LUDWIG VON MISES INSTITUTE VOLUME 8, NUMBER 2 FEBRUARY 1990

he banking dilemma seems Bring eternal, like the monetary dilemma, the tax dilemma, Back the and the marital dilemma. TThe essence of the banking Bank dilemma, however, is that the depositors' money is not in thtr l Run vault awaiting the depositors, BY JAMES GRANT decision to withdraw it. Instead it is out on loan or invested in the money market or in mortgage­ backed securities. Some of the money is in the vault or on deposit with the Federal Reserve-these funds are called bank reserves-but only a few cents of every dollar. Depending on the specific man­ agement, depositors, and finan­ cial markets, the average bank may be prepared to accommodate Institute economist and liber­ banking dilemma are new, nota­ a sudden demand for repayment tarian philosopher, has a forcible bly the socialization of credit risk by a sizable minority ofits depos­ view on the institutions of frac­ during the Reagan years. It was itors. Almost no bank in modern tional-reserve banking: It is "a decided that no money-center times, however, has been able to giant Ponzi scheme in which a bank would be allowed to fail and accommodate a sudden demand few people can redeem their that no depositor, even a sophisti­ for repayment by a majority ofits deposits only because most depos­ cated one, would be allowed to depositors. itors do not follow suit." lose his money in a failure, if it Murray N. Rothbard, Mises Some features of the 1989 CONTINUED ON PAGE FIVE

he recent astonishing devel­ Will Turn to Butter." Said one are not actually cuts from the pre­ Time lor an opments in the Soviet investment strategist, "we were sent level of spending but cuts in Union and Eastern Europe all joyous at the scenes of people the Pentagon's desired spending American suggest that after more than climbing on the Wall, but the increases over the next five years. T40 years, the Cold War may problem is, how do you make At present military spending is Perestroika be about to end or at least to enter money on this?" Is it gauche to about $300 billion per year. So BY ROBERT HIGGS a less menacing phase. But not suggest that superfluous military the U. S. military economy is everyone is rejoicing at the turn of firms try to make money by pro­ roughly the same size as the events. Many people have a ducing goods consumers are will­ entire economy of East Ger­ strong vested interest in the con­ ing to buy? many. And like that economy, it tinuation of a high level of mili­ Of course, one should not is centrally planned. Long ago tary spending. The prospect of a expect to collect the peace divi­ Ludwig von Mises showed that more reliable peace scares them dend. The widely discussed the authorities in a planned econ­ to death. "cuts" of $180 billion in military omy cannot calculate to achieve The·reaction is described as spending, which Defense Secre­ an economically rational alloca­ "panic" as headlines proclaim tary Dick Cheney recently asked tion of resources. Without prices ''Arms Companies Fear Guns the armed services to consider, CONTINUED ON PAGE SIX n the loony leftist town Mexico City today or Americans for example, degraded rapidly, Government where I live, we're ordered 100 years ago. Gone, for exam­ tons of ink would leach into the to separate our trash into ple, are the 1,200 lbs. of coal ash groundwater. And we should bel Garbage seven neatly packaged piles: each American home used to glad that plastic doesn't bio­ newspapers, tin cans (flat- generate, and our modem pack­ degrade. Being inert, it doesn't tened with labels removed), aged foods mean less rubbish, introduce toxic chemicals into aluminum cans (flattened), not more. the environment. glass bottles (with labels But most landfills will be full We're told we have a moral removed), plastic soda pop in ten years or less, we're told, obligation to recycle, and most of From the bottles, lawn sweepings, and that's true. But most landfills us say we do so, but empirical and regular rubbish. And to pay are designed to last ten years. The studies show it isn't so. In sur­ President high taxes to have it all taken problem is notthat they are filling veys, 78% ofthe respondents say away. up, but that we're not allowed to they separate their garbage, but Because ofmy aversion to gov­ create new ones, thanks to the only 26% said they thought their ernment orders, my distrust of environmental movement. neighbors separate theirs. To test government justifications, and Texas, for example, handed out that, for seven years the Garbage my dislike of ecomania, I have 250 landfill pennits a year in the Project examined 9,000 loads of always mixed all my trash mid-1970s, but fewer than 50 in refuse in Tucson, Arizona, from together. If recycling made eco­ 1988. a variety of neighborhoods. The