Date: 1950-01-01T07:00:00+00:00
Keywords: liberty
Description: The Foundation for Economic Education The Freeman 1982

The Freeman 1982

Foundation for Economic Education
the Freeman VOL. 32 NO.1 • JANUARY 1982 Exploitation·and Knowledge Gary North 3 Concerning the importance of accurate information and awareness of opportunities. And Now for Some Good Economic News! Russell Shannon 12 Computers and other innovations in technology signal market progress. Co-Determination in West Germany Hans F: Sennholz 15 The power of decision amounts to ownership and control-and may destroy competitive enterprise. The Humanity of Trade Frank Chodorov 23 Far better that men come together for peaceful trade than meet on a battlefield. They Solve Tomorrow's Problems Brian Summers 30 Preventive maintenance of the market economy. The Civil War and Political Nationalization Clarence B. Carson 32 Concerning the extension of Federal intervention and control in the aftermath of the Civil War. Adam Smith's Economics of Freedom John Montgomery 47 Our debt to one of the.great advocates of the market economy.

Some Mistakes of Marx Wm.. Henry Chamberlin 55 A 1956 appraisal of the more obvious failures of sociialism. Book Reviews: 62 "Enterprise Zones: Greenlining the Inner Cities" by Stuart M. Butler Anyonewishing to communicatewith authorsmay send first-class mail in care of THE FREEMANfor forwarding.

FOUNDATION FOR ECONOMIC EDUCATION Irvington-on-Hudson, N.Y. 10533 Tel: (914) 591-7230 Leonard E. Read, President Managing Editor: Production Editor: Contributing Editors: Paul L. Poirot Beth A. Hoffman Robert G. Anderson Bettina Bien Greaves Edmund A. Opitz (Book Reviews) Roger Ream Brian Summers THE FREEMAN is published monthly by the Foundation for Economic Education, Inc., a nonpo litical, nonprofit, educational champion of private property, the free market, the profit and loss sys tem, and limited government. The costs of Foundation projects and services are met through donations. Total expenses average $18.00 a year per person on the mailing list. Do nations are invited in any amount. THE FREE MAN is available to any interested person in the United States for the asking. For foreign delivery, a donation is required sufficient to cover direct mailing cost of $5.00 a year. Copyright, 1982. The Foundation for Economic Education, Inc. Printed in U.S.A. Additional copies, postpaid: 3 for $1.00; 10 or more, 25 cents each.

THE FREEMAN is available on microfilm from University Microfilms International, 300 North Zeeb Road, Ann Arbor, Mich. 48106. Some articles available as reprints at cost; state quantity desired. Permission granted to reprint any article from this issue, with appropriate credit, except "Exploitation and Knowl edge."

Gary North Exploitatlon and Knowledge THE PROFIT MOTIVE: Everyone knows that the free market economic sys tem operates in terms of the profit motive. The trouble. is, hardly any one understands where profits come from. This includes businessmen who make them. This failure to under stand the source of profits has given a real advantage to the critics of the market. When the supposed defend ers of the market argue that the hope for profit is the motivating force of capitalism, yet they cannot state clearly where profits come from, they have left themselves intellectually defenseless. The critics claim that profits come from the ability of the stronger, richer, and more ruthless members © Gary North, 1982. Gary North, Ph.D., is President of the Institute for Christian Economics. The ICE pUb lishes a newsletter, Biblical Economics Today. A free six-month trial SUbscription is available by writing to Subscription OffIce, ICE, P. O. Box 8000, Tyler, Texas 75711.

of the society to exploit their weaker neighbors. Tbe word "exploitation" has been a favorite one in socialist circles. Marx made the word a weapon ag&ip.st capitalism. The workers are •exploited by the capi talists, Marx said, because the capi talists can extract surplus value from laborers. The •laborer has to work, say, three hours in order to have enough money to buy minimum food and shelter, but the capitalist keeps him on the job many hours longer. Thus, the capItalist "exploits" extra money from hi.s workers. The theory was absolutely wrong, and it was demolished by the Aus trian economist, Eugen von Bohm Bawerk, befor~ Marx died.l Workers IThe Exploitation Theory ofSocialism-Com munism by Eugen i von Bohm-Bawerk. An ex tract from Capital and Interest. Third revised edition 1975, 17(),pp. paperback. Libertarian Press, P. O. Box 218, South Holland, Illinois 60473.

4 THE FREEMAN January are paid the value of their output, or very close to it. When they are not paid according to the value of their output, other profit-seeking employ ers start offering them more, since they want the "surplus value" for themselves.-The market price of the formerly "exploited" labor services climbs, since no capitalist wants to allow his competitors the advantage of hiring underpriced labor services. Capitalists may well be greedy; this is the best assurance for workers that they are being paid what they are worth. The IgnoranceFactor It might be argued that laborers really do not know what their labor services are worth on the free mar ket. Therefore, they refuse to take a chance and threaten to quit. They are afraid of losing their jobs, and they are not aware of the better op portunities available to them else where. This is quite true; accurate infor mation is not a free good. It is, per haps more than any other scare eco nomic resource, the most valuable of assets. If men are unaware of an op portunity, then they cannot take ad vantage of it. But all men do not need to be informed of the existence of higher wages, or better working conditions, or jobs that offer more days of paid vacation per year. A few workers are sufficient to alert all the others. "Say, did you hear that XYZ Widgets have raised their pay scale 25 per cent?" That story, if true, is all that is needed to alert workers.

The information comes to a few. They start quitting. Others wonder why their old friends are, leaving the job. Nothing spreads faster than infor mation about opportunities. Rumors are efficient means of spreading in formation; in fact, the problem fac ing the listener is to sort out false from true information. But there is an economic incentive for laborers to check out rumors of major em ployment opportunities. Consider a particular worker. For the sake of the argument, let us as sume that he is indeed "exploited." His employer knows that he is worth, say, $10 per hour. But we will not call them dollars, since inflation tends to make dollar-denominated arguments look silly after a few years, or at least very old-fashioned. So we will not pay him in dollars. We will pay him in a hypothetical currency units, shekels. (A shekel in ancient Israel was a unit of weight, which made it easier for people to know what units they were dealing with: shekels of silver, shekels of gold, etc.) The employer is paying him only eight shekels per hour, and the company is pocketing the extra two shekels. Or maybe the company is only pocketing one shekel, but is charging less for the product, and is thereby underbidding the competi tion' and increasing its share of the 1982 EXPLOITATION AND KNOWLEDGE 5 market. Whatever the case happens to be, the laborer is not receiving the value of his output.

What Can He Do? What can he do to better himself? He can start investing. He starts putting time and effort into a "new company," himself. He starts invest ing in a search for information. He looks in the classified ad columns of his newspaper to see what other cor porations are paying for labor ser vices like his. He starts calling old friends on the phone, asking them what conditions are like at ABC Widgets, Inc. He starts calling the personnel offices of rival companies. Sooner or later, if he is really being exploited, he may find proof of the exploitation: some firm that is offer ing more than eight shekels per hour for labor services like his. This investment involves sacri fice. When he searches for better in formation concerning the market he is participating in, he is an inve~tor. He is a kind of capitalist. More im portant, he becomes an entrepre neur. He thinks ~here is a better op portunity around. He hopes he can find it by investing time and effort into his search. He expects to better himself if he discovers higher pay, or better working conditions, being offered by another company. He wants to take advantage of any such offer. But the key fact is this: ini tially, he does not know lor certain.

If he knew for sure; he would not have to spend time searching. He would simply take the better offer. There is ignorance involved. He may not be exploited after all. Perhaps his employer is paying him a mar ket wage. In fact, perhaps the mar ket is about. to drop; his employer may be paying him too much, by mistake. Also, even if a better offer is ready and waiting, he may not find it in time. He may never find it at all. There is no way for him to be sure just wh~t ithe market is offering to people who sell services compa rable to his. And even if he finds a better deal, he may not be able to convince the prospective employer that he, as a skilled worker, actually possesses the i qualifications. After all, the prospective employer really is not certain just who this prospec tiveemployee ,is, or what he can do on the job. The ignorance factor is inescapable. The worker •. who begins a search to better his position is, in fact, an entrepreneur. He is making a fore cast: with work, and time, and tele phone calls, h¢ thinks he can find a better opport~nity. He cannot be certain, but he thinks so. He faces an uncertain f¥ture. He is not omni scient. No p~rson is omniscient.

Nevertheless, he "senses" that there are better opportunities available. He is willing to invest time in the search. He skJPs Saturday afternoon television in. order to find a better 6 THE FREEMAN January opportunity. He skips bowling with the boys. He skips an afternoon of fishing. In other words, he invests a scarce resource-leisure-by forfeit ing it. He tries to get a return on his investment: money, or working con ditions, or a job that offers possibili ties of advancement, that will be more valuable to him in the future than the leisure time activities are valuable to him in the present. Is He Exploited? Is the worker really exploited? How has his present employer exploited him? Only by not giving him a gift, namely, the precious gift of accurate knowledge. He has not come to the worker and said to him, "Look, Charlie, I'm paying you eight shek els an hour, but ABC Widgets is paying at least ten per hour. I've known that for a long time. I feel guilty for not telling you. Now, if you want to call the personnel de partment at ABC Widgets, go ahead.

