THEFREEMAN IDEAS ON LIBERTY

FEATURES 4 Understanding Say's Law of Markets by Steven Horwitz What Say said-and meant. 8 The Socialist Roots of Modern Anti-Semitism by Tyler Cowen The link between statism and the persecution ofminorities. 12 Income and the Question of Rights by Roy E. Cordato A fundamental issue ofmorality. 16 Mises, Hayek, and the Market Process: An Introduction by Nevenka Cuckovic and David L. Prychitko Marking the publication ofa new volume ofCroatian-language translations. 23 Breaking Up Antitrust by Edward J. Lopez Potential monopolies should be exposed to the discipline ofmarket competition. 27 The Economic Woes of Pro Sports: Greed or Government? by Raymond J. Keating Why meddling politicians and bureaucrats should be taken out ofthe lineup. 28 Superstar Athletes Provide Economics Lessons by K.L. Billingsley Playing the workers' compensation game. 32 Teen Smoking: The New Prohibition by D. T. Armentano Proposed regulations are likely to-have little effect. 33 Government and Governance by Fred E. Foldvary Toward more voluntarism and less coercion. 38 The Benefits of Outsourcing by Brian Boland and Walter Block Allocating resources more efficiently. 41 Marcus Tullius Cicero, Who Gave Natural Law to the Modern World by Jim Powell A builder ofWestern civilization.

COLUMNS

Center NOTES from FEE-Welfare Reform by Hans F. Sennholz 14 IDEAS and CONSEQUENCES-The Problem of Education Doesn't End at the 12th Grade by Lawrence W Reed 30 POTOMAC PRINCIPLES-Replace the Monopoly, Not the Superintendent by Doug Bandow 50 ECONOMICS on TRIAL-Economics in One Page by Mark Skousen

DEPARTMENTS

1 Perspective-Peter J. Boettke 52 Book Reviews • The Social Security Fraud by Abraham Ellis, reviewed by William H. Peterson; The Home by Richard McKenzie, reviewed by Karol Boudreaux; EndingAffirmativeAction: The Case for Colorblind Justice by Terry Eastland, reviewed by Steven Yates; This Land Is Our Land: How to End the War on Private Property by Richard Pombo and Joseph Farah, reviewed by Raphael G. Kazmann; Against the Tide: An Intellectual History ofFree Trade, by Douglas A. Irwin, reviewed by Robert Batemarco. THEFREEMAN IDEAS ON LIBERTY PERSPECTIVE

Published by Economic Research and The Foundation for Economic Education Economic Education Irvington-on-Hudson, NY 10533 Phone (914) 591-7230 FAX (914) 591-8910 In 1948, Ludwig von Mises wrote a mem­ E-mail: [email protected] orandum to FEE President Leonard Read on President: Hans F. Sennholz the objectives ofeconomic education.1 In this Managing Editor: Beth A. Hoffman memorandum, Mises laid out the main "fal­ lacies ... which economic education must un­ Guest Editor: Peter J. Boettke mask." Exposing economic error requires a Editor Emeritus Paul L. Poirot transcendence of the practical problems of Lewisburg, Pennsylvania the day: "The urgent tasks ofthe daily routine Editorial Assistant Mary Ann Murphy impose on [businessmen, professionals, poli­ Columnists ticians, editors, and journalists] an enormous Doug Bandow Cato Institute, Washington, D.C. quantity of pressing work, and no time is left Lawrence W. Reed for a thoroughgoing examination of ... prin­ Mackinac Center for Public Policy Midland, Michigan ciples and doctrines." Mark Skousen The practical man, in fact, often scorns Rollins College, Winter Park, Florida Contributing Editors theory. But, as Mises pointed out, this disdain Charles W. Baird "is mainly caused by the mistaken belief that California State University, Hayward Peter J. Boettke the facts of experience speak for themselves, New York University Clarence B. Carson that facts by themselves can explode errone­ American Textbook Committee ous interpretations." Facts must be inter­ Wadley, Alabama Thomas J. DiLorenzo preted through the lens of theory. The intel­ Loyola College, Baltimore, Maryland lectual conflicts of any age are theoretical Joseph S. Fulda New York, New York conflicts, not factual ones. Bettina Bien Greaves Resident Scholar, FEE Theories give meaning to facts. "Hence," John Hospers Mises wrote, "it is obvious that the attempts University of Southern California Tibor R. Machan to free the people, especially the intellectual Auburn University youth, from the fetters of 'unorthodox' indoc­ Ronald Nash Reformed Theological Seminary trination must begin on the philosophical and Edmund A. Opitz Chatham, Massachusetts epistemological level." James L. Payne This was, in Mises' view, the purpose of Sandpoint, Idaho Jim Powell FEE. To educate thoughtful people, espe­ Westport, Connecticut cially the intellectual youth, on the political, William H. Peterson Adjunct Scholar, Heritage Foundation, philosophical, and economic issues of the age Washington, D.C. Jane S. Shaw was the main task of a foundation for eco­ PERC, Bozeman, Montana nomic education. A disinclination to deal with Richard H. Timberlake University of Georgia "theory" would mean submission to Marxism and Progressivism. According to Mises, the

The Freeman is the monthly publication of The Foundation for doctrine of the age promoted ten major Economic Education, Inc., Irvington-on-Hudson, NY 10533. FEE, established in 1946 by Leonard E. Read, is a non-political, educational economic fallacies which must be debunked. champion ofprivate property, the free market, and limited government. FEE is classified as a 26 USC 501(c)(3) tax-exempt organization. 1. Modern technological developments, it is Copyright © 1997 by The Foundation for Economic Education. Permission is granted to reprint any article in this issue, except "Marcus contended, have delivered humanity into a post­ Tullius Cicero" and "Economics in One Page," provided credit is given scarcity situation. Thus, remaining economic and two copies of the reprinted material are sent to FEE. problems are a result of inherent contradictions The costs of Foundation projects and services are met through dona­ tions, which are invited in any amount. Donors of $30.00 or more receive with capitalism, not due to the problem of a subscription to The Freeman. Student subscriptions are $10.00 for the limited resources and unlimited wants. nine-month academic year; $5.00 per semester. Additional copies of this issue of The Freeman are $3.00 each. For foreign delivery, a donation of 2. Following from the post-scarcity situation, $45.00 a year is suggested to cover mailing costs. monetary expansion can solve problems. Pov­ Bound volumes of The Freeman are available from The Foundation for calendar years 1972 to date. The Freeman is available in microform from erty can be eradicated simply by printing new University Microfilms, 300 N. Zeeb Rd., Ann Arbor, MI 48106. money.

2 PERSPECTIVE 3. Business cycles, it is said, are not a result of able to coordinate the activities of Mises, government mismanagement, but instead a nat­ Hazlitt, and other scholars and writers to ural consequence of the contradictions of cap­ translate theory into the modern idiom, thus italism. 4. Mass unemployment is endemic to capi­ challenging the prevailing Progressivism of talism and the free enterprise system cannot postwar America. provide enough jobs. Technological improve­ If we compare the current state of eco­ ments in production are beneficial to some, but nomic knowledge with the economic outlook a scourge to the masses. of the late 1940s, as presented by Mises' 5. Improvements in the working class are due to actions of government, and especially, pro­ analysis, then classical liberals have reason labor union legislation. both to rejoice and to despair. 6. Despite the best intentions of government On a fundamental level, the work of Mises, and labor unions, the masses ofworkers remain Hazlitt, and others-and such organizations in. a desperate state of affairs. as FEE-has done much to unmask error. 7. Bargaining power within the economy rests disproportionately with businessmen, and But too many economic myths persist. A new against labor. Without the aid of collective generation must pick up where Mises and bargaining, wages would be pushed to subsis­ Hazlitt left off, advance the theoretical and tence levels by businessmen, who see this as the historical understanding ofeconomic life, and way they will increase their profits. learn to communicate these ideas to the 8. Competitive capitalism might have accu­ rately described a previous era, but in the world "intellectual youth" more effectively. of today the market is dominated by monopo­ Much has been made of the failure of lies. universities and colleges in recent years. Self­ 9. In a world dominated by monopolies, the indulgent professors, who pursue their eso­ idea ofconsumer sovereignty is a myth. Business teric research at the expense of the education firms do not attempt to supply the wants of consumers, but instead attempt to manipulate of their students, have come under increased those wants in order to increase profits. scrutiny as tuition continues to rise. Teaching, 10. Since we live in a post-scarcity world, and not research, should be the primary function income distribution is so top-heavy, redistribu­ of faculty, though it must be understood that tion of income from rich to poor will not have research is vital for improved instruction-in any effect on economic productivity. particular, careful academic study and writing These fallacious economic propositions, that meet the scholarly demand of peer re­ one should recognize, were later embodied in view. But with the legitimate critique of the such influential writings as John Kenneth existing situation, there also tends to be a Galbraith's The Affluent Society. But at the "disdain of theories and philosophies" that time Mises was writing to Leonard Read, the Mises warned would lead to the spread of intention was to give a purpose and direction economic fallacies. to FEE's educational mission. This required As classical liberals work to fulfill their first and foremost the continued refinement mission in the coming years, they must take ofeconomic theory, significant historical work inspiration from the accomplishments of guided by correct theory, and the ability to Mises, Hazlitt, and Read. If they too readily communicate the results of these theoretical reject basic research and theory in favor of and historical investigations to as wide an practical knowledge and superficial instruc­ audience as possible. According to Mises, tion, then Mises' challenge will remain "Success or failure of endeavors to substitute unmet. sound ideas for unsound will depend ulti­ -PETER J. BOETTKE mately on the abilities and the personalities of New York University the men who seek to achieve this task." Guest Editor Mises, the philosopher and economic the­ orist, was complemented in his effort by 1. This memorandum has been published in Ludwig von Henry Hazlitt, the economic journalist. Leo­ Mises, Economic Freedom and Interventionism (FEE, 1990), pp. nard Read-the entrepreneur of ideas-was 179-186.

3 THEFREEMAN IDEAS ON LIBERTY

Understanding Say's Law of Markets by Steven Horwitz

ne of the problems in the world ofideas, a good they have already chosen to supply, but Oparticularly in the social sciences, is that that is not the same thing as saying that an act the insight behind old ideas can get lost as new of supply necessarily creates demand for the ideas crowd the intellectual landscape. Often, good in question. This understanding of the the historian ofideas has the thankless task of law is obviously nonsensical as numerous reminding his colleagues that what they think business and product failures can attest to. If some long-dead writer said is not, in fact, what Say's Law were true in this colloquial sense, he was talking about at all. then we could all get very rich just by pro­ Such misunderstandings are frequently ducing whatever we wanted. more than just simple errors; they can have In a somewhat more sophisticated under­ profound effects on our theories of the social standing, one which John Maynard Keynes world, our interpretations of history, and our appeared to pin on the Classical economists, proposals for policy. In economics, one can Say's Law is supposed to be saying that the find numerous examples ofthis phenomenon. aggregate supply of goods and services and My task here is to explore one of them: the the aggregate demand for goods and services way in which Say's Law ofMarkets (named for will always be equal. In addition, Say was the great Classical economist Jean-Baptiste supposed to have been saying that this equal­ Say) has been fundamentally misunderstood ity would occur at a point where all resources by economic theorists and laypersons alike, are fully employed. Thus, on this view, the and to explore some of the consequences of Classical economists supposedly believed that this misunderstanding. markets always reached this full-employment W. H. Hutt once referred to Say's Law as equilibrium. In one sense this is trivially true. "the most fundamental 'economic law' in all If we compare the actual (ex post) quantities economic theory."l In its crude and colloquial of goods bought (demanded) and sold (sup­ form, Say's Law is frequently understood as plied) they will always be equal. Whatever "supply creates its own demand," as if the is sold by one person is bought by another. simple act of supplying some good or service Presumably, however, Keynes thought the on the market was sufficient to call forth Classical economists meant something else, demand for that product. It is certainly true perhaps more along the lines of "market that producers can undertake expenses, such economies will never create general gluts or as advertising, to persuade people to purchase shortages because the income generated by Dr. Horwitz is Eggleston Associate Professor of sales will always be sufficient to purchase the Economics at St. Lawrence University in Canton, quantity of goods available to buy." There is New York. a strong sense in which this is true, butby itself 4 UNDERSTANDING SAY'S LAW OF MARKETS 5 it does not assure that full employment will my labor directly, so I am unlikely to demand take place because obvious examples of them. The demand for my services as a significant unemployment and unsold goods computer technician is a result of the supply­ can easily be pointed to. And, in fact, this is ing activities of everyone but computer tech­ what critics of Say's Law have done. By nicians. pointing to the various recessions and de­ This way of viewing Say's Law gets at the pressions that market economies have ex­ interconnections between the various sectors perienced, they claim to show that Say's Law of a market economy. In particular, it makes was at the very least naive, and probably sense ofthe claim that "the employment of all downright wrong. is the employment of each." As each worker finds employment, he or she is able to turn What Say Said around and demand goods and services from all other noncompeting suppliers, creating the If we want to get a more accurate under­ opportunity for their employment. From this standing of Say's Law, perhaps we should perspective, Say's Law has nothing to do with consult what Say himself had to say about his an equilibrium between aggregate supply and supposed law. In the passage where he gets aggregate demand, but rather it describes at the insight behind the notion that supply the process by which supplies in general are creates its own demand, Say writes: "it is turned into demands in general. It is always production which opens a demand for prod­ the level of production which determines the ucts.... Thus the mere circumstance of the ability to demand. creation of one product immediately opens a vent for other products."2 Put another way, Production Must Come First Say was making the claim that production is the source of demand. One's ability to de­ This process can be seen in the differences mand goods and services from others derives between small, poor, rural towns and wealth­ from the income produced by one's own acts ier suburban areas. In the small town, the fact of production. Wealth is created by produc~ that less value is being produced by residents tion not by consumption. My ability to de­ means that their ability to demand goods and mand food, clothing, and shelter derives from services is correspondingly limited. As a re­ the productivity of my labor or my nonlabor sult, the selection of products, the number assets. The higher (lower) that productivity, and diversity of sellers, and the degree of the higher (lower) is my power to demand. specialization among producers is quite lim­ In his excellent book on Say's Law, Hutt ited. By contrast, in the wealthier suburb, states this as: "All power to demand is derived there is an amazing array of products, with a from production and supply.... The process large number of diverse sellers all offering of supplying-i.e., the production and appro­ very specialized goods. Perhaps most impor­ priate pricing ofservices or assets for replace­ tant is that in the wealthier area, there is a ment or growth-keeps the flow of demands greater degree of competition, as the market flowing steadily or expanding."3 Later, Hutt can support multiple sellers of particular was to be somewhat more precise with his goods given the level of wealth being gener­ definition: "the demand for any commodity ated by producers. Say points out that this is a function of the supply of noncompeting explains why a seller will likely get more commodities.,,4 The addition of the modifier business as one among a large number of "noncompeting" is important. If I sell my competitors in a big city than the sole seller of services as a computer technician, it is pre­ an item in the more sparsely populated coun­ sumed that my resulting demands will be for tryside.s The key to understanding Say's Law goods and for services other than those of a of Markets is that it is production that must computer technician (or something similar). come first. Demand, or consumption, follows The goods or services competing with those from the production of wealth. that I sell can always be obtained by applying To a degree, Say's Law is just an extension 6 THE FREEMAN • JANUARY 1997 of Adam Smith's insight that "the division of Notes), then that withheld consumption labor is limited by the extent of the market.,,6 power will be transferred to those who borrow Smith's point was that the degree of special­ money from the bank that created it. The ization that one would see in a given market money I leave sitting in my checking account depended upon how much demand there is the basis for my bank's ability to lend to was for the specialized product. Thus, small others. The power to consume that I choose towns rarely have ethnic restaurants beyond not to utilize by leaving my production­ the very popular Chinese and Italian, nor generated wealth as money is transferred to do they have radio stations that specialize in the borrower. When she spends her loan, her very narrow musical formats (oldies from the addition to aggregate demand fills in for the 1970s only, for example). Larger, wealthier "missing" consumption demand resulting communities can support this degree of spe­ from my decision to hold money. There is, cialization because there is sufficient demand, therefore, no excess or deficiency in aggregate deriving from a larger population and a larger demand, as long as the banking system is free degree of wealth being produced. It is in this to perform this process of turning the saving sense that production (supply) is the source of of depositors into the spending of borrowers. demand. Say's Law of Markets cannot be fully appre­ Because all movements between supplying ciated unless one understands the working of and demanding have to take place through the banking system and its role in intertem­ the medium of money, it is somewhat over­ poral coordination.7 simplified to say that production is the source of demand. Actually demanding products All Markets requires the possession of money, which in Are Money Markets turn requires a previous act ofsupply. We sell assets or labor services for money, which we Because all market exchanges are of goods then use to demand. Money is an intermedi­ or services for money, all markets are money ate good that enables us to buy the things markets, and the only way there can be an we ultimately desire. However, we have to be excess supply or demand for goods is if there careful to remember that what enables us to is an opposite excess supply or demand for purchase is not the possession of money, per money. Take the more obvious case of a glut ~e, but the possession ofproductive assets that ofgoods, such as one might find in a recession. can fetch a "money's worth" on the market. Say's Law, properly understood, suggests that When we sell that asset (or ourlabor services) the explanation for an excess supply of goods we receive wealth in the form of money. As is an excess demand for money. Goods are we spend that money, we demand from the going unsold because buyers cannot get their wealth our production created. However, be­ hands on the money they need to buy them cause we do not spend all of our wealth that despite being potentially productive suppliers we temporarily store as money, but choose to of labor. Conversely, a general shortage, or continue to hold some of it in the monetary excess demand for goods, can only arise if form, the demand for current goods and there is an excess supply of the thing goods services will not precisely match the value of trade against, which can only be money. what has been produced, as some money Recessions and inflations are, therefore, fun­ remains in the producers' possession. Thus it damentally monetary phenomena, as Say's looks as though, given the existence and use Law points us in the direction of looking at ofmoney, Say's Law, even rightly understood, what is going on in the production of money leaves open the possibility that aggregate to explain the breakdown of the translation demand is insufficient to purchase what has process of production into demand. been supplied. Unlike Keynesian critics of Say's Law of However, if the monetary wealth is stored Markets who saw deficient aggregate demand in the form of bank-created money, such as a resulting from various forms ofmarket failure checking account (but not Federal Reserve as causing economic downturns, we have UNDERSTANDING SAY'S LAW OF MARKETS 7 argued that a more accurate understanding of insight into the operations of a market Say's Law suggests that there is no inherent economy. 0 flaw in the market that leads to deficient aggregate demand, nor is the existence of real-world recessions a refutation of the Law. 1. W. H. Hutt, A Rehabilitation ofSay's Law (Athens, Ohio: Ohio University Press, 1975), p. 3. Rather, once we understand the role of 2. J. B. Say, A Treatise on Political Economy (New York: money in making possible the translation of Augustus M. Kelley, 1971), pp. 133, 134-35. 3. Hutt,op. cit., p. 27. our productive powers of supply into the 4. W. H. Hutt, The Keynesian Episode (Indianapolis, Ind.: ability to demand from other producers, we Liberty Press, 1979), p. 160. 5. Say, op. cit., p. 137. can see that the root of macroeconomic 6. Adam Smith, An Inquiry into the Nature and Causes ofthe disorder is most likely monetary, as too much Wealth ofNations (Chicago: University of Chicago Press, 1976), p. 21ft'. or too little money will undermine that trans­ 7. On the relationship between the banking system and Say's lation process. Despite having been dismissed Law, see George Selgin, The Theory of Free Banking (Totowa, N.J.: Rowman and Littlefield, 1988); Larry J. Sechrest, Free in the onslaught of the Keynesian revolution, Banking: Theory, History and a Laissez-Faire Model (Westport, Say's Law, when properly understood both Conn.: Quorum, 1993); and Steven Horwitz, "Capital Theory, Inflation, and Deflation: The Austrians and Monetary Disequi­ in its original meaning and its relationship librium Theory Compared," Journal of the History of Economic to the banking system, remains a powerful Thought 18:2 (Fall 1996).

