VOLUME 61, NO 2 MARCH 2011

Features 6 The Day FEE Was Called before Congress by David T.Beito 13 And the Slump Goes On by Angel Martín Oro 17 An Impossible Job by Richard W.Fulmer 23 Gold and Money by Warren C. Gibson 29 What Economic Freedom Indexes Leave Out by Kevin A. Carson 33 Seasteading: Striking at the Root of Bad Government by Patri Friedman and Brad Taylor Page 4 38 The Canard of “Underutilized Resources” by Tyler Watts

Columns 11 Peripatetics ~ “F” as in Fed by Sheldon Richman 21 The Therapeutic State ~ The Shame of Medicine: Celebrating Coercion by Thomas Szasz 27 Our Economic Past ~ Ideological and Political Underpinnings of the Great Society by Robert Higgs 41 Give Me a Break! ~ Why Do the Poor Stay Poor? by John Stossel Page 17 47 The Pursuit of Happiness ~ Card Check Without Congress by Charles W.Baird

Departments 2 Perspective ~ A Boost for the Managed Economy by Sheldon Richman 4 The TSA Makes Us Safer? It Just Ain’t So! by Art Carden and Steven Horwitz

Book Reviews 42 Realizing Freedom: Libertarian Theory, History, and Practice by Tom Palmer Reviewed by Ben A. Rast 43 Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves Andrew Ross Sorkin Reviewed by Chidem Kurdas Page 41 44 The Hesitant Hand: Taming Self-Interest in the History of Economic Ideas Steven G. Medema Reviewed by Sandy Ikeda 45 Intellectuals and Society Thomas Sowell Reviewed by George Leef Perspective A Boost for the Published by The Foundation for Economic Education Managed Economy Irvington-on-Hudson, NY 10533 Phone: (914) 591-7230; E-mail: [email protected] owhere is it easier to miss the forest for the www.fee.org trees than in discussions of government policy. President Lawrence W.Reed NLate last year the media were saturated with Editor Sheldon Richman debates over the compromise tax package agreed to by Managing Editor Michael Nolan Barack Obama and congressional Republicans. The Book Review Editor George C. Leef package that passed the House and Senate included a Columnists two-year extension of the Bush-era tax-rate cuts for all Charles Baird David R. Henderson Donald J. Boudreaux Robert Higgs income levels, a one-year two-point reduction in the Stephen Davies John Stossel employee’s Social Security and Medicare payroll tax, Burton W.Folsom, Jr. Thomas Szasz and a 35 percent estate tax beginning at $5 million for Walter E.Williams an individual and $10 million for a couple (up from the Contributing Editors current zero rate and heading off the scheduled 55 per- Peter J. Boettke Dwight R. Lee James Bovard Wendy McElroy cent beginning at $1 million).The bill also contained an Thomas J. DiLorenzo Tibor Machan extension of unemployment benefits. Bettina Bien Greaves Andrew P.Morriss What prompted the compromise was the looming Steven Horwitz James L. Payne increase in everyone’s income tax rates on January 1 and John Hospers William H. Peterson Raymond J. Keating Jane S. Shaw Obama’s inability to maintain the middle-class rates while Daniel B. Klein Richard H.Timberlake letting the rate on the top 2 percent of income earners Lawrence H.White rise, as he had promised to do during his campaign. Foundation for Economic Education The first thing to note is that the media and other Board of Trustees, 2010–2011 participants in the discussion have been sloppy (at best) Wayne Olson, Chairman in calling this a debate about tax cuts.Preventing a tax Harry Langenberg Peter J. Boettke increase—even one set on automatic—is not a cut. William Dunn Frayda Levy Jeff Giesea Kris Mauren Under the bill passed the tax rates in effect on Decem- Ethelmae Humphreys Roger Ream ber 31 were the same as those in effect on January 1. Edward M. Kopko Donald Smith How is that a cut? The Foundation for Economic Education (FEE) is a More important, all players in the game have nonpolitical, nonprofit educational champion of revealed themselves to be interventionists. Regardless of individual liberty, private property, the free market, party, they see the economy as something to fix by and constitutionally limited government. turning a knob here, pulling a lever there, and stepping The Freeman is published monthly, except for combined January-February and July-August issues. Views expressed by on a pedal over yonder in order to get the desired per- the authors do not necessarily reflect those of FEE’s officers formance: higher consumer spending, lower unemploy- and trustees. To receive a sample copy, or to have The Freeman ment, and increased investment. It’s as though the come regularly to your door, call 800-960-4333, or e-mail [email protected]. economy were a machine. But an economy is not a The Freeman is available electronically through products and serv- machine. It’s a network of people engaged in myriad ices provided by ProQuest LLC, 789 East Eisenhower Parkway,PO exchanges of goods and services—pursuing end-ori- Box 1346, Ann Arbor, Michigan 48106-1346. More information ented activities informed by subjective values and can be found at www.proquest.com by calling 1-800-521-0600. Copyright © 2011 Foundation for Economic Education, expectations. Such information is largely unavailable to except for graphics material licensed under Creative Commons politicians, bureaucrats, and their economic advisers. Agreement. Permission granted to reprint any article from this issue, with appropriate credit, except “Why Do the Poor Stay That’s why politically managed economies are chroni- Poor?” cally problem-ridden.

THE FREEMAN: www.thefreemanonline.org 2 PERSPECTIVE: A Boost for the Managed Economy

With unemployment at press time officially at 9.4 when advocates of individual liberty were subpoenaed percent, the economy indeed remains in the doldrums. by government investigators because of their views. None of the palliatives that George W.Bush or Obama David Beito tells the story. tried has worked, but instead of realizing that gov- Regardless of what selected statistics indicate, for ernment and its corporate-state policies are the obsta- many people the Great Recession goes on. Angel cles to a flourishing economy, the ruling elite remains Martín Oro discusses the various theoretical explana- committed to the managed economy. So it’s decided tions of what’s happening. not to raise taxes—for two years—and to reduce the Newsweek has declared the U.S. presidency an employee payroll tax—for one year. These expiration impossible job. Did it therefore recommend shrinking dates are signs of political management. Understand- the size and scope of government? Richard Fulmer ing the necessity of a freed market would lead one analyzes the mainstream news magazine’s solution. to call for permanent—not temporary—government Though expelled from the monetary system long retrenchment. ago, gold refuses to go away.Why does it have such an Some questions were apparently overlooked. If tax allure, and will it make a comeback? Warren Gibson rates may go up in two years, why make tax-sensitive begins a two-part series on what some call real money long-term plans? If the payroll tax is to be two points and Keynes called the “barbarous relic.” lower in 2011, that implies it will most likely be two When the United States was demoted from “totally points higher in 2012. Will people spend the extra free” to “mostly free” in a recent measure of economic money next year or save it in anticipation of the tax freedom, Kevin Carson wondered when it was “totally increase to come? In any event, they will need to make free.”That depends on whose freedom matters to the an unpleasant adjustment in their household economies measurers, he explains. on January 1, 2012. People do think long-term, even if Advocates of freedom constantly look for an effec- politicians don’t. tive strategy to roll back the power of government. Of course, there was scarcely an acknowledgment What about establishing freedom outside government’s during the debate that money subject to taxation reach on the high seas? Patri Friedman and Brad Taylor belongs to someone and not the State. You’d think it see promise in that approach. magically appears in a common pot and the govern- Much of the impetus for government stimulus of ment’s job is to ladle it out effectively and fairly. the economy comes from the notion of “underutilized In objecting to politicians’ taking money through resources.” Private spending is insufficient to put labor taxation, I am not unmindful that in America much and capital to work fully, so government spending will money is made through what sociologist Franz Oppen- have to do it. Tyler Watts exposes the bad economic heimer called “the political means” (as opposed to the theory within. economic means: voluntary exchange). The plutocracy Our columnists have these enlightening offerings: is real, thanks to the centralizing effect of much gov- Thomas Szasz explores how psychiatry thinks about ernment intervention and the nature of politics. But coercion. Robert Higgs revisits Lyndon Johnson’s Great the way to prevent accumulations of wealth via the Society.John Stossel asks why some people in the world political means is not taxation but elimination of privi- are stuck in poverty. Charles Baird warns of union card lege—that is, all competition-stifling interventions, including check by nonlegislative means, while Art Carden and barriers to self-employment.The answer to government Steven Horwitz, having been bombarded with the power can never be more government power. All that message that the TSA keeps us safe, respond, “It Just gets you is bigger government. Ain’t So!” Books on liberty, too-big-to-fail, economic self- * * * interest, and intellectuals have occupied our reviewers. In 1950 FEE founder Leonard E. Read faced a hos- —Sheldon Richman tile congressional committee. Those were the days [email protected]

3 MARCH 2011 The TSA Makes Us Safer? It Just Ain’t So!

BY ART CARDEN AND STEVEN HORWITZ

e both have contributed to the debate liberal press, such as the New York Times or The Nation. about the Transportation Security Adminis- Actress Whoopi Goldberg and her left-leaning col- Wtration (TSA) since the furor erupted over leagues on ABC’s The View agreed that those protesting the new “enhanced pat-downs” and backscatter scan- the invasive techniques by slowing down the process at ners, which some call “porno scanners.” This debate airports are equivalent to terrorists. It is striking how has shown how few are the real defenders of liberty, quickly the left adopts “America: love it or leave it” and since even the “liberal” media have lined up with forgets that dissent is the highest form of patriotism the government. The debate has also demonstrated when their guys are in power. Would these people people’s willingness to be bending over backward believe there is a tradeoff to excuse the TSA if a between liberty and secu- Republican were in the rity. In our view, no such White House? We don’t tradeoff exists: More lib- think so. erty and less government Beyond the media intervention would pro- treatments, the idea that vide better security. we should trade off a little One example of media liberty to get more secu- complicity is a Thanks- rity presents a false choice. giving Day column in The TSA does not provide which Debra Saunders security. It provides what called the enhanced pat- security experts like downs “freedom fondles.” Bruce Schneier call “secu- Jonathan Tobin Reason editor Matt Welch rity theater.” As one of us assembled two sets of links for the Hit & Run blog cat- (Carden) wrote recently, the TSA agent with his hand aloguing favorable media statements about the new in your pants is not there for your safety. He is there to techniques. We have been advised by the Los Angeles give you the illusion of safety.The TSA dog-and-pony Times to “shut up and be scanned.”The Santa Fe New show is just the government’s very expensive way of Mexican tells us we should “stand, or bend over, on saying,“We’re doing something about this.” principle and suffer attendant indignities,” while the Rochester Post-Bulletin tells us to “grin and bear it.”The Art Carden ([email protected]) teaches in the department of economics Louisville Courier-Journal asks,“At what point did Amer- and business at Rhodes College and writes a weekly column, "The icans turn into a nation of crybabies?” Economic Imagination," at blogs.Forbes.com/artcarden. Contributing editor Steven Horwitz ([email protected]) writes a column at What’s particularly stunning is how often these TheFreemanOnline.org and is the Charles A. Dana Professor of Economics defenses of TSA procedures came from the (so-called) at St. Lawrence University.

THE FREEMAN: www.thefreemanonline.org 4 The TSA Makes Us Safer? IT JUST AIN’T SO!

If we were serious about security,we would do three information and in the presence of important cognitive things. First, we would eliminate the TSA. It makes fly- biases, sources of reliable and unbiased information are ing less convenient and gives people an incentive to indispensable—especially when so many lives are on drive. Per passenger mile, driving is far more dangerous the line. than flying. The evidence suggests that more people The PAM started as a Defense Advanced Research will die on the roads than would have died in terrorist Projects Agency (DARPA) project to allow people to attacks on planes because they are discouraged from purchase very small contracts that would pay out in the flying by the TSA and its new more invasive proce- event of a given combination of outcomes.The project dures. drew fundamentally on the insights of F.A. Hayek and Second, we should give the airlines responsibility for James Buchanan, who argued that the process of security.The discovery process of genuine market com- exchange itself reveals crucial information and gener- petition among airlines would determine the degree ates order. In the early trials of the project, traders were of security passengers are comfortable with, while also asked to predict different combinations of events that avoiding techniques they find invasive. What profit- might result from adopting a particular policy. seeking firm would want to alienate its customers by taking nearly nude photos or touching “their junk”? The Need for Information It’s the airlines that stand to lose physical capital and s an aside, the furor over the Policy Analysis Mar- reputation, so they have every reason to get it right. Aket and the ratcheted-up procedures by the TSA They will certainly be more responsive to fliers’ needs are especially interesting in light of the controversy over than a monopoly would. WikiLeaks. Some have denounced WikiLeaks and its This second point is the response to the claim that founder, Julian Assange, for endangering American we are corporate shills looking to advance a privati- lives, and we remain agnostic on this until the fury has zation agenda.While there might be some cost savings settled. Even if WikiLeaks is morally culpable for from privatization, this might also do more harm than endangering innocent people through its leaked docu- good since a “privatized” TSA would do a lot of ments, we would be willing to bet that those who were the same invasive things, only the State would be able instrumental in canceling the PAM in 2003, thereby to shift blame to the private sector. As a mono- thwarting the open flow of information, are responsible poly, a “privatized” TSA would still lack the ability to for more casualties by several orders of magnitude.As a respond to customers’ desired tradeoffs. What we need rule, more information is better than less. is not “privatization” but “de-monopolization.” Bruce Schneier and others argue that the best way Finally, we would get serious about using decision to fight terrorism is to identify terrorists rather than markets for terrorism detection. This idea met with scanning grandmothers or treating someone’s fierce resistance when first introduced—politicians and urostomy bag as if it were a possible explosive device. pundits said no one should “profit from terrorism.” One of the best ways to do this would be to develop a These critics missed the point, though. As economist terrorism prediction market like the one proposed by Robin Hanson has written, decision markets are a very Hanson. high-efficiency way to obtain information, even when The TSA should be abolished and serious, competi- the payouts are small. tive alternatives should be explored. As Carden argued Hanson points out that a crucial failing of interna- on Forbes.com, “Full Frontal Nudity Will Not tional intelligence gathering is that information is Make Us Safer: Abolish the TSA” (emphasis added, incomplete and/or flawed. Ironically (and tragically), www.tinyurl.com/2drrzz4).The problem with govern- the political outcry over the Policy Analysis Market ment-run airport security is that it eliminates the mar- (PAM; summarized on Hanson’s website: www.tinyurl. ket’s search process that would otherwise allow people com/6879e3) demonstrated precisely why such a mar- to discover the most effective and customer-friendly ket is necessary.In the face of incomplete and incorrect security methods.

5 MARCH 2011 The Day FEE Was Called before Congress

BY DAVID T. BEITO

n 1950 Leonard E. Read faced one of the most idation to attack conservative and libertarian critics of difficult challenges of his life as he prepared to the growing federal bureaucracy. Iappear before a hostile congressional committee. Why have most historians ignored these witch His friend W.C. Mullendore warned that the commit- hunts? Part of the reason is undeniably the political bias tee was out to destroy him: “You should be under no of historians.They tend to be sympathetic to the New illusion whatever but that the intention is to smear and Deal and Fair Deal and, in many cases, causes much fur- not look [for] information, enlighten- ther to the “left.”This has encouraged ment and the philosophy of freedom. a natural human tendency to overlook You are going against a bunch of the dark side of those causes and an cutthroats who have very vicious unwillingness to sympathize with motives.” conservatives and libertarians who Read was not the only target of may have been their victims. But this committee. Even more in the some of it has to do with the methods crosshairs was Edward Rumely, who used by the New Deal witch hunts, had refused to divulge the names of which were often informal and those who had purchased controver- avoided head-on attacks. For example, sial books he published. in New Deal or Raw Deal? Burton Fol- When modern historians, most of som describes how Franklin Roo- whom write from a left-wing per- sevelt worked closely with his good spective, chronicle the “witch hunts” friend and Treasury secretary Henry of the 1940s and 1950s, they rarely Morgenthau to use the Bureau of have in mind the likes of Read and Internal Revenue against political

Rumely.Neither fits their formal vic- Edward Rumely was hounded by Congress opponents. Roosevelt arranged audits tim profile. Read, of course, was the and columnists for his opposition to the New against such prominent opponents as Deal and Fair Deal. founder and president of FEE and the the wealthy anti-New Dealer Moses future publisher of The Freeman.Mullendore was his Annenberg, publisher of the Philadelphia Inquirer; for- close associate and a trustee of the organization. mer Treasurer Secretary Andrew Mellon; and conserva- Rumely was the president of the Committee for Con- tive U.S. Rep. Hamilton Fish, who represented stitutional Government, a group that defended the free Roosevelt’s hometown in New York. market and limited government. In addition to informal pressure, the New Deal Read and Rumely were not alone. Ever since 1933, witch hunt also included congressional investigations. many prominent New Deal and later Fair Deal David Beito ([email protected]) is a professor of history at the Democrats had relied on the same methods of guilt by University of Alabama and a contributor to the group blog Liberty and association, character smears, and other forms of intim- Power (www.libertyandpower.com).

