refracted light rays may leave beseeched Barack Obama to add a others colder than Miss Havisham secretary of arts to his cabinet. In on her wedding night or a Jack March the President established a London character attempting to new staff position to oversee arts strike his last remaining match. and culture in the Office of Public Liaison and Intergovernmental Different Art, Different Audiences Affairs. Kareem Dale, named spe- efining art and its many pur- cial assistant to the president for Dposes and intended audiences disability policy in February, was is tricky. Classicists, for example, elevated to the new post. This—or probably would say that art can be any—government interference in appreciated only from a distance of the arts is at the very least short- 100 years or more, assuring histori- sighted. cal validation from critics, academ- For the nearly 250,000 people ics, and a refined general public. who signed Jones’s online petition, For this audience, Shakespeare, the arts are touted as critical to our Michelangelo, and Beethoven are national identity and even a source art’s sine qua non. Only recently— of spiritual sustenance. Use of the within the past 50 years or so— term “art,” however, is rife with have they been convinced that conflict—raising more questions A subsidy! A subsidy! My kingdom for—wait a sec- James Joyce, Virgil Thompson, and ond . . . than answers. For the purposes of commons.wikimedia.org Joan Miró belong to the canon. this essay, let’s agree that art, as a result of its examination of the myriad states of the Bruce Edward Walker ([email protected]) is communications manager human condition, can be a repository of both empirical for the Mackinac Center for Public Policy’s Property Rights Network. and received knowledge and lore, an outlet for special- He has authored CliffsNotes on Ken Kesey’s One Flew Over the ized creativity, and a cultural bonding agent. But to Cuckoo’s Nest, Edith Wharton’s The House of Mirth, Willa speak in the high-flown language of art’s ability to con- Cather’s Death Comes for the Archbishop, and Lewis Carroll’s Alice’s Adventures in Wonderland in addition to writing more than a vey a national identity is to make teleological claims hundred reference book, magazine, and newspaper articles on arts funding, that can be neither substantiated nor dispelled. It novelists, poets, philosophers, filmmakers, and musicians.

35 NOVEMBER 2009 Bruce Edward Walker

Others position art at the vanguard of culture— be used in a pejorative sense, since they can—and often always one step ahead of the rest of us with self-refer- do—create a wider cultural perspective through aes- ential and highly individualized creations that thetic cross-pollination across genres and the blending eventually percolate to the fringes of the mainstream of high and popular art. and exert a huge influence on subsequent generations. Government-Funded Art The Cherry Pickers ecause art is many things to many different people, n between the snobs and the avant garde are the Bhow can government-funded agencies hope to Icherry pickers, the multitude who have no trouble anticipate the aesthetics of a wide-ranging, diverse pop- bouncing from Mozart and Mahler to Berry Gordy and ulation? The question is moot, of course, but the larger the Beatles. “It doesn’t have to be old to be classic, it questions remain: Can government money create a just has to be good” was the classic-rock radio tagline a nation of renaissance men and women equally conver- few years back. Informed cherry pickers recognize that sant in the realms of visual, written, and performance cultural uplift—however pristine or watered-down— art—and are such ends desirable in the first place? Have can be found at the local cinema, on television pro- government subsidies sparked the creation of any grams, and even sandwiched in the spaces between prominent new art, reintroduced the best of historically those programs. The 1968 eight-mil- validated art to new generations with lion-selling record “I’d Like to Teach lasting impact, acculturated immi- the World to Sing (In Perfect Har- Let’s acknowledge grants to the best of Western thought, mony),”for instance, began as a group that art is important ideals, and talent, or led to anything effort between gurus at advertising remotely resembling the equivalent of agency McCann Erickson and their for most of us and Italy’s fifteenth-century Rinasci- client Coca-Cola. It became a hit that the enjoyment mento? Whither art without my tax single. dollars? Cherry pickers can immerse thereof is a matter In his 2008 book Money for Art, themselves in many different art of degrees. David A. Smith presents a detailed forms, increasingly blurring the dis- history of U.S. government funding tinctions between high art and low for the arts, beginning in 1817 when art. High art often borrows from popular (or low) art Congress commissioned four paintings by John Trum- as evidenced by the work of Roy Lichtenstein and ball. Nine years later, Trumball unveiled four historical Andy Warhol. paintings depicting events of the U.S. Revolution. Conversely,popular art borrows freely from high art. According to Smith,Trumball was paid $32,000, a sum The artist Hieronymus Bosch, for example, may be that rankled several politicians. One disgruntled senator well-known to some, while others know his work only reportedly believed the paintings unworthy of 32 cents, from the use of his “Garden of Earthly Delights” as while Smith quotes one congressman’s observation that cover art for an album by folk-rock group Pearls Before “if the Fine Arts cannot thrive in this country without Swine or the song “OK, Hieronymus” by British-born government jobs . . . let them fail.” rocker Graham Parker. Shakespeare references abound By the end of the nineteenth century art flourished on such television programs as Star Trek.Even Barry largely due to the largess of successful businessmen. Manilow cribbed from Chopin. The Gilded Age captured in the literature of Mark In short, let’s acknowledge that art is important for Twain and Edith Wharton was highly fruitful for the most of us and that the enjoyment thereof is a matter of nation’s art, witnessing the establishment of the Metro- degrees. One man’s Proust is another man’s Pelecanos. politan Museum of Art (1870, New York), the Boston One woman’s Bach is another’s Bachman Turner Over- Museum of Fine Arts and the Philadelphia Museum of drive. Cherry pickers are dilettantes, but that need not Art (both 1876), the Chicago Academy of Fine Arts