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The Socialist Roots of Modem Anti-Semitism by Tyler Cowen

Auschwitz meant that six million Jews were of all kinds, discriminators must pay pecuni­ killed, and thrown on the waste-heap of ary costs for indulging their prejudices in a Europe, for what they were considered: market setting. Even the prejudiced usually money-Jews. Finance capital and the banks, will trade with minorities; bigots attempt to the hard core of the system of imperialism oppress minorities by socializing the costs and capitalism, had turned the hatred ofmen through government action, but bigots usually against money and exploitation, and against are less willing to bear these costs themselves. the Jews. ... Antisemitism is really a hatred Repeated commercial interactions also in­ ofcapitalism. crease the social familiarity of customs or -ULRlKE MEINHOF, left-wing German lifestyles that otherwise might be found un­ terrorist of the 1970s1 usual or alien. Sustained economic growth alleviates political and social tensions by cre­ ating more for everybody. apitalism and the market economy en­ The history of the Jewish people illustrates Ccourage racial, ethnic, and religious tol­ the relatively favorable position of minorities erance, while supporting a plurality ofdiverse in a market setting. Hostility toward trade lifestyles and customs. Heavily regulated or and commerce has often fueled hostility to­ socialist economies, in contrast, tend to breed ward Jews, and vice versa. The societies most intolerance and ethnic persecution. Socialism congenial to commercial life for their time­ leads to low rates of economic growth, dis­ Renaissance Italy, the growing capitalist putes over resource use, and concentrated economies of England and the Netherlands political power-all conditions which encour­ in the seventeenth century, and the United age conflict rather than cooperation. Ethnic States-typically have shown the most toler­ and religious minorities usually do poorly ation for Jews. Ellis Rivkin, in his neglected when political coercion is prevalent. Eco­ masterpiece, The Shaping ofJewish History: A nomic collapses-usually associated with in­ Radical New Interpretation, wrote: terventionism-worsen the problem by un­ leashing the destructive psychological forces Since World War II Jews and Judaism have been liberated in every country and territory where of envy and resentment, which feed prejudice capitalism has been restored to vigorous and persecution. growth-and this includes Germany. By con­ While discrimination is present in societies trast, wherever anticapitalism or precapitalism has prevailed the status ofJews and Judaism has Dr. Cowen teaches economics at George Mason either undergone deterioration or is highly pre­ University in Fairfax, Virginia. carious. Thus at this very moment the country 8 9

where developing global capitalism is most ad­ develop systematic anti-Semitic political and vanced, the United States, accords Jews and intellectual movements. In Germany, Adolf Judaism a freedom that is known nowhere else Stocker's Christian Social Party (1878-1885) in the world and that was never known in the combined anti-Semitism with left-wing, re­ past. It is a freedom that is not matched even formist legislation. The party attacked laissez­ in Israel. ... By contrast, in the Soviet Union, the citadel ofanticapitalism, the Jews are cowed faire economics and the Jews as part of the by anti-Semitism, threatened by extinction, and same liberal plague. Stocker's movement syn­ barred from access to their God.2 thesized medieval anti-Semitism, based in religion, and modern anti-Semitism, based The socialist origins of modern anti­ in racism and socialist economics. He once Semitism illustrate the link between statism wrote: "I see in unrestrained capitalism the and the persecution of minorities. Anti­ evil of our epoch and am naturally also an Semitism as a formal, intellectual movement opponent of modern Judaism on account of arose in the middle ofthe nineteenth century, my socio-political views." Stocker had revered when Jewish conspiracy theories grew in the Prussian aristocracy since his youth. popularity. German writers picked up on Georg Ritter von Schonerer led the left­ earlier anti-Enlightenment theories of a wing, anti-Semitic movement in Austria. Judeo-Masonic conspiracy to rule the world. Schonerer's German Liberal Party, devel­ During the French Revolution, the Jews, oped a lower-middle-class, anti-Semitic, anti­ along with the Masons, were identified as capitalistic platform in the 1880s. Schonerer forces for liberalism, secularism, and capital­ directed his anti-Semitism at the economic ism. German writers quickly found the Jews activity of the Rothschilds; he advocated to be a more popular target than the Masons, nationalization of their railroad assets. Later, perhaps because they were more visible or he broadened his charges to attack Jewish more different. The originally Judeo-Masonic merchants more generally. Hitler was an avid theories eventually discarded the other con­ admirer of Schonerer, and as a young man spirators, such as the Templars and the Illu­ even hung Schonerer's slogans over his bed. minati, and focused on the Jews. The growing nineteenth-century socialist movements did little to stem the anti-Semitic Anti-Semitism in Nineteenth­ tide and often explicitly promoted anti­ Century Germany and Austria Semitism. The initial link between socialism and anti-Semitism arose through intellectual The anti-Jewish creed was formalized by affinity. Throughout the nineteenth century, Wilhelm Marr, the Germanwriterwho coined the socialist critique of capitalism and the the term "anti-Semitic." In 1879 Marr pub­ anti-Semitic critique used the same argu­ lished his book The Victory of Judaism over ments. Many socialists considered anti­ Germandom, which went through twelve edi­ Semitism to be a way station on the path tions in six years. He also founded the "An­ toward a more consistent socialist viewpoint. tisemitic Journal," and started an "Anti­ The very first systematic socialist philoso­ semitic League." Marr idolized Tsarist phers, the French Utopians of the early Russia, and earlier in his career he had been nineteenth century, had implicated the Jews a radical socialist. The new anti-Semites in their critique of capitalism. French Jewry who followed Marr expanded the medieval was highly commercial, financial, and capital­ attacks on Jewish traders and usurers and istic. Proudhon and Fourier, who stressed the developed them into a full-scale economic abolition of usury, saved their most vitriolic critique. The Jews who provoked the most anti-Semitic tirades for Jewish moneylenders. anger were those who embraced cosmopoli­ Karl Marx continued the anti-Jewish po­ tan, Enlightenment values, and who achieved lemics of the socialists. The historical associ­ economic success. ation between Jews, private property, and In the second half of the nineteenth cen­ commerce led to his well-known anti-Semitic tury, Germany became the first country to diatribes. Marx, who sought to reconstruct 10 THE FREEMAN • JANUARY 1997

society according to his master plan, detested gains only at the expense of another. The the particularistic nature of Jewish religion necessities of totalitarian government, in and custom. Some.of Marx's followers, such time, override whatever nonracist feelings as Diihring and Lassalle, used anti-Semitism might be held by the leaders, and create as a means of introducing anti-capitalist doc­ strong pressures for political support of rac­ trine. They believed that if the public could be ism. Control over the press and rights of convinced to hate Jewish capitalists, the pub­ speech makes racist feeling relatively easy to lic would eventually come to hate non-Jewish whip up. capitalists as well. Soviet anti-Semitism flourished after the A widely circulated nineteenth-century Second World War, as the Communist lead­ witticism described anti-Semitism as "the so­ ers were unable to resist the target that had cialism of fools" [der Sozialismus des bladen proven so successful for Hitler. In 1953 Stalin Mannes]. It was widely recognized that the alleged the existence of a "Doctors' Plot," anti-Semites shared the same gripes as the masterminded by Jews, to poison the top socialists; the anti-Semites simply chose too Soviet leadership. Stalin died before a trial narrow a target. The socialists happily ac­ was called, but he had been planning to cepted the spirit of anti-Semitism, provided forcibly deport two million Jews to Siberia. . the target was widened to the entire capitalist The "economic crimes" executions of the class. More recently, the historian Paul John­ early 1960s were directed largely against Jews. son has noted with irony that socialism has Textbooks were rewritten either to remove served as the "anti-Semitism of the intellec­ the Jewish role in history, or to provide tuals.,,3 negative stereotypes of Jews. Government Even when socialists opposed anti­ texts dealing with Germany and World War II Semitism, as later came to pass for tactical mentioned neither the Jews nor the Holo­ reasons, European socialist parties failed to caust. The Russian pogroms were reinter­ provide effective opposition to anti-Semitic preted as justified retribution for the capital­ trends. Most socialists, with their dislike of istic excesses of the Jews. The Soviet capitalism, were unwilling to defend the eco­ government attacked all forms ofreligion, but nomic activities of Jews. Socialism pretended Judaism most of all. to be a revolutionary, liberal movement but Eastern Germany continued the earlier in fact embraced the conservative doctrine Nazi polemics against Jews, substituting the of concentrated state power. Most socialists words "Zionist" or "Israel" for Jew, and supported World War I, which provided a referring to the salutary effects of "progres­ tremendous boost to anti-Semitism, without sive socialist forces," a scant difference from hesitation. Later, the Nazi party, the most the earlier Nazi terminology of "national dedicated enemy of the Jews, was a national socialism." Many former Nazi journalists socialist party from the beginning.4 were hired to write these "anti-Zionist" po­ lemics. Similar trends came to pass through­ Soviet Anti-Semitism out eastern Europe. In the early 1950s, thir­ teen leaders in the Czech Communist party The actual practice of socialism has not (ten were Jewish), were accused of being been kind to its religious and ethnic minori­ "Zionists," and were hanged. In 1968 the ties, including Jews. The Soviet government Polish media spent months debating the "un­ adopted consistently anti-Semitic policies. masking ofZionists in Poland," although Jews Lenin was strongly opposed to anti-Semitism, comprised less than one-fifteenth of one per­ but Soviet policy reversed shortly after his cent of the population. The anti-Zionist cam­ death. Totalitarian states, with their inevita­ paign was accompanied by demonstrations, ble economic failures, eventually need scape- arrests, surveillance, police persecution, and , goats. Economic performance rarely matches other typical methods of totalitarian oppres­ the official promises, and the subsequent sion. privations feed social resentment; one person The contrast with the more capitalistic THE SOCIALIST ROOTS OF MODERN ANTI-SEMITISM 11

United States is striking. The United States 1. My translation draws upon that of Paul Lawrence Rose, started off with few Jews but attracted many Revolutionary Antisemitism in Germany: From Kant to Wagner (Princeton, N.J.: Princeton University Press, 1990), p. 304. Jewish immigrants with its relatively free 2. Ellis Rivkin, The Shaping ofJewish History: A Radical New economy and atmosphere of relative toler­ Interpretation (New York: Charles Scribner's Sons, 1971), pp. ance. By the 1920s, three ofthe four cities with 239-240. 3. Paul Johnson, A History of the Jews (New York: Harper­ the most Jews were located in the United Collins, 1987), p. 353. States. New York had the largest number of 4. European socialist attitudes toward anti-Semitism shifted in the last decade of the nineteenth century. At this time the Jews, and Chicago and Philadelphia were socialists realized several truths. First, anti-Semitism was a way third and fourth (Budapest was second). To­ station to state control, but the right-wing and fascist parties were likely to capture the benefits. Second, the socialists realized that day Jews account for only two percent of the the anti-Semites (like Judaism itself, in socialist eyes) had become American population, but they account for precisely the kind of particularist sympathy that held back the more universalist socialist ideal. These points became clearest in half ofthe billionaires. The history ofthe Jews Germany, where most leftists had abandoned anti-Semitism by provides a stark illustration of the differences the early twentieth century. The French left, in contrast, was much slower to repudiate the ideology of racism, perhaps because between capitalism and socialism. 0 French politics never polarized the way German politics did.

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Income and the Question of Rights by Roy E. Cordata

n C-SPAN's Journalist Roundtable pro­ erates can go a long way toward explaining Ogram, Victor Kamber, a Democratic positions that are taken on a large cross Party political consultant, and conservative section of public policy issues. This includes author David Frum were discussing whether not only budget and fiscal policy issues, but Congress should pass an amendment to the also most regulatory issues, which involve Constitution allowing states to ban flag burn­ forcing people to use their incomes in ways ing. As an aside, Mr. Kamber said that this that they would not freely choose. A person's would be the first amendment to the Consti­ right to his or her income means nothing if it tution that actually reduced people's rights. doesn't mean having the right to choose how (He dismissed prohibition by pointing to the that income is used. fact that it was repealed.) To counter this If Kamber's view, that the person who claim, Mr. Frum pointed to the Sixteenth generates or earns a particular amount of Amendment, which allowed the government income has no moral claim to it, is represen­ to impose an income tax. Amazingly, Kamber tative ofAmerican liberal thought, then many denied that the Sixteenth Amendment re­ issues fall neatly into place. For example, the duced anyone's rights, claiming that it simply overriding concern that many modern liberals allowed the government to tax people's in­ have for "tax fairness" is driven by an under­ come. The clear implication was that people lying egalitarian ethic-no one should have a do not have a right to their income, i.e., the greater income than anyone else. Hence, it is fruits of their labor. Therefore, the Sixteenth always "fair" to raise taxes on upper-income Amendment, which allowed the government people, and tax cuts that accrue to the wealthy to coercively take a portion of individual will always be "unfair." income (presumably up to 100 percent), did Conservatives and especially libertarians not reduce anyone's rights. might suggest that the egalitarian perspective This entire digression lasted for less than a itself is unfair because it disproportionately minute. Yet it can be viewed as defining the denies people the right to their income. But if fundamental difference between contempo­ income is viewed not as being the property of rary liberalism and conservatism. the people who earn it, but as a "common How one views the rights that people have pool" resource, then there is no moral di­ over the income that their productivity gen- lemma. The government's job is simply to make sure that "society's economic pie" is divided "fairly." Wealth redistribution Dr. Cordato is the Lundy Professor at Campbell schemes, then, are never an issue of robbing University in Buies Creek, North Carolina. from Peter to pay Paul, because the term 12 13

"robbery" implies that Peter has a "right" to "you can't subsidize someone with his own what is being taken. money." But what if it isn't his own money? What if none of his income, beyond what the Corporate Welfare government allows him to keep, is his own money? Ifthis were the case, then the concept A second example is the issue of"corporate of a tax subsidy makes complete sense. In­ welfare." Historically, government welfare deed, from this perspective, any amount of or "relief" has implied a transfer of income, income that the tax system allows the indi­ via taxation, from people who have earned it vidual income earner to keep and use for his to some subgroup that "needs" the income or her own purposes is a "tax subsidy." but has not been able to generate it through If my hypothesis is correct, that this short, productive effort of its own. From this per­ "beside-the-point" dispute on C-SPAN is spective, such programs as subsidies at the center of many of our most pressing to farmers and government loan guarantees economic policy debates, then much of cur­ to businesses would all qualify as "corporate rent political discourse can be seen as missing welfare." However, in recent years, many the point. The fundamental debate should politicians and political pundits have been focus on a question that is rarely, if ever, referring to a new kind of corporate welfare, asked: What should be the relationship be­ known as a "tax subsidy." While it is not tween the income that a person generates and always precisely clear what constitutes a tax the legitimacy with which he can claim rights subsidy, a business is typically said to be to that income? This is not an issue of receiving such corporate welfare if there are economics or of pragmatic public policy. It is certain "loopholes" in the tax code that allow a fundamental issue ofmorality. It is the right it to reduce its tax liability. to the fruits ofour labor and effort that makes From the perspective ofthose who feel that our "Creator-Endowed" rights to life, liberty, people have a fundamental right to income and the pursuit of happiness meaningful. In that they have generated, Le., that the Six­ reality, if the Sixteenth Amendment to the teenth Amendment was rights reducing, the Constitution did not reduce our rights as a expression "tax subsidy" is an oxymoron. As free people, then neither did the first ten many conservatives are fond of pointing out, amendments secure those rights. 0

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The Problem of Education Doesn't End at the 12th Grade

he sad story of poor student performance the courses they take from university depart­ Tin America's public schools is so widely ments of education. known these days that most people greet each Poor student performance and poor new study that confirms it with a kind of teacher preparation are directly related. In a numbed disgust. recent study for the Mackinac Center for That was the case in my state of Michigan Public Policy, Professor Thomas Bertonneau last Septemberwhen the results ofproficiency argued that general undergraduate instruc­ tests in math, reading, writing, and science tion in the state universities is deficient and were reported in the press. Barely one-third deteriorating. Far too many graduates lack of high school seniors were rated proficient basic verbal and cognitive abilities, and the in science and writing and fewer than half reasons are disturbing: the disintegration of achieved that basic level in math and reading. an effective core curriculum; the pervasive­ "So what else is new?" seemed to be the ness of trendy, politically correct courses that common response. stress indoctrination over genuine learning; The decline in students' test scores and of the dumbing down of instruction in proper literacy in America are often laid at the writing and reasoning skills; and a growing doorstep of K-12 public education. Children gap between what students are taught and are clearly being shortchanged, but not by the what they must know to succeed as teachers K-12 system alone. Indirectly but decisively, or other professionals. children are being shortchanged by the system Analyst David P. Doyle describes teacher that teaches the teachers who teach the chil­ education in these terms: "It is a classic dren-higher education. example of a 'closed' system, one in which Last September, the National Commission there is little or no feedback from the outside on Teaching & America's Future released world. Once through the process, teachers an important study. The bottom line: Large heave a sigh of relief and get on with their numbers of public-school teachers are not work. Teacher educators, institutionally in­ qualified to teach the subjects to which they sulated, have been under little pressure to are assigned. Close inspection suggests that change or improve. Worse yet, their inertia the problem is not that too few teachers are is reinforced by state teacher licensing re­ graduating with good grades and degrees in quirements that mirror the vapid courses they education; the problem is what goes on in offer." Let's examine a few of the dubious exer­ cises our universities are engaged in. Lawrence ~ Reed, economist and author, is presi­ dent ofthe Mackinac Center for Public Policy, a free Most college graduates over the age of 40 market research and educational organization head­ will recall taking freshman English composi­ quartered in Midland, Michigan. tion. That's the course in which they learned 14 15

the fundamentals of written exposition, in­ in which students who have not yet gained cluding a review of grammar and syntax, and competency in prose are supposed to substi­ some lessons in informal logic and the rules tute for the teacher and teach each otherwhat of evidence. A tedious but valuable course, none of them by himself knows, namely, the freshman composition once sharpened uni­ elements ofclear and correct communication. versally applicable skills that helped us deal Dr. Peter T. Koper, one of Professor Ber­ meaningfully with material and assignments tonneau's colleagues at Central Michigan in other courses. University, dissents from this prevailing or­ But in universities today, much of what thodoxy. He sees the trends cited here as passes for freshman composition is trivial and inherently divisive. In Koper's view, "Gram­ irrelevant, or worse. Heather MacDonald mar is not elitist. It is, rather, quintessentially writes in The Public Interest, "The only thing democratizing, the ability to use Standard composition teachers are not talking and Written English being the condition for par­ writing about these days is how to teach ticipating in public life in this country and in students to compose clear, logical prose." much of the rest of the world." Course syllabi and related materials from A preference for trivia is also part of the English departments and writing programs problem in today's teacher education courses. in universities across the country reveal a The curricula offered by university education general lowering-and in some cases, an departments are heavy on fuzzy "self­ abandonment-of standards of correct writ­ awareness," "multicultural," and other fad­ ing. Self-expression and moral liberation (the dish or politicized material, and light on the "anything goes" approach) are often empha­ hard knowledge of the subjects that teachers sized over prose competency. Typical is this will eventually have to teach. One assignment, professor's advice from a freshman compo­ offered as a model to teaching assistants at a sition course syllabus at Eastern Michigan major university, asked students to watch and University: "Don't worry about writing per­ discuss TV talk shows like Oprah and Montel fect papers. I do not have a set standard for for two weeks of a 15-week semester. what I consider 'good writing.'" Rigorous content in the traditional liberal Professor Bertonneau conducted a survey arts has disintegrated in favor of cultivating of the master syllabi for freshman composi­ emotions and politically correct opinions. The tion at Michigan's universities. His work re­ result is a huge disservice to prospective vealed the dominance of a school of thought teachers who pay good money to become that denigrates the very notion of"basic skills." prepared for the classroom but are instead According to this view, there is no connection diverted into shallow, unproductive, and even between a knowledge ofgrammar, syntax, and irrelevant course work. If that were the end logic on the one hand, and the communication ofit, it would be tragedy enough. But millions competency ofstudents on the other. Empha­ of taxpayers who help pay the bill and mil­ sizing basic skills is characterized as "elitist," lions of children who suffer at the hands of or as an exercise in "discrimination" against poorly prepared teachers are casualties too. ethnic minorities, or as a manifestation of an This cake was baked with ingredients that "oppressive" economic system. could hardly have produced any other out­ A study from the Empire Foundation last come: a tax-funded, politicized education sys­ summer showed that the same philosophy tem leavened with institutionalized protec­ pervades the state universities of New York. tion for incompetence and annual financial Indeed, this is a cancer that afflicts higher rewards for mediocrity. education-and hence, teacher training-all Education reformers have scored points across America. everywhere by painting K-12 public education The abandonment of rules and standards as an unresponsive government institution in in the universities shows up in other ways need ofcompetition, accountability, even pri­ too-in a popular but dubious focus on "peer vatization. If they take a look at universities, teaching," for example. This is an activity they will find much the same thing. 0 THEFREEMAN IDEAS ON LIBERTY

Mises, Hayek, and the Market Process: An Introduction

by Nevenka Cuckovic and David L. Prychitko

Why Mises and Hayek? The problem of central planning has been the distinguishing theme of the modern Aus­ After decades of self-managed socialism, trian School through the twentieth century, Croatia has embarked upon a market­ nurtured through the concentrated efforts capitalist transition of historical proportions; of Mises and Hayek. Both Mises and Hayek yet it is still a country that struggles in search developed an epistemological case against of sound economic foundations. comprehensive planning, and argued that The collapse of the Yugoslav system has modern society owes its preservation to pri­ unleashed a new dialogue in Croatian schol­ vate or separate ownership of the means of arship over the promises and prospects of production and to market-exchange pro­ classical liberalism. The visions ofLudwig von cesses. The "economic freedom" stemming Mises·and F.A. Hayek, two leading figures of from private ownership and free markets the Austrian School, have enjoyed a growing becomes a necessary condition (though, em­ interest, although their work is often dis­ phatically, not sufficient: witness fascism) for cussed solely in terms ofthe historical socialist an overarching political freedom. calculation debate within the economics pro­ fession during the 1930s and 1940s. There are Property Rights and the some exceptions, such as the largely neoclas­ Market Order sical textbook of Djordje Pribicevic, which explores some later Austrian themes, includ­ But what is ownership? Scholars of the ing the notion of competition as a discovery former Yugoslavia have asked this question procedure. Very little of Mises' and Hayek's for decades. Articles by Aleksandr Bajt (1968) work, however, has been translated into the and Eirik Furubotn and Svetozar Pejovich Croatian language. We hope to make a small (1970) provided a pioneering critical analysis step forward with the publication of this of the notion of "social ownership," which slender volume. would go a long way in establishing the "property rights" analysis within modern Ms. Cuckovic is research coordinator at the Institute neoclassical economics (and its correspond­ for Development and International Relations in ing critique ofself-managed socialism). More Zagreb, Croatia. Dr. Prychitko is associate professor recently, Andrija Gams (1988) offered a ofeconomics at SUNY-Oswego. comprehensive and important treatise on This article is adapted from the introduction to the Croatian-language edition ofMises, Hayek, and the subject, although the book (Svojina­ the Market Process, to be published later this year in ownership) is unknown to most Western Zagreb. economists. 16 17