THE FREEMAN: www.thefreemanonline.org 6 The Day FEE Was Called before Congress

The first of these was the Special Committee on Lob- found common cause with his friends publisher Frank bying Investigations (better known as the Black Com- Gannett and conservationist and civil-libertarian Gif- mittee)—named after the committee chairman, Senator ford Pinchot. On the same day that Franklin D. Roo- Hugo Black of Alabama. Black was a committed New sevelt announced his court-packing plan in 1937, the Dealer. From 1933 on he targeted companies and trio organized the Committee for Constitutional Gov- organizations that opposed Roosevelt’s policies. In ernment (CCG). Gannett wrote the checks, and 1936 he went after the American Liberty League, Rumely ran day-to-day operations. In fighting the which united Democrats and Republicans who court plan, the CCG led perhaps the first successful opposed the New Deal. In this effort Black pioneered offensive against the New Deal and pioneered the use the use of the so-called dragnet subpoena. He also of direct mail. teamed with the Federal Communications Commission Despite an overwhelming three-fourths Democratic to require Western Union, a private company, to turn majority, the Senate rejected the court plan. It was the over copies of thousands of telegrams sent by New first major congressional defeat for the Roosevelt Deal opponents.At the time the FCC required Western administration. Hugo Black, however, received the ulti- Union to keep a copy of each telegram sent. mate reward for his loyalty when Roosevelt nominated The next phase in the New Deal him to the Supreme Court the same year. witch hunt began in 1937, when Roo- Not even news that Black had once sevelt tried to expand the U.S. Supreme belonged to the Ku Klux Klan deterred Court after it had overturned key New Roosevelt from nominating him. Deal legislation. No one was more After the court plan lost, New Deal important in mobilizing public opposi- Democrats almost immediately launched tion to the “court-packing scheme” than a counterattack against the CCG. In 1938 Edward A. Rumely. Rumely was born in Senator Sherman Minton of Indiana, LaPorte, Indiana, in 1888 and became another ardent New Dealer and Black’s wealthy as a manufacturer of tractors. He successor as head of the lobbying com- got involved in politics as an enthusiastic mittee, announced a sweeping congres- supporter of Franklin’s distant cousin, sional investigation targeting forces

Theodore Roosevelt. Rumely depicted FEE founder Leonard Read was called opposed to “the objectives of the admin- himself as a Theodore Roosevelt Progres- before Congress in 1950, after the istration.” Minton had actually been Feds raided FEE’s headquarters. sive for the rest of his life. (Favoring TR Roosevelt’s first choice for the Supreme and limited government was a curious combination Court appointment that went to Black, but Minton had that Rumely and others were able to rationalize some- turned it down because he preferred to stay in the Sen- how.) ate. At the top of his Senate agenda was the investiga- In 1915 Rumely purchased the New York Evening tion of the CCG. He issued yet another dragnet Mail with funds borrowed from an American citizen subpoena, this time for the CCG’s records, and sent his living in Germany. Rumely later claimed he did not staff down en masse to the CCG’s office, where they know that all such loans had first to be funneled began copying files. After watching this go on for sev- through the German government. Nevertheless, he was eral hours, Rumely ordered them out, charging them convicted under the Trading with the Enemy Act and with an illegal “fishing expedition.” served time.Although President Calvin Coolidge issued Minton’s undoing was his proposed bill to ban a full pardon, Rumely’s enemies brought the case up newspapers from publishing articles known to be false. repeatedly to discredit him over the next three decades. The public backlash over a perceived threat to free During the 1930s he turned against the emerging speech led to the collapse of the investigation. Like New Deal, which he feared was undermining individ- Black, however, Minton’s loyalty to the New Deal was ual liberty by centralizing power in Washington. He ultimately rewarded with an appointment to the

7 MARCH 2011 David T. Beito

Supreme Court by his former Senate ally, President Like Minton, Anderson subpoenaed the names of Harry S.Truman. the CCG’s contributors.After Rumely refused to com- The CCG continued to be a stumbling block for ply, the Committee cited him for contempt. A court the New Deal and later the Fair Deal. After 1937 the acquitted him in 1945, finding that the subpoena was committee distributed over 82 million pieces of litera- improper because the CCG was not a political organi- ture criticizing such policies as expanded government zation.The most important result of this event was the medical insurance, public housing, and labor legislation. Lobbying Act of 1946, which required lobbies (broadly In an article for Colliers, Interior Secretary Harold Ickes defined) to disclose the names of all contributors of presented the administration’s case against the CCG. $500 or more. Although the CCG decided to register He called it a “devilish petard” and said it had been under protest, it found an inventive way around the “arousing mob spirit, that miasmic, bloodthirsty reporting requirement, or so it thought. Instead of degrading emanation out of the dim past.” accepting cash contributions over $490, it took them in The New Deal witch hunt reached its apogee dur- the form of book orders. ing World War II. Once the United States entered the After Truman’s 1948 upset victory, Fair Deal war, Roosevelt put constant pressure on Attorney Gen- Democrats promised again to scrutinize lobbies such as eral Frances Biddle to crack down on the CCG. The New Republic declared critics of his foreign policy. Most triumphantly that the “New Deal is notably he wanted Biddle to prose- The New Deal witch again empowered to carry forward cute the publisher of the Chicago Tri- the promise of American life” and bune, Robert McCormick, a powerful hunt reached its that it was high time to investigate critic of the New Deal and entry into “the great lobbies and the millions the war, for sedition. To his credit, apogee during World they have spent . . . to defeat social however, Biddle resisted this pressure. War II.Truman’s legislation.”The AFL and CIO agreed Finally, though, he began to relent by, on this goal, as did two of the best- for example, ordering wiretaps on key Fair Deal supporters read columnists in the United States: administration critics such as Joseph launched their own Drew Pearson and Walter Winchell. Patterson, publisher of the New York One of the early targets was FEE, Daily News. In addition, the postmas- after the war. which Pearson condemned on the ter general barred dozens of anti- grounds that it was “flooding the administration periodicals from the country with propaganda aimed at mails. Finally, and much more quietly, Roosevelt undermining the Marshall Plan, rent control, aid to ordered Treasurer Secretary Morgenthau to launch a education, and social security.” new round of tax audits on such prewar noninterven- After a failed effort to set up a Senate-House joint tionists as Rep. Fish. committee, the House assigned the investigation to a In 1944 a U.S. House committee chaired by Clinton committee led by Rep. Frank Buchanan of Pennsylva- Anderson of New Mexico launched a second major nia. Buchanan was not only a stalwart Fair Dealer but lobbying investigation. Many New Dealers, notably had his own ax to grind because the CCG had success- Wright Patman, were upset about the CCG’s campaign fully fought expanded public housing, a goal he had for a constitutional amendment to limit taxes to 25 per- championed. He defined lobbying in the broadest pos- cent of income. Patman characterized the CCG as the sible terms to include groups that had an indirect influ- “most sordid and most sinister lobby ever organized.” ence on the formation of public opinion. The He charged that it represented the “Quisling reserves” committee sent out a probing questionnaire to 166 of Hitler because it was trying to “sap the power and businesses and organizations, most of them opponents strength of this government at its tenderest spot, its of the Fair Deal. The Buchanan committee ignored purse strings, in time of war.” lobbying by government agencies, but perhaps for the

THE FREEMAN: www.thefreemanonline.org 8 The Day FEE Was Called before Congress sake of balance a questionnaire also went to the Civil While most of Read’s testimony explained FEE’s Rights Congress, an organization with close ties to the mission to inform and educate Americans about free Communist Party. markets, he also challenged the legitimacy of the com- When Buchanan’s staffers, armed with a dragnet mittee’s investigation. To Read, under the committee’s subpoena, arrived in force at FEE’s headquarters in all-inclusive definition, lobbying “becomes synonymous early 1949, Read reluctantly cooperated. It became with communication of thought—all thought. The readily apparent to him, however, that the investigators Bible communicates ideas that may affect legislation. were leaving no stone unturned in the hope of finding ...The list is endless.” something—anything—to discredit the organization. It Rumely agreed to answer all the Buchanan com- was also clear that the committee had formed a work- mittee’s questions except the one asking the names of ing alliance with key New Deal interest groups and those who had purchased The Road Ahead.Pointing to journalists. Almost immediately after the committee the First Amendment, he asserted that the committee rummaged through FEE’s offices, someone leaked the had “no power to go into a newspaper publisher and information to Drew Pearson. Pearson’s column pub- say, ‘Give me your subscription list.’ And you have no licized the best-known names on FEE’s “secret” power to come to us.” If the House wanted to cite him contributor list and quoted liberally from internal cor- for “contempt and bring me to trial,” it would “get an respondence. Mullendore expressed education on the Bill of Rights.” his outrage about the leak in a letter By this point the press had turned to Buchanan: “Those who seek to Immediately after the against the Buchanan committee and extend the power of government try its methods. Editor and Publisher found to close the mouths of citizens who Feds ransacked FEE, it guilty of “an invasion of the guaran- dare to oppose them. . . . Your information they teed right of the American people inquisitorial and extremely burden- to own, hire or use a printing press some demand for information seized was leaked to without interference.” Similarly, the which you have no moral right to Cleveland Plain Dealer called the inves- demand is a most alarming example a popular national tigation “Fair Deal Intimidation.” Even of the use of this means of intimida- columnist. Buchanan’s hometown paper, the Pitts- tion.” burgh Post-Gazette, condemned the For its part, the CCG ramped up probe. Frank Chodorov,a leading liber- its anti-Fair Deal efforts by promoting purchases of tarian and future editor of The Freeman, asked during John T. Flynn’s book The Road Ahead.Flynn warned the period: “Why did the Committee want these that pro-New Deal pressure groups were pushing the names? Simply to discourage support of the anti-col- United States, like Britain, into socialism. Harper & lectivist organizations by harassment and intimidation. . Brothers sold the book for $2.50, but the CCG cut the ..Buchananism, then, is a step in the direction of price to a dollar, thus encouraging bulk purchases. thought control.” From 1949 to 1950 the CCG distributed an amazing The Buchanan committee presented three separate ten million copies. contempt resolutions for a House floor vote in August Despite Mullendore’s warnings, Read agreed to tes- 1950. Each had the support of most Democrats. The tify before the committee. Ever the optimist, he used first and most-publicized centered on Rumely.The sec- that venue to educate the members, and he had some ond resolution focused on Joseph Kamp, head of a success. He found a sympathetic audience among the much smaller group, the Constitutional Education leading Republican members, and even Carl Albert, a League. Unlike Rumely, Kamp had stated he was will- member of the majority, admitted Read was “far more ing to cooperate but was unsure exactly what the effective than the average buttonhole artist, so-called, Buchanan committee wanted from him.The last of the around the capital.” contempt resolutions dealt with William Patterson,

9 MARCH 2011 David T. Beito head of the Civil Rights Congress. Like Rumely, he exulted that he “got real satisfaction out of the convic- had refused to reveal the names of contributors. tion last week of Edw.A. Rumely...[a] convicted pro- In the floor debate Rep. John W. McCormick, the German agent.” Few newspapers or columnists agreed Democratic majority leader, went to bat for the com- with Winchell. Even The New Republic and Drew Pear- mittee. In language as extreme as just about any smear son, who had egged on Buchanan at the beginning, uttered by Sen. Joseph McCarthy, he condemned steered clear of the controversy. Rumely as “a spy in World War I, and a man who is nothing but a Fascist, who is an opponent of American The Last Laugh institutions and American Government.” Virtually all t was Rumely who had the last laugh, however, when those opposed to the resolution were conservatives, Iin 1953 the Supreme Court overturned his convic- with the notable exception of Rep.Vito Marcantonio. tion 7-0. Two justices recused themselves because of As the lone American-Labor Party member in the possible conflicts of interest. In a separate opinion the House, he was easily the most left-wing person in Con- Court’s most “liberal” members, William O. Douglas gress. Marcantonio portrayed himself as absolutist and Hugo Black, endorsed Rumely’s free speech and champion of free speech even for a “fascist” like privacy rights in no uncertain terms.When it turned to Rumely. If Rumely’s conservative the Buchanan committee’s demands it defenders truly valued free speech, declared: “If the present inquiry were he challenged, they would also vote The Supreme Court sanctioned a publisher would be com- against the contempt resolution for pelled to register as a lobbyist with the Patterson. Despite his claims, Mar- eventually overturned federal government, would be sub- cantonio’s record on free speech was Rumely’s contempt jected to harassing inquiries. A at best mixed. During World War II, requirement that a publisher disclose for example, he had urged tough resolution as a the identity of those who buy his action against critics of the war. violation of free books, pamphlets or papers is indeed The final vote on the Rumely the beginning of surveillance of the resolution was close but went speech and privacy press.” against him. Nearly all Republicans, rights. By this time some prominent New joined by Marcantonio and 42 Dealers were losing their appetite for Democrats, almost all from the investigative crusades against the con- South, opposed it. servatives and libertarians. For one thing, they were too The Patterson contempt resolution also passed but busy beating back McCarthyism. By championing by a much more lopsided majority. Although the Rumely’s free speech, they could better fend off debate took place at the height of the McCarthy era, charges of hypocrisy. Even before the House cited Republicans cast virtually all their 109 votes against it. Rumely for contempt, for example, the pro-New Deal By contrast, those southern Democrats who had columnist Marquis Childs pointed to him as an exam- opposed the Rumely resolution were not about to vote ple of how the First Amendment protected “rightists” against the Patterson resolution even though the just as much as communists. In addition, lawyers for charges were essentially the same. For the southerners, two victims of McCarthyism, Owen Lattimore and race and anticommunism apparently trumped all other Corliss Lamont, cited the Supreme Court ruling in considerations. defense of their clients. Rumely had become a case In April 1951 a federal judge gave Rumely a six- study in the need to protect free speech. It was quite a month suspended sentence for contempt and a $1,000 turnabout for a man whom the left only a few years fine, saying he would have sent him to jail save for his earlier had roundly condemned as a fascist, a federal advanced age. Rumely’s old nemesis, Walter Winchell, convict, and a German spy.

THE FREEMAN: www.thefreemanonline.org 10 Peripatetics

“F” as in Fed

BY SHELDON RICHMAN

he Federal Reserve, America’s fatally conceited employment—the authors use the following criteria to monetary central planner, is not terribly popu- assess its record: “the relative extent of pre- and post- Tlar these days—which is cause for hope—and Federal Reserve Act price level changes, pre- and post- now we have a report card on the entire Fed era that Federal Reserve Act output fluctuations and business strongly supports the view that we’d be better off with- recessions, and pre- and post-Federal Reserve Act out it.At the very least, as the authors suggest, the bur- financial crises.” The Fed has done poorly on every den of proof is squarely on those who would retain the count. No one familiar with the Mises-Hayek critique central bank. of central planning will be surprised. Central banking The report card comes in the form of a working is not equivalent to comprehensive planning of the paper from the Cato Institute: “Has the Fed Been a economy, but money is the most pervasive good and Failure?” by George A. Selgin,William D. Lastrapes, and monetary engineers suffer the same insurmountable Lawrence H.White. ignorance as any central planner. The authors state in their abstract: I can only hit the paper’s highlights here.

As the one-hundredth anniver- Inflation sary of the 1913 Federal Reserve The burden of elgin et al. pronounce the Fed a Act approaches, we assess whether proof is on those Sdismal failure in controlling infla- the nation’s experiment with the tion. “[F]ar from achieving long-run Federal Reserve has been a success who would retain price stability, it has allowed the or a failure. Drawing on a wide the central bank. purchasing power of the U.S. dollar, range of recent empirical research, which was hardly different on the eve we find the following: (1) The Fed’s of the Fed’s creation from what it had full history (1914 to present) has been characterized been at the time of the dollar’s establishment as the by more rather than fewer symptoms of monetary official U.S. monetary unit, to fall dramatically.” and macroeconomic instability than the decades The value of the dollar was essentially stable from leading to the Fed’s establishment. (2) While the Fed’s the late eighteenth century to the second decade of the performance has undoubtedly improved since World twentieth century! “A consumer basket selling for $100 War II, even its postwar performance has not clearly in 1790,” they write, “cost only slightly more, at $108, surpassed that of its undoubtedly flawed predecessor, than its (admittedly very rough) equivalent in 1913.” the National Banking system, before World War I.(3) And since that time? “[T]hereafter the price soared, Some proposed alternative arrangements might plau- reaching $2,422 in 2008. ...[M]ost of the decline in sibly do better than the Fed as presently constituted. the dollar‘s purchasing power has taken place since We conclude that the need for a systematic explo- 1970, when the gold standard no longer placed any ration of alternatives to the established monetary sys- limits on the Fed’s powers of monetary control.” tem is as pressing today as it was a century ago. The dollar has lost 95 percent of its value since the Fed came into existence.

In light of the Fed’s defined mission—monetary Sheldon Richman ([email protected]) is the editor of The Freeman and support for economic growth, stable prices, maximum TheFreemanOnline.org.

