Ideas On: Liberty ~ June 1999 Vol. 49, No.6

8 The Professionalization of Parenthood by Susan Orr 11 Children's Real Enemy by John Hood 16 The Second Amendment in the Light of American Republicanism by Joseph R. Stromberg 23 The Reserve Requirement Debacle of 1935-1938 by Richard H Timberlake 130 The Great Gold Robbery by James Bovard 125 Market-Share Sophisms by Christopher Mayer 39 The Market and Political Freedom by John Marangos 42 Against the Tide: The Life of Francis W. Hirst by Mark Brady 48 Educational Savior? by Daniel Hager

4 THOUGHTS on FREEDOM-Government Is No God by Donald J. Boudreaux 21 IDEAS and CONSEQUENCES-A Tax Is Not a User Fee! by Lawrence W Reed 33 POTOMAC PRINCIPLES-Balkans Bungling: Why Only Congress Can Declare War by Doug Bandow 37 PERIPATETICS-The Permanent War by Sheldon Richman 146 ECONOMIC NOTIONS-Private Property and Opportunity Costs by Dwight R. Lee 52 ECONOMICS on TRIAL-New Possibilities for Our Grandchildren by Mark Skousen 63 THE PURSUIT of HAPPINESS-Nothing's Free by Russell Roberts

2 Perspective-When Bullies Take Power by Sheldon Richman 6 Workers Exploited? It Just Ain't So! by Donald J. Boudreaux 51 Capital Letters: Does Survival Trump Morality? 54 Book Reviews A Life of One's Own: Individual Rights and the Welfare State by David Kelley, reviewed by Ellen Frankel Paul; Mugwumps: Public Moralists of the Gilded Age by David M. Tucker, reviewed by Burton Folsom; Who Killed Homer? The Demise of Classical Education and the Recovery of Greek Wisdom by Victor Davis Hanson and John Heath, reviewed by Fred D. Miller, Jr.; Secession, State & Liberty edited by David Gordon, reviewed by George C. Leef; Money and the Nation State: The Financial Revolution, Government and the World Monetary System edited by Kevin Dowd and Richard H. Timberlake, reviewed by Bert Ely; Policy Analysis and Public Choice: Selected Papers by William A. Niskanen, reviewed by Bruce Yandle. THE

F'EEMAN When Bullies Take Power Published by The Foundation for Economic Education Life is Beautiful, winner ofAcademy Awards Irvington-on-Hudson, NY 10533 for best foreign language film and best actor Phone (914) 591-7230 FAX (914) 591-8910 (Roberto Benigni), is a remarkable movie. E-mail: [email protected] FEE Home Page: http://www.fee.org This story about a Jewish father's attempt to shield his son from a Nazi concentration camp President: Donald J. Boudreaux is perhaps the most powerful movie ever made Editor: Sheldon Richman about the Holocaust. The movie makes a stun­ Managing Editor: Beth A. Hoffman ning impression precisely because it focuses Editor Emeritus Paul L. Poirot on one family's ordeal and juxtaposes horror Book Review Editor and humor. George C. Leef I'd like to know what audiences are thinking Editorial Assistant when they leave the theater. I suspect the stan­ Mary Ann Murphy dard reactions are along these lines: The Nazis Columnists Charles W. Baird sure were bad. Or, hate and intolerance are Doug Bandow terrible. That's fine, as far as it goes. But it Dwight R. Lee doesn't go nearly far enough. Lawrence W. Reed I wonder how many people came away Russell Roberts thinking: Government certainly is dangerous. Mark Skousen Thomas Szasz How can we limit its power so it will never Walter Williams engage in systematic mass murder again? Too Contributing Editors few, I fear. Peter J. Boettke Murderous hatred was certainly a necessary Clarence B. Carson condition for the Holocaust. But it was hardly Thomas J. DiLorenzo a sufficient condition. How many Jews could Burton W. Folsom, Jr. Joseph S. Fulda Hitler and his thugs have killed had Germany Bettina Bien Greaves had a strong classical liberal tradition under­ Robert Higgs girding a constitutionally limited government. John Hospers The question answers itself. Raymond J. Keating Murder on the scale perpetrated by Hitler, Daniel B. Klein Lenin, Stalin, Pol Pot, Idi Amin, et al. requires WendyMcElroy Tibor R. Machan a state; that is, a legitimized machinery of Ronald Nash force. Only a state can concentrate the Edmund A. Opitz resources (thanks to taxation) necessary for James L. Payne such a monstrous feat. More important, only a William H. Peterson state has the mystique (thanks to its schools, Jane S. Shaw among other things) to command the sort of Richard H. Timberlake Lawrence H. White allegiance required to induce large numbers of people to cooperate or at least to stand by and The Freeman is the monthly publication of The Foundation for Eco­ nomic Education, Inc., Irvington-on-Hudson, NY 10533. FEE, let it happen. A dictator is just a bully with a established in 1946 by Leonard E. Read, is a non-political, educational champion of private property, the free market, and limited government. state at his disposal. FEE is classified as a 26 USC 50l(c)(3) tax-exempt organization. Hate and intolerance are likely to be fea­ Copyright © 1999 by The Foundation for Economic Education. Per­ mission is granted to reprint any article in this issue, provided credit is tures of the social landscape for quite some given and two copies ofthe reprinted material are sent to FEE. The costs of Foundation projects and services are met through dona­ time to come. Trying to avert future systemat­ tions, which are invited in any amount. Donors of $30.00 or more receive a subscription to The Freeman. For delivery outside the United ic mass murders by abolishing hate and intol­ States: $45.00 to Canada; $55.00 to all other countries. Student sub­ erance is naIve and futile-especially if gov­ scriptions are $10.00 for the nine-month academic year; $5.00 per semester. Additional copies ofthis issue ofThe Freeman are $3.00 each. ernment accumulates new powers in the Bound volumes of The Freeman are available from The Foundation for calendar years 1972 to date. The Freeman is available in microform process. A more efficacious and feasible from University Microfilms, 300 N. Zeeb Rd., Ann Arbor, MI 48106. 2 course (albeit still extremely difficult) is to achieves a dominant share of a market. Are institutionalize strict limits on government consumers at risk from a dominant firm? power. When that's achieved, aspiring dicta­ Christopher Mayer ponders the question, tors will have difficulty achieving office high­ showing that "market share" is not the simple er than neighborhood bully. concept that regulators think it is. Is the market order compatible with author­ *** itarianism? Even some champions of capital­ Thanks to a passel of government pro­ ism reluctantly believe so. John Marangos grams, Americans are·increasingly getting the disagrees, arguing that economic freedom message that parenthood can't be left to ama­ holds the seeds ofpolitical freedom. teurs any longer. A century and a half after Francis Hirst is virtually unknown today. responsibility for schooling was lifted from But in his time, he was a prominent advocate parents' shoulders, is the state ready to relieve of individual liberty and opponent of state them-starting with low-income people-of power, both the welfare and warfare variety. the rest of the job of rearing children? Susan Mark Brady introduces us to this forgotten Orr doesn't like what she sees. English champion offreedom. Programs such as Head Start are often A government-controlled education system defended as "investments" in children that that only sought to teach children to read promise to avoid later social problems like would have been bad enough. But what about crime and dependency. John Hood looks at a school system designed to recast society in a the data and isn't impressed. collectivist mold? Daniel Hager profiles an old No matter how the advocates ofgun control proponent ofsuch a system, George Counts. try to evade it, America's founding generation Our columnists once again find provocative was avidly pro-gun and not just for sporting topics to chew on. FEE President Donald purposes. Joseph Stromberg explores the rela­ Boudreaux reminds us government isn't a tionship between firearms and the philosophy god, then looks at a claim that workers are on which the United States was established. being forced to work without pay and The federal government did many things to responds, "It just ain't so!" Lawrence Reed tum what might have been a short recession sees differences between taxes and user fees. into the Great Depression. In his series finale, Doug Bandow explores President Clinton's Richard Timberlake explains that one ofthose Balkans folly. Dwight Lee illustrates that even things was the manipulation of the banking gifts entail opportunity costs. Mark Skousen system's reserve requirements. thinks economic growth could double and go One ofFranklin Roosevelt's first acts was to on indefinitely. Russell Roberts warns that outlaw the possession and monetary use of nothing is free. gold. It was an assertion of executive power Our reviewers render verdicts on books that would have far-reaching consequences, about money, the welfare state, Mugwumps, writes James Bovard. the classics, secession, and the work of a The Department of Justice and the Federal major public choice economist. Trade Commission get upset when a company -SHELDON RICHMAN

The apple icon _ identifies Freeman articles that are appropriate for teaching high­ school· students several major subjects-including economics, history, government, phi­ losophy, and current issues. We also provide sample lesson plans for these articles on our Web site www.fee.org and in written form. Teachers and homeschooling parents need only to visit our Web site or request written lesson plans to take advantage ofthis unique service.

3 e>rl by Donald J. Boudreaux

Government Is No God

ssume you need surgery to remove a possess near-godlike capacities for mastering Abrain tumor. Two physicians in your town a vast array ofissues and disciplines. It's typ­ offer to perform this operation. Dr. Smith spe­ ical to hear Bill Clinton-in a single day!­ cializes in neurosurgery; it's his sole occupa­ speak with seeming authority on the merits of tion. Dr. Jones, however, divides his time school uniforms, on plans for bringing peace among a variety of occupations. Along with to the Middle East andto Kosovo, on the con­ performing neurosurgery, he practices den­ sequences of higher tax rates, on the benefits tistry, gynecology, podiatry, and radiology. He of V-chips for televisions, and on how to also spends part ofeach day teaching political reduce the number of illegitimate births science at the local college, and another part among inner-city teenagers. No social issue ofeach day as an investment counselor. seems beyond his grasp. Which surgeon will you use? Perhaps more astonishing is that virtually If your brain tumor hasn't yet seriously no one looks askance at such absurd preten­ diminished your capacity for rational thought, sions. While almost everyone would (proper­ you'll choose Dr. Smith-the specialist. Dr. ly) regard as crazy a physician who attempted Jones might well be more brilliant than Dr. to work also as an accountant, farmer, and Smith, but common sense correctly tells you political philosopher, most people don't think that even the world's smartest person can twice about a politician who not only express­ never master a complex task if that person es opinions on countless complex subjects, spreads himself too thin. Mastery requires but also meddles in each of these matters. specialization. Indeed, many people positively demand that In our everyday lives, we all grasp this fun­ politicians each have a hand in an oceanic damental truth about the importance of spe­ array ofhuman activities. cialization. Each of us is trained-through Why? Why are politicians-unlike people schooling, experience, or both-to do a par­ in other occupations-widely presumed to ticular job. None of us grows his own food, possess sufficient expertise in almost any sub­ weaves his own cloth, brews his own beer, ject that catches their fancy? Why don't peo­ mixes his own toothpaste, and works as a CPA ple howl with laughter, rather than nod their or a pipefitter. In fact, none ofus even thinks heads seriously, whenever Bill Clinton, Al to try to do all these things. Nor do we pur­ Gore, or Trent Lott discourses on some matter chase goods and services from non-special­ about which he has neither experience nor ists-with one big exception. expertise? Why do people swallow the ludi­ The exception is politics. Judging from any crous promises and proclamations of politi­ ordinary day in the life ofthe president ofthe cians-promises and proclamations that are United States, politicians fancy themselves to typically sillier than the assertions of a third­ Donald J. Boudreaux is president ofFEE. rate fortuneteller with a traveling circus? 4 The answer to these questions, I fear, is that value the emotion du jour over evidence and most people regard the state as a superhuman rational analysis. institution. Most people regard government Yet another source of support for politi­ (or, at least, democratic government) as some­ cians seeking to deify the state is a popular how free of the limitations that beset human press that reports on government actions and beings in nonpolitical activities. In short, too agencies as though their names accurately many people deify the state. But regardless of describe their actual effects. For example, your political views, it is impossible seriously Congress's claim that the recent Small Busi­ to deny that government is a human institu­ ness Jobs Protection Act will do just that goes tion. Just as General Motors, Sun Microsys­ largely unchallenged-despite the fact that it tems, the Ford Foundation, the Kiwanis Club, raises the minimum wage! mom-and-pop retailers, and every other prof­ It's no surprise, then, that Americans too it and not-for-profit organization you care to seldom question the motives and the abilities name is run by human beings, so too is gov­ of government officials who regularly claim ernment. The state is no more capable of to possess far wider expertise than could have superhuman feats than is any other human been acquired in a lifetime by a legion of institution. Leonardo da Vincis. Few people dispute this fact when it is stat­ My objection can't be parried by pointing ed so baldly. Nevertheless, people routinely out that the president gets advice from spe­ act as though they do in fact believe govern­ cialists ofall kinds. How does he know whom ment to be (at least semi-) godlike. to canvass for that advice? If he seeks advice on whom to seek advice from, the problem is Why Is the State Deified? merely pushed back a step. It cannot be repeated too often: government The question then becomes: Why do people is no god. Its employees are no more ethical deify the state? or expert than employees in the private sector; Part ofthe answer is that politicians shame­ nor are government employees-including lessly encourage this deification. They do so the president and members of Congress­ directly by promising to perform all sorts of immune to the cognitive limitations that natu­ impossible miracles-using prohibition to rally affiict the rest ofus. eliminate drug use, keeping Social Security I refer anyone who is tempted to fantasize solvent without imposing crushing taxes, that government possesses unlimited intelli­ using campaign-finance reform to exorcise gence and abilities to these wise words from interest-group demons. The fact that these EA. Hayek's Road to Serfdom: schemes always fail seldom poses a problem, for politicians are unscrupulous and clever [I]t is impossible for any man to survey about blaming others for these failures. more than a limited field, to be aware ofthe Politicians' direct efforts to encourage urgency of more than a limited number of deification ofthe state would come to naught, needs. Whether his interests center round however, without their myriad indirect his own physical needs, or whether he efforts. takes a warm interest in the welfare of Probably the most effective of these indi­ every human being he knows, the ends rect efforts is government-run schooling. By about which he can be concerned will failing to educate American children, govern­ always be only an infinitesimal fraction of ment schools each year spew out platoons of the needs ofall men. young people who are not taught to think crit­ ically and reason carefully. Instead, they learn Anyone seeking power who denies this only to parrot bumper-sticker slogans and to truth is a devil, not a god. D

5 Workers Exploited? Great Depression, the number of hours worked per week by the typical American worker fell from 44 in 1938 to 38.6 in 1960 to 36.9 in 1973 and to 34.4 today. Moreover, the number of vacation days rose from six in It Just Ain't So! 1938 to seven in 1960 to eight in 1973 and to 10.5 today. The number of holidays and per­ sonal days during this period increased even he late Nobellaureate economist George more dramatically. T Stigler rightly insisted that anecdotes are Geohegan would question these data, argu­ not reliable data on which to base judgments ing that Americans work ever-more hours off about the state of the world. Labor lawyer the books. Presumably, employers are reduc­ Thomas Geohegan either never heard or ing the number· of hours that employees are ignores Stigler's wise warning. Geohegan formally required to work, while increasing relies on a handful of anecdotes to argue in the number of hours-without pay-that the January 24, 1999, New York Times that employees are in fact required to work. But American workers are increasingly exploited again, aside from some anecdotes, where's the by their employers ("Tampering with the evidence? Time Clock"). The same consistent and substantial decline The thrust of Geohegan's argument is that in hours worked that marks the modern work­ employers are forcing more and more workers place also marks the modern home. Holier­ to work more and more hours "offthe books." than-thou pundits routinely condemn capital­ "Go anywhere," he asserts, "a supermarket. A ism for turning out excessive quantities of nonunion hotel or club. Any nursing home. gadgets and gizmos. But the fact is that these There's a very good chance that the staff is gadgets and gizmos relieve us ofmany ofthe working for nothing some of the time." The monotonous household tasks that burdened consequence, Geohegan asserts, is that the our parents and grandparents. Automatic American worker now suffers "longer hours, dishwashers cut the number of hours we less vacation, more stress on the job." spend at the dreary task of cleaning up after His apparent solution for this problem is dinner; microwave ovens reduce the amount stronger labor unions and stricter government­ of time necessary to prepare meals; no-iron enforced work rules. For example, he wants fabrics mean less time caring for clothes; Jiffy the government to require that time-and-a­ Lube and Pep Boys now change our cars' oil halfbe paid not only to hourly employees who in minutes; improvements in health care and work overtime (which is the current rule) but household sanitation diminish the amount of also to workers at the professional and man­ time that we are down with illnesses; on-line ageriallevels. shopping enables us to spend less time in stores. These and countless other advances brought to us by the free market have slashed Record-Setting Leisure the number ofhours that we must give over to Geohegan's facts are mistaken-not sur­ household chores. prisingly, given his reliance on anecdotes­ All told, say researchers W Michael Cox and his economics is gobbledygook. First the and Richard AIm, "In 1996, an average life­ facts. Today's American workers enjoy more time's waking hours devoted to work, both on leisure-both at work and at home-than any the job and at home, stood at an all-time low previous generation of workers. Since the of 21.8 percent, compared with 24.8 percent 6 7 in 1973." (See The Myths ofRich and Poor, some lower wage rather than be unemployed, Basic Books, 1999.) are forced by this legislation out oftheir jobs. Our greater leisure time isn't spent idly. We They are made worse off. Identical logic spend this time-and larger portions of our applies to government-mandated fringe bene­ income-on entertaining activities. For exam­ fits-including worker leave and improved ple, there are todayfive times more adult soft­ working conditions. At best such mandates ball teams than there were in the mid-1970s. merely change the compensation package to The proportion of the population that today one that workers prefer less than the package attends professional sporting events is almost that would be offered in the absence of the twice what it was in 1970. The same is true regulation. for live symphonies and operatic perfor­ Employers compelled by government to mances. And the number ofpleasure trips we offer more employee leave will offer employ­ take today is three times higher than it was ees less of other forms ofpay, such as wages, back then. Finally, the proportion of Ameri­ pension contributions, or employee discounts. cans who donate some oftheir time to volun­ The number ofpossible adjustments is count­ teer efforts is today double what it was in the less. And to the extent that employers cannot mid-1970s. offset the costs of any government mandate, the consequence for many workers is devas­ tating: unemployment. When government Government Can't Help piles mandates atop mandates, it artificially The facts show overwhelmingly that Amer­ and unnecessarily raises firms' costs ofhiring ican workers are not only paid more today workers. Firms that would have hired 1,000 than at any time in the past, but that the workers now hire only 850; firms that would amount of leisure time we have to enjoy our have hired 100 workers now hire only 70; higher incomes is at an all-time high. But let's firms that would have hired ten workers now suppose for the sake ofargument that the facts hire only nine-and some firms that would are opposite of what they really are; that is, otherwise have sprung to life now are never let's suppose that Geohegan's picture of the formed; they are snuffed out in advance by American worker's lot is accurate. Would reckless government regulation of the condi­ increased government regulation ofthe work­ tions ofemployment. place-both directly and through special priv­ So even though Geohegan's statement of ileges granted to labor unions-improve mat­ the "facts" is a sham, it is also dangerous. The ters? Hardly. danger lies in people's believing what he says Government mandates of pay, fringe bene­ and, in response, endorsing the destructive fits, and working conditions inevitably worsen policies he proposes. the lot ofthe typical worker. The reason is that Genuine data, however, belie the gloomy government-mandated pay and working con­ and sinister picture painted by Geohegan. ditions are substitutes for what workers them­ These data are nowhere better collected, selves prefer. reported, and interpreted than in Cox and The classic case is minimum-wage legisla­ AIm's book, as well as in the many books of tion. When government mandates that no the late Julian Simon. Almost any single worker be paid less than $5.15 per hour, all chapter from the works of these scholars workers who are worth less than that to proves that Geohegan's argument just ain't so. employers, but who would prefer to work at -DONALD 1. BOUDREAUX The Professionalization ofParenthood by Susan Orr