The Austrian economists anticipated the erty rights and other moral rules and codes development of modern property-rights eco­ that allowed small societies to thrive and nomics and articulated a clear notion of eventually led to the extended order of the ownership as early as 1881, with Bugen von modern market-capitalist system. Hayek fully Bohm-Bawerk's short book Rechte und Ver­ accepts the importance ofthe de jure/de facto haltnisse vom Standpunkte der volks­ distinction. Yet, he tries to explain how our wirtschaftlichen Guterlehre. Bohm-Bawerk is overarching set of moral rules (those of the first economist that we are aware of to contract, justice, trust, honesty, reputation, distinguish between legal (de jure) ownership family, even private property itself) emerged and factual (de facto) ownership ofthe means over time, as largely an unintended and un­ of production and by doing so maintain that anticipated consequence of individual coop­ economics must necessarily study de facto erative and competitive behaviors. ownership and its corresponding social pro­ Hayek argues that people did not accept cesses. Part I of our present collection ad­ the moral rules of property and family be­ dresses the implications ofthe Austrian study cause they rationally understood the enor­ of ownership and the emergence of the mar­ mous social consequences thatwould emerge; ket economy. instead, those small groups of people (Hayek In the first essay, "Ownership," Ludwig von is considering the earliest emergence of civ­ Mises explores the full implications of these ilization here) who stumbled upon such un­ two kinds of categories of ownership rights. written, tacit codes of conduct tended to What matters for economic analysis is an prosper, and their populations tended to exploration ofwho actually holds the power to multiply compared to those who had not. use scarce economic goods, rather than simply Later these would become codified into com­ focusing on the formal connections between mandments, laws, and so forth. It was these those who enjoy the legal or juristic titles to de facto practices and customs that allowed economic goods. The juristic notion defines people to prosper and civilization to emerge; who, if anybody, "should have" the power to only later would these customs reach de jure dispose of the means of production. In the stature. The de jure codes of conduct did not 1974 Yugoslav Constitution, for example, the create the extended market order, but rather juristic notion of social ownership declared helped reaffirm the embodied wisdom that that society as a whole (and thereby "no­ had arisen through a complex process of body") owns the means of production. But selective, cultural evolution that emerged the goal ofthe economist, according to Mises, over the course of thousands of years. is to pierce through the juristic network of The contemporary market order, then, is formal ownership claims and uncover who, or the product of a centuries-long unfolding of what groups, are actually controlling "society's" countless human actions, but it is certainly not resources. The implications for the study ofthe the product ofintentional human design. It is, factual workings of Yugoslav self-managed in other words, a spontaneous order. socialism are now obvious, but the seeds ofthe Hayek clearly discusses the distinction be­ critique were actually planted, it seems to us, tween organization-a fully planned or de­ in this early essay by Mises. signed order-andunintended, unplanned, or Mises himself would embrace the idea that "spontaneous" order in "Kinds of Order in property rights emerged because people an­ Society," the third essay in our book. Individ­ ticipated, in advance, the net benefits to be ual households and enterprises are generally gained from such a social order, and he would goal-related organizations: their members co­ continue to dismiss, as he does in this partic­ operate to attain a common aim (for example, ular essay, the evolutionary explanation based a family holiday, or university education for on "natural selection" processes. the children; higher productivity or increased In the second essay, "Our Moral Heritage," sales for the firm). What emerges, however, is Hayek offers an alternative evolutionary ex­ an integrated social division of labor and an planation ofthe development ofprivate prop- overall market process that is at once more 18 THE FREEMAN • JANUARY 1997 complex and informationally efficient than corresponding equilibrium prices. (Actually, the participants could have ever intentionally Hayek's criticism in this chapter can also be engineered: the cooperative and competitive interpreted as a criticism of neoclassical eco­ exchange processes and the system of com­ nomics in general. Whether the model is used, modity production at once harness knowledge as Lange did, to defend market socialism, or from the level ofindividuals, households, and whether it is used, as, say, Milton Friedman firms and, through changes in prices, interest does, to defend capitalism, in either case it rates, rents, incomes, profits, losses, and so assumes too much for the planners or for the on, also further inform them of the economic capitalist enterprises.) efficiency of their plans. In this way, the How, then, does capitalism work? Building spontaneous ordering of the market process upon Mises' path-breaking 1920 article, "Die goes well beyond the epistemological limita­ Wirtschaftsrechnung in sozialistischen Ge­ tions of individual human minds and plans. meinwesen" (translated into English as "Eco­ nomic Calculation in the Socialist Common­ l The Knowledge Problem wealth," and omitted here for lack ofspace ), Hayek argued that spontaneously generated The implications for socialist planning are market prices inform participants, after the enormous. Call it the "knowledge problem," fact, of the economic suitability and consis­ the subject of Part II. tency of their individual plans. Enterprise The first article in this section, "The Use organizations use past, present, and, espe­ of Knowledge in Society," provides Hayek's cially, expected future prices to develop their most celebrated article in economic theory. ex ante plans, to make calculative business Writing in response to the neoclassical market­ judgments and guesses about the future. They socialist models of Oskar Lange, Abba will learnwhether their plans and calculations Lerner, and Joseph Schumpeter, Hayek ar­ were worthwhile, however, by the actual un­ gues that models of socialism (advocating folding of events that define the market central planning or market socialism) assume process: ex post, the actualized market prices away the central problem of economics: pre­ will inform enterprise owners of bottonl-line cisely how will planners gather the knowledge profits or losses. and information required to successfully de­ Both Mises and Hayek argue that the sign and coordinate a modern economy? calculative or epistemological characteristics Most planning models demonstrate that ofthe market pricing system cannot be limited planners could design a comprehensive and to mere markets for consumer goods, but efficient plan if they possessed all the relevant must also encompass higher-order capital information, including the preferences ofmil­ goods and resources, including the means of lions ofconsumers and, even more incredibly, production. Consumer-goods markets inform the availability and alternative uses of all enterprise organizations of what to produce; scarce resources. The "solution," then, is a but it takes a market process in the means of mere unfolding of the logic of rational action, production to inform enterprises how to pro­ a task suitable indeed for neoclassical eco­ duce both consumers goods and higher-order nomics. But Hayek, as an Austrian economist, goods. argues that these exercises in pure logic By abolishing the market for means of assume away the real economic problems that production, through collectivization and na­ societies face: how can plans be integrated tionalization, and by seeking, essentially, to when people do not possess all the relevant turn all of society into a single, integrated information? Lange's model went no further organizational order, socialism must fail. Its in addressing this question, since it assumed complexity and ability to coordinate the mil­ that consumer preferences, production func­ lions of individual plans among households tions, costs of production, and availability of and enterprises and other suborganizations in resources are all given "data," and the only society on the basis of an all-encompassing, knowledge that planners lack is that of the comprehensive ex ante plan will be limited to MISES, HAYEK, AND THE MARKET PROCESS: AN INTRODUCTION 19 the epistemological abilities of the central chic against scientism's social-engineering planning authorities. Lacking a market pro­ ideal; better to rationally control those behav­ cess and private or separate property in the iors in order to facilitate an ever more efficient means ofproduction, and clinging to the goal social outcome. of ex ante plan coordination, even decentral­ The pretense of science rests in the vain ized or self-managed socialist planning hope to predict and control social outcomes. schemes (such as Croatian economist Branko We've recently learned, if chaos theory has Horvat's sophisticated attempt to answer any truth to it, that prediction is problematic Hayek) are equally vulnerable to the Austri­ even in the natural sciences. The social sci­ an-School critique. ences differ from the natural in that they study While Hayek's article, written in 1945, was phenomena of the highest complexity, not geared toward the economics profession, and mere physical phenomena, but instead hu­ considered a closing argument in the "social­ mans capable of imagining and forming ex­ ist calculation debate," Mises' "The Delu­ pectations, and changing their expectations sions of World Planning" (the fifth chapter in and plans on the basis of changes in socio­ this volume) appeared in 1944 as part of his economic conditions (which can therefore observations of World War II in his book unintentionally frustrate the carefully de­ Omnipotent Government. Here Mises applies signed plans of the best social engineers). the Austrian arguments to immigration poli­ Hayek reminds us in the next chapter, on cies, foreign trade agreements, international "Competition as a Discovery Procedure," that monetary arrangements, and the planning of neoclassical economics itself leans toward international capital transactions. Mises chal­ the scientistic ideal by its almost exclusive lenges the belief that a capitalistic market emphasis on general equilibrium and its wel­ order can be rationally managed through fare characteristics. broad-sweeping governmental (and intergov­ Recalling the central theme ofhis "The Use ernmental) planning policies. Although his of Knowledge in Society" essay, here Hayek criticisms predated the post-Bretton Woods more clearly articulates that a real, rivalrous monetary order, they are applicable to today's market process-in actual disequilibrium con­ International Monetary Fund and the policies ditions-spontaneously discovers the data of the World Bank. (the efficient ways to produce and distribute Hayek broadens the discussion of planners scarce goods and services) that are otherwise and their plans in chapter six, on "The Pre­ unexplained and already assumed in advance tense of Knowledge," his Nobel Memorial in the abstract fiction of a general economic Lecture of 1974. For Hayek, the motivation to equilibrium. Hayek discusses how, by its very plan and intervene in spontaneous market nature as a process, rather than an already order may largely be the result ofscientism, or attained equilibrium, the results of a compet­ our over-fascination with positivistic science. itive discovery procedure cannot be predicted People have placed too much faith in scientific in advance. expertise, as if science alone enjoys a monop­ oly on the generation of knowledge and On Economic and truths, and the experts themselves have Political Freedom wrongly assumed that complex social phe­ nomena can be managed and controlled much These essays set the stage for Mises' and the same as natural phenomena. Scientism Hayek's confirmation of classical liberalism: rests on the mistaken assumption that spon­ economic freedom is a necessary condition taneous social order can be rationally man­ for political freedom, the subject of Part III. aged and scientifically engineered through Society seems to face a choice: Either we state intervention and national economic can allow millions of people to use property planning. The cooperative and competitive as they see fit (within a set of constitutional behavior among individuals, households, and rules, of course) and engender a market­ enterprises appears too haphazard and anar- based discovery procedure, or we can abolish 20 THE FREEMAN • JANUARY 1997 ownership and private initiative in favor of an self-at a higher moral level than the millions increasingly centralized plan designed by ex­ of concrete individuals whom the democratic pert authority and employing the latest sci­ state was originally meant to serve; one who entific procedures. can confidently and without moral hesitation In chapter eight-"Interventionism"­ consider individuals-including those filling Mises argues that there is no "third" way the bureaucracy-as the means to attain the between a market system and a planned collectivist goals of the state itself. The eco­ economy. He states it bluntly and provoca­ nomic power of individuals (through private tively: either capitalism or socialism-there ownership of the means of production and exists no middle way. State "interventions" labor mobility) becomes increasingly appro­ into the market system (such as price con­ priated by the institutions of the state, re­ trois) will unintentionally create distortions emerging as a tremendous instrument of in other parts ofthe system (such as shortages political power that destroys political free- or surpluses) which, in turn, will create more dom-freedom of the press, of religion, of demands for intervention in order to solve emigration, and so on. Those who despise such those problems. Rational and partial inter­ political freedoms are more likely to rise to ventions into the economy beget more inter­ the top as opposed to those who are indiffer­ ventions, which further choke the system's ent to (let alone those who cherish) such discovery properties, generating further dis­ freedoms. coordination and inefficiencies which only promote louder cries for systemic and all­ Is Self-Managed Socialism encompassing intervention. In this sense, the Answer? capitalist economies might tend toward-but due to the knowledge problem--.;.will never What about democratizing the interven­ fully achieve, outright socialist planning. tionist state? Or, recalling the writings of What emerges is neither a more efficient some members of the Praxis Group, such as capitalist economy nor greater political free­ Mihailo Markovic-which enjoyed critical in­ dom. Instead, as Mises maintains in the next ternational acclaim among disillusioned chapter, "The Social and Political Implica­ Marxists in the West-why not insist on a tions of Bureaucratization," the piecemeal radically self-managed socialism as a correc­ state interventions into capitalism create an tive to the centralized socialist state? (Mark­ ever-spreading and contradictory bureau­ ovic himself argued that both the abolition of cracy, a panoply ofstate bureaus and agencies private ownership of the means ofproduction with often conflicting and incompatible agen­ and the abolition ofpolitics as a profession are das that crowd out both the market process necessary conditions for true political free­ and civil society. dom, which, when fully combined, amount to Chapter ten, on "Why the Worst Get On a sufficient condition.) Would this answer the Top," is taken from Hayek's provocative book Mises-Hayek objections? The Road to Serfdom. Here Hayek seems, Attempting to draw the Austrian critique on the surface, to affirm Mises' "dictatorship to the Yugoslav model of self-managed so­ complex" argument. Hayek argues that the cialism, one of the present editors has argued interventions and creeping bureaucratization that self-managed socialism would face, even of society create a new kind of competitive under some hypothetically "ideal" condition, selection mechanism-one that rewards to­ the same set of knowledge problems and talitarian discipline and readiness to disre­ totalitarian problems as that of the centrally gard society's accepted morals in order to planned case.2 execute more rational plans and policies. The The maintenance, reproduction, and well­ centralized, state-bureaucratic institutions being ofthe self-managed socialist society still reward precisely those individuals who can depends, absolutely, on a smoothly function­ place the "community" in the abstract-but ing, rational plan. But the planning board­ especially the institutions of the state it- democratically self-managed or not-would MISES, HAYEK, AND THE MARKET PROCESS: AN INTRODUCTION 21

Lessons for Lithuania

think the West is still a good example of how to get rich or at least how to emerge out ofpoverty. But only as long and as much as there is a grain I of capitalist spirit and practice there-only as much and no more. It would be a big mistake to copy socialist tendencies of Western socioeco­ nomic life-tendencies that are contrary to capitalist spirit and practice. Unfortunately, it is these attributes of Western life that seem to have a particular fascination for some of us. As to Lithuania, the adoption of constructive capitalist elements that continue to glimmer in the West would mean two simple things: first, the necessity to continue privatization of all state domains and functions without exception, starting, say, with the monetary and credit systems and all the way through to education, health care, social security, pension insurance, and others; and second, the necessity to put an end to all sorts of government controls and regulations that restrain and stifle private initiative. This is inevitable as Lithuania continues to extend the scope and weight of the private sector by using private property in the most beneficial way for people and the most profitable way for the owner. I believe that such reform guidelines that will lead to a free-market capitalism will help us to build up a better and more decent life-based on our own ingenuity and reason rather than government favors. Government, after all, is not an almighty gracious God that works miracles.

-AUDRONIs RAGUOTIS (Excerpted from The Free Market, a newsletterofthe Lithuanian Free Market Institute. ) still face an immeasurable degree ofcomplex­ evitably lack useful criteria to help them ity when it attempts to formulate a feasible acquire and transmit the detailed and relevant plan of action. Without private ownership of knowledge necessary to comprehensively co­ the means of production, and thus a series of ordinate and plan the entire economy. The prices emerging from a spontaneous market relevant information surely will not be un­ process, the economy has no systemic discov­ earthed through the workers' councils. ery procedure to evaluate the relative scarci­ The planners, in a sincere effort to create ties of goods and services-especially that of a unified and comprehensive plan worthy of the means ofproduction. The planners would its name, will not allow-indeed, they cannot find that their task is constrained more by allow-everyone to participate in plan for­ epistemological limitations than by moral mulation. The organizational logic must be principles. That is, although they may believe one whereby planning tasks must be dele­ they possess objective, concrete guidelines gated to experts-at the level of councils, regarding political-economic justice (whether enterprises, ministries, and the central organs traditional-to each according to his needs, of state power itself. In order to feed the from each according to his abilities, or more people (let alone clothe, house, educate, contemporary rules articulated by Markovic safeguard, and enrich the masses) the plan­ and others), the planners will soon face an ning board will find that it cannot place enormous epistemological wall: they will in- socially important technical problems into the 22 THE FREEMAN • JANUARY 1997

hands of society as a whole. Rather, the constitutionalist approach-a rule of law­ planning board, in conjunction with other that enforces general codes of just conduct centralized bureaus of the state, will deem it equally applicable to all citizens. The details necessary, if rationalized production, distri­ on the use of property, and so on, would bution, and consumption processes are ever be left to individual and group initiatives, to to commence, to appropriate control over the cooperative and competitive behavior among means of production and pursue the social people and organizations, as long as they goals that it deems technically possible and follow the broad rules articulated within the economically and socially worthwhile. The general constitution. (There is nothing pro­ knowledge problem inherent in socialist pro­ hibiting, for example, the emergence of co­ posals-to the extent that socialism seeks to operatives and other self-managed organiza­ abolish private ownership by whatever tions, at least in principle, to compete method of planning (centralization, self­ alongside more traditional privately owned management, or market socialism of the enterprise.) Lange variety)-paves the way for the total­ This type of constitutional approach is of itarian problem, the logical tendencies behind key importance for present-day Croatia. The Mises' bureaucratization of the world or editors do not, of course, pretend that Hayek Hayek's road to serfdom. should have the first or the last word on the So what's left? In chapter eleven­ subject. Rather, we offer this chapter in order "Economic Freedom and Representative to complete the Mises-Hayek analysis of the Government"-Hayek sketches what he con­ problems of socialism and interventionism, siders the basic economic and political prin­ and the corresponding appeal for the estab­ ciples for a free, liberal society. How do we lishment of a general rule of law as opposed maintain or, in the case of the new regime in to the rule of men. 0 Croatia and other parts of Eastern Europe, cultivate, a market-based economy that fights 1. See F. A. Hayek, ed., Collectivist Economic Planning: the gradual erosion of political liberty and Critical Studies on the Possibilities ofSocialism (London: George civil space-the tendencies to drift back to­ Routledge and Sons, Ltd., 1935), pp. 87-130. 2. David L. Prychitko, Marxism and Workers' Self­ ward statism and totalitarianism? Hayek ar­ Management: The Essential Tension (New York and London: gues that government must adopt a strict Greenwood Press, 1991), pp. 45-55, 83-100.