See if you can get a job lined up there. If you do, come to me and tell me. Then I'll be forced to give you a raise. Fair enough? Have a nice day." How can we distinguish "exploita tion" from a mere refusal to give away information that is economi cally detrimental to the income of the one who is giving it? (And how could we distinguish the gift of in formation from possible stupidity on the part of the company's manage ment?) Furthermore, how can we distin guish the worker who goes shopping for a better job from a capitalist? And if he finds the job, and refuses to run to all his fellow workers to tell them about the job down at ABC Widgets that pays 25 per cent more, how can we distinguish him from an exploiter of labor himself? After all, he has information that would help his buddies. He wants to take ad vantage of the information to in crease his income. But that is pre cisely what his present employer is doing to him: taking advantage of better information. If there is only one job available at ten shekels per hour, and he takes advantage of it, has he become a selfish exploiter of his fellow man? If he forfeits the raise, despite his investment of time and effort in searching for a better deal for himself, has he acted ratio nally? Is rational action-taking advantage of the opportunity a man searches for-inevitably immoral, selfish, and exploitative?

Employer-Entrepreneurvs. Worker-Entrepreneur How can we distinguish the worker from the employer? What is differ ent about an employer-entrepre neur, who takes advantage of his ac cess to information by refusing to give that information away, from a worker-entrepreneur, who takes ad vantage of his access to information by refusing to give that information 1982 EXPLOITATION AND KNOWLEDGE 7 away? The employer-entrepreneur spent years in establishing his busi ness, and his profits stem from using accurate information wisely. He has invested in information-gathering, and it has finally paid off. He is beating his competition, since ABC Widgets does not· know that there are workers available-or at least one worker available-who will work for slightly over eight shekels per hour. He is profiting at the expense of the competition: the other Widget company. He is also profiting from the worker's lack of knowledge. But if the worker finds out, and other workers do not find out, then the worker is also profiting at the ex pense of the other workers (his com petition) and his present employer, who now will have to pay him more, or do without his services. What is the difference?

The people who proclaim that cap italism exploits workers are really proclaiming something very, very different: capitalism allows people to take advantage of better infor mation, at least until the competi tion finds out and starts taking ad vantage of it themselves. What the opponents of capitalism are really proclaiming is that men have a moral and legal obligation to give away the world's most valuable scarce eco nomic resource: accurate, profitable knowledge. The critics expect men to give away a resource as if it were a free good, when we all know it is anything but a free good. It takes an investment in an uncertain future to gain ownership of this asset. Yet the critics want us to believe that it is exploitative to use it once we have discovered it~ 'l'he critics want to kill the private markets for information. Hidden Treasure Some of the finest economic wis dom in history can be found in Je sus' parables. He aimed His para bles at the average listener. He knew that they were not trained theolo gians. They would not respond to de tailed theological analysis. So he went to them with parables, and several were. '~pocketbook parables."

(Others were agricultural parables: seeds, growtn~ sowing, reaping.) His parable of the buried treasure was based on His. understanding of the market's process of searching for in formation and using it to one's ad vantage: Again, the kingdom of heaven is like;unto treasure hid in a field; the which when a man hath found, he hideth, and for joy thereof goeth and selZeth all that he hath, and buyeth . that field (Matthew 13:44). Consider what the man in the parable was. doing. He stumbles across an important piece of infor mation. There is a valuable treasure hidden in a field. He is not sure just who it was who hid it, but it is there. He presumes i that the person who hid it was not the present owner of 8 THE FREEMAN January the field. He is not certain of this at first, but he is willing to take a ma jor step. He hides the treasure again, and goes out and sells everything that he owns. I suppose he did some preliminary investigating, just to see if the present owner will sell it. But the present owner may change his mind. Or he may have known about the treasure all the time, and he is luring the speculator into a disas trous decision. The discoverer can not be certain. But he takes a chance.

He sells everything, and goes to the owner with his money. He buys the field. Now he owns the treasure. He took advantage of special informa tion: his know ledge of the existence of a treasure in a particular field. He took a risk when he sold everything that he owned to come up with the purchase price. Then he went back to the owner, thereby alerting the owner to a possible opportunity-the possibility that something valuable is connected to the field. Maybe it would be unwise to sell it after all. But finally he decides to sell. The entrepreneur-the man with the in formation and some venture capi tal-has closed the deal. He has at tained his goal. The Socialist View The modern socialist would be outraged at this parable. The entre preneur, who was striving to better his position, was clearly immoral. First, the land he was on should have been owned by the people, through the State. Second, he had no business being on the land, with out proper papers having been filed with the State in advance. Third, he should never have hidden the trea sure again. It was the State's. Fourth, if it was not the property of the State, then he should have notified the pri vate owner of the property. Fifth, failing this, he was immoral to make the offer to buy the property. He was stealing from the poor man who owned the property. Sixth, should he attempt to sell the treasure, the State ought to tax him at a mini mum rate of 80 per cent. Seventh, if he refuses to sell, the State should impose a property tax, or a direct capital tax, to force him to sell.

What the socialist-redistribution ist objects to is the lack of mankind's omniscience. The economy should operate as smoothly, as efficiently, and as profit-free as an economy in which all participants had equally good knowledge-perfect knowl edge-as all other participants. Knowledge, in a "decent" social or der, is a universally available free good, equally available to all, and equally acted upon by all. It is only the existence of private property, and personal greed, and a willingness to exploit the poor, that has created our world of scarcity, profits, and losses. Knowledge about the future should be regarded as a free good. Profits are therefore evil, not to 1982 EXPLOITATION AND KNOWLEDGE 9 mention unnecessary, in a sound economy. This has been the argu ment-the real, underlying, im plicit argument---:-of all those who equate profits and exploitation. Men are not God; they are not omni scient. This angers the socialists, and they strike out in wrath against the market order which seeks to encour age men to search for better infor mation so that they can profit from its application in economic affairs.

The socialists prefer to stop the search for information concerning the uncertain future, rather than to allow private citizens to profit per sonally from the use of knowledge in society. The Transfer of Knowledge Accurate knowledge of the future is a valuable asset. How can society profit from its discovery and appli cation? Not everyone wants to take the time and trouble to search out the future. No one can take the time and trouble to search out all the pos sible bits of information concerning an uncertain future that might be useful to him or his family. So we allow others to do the work, bear the risk of action, and sell us the results at a price we are willing and able to pay. We consumers become the users, and therefore the beneficiaries, of the entrepreneur's willingness and ability to peer into the future, take steps to meet the demand of the un certain future, and deliver the finished product,-+-consumer good, con sumer service, or spiritual insight at a price we are willing to pay. Why should we care what price he paid, or what risks: he bore, when we pay the price? Sure, if we knew what he paid, we might guess that he is will ing to take less than what he is ask ing, but why should we care from a moral standpoint what he paid ver sus what he is asking us to pay?

Besides, the 'existence of his profit on any trans8iction encourages other entrepreneurs to search out similar opportunities to present to us in the future. Let us consider our old friend, the entrepreneur-worker. He ac cepts the job with ABC Widgets. The other workers throw a farewell party for him. The conversation inevitably gets around to' the reason why he is leaving. "Hey, iCharlie, why are you leaving XYZ, Widgets? Haven't we had great times together? What are you trying to do, get on their bowl ing team or something?" And Char lie may be wiUing to say, now that he knows he has his job, and there are others just like it available. Now he can look liike a smart cookie in front of his friends. "I'm leaving be cause I'm going to make 25 per cent more each week, that's why. Why should I stay. here at XYZ Widgets and work for iless than I'm worth?" That bit of information will make itself felt in the labor market ofXYZ Widgets very, very fast. The man agement at XYZ Widgets will have 10 THE FREEMAN January to do some explaining, and perhaps make some wage adjustments for the workers, as the effects of that new knowledge are felt. The spread of information is rapid because the pay-off for those who have it is im mediate, and personally beneficial for those who act in terms of it.