hat do the following things have in hood development, or the latest proposal to W common? The child-care initiative, fos­ triple funding to schools that make after­ ter care, Head Start, and the child-abuse pre­ school programs available, the Clinton admin­ vention effort "Healthy Families." All are pro­ istration is more than willing for government grams for children and all receive government to step in to "help" parents. funding, most at the federal level. They also share an insidious assumption: most people, particularly the poor, are unable to be good Caution Warranted parents without the help of professionals. 1 Is Americans should exercise caution before such an assumption warranted? And if not, embracing such assistance. One has only to why not? look at the results of the government "help" Parents increasingly complain about how extended to the poor over the last several difficult it is to raise their children in a whole­ decades. Since the war on poverty began in some atmosphere. In The Assault on Parent­ the sixties, an unintended consequence of hood, Dana Mack tapped into that sense of government policy has been to treat the poor frustration. Parents, she, says, find that the as ifthey were incapable ofliving responsibly, "communal supports for the child-rearing particularly when it comes to raising their work of even the best families are crumbling. children. This shows up most clearly in edu­ ... In fact, parents see the decline of social cation and child-welfare policy. supports and the breakdown of families as The easy answer over the years has been to symptoms of a larger phenomenon: the sud­ spend more money on government programs. den and rapid decay ofthose stable social val­ Ifwe are feeling guilty about the plight ofthe ues that once fostered a protective culture of urban poor, then increased funding for Head childhood."2 Start (the preschool program for poor children Recognizing the need for community sup­ that is supposed to help them enter grade port does not necessitate turning over parent­ school on a par with their more affluent peers) ing· to a professional class, particularly one is the easy solution. Increased spending subsidized by the state. But the two things are requires only our money, not our time or not unconnected. As anyone could tell who effort. Simply spending more money also has monitored last year's debate over child care, the added advantage of appearing nonjudg­ the White House conference on early child- mental. We don't have to say that children do better with both a mother and a father or that Susan Orr is director of the Reason Public Policy neglectful parents are bad. Instead, we ignore Institute's Center for Social Policy in Washington, the underlying problem, hoping that more D.C. education will inoculate children against their 8 9 upbringing. In practice, this has meant turn­ children in foster care today. 7 Unfortunately, ing the problem over to professionals. over 30 percent ofall children sent back home Only occasionally do we get hints that pro­ to their families eventually re-enter foster care fessionalized child rearing might be problem­ because of further abuse or neglect.8 atic. Only occasionally is anything made of But who are these children and why don't the fact that Head Start, now in its fourth we hear about them? The children caught in decade, might be little more than a salve for the web ofthe child welfare system are over­ our consciences. A recent GAO study con­ whelmingly poor and without fathers. 9 Most firms what earlier research has consistently Americans are horrified when confronted pointed out, i.e., there is scant evidence that with these statistics, but are unaware that they Head Start has any long-term beneficial are predictably the direct result of policies effects for children.3 Yet the program now that do not hold parents accountable for their routinely recruits three-year-olds. There is behavior. Not surprisingly, the children of also a "0 to 3 initiative," because age three those irresponsible parents are the ones who was deemed too late for a sufficient head start. end up in Head Start. This initiative, as its name implies, works intensively with young mothers, teaching Perverse Incentives them about child development and encourag­ ing them to rear their children responsibly. Yet The pervading problem is that the child­ as the program grows more expansive, there is welfare system is riddled with perverse little indication that children fare any better incentives that undermine personal responsi­ and some signs that they do not. (See John bility and reward destructive behavior. Social Hood's article, page 11.) workers understand themselves as providing The Comprehensive Child Development remedies in the guise of therapeutic treat­ Program, a similar federally funded initiative ment. Child abuse is not regarded primarily geared toward low-income families, released as a violation ofjustice, but as either a symp­ its evaluation results last year with little fan­ tom ofillness or the result ofeconomic depri­ fare because the study revealed that partici­ vation, depending on which theoretical pating families fared no better than their less model ofabuse the social worker follows: the pampered peers and sometimes even did medical or ecological model. Parents, worse. At some time we have to admit that according to either theory, are not at fault. there are limits to what professionals can do. Because abuse is not seen as a moral prob­ By failing to insist on responsible parents, we lem, it should be susceptible to professional ask educators to take on an extra burden and help. It is therefore not surprising to find are shocked when they fail. . reluctance to ever pronounce any given par­ In many respects, education policy has ent irredeemable. been driven by the disasters plaguing the Mirroring the science ofmodern medicine, child-welfare system. Just a glance at recent child-welfare professionals are trained to look statistics tells us that something is dreadfully at human behavior as a doctor would look at awry. Child protective agencies looked into disease. Just as doctors strive to eradicate can­ the lives ofover three million children in 1996 cer, child-welfare professionals work to end (the latest year for which we have data).4 This all strife within the family. Even the tools of number reflects more than a 300 percent their trade are couched in scientific terms. If increase in reports over the last 20 years.5 In someone beats a child, he is in need oftreat­ under one-third (28 percent) of the cases, a ment, even if treatment is a parenting class. caseworker determined that a child had been Caseworkers use "risk assessment tools" to hurt by his parents; ofthat number, 15 percent decide whether a child can safely remain in were considered to be in sufficient danger to the home, as if by application of a checklist be removed from their homes and put into one could do more than guess who will foster care.6 While no official count exists, choose to do evil. Such tools lessen the digni­ experts estimate that there are at least 500,000 ty of all involved: they fail to take into 10 THE FREEMAN/IDEAS ON LIBERTY • JUNE 1999 account, and in fact attempt to replace, the example, the first-time mothers in the control free will ofthe parent and the judgment ofthe group had a lower incidence ofabuse than the caseworker. group in the program. 10 After several decades The profession continuously speaks ofcreat­ of social experimentation, one thing is clear: ing "systems of care" to protect children from yet another government program will fail to the harm caused by bad parents, thus attempt­ make parents better; we do know it can make ing to restore the broken family through social things worse, however. engineering. Ifa system fails, one needs simply It is the poor and marginalized citizens who to tinker with the machine, not find fault with are hurt most by current policy. If we want the human beings involved. Finding fault is parents to raise their children in a manner fit­ made more difficult because any agency inter­ ting to a free society, we must remove the vention is cloaked under the secrecy of confi­ incentives for irresponsibility. Overcoming dentiality laws and treated as utterly private. desperate circumstances requires good char­ Since child-welfare agencies are lodged within acter, especially that virtue which is the foun­ the state, however, their actions cannot be pri­ dation of all the other virtues: self-control. vate: citizens do not have a choice about when When virtue is not rewarded, but is instead the agency enters into their lives. treated as one of many equally worthy That cases of abuse and neglect are subject lifestyle choices, the poor are disproportion­ to intervention is not a problem in and of ately harmed. It is more than time to insist itself; rather, it is the manner in which such that all parents be responsible for raising their intervention is carried out. Child welfare pro­ children. D fessionals were long ago successful in per­ 1. This may indeed be true offoster care, where the state steps in suading state legislatures to decriminalize and physically removes a child from a dangerous parent. most cases ofchild abuse and neglect. By for­ 2. Dana Mack, The Assault on Parenthood (New York: Simon and Schuster, 1997), p. 17. saking the courts of criminal law, in which 3. U.S. General Accounting Office, "Head Start: Research Pro· determinations of justice and injustice are vides Little Information on Impact ofCurrent Program," April 1997. See also Nina H. Shokraii and Patrick F. Fagan, "After 33 Years and made and punishments meted out, social work $30 Billion, Time to Find Out If Head Start Produces Results" took on the much larger task ofattempting to (Washington, D.C.: Heritage Foundation), July 15, 1998. 4. U.S. Department of Health and Human Services, Children's heal family members who have gone wrong. Bureau, Child Maltreatment 1996: Reports from the States to the The therapeutic regimen is carried out by pro­ National Child Abuse and Neglect Data System (Washington, D.C.: U.S. Government Printing Office, 1998), p. 2-1. viding various services from things as simple 5. Patricia A. Schene, "Past, Present, and Future Roles of Child as housekeeping to as complicated as residen­ Protective Services," in The Future ofChildren, Spring 1998 (Los Altos, Calif.: The Center for the Future of Children, David and tial drug treatment for both the drug-addicted Lucile Packard Foundation), p. 29. mother and her children. 6. Child Maltreatment 1996, p. 2-3. 7. The Voluntary Cooperative Information System (VCIS) is the Healthy Families America, embraced by most complete aggregate data on children in substitute care. It is col­ politicians across the spectrum, is only the lat­ lected by the American Public Human Services Association (APHSA), formerly known as American Public Welfare Association, est government-funded fad directed at pre­ in Washington, D.C. The last estimate available is for 1995, which venting child abuse. Healthy Families, spon­ puts the number of children in foster care at 483,000. However, APHSA projects a 3--4 percent increase each year, which would put sored by the National Committee to Prevent the estimate at 527,787 for 1998. See American Public Human Ser­ Child Abuse and funded by most states, is vices Association's Web site at: http/I: www.apwa.org/faq/quest7.html. 8. U.S. Department of Health and Human Services, Children's popular because it is advertised as voluntary. Bureau, National Study ofProtective, Preventive and Reunification This home-visiting program screens parents Services Delivered to Children and Their Families (Washington, D.C.: U.S. Government Printing Office, 1997), p. 3-11. with newborns in the hospital for risk factors 9. U.S. Department of Health and Human Services, National for abuse; then paraprofessionals visit parents Center on Child Abuse and Neglect, Executive Summary ofthe Third National Incidence Study on Child Abuse and Neglect (Washington, deemed to be high-risk and provide them with D.C.: U.S. Government Printing Office, 1996), pp. 8-10. advice and information on child development. 10. Robert Franciosi, "Get 'Em While They're Young: The Sec­ ond Childcare Revolution and the Expansion of the Nanny State" Its effectiveness is unclear: in Arizona, for (Phoenix: Goldwater Institute, 1998), p. 20. Children's Real Enemy by John Hood

n ounce of prevention is worth a pound American families. Census data show that Aof cure," or so the old saying goes. For nearly three-quarters of all preschoolers are the past three decades, politicians and policy­ still cared for by parents or relatives at home, makers attempting to close the gaps in educa­ rather than in the day-care centers that benefit tional achievement and social well-being most from the new government initiatives. It is, among American children have taken this sen­ in other words, impossible for preschool mod­ timent to heart. From the creation of Head els, day-care subsidies, provider training, and Start in 1965 to various preschool and child­ new regulations to improve the early childhood care programs today, government at all levels development of the many children who will has attempted to ameliorate or eliminate never set foot in a day-care center or preschool. social problems such as poverty, illiteracy, What they and other children need are not new crime, drug abuse, out-of-wedlock births, and government programs but tax relief to allow welfare dependency by "investing" in early families to keep more ofwhat they earn and to childhood education. The case for such pro­ make their own investments in their children's grams has been seductive. Why not inoculate development. youngsters against these social pathologies with a preschool program, much as public­ health departments inoculate youngsters Head Start against viral or bacterial pathologies? The granddaddy of the government In reality, the public-health model has little preschool movement is Head Start, a federal relevance for early childhood development. program that provides educational, medical, The wide range ofinfluences on young minds and social services to disadvantaged has proven resistant and sometimes impervi­ preschool children. The program originated in ous to government alteration. Head Start and 1965 as an eight-week summer program of other preschool programs aren't "miracle the U.S. Office of Economic Opportunity. drugs" that can overcome the effects of poor Over the next three decades, it grew into a $4 parenting, poverty, and educational malprac­ billion year-round program providing grants tice in the public schools. to local organizations to operate programs for Nor is an institutional setting the preferred about 800,000 poor preschoolers. means of caring for preschoolers in most There are four major components to Head Start: (1) education, (2) health care, (3) parent John Hood is president ofthe John Locke Founda­ education, and (4) social services. Local pro­ tion, a state policy think tank based in Raleigh, North Carolina, and one ofthe authors ofa new report on grams provide these services in surprisingly children andpublic policyfrom the Pacific Research different ways and levels of quality. Indeed, Institute. reports by the Inspector General's Office in 11 12 THE FREEMAN/IDEAS ON LIBERTY • JUNE 1999 the U.S. Department of Health and Human tion, welfare, and crime costs-all based on Services have found that many programs fail the Perry experiment. Even as pressure to deliver the services for which they are paid. mounted to expand Head Start, and several Many children fail to receive scheduled states began their own early childhood initia­ immunizations despite spending two or more tives, few bothered to ask why the Perry years in Head Start. results differed so radically from those of Even given the spotty nature of local Head Head Start programs themselves. Start performance, few analysts dispute that In fact, studies ofthe Perry Preschool and a children who leave Head Start and enter ele­ couple of other university experiments don't mentary school exhibit some advantages over offer much guidance about the probable effi­ their non-Head Start peers in academic and cacy of government preschool. "These pro­ socio-emotional measures. Unfortunately, grams were conducted under ideal circum­ these benefits do not last long. By the third stances," wrote Congressional staffer Ron grade, according to the federal government's Haskins in a seminal article in The American own analysis ofHead Start studies, the bene­ Psychologist. "They had skilled researchers, fits "fade out." That is, disadvantaged young­ capable staffs with lots of training, ample sters with Head Start experience become budgets.... It seems unwise to claim that the indistinguishable from disadvantaged young­ benefits produced by such exemplary pro­ sters without such experience. Whatever Head grams would necessarily be produced by ordi­ Start is, it does not qualify as inoculation nary preschool programs conducted in com­ against educational or social maladies later in munities across the United States." life. Another major difference between Perry Still, defenders of Head Start and similar and Head Start is obvious: studies ofthe Perry government programs continue to argue that project and a few similar projects track only a an early taxpayer investment can save signifi­ relative handful of students, a few hundred, cant costs in the future. They base their case through their academic and early adult lives. not on Head Start itselfbut studies ofa hand­ Studies of Head Start, on the other hand, ful of university experiments. The most involve hundreds of preschool programs and famous of these is probably the Perry thousands of children. When dealing with Preschool in Ypsilanti, Michigan. In 1962 the complex issues such as child development, preschool selected 123 poor children. Halfthe researchers and policymakers must do better group was given two years of preschool than hype a few best cases. instruction and services, two-and-a-halfhours a day, five days a week. The other half took Smart Start and Success by Six part in no preschool program. Both groups of children were then tracked throughout their Fueled by Head Start's public-relations suc­ academic careers and into adulthood. The cesses in the mid and late 1980s, several Perry students demonstrated not only signifi­ states began designing their own early child­ cant short-term gains, as do typical Head Start hood development initiatives in the early participants, but also long-term gains. About 1990s. With names such as "Smart Start" and two-thirds ofthe Perry group graduated from "Success by Six," these programs mixed a high school, compared to 50 percent of the variety of approaches to assisting families control group. Similarly, while 51 percent of with preschoolers, including grants to local the control group had been arrested by age 19 service providers, day-care subsidies, home for some crime, fewer than a third of Perry visitation by nurses or social workers, child­ graduates had. care referral activities, and parent-education When the Perry results were first reported efforts. In a 1998 report, Columbia Universi­ in the mid-1980s, they made a huge public ty identified eight states as having the most relations splash. Child advocates began argu­ "comprehensive" initiatives in the early child­ ing that a dollar spent on preschool would hood area. They included Colorado, Georgia, save taxpayers $5 in future economic, educa- Minnesota, North Carolina, Ohio, Oregon, CHILDREN'S REAL ENEMY 13

Vermont, and West Virginia. The Smart Start dence that it is achieving its stated goals. Like program, created by North Carolina Governor Head Start, Smart Start has been successful Jim Hunt in 1993, serves as a useful case on a political level without establishing a study for how these programs have developed demonstrable record ofsuccess. and what impact they have on children's lives. Hunt made Smart Start the centerpiece of The Early Evidence his election campaign in 1992. He promised not a traditional entitlement program but a Unfortunately for its boosters, the early evi­ public-private partnership to link preschool dence that does exist does not bear out Smart children with service providers in local com­ Start's reputation. Two studies, neither con­ munities. Very quickly, however, it became ducted by critics ofthe program, have found it clear that Smart Start was in fact a govern­ not to be the public-private partnership Hunt ment program paid for almost entirely by tax­ promised in 1993, nor is it likely to be a suc­ payers and routing most dollars to service cessful "investment" in early childhood devel­ providers rather than parents. When fully opment. funded, the program is expected to cost near­ InAugust 1998, North Carolina State Audi­ ly $350 million a year-larger than entire tor Ralph Campbell released a "Special departments ofNorth Carolina's state govern­ Report on the Smart Start Program," which ment. Just to put that in perspective: Smart included financial data for FY 1995-96 and Start will consume more resources than the 1996-97. While Campbell's office found state's law enforcement budget and almost as some areas of improvement, particularly in much as the state's entire judiciary. the number ofmanagement problems at local Smart Start may well be the most success­ partnerships, it concluded that Smart Start ful public-policy initiative ever hatched in still operates without a uniform fund account­ North Carolina-if one defines success as ing system, without a uniform contract man­ getting good press. Not just in North Carolina agement and monitoring system, and without but nationally, the program has received lav­ sufficient oversight by its nonprofit parent, the ish praise for making an investment in the N.C. Partnership for Children. future ofthe state. Most recently, the program Perhaps most significantly, the audit found was the recipient of the 1998 Innovation in that Smart Start continues to fail to meet its American Government Award from Harvard private fundraising goals. For 1996-97, the University and the Ford Foundation. "North program received $3.9 million in cash and in­ Carolina is making an effort for early child­ kind contributions, far less than the $6.7 mil­ hood education that includes county by coun­ lion in private funds required by the state leg­ ty, group after group, and business after busi­ islature in exchange for past increases in tax­ ness, and is making significant headway," said payer support. Even this standard wasn't selection committee chairman David Gergen, particularly high; the legislature mandated former Clinton aide and editor-at-Iarge for only that Smart Start raise $1 in private funds U.S. News & World Report. Other kudos for for every $10 in taxpayer funds. Given the Smart Start have come from national maga­ early rhetoric about Smart Start not being a zines such as Working Mother and Good government entitlement program and instead Housekeeping. being a public-private partnership, the failure After such heady praise, many state leaders to meet the legislature's low fundraising target seem to have conveniently forgotten the pur­ represents a major disappointment. Indeed, pose of Smart Start-to make a long-term the N.C. Partnership for Children says it has impact on the education and social develop­ exceeded the fundraising goal for 1997-98­ ment of children. With only four years of but only after liberalizing the definition of operation under its belt, Smart Start cannot fundraising to include gifts made directly to yet be judged conclusively on this criterion. day-care centers, not to Smart Start itself. Indeed, it is striking how many plaudits the How much private support would flow to the program has received without a shred of evi- centers anyway? It is impossible to tell. 14 THE FREEMAN/IDEAS ON LIBERTY • JUNE 1999

With regard to the benefits ofthe program, two points on a test-is unlikely to persist. It only one study provides any useful informa­ is certainly not a worthwhile return on the tion. It was conducted by the Charlotte­ huge investment that North Carolina taxpay­ Mecklenburg Public Schools and Smart Start ers have made in the Smart Start program of Mecklenburg County and was released in since 1993. July 1998 by the N.C. Partnership for Chil­ Even the small jump in scores for long­ dren. In examining the educational impact of term Smart Start participants may be suspect. Smart Start on kindergartners in Mecklenburg After all, it is difficult ifnot impossible to rule County, the state's most populous county, it out "selection bias" in such a study. That is, surveyed 5,715 parents. It used different parents with other characteristics likely to assessments to provide educational data. One, improve student performance are probably the Kindergarten Awareness Profile (KAP), is more likely to get their children involved in given to incoming students to identify poten­ Smart Start-type programs than are their tial learning difficulties. The other, the peers. This effect may be small, but it would Kindergarten Assessment in Reading and not take much to eradicate the small outcome Mathematics (KARM), is a periodic observa­ differences the study found. tion ofacademic achievement given by class­ room teachers. The results are combined at the end of the year and serve as a measure­ A Different Approach ment ofstudent achievement. There is no great mystery as to why gov­ In brief, no statistically significant relation­ ernment programs like Head Start and Smart ship was found between the KAP and KARM Start don't provide the long-term benefits they results, on the one hand, and participation in promise. Two or three years of preschool are the Smart Start program for fewer than three unlikely to make an indelible impact on chil­ years, on the other. That is, preschoolers who dren who will spend far more time with their spent a single year in a Smart Start-supported parents and in what are often mediocre (or day-care center or simply received a Smart worse) government schools. There is no Start-sponsored vision or hearing screening magic wand that can wish away the effects of did not perform any better on the KAP poverty, family breakup, and educational mal­ screening or the KARM achievement assess­ practice. There are no shortcuts in tackling ment than preschoolers who did not. For these problems, nor are many of them those who spent three years in a Smart Start­ amenable to government solutions at all. supported center, the study did find a statisti­ On this point, the comments offour acade­ cally significant-but small-difference. On mic researchers who support Head Start are the KAP screening, long-term Smart Start particularly .salient: kids scored an average of93.35 (on a scale of 0-102) versus 91.05 for kids without that If we wish to "close the gap" between experience. On the KARM, the point differ­ advantaged and disadvantaged children, ence was similar: 32.18 versus 29.83. educational services need to go beyond the Smart Start proponents trumpeted that last provision ofshort-term interventions. Poli­ result as evidence of the effectiveness of the cy decisions that support the expansion of program. "Smart Start is working in Mecklen­ preschool programs without addressing the burg County and this study proves it," said more fundamental question of trying to Ashley Thrift, chairman of the N.C. Partner­ alter what happens to disadvantaged chil­ ship for Children. He is mistaken. The Head dren in our nation's public schools are Start experience shows that the difference shortsighted. (Valerie Lee, et aI., "Are between participating and nonparticipating Head Start Effects Sustained?," Child preschoolers will shrink as both groups go Development. vol. 61, 1990, p. 505) through the same schools. A large gain in early educational outcomes for participants Furthermore, there is no reason to believe might be sustained over time, but a tiny one- that government involvement or oversight of CHILDREN'S REAL ENEMY 15 preschool and child-care arrangements will the impact ofday care and preschool, positive improve their quality. It is not obvious, for or negative, on a child's readiness to learn is example, what specific factors make an early difficult to demonstrate. Only 1.3 to 3.6 per­ childhood program effective, so governments cent of differences among children in cogni­ have little to go on in trying to mandate tive and language performance has been sig­ improvements. As the National Research nificantly linked to child-care factors; the vast Council stated in 1996, researchers do not majority of such differences' among students know what constitutes the "basic ingredients" when they enter school can be linked to fac­ of high-quality child care. The council tors such as family income, mother's vocabu­ observed that "what is developmentally bene­ lary, and family environment. ficial for one child may not be so beneficial If policymakers really want to help all chil­ for another." dren grow and develop, the most important task The few studies that do exist suggest that is to alleviate the tax burden on families. 0

It's the time ofyear when many ofus are thinking about Mother's Day or Father's Day gifts. Likewise, many people are busy celebrating wedding anniversaries. Are you puzzling over what to give? Why not consider something really unusual: a Tribute Gift in honor of a parent, husband or wife, or other loved one?

Tribute Gifts allow you to celebrate the life and vision ofsomeone you hold dear, while also helping FEE to achieve its vital mission ofpromoting liberty and economic understanding.

To give a Tribute Gift, simply contact us with the name ofthe person you are honoring, your name and address, and the name and address ofanyone else to whom you would like an acknowledgment letter sent. Your contribution may be in the form of check, credit card transaction, securities, or other property.