nomic sense-and this is an eco­ The environmentalists claim results: most people do what they nomic question, not a dogma of that disposable diapers and fast­ say their neighbors do: they don't BY LLEWELLYN H. the mythical earth goddess food containers are the worst separate. No matter how high or ROCKWELL, JR. Gaia-we would be paid to do it. problems. To me, this has always low the income, or how liberal For the same reason, I love to use plastic fast-food containers ecause of Illy aversion to and non-returnable bottles. The whole recycling commotion, like governIllent orders, Illy the broader environmental move­ distrust of governIllent e ment, has always seemed to have "\"llnters a large malarkey component. Sol justifications, and Illy VV J have never felt guilty-just the dislike of ecoIllania, I IN THIS ISSUE opposite-nor have I yet been James Grant, a media fellow arrested by the garbage gen­ have alwrays Illixed Illy of the Ludwig von Mises dannes. But I was glad to get Institute, publishes Grants some scientific support for my trash together. Interest Rate Observer in New York City. position in the December 1989 Robert Higgs, an adjunct issue of The Atlantic Monthly. revealed the anti-family and pro­ the neighborhood, or how much scholar of the Ludwig von Professor William L. Rathje, elite biases common in any left­ the respondents said they cared Mises Institute, is Thomas F. an urban archaeologist at the wing movement. But the left, as about the environment, only Gleed Professor in the Albers University of Arizona and head usual, has the facts wrong as well. 26% actually separated their Business School at Seattle of its Garbage Project, has been In two years of digging in trash. University and editor of Arms, studying rubbish for almost 20 seven landfills all across America, The only reliable predictor of Politics, and the Economy (Holmes &Meier, 1990). years, and what he's discovered in which they sorted and when people separate and when Lawrence W. Reed is contradicts almost everything weighed every item in 16,000 they don't is exactly the one an president of the Mackinac we're told. pounds of garbage, Rathje dis­ economist would predict: the Center for Public Policy in When seen in perspective, our covered that fast-food containers price paid for the trash. When Midland, Michigan, and an garbage problems are no worse take up less than 1110th of one per­ the prices ofold newspaper rose, adjunct scholar of the Ludwig than they have always been. The cent ofthe space; less than 1% was people carefully separated their von Mises Institute. only difference is that today we disposable diapers. All plastics newspapers. When the price of Llewellyn H. Rockwell, Jr., is have safe methods to deal with totalled less than 5%. The real newspapers fell, people threw founder and president of the them, if the environmentalists culprit is paper-especially tele­ them out with the other garbage. Ludwig von Mises Institute. will let us. phone books and newspapers. We're all told to save our news­ Murray N. Rothbard is The environmentalists warn of And there is little biodegrada­ papers for recycling, and the idea academic vice president of the a country covered by garbage tion. He found 1952 newspapers seems to make sense. Old news­ Ludwig von Mises Institute and S.J. Hall distinguished because the average American still fresh and readable. papers can be made into boxes, professor of economics at the generates 8lbs. a day. In fact, we Rather than biodegrade, most wallboard, and insulation, but University of Nevada, Las create less than 3lbs. each, which garbage mummifies. And this the market is flooded with news- Vegas. is a good deal less than people in may be a blessing. Ifnewspapers, CONTINUED ON PAGE EIGHT

FreeMarket FEB R U ARY 1 9 9 0 2 rom its inception Amer­ Unfortunately, too productive as allegiance to America there is an Welcoming ica was largely the land fishermen for some oftheir ineffi­ implication that they are untrust­ of the free, but there cient Anglo competitors. In the worthy." the were a few exceptions. early 1980s, Texas shrimpers In the best tradition of Marie One was the blatant attempted, by use of violence, to Antoinette's "let them eat cake," Vietnamese subsidies to the politi­ put Vietnamese-American com­ the government replies that the cally powerful maritime petitors out of business. Vietnamese are free to work on industry, trying to pro­ The latest outrage against boats under five tons which tect what has long been Vietnamese-American fishermen would be fishing closer to shore. a chronically inefficient has occurred in California, The problem is that the Viet­ industry from international com­ mainly in San Francisco, where namese concentrate on fish that petition. One ofthe initial actions Vietnamese-Americans, legal