A Chance· to Profit from the Use of Better Knowledge If knowledge is a scarce economic resource, and ifit is a good thing for members of society to act in terms of accurate information, then it is cer tainly a wise policy to allow citizens to profit from the use of better knowledge. That way, there is an economic incentive for others to en ter the "knowledge market" and take advantage of whatever knowledge is available. The spread of accurate knowledge is increased because of the profit potential offered to acting individuals. If better knowledge is a valuable asset, then its sale in the market should be encouraged. Inaccurate knowledge should be dropped rapidly. How do we best stop the transfer of inaccurate knowl edge? Make it expensive to act in terms of inaccurate knowledge. This is why we need opportunities to make losses as well as profits. Make the use of inaccurate knowledge expen sive to those who use it, and you will discourage its transfer through the whole society. This is perhaps more important than encouraging the production or discovery of new, ac curate knowledge. There are always more good ideas available than cap ital to finance them. But the contin ueduse of bad' ideas-loss-produc ing ideas-inhibits the build-up of capital. It is always very risky to launch a new project, since there are so many variables. But dropping a bad idea is an immediate benefit to society, for it increases the capital base-the information base-by re moving a major source of capital consumption. The existence of losses testifies to the existence of inappro priate plans in an economy. Without negative feedback-the loss portion of the profit-and-loss sheet-society has no effective way to eliminate bad ideas. If men see the danger of establishing censorship boards to reduce the spread of knowledge, they had better cling to the free market's mechanism of eliminating resource absorbing, erroneous information.

Conclusion The word "exploitation" should be understood by those people who are likely to be the victims of true ex ploitation. Exploitation in a market order means the personally benefi cial use of accurate economic infor mation. Socialist programs to re duce exploitation are, in the final analysis, programs to make it un profitable for forecasters to launch risky ventures based on their pre dictions concerning the uncertain 1982 EXPLOITATION AND KNOWLEDGE 11 future. These socialist programs are also based on a false view of knowl edge: that it is a free good that is available to all, if only private own ership were abolished. By abolish ing "exploitation"-the profitable use of knowledge-the socialists will in evitably reduce the flow of accurate knowledge of economic conditions. The public will have more inaccu rate knowledge in its capital struc ture, and therefore more losses, with fewer profits to compensate for the losses. Men will not be the benefici aries of uncertainty-bearing fore casters. The State becomes the ac tive suppressor of the spread of accurate knowledge. If this is not exploitation, what is?

What we need is a means of reduc ing "exploitation" -the profitability of suppressing knowledge. The ex ploitation of another man's igno rance cannot long continue in a so ciety in which there is freedom of expression, if this freedom is accom panied by the freedom to act on the information provided by the free dom of expression. It means that each man's "exploitation" of the re source of knowledge is always threatened by his competitors' "ex ploitation" of that same knowledge, as well as the "exploited" person's use of the knowledge. Knowledge is like any other asset: it is not a free good. Those who want it must pay for it. The socialist brings a moral critique of profits: "Capitalists would try to reduce exploitation by making opportunities for exploitation avail able to all. They tell us that the spread of the legal right of exploit ing others leads to a reduction of ex ploitation. Who can believe such nonsense? Exploitation should be made illegaL The best way to stop exploitation is to make it costly to be an exploit~r." But this assumes always that knbwledge is a free good.

But it is a scarce good. So·the best way to produce better knowledge that is, the best way to reduce the zones of ignorance in a society by in creasing the fU~w of accurate knowl edge-is to get everyone who wants to be in the "discovery business" the right to get involved. The best way to obtain better knowledge is to make it profitable for people to increase the producti~n of knowledge. By giving all mert the right to sell all that they have and buy the fields of the world-if the sellers have the right to turndown the offer (Le., have the right to keep ''buying'' their fields, day by day)-the hidden trea sures of life will see the light of day. There is no treasure more precious than knowledge of the truth. That is why the kingdom of heaven is like a field in which a treasure is hidden. Give all men an incentive to search out the treasures of life. If we want more treasure$, we had better en courage men 'tQ go out and look for them. , Russell Shannon And Nowfor SomeGOOD EconomicNews!

THIS PAST SUMMER, the economic news was good. Congress and the Reagan Administration agreed on an unprecedented package of budget cuts and tax incentives designed to curb inflation and boost the econ omy. The Dow Jones average rose above 1000. The much-taunted "supply-side" economics had ar rived, and the stock market, seeing it, found it good. Then came the fall. Prospects of huge budget deficits and persistent double-digit inflation kept interest rates high and interest in stock pur chases low. The construction indus try continued to flounder, and sav ings and loan associations hovered on the brink of catastrophe. What's worse, alarming signs suggested extensive government Russell Shannon Is a professor in the Department of Economics, College of Industrial Management and Textile Science, Clemson University. 12 controls and subsidies could be re stored. The Reagan Administra tion's agreement to limit Japanese auto imports served as a frightening precedent for other industries to seek similar trade restraints. Farm groups, having lent their support for Reagan's tax and budget adjust ments, pressed for further federal fi nancial aid.

l In short, the outlook became so bleak that "supply-side" economics now seemed likely to be come just another version of what Carlyle called the "dismal science." Yet a pleasant prospect glows be neath the gloom. Harking back to the refreshing optimism expressed by Adam Smith, the founder of mod ern economics, it relies upon the dramatic possibilities for expanding output via the advantages of spe cialization, innovation, and free trade. Smith showed what the division AND NOW FOR SOME GOOD ECONOMIC NEWS! 13 of labor did just to the production of pins. One pin-maker, working alone, said Smith, "could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty." But specialization changed all that. Now one man, as Smith described it, "draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head."

Altogether, Smith said, the pro cess of making pins had been broken up into "about eighteen distinct op erations." But with what marvel lous results! Each person, Smith re ported, ended up making not just 20 but the equivalent of about 4,800 pins in a day.2 What a fabulous in crease in productivity! What a strong argument for maintaining free and open markets in which to sell this prodigious output! About a century after Adam Smith wrote, the moving assembly line further enhanced the production process. Usually we associate the name of Henry Ford and automo biles with that feat. In fact, Gus tavus Swift was more instrumental and the product was meat. As quoted by the historian Daniel J. Boorstin, Upton Sinclair de scribed the new assembly line for processing in his novel The Jungle: "The carcass hog was strung up by machinery and sent upon another trolley ride." It then passed between two lines of men, "each doing a cer tain single thing to the carcass as it came to him.· One scraped the out side of a leg; '~nother scraped the in side of the same leg. One with a swift stroke cut the throat," and so on.3 Swift imaginatively combined the assembly-line dismembering of hogs with distribution of the finished product via refrigerated railroad cars.

So sharply did Swift cut costs and so vastly did he increase production that he was able to market meat not only throughout the U.S. but in Europe and the Orient as well.4 Now anoth~r century has elapsed since Adam. Smith wrote, and we find ourselves face to face with the prospect of a further momentous up surge in productivity launched by the computer. ,Gene Bylinsky gave a glimpse of the amazing future that it promises in!the October 5 issue of Fortune magazine. Specifically ~ the innovation Bylin sky describes' is called CAD/CAM (Computer Aided Design/Computer Aided Manufacturing). Bylinsky uses for an example the tubes which Northrup needs for its aircraft. Prior to the new coroputer process, "it took Northrup six weeks from release of engineering drawing to bent tube in hand." But the use of CAD/CAM col lapsed the time from six weeks to 18 minutes! Similarly, Pratt & Whit ney report that CAD/CAM allows a 50 to one reduction in labor, and GM 14 THE FREEMAN now "turns out car-body components such as fenders in half the time it took with manual techniques."5 Of course, there are those who will despair at these fabulous prospects.

What, they ask in dismay, will peo ple do for jobs if computers merci lessly replace all those diligent workers? One who does not share such a gloomy view is Alvin Toffier. Writ ing in his recent book, The Third Wave, Toffler notes: "Between 1963 and 1973 Japan had the highest rate of investment in new technology, as a percentage of value added, of any country in a seven-nation study. It also had the highest growth in em ployment. Britain, .whose invest ment in machinery was the lowest, showed the greatest loss of jobs."6 Now the labor unions are upset with President Reagan for his treat ment of the air traffic controllers. Many people look with dismay at the perceived dismantling of gov ernment social programs by an Ad ministration bent on balancing its budget. But there is a vital question which must be squarely faced: Can labor Alfred North Whitehead IDEAS ON unions, or social programs, or trade restrictions possibly provide for the health and welfare of American workers and consumers even a small fraction of what the innovations in technology, ranging from pin making, to meat dressing, to com puter designing, have demonstrably achieved? Expressed another way, can the promises of shallow social ism and meager mercantilism ever hope to match the powerful impact of creative capitalism? The impres sive evidence of the past two centu ries surely suggests that the answer is "no." , -FOOTNOTESl"The Ripples of a Farm Recession," Business Week, September 28, 1981,27.

2Adam Smith, An Inquiry into the Nature and Causes of the Wealth ofNations (New York: Modern Library, 1973; originally published in 1776),4,5. 3Daniel J. Boorstin, The Americans: The Democratic Experience (New York: Vintage Books, Random House, 1974),319. 4Ibid., pp. 318-20. 5Gene Bylinsky, ''A New Industrial Revolu tion Is on the Way." Fortune, October 5, 1981, 106-14. 6Alvin Tomer, The Third Wave (New York: Bantam Books, 1981), 192. LIBERTY WITHOUT a society in which life and property are to some extent secure, existence can continue only at the lowest levels-you cannot have a good life for those you love, nor can you devote your energies to life on a higher level.