This year, forget the flowers or the tie - and give a gift that really means something! The Second Amendment in the Light ofAmerican Republicanism by Joseph R. Stromberg

he "transforming" ideology ofAmerica's ment enshrines his role in the ideological and Trevolutionary period saw the chief con­ political systems. flict in society as one between liberty and Some latter-day writers on republicanism power. That ideology synthesized .themes have a way of overestimating the tensions from several sources.! Given the differing ori­ within the American synthesis. But some of gins and jumping-offpoints ofclassicalliber­ the alleged incompatibilities-"agrarianism" alism and classical republicanism (the two versus "commercialism," "virtue" versus most important elements), the American "luxury"-were either handled well enough "synthesis" might be expected to undergo byAmericans, or exist mainly in the eye ofthe some unraveling when up against the harder beholder. Wendy Kaminer, for example, problems of political life. What is striking, writes that "[a]t the heart of the gun-control however, is the surprising tenacity and coher­ debate is a fundamental tension between ence ofAmerican republicanism over the long republicanism and individualism" (that is, lib­ haul, the persistence of its language, and the eralism).2 A look at the Second Amendment continuing relevance of its key ideas down to is an opportunity to learn more about Ameri­ the present. can republican ideology and to gain a better One of these key ideas is the notion of the understanding ofthe Amendment itself. individual properietor on his own land, capa­ Kaminer writes of "the challenge posed by ble ofbearing arms in defense ofhimself, his republicanism to the individualist culture that property, his family, and the republic. In his many gun owners inhabit."3 But when have role as defender ofhis free society, the armed Americans not inhabited an individualist citizen served with his fellows in the militia, culture? And when did American "individual­ which republican thinkers regarded as the ists" not live in communities? (Re-read military system most compatible with repub­ Tocqueville.) lican liberty and whose existence helped off­ The problem as set up by Kaminer rests on set the menace of "standing armies" drawn the old caricature of"atomistic liberalism." It from outside the community ("crimped does not follow that because John Locke start­ scum") loyal only to their immediate superi­ ed with individuals and their rights, that he or ors (men of "ambition" or a "court party"). any other liberal writer overlooked the exis­ The armed proprietor was the idealized tence of families, churches, and other social republican citizen, and the Second Amend- institutions. It has never been strictly a matter of "the individual versus society"; rather it Joseph Stromberg is a part-time college lecturer in history who has contributed to the Journal of Liber­ has been about what kind ofsociety we live in, tarian Studies, Reason, Independent Review, and or wish to live in, and whether or not a free other publications. society is desirable and possible. If there are 16 17

"atomistic" versions ofliberalism, the French cals held forth on natural rights and the Rights can answer for them, since the English, Scot­ of Englishmen (which in their minds were tish, and American writers did not create much the same thing). James Otis advanced them. The rootless, abstract individual, who arguments from both directions in his speech can only be made "whole" again by partici­ against the Writs ofAssistance, making good pating in an authoritarian-to-totalitarian form use of the truism that an Englishman's home ofrepublic, is central to Rousseau's system­ is his castle.S not Locke's.4 Much ofthat ground had been covered in the Puritan Revolution and the Glorious Rev­ olution of 1688. The seventh item in the Eng­ The Second Amendment in a lish Bill ofRights of 1689 stands in ancestral Distinctively American relation to our own and says: "That the sub­ Republicanism jects which are Protestants may have arms for their defence suitable to their conditions, and Anti-Second Amendment writers have as allowed by law." This is not very "inclu­ great sport trying to separate the individual's sive"-as we say these days-but this was the right to bear arms from the same individual's Parliament that had just deposed James II for role in the militia. On their reading ofrepub­ being too absolutist and too Catholic, and we licanism, the community stands opposed, can hardly expect these lords and great land­ somehow, to those who make it up, and the holders to have shared the right of self­ people have "the right to keep and bear arms" defense fully with the lower orders.6 only in relation to their duties in the militia. The immediate context of the Second We are asked to take seriously the view that Amendment is, of course, the struggle over these individuals only keep and bear arms at the ratification of the second U.S. Constitu­ the command ofthe state, and really ought to tion. Part of this context is the revolutionary store them all in a central warehouse, whence generation's correct view that the militia had they will be issued when the state organs played an important role in the success ofthe (of "national security"?) decide there is an American war of secession from the British emergency. The state militias, it is likewise Empire. Perhaps the only believable reason asserted, mean nothing today, having been for throwing over the existing Articles ofCon­ consumed by the National Guard, with its sort federation (the first constitution) was the ofThird World name. I shall demonstrate the claim that a slightly more effective federal leglessness ofthis stand directly. government was needed to defend the confed­ As far as an individual right to self-defense eracy from European powers that still held goes, the law-which is very conservative­ large parts of North America. This, in turn, gives us examples from the earliest societies raised many questions that went to the heart connected with the Indo-European language of republican theory: internal versus external family. It was a settled thing in Greek, taxation, standing armies versus militia, Roman, and Slavic law that a man who caught "empire" versus republican decentralization, an intruder in his house by day, should seize and the like. It is not surprising, therefore, him and hold him for the authorities; if the that seven state conventions ratified the sec­ intruder came at night, he could kill him. I ond Constitution with reservations. They sub­ suppose he could do this barehanded, but mitted declarations about rights to spell out more likely he was armed their understanding of the new charter and We need not reach so far back for prece­ proposed amendments to set right ambiguities dent, however. William Blackstone; whose they saw in it. views on English law were more or less com­ Some of these proposals spoke directly to mitted to memory by the Founders, regarded the related questions of the militia and the self-defense as one of the three most funda­ people's right to bear arms. New Hampshire mental rights embodied in that law. In the run­ asked for amendments-among others-stat­ up to the American Revolution, colonial radi- ing that ·'no standing army shall be Kept up in 18 THE FREEMAN/IDEAS ON LIBERTY • JUNE 1999 time ofPeace unless with the consent ofthree draftsmanship" only in the sense that the sen­ fourths of the Members of each branch of tence structure leaves itself open, perhaps, to Congress" and that "Congress shall never dis­ deliberate and willful misreading that the arm any Citizen unless such as are or have amendment's framers could never have fore­ been in Actual Rebellion." Asserting the power seen. That they and their contemporaries to "resume" (take back) powers granted ifthey understood what they were about, and what should be abused, Virginia called for a Bill of the amendment means, is clear from the state Rights to include the following: "That the peo­ proposals cited as well as from a mountain of ple have the right to keep and bear arms; that related language in contemporary opinion and a well-regulated Militia composed ofthe body private communications. Judge Joseph Story ofthe people trained to arms is the proper, nat­ of Massachusetts-High Federalist, U.S. ural and safe defence of a free state. That Supreme Court Justice, and a founder of the standing armies in time of peace are danger­ Yankee theory of the union-wrote in 1840 ous to liberty, and therefore ought to be avoid­ that the right to keep and bear arms is "the ed...." (My italics.) New York, also asserting palladium of the liberties of a republic; since the right of the people to "reassume" powers it offers a strong moral check against the abused by the new federal government, usurpations and arbitrary power ofrulers; and declared that "the people have a right to keep it will generally, even if these are successful and bear Arms; that a well-regulated Militia, in the first instance, enable the people to resist including the body of the People capable of and triumph over them."8 bearing arms, is the proper, natural and safe Stephen ~ Halbrook quotes Thomas Jeffer­ defence of a free State; [t]hat the militia son's and James Madison's comments on Vir­ should not be subject to Martial Law except in ginia legislation to show that there is no mys­ time of War, Rebellion or Insurrection. That tery about the meaning of "bear" (it means standing armies in time of Peace are danger­ "carry"). This goes to the modern liberal ous to liberty, and ought not to be kept up, superstition that Second Amendment advo­ except in Cases of necessity. .. ." (Italics in cates believe in private ownership of tanks original.) North Carolina likewise: "[T]he and nuclear bombs. If the private right were people have a right to keep and bear arms; that not already clear from the ratifying conven­ a well-regulated militia composed ofthe body tions' drafts, Robert Shalhope cites Thomas ofthe people, trained to arms, is the proper, Jefferson's views: "Let your gun therefore be natural and safe defence of a free state." (My the constant companion of your walks." A italics.) Finally, Rhode Island, asserting the ramble through the' country with your gun is right of the people to "reassume" delegated manifestly not service in the militia.9 powers, declared that "the people have a right The meaning of the Sec()nd Amendment is to keep and bear arms," with the same lan­ also clarified by a look at comparable provi­ guage regarding militia, standing armies, etc., sions in eighteenth-century and nineteenth­ used by the other state conventions.7 century state bills of rights. Here I will cite It would seem that the men who demanded only the Texas Constitution of 1876: "Every what became the Second Amendment citizen shall have the right to keep and bear expressed their views with great power and arms in the lawful defense of himself or the clarity. Yet it is this straightforward proposi­ State; but the Legislature shall have power, by tion that overmasters the reasoning power of law, to regulate the wearing of arms, with a several prominent northern congressmen and view to prevent crime."l0 Here as elsewhere, senators today. there is no question that an individual right of self-defense exists alongside but separate The Hermeneutics of the from any militia issues. The point about the "wearing" ofarms, and the state's right to reg­ Second Amendment ulate that, brings up some issues as to the The wording of the actual text of the Sec­ scope ofthe SecondAmendment within a fed­ ond Amendment can be described as'"sloppy eral system. THE SECOND AMENDMENT 19

The original understanding-ifwe may use put it, "secured to the Philippine people all the this. phrase-was that .the Bill of. Rights guarantees ofour Bill ofRights except trial by applied against the new and feared general jury and the right to bear arms"-that is, all government and not against the several states. but the two most important ones. Of course The language ofthe Second Amendment is so the American colonialists, having just fought broad that it might be argued that the states a brutal counter-insurgency war to make good bound themselves by it ("the right ... shall not their claim to the islands, and which led to the be infringed" versus "Congress shall make no death of some 200,000 Filipinos, were not in law" in the First Amendment). Usage sug­ a mood to encourage unreliable Filipinos to gests, however, thatprotection ofthe right was bear arms. II It may be significant, however, left-at the state level-to bills ofrights in the that proponents ofgun control think it appro­ state constitutions where the actual details priate to treat Americans the wayan imperial might vary. The Fourteenth Amendment (if power treats its far-off colonial subjects. actually ratified) .may alter matters. The The gun-controllers, to put it another way, Supreme Court has proclaimed that the Four­ can't see why Americans are so reluctant to teenth Amendment "incorporates" those rights submit themselves unquestioningly to the in the first ten amendments to which the Court benevolent rule of a social-democratic wel­ is partial. So far, it has not seen fit to extend fare-warfare state of the sort in place in the this reasoning to the Second Amendment. happy and peaceful nations of western Europe. In such a state things will be very The Bad Faith of the orderly-and there is absolutely nothing to Gun Grabbers fear because we will all have that all-impor­ tant right to trudge to the polls every so often If the gun opponents were honest, they to show (perhaps under threat of fines) our would-like George Will-eoncede the over­ acquiescence in whatever the politicians whelming case against their "interpretation" decide to do with our lives, incomes, and of the amendment, and then go out and work property. No matter how detailed bureaucrat­ to get their own amendment. The opponents ic oversight of people's lives may become, want to get by with "interpreting" the amend­ they can always vote for a change in person­ ment away, or simply ignoring it as so much nel-if not about anything substantive. This "irrelevant" eighteenth-century metaphysics, happy scenario looks to a re-creation of the while Congress gets on with the important Old Order in which priests and warriors rule work of overriding, "infringing," and elimi­ over the economic producers who, after all, nating the. right to keep and bear arms. They need only do what they are told. wish to proceed as ifwe were living under the Anti-Constitution composed by Rexford. G. Why Bother with Tugwell, ex-New Deal technocrat and plan­ Republican "Discourse"? ner. Tugwell's version of the amendment reads, "No person shall bear arms or possess Law professor William Van Alstyne writes lethal weapons except police, members ofthe that the Second Amendment is not "mysteri­ armed forces, or those licensed under law ous, equivocal, or opaque"-"today it is sim­ according to rules established by the Court of ply unwelcome." As for those who dislike it, Rights and Duties." In 1941, Clarence G. "it is for them to seek a repeal." He adds that Streit, Anglophile proponent of federation "the essential claim" made by the NRA "is between the United States, Britain, Australia, extremely strong."12 Even so, it is likely that New Zealand, and South Africa, wrote a draft Congress will go on infringing the amend­ "based on the U. S. Constitution" that· simply ment and order the states to infringe it further, left out any right to bear arms. More to the and that the courts will regard the right as point may be the plan of government for the "irrelevant" and of mere antiquarian interest. Philippine Islands drawn up in 1913 by the People will still believe in their right of self­ U.S. Secretary ofWar, which, as Philip Jessup defense. 20 THE FREEMAN/IDEAS ON LIBERTY • JUNE 1999

So what do we gain by going over all this? 6. English Bill ofRights, 1689, in Irwin Edman, ed., Fountain­ heads of Freedom: The Growth of the Democratic Ideal (New We learn the truth, and that is probably a good York: Reynal & Hitchcock, 1941), p. 338. The Whig landlords who thing in itself. We learn something about the ousted the Stuarts soon passed the draconian Black Act, which almost made it a capital crime to even think about shooting any American revolutionary synthesis and, alas, game on their vast estates. See E.P. Thompson, Whigs and Hunters the difference between ourselves and our (New York: Pantheon Books, 1975). The connection between game laws, arbitrary search and seizure, and gun confiscation seems fair­ forefathers. And we may learn something lyobvious. about constitutional morality as against 7. The full text of ratifications is in Charles C. Tansill, ed., Doc­ uments Illustrative ofthe Formation ofthe Union ofthe American "stealth" amendment by Congress and the States (Washington, D.C.: Government Printing Office, 1927), pp. courts, which present us every few years with 1009-1059. 8. Joseph Story, Familiar Exposition ofthe Constitution ofthe a brand new "constitution" they have found United States (Lake Bluff, Ill.: Regnery Gateway, 1986), p. 319. lurking inside the real one. 0 9. Stephen P. Halbrook, "What the Framers Intended: A Linguis­ tic Analysis of the Right to 'Bear Arms,'" Law and Contemporary 1. For a discussion ofthe various themes and references, see my Problems, Winter 1986, pp. 151-162, and Robert E. Shalhope, "The article "Tensions in Early American Political Thought," The Free­ Armed Citizen in the Early Republic," ibid., pp. 125-141. man, May 1999. 10. Texas Almanac, 1980-1981 (Dallas: A.H. Belo Company, 2. Wendy Kaminer, "Second Thoughts on the Second Amend­ 1979), p. 482. ment," The Atlantic Monthly, March 1996, p. 32. 11. Rexford Guy Tugwell, Model for a New Constitution (Santa 3. Ibid., p. 43. Barbara: Center for the Study of Democratic Institutions, 1970), p. -4. See Robert A. Nisbet, Tradition andRevolt (New York: Vintage 81; Clarence G. Streit, Union Now with Britain (New York: Harper Books, 1970), "Rousseau and the Political Community," pp. 15-29. & Brothers, 1941), pp. 215-16; and Philip C. Jessup, Elihu Root, vol. 5. James Otis, "On the Writs ofAssistance" in Orations ofAmer­ I (Hamden, Conn.: Archon Books, 1964 [1938]), p. 354. ican Orators, I (New York: The Co-operative Publication Society, 12. William Van Alstyne, "The Second Amendment and the Per­ 1900), pp. 19-24. sonal Right to Arms," Duke Law Journal, April 1994, p. 1250.

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A Tax Is Not a User Fee!

oliticians and bureaucrats are notorious itself through user fees instead of taxes, the Pfor manufacturing euphemisms-elever less it looks like government and the more it but deceptive substitutes for what they really gets out of the redistribution business and mean but don't want to admit. That's how the begins to resemble private firms operating in phrase "revenue enhancement" entered the free markets. vocabulary. Some of our courageous friends Instinctively, most people sense a certain in government couldn't bring themselves to fairness about true user fees. You pay for what say "tax hike." you get, and you get what you pay for. Most At all levels of government, a bipartisan people understand and support user fees for effort to impose new or higher taxes and mis­ such things as toll roads, harbors and water­ label them as seemingly less onerous "user ways, and even parks and recreational facili­ fees" provides another example. Sometimes, a ties. Ifthey understand that private enterprise user fee is indeed a user fee. Other times, it's would probably do a better job with these not that at all. Instead, it's a tax hike disguised things, they know that at least a user fee by a misnomer. approach for government services gives them When someone chooses to use a govern­ an opportunity to make a rational economic ment service and pays for it, he's paying a choice: buy it ifit's worth the price, patronize user fee. Furthermore, what he pays should an alternative, or do without. All this makes cover the cost of the service he is receiving; for useful background to a victory that advo­ if it goes for something he isn't getting or cates ofliberty and sound economics recently doesn't want, then he's paying a little of won in my state ofMichigan. both-a user fee plus a tax. Taxes differ from In 1978, Michigan voters approved the user fees in that paying them isn't a matter of Headlee Amendment to the state constitution. choice and what you pay is not tied directly to Among other provisions, the amendment what you're using. requires voter approval before a tax can be In principle, true user fees make a lot of imposed or increased. In its 1994 report, the sense, especially ifyou want people to under­ Headlee Amendment Blue Ribbon Commis­ stand that nothing from government is truly sion found that a growing number of Michi­ "free." Indeed, the more government finances gan townships, counties, and cities were skirt­ Lawrence Reed is president ofthe Mackinac Center ing that requirement by mislabeling certain for Public Policy (www.mackinac.org), afree market taxes "user fees." The commission recom­ research and educational organization in Midland, mended that the legislature clarify the differ­ Michigan, and chairman ofFEE's Board ofTrustees. ence between a tax and user fee. The Michi­ As a member ofthe Headlee AmendmentBlue Ribbon Commission, he helped write the portion ofthe com­ gan Supreme Court now has done what the mission's report dealing with the userfee versus tax legislature never got around to doing. Here's issue in 1994. how the case arose: 21 22 THE FREEMAN/IDEAS ON LIBERTY. JUNE 1999

In 1995, the city of Lansing adopted Ordi­ Just what exactly distinguishes. a user fee nance 925, known by many as the "rain tax." from a tax? The Court advanced three main It provided for the creation of a storm water criteria: (1) a user fee is designed to defray the enterprise fund "to help defray the cost ofthe costs of a regulatory activity (or government administration, operation, maintenance, and service), while a tax is designed to raise gen­ construction" of a·· new storm water system eral revenue; (2) a true user fee mustbe pro­ that would separate sanitary and storm sew­ portionate to the necessary costs of the ser­ ers. Heavy rains had occasionally caused the vice, whereas a tax may not be; and (3) a user city's combined sanitary and storm sewer sys­ fee is voluntary, whereas a tax is not. tem to overflow, discharging untreated and The Lansing ordinance failed all three tests partially treated sewage into the Grand and of a user fee. The Court determined that it Red Cedar rivers. Fifty percent ofthe 30-year, constituted "an investment in infrastructure as $176 million cost of the system was to be opposed to a fee designed simply to defray the financed through an annual "storm water ser­ costs ofa regulatory activity" and agreed with vice charge" imposed on each parcel ofprop­ the dissenting opinion in a lower court ruling erty in the city. The city maintained that the that the revenue from the charge was "clearly service charge was a user fee and therefore in excess of the direct and indirect costs of did not have to .. be put before the voters for actually using the.storm water system." The approval. But Lansing citizen Alexander Bolt Lansing rain tax applied "to all property own­ had read the constitution and knew a tax when ers, rather than only to those who actually he saw one. benefit," contrary to a genuine user fee. More­ Bolt challenged the Lansing "rain tax," tak­ over, the ordinance "failed to distinguish ing the case all the way to the Michigan between those responsible for greater and Supreme Court, a majority of which on lesser levels ofrunoff." December 28, 1998, declared, "We hold that Most plainly, the rain tax was utterly invol­ the storm water service charge is a tax, for untary. True user fees are only "compulsory" which approval is required by a vote of the for those who choose to use a service, but people. Because Lansing did not submit Ordi­ Lansing property owners·in this case had "no nance 925 to a vote ofthe people as required choice whether to use the service" and were by the Headlee Amendment, the storm water "unable to control the extent to which the ser­ service charge is unconstitutional and, there­ vice" was used. fore, null and void." The decision established The Court's majority concluded by quoting an important precedent that puts municipali­ the Headlee commission report, "This is pre­ ties on notice that the voters who approved the cisely the sort of abuse from which the amendment intended for it to be enforced, not Headlee Amendment was intended to protect subverted. taxpayers." Amen! The Court's majority opinion refreshingly The message is clear to Michigan munici­ argues that "a primary rule in interpreting a palities: You now have no legitimate excuses constitutional provision ... is the rule of for mislabeling taxes as "user fees." Be hon­ 'common.understanding.'" In other words, in est. If it's a tax, put it before the voters as this case the intent of the voters should be of the Headlee Amendment requires and make utmost importance, as opposed to some judi­ your best case. You can't junk the constitu­ cially activist fabrication. The Court affirmed tion justbecause you want the money. It's a that the voters intended to place limits on refreshing message that ought to be applied taxes and governmental expansion. everywhere. [] The Reserve Requirement Debacle of 1935-1938 by Richard H. Timberlake

he principal thrust of Treasury-Federal Without some human provision on some basis TReserve monetary policy throughout the for supplying money to the economy, the eco­ 1920s and 1930s was by turns restrictive, con­ nomic machine was derelict. tractionary, and depressive. Even as the econ­ A related policy shortcoming that aggravat­ omy was floundering helplessly in a financial ed the Federal Reserve's restriction ofmoney environment ofmonetary austerity, no one in was the official attitude toward "the" gold the Treasury-Fed bureaucracy seemed to standard. Since 1920, the gold standard in understand the ongoing disequilibrium. Most practice had become an unwelcome nuisance economists and bankers could not grasp it to be fit into the government's monetary-fiscal either. Federal Reserve spokesmen claimed program in ways that would not interfere with that "low" interest rates were a sign ofmone­ the current hands-on priorities ofcurrent pol­ tary ease and plenty of credit. Since market icy. Especially was this stance clear after interest rates had almost disappeared into the 1933. woodwork, "money" was supposedly plenti­ ful. In fact, the quantity of money-the Eclectic Model money the central bank was supposed to pro­ vide scientifically and opportunely to the Treasury and Federal Reserve excuses for economy-was suffocatingly inadequate.! past mistakes were highly successful. Fed Part ofthe problem was the flawed real bills spokesmen then trotted out their eclectic doctrine that most commercial bankers and, model ofthe economy, which claimed that the subsequently, Federal Reserve officials depression was worldwide and developed embraced to fashion credit policy. If bankers from a number ofindependent causes. One of and businessmen were not borrowing at the their favorite slogans was, "Monetary policy minuscule rates then current, the argument is like a string. You can pull with it, but you went, their enterprises were just not produc­ can't push on it." Those who had a collectivist tive enough to warrant additional monetary bent were only too happy to hear that a mar­ resources. According to this view, the produc­ ket order based on individual property rights tion of goods, services, and capital led to the and the rule of law could not thwart a great production ofmoney through the operation of depression. banks and the gold standard. In fact, with the Another factor that obscured a path out of production of money in the province of the depressionary forest was the policy of human design, it was the other way around: raising. the price ofgold after all the gold had Richard Timberlake is a professor of economics gone to Washington and been buried in the retiredfrom the University ofGeorgia. This is the last Treasury's dungeons. Government ownership in a series. ofthe gold, and the actual illegality ofprivate 23 24 THE FREEMAN/IDEAS ON LIBERTY • JUNE 1999 ownership, left gold with no more function checks against for conventional transactions. than ballast in the basement that would pre­ All these reserve items are ultimate legal sat­ vent the U.S. Treasury building from rocking isfaction for redeeming the demand deposits in a windstorm. (and in the nineteenth century, bank notes) The middle 1930s witnessed an even more that the commercial banks issue(d) as a by­ astonishing event. The belated recovery, product of their lending and investing opera­ helped in part by monetary expansion from tions. the massive gold monetization, was just Before governments imposed legal reserve beginning to show some vitality when Trea­ requirements, bankers maintained their own sury-Fed officials decided that the continuing reserve accounts. The typical banker consid­ gold inflows were leading to the acute danger ered a variety of circumstances to determine ... ofan inflation! Official opinion in the two the fraction ofreserves he should keep against agencies concluded that the proper tactic now the bank's demand obligations: the volatility was for the Fed to increase member-bank ofhis lending business, his bank's geographi­ reserve requirements using the new power it cal location-rural or urban and its proximity had been granted by the Banking Act of 1935. to financial centers, the season of the year, Simultaneously, the Treasury would reinsti­ and the general state of business. Especially tute the gold-sterilization procedures that the did he consider banking laws that added insti­ Fed had used so conspicuously in the 1920s. tutional restrictions to his other concerns. The Board of Governors regarded the mone­ Banking laws have been especially onerous tary conditions ofthe mid-thirties as a made­ for banks, probably because all legislators to-order opportunity to experiment with its know that banks somehow create money and new reserve-requirement gadget. the legislators feel that it is their duty to pro­ tect their constituents from these "predators." Reserves and Reserve Clearly, the importance ofthe many factors Ratios determining the volume of reserves the banker felt he needed would vary over time. Before going further, the reader might find The banker would then adjust the ratio by useful an explanation ofbanks' reserve ratios extending or diminishing his loans and and the central bank's authority over legal accommodations to the borrowing communi­ reserve requirements. A bank's reserve ratio is ty. Whatever his reserve position, the banker the fraction of the bank's effective reserves had his reserves on hand and knew he could relative to its demand obligations (that is, use them to the fullest if any panic or emer­ checking deposits). It is stated either as a dec­ gency threatened. imal ·or as a percentage. Reserves· always At first blush, specification of minimal included currencies and cash, such as gold, reserve requirements seems to be a logical silver, and other legal tender. All legal tender function of government-something akin to currency is government issued or government police protection. Indeed, that was the view guaranteed, and has included greenbacks, sil­ when Congress first considered the idea in the ver certificates, gold certificates, national mid-1830s, as the U.S. Treasury deposited the bank notes, and Treasury notes. Since 1913, money from land sales and tariffs in private the principal currency has been Federal banks. Congress then deliberated a plan that Reserve notes issued by the twelve Federal called for a 20 percent legal reserve minimum Reserve Banks. for all banks holding U.S. Treasury balances. Reserves also include reserve-deposits that At first, the proposal had a good deal of sup­ member banks maintain in Federal Reserve port. On reflection and "reconsideration," Banks. These accounts are the balances that however, the lawmakers of the time backed Fed Banks use to clear the demand obliga­ away from a specific prescription. They decid­ tions of their member banks to other banks. ed to let the secretary ofthe treasury stipulate They are similar to the commercial bank the reserve qualifications for banks that held accounts households and businesses write government balances.2 THE RESERVE REQUIREMENT DEBACLE 25