cater to Asian restaurants and fish ofthe first American Congress in residents of the United States, shops, and that such kingfish and 1789 was to pass the Jones Act, have pooled their resources to hagfish have to be caught in gill which protected both maritime purchase boats, and have been nets. So why not use gill nets in BY MURRAY N. owners and top employees. The engaged in successful fishing of small boats closer to shore? ROTHBARD Jones Act provided that vessels of kingfish and hagfish for the past Because here, in a classic govern­ five or more tons in American decade. In recent months, in mental Catch-22 situation, our waters had to be owned by U. S. response to complaints by Anglo old friends the environmentalists citizens, and that only citizens competitors, the Coast Guard have already been at work. Seven could serve as masters or pilots of has been cracking down on the years ago the environmentalists such vessels. Vietnamese, citing the long-for­ persuaded California to outlaw Times have passed, and what­ gotten and long-unenforced the use ofgill netting in less than ever national security considera­ tions that might have required a nce again, the environ­ fleet of private boats ready to Illentalists, speaking for assist the U. S. Navy have long since disappeared. TheJones Act the interests of all con­ had long become a dead letter. Butlet a law remain on the books, ceivable species as against and it can always be trotted out to Illan, have ~on out Pat Buchanan (right), leader of be used as a club for protec­ the American conservative tionism. And that is what has against their proclaiIlled movement, recently named happened with the Jones Act. enemies, human beings. Mises president Lew Rockwell Unfortunately, the latest vic­ (left) to the board of editors of tims of the Jones Act are Viet­ prOVIsIons of the Jones Act. 60 feet of water. Why? Because his new monthly, On the Right. namese immigrants who were While the Vietnamese-Ameri­ these nets were, willy-nilly, Rockwell has also been welcomed as refugees from com­ cans have been willing to pay the named acolumnist for the ensnaring migratory birds and 920,OOO-circulation Orange munism, and \fho have proved to $500 fine per citation to keep marine mammals in their County Register in Los be thrifty, hard-working, and earning their livelihood, the meshes. So, once again, the Angeles, to which he has productive residents of the U. S., Coast Guard now threatens to environmentalists, speaking for been afrequent contributor. working toward their citizenship. confiscate their boat-registration the interests of all conceivable documents and thereby put them species as against man, have won out of business. The fact that out against their proclaimed these are peaceful, legal, perma­ enemies, human beings. nent residents makes all the more And so, seeking freedom and ridiculous the U.S. government's contention that they "present a freedom of enterprise as victims clear and present threat to the of collectivism, the Vietnamese national security." have been trapped by the U. S. Dennis W. Hayashi of the government as pawns of ineffi­ Asian Law Caucus, who is an cient competitors on the one attorney for the Vietnamese fish­ hand and anti-human environ­ ermen, notes that all ofthem "are mentalists on the other. The working toward citizenship. Vietnamese-Americans are seek­ They were welcomed as political ing justice in American. courts, refugees. It is noxious to me that however, and perhaps they will because they have not yet sworn obtain it. ~ 3 FEB RUARY 1 9 9 0 Free Market f drugs were legalized, says ground" and even had the per­ and gasoline." Millions of first­ Would drug czar William Bennett, verse effect of increasing both. time drinkers were brought into drug use "would sky­ Many people drank more than the underground. Legalization rocket. " George Will echoes ever, or for the very first time, just Lee is backed up by the most him. They offer no evi­ because the stuff was illegal. respected analyst in the field, Increase dence for this claim, of "Men were drinking defiantly," economist Clark Warburton, course. Judging from writes Lee, "with a sense of high whose data in his The Economic Drug Use? America's last experience purpose, a kind of dedicated Results of Prohibition (1932) come BY LAWRENCE W. with Prohibition, they are drinking that you don't see much from law enforcement officials, REED probably wrong. If we of today." consumers, and producers. He ended the War on Drugs, drug One place where they drank shows that alcohol use increased use might even decline. dramatically during Prohibition: was the "speakeasy." In In his 1963 book How Dry * Rochester, NY, for instance, 500 liquor, from .3 gallons per capita ffire: Prohibition Revisited, Henry licensed saloons in the