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Breaking Up Antitrust by Edward J. Lopez

n one of the most famous passages in The and that antitrust enforcement is the perfect I Wealth of Nations, Adam Smith cautions, remedy, at least in theory. "People of the same trade seldom meet The real world also provides plenty of together, even for merriment and diversion, examples that support the claims of antitrust but the conversation ends in a conspiracy supporters. The kind of behavior that Smith against the public, or in some contrivance to describes does indeed occur. One such case raise prices...." was the notorious fare-fixing telephone con­ Supporters of antitrust laws believe that versation initiated by American Airlines Smith couldn't speak the truth more plainly. chairman Robert Crandall with Braniff pres­ They deem this sort of anticompetitive be­ ident Howard Putnam in 1983. 1 havior bad for consumers. Antitrust regula­ The early 1960s gave us another infamous tion, they argue, is necessary to protect com­ example. General Electric, Westinghouse, petition and the well-being of society from Allis-Chalmers, and 1-T-E coordinated a per­ these kinds of conspiracies. vasive price conspiracy in selling heavy elec­ But is Adam Smith right? He correctly trical equipment to the government. A single warns of the natural incentive that businesses company would enter a bid lower than all its have to get the highest price possible for their "competitors," all ofwhom would enter iden­ products, and perhaps to monopolize their tical bids higher than the lowest. In one industry or collude with one another to in­ instance, seven different companies entered a crease prices. One might legitimately con­ bid of exactly $198,438.24, and the contract clude that free markets cannot always be left was awarded to the single firm that bid lower. free, and that government institutions like It was a very effective cartel. antitrust are necessary for the protection of These were supposed to be secret bids, and society's interests. the conspiracy would never have worked if As awful and ridiculous as this may sound, not for the cartel's ingenious enforcement people who love freedom must take this claim strategy. The firm to enter the lowest bid was seriously. Antitrust supporters generally have determined by the fullness of the moon. This a strong foundation, not only in Adam Smith, "phase of the moon" strategy was foolproof but in much of the conventional economic for decades, and was only discovered in 1959 theory of the twentieth century. Economists by a reporter in Tennessee, who noticed the have at their disposal powerfully convincing peculiarity of the identical bids. The conspir­ ways of showing that monopoly is harmful, acy is estimated to have cost consumers $175 million in every year of its decades-long existence.2 Mr. Lopez is Charles G. Koch Research Fellow at the Center for Market Processes and H. B. Earhart These examples illustrate the creativity that Doctoral Fellow in economics at George Mason businesses sometimes use in trying to monop­ University. olize a market. When cartel members can 23 24 THE FREEMAN • JANUARY 1997 actually enforce the agreement, or when a firm Unfortunately, the naive assumption that actually succeeds in monopolizing a market, the there is a "public-interest" standard in gov­ result is almost invariably bad for consumers.3 ernment dominates discussions of antitrust Whether antitrust enforcement does the job or and in so doing abstracts entirely from the not, we still need to take the threat ofmonopoly existence and power of special interest seriously. And we still need to recognize and groups. Policies that were introduced in the acknowledge that antitrust is, at least in theory, name ofpromoting competition have become a way to deal with this threat. tools to protect against competition. Con­ But do classical liberals need to concede gress, businesses, and the antitrust bureau­ that antitrust regulation actually does the cracy all have much at stake in the antitrust job? Do we need to agree that antitrust deals game. Theyform a triangle ofprivate interests effectively with the threat of monopoly and that drive antitrust enforcement at the ex­ that it is therefore good for society? The pense of the general public. answer is clearly no. In fact, sober economic analysis can explain how antitrust policy fails The Antitrust Bureaucracy to combat the monopoly threat, how it betrays the public interest it is pledged to protect, and First, consider the incentives of those who how it therefore serves the private interests of are in charge of enforcing the antitrust stat­ the businessmen, politicians, and bureaucrats utes. At the Antitrust Division, there are 331 involved. In short, we need to voice the attorneys and 50 economists, while the FTC reasons why the antitrust laws should be maintains a comparable 435 attorneys and 63 repealed.4 economists. These agencies are hierarchical and experience much of the red tape that any Antitrust Enforcement: government bureau does. But at some point, The Ideal Versus the Real every decision is made by an individual, who has his own career· agenda and objectives. One would rightly be suspicious to discover One study of the Antitrust Division7 found that antitrust laws in this country are enforced that the strengthening ofthe anti-merger laws by two separate federal agencies, the Anti­ (the 1950 Cellar-Kefauver amendment), and trust Division of the Department of Justice especially the early cases brought to court, and the Federal Trade Commission.5 Each made antitrust expertise more valuable in the agency is subject to Congress byway ofbudget private marketplace. There was a clear in­ appropriation, confirmation of appointees, and crease in the demand for these skills so that general oversight into agency activities. Because a young lawyer had a great deal to gain by ofthis oversight, we can be fairly certain that the working in the Antitrust Division. What's agencies enforce the statutes according to the more, he or she had even more to gain from wishes of the current Congress.6 the specific experience ofarguing cases at trial In a perfect world in which Congressmen in the federal courts. Lawyers at the Antitrust are public servants, antitrust should work the Division have every incentive to choose cases way it is supposed to. We should expect that that will go to trial, and go to trial quickly, once Congress allocates an amount to each regardless of the efficacy of the action in agency, staff members there take an inventory combating monopoly, or its effect on con­ of the monopoly inefficiency in the economy, sumer welfare. make a list according to the costs to society, A similar study focuses on the FTC.8 The and bring cases against these monopolies in study found that the ultimate career objective order of their importance until their budgets ofmost FTC lawyers was a job at a prestigious are exhausted. There might be some red tape private law firm. Robert Katzmann writes that and pre-investigation procedures to worry some cases "threaten the morale of the staff about, but overall this seems to be the way it because they often involve years of tedious should work. What betterway to make society investigation before they reach the trial better off? How much better can a policy get? stage."g Therefore, the FTC opens "a number BREAKING UP ANTITRUST 25

of easily prosecuted matters, which may have pany gain at the expense of the stockholders little value to the consumer ... in an effort to of the more efficient, yet legally hampered, satisfy the staff's perceived needs."10 One competitor. FTC attorney is quoted in the study as saying, The evidence on the matter is clear. Anti­ "for me, each complaint is an opportunity, a trust enforcement falls less stringently on vehicle which someday could take me into companies headquartered in the congres­ the courtroom. I want to go to trial so badly sional districts of members on the key com­ that there are times when I overstate the mittees with oversight and budget authority possibilities which the particular matter might over the antitrust bureaus.12 And if a com­ offer."11 mittee's membership changes significantly, It's clear from studies like these that the the antitrust bureaucracy changes as well. antitrust bureaucracy doesn't select cases to After the 1976 and 1978 elections, the key prosecute on the basis of their potential net oversight committees experienced rapid turn­ benefit to society. Instead, the staff at FTC over of its members. Prior to that, the FTC and the Antitrust Division use the discretion had a very avid enforcement agenda. But the that they do have to further their own private new committee members found their constit­ interests and careers rather than those of the uent interests demanded a different ap­ public at large. The antitrust bureaucracy proach. Therefore, in 1979, the Congress cannot be counted on to uphold the public blasted the FTC as a runaway and out-of­ interest in enforcing antitrust laws. control bureaucracy. After a series of heated hearings, the FTC systematically watered The Congress down or simply halted most of its controver­ sial activities. As the currents change in Although the antitrust bureaucrats would pork-barrel waters, so too does the antitrust like to exercise complete control over their bureaucracy. enforcement agendas, they are ultimately Other aspects of antitrust also reveal pri­ accountable to their congressional oversight vate interests at work. While the original and appropriations committees. Now, con­ Sherman Act was ostensibly supposed to rein sider the incentives of members of Congress. in the "dangerous concentrations of wealth" The goal for most members is to get re-elected among the "giant monopolies" of the day, or ascend to a higher office. There is a much history reveals little monopoly power existed greater chance that this will happen if they at the time. Prices were falling throughout the support local or narrow interests rather than economy and output was surging.13 This only some vague notion of the national or public serves to benefit consumers, and Congress interest. even recognized this as true.14 So why did Antitrust is one of many pork-barrel pro­ Congress enact an antimonopoly law in such grams that Congress uses to transfer wealth an apparently competitive climate? Because from large, unorganized groups ofindividuals the law protected small or inefficient busi­ to the narrow, organized interests of others. nesses from the rigors of competition, and it In many ways, antitrust is the perfect wealth­ portrayed Congress as a champion of justice transfer vehicle. It is highly inconspicuous, and freedom. Other studies find similar re­ covering the entire economy rather than just sults for the Clayton Act.15 Still other studies specific industries. It applies to specific busi­ show that antitrust not only fails to benefit ness practices, and can therefore be used to consumers, but also harms them. protect less efficient companies from their The conclusion from examining the incen­ more efficient competitors. Antitrust can tives created by antitrust laws, and actions therefore deliver potent benefits (directly taken under them, is that antitrust laws do limiting the competitiveness of one's rivals), not serve the public interest as their support­ while the costs occupy a tiny line on the ers would claim. Antitrust does not combat federal budget and are hardly noticeable at the monopoly threat, but rather protects less all. The stockholders of the protected com- efficient companies from their competitive 26 THE FREEMAN • JANUARY 1997 rivals, bolsters the political capital of mem­ 1. Howard Putnam taped this conversation. It was entered as bers of Congress, and furthers the careers of evidence in the case brought by the government against American Airlines and Crandall. Quoted from Roger E. Meiners, AI H. Washington bureaucrats. In short, the only Ringleb, and Frances L. Edwards, The Legal Environment of thing that antitrust makes more efficient is the Business, 3rd ed., p. 401. cozy triangle of special interests. 2. Dennis W. Carlton and Jeffrey M. Perloff, Modem Indus­ trial Organization, pp. 181-183, and Richard A. Posner, "The Social Cost of Monopoly and Regulation," Journal of Political Economy, 83:807-827. Conclusion 3. Probably most successful monopolization is achieved through government protection. Classical liberals should take the threat of 4. A compelling case has been made along these lines by D. T. Armentano. See Antitrust and Monopoly (New York: John Wiley monopoly seriously. But the answer to this and Sons, 1982) and Antitrust Policy: The Case for Repeal threat is not antitrust laws. Any potential (Washington, D.C.: Cato Institute, 1986). 5. This arrangement has been the subject of widespread and monopoly must instead be exposed to the extensive criticism, which typically calls for the elimination of the discipline of market competition. Econo­ FTC. See Richard S. Higgins, William F. Shughart II, and Robert D. Tollison, "Dual Enforcement ofthe Antitrust Laws," in Robert mists have long made convincing arguments J. Mackay, James C. Miller III, and Bruce Yandle, eds., Public that a natural monopoly is rare. Most mo­ Choice and Regulation: A View from Inside the Federal Trade Commission (Stanford, Calif.: Hoover Institution Press, 1987). nopolies exist because of government inter­ 6. Barry R. Weingast and Mark J. Moran, "Bureaucratic vention. By repealing antitrust statutes, and Discretion or Congressional Control? Regulatory Policymaking by the Federal Trade Commission," Journal ofPolitical Economy, ending government-sponsored monopoly, October 1983, 91:765-800. we will allow the threat of monopoly to be 7. Suzanne Weaver, The Decision to Prosecute: Organization andPublic Policy in the AntitrustDivision (Cambridge: MIT Press, dealt with in the most effective manner 1977). possible: the market process. 8. Robert A. Katzmann, Regulatory Bureaucracy: The Federal Trade Commission and Antitrust Policy (Cambridge: MIT Press, Adam Smith rightly warned us of the dan­ 1980). gers of business conspiracies. But in the same 9. Ibid., p. 83. famous passage quoted earlier, he went on to 10. Ibid. 11. Ibid., p. 61. warn of the even greater danger of relying on 12. Richard A. Posner, "The Federal Trade Commission," government institutions to combat it: University ofChicago LawReview, 37:47-89,1969. Roger L. Faith, Donald R. Leavens, and Robert D. Tollison, "Antitrust Pork­ It is impossible indeed to prevent such meet­ barrel," Journal of Law and Economics, 15:329-342, 1982. 13. Thomas J. DiLorenzo, "The Origins of Antitrust: An ings, by any law which either could be executed, Interest-Group Perspective," International Review of Law and or would be consistent with liberty and justice. Economics, 5:73-90, 1985. But though the law cannot hinder people of the 14. Ibid., pp. 80-81. 15. Robert B. Ekelund, Michael J. McDonald, and Robert D. same trade from sometimes assembling to­ Tollison, "Business Restraints and the Clayton Act of 1914: gether, it ought to do nothing to facilitate such Public- or Private-Interest Legislation?" in Fred S. McChesney and William F. Shughart, The Causes and Consequences of assemblies; much less to render them Antitrust: The Public Choice Perspective (Chicago: University of necessary. [] Chicago Press, 1994).

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The Economic Woes of Pro Sports: Greed or Government? by Raymond J. Keating

eyond labor strife, two issues particularly have been classified by government officials Bannoy pro sports fans today-exorbitant as monopolies, and are therefore subject to player salaries and city-hopping by teams. antitrust regulation. This makes it all but Player salaries that seem wildly out ofkilter impossible for leagues to exert any control have been bothersome for some time. For over team movements. If a league wishes to example, the average Major League Baseball stop a team from picking up and moving to player reportedly earned $1.2 million dol­ another city, it faces an expensive and prob­ lars last year. Payrolls averaged about $32 ably losing litigation battle. The exception to million per team. The Montreal Expos were this has been Major League Baseball, which considered cheap-theirpayroll was only a bit operates under an antitrust exemption, and more than $15 million, compared with the indeed, baseball teams remain far less mobile New York Yankees' top payroll, reportedly than, for example, NFL teams. exceeding $60 million by year's end. In reality, pro sports leagues can in no Almost as irksome are team owners who serious economic way be considered monop­ move, or threaten to move, their teams from olies. Leagues are nothing more than part­ city to city. Art Modell's recent uprooting of nerships competing for consumers' entertain­ the NFL's Browns from Cleveland to be­ ment dollars. Members of Congress often come the Ravens of Baltimore is the most­ remind Major League Baseball how lucky it publicized example-though actual and is to be granted an antitrust exemption. And threatened moves have spread into a mini­ baseball is indeed lucky to be granted a plague in pro sports. reprieve from congressional economic igno­ Fans regularly identify private greed as the rance. Antitrust regulation stands on highly source of these annoyances. However, the precarious ground even in more seemingly true genesis of these problems is government simple cases. On the field of pro sports, it action. In this instance, federal, state, and lands clearly out of bounds. local governments contribute to the mess. All pro sports leagues should be exempt At the federal level, antitrust legislation from antitrust regulation. The effect of this serves as one culprit in the city-switching action would allow leagues to be run as the games played by teams. Pro sports leagues partners see fit, including the power to stop team movements that hurt the sport. Mr. Keating is chiefeconomist with the Washington, At the state and local levels, government D. C. -based Small Business Survival Foundation. subsidies boost player salaries and also en- 27 28 THE FREEMAN • JANUARY 1997 courage team mobility. These subsidies take and moving. Naturally, under this scenario, the form of taxpayer-financed stadiums and teams possess every incentive to pit city arenas. against city and state against state in a vicious In essence, the taxpayers pick up the ma­ game of corporate welfare. jority of a team's capital costs-usually run­ My fellow fans, in the end, it is not the greed ning anywhere between $100 million and of players and owners that result in skyrock­ $400 million for a new stadium (though New eting salaries and city-hopping by teams, but York City is talking about more than $1 bil­ the actions of government officials. lion for a new Yankee Stadium on the city's In a truly free sports market, leagues op­ West Side). The annual debt-service costs on erate free of antitrust regulation, teams re­ a new ballpark can run into the tens-of­ ceive no subsidies, owners build their own millions-of-dollars range. Obviously, relieved stadiums, and player salaries stay within the ofsuch expenses, owners are free to bid player realm of sanity as owners are forced to salaries ever higher, while boosting their own consider the full cost of team operations bottom lines as well. including stadium or arena financing. Indeed, Government-built stadiums also transform this is how the pro sports business largely teams from the status of owners to renters. worked until the 1960s and 1970s, when It's always easier for a renter to up and leave corporate welfare expanded along with all than it is for an owner. So, perversely, gov­ other forms of government activity. ernment officials who believe that only a Government needs to deregulate, privatize, taxpayer-built stadium can attract or keep a and downsize, allowing the market to work. major league team in their state or city merely The result will be healthier sports leagues, ensure that teams will continue issuing threats happier fans, and savings for taxpayers. D

Superstar Athletes Provide Economics Lessons

by K.L. Billingsley

, X Jhat do former San Francisco 4gers them with, say, a plasterer in Pasadena or a y, quarterback Joe Montana, L.A. Raid­ sheet-metal worker in Santa Ana. Yet, as the ers running back Bo Jackson, and San Diego San Diego Union- Tribune recently reported, Chargers quarterback Dan Fouts have in all three-along with many other athletes­ common? are tapping into workers' compensation in the All three are former National Football state of California. League stars and all three are multimillion­ Since 1990, nearly 200 members of the San aires-not the sort of status that would rank Diego Padres and Chargers alone have ap­ Mr. Billingsley is a journalism fellow at the Los plied for workers' compensation, a generous Angeles-based Center for the Study of Popular $8 billion system-primarily funded through Culture. compulsory contributions of employers-to The Foundation for Economic Education Irvington-on-Hudson, New York 10533 Tel. (914)591-7230 Fax (914) 591-8910 E-mail: [email protected]

January 1997 Welfare Reform ll fashions of this world pass away. more reforms to come. The legislation The welfare state which came into transfers control of much of the nation's A vogue during the 1930s may be welfare system from the federal govern­ with us for a while yet, but not for long. It ment to the states and imposes many new is dying by inches, going out with the tide restrictions on aid. It requires workfare for of socialism and its many variations. most recipients, imposes strict time limits Welfarism is bound to die from its on benefits, and cuts back on benefits for innate venom and virus. Sired by the doc­ immigrants. It affects millions of people for trines of labor exploitation and class con­ whom welfare has become a way of life. flict, born of social and economic conflict, The reform is bound to bring some con­ nursed on progressive taxation and confis­ fusion, pain, and condemnation. The trans­ cation, feasting on deficit spending and fer of control from the federal government monetary depreciation, and saddling its to the states removes its monolithic struc­ trillion dollar debt on future generations, it ture and introduces a measure of flexibility embodies all the social ills that men may and competition among the states. In time, endure. It is bound to end ignominiously it will lead to differences in state legisla­ as the growing burden of the welfare state tion and regulation which will give rise to is grinding more and more people into large differences in welfare benefits and dependence and poverty. With more than tax burdens. Facing economic stagnation $5 trillion in debt, which is expected to rise and decline, the states most generous in to $8 trillion in a few years and half a tril­ benefits and most severe in tax burdens lion in annual interest costs, with Medicare can be expected to lament the reform and and Medicaid spending doubling every call for an immediate return to the old few years, it is destined to self-destruct. It system. may implode rather suddenly, like Soviet The new system of state-run workfare communism. Or it may disintegrate slow­ builds on the assumption that the recipi­ ly, perhaps over decades, as is evident in ents can actually be led to forego the dole the old industrial countries from France to and return to the labor market. It com­ Germany, Italy, and Britain. pletely overlooks and ignores the numer­ The sweeping federal welfare act of ous institutional obstacles which the August 22, 1996 is an indication of many reformers themselves have erected. Surely, some people are lured to the dole by gen­ it rather unlikely that any welfare recipient erous benefits which may approach or will ever clear it. even exceed the wages they could earn in The Employment Retirement Security the labor market. Assistance payments plus Act of 1974 (ERISA) and its several supple­ housing allowance, food stamps, and free ments erected unsurmountable barriers for medical care may exceed the wages an many elderly workers. The law made pen­ unskilled laborer may earn, which is a sions for elderly workers a cause of politi­ powerful incentive for shunning employ­ cal concern, prescribing rules of eligibility, ment. But even if all such inducements vesting portable pension benefits, and giv­ were removed, real obstacles to gainful ing pension claims the same status as tax employment would remain. exactions. The financial burdens and the Unskilled workers face formidable bar­ bureaucratic hazards cause many employ­ riers to the labor market. Federal and state ers to be rather reluctant to engage elderly laws regulating minimum wages, child welfare people and soon thereafter pay labor, and working conditions legally bar them a pension. poor people from securing employment. Similarly, the Equal Employment Minimum wage legislation may be the Opportunity Commission (EEOC) which worst barrier which millions of unskilled was created by the civil rights acts of 1964 workers, old and young, are unable to and 1967 aims to ensure that employers do clear. It is tragic, and yet so typical of pol­ not discriminate against anyone on the itics, that the very legislators who enacted basic of race, age, gender, religion or the workfare reform recently raised the national origin. It makes the employment minimum barrier to the labor market. of public-assistance people doubly haz­ Lifting it to $5.15 an hour to which the ardous. Prevented from entering the labor mandated fringe costs must be added, market and unable to clear the obstacles such as Social Security levies on employ­ built by government, they are likely to lay ers, workman's compensation, unemploy­ the blame on employers. After all, it is they ment taxation, paid holidays, and other who deny employment. A simple charge mandated employment costs, raising the of "discrimination" is easily made and employment costs to some $8 an hour, rather difficult and costly to refute. government is blocking countless workers The welfare reformers are laboring to from reaching the market. At $8 an hour, roll the welfare stone up the" mountain to many welfare mothers are searching far the barriers they themselves erected. and wide without meeting a single Their inevitable failure may reinforce the employer. very system they are seeking to abolish. Other legal barriers stand in their way. A true welfare reform would eliminate The Davis-Bacon Act of 1931 commands the political barriers to the labor market. contractors performing work for the gov­ ernment or with government assistance to pay their workers "prevailing" wage rates, that is, union rates. Such rates are even L4 higher than an $8 minimum, which makes Hans F. Sennholz January Book Sale Save 50 - 75%/ Just in time for your winter reading enjoyment. Hurry! Offer ends January 31, 1997.

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Booksellers and others who wish to order in quantity should call Renee Oechsner, at 914-591-7230. New from FEE! The Industrial Revolution and Free Trade Edited by Burton W. Folsom, Jr.

ost historians give the Industrial Revolution low marks. This volume tells the rest of the story. The advent of the factory system M and mass production made more goods available to more people less expensively than ever before. Even though factory workers often labored long hours under hard conditions, they also increased their wealth, length­ ened their lives, and improved their standard of living. The economic policy of free trade, which often followed when nations industrialized, fostered increased commerce, the exchange of information, and greater understanding among countries.

"For anyone who doubts that economies thrive when guided by free enterprise and the marketplace rather than the strictures ofgovernment, The Industrial Revolution and Free Trade should be required reading. This is an anthology ofvery readable-even colorful-articles, most ofwhich first appeared in The Freeman, but whose classic character was wisely appreciated by Editor Folsom. Adam Smith lives!" -PAUL L. MAIER, Professor of History Western Michigan University, Kalamazoo

liThe Industrial Revolution and Free Trade is a rich, informative anthology. A veritable gold mine offacts about the history offree trade and ofthe free market, it is a book worth owning and consulting. Professor Folsom has done well to provide us with this collection and with his

own learned introduction. fI -PAUL GOTTFRIED, Professor of History Elizabethtown College, Pennsylvania .. DR. BURTON W. FOLSOM, JR., is a Senior Fellow in Economic Education at the Mackinac Center for Public Policy in Midland, Michigan. A for­ mer college professor, he is the author of several books and many essays on economic history.