Hans ~ Sennholz CO-DETERMINATION IN WEST GERMANY MOST AMERICANSare aware that la bor unions are enjoying legal privi leges and immunities, that their members and officials are free to commit wrongs to person and prop erty, to deprive individuals of the right to earn a livelihood, to break contracts and trespass upon other people's property, to restrain indus try, trade and commerce. All these immunities and privileges were granted by law, embellished by courts and agencies, under the polit ical pressure and power which labor unions possess in contemporary so ciety. Many unions and their numerous spokesmen in education and the news media are clamoring for more legis lation. They are demanding a "de mocratization of the economy," Dr. Sennholz heads the Department of Economics at Grove City College in Pennsylvania. He's a noted wri ter and lecturer on economic, political and monetary affairs.

"equal rights~'Jor employees, a gen uine "social' partnership" for em ployers and workers, "equal power for capital and' labor." Many point at West Germany where labor unions are enjoying' unprecedented power through equal representation on corporate boa~ds of directors. In no other country of the West do union officials exert as much influ ence ·on econQmic decision-making as in West Qermany. Their influ ence rests on •legislation that goes back to 1947 when the Allied occu pation power~ ·introduced equal rep resentation in'the steel industry. In 1951 the German Bundestag yield ing to union pressure made it appli cable also to c0al mining. In 1956 it applied and expanded the concept to holding comp~nies in the coal and steel industries. In 1952 and 1972 it incorporated eo-determination in the Enterprise Organization Acts, and in 1976 it passed the Co-Determi16 THE FREEMAN January nation Act. Depending on the na ture of the industry, its structure and size, and the legal organization of the enterprise, the laws are appli cable to most privately owned busi nesses.!

The Coal and Steel Co-Determi nation Act of 1951 provides for equal representation on the boards of di rectors. That is, the number of union officials or shop stewards elected to the board of directors by employees must equal the number of board members elected by stockholders. Moreover, both groups of directors must agree on and elect a "neutral member" who is expected to break any potential deadlock in decision making. The law also created the position of a full-time "labor direc tor" serving on the executive com mittee who cannot be removed ex cept by majority decision of the labor directors. The Enterprise Organization Acts of 1952 and 1972 stipulated that the board of directors of all corporations consist of one-third employee-direc tors. The same was ordered for all other business organizations with limited liability and to cooperatives with more than 500 employees. The law also directed the creation of workers' councils or committees in all such enterprises with five or more.

lCf. Walter Hamm, Erfahrungen mit der Mitbestimmung in der Bundesrepublik Deutschland, Schweizerischer Handels-und Industrie-Verein, #25, Sept. 1981. employees. The committees were endowed with far-reaching co-deter mination rights in social, personal and economic matters. But the law was not to apply to so-called "pur pose enterprises" pursuing objec tives in politics, labor unions, reli gion, education, science, art, and similar pursuits. Moreover, the law does not cover enterprises of the fed eral, state and local governments and other public corporations. ContractualCo-Determination throughCollectiveBargaining The Co-Determination Act of 1976 is applicable only to corporations with more than 2000 employees. The boards of directors of such enter prises must consist of an equal num ber of directors elected by stockhold ers and by employees. The stockholders may elect the chair man of the board who in case of deadlock may cast the decisive vote.

In addition to these legal provi sions imposing co-determination. on German commerce and industry there is contractual co-determina tion resulting from collective bar gaining. As a condition for coopera tion with management on such issues as reorganization or production ad justments, or to settle a costly strike, many companies not covered by law were forced to introduce the kind of co-determination imposed on the coal and steel industries, that is, parity representation by labor. To the 1982 CO-DETERMINATION IN WEST GERMANY 17 unions this is the only co-determi nation worthy of the name. The Co Determination Act of 1976 is re jected as unsatisfactory because it grants the decisive vote to the chair man of the board who is elected by the owners. Altogether, 600,000 employees of the coal and steel industries have parity co-determination rights. One million workers possess the rights granted by the Enterprise Organi zation Acts, and more than four mil lion employees in some 500 large corporations are covered by the Co Determination Act. All in all, one fourth of all West German employ ees are grantees of co-determination rights. But this does not mean that these millions of workers actually view their rights as urgent or im portant, or that they are co-deter mination conscious. Every public opinion poll seems to confirm that the masses of workers are uncon cerned and uninterested, which leads many labor leaders to voice their disappointment. It seems that the interest in labor co-determination is limited primarily to union officials.

ThreeTypes of Co-Determination It cannot be surprising that the laws created voting blocs consisting of owner-directors and labor-direc tors. Each bloc meets well in ad vance of a board meeting in order to arrive at a consensus that will be presented and defended in unison at the meeting ~ Nevertheless, in the coal and st¢el industries subject to full parity l~gislation there is no se rious confrontation. Both blocs are fully aware that they may be. out voted by the "neutral director." It leads them ,to make every effort through lengthy and painstaking consultations and negotiations to arrive at some compromise. Many decisions are finally made by unan imous vote. The situation is quite different in the corporations subject to the Co Determination Act. There is little bargaining · and maneuvering for compromises as the chairman of the board can be expected to cast his de cisive vote with his colleagues, the stockholderH,lirectors, in opposition to the bloc of labor-directors. More over, some corporations managed to reduce the' tasks and functions of their boards to the legally permissi ble minimum, which has led to sig nificant changes in the corporate structure. Union officials obviously are distressed and perturbed by the power of the chairman and the re duction inboard functions, which they interpret as flagrant examples of anti-labor· and anti-union behav ior. Of course, the boards organized under the Enterprise Organization Acts of 1952 and 1972, on which the owner-directors outvote the one-third labor-directors without much ado, are the favorite objects of union scorn and contempt.

18 THE FREEMAN January A New Breed of Directors Co-determination in the true par ity sense exists only in the coal and steel industries. The law imposing the co-determination effected far reaching changes in the composition of the boards of directors, in the be havior of board members, and in company policies, which in turn af fect not only the employees but also the public at large. To the labor union agents on a board, the election of new stock holder-members is of utmost impor tance. As it is most difficult to be elected without the consenting votes of the labor,..directors, only candi dates with proven willingness to "cooperate" can be expected to be elected to the board. Surely, the chairman of the board usually se lects and recommends the candi dates. But he must be ever mindful that they must be acceptable to the labor-directors. The selection there fore concentrates on "friendly" can didates whose board behavior can be surmised in advance.

In every board meeting and with every vote the owner-director may jeopardize his professional future. If he aspires to be elected to the boards of other companies he faces the risk that the union agents on the board may be in contact with other agents on other boards and bar his election. The union may even black -list him, which would signal the end of his career. Surely, the capabilities and tal ents on the boards of directors in the coal and steel industries have changed materially. Young owner directors work diligently to curry the favors of labor-directors in order to enhance their professional ca reers. The labor-directors are ex pected to be uncompromisingly loyal to their unions, and owner-directors are expected to be cooperative with the labor-directors. At any rate, the former must at least be depended upon to be very silent and sympa thetic to the. actions of labor-direc tors. It cannot be surprising, there fore, that any and all insider criticism of parity co-determination has been muzzled and the freedom of speech, at least for owner-directors, abridged.

A new breed of directors is crowding the boards jealously guarding the interests of employees as inter preted by the labor-directors. Em ployee benefits are always para mount-even if they should be very costly, inflict losses, or even jeop ardize the future of the company. In final analysis, massive government subsidies can be expected to cover the losses of an ailing coal and steel industry. The law sought to avoid paralyz ing situations in which both blocs are deadlocked and are unable to make management decisions by cre ating the position of a "neutral member." As such situations occur rather frequently, excessive de~ 1982 CO-DETERMINATION IN WEST GERMANY 19 mands are made on one person who usually has little or no professional knowledge. He is expected to resolve difficult issues on which the two di rector blocs cannot agree, which leads him to make very few resolute deci sions. He may simply abstain from voting or alternate his vote between the owner-directors and the labor directors in order to retain the good will of both sides. After all, he, too, would like to be reelected.

Co-determination has seriously impeded the decision-making abil ity of the board. There is little de mand for expert knowledge of the enterprise or even the industry. A member must be loyal to the labor team and, as owner-director, be sympathetic to the other team. The boards which in bygone days used to guide the affairs of their enterprises now are spending considerable time and energy on the discussion and so lution of labor union problems. If enterprise questions are to be re solved, their solution invariably is made dependent upon the satisfac tion of employee demands. Transac tion costs are greatly increased, in vestment returns are reduced, and the profitability of the enterprise is sacrificed anew to union objectives. And all such effects are the bitter fruit of many months or even years of feverish deliberations and nego tiations. At times, heterogeneous composi tion .of the .owner-bloc compounds the co-determination problems.