Some state governments began specifying banks to trench on their required reserves by legal reserve requirements for banks as early paying substantial penalties. Often, however, as the 1840s. Then the National Bank Act the reserve requirement was treated as an passed during the Civil War included reserve ironclad minimum, which if breached, gave requirements for all national banks. It listed banking authorities cause to shut down the three classes ofbanks (described last month): offending bank. In other cases, the bad pub­ central-reserve-city banks, reserve-city banks, licity banks received when their reserve ratios and "country" (all other) banks. Only state became deficient practically put them out of laws governed the reserves of non-national business. Under such opprobrium, the legal banks, and some states had no formal reserve minimum percentage converted what would requirements at all.3 have been a cushion ofusable reserves against Of course, no bank, regardless of state law, unusual redemptions into an unusable fixture can operate without a contingency or provi­ that banks only dared breach when they were dential reserve of some amount. Competition at the end oftheir other resources. among banks for deposits and loan-making opportunities, and clearing of banks' checks through clearinghouses, force banks to main­ Uncertain Effects tain some level of reserves. Legal minimal The potential effect on the money supply requirements simply mandate what solvent from the reserve-requirement manipulation and responsible banks would do anyway to the Banking Act of 1935 vested in the Feder­ stay in business as cost-recovering enterpris­ al Reserve Board was very uncertain. The es-with this exception: legal minimums are greatly increased quantity of monetized gold usually a fixed percentage for a wide classifi­ had expanded bank reserves to double the dol­ cation ofbanks, and are, therefore, somewhat lar amounts that current requirements-7, 10, greater than most banks would keep if left to and 13 percent for the different classes of themselves. They are greater because a gov­ banks-specified. Banks had plenty of ernmental regulatory agency must cover a reserves but they were not using them to make wide spectrum of banks that have diverse loans and investments to households and exposures to risks and other reserve mainte­ businesses. Given that dollar reserves were nance requirements. double the amount legally required, the bank­ Though minimum legal reserve require­ ing system, by expanding credit and deposits ments seem sensible and have become part of to the legal limit, could have doubled the the conventional wisdom, their presence has quantity of demand deposits.4 This unused proven in practice to be destabilizing to the potential implied two questions: First, what banking and monetary system. First, the "cor­ was the probability of such a bank credit rect" ratio is highly variable from bank to bank, expansion? Second, if it happened, what depending on all the factors listed. Since it is would be the effect on prices? also highly variable from season to season for Marriner Eccles, the new chairman of the the same bank, it is not a parameter that a gov­ Federal Reserve Board, was one of many ernment agency, even with perfect wisdom, Treasury and Fed officials who thought that can specify for banks collectively. It is another the reserve overhang was dangerous. These example ofthe synoptic regulatory delusion. reserves, he observed in late 1935, "could Finally, the very nature of a legal reserve become the basis of a potential expansion of requirement raises this unresolvable question: bank credit of such proportions that the Fed­ if a bank must keep a minimal ratio of eral Reserve could lose all control or influ­ reserves to deposits, how can it use those ence over the supply and cost ofmoney."5 He reserves when redemptions of its notes or noted, however, that the Board of Governors deposits would bring its reserve ratio down still saw "no evidence of overexpansion of below the legal minimum? business activity or ofcredit."6 This dilemma has never been satisfactorily In the next six months the continuing gold solved. Some banking laws have allowed inflow raised total bank reserves to $6 billion, 26 THE FREEMAN/IDEAS ON LIBERTY • JUNE 1999

and excess reserves to $3 billion. These num­ Anderson's arguments reflected the conven­ bers convinced Eccles, other Fed and Trea­ tional economic reasoning of the time. Mone­ suryofficials, and much ofthe financial com­ tary policy could only influence financial and munity that an increase in reserve require­ business conditions by its limited effect on ments was advisable. What the policymakers interest rates. Since rates were already at rock especiallydisliked was the fact that the banks, bottom, excess bank reserves made no differ­ with all their excess legal reserves, could ence, and their elimination would do no harm. to operate outside the control of the Fed. Once the excess reserves became required, Fed pol­ Contradictions in Reasoning icymakers would have a tight rein on the banks. "Even if the increase was as much as Both Anderson's and Eccles's comments, fifty per cent," Eccles concluded, "the remain­ and also those ofmany other observers, were ing reserves would still be beyond current or clearly contradictory. On the one hand, excess prospective needs ofbusiness and would pro­ reserves did not have any monetary thrust for vide a more than adequate basis for legitimate restoring normal levels of business activity; credit expansion."? on the other hand, they gave rise to inflation­ The Fed Board, under the urging ofthe Fed ary levels of credit expansion. Now which Bank of New York, raised reserve require­ view was correct? ments by 50 percent in August 1936. The No one at the time had the energy or initia­ increase, as far as the banks were concerned, tive to do so, but a simple empirical analysis made half-$1.5 billion-of their existing can estimate the price-level potential of the reserves unavailable. However, they. still had excess reserves then current. The questions to excess legal reserves of $1.5 billion. So the be answered are: (1) How much money could Fed Board in early 1937. raised requirements the banking system have generated with all the again, effective in March and May, to "mop reserves it held before the policy actions that up" the remaining legal excess. The total vol­ reduced excess legal reserves to virtually noth­ ume of reserves moved. from "excess" to ing? (2) What were the chances that this "required" came to $3 billion. expanded money stock would produce an The magnitude of this change is under­ inflation? (3) Finally, what was the probability stood best when it is viewed in equivalent that commercial bankers would expand their dollar value to an open-market sale of gov­ loan and deposit accounts to this maximum? ernment· securities. As Friedman and The table on the next page includes the Schwartz point out, $3 billion "amounted to monetary, employment, and price-level data nearly one-quarter of total high-powered of the period to suggest practical answers to money." Since the total amount of govern­ the first two questions. Columns (1) and (2) ment securities in the Fed Banks' portfolio at show member-bank deposits and reserves for the time was only $2.4 billion, the Federal the dates listed. Column (3) shows required Open Market Committee could not possibly reserves as of those dates. The difference have carried out such a momentous open­ between columns (2) and (3), excess legal market sale. Neither would it have considered reserves, is in column (4). the idea for an instant.8 If the banks had used these excess Raising reserve requirements had a good reserves at the various dates to extend their deal of support outside the Fed and Treasury. loans and investments to the limits then cur­ Benjamin M. Anderson, a conservative critic rent, bank deposits would have increased by of both New Deal policies in general and the values shown in column (5). Column (6) monetary policy in particular, expressed a is the M2 money stock-the sum of curren­ typical view. The great increase in excess cy and demand deposits, plus time deposits reserves, Anderson noted, had had very little in commercial banks-for the dates shown. effect on interest rates. Therefore, decreasing Therefore, the maximum money stock that reserves by raising requirements would have could have appeared because of bank-credit very little reverse effect.9 expansion is column (7), "maximum money THE RESERVE REQUIREMENT DEBACLE 27

Deposits and Reserves of Member Banks, Various Money Stocks, Unemployment, and Prices, 1935-1938*

Member Possible Member bank increase Maximum Full Member Member bank excess in member M2money employment Inflationary Unemployment bank bank required reserves bank M2money stock money potential of as percent of Prices, deposits reserves reserves (2)-(3) deposits stock (5)+(6) stock (7) labor force 1929=100 Date (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)

1935 Dec. 31 28.9 6.28 3.30 2.98 26.1 40.3 66.4 59.2 +12.2 18.5 80.5

1936 June 30 31.3 6.17 3.58 2.59 22.6 43.3 65.9 62.4 + 5.6 16.9 80.9

Dec. 31 32.2 7.33 5.28 2.05 12.5 45.0 57.5 63.5 -9.5 15.6 82.3

1937 June 30 37.3 7.38 6.50 0.88 4.4 45.2 49.6 61.5 -19.3 14.3 83.8

Dec. 31 31.7 7.71 6.64 1.07 5.0 44.0 49.0 61.6 -20.5 16.6 83.1

1938 June 30 31.6 8.61 5.85 2.76 14.9 44.1 59.0 64.4 -8.4 19.0 82.3

*Monetary data in $ billions; unemployment data and prices in percentages. Sources: Philip Cagan, Determinants and Effects of Changes in the Stock of Money, 1875-1960, National Bureau of Economic Research (New York: Colum- bia University Press, 1965), table F-8, p. 350; Board of Governors of the Federal Reserve System, Banking and Monetary Statistics (Washington, D.C., 1943), pp. 39&-97; Friedman and Schwartz, Monetary History ofthe United States, 1867-1960, table A-1, pp. 714-15. stock," the sum of columns (5) and (6). order to state the excess (or deficiency) as a Column (8), the "full employment money percentage. On these terms, column (9) esti­ stock," is a constructive estimate ofhow much mates the inflation that the banking system common money (M2) the u.s. economy could have generated given the institutional would have required to achieve full employ­ constants then present. Columns (10) and (11) ment on the dates shown. It is based on two are the data for unemployment and prices as conceptual adjustments to the existing money conventionally measured by the Bureau of stocks. First, a greater quantity of money Labor Statistics. For simplicity, the price would have been necessary to transact the index value for 1929 is given as 100. increased volume ofgoods and services that a As Column (9) shows, the maximum poten­ fully employed labor force would have pro­ tial inflation in the system was only 5.6 per­ duced. Second, an additional quantity of cent in June 1936, just before the first massive money would have been necessary to get the increase in reserve requirements of August price level back to the value it had in 1929, 1936. After the increase, the inflationary the last time at which the economy enjoyed potential became negative (-9.5 percent) substantially full ·employment. 11 In a market implying that the economy could no longer economy suffering from .severe unemploy­ reach full employment under the conditions ment, increases in the money stock simultane­ then prevailing, no matter how prodigally ously stimulate both revived· output and high­ commercial banks expanded their accounts. er prices. (In technical terms, the aggregate On the basis ofwell-intentioned ignorance, supply function is neither perfectly elastic nor the first increase in reserve requirements perfectly inelastic.) could be forgiven. It undid part of the Column (9) is the percentage excess (+) or immense increase in gold monetization that deficiency (-) ofthe money stock for the date. Roosevelt's inexcusable increase in the price It is a measure ofpotential inflation calculat­ of gold had induced. The second round of ed by dividing (8) into (7) and subtracting 1 in increases in March and May 1937, however, 28 THE FREEMAN/IDEAS ON LIBERTY • JUNE 1999 turned what had been an ongoing recovery during the years from 1929 to 1933 had into another cyclical disaster. "Inflationary" taught banks that it was not enough to keep potential came down to -20.5 percent, and all ... only the minimum amount [of reserves] the leading indicators of business activity required by law; legally required reserves turned negative. By September the recession could not be drawn on to meet emergency was unmistakable. Both the Treasury and the demands without the banks being liable to Fed undid some small part oftheir restrictive closure [by order of governmental banking measures in mid-1938, but a state of healthy authorities]. ... Little wonder that the economic activity did not appear again survivors of the holocaust felt it necessary until the wartime monetary increases of to provide their own protection against 1941-1942. So, to answer the first question unexpected demands. [Bank] deposits in posed above: No inflation of any size could excess of required legal reserves were have occurred between 1937 and 1941. What essentially uncovered [bank] liabilities for did appear as a result ofFed-Treasury policies which only the excess of high-powered was a sharp recession that further undermined money over required reserves provided an confidence in the market system. effective reserve."12 The third question-What was the proba­ The experience of having survived the bility that commercial bankers would expand banking crises of the times because he had their loan and deposit accounts to this maxi­ been more conservative in lending opera­ mum?-cannot be answered with monetary tions than his fellows would have added to data. To answer this question, the observer the banker's conservatism. Now the Federal must imagine the mindset of a typical banker Reserve Board suddenly doubles his reserve of the time who has survived the Great Con­ obligations before his bank has recovered traction, many unsavory New Deal shenani­ any significant fraction of its pre-depression gans' and now the extraordinary reserve income. In addition, the Supreme Court has requirement increases. just upheld abrogation ofthe gold clauses in government contracts, labor unions are Cautious Bankers showing increased· virulence, and Social Security taxes have appeared. What are .his Bankers, to begin with, are not by occupa­ profitable lending prospects at this point? tion very radical. They operate institutions that What problem can he next expect from the have only fractional reserves with which to "lender oflast resort," who is supposed to be meet liquidity demands. Assume this bank has his protector? survived eight years ofmonetary turmoil, and Required reserves are not just numerical now finds its legally required reserves doubled artifacts, and paradoxically they fail in prac­ in less than a year. Four to six years earlier it tice to protect bank obligations. However, had perhaps sought accommodation from its they have very important side effects on regional Fed Bank, as anxious depositors filled banker behavior. Since the horrendous blun­ its lobby during one ofthe banking crises in the ders in their implementation during the early 1930s. To extend his reserves and satisfy 1930s, the Federal Reserve has used them less his clients, the banker may have taken some of and less for monetary control purposes. his "eligible paper" to his regional Fed Bank Today, the Fed relies almost exclusively on for discount. The Fed Bank loan committee open-market operations to manage the econo­ might well have replied in "shaggy dog" terms my's money stock. Even ifnot used, however, that his bank's paper "was not eligible enough," legal reserve requirements should be abol­ and refused the loan application. ished completely so that the Federal Reserve This response surely would have condi­ Board could not blunder again into the mone­ tioned the banker not to rely on the Fed Bank tary catastrophe it fostered in the 1930s. to save him from liquidity shortages. Milton Banks would manage their own reserves, and Friedman, who reviewed this episode in reserves would once again fulfill their tradi­ minute detail, remarked: "Bitter experience tional purpose. 0 THE RESERVE REQUIREMENT DEBACLE 29

7. Ibid., pp. 288-89. 1. This article draws heavily from the outstanding and exhaustive 8. Friedman and Schwartz, A Monetary History of the United account of the Great Contraction and Great Depression carefully States, p. 532. The authors discuss the political and intra-government detailed and analyzed by Milton Friedman and Anna 1. Schwartz in power factors behind the policy. The scenario they document reveals their monumental A Monetary History· of the United States, how important noneconomic causes were and are in the actions ofan 1867-1960 (Princeton, N.J.: National Bureau ofEconomic Research agency supposed to be devoted completely to the good stewardship and Princeton University Press, 1963). I have supplemented their ofthe monetary system and the economy. account with some material from my Monetary Policy in the United 9. Benjamin M. Anderson, Economics and the Public Welfare: A States: An Intellectual and Institutional History (Chicago: Universi­ Financial and Economic History of the United States, 1914-1946 ty of Chicago Press, 1993). (Indianapolis: Liberty Press, 1979 [1949]), p. 405. 2. See Monetary Policy in the United States, chapters 4 and 5, for 10. Ibid., pp. 432-33. an explanation ofthis episode. 11. These adjustments do not include a possible change in the 3. The state ofIllinois, for example, required no legal reserves of velocity of money. Cyclical experiences of monetary velocity con­ banks chartered by that state until the Monetary Control Act of 1980 firm that it changes only sluggishly and belatedly. For a more made legal reserve requirements mandatory for all banks regardless detailed analysis ofthe "full employment money stock," see Mone­ ofthe states in which they were chartered. Practically no other coun­ tary Policy in the United States, pp. 292-94.lfthe dollar price struc­ try in the world imposes reserve requirements on its commercial ture were perfectly flexible downward, "full employment" could banks. result at any level ofprices. In the real world ofthe 1930s, however, 4. It is important to emphasize here that the commercial banking prices were no longer flexible downward as they had already gone system could not carry out such an expansion deliberately and pur­ through the floor. More to the point, government programs had posively. Any expansion that banks undertook necessarily would be actively worked against money price declines for almost ten years. a result ofdecisions made by individual banks, and their intent would 12. Milton Friedman, A Program for Monetary Stability (New be to earn profits from successful financial operations. In short, com­ York: Fordham University Press, 1960), p. 46; emphasis added. In mercial banks could not (and cannot) make monetary policy. Only their Monetary History, Friedman and Schwartz comment similarly the central bank can do that. on page 348. Every bank panic that occurred in the presence ofgov­ 5. Marriner Eccles, Beckoning Frontiers (New York: Alfred ernmentally mandated reserve requirements bore witness to this Knopf, 1951), p. 287. paradox: Set up a system oflegally required reserves for banks, and 6. Ibid. the reserves will not be used for their intended function.

THE CLASSIC BLUEPRINT FOR A JUST SOCIETY lllHIIE ILAW By FREDERIC BASTIAT New Introduction by WALTER E. WILLIAMS Foreword by SHELDON RICHMAN

"Phenomenal! An amazing and timeless treatment ofthe cost ofusing government to solve problems." - Russell Roberts, author of The Choice

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The Great Gold Robbery by James Bovard

he New Deal established much of the few days after taking office,. that the gold stan­ T moral framework ofcontemporary politi­ dard was safe. But three days later, he issued cal life. Though some of the programs and an executive order forbidding gold payments policies ofthat era have been terminated, the by banks; Treasury Secretary Henry Morgen­ moral heritage of the New Deal continues to thau, Jr., announced on March 11 that "the permeate American government and political provision is aimed at those'who continue to thinking. retain quantities of gold and thereby hinder In 1936 Franklin Roosevelt declared, "I the Government's plans for a restoration of should like to have it said ofmy first Admin­ public confidence."3 Thus, according to Mor­ istration that in it the forces ofselfishness and genthau, any limit on government power was oflust for power met their match.... I should bad forpublic confidence. And whatever con­ like to have it said ofmy second Administra­ fidence people might seek to achieve must be tion that in it these forces met their master."l left in abject dependence on polIticians' latest No American president has rivaled Roosevelt salvation scheme. in his denunciation of what he called "eco­ The ban on bank gold payments created nomic royalists." He sought to "master'" the widespread doubts about the Roosevelt "forces ofselfishness" by making government administration's intentions. Ogden Mills, who master ofevery person's private financial des­ had served as President Herbert Hoover's tiny. Like today, the citizen who wanted to treasury secretary, observed that "it was not retain control over his own life was selfish, the maintenance of the gold standard that while the bureaucrat who wanted to seize caused the banking panic of 1933 and the out­ power over the citizen was automatically pre­ flow of gold. ... [I]t was the definite and sumed benevolent. growing fear that the new administration One of the most controversial New Deal meant to do what they ultimately did-that is, policies was the seizure of citizens' gold.2 abandon the goldstandard."4 People naturally During the Great Depression, several foreign sought to get rid of their paper currency and nations repudiated their promises to redeem to put their savings into something with more their currencies for gold. In 1933, when Roo­ secure value-gold. sevelt became president, the United States had the largest gold reserves of any nation in Gold as Contraband the world. He announced on March 8, 1933, a Fear of'devaluation spurred a panic, which James Bovard is the author ofFreedom in Chains: Roosevelt 'invoked to justify seizing people's The Rise of the State and the Demise of the Citizen gold. OnApril 5,1933, Roosevelt command­ (St. Martin's Press, 1999). ed all citizens to surrender their gold to the 30 31 government. No citizen was permitted to own edict and possessed more than five Double more than $100 in gold coins, except for rare Eagle gold coins. coins with special value for collectors. Mor­ Roosevelt was hailed as a visionary and a genthau announced on the same day that savior for his repudiation ofthe government's "gold held in private hoards serves no useful gold commitment. Citizens who distrusted the purpose under present circumstances."5 Gold government's currency management or was thus turned into the same type of contra­ integrity were branded as social enemies, and band as Prohibition-banned rum. Roosevelt their gold was seized. And for what? So that announced, "Many persons throughout the the government could betray its promises and U.S. have hastened to turn in gold in their pos­ capture all the profit itself from the devalua­ session as an expression of their faith in the tion it planned. Shortly after Roosevelt Government and as a result of their desire to banned private ownership of gold, he be helpful in the emergency. announced a devaluation of 59 percent in the There are others, however, who have waited gold value of the dollar. In other words, after for the Government to issue a formal order for Roosevelt seized the citizenry's gold, he pro­ the return of gold in their possession."6 To claimed that the gold would henceforth be of speak ofthe "return ofgold" implied that gov­ much greater value in dollar terms. ernment was the rightful owner ofall the gold Citizens who had desired to hold gold as a in the nation, and thus that no citizen had a hedge against government inflation policies right to possess the most respected store of were completely vindicated. FDR's adminis­ value in history. Roosevelt assured the coun­ tration subsequently did everything possible try: "The order is limited to the period ofthe to inflate prices, foolishly confident that a emergency." But the order stayed on the books mere change in numerical prices would pro­ until 1974. duce prosperity. Citizens had accepted a paper Roosevelt labeled anyone who did not sur­ currency based on the government's pledge to render his gold a "hoarder." His executive redeem it in goldat $20 per ounce; then, when order defined "hoarding" as "the withdrawal Roosevelt decided to default on that pledge, and withholding ofgold coin, gold bullion or he also felt obliged to turn all citizens holding gold certificates from the recognized and cus­ gold into criminals. Roosevelt stated that the tomary channels of trade."7 Actually, Roo­ ban on private ownership "was the first step sevelt was not concerned with the gold being also to that complete control of all monetary in the "customary channels of trade"; gold in the United States, which was essential instead, he wanted government to possess all in order to give the Government that element the gold. And the notion that people were of freedom of action which was necessary as "withholding" their gold merely because they the very basis ofits monetary goal and objec­ did not rush to the nearest Federal Reserve tive."9 But the primary "freedom" govern­ bank to surrender it was political logic at its ment acquired was the freedom to default on best. its promises and to manipulate the lives of Roosevelt, in a later note to his Public everyone depending on U.S. dollars in their Papers, justified the order because it "served daily transactions. to prevent the accumulation of private gold Curiously, FDR retained his denigrating hoards in the U.S."8 Roosevelt used the same tone toward so-called gold-hoarders even "hoarding" rhetoric against anyone who after he defaulted on the federal government's owned gold that Stalin used against Ukrainian gold redemption promise. Even though peo­ peasants who sought to retain part of their ple who distrusted politicians' promises were wheat harvest to feed their families. But while vindicated, they were still evil people because Stalin sent execution squads to kill peasants they had not obeyed FDR's demand to surren­ who had a few bushels ofgrain hidden in their der their gold. In the moral world ofthe New hovels, Roosevelt was kinder and gentler, Deal, justice consisted solely of blind obedi­ seeking only ten-year prison sentences and ence to political commands. FDR had $250,000 fines for any citizen who defied his absolutely no sense of embarrassment or 32 THE FREEMAN/IDEAS ON LIBERTY • JUNE 1999

shame after he defaulted on the federal gov­ severely disrupted the ability ofscores ofmil­ ernment's gold promises-it was simply polit­ lions ofAmericans to plan their own lives and ical business as usual. save for retirement. Ifsomeone proposed a law Senator Carter Glass ofVirginia, chairman to give government the right to explicitly ofthe Senate Finance Committee, denounced default by 2 to 3 percent a year on all its debts, the gold seizure: "It's dishonor. This great the proposal would be widely denounced. Yet, government, strong in gold, is breaking its this is what the government has been doing for promises to pay gold to widows and orphans decades. Though inflation has slowed since to whom it has sold government bonds...."10 1980, the purchasing power of the dollar has fallen by over 50 percent in subsequent years according to the government's· own numbers Free to Inflate (which slightly exaggerate the damage to The refusal to convert paper dollars into the dollar), making a mockery of people's gold meant that the government was "free" to attempts to calculate and save for the future. A flood the country with paper money and sab­ 1997 study by Congress's Joint Committee on otage the currency's value. The stability ofthe Taxation found that because of how capital value of currency is one of the clearest mea­ gains taxes are calculated, many citizens are sures of a government's trustworthiness. forced to pay taxes on investment "gains" Before Roosevelt took office, Americans when in reality they have suffered losses due clearly recognized the moral implications of to the deterioration ofpurchasing power. 13 inflation. Vice President Calvin Coolidge had Roosevelt's gold seizure was based on the bluntly declared in 1922: "Inflation is repudi­ doctrine that in order for government to save ation." Inflation is a tax whereby government the people, it must be permitted to breach all prints extra money to finance its deficit spend­ the promises it made to the people. According ing. The value ofmoney is largely determined to modern conventional wisdom, government by the ratio ofmoney to goods; ifthe quanti­ has no obligation to do justice or treat any ty ofmoney increases faster than the increase specific individual citizen fairly-instead, in the amount of goods, the result is an government's only duty is to achieve "social increase in the ratio ofmoney to goods and an justice" or some other abstraction perfectly increase in prices. Thus, the government's suited for evasion. D printing presses devalue people's paychecks 1. The Public Papers andAddresses ofFranklin Roosevelt, 1936 and effectively allow government to default (New York: Random House, 1938), pp. 232-33. on the value ofits debt. 2. Editor's note: See Richard Timberlake's article "Gold Policy in the 1930s," The Freeman, May 1999. The threat of inflation was invoked in the 3. Gustav Cassell, The Downfall of the Gold Standard (New early 1940s to justify imposing payroll tax York: Augustus Kelley, 1966 [1936]), pp. 118-19. 4. Barry 1. Eichengreen, Golden Fetters: The Gold Standard and withholdingll (protecting people from their the Great Depression (New York: Oxford University Press, 1992), p. own paychecks) and in the 1970s to impose 321. 5. Cassell, p. 124. price controls over the entire economy. Appar­ 6. The Public Papers and Addresses ofFranklin D. Roosevelt, ently, politicians who decide to flood the The Year of Crisis, 1933 (New York: Random House, 1938), pp. 110-11. money supply automatically become entitled 7. Ibid., p. 112. to increase their coercion oftheir victims who 8. Ibid., p. 114. 9. Ibid., p. 115. hold increasingly worthless currency. 10. Benjamin Anderson, Economics and the Public Welfare (Indianapolis: Liberty Fund Press, 1979 [1949]), p. 314. Since Roosevelt banned citizens from own­ 11. Charlotte Twight, "Evolution of Federal Income Tax With­ ing gold in 1933 and forced people to rely on holding," Cato Journal, Winter 1995. See http://www.cato.org/pubs/ journal/cj 14n3-1.html. the unbacked promises of politicians for the 12. For information on the deterioration ofthe dollar's purchas­ value of their currency, the dollar has lost ing power, see the Web site ofthe U.S. Bureau ofLabor Statistics at 12 http://www.bls.gov/cpihome.htm. about 93 percent of its purchasing power. 13. Bruce Bartlett, "How Inflation Hikes the Capital Gains Bite," The collapse in the dollar's purchasing power Washington Times, March 31, 1997. Potomac Principles by Doug Bandow