Published by The Foundation for Economic Education, Inc. 30 South Broadway, Irvington-on-Hudson, NY 10533

ISBN 1-57246-057-1 • Paperback $14.95 Available in bookstores nationally, or call FEE: 1-800-452-3518 SUPERSTAR ATHLETES PROVIDE ECONOMICS LESSONS 29 assist workers who are unable to perform the job, whatever his race, nationality, or their jobs because of injury. Athletes, on the religion. In sports, nepotism is a guarantee of other hand, often enjoy guaranteed contracts failure, something that government needs to that pay them big money even when they are learn. But the attempt of some stars to gain injured, or when they are healthy and don't money by other means is also illuminating. play at all. And their respective teams pick up A key player in the scheme is lawyer Ron the cost of treating their injuries. Mix, a former NFL lineman. Along with a Other wealthy athletes dipping into the squad of attorneys working with the NFL public purse include basketball great Bill Players Association, Mix pushes the envelope. Walton, former Cy Young award-winning He even urged former Baltimore Colts quar­ pitcher Randy Jones, and legendary receiver terback Johnny Unitas, now 63, to file a claim Lance Alworth, who began collecting work­ in California. It was one of the few turned ers' compensation nearly 20 years after he down. Word quickly spread that California's stopped playing football. Walton, Fouts, and system is an easy mark. Even those living in Montana declined to discuss their windfalls, other states, and who played for non­ which average $50,000 to $70,000 per claim. California teams, have cashed in. Joe Montana was once the highest paid The superstars' compensation game con­ player in the NFL, earning $13 million over firms that those willing to exploit such pro­ four years. Both the stars' salaries and the grams need not be low-income people. In­ current workers' compensation caper illus­ deed, in recent years, the wealthy from trate key economic realities. Mexico, Central America, and as far as Sri Though some fans are outraged at the high Lanka, have had elaborate surgeries such as salaries of today's athletes, those salaries are quadruple bypasses performed under Medi­ simply a reflection of the willingness of mil­ Cal, the Golden State's health-care system for lions of people to pay money to watch them low-income people. Word has spread world­ play and perform. They are part of the wide that this is the place to go for free care, entertainment business-software if you courtesy of taxpayers ineligible to use the will-providing vicarious thrills for a mostly system themselves. sedentary populace. If 80,000 cheering fans If a welfare, workers' compensation, or were willing to part with $20 apiece to watch medical-aid system exists, it will be exploited, accountants add, teachers teach, or window with the exploitation abetted by professionals washers wash, then these occupations could who get a piece of the action. Such systems, command similar salaries, complete with lu­ by their very nature, will always be inefficient crative commercial endorsements. and corrupt, however noble the intentions Besides illustrating market forces, athletics and rhetoric of their political creators. shows how a nearly pure meritocracy works. For policymakers, the rule would seem to Nobody starts at quarterback for the Dallas be that it is better not to establish such a Cowboys or guard for the Los Angeles Lakers system in the first place. It is always easier to because his father once played or happens to set up a system than to reform it, much less own the team. If a misguided urban youth can shut it down. To paraphrase the baseball run, pass, kick, and play defense better than fantasy Field ofDreams: if you build it, even those raised in the wealthy suburbs, he will get the millionaires will come. 0 Potomac Principles by Doug Bandow

Replace the Monopoly, Not the Superintendent

here's a lotwrong and not much right with bottom compared to students in other coun­ Tthe Washington, D.C., public schools: tries, they rate themselves at the top. Buildings aren't safe, kids are gunned down But if suburban kids aren't learning as in front of their classmates, money is wasted, much as they should, city children aren't and precious little learning occurs. So the learning much at all. In 1988 the Carnegie financial control board, created by Congress Foundation declared: "The failure to educate in effect to govern the city, engaged in a very adequately urban children is a shortcoming of public debate over firing the local superin­ such magnitude that many people have simply tendent. But blame for the failure of the D.C. written off city schools as little more than system, and for government schools else­ human storehouses to keep young people off where around the nation, doesn't lie with a the streets." Half of urban kids typically fail particular administrator. It lies with the public to graduate. Those who do find their diplomas nature of education, and especially the mo­ to be about as valuable as Czarist bonds. nopoly enjoyed by the public school system. Unfortunately, the District's diplomas prob­ After all, the District's problems merely ably aren't even worth that much: Student reflect a larger national crisis. Average SAT scores on the Comprehensive Test of Basic scores dropped from 980 to 899 between 1963 Skills dropped again in 1996. and 1992, a period duringwhich real per-pupil The tragedy is not simply that we are losing spending rose 160 percent. Over the last 20 ground in education. We are losing ground years the number of top scorers on the SAT at a time when companies elsewhere in the has dropped in half. And nothing has changed economy routinely provide us with better during the 1990s despite even more money quality for less cost. Consider the advances and a panoply of "reforms." The 1994 Na­ in banking, communication, computers, and tional Assessment of Education Progress test transportation. To merely stand still today is found that 36 percent of 4th-graders, 39 to be falling behind. percent of 8th-graders, and 57 percent of Money, ofcourse, is not the answer to failed 12th-graders failed to meet basic standards in public schools. Inflation-adjusted per-pupil history. Students' ignorance of geography, spending has been rising 40 percent a decade math, and other subjects is legendary. The since World War II, without obvious effect on only thing American children excel at inter­ the quality of education. Washington's expen­ nationally is self-esteem: While scoring at the diture per student of$9,400 is higher than that at elite Gonzaga preparatory school. Nation­ Mr. Bandow is a senior fellow at the Cato Institute wide, private schools cost less (averaging less and a nationally syndicated columnist. He is the author of several books, most recently, Tripwire: than half the per-pupil spending of public Korea and U.S. Foreign Policy in a Changed schools) and achieve better results. The late World. sociologist James Coleman's extensive re- 30 31 search was recently bolstered by Sol Stern's cational establishment. Professional educa­ survey, published in City]oumal, ofNew York tors don't trust parents, even affluent ones. City's experience. Students in parochial And what about the poor? schools-which mirror .. the socio-economic Yet, today poor parents make incredible characteristics of public facilities-score bet­ efforts to get their kids out of decrepit inner­ ter, suffer fewer expulsions, and ultimately city schools. Those sacrifices, if undertaken earn more. by people holding better jobs in a stronger The basic problem is public monopoly. As economy (less burdened by high taxes' and Albert Shanker, head of the American Fed­ strengthened by better trained workers) and eration of Teachers, admits: "It's no surprise helped by charitable assistance, would expand that our school system doesn't improve; it the opportunity for quality education. Indeed, more resembles the communist economy than it would be hard to devise a worse system for our own market economy." The solution, poor kids than today's. then, is parental choice, real choice in the The arguments against choice are unper­ private marketplace. Allowing students to suasive. One is that public money should not switch from failing public institutions to pri­ go to private schools. But the money ulti­ vate ones would have the same effect on mately belongs to parents, not the govern­ education that it has everywhere. It would ment; let them keep and use their money to simultaneously put competitive pressure on better educate their children. Another is that existing schools and spur the development of we can't let the public schools fail. But they innovative new facilities. already are· failing. Instead of holding them Choice means different things to different accountable, we now give them more money people, but every form of it is resisted fero­ and students. Failing schools should close. ciously by the teachers unions and their Finally, some people worry about the pre­ political allies. Yet many of the strongest sumed democratizing role of public educa­ opponents of choice personally exercise tion. Yet most private schools are more choice. The president and nearly half of the integrated than public systems. Even with members of Congress send their children equally segregated systems, choice would in­ to private schools. One has to look far and crease diversity. In New York City, for in­ wide to find members of urban education stance, the public schools are 90 percent boards who place their kids in the schools they minority while the private institutions are 80 run. Moreover, controlling for income, public percent white. Choice, by allowing minority school teachers are four times as likely as students to move from public to private private citizens to send their children to schools, would actually promote integration. private schools. Over one-third of public In any case, the bottom line should be school teachers in Boston, Cleveland, Chi­ performance. Washington's schools, like cago, Grand Rapids, and San Francisco put those in so many other cities, don't educate. their kids in private facilities. So, too, did They don't even protect students and teachers the head of the Jersey City teachers union, from violence. Shoveling more money into who threatened a boycott of Pepsi products failed institutions would only reward failure, when the company announced its plan to give guaranteeing more of it. The ultimate answer scholarships to poor children for use in pri­ is to treat causes, not symptoms, by turning vate schools. loose on education the same market forces The right form of choice is full privatiza­ that have had such a transforming impact tion. That is, public education should be elsewhere in the economy. Politicians must abolished and the money left with parents, decide about whom they are most concerned: who would have responsibility for their chil­ the children being cheated by the current dren's education. Such a prospect is, of educational monopoly or the interest groups course, seen as beyond the pale by the edu- being paid by it. 0 THEFREEMAN IDEAS ON LIBERTY

Teen Smoking: The New Prohibition by D. T. Armentano

he expressed goal of the Clinton Admin­ culture, family, and peer pressure, not corpo­ Tistration's proposed regulations on ciga­ rate advertising. So banning brand-name rettes and smokeless tobacco products is to event sponsorships, or limiting cigarette reduce adolescent consumption by one half. brand logos on race cars and drivers' uni­ Roughly three million American juveniles forms, will have no measurable effect on any smoke and an additional one million young ten-year-old's decision to light up. males use smokeless tobacco. Putting aside FDA Commissioner David Kessler would (for the moment) all of the other difficulties have us believe that billboards near play­ with the new regulations, can they possibly grounds and the use ofcigarette brand names accomplish their objective? on t-shirts (which would all be prohibited The government proposes severe new re­ under the new regulations) have created a strictions on the advertising of cigarettes teen-smoking health epidemic. Nonsense. under the mistaken assumption that there is The marginal increase in teen smoking re­ a direct relationship between advertising and corded since 1991 is easily swamped by the the decision to begin smoking. But there is longer-term steadily downward trend. little reliable evidence in the literature to Listening to the FDA one would never support this contention and plenty of evi­ know that the percentage of high school dence to contradict it. seniors who smoke daily has fallen from over Juvenile smoking actually increased in Fin­ 28 percent in 1977 to less than 20 percent in land after a complete ban on tobacco adver­ 1994. Heavy smoking (half a pack or more per tising was implemented in 1978. Norway, day) among high school seniors had declined which completely prohibited tobacco adver­ from 17.9 percent in 1975 to approximately 11 tising in 1975, has a higher percentage of percent today. Yet the Administration now juvenile smokers than does the United States. proposes to restrict tobacco advertising in And black teens in the United States, pre­ teen-oriented magazines to a black-and­ sumably exposed to the same "persuasive" white, text-only format even though there is advertising as white teens, have far lower no evidence that such publishing censorship smoking rates. would impact teen cigarette consumption. It is widely acknowledged (outside of The bottom line is that these new regula­ Washington) that the decision to start using tions have little to do with changing cigarette tobacco products is influenced primarily by consumption by teenagers. What they will do, however, is hurt certain advertisers, promot­ Dr. Armentano is professor emeritus ofeconomics at ers of sporting events, tobacco manufacturers the University ofHartford. and their employees, and vending machine

32 GOVERNMENT AND GOVERNANCE 33 owners. Even more importantly, they will Health and Human Services, the Federal enhance the power of government bureau­ Trade Commission, and the Bureau of Alco­ crats to exercise additional control over hol, Tobacco and Firearms, already police private markets and lifestyles. And that's and regulate the industry. Every state taxes what the antismoking crusade is really all cigarettes and most lump a sales tax on top of about. the excise tax. Cigarettes are already among Make no mistake about it. The FDAwould the most taxed and regulated products in like to severely restrict the sale ofall cigarettes America. in the United States. The Administration The Administration has invited public com­ knows that total prohibition is politically ment, so it should be told that its new regu­ impractical at the moment so it starts the lations will not affect teen smoking but will, crusade with regulations that aim to "protect instead, reduce employment and income in the children." And when these fail, as they tobacco-related industries. It should also be must, the regulators will return with stronger told that its contrived rationale to regulate recommendations and sterner controls. cigarettes as a "medical device" is as phony as But controls are already a way oflife in this a three-dollar bill. Finally it should be told industry. Laws addressing tobacco sales to that freedom and persuasion, not censorship minors are on the books in every state and the or regulation, are the primary social values District of Columbia. Dozens of governmen­ that we choose to pass on to our children ... tal agencies, including the Department of whether they smoke or not. 0

Government and Governance by Fred E. Foldvary

· olicy debates typically center around the people within some jurisdiction. So a central Prole of markets versus the role of govern­ question is not whether the market or the ments. But this is a misleading distinction. government can best accomplish some task, Human society always has governance. Pri­ butwhether the governance shall be voluntary vate organizations such as corporations and or coercive. clubs have management, rules, and financial administration similar in function to those The Market-Failure Doctrine of government. The difference is that private governance is voluntary, while state-based Most economists would agree that we don't government is coercively imposed on the live in the best of all possible worlds. But the doctrine of market failure found in most Dr. Foldvary is the author of Public Goods and Private Communities: The Market Provision of economics textbooks fails to distinguish be­ Social Services (Edward Elgar, 1994). He teaches tween consensual and coercive governance as economics at California State University, Hayward. correctives. The prevailing theory asserts that 34 THE FREEMAN • JANUARY 1997 while markets might provide private goods be large with many small units, governance efficiently in a competitive economy, markets within an institution is more effective than fail to provide the collective goods that people transactions among firms. want. There are two basic reasons offered An important industry in which these ele­ as to why markets are not sufficient. Markets ments make governance play a key role is can easily determine the demand for private the development and operation ofreal estate. goods, but how can we tell how much each Spencer Heath in Citadel, Market and Altar individual wants of a collective good? We and Spencer MacCallum in The Art of Com­ could ask people how much they are willing to munity both recognized the similarities in pay, but how do we get a truthful answer? functions between hotel and city governance. Free riders also are a problem. Once the A hotel provides management, a town square collective good is provided, folks can use it (the lobby), streets (hallways), transportation whether they payor not, so why pay? (elevators and escalators), fire protection, So, the market-failure story goes, markets recreation, and many other services. The fail to deliver collective goods. Entrepreneurs collective goods are paid for from the rental lack incentive because they can't get their that the guests pay, while user fees pay for the customers to pay for the service the way they more individually consumed items such as can get people to pay for individually con­ room service and telephone calls. sumed private goods. Other real estate complexes operate by The market-failure argument does have the same principles. Many developers now one valid point: governance is required for build not just homes but also community the provision of typical collective goods. But facilities, which are then operated by an this argument fails to recognize that gover­ association. Just as cities have councils, asso­ nance can be consensual and contractual. ciations are governed by elected boards. A key Compounding the flaw in the argument is the difference is that property owners have a confusing use of the terms "private" and voice, though tenants in some communities "public." These have completely different also have a vote and are welcomed on the meanings when referring to goods and to the committees that do much of the work and sectors of an economy. A private good is decision-making. individually consumed in quantity, whether Condominiums, housing cooperatives, res­ provided by government or by a market. A idential associations, and land trusts are "public" good is collectively used, whether among the forms such private-sector gover­ provided by the "private" or the "public" nance can take. For example, in a typical (government) sector. But in typical economics condominium, a unit such as an apartment is texts, the public sector and public goods get individually controlled, while the "common sewn together, mingled and mangled into one elements" such as the grounds, some utilities, cloth. Perhaps Leviticus 19:19 is a symbolic security, and exteriors are operated by the injunction against such insalubrious combin­ association. Each unit owner pays an annual ing: "thou shalt not sow thy field with mingled assessment, just as a hotel guest pays a rental. seed: neither shall a garment mingled oflinen In both cases, the collective goods increase and woolen come upon thee." the market rental value of the site, so the collective goods become self-financing. They Voluntary Governance are paid for out of the increased rent they generate. Proprietary communities, such as Economists who study institutions recog­ shopping centers, marinas, and industrial nize the importance of private governance. parks, operate with such economic principles For example, Oliver Williamson's work on as well; the governance in these cases usually industrial organization concludes that when is provided by the owner. assets are specific to certain uses, when op­ The complexity of real estate relationships, portunism is possible, when transactions recur especially for more permanent residency, re­ frequently, and when transactions costs would quires contractual governance with a consti- GOVERNMENT AND GOVERNANCE 35

tution (master deed and bylaws) and ongo­ pay rent implies that there are no free riders ing administration. These associations are for community services. voluntary at the constitutional level-when In contractual communities, rent serves you join, you agree to follow the constitu­ another function besides financing the col­ tional rules. Unlike imposed government, lective services. Rent is also a measure of the association is a property relationship whether the services are profitable, and of bound by an explicit contract by legally whether the community is being run effi­ equal parties. ciently. Wasteful and ineffective management While the "free-rider" argument would will cause rent to decline. So a profit-making suggest that voluntary services will be defi­ proprietary governance will attempt to keep cient, in practice this depends much on the the rental income high by serving their cus­ culture of a community and on social entre­ tomers well, and democratically run associa­ preneurs. The condominium community in tions will attempt to keep their property Virginia where I once lived was managed values high with good management and effi­ professionally, but the board and all the cient services. committees were served by volunteers. Most Contrast this with the blight of our cities residents did ride free, but there were suffi­ and the waste in typical governments. Just as cient volunteers to do the job. Occasional firms providing individually consumed goods parties provided social glue for the activists; compete, so too do private communities com­ the minor cost was money well spent, reaping pete for customers and users. Not just hotels dividends in community spirit and volunteer and shopping centers, but also residential work. associations and developments compete, as recognized by the "Tiebout" model of public Territory and Rent economics. The Austrian economists F. A. Hayek and Ludwig von Mises recognized the The market-failure doctrine, besides not importance of market competition and de­ recognizing the possibility and fact of con­ centralization. Hayek emphasized the decen­ tractual governance, omits a critical compo­ tralized nature of knowledge and Mises ex­ nent of real-world collective goods: space. pounded the need for capital markets in the Typical community services such as streets, efficient allocation of goods. Both of these parks, policing, fire protection, and transpor­ elements are important parts ofthe competitive tation are territorial, impacting a particular contractual provision of community services. area. The services make the territory more Can we use these Austrian insights for the desirable, therefore increasing what econo­ reform of the public finances of government? mists call rents. These rents provide the We can, by moving government and its ser­ means to pay for the civic goods. The concept vices closer to how contractual communities of rent sufficiently paying for collective goods operate. Consensual communities thus offer has been termed the "Henry George Theory" a model for tax reform and the reform of by some economists, after Henry George, who government itself. Among the principles for theorized that rent could fund all government. reform are the decentralization and demon­ But while this concept has been recognized, opolization of operations, making govern­ most public-finance economists have not ment more contractual, and the use of mar­ drawn the logical conclusion. The result is not ket-based rentals and fees rather than just that the taxation of labor, enterprise, and arbitrarily imposed taxation. We can turn the goods is not economically required, but that market-failure doctrine on its head: not only rent can also be collected by private, contrac­ does the market work well, but it shows how tual, consensual means, to provide collective government can be made to work better, both goods via the market process. The need to more efficiently and less coercively. We can pay rent in order to use territorial goods reform government-both by making it (either by buying or renting land) further smaller and by bringing government closer to topples the free-rider argument. The need to voluntary governance. D THEFREEMAN IDEAS ON LIBERTY

A Sentinel for Auto Emissions by Daniel B. Klein

he 1992 Clean Air Act amendments re­ get warnings. If you continued to drive in a T quire local governments in smoggy re­ smogsome fashion,. you'd get fines. If you gions to abide by an array of tough regula­ refused to pay the fines, you'd eventually get tions. The most controversial are Smog pulled over and your car would be im­ Check, car-pooling mandates, electric vehicle pounded. sales quotas, and alternative fuel programs. Sound scary? Maybe the remote sensor Yet it may be time to expunge all of these isn't very accurate. Maybe the license plate command-and-control measures. identification is faulty. Maybe the remote Consider Smog Check, which requires that sensor caught your car during an uncommon cars have their emissions tested every other acceleration. Big Brother is sniffing your year. The vast majority of motorists spend a tailpipe! lot oftime and money to find out that their car In fact, there isn't much cause for alarm. is clean. It's like making people report for a The key point is that more than half of the scheduled checkup to prove that they do not auto-generated carbon monoxide comes from have halitosis. less than 10 percent of the cars. The same is In the past few years, scientists have devel­ true of hydrocarbon emissions. The problem oped a new technology called "remote sens­ is a small number of extremely dirty cars. The ing," and it promises to be the silver bullet for roadside sensors can use lenient criteria to auto-generated smog. Remote sensors are make almost certain that only the truly pol­ mobile roadside devices that read tailpipe luting cars receive citations. Furthermore, emissions using infrared and ultraviolet synchronized radar guns can check your ac­ beams. They measure carbon monoxide and celeration and infrared cameras can check hydrocarbons with very good accuracy and whether your car is warmed up. nitrous oxides with fair accuracy. No one wants to be subject to a new penalty Imagine the following system: government or fine. But the bright side is bright indeed. randomly scans your car's emission levels Remote sensing will intrude on your life only using remote sensors and reads your license if your tailpipe emissions continue to exceed plate. If your emissions are excessive, you the limits. get a postcard. Because the technology is so More important, a full-scale remote sens­ inexpensive, the government can read your ing program is all we really need to police car four or even eight times a year. First you'd against excessive emissions. We'll have to live with the chance of smog fines, but we can get Dr. Klein, associate professor ofeconomics at Santa rid ofSmog Check, forced car-pooling, forced Clara University, is co-author with Pia Koskenoja of The Smog Reduction Road: Remote Sensing Ver­ alternative fuels, electric vehicle mandates, sus the Clean Air Act, recentlypublishedby the Cato and meddlesome regulations imposed on en­ Institute. gine design in Detroit. 36 37

All these programs have been notoriously like a passive sentinel, we can be free of troublesome, bureaucratic, politicized, and meddling and hassles and really clean up the inefficient. My research indicates that a re­ air. mote sensing program implemented in Los Remote sensing challenges the entrenched Angeles would prove far more effective than groups who stand behind all the inefficient the current Smog Check program-at one­ programs. Its advancement has been a slow fifth the cost. A recent on-road study in and arduous battle. But no slower than we Orange County, California, conducted by should expect from the massive and lumber­ the Desert Research Institute, found that a ing system of policymaking. Every year re­ program of remote sensing combined with mote sensing is in greater usage on the road, free engine repairs reduces emissions 10 to and is becoming known to the public. It is 20 times more cheaply than does manda­ destined to change the face of air quality tory car-pooling. With remote sensing on duty management. D