Twenty-five·.per cent of the stock of the well-known Krupp enterprises in Bochum, for instance, is owned by the government of Iran. In June of 1981 the Iranian representative on the board 'single-handedly pre vented a needed reorganization be cause "Islamip principles elevate the fate of man above economic issues." Offsetting the vote of the neutral di rector, the lone Iranian vote suc ceeded in paralyzing the board. A similar. heterogeneity of the owner bloc can be anticipated as a result of certain union demands. In recent rounds of bargaining the unions insisted on profit sharing that would transfer company profits or preferably company shares to an employee fund managed by the la bor union. Workers are to become owners of stock that is managed by the union, which in turn entitles its agents to be elected to the board as owner-directors. Bargains Without Bargaining Co-determination has changed the nature of coHective bargaining. The notion that both sides meet at the bargaining table in order to come to amicable agreements on employ ment conditions cannot hold true if both sides ar~ represented by or are loyal to a labor union. There are no two sides if the members of the ex ecutive board. who are to represent the interests of the company can be 20 THE FREEMAN January appointed only with union support.

When difficult decisions must be made by the board, such as a reduc tion of output or the closing of a plant, a temporary impasse can be ; expected which, in the end, will be resolved at the expense of owners. The severance pay to employees, even though they may readily find em ployment elsewhere or draw gener ous unemployment compensation, may reach 40,000 DM (some $17,600) per person. If the company cannot bear such expense, the board is ex pected to petition and pressure the government for more subsidies, for protection from cheap foreign com petition, or for government guaran tees of sales at higher prices. During the 1950s and 1960s when coal min ing was laboring under the compet itive pressures of cheap oil imports, it became the most subsidized West German industry. During the 1970s also the steel industry needed ex tensive government aid and sup port. Public discussion of co-determi nation in Germany usually is lim ited to the confrontation between owners and employees, to the pros and cons of parity power between owner-management and labor unions. Little is said about the eco nomic, social and political effects of co-determination, or about its moral and ideological aspects. And little mention is made of countless con sumers whose economic well-being depends on the industries, and mil lions of taxpayers who are called upon to subsidize the companies.

Parity co-determination has not brought peace to the labor markets. A long and ugly strike shut down the steel industry from November 1978 to January 1979. The key issue was the union demand for a 35-hour work week. The strike was settled with a compromise that retained the 40-hour work week, but granted in creased holidays and vacations to employees. Co-Determination is Expropriation Co-determination brings into question the very foundation of the private property order. It grants equal rights of property to individu als who did not provide it. If labor unions or their agents have equal rights of management they are equal partners in ownership. No new rights are created; existing property rights are merely redistributed, that is, seized by political force from the owners and given to labor unions. An inevitable consequence of such a seizure is the im.mediate closure of all new sources of equity capital. No one can be expected to invest or reinvest his savings in an enterprise in which someone else has parity rights to his investments. No one is likely to risk his capital in economic production if he bears all the risk and someone else has equal rights not only to the returns but to the 1982 CO-DETERMINATION IN WEST GERMANY 21 capital itself. Any industry with parity co-determination, therefore, loses its access to the equity market and is relegated to the credit market or to the public treasury.

. The ever-rising operating costs not only depress the returns on the cap ital invested, but sooner or later lead to losses which in turn cause the in dustry to constrict. Despite the mil itant union opposition to production curtailments, to shut-downs of plants and facilities, the number of jobs tends to shrink continually and out put declines. The industry loses its ability to adjust to changing market constellations and to compete effec tively with foreign enterprises working without the co-determina tion handicap. If it were not for new government intervention in order to effect the rescue of co-determination industries, such as·government sup port prices, import restrictions or generous subsidies, the co-determi nation industries would self-de struct, giving way to foreign com petition. Unseen Consequences In the short run the employees of a company with parity co-determi nation may enjoy the benefits they reap from union work rules, from less work and higher pay, from management limitations and costly fringe benefits. They may savor the consumption of investors' capital and the returns that otherwise go to them. But when the industry begins to stagnate or: even constricts, which is unavoidabl~ after a while, the co determination benefits give way to co-determination losses. As plants and mines shut down permanently, unemploymeIjLt rises, especially among young, workers. Moreover, it becomes increasingly difficult to find and tap new sources of benefits.

When, as a· last resort, the public treasury becom.esthe primary source, a national I ,economic "crisis" or "emergency" needs to be declared to come to the I, rescue of the co-deter mination industries. The "emergency" proves to be se vere and tenacious. It just won't go away; but it can be alleviated tem porarily through bigger and bigger subsidies. To' listen to the moaning of the co-determination directors is most interesting and amusing: "The Arabs are qausing the energy cri sis." "The U.S. dollar is too weak." "It is too strong." "We are running out of cheap, energy" -and so on. The blame invariably is laid on some extraneous factor, preferably abroad. The public is paying a co-deter mination priqe in the form of higher goods prices~ }Vhichsignal lower lev els of living. iWhen the public trea sury must finally be tapped to sus tain the industry and pay the benefits, th¢ public pays again through higher taxes or, in the case of debt monetization, through more inflation. ADm finally, the people in 22 THE FREEMAN neighboring countries trading with the co-determination country are adversely affected as trade and com merce are shrinking and trade bar riers are rising. Everyone loses be cause the co-determination industry , no longer functions efficiently and is consuming or misusing economic re sources.

Eroding the Market Order The private-property competitive order depends on the unhampered choices and decisions of countless individuals seeking to satisfy their wants and desires. Entrepreneurs as managers or investors guide the production process which is a con tinuous process of adjustment of eco nomic resources to the whims and wishes of consumers. Successful ad justment generates profits, ineffi cient operation inflicts losses. Labor-directors who are not guided by profit and loss and are unaffected by the consequences of their actions, are hampering or thwarting the ad justment process. Intentionally or instinctively they are sabotaging the market process in order to preserve or expand their own economic power and ultimately to replace the mar ket order with a political command system, that is, with socialism. It is a fact verifiable in words and deeds that many labor-directors fa vor a command system in which they themselves would man the central controls. Their ideological bent raises the question whether their board decisions, aiming to thwart market adjustments and to turn profits to losses, may not be designed to prove the "failure" of the market order and to promote the command order.

West German labor unions are playing an ominous game. They are ruthiessly employing political power to gain economic power, which in turn is paving the way for a political command order. It must not be for gotten that parity co-determination came into existence by sheer labor union intimidation. On April 10, 1951, the Bundestag cast its final vote against it. But Carlo Schmid, the speaker of the House, refusing to announce the outcome of the vote, called the leadership into special session in order to inform it anew of the seriousness of the situation. With the union posted for a general strike he made the Bundestag vote again until it agreed to co-determination. The "democratization" of industry thus was born by antidemocratic means. The German miracle of economic recovery after World War II never touched the coal and steel indus tries. On the contrary, they mili tated against it and vitiated it until the miracle gave way to stagnation and decline. The ideology and policy that gave rise to co-determination, and other government intervention in the private-property competitive order, must answer for the decline.' Frank Chodorov WHEREVER two boys swap tops for marbles, that is the market place.

The simple barter is in terms ofhu man happiness no different from a trade transaction involving banking operations, insurance, ships, rail roads, wholesale and retail estab lishments; for in any case the effect and purpose of trade is to make up a lack of satisfactions. The boy with a pocketful of marbles is handicapped in the enjoyment of life by his lack of tops, while the other is similarly discomfited by his need for marbles; both have a better time of it after the swap, while their respective sur pluses before the swap are nui sances. In like manner, the Detroit worker who has helped to pile up a heap of automobiles in the ware house is none the better off for his efforts until the product has been shipped to Brazil in exchange for his morning cup of coffee. Trade is nothing but the release of what one has in abundance in order to obtain some other thing he wants. It is as perti nent for the· buyer to say "thank you" as for the seller.

The market place is not necessar ily a specific site, although every trade must take place somewhere. It is more exactly a system of channel ing goodsor services from one worker to another, from fabricator to con sumer, from where a superfluity ex ists to where there is a need. It is a method devised by man in his pur suit of happiness to diffuse satisfac tions, and operating only by the hu man instinct of value. Its function is not only to transfer ownership from one person tp another, but also to direct the current of human exer tion; for the· price-indicator on the chart of the market place registers the desires <;>f people, and the inten sity of thes¢, desires, so that other 23 24 THE FREEMAN January people (looking to their own profit) may know how best to employ them selves. Living without trade may be pos sible, but it would hardly be living; at best it would be mere existence.

Until the market place appears, men are reduced to getting by with what they can find in nature in the way of food and raiment; nothing more. But the will to live is not merely a crav ing for existence; it is rather an urge to reach out in all directions for a fuller enjoyment of life, and it is by trade that this inner drive achieves some measure of fulfillment. The greater the volume and fluidity of market place transactions the higher the wage-level of Society; and, inso far as things and services make for happiness, the higher the wage-level the greater the fund of happiness. Policing the Market The importance of the market place to the enjoyment of life is il lustrated by a custom recorded by Franz Oppenheimer in The State. In ancient times, on days designated as holy, the market place and its ap proaches were held inviolable even by professional robbers; in fact, stepping out of character, these rob bers acted as policemen for the trade routes, seeing to it that merchants and caravans were not molested.