days to 1.86 (520%); wine from .44 to Lee gives us a fascinating and before Prohibition gave way to .87 gallons per capita (97%); and instructive account of what hap­ twice as many speakeasies when beer from 1.26 to 6.9 gallons per capita (447%). During Prohibi­ pened when alcohol was prohib­ booze was outlawed. On Eagle tion, America went on a drinking ited from 1919 to 1933. Street in Albany, there were 18 speakeasies; before Prohibition binge, and, says Warburton, the When Prohibition was data for spirits may be underesti­ there were only three saloons. enacted, everyone predicted the mated. dawn of a New Moral Era. Dr. Public drunkenness was illegal Prohibition also made the Billy Sunday said: "The slums both before and during Prohibi­ liquor much more potent (as with will soon be only a memory. We tion, but in Detroit, drunkenness drugs today) and alcoholism arrests increased steadily from will turn our prisons into facto­ much more common. After 11 6,590 in 1920 to 28,804 in 1928. ries and our jails into storehouses years of Prohibition, wrote Brit­ Drinking even increased among and corncribs. Men will walk ish author G.K. Chesterton, members of Congress during the upright now, women will smile ''Alcoholism has never threatened Mark Skousen held adinner­ Prohibition! dance in honor of the Hard­ and the children will laugh. Hell disaster as it is threatening Amer­ Money Pioneers: (back ro~ will be forever for rent." During daylight, "Prohibition ica today. It isn't normal that girls I-r) Jim Dines, Richard Band, And George Will agrees: "The did cut down the amount of at 16 should go to dances and Ian McAvity, Jim Davidson, Ed fact is that Prohibition worked. drinking," says Lee. "Probably drink raw alcohol." Alcohol­ Gunther, Doug Casey, James because it was illegal, people pre­ induced deaths appeared and McKeever, Harry Browne, Alcohol consumption during the ferred to do their imbibing at Walter Perschke, Adrian Day, twenties declined. " The reality is increased. Of the 480 gallons of night, more than making up for Vern Myers, Clark Aylsworth; otherwise. liquor confiscated in one Prohibi­ (middle ro~ I-r) Lew Rockwell, their daytime abstinence." tion year, 98% contained poisons. Lee's facts and figures show, as Joe Bradley, Gary North, Larry Another indication of all the Bennett and Will are wrong. Abraham, Jim Blanchard; we might expect, that prohibiting booze sloshing around in the Prohibition didn't work, and (front ro~ I-r) Mark Skousen, alcohol simply drove its produc­ 1920s was "the most spectacular Jack Pugsley, Howard Ruff. tion and consumption "under- meanwhile, taxpayers were pick­ agricultural event" of the dec­ ing up the bill for the massive ade-the 470% increase in corn enforcement effort. And though sugar production. The stills were decent people might have used operating at full tilt; neither the alcohol, they didn't manufacture revenuers nor Elliott Ness's or distribute the illegal stuff, leav­ "Untouchables" put much of a ing those lines ofwork to some of dent in their growth. In 1929, one the sleaziest and most violent state alone confiscated more stills crooks in our history. Crime rates than the nationwide total in 1913, soared in the "Roaring '20s," while the grand total of all state most of it Prohibition related. and federal seizures was a dozen My guess is that ifwe outlawed times higher. soda pop, we could produce a America's total national similar effect. Bootleg cola-from­ "drunk tab" during Prohibition a-still would flow like water; peo­ was in the neighborhood of $2.9 ple would pay a high price for billion (in 1929 dollars), putting illegal root beer; criminal gangs the bootleg liquor business "right would supply it; and the feds up in the category ofsteel, autos, would spend billions fighting the

FreeMarket FEB RUARY 1 9 9 0 4 soda-pop cartel. Lower prices, which legaliza­ which some young people are Making drugs illegal only tion would bring, always attracted to drugs precisely increases their lure, and with the increases the quantity because they are illegal. profits available in the drug trade, demanded. But probably just Bush and Bennett want people there is more incentive to adver­ about everybody who wants to tise and get others hooked. to stop abusing drugs. I couldn't use drugs is using them now. Peo­ Experience strongly suggests agree more. What they haven't ple can get them easily, even in that drug abuse, like alcohol explained, howeve\, is just abuse, is a demand problem. federal prisons. There simply is exactly why this latest stepped­ Attacking it from the supply side no pent-up demand. And legal­ up attempt at Prohibition will is inherently futile and even ization would end the "forbid­ work any better than the last time counterproductive. den-fruit phenomenon," in we tried it......