11 MARCH 2011 Sheldon Richman

Deflation [A]lthough contractions were indeed somewhat he authors say that since the Great Depression the more frequent before the Fed‘s establishment than TFed has rid the economy of deflation (defined as after World War II (though not, it bears noting, falling prices), which was a feature of the late nine- more frequent than in the full Federal Reserve teenth-century economic landscape. Economists, sample period), they were also almost three including Fed chairman Ben Bernanke, generally deem months shorter on average, and no more severe. deflation as something to be avoided at almost all costs, Recoveries were also faster, with an average time so they would give the Fed kudos in this respect. But from trough to previous peak of 7.7 months, as Selgin et al. point out (as have others, such as Steven compared to 10.6 months.Allowing for the recent, Horwitz, in the January/February 2010 Freeman, 18-month-long contraction further strengthens www.tinyurl.com/ycqzyyv) that what matters is not these conclusions. deflation per se but the kind of deflation: Moreover, the Fed has violated traditional standards Harmful deflation—the sort that goes hand-in- by bailing out insolvent banks. Selgin et al. reject the hand with depression—results from a contraction in “too big to fail” doctrine, arguing that the fear-mon- overall spending or aggregate demand for goods in a gering about “systemic risk” is unsubstantiated. Bail- world of sticky prices. As people ing out the creditors of insolvent try to rebuild their money bal- institutions, as the Fed did during the ances they spend less of their The dollar has lost current financial crisis, has increased income on goods. Slack demand 95 percent of its the future exposure of the public by gives rise to unsold inventories, reinforcing moral hazard—encourag- discouraging production as it value since the Fed ing excessively risky behavior by cre- depresses equilibrium prices. came into existence. ating the expectation of government Benign deflation, by contrast, is rescue. In the process the Fed has driven by improvements in aggre- gone from lender of last resort to gate supply—that is, by general reductions in unit allocator of capital—an ominous move toward central production costs—which allow more goods to be planning. produced from any given quantity of factor and The authors do not endorse the pre-Fed system, which are therefore much more likely to be quickly which was heavily regulated by the national and state and fully reflected in corresponding adjustments to governments. Indeed, for most of American history actual (and not just equilibrium) prices. interstate and intrastate branch banking was illegal, pro- Historically, benign deflation has been the far ducing an industry of uncompetitive and undiversified more common type. banks. During roughly the last quarter of the nineteenth Nor do they explore the free-banking alternative, century, prices in the United States declined 37 per- though Selgin and White are well-known advocates of cent—1.2 percent a year on average. That’s what the it. Instead they confine their analysis to various rules Fed has saved us from, thank you very much. that would take away the Fed’s discretionary power over the money supply.These would be improvements Frequency and Duration of Recessions but a far distant second to free banking. gain, the pre-Fed record is better than the Fed’s The authors leave no doubt that “the Fed‘s poor Aperformance. Drawing on the latest research, the record calls for seriously contemplating a genuine authors conclude: change of regime.”

THE FREEMAN: www.thefreemanonline.org 12 And the Slump Goes On

BY ANGEL MARTÍN ORO

fficial economic statistics and the underlying The slow recovery from the recession presents an economic reality sometimes differ starkly. analytical challenge, provoking debate among macro- OSuch discrepancies may be almost inevitable economists and pundits. As usual, there are many when a small group of macroeconomic experts sets the diverse explanations, some complementary, some con- official dates for peaks and troughs of aggregate eco- tradictory. To an important extent these divergences nomic activity.The Business Cycle Dating Committee reflect different conceptions of the business cycle. I will of the National Bureau of Economic Research describe and briefly analyze four of the most common (NBER) recently “determined that a trough in business explanations. activity occurred in the U.S. economy in June 2009.” According to the official announce- The Keynesian Story ment, this date “marks the end of the The official et us start with the Keynesian recession that began in December 2007 Lstory, filtered through the writ- and the beginning of an expansion.” unemployment rate ings of Paul Krugman. (There are Yet some data and sound theory, is still over 9 percent, much more nuanced versions of which take into account more than Keynesianism than Krugman’s.) In simple macroeconomic aggregates— private long-term his weekly column and popular blog higher GDP good, lower GDP bad— at the New York Times,Krugman indicate that the U.S. economy has not investment remains declares that the slow recovery and fully recovered.The official unemploy- at low levels, and the persistence of high unemploy- ment rate is still over 9 percent, private ment arise from a “lack of aggregate long-term investment remains at low even GDP growth demand,” which is the main cause of levels, and even GDP growth has been has been weak. the poor sales by private businesses weak, in spite of the great increase in and hence of the high unemploy- government spending for final goods ment rate. and services (which adds directly to GDP, defined as In his characteristic self-confident argumentative consumption plus investment plus government spend- style, Krugman asserts,“Businesses aren’t hiring because ing plus net exports). of poor sales, period, end of story.”This sentence is fol- The weak recovery is clearly recognized by policy- lowed by a graph showing a substantial increase since makers, who have advocated and implemented addi- late 2008 in the percentage of small businesses that tional fiscal and monetary stimulus by the Obama named “poor sales” as their “single most important administration and perhaps the Federal Reserve. They seem to take for granted that an unexpectedly slow Angel Martín Oro ([email protected]) is a graduate student in economics and research fellow of the Instituto Juan de Mariana recovery requires even more expansionary government (www.juandemariana.org), a leading free-market think-tank in Spain. policies to keep the economy on track. The author thanks Robert Higgs for his assistance.

13 MARCH 2011 Angel Martín Oro problem.” The remedy for this malaise is, of course, Economists from this perspective usually refer to more public spending: “[T]he best thing government how the velocity of money—the average frequency could do to help business would be to spend more, with which a unit of money is spent in a specific increasing demand.” period—collapsed in the second half of 2008.To com- However, as many economists have written in recent pensate for this reduction, monetarists recommend an years, Krugman’s focus on aggregate demand is simplis- expansionary monetary policy by the central bank. tic, to say the least. First, one needs to ask, why is the Although one might think that Fed Chairman Ben growth of aggregate demand so weak? It may very well Bernanke’s strategy has been to respond precisely in be that spending less and saving more is a healthy reac- this way,some economists, such as Scott Sumner, argue tion to the previous unsustainable boom. Thus weak otherwise. Sumner claims the Fed’s monetary policy demand might be an inevitable consequence, not the since the end of 2008 has actually been contractionary deep cause, of the current bust. relative to what the economy needed at that time. Bernanke Furthermore, what particular parts of the econ- should have been more aggressive, Sumner argues, to omy—which markets or industries—suffer most from avoid the contraction of nominal GDP that finally low sales? As Austrian economists argue, we need to occurred. disaggregate the macroeconomic This explanation suffers from sev- picture to understand what is going eral problems, similar to the short- on. Nevertheless, such disaggregated The monetarist story, comings of the Keynesian story: (1) analysis does not seem to be impor- usually presented as excessive aggregation of key con- tant for some Keynesians, such as cepts—making extensive use of GDP Krugman and Brad DeLong. In the free-market as the key indicator of the cycle does November 2009, DeLong wrote, “At alternative to the not allow the monetarists to explain this point, anything that boosts the the crux of the matter, which is the government’s deficit over the next Keynesian one, shares real microeconomic distortions in the two years passes the benefit-cost productive structure of the economy test—anything at all.” its excessive that had been created during the aggregation of key boom; (2) the analysis of the crisis and The Monetarist Story the sharp credit contraction as exoge- he monetarist story of Milton concepts. nous shocks, rather than conse- TFriedman’s followers is usually quences of the previous unsustainable presented as the free-market alternative to the Keyne- credit expansion. From Sumner’s point of view, sian interpretation. However, these explanations have it seems that the fall in nominal GDP was something important though subtle points in common. to be avoided. In simple terms the monetarist thesis focuses mainly on sudden bank credit contraction. Monetarists argue The Austrian Story: The Adjustment Problem that the accumulation of vast amounts of excess or economists drawing on the Austrian story, reserves by banks—which basically means that instead FGDP contraction was a symptom of the bust, of lending money to the private sector, they are keep- the inevitable hangover after a credit spree that led ing it to themselves—has negative effects for the whole to bad decisions—malinvestments and excessive lever- economy. Given that credit is usually considered the age. As the Austrian business cycle theory emphasizes, economic equivalent to the human body’s blood circu- the economy has to go through a process of adjust- lation, a credit contraction is seen as invariably danger- ment that cleanses the massive errors resulting from ous. If a person suffers a sudden loss of blood, the cure economic decisions taken in the past. This restructur- would be to inject blood into him. The same cure ing involves not only reallocating factors of produc- applies to credit, the monetarists claim. tion (capital and labor), but also reducing debt a sig-

THE FREEMAN: www.thefreemanonline.org 14 And the Slump Goes On nificant amount (deleveraging), which has contrac- to go through an adjustment process. All this takes tionary effects on demand and aggregate economic time. activity. This consideration leads to the first element of the Regime Uncertainty best explanation for the prolongation of the recession: he second main piece of the puzzle of the reces- the fact that the necessary adjustment process has not Tsion’s duration is the “regime uncertainty” argu- been completed. As a recent report by the Bank for ment formulated by Robert Higgs. He first elaborated International Settlements (BIS) concludes, the debt this concept to explain why the Great Depression lasted reduction of private economic agents still has a long so long, finding that the Roosevelt administration, with way to go. But as the Spanish economist J. R. Rallo its constant attacks (in rhetoric and in policies) on the argues, keeping interest rates extremely low for a pro- free-enterprise system and its threats to private prop- longed period, as the Federal Reserve has, creates erty, was largely responsible for the failure of long-term incentives for people not to reduce debt and adjust to private investment to recover fully until World War II the new circumstances. Moreover, government “stimu- ended. lus” policies may have made things worse by massively Not surprisingly, in a series of commentaries since increasing federal government debt. 2008, Higgs has found parallels in the Obama adminis- Furthermore, the necessary reallo- tration’s actions and in the stagnant cation of the factors of production— private investment that help to both intersectoral (from sectors Physical capital and explain why sustained economic overexpanded during the bubble to human capital have recovery has not yet taken place. sectors that will yield higher profits in Higgs points to several particular the future) and intrasectoral (among to go through an causes: the surge in the federal deficit different products and services in the and debt; the likely introduction of same sector) may take a long time, adjustment process. new taxes to finance the recent mas- especially in the labor markets. Apart All this takes time. sive public spending, or changes in from the fact that the adjustment in existing tax rules; the potential bur- relative prices and wages may take dens on businesses brought about by longer than desirable because of rigidities, there are environmental and energy regulations; and the still additional issues worth considering. uncertain real effects of Obamacare and the new Research on markets with search frictions—which financial regulatory framework. won Peter Diamond, Dale Mortensen, and Christo- Problems related to the adjustment process, along pher Pissarides the 2010 Nobel prize in economics with the existence of regime uncertainty, might form a —may fit in this context. For several decades main- relatively complete explanation of why the U.S. econ- stream neoclassical economists have depicted the omy is still suffering from the Great Recession, com- market as a mechanism that perfectly and instanta- plementing the analysis expressed in the Mises/Hayek neously coordinates supply and demand. The Nobel business cycle theory. laureates, however, have emphasized that economic The importance of this debate, and how current agents often have to spend time and resources in economic events are interpreted, can hardly be exag- making that adjustment (search frictions). Moreover, gerated. As economist Mario Rizzo has noted, the res- finding satisfactory employment for people who have olution of this puzzle “will affect economics and public just lost jobs may require the acquisition of substan- perceptions for a long time to come,” just as the debate tially different skills and capabilities. The features of between Hayek and Keynes in the 1930s had profound this process depend on the degree of specificity and (and unfortunate) consequences for the future of the complexity of the economy’s capital structure. Thus economics discipline. Let us hope that the outcome not only physical capital but also human capital has will be different this time.

15 MARCH 2011 THE FREEMAN: www.thefreemanonline.org 16 An Impossible Job

BY RICHARD W. FULMER

onventional wisdom has it that the more com- issues with which any president must grapple: unem- plex a nation’s economy,the more government ployment, Middle East peace, energy, homeland secu- Coversight and regulation are needed to keep it rity, drug abuse, Iraq, offshore drilling and oil spills, from spinning out of control. It follows that govern- foreign trade, terrorism, scandals, greenhouse-gas emis- ment must grow in size and complexity along with the sions, Afghanistan, North Korea, health care, the finan- economy. Apparently, however, our government has cial industry, pollution, education, transportation, become so vast and nuclear proliferation, the complex that it may national economy, the have spun out of control global economy—the list itself. is endless. How can any Daniel Stone, in the one person competently November 13, 2010, deal with all that, no issue of Newsweek, matter how many advis- addresses the dilemma in ers he or she might have? his article, Hail to the In Stone’s words, Chiefs. The essay’s sub- “Days in the West Wing head summarizes the are a constant, head- problem: “The presi- spinning oscillation dency has grown, and between dozens of grown and grown, into domestic, foreign-policy, the most powerful, most and political eruptions impossible job in the and concerns.” world.” Stone’s solution, Imagine the mass of as suggested by his arti- information flooding cle’s title, is to devolve into the White House presidential power either to cabinet members (oli- each day.Who could digest it? Some half-dozen aides garchy?) or to “outside agencies” (technocracy?). are needed just to deal with incoming mail. Stone Stone dismisses the notion that government or the relates former chief of staff Rahm Emanuel’s instruc- president could simply do less. “It’s hard to imagine,” tions to senior staff members trying to deal with the he writes, “how the office could sizably shrink, allow- daily deluge:“We need to make his memos shorter. Last ing the president to return to a more aloof, strategic night we sent the president a phone book.” role.” The job’s impossibility stems from the sheer scope of Richard Fulmer ([email protected]) is a freelance writer from government power and therefore the incredible array of Humble,Texas.

17 MARCH 2011 Richard W. Fulmer

Yet a library of “phone books” would be needed to flood of data we face every day, allowing us to concen- adequately cover all the issues a president attempts to trate on what we believe to be important.To the extent handle. A country, not to mention the world, is too that our models are incorrect or only approximate real- complex for anyone (or any group) to manage; they ity, though, we can overlook important information simply cannot gather, analyze, and act on the necessary that does not fit our worldview.This is known as “con- mass of information in a timely fashion. In fact, this formation bias.” understates the problem: The most critical knowledge Consider the CIA’s acceptance of the face the Soviet on which a society depends for its smooth operation— Union presented to the world during the 1970s, “knowing how” rather than “knowing that”—is widely including its claim that its economy was enjoying an dispersed and cannot be fully articulated. This is the impressive 3 percent annual growth rate. President “knowledge problem” emphasized by F.A. Hayek. Del- Ronald Reagan, familiar with free-market critiques of egating power to cabinet members or agencies cannot central planning, did not believe a command economy solve that problem. could work as well as the CIA thought.William Casey, Consider the process by which a government policy Reagan’s CIA director, tasked agency analysts with is instituted. First, the goal must be clearly defined or exploring the possibility that the Soviet financial system the problem to be solved properly was in fact crumbling. Specifically, diagnosed. Next, a policy is formu- Casey asked them what might be lated to achieve the goal or address A country, not to expected from a Soviet Union whose the problem.Then a bill must make its mention the world, economy was shrinking. way through Congress relatively The analysts speculated that popu- intact. Once enacted, it has to be is too complex for lar discontent would rise. In response, properly implemented and enforced. anyone to manage. Moscow would shift military spend- Finally, the policy’s impact must be ing to the civilian sector, perhaps by monitored so that adjustments can be The most critical using steel to build locomotives made in a timely manner. Performing knowledge is widely instead of tanks. The Soviets might any one of these steps successfully is also purchase foreign technology to difficult; performing all successfully is dispersed and cannot boost consumer-goods production, virtually impossible. And this only obtaining the necessary hard cur- begins to identify the obstacles. be articulated. rency by increasing oil and gas sales The chances of success decline to Europe. rapidly as the complexity of the system to be controlled Casey then asked analysts to determine whether any increases. Not only does predicting the impact of a of these predicted signs of economic distress were in given change become more difficult, but assessing the evidence.Within days, reports flowed in confirming the results also becomes harder. Did the policy really cause predictions. This data had long been available but was an observed behavior or was it the result of something ignored as irrelevant given the assumption of a solid else entirely? Further reducing the ability to determine Soviet economy. (See articles by former intelligence cause and effect are the filters that ideology places on official Herbert Meyer at www.tinyurl.com/24e7deh incoming information. and www.tinyurl.com/2dyllqj.) The lesson is not that models are inherently bad but Ideological Filters that they must be periodically and critically examined eople use simplified models of the world to deal to ensure they accurately mirror reality. Pwith its complexities.These models (aka paradigms, The Great Recession offers a more recent example worldviews, or ideologies) provide logical frameworks of entrenched paradigms at work. There are many for understanding cause and effect. Models also help fil- competing explanations for the current financial ter out apparently unnecessary information from the crunch: (1) an investment bubble produced by the