Why? Because they had accumu lated a superfluity of loot of one kind, more than they could consume, and / the easiest way of transmuting it into other satisfactions was through trade. Too much of anything is too much. Frank Chodorov (1887-1966) taught in and later directed the Henry George School of Social Science and edited the School's paper, The Freeman. Later he founded his own journal, analysis, eventually merg ing it with the Washington newslet ter, Human Events. In 1954-55 he edited The Freeman for The Foun dation for Economic Education, and continued to appear in later issues of the journal. This article, reprinted from the July 1956 issue, is especially pertinent in light of the trade wars plaguing the world today. The market place serves not only to diffuse the abundances that hu man specialization makes possible, but it is also a distributor of the mu nificences of nature. For, in her in scrutable way, nature has spread the raw materials by which humans live over the face of the globe; and unless some way were devised for distributing these raw materials, they would serve no human purpose.

Thus, through the conduit of trade the fish of the sea reach the miner's table and fuel from the inland mine or well reaches the boiler of the fish ing boat; tropical fruits are made available to northerners, whose iron 1982 THE HUMANITY OF TRADE 25 mines, in the shape of tools, make production easier in the tropics. It is by trade that the far-flung ware houses of nature are made accessi ble to all the peoples of the world and life on this planet becomes that much more enjoyable. We think of trade as the barter of tangible things simply because that is obvious. But a correlative of the exchange of things is the exchange of ideas, of the knowledge and cul tural accumulations of the parties to the transaction. In fact, embodied in the goods is the intelligence of the producers; the excellent woolens im ported from England carry evidence of thought that has been given to the art of weaving, and Japanese silks arouse curiosity as to the ideas that went into their fabrication. We acquire knowledge of people through the goods we get from them. Aside from that correlative of trade, there is the fact that trading involves hu man contacts; and when humans meet, either physically or by means of communication, ideas are ex changed. "Visiting" is the oil that lubricates every market place oper ation.

It was only after Cuba and the Philippines were drawn into our trading orbit that interest in the Spanish language and customs was enlivened, and the interest in creased in proportion to the volume of our trade with South America. As a consequence, Americans of the present generation are as familiar with Spanish dancing and music as their forefathers, under the influ ence of commercial contacts with Europe, were at home with the French minuet and the Viennese waltz. When ships started coming from Japan, they brought with them stories of an interesting people, sto ries that enriched our literature, broadened our art concepts, and added to our operatic repertoire. It is not only that trading in itself necessitates some understanding of the customs of the people one trades with, but that the cargoes have a way of arousing curiosity as to their source, and ships laden with goods are followed with others carrying explorers of ideas; the open port is a magnet for the curious. So, the ten dency of trade is to break down the narrowness of provincialism, to liq uidate the mistrust of ignorance. So ciety, then, in its most comprehen sive sense, inCludes all who for the improvement •of their several cir cumstances engage in trade with one another; its. ideational character tends toward ,a blend of the hetero geneous cultures of the traders. The market place unifies Society.

The Trading Community The concentration of population determines the character of Society only becausecontinguity facilitates exchange. But contiguity is a rela tive matter, depending on the means 26 THE FREEMAN January for making contacts; the neutraliza tion of time and space by mechani cal means makes the whole world contiguous. The isolationism that breeds an ingrown culture, and a mistrust of outside cultures, melts away as faster ships, faster trains, and faster planes bring goods and ideas from the great beyond. The pe rimeter of Society is not fixed by po litical frontiers but by the radius of its commercial contacts. All people who trade with one another are by that very act brought into commu nity. The point is emphasized by the strategy of war. The first objective of a general staff is to destroy the market place mechanisms of the en emy; the destruction of his army is only incidental to that purpose. The army could well enough be left in tact if his internal means of com munication were destroyed, his ports of entry immobilized, so that spe cialized production, which depends on trade, could no longer be carried on; the people, reduced to primitive existence, thus lose the will to war and sue for peace. That is the gen eral pattern of all wars. The more highly integrated the economy the stronger will be the nation in war, simply because of its ability to produce an abundance of both mili tary implements and economic goods; on the other hand, if its ability to produce is destroyed, if the flow of goods is interrupted, the more susceptible to defeat it is, because its people, unaccustomed as they are to primitive conditions, are the more easily discouraged. There is no point to the argument as to whether "guns"

or "butter" are more important in the prosecution of war. Intervention Is War It follows that any interference with the operation of the market place, however done, is analogous to an act of war. A tariff is such an act. When we are "protected" against Argentine beef, the effect (as in tended) is to make beef harder to get, and that is exactly what an in vading army would do. Since the duty does not diminish our desire for beef, we are compelled by the dimin ished supply to put out more labor to satisfy that desire; our range of possibilities is foreshortened, for we are faced with the choice of getting along with less beef or abstaining from the enjoymAnt of some other good. The absence of a plenitude of meat from the market place lowers the purchasing power of our labor. We are poorer, even as is a nation whose ports have been blockaded. Moreover, since every buyer is a seller, and vice versa, the prohibi tion against their beef makes it dif ficult for Argentineans to buy our automobiles and this expression of our skills is constricted. The effect of a tariff is to drive a potential buyer out of the market place. The 1982 THE HUMANITY OF TRADE 27 argument that "protection" provides jobs is patently fallacious. It is the consumer who gives the worker a job, and the consumer who is pre vented from consuming might as well be dead, as far as providing produc tive employment.

Incidentally, is it jobs we want, or is it beef? Our instinct is to get the most out of life with the least expen diture of labor. We labor only be cause we want; the opportunity to produce is not a boon, it is a neces sity. Neither the domestic nor the foreign producer "dumps" anything into our laps. There is a price on ev erything we want and the price is always the weariness of toil. What ever causes us to put out more toil to acquire a given amount or kind of satisfactions is undesirable, for it conflicts with our natural urge for a more abundant life. Such is a tariff, an embargo, an import quota or the modern device of raising the price of foreign goods by arbitrarily lower ing the value of our money. Any re striction of trade, internal or exter nal, does violence to a man's primordial drive to improve his cir cumstances. The Seeds of Conflict Just as trade brings people to gether, tending to minimize cultural differences, and makes for mutual understanding, so do impediments to .trade have the opposite effect. If the customer is always "right," it is easy to assume that there is some thing wrong with the non-buyer. The faults ofthose'who refuse to do busi ness with us are accentuated not only by our loss but also by the sting of personal a~ront. Should the boy with the tops refuse to trade with the boy who· has marbles, they can no longer play together; and this de socialization can easily stir up an argument over the relative demerits of their dogs: or parents. Just so, for all our protestations of good neigh borliness, the Argentinean has his doubts about. our intentions when we bolt our commercial doors against him; compelled to look elsewhere for more substantial friendship, he is inclined to think less of our national character and culture.

The by-product of trade isolation ism is the feeling that the "outsider" is a "different kind" of person, and therefore inferior, with whom social contact is at least undesirable if not dangerous. To what extent this seg regation of people by trade restric tions is the •cause of war is a moot question, but! there can be no doubt that such restrictions are irritants that can give other causes for war more plausibHity; it makes no sense to attack a good customer, one who buys as much of our products as he can use and pays his bills regularly. Perhaps the) removal of trade re strictions throughout the world would do mote for the cause of uni versal peace than can any political 28 THE FREEMAN January union of peoples separated by trade barriers; indeed, can there be a via ble political union while these bar riers exist? And, if freedom of trade were the universal practice, would a political union be necessary?

Testing the Logic Let us test the claims of "protec tionists" with an experiment in logic. If a people prosper by the amount of foreign goods they are not permitted to have, then a complete embargo, rather than a restriction, would do them the most good. Continuing that line of reasoning, would it not be better all around if each community were hermetically sealed off from its neighbor, like Philadelphia from New York? Better still, would not every household have more on its table if it were compelled to live on its own production? Silly as this re ductio ad absurdum is, it is no sillier than the "protectionist" argument that a nation is enriched by the amount of foreign goods it keeps out of its market, or the "balance of trade" argument that a nation pros pers by the excess of its exports over imports. Yet, if we detach ourselves men tally from entrenched myths, we see that acts of internal isolationism such as described in our syllogism are not infrequent. A notorious instance of this is the French octroi, a tax levied on products entering one district from another. Under cover of "quarantine" regulations, Flo~ida and Cali fornia have mutually excluded cit rus fruits grown in the other state.