Balkans Bungling: Why Only Congress Can Declare War

hen the U.S. attacked Yugoslavia earli­ attorney general claimed that "the Constitu­ W er this year, it inaugurated war against tion leaves the President, for good and suf­ another sovereign state that had not attacked ficient reasons, the ultimate decisionmak­ or threatened America or an American ally. ing authority." He opposed congressional The President, and the President alone, made attempts to restrict his plans in both Bosnia the decision. The constitutional requirement and Haiti and more recently pressured Con­ that only Congress shall declare war is gress not to vote on his plan to launch air obviously a dead letter. Yet the administra­ strikes on Yugoslavia and place 4,000 peace­ tion's embarrassing bungling in Kosovo illus­ keeping soldiers in Kosovo. trates just why the Framers intended that Alas, this executive presumption goes back the decision to go to war be vested in the to Richard Nixon, Harry Truman, and, legislature. indeed, much further. It was also shared by Presidential war-making has become a con­ the various potentates who once ruled Europe. stant. Ronald Reagan invaded Grenada; Observed President Abraham Lincoln: George Bush attacked Panama. Neither both­ "Kings had always been involving and impov­ ered to consult Congress. Bush planned to erishing their people in wars, pretending gen­ attack Iraq irrespective of Congress, explain­ erally, ifnot always, that the good ofthe peo­ ing that "I don't think I need it" when asked if ple was the object." America's founders congressional approval was necessary. Why? intended to take a different path. "Many attorneys," he said, had "so advised Article 1, Sec. 8 (11) states that "Congress me." He apparently didn't bother to read the shall have the power ... to declare war." As Constitution himself. Lincoln explained: "This, our Convention, President Clinton ended up only a Carter­ understood to be the most oppressive of all brokered agreement away from invading Haiti Kingly oppressions; and they naturally and has promiscuously attacked other nations resolved to so frame the Constitution that no or ·groups within nations-Afghanistan, one man should hold the power of bringing Bosnia, Iraq, Somalia, Sudan, Yugoslavia­ this oppression upon us." without appropriate legislative authorization. Of this there is no doubt. James Madison Like his predecessor, Bill Clinton has resisted wrote in 1793 that it is necessary to adhere to any attempt to restrict his war powers. In late the "fundamental doctrine ofthe Constitution 1993 the one-time law professor and state that the power to declare war is fully and exclusively vested in the legislature." Pierce Butler of South Carolina proposed giving Doug Bandow, a nationally syndicated columnist, is a senior fellow at the Cato Institute and the author the president the power to start war, caus­ and editor of several books, including Tripwire: ing Elbridge Gerry of Massachusetts to Korea and u.s. Foreign Policy in a Changed World. exclaim that he "never expected to hear in a 33 34 THE FREEMAN/IDEAS ON LIBERTY • JUNE 1999 republic a motion to empower the executive to approval is required to launch an aggressive declare war." The convention rejected Butler's war against Yugoslavia. motion. Presidents have been able to ignore the Why? The founders wanted to make it more Constitution's clear strictures only because difficult to go to war. Thomas Jefferson wrote successive Congresses have allowed them to that "We have already given ... one effectual do so. The partisan flip-flops have been daz­ check to the dog of war by transferring the zling: Republicans raged against Truman's power of letting him loose." The nationalist actions but defended Nixon; Democrats Alexander Hamilton reassured early Ameri­ demanded that Bush go to Congress but cans who feared that the proposed Constitu­ encouraged executive war-making by Clinton. tion.granted the president powers too similar Many legislators care less about dead soldiers to those of Britain's king. The president's than dead careers. Avoiding a vote allows authority, he said, was "in substance much them to avoid taking any responsibility on the inferior to it. It would amount to nothing more most serious ofissues, war and peace. than the supreme command and direction of It is time for all sides to re-examine their the land and naval forces ... while that ofthe commitment to the Constitution. Presidents Bri~ish King extends to the declaring of war take an oath to support the Constitution; that and to the raising and regulating offleets and means going to Congress for a declaration of armies; all of which by the Constitution war. Legislators, who make the same pledge, would appertain ofthe legislature." should want to protect not only the Constitu­ Virginia's George Mason, who favored tion, but also their institutional authority. Yet "clogging rather than facilitating war," was the issue is far more fundamental than just a blunt: the president "is not safely to be political struggle between the executive and entrusted with" the power to make war. This legislative. The nation's security is at stake. view has certainly been validated by history. As a result of presidents' routinely plung­ President Franklin Delano Roosevelt schemed ing America into overseas conflicts that are at to get America into war; both George Bush best tangentially related to U.S. security, hun­ and Bill Clinton conducted dubious propa­ dreds of thousands of soldiers have been ganda campaigns to build public support for killed, hundreds of billions of dollars squan­ their executive war-making. The pervasive dered, numerous civil liberties lost, and a host dishonesty ofand abuses perpetrated by exec­ of government bureaucracies spawned. The utive leaders in the United States and else­ issue ofwar and peace is simply too important where demonstrate the importance ofcircum­ to leave to the president. scribing their power. Perhaps this never has been more obvious The requirement of a declaration of war than after watching this administration turn a obviously offers no guarantee against ensnar­ minor tragedy into a monumental crisis in ing the nation in costly and unnecessary over­ Europe's tar baby, the Balkans. The President seas conflicts. But the need to win legislative and his advisers were surprised when the assent still limits presidential discretion, Albanian Kosovars first rejected the Ram­ while a debate puts the issue before voters and bouillet diktat, surprised when bombs did not allows them to hold Congress responsible for compel Belgrade's acquiescence, surprised government policy. when the Serbs struck back at the Kosovo Lib­ In a complex world filled with a. variety of eration Army and the Albanian Kosovars, sur­ potential threats, there will always be unclear prised when refugees overwhelmed neighbor­ instances, perhaps retaliation against a terror­ ing countries, surprised at the capture of U.S. ist group, where a president might claim col­ soldiers stationed in Macedonia, and surprised orable constitutional authority for unilateral that the conflict continued, week after week. A military action. But the number ofhard cases full and unfettered congressional debate could are few. There is no doubt that congressional have prevented the looming debacle. D • Economics

Market-Share Sophisms by Christopher Mayer

here are few more widely held fallacies What's the Market? Tthan equating market share to power over consumers and competitors. That great com­ Another complication is how a given mar­ panies maintain dominant positions in their ket is defined. Do manufacturers of corn markets is a red flag for regulators and anti­ flakes compete only against one another? Or capitalist moralists, rather than a sign ofhard­ do they also compete against makers of other won success and ingenuity worthy ofadmira­ ready-to-eat cereals? What about hot cereals? tion and study. Weaker competitors use the What about bacon and eggs? The answers to market share of others as an excuse for their those questions make a big difference for the own failures when they turn to the govern­ market shares of companies. Regulators base ment for assistance. Witness the pursuit of their claims on arbitrary assumptions. What such great companies as Microsoft and Intel. counts is how consumers see things. Market share is a reward for serving con­ One final element that's often neglected in sumers better than competitors do. It does not the analysis of market-share data: time. Mar­ confer special privileges or powers to a pro­ ket positions are snapshots. They change. The ducer, which is subject to the same economic market leaders of ten years ago are different laws and will of the consumer as any other from today's. They'll be different years from company. Market share can be easily lost by now. In a free market, the continued long­ poor decisions and inefficiency. term dominance ofa firm reflects its superior These conditions hold true on a free mar­ ability to satisfy consumers. ket. But there are many influences in the real Size doesn't determine a firm's degree of world that are not consistent with a free mar­ control over prices and production. Large and ket. Minimum-wage laws, the plethora of small companies may produce in whatever entitlements, union privileges, government quantity they wish and attempt to charge grants, state-managed money, regulations, whatever price they wish. Ludwig von Mises and a host ofinterventions change the pattern got to the heart of the matter when he wrote ofproduction in unknowable ways from what that "What those who blame the economies of might have been in the absence of these big-scale production for the spread ofmonop­ things. We can only imagine where some of oly prices are trying to say is that the higher the capital deployed in the steel industry efficiency of big-scale production makes it would have gone had the U.S. government not difficult or even impossible for small-scale protected it from foreign competition. plants to compete effectively." Christopher Mayer is a loan officer at a bank in That inefficient firms are kept from the Maryland and an MBA student at the University of market is no vice. In fact, this is one of the Maryland. market's virtues. But that doesn't mean small 35 36 THE FREEMAN/IDEAS ON LIBERTY • JUNE 1999 companies have no chance. Large firms are ruary 1999 issue of The Freeman.) But the not always best at providing value to cus­ problem of economic calculation is more tomers. There may be diseconomies of scale fundamental. that make it increasingly difficult to compete While the economist can say little about the effectively beyond a certain size. optimal size ofa specific firm, he can say the This is not to deny certain advantages that market will tend to establish the best possible large dominant firms enjoy. Large firms with arrangement thanks to the calculation that deep pockets have the financial wherewithal market prices make possible. Imagine a firm to respond to opportunities and weather that grew so big that it swallowed up the storms better than smaller, less well-capital­ external markets for its inputs. In the absence ized rivals. A bountiful corporate treasury of market prices for those inputs, the firm provides a margin for error that smaller firms could not engage in economic calculation and may not have. This is not a market failure, but thus could not know if it was deploying its the reward for past successes. capital in the most efficient manner. As Roth­ bard wrote, "When any ofthese external mar­ Calculation Problem kets [for inputs] disappears, because all are absorbed in the province ofa single firm, cal­ There is something that limits the size of culability disappears, there is no way for the firms in the free market: the need for eco­ firm rationally to allocate factors to that spe­ nomic calculation. The application of the cific area. The more these limits are calculation problem to private firms, an encroached upon, the greater and greater will extension of Mises's refutation of socialism, be the sphere of irrationality, and the more was an important insight of Murray Roth­ difficult it will be to avoid losses"(p. 585). bard in Man, Economy and State. Ronald The upshot is we can let the free market Coase's analysis of the firm concluded that take its course. Let us not worry about the the free market would establish a size that alleged power of dominant firms and instead tended to optimize transaction costs. (See focus on creating an environment in which the Max More, "Small is Awesome," in the Feb- free market is free to function. D

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The Permanent War

ome years ago Stanley McGill, 93, mailed administrative problem suggest that Con­ Sa check for $7,000 to the Internal Revenue gress decided to pay the price of occasion­ Service. When he died, his daughter discov­ al unfairness in individual cases ... to ered that Mr. McGill had made a mistake. The maintain a more workable tax enforcement money should not have been sent. Marian system. Brockamp explained to the IRS that her father was senile and asked for a refund. Congress decided to pay the price? How The IRS said no. Requests for refunds must noble. Except that in this case it appears Con­ be made within three years. gress has forced Mr. McGill's heirs to pay the Mrs. Brockamp took the case to court-all price. Why? Because the rights ofthe individ­ the way to the U.S. Supreme Court. ual must not be permitted to create adminis­ She lost. trative problems for the IRS or to interfere In the grand scheme of things, that was a with the maintenance of a workable tax small event. The Internal Revenue Service has enforcement system. done far worse in its time. It has harassed and Yes, that incident occurred in the United tormented people. It has seized property and States ofAmerica. frozen bank accounts. It has ruined credit Imagine ifthe tables were turned and after records. It has driven people to suicide. Nev­ Mr. McGill's death the IRS discovered that he ertheless, the Stanley McGill story sums up a "owed" the government $7,000. Imagine fur­ great deal about the IRS and the American tax ther that Mrs. Brockamp politely replied that system. The IRS concedes that the $7,000 the IRS was too late in its request. What should not have been sent. Mr. McGill made a would have happened? The IRS would have mistake. His daughter informed the IRS as seized the money and perhaps have made hell soon as she discovered the error. No one ques­ out ofMrs. Brockamp's life. And the Supreme tions the facts. But the IRS won't surrender Court would have sided with the IRS. the money. And the U.S. Supreme Court said The IRS-tax historian Charles Adams the IRS doesn't have to. equates it with "a miniature Soviet state"-is Speaking for a unanimous court, Justice something we have unfortunately grown Stephen G. Breyer wrote: accustomed to. It is time to put the income The nature and potential magnitude ofthe tax, and the Sixteenth Amendment that per­ mits it, into historical context and show its implications for morality, the relationship Sheldon Richman is editor ofThe Freeman. This is between citizen and state, and the quest for excerpted from the first chapter ofhis recently pub­ lished book, Your Money or Your Life: Why We prosperity. The verdict on the tax is not favor­ Must Abolish the Income Tax (The Future ofFree­ able: ratification of the amendment and pas­ dom Foundation). sage of the tax was a major turning point in 37 38 THE FREEMAN/IDEAS ON LIBERTY. JUNE 1999 the transmogrification of America from they eagerly await their refunds. But the. war republic to democratic despotism. More than is part of the American psyche nonetheless. anything else, it converted Americans from All Americans sense that an awesome power citizens to subjects. lurks, ready to grab an increasing portion of In carrying out its mission, the IRS is only anything they earn. That adversary relation­ serving a higher power: the legislators who ship has far-reaching consequences for a soci­ need a never-ending flow ofcash to the feder­ ety founded on the principles of the Declara­ al treasury. They wrote the laws that loosed tion of Independence, according to which the IRS on the American people. They can government was the rights-guarding servant repeal them. Why don't they? They want the and the people the master. But the income tax money, pure and simple. turns that relationship on its head. As bad as any taxation is, the income tax is Americans lived without the fears and bur­ worse. It is aggravated theft, robbery with mal­ dens imposed by the income tax for over 100 ice aforethought. Theoretically, all forms of years (except in the Civil War era). They built taxation could be draconian. But in practice, a decent and prosperous society. the income tax has been more abusive of the The income tax has been a key factor in the people's rights than other taxes. It lends itself growth of government. When enacted, only more readily to draconian enforcement. That the few richest people in America paid the justifies singling it out for special condemna­ tax. It became·a tax for the masses during tion. But merely replacing the income tax World War II, under that reputed champion of with another tax designed to raise more than a the masses, Franklin Delano Roosevelt. trillion dollars would be a shallow victory. Today, it accounts for over 43 percent of the The moment the principle of income taxa­ revenue raised. Payroll taxes for Social Secu­ tion is granted, the ground is prepared for rity and Medicare account for about 35 per­ myriad abuses of the people. If the govern­ cent. Americans' incomes have provided a ment is permitted to tax incomes, it will rich vein for the government to mine. demand reams ofpersonal information about Thus we can see that the income tax has: each citizen's financial endeavors. It will compel people to report on the peaceful • Given the government unprecedented financial activities of others. But more than access to the American people's wealth; that, it must have the muscle to check that • Provided the rationale for the govern­ information, to spy on people, to conduct ment to intrude into our personal affairs; inquisitions, and to punish-hard. ,Why? • Reversed the traditional rule-of-Iaw rela­ Because there is nothing more natural than tionship between government and those people's trying to' keep what they worked to suspected oflawbreaking; acquire. Regardless of their explicit political • Confused "cheating" the government in philosophy, most people are implicit advo­ order to keep one's own property with cates ofproperty rights. They don't like being cheating one's fellow citizens; dispossessed of their belongings. Even • Bewildered the American people with thieves don't like to be robbed. constantly changing technical rules that no one can possibly comply with perfect­ Man versus State ly; and • Permitted lawmakers to influence our Income taxation inaugurates a permanent conduct through selective tax deductions war between the people, who want to keep and exemptions. what they earn, and the government, which wants as much of it as it can get. The govern­ All this has come from the principle that ment tries to make the war less obvious by government may tax incomes. That is why deadening the pain when possible. The with­ repealing the tax, along with the Sixteenth holding tax makes it unnecessary for most Amendment, is an essential blow in the strug­ Americans to write checks to the IRS; indeed, gle against power and for liberty. 0 The Market and Political Freedom by John Marangos

he history ofcivilized societies is a time­ is, the absence of discretionary power, and Tless effort to enhance freedom. Freedom seeks a compatible political process. Political must be viewed as a whole, and anything that freedom means freedom from coercion in the reduces it in one aspect of life is likely to sense of arbitrary power-freedom even from reduce it in others as well. the coercion exercised by the government. Free people make decisions through their In a historical context, politically free soci­ independent minds and have the courage to eties and the market have a common origin. In pursue their own convictions through Capitalism and Freedom, Milton Friedman exchange relations in the market. Thus a free states: "I know no example in time or place of person rejects attempts by others to exercise a society that has been marked by a large power over his own choices. He treats other measure ofpolitical freedom and that has not people as equals, thus limiting interaction to used something comparable to a free market voluntary transactions. The market is the to organize the bulk of economic activity."l expression of economic freedom. In the The rise of the market is associated with the absence ofany form ofdiscretionary power, it rise of political freedom and the gradual is an institutional process in which individuals removal of governmental and religious con­ interact with each other in pursuit of their straints on the individual. economic objectives. However, it appears that while a market The economic and political processes are system is necessary for political freedom, it is linked: one generates and sustains the other. not sufficient.2 R.E. Lane agrees that "histori­ Thus a society's economic process would have cally, a free market has seemed to be a condi­ ultimate consequences for the kind ofpolitical tion ofpolitical freedom, as exemplified in the process it ends up with. This is because the bill ofrights and free elections, but it has not state, as a monopoly of legitimate force, is in been a sufficient condition."3 the position to impose restrictions on the indi­ I am skeptical about this argument. I vidual's action. A free person realizes the ben­ believe it was developed because in the 1960s efits derived from free-market relations, that and 1970s the political situation of the world John Marangos teaches in the department of eco­ was bleak with respect to political freedom. nomics at Monash University in Melbourne, Aus­ Suppression of political freedom was wide­ tralia. This article is adapted from "Market and spread in the form of authoritarian political Political Freedom" in D. Kartarelis, ed., Business & structures, especially military dictatorships, Economics for the 21 st Century, proceedings ofthe where tenure was based on power instead of Business and Economics Society International Con­ ference, Athens, Greece, July 18-22, 1997, volume I. reason and irresponsible political power func­ The author wishes to thank John King for his valu­ tioned outside the discipline oflaw. The argu­ able comments. ment raised by Friedman and Lane is an 39 40 THE FREEMAN/IDEAS ON LIBERTY • JUNE 1999 unfortunate simplification that does not corre­ personality development. In the market, indi­ spond to reality anymore; in fact, while in the viduals learn to be free and· independent and short run within a market system political to follow their own convictions. Freedom is a freedom may be restricted, in the long run skill that is generated and sustained by the authoritarian political processes cannot sur­ market.5 People preserve these values vive alongside markets. This is demonstrated throughout their adult life once they have by the fall ofmilitary dictatorships in the end been developed in their formative years.6 If ofthe 1970s and in the 1980s and the collapse the market encourages self-direction, how can of authoritarian socialism that stimulated the that behavior be restricted only to economic re-establishment ofpolitical freedom. relations and not extended to the political In essence, people enjoying the benefits of process in the form ofpolitical freedom? the market process will question and under­ Despite differences among markets, they mine the power ofauthoritarian governments. have essential features that tend to promote Individuals who experience the benefits of the acquisition of qualities important for per­ freedom through market relations are likely to sonality development. Lane identified the require freedom in the political process. The qualities necessary for maximizing the devel­ market and political freedom are internally opment ofpersonality: 7 linked: one generates and sustains the other. Cognitive complexity. This involves the Markets and Authoritarianism capacity to understand abstractions, to hold preferences, to be able to judge others and The point is not obvious. Some countries oneself, to change concepts to fit reality rather have developed political systems featuring a than fitting reality to fixed conceptions, and hierarchically structured bureaucratic organi­ finally to hold several ideas in order to arrive zation that gives privileges to an elite class. at original solutions. While the market is the main process for deci­ Autonomy. This is the desire and ability to sion-making, political freedom is restricted in remain independent, which encourages free order to serve the purposes ofthis elite minor­ initiative and free expression in all areas of ity. In these instances the political process life. Through this quality an individual is at results in a loss of personal control and liberty to conform to tradition and authority­ encourages dependency. It rewards conformi­ or not. Each authority is treated as a source of ty, obedience, and affiliation instead of inno­ information rather than ofcommand. vation, enterprise, and autonomy. Individuals Sociocentricity. The thoughts and claims of feel powerless and helpless. Such people per­ others are understood and given recognition. form less efficiently in a market system than Sociocentricity comprises socialization, expe­ do self-interested, competitive individuals. In rience, understanding, and reasoning. Individu­ addition, political authorities distort the mar­ als learn the rules ofthe game and conform to ket by allocating resources by coercion. They them. It is a guide to social reality and a neces­ control a large part of the resources, and the sary ingredient in good interpersonal relations. influence oftheir decisions on the remainder is Attitudes towards self. A combination substantial; that results in effective control of of self-knowledge, self-acceptance, and self­ the entire spectrum ofeconomic decisions.4 respect are necessary for the establishment of an identity. With these qualities people avoid Market-Produced Opposition internal conflict and uncertainty about values. Identification with moral values. This is But the market plays an important role in necessary to secure moral reasoning and providing the mechanisms of opposition to moral behavior without taking refuge in tradi­ the suppression of political freedom. The tion and authority. market should be evaluated not only as a process for achieving the optimal allocation Lane aimed to identify the effects of mar­ of resources but also as one of learning and kets and politics on personality development.8 THE MARKET AND POLITICAL FREEDOM 41