could possibly be helped. But ing in the 1980s, it is the substitu­ bank run: "It is a marvelously Bring other problems are cyclical and tion of federal guarantees for the effective weapon because (a) it is still others are chronic. Reading liquidity ofindividual banks. It is irresistible, since once it gets Back the up on the subject, one becomes the policy that, in the case of the going it cannot be stopped, and fatalistic about it. 11 or so largest banks, failure will (b) it serves as a dramatic device Bank In gaslight days, before the not be allowed and that, even in for calling everyone's attention to "Too-Big-To-Fail" doctrine and smaller institutions, depositors the inherent unsoundness and Run other modem banking improve­ will be protected. It is this reg­ insolvency of fractional reserve CONTINUED FROM PAGE ONE ments, national banks were ulatory sea change that dis­ banking." bound to hold reserves amount­ tinguishes the current debt The Federal Reserve Act of ing to 25% of demand deposits. expansion from so many earlier 1913 was hailed as a gift to the By our standards, this was a lav­ ones. nation, in part because it seemed ish margin of safety, even if, as Years ago, when weak banks to promise a run-free future. Rothbard notes, capital reserves suffered runs by public depos­ Because the reserve banks would were often tied up in government itors, instead of seizure by the lend in times of crisis, commer­ bonds ("...banks were induced to Federal Deposit Insurance Cor­ cial banks could afford to become monetize the public debt," he has poration, a liquid balance sheet a little less liquid-a little more written, "state governments were constituted a competitive advan­ expansive-in good times. encouraged to go into debt and tage. When James ("Sunshine Things did not work out government and bank inflation Jim") Stillman, National City's exactly that way, and the 1930s were intimately linked"). dour chairman, correctly fore­ saw a marathon of bank runs. Reserve requirements were warned his associates in early Rejecting conservative counsel, reduced to 18% with the advent 1907 to prepare for a panic that the Roosevelt administration cre­ of the Federal Reserve System in Fall, he was able to anticipate a ated the Federal Deposit Insur­ 1913 and stand at 12% today. competitive silver lining: "What ance Corporation to furnish still Loans as a percentage of assets impresses me as most important more federal assurances to bank­ are higher today than they used is to go into next Autumn ers and depositors. Over the next to be, however. And off-balance ridiculously strong and liquid, several decades, the conviction sheet liabilities-such as standby and now is the time to begin and took root that enlightened legisla­ letters of credit, interest-rate shape for it. If by able and judi­ tion had eliminated the possi­ swap commitments, and futures­ cious management we have bility ofanother national banking markets trading-are higher, money to help our dealers when CrISIS. too. trust companies have suspended, The strategy has worked, and The rise in the risks attached to we will have all the business we it hasn't worked. There has been banking prompts numerous want for many years." no great deflation, no national questions about the nature of If, however, one's institution is bank holiday, and no prairie-fire Trusts and Taxes-The Institute lending and the credit cycle. beyond failure, it hardly makes run on the members of the New now has the ability to offer all How has the regulatory and business sense to build reserves York City Clearing House Asso­ nanner of Charitable Trusts and monetary climate of the 1980s against an unpredictable day of ciation. On the other hand, there I"\llnuities to Members who want to affected bank lending? If, as reckoning...What it makes sense has been the thrift snafu and the help the Institute in its work, and reap significant tax benefits in the bargain. seems obvious, it has inflated it, to do is lend, and so banks have Third World crisis. Each is an For more information, without any what will be the consequences of lent. emblematic event, as each has lin­ obligation, please check the box on this? Economist Rothbard has writ­ gered for years, not months, and the enclosed form. Ifanything is new about bank- ten a brief ode in prose to the CONTINUED ON NEXT PAGE