Labor unions are violent advocates of opulence-through-scarcity, as when they restrict, by direct vio lence or by laws they have had en acted, the importation of materials made outside their jurisdiction. A tax on trucks entering one state from another is of a piece with this line of reasoning. Thus, the "protectionist" theory of fence-building is internal ized, and in the light of these facts our reductio ad absurdum is not so farfetched. The market place, of course, scoffs at such scarcity-mak ing measures, for it yields no more than it receives; if its offerings are made scarce· by trade restrictions, that which remains becomes harder to get, calls for an expenditure of more labor to acquire. The wage-level of Society is lowered. The Labor Theory of Value-and Prosperity The myth of "protectionism" rests on the notion that the be-all and end-all of human life is laboring, not consumption-and certainly not lei sure. If that were so, then the slaves who built pyramids were most ide ally situated; they worked much and received little. Likewise, the Rus sians chained to "five year plans"

have achieved heaven on earth, and so did the workers who, during the depression, were put to moving dirt 1982 THE HUMANITY OF TRADE 29 from one side of the road to the other. Extending this notion that exertion for the sake of exertion is the way to prosperity, then a people would be most prosperous if they all labored on projects with no reference to their individual sense of value. What is euphemistically called "war produc tion" is a case in point; there is in fact no such thing, since the purpose of production is consumption; and it is not on record that any worker built a battleship because he wanted it and proved his craving by will ingly giving up anything in ex change for it. Keeping in mind the exaltation of laboring, would not a people be most uplifted if all of them were set to building battleships, nothing else, in return for the necTrade and Productivity essaries that would enable them to keep building battleships? They cer tainly would not be unemployed.

Yet, if we •base our thinking on the natural urge of the individual to better his circumstances and widen his horizon,Qperating always under the natural law of parsimony (the most for the least effort), we are compelled to ,the conclusion that ef fort which does not add to the abun dance of the market place is useless effort. Society thrives on trade sim ply because trade makes specializa tion possible, specialization in creases output, and increased output reduces the cost in toil for the satis factions me~l'live by. That being so, the market p[ace is a most humane institution. , IDEAS ON LIBERTY THE RULE to remember is that what hurts consumers hurts business, and what hurts business hurts proficiency.• After all, what is profi ciency? Simply the power to produce. The power to produce is best de termined by free trade, and not by bureaucratic decree. The power to produce is a corollary of the power to trade.' Thus the more trade the more production, and the more production the more trade.

Protection, on the other hand, is aimed atthe power to trade. In this, the protectionist government does indeed aid:some industries, but only at the expense of all industry. Under protection, all domestic industry is deprived of markets at home and abroad. All domestic industry is hurt by the higher costs of labor and materials. Thus by restricting the power to trade and locking in inefficiency, the protectionist government restricts the power to produce. This means, in turn, that consumers will. have less, for production constitutes the sole means of consumption. The power to produce, after all, is the power to consume. WILLIAM H. PETERSON, "Barriers to World Commerce"

Brian Summers 30 My NEIGHBOR JOE is a friendly chap with a sharp eye on current affairs. Thus, one Saturday morning after I had mowed the lawn, I strolled over to get his considered views on the state of the world. "This country faces a lot of prob lems," he told me as he slid under his car to change the oil. "Every thing seems to be falling apart. Last night I was an hour late getting home because the subway broke down. I don't know why they can't maintain those trains any better." "You seem to be doing a pretty goodjob maintaining your car," I ob served. "Sure," he said. "I have to keep this car in good condition. I want to sell it next year." "Too bad we can't sell the sub ways." ''What?'' he asked, poking his head from under the chassis. "Suppose you held a share in a privately owned subway. Wouldn't you want the managers to maintain the value of your share by keeping the trains in good working order?"

"Sure. If they didn't, I-would sell my stock." "Of course. And as people sold their shares, the price of the company's stock would fall. This could lead to a stockholder revolt or corporate take over. Either way, management would Mr. Summers is a member of the staff of The Foun dation for Economic Education.

THEY SOLVE TOMORROW'S PROBLEMS 31 be compelled to fix the trains. As a general rule, when things are pri vately owned, people try to main tain their value by anticipating fu ture maintenance problems." "What about the apartments across town?" he asked as he reached for an oil filter. "Why don't the owners maintain them?" "Rent controls have destroyed the incentive," I answered. "The owners know that controls will keep them from getting higher rents, even if they make extensive repairs. Fur thermore, they can't get full market value if they try to sell. Who wants to buy a rent controlled apartment building, even if it is in perfect con dition?" "A free market may encourage people to maintain their own prop erty," Joe allowed, "but this country faces some bigger problems. We are running low on natural resources. Each year, for instance, loggers cut down more trees." "Yes," I agreed, "but each year forest product companies plant more trees. They try to maintain the value of their land, the same as you try to maintain the value of your car. Here again, private ownership is the key to heading off tomorrow's problems."

"What about the energy short age?" he asked as he opened a can of oil. "Private owners don't go around planting more oil." "Yes, but with price controls being lifted, they do 'go around looking for more oil. AnQ. you and I may be helping in the!search." "How is that?" "When we save our money, we make more capital available for pri vate investment. The money you put into yourban~ may help provide the loan capital. oil companies need to lease equipment." "I never thought of it that way. I am just trying to make some invest ments to provide for my retirement." "Sure. But by trying to provide for your own future, you help solve to morrow's prOblems." "Come again?" "Well, consider your mutual fund. The fund's managers try to antici pate tomorrow's problems, and try to invest in the corporations most likely to profit by solving these problems. For instance, some of your money may I be furnishing equity capital for ani oil exploration firm."

"You make it sound as if free en terprise will solve all our problems." "No, people will have problems under any social system. But we should examine the incentives in herent in each system. Some incen tives tend to create problems; others will solve them." "This is all very new to me," Joe said as he closed the hood. "I'll have to think about it." , THE CIVIL WAR was a watershed in American economic history. During the war, and the Reconstruction of the South which followed, the stage was set for major economic develop ments. The political nationalization which occurred provided the frame work for large-scale economic devel opment. A nationwide rail trans portation network was soon formed. Interstate commerce grew rapidly, and some businesses became nation wide in scope. Foreign investment and domestic accumulation pro vided the capital for large indus tries. It would be a mistake, however, to attribute these developments to the warfare itself. At least, that is not my meaning. Warfare is destructive Dr. Carson has written and taught extensively, spe cializing in American intellectual history. He is the author of several books and a frequent contributor to The Freeman and other scholarly Journals.

32 of capital, of materials, and of man power. It has been shown, too, that the most immediate impact of the Civil War was a decline in the growth of production of consumer goods, and that it took several years before the rate of growth that had been going on before the war was achieved again. Certainly, the devastation and political disruptions within the South were anything but conducive to eco nomic development. Rather, my point has to do with the control and disposition of politi cal power. The secession of the South brought a new political party, the Republican party, to power. The vic tory of the North and the policies followed during Reconstruction con solidated the Republican party in power for several decades. Involved in this development was a basic shift of political power from the South to the Northeast and Midwest. Most THE CIVIL WAR AND POLITICAL NATIONALIZATION 33 important, it meant a change in the ends for which the power of the United States government was to be used.

The Gilded Age An understanding of the shift in the role of government in the econ omy is critical to the interpretation of the period which historians have long called the Gilded Age. But by .whatever name it may be called, the period from 1870 to 1910, or there abouts, left a distinctive mark on America. It was the age of the great entrepreneurs, of John D. Rockefel ler, Jay Gould, Philip Armour, Le land Stanford, Andrew Carnegie, James J. Hill, Jim Fiske, Collis P. Huntington, Cornelius Vanderbilt, J. P. Morgan, and many others. It was an age of spectacular economic developments: of great rail systems thrust across the plains, over the mountains, and to the Pacific, of the emergence of large industrial cor porations, of the growth of large cit ies as manufacturing and commer cial centers, and of the opening up of millions of acres of land to farming and ranching. These dramatic developments provided the substance, such as ex isted, for a number of myths, some of which have been given generic names, such as the Robber Barons myth, the Horatio Alger myth, and so on. Probably, the most persistent myth. is the one that the economic thrust in the. latter part of the nine teenth century was simply a result of freedom. This position was force fully stated by Vernon L. Parring ton in these words: It was an abundant harvest of those freedoms that America had long been struggling to achieve, and it was making ready the ground for later harvests that would be less to its liking. Freedom had become individualism, and individual ism had becom~ the inalienable right to pre-empt, to exploit, to squander ....

From the sober testraints of aristocracy, the old inhibitions of Puritanism, the niggardliness 'o:f an exacting domestic economy, it swung far back in reaction, and with the discovery of limitless oppor tunities for exploitation it allowed itself to get drunk. Figures of earth, they fol lowed after their own dreams. Some were builders with grandiose plans in their pockets; others were wreckers with no plans at all. It. was an anarchistic world of strong, capable men, selfish, unen lightened, amoral-an excellent exam ple of what human nature will do with undisciplined freedom.! The other side of the coin of this myth of unlimited economic freedom was that it provided a justification for government regulation, restric tion, and control of the economy. Freedom must' be curbed, obviously, if it produces such results as Par rington and other mythmakers de scribe. Freedom is nothing short of a destructive :menace by their inter pretation.