THE FREEMAN: Ideas on Liberty 36 Art Needs No State Subsidies

(1879), and the Corcoran (1869, Washington). All of strong organization and collective action to pressure opened their doors without government money, as did the government to respond to artists’ needs.” a plethora of other museums, private collections, and While FDR’s administration was busy inventing art schools. new sleight-of-hand parlor tricks to divert tax dollars By the end of the century, art school alumni were to individual artists, others took a more honorable producing a surfeit of fine art, which coincidentally is route. Automotive scion Edsel Ford and his wife the title of a Jacques Barzun essay warning that govern- Eleanor, for example, became the Detroit Institute of ment subsidies for art could produce such a large Art’s (DIA) greatest benefactors by commissioning art quantity of high-quality art that the nation would be from the likes of Diego Rivera and purchasing with unable to discern between what is merely good, what is their combined fortune works for the DIA’s permanent very good, and what will stand the test of time. collection.They even took it upon themselves to cover When Theodore Roosevelt became president, he the museum’s payroll during the Great Depression. helped infect the American population with his passion Fiscal restraint for government arts funding fell for art. But Roosevelt’s views on art were somewhat like dominoes in the 1950s and 1960s. Eisenhower provincial. He famously disparaged approved the National Cultural Cen- Modernist art in a review of the 1913 ter (completed with government New York Armory Show and openly Although the New funds and renamed the Kennedy sneered at American painters who Deal programs for Center during the Johnson adminis- traveled abroad for their subject tration) in 1958; Kennedy ordered matter. Before leaving office in 1910 artists expired when Congress to establish the National he ordered the establishment of the nation emerged Council on the Arts, which during the Commission of Fine Arts (CFA) the LBJ administration became the to encourage arts and culture in from its financial overseer of the National Endowment Washington. Proving the wisdom of for the Arts (NEA). Reports of the Ronald Reagan’s adage: “The nearest travails, they left an first meeting of the Council mention thing to eternal life we will ever indelible imprint that work progressed only in the see on this earth is a government morning, because members Harper program,” the CFA received on the nation’s Lee and John Steinbeck needed to $10,426,000 in 2008 federal money. cultural mavens. sleep off their lunch-hour tippling— For 2009 the CFA requested only auspicious beginnings for an institu- $2,234,000—covering only depart- tionalized steward of American tax ment salaries. dollars with a budget that reached $176 million in The New Deal of the 1930s found innovative ways 1992 and receded to $145 million in 2009 plus the $50 to fund art by offering commissions to artists seeking million stimulus supplement. work. In 1933 some out-of-work artists formed the Unemployed Artists Group, which eventually became Artists In Their Own Words and Works knows as the Artists’ Union (AU). The AU unsuccess- ost artists believe that without government subsi- fully sought the establishment of a cabinet-level Mdies, quality art would disappear.“The voice of the Department of Fine Arts. artists has been relegated to entertainment or a mar- Although the New Deal programs for artists expired ketable commodity or to a nuisance, but neither the when the nation emerged from its financial travails, political class nor the mainstream media are paying atten- they left an indelible imprint on the nation’s cultural tion to what the artist is saying and that to me is worri- mavens.As Smith so aptly states:“The New Deal’s most some,” Mexico-born performance artist and National important legacy to artists . . . was a mild sense of enti- Public Radio commentator Guillermo Gómez-Peña told tlement among professional artists and the beginnings me in a 2008 interview.“We can see since the mid-’90s