5 FEB RUARY 1 9 9 0 Free Market the cost ofeach is measured in the broad historical range." Rothbard's theory that a run­ Bring scores of billions ofdollars, noth­ In other words, by historical resistant, semi-socialized, frac­ ing less. It is hard to imagine a standards, the banks are loaned tional-reserve banking system is a Back the free banking system getting itself up. More than that, they are house of cards. into scrapes like those in the first stuffed (many ofthem) with loans What has been lacking in Bank place. that were once considered inap­ American banking in recent years propriate for the balance sheet of is the run. And when it has not Commenting on some ofthese a commercial lending institution. been lacking-as in the rescue of Run trends a few months ago was The most prevalent specimen of Continental Illinois in 1984-it CONTINUED FROM PAGE FIVE none other than the Chairman of this class of dubious assets is has been frightening. With the the Federal Reserve Board. Alan loans against speculative com­ wholesale substitution of federal Greenspan delivered an unusual mercial real estate. As banks promises, actual or implied, for speech at a remarkable time. The withdrew from business lending, conservative banking practices, date was October 16, the Monday they turned to property. the caliber oflending has inevita- following Friday the 13th, and the audience was the American othbard's th.eory Bankers Association. Greenspan proceeded to describe the 150­ holds that a run­ year odyssey by which American banks have become more lever­ resistant, seIlll­ aged and less liquid. socialized, fractional­ What was notable was the reserve banking systeIll chairman's historical perspective (even if, for professional reasons, is a house of cards. he did not share Rothbard's view that fractional-reserve banking is Like Greenspan, Robert L. bly suffered. Sunshine Jim Still­ a fraud). In banking and credit Clarke, Comptroller of the Cur­ man, were he to return to Wall terms, Greenspan admitted, the rency, adopts a non-Rothbardian Street for a day, would very prob­ 20th century has been an age of world view. He recently testified ably wish that he hadn't. relaxation. While not deploring that "the national banking system Is the banking dilemma eter­ this trend, he did not ignore it is fundamentally sound. That nal? It doesn't have to be. We either. ''Although leverage was conclusion is based on a substan­ could desocialize credit risk and important in the past, as now, the tial increase in capital levels, let the bank runs take their toll. amount of leverage historically especially equity capital levels, Absent federal meddling, the was much less than we see today. " relatively strong earnings, and an bottom line would be simplicity Despite the addition of$14 billion improvement in overall credit itself The proof that banks have in equity capital by national quality among the majority of created excess credit would be banks in 1988 and the first halfof national banks during the past 18 found in the action ofmarkets. It 1989, "capital levels for the indus­ months." would be a fascinating picture if try remain at the low end oftheir He evidently rejects Professor not a pretty one.....

ratified by consumer demands mand its heights or feed at its secure or even less secure, but Time lor an and without asset values estab­ troughs. assuredly poorer. lished in open capital markets, a Defense, of course, is often Further, no one knows how American planned system must necessarily taken to be the classic "public much of the military effort goes misallocate resources. By now good," and it is true that virtually toward protecting the lives and Perestroika everyone, including communists all Americans want the govern­ property of v. S. citizens and CONTINUED FROM PAGE ONE from Gorbachev on down, ment to do whatever is necessary how much goes toward advanc­ acknowledges that the planned to deter attacks from abroad. But ing the interests of the V.S. gov­ economies ofthe Soviet bloc have no one knows with any certainty ernment, which are by no means been failures. The V.S. military what the relation is between mili­ synonymous with the interest of economy also has been a failure, tary spending and national the general public. But however for the same reasons. security. Obviously, vast sums problematic true nationaf But if the military economy can be, and have been, spent for security may be, military spend­ has been an economic failure, worthless weapons. Other weap­ ing undoubtedly generates pri­ squandering resources right and ons work ~ell enough but trigger vate benefits in the foim of jobs, left, it has been a political suc­ offsetting reactions by adversar­ incomes, votes, and power. For cess-atleast for those who com- ies, leaving the nation no more these prizes, there has been no