Unfortunately, in his analysis the influence is become sociocentric, since success in the one way: markets and politics influence devel­ market requires good interpersonal skills. opment of personality, but individuals are Participation in the market process encour­ unable to influence markets and politics. ages self-knowledge, self-acceptance, and But contrary to Lane, social processes are self-respect. Through successes and failures, reflexive. Individuals in the market acquire participants realize their potentialities. They qualities for personality development that will learn through their mistakes rather than influence the political system. A market partic­ through tutelage, and they succeed through ipant will require a politics based on freedom. their own analytical and planning strategies. In the market people develop through trial The market increases awareness ofthe partic­ and error the skills, qualities, and behavior ipants' potential in solving problems and real­ necessary to participate effectively. They need izing goals. The sense of accomplishment to think for themselves. They slowly reject contributes to one's satisfaction with life. intellectual dependence on others. They dis­ Lastly, the market encourages fair dealing miss dependency on family, village, commu­ since exchange is voluntary. Capitalism con­ nity, ethic group, or social class. They need to tributes to identification with moral values. make difficult complex decisions with respect to education and careers. As the market Transference ofVirtue becomes increasingly complicated, with more sophisticated products, proliferating brands, Behavior learned in one aspect of life may and aggressive advertising, people need to be applied in others. The qualities gained search, examine, and analyze what is offered. through the market process can be used in Thus they are faced with difficult, complex politics, for example, because those qualities choices that require complex cognition. become part of the personality. The political A sense of autonomy is achieved through structure does not exist in a vacuum. More­ the market, since the participants learn that over, market participants· equipped with the the environment around them is responsive to five qualities discussed will require a political their actions. Individuals work, get paid, and process that protects their personality, that is, buy goods through the market process; this political freedom. enables them to control their own destinies. Thus economic freedom and political free­ Within the market individuals can afford to be dom are internally linked. One generates and self-dependent, since they have alternatives. sustains the other. While in the short run They can follow their own convictions. political freedom may be restricted in a Rewards are individual instead of collective. market-oriented society, individuals enjoying So the market participant learns that effort the fruits ofeconomic freedom will eventual­ will be rewarded and wrong decisions penal­ ly question and undermine an authoritarian ized; he will need to bear the burden of his political process. Because the value of self­ mistakes, but also enjoy the outcome of cor­ control is taught, exercised, and mobilized by rect decisions. The market thus contributes to the market, in the long run, authoritarianism the desire for, value of, and belief in one's cannot exist alongside free markets. D own competence to control one's own destiny 1. Milton Friedman, Capitalism and Freedom (Chicago: Univer­ and to develop along a unique path. It instills sity of Chicago Press, 1962), p. 9. an appreciation for the same in others. 2. Ibid., p. 10. 3. R.E. Lane, "The Dialectics ofFreedom in a Market Society/, Economic transactions bring people togeth­ The Edmond James Lecture, April 16, 1979, University of Illinois, er under the rule that any exchange must be Urbana-Champaign. 4. F.A. Hayek, The Road to Serfdom (London: Ark Edition, 1986 voluntary and thus mutually beneficial. Par­ [1944]), p. 45. ticipants thus need to understand one anoth­ 5. K.R. Minogue, "Freedom as a Skill," in A.P. Griffiths, ed., Of Liberty (Cambridge: Cambridge University Press, 1983), p. 21. er's point of view. Agreement will only be 6. R. Inglehart, The Silent Revolution (Princeton: Princeton Uni­ reached when market participants realize they versity Press, 1977). 7. R.E. Lane, "Markets and Politics: The Human Product," need to work together, communicate, bargain, British Journal ofPolitical Science, 1981, p. 5. and compromise. In this way, individuals 8. Ibid., p. 7. Against the Tide: The Life ofFrancis W. Hirst by Mark Brady

adly, it is only an exceptionally well­ the taxed grain rose to impossible prices. Thus Sinformed reader who will recognize the during his childhood, which seems to have name of Francis W Hirst, whose stalwart been a happy one, he imbibed the great Liber­ advocacy ofpersonal freedom, free trade, and al tradition of peace, retrenchment, and peace during the first half of the twentieth reform, causes that he held dear throughout century, and especially during the First World his long life. War and its aftermath, surely earns him an In 1891 Hirst won an open scholarship in honored place in the pantheon of individual classics to Wadham College, Oxford, where liberty. he had a distinguished university career. He Francis Wrigley Hirst ("Frank" to his fami­ was elected successively librarian and presi­ ly) was born on June 10, 1873, at Dalton dent of the Oxford Union, the renowned Lodge, two miles east of Huddersfield in the debating society, where he was a contempo­ West Riding ofYorkshire. He was the third of rary of Hilaire Belloc and F. E. Smith, later five children (two sons, three daughters) of a Earl ofBirkenhead. In 1899 he won the Cob­ prosperous wool-stapler, Alfred Hirst, who den Prize and was called to the bar by the went blind at 27, and his wife, Mary Wrigley. Inner Temple. Although for some years he had On both sides ofhis family Frank Hirst had entertained hopes ofmaking an income as an nonconformist ancestors who had worked and attorney, these hopes faded away as few voted for the Great Reform Bill and the repeal clients sought him out and he found he had no of the Corn Laws. His maternal grandfather, natural talent for court work. So Hirst practi­ Joseph Woodhead of Huddersfield, had sup­ cally abandoned the·law for journalism and ported Richard Cobden and John Bright in book writing. their opposition to the Crimean War and had In 1903 he married Helena Cobden, a voted for Cobden at Huddersfield in 1857. His great-niece of Cobden, at Heyshott and even­ paternal grandfather, Charles Hirst, had tually they were to live in Cobden's old home, enjoined his son, Alfred, "always be against Dunford House, in Sussex, where he was war; nine times out of ten you will be right, chairman of the Dunford House Association. and the other time it will not matter." They had no children. As a young boy in the early 1880s, Frank Hirst met a few ofthe old handloom weavers who spoke of the hungry years during and Liberal Author after the French wars, when work failed and As early as 1897 Hirst had co-edited and Mark Brady, who was born and grew up in England contributed to Essays in Liberalism by "Six but now lives in America, has been a libertarian for Oxford Men," who included Belloc and 1. L. almost 30 years. Hammond, later to become famous as one half 42 43 ofthe Hammonds, the labor historians. Hirst's edited Josef Redlich's Local Government in own contribution was a stalwart defense of England, a much-acclaimed work. It was also "Liberalism and Wealth." The book was dedi­ at this time that he threw himselfinto the fight cated to John Morley, the writer and Liberal for free trade and helped revive the Cobden statesman, with whom Hirst was to have a Club, which published Fact versus Fiction close relationship until Morley's death in 1923. (1904), a reply to Joseph Chamberlain's tariff On February 14, 1900, with the Boer War reform speeches, and The Burden ofArma­ under way, Hirst was a founding member of ments (1905), a plea for the reduction ofmil­ the League of Liberals against Aggression itary and naval expenditures, both of which and Militarism. The following month Hirst Hirst helped write. He was therefore over­ al1;d Hammond decided to collaborate on a joyed when in 1906 the Liberal Party swept volume of essays expressly devoted, as the into power under the banner offree trade. eventual title said, to Liberalism and the In 1906, Hirst's The Arbiter in Council was Empire. It proudly appealed to the memory of published anonymously, financed by 1. P. "the older school ofEnglish liberals." Thomasson, a Cobdenite from Bolton. Writ­ One unspoken target was George Bernard ten as a series of imaginary conversations Shaw's celebrated pamphlet of May 1900, between a former associate of Cobden and Fabianism and the Empire, which argued for others, Hirst sought to analyze the follies of what historians now call Fabian social imperi­ war principally on economic grounds. In alism. Hirst's essay on "Imperialism and Monopolies, Trusts and Kartells (1906) he Finance" showed how militarism and exces­ explored another timely question in some sive expenditure on armaments both feed and depth. Subsequently he wrote several books are fed by calculated panics and "inevitable on money, investment, public finance, interna­ war," which also prevent reforms at home. It tional trade, the law ofthe sea, and a book on should be added that Hirst was never a paci­ the stock exchange for the Home University fist. He wrote in his memoirs, In The Golden Library in 1911. Days (1947), that "a clearly aggressive attack on one nation by another-e.g. that of Soviet Years at The Economist Russia on Finland or of Germany on Hol­ land-should be resisted until resistance is In 1907 Hirst was appointed editor of The hopeless. But in nearly all the wars recorded Economist and proceeded to make important in history it may be said that there were two innovations in the publication and to extend its sides to the quarrel; and nearly all wars have appeal beyond the business community. He been initiated by rulers who have forced their wrote his own policy editorials and recruited a peoples to fight, relying upon conscription or competent staff to assist him. He also printed the pugnacity ofthe human species, especial­ contributions from such distinguished foreign ly when patriotism and the cry of 'my country scholars as Josef Redlich and Luigi Einaudi. right or wrong' can be evoked." Hirst remained editor until he was forced to His work for Essays in Liberalism and his resign in 1916 owing to his opposition to contribution to a popular life of W. E. Glad­ World War I. Like his friend John Morley, who stone, the Liberal prime minister, brought him resigned from the cabinet in protest at the deci­ to the attention of Morley, who engaged him sion to declare war in August 1914, he viewed to help go through Gladstone's papers and the Great War as a tragedy from the start. later read the proofs ofMorley's monumental His valedictory leading article said: "Since Life of Gladstone, which finally appeared in the war began, the function of an editor who November 1903. Hirst wrote Adam Smith believes that truth and patriotism ought to be (1904) for Morley's English Men of Letters reconciled has been difficult and even haz­ series; he edited a useful anthology ofspeech­ ardous." To his great credit he never displayed es and writings under the title Free Trade and the bitterness that one might expect of some­ Other Fundamental Doctrines of the Man­ one who had been forced to give up such a chester School; and he also translated and prestigious position. 44 THE FREEMAN/IDEAS ON LIBERTY • JUNE 1999

Hirst's The Political Economy of War was two decades ofreaction." That same year also published in 1915. He was a zealous support­ saw the publication ofhis Economic Freedom er of (the Conservative) Lord Lansdowne's and Private Property, a defense of economic Letter in 1917, which rejected a policy of liberty. unconditional surrender and sought a negoti­ After the war Hirst continued to write on ated peace. He also helped Earl Loreburn, the behalf of the cause of free trade. His From former Liberal Lord Chancellor, on his book Adam Smith to Philip Snowden: A History of How the War Came (1919). He was opposed Free Trade (1925) was a short political history to aspects of the punitive anti-German peace of free trade in Britain. In Safeguarding and treaty that came out ofVersailles. Protection, first published in 1926 as a Cobden From 1916 until 1921 he edited Common Club pamphlet and expanded into a book the Sense, a weekly journal of commerce that following year, he explained how the Conser­ later merged with the Manchester Guardian vative government, despite Prime Minister Commercial, and thereafter devoted his life to Stanley Baldwin's pledge against protection, writing and travel. had extended customs duties under the guise of "safeguarding" (a euphemism for protec­ Collectivism on the Rise tionism). This had reassured voters and enabled the Tories to exploit fears of Bolshe­ Hirst had come of age at a time when the vism and defeat the pro-free trade Labour and New Liberalism that advocated an expansive Liberals in the 1924 general election. Hirst role for the State was in the ascendant, criticized the "American customs union," con­ although his own sympathies lay with an trasted the free-trade Democrats with the pro­ older, more individualist liberalism. And he tectionist Republicans, and explained how attained middle age just as the Great War high American tariffs made it difficult for began. Thereafter he observed and wrote European nations to payofftheir war debts to about Britain and the world in an era when the United States. He also described how the collectivist ideologies ofvarious stripes dom­ "tariff walls of Europe" prevented economic inated intellectual debate, and increasingly recovery. interventionist and sometimes tyrannical gov­ Hirst also wrote Life and Letters ofThomas ernments disrupted and on occasion destroyed Jefferson (1926), Early Life and Letters of the market order and civil society. John Morley (1927), and the introduction to A notable moment in Hirst's life was his Morley's Memorandum on Resignation, speech before the Lords ofAppeal on behalf August 1914 (1928), which Morley had writ­ ofArthur Zadig, a naturalized British citizen ten immediately after his resignation from the of German parents, who had been interned cabinet. In his entry on Morley in the Dictio­ under the Defence ofthe Realm Act in 1915. nary ofNational Biography, Hirst wrote that Although Zadig lost, Lord Shaw of Dun­ Morley's "loyalty indeed was to the faith fermline gave a dissenting judgment that rec­ rather than to the party," a statement that ognized Hirst's arguments grounded in Eng­ applied as much to Hirst himself. (Hirst stood lish legal history, and Zadig was released two unsuccessfully as a Liberal candidate in the weeks later. Nearly 20 years later Hirst general elections of 1910 and 1929, but sub­ reprinted Lord Shaw's judgment in full in his sequently moved away from the official lead­ account of The Consequences of the War to ership of the party, even supporting the Great Britain (1934). He also traced the his­ Munich agreement.) tory of English liberty in one of his best books, Liberty and Tyranny (1935), which he Pure Individualism wrote as "a reasoned defence ofpolitical and civil liberty." Describing the dark age for indi­ During the Second World War, Hirst was vidual liberty worldwide that had been inau­ involved in the foundation of Sir Ernest gurated by the Great War, he wrote: "Two cen­ Benn's Society of Individualists in 1942 and turies of emancipation have been followed by wrote some pamphlets for it. But he found AGAINST THE TIDE: THE LIFE OF FRANCIS W HIRST 45 this body more conservative than he had sup­ disapproved ofredistributive taxation and was posed and withdrew his support. In Free Mar­ critical of Keynesian economics. Regarding kets or Monopoly (1941, revised 1944) he Marxism, he wrote: "Those who favour class wrote: "When I was an Oxford undergradu­ war, while denouncing capitalist war, cannot ate, I met pure individualism in the person of be counted among the forces favourable to Auberon Herbert, and in later life I have peace." become acquainted with disciples of Karl A volume ofHirst's memoirs, going only to Marx. I call myself an Individualist, not 1906, was published in 1947 and he died at because I object to State activity, either cen­ Singleton in Sussex on February 22, 1953, tral or local-such as existed in England after an attack ofinfluenza. before 1914-but because I hold that the Truth described him as "one ofthe greatest State exists for the individual citizens who libertarians of all time" for his work as an compose it and ought to control it." He also apostle of civil liberty and personal freedom. wrote: "Private Property, Free Competition, A book of reminiscences by his family and the right to make profits, the right to save and friends appeared in 1958, in which his life­ to employ your savings (the reward ofskill or long friend and brother-in-law, 1. E. Allen, thrift) as you like are all the rights of a free wrote that he had a "genius for friendship" citizen in a free State. They are the precious and the historian G. ~ Gooch declared, "I inheritance ofEnglishmen." It greatly pleased have never known a man whose character and him that the Cobden Club was on the convictions underwent less change with Gestapo's infamous Black List of people and advancing years." organizations to be suppressed were the Nazis Hirst was a prolific writer, skillful biogra­ to conquer Great Britain. pher, and scholarly exponent of basic princi­ Hirst denounced the welfare state as the ples, who devoted his life to the cause ofindi­ "Beveridge hoax," after the Liberal Sir vidual liberty when at times it must have William Beveridge, author of the report that seemed that collectivism had triumphed. It is bore his name and was accepted by the therefore appropriate that we salute Francis Labour, Liberal, and Conservative parties as W Hirst as a valiant defender ofthe Cobden­ the basis for the postwar welfare state. He also ite tradition ofpeace and free trade. D Economic Notions by Dwight R. Lee

'Economies

Private Property and Opportunity Costs

n three previous columns I discussed you got the Rolls Royce, the cost ofdriving it I opportunity cost and the importance ofthis is the price someone else is willing to pay for concept to understanding economics. We have it. And because the car is your private prop­ considered the advantage the ma~ket has over erty, you can't ignore that cost. As the owner government at incorporating opportunity you can sell it at a price that reflects the high­ costs into the calculus of decision-makers. est value someone else places on it. So you Markets promote the general interest by will continue driving your Rolls only if you revealing costs while governments commonly value it by at least as much as, or more than, favor special interest by concealing those what you could buy with the approximately costs. In this column I shall extend the dis­ $250,000 that some Rolls Royce aficionado cussion of opportunity costs by introducing is willing to pay you for it. Most likely you the critical role of private property. Private will sell the Rolls, buy a perfectly nice and property lies at the foundation of market serviceable car for $20,000, and have economies because without private property, $230,000 left over to save or spend on other and the exchange it fosters, people would things. be unable to consider the full costs of their This story is fanciful, or course, since you decisions. are not likely to win a Rolls Royce. But it illustrates a real and important point-private property prompts people to consider the Too Costly to· Drive opportunity cost (the value forgone) of their Assume you win a Rolls Royce Silver decisions. Because of private property, this Shadow, with insurance, maintenance, gas, consideration is the hallmark ofmarket action and taxes paid. While this isn't quite as nice as and explains the market cooperation that winning the state lottery, the going price for a directs resources and products into the hands Silver Shadow is around $250,000. That's the ofthose who value them most. good news. The bad news is that you're prob­ ably not wealthy enough to drive this car. Your Cooperation Between Bird first reaction is likely: What do you mean I Watchers and Hot Rodders can't afford to drive it? Everything is paid for by someone else. Members ofthe Audubon Society are inter­ True, but I still predict that you will find ested in protecting fragile habitat for birds the car too costly to drive. Regardless ofhow and other animals. It is easy to predict how it would come down on a choice between pro­ tecting wildlife habitat and increasing the Dwight Lee is Ramsey Professor of Economics in the Terry College ofBusiness at the University of availability ofgasoline for high-powered cars, Georgia. or any other cars for that matter. For example, 46 47 the Audubon Society strongly opposes off­ bers ofthe Audubon Society may despise hot shore drilling for oil. Oil companies promise rodders and hot rodders may laugh at bird to, and in fact do, take extraordinary precau­ watchers, but because of private property, tions to prevent oil spills, but the Audubon each takes the concerns (and opportunity Society is not convinced. Regardless of pre­ costs) ofthe other into consideration and acts cautions, its position is: No offshore to promote the other's interests. drilling-none! How can hot rodders possibly communi­ The Opportunity Cost of cate their desire for cheaper gas to the Audubon Society so as to convince it to Prisoners ofWar accommodate them by risking wildlife habi­ European wars during the Middle Ages tat? In fact, they have succeeded at doing just were often rather peaceful affairs, with pris­ that. Hot rodders, along with all other gaso­ oners typically well treated. It was not uncom­ line consumers, have convinced the Audubon mon for opposing armies to count the number Society that the value they place on gas is an of soldiers on each side, before the smaller opportunity cost ofprotecting habitat that the army surrendered. Such nonviolent "combat" Society shouldn't ignore. They have done so occurred because at that time soldiers had a through market communication based on pri­ property right in the prisoners they captured. vate property. That legal right included the power to sell The Audubon Society owns a wilderness prisoners back to their families, creating an area in Louisiana known as the Rainey Pre­ opportunity cost for the victors if they killed serve. It is an ideal habitat for birds and other their prisoners. Private organizations, some of wildlife, but it also contains commercial them religious orders, began specializing as quantities of petroleum and natural gas that middlemen between those who had prisoners oil companies are eager to recover. One might to sell and those who wanted to purchase conclude that since the Audubon Society them. owns the land and can easily prevent oil com­ Unfortunately for prisoners of war, when panies from drilling on it, they would do so. long-range weapons became available and Wrong! The Audubon Society allows oil com­ hand-to-hand combat became uncommon, it panies to drill there. was less likely that individual soldiers would Ofcourse, it requires the companies to take capture prisoners. Wars then became more strong precautions against oil leaks, but not as brutal, not only because the technology of strong as it claims to be necessary with off­ slaughter improved, but also because the shore drilling. Why the difference? Because ownership of prisoners shifted to the state. the Audubon Society owns the Rainey Pre­ Because opportunity costs to individuals serve, the money others are willing to pay for diminish when property belongs to the state, the oil represents an opportunity that would it became far more common to kill or mutilate be sacrificed ifit refused to allow drilling. But prisoners. Human beings obviously should the Society doesn't face an opportunity cost not'be treated as private property. But because on offshore sites because it doesn't own them. of the phenomenon of opportunity cost, cap­ It thus has no motivation to take the interest of tured soldiers are far better off as "private others in offshore oil into consideration. property" than "public property." Private property not only motivates the Private property is essential to the coopera­ Audubon Society to cooperate with hot rod­ tion that emerges from market interaction, ders, it also motivates hot rodders to cooper­ because it ensures that people consider the ate with the Audubon Society. Their purchase opportunity cost oftheir actions. It is both sad of gas allows the Audubon Society to obtain and ironic that so many people blame private and protect wildlife habitat that it believes is property for problems that exist because of more valuable than what it sacrifices in the the lack of private property. This will be the Rainey Preserve because ofoil drilling. Mem- topic ofmy next column. D Educational Savior? by Daniel Hager

eorge S. Counts is not a widely recog­ ning, according to his vision, would deliver G nized figure in twentieth-century Ameri­ bounty and the good life for all. can education, but he was extremely influen­ In Counts's view, the masses were helpless tial. Twenty-five years after his death, the victims of twentieth-century industrialism. damage caused by this one-time president of Their rescue would have to be effected by per­ the American Federation ofTeachers lives on. sons anointed to that noble calling, mes­ The first step in counteracting his effects is sianocrats who knew better than the people to challenge the premise on which he operated themselves what the people needed. Teachers and which remains entrenched in public think­ should become part of the self-appointed ing-that governments should be involved in elites that must carry out that mission. elementary and secondary schooling. Counts carried the premise beyond simple involvement. Tax-funded teachers, he main­ Uncommonly Common tained, must enlarge their task past mere The ironies endemic to messianocracy classroom instruction and become primary abounded in Counts's life. For instance, he forces in fundamentally restructuring the fancied himself a champion of the common nation socially and economically. From the man but lived uncommonly well. He pur­ eminence of Columbia University's Teachers chased a Pennsylvania farm to which he College, where he was a faculty member from repaired often from his New York City home. 1927 to 1955, he was in demand as a speaker In 1931, when the unemployment rate was to professional educators, and in 1932 he 15.9 percent, he had a salary of $15,000, the delivered three speeches that he combined equivalent of a six-figure income today. Dur­ into a book titled Dare the School Build a ing the same period he was referring to "the New Social Order? Although he muted the most terrible form of human madness-the radicalism of his thesis by phrasing it inter­ struggle for private gain."! rogatively, he clearly answered the question in Counts believed that because "the urge for the affirmative. Powerfully organized teachers private gain tends to debase everything that it using the medium of the classroom should touches,"2 capitalism had to go. "With its steer the young away from the bankrupt deification of the principle of selfishness, its American individualism of the past toward a exaltation of the profit motive, its reliance future in which all would work for the com­ upon the forces of competition, and its plac­ mon good. Strong social and economic plan- ing of property above human rights, it will either have to be displaced altogether or Daniel Hager is a freelance writer in Lansing, changed so radically in form and spirit that its Michigan. identity will be completely lost."3 48 49