THE FREEMAN: www.thefreemanonline.org 18 An Impossible Job

Federal Reserve’s inflationary actions; (2) a housing nant with the White House consensus and discounts bubble created by federal pressure on mortgage com- those that are not. Failed programs are therefore more panies to lend to bad credit risks; (3) the federal gov- likely to be expanded than ended.The president and his ernment’s implicit backing of Freddie Mac, Fannie advisers will want to believe that any problems were Mae, and other financial institutions, leading them to caused by insufficient funding or enforcement rather take excessive risks; (4) deregulation, notably the repeal than an unsound worldview. Reinforcing this tendency of the Glass–Steagall Act; (5) unregulated derivatives is self-interest—admitting mistakes can shorten a politi- trading; (6) housing speculators; (7) predatory lending; cian’s career. (8) Wall Street greed; and (9) tax cuts that allowed imprudent investments by wealthy individuals leading Increasing Efficiency, Dispersing Information to a financial bubble. he notion that a president can oversee an economy Any of these views can be supported by citing iso- Tis a fantasy. Unfortunately, although central plan- lated nuggets of carefully selected data. Predictably, ning has been discredited, Keynesian-style policies for libertarians and conservatives prefer explanations predi- maintaining employment or aggregate demand are cated on government failure. Proponents of govern- still thought feasible—despite overwhelming contrary ment control favor theories rooted in market failure, experience grounded in proper theory. But anything while class warriors promote those blaming the rich in more complex than the most primitive economy sim- general and Wall Street in particular. ply is not amenable to such “assistance” from a central Theoretically, corrective policies based on each authority. explanation could be implemented In Capital and Interest, Eugen one after another.A policy’s success or The notion that a von Böhm-Bawerk explained that failure might indicate whether the economies become more efficient by explanation on which it was based is president can oversee employing increasingly “roundabout correct. But a nation is not a labora- an economy is a methods of production.” For exam- tory, and uncertainty caused by such ple, a caveman could catch small ani- experimentation would bring the fantasy. mals for food with his bare hands, or economy to a grinding halt. Further- he could increase his efficiency by more, success or failure would not be conclusive. using tools, perhaps using rocks or sticks as clubs. Hunt- Opponents of a successful policy might argue that con- ing becomes marginally more complex, but the result is ditions improved despite, not because of, the action a bigger “harvest.”The caveman could raise his produc- taken. Similarly, supporters of a failed policy could tivity further by crafting better tools—clubs, spears, claim that things would have been far worse without it. snares, bows and arrows. It costs the caveman time and Rather than experimenting, policymakers might effort to construct tools and become proficient with consult history to determine the results of similar past them, but his investment is likely to be well rewarded. policies.Yet history is also seen through a filter.After 70 The process of constructing hunting implements years of hindsight, economists and historians still argue could itself be improved by fabricating tools such as whether market or governmental failure caused the knives and scrapers. The use of these tools is a further Great Depression and whether the New Deal helped step removed from the process of hunting, constituting or hurt. a yet more roundabout method of “producing” small Politicians generally surround themselves with peo- game.This progression can be continued indefinitely as ple who share their fundamental beliefs.The president’s still other tools are created to facilitate the production staff controls the information he sees, and that informa- of each new tool set. tion is likely to comport with their shared worldview. Further efficiencies can be realized, as Adam Smith This alignment of “paradigm filters” exaggerates the explained, through the division of labor. For example, importance of those bits of information that are conso- while some cavemen hunt, others can concentrate on

19 MARCH 2011 Richard W. Fulmer crafting snares or spears.With each improvement, either knowledge who quickly adapt to changes in everything by creating new tools or further subdividing tasks, effi- from costs to the weather. None of this could be cen- ciency is increased, though at the cost of additional trally directed by boards of bureaucrats incapable of time and complexity.This process is repeated endlessly even cataloging all the people, tasks, parts, and services as economies advance. involved before the list became outdated. In undeveloped countries, manufacturers must be relatively self-sufficient because suppliers and trans- Managing the Unmanageable portation are expensive and unreliable.This was true in s Hayek pointed out in his essay “The Use of the Soviet Union and in early twentieth-century AKnowledge in Society,” the term “planned econ- America.The first U.S. automakers built their cars from omy” is misleading. All economic activity is planned. the ground up. Nearly everything—nuts, bolts, springs, The question is whether the planning is done by peo- and engines—was made in a single factory.A company’s ple on the scene with local knowledge and a stake in employees did everything from fabricating parts, to the outcome, or by remote bureaucrats with insuffi- assembling them, to sweeping up afterwards. As the cient, outdated information and nothing to lose— nation’s economy and infrastructure bureaucrats ignorant enough to developed, however, auto companies believe that people can be ordered discovered they could make better All economic activity like pieces on a chessboard and arro- cars at lower prices by purchasing is planned.The gant enough to try.Will planning be components and services from spe- done by businesspeople who either cialized firms. question is whether replace faulty paradigms or fail, or by With inexpensive transportation, the planning is done politicians holding fast to broken ide- tools and subcomponents can now be ologies for fear of losing office? fabricated far from final assembly by people on the Complex systems—from rain- points. Parts once built in one area of scene with a stake in forests to economies—are less pre- a plant then moved to another to be dictable than simpler ones. They are bolted onto a chassis are now trans- the outcome or by also harder to control because every- ported from remote factories by thing within them is interconnected. ships, trains, and trucks over vast dis- remote bureaucrats. A tweak here or a prod there can tances, often from other countries. have unintended and undesirable Where once hundreds of companies helped to produce consequences. No one can anticipate how creative, American cars, now tens of thousands from all over the entrepreneurial individuals will adjust their behavior to globe help to produce far more vehicles of higher regulatory obstacles or stimulative measures. While a quality and with features unimaginable just a few bad decision made at the local level can cause a man- decades ago. ageable problem, that same decision made at the With this explosion of companies comes an explo- national level can create a nationwide or worldwide sion of complexity.Those contributing to an end prod- disaster. uct’s manufacture may have no idea what that product The presidency has indeed grown beyond the is, where it will be built, or who will use it. Logistics is capacity of any single individual. That is because gov- now key—ensuring that molded plastic parts, tires, ernment has ventured into areas where it has no busi- paint, fasteners, adhesives, and countless other compo- ness intruding. The answer is not to redistribute the nents from all over the world arrive at assembly lines in government’s vast power but to radically reduce its just the right number and at just the right time.All this power so that private individuals are free to control complexity is managed by millions of people with local their own lives and property.

THE FREEMAN: www.thefreemanonline.org 20 The Therapeutic State The Shame of Medicine: Celebrating Coercion

BY THOMAS SZASZ

“ oercion is a subjective response to a particu- So why am I so attracted to this patient population? lar intervention and has been considered an I’ve always been enthralled by insanity....[N]ow I Cunfortunate but necessary part of the care of am the doctor in charge of Bellevue’s psychiatric people with psychiatric illness.” That definition of emergency room. ...I run two fifteen-hour the State-sanctioned forcible control of innocent per- overnight shifts on Saturday and Sunday nights. sons labeled mentally ill by persons labeled psy- They call me “the weekend attending.” It feels just chiatrists was offered by Giles Newton-Howes— like rock-and-roll psychiatry to me.This is my Sat- honorary senior lecturer in the department of psy- urday night gig. ...[The police deliver a prisoner chological medicine, Imperial College London, and receiving methadone detoxification.] I go inside to consultant psychiatrist at Hawkes Bay District Health talk to Nancy [the nurse]. “The cop wants dead Board, Napier, New Zealand—in the editorial in the weight, the prisoner wants methadone. Looks like June 2010 issue of The Psychiatrist, a journal of we should probably just take advantage of the situa- the Royal College of Psychiatrists tion.”We agree to do something that (United Kingdom). Contemporary everyone knows damn well is com- In contemporary English the pletely against the rules. I have never meaning of the noun “coercion” is practitioners of done it before or since: I tell the clear and uncontroversial. The Mer- psychiatry brag about patient we are going to give him an riam-Webster online dictionary injection of methadone, and we give defines it as “the act, process, or their love of the him Thorazine....[S]ometimes down power of coercing; ... . . . synonyms: arm-twisting, exercise over their they both leave and we can go on force, compulsion, constraint, duress, captives. with our night. pressure . . .; near antonyms: agree- ment, approval, consent, permission.” The State-sanctioned forcible con- Coercion is emphatically not the private “subjective trol of one group of innocent persons by another group response” of the oppressed person; it is the objective, of persons authorized to control them is, of course, as publicly observable action of the oppressor. According old as civilization.We call its prototype “slavery.” Justi- to the authoritative Black’s Law Dictionary (Fourth fied by religious and philosophical authorities, the Revised Edition), the relationship between hospital supporters of such systems of institutionalized domina- psychiatrist and patient clearly constitutes coercion: tion-submission always felt morally superior to those “COERCION. Compulsion; constraint; compelling who rejected their reasoning and opposed their power. by force or arms.” Today, the system based on the same age-old rationali- Contemporary practitioners of psychiatry, enlight- zations is called “psychiatry.”I have renamed it “psychi- ened by neuroscience, brag about their love of atric slavery.” the naked power they exercise over their captives. Thomas Szasz ([email protected]) is professor of psychiatry emeritus at In her book Weekends at Bellevue, Julie Holland SUNY Upstate Medical University in Syracuse. His latest book is explains: Antipsychiatry: Quackery Squared.

21 MARCH 2011 Thomas Szasz

“If slavery is not wrong,”declared Abraham Lincoln, brain disorders, psychiatry is now much more inte- “nothing is wrong. I cannot remember when I did not grated with other medical and surgical specialties than so think, and feel.” Slavery is wrong because it empow- in the past. Psychiatry is no longer perceived as a ‘dif- ers one group of persons to deprive another group of ferent’ discipline....”Where is the outrage at this liberty on the ground of who they are, not of what they shameless mendacity? Nowhere. do. I knew very little about Lincoln when I grew up in Forgotten Human Rights Violations post-World War I Hungary.But I did recognize, as a gut feeling, that if the domination of the mental patient by he human-rights violations of chattel slavery, the psychiatrist is not wrong, then nothing is wrong. I Tcolonialism, the Inquisition, national socialism, cannot remember when I did not so think and feel. and communism have been well documented. Spo- radic reports of the human-rights violations of psychi- Wrong but Necessary atry abound in our newspapers and magazines. They any decades later I learned about Lincoln’s more are quickly forgotten as exceptional “abuses.” More Mcomplex, confused, and conflicted opinions than 50 years ago I set myself the task of not letting the about slavery, and also about the inconsistency of liber- profession and the public forget that psychiatry—the tarians’ passionate commitment to the oppression of the patient by the psy- principle of self-ownership as a pillar chiatrist, today justified as the of individual liberty and their pen- If domination of the patient’s liberation from an illness chant to turn their gaze away from that robs him of freedom and respon- psychiatric slavery as an integral part mental patient by the sibility—belongs in the same pan- of the political-social fabric of mod- psychiatrist is not theon of brutal oppressions as do ern Western societies. chattel slavery,colonialism, the Inqui- In 1999 an editorial in the British wrong, then nothing sition, national socialism, interna- Medical Journal warned, “The growing tional socialism (communism), and pressures on them [psychiatrists] to is wrong. institutions dedicated to the coercive deliver public protection was perhaps betterment of humanity not yet inevitable, given the rise of biopsy- invented. chomedical paradigms as explanations for the vicissi- Sixty years ago, when I was young, the psychiatrist tudes of life in modern Western society. Psychiatrists was embarrassed by his role as coercer. Now,when I am have played their part by assuming the authority to old, he is proud of it. That, in my opinion, is the sum explain, categorize, manage, and prognose in situations total of the “progress” achieved by modern, “scientific where well defined disease (arguably their only clearcut psychiatry.” It is a fearful truism that we learn from his- remit) was not present.” tory that we do not learn from history: “The time to Such warnings have not deterred prominent psychi- guard against corruption and tyranny, is before they atrists from making brazen claims about the nature of shall have gotten hold on us. It is better to keep the psychiatry as a medical specialty. In an editorial in the wolf out of the fold, than to trust to drawing his teeth September 2010 issue of Current Psychiatry, titled “Inte- and talons after he shall have entered.” (Thomas Jeffer- grating Psychiatry with Other Medical Specialties,” son, 1782) psychiatrist Henry A. Nasrallah—professor of psychia- But this wolf does not enter. He is inherent in try at the University of Cincinnati College of Medicine human nature, and we must purge it from our own (my alma mater)—writes,“As a specialty that deals with souls, one soul at a time.

THE FREEMAN: www.thefreemanonline.org 22 Gold and Money

BY WARREN C. GIBSON

othing seems to arouse passions—pro and what future Federal Reserve Chairman Alan Greenspan con—quite like suggestions that gold should thought in 1967, when he wrote “Gold and Economic Nonce again play a role in our money. “Only Freedom” for Ayn Rand’s newsletter.“In the absence of gold is money,”says one side.“It’s a barbarous relic,”says the gold standard, there is no way to protect savings the other. Let’s turn down the heat a bit and look into from confiscation through inflation,” he said. When some propositions about gold. That should lead us to later asked by U.S. Rep. Ron Paul whether he stood by some reasonable ideas about whether or how gold that article, Greenspan said he did. But he weaseled out might return. by saying a return to gold was unnec- Nothing has intrinsic essary because central banks had Propositions About Gold learned to produce the same results old has intrinsic value. Actually, value.What gold gold would produce. Gnothing has intrinsic value.The The gold standard is too rigid. The value of any good or service resides in does have is some gold standard makes it impossible for the minds of individuals contemplat- rather remarkable a government central bank to conduct ing the benefits they might derive monetary policy—hooray! Under the from it.What gold does have is some physical properties Fed’s watch the dollar has lost more rather remarkable physical properties that make it very than 95 percent of its purchasing that make it very likely that people power and the economy was con- will continue to value it highly: luster, likely that people vulsed by the Great Depression of the corrosion resistance, divisibility, mal- will continue to 1930s, the stagflation of the 1970s, leability, high thermal and electrical and the crash of 2008. Milton Fried- conductivity, and a high degree of value it highly. man long ago explained the long and scarcity. All the gold ever mined variable lags that follow monetary would only fill one large swimming pool, and most of interventions and at one point called for replacing the that gold is still recoverable. Fed with a computer. The end of government eco- Only gold is money. Although gold was once used as nomic manipulations in the form of monetary policy is money, that is no longer the case. Money is whatever is a major potential benefit of a gold standard. generally accepted as a medium of exchange in a par- Gold is supposedly too rigid to accommodate ticular historical setting. Right now, government-issued increased demand for money at certain times of the fiat money, unbacked by any commodity, is the only year—historically harvest time and Christmas time—or kind of money we find anywhere in the world, with in wartime. Falling prices are one way an economy can some possible obscure exceptions. Warren Gibson ([email protected]) teaches engineering at Santa Clara Perhaps people who say this mean that gold is the University and economics at San Jose State University.This is the first of a only form of money that can insure stability. That’s two-part series.

23 MARCH 2011 Warren C. Gibson adjust to an increase in the demand for money, but this strict government regulation of money and banking. accommodation works best over a longer period. A Like other free-market institutions, free banking rests short-term accommodation is possible when banks on the sanctity of property rights, with no government hold fractional reserves. On short notice and without involvement other than prosecution of theft or fraud. any increase in monetary gold, fractional-reserve banks But there was substantial government involvement all could simply issue more bank notes or their electronic along, so the “free banking” label is only accurate in equivalent during periods of high demand and retire relative terms. them when demand subsided. The most egregious departure from free-banking Inflation is impossible under a gold standard. Between principles was the frequent suspension of specie pay- 1897 and 1914 the gold stock rose at about 3.5 percent ments: banks’ refusal to honor their obligation to a year due to new discoveries and inflows from abroad. redeem their banknotes for gold. These breaches of As a result, prices rose about 26 percent over this span, contract, which should have triggered liquidation and or about 1.4 percent per year.This was not a disruptive perhaps criminal prosecution, were in many instances level of price inflation—but it was inflation. tolerated or even encouraged by government authori- The gold standard was tried and failed. This is a plausi- ties, especially during times of war or economic con- ble proposition, not to be dismissed out of hand. Nor traction. may we simply note that because we never had a pure Second, the free-banking paradigm does not include gold standard, the concept was never a monopoly central bank.The Second really tested. We must do better than The record of gold is Bank of the United States—roughly that. speaking, the U.S. central bank of its During much of our history, bound up with the time—closed its doors in 1836. Its money was linked to gold in some institutional defeat, engineered by populist Presi- degree, and there were some serious dent Andrew Jackson, with wide sup- monetary problems during that time. arrangements that port from a public that had been The record of gold is bound up with generally suspicious of banks since the institutional arrangements that prevailed at various the founding of the Republic. But the prevailed at various times in our his- times in our history. end of the Second Bank was by no tory. Snapshots from that history means the end of federal government should help illuminate this claim. involvement in banking. With the Second Bank gone, Before proceeding, we need a definition. Under a the federal government still needed depositories for its gold standard either private banks or a monopoly cen- funds. Certain private banks, which came to be known tral bank issues notes (or their electronic equivalent) as “pet banks,” were selected for this privilege.This was redeemable in gold. Gold coins may circulate as well. one way in which the federal government continued to Notes may be fully or fractionally backed, meaning a influence the banking system. note issuer may not have sufficient gold to redeem all A third intervention, practiced by federal and state outstanding notes at one time. In passing I assert, con- governments, was prohibition of branch banking. No trary to some “hard money” advocates, that fractional- banks were allowed to cross state lines to open reserve banking is an institution that is entirely branches, and there were significant restrictions within compatible with free markets and the rule of law. most states as well. The strictest state laws forbade any The period between the War of 1812 and the Civil branching whatever, while others allowed branching War is commonly called the “free banking era.”It is also within their states on a limited basis.The result was that called the era of “wildcat banks” because many banks many communities could only be served by small, were poorly capitalized, poorly if not fraudulently man- poorly capitalized, and often poorly managed local aged, and prone to failure. Conventional wisdom says banks. Stronger city banks might have established that this era demonstrates conclusively the need for branches in areas where early banks had failed or where