37 NOVEMBER 2009 Bruce Edward Walker art has been defunded systematically throughout the enhanced the literature they produced: William Carlos world not just in the U.S. but also in European societies Williams was a doctor; Wallace Stephens was an insur- that were leaders in that funding in places like Germany, ance broker; former NEA head Dana Gioia worked as an the U.K., France or even Eastern European countries that advertising/marketing manager for General Foods; T. S. took very good care of their artists. Even Mexico, for Eliot was a banker and editor; and Gary Snyder worked centuries paid very careful attention to its artists.” as a lumberjack and fire lookout. Many current artists are Although Gómez-Peña, a very articulate, intelligent, also tenured faculty at esteemed universities that pay and accomplished artist, adopts a pessimistic view of them healthy sums to court their respective muses. art without government support, he Gómez-Peña and Wilber are attaches to it an almost religious earnest, but one also senses a degree urgency: “In a sense, this systematic Serious art and of hubris in their overstatements of attack on the arts by the political class, serious artists can art’s transformational and spiritual the corporations, and the mainstream powers—as well as their belief that it’s media has resulted in the spiritual survive—and have the public’s responsibility to pay for impoverishment of society.” it. After all, we can accept the impor- Likewise, Dolores Wilber, a survived—without tance of art privately without the Chicago filmmaker I interviewed in subsidy. concomitant expectation of having to 2006, believes public funding of pri- pay for someone else’s transcendent vate art is a net positive for the Amer- experience. In fact, it wasn’t govern- ican people: “Art is a reflection of the society and it’s ment largess that created and distributed HBO’s The about creativity and being alive and has provided a lot Wire and The Sopranos, arguably the pinnacle of the last of positive things in the social fabric with every society ten years of visual storytelling; Coppola’s Godfather epic; whether it’s democratic or a totalitarian government. the Beatles’ Sergeant Pepper; or even initially transferred ...I think it’s a great thing about our country that in millions of consumer dollars to Robert Mapplethorpe general we do support art making.” and his estate—it was talent, drive, unfettered creativity, Serious art and serious artists can survive—and have and the public’s willingness to purchase these works on survived—without subsidy. In fact many of the greatest their own terms rather than the whims, opinions, and poets of the past 100 years pursued careers that greatly highly subjective tastes of government bureaucrats. Checking your holiday gift list? Give a year of The Freeman! It’s a thoughtful way to remember that special teacher, student, business associate, or friend. Just $50 per year. Call 1-800-960-4FEE for further information.

THE FREEMAN: Ideas on Liberty 38 Give Me a Break!

Competition

BY JOHN STOSSEL

“ hoice, competition, reducing costs—those didn’t know before and aren’t likely to learn any other are the things that I want to see accomplished way. Cin this health reform bill,” President Obama “Competition is valuable only because, and so far as, told talk-show host Michael Smerconish back in its results are unpredictable and on the whole different August. from those which anyone has, or could have, deliber- Choice and competition would be good. They ately aimed at,” Hayek wrote. would indeed reduce costs. If only the President meant Well-meaning politicians have created untold misery it. Or understood it. by assuming they and their experts know enough already. In a free market, a business that is complacent about The healthcare bills are perfect examples. If compe- costs learns that its prices are too high when it sees tition is a discovery process, the congressional bills lower-cost competitors winning over its customers.The would impose the opposite of competition.They would market—actually, the consumer—holds businesses forbid real choice. accountable and keeps them honest. No “public option” is needed. If You Liked the Election, You’ll So the hope for reducing med- Love the Public Option ical costs indeed lies in competition Obama’s so-called n place of the variety of products and choice. Today competition is reforms would Ithat competition would generate, squelched by government regulation we would be forced to “choose” and privilege. not create real among virtually identical insurance But Obama’s so-called reforms competition and plans. Government would define would not create real competition and these plans down to the last detail. choice.They would prohibit them. choice.They would Every one would have at least the same “basic” coverage, including Competition Produces Knowledge prohibit them. physical exams, maternity benefits, ompetition is not a bunch of well-baby care, alcoholism treatment, Ccompanies offering the same products and services and mental-health services. Consumers could not buy a in the same way. That sterile notion of competition cheap, high-deductible catastrophic policy. Every insur- assumes we already know all that there is to know. ance company would have to use an identical govern- But consumers often don’t know what they want ment-designed pricing structure. Prices would be the until it’s offered, and their preferences and requirements same for the sick and the healthy. change. Businesses don’t know exactly what consumers In this respect, it wouldn’t matter whether Congress want or the most efficient way to produce it until they created a “public option”—that is, a government insur- are in the thick of the competitive hustle and bustle. ance plan. In either case, bureaucrats would dictate vir- Nobel laureate F. A. Hayek taught that competition tually every aspect of the health-insurance business. is a “discovery procedure.”In other words, the “data” of supply and demand emerge only through the market John Stossel is the hosts of Stossel on Fox Business and the author of Myths, Lies, and Downright Stupidity: Get Out the Shovel— process. We need open-ended competition not merely Why Everything You Know is Wrong. Copyright 2009 by to see which rival is better, but to learn things we JFS Productions, Inc. Distributed by Creators Syndicate, Inc.

39 NOVEMBER 2009 John Stossel

What Obama says in favor of a public option tells us “Well, not so fast. By what method exactly will the how little he understands competition. The public officials know how to allocate resources? By what option’s virtue, he told Smerconish, is that “there method will they know how much of what kind of wouldn’t be a profit motive involved.”But as contribut- health care people want? And more important, by what ing editor Steven Horwitz, a professor method will they know how to pro- of economics at St. Lawrence Univer- duce that health care without wast- sity, wrote in The Freeman,profit is Profit is the key to ing resources? . . . In markets with not just a motive (www.tinyurl.com/ competition.Anyone good institutions, profit-seeking pro- m4nd2j). Profit (along with loss) is ducers can get answers to these ques- what enables competition to perform who claims to favor tions by observing prices and their its discovery role: competition but own profits and losses in order to “Suppose for a moment that determine which uses of resources we try to take the profit motive out looks down at profit are more or less valuable to con- of health care by going to a system in has no idea what he sumers. ...[P]rofits and prices signal which government pays for and/or the efficiency (or lack thereof) of directly provides the services. . . . is talking about. resource use and allow producers to For many critics of the profit motive, learn from those signals.” the problem is solved because public-spirited politi- Profit is the key to competition.Anyone who claims cians and bureaucrats have replaced profit-seeking to favor competition but looks down at profit has no firms. idea what he is talking about.