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• Enabling better results Tom Bushnell and son Jordan Special needs home education is the successful private sedor approach. It works. Tom is the director ofNATHHAN. Want to help? NATHHAN is funded by private donations only. Thousands of families need your help. Call or write for information about current projects such as the NATHHAN Family Learning Center and NATHHAN Family Camp. Look at how families are meeting the educational and therapy needs of their disabled children. Subscribe to the NATIDIAN NEWS for SZ5.00\year. 4 issues, 72 pages of letters, inspiring articles and pictures from families homeschooling children with special needs. NATHHAN - National Challenged Homeschoolers 5383 Alpine Rd S.E. Olalla, WA 98359 (206) 857-4257 E-mail [email protected] THEFREEMAN IDEAS ON LIBERTY The Benefits of Outsourcing by Brian Boland and Walter Block

magine yourself an entrepreneur plan­ way to get the job done is to have someone I ning a new firm. After extensive market else do it. research, you decide to manufacture pencils. For instance, the superintendent ofa build­ You begin selling them for five cents each. ing typically has a working knowledge of Your accountants have determined that it electricity, plumbing, and heating; he will costs you two cents to produce each eraser-40 perform many repairs or adjustments that percent ofyour selling price. Another firm can arise. While he may be very capable, he may produce erasers for you for only one cent each not be the best person for each and every task. (a 50 percent savings on erasers). Do you There may be times when a heating specialist continue to make them yourself or do you farm should be called in ,because he has the exper­ out this operation? tise to do a job better or more efficiently. Common sense dictates the latter course. When it snows, the super may hire local kids This demonstrates the principle of outsourc­ to shovel the sidewalk, leaving him free to ing-purchasing parts or hiring labor from an attend to other tasks. It all comes down to the outside source in order to cut manufacturing most efficient allocation of resources. costs. A successful manager recognizes that there Traditional economic theory holds that are occasions when it is best to hire a spe­ firms are created to keep the cost of transac­ cialist. This is because there are opportunity tions down. By reducing the costs and ineffi­ costs involved. The superintendent in this ciencies associated with searching for and example delegates responsibility so that every training the proper' personnel, businesses can task is completed efficiently. His time is worth better maximize profits. For example, if a more installing light fixtures than shoveling CEO had to place an ad in the paper for a snow, so he assigns someone else to clear the secretary every time he needed a report typed, sidewalks. He doesn't hire a full-time snow time and money would be wasted. By main­ shoveler for his staff since this sort of work taining a staff sufficient to cover the firm's is seasonal. Nor can he afford to retain a needs, such inconveniences are avoided. heating specialist on a 24-hour basis. Such Occasionally the enterprise must look out­ help is called upon only when needed. side its own personnel to fill its needs. Sub­ contractors may be called in when they can A Sensible Choice be expected to do a job better or more efficiently than those presently employed. The Outsourcing makes good sense. Profits in­ profit-maximizing firm will be expected to do crease as resources are allocated more effi­ that which is in the best interest of its bottom ciently. But not everyone agrees. line. Contraryto union rhetoric, often the best Some critics argue that outsourcing causes Mr. Boland is a student, and Dr. Block a professor unemployment. Consider again our example of economics, at the College of the Holy Cross in of the pencil factory. Many would condemn Worcester, Massachusetts. outsourcing eraser production to anotherfirm 38 39 because such action means unemployment for Pope John Paul II recognizes the inherent workers on the in-house eraser assembly line. good in profit. In his 1991 encyclical, Centesi­ The "exploitative" capitalist has maximized his mus Annus, he said "The Church acknowl­ own profits at the expense of the workforce. edges the legitimate role of profit as an On the surface, the criticism seems to have indication that a business is functioning well. some validity. Purchasing services from others When a firm makes a profit, this means that does weaken dependency on the current productive factors have been properly em­ staff. If output remains constant, the need for ployed and corresponding human needs have staff employment will decrease. If the trend been duly satisfied." continues, the classic workforce will be slowly But what constitutes a productive factor's rendered obsolete; the logical implication is a proper employment? Henry Ford developed world where everyone is self-employed­ a method of producing cars that made them working for firms on a temporary or catch­ more affordable and hence accessible to the as-catch-can basis. average consumer. When this happened, the horse-and-buggy industry was all but de­ Moral and Religious stroyed. Should the owners ofbuggy factories Criticisms be forced to remain open if there is no demand for their product? Should the gov­ Pope John Paul II has condemned out­ ernment step in and provide subsidies for sourcing because he thinks it contributes to horse breakers, carriage makers, or whip and "the scourge of unemployment" and denies bridle manufacturers? Ofcourse not. To do so the worker "a just wage and the personal would be to render more difficult and costly security of the worker and his or her family."1 the production of cars and trucks. Given the The Popewent on to say, "Every effort must new technology, this would be highly ineffi­ be made to ensure that in this kind of system cient-and unsatisfactory. ... the human person can preserve his aware­ ness of working for himself. If it is not done, Manipulating the Market incalculable damage is inevitably done throughout the economic process, not only Some people are able to manipulate the economic damage but first and foremost market so they can thrive in conditions that damage to the man."2 would otherwise drive them out of business. The U.S. Catholic bishops have supported Government intervention-including subsi­ the priority of labor and condemned profit dies, bailouts, and special privileges-allows maximization. They believe that the market them to compete in a market that would not improperly places profits before people. En­ sustain them otherwise. The Chrysler bailout trepreneurs are only concerned with their of the early 1980s and the strike at General own self-interest and will act without regard Motors in the spring of1996 are two examples for their fellow humans in seeking profits.3 of such behavior. The bishops are missing the point. Profits GM had been entertaining the notion of are an indication that needs are being met and outsourcing brake production and shutting customers are being satisfied. If someone down two of its brake plants in Dayton, Ohio. attempts to provide a service for which there The threatened workers went on strike. Un­ is no demand, it will be a losing endeavor. fortunately for GM, the company had recently Under capitalism, as Adam Smith pointed adopted a just-in-time theory of inventory out, one's best interest is to provide a service management and had very few surplus parts that is also in someone else's best interest. If on hand. Keeping inventory to a minimum, it is not, there will be no sale at all, let alone a while more efficient, creates a stronger de­ profit. A profitable business venture does not pendence on suppliers, and gives them exploit workers; rather, it serves customers, greater bargaining power. Without brakes, employees, investors, and suppliers by providing GM could not build new cars. Production opportunities they consider beneficial. ceased in 26 ofits 29 assembly plants in North 40 THE FREEMAN • JANUARY 1997

America. The 3,000 workers in Dayton were promulgate the spread-the-work schemes able to make GM capitulate and thus saved criticized by Henry Hazlitt in Economics in their jobs. Union leaders heralded the event One Lesson. The Dayton employees used as a tremendous victory. But all they really did their protected legal position to ensure that was to perpetuate inefficiency. more labor is employed than is truly neces­ If the brake plants had been profitable, sary. GM would be better off if it had been would GM have considered closing them able to close the plant, or at least to engage in down? Not at all. But the plants were not outsourcing. Both options were thwarted by performing adequately. The workers in es­ labor legislation; the firm could have been sence have forced GM to provide them with accused of "unfair labor practices" had it work although they are not producing at levels chosen either alternative. that would enable them to be paid their By outsourcing, companies can achieve salaries. GM tried to avoid a waste of re­ improved levels of efficiency. Even an ex­ sources, but was not allowed to do so. tremely conservative estimate places the sav­ GM line workers cost the company $45 an ings by outsourcing at a healthy 9 percent.5 hour in wages and benefits-double the labor Lower production costs lead to a decreased costs of some outside contractors.4 The com­ price for the consumer in a competitive mar­ pany saw considerable savings in producing ket. That frees up more of the consumer's parts elsewhere. Some might argue that GM's income to purchase other goods and services. decision would have rendered 3,000 workers Had the market been allowed to function unemployed. But what about the people who properly, those 3,000 workers in Ohio would would have been employed at non-GM be looking for new jobs, where they could now plants? The Dayton workers are more produce items hitherto unavailable to the "guilty" of self-interest than any of the capi­ public. In addition, thousands of other work­ talists who wanted to close the plants. ers would be employed elsewhere and the The strength of this strike was due to a general public would have enjoyed more welter of U.S. labor laws-Norris-La affordable automobiles. Here is just one more Guardia, the Wagner Act, and Taft-Hartley­ example ofthe shortsightedness oursociety so which give unfair advantage to unionized often rewards. workers vis-a-vis capitalists and competing Let nothing said above be interpreted as nonunion labor. In an attempt to preserve a blanket advocacy of outsourcing. Subcon­ their own "right to work"-that is, the "right" tracting is but one tool management can use. to prevent the owner from hiring whom he Sometimes it can be profitable; at other times wished-the Dayton workers forced thou­ it can reduce profits, as in the case where the sands ofother GM employees into idleness. It workers already hired can do the same job is impossible to ignore the fact that these more cheaply than outsiders. What can be 3,000 workers consciously decided to force said, however, is that if the entrepreneur is the temporary unemployment ofthousands of allowed to pick and choose, the profit-and­ others, without regard for their right to work. loss system will allocate resources efficiently. It is easy for intellectuals critical of capi­ But this is all that the system offree enterprise talism to condemn outsourcing as a cause of can promise in any case. 0 unemployment without considering why the company might choose to look elsewhere or 1. Laborem Exercens (Washington, D.C.: Catholic News Ser­ what the long-term effects might be. No one vice, 1995), p. 19. 2. Ibid., p. 35. can deny that outsourcing causes unemploy­ 3. Pastoral Letter on Catholic Social Teaching and the U.S. ment, at least initially. But the same can be Economy: Origins, NC DocumentaryService, November 15,1984, Vol. 14, No. 22/23; "Second Draft of the U.S. Bishops' Pastoral said every time an entrepreneur declines to Letter on Catholic Teaching and the U.S. Economy," Origins, use a specific factor of production in favor of October 10, 1985. 4. Bill Vlasic, "Bracing for the Big One," Business Week, April a more efficient alternative. 1, 1996, pp. 34-35. In effect, the GM workers are attempting to 5. Ibid. THEFREEMAN IDEAS ON LIBERTY

Marcus Tullius Cicero, Who Gave Natural Law to the Modem World by Jim Powell

arcus Tullius Cicero expressed princi­ Roman author Quintilian remarked that Ci­ Mples that became the bedrock of liberty cero was "the name not of a man, but of in the modern world. eloquence itself." As a writer, Thomas Jef­ He insisted on the primacy of moral stan­ ferson called Cicero "the first master of the dards over government laws. These standards world." Historian Edward Gibbon, who ele­ became known as natural law. Above all, gantly chronicled Rome's decline, recalled Cicero declared, government is morally that when reading Cicero "I tasted the beauties obliged to protect human life and private of language, I breathed the spirit of freedom, property. When government runs amok, peo­ and I imbibed from his precepts and examples ple have a right to rebel-Cicero honored the public and private sense of a man." daring individuals who helped overthrow ty­ As Rome's most famous orator, Cicero rants. prosecuted crooked politicians and defended Intellectual historian Murray N. Rothbard citizens against rapacious officials. On one praised Cicero as "the great transmitter of occasion when Cicero spoke, mighty Julius Stoic ideas from Greece to Rome.... Stoic Caesar reportedly. trembled so much that he natural law doctrines heavily influenced the dropped papers he was holding. Scholar Roman jurists of the second and third centu­ H. Grose Hodge observed that Cicero at his ries A.D., and thus helped shape the great best offered "a sustained interest, a constant structures of Roman law which became per­ variety, a consummate blend of humour and vasive in Western civilization." pathos, ofnarrative and argument, ofdescrip­ For centuries, people read Cicero because tion and declamation; while every part is of his beautiful Latin prose. He transformed subordinated to the purpose ofthe whole, and Latin from a utilitarian language, which combines, despite its intricacy of detail, to served generals, merchants, and lawyers, into form a dramatic and coherent unit." a poetic language. The first century A.D. Amidst a violent age, Cicero was a man of peace. He refused to build a personal army Mr. Powell is editor of Laissez Faire Books and a like other leading Roman politicians,. and he seniorfellow at the Cato Institute. He has written for spoke out against violence. "A war which is the New York Times, the Wall Street Journal, Barron's, American Heritage, and more than three launched without provocation," he wrote, dozen other publications. Copyright © 1996 by Jim "cannot possibly be just." He warned: "vio­ Powell. lence is more ruinous than anything else." 41 42 THE FREEMAN • JANUARY 1997

Cicero never challenged Roman slavery, a better education. He was about eight. He which was among the most brutal in history, had some Greek teachers who exposed him to but he was more humane than his contempo­ Homer, Euripides, and Greek orators. He raries. He preferred to have his farms worked attended lectures on law, philosophy, and by tenants rather than by slaves. rhetoric. For a while, he studied dialectics Cicero lived during an era of great sculp­ under Diodotus, the Stoic. ture, but only one bust is marked as his. It has He emerged as a great author and speaker been the basis for identifying others. These because he worked at it. "The time which sculptures tend to portray Cicero as having a others spend in advancing their own personal high forehead, large nose, small mouth, and affairs," he recalled, "taking holidays and worried expression, as if he were agonizing attending Games, indulging in pleasures of over the fate of the Roman Republic. various kinds or even enjoying mental relax­ More is known about Cicero than any other ation and bodily recreation, the time they ancient personality because hundreds of his spend on protracted parties and gambling and candid letters, dispatched by courier through­ playing ball, proves in my case to have been out the Mediterranean, have survived. Cicero taken up with returning over and over again often comes across as intellectually curious, to these literary pursuits." affectionate, charming, and generous. One Cicero aimed to be a defense attorney as critic, the pro-Caesar University of Michigan the best bet for success in politics. While classicist D.R. Shackleton Bailey, belittled defense attorneys didn't get a formal fee, they Cicero as "a windbag, a wiseacre, a humbug, often could borrow money, receive legacies, a spiteful, vain-glorious egotist." But classicist and gain political support from their clients. J.A.K. Thomson provided more perspective Therewas plenty to keep a defense attorney when he observed: "It is probable that Cicero busy. Murder had been a way oflife in Roman is the greatest of all letter-writers. The im­ politics since at least 133 B.C., when a re­ portance of his matter, the range of his public former named Tiberius Sempronius Gracchus and private interests, the variety ofhis moods, was clubbed to death by senators he had his facility in expressing every shade of sense criticized. Cicero also witnessed the years of and feeling, the aptness of his quotations, bloody struggle between pro-Senate Lucius above all his spontaneity, have never in com­ Cornelius Sulla and allegedly popular leader bination been excelled or equalled." Gaius Marius. When the chips were down, Cicero dis­ Amidst the tyranny, Cicero became famous played the courage of his convictions. He as a brilliant, hard-working attorney who won opposed Julius Caesar's schemes for one-man difficult cases. His methods don't meet today's rule. After Caesar's assassination, he de­ standards for due process. He focused on the nounced Mark Antony's bid to become dic­ motive for a crime, often ignoring the specifics tator. For that, Cicero was beheaded. about how the act was committed. He made claims, such as that his client wasn't near the Cicero's Early Years crime scene, without offering specific proof. He didn't seem to call witnesses. He some­ Marcus Tullius Cicero was born January 6, times resorted to blatant logical fallacies. 106 B.C., on his grandfather's country estate Yet Cicero prospered. He acquired villas in in Arpinum, about 70 miles southeast of Asturae, Puteoli, and Pompeii, an estate near Rome. His father, who shared all three Formiae, and a mansion in Rome's fashion­ names, was a frail aristocrat with literary able Palatine district, plus lodges where he interests, property in Arpinum, and a house in could stay while traveling to these properties. Rome. His mother, Helvia, was from a socially By 79 B.C., he was worn out. As he ex­ connected family in Rome. The Cicero family plained in the Brutus (46 B.C.), which includes name doesn't suggest much dignity-in Latin, perhaps the earliest piece of intellectual au­ cicer means chickpea. tobiography: "I was at that time very slender His family moved to Rome so he could get and not strong in body, with a long, thin neck; MARCUS TULLIUS CICERO 43 and such a constitution and appearance were cylinder," he recalled. "1 at once told the thought almost to promise danger to life, if Syracusans I thought that was just what I was combined with hard work and strain on the looking for." lungs. Those who loved me were ... alarmed, As quaestor, Cicero joined the Senate. This that 1 always spoke without remission or had about 600 members, nearly all of whom variation, using all the strength of my voice were from families who owed their position to and the effort of my whole body. When my military conquest. They were members for friends and doctors begged me to give up life. Although the Senate had a prestigious speaking in the courts, I felt I would run any advisory role in the government, and candi­ risk rather than abandon my hope of fame as dates for higher political office came from the a speake,r. 1thought that by a more restrained Senate, it lacked its own power base. There and moderate use of the voice and a different weren't any Senate elections or political par­ way ofspeaking 1could both avoid the danger ties. The Senate didn't command an army. By and acquire more variety in my style; and the law, senators were banned from business. reason for going to Asia was to change my Senators looked forward to winning an ap­ method of speaking. And so, when 1 had two pointment as governor of a province where years' experience oftaking cases and my name they could enrich themselves. was already well known in the Forum, I left In 70 B.C., Cicero moved his way up the Rome." political ladder when he got elected adile He spent time in Athens and then toured (responsible for the Roman food supply and the Peloponnesian islands and Greek cities of games). Thatyear, people from Sicily filed suit Asia Minor. He studied philosophy with the against their former governor Gaius Verres, Athenian Antiochus, who reflected Stoic in­ who had done considerable looting during his fluence, and at Rhodes with the learned Stoic three years there. Cicero was asked to handle Posidonius. He also studied oratory with the case. The odds were with Verres because Posidonius' teacher, Molon. "I came home he was defended by Quintus Hortensius Hor­ after two years," Cicero reported, "not only talus, the most famous orator of the day, and more experienced, but almost another man; senators who sat on the jury were, as always, the excessive strain of voice had gone, my reluctant to return a guilty verdict against an style had ... simmered down, my lungs were influential politician. stronger and I was not so thin." The trial began August 5, and there were crowds ofspectators since people had come to Cicero Enters Politics Rome for elections and games. "This one man's brutality and cupidity," Cicero thun­ Cicero first sought political office when he dered, "were depriving [Sicilians] of the ad­ was 3D-as quaestor, the lowest major office, vantages and privileges bestowed on them by which involved administrative responsibility the Senate and the Roman people." What we for a province. Elections took place every know about the case comes primarily from July, after the harvest. They were held in the Cicero's orations, and while they cannot be Field of Mars. Voters scratched the name or treated as factual documents-theywere par­ initials of their chosen candidate on waxed tisan briefs-Verres subsequently fled Rome wooden ballots, then dropped these in baskets for Marseilles. Cicero's reputation was en­ for counting. Elected, Cicero was assigned hanced. Western Sicily, where he made sure corn In 66 B.C., Cicero was elected First Praetor, supplies were remitted to Rome. His proudest which meant that he administered the highest personal achievement during the one-year civil court in Rome. As soon as Cicero's term seems to have been discovering the grave one-year praetorship was up, he began lob­ of Archimedes, the third-century B.C. Greek bying to be elected as a consul, the highest mathematician. "1 noticed a small column office in Rome. Two consuls served at a time, projecting a little way from the bushes, on each with the power to veto decisions by the which there was the shape of a sphere and a other. Cicero became a consul in 64 B.C.- 44 THE FREEMAN • JANUARY 1997 remarkably, without resorting to bribery or portedly changed wives to improve his polit­ violence. ical prospects. While he skirted constitutional One ofthe unsuccessful contenders, Lucius restraints to advance his career, he never tried Sergius .Catiline, a wild man who gained to overthrow the traditional (unwritten) Ro­ support from Julius Caesar, schemed for man constitution. He wanted fame rather revenge. He tried to recruit foreign armed than political power. forces, assassinate Cicero, and take over the Pompey crushed Rome's adversaries in the government. During Senate debates, Cicero Middle East. He wiped out the piracy in the unleashed powerful orations attacking Cati­ eastern Mediterranean that had disrupted line. Caesar cited an old law that a death Rome's vital food supplies. He conquered sentence required prior approval by a popular some 1,500 towns and fortresses. He orga­ assembly. He advocated seizing the property nized four new Roman provinces-Asia, of conspirators and banishing them. Cicero Bithynia, Cilicia, and Syria-which extended favored capital punishment. Catiline's top five Roman frontiers to the Caucasus mountains associates were executed, and Catiline was and the Red Sea. He started or rebuilt 39 subsequently killed in battle. For years, Cic­ cities. He established a network of client ero irritated people by boasting how he saved rulers who helped Rome guard the eastern the Republic from Catiline. frontiers. He boosted Rome's revenue from Cicero attacked Rome's policy of endless the region by 70 percent and became the wars. "It is a hard thing to say," he declared, wealthiest Roman. "but we Romans are loathed abroad because In December 62 B.C., Pompey returned to of the damage our generals and officials have Rome and dismissed his army. All he asked done in their licentiousness. No temple has for was that the Senate pass a bill rewarding been protected by its sanctity, no state by its his soldiers with land in the provinces-the sworn agreements, no house and home by its traditional way of compensating combatants locks and bars-infact there is now a shortage after a successful military campaign. But the of prosperous cities for us to declare war on Senate blocked such a bill, and Pompey so that we can loot them afterwards. Do you became convinced he should consider collab­ think that when we send out an army against orating with his rivals. an enemy it is to protect our allies, or is it The best-financed rival was Marcus Cras­ rather to use thewar as an excuse for plundering sus. Crassus had inherited a small fortune­ them? Do you know of a single state that we 300 talents-and parlayed this into some have subdued that is still rich, or a single rich 7,000 talents largely in the proscriptions, state that our generals have not subdued?" which meant buying cheaply and then resell­ ing the properties of people condemned to Choosing Among Evils death. Until Pompey's lucrative triumph in the Middle East, Crassus had been thewealth­ If Rome had stopped its conquests, the iest Roman. He built his own army and Republic might have developed. Corrupt and crushed the slave revolt led by Spartacus, cru­ limited though it was, it offered the best chance cifying some 6,000 slaves on the Appian Way. of averting one-man rule. But the aggression To strengthen his position against Pompey, continued, and successful generals eclipsed the Crassus bought the political support of Gaius power of the Senate and other republican Julius Caesar, who was an ambitious, spend­ institutions. Cicero found himselfin the uncom­ thrift demagogue. He had been elected a fortable position of choosing among evils. quaestor in 68 B.C. and assigned to administer The least dangerous, he believed, was Further Spain, where he discovered his genius Cnaeus Pompeius (Pompey), a highly capable as a military commander. Equally important, military commander, remarkable administra­ he acquired loot for expanding his power. He tor, and political opportunist. During his early gained a popular following by sponsoring days, he was known as the "boy executioner." lavish "free" games and banquets whose as­ Pompey lacked political principles and re- tonishing cost-19 million sesterces, almost a MARCUS TULLIUS CICERO 45 tenth of government revenues-were under­ Meanwhile, Crassus pursued more wealth written by Crassus. and military glory, and he led his army against Cicero led successful opposition to a Senate the Parthians, a nomadic people based in bill promoted by Caesar and Crassus, which western Persia. Their territory sat astride the would have empowered them to sell overseas great Silk Road that connected China with the Roman territory, and use the proceeds to Mediterranean. Crassus' forces were routed acquire land in Italy for redistribution to their by Parthian bowmen, and he was slain in May political supporters. Cicero spoke against the 53 B.C. bill three times, and he displayed considerable skill defeating it without alienating ordinary The Rise of Caesar people who hoped for free land. Caesar had been busy building his personal The First Triumvirate empire in Gaul, which included territory now in France, Belgium, part of Holland, and In 60 B.C., Pompey, Crassus, and Caesar Switzerland, plus Germany west ofthe Rhine. were frustrated by Senate efforts to thwart Caesar reportedly sold 53,000 members ofthe their ambitions, so they formed a dictatorship Nervii tribe as slaves. He boasted that he known as the First Triumvirate. During the slaughtered 258,000 Helvetii men, women, next decade, they controlled candidates for and children. He went on to slaughter some office, and they parceled out provincial loot 430,000 Germans. among themselves. Crassus got the East. Pom­ Caesar combined his tactical genius­ pey, Spain. Caesar, Cisalpine Gaul (northern especially surprise attacks-with effective Italy) and Illyricum (eastern Adriatic coast). propaganda, something the aloof Pompey Cicero declined an invitation to join them. neglected. Caesar appealed for popular sup­ Despite their friendly overtures, Crassus, port by promising peace. Caesar repeatedly Pompey, and Caesar didn't defend Cicero sought Cicero's backing because he needed when, in 58 B.C., the gangster-senator Publius legitimacy. Caesar had always been cordial to Clodius Pulcher (an ally ofCaesar's known as Cicero and even lent him money, but Cicero Clodius) proposed a law banishing Cicero reluctantly sided with Pompey. After a tense from Rome. Clodius also plundered three of meeting with Caesar, Cicero wrote Atticus: "I Cicero's homes. Cicero was exiled for 16 think Caesar is not pleased with me. But 1was miserable months, which he spent at a friend's pleased with myself, which is more than 1have home in Salonika· (northeastern Greece). been for a long time." "Your pleas have prevented me from com­ In January 49 B.C., the Senate ordered mitting suicide," he wrote Titus Pomponius Caesar to return from Gaul without his army. Atticus, his banker, publisher, and friend, who But he refused to cooperate in his political helped cover his expenses in exile. Cicero destruction. On the evening ofJanuary 10, 49 returned to Rome when Pompey decided he B.C., Caesar led one legion of soldiers across needed an ally against Clodius. the Rubicon, a small river on the northwest­ But the triumvirs wouldn't tolerate the free ern Italian peninsula, separating Gaul from expression ofCicero's views. "I who if 1speak Rome. This violated Roman law requiring as I ought on public matters am thought mad," that armies be kept in the provinces, and he wrote Atticus, "if I say what expediency another civil war was on. Unable to defend demands, appear a slave, and if 1 am silent, himself in Italy, Pompey fled to the East on seem oppressed and crushed. . .. What if I March 17. Caesar entered Rome on the first choose to give up and take refuge in a life of of April, 49 B.C. leisure? Impossible. I have to take part in the Whether Caesar or Pompey won, Rome fight." He added: "I am sustained and would clearly be ruled by a strongman. In one strengthened by literature, and prefer to sit in of his letters, Cicero lamented the "general your little chair under the bust of Aristotle, destruction; so vast are the forces which I see than in our consuls' chairs of office." will take part in the conflict on both sides.... 46 THE FREEMAN • JANUARY 1997