THE FREEMAN: www.thefreemanonline.org 24 Gold and Money none had emerged, particularly with the spread of the The Panic was ended largely through the efforts of telegraph and railroads. But they were not allowed to J. P. Morgan.Again, things turned around in fairly short do so. For confirmation of the ill effects of branch pro- order and growth resumed. hibition, we need only look as far as Canada, which has The dollar-gold link established by the 1944 Bretton always had a few strong nationwide banks. During the Woods agreement didn’t work. Indeed it didn’t, at least not Great Depression, when some 9,000 U.S. banks failed, for long. Under Bretton Woods the United States and not a single Canadian bank went under. its currency were accorded a special role. The United Fourth, many state governments required banks to States was obliged to redeem dollars for gold, but only hold their bonds as part of their reserves. This of dollars tendered by foreign central banks. No one else course provided a captive market for such bonds.The could get gold for dollars, and no other currencies National Banking System, established after the Civil were directly redeemable.There was a tacit agreement War, imposed a requirement to hold federal Treasury that foreign governments would not “abuse” their securities. Thus the five-dollar gold note (see photo), redemption privilege, but the French under Charles de issued by the Farmers Gold Bank of San Jose, Califor- Gaulle and his gold-oriented finance minister, Jacques nia, in 1874 promises to “pay the bearer on demand Rueff, saw things differently and insisted on redemp- five dollars in gold coin.” But it also says the note is tion—which, oddly enough, entailed moving gold bars “secured by bonds of the United States deposited with from one part of the New York Fed’s vault to another, the U.S. Treasurer at Washington.” In other words, since the Fed was storing gold as a service to the the government gave the banks French. By 1971 it had become incentive to substitute bonds for clear that far more dollars were some of the gold they might have likely to be tendered than could held as reserves. be covered by gold, and Presi- The gold standard is to blame for dent Nixon unilaterally ended severe downturns in 1893 and 1907. gold redemptions. This cut the The panic of 1893 was quite last (very indirect) link between severe. That year saw numerous railroad bankruptcies, the dollar and gold. By then silver had disappeared bank failures, and declining stock prices. Among the from U.S. coins as well. causes were general overbuilding of railroads, the Silver De Gaulle cannot be blamed for the failure of Bret- Purchase Act of 1890, and the protectionist McKinley ton Woods. All he did was to point out the emperor’s tariff of 1890. Perhaps a modern central bank, with lack of clothing. As the Federal Reserve created more unlimited money-creation power, could have mitigated and more fiat money, some of which made its way over- some of the immediate pain. But as we have seen, the seas, the redemption promise rang more and more hol- record of the Federal Reserve, which acquired that low. By the time Nixon took action there was no other power in the following century,suggests a failed institu- choice but to slam the gold window shut. tion. As it was, the panic was over in fairly short order Milton Friedman was one of the first to propose and economic growth resumed. floating exchange rates.The notion seemed radical and The Panic of 1907 was marked by bank runs, unworkable at the time (around 1960).That of course is numerous bankruptcies, and sharp drops in stock the system we have now, and while it has eliminated prices. A trigger for the Panic was a failed attempt to sudden devaluations, currency markets are much more corner the stock of United Copper using borrowed volatile than Friedman anticipated. Nor did he antici- money. Other factors included the San Francisco pate the degree to which governments would enter the earthquake and the Hepburn Act, which gave the markets to manipulate their own currencies, as when Interstate Commerce Commission power to set maxi- the Chinese authorities sell their currency to keep it mum railroad rates, suppressing the shares of those from rising too fast against the dollar. And he would companies. have been appalled at the “race to the bottom” that

25 MARCH 2011 Warren C. Gibson threatens to break out as governments seek to boost even desperation and might trigger a loss of confidence their domestic economies by driving down their cur- in the government’s money and/or its debt. He also rencies to make their exports more competitive. cites a poll which indicates that 87 percent of Americans In his wonderful little book Money Mischief,Fried- believe the government shouldn’t sell its gold reserves. man asked himself whether the pure fiat standard, We can only conclude that gold still plays a very indirect which has been in force only since 1971, could endure. role in maintaining confidence in the government. He didn’t give a definite answer but expressed grave But is the gold still there? Yes, almost certainly, doubts.The possibility of a general loss of confidence in though we hear occasional calls for an outside audit. A fiat money is reason to believe that gold could once more plausible accusation is that some of it has been again play a monetary role, as I will argue in the second leased to short sellers.This is a common practice among part of this series. central banks that offers distinct benefits to the govern- The gold that was once locked up at Fort Knox is gone. It ment. First, it earns a bit of interest income. More has been 40 years since the last indirect link between important, it can covertly suppress the gold price. Ris- the dollar and gold was severed, and yet the govern- ing gold prices annoy Treasury secretaries and central ment continues to hold some 8,000 metric tons of gold bankers because the rise implies falling confidence in bullion—the world’s largest single stash. Oddly enough their currency. Leased gold remains in the vault and on it is valued at $42 per ounce, the last official price the balance sheet even though it (or rather a paper before it was set free to be established in free trading.At claim on it) has been sold to someone else. Although today’s market price of around $1,300 per ounce, the one can find rumors on the Internet, there is no way, hoard would be valued in the hundreds of billions of short of a thorough audit, to know the extent of gold dollars, although that much gold could not be dumped leasing by the U.S. government, if any. precipitously without suppressing the price. With the global economic downturn continuing and James Picerno, writing in a recent issue of The the prospect of currency wars looming, scattered voices Atlantic, asked why the hoard remains. Three hundred are again suggesting a role for gold in our money. One billion dollars may not be a huge sum in this new era of of those voices belongs to Robert Zoellick, president of trillions, but it’s not chump change either. His conclu- the World Bank. Could gold stage a comeback in some sion: A selloff would be seen as a sign of weakness or form? In Part 2 we will examine those prospects.

THE FREEMAN: www.thefreemanonline.org 26 Our Economic Past Ideological and Political Underpinnings of the Great Society

BY ROBERT HIGGS

he surge of federal economic interventions that 1964, the Economic Opportunity Act of 1964, the occurred during Lyndon B. Johnson’s presi- Food Stamp Act of 1964, the Elementary and Sec- Tdency—the much-ballyhooed Great Society, ondary Education Act of 1965, and the Social Security whose centerpiece was the War on Poverty—differed Amendments of 1965 (creating Medicare and Medic- from the four preceding surges, each of which had been aid), as well as establishment of the Office of Economic sparked by war or economic depression. No national Opportunity (to oversee programs such as VISTA, Job emergency prevailed when Johnson took office follow- Corps, Community Action Program, and Head Start), ing John F. Kennedy’s assassination on November 22, the Community Action Agencies, and many other 1963.The nation was not engaged in a major shooting bureaus ostensibly promoting poor people’s health, war, and the economy was on the mend after the mild education, job training, and welfare. In addition, broad- recession of 1960-61. For the most part, the Great Soci- gauge economic regulatory measures were adopted in ety represented simply the culmina- connection with traffic safety, coal- tion of economic, political, and Great social changes mine safety, consumer-products safety, intellectual developments stretching age discrimination in employment, back as far as the nineteenth century. and an unusually truth in lending, and other areas. After the Korean War armistice of large (and “leftist”) What accounts for this multifac- July 27, 1953, the United States had eted outburst? Do its various elements enjoyed a decade of respite from the Democratic majority have a common denominator? Some rapid growth of government power set the stage for the scholars point to an intellectual devel- over economic affairs. The wartime opment that Stein dubs “Galbraithian- wage, price, and production controls Great Society’s ism,” after its leading propagator John lapsed, although authority to rein- Kenneth Galbraith—a loose collec- stitute the production controls massive expansion tion of socioeconomic analysis and remained. No major extensions of of government into evaluation hostile to the free market the government’s economic controls and favorably inclined toward more were enacted. Big government did all areas of life. sweeping government controls. not disappear, of course; many of the “There was,” says Stein, “no demand controls and other interventions put in place in the for a new and different economic system” in the Gal- 1930s and 1940s remained in force. But businessmen, braithian view. Rather, “[t]he ideological case for the according to economist Herbert Stein, “had learned to old system, the free market, capitalist system, was punc- live with and accept most of the regulations.” Govern- tured by the demonstration of exceptions to its general ment spending, especially for Social Security benefits, rules and claims, and this opened the way for specific crept upward. All in all, however, the Eisenhower and policy interventions and measures of income redistrib- Kennedy administrations were placid in comparison ution without any visible limits.” with their immediate predecessors and successors. Under Johnson, however, the federal government’s Robert Higgs ([email protected]) is senior fellow at the Independent Institute (www.independent.org), editor of The Independent Review, intrusion into economic life swelled enormously.Major and author of Neither Liberty nor Safety: Fear, Ideology, and the events included enactment of the Civil Rights Act of Growth of Government (Independent Institute).

27 MARCH 2011 Robert Higgs

Galbraithianism’s arguments and attitudes gained The specific forms the Great Society took reflected strength from a spreading conviction that the U.S. the increasing diversity of animals in the political jungle. economy would continue to grow forever at a fairly While longstanding lobbies for business, labor unions, high rate, thereby ensuring that new and costly govern- farmers, and middle-class professional groups continued ment programs could easily be financed by drawing on to operate, many new interest groups organized and the “growth dividend.” gained political clout on behalf of women, Indians, Chi- Economist Henry Aaron’s description of the cli- canos, students, homosexuals, the handicapped, the eld- mate of opinion in the 1960s essentially agrees with erly, and many others, none of whom had been directly Stein’s. Aaron traces the widely held Galbraithianism represented as such to an important extent in U.S. poli- back to previous crises: “The faith in government tics.These groups demanded that the federal government action, long embraced by reformers and spread to the solve a variety of racial, urban, employment, and con- mass of the population by depression and war, sumer problems, real and imagined. achieved political expression in the 1960s. This faith Galbraithianism, Marxism, and other varieties of was applied to social and economic problems, the per- critical socioeconomic analysis also helped to justify the ceptions of which were determined displacement of antiwar and pro- by simplistic and naive popular atti- civil-rights enthusiasms onto a diverse tudes and by crude analyses of social A spreading belief set of anti-market causes, giving rise scientists.” that the U.S. to heightened support for environ- At the same time, a so-called New mental, consumer, and zero-risk regu- Class—composed of scientists, lawyers economy would lations. No perceived social or and judges, city planners, social work- grow forever at a economic problem seemed out of ers, professors, criminologists, public- bounds in this cacophonous new health doctors, reporters, editors, and high rate made new political environment. commentators in the news media, and costly programs Although the Great Society estab- among others—viewed new govern- lished critically important new federal ment programs as outlets for their seem even more powers and agencies, it did not cause “idealism” and as opportunities to do federal domestic spending to increase well while doing good.Thus a multi- appealing. tremendously at first. A portentous tude of left-leaning intellectuals and sign might have been seen, however, pseudo-intellectuals gave significant leadership, support, in the quick acceleration of federal transfer payments, and voice to the government surge of the Johnson which increased from $34.2 billion in 1963 to $65.5 years. billion in 1969. Over time this locomotive gained More prosaic political developments also played an more and more momentum. According to Michael D. important role. Lyndon Johnson, who had begun his Tanner of the Cato Institute, between 1963 and 2010, political career as a New Dealer and political horse- “the federal government spent more than $13 trillion trader in Texas, possessed not only boundless ambition fighting poverty.” but also keen political instincts and skills; he knew how Almost everyone now acknowledges that federal to move Congress in the direction he wanted it to go. entitlement programs, crowned by the enormously Moreover, the elections of 1964 gave the Democrats costly health-care systems the Great Society spawned, huge majorities in both houses of Congress and have promised much greater benefits than the govern- brought into office an extraordinarily leftish group of ment can fund, and hence that many of these benefits freshman legislators.According to Aaron,“No adminis- will have to be cut, notwithstanding the political fury tration since Franklin Roosevelt’s first had operated such cuts surely will elicit. This impending socio- subject to fewer political constraints than President political tumult represents one of the Great Society’s Johnson’s.” bitterest fruits.

THE FREEMAN: www.thefreemanonline.org 28 What Economic Freedom Indexes Leave Out

BY KEVIN A. CARSON

n a syndicated column last October, television jour- permitted to compete in offering a given good to a nalist John Stossel lamented the downgrading from given population. Isixth to eighth place—“behind Canada!”—of the But among the inside-the-Beltway “free market United States on the Heritage Foundation/Wall Street community,” Heritage is one of the staunchest advo- Journal Index of Economic Freedom. The Index is cates of global “intellectual property” enforcement based on several metrics, including freedom of move- expansion. Indeed, two lines out of six in its summary ment of capital, the degree of business regulation, and concerning its metric for “Property Rights” in the levels of taxes and spending. Apparently increased gov- United States are taken up by this: “A well-developed ernment spending, coupled with the bailouts and/or licensing system protects patents, trademarks, and copy- purchases of banks and auto companies, was the pri- rights, and laws protecting intellectual property rights mary cause of the U.S. decline. are strictly enforced.” For the first time in 16 years the U.S. economy was reclassified from The United States One-Sided Index “totally free” to “mostly free.” But here are other suggestions of the wait:The United States was totally free was totally free Tone-sided nature of the Index, as economically until 2010? That’s well. For example, under “Labor enough to suggest that the Index economically Freedom” it simply states that “dis- focuses on quite a narrow range of until 2010? missing an employee is not burden- “economic freedom” criteria, rather some.” Never mind for the moment than looking critically at the forms of that, from the standpoint of an State intervention most structurally important to the employee, a bit of contractual security might be a good survival of big business and corporate power. thing. (I doubt if the people at Heritage would gener- For example, by any valid measure of economic alize this disdain for contracts to all their other com- freedom, the passage of the WIPO Copyright Treaty, mercial dealings.) What’s important is what the article the Uruguay Round TRIPS (Trade-Related Aspects of doesn’t say: “Quitting without notice is not burden- Intellectual Property Rights) Accord, and the Digital some.” In fact it is not burdensome; workers in most Millennium Copyright Act would have been consid- states are at-will employees unless a union contract ered an upward surge in statism and protectionism specifies otherwise. But Heritage doesn’t consider the unequaled since (at least) the Smoot-Hawley Tariff. contractual burden on the worker or lack thereof a suf- “Intellectual property” is every bit as much a form of ficiently important issue even to bear commenting protectionism as are tariffs. Patents and copyrights serve exactly the same protectionist function for transnational Kevin Carson ([email protected]) is the author of The Homebrew Industrial Revolution:A Low-Overhead Manifesto corporations that tariffs did for the old national indus- and a research associate at the Center for a Stateless Society. He blogs at trial corporations; in both cases they restrict who is Mutualist Blog: Free Market Anti-Capitalism (www.mutualist.blogspot.com).

29 MARCH 2011 Kevin A. Carson on—and this in a section titled, mind you, Labor Free- Meese, in a 2008 article entitled “The Bailout Package: dom, not Employer Freedom. Vital and Acceptable” (www,tinyurl.com/368oyuv), did The problem is that an index, ostensibly put forward express concerns lest the bailout take the form of a as a general survey of economic freedom as such, is blank check—to the government, that is. really a survey of economic freedom primarily as it So they favored TARP, as such—a Hamiltonian pro- affects the minority of the population that owns con- gram of using taxpayer money to prop up the bubble- siderable amounts of capital and employs others. The inflated value of financial assets and preventing them idea that being employed is an economic activity, and from being marked down to market value. They just that those who are employed have economic interests objected to any conditions on how the free money could as much as those who do the employing, doesn’t even be spent once the banksters got hold of it. I wonder how appear on the radar. they feel about workfare. I understand that it was proba- Ye t another example of the Index’s bias is its “con- bly different people composing the different passages in cerns” regarding bailouts of automakers over “expropri- question, but still it would be nice if the right hand knew ation and violation of the contractual rights of what the further-right hand was doing. shareholders and bondholders.” Bill Beach, director of the Heritage Foundation’s Center for Ignoring Primary Interventions Data Analysis, laments that “the rule he Index fails to distinguish of law declined when the Obama The Index fails to Tbetween the primary, structural administration declared some con- distinguish between forms of government intervention tracts to be null and void. For exam- that prop up corporate power and the ple, bondholders in the auto industry the primary inter- secondary, ameliorative forms of were forced to the back of the credi- intervention that attempt to moderate tor line during bankruptcy.” ventions that prop up its side effects. The State enforces a But note the glaring lack of con- corporate power and whole host of artificial property rights cern for contractual rights guaranteed and artificial scarcities that serve as under GM’s contracts with the UAW. the secondary inter- sources of economic rent to privi- This one-sided concern with impair- ventions that attempt leged firms, and maintains all sorts of ment of the obligation of contracts is regulatory cartels. The cumulative fairly widespread on the “free mar- to moderate the effect of these privileges, artificial ket” right. The same people who side effects. scarcities, and cartels is to sustain cor- protested the loudest about bailout porate power on a global scale and “blackmail” in interfering with CEO create vast disparities in wealth. salaries and benefits, oddly enough, were by and large These forms of intervention, these primary grants of also the source of the most strenuous calls for using privilege, don’t show up very prominently on the Index Washington bailout money as a hammer to “impose of Economic Freedom. What does show up is mainly discipline” on auto workers. So apparently, for a certain the kinds of fiscal and welfare-state interventions that breed of “free market” advocate, the differential serve to limit the exercise of State-granted privileges between a GM and Toyota assembly line worker is and make corporate power less galling to average peo- problematic—but the differential between a GM and ple. Is it only “statism” when it benefits someone Toyota CEO isn’t. What’s that thing I was saying besides the rich? before? Contractual security is a good thing—for In fairness, while Heritage supports many of the everybody but workers. legal privileges that serve as entry barriers at the This shortcoming is compounded by Heritage’s national level, the Index does at least acknowledge bar- endorsement of Bush Treasury Secretary Henry Paul- riers to small business formation at the state and local son’s original TARP program. Stuart Butler and Edwin levels, comparing them favorably to other places: “The