Start your weekday morning with

One click of the mouse … and FEE’s popular news e-commentary will come to your computer five days a week. Subscribe online: www.fee.org or e-mail: [email protected]!

THE FREEMAN: Ideas on Liberty 40 deflation is always good is absurd because there is no Book Reviews benefit from deliberately creating a deflation by shrink- ing the money stock. Auric Goldfinger’s plan, in the How Much Money Does an Economy Need? James Bond story, to nuke the gold in Fort Knox, Solving the Central Economic Puzzle of Money, thereby raising the purchasing power of his own gold, Prices, and Jobs was the plan of a villain not a hero. Just as a central- by Hunter Lewis bank-engineered monetary expansion disrupts the Axios Press • 2008 • 185 pages • $17.00 economy and causes misallocation of resources—some- thing Lewis recognizes—so too does a central-bank- Reviewed by Lawrence H.White engineered monetary contraction. n How Much Money Does an To his credit Lewis identifies the error of monetary IEconomy Need? Hunter Lewis expansionism: “If you have four apples and a dollar, addresses some of the most funda- the dollar may help you price and trade the apples. mental questions of monetary But adding another dollar will not increase wealth; it policy in a question-and-answer will simply raise the price of the apples.”Unfortunately, format. For a subject often clouded he fails to identify the corollary error of deliberate by technicalities, the language is contractionism. refreshingly plain. Sometimes too In the second half of the book, Lewis discusses what plain, perhaps, to satisfy an academic he calls “the problem of banks,” meaning the question economist. But academic economists aren’t the intended of fractional-reserve banking. Here Lewis—following audience.The book can be read profitably by interested and citing Murray Rothbard’s The Case Against the Fed laymen, including bright high-school students. —offers the view that fractional-reserve banking is Lewis poses excellent questions and gives fairly good prone to runs,“inherently destabilizing” for the broader answers. His questions include: Should prices in general economy, and should be outlawed as fraudulent. be stable, fall, or rise? and Should the stock of money Uncharacteristically, he neglects to consider the other grow continuously,never, or sometimes? He conducts a side: the historical studies indicating that free banking dialog with himself over these questions, first defending with fractional reserves is not run-prone but robust, the a “yes” answer, then a “no,”and then offering additional theoretical arguments for the efficiency and economi- replies and counter-replies. His sympathies lie with cally stabilizing character of free banking, and the what he describes as “the Austrian, laissez-faire, or free- jurisprudential arguments for the legitimacy of volun- market point of view,” but he endeavors to represent tary fractional-reserve arrangements based on freedom the alternative Keynesian view fairly. of contract. Lewis is to be applauded for presenting the case for Defenders of fractional-reserve free banking (the letting prices fall in a growing economy. Unfortunately present reviewer included) would reject the claim that, he appears to have overlooked some of the strongest like a central bank, “a fractional reserve bank can also previous presentations of that case.We must distinguish ‘print’ new money” arbitrarily.Any bank in a competi- between a harmless deflation, where technological tive system issuing gold-redeemable notes and deposits progress or other sources of improved productivity is tightly constrained, unlike a monopoly central bank. lower costs and thereby gently draw prices down, and a Contra Lewis, the money supply in a fractional-reserve harmful deflation, where shrinkage in the stock of free banking system is neither “over elastic” nor “gener- money or its velocity brings unsold inventories and ally expanding.” Lewis might have consulted Mises’s thereby painfully forces prices down. Lewis recognizes The Theory of Money and Credit and Human Action more a distinction between gentle and painful, but oddly closely on these points. claims that, in the view of its defenders, “deflation is Lewis does a good job of sketching the Austrian the- always good,” even when “quite painful.” Claiming that ory of the boom-bust cycle resulting from a central