FreeMarket FEB RUARY 1 9 9 0 6 shortage of seekers. phone conversation between two Accounting Office; countless Time lor an The military-industrial-con­ men engaged in a Pentagon pro­ proposals by scholars and private gressional complex (hereafter the curement fraud, recorded one of groups-all have come to American MICC) includes all those who them saying, "If the farmers in naught. have found a way to turn a bad Indiana knew what you sons of Secretary Cheney took office Perestroika public situation, the Cold War, bitches were doing with their pledging to carry out effective CONTINUED FROM PAGE SIX into a good personal deal. Mem­ money, they would come up fundamental changes. But his bers ofCongress, especially those there and kill you with their actual plan, announced late in who belong to the key military pitchforks." 1989, was correctly described as committees, milk the system to But despite the scandals that leaving "intact the structure and gain reelection. Arms contracting flare up every few years, the pub­ authority of the entrenched Pen­ firms, many of which lack the lic either doesn't know or feels tagon procurement bureaucracy." ability to compete successfully in powerless to do anything about Cheney sought to avoid alienat­ commercial markets, rake in the conduct of the MICC. Like ing the top civilian and military large profits, often with little or the East Germans who toiled in leadership ofthe armed services. no risk. The military services, poverty while their masters lived T'he result: no substantive with their bloated officer corps in luxury, the average citizen sur­ change. and labyrinthine bureaucracies, renders the funds to feed the Now, as the public sees less gain positions, income, and pre­ gargantuan military economy and less justification for the main­ requisites, not to mention one of year after year. tenance of an enormous military the cushiest retirement plans in establishment, especially one the land. On the periphery ofthe designed for another world war MICC thrives congeries of mili­ he COIll­ in Central Europe, the MICC tary-oriented lobbyists, consul­ panies that will surely come under attack. tants, research institutions, aca­ But its political resources are demicians, and labor unions. supply the enormous. Even if military Thecompanies thatsupply the Pentagon spending is cut, it is unlikely to Pentagon talk a good private­ be cut very much very fast. enterprise game, but in practice are at best Regardless of events in Eastern they are at best mutant and Europe and the Soviet Union, Illutant Fighting for twisted actors in the market. those whose positions and They are subject to no genuine and incomes derive from high levels the Free Market market discipline; the govern­ of military spending will con­ When you help the Ludwig von ment is the sole buyer ofthe arms t'-Visted actors tinue to resist the spending cuts. Mises Institute, you support they produce. But the govern­ in the Illarket. They may also be tempted to internationally recognized ment purchasers are using other stir up fears of new threats or to educational programs dedicated people's money and have no bot­ revive the Cold War-after all, to the free market, sound money, tom line of their own. As William J. Stem recently the past 40 years are littered with individual liberty, and private Small wonder if the big mili­ wrote, the political insiders who weapons "gaps" and other forms property. tary companies all form political flourish when the government of scare-mongering. The public Since the Institute refuses to action committees to channel maintains a vast military econ­ would be well advised to antici­ solicit or accept government funds, and is considered-like millions into the campaign cof­ omy are "our version of the East pate such tactics. Ludwig von Mises himself-"too fers and personal accounts of bloc's Nomenklatura and they As the welfare state has uncompromising and many members of Congress. have absolutely no wish to see matured, people have come to intransigent" by establishment Hardly surprising if the firms anything change." For a perfect appreciate better that groups sources, we depend entirely on hire thousands ofretired military example, read the history of seeking to redistribute income to those people who share our officers, former congressmen, Wedtech-itdoesn't get any slea­ themselves always present their principles. and congressional staffers to help ZIer. plans wrapped in a claim to pro­ them acquire additional arms Over the years, numerous real mote the public interest. Those contracts. Big arms companies in or pretended efforts to reform the who seek to feather their nests in trouble can confidently apply for system have been made. Three the warfare state use the same a government bailout. major studies by presidential tactic even more effectively. The whole business reeks of blue-ribbon commissions, the Perhaps, ifthe Cold War really corruption, some of it illegal but latest being the Packard Commis­ does end, the basis for this far­ much ofit, like the blatant bribes sion of1986; many acts passed by reaching redistributive activity ("honoraria") paid to members of Congress; various in-house will erode. Then perestroika may Congress, perfectly legal. The efforts at the Pentagon; scores of become possible in the United FBI, eavesdropping on a tele- investigations by the General States, too. ~ 7 FEB RUARY 1 9 9 0 Free Market print thanks to government pro­ erty from what