THE FREEMAN: www.thefreemanonline.org 30 What Economic Freedom Indexes Leave Out overall freedom to start, operate, and close a business, promoted by assorted “structural adjustment” programs, regulated primarily at the state level, is still strongly Hildyard wrote: protected [in the United States]. Starting a business takes six days, compared to the world average of 35 While the privatisation of state industries and assets days. Obtaining a business license takes less than the has certainly cut down the direct involvement of the world average of 218 days. . . .” state in the production and distribution of many The same critique applies to other indices of “eco- goods and services, the process has been accompanied nomic freedom,” as well. For example, Like Heritage, by new state regulations, subsidies and institutions the Economic Freedom of the World Index (Fraser and aimed at introducing and entrenching a “favourable Cato institutes) treats voting for anything called a “free environment” for the newly-privatised industries. trade agreement” as a proxy for supporting free trade. [“The Myth of the Minimalist State,” The Corner Economist Dean Baker ridicules mainstream journalists House, March 1998; www.tinyurl.com/22uu8fm] for taking the “free trade” label at face value when the primary purpose of such agreements is to boost “intel- In practice, such “privatization” involves, first of all, lectual property” protectionism rather than to reduce spending taxpayer money on upgrades of State property tariff protectionism. In the introduction to The Conser- to entice corporate buyers to take it off their hands— vative Nanny State, Baker writes: with the new outlays to make the property salable frequently exceeding [N]ews reports routinely refer to Several other indexes the purchase price.The bidding process bilateral trade agreements, such as also treat voting for itself for State-owned industries and NAFTA or CAFTA, as “free utilities has usually been governed by trade” agreements. This is in spite anything called a what Joseph Stromberg calls “funny of the fact that one of the main “free trade agreement” auctions, that amounted to new expro- purposes of these agreements is to priations by domestic and foreign increase patent protection in a a proxy for investors” (“Experimental Economics, developing countries, effectively Indeed,” Mises.org, Jan. 7, 2004; increasing the length and force of supporting free trade. www.tinyurl.com/3x873rt). The first government-imposed monopolies. order of business, subsequently, is mas- Whether or not increasing patent protection is sive asset stripping by the new corporate owners.And as desirable policy, it clearly is not “free trade.” Hildyard suggested, the newly “privatized” functions are It is clever policy for proponents of these agree- carried out within a web of special regulations and pro- ments to label them as “free trade” agreements tections to make sure the “private” firms are insulated (everyone likes freedom), but that is not an excuse from anything resembling genuine market competition. for neutral commentators to accept this definition. A genuinely libertarian privatization policy, as rec- ommended by Murray Rothbard in “Confiscation and Nicholas Hildyard had a pretty good handle on the Homestead Principle” (Libertarian Forum,June 15, what’s actually entailed in the neoliberal “free market” 1969), would treat State-owned utilities as the home- agenda promoted by these indices. The effect of the steads of those working them. agenda “has not, in most cases, been to diminish either The same is true of so-called “deregulation,” which the state’s institutional power or its spending. Instead, it (as Hildyard pointed out) can more accurately be called has redirected them elsewhere. It has also strengthened reregulation.The nature of most so-called utility dereg- the power of many Northern nations to intervene in ulation can be illustrated by the mid-1990s electrical the economic affairs of other countries. . . .” “deregulation” in Texas,home of “free market” champi- Of the kind of “privatization” that prevailed, for ons like Dick Armey and Tom DeLay. Writing at example, under Chile’s Pinochet and has since been Mises.org,Tim Swanson stated:

31 MARCH 2011 Kevin A. Carson

[I]n the mid-90s, regulators, consumers and energy two separate companies, one (Nexis) that owns all of producers began to rearrange the market for “dereg- the cables, wires, PBXs, switching stations, call cen- ulation” in Texas.Incumbent providers such as TXU ters, etc. and provides all of the services, repairs, and Reliant were restructured in the name of free installations, etc., and the other company (Willy) markets, but when the dust cleared, the only winners whom [sic] simply sends you a bill at the end of the were members of the political class and corporations month, providing no value-added service. that had been State-sanctioned monopolies prior to Not only is it not deregulation (the same players the “deregulation.” exist with State protection) but more overhead is TXU was separated into two companies, Oncor created through the creation of another billing com- and TXU Energy. Oncor was given the monopoly pany. [“Texas Sized Tomfoolery,” Sept. 9, 2003; on all services including meter reading, energy www.tinyurl.com/25f2jr7] delivery, etc. Additionally they own all of the poles and wires and are protected by law from competi- When the mainstream press and mainstream politics tion. TXU Energy became a billing company (and identify the narrow analysis associated with the indices owner of power plants), merely forwarding all of the as “economic freedom,”it’s no wonder that most people customer service questions and problems to Oncor, are wary of “free markets.” If I didn’t know better—if I and therefore providing no services themselves. didn’t know that real free markets were like kryptonite This is akin to the following: splitting AT&T into to corporate power—I’d hate them myself.

THE FREEMAN: www.thefreemanonline.org 32 Seasteading: Striking at the Root of Bad Government

BY PATRI FRIEDMAN AND BRAD TAYLOR

ibertarians have done a wonderful job of point- Rules Matter ing out the inefficiency and cruelty of govern- ules governing interaction and resolving disputes Lment and identifying some of the causes. We Rare an essential part of free and prosperous human know that current policies are bad; we know that such life. It’s difficult to stress strongly enough the impor- policies are the inevitable outcome of unrestrained tance of good rules.There are enormous differences in democracy; and we even have some ideas about what living standards around the world, and affluence is would work better. The most fundamental problem largely determined by the geographical lottery of birth. with government and the most promising form of The average American earns about $47,000 a year, activism have been largely ignored, while the average Zimbabwean gets though. If we want liberty in our life- The root we should by on a little more than $300. This times, we need to think more care- doesn’t mean that Americans simply fully about why we have bad be striking at is a have more stuff, but also more health, government and how best to improve tangled mess of security, and peace. things. The difference between the To think about this question, we barriers to entry and United States and Zimbabwe is that need to avoid being either too the former has relatively good institu- romantic or too cynical about gover- costs to switching in tions that allow trade and specializa- nance. While readers of this publica- the governance tion, while the latter does not. An tion are at no risk of being roman- even starker demonstration of the tic about government, there is a market. power of rules comes from the Korean chance of excessive cynicism. Gov- peninsula. Before World War II, North ernment currently works very poorly, and South Koreans shared a common culture, history, but this doesn’t need to be so. Competition would and set of rules.With the arbitrary division of the coun- force providers of governance to offer high-quality try based on the strategic maneuvering by the United rules and public services at a reasonable price, unleash- States and the Soviet Union, this all changed. The ing institutional innovation and making the world a South became more free; the North less. The result of much better place. this natural experiment is those in the South are now So far, most libertarians have been hacking at almost 15 times richer than those in the North. branches, while a few come tantalizingly close to strik- ing at the root.We’re going to try to convince you that Patri Friedman ([email protected]) is the founder and executive the root at which we should be striking is a tangled director of The Seasteading Institute (www.seasteading.org). Brad Taylor mess of barriers to entry and costs of switching in the ([email protected]) is a research associate there.They blog on seasteading and competitive government at Let a Thousand Nations governance market. The ax we should be using is the Bloom (www.athousandnations.com) and are writing a book on seasteading technology to settle the ocean. with Daniel Holt.

33 MARCH 2011 Patri Friedman and Brad Taylor

Of course, even relatively rich countries have their respond to incentives. James M. Buchanan describes problems, and libertarian policy activists have spent Public Choice, a field he jointly founded, as “politics countless hours and pages describing areas for improve- without romance.” ment. Patri’s grandfather Milton Friedman, for exam- The theory makes a distinction between two levels ple, painstakingly laid out the problems caused by many of politics. At the first is the to-and-fro of everyday government programs and argued that giving people politics in which rules are created, amended, and greater freedom would lead to dramatic improvements. repealed. This is the level at which policy activists While such reforms would certainly be desirable, sim- concentrate their efforts. The behavior at this level, ply insisting that we need particular reforms ignores the though, is determined by the incentives created at the incentives of the political system. constitutional level. Public Choice theorists argue that This neglect is rather odd: Libertarians are well if we want to improve policy, we need to do so indi- aware of systemic incentives and unintended conse- rectly by changing the constitutional meta-rules (rules quences at the policy level, but most ignore simi- about rulemaking) through which ordinary rules are lar problems in the established. higher-level political This has led many system.They will chide to advocate constitu- statists for assuming tional limits on the they can bring about power of government. a particular social or While this approach is economic outcome better than lobbying through top-down for particular policy planning, and then go changes, since the on to specify how results are likely to be they’ll change the rules more robust, Public from the top down Choice-influenced to allow bottom-up constitutionalists have interaction. not entirely rid their Policy activists are analysis and approach forgetting that the to activism of romance. Public Choice applies as much to writing constitutions as it does to governing under same problems that them. The familiar prob- prevent statist policies commons.wikimedia.org lems of unintended from working as advertised also block desirable consequences also arise at the constitutional level. Even reforms. The political system is itself a spontaneous if we could design the perfect constitution, we’d need order in which the interaction of many individuals to find a way of implementing and enforcing it. Given operating under various constraints and incentives that this would need to happen through existing polit- determines the policy decisions that will eventually be ical channels, we’re unlikely to end up with anything reached.This is where Public Choice theory is helpful: good. Constitutional politics is still politics, and those It allows us to analyze the incentives of political actors drafting the new constitution have the same foibles as and suggests a more fundamental level of intervention. anyone else. The problem of crafting better meta-rules is the Meta-Rules Matter same as that of crafting better rules:We know what the ublic Choice begins with a simple, indisputable, but problems are and might even have some good ideas Psomehow widely rejected idea: Politicians, voters, about how things can be improved.What we don’t have and bureaucrats are not angels. Political actors do not is a mechanism for improving things.The interests and selflessly strive to pursue the common good but passions of people do not disappear when they start

THE FREEMAN: www.thefreemanonline.org 34 Seasteading: Striking at the Root of Bad Government drafting constitutions, and political behavior, whether at The Machinery of Freedom. Market anarchism is not sim- the policy or constitutional level, emerges from the ply a system of good rules or even a system for produc- interaction of various agents. We need to think about ing good rules. It is a system for producing good the incentives that structure all political behavior, rule-making organizations. including that of the constitutional level. Similarly, though less radically, some have argued that we need to geographically decentralize political The Governance Industry Matters power.With smaller units of governance among which n extremely useful way to think about the incen- citizens could move based on quality and their idiosyn- Atives that structure the political game is to consider cratic preferences, we’d see governors constrained by the market for governance. Rules have economic value, the threat of exit and the quality of governance would and people would be willing to pay for them. We can improve. This was an important argument underlying think of the bundle of rules and public goods provided the federalism of the U.S. Constitution: There would by government as a product, governments as producers, be competition among the several states, and Ameri- citizens as consumers, and cans would enjoy better taxes as prices. governance. This seems counterin- While market anarchists tuitive, especially to liber- and decentralists are cor- tarians—who realize that rect that we need more markets provide choice competition if we are to whereas governments as improve government, they we know them do not. have generally failed to There are, however, a address the reasons we have number of benefits to this such an uncompetitive view. It allows us to ana- market for governance and lyze the industry structure therefore provide no route for government and learn for getting from here to The providers of governance face little real competition because of the why governance quality is difficulty in switching from one to another. there. Aotearoa [Wikimedia.org] currently so low.The cur- rent market for governance is dominated by a series of The Technological Environment Matters large geographic monopolies not subject to competi- hen we think of governance as an industry, the tion. In a competitive market those organizational Wproblem with policy and constitutional activism forms that are not conducive to producing high levels becomes clear: Policy advocates are demanding better of customer satisfaction are weeded out by natural products without providing a mechanism for products selection. Without competition, this selection mecha- to improve, while constitutionalists are demanding bet- nism is absent and we end up with what we have today: ter firms without providing a mechanism for firms to bad firms producing bad products. improve.The problem with the arguments of anarcho- This is why we have bad constitutional structures. capitalists and decentralists is less obvious but simple A number of scholars have already recognized this. enough: They demand a better industry structure but The idea of market anarchism is to have governance have provided no mechanism for the industry structure services such as rulemaking, adjudication, and protec- to improve. tion provided on the open market. This would force Think about the operating-system (OS) industry. providers to compete and the incompetent would go This is one of the least competitive industries around out of business. Patri’s father, David Friedman, provided (though it’s still orders of magnitude more competitive what is, in our unbiased opinion, the best description of than the governance industry).We all know it’s uncom- how such a polycentric system would work in his book petitive, but simply insisting that we need to increase

35 MARCH 2011 Patri Friedman and Brad Taylor competition is not useful. It is uncompetitive for a rea- The Seasteading Institute with the mission of develop- son. Creating an operating system is an expensive ing the technological, political, and economic knowl- undertaking, and network effects and switching costs edge we need to revolutionize the governance industry. mean that consumers are reluctant to change. If the ultimate problem with that industry is high If someone genuinely wanted to make the OS barriers to entry and switching costs, we need to find a industry more competitive, she wouldn’t go about it by way to dismantle these obstructions to competition. In simply insisting that we need more competitors. the past, frontiers have provided the means for disen- Rather, she would attempt to change the underlying franchised groups to start their own country. Unfortu- technological factors that cause the OS industry to have nately, we’ve run out of frontier on land. Every square high barriers to entry and switching costs. We can see inch of land on the planet is claimed by some existing this happening with the open-source software move- State, and none is going to give up its claim. ment, which does not simply create a new competitor The ocean is a vast frontier unclaimed by States. to Microsoft, but rather opens a range of possibilities While they claim some jurisdiction over resources in for improvement by making it easier for hackers to large areas of ocean, there is much space for political build custom OSes. Over time this experimentation within these zones has produced new versions of Linux and plenty of space outside any State’s that are more user-friendly and com- If the ultimate practical reach. Starting your own patible with Windows, lowering the problem with the country on the ocean will be difficult cost of switching. and expensive, but at least it’s possible. This is the sort of technological governance industry The ocean is not yet ready for set- activism libertarians need to engage tlement by most people. It is harsh in if they really want to change is high barriers to and unforgiving, and long-term life things. Some are doing this already. entry and switching on the sea is currently limited to only Crypto-anarchists aim to help people a few pioneers in the fishing, offshore escape State control by developing costs, we need to find oil, and cruise industries, as well as more secure communication tech- a way to dismantle a handful of dedicated live-aboard nologies; agorists aim to develop non- sailors. State institutions that would allow these obstructions to Technology, though, has the people similarly to avoid dealing with competition. potential to make the ocean a feasible the State; and Julian Assange’s Wiki- alternative for more people. Early Leaks project uses technology to pioneers will learn lessons that will make government more transparent.While we applaud make life on the ocean easier, thus prompting previ- these efforts, we don’t think they are going to get us to ously unwilling pioneers to make the move. Over time a radically freer world. The State is a powerful and the costs in comfort, safety, and access to civilization resilient institution, and it will fight back against these will fall and the ocean will be just another place to live. internal threats to its existence. Fortunately, there is This is the path we see on any frontier. Living in the another way that has the potential to fundamentally harsh environment of North America would not have change things. seemed like an attractive proposition to most Euro- peans a few centuries ago. Eventually, the wilderness Seasteading was tamed, and North Americans now enjoy higher eveloping the technology to create permanent, standards of life than many in the old world. Dautonomous communities on the ocean seems As it happens, the ocean has another important like a strange way to solve the problem of bad gover- benefit. Water makes it easy to shift large objects nance, but we’re convinced it’s the best chance we have around cheaply.This is what allowed the global ship- for liberty in our lifetimes.This is why Patri established ping industry to prosper, and it could also help make

THE FREEMAN: www.thefreemanonline.org 36 Seasteading: Striking at the Root of Bad Government government more competitive. We normally think of fully about the business case for particular industries buildings as being tied to land, and this has serious for which seasteading has a comparative advantage. implications for competition. Government can do a lot Many industries are overregulated, and a seastead off of harm before it becomes worthwhile for someone to the coast of a major U.S. city offering medical treat- move away.The fluidity of the ocean, ments not yet approved by the FDA, in contrast, allows people to vote The challenges and for example, would be a very lucrative with their house by sailing to a proposition. neighboring jurisdiction. If a seast- uncertainties in We know it is possible to live on eading government announces an settling the ocean are the ocean; we know there are ways to unpopular policy, it could find that it make money there, and our mission is rules over nothing but empty waves. large, but there are to drive down the costs of seasteading This would allow bad governments to transform the ocean from potential to die without bloodshed and force only a few core frontier into real frontier and eventu- governors to think about what peo- problems and none ally into just another option with ple really want. some serious advantages.This will lead While the challenges and uncer- are insurmountable. to experimentation and innovation in tainties in settling the ocean are governance and force existing States large, there are only a few core problems and none are to improve or wither away for a lack of residents. The insurmountable.To make seasteading a reality we need challenges are large but the potential payoffs are much, to take a pragmatic, incremental, and business-focused much larger. By transforming the political problem of approach. Rather than creating a multibillion-dollar bad governance into a hard but achievable technologi- vessel straight away without any clear way to finance it, cal problem, which humans have a knack at solving, we we encourage seasteading entrepreneurs to think care- make success possible.