41 NOVEMBER 2009 Book Reviews bank’s cheap-credit policy. And he sagely notes that American enterprise he shares with William Appleman when a central banker promises to inflate the economy Williams. and bail out financially troubled firms,“then it becomes Martin, likely the most interesting Anti of all, is more rational to speculate, to take excessive risk, and hardly known today, but Kauffman finds much of value not at all rational to save, to take precautions, to be pru- while dealing unflinchingly with Martin’s public and dent. In this respect . . . so-called stabilization is actually private life. de-stabilizing.” With ancestors in America since 1623, Martin was The book contains three appendices, respectively born in 1744 or 1748 in New Jersey. He excelled at concerning the Federal Reserve System and its opera- Princeton and studied law at Williamsburg, where he tions, the gold standard and other international mone- befriended Patrick Henry. Thence he went to Mary- tary arrangements and institutions, and nonmonetary land, serving as a revolutionary propagandist and as cycle theories.The appendix on the Fed unfortunately attorney general of Maryland from 1778 on. He drank gives an incorrect account of how the money multi- excessively and was often in debt. plier and open-market operations determine the Sent as a delegate to the select and secretive money stock. Philadelphia Convention, Martin was shocked by the The academic economist-reviewer cannot resist impending coup underway. He discerned three fac- noticing some other errors. For example, no sensible tions: consolidationists like Alexander Hamilton, big- view holds that a period of inflation typically or auto- state men like James Madison, and a “truly federal” matically leads to a period of deflation in a fiat money element. Together, the first two parties set the tone, economy.A determined central bank can issue enough pursuing a “counterrevolutionary” nationalist agenda to money to keep the price level rising continuously, as subordinate the states. Working with John Lansing, Jr. almost all have since the fiat era began in earnest in and Robert Yates (both of upstate New York) in an 1971. “ad hoc small state/states’ rights caucus,” Martin tried Despite its shortcomings, this book is an interesting to limit the damage caused by the emerging system that and useful introduction to the important question Lansing called “a triple-headed monster”—a mythic posed in its title. theme, if ever there was one. Before leaving the convention in disgust, these Lawrence White ([email protected]) is Mercatus Professor of Economics at George Mason University and F.A. Hayek Professor of Economic History critics made interesting points too numerous to treat at the University of Missouri–St. Louis (on leave). here. Oddly, Martin was the father of the so-called “supremacy clause,” the point of which was to subject the new Leviathan’s acts to the law. Federal Del- Forgotten Founder, Drunken Prophet: The Life of phic oracles were not yet in the plan, and Martin Luther Martin wanted treaties and federal statutes subject to inter- by Bill Kauffman Intercollegiate Studies Institute • 2008 • 225 pages • pretation by the state courts. Having left the con- $25.00 clave early, Martin reported what he had seen to the Maryland legislature. For Kauffman, Martin’s The Reviewed by Joseph R. Stromberg Genuine Information is “the Anti-Federalist Paper.” Mar- ntifederalists get no respect. His- tin continued the fight in the press, advocating a bill Atorian Cecilia Kenyon called of rights, limits on the standing army, and reliance them “men of little faith.” Other his- on militia. torians (even Charles Beard) pegged But the Federalists managed to “control the debate” them as rural debtors. In this brief but and won the day. Martin remained Maryland’s attorney engaged life of Luther Martin, general, never held federal office, and argued 40 cases though, Bill Kauffman enters a plea before the U.S. Supreme Court. In court performances, for “the people who lost”—an un- he knew the law and the cases but was seldom fully

THE FREEMAN: Ideas on Liberty 42 Book Reviews sober. Hating the elusive Thomas Jefferson, Martin but by another revolution.”In our present state we may became “a states’ rights Federalist” but never apologized wonder if the Antis’ New Jersey Plan and plural execu- for his opposition to the Constitution. tive were such awful alternatives. We may let Martin Martin defended Federalist Judge Samuel Chase himself have the last word. Speaking of the Great against impeachment and made Chase a martyr. It was Convention, Martin wrote in March 1788: “Happy, not, Kauffman suggests, his finest hour. He also thrice happy, would it have been for my country, if the defended Aaron Burr against Jefferson’s charges of trea- whole of the time had been devoted to sleep, or been a son. Kauffman comments, “[Supreme Court Justice blank in our lives, rather than employed in forging its John] Marshall rule[d] for once as a strict construction- chains.” ist” on whether Burr had actually levied war. In McCul- Joseph Stromberg ([email protected]) is an independent historian loch v. Maryland (1819) Martin argued Maryland’s right and writer living in northern Georgia. to tax the Bank of the U.S., while Marshall wrote a “landmark” decision to the contrary—that is, a tedious essay in Federalist ideology. Montessori, Dewey, and Capitalism: Educational Along the way Kauffman refutes some well- Theory for a Free Market in Education entrenched myths.Yes,Martin was long-winded, but his by Jerry Kirkpatrick “diffuse” speeches were “coherent” and “struck a TLJ Books • 2008 • 212 pages • $42.95 hardcover; $18.95 nerve.” Kauffman challenges the claim that Madison’s paperback; $8.95 Kindle and Mobipocket Journal of the Constitutional Convention is a spotless pri- Reviewed by Terry Stoops mary source, while Antifederalist eyewitnesses are wholly untrustworthy. or years, school-choice pro- In Kauffman’s judgment, there was “no pressing Fponents have assessed and external threat” in 1787 requiring central aggrandize- reassessed the possibilities of ment. He ridicules the Federalists’ “airy reassurances” expanding government support for and their easy assumption that Washington would be vouchers. Jerry Kirkpatrick’s the measure of future presidents. Their sense of poli- Montessori, Dewey, and Capitalism: tical scale was no better. Superior sorts far outshining Educational Theory for a Free Market local “demagogues” would, they said, invariably serve at in Education is a refreshing alterna- the federal level. But of course those “immigrant” tive to those tired discussions of nationalists Hamilton and James Wilson (a “deracinated political coalitions, legislative Scot”) and Madison, “the farsighted abstractionist,” machinations, and disparate school-choice programs. were in a hurry. It is no surprise that Kauffman remarks Indeed, Kirkpatrick’s book is one of the first to con- upon the universal values and globalism of certain sider the methodological and instructional foundations framers and that he turns some counterfactual horror of an educational free market, and the author does so in stories on their heads. Quite insightfully, Kauffman an original and engaging way. takes the apparent American “nationalists” of the Old Kirkpatrick argues that the goal of education should Dominion as Virginian imperialists out to dominate the be to cultivate self-esteem and independence and reject federation. coercion and rationalism, thereby freeing the young For Kauffman, the Antis were “plain people” who mind and encouraging children “to be actively curious saw the political scale “getting too big.” They wished and practically self-assured.”To achieve these goals, he to conserve the local and familiar. Today they seem constructs a theory based on “concentrated attention,” rather prophetic. After ratification, Martin observed, a psychological concept central to the educational “powers once bestowed upon a government, should theories of Italian educator and philosopher Maria they be found ever so dangerous or destructive to free- Montessori. Kirkpatrick defines concentrated attention dom, cannot be resumed or wrested from government as the “heightened awareness of one object out of