Ronald Reagan no better than the Bulgarian Government grams. In NewJersey, for exam­ once called "the tree huggers." economy. Only the free market ple, the price ofused newspapers Some liberal economists claim will solve the garbage problem, GarballB has plummeted from $40 a ton to prices can't solve the garbage and that means abolishing n( CONTINUED FROM PAGE TWO minus $25"a ton. Trash problem because of "external dis­ only socialism, butthe somewhat entrepreneurs used to buy old economies." Since greedy cap­ more efficient municipal fascist newspaper. Now you have to pay italists are out to make a fast systems where one politically someone to take it away. buck, the theory goes, they pro­ favored contractor gets the job. Ifit is economically efficient to duce goods that impose costs The answer is to privatize and recycle-and we can't know that external to their businesses, i.e., deregulate everything, from trash so long as government is trash. But all businesses have pickup to landfills. That way, involved-trash will have a mar­ spill-over effects, good and bad, everyone pays an appropriate ket price. It is only through a free and in a free market, this creates part of the costs. Some types of price system, as Ludwig von opportunities for other trash would be picked up for a Mises demonstrated 70 years ago, entrepreneurs. The donut indus­ fee, others would be picked up that we can know the value of try may help make people fat (an free, and still others might com­ goods and services. external diseconomy). Should it mand a price. Recycling would Environmentalists don't seem be forced to sponsor Weight be based on economic calcula­ to understand this. They ask Watchers? Or, more to the point, tion, not bureaucratic fiat. their followers to ignore price sig­ should the public be taxed for a The choice is always the same, nals and cut their consumption of new federal Department of Cor­ from Eastern Europe to my everythingfrom gasoline to paper pulent Affairs? town: put consumers in charge towels. This one plank in the The cave men had garbage through private property and a environmental platform I agree problems, and so will our pro­ free price system, or create a with, since it will make these geny, probably for as long as fiasco through government. goods cheaper for the rest of us. human civilization exists. But Under the right kind of system, I'm happy to have my standard of government is no answer. A even I might start separating my living raised by voluntary pov- socialized garbage system works trash. ~

large stone sails catching up with Hazlitt, and the science is through analysis of the Still through your front blurb on the first edition still economic fallacies most popular window. Does this rings true: ''An introduction to today, and particularly ofthe cen­ the Best help the economy? economics based on the convic­ tral error from which they stem." The answer is, of tion that the shortest and surest Even today, there is still no better course, no, and gov­ way to an understanding of this introduction to the economics of ernment intervention freedom. is the stone writ large. Hazlitt-economist, jour­ From taxes, regula­ nalist, and student and friend of tion, inflation, wel­ Ludwig von Mises (and the fare, and price-fixing to protec­ Institute)-gave the "freedom Henry Hazlitt's classic tionism and group privileges, vir­ philosophy" real meaning. He Economics in One Lesson is tually everything the government believed that ideas have conse­ available this month for $9, does is destructive to prosperity. quences only when individuals which includes U.S. postage Economics in One Lesson by Henry and handling. Please see the apply and advocate them, enclosed form. Hazlitt explains why. especially by battling the govern­ This book is more than a clas­ ment. Hazlitt was a fierce oppo­ sic. It is a treasure. It first nent of the leviathan state, and appeared in 1946 and caused a this helped inspire the founding sensation. And the economic of the Mises Institute. Economics establishment was scandalized. in One Lesson will show you The economics profession is still why. ~

Copyright ©1990 by the LUdwig von Mises Institute, 851 Burlway Road, Burlingame, California 94010, (415) 579-2500, ~~G Fax: (415) 579-0612, and Auburn University; the O. P. Alford III Center for Advanced Studies in Austrian Economics; the University of Nevada, Las Vegas; the Lawrence Fertig Student Center; and the Review of Austrian Economics. Permission to reprint articles is hereby granted provided full credit and address are given. Editor: Llewellyn H. Rockwell, ~ Jr.; Contributing Editor: Murray N. Rothbard; Managing Editor: Jeffrey A. Tucker; Scholarly Publications Editor: Judith ~ Thommesen; Production by MacDonald-Morris Creative Services; Publisher: Patricia O. Heckman; Associate Publisher: INSTITUTE Norma A. Marchman.

FreeMarket FEB RUARY 1990 8