Nothing can exceed the misery, ruin and lilia, but she couldn't get along with his disgrace. ... The sun seems to me to have daughter, Tullia, so they divorced about a year disappeared from the universe." later. Then Tullia died in childbirth. "Next to Caesar seized the Roman treasury to fi­ yourself," he wrote Atticus, "I have no better nance his military campaigns. He went to friend than solitude. In it all my converse is Spain, preventing Pompey from rebuilding an with books. It is interrupted by weeping, army there. Caesar's deputy, Mark Antony, against which I struggle as much as I can...." took charge of Italy. Caesar destroyed Mar­ Cicero turned more to writing about phi­ seilles, which had supported Pompey. Then losophy and secured his immortality. While Caesar returned to Italy and defeated Pom­ he didn't construct any new philosophical pey's larger forces at Pharsalus, north of system, he interpreted his favorite Greek Athens, on August 9, 48 B.C. Cicero was thinkers and made the ideas soar. He drew offered command of Pompey's surviving from his own library, since there weren't any forces, but he wanted no part of the violence. public libraries in Rome. Hewrote with a reed Pompey fled to Egypt, where he was mur­ pen and ink on papyrus scrolls. The ink was dered upon landing by local people who had made from lampblack and gum. Heworked to enough ofRome's wars. When Caesar arrived expand Latin which, among other things, in Egypt, he was presented with Pompey's lacked an equivalent of "the" and had few severed head. He subsequently became a metaphors or compound words. He adapted lover of young Queen Cleopatra, who joined words from Greek, which had been a philo­ him back in Rome. Caesar crushed remnant sophicallanguage for centuries. Cicero intro­ opposition-some 10,000 people were slaugh­ duced such words as essentia, qualitas, and tered, and their leader Marcus Porcius Cato moralis to Latin, which makes him the source pulled a sword into his abdomen. ofthe English words "essence," "quality," and During the bloodbaths, Cicero sought ref­ "moral." uge in Brindisi. Victorious Caesar pardoned Atticus had slaves make copies of Cicero's him, as he pardoned many of his adversaries, works, the standard practice. One thousand and Cicero returned to Rome in 47 B.C. copies were produced initially. For their trou­ Almost 60, Cicero learned that many of his ble, authors like Cicero received prestige and compatriots and rivals were dead. "I was gifts-royalties were unknown. reconciled with myoid friends, I mean my books," he wrote, "though I had not aban­ "The Law of Nature.. " doned their .companionship because I was angry with them, but because I felt a sense of Cicero transmitted the Greek Stoic idea of shame. I thought that I had not obeyed their a moral "higher law" to the modern world. In precepts by plunging into turbulent events his dialogue De Legibus (On the Laws, 52 with such untrustworthy allies." B.C.), he talked about the "supreme law Cicero did his best to influence Caesar. He which existed through the ages, before the urged that Caesar "restore this city of ours to mention of any written law or established stability by measures of reorganization and state." He also referred to it as "the law of lawgiving." But it was a hopeless task, since nature for the source of right." In De Re­ Caesar had already planned another cam­ publica (The Republic, 51 B.C.) he says "True paign of overseas conquest. law is right reason in agreement with nature; it is of universal application, unchanging and Cicero's Personal Woes everlasting ... there will not be different laws at Rome and at Athens, or different laws now While the Roman Republic was collapsing, and in the future, but one eternal and un­ Cicero's personal life was, too. In 46 B.C., he changeable law will bevalid for all nations and and his wife, Terentia, were divorced appar­ all times, and there will be one master and ently because of financial disputes. He soon ruler, God, over us all, for he is the author of remarried a rich young woman named Pub- this law, its promulgator, and its enforcing MARCUS TULLIUS CICERO 47 judge. Whoever is disobedient is fleeing from For it is a nobler thing to enlarge the bound­ himself and denying his human nature, and by aries of human intelligence than those of the reason of this very fact he will suffer the worst Roman Empire." The two men had dinner at penalties ..." one of Cicero's villas-Caesar came with his Cicero further distinguished the "higher retinue of about 2,000 soldiers. Later Cicero law" from the laws of governments. He de­ told Atticus: "my guest was not the sort to clared it was "quite absurd to call just every whom one says, 'Do pray come again when article in the decrees and laws of nations. you are back.' Once is enough. We did not talk What if those laws were enacted by tyrants? about serious matters, but a great deal about ... The essential justice that binds human literature." society together and is maintained by one law Caesar proceeded to twist the Roman con­ is right reason, expressed in commands and stitution beyond recognition. He packed the prohibitions. Whoever disregards this law, Senate with some 400 of his partisans. He whether written or unwritten, is unjust." rigged the election of a new consul. He While Cicero derived many ideas from the became the first living Roman to have his Greeks, he also contributed some key ideas of portrait appear on coins. He had himself his own. Greek philosophers had conceived of named dictator perpetuus-dictator for life. society and government as virtually the same, As historian John Dickinson observed, coming together in the polis (city-state). Ci­ Caesar "indulged in a lifetime of double talk, cero declared that government is like a professing slogans of democracy, while de­ trustee, morally obliged to serve society­ basing and destroying the powers of the which means society is something larger and electorate, and insisting on constitutional separate. Appreciation for the myriad won­ technicalities, while persistently undermining ders of civil society, where private individuals the constitution. In the end, his prescription develop languages, markets, legal customs, for government turned out to be a surprisingly and other institutions, didn't come until the simple one: to reduce its mechanism to the eighteenth century, but it was Cicero who simplest and most primitive ofall institutional began to see the light. forms, personal absolutism, and to employ it Cicero was the first to say that government for one of the simplest and most primitive of was justified primarily as a means of protect­ all purposes, foreign conquest." ing private property. Both Plato and Aristotle Some influential Romans, however, still had imagined that government could improve cherished republican principles. morals. Neither had conceived of private Gaius Cassius, who hated Julius Caesar, property-an absolute claim to something seems to have hatched the plot against him. over everyone else. He was joined by his intense brother-in-law, Cicero's De Officiis (On Duties, 44 B.C.): Marcus Brutus. Both men had fought with "the chief purpose in the establishment of Pompey. Caesar pardoned both and named states and constitutional orders was that in­ both praetors. But Brutus felt betrayed after dividual property rights might be secured ... Caesar had promised a new order and pur­ it is the peculiar function of state and city to sued one-man rule. Brutus decided he had a guarantee to every man the free and undis­ historic role to play, because an ancestor had turbed control of his own property." Again: dispatched a tyrant, and he was the nephew of "The men who administer public affairs must Cato, stalwart foe of Caesar and defender of first of all see that everyone holds onto what the Roman Republic. Cassius and Brutus is his, and that private men are never deprived recruited about 60 co-conspirators. of their goods by public men." Caesar continued to seek Cicero's goodwill The Ides of March by praising his work. Caesar dedicated his book De analogia (On Analogy, 54 B.C.) to Caesar planned to leave Rome for another Cicero, saying "You have gained a triumph to war, against the Parthians, on March 18, 44 be preferred to that of the greatest generals. B.C. Brutus and Cassius decided that the 48 THE FREEMAN • JANUARY 1997 assassination must take place on March 15­ "I fought for the Republic when I was the Ides of March-during a Senate meeting. young," Cicero declared, "I shall not abandon It was held in a hall next to the Theatre of her in my old age. I scorned the daggers of Pompey. Apparently Cicero was there, al­ Catiline; I shall not tremble before yours. though the conspirators hadn't confided in him Rather I would willingly expose my body to because of his age and his tendency to talk. them, if by my death the liberty of the nation After Caesar, 63, sat on a gilded chair, a could be recovered and the agony of the man named Tillius Cimber approached Cae­ Roman people could at last bring to birth that sar and requested a pardon for his brother. with which it has been so long in labour." He When Caesar refused, Cimber grabbed Cae­ expressed the wish that "at my death I may sar's purple toga, the signal for attack. "The leave the Roman people free." Liberators," as the conspirators called them­ Cicero delivered another dozen attacks on selves, fell on him with their daggers. Cassius Antony by April 21, 43 B.C. He urged that the struck Caesar in the face. Brutus cut Caesar Senate brand Antony as a public enemy and in the thigh. Altogether, he was cut 23 times recognize the legitimacy of Octavian as the and fell dead before a statue of Pompey. lesser of evils. These speeches became known Reportedly, Brutus held high his dagger, as the Philippics, inspired by Demosthenes' shouted Cicero's name and congratulated him speeches three centuries before, intended to on the recovery of freedom. stir Athenians against the invader Philip of Brutus and Cassius apparently expected the Macedon who was the father ofAlexander the Republic to revive on its own-they didn't Great. make any plans to exercise power themselves. Cicero withdrew to his Arpinum estate, Cicero, however, recognized that the prob­ away from the turmoil of Rome. He finished lems of the republic went beyond one man. his final book, De Amicitia (On Friendship)­ "We have only cut down the tree not rooted dedicated to his friend Atticus who, ironically, it up," he told Atticus. carried on a cordial correspondence with Soon hard-drinking and brawling Mark Antony and Octavian. Antony bid to succeed Caesar as dictator. He The rivals Antony, Octavian, and Marcus got possession of Caesar's papers and per­ Aemilius Lepidus concluded that they weren't sonal fortune-some 100 million sesterces, in a position to crush each other or get about one-seventh as much as was in the cooperation from the Senate. Consequently, entire Roman treasury, which Caesar had they established themselves as Triumvirs for intended for his I8-year-old adopted son, the Restoration of the Republic, and they Octavian. Antony recruited his own armed divided spoils in the western provinces. They forces. He pushed through a law giving him also announced rewards for anyone who control of north and central Cisalpine Gaul. could produce the heads of their enemies. On September 2,44 B.C., Cicero delivered Antony saw that Cicero's name appeared on a speech asserting that Antony's actions were the proscription list, and Octavian did nothing unconstitutional, unpopular and contrary to about it. Caesar's intentions. On September 19, Antony countered with a scathing speech that The Murder of Cicero blamed Cicero for the murder of Catiline, the assassination of Clodius, and the split be­ Cicero fled. He started sailing for Greece, tween Caesar and Pompey. Antony made where he had heard that Brutus had some clear that Cicero was a mortal enemy. armed forces, but rough winter weather soon Cicero wrote a second blistering speech forced him ashore. He sought shelter at his which, while never delivered, became one of house near Formiae, along Italy's west coast. the most famous political pamphlets in his­ There, on December 7, 43 B.C., assassins tory. He blasted Antony for inciting violence caught up with him. A soldier named Heren­ and provoking the Civil War. He portrayed nius cut off his head and hands. Herennius Antony as an unscrupulous opportunist. brought these to Antony. Fulvia, Antony's MARCUS TULLIUS CICERO 49 wife, pushed a hairpin through Cicero's Duties] as an ethics text. Philosopher John tongue, and Cicero's head and hands were Locke recommended Cicero's works. Cicero's nailed to the Forum Rostra where orators vision of natural law influenced such thinkers spoke. as Locke, Samuel Pufendorf, and Cato's Let­ This was just the beginning of renewed ters' authors John Trenchard and Thomas violence. Antony ordered the murder ofsome Gordon who had the most direct intellectual 300 senators and a couple of thousand influ­ impact on the American Revolution. ential citizens. Antony and Octavian crushed Cicero's defense of the Roman Republic the republican forces ofBrutus and Cassius at made him a hero to many others. In Germany, Philippi (northeastern Greece), October 43 he was admired by the libertarian poet and B.C., and both republicans committed sui­ dramatist Johann Christoph Friedrich von cide. A decade later, Antony and Octavian Schiller. French Baron de Montesquieu, who were at each other's throats. Antony lost urged the importance ofdividing government three-quarters of his fleet at Actium (western powers, considered Cicero "one of the great­ Greece), then fled with Cleopatra to Egypt est spirits." Voltaire wrote that Cicero "taught where they committed suicide in 30 B.C. us how to think." Inspired by Cicero, during Octavian, who became known as Augustus, the French Revolution, journalist Jean­ launched the Roman Empire. Baptiste Louvet de Couvray boldly attacked According to the first-century A.D. Roman Maximilien de Robespierre for promoting the biographer Plutarch, Augustus came upon Reign of Terror. one of his grandsons reading a book by Cicero's oratory continued to stir friends of Cicero. The boy tried to hide it, but Augustus freedom. It helped inspire the libertarian picked it up and remarked: "My child, this was ideals of the great historian Thomas Babing­ a learned man, and a lover of his country." ton Macaulay. It influenced the dramatic Cicero's works generally fell out of favor speaking styles of young (libertarian) Ed­ during the Empire. The fifth-century Catholic mund Burke, Charles James Fox, William philosopher Saint Augustine confessed: "I Ewart Gladstone, and Winston Churchill. came in the usual course of study to a work of Cicero's oratory helped convince Frederick one Cicero, whose style is admired by almost Douglass that if he mastered public speaking, all, not so his message." By the early Middle he could fight American slavery-and he did. Ages, many of Cicero's works were lost. Cicero's views became unfashionable when The Renaissance scholar Petrarch found imperial Germany emerged as a major power some ofCicero's speeches (58 were eventually during the late nineteenth century. Nobel recovered). Then in 1345 at the Verona Prize-winning historian Theodor Mommsen, cathedral library, he discovered a collection of for instance, was an ardent admirer of Caesar Cicero's letters-864 altogether, 90 to Cicero and sneered at Cicero's republicanism. While and the rest by him-which had been pub­ Hitler did much to make Caesarism unpop­ lished in the first century A.D. Half were ular, far more people today are interested in written to his friend Atticus, mostly based in the conqueror Caesar than in an author and Greece. All the letters date from the last 20 orator like Cicero. years of Cicero's life. Petrarch exulted: "you Yet Cicero remains an "absorbingly signif­ are the leader whose advice we follow, whose icant builder of western civilization," as his­ applause is our joy, whose name is our orna­ torian Michael Grant put it. Cicero urged ment." Cicero was cherished by Erasmus, the people to reason together. He championed Dutch Renaissance man who deplored reli­ decency and peace. He gave the modern gious intolerance among both Catholics and world some of the most fundamental ideas of Protestants. liberty. Back when speaking freely meant In seventeenth-century England, according risking death, he denounced tyranny. He has to one observer, it was "the common fashion helped keep the torch ofliberty burning bright at schooles" to use Cicero's De Officiis [On for more than 2,000 years. 0 Economics on Trial by Mark Skousen

Economics in One Page

"What makes it [economics] most "cost." Everything has a price; everything has fascinating is that its fundamental principles a cost. are so simple that they can be written on Additionally, sound economic policy is one page, that anyone can understand straightforward: Let the market, not the state, them, and yet very few do."l set wages and prices. Keep government's -Milton Friedman hands off monetary policy. Taxes should be minimized. Government should do only those he above statement by Friedman got me things private citizens can't do for themselves. Tthinking: Is it possible to summarize the Government should live within its means. basic principles ofeconomics in a single page? Rules and regulations should provide a level After all, Henry Hazlitt gave us a masterful playing field. Tariffs and other barriers to summary of sound principles in Economics in trade should be eliminated as much as pos­ One Lesson. Could these concepts be reduced sible. In short, government governs bestwhich to a page? governs least. Friedman himself did not attempt to make Unfortunately, economists sometimes for­ a list when he made this statement in a 1986 get these basic principles and often get caught interview. After completing a preliminary up in the details of esoteric model-building, one-page summary of economic principles, I high theory, academic research, and mathe­ sent him a copy. In his reply, he added a few matics. The dismal state ofthe profession was ofhis own, but in no way endorses my attempt. expressed recently by Arjo Klamer and David After making this list of basic principles Colander, who, after reviewing graduate stud­ (see the next page), I have to agree with ies at major economics departments around Friedman and Hazlitt. The principles of eco­ the country, asked, "Why did we have this gut nomics are simple: Supply and demand. Op­ feeling that much of what went on there was portunity cost. Comparative advantage. Profit a waste?,,2 and loss. Competition. Division oflabor. And On the following page is my attempt to so on. summarize the basic principles of economics In fact, one professor even suggested to me and sound economic policy. If anyone has any that economics can be reduced to one word: suggested improvements, I look forward to "price." Or maybe, I suggested alternatively, receiving them.