He grew up on a northeastern Kansas farm But Counts glowed "that a new morality is in the waning days of the agrarian order, emerging. ... The welfare of society as a which fostered self-reliance. But industrial­ whole is being placed above the narrow self­ ization had raised "the most profound issue" interest ofthe individual."9 When he looked at of the day-"the issue of the control of the the children, "I thought of the latent powers machine. In whose interests and for what pur­ which a rational system ofnurture and educa­ poses are the vast material riches, the unri­ tion would bring to full fruition."1o As he trav­ valed industrial equipment, and the science eled the "workers' republic," he found that and technology of the nation to be used? ... "the workmen know that they rule the country [A]ll ofthese resources must be dedicated to and take great pride in the beliefthat theirs is the promotion of the welfare of the great the first society in history to be so gov­ masses ofthe people."4 He stated, "Ifproper­ erned."11 Against the backdrop of "centuries ty rights are to be diffused in industrial soci­ of poverty" under the czars, now "both pes­ ety' natural resources and all important forms simists and optimists ... dream of an era of of capital will have to be collectively material plenty" because "the new order will owned."5 He concluded that "the growth of be realized through the introduction of science and technology has carried us into a machines and the careful ordering of the new age where ignorance must be replaced processes ofproduction."12 by knowledge, competition by. cooperation, Back home a year later Counts read a trust in providence by careful planning, and copy of a Russian schoolbook on the Five­ private capitalism by some form ofsocialized Year Plan and responded that "practically economy."6 every page carries the mark ofgenius."13 He Counts was enamored of the Bolshevik translated it into English, including a chap­ experiment then under way in the Soviet ter that caricatured capitalism and claimed Union and in 1929 made a 6,OOO-mile auto­ the system inevitably collapses because mobile journey through the nation. In an irony "they work without a plan." In his preface that apparently escaped him, he did not secure Counts wrote, "Perhaps the most challeng­ a vehicle in that collectivized economy, where ing feature of the little book ... has to do automobiles were scarce and ownership tight­ with the relation ofeducation to social plan­ ly controlled by the government. Instead, he ning. ... The American teacher will be bought a new Ford, the product ofthe capital­ forced to put to himself the question: Can ist system he scorned, and paid only $661.42 we not in some way harness the school to for it, delivered in Leningrad, including the task of building a better, a more just, a $23.57 in spare parts. more beautiful society?"14 He traveled through the Soviet Union like a wide-eyed farm boy just arrived in the big Retreat from Bolshevism city. Although he acknowledged the stifling inefficiency of the bureaucracies he encoun­ By the mid-1930s Counts had to retreat tered, he stated that "as an intellectual from his ardor for the Soviets as their internal achievement the revolution has been an repression ·became widely known. He was astounding success."7 The vast 1928 Five­ active by then in advancing organized teach­ Year Plan for industrialization and agricultur­ ers as a political force. In 1939 he was elect­ al collectivization was being implemented, ed to the first of his three terms as national and he admired its visible results. Already in president of the American Federation of 1929, however, as Vladimir v: Tchernavin Teachers (AFT). He had recently discovered documented in I Speakfor the Silent: Prison­ that international communists had been infil­ ers ofthe Soviets, the Five-Year Plan was in a trating the organization, and during his tenure shambles, and the nation was being kept three large AFT locals were purged for being afloat by the GPU, the secret police that oper­ under communist control. He affirmed his ated an economy within an economy through anti-communism in 1949 by co-writing, with wealth produced by expendable slave labor. 8 his administrative assistant, Nucia Lodge, The 50 THE FREEMAN/IDEAS ON LIBERTY • JUNE 1999

Country of the Blind: The Soviet System of Today's reactionaries balk at even a hint of Mind Control. 15 competition, such as charter schools and But Counts remained throughout an adher­ tuition vouchers. Such devices give only an ent of collectivism, committed to the princi­ illusion of competition, however, because ples ofbenevolent messianocracy. In 1941 he they still depend on coercively obtained began a political career on a local level with funds. As long as this "free" money funneled the American Labor Party. That career through the public treasury exists, it distorts included an unsuccessful run for the U.S. the market and the seller-buyer relationship. Senate from New York in 1952 for the Amer­ The genuine new age in schooling will be ican Liberal Party. Following his compulsory one that rids itselfofmessianocracy, which is retirement from Columbia University at 65 in no more appropriate in that field than in any 1955, he took several short-term positions other. A freed schooling market stripped of with education schools. He then spent nine public funding will determine which suppliers years, until 1971, at Southern Illinois Univer­ offer customers the best value according to sity, where he was so admired and influential the customers' own interests, irrespective of that in 1980, six years after his death, the the windy aspirations of the contemporary university press published a tribute, George Countses. S. Counts: Educatorfor a New Age. The new But what about those who can't afford to age in education had turned increasingly col­ pay for schooling? The marketplace will drive lectivist as the National Education Associa­ prices down. Entrepreneurs will see to that, tion (NEA) became in the 1960s and 1970s just as Henry Ford brought a road tour ofRus­ as militant as its smaller rival, the AFT. sia within the grasp of George S. Counts. In a free society, collectivists have a right to But ifthe price is still too high? As Leonard their beliefs but not a right to other people's Read is said to have responded, "Ifyou had to money to propagate their beliefs. The legacy pay the entire costs of your child's schooling ofGeorge S. Counts is that successive gener­ yourself, wouldn't you do it?" D ations of proteges have leveraged public 1. George S. Counts, Dare the School Build a New Social Order? money to their own advantage and the (New York: The John Day Company, 1932), p. 17. advancement oftheir agendas. 2. Ibid., p. 47. 3. Ibid. Counts complained in 1932 that "almost 4. Ibid., p. 43. everywhere it [the existing school] is in the 5. Ibid., pp. 45-6. 6. Ibid., p. 48. grip of conservative forces and is serving the 7. George S. Counts, A Ford Crosses Soviet Russia (Boston: The cause of perpetuating ideas and institutions Stratford Company, 1930), p. 186. 8. London: Hamish Hamilton, 1935. suited to an age that is gone."16 His final irony 9. A Ford Crosses Soviet Russia, p. 181. is that his intellectual descendants are now the 10. Ibid., p. 145. 11. Ibid., p. 172. conservative forces seeking to preserve a sta­ 12. Ibid., p. 191. tus quo unsuited to the present age. He was 13. M. Hin, New Russia's Primer: The Story of the Five-Year Plan (Boston and New York: Houghton Mifflin Company, 1931), considered a progressive, but now the pro­ p.v. gressives are those who want to detach all 14. Ibid., pp. viii-ix. 15. Boston: Houghton Mifflin Company, 1949. schooling from state control. 16. Dare the School Build a New Social Order?, p. 5. 51

However, it remains for libertarians to CAPITAL acknowledge that liberty is not indivisible, but on rare occasion must be compromised LETTERS: for survival (as when the Continental army fought the British). With that modification, Does Survival the position ofDr. Otteson can establish "the philosophical underpinnings ofthe free soci­ Trump Morality? ety." -ALLEN WEINGARTEN To the Editor: Morristown, New Jersey I welcomed the article "Philosophy 1 On 1" (The Freeman, March 1999), because James Otteson makes the moral case for a free soci­ James Otteson responds: ety. Usually, libertarians focus upon utilitarian I thank Dr. Weingarten for his letter, but I issues, seemingly unaware that we often lose am not sure what his disagreement with my on this basis because our adversaries have position is. The two exceptions he offers to taken the moral high ground. Moreover, fre­ the moral principles I discuss in my essay quently the very cause ofeconomic and mate­ both presuppose prior violations of those rial loss is an outgrowth of the violation of same principles: if a soldier is justified in moral principles, as when incentives are given killing someone, presumably this is because for destructive behavior while penalties are some violation oflife, liberty, or property has given for responsible behavior. Consequently, -already taken place; similarly, ifan escapee is the author is right to raise the fundamental justified in stealing from (perhaps even question as to whether slavery and theft are killing) his captors, it must be only because a wrong. similar violation has already taken place. However, there is a stumbling block to the I assume Dr. Weingarten agrees with me suggestion that we adhere to moral princi­ that ifthere had been no such violations, then ples. People respond that although they find the killing and stealing would not in fact be murder and theft abhorrent, there are times justified. If so, his examples actually under­ when they are called for. Here it does not suf­ score, not undermine, the importance of fice to simply repeat that what is wrong is respecting others' life, liberty, and property. wrong. Rather, one needs to acknowledge the conditions under which morality must be violated (as when a soldier kills, or an We will print the most interesting and escapee from a concentration camp steals). provocative letters we receive regarding The guide is simple: survival trumps morali­ Freeman articles and the issues they raise. ty. It is this requirement that necessitates gov­ Brevity is encouraged; longer letters may ernment, and which should provide its limits. be edited because of space limitations. Consequently, theft and taxation can be justi­ Address your letters to: The Freeman, FEE, fied, even as they violate morality-provided 30 S. Broadway, Irvington-on-Hudson, there is no realistic alternative, and they are New York 10533; e-mail: [email protected]; limited to their minimum extent. By this cri­ fax (914) 591-8910. terion, almost all intervention is precluded. Economics on Trial by Mark Skousen THE ~~!M~~ JUNE 1999

New Possibilities for Our Grandchildren

"It would not be foolish to contemplate the possibility of a far greater progress still." -JOHN MAYNARD KEYNES l

n 1930, after the Roaring Twenties, John Can We Grow Faster? I Maynard Keynes wrote an optimistic essay titled "Economic Possibilities for our Grand­ Today's economists don't appear to be as children." After lambasting his disciples who optimistic as Keynes, even as we enter anoth­ predicted never-ending depression and per­ er year ofa dynamic, full-employment econo­ manent stagnation, Keynes foresaw a bright my. I asked several well-known economists future. Through technological improvements for recommendations that would give us sus­ and capital accumulation, mankind could vir­ tained (long-term, not short-term) economic tually solve its economic problem within the growth rates of6, 7, or maybe even 10 percent next hundred years, he said. Goods and ser­ a year, eventually fulfilling Keynes's econom­ vices would become so abundant and cheap ic nirvana. that leisure would be the biggest challenge. "Not possible!" most ofthem exclaimed. "I According to Keynes, capital could become think it's impossible to double the long-term so inexpensive that interest rates might fall to growth rate in the U. S.," answered Harvard zero. economist Robert Barro. David Colander of Interest rates have not fallen to zero, but Middlebury College agreed. "The idea ofdou­ our standard of living has advanced remark­ bling economic growth in ten years sounds ably since the Great Depression. In fact, we very much like a central planning goal of the have probably already fulfilled Keynes's pre­ former Soviet system." He quoted Herbert diction that "the standard ofliving in progres­ Stein: "Economic policy is random with sive countries one hundred years hence will respect to the performance of the American be between four and eight times as high as economy, but thank God there isn't much ofit." to-day."2 Recently a whole book ofessays was devot­ ed to charting a course toward higher growth rates. In the foreword to The Rising Tide, Mark Skousen (http://www.mskousen.com; mskousen Dana Mead, CEO of Tenneco and former @aol.com) is an economist at Rollins College, chairman ofthe National Association ofMan­ Department ofEconomics, Winter Park, FL 32789, ufacturers, rejects the notion that the U.S. a Forbes columnist, and editor of Forecasts & Strategies. See the next pagefor details on his newly economy can't exceed its secular long-term published textbook, Economic Logic. growth pattern of around 3 percent a year. He 52 53 argues that faster economic growth is achiev­ ine how much advanced· our standards of liv­ able without creating shortages, rising labor ing could become ifwe costs, and higher interest rates. As Jack Kemp states, "We can raise the ceiling on growth by • slashed government spending to its legit­ judicious changes in policy."3 imate functions, which undoubtedly Of course, not all the economists in the means less than 10 percent of GDP; book agree with Mead and Kemp. James • replaced the current tax code with a sim­ Tobin, Yale professor and Nobel laureate, plified 10 percent flat tax; declares, "Although politicians freely promise • privatized Social Security, or better yet, faster growth, governments have no handy set let Americans make their own plans for of tools for effecting it."4 Apparently he retirement; hasn't found the formula to fulfill his mentor • established a sound money standard that Keynes's dream ofuniversal opulence. discouraged malinvestment and the Despite their skepticism of substantially boom-bust business cycle; higher growth rates, major economists do • established a fair system of justice that offer several ways to improve long-term freed 90 percent of the lawyers in this prospects. Rudi Dornbusch of MIT recom­ country to become productive citizens; mends privatizing Social Security and educa­ and tion. Robert Barro urges a flat-rate consump­ • stopped interfering in foreign military tion tax, exemption of savings from taxation, affairs. deregulation of labor and business, and a 10 percent cut in the size of government. Robert Imagine the breakthroughs in medicine, Mundell warns against inflating the money transportation, housing, telecommunications, supply as a growth tool and instead favors and science that could take place by adopting slashing capital gains and income tax rates to this laissez-faire program. It boggles the mind encourage entrepreneurship and investing. "A to think that we could double or triple our liv­ lower level of government spending would ing standards in a short time. To quote make more ofthe surplus ofsociety available Keynes: "Thus for the first time since his cre­ for capital formation and growth. A shift in ation man will be faced with ... how to use government priorities from consumption and his freedom from pressing economic cares, redistribution to social overhead capital, how to occupy his leisure, which science and improved education, and investment in scien­ compound interest will have won for him, to tific and medical research would go far in live wisely and agreeably and we11."6 D raising the productivity of capital with a per­ manent effect on growth."5 1. John Maynard Keynes, "Economic Possibilities for Our Grandchildren," Essays in Persuasion (New York: Norton, 1963), p.365. 2. Ibid. The Future Is Boundless 3. Quoted in Jerry 1. Jasinowski, ed., The Rising Tide (New York: John Wiley & Sons, 1998), p. xxi. My own view is that we are selling our 4. James Tobin, "Can We Grow Faster?," in ibid., p. 44. 5. Robert A. Mundell, "A Progrowth Fiscal System," in ibid., country short by thinking that super-growth pp.203-04. cannot be sustained over the long run. Imag- 6. Essays in Persuasion, p. 367.

Professor Skousen's Economic Logic Now Available "Economic Logic is a first-rate and exciting introduction to economics. It's clear and accessible, uncommon among today's textbooks." -DON BOUDREAUX

The first volume of Mark Skousen's breakthrough college textbook, Economic Logic, has just been published. This "micro" text ?overs s.upply and deman~, m~nopoly vs. competition, entrepreneurship, wages, capItal and Interest, and the fl~anclal markets. Economic Logic is a no-compromise free-market college textbo?k, ~Ith a hands-on approach (it begins with a profit-and-Ioss income stateme~t). Pnce IS $29.95 each. Sen~ your order to: Skousen Publishing Co., P. O. Box 2488, Winter Park, FL 32790, or e-mail [email protected]. Instructors should e-mail requests for a review copy. 54

poorly in the twentieth century. Kelley pro­ vides some interesting answers. Tracing the BOOKS origins ofthe welfare state back to Bismarck's Germany ofthe 1880s-with its payroll taxes A Life of One's Own: Individual to fund unemployment, accident, health, and old-age insurance-Kelley shows how Amer­ Rights and the Welfare State ican resistance to this Prussian model broke by David Kelley down under the pressure ofthe Great Depres­ Cato Institute • 1998 • 174 pages • $18.95 cloth; sion and the exhortations ofprominent social $9.95 paperback activists and academics. Fundamentally, these welfare state initia­ Reviewed by Ellen Frankel Paul tives were a response to changes in the way people led their lives during the Industrial avid Kelley, erstwhile professor of phi­ Revolution. In the new economy based on D losophy, social commentator, and execu­ employment for a wage, the vagaries of eco­ tive director of the Institute for Objectivist nomic cycles, chance, and bad luck played a Studies, has written a marvelous yet slim vol­ much more significant role in people's lives, ume exposing virtually everything that is and they desired protection against those wrong with the welfare state. Kelley's writing risks. Disabling accidents in the factory, sick­ is always pellucid-an academic's word for ness of the breadwinner, old age, and unem­ clear-and utterly comprehensible, which no ployment were potential calamities that wage doubt explains why he left college teaching. earners and their families faced. This broad­ This book is simply outstanding. ened the constituency for governmental reme­ Kelley is a superb synthesist, and one could dies beyond the narrower band ofthe chroni­ hardly do better than to purchase a copy ofA cally poor. Life ofOne sOwn to acquire an understanding While conceding that these risks were real, of the defects of the welfare state. Here one Kelley shows how they were being addressed finds elegant refutations ofthe key arguments by insurance, friendly societies, and other vol­ that opponents ofAmerica's tradition of indi­ untary charitable associations. In other words, vidual liberty have employed to undermine he sees nothing inevitable about the develop­ our freedom. Primary among these is the ment of the welfare state. For such voluntary notion of "welfare rights," which he argues remedies to have been usurped by state pro­ are spurious because they are parasitic on the grams, a "sea change in thinking about the efforts of other people: one person's right to problems of poverty and economic risk" had welfare payments as an unwed mother, for to have transpired. The transformation from example, is dependent on the coerced transfer private to public provision ofassistance could of money from its rightful owners, the tax­ not have happened from economic causes payers who actually earned it. In contrast, the alone, Kelley contends, but rather, resulted natural rights of life, liberty, and property are from a revolution in "ideas, values and philo­ not parasitic on the efforts of others, and ask sophical outlook." of others only that they not interfere with Virulent critics of individualism set the what is mine and thine. What is fundamental­ moral stage for the welfare state's assault on ly wrong with "welfare rights" is that they liberty. Ideas essential to liberty-such as the cannot be implemented without violating lib­ morality of self-interest and the efficacy of erty rights. reason-were ridiculed and repudiated. The Kelley is at his most instructive when he "new liberals" paved the way for the welfare analyzes why the welfare state developed out state in five key ways, Kelley argues: (1) by of the Industrial Revolution. Defenders of redefining freedom into a spurious "positive individual liberty, free markets, and limited freedom" to be taken care ofby the state, (2) government often are weak on the question of by redefining "coercion" to mean what why such appealing doctrines have fared so employers do to their employees by offering BOOKS 55 them a wage, rather than the threatening of among others, the careers of Mugwump people with harm if they don't obey, (3) by "chiefs" William Graham Sumner, professor undermining individualism with the claim at Yale University; E. L. Godkin, editor ofThe that we are all helpless creatures of social Nation; Carl Schurz, senator from Missouri; forces, (4) by advocating a secular variant of David Wells, a government statistician; and altruism that replaced service to God with Henry Adams, popular writer descended from service to society, and (5) by undermining the two presidents. distinction between society and the state, and The Mugwumps greatly admired the writ­ deifying the latter. ings ofBritish thinkers Adam Smith, Richard Kelley concludes his demolition ofthe wel­ Cobden, and John Stuart Mill. The ideas of fare state on an optimistic note. Just as com­ free markets, strong property rights, sound munism imploded when its myth of a work­ currency, and limited government were hall­ ers' paradise wrought by central planning lost marks of Mugwump thinking. As Tucker its credibility, so might the welfare state col­ notes, "They mastered historical and statis­ lapse under the weight of its myths and near­ tical material that demonstrated that steam ly bankrupt programs. and electricity had multiplied the produc­ Not as sanguine by nature as Kelley, I do tivity of workers and would create an abun­ hope that his powers of prognostication are dance if only individuals learned personal keen. I wonder, though, whether a system virtue and ifgovernments withdrew their mar­ based on pure evil, like communism, is more ket interferences." vulnerable to collapse than one grounded on Not only would society function more smaller, subtler evils, like the welfare state. smoothly ifentrepreneurs were unleashed and We shall see. D government restrained, but poor people and Ellen Frankel Paul is professor ofpolitical science immigrants would have greater chances for andphilosophy and deputy director ofthe Social Phi­ success. Protective tariffs, according to Mug­ losophy and Policy Center at Bowling Green State wump research, helped fewer than 10 percent University. of American workers and pushed prices upward for the rest. Tariffs further created lobbies of special interests who corrupted Mugwumps: Public Moralists government by pressuring politicians to vote of the Gilded Age special favors for them. The Mugwumps deplored the political by David M. Tucker arena and preferred to write rather than run University ofMissouri Press • 1998 • 160 pages for office. Their big political success was • $27.50 when they bolted the Republican party in 1884 and helped Grover Cleveland win the Reviewed by Burton Folsom presidency. Cleveland proved to be a strong free-market thinker and his two terms were t last, the Mugwumps have their modern­ the high point ofMugwump influence. Aday champion: Professor David Tucker, a In the late 1800s, the Mugwumps were historian at the University of Memphis. The challenged by the Populists, who wanted gov­ Mugwumps are best known as civil service ernment aid for farmers; silver miners, who reformers who worked within the Republican wanted the government to buy large amounts party to quash the spoils system with the of silver at high prices; and some intellectu­ Pendleton Act of 1883. As Tucker shows, als, who saw government as a useful tool however, the Mugwumps were much more to create a more perfect society. Tucker than mere moral reformers. They were elo­ describes these challenges to free-market quent and persuasive spokesmen for free mar­ ideas and observes that Mugwumps opposed kets and free trade throughout the late 1800s. federal tinkering because "government poli­ The Mugwump name came from the Algon­ cies violated liberal beliefs in absolute indi­ quian word for "chief." Tucker looks at, vidual rights oflife, liberty, and property." 56 THE FREEMAN/IDEAS ON LIBERTY • JUNE 1999