43 NOVEMBER 2009 Book Reviews the many that exist in our field of awareness.”Accord- political and educational philosophies were compatible. ing to Kirkpatrick, most educational approaches seek to For example, in Anti-intellectualism in American Life, either coerce children or neglect them altogether, but historian Richard Hofstadter noted that Dewey concentrated attention focuses on educational methods assumed “a kind of pre-established harmony between that nurture the child. He meticulously details the the needs and interest of the child and ‘the society we proper methods of employing concentrated attention should like to realize.’” Kirkpatrick’s effort at separating and also outlines the content of education—the knowl- Dewey’s political and educational philosophy is not edge, values, and skills—needed to thrive in a free entirely persuasive. society. It is also difficult to agree with Kirkpatrick’s con- Where did the idea of concentrated attention come tention that there is an underlying compatibility from? Kirkpatrick finds its first clear expression among between the educational theories of Dewey and the child-centered educational theories of Enlighten- Montessori. Dewey identified serious differences ment thinkers like John Amos Comenius, John Locke, between his educational theories and Montessori’s. In and Jean-Jacques Rousseau. In the nineteenth century Schools of Tomorrow, for example, he argued that Johann Pestalozzi, Johann Herbart, and Friedrich Montessori adhered to “older” psychological theories, Froebel further developed the psychological and philo- which asserted that “people have ready-made faculties sophical foundations of child-centered education. In which can be trained and developed for general pur- the early twentieth century John Dewey and Maria poses.”Dewey boasted that he ascribed to “newer” psy- Montessori provided the modern theoretical founda- chological theories, which claimed that children have tions of the concept of concentrated attention. One “special impulses of action to be developed through may have wished, as I did, that Kirkpatrick had aug- their use in preserving and perfecting life in the social mented this chapter by discussing the slew of dubious and physical conditions under which it goes on.” These child-centered educational practices that followed substantive differences in their basic assumptions about Dewey and Montessori. Even so, Kirkpatrick’s history the nature of learning required fundamental differences of child-centered versus teacher-centered theories of in their respective instructional approaches. education is highly instructive. Aside from the difficulties of attempting to redeem While Montessori’s ideas provide a solid foundation Dewey’s educational thought, one nagging problem to Kirkpatrick’s theory, Dewey’s educational theories with Kirkpatrick’s book is that while he acknowledges appear to undermine it. Dewey was a collectivist who that the content of education would be “freely chosen by sought to use state-sponsored coercion to properly the education consumer in a marketplace of ideas,” “socialize” children. In isolation, some of Dewey’s ideas he doesn’t concede that consumers should also freely may resemble Montessori’s concept of concentrated choose the method of education. attention, but Dewey wasn’t interested in cultivating There is no guarantee that parents would flock to independent young minds. He was interested in using schools that implemented educational approaches public schools to cultivate dependency on the State. based on concentrated attention. In a free market In defense of his use of Dewey’s ideas, Kirkpatrick in education, parents who want to raise their children argues against conflating Dewey’s political and edu- to become confident, independent adults might cational philosophies. On one hand, Kirkpatrick find concentrated attention-based instruction a desir- acknowledges that Dewey and his Progressive col- able alternative to existing educational approaches. leagues sought government control over schooling. On Even if they don’t, they should have the choice. Kirk- the other, he suggests that Progressives wanted to free patrick’s success is in offering them a choice worthy students from coercive educational environments by of attention. urging public schools to adopt student-centered instructional approaches. Kirkpatrick calls this a “con- Te rry Stoops ([email protected]) is education policy analyst at the tradiction,” but many critics maintain that Dewey’s John Locke Foundation.