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37 MARCH 2011 The Canard of “Underutilized Resources”

BY TYLER WATTS

ast November the Federal Open Market Com- why those resources became unemployed—“underuti- mittee announced plans to purchase, by printing lized” in fedspeak—in the first place. This is precisely Lmoney, $600 billion of long-term government the question that Austrian economists are asking:What bonds over the next 6 months.This “Quantitative Eas- exactly went wrong in the economy such that so many ing,”Fed Chairman Bernanke assures us, is necessary to resources are now not being utilized? By addressing this aid an economy that is suffering from “a very high level crucial question, only the Austrian perspective can ade- of underutilization of resources.”In other words, there’s quately dissect the very concept of “underutilization” a whole lot of unemployment out there, of both labor and offer a coherent critique of this mad-hatter mone- and capital, and it will take a huge jolt of monetary tary stimulus. stimulus to get these “idle resources” back to work. Let’s deconstruct this notion of resource “underuti- This massive money injection is supposed to work as lization.” Resources are only resources to the extent follows: buying up Treasury bonds will make their that they have value, or usefulness, to somebody. prices rise, and their yields—hence long term interest Resources, properly speaking, are components of a rates in general—fall. (Recall that pre- broader plan of entrepreneurial vious monetary stimulus has already action that brings more and better pushed short-term rates close to zero.) Things that can’t be goods into existence, which people Lower interest rates mean investment can use to improve their lives. Not all capital will be even cheaper than it used to enrich life things are resources—things that can’t already is, pushing idle investment be used to enhance life aren’t money “off the sidelines” and into aren’t resources. resources, just objects; things that productive, labor-demanding business used to be resources but are now activity. And because all the fresh worn out, obsolete, or otherwise money starts its life as bank reserves, banks will be in a have lost their usefulness aren’t resources. They’re position to extend new loans six ways from Sunday. just junk. Keynesians insist that this kind of massive stimulus is Context matters when we’re talking about the only weapon the monetary authorities have left in resources. The mere fact that a good was produced at their struggle to cure unemployment. This is a short- some point and sold for some price does not mean it is term fix, mind you; all economists realize that printing still as valuable as originally anticipated. For example, if money does not call new goods or services into exis- I took the trouble to fatten 100 steers in hopes of sell- tence, and not even Keynes himself would tell you that ing 50 tons of beef, only to later discover that everyone straight-up money printing is a recipe for long-term has become a vegetarian in the meantime, the beef I prosperity. But can printing money induce entrepre- neurs to expand output? Can it make unemployed Tyler Watts ([email protected]) is an assistant professor of economics at Ball resources suddenly employable? The answer depends on State University.This article first appeared at TheFreemanOnline.org.

THE FREEMAN: www.thefreemanonline.org 38 The Canard of “Underutilized Resources” produced, economically speaking, would not be a The value of capital—both capital equipment, or resource. Nor would the beef-producing equipment, physical capital, and people’s knowledge, experience, tools, and knowledge I invested in have the same value and training, or human capital—is critically dependent to me once I found out the true state of people’s on how well it can fit into the structure of actual con- dietary preferences. While some cattle-raising equip- sumer demands and the structure of existing comple- ment could be converted to other uses, much of it— mentary capital (both physical and human). It is like the squeeze chute used for medicating and precisely this kind of interconnectedness among differ- branding cattle—was highly specific to beef production ent kinds of resources that mainstream economists tend and would be worth no more than its scrap-metal value to disregard.Yet the extent of economic losses revealed in a world where nobody wanted to consume beef. My by the recent financial crisis and recession is making the plan to be a cattleman turned out a big mistake entail- malinvestment (waste) of resources hard to ignore. Even ing a loss on investment. Losing investments mean eco- at the Fed, some people show signs of understanding nomic waste has occurred—to some degree, resources the relevance of the structure of capital resources, as have been turned into junk. opposed to sheer quantities or supposed dollar values. This example may be ridiculous, but is it really that As Naranya Kocherlakota, president of the Minneapolis far-fetched? It is highly unlikely that people’s prefer- Fed, recently stated: “[T]he Fed does not have a means ences would change so drastically or that entrepreneurs to transform construction workers into manufactur- would be so clueless at forecasting ing workers. ...Most of the existing market trends. But a strong enough unemployment represents mismatch outside influence might induce No amount of that is not readily amenable to mone- enough entrepreneurs into misreading money-printing will tary policy.” the true state of the market such that In other words, no amount of they become overoptimistic and change the real money-printing will change the real invest too much. If, for instance, relationship of any relationship of any particular object politicians were dedicated to stimulat- to its economic context. But the term ing the beef industry and promoting particular object to its “mismatch” implies mistakes have beef consumption, and built policy on economic context. been made—entrepreneurial error— policy to that purpose over the and raises the question: What went decades—a labyrinthine mixture of wrong to cause such massive mistakes subsidies, tax breaks, and cheap credit—they just might in the first place? Again, Austrian capital theory pro- generate an investment boom in beef production. The vides the answer:The Fed itself, with its cheap money, boom, however, would be destined to end as soon as along with a host of government “affordable housing” the policy changed or, more likely,the oversaturation of policies, severely overstimulated the housing construc- the market became evident. tion market in the years of the boom. At this point, with declining beef prices and (now- Entrepreneurs always have many options for how to apparent) excess capacity in beef production, market employ their time, labor, and capital. During the hous- forces would oust marginal producers from the industry ing boom the amazing increase in home prices relative and induce even the large, established operators to scale to construction costs made projects like new home back production. As for the now “underutilized” construction and even flipping condos seem an obvious resources, it would take some time and a lot of extra profit opportunity. Following the price signals, people work to melt down those excess squeeze chutes, to expanded their investments appropriately:Young entre- convert cattle pasture into other crops, and for the preneurs learned about real estate and construction reluctant surplus cowboys to eventually accept city jobs management, and new workers learned construction mopping floors, answering phones, ringing up sales, and trades; building companies were started and existing so on. companies expanded, purchasing more new equipment

39 MARCH 2011 Tyler Watts like nail guns, Skilsaws, and pickup trucks; upstream But this adjustment takes time, and the more spe- suppliers similarly expanded investment in things like cialized the resource, the longer the wait. Some excess cement plants, timber plantations, sawmills, and the like. concrete trucks can be sent overseas or converted to Regardless of whether these workers and entrepre- other industrial uses, but many will simply sit, awaiting neurs were cognizant of the temporary, cheap credit- the next boom or the scrap heap. Indeed, in some and subsidy-induced nature of the boom, the lure of cases, when a particular resource loses its usefulness, high prices and high profits proved irresistible. In retro- leaving it idle can be its optimal “use.” Likewise, the spect it is easy to see how the Fed’s cheap money pol- surplus low-skilled construction laborers can perhaps icy, along with a host of government subsidies to get jobs washing dishes, but skilled tradesmen, engi- homebuyers and lenders, set the stage for an unsustain- neers, and jobsite managers must retrain to find differ- able boom—a boom that did not match well the actual, ent jobs that match their boom-era earnings. Not long-term consumer demand and for which the credit surprisingly, some choose to wait (and take unemploy- that financed it was not fully funded by actual savings. ment benefits) rather than risk retraining. For those (For an excellent explanation of the government’s role who have thrown in the towel on a construction career, in the housing boom and bust, see Peter Boettke and retraining and reemployment can take years. No Steven Horwitz’s FEE publication “The House That amount of money-printing can change this reality. Uncle Sam Built,” www.tinyurl.com/yjnptej [PDF]). Political efforts to “stimulate” economic activity Nonetheless, the slew of political interventions into the will necessarily alter the capital structure of the econ- housing market led these entrepreneurs on for years omy. Government-based stimulus for industry Z nec- before the inevitable market correc- essarily detracts from what the tion occurred.The net result was that The optimal market would have provided indus- too much investment capital went tries A through Y. Even a nonspecific into home building, and not enough monetary policy is stimulus, if such is possible, will only into other economic activities—a stimulate the investment fad du jour; mistake of grand proportions. not to have one. there is no such thing as neutral gov- The housing bust revealed that ernment policy. The key policy many of the capital investments of the boom period— implication of Austrian capital theory is that any from concrete trucks on up to skilled construction attempt to stimulate the economy will, by spurring tradesmen—were actually malinvestments whose value malinvestment, doom some resources to superfluous- turned out to be less (in some cases much less) than ness. From a statistical standpoint this may look like anticipated. The capital resources created to build underutilization; from an economic standpoint, how- houses are, to varying degrees, ill-suited to other tasks. ever, it’s simply the waste that results from too many They will necessarily be underutilized relative to the investment plans gone bad. Attempting to undo the boom era, precisely because they have lost value (use- waste by further stimulus will only exacerbate the fulness) in light of the new economic reality. Indeed, problem: more stimulus, more malinvestment, more economic reality in the bust indicates that many of wasted resources. these resources will have to find other ways to be pro- So what should the wise and munificent monetary ductive, as attested by the overbuilt housing market. central planners do? Ironically, the optimal monetary (According to National Association of Realtors figures, policy is not to have one, but to let the competitive there were between 1.02 and 1.77 million “excess” market process function for money and credit the way homes as of September. Supply was converted into it does for countless other goods. If we must have cen- excess units on the basis of six-to-eight months’ supply tral banking, the ideal policy is simply this: First do no representing “normal” conditions.) harm.

THE FREEMAN: www.thefreemanonline.org 40 Give Me a Break!

Why Do the Poor Stay Poor?

BY JOHN STOSSEL

f the six billion people on earth, two billion places in the developing world barely have law. So try to survive on a few dollars a day. They enterprising people take a risk.They work a deal with Odon’t build businesses—or if they do, they the guy on the first floor, and they build their house on don’t expand them. Unlike people in the United States, the second floor. Europe, and Asian countries like Japan, South Korea, “Probably the guy on the first floor, who had the Hong Kong, etc., they don’t lift themselves out of guts to squat and make a deal with somebody from poverty.Why not? What’s the difference between them government who decided to look the other way, has and us? Hernando de Soto taught me that the biggest got an invisible property right. It’s not very different difference may be property rights. from when you Americans started going west, [but] I first met de Soto maybe 15 years ago. It was at one Americans at that time were absolutely conscious of of those lunches where people sit around wondering what the rule of law was about,” de Soto said. how to end poverty. Americans marked off property, I go, but I’m skeptical.There sits de Commerce between courts recognized that property, and Soto, president of the Institute for the people got deeds that meant Liberty and Democracy in Peru, and total strangers everyone knew their property was he starts pulling pictures out showing wouldn’t happen theirs. They could then buy and sell slum dwellings built on top of each and borrow against it as they saw fit. other. I wondered what they meant. without a deed This idea of a deed protecting As de Soto explained, “These pic- protecting propery. property seems simple, but it’s pow- tures show that roughly 4 billion peo- erful. Commerce between total ple in the world actually build their homes and own strangers wouldn’t happen otherwise. It applies to more their businesses outside the legal system. ...Because of than just skyscrapers and factories. It applies to stock the lack of rule of law [and] the definition of who owns markets, which only work because of deed-like paper- what, and because they don’t have addresses, they can’t work that we trust because we have the rule of law. get credit [for investment loans].” Is de Soto saying that if the developing world had They don’t have addresses? the rule of law it could become as rich as we are? “To get an address, somebody’s got to recognize that “Oh, yes. Of course. But let me tell you, bringing in that’s where you live.That means . . . you’ve a got mail- the rule of law is no easy thing.” ing address. . . .When you make a deal with someone, De Soto says we’ve forgotten what made us prosper- you can be identified. But until property is defined by ous. “But [leaders in the developing world] see that law, people can’t . . . specialize and create wealth. The they’re pot-poor relative to your wealth.” They are day they get title [is] the day that the businesses in their beginning to grasp the importance of private property. homes, the sewing machines, the cotton gins, the car Let’s hope we haven’t forgotten what they are repair shop finally gets recognized. They can start beginning to learn. expanding.” That’s the road to prosperity. But first they need to John Stossel hosts Stossel on Fox Business and is the author of Myths, Lies, and Downright Stupidity: Get Out the Shovel—Why be recognized by someone in local authority who says, Everything You Know is Wrong. Copyright 2010 by JFS Productions, “This is yours.”They need the rule of law. But many Inc. Distributed by Creators Syndicate, Inc.

41 MARCH 2011 Book Reviews

Enunciating ideas is not enough. They must be acted Book Reviews on, at home, at work, and in public policy.And there is no one-size-fits-all formula for liberty.What works in one cultural context may not work in another. Every Realizing Freedom: Libertarian Theory, History, attempt to foster a free society must find roots in the and Practice way people live. by Tom Palmer Realizing Freedom is divided into four sections: liber- Cato Institute • 2009 • 496 pages • $29.95 tarian theory, history, practice, and books and ideas. In his section on theory, he addresses the connections Reviewed by Ben A. Rast between liberty, rights, and the rule of law. Hardly a very generation faces the surprising theme, he admits, but “the rule of law is the Estruggle for freedom anew, but key to freedom.”When theorists pursue “social justice,” not alone.To be successful it must they weaken or even eliminate the rule of law. draw on its inherited ideas of free- One such theorist is John Rawls. Rawls’s theory of dom, then reformulate them into a justice is one of the most influential products of the message that is relevant and inspir- twentieth century, but Palmer eviscerates it. Rawls ing to the people of a particular derived his theory from a set of “thought experiments.” time and place. Palmer points out a fundamental flaw in these experi- Success in this task requires ments, a flaw so large that it compromises all of Rawls’s both a message and a messenger: something worth say- conclusions: Rawls assumes an individual cannot exit ing and someone who can say it well. Realizing Free- an undesirable social contract. Palmer writes, “Slam- dom,a collection of 20 years of his published writing, ming shut the exit door creates the problem to which shows that Tom Palmer has been among the most suc- fairness is alleged to be the answer, but it also makes it cessful messengers of liberty.At the risk of crossing the impossible to put the solution into practice. Not only is fine line between praise and hyperbole, Palmer is a tire- the game rigged; it is not even possible to play it by the less apostle of international liberty. rules stipulated.” Instead of fairness, Palmer shows that Realizing Freedom demonstrates Palmer’s versatility as Rawls’s thought experiment ends in a closed system of a writer as well as his avoidance of narrow political forced labor. pigeonholing.The collection includes scholarly analyses In his section on history Palmer covers the tradition of intellectuals like John Rawls and G. A. Cohen and of classical liberalism, introducing his readers to its great guest editorials in publications as diverse as the conser- exponents and the battles they fought. Even longtime vative Washington Times and the not-so-conservative libertarians will learn much about their intellectual Washington Blade,a gay newspaper. heritage. Palmer’s writing is a call to social action in the The book’s “practice” section covers many specific name of human freedom. Liberty, he argues, is for issues, such as the proclivity of governments to engage everyone, not just those who manage to control political in needless wars and to whittle down even supposedly power. He feels that liberalism lost the battle of ideas sacred rights, such as freedom of speech. Palmer’s final (and humanity consequently suffered) because libertar- section on key books and ideas is extremely valuable to ians shrank from the debate and left the field to the those just getting into libertarianism who want to learn enemies of freedom. His message is uncompromising: more. Do not concede; do not flee.Take the enemies of free- Palmer’s essays are always cogent and range over dom seriously—as seriously as they take their fight a wide array of topics.The utility of the book, how- against it. ever, would have been improved by better docu- Palmer warns us that defending liberty is not easy. It mentation of each essay’s original publication. A col- is not a parlor game played by polite intellectuals. lection of his essays like this, written over 20 years

THE FREEMAN: www.thefreemanonline.org 42 Book Reviews and for different periodicals, is risky business. It must Federal Reserve facilitate JP Morgan’s takeover of Bear, overcome the obstacles of ideas presented out of leaving Lehman the smallest of the remaining invest- context and out of time. A short introductory para- ment banks. Its stock drops precipitously. graph explaining the time, context, and audience of From a huge cast of characters, one man emerges as the piece would have made the reading experience a tragic figure—Lehman chief executive Richard Fuld. more enjoyable. He became obsessed with short sellers (traders who But that’s just a quibble. Tom Palmer is a modern borrow and sell shares to profit from a future price Bastiat: a scholar, a public intellectual, and an indefati- decline), blaming them for spreading malicious rumors gable defender of liberty around the world. His message about Lehman instead of confronting the bank’s real is simply this: Freedom is not a unique cultural product. weakness.That was one in a series of dreadful mistakes. Every nation has a native set of ideas about liberty.The With Fuld’s backing, Lehman president Joseph Gregory intellectual’s task is to identify and cultivate those ideas had pushed the bank into mortgages, commercial real that promote the expansion of freedom and to boldly estate, and leveraged loans. He put inexperienced man- oppose those ideas that constrict it. agers in charge of those activities and got rid of special- Realizing Freedom is the record of Palmer’s remark- ists who warned of danger. Catastrophic losses from the able contributions toward that endless task. I strongly real-estate slump were killing Lehman by 2008. Short recommend a studious reading of this book. selling the stock was a symptom rather than a cause of the disease. Ben Rast ([email protected]) is president of The Bastiat Society. Sorkin recounts Lehman’s destruction, which occurred despite Fuld’s increasingly frantic efforts to raise capital or sell the company. Bank of America bought Merrill Lynch instead of Lehman, with the Too Big to Fail: The Inside Story of How Wall Street blessing of the Treasury and the Fed.A deal was worked and Washington Fought to Save the Financial out with Barclays Capital but scuttled at the last minute System—and Themselves by British regulators, a debacle their American counter- by Andrew Ross Sorkin parts could almost certainly have prevented. Viking Penguin • 2009/2010 • 624/640 pages • $32.95 Timothy Geithner, then head of the New York Fed- hardcover; $18.00 paperback eral Reserve, was fixated on merging other banks. Dur- ing a tense phone call, he effectively ordered Morgan Reviewed by Chidem Kurdas Stanley chief John Mack to sell his company to JP ooks about the 2008 financial Morgan for almost nothing. “I just won’t do it,” Mack Bcrisis keep coming, and New said and hung up. There was no good business reason York Times reporter Andrew Ross for the merger, and JP Morgan chief Jamie Dimon did Sorkin offers one of the better not want it either. accounts of the meltdown. Using a Mack managed to save Morgan Stanley by getting large number of interviews, he capital from the Japanese bank Mitsubishi. Had Geith- reconstructs the words and acts of ner succeeded in bulldozing Mack into selling, tens of key people during the six months thousands of employees would have lost their jobs from the near-collapse of Bear and the too-big-to-fail problem would have been exac- Stearns in March to the bankruptcy of Lehman Broth- erbated. The incident does not inspire confidence in ers in September. Geithner, currently Treasury secretary. The book is somewhat bloated, but the tale is com- Another bad shotgun marriage was arranged by pelling. It starts as Bear Stearns, the smallest of the five Sheila Bair, head of the Federal Deposit Insurance Cor- Wall Street investment houses, wobbles on the edge of poration, who decided to sell Wachovia to Citigroup bankruptcy.Treasury Secretary Henry Paulson and the with a government guarantee for toxic assets. Fortu-