Dr. Skousen is an economist at Rollins College, 1. Quoted in interview, Lives ofthe Laureates, William Breit Department of Economics, Winter Park, Florida and Roger W. Spencer, eds. (Cambridge, Mass.: MIT Press, 32789, and editor ofForecasts & Strategies, one of 1986), p. 91. 2. Arjo Klamer and David Colander, The Making of an the largest investment newsletters in the country. The Economist (Boulder, Colo.: Westview Press, 1990), p. xiv. See also third edition ofhis book Economics of a Pure Gold David Colander and Reuven Brenner, Educating Economists Standard has recently been published by FEE. (Ann Arbor: University of Michigan Press, 1992).

50 ECONOMICS IN ONE PAGE 51

Economics in One Page by Mark Skousen

1. Self-interest: "The desire of bettering our condition comes with us from the womb and never leaves till we go into the grave" (Adam Smith). No one spends someone else's money as carefully as he spends his own. 2. Economic growth: The key to a higher standard of living is to expand savings, capital formation, education, and technology. 3. Trade: In all voluntary exchanges, where accurate information is known, both the buyer and seller gain; therefore, an increase in trade between individuals, groups, or nations benefits both parties. 4. Competition: Given the universal existence of limited resources and unlimited wants, competition exists in all societies and cannot be abolished by government edict. 5. Cooperation: Since most individuals are not self-sufficient, and almost all natural resources must be transformed in order to become usable, individuals-laborers, landlords, capitalists, and entrepreneurs-must work together to produce valuable goods and services. 6. Division of labor and comparative advantage: Differences in talents, intelligence, knowl­ edge, and property lead to specialization and comparative advantage by each individual, firm, and nation. 7. Dispersion of knowledge: Information about market behavior is so diverse and ubiquitous that it cannot be captured and calculated by a central authority. 8. Profit and loss: Profit and loss are the market mechanisms that guide what should and should not be produced over the long run. 9. Opportunity cost: Given the limitations of time and resources, there are always trade-offs in life. Ifyou want to do something, you must give up other things you may wish to do. The price you pay to engage in one activity is equal to the cost ofother activities you have forgone. 10. Price theory: Prices are determined by the subjective valuations of buyers (demand) and sellers (supply), not by any objective cost of production; the higher the price, the smaller the quantity purchasers will be willing to buy and the larger the quantity sellers will be willing to offer for sale. 11. Causality: For every cause there is an effect. Actions taken by individuals, firms, and governments have an impact on other actors in the economy that may be predictable, although the level of predictability depends on the complexity of the actions involved. 12. Uncertainty: There is always a degree of risk and uncertainty about the future because people are often reevaluating, learning from their mistakes, and changing their minds, thus making it difficult to predict their behavior in the future. 13. Labor economics: Higher wages can only be achieved in the long run by greater productivity, i.e., applying more capital investment per worker; chronic unemployment is caused by government fixing wage rates above equilibrium market levels. 14. Government controls: Price-rent-wage controls may benefit some individuals and groups, but not society as a whole; ultimately, they create shortages, black markets, and a deterioration of quality and services. There is no such thing as a free lunch. 15. Money: Deliberate attempts to depreciate the nation's currency, artificially lower interest rates, and engage in "easy money" policies inevitably lead to inflation, boom-bust cycles, and economic crisis. The market, not the state, should determine money and credit. 16. Public finance: In all public enterprises, in order to maintain a high degree of efficiency and good management, market principles should be adopted whenever possible: (1) Government should try to do only what private enterprise cannot do; government should not engage in businesses that private enterprise can do better; (2) government should live within its means; (3) cost-benefit analysis: marginal benefits should exceed marginal costs; and (4) the account­ ability principle: those who benefit from a service should pay for the service. 52

Initially, though, the Social Security tax wa~ deceptively and of course politically light-one BOOKS percent each on employee and employer. You needn't ponder long on why Congress magnani­ mously suspended payroll tax increases scheduled for 1946 and 1949. Workers, after all, vote. Yet The Social Security Fraud today the combined tax is more than 15 percent, up by Abraham Ellis more than sevenfold. The Foundation for Economic Education. That's bad enough, but the record of the White second revised edition, 1996 • 209 pages. House and Congress in further administering So­ $14.95 paperback cial Security is just as bad or worse, as politics has ever reared its ugly head. For example, in 1956 Reviewed by William H. Peterson women, who also happen to vote, were allowed to receive reduced benefits at age 62, unlike their male counterparts whose eligible age held at 65. In .s. Supreme Court Justice Louis Brandeis 1965 widows had their eligible age reduced to 60. Ustated his opinion in Olmstead v. United States Compassion is never in short supply in Congress. in 1928: "The greatest dangers to liberty lurk in Abraham Ellis has a fun chapter on "Social insidious encroachment by men of zeal, well­ Security Semantics." Social Security taxes are still meaning but without understanding." tagged as "contributions"; the system has a ficti­ Just six years later, with the New Deal, a zealous, tious actuarial aura in its official description as presumably well-meaning President Franklin D. "Old-Age, Survivors, and Disability Insurance." Roosevelt, if also presumably without much un­ Social Security "trust funds" imply actual invest­ derstanding, said in a message to Congress calling ment set-asides for future obligations while the for a system of "social insurance": "Among our funds themselves are virtually sham dummy ac­ objectives I place the security of men, women, and counts, with strictly pay-as-you-go intergenera­ children ofthe Nation, first. Fear and worry, based tional transfers; fund "trustees"-not going to on unknown danger, contribute to social unrest prison for the deception-simply accept federal and economic demoralization. If, as our Constitu­ IOU's and hand over the cash receipts to the U.S. tion tells us, our Federal Government was estab­ Treasuryfor general government expenses; current lished among other things 'to promote the general workers carry ever more retired workers on their welfare,' it is our plain duty to provide for that aching backs, now in the range ofthree workers per security upon which welfare depends." one retiree. In 2029 the ratio will be two to one. So That's a stretch, FDR's citing the General the Ponzi-pyramid scheme unravels; so the $350 Welfare Clause as authority to launch Social billion cash cow laden with tens ofmillions ofvotes Security. Note his cited phrase specifically says sinks into the muck of Welfare State politics. "promote" and not "guarantee," and "general," In the introduction, FEE president Hans Senn­ not "individual," welfare. holz wonders about the applicability of the touted Nonetheless, Social Security began in 1935, the privatization of Chilean social security to the same year as Child-Welfare Assistance, now American situation. He says reform here has to known as Aid to Families with Dependent Chil­ proceed "from the high ground of goodness and dren (AFDC). Social engineering was off and morality; any other ground, no matter how rational running, with both welfare schemes incurring the and economical, is bound to disappoint." wrath of the Law of Unintended Consequences. The note on morality is appropriate. For in the For instance, both Social Security and AFDC, if in upside-down world of Social Security, Abraham different ways, have contributed to the breakdown Ellis could have well come up with the crack: of the American family. "There's a Fraud in Your Future." 0 Abraham Ellis, an English-born lawyer practic­ Dr. Peterson, an adjunct scholar at the Heritage ing in Manhattan, does a solid job in demolishing Foundation, is LundyProfessorEmeritus ofBusiness the shaky case for Social Security-shaky legally, Philosophy at Campbell University in Buies Creek, analytically, and empirically. Rightfully, he tags North Carolina. the scheme as a "fraud," as but one more means, through the years, of extracting heavy taxes from the already tax-squeezed American citizen. The fact is that today, for most working Americans, payroll taxes are bigger than income taxes. 53

The Home McKenzie credits The Home with giving him the "bounds" that he needed, instilling in him by Richard McKenzie discipline and a desire to succeed, and providing Basic Books. 1995 • 228 pages. $23.00 support to start down that road to success. (The Home, for example, paid for his undergraduate Reviewed by Karol Boudreaux education.) Of course, The Home was not perfect. McKenzie concedes that it could not provide him with the kind of emotional support offered by a ccording to statistics, there were 442,000 chil­ loving family: "[i]f there is one thing we missed at A dren in foster care in the United States in The Home, it was having access to the type of 1992, nearly 50 percent more than in 1985. Critics person our mothers could have been." But in his argue that this system is grossly unfair to children, eyes, it was vastly better than life with his father or keeping them bound for years in a legal limbo life on the streets. where parental rights are neither terminated nor Over and over again McKenzie asks readers relinquished, and where social workers have dis­ to consider how children of broken and abusive incentives to move children out of foster care. homes are best cared for. Is a child's experience in Despite the criticisms leveled at the current foster­ the current system really better than life at The care system, when Newt Gingrich suggested that Home? Throughout his account, McKenzie is some children might be better cared for in orphan­ careful to remind his readers that for children in ages his idea was decried as a draconian throwback situations like his, life was necessarily a choice to a crueler time. Was it really? between imperfect alternatives. There was no fairy In The Home, economist Richard McKenzie godmother waiting to carry McKenzie and his argues from personal experience that orphanages brother off to a perfect family. Instead, the choice aren't such bad places after all. This coming-of-age was between a dysfunctional family and institu­ memoir chronicles McKenzie's eight years during tionalized care. McKenzie convincingly argues that the 1950s in a North Carolina Presbyterian or­ for him and for many ofhis peers at The Home, the phanage. Although not designed as a public-policy orphanage offered more and better possibilities for piece, the book nonetheless has a strong public­ a satisfying future than did relatives or foster care. policy message. For some children, life in a well­ To his credit, McKenzie does not sugarcoat life run institution may be preferable to foster care or at The Home. His days were full of hard work in life in a dysfunctional, abusive family. The great fields, milking cows, working in orchards, doing virtue of The Home is that by telling his own story, school work, playing sports, and going to church. and those of fellow orphans at The Home, He had little free time and little in the way of McKenzie makes a compelling case for the insti­ material comforts: no shoes in the summer, too few tutional care of some children. blankets in the winter. When the children's work­ McKenzie's saddest story is of how he got to load increased one fall, McKenzie was forced to The Home. Like most other children at the or­ sell his favorite pet goat, a combination friend and phanage hewas not a full orphan-he did have one confidante. Some of the employees at The Home living parent, his father. But his father drank were racist, and some were downright insensitive heavily and had no steady job. Mter McKenzie's to the children. But others were wonderful people mother committed suicide in 1952, his maternal who became role models for McKenzie and his aunts fought his father for legal control ofhim and friends. his older brother. The aunts won the battle but McKenzie wants his readers to understand "why decided they couldn't care for the young boys (then an orphanage can be a refuge and a source of 10 and 12), and so sent them to The Home, where inspiration and why the overwhelming majority of they joined some 200 other children. those who spent their childhoods there can look Is McKenzie sorry that his aunts made this back on them with fondness and gratitude." At the decision? The answer is an unequivocal "no." end of the book readers do understand just that. Indeed, McKenzie attributes much of his later This makes the final episode of McKenzie's success in life to his experiences at The Home. (He book all the more discouraging. He returned to is an accomplished economist who holds a chaired The Home in 1994 for an annual homecoming. No professorship at the University of California, Ir­ longer a residential orphanage, The Home now vine.) Far from bemoaning his life as a poor caters to "severely troubled children" who stay for orphan, McKenzie argues that The Home was weeks, not years. The annual cost ofcaring for each probably the best thing that could have happened child now averages over $45,000, compared with to him-given the alternatives. less than $3,000 (in 1995 dollars) while he was in 54 THE FREEMAN • JANUARY 1997 residence. The staff-to-student ratio today is 1.5 ideologies have kept attention focused on the to one. The students no longer work in the fields, differences· between groups, contrary to the in­ or do other chores, because as one administrator tent of the prime movers of the civil rights move­ said, "we can't afford to pay them." Are these ment. children better off than McKenzie and his fellow Eastland deftly guides us through these changes, students? focusing on misguided decisions by both the exec­ It is impossible to separate the story of utive and judicial branches of government. The McKenzie's personal triumph over adversity from first major turning point was the shift in emphasis the story of The Home's role as a "refuge and a from disparate treatment to a disparate impact. The source of inspiration." This book demonstrates disparate impact doctrine broadened the defini­ that positive alternatives to the current child­ tion of discrimination to include not merely inten­ welfare system do exist. How sad that a place that tional actions against individuals but any hiring did so much good for so many people was ruined and contracting practices that resulted in polit­ by social theorists. However, it is a blessing that ically unacceptable ratios. Quotas had actually Richard McKenzie has reopened the dialogue been adopted as part of Richard Nixon's Phila­ about orphanages and children. Let us hope that delphia Plan. Soon thereafter, whites­ his positive message will influence the crafting of especially white men-began to experience re­ today's child-welfare policy. D verse discrimination. Ms. Boudreaux is a research associate at Clemson The second juncture occurred in the late 1970s University's Center for Policy & Legal Studies. when the Supreme Court missed the opportunity to repudiate reverse discrimination and informal quotas. Rather than questioning whether govern­ ment should be classifying people by race, it sought to define the circumstances when such classifica­ Ending Affirmative Action: tions were warranted and did so very ambiguously. The net result was that preferences soon got out The Case for Colorblind Justice of control, particularly in the universities and in by Terry Eastland government. Basic Books. 1996 • 219 pages. $23.00 In the late 1980s, we reached another turning point. Set-asides had become the norm in con­ Reviewed by Steven Yates struction, and "cultural diversity" was becoming the official ideology of increasingly thought­ controlled colleges and universities. TheJohnson v. his book is a tour de force. Terry Eastland TransportationAgency decision in 1987 had allowed T looks at the history of civil rights in America preferences to overcome "underrepresentation" and sees two incompatible visions of what a civil without any necessary tie to past or present dis­ rights movement should accomplish. One favors crimination. colorblindness and race-neutrality; the other, New cases started making their way to a some­ color-consciousness and group-based preferences. what different Supreme Court with Reagan ap­ The first might eventually enable us to solve our pointees who tended to oppose racial engineering. racial problems. The second has kept them in­ By letting a lower court's 1989 decision stand in flamed now for over a quarter century. J R. Croson Co. v. City ofRichmond, and in Wards Yet colorblind policy can only remove barriers; Cove v. Atonio that same year, the Court made it cannot guarantee specific, quantifiable results. efforts to rein in set-asides. Yet their defenders So to those who wanted such results, colorblind­ proved too strong, as these decisions were over­ ness was not enough, and the struggle for a turned by the so-called 1991 Civil Rights Act, which colorblind legal system was quickly reversed in held onto the disparate impact doctrine. Hopwood favor of color-consciousness which soon spread to v. University of Texas School of Law was another include other groups. This meant continuing the case which let a lower court's decision stand, but practice of differential treatment, i.e., discrimina­ threw the legal status of affirmative action pro­ tion. The entire focus ofaffirmative action changed grams in higher education into doubt without from efforts to remedy discrimination to quite resolving the issue. Adarand Construction v. Pefia different ones aimed at managing "diversity," called for an application of "strict scrutiny" to i.e., hiring and promoting by group-identity, and racial classifications. This was a step in the right ultimately, engineering a new social order. Multi­ direction, if not the outright repudiation that was culturalism, radical feminism, and other identity- really needed. These cases have brought us nearer BOOKS 55 to what-dare we hope?-is the beginning of the interested in the Corps of Engineers and its repudiation of preferential treatment. connection with "wetlands." Ever since the virtual There are important lessons to be learned from demise of the dam-building program in the 1980s, the legal trajectory of affirmative action. First the Corps has been looking for another mission. and most obviously, government classification by This turns out to be "protection" of wetlands­ group identity for any purpose is inviting trouble, even though there is no authoritative definition since it provides a basis for legally acceptable of what a wetland is. According to the General discrimination. Another is that "temporary mea­ Accounting Office, changes in wetland definition sures" translate into permanent entitlements. A have significantly expanded the area of land under third is familiar: social engineering is not possible, the jurisdiction ofthe Corps, possibly doubling it to since most people resent top-down manipulations perhaps as much as 200 million acres, 40 percent and will thwart them if they can. Terry Eastland's of which is privately owned. wide-ranging account includes more than I have The violation of property rights by the Corps been able to consider here, such as the relationship (and the EPA) is epitomized by the story of John between affirmative action and immigration and Pozsgai of Morrisville, Pennsylvania, who bought the question of ·whether recent immigrants who a dump next to a small streambed. He removed cannot have suffered discrimination in America tons of garbage, thousands of old tires and car ought to be eligible for affirmative action as parts, and replaced this eyesore with clean dirt. He members of "underrepresented" groups. was convicted offilling a wetlands without a permit. The themes of this book are not new; what is His sentence? A prison term of 33 months. There newest here are up-to-date accounts of cases such are many more such stories, all taken from the as Hopwood and Adarand, and of actions such as records and involving people who opposed the the California Civil Rights Initiative. It is a com­ bureaucracy in the courts and in congressional mentary on our times that the same message needs hearings. to be sent out again and again. D The entire book is devoted to showing how the bureaucracies have increased their areas of oper­ Dr. Yates is Adjunct Research Fellow with the Acton Institute for the Study of Religion and ations under the guise of "protecting the environ­ Liberty and the author of Civil Wrongs: What ment" from the legitimate operations ofthe owners Went Wrong With Affirmative Action (ICS Press, of private property. In essence, environmental 1994). regulators claim that man is not a part of nature, a fundamentally flawed concept. People have been on the face of the earth for a very long time and have altered the original environment, developing mines, building roads, lakes, houses, and all sorts This Land Is Our Land: How to End of buildings. People also plant trees, lawns, and the War on Private Property crops, and prevent wild animals from endangering the lives of children. All of these legitimate activ­ by Congressman Richard Pombo and ities depend on property rights and all are the Joseph Farah target of the regulators and their "green" activist St. Martin's Press. 1996 • 224 pages. $22.95 helpers. This Land Is Our Land does a great service in Reviewed by Raphael G. Kazmann bringing into one focus myriad examples of the attack on property rights-read, "property hold­ ers." We need more books like this one to provide his timely book deals with an important sub­ information to people who come under attack by T ject: property rights. After two short introduc­ environmentalists, animal-rights advocates (they tory chapters that review the history of property can discover endangered species faster than biol­ rights and the place ofproperty rights as described ogists can classify them), and assorted government in the Constitution, Richard Pombo and Joseph bureaucracies. But most of all we need to demand Farah get down to business: How are property that before a property owner is condemned for rights faring at present? violating a regulation, the regulation itselfhas been The authors enumerate the legislation that is subjected to cost-benefit analysis and that the already in place and use case histories to describe scientific basis is not the "junk science" that is the deleterious impact on individuals. As a hydro­ polluting our courts and legislatures. 0 logic engineer with 50 years of experience in the development ofwater resources, I was particularly Professor Kazmann lives in Baton Rouge, Louisiana. 56 THE FREEMAN • JANUARY 1997

Against the Tide: An Intellectual dent in his discussion of the "theory of domestic History of Free Trade divergences," which posits that interferences with free trade are not required to correct certain by Douglas A. Irwin "market failures" because purely domestic inter­ Princeton University Press. 1996 • 275 pages. ventions can correct them more efficiently. An $30.00 example of what this means is that we should not use tariffs to reduce unemployment since Reviewed by Robert Batemarco increased government spending could do so at lower cost. I think most readers of The Freeman know what is wrong with this argument. The he economics of free trade has virtually noth­ Austrian insight that the presence of international T ing to do with professional boxing. Yet this boundaries does not change the essence of eco­ book reminded me of the late heavyweight champ nomic activities is sorely needed here. But, alas, Joe Louis and what some sportswriters referred no Austrian school economist except for Gottfried to as his "Bum-of-the-Month Club": the weak field Haberler (in a context which reveals none of his of challengers Louis fought in his prime years as "Austrianism") rates so much as a mention. champion. Who wouldn't be a "bum" by compar­ By the book's final chapter, however, the point ison? Analogously, we see in the second half of this is made that even if an argument for protection scholarly, well-researched book a "fallacy-of-the­ could pass analytical muster, it would never be decade club." Improving the terms of trade, pro­ implemented in a way to achieve its purported tecting infant industries and industries which enjoy benefits. It seems to me that this argument applies increasing returns to scale, correcting distortions every bit as much to domestic interventions as to in domestic labor markets, and creating jobs are restrictions on international trade. among the arguments in favor of protectionism It should be noted that many of the controver­ that author Douglas Irwin scrutinizes. He makes it sies dealt with here are of a somewhat technical clear that even though one or two of these chal­ nature. Thus, Against the Tide is likely to be of lengers may lay a glove on the reigning champion, much greater interest to professional economists free trade, none emerges from the main event a than to the general public. Still, the writing is much victor. livelier than that found in the average economics Before analyzing protectionist fallacies, Irwin book. Despite my reservations about some aspects takes the reader through the development of the of this book, I found myself in full agreement with positive case for free trade. The arguments vary the author's conduding statement: "Yet if the from the quasi-religious "doctrine of universal historical experiences described here continue, economy," which "held that Providence deliber­ free trade will remain one of the most durable and ately scattered resources and goods around the robust propositions that economic analysis has to world unequally to promote commerce between offer for the conduct of economic policy." In other different regions," to the familiar classical analysis words, it's free trade by a knockout. 0 of comparative advantage. While a proponent of free trade himself, the author disappoints somewhat in accepting the idea Dr. Batemarco is director ofanalytics at a marketing that the case for free trade is independent of the research firm in New York City and teaches econom­ case for laissez faire in general. This is most evi- ics at Marymount College in Tarrytown, New York.