THE FREEMAN: Ideas on Liberty 44 Book Reviews

The Left, The Right, and The State Rockwell has sharp words for both the left and the by Llewellyn Rockwell right on the ways they have been lured by the siren song Ludwig von Mises Institute • 2008 • 553 pages • $29.00 of government to abandon principles they formerly held. On the right, for example, he shows that pro-fam- Reviewed by George C. Leef ily advocates have been drawn into the big-government he Left, The Right, and The orbit with such nonlibertarian policies as school vouch- T State,a collection of 103 essays ers. He also takes aim at “free-market” scholars who by Llewellyn Rockwell, looks at propose “solutions” to welfare-state problems, such as the ways both the left and right use Social Security, that merely involve some trimming of the State to pursue their goals. that poisonous plant, rather than uprooting it entirely. Rockwell, president of the Ludwig The left also gets taken to the woodshed over issues von Mises Institute, argues force- like its abandonment of free speech in favor of restric- fully that our liberty and property are endangered tive campus speech codes.And what has become of the equally by left-wing and right-wing statism. As he puts old leftist commitment to civil liberties? Today it’s little it, “The left has a laundry list and the right does too. more than a fading memory, with leftist politicians Both represent a grave threat to the only political posi- jumping on the bandwagon for the war on drugs, the tion that is truly beneficial to the world and its inhabi- war on illegal immigration, expansive eminent-domain tants: liberty.” powers, and so forth.The omnipotent State now tram- Precisely.The great virtue of the book is how Rock- ples all over the rights of “the little guy.” The left well shows that when people on the political right used to care, but now prefers to turn a blind eye. point to “liberal” increases in government power and After several hundred pages of razor-edged attacks say, “They’re attacking freedom!” they are correct—as on the waste, folly, and outright evils of “liberal” and are those on the political left who point to “conserva- “conservative” statism, Rockwell gets to the crucial tive” increases in government power and say the same question:What do we do? Examining and then reject- thing. The problem Rockwell illuminates is that both ing various suggested courses, he argues that libertari- camps are blind to the damage done by their own ans must work to cultivate sound ideas.We can make impulses to expand the power of the State. A massive, no progress against our greedy, intrusive, authoritar- unrestrained government is a bull in a china shop. ian government so long as most Americans accept the Each reader will undoubtedly find certain essays false idea that government action is the key to progress especially insightful. One of my favorites is “Freedom and prosperity. is Not ‘Public Policy.’” Rockwell argues that one For example, since most Americans believe that eco- of the worst errors of free-market intellectuals is their nomic recessions are a natural part of the free market discussion of liberty as just another policy option for and we need government action to “stimulate the politicians and bureaucrats to consider. That formula- economy” when it turns sick, it’s inevitable that politi- tion, he writes, “implies that it is up to the state—its cians will support massive federal spending to cure it. managers and kept intellectuals—to decide how, when, We need to explain the truth about economic cycles to and where freedom is to be permitted.” He cites as an the public. Similarly, most Americans believe that we egregious example the Reagan administration’s must have “public” education or else suffer from wide- approach to tax cutting, when tax cuts were defended spread illiteracy.We need to convey the truth that the on the grounds that they would ultimately bring in market for education works and would deliver far bet- more government revenue. We don’t cherish freedom, ter results at less cost if it were allowed to function. Rockwell observes, because it maximizes the govern- Indeed—cultivate sound ideas. Reading Rockwell’s ment’s haul of money. Instead, tax cuts should book will help you do exactly that. be advanced on the grounds that it is right for people to keep and decide how to spend the money they earn. George Leef ([email protected]) is book review editor of The Freeman.