43 MARCH 2011 Book Reviews nately,Wells Fargo chief Richard Kovacevich, who was The Hesitant Hand: Taming Self-Interest in the interested in Wachovia all along, took action just in History of Economic Ideas time. Wells Fargo was willing to pay a higher price by Steven G. Medema without a taxpayer guarantee. Princeton University Press • 2009 • 248 pages • $35.00 These events raise the question of why government Reviewed by Sandy Ikeda agents can dispose of other people’s property.They cer- tainly don’t seem to worry about preserving the value “ he focus of this book,” of businesses or reducing taxpayer liability. Taccording to its author, “is What’s the lesson in this? Unfortunately, Sorkin the interplay of self-interest, mar- doesn’t make the big picture clear.The boom-and-bust ket, and the state in economic happened because the Fed opened the floodgates to analysis from the mid-nineteenth easy money.That’s what got everybody, from the sec- century up through the latter stages ond-mortgaged homeowner to Lehman Brothers, to of the twentieth.” leverage up. Our supposedly expert government players Much of this well-written study, apparently never realized this: Their conceit that they however, is devoted to describing know how to manage the economy is the root of the intellectual origins of the approach to political our trouble. economy known today as “Public Choice”—the eco- They might avoid fueling bubbles, but let’s leave that nomics of politics. Nevertheless, its subject is the his- aside, since Sorkin doesn’t dig that deep. He describes tory of the analysis of nonmarket activity generally. interventions notable, among other things, for their Modern economics offers two separate grounds for sheer arbitrariness. The Fed and Treasury backstopped interventionism. One traces its origins to John Maynard Bear Stearns debt in the acquisition by JP Morgan, but Keynes, the other to Arthur Cecil Pigou. Both were would not do the same for Lehman. The first action students of Alfred Marshall; both were fellows of King’s created expectations that the same support would be College, Cambridge, in the 1930s; and both proposed available for other banks and led to a false sense of theories of “market failure.” Pigou was probably the security. There is no obvious reason why two sets of first to examine so-called “market failure” within a bond holders should be treated differently. It would be Marshallian, microeconomic framework, pointing out vastly better if government officials were deprived of how self-interest can produce systematic inefficiencies. the authority to bail out anyone. His intellectual descendants often use the framework he Our financial system has suffered tremendously as a created to conduct “welfare analyses” of positive and result of capricious interventions by government officials negative externalities, as well as of the taxes, subsidies, who themselves never bear any costs from the adverse and other measures that are supposed to fix them. effects of their decisions. If anything, they benefit. Steven G. Medema deals with the Pigouvian legacy Though the entire boom-bust cycle provides evidence in this fascinating intellectual history. But Pigou lies that government agencies, from the Fed on down, somewhere in the middle of the story Professor should have far less discretion, the massive financial reg- Medema tells. ulation law passed this year rewards them with greater The book presumes familiarity with economic the- powers and wider room to do whatever they want. We ory and contemporary ideas in political economy, so I should be afraid of the economic and social damage would not recommend this book for the general reader. their arbitrary actions will wreak in the future. But anyone who has taken an introductory course in microeconomics should be reasonably comfortable Chidem Kurdas ([email protected]) is a financial writer in New York. with the discussion. The book opens with a short overview of Adam Smith’s explanation of how self- interest promotes the general welfare via the “invisible hand,” contrasting that view with the more statist

THE FREEMAN: www.thefreemanonline.org 44 Book Reviews approaches of the earlier French Physiocrats and Eng- Richard Posner, the law-and-economics tradition lish Mercantilists. In the hands of Smith, self-interest evolved into the “economic analysis of law.” “had finally found legitimacy.”But this is not the Smith This book reads a bit like a “Whig interpretation of of laissez-faire caricature. Medema offers an impressive the history of political economy,” in that it gives the list of interventions Smith advocated, from regulating impression that the developments in political economy public hygiene to taxes on liquor. For Medema, Smith’s after Smith have led to Public Choice as not only the great achievement, however, was to make laissez-faire predominant but perhaps the sole market-based theory capitalism the “default mode” of government policy. of government failure. The next two chapters trace the swing from wide- Thus there is only the briefest, nonsubstantive spread support for laissez faire among British intellectu- reference to F.A. Hayek and his influential book The als back to a more interventionist proclivity in the latter Road to Serfdom and none at all to Ludwig von Mises, nineteenth century in the writings of Jeremy Bentham, who wrote many tracts critiquing the doctrine of J. R. McCulloch, J. E. Cairnes, and especially John Stu- interventionism. While their take on government fail- art Mill and Henry Sidgwick. However, despite impor- ure does appreciate the role of (perverse) incentives in tant reservations, the default remained laissez faire the political process, its main focus is on how knowl- capitalism, more or less. edge and calculation problems tend to thwart interven- In chapter four we see how,beginning with the Ital- tionism by systematically creating negative unintended ian La Scienza delle Finanze and the work of the consequences. Swedish economist Knut Wicksell, some economists by But these are really nits I’m picking here. I whole- the mid-twentieth century were beginning to integrate heartedly recommend this informative book to anyone political incentives into the area that we today call with a little background in microeconomics who is “public finance,” something British political economy interested in a history of Chicago and Virginia polit- (Keynes included) had neglected to do.This gave rise to ical economy told in a clear, scholarly, and engaging a systematic examination of the causes and conse- way. quences of “government failure.” Sandy Ikeda ([email protected]) is an associate professor of Chapter five discusses the contributions of Ronald economics at Purchase College, SUNY. Coase, who opened inroads into the study of nonmar- ket phenomena. What later became known as the “Coase theorem” emerged from an explicit critique of the Pigouvian market-failure theory (though, as Intellectuals and Society Medema argues, not of Pigou himself), and is the basis by Thomas Sowell of the “economic analysis of law” tradition and modern Basic Books • 2010 • 416 pages • $29.95 theories of regulation. Reviewed by George Leef Chapter six addresses the Public Choice school itself, moving in a most welcome and informative way f you trace back to the origins of from intellectual to institutional history. It chronicles Ialmost any damaging public-pol- the beginnings of Public Choice from the University of icy idea in America, you find it Virginia in the late 1950s, to the ideological tensions rooted in the imagination of some that may have scattered its most important scholars in intellectual. Just to pick one field, the 1960s, to its reestablishment at Virginia Polytechnic consider housing.Why do we have Institute and the founding of the Center for the Study huge tracts of depressing, unsafe, of Public Choice, as well as the journal Public Choice,in unclean public housing in some of the late 1960s. our largest cities? That did not sim- Finally, chapter seven could actually stand alone as ply happen—the idea for such projects came from “Pro- an essay on how, largely in the masterful hands of gressive” intellectuals who were certain their thoughts

45 MARCH 2011 Book Reviews on how cities should be planned would make life Sowell highlights a curious feature of many intellec- immeasurably better. tuals: namely, their indifference to evidence that ques- Eventually, politicians sensed there would be votes tions the wisdom of their pet policies. Gun control is a coming their way if they put supposedly expert and good example. Do gun control laws actually reduce compassionate ideas like public housing into effect.The violence? A wealth of data shows that antigun statutes result was that many people were displaced into worse have precisely the opposite effect. You might expect housing than they’d previously had and those “lucky” that people who are ostensibly committed to rationality enough to get into the new government housing proj- would change their minds when faced with such evi- ects soon found them abominable. But what about the dence, but that is almost never the case. On the con- intellectual progenitors of public housing? They suf- trary, if you challenge a pro-gun-control intellectual, fered in no way.No professorships were lost; no reputa- you are apt to be met with condescension and invec- tions were damaged. If any intellectuals who had tive. advocated “urban renewal” had any pangs of conscience It is the same with scores of other issues in which over it, they issued no mea culpas. intellectuals adhere dogmatically to cherished beliefs In Intellectuals and Society Thomas Sowell essays a about the benefits of government intervention, no devastating assessment of the role that intellectuals matter how strong the case that they’re actually play in modern life. Their impact, he argues, is over- harmful. whelmingly detrimental and stems from their ability There is, however, a serious flaw in the book. to use their primary skill (“verbal virtuosity,” he terms Although Sowell quite correctly observes that the “Pro- it) to get those in power to reorganize the world in gressive” intellectuals managed to embroil the United accordance with their theories about how society States in needless wars (especially World War I, but also should function. Those theories usually entail govern- other conflicts), he cannot or will not see that “right- ment coercion euphemistically called “planning” or wing” intellectuals have done similar damage by pro- “regulation.” viding the rationales for our disastrous military When it’s good, this book is magnificent. Here is escapades this century. Sowell doesn’t explain why the one of many excellent, quotable passages: “Intellectuals influence of interventionist intellectuals who favored are often extraordinary within their own specialties— war in the former era was harmful, but the influence but so are chess grandmasters, musical prodigies and of interventionist intellectuals who favor war today many others. The difference is that these other excep- is good. tional people seldom imagine that their talents . . . enti- Or we might turn this around and ask why the aver- tle them to judge, pontificate to, and direct a whole sion to conflict and efforts at “nation-building” that society.” That sums up the problem with intellectuals characterized Woodrow Wilson’s opponents was sensi- very nicely. ble, but when (some) intellectuals today question the Intellectuals are usually so absorbed in their visions same sorts of policies, Sowell regards them as blind ide- for a better world that they have no patience for the ologues. It is the pro-intervention crowd here that is gradual change that comes through market processes oblivious to the consequences of their favored actions. and voluntary action.Why wait for “social justice” out- Convincing a neoconservative intellectual that our comes such as the elimination of poverty or the end of “war against terrorism” is counterproductive seems to discrimination if the government can simply mandate be on the same order of difficulty as convincing a Pro- higher wages or outlaw “unfair” hiring practices? Sow- gressive that rent-control and minimum wage laws are ell acknowledges that some intellectuals understand counterproductive. that State coercion, no matter how splendid the inten- Aside from that serious blind spot, however, Intellec- tions behind it, is counterproductive. Most of them, tuals and Society is a sharp and enlightening book. however, continue advocating programs built around mandates, prohibitions, and taxes. Power is their opiate. George Leef ([email protected]) is book review editor of The Freeman.

THE FREEMAN: www.thefreemanonline.org 46 The Pursuit of Happiness

Card Check Without Congress

BY CHARLES W. BAIRD

n 2009 I made a bet with fellow Freeman columnist Board, is a former union lawyer with a long record of David R. Henderson that before the Obama presi- serving the interests of unions. Her term expires August Idency expires, Congress would enact substantial 27. Obama may reappoint her, but the new Senate may freedom-reducing changes—such as card check—to not go along. While in private practice Hayes repre- American union law. David, ever the optimist, didn’t sented management interests in labor disputes. His term think so. Inasmuch as Speaker Nancy Pelosi is just a bad expires in 2015. In private practice Pearce represented memory from a horrible dream, and it is now very dif- union interests in labor disputes. His term also expires ficult for Obama and his allies to break filibusters in the in 2015. Senate, it seems that David will win our bet when Obama leaves office in January 2013. (I can be an opti- Becker Versus Workers mist, too.) he other member, Craig Becker, was never The 112th Congress is not likely to enact the sort of Tapproved by the Senate. He is on the Board changes to American union law pre- because in 2010 Obama used his ferred by the bosses of the Service recess appointment power to get Employees International Union Obama is very likely around Senate confirmation. He may (SEIU), but Obama is very likely to to try to enact have to do the same to keep Liebman try to do so through administrative on the Board when her term expires. and executive fiat. As Shelby Steele freedom-reducing Becker is unique in his pro-union, says, Obama’s “policymaking has changes to union law, anti-worker sympathies.As I will show been grandiose, thoughtless and bul- below, he is an Obama kind of guy. lying.” Two non-union examples with or without While a package deal between Obama (mine not Steele’s): Obama, when and sufficient Senate Republicans faced by Senate opposition to his Congress. involving Liebman and a Republican grandiose cap-and-tax war against appointee to fill the fifth seat may be carbon, deliberately went around Congress to his put together, there is no way Becker can avoid a Senate thoughtlessly green appointees in the EPA to attack filibuster against his appointment to a regular term. carbon through administrative fiat. Again, when faced Right now there are three reliably pro-union votes by two court decisions that told him he could not shut on the NLRB. They can do what they want in each down offshore oil drilling in the Gulf of Mexico, he case that comes before them.The imminent danger to deliberately went around the court decisions to his EPA worker freedom is best understood by examining the and his Interior Department effectively to prevent views of the most articulate and forceful of the three— drilling by holding up the permitting process. Becker. When he was appointed, Becker was associate The five-member National Labor Relations Board general counsel to the SEIU. Earlier, as a professor of (NLRB) is appointed by the president, with concur- law, he published many articles in scholarly journals in rence of the Senate, to five-year terms. At this writing which he promulgated his pro-union vision. there are only four members. Three of them—Wilma Liebman, Brian Hayes, and Mark Pearce—are serving Charles Baird ([email protected]) is a professor of economics Senate-approved terms. Liebman, the chairman of the emeritus at California State University at East Bay.

47 MARCH 2011 Charles W. Baird

He doesn’t think any worker should be allowed to ized employees of A. Does Firm B have to recognize be union-free. In his own words, “Just as U.S. citizens those workers’ union as a monopoly-bargaining agent cannot opt against having a congressman, workers for all of B’s employees? In 2002 the NLRB said that should not be able to choose against having a union as workers themselves should decide the question by an their monopoly-bargaining agent.” Apart from the election. obvious rejoinder that unions are not governments, In both cases the NLRB decided that a secret-ballot Becker, like Obama, doesn’t believe in the consent of election, not administrative fiat, should determine the the governed. They are Mountaintop people—that is, fate of workers. Now a majority of the Board wants to elitists. “reconsider” whether the two cases were correctly In a 1993 article in the University of Minnesota Law decided. It appears that Liebman and Pearce want to Review,Becker argued that existing union law can and join Becker and Obama on the Mountaintop. When should be interpreted to strip employers of any “legally this NLRB reopens these two cases it is likely to reverse cognizable interest” in the process by which their both, and those reversals will be the first steps on the employees unionize. When faced with aggression, road to compulsory private-sector card check without employers should be forced not to resist. Just after Congress. I have no doubt that Becker and the others Obama’s inauguration, Becker com- will try to take the whole trip. posed executive orders that the Presi- As voters across the country gave dent then imposed on workers and The NLRB seems us the new Congress, voters in Ari- employers. For example, if a union- likely to try and zona (Prop. 113), South Carolina impaired federal contractor supplying (Amendment 2), South Dakota services to the federal government impose compulsory (Amendment K), and Utah (Amend- loses a contract to a union-free firm, card check. ment A) adopted amendments to the latter must extend preferential hir- their respective state constitutions ing offers to the unionized workers of that prohibit compulsory card check the former and recognize and bargain with the unions whether imposed by Congress or from the Mountain- representing those workers. top. States control the rules of unionism as they per- tain to their state and local government employees, so Reversing Course these newly adopted amendments will protect those ast August 27, Becker, Liebman, and Pearce voted employees from card check. However, the National Lto reconsider two earlier NLRB cases that dis- Labor Relations Act (NLRA) sets the rules for pri- pleased union bosses. Existing law allows, but does not vate-sector workers, and my guess is that federal compel, an employer to turn his employees over to courts will decide federal law preempts state law on monopoly-bargaining unions on the basis of card card check. check. In Dana Corp. (2007), the NLRB said that such In sum, David wins the bet, but workers are still workers had 45 days to request an election to void a exposed to the tyranny of the Mountaintop.The short- card-check recognition. MV Transportation (2002) run consolation for workers who want to become and addressed the following: Suppose firm A is unionized remain union-free is that a future NLRB can reverse and has to go out of business because it cannot effec- what the existing Board does. The better, long-run, tively compete. Union-free Firm B buys A’s assets and solution is the permanent repeal of the NLRA in favor hires workers, a majority of whom are former, union- of genuinely voluntary unionism.

THE FREEMAN: www.thefreemanonline.org 48