Tucker does an excellent job of presenting Who Killed Homer? The Demise of the Mugwumps and their ideas, which he says were compelling and logical. They won some Classical Education and the battles, lost others, and, by the early 1900s, Recovery of Greek Wisdom were overshadowed by the Progressives. by Victor Davis Hanson and John Heath "Politicians," Tucker says, "always needed Free Press. 1998 • 288 pages • $25.00 encouragement to do the right thing, and even ifthe advice was rarely followed, critics were Reviewed by Fred D. Miller, Jr. not necessarily failures." In the past,. historians have ridiculed Mug­ ver a decade ago, Allan Bloom's explo­ wumps as priggish, selfish, and suffering O sive book, The Closing ofthe American from declining status in society. Tucker argues Mind, opened the floodgates of criticism of that this view says more about the historians American higher education for perverting its than it does about the Mugwumps. "Mug­ ostensible mission and values. Professors of wumps were given their reputation for failure the humanities, in particular, have been exco­ by later cheerleaders for the welfare state," he riated for behaving like politically correct ide­ observes. "[A]fter the Great Depression ofthe ologues and overspecialized self-promoters 1930s turned educated opinion to Keynesian and careerists rather than teachers and schol­ economics, nineteenth-century liberals who ars in the traditional sense. Who Killed feared government as the enemy of freedom Homer? presses the attack into that most ven­ and progress were recast as selfish, wrong­ erable citadel of the academy: the discipline headed agents for the middle class." of classics, which studies the languages and Tucker's research is solid and he explores a literature ofthe ancient Greeks and their intel­ wealth ofprimary and secondary sources. His lectualheirs, the Romans. writing is clear and crisp and his chapters are Authors Hanson (professor ofGreek at Cal­ well organized. Most historians assume that ifornia State University-Fresno) and Heath free-market ideas lost because they were not (professor ofclassics at Santa Clara Universi­ sound; Tucker, by contrast, assumes that the ty) start with a paradox: In 1992 classicists Mugwumps held ideas that were solid and published over 16,000 books, articles, and enduring. To explain their ultimate defeat, he reviews, double the output of 1962. Yet during explores how the German ideas ofstatism and this time, enrollments in Latin have plummet­ empire-building began to permeate American ed and Greek has all but disappeared. As a society in the late 1800s. result, "there are now five or six Classics pro­ Tucker's book is an excellent addition to the fessors in the country for every senior Clas­ literature on the Gilded Age and a valuable sics major, and over thirty articles and books correction to the standard books by historians each year for every graduating student." This Richard Hofstadter, Ari Hoogenboom, and is having dire effects: retiring classicists are John Sproat. D not replaced, and ever fewer courses in clas­ Burton Folsom is senior fellow with the Mackinac sics are being taught. How did this happen? Center for Public Policy in Midland, Michigan. His Or, as the authors ask, who killed Homer? book The Myth of the Robber Barons is in its third There has been a drastic decline in the qual­ edition. ity of American public education (partially concealed by grade inflation and the "dumbing down" ofstandardized tests), and the elimina­ tion offoreign language requirements has had a disproportionate effect on Latin and Greek. But the authors place much of the blame on classicists themselves who are unimpressed with or unaware of the values of Greek and Roman civilization and have little interest in explaining them to the general public. This is BOOKS 57 in part the result of the hyperreaction against tunnel: the power and beauty of classical lit­ Western civilization that has seeped into the erature and the values it contains. university professoriate along with postmod­ An effective jeremiad must exaggerate ernism and multiculturalism. The Greeks, somewhat, and this book is no exception. The especially, have been ignored, debunked, or profession of classics includes many dedicat­ denigrated, although they bequeathed to us ed teachers who devote long hours to their enduring ideals such as rationality, scientific students and many scholars who conscien­ inquiry, and freedom ofspeech. tiously search for the truth. But the book's Classical scholarship has unfortunately fol­ thesis is correct that the discipline of classics lowed the lead ofliterary criticism, "adding a as a whole is "in crisis." vacuous jargon and sophistic superstructure The solution proposed in this book is a fun­ on top of the multiculturalist perspective." damental change in how universities do busi­ Books in classics are routinely praised by ness: professors should be expected to teach a reviewers for being "densely argued" or lot more, they should be expected to motivate "challenging," rather than panned for their their students to learn, and they should be turgid, unintelligible verbosity. The authors hired, promoted, and rewarded on the basis of document this with a series ofoutrageous and their teaching to a much greater extent than sometimes hilarious examples of pretentious they are now. verbiage, which receive adulation from other The prospects for such reforms seem dim. academic reviewers. For example, one book Academics generally, and classicists in partic­ review in the esteemed Journal of Hellenic ular, have little incentive to alter their behav­ Studies concludes: ior. Until and unless there are fundamental changes in how higher education is offered to In sum, this book might be refigured as students, it is unlikely that Homer will rise revealing the contradictions between a again from the dead. D mainly "pessimistic" post-structuralist/ FredMiller teaches the classical Greek language and deconstructive discourse and a more "opti­ is professor ofphilosophy and executive director of mistic" Marxizing discourse, contradic­ the Social Philosophy and Policy Center at Bowling tions through which-eould one say?­ Green State University. glimmer sights of the Althusserian "real conditions ofexistence." Or not. & Why do academics publish such stuff? Secession, State Liberty Because they learn that the key to success is edited by David Gordon recognition within their academic guild. So Transaction Publishers • 1998 • 344 pages • $44.95 they strive to earn Ph.D.'s from illustrious uni­ versities, find jobs at similarly illustrious uni­ Reviewed by George C. Leef versities, secure tenure, and ultimately ascend to stardom, which is measured in terms of erbert Spencer argued in a famous essay grants, endowed chairs, appointments to edi­ H that individuals have a right to ignore the torial boards, professional recognition, state. If so, it follows that a group of individ­ reduced teaching loads, extended leaves, and uals also has the right to ignore the state, and prestigious fellowships. In pursuing these enter into some new political arrangement if goals, however, scholars are making them­ they choose. That is, they may secede. selves collectively irrelevant. Although secession has had a bad press in the The authors show from experience that United States since the Civil War, with the teaching Greek and Latin is not easy. In order secessionist cause and slavery almost invari­ to motivate students, teachers must be highly ably linked, this book brings together 11 dedicated and view the task of teaching as essays which collectively make the case that it their primary responsibility. They must com­ merits serious consideration. municate to students the light at the end ofthe The essays fall into three categories-those 58 THE FREEMAN/IDEAS ON LIBERTY • JUNE 1999 examining American history for fresh insights against a state that has concluded it is no on the legality and morality of secession, longer benefiting from the union." Ostrowski those taking a theoretical look at secession ends his piece with his thoughts on the generally, and those applying secession theo­ present-day legality of secession, holding that ry to the contemporary world. the Civil War and subsequent constitutional In the first category are Donald Liv­ amendments did not change underlying legal­ ingston's "The Secessionist Tradition in ities: the Ninth and Tenth Amendments still America," Joseph Stromberg's "Republican­ protect the right to secede. ism, Federalism and Secession in the South, In the second group ofessays, Steven Yates 1790 to 1865," Thomas DiLorenzo's "Yankee asks, "When is Political Divorce Justified?" Confederates: New England Secession Move­ and answers that because the federal govern­ ments Prior to the War Between the States," ment has ignored its legitimate functions and and James Ostrowski's "Was the Union has undertaken many illegitimate ones, Army's Invasion of the Confederate States a "Americans are morally justified in taking Lawful Act?" If you enjoy challenges to con­ action to restore limited government, includ­ ventional wisdom, these essays are a feast. ing, as a last resort, secession." Scott Boykin Livingston takes great pains to attack "the explores "The Ethics of Secession" and, absurd nationalist theory of the Constitution among other things, refutes arguments that propounded by Story and Webster," maintain­ have been made purporting to limit the right ing that the prevailing philosophy of the to secede. The late Murray Rothbard's Founders was that the country was a volun­ "Nations by Consent: Decomposing the tary union of sovereign states, each possess­ Nation-State" is classic Rothbard. He writes, ing as much right to depart as they had to "One goal for libertarians should be to trans­ depart-secede-from the British Empire. form existing nation-states into national enti­ Stromberg, traversing much of the same ties whose boundaries could be called just ... ground, quotes Madison that ratification of that is, to decompose existing coercive the Constitution was "the act ofthe people, as nation-states into genuine nations, or nations forming so many independent states, not as by consent." As Clyde Wilson's "Secession: forming one aggregate nation." DiLorenzo The Last, Best Bulwark of Our Liberties" makes the historically deft point that talk of argues, "The right ofself-government rests on secession did not originate in the South, but the right to withdraw consent from an oppres­ rather in New England in the years before and sive government. That is the only really effec­ during the War of 1812. Hostility to Jeffer­ tive restriction on power, in the last analysis." son's trade embargo and the war caused lead­ In the third category of essays, Hans­ ers in New England to convene in Hartford Hermann Hoppe contends that secession is a to discuss secession. The movement fizzled, healthy trend in "The Rationale for European of course, but DiLorenzo concludes that Secession." Pierre Desrochers and Eric "there was virtually universal support-from Duhaime examine the case ofQuebec. Lastly, Republicans and Federalists alike-for the Bruce Benson contributes "How to Secede in right of secession." Business Without Really Leaving," an essay Arguably the most affecting in this group is exploring arbitration as a means of "seced­ Ostrowski's essay, an extended analysis ofthe ing" from the government's system oflaw and arguments advanced by President Lincoln for courts. Ofparticular interest here is the battle the legality of sending troops into Confeder­ that the "anti-secession" forces (mainly ate territory. Ostrowski finds no constitution­ lawyers who fear the loss of business if arbi­ al support for any of those arguments. tration provides an attractive alternative Instead, he marshals considerable support for method of dispute resolution) have waged the opposite proposition, that the war was with considerable success to undermine the conducted in violation of the Constitution, advantages ofarbitration. concluding that "the purposes of the Consti­ A most intriguing book! D tution do not envision the use of armed force George Leefis book review editor ofThe Freeman. BOOKS 59

to policy prescriptions based on outdated Money and the Nation State: The understandings ofthat marketplace. Financial Revolution, Government and Today, all forms of money are merely the World Monetary System credit instruments that also readily serve as Edited by Kevin Dowd and media of exchange. That is, coins, currency, Richard H. Timberlake and checkable bank deposits represent Transaction Publishers • 1998 • 453 pages credit extended to the issuers of media of • $34.95 cloth; $19.95 paperback exchange. The authors seem not to understand that Reviewed by Bert Ely inflation is caused by excessively rapid credit expansion, because it is credit, not media of exchange per se, that gives individuals, busi­ his is a book on a vital-and much nesses, and governments the ability to own Tmisunderstood-topic. It is sometimes assets or mortgage future income and tax col­ excellent, but largely disappointing. lections. Media ofexchange merely represent The book consists of 13 chapters divided one way to facilitate a purchase; using a cred­ into three sections: The History of the Mod­ it card or a check drawn against a pre-estab­ ern International Monetary System, Modern lished line of credit represents an increasing­ Money and Central Banking, and Founda­ 1y common way ofbuying something without tions for Monetary and Banking any "money" changing hands. Reform. The editors' introduction provides a Such transactions create credit; credit good summary of each chapter. As Merton growth in turn is controlled by interest Miller notes in the foreword, the authors felt rates. If rates are too low, in real or inflation­ free to "disagree among themselves in their adjusted terms, credit will grow too rapidly, interpretations of key events, empirical evi­ causing inflation, regardless ofwhat happens dence on devaluations, and a variety ofother to the money supply. If rates are too high, monetary issues." credit demand will contract, eventually caus­ The book's first section is its strongest. The ing a recession, again regardless ofchanges in late Murray·Rothbard's contribution, "The the money supply. Gold-Exchange .Standard in the Interwar Interest, of course, is a price. Therefore, Years," alone is worth the price. Rothbard is price stability depends on how accurately the especially effective in differentiating the credit markets price interest. Inflation's "gold-exchange" standard, which Britain decline in recent years reflects the improved adopted in 1925, from pre-World War I mon­ functioning of the increasingly globalized etary arrangements when gold coins circulat­ financial marketplace in which debtors and ed freely. Another noteworthy chapter is creditors, acting out ofself-interest, negotiate Frank van Dun's "National Sovereignty and interest rates whose cumulative effect is to International Monetary Regimes," in which foster non-inflationary credit growth. the author draws on the work of political Unfortunately, the essays provide no sense philosophers to explain why governments of how the credit markets work and the over­ seek to dominate monetary systems at the riding importance of properly priced interest expense ofmarket efficiency. even as they acknowledge the importance of The latter two sections generally reflect a the pricing mechanism generally. Conse­ weakness characterized by the first word in quently, they present worn-out, statist solu­ the book's title-an excessive emphasis on tions, usually involving central banks, for money that disregards how electronic technol­ ensuring price stability. For example, Steve ogy has altered the financial marketplace in Hanke and Kurt Schuler advocate currency recent years. By failing to describe how this boards (backing the local currency with the marketplace actually works today, particularly currency of another country). However, cur­ in the industrialized nations, the authors mis­ rency boards are unnecessary: merely guaran­ interpret recent monetary events, which leads teeing the convertibility ofgovernment-issued 60 THE FREEMAN/IDEAS ON LIBERTY • JUNE 1999 currency into debt carrying a market rate of and productive 40-year career as a profession­ interest will protect any economy from a cur­ al economist. Never so technical as to restrict rency-driven inflation. access to readers of policy analysis, the Lawrence White, Richard Timberlake, and papers cover issues as diverse as school others write fondly of a gold-based monetary choice, drug policy, Reaganomics, trade poli­ standard. Gold and other specie standards, cy, voting rules, and the prospects for a liber­ however, have never provided price stability, al economic order. In short, the papers repre­ except over the very long term, nor have they sent a delightful smorgasbord ofpolicy analy­ been sustainable. sis by one who is at once a respected scholar Several authors advocate fixed exchange and a friend ofliberty. rates, but they are unsustainable and wreak But the range and quality ofthe papers is just economic havoc when the inevitable devalua­ one gainful reason for reading the book. The tion occurs-witness today's Asian crisis. second reason, and perhaps the more interesting Robert Keleher, for example, argues in one, is that the collection reveals the author's "Global Economic Integration: Trends and preferences regarding the work ofhis long and Alternative Policy Responses" that fixed impressive career. In that regard, Niskanen exchange rates "minimize the variability and shows that he is as much concerned about rules dispersion of many other prices, and so fur­ of just conduct and constitutional constraints ther improve the workings of the price sys­ that assure a liberal order as he is about good tem." Such price smoothing, though, distorts economic analysis and the powerful insights important price signals coming from the rest offered by Public Choice. The papers demon­ of the world. What advocates of fixed strate thoughtful appreciation of both the nor­ exchange rates ignore is that an exchange rate mative and positive aspects ofpublic policy. is a price, and therefore should no more be To Public Choice scholars, the name Niska­ manipulated than the price of crude oil or nen brings an immediate association with his toothpaste. Instead of distorting the pricing seminal work on bureaucratic tendencies to mechanism, public policy should ensure price increase budgets and bargain with politicians stability by relying on market-determined in all-or-nothing deals to expand activities prices, especially the price ofcredit and prices beyond efficient margins. To industry econo­ expressed in other currencies. mists, the name generates memories of Ford The subject of this book-ideal modem Motor Company's chief economist who monetary and credit policies and institutions­ resigned after attempting to counter the firm's desperately needs a penetrating analysis. Sadly, protectionist stance. To defense and govern­ this book fails to deliver it. I hope that the next ment economists, Niskanen is known for his book to address this subject will. D work at the Pentagon and as acting chairman Bert Ely is a financial institutions and monetary pol­ of President Reagan's Council of Economic icy consultant in Alexandria, Virginia. Advisers. And to those who know none of this, the collection demonstrates the power of careful analysis to offer useful and sometimes Policy Analysis and Public Choice: unexpected insights. Selected Papers Niskanen's 1994 paper on crime and police offers an example of the power of his think­ by William A. Niskanen ing. After his analysis ofthe data, one begins Edward Elgar. 1998 • 448 pages • $95.00 to doubt the generally held idea that crime rates rose; for one thing, crime reporting has Reviewed by Bruce Yandle improved considerably. Moreover, what can be done to counter any possible crime his volume has much to recommend it. increase? The author's conclusion: not much. T First off, William Niskanen, chairman of To a large degree criminal activity represents the Cato Institute, presents an organized col­ tolerance for crime, the demise ofrules ofjust lection of 34 papers that span his interesting conduct. The best thing the federal govern- BOOKS 61 ment could do would be simply to get out of describes the rising status ofeconomic advis­ the way by repealing its own crime legislation ers in government, noting the arrogance that and encouraging state and local experiments. developed among those who thought Keynes­ A strong believer in looking at the data, ian economics would solve the nation's unem­ Niskanen does this in spades when he deals ployment problems. Finally, Niskanen returns with drug policy. After modeling the problem, to his Public Choice roots by observing that he concludes that legalization would reduce politicians hire economists to serve political drug-control expenditures by as much as $10 interests. On the whole, the record of econo­ billion annually, reduce violent crime and mists as policy advisers has been more con­ AIDS transmission, and generate substantial genial to the growth of government power tax revenues from an excise tax on drugs. But than to liberty. Niskanen has a habit ofrecognizing all sides; Of all the papers in this stimulating book, so he describes the fallout that might be gen­ my favorite is a graduation address given at erated by a more open market for drugs: Suomi College in Michigan in 1983. Here cocaine babies, increased health-care costs Niskanen lays out some simple but profound borne by taxpayers, and additional welfare rules for living: recognize and reinforce your dependency. Weighing the evidence, he con­ natural abilities, be willing to take risks, learn cludes that legalization could generate net from the errors risk-taking generates, be hum­ benefits, but that some new costs would be ble, keep a sense of humor, and develop produced along the way. respect, but not fear, for the many mysteries Niskanen's paper on economists and politi­ oflife. cians overflows with insights into the activi­ Public Choice scholars, anyone who appre­ ties in the higher reaches of government. He ciates strong policy analysis, and readers begins with a question: Why do politicians interested in political economy should put this hire economists? He stakes out his answer by book on their reading list. D describing canons of good policy analysis, Bruce Yandle is Alumni Professor ofEconomic and which are worth studying. Niskanen then Legal Studies at Clemson University. The Freeman-Reaching Out to New- Readers If you know of a friend or colleague who might appreciate a free sample issue of The Freeman, please fill out the following form and return it to us in the postpaid envelope. Make sure to include your own name-we will mention you in the covering letter we send to the potential subscriber. We appreciate your assistance in finding new friends for liberty! T'i.m.e t·o, hea.d. for the bea.c'h." Of' t:he mount:a.ins (o,r wher'ev'e:r e·lse it is, that yo:u 11:0, w'hen the da.ys get 10,81) with a. good boo,k" a, clear' mind., a.ad a ta.11 gla.s,s of lemonad.e. I"t's s,umme'F", the time: when w·e· all V'o,w' to, cat-c.h up on our rea.ding, to increase; our knowledge, and to gene,ra.lly become, b,e'tter, brig:hter folk.s. To he,lp wit.h this. noble' mission..' .. , we offe'r' her'e a' oroup','a of'."."books on sp.,ec:lal' c.lear-' ..'. a.Dce., Q:.<'uan:tit"·:.:les: a.r'e d'·..:e::·nlfi ·'t.. eI:.Y I"'I.ml.·e:.,"t d so ord'er earIy'.. j~' A'.·' ..n·...... :d' d:An·'t·:..'.v" '., oe··t···et.....: ... t·oo,'.,: '.": d:I'sl'.'ou·r·aoe···d:..:.:. '..':. • 'b '.;..: I:f;':: y·'·ou·r·:...:"."m,',.11.':s·t,: ..."";:r"e··ad:"..;'.':'. pi'I'e.J.:. : '.0:: co,n.t:i.n.ue's t·o grow'.. As a wis,e ma.D once said:: "So many' bo...: :.;o ·ok··s.....' .' ..;.".s·o' ..: I:i·t·t.:...' .... :...... le··: t".·m·'.. ::.....e···'",

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Nothing's Free

y brother and I have a game we play ficiently high grade point average gets "free" M from time to time. He calls me with a education at any public Georgia college. The can't-miss investment opportunity, and my funds come from sales of lottery tickets. It job is to figure out what's wrong with it. There sounds like the ultimate bargain. Who can is always something wrong with it. In fact, the quarrel with free education? better it looks on the outside, the worse it Let's take a closer look. There are many looks on the inside when you take a closer senses in which a University of Georgia edu­ look. That doesn't necessarily make it a bad cation is not free. Resources get used up to investment. But it's never the bargain it provide it. Those resources could have provid­ appears to be at first. ed something else ofvalue. Such is the economist's burden and bless­ But who provides those resources? If the ing. There is no free lunch. The bigger the education is not really free, someone must be bargain, the more likely it is that something paying. It would seem to be the losers in the worrisome lurks beneath the surface that lottery. And that's why the education seems needs to be examined. There's always a catch. free. We know there have to be losers in the Usually it's easy to discover: the bargain is of lottery. They help pay for education. Sounds questionable quality; the bargain has a hidden great. And besides, no one forces anyone to payment that comes later; the bargain play the lottery, so the whole thing is more involves an unforeseen risk. But every once in like a voluntary contribution than a tax. a while a bargain comes along that looks so To see the flaw, suppose the government good, you wonder if it might actually be a decided to fund free education by opening a genuine bargain. This should make you espe­ chain of dry-cleaning stores. Profits from the cially nervous..For that means the catch is store are used to pay for "free" education. To especially hard to see. So look carefully make sure the stores are sufficiently prof­ before you leap, then look some more. itable, the government decides to charge a dollar more per shirt than dry cleaners cur­ State Lotteries rently in operation. And to keep those private­ ly run stores from attracting customers at So it is with the "free" education that is lower prices, the government decides to ban being offered in some states with lotteries. In all private competition and enjoy a monopoly. Georgia, for example, any student with a suf- We would all understand that in this world the "free" education is being paid for by peo­ Russell Roberts ([email protected]) is ple who enjoy pressed and clean clothes. Such director of the Management Center at the John M. Olin School ofBusiness at Washington University in people would be paying in two senses. The St. Louis. He is the author ofThe Choice: A Fable of first sense is literal: they fund the education Free Trade and Protectionism (Prentice Hall). with their excess payments above the compet- 63 64 THE FREEMAN/IDEAS ON LIBERTY • JUNE 1999 itive prices that would prevail without a gov­ So lottery-funded education is not free after ernment monopoly. They also pay in the sense all. Subsidizing education out of lottery pro­ ofhaving their clothes cleaned less often than ceeds punishes people who like to gamble. they would under a private system. Given the Those tum out on average to be people who higher prices, some people are going to do are relatively poor with less education. Can less dry cleaning and some are going to do you think of a more immoral solution for none at all. Under such a system, it would be funding education than to take the money ludicrous to claim that the education is free. from those with the least.education? It's clearly being paid for by the users ofdry­ People like to defend the lottery by saying cleaning services. Funding education from it's voluntary. After all, you don't have to play. the pockets of dry-cleaning customers also It's also true you can avoid the income tax by raises a question ofmorality. Why should the not working. So I guess that's voluntary, too. burden offunding education fall arbitrarily on But it's hard to argue that the lottery is a vol­ those who like clean clothes? untary tax when the government has a monop­ oly. Can you imagine how many people would Government Monopoly play state lotteries if there were competing private lotteries that paid 90 percent of the Now, let's return to the state lotteries. About proceeds in prizes instead of the typical 55 55 percent ofthe receipts go to prizes, 10 per­ percent? cent to expenses, and 35 percent to education Under a private, competitive lottery system, or some similar unimpeachable cause. the prizes would be bigger and the odds of Because 35 percent goes to neither winners winning would be higher. It would be a better nor losers, the real cost of the lottery is that world than the one we now live in, where peo­ you win less often and the prizes are smaller ple. in search of hope are forced to pay a 35 than would be the case without a government percent tax to finance the college education of monopoly. If government allowed competi­ mostly upper-class children. That's why I like tion or made gambling legal, people who like my dry-cleaning proposal. Sure it's unfair. to gamble would have a higher chance ofwin­ But it's better than using the money from a ning and there would be more money distrib­ government lottery. D uted to winners.