45 NOVEMBER 2009 THE FREEMAN: Ideas on Liberty 46 The Pursuit of Happiness

Rule of Law versus Legislative Orders

BY WALTER E. WILLIAMS

ebster’s dictionary defines law as all the good as others. How about allowing them to stand rules of conduct established and enforced closer to the batter? Better yet, we could rule their first Wby the authority, legislation, or custom of a pitch to each batter a strike no matter what. In the given community or group. Why are there laws in the interest of baseball justice we might make other special first place? The most apparent answer is, were there not rules to level the playing field between old players and a particular law,some people would not conduct them- young players, black and white, and fast and slow. selves according to the law in question. But is that You say, “Williams, you can’t be serious! Can you entirely true? imagine the conflict that would emerge: players lobby- For example, were there no law regarding which ing umpires, umpires deciding who gets what favor, side of the road we should drive on, lawsuits, not to mention fighting?” one imagines that self-interest would You’re absolutely right. The reason lead to a spontaneous emergence of a The rule of law baseball games end peaceably, and custom to drive, say, on the right-hand players and team owners are gener- side of the road—at least in the United means laws are ally satisfied with the process, States. But there would probably be certain and known whether they win or lose, is that some who would drive on the left; baseball rules are known in advance. therefore, a law, with associated penal- in advance, they They apply to all players. They are ties, is needed to enforce concurrence envision no particular fixed, and umpires don’t make up among would-be outliers. rules as they go along. In other There are other standards of human outcome, and most words, baseball rules meet the test of conduct not codified in law, such as “abstractness.”They envision no par- men taking their hats off in Christian important, laws are ticular outcome in terms of winners churches and wearing hats in syna- equally applied to and losers. Baseball rules simply cre- gogues, eating with utensils rather than ate a framework in which the game one’s hands, and giving the appropriate everyone, including is played. greeting. It is tempting to trivialize government officials. Laws, or rules that govern a free these standards by suggesting they are society, should have similar features. not as important as laws mandating There should be a “rule of law.”The which side of the road to drive on. But that is untrue. Rule of law means laws are certain and known in A nasty remark, discourtesy, or show of disrespect that advance. Laws envision no particular outcome except is not apologized for can lead to violent conflict. that of allowing people to peaceably pursue their own What should be the characteristics of laws in a free objectives. Finally, and most important, laws are equally society? Think about baseball rules (laws). Through no applied to everyone, including government officials. fault of their own, some players hit fewer home runs Sir Henry Maine, probably the greatest legal histo- than others.To create baseball justice, how about a rule rian, said, “The greatest movement of progressive soci- requiring pitchers to throw easier pitches to poorer home run hitters, or one that would treat a double like Walter Williams is the John M. Olin Distinguished Professor of Economics an inside-the-park home run? Some pitchers aren’t as at George Mason University.

47 NOVEMBER 2009 Walter E. Williams eties has hitherto been a movement from status to con- That Americans have become ruled by orders and tract.” In nonprogressive societies the rule of law is special privileges helps explain all the lobbyists, money, absent. Laws are not general.They’re applied according and graft in Washington. We’ve moved away from a to a person’s status or group membership.There’s rule, government with limited powers, as our Founders envi- not by legis, the Latin word for law, but by privilegium, sioned, to one with awesome powers.Therefore, it pays the Latin term for private law. What’s lacking is the people to spend huge amounts of money to influence principle summarized by English jurist A.V. Dicey: Congress in their favor. Privilege-granting is precisely “Every man, whatever be his rank or condition, is sub- what most Americans want, though they might disagree ject to the ordinary law of the realm and amenable to on who gets what privilege. Most Americans have no the jurisdiction of the ordinary tribunals.” inkling of what the rule of law means. We think it Consider the case of a person arrested and charged means obedience to whatever laws Congress enacts and with rape. Should his status—whether he’s a senator, the president signs.That’s a tragedy. professor, or ordinary man—play a role in the adjudica- Customs, traditions, mores, and rules of etiquette, tion of the crime and subsequent punishment? I’m bet- not laws and government regulations, are what make ting that the average person would for a civilized society.These behav- answer no. At best, the police ioral norms, mostly transmitted by Just about every law that Congress example, word-of-mouth, and reli- enacts violates all the requirements for and criminal justice gious teachings, represent a body of the rule of law. How do we determine system are the last wisdom distilled through ages of violations of rule of law? It’s easy.See if experience, trial, and error. It’s the the law applies to particular Americans desperate line of morality embodied in those thou- as opposed to all Americans. See if the shalt-nots: kill, steal, lie, cheat, and so law exempts public officials from its defense for a civilized on. The importance of these behav- application. See if the law is known in society. Our increased ioral norms is that people behave advance. See if the law takes action themselves even if nobody’s watch- against a person who has taken no reliance on laws to ing. There are not enough cops and aggressive action against another. If regulate behavior is laws to replace personal morality as a you conduct such a test, you will con- means to a civilized society.At best, clude that it is difficult to find many a measure of how the police and criminal justice sys- acts of Congress that adhere to the uncivilized we’ve tem are the last desperate line of principles of the rule of law. defense for a civilized society. Our A rule-of-law regime would become. increased reliance on laws to regu- require that we scrap the Internal late behavior is a measure of how Revenue Code in its entirety. What justification is uncivilized we’ve become. there for the tax laws to treat an American differently Twenty-five years ago, during a dinner conversation because he has a higher income, minor children, or with Nobel laureate Friedrich A. Hayek, I asked if he income from capital gains instead of wages? Equal could propose one law that would help restore, pro- treatment, at the minimum, would require Congress to mote, and preserve liberty.Hayek answered that the law figure out the cost of the constitutionally authorized would read: Congress shall enact no law that does not functions of the federal government, divide it by the apply equally to all Americans. Hayek’s suggestion adult population, and send us each a bill for our share. would do untold wonders in fostering the liberties You say, “What about the ability-to-pay principle?” envisioned by our Founders. But I’m betting that most That’s just a politics-of-envy concept that would be Americans would greet Hayek’s proposal with con- revealed as utter nonsense if applied to anything else, tempt after they realized it would mean Congress could such as gasoline or food. not play favorites.

THE FREEMAN: Ideas on Liberty 48