There is a profound misunder34 THE FREEMAN January standing of the free market and free enterprise entangled in this myth. What some, at least, of the myth makers are leaving out of account is that government was intervening in the economy during these years, and doing so to a significant and some times determinate extent. There are two distinct types of government in tervention. One is when govern ment grants favors to some kinds of economic development, promotes some industries, grants class privi leges, and aids and abets in the es tablishment of monopolies. The other type is government regulation and restriction of economic undertak ings. Both types of intervention are in terferences with the market. Each produces its own kinds of distor tions, favors some and disadvan tages others. That some business men, for example, may seek and get government privileges should not be taken to mean that such things are in accord with freedom. That much of the intervention between 1860 and 1900 was of the first type means as surely that there was intervention and distortion as it would if the sec ond type had prevailed.

CurbingIntervention The main political thrust of the first half of the nineteenth century was to get the United States govern ment out of involvement with or in tervention in the economy. There were two main elements behind this thrust. One was that many of the intellectual and political leaders fa vored a free market in principle. The other was that the South (or slave states, as they became known, in cluding not only those states which would eventually be a part of the Confederacy but also Maryland, Delaware, Kentucky, and Missouri) both generally opposed intervention by the United States government in the economy and favored a free mar ket. The South was the major ex porting region during this era, fa vored the development of inter national trade, and looked toward Europe both as a market for its goods and as a source of imports. And, the South dominated na tional politics from 1800 to 1860, or, at least, Southerners did. Southern ers served in the Presidency for ap proximately 41 years from 1801 to 1861. There were only two Chief Justices of the Supreme Court from 1801 to 1864, John Marshall of Vir ginia and Roger Taney of Maryland.

Southerners served as Speaker of the House of Representatives for ap proximately 49 years between 1801 1861. SouthernDominance How or why the South should have been so dominant politically is not readily apparent. From the outset, the South had a minority. If disfran chised blacks had not been counted 1982 THE CIVIL WAR AND POLITICAL NATIONALIZATION 35 in the census, their minority status would have been even more pro nounced. It was the prominence· of the South in one political party that enabled Southerners to exercise their dominant political role. The Jeffer sonian Republican party and the Jacksonian Democratic party, which succeeded it, were in control of the government for all but a few years from 1801 to 1861. While both these parties, if they be considered dis tinct from one another, had a na tional following, their greatest strength was in the South. So it was that Southerners maintained their leverage over the government dur ing these years.

So it was, too, that the opposition to using the power of the general government to develop a nationally integrated economy triumphed dur ing the era before the Civil War. Both the Jeffersonians and Jackson ians were basically states' rights parties. Both generally opposed gov ernment intervention and favored free trade and free markets. J effer son's party had been born out of op position to what might be called the economic nationalism of Hamilton's policies. Jackson's party was shaped in opposition to the National Repub licans and Whigs, at least in part, in opposition to Henry Clay's "Ameri can System" and John Quincy Ad ams' nationalist ideas. The critical economic issues from 1800 down to about 1845 were the protective tariff, a national banking system, and internal improvements (roads and canals mainly, to that date). These were joined from about 1845 onward: QY immigration, slav ery expansion,: and railroad promo tion for internal improvement. Gen erally, the J efl'ersonians and Jack sonians opposed a protective tariff, a national bank, federal appropria tions for internal improvements, and, in the years 'before the Civil War, favored the expansion of slavery. The opposition to the national bank and federally aided internal improve ment reached· its peak during Jack son's presidency, and is symbolized by his veto of, the Maysville Road Bill and the Bin for rechartering of the Second United States Bank.

Jackson got. caught in political crossfires on the tariff question, but his followers generally opposed the protective tariff as well. Seeds of Conflict Those who would use the power of the United Sta~es government to de velop a national economy were gen erally thwarted up to the Civil War, and undoubtedly they were more than a little frustrated. Some histo rians have maintained that the frustration mOUl1tedin the years just before the war. Charles A. Beard held that it wasi.Northern capitalists ranged against 'Southern slavehold ers that precipitated the conflict. The desire for a protective tariff did ap36 THE FREEMAN January parently spread after the depression which began in 1857. There is no doubt that the necessity for expand ing slavery if the South was to re gain its parity in the Senate became more pressing after 1850. That slaveholders (actual and potential) suffered from a capital (or credit) crunch attributable mainly to the rising cost of slaves can be, and has been, documented ad nauseam. That made them competitors, at the least, with Northern industrialists for capital.

But it is neither my purpose to make an economic interpretation of a portion of United States history nor to explain the coming of the Civil War. Rather, I· wish to show the change· in direction that took place by way of political centralization or nationalization during and after the war. To do that at all effectively, it needs to be done against the back ground of what had happened before the war. Sectional Interests The main features ofpre-Civil War America were: widespread economic freedom, decreasing intervention in the economy by the national govern ment, and developing sectionalism, regionalism, and localism. The sec tionalism was not a consequence of economic freedom, but of slavery, which is its opposite. The regional ism and localism were, however, at least according to its critics, a product of non-involvement by the United States. One thing is clear: while the Constitution removed or forbade the erection of political obstacles to a common market in the United States, the general government did very lit tle to overcome the natural obsta cles to a nationwide market. A case can be made that building roads, ca nals, and railroads is not the busi ness of government, and that posi tion had vigorous advocates during these years. Also, it should be noted that much building of transporta tion routes and linking of regions was done during this period, both by private investors and with the aid of state governments. But for virtually the whole period they were links from the inland to seaports, not con nections between inland areas.

Aside from the difficulties of transportation, one of the greatest obstacles to a national market dur ing much of this period was the ab sence of a generally agreed upon and acceptable currency. To put it more precisely, a good many differ ent kinds and varieties of money, or would be money, vied to become the currency. The Constitution seemed to bend the United States toward a gold and silver coin currency. That ran into trouble early on, however, because of Hamilton's effort to es tablish bimetallism. He set a ratio of 15 to 1 between silver and gold. This undervalued gold and overval ued silver. In consequence, only sil1982 THE CIVIL WAR AND POLITICAL NATIONALIZATION 37 ver was presented to the mint for coining. But that ran into difficul ties, too, because the American dol lar was slightly lighter than the Spanish silver dollar. It tended to leave this country to be exchanged for the Spanish dollar. The mint had little to employ it, so the ever frugal Jefferson had it closed in 1806.2 Thereafter, until the 1830s, Ameri cans relied mainly on foreign coins for minted money.

Government Control of Banking Meanwhile, banks took up the slack by issuing paper money which was sometimes redeemable in spe cie. The First United States Bank was chartered in 1791 and lasted until 1811. The Second United States Bank was chartered in 1816 and ex pired in 1836. During their tenure, these banks usually supplied a com mon currency for the United States, one limited in its quantity by law and redeemable ordinarily in specie. Further, they held in check the is sues of paper money by state banks by discounting their paper money. Thus, the United States Banks pro vided a standard of measurement of the value of all circulating media of exchange in the country. With the demise of the second bank there was no longer any generally acceptable measure of the worth of state bank issues. Before its demise, however, a new mint had been established by the United States, and a 16 to 1 ratio between gold and silver promul gated. This overvalued gold and un dervalued silver. In consequence, gold was brought in for minting. 3 Whether thelJJnited States then had a gold standard may be debatable, but it is certain that thereafter sil ver dollars,. ,following Gresham's Law, did not remain long in circu lation. After·. t~e gold discoveries of the late 1840~, even the subsidiary silver coins had to be debased to keep them in circulation.

MarketPossiibilities If governments had withdrawn entirely from the monetary field, ex cept for specifying in what forms they would ac~ept payment of taxes and for land, i~ is quite possible that a common currency would have de veloped in the United States. Pri vate mints could have supplied the coins, and the troublesome question of a fixed ratio between precious metals could·.nave been settled by having none .•The weight in ounces of what metal \could have been en graved on all cQins. Merchants could have set their! prices, and adjusted them from time to time, in terms of ounces of gold, silver, copper, or what have you. Paper money might even have circulated with a guarantee of redeemability certified by 100 per cent reserve in,specie backing it. (A major difficulty! with this scenario is that there would be little profit, if 38 THE FREEMAN January any, for the mints and none, so far as I can see, for the issuers of paper money. Counterfeiting and fraud might not be prohibitive difficulties, but they would remain as problems nonetheless.) There was a movement, of sorts, against banks and against their is suance of paper money which mounted in the 1830s and probably reached a peak in the 1840s.

4 It got underway with Jackson's veto of the bill to recharter the Second Bank of the United States. Animosity mounted following Jackson's issu ance of the Specie Circular, requir ing the payment for government lands in specie. There were numer ous bank failures as banks were pressed to redeem their paper money in specie. President Martin Van Buren proposed an Independent Treasury, which was eventually passed into law in the 1840s. This meant that money received and held by the United States would not go into the banking system (or lack of system) at all, and could not, there fore, be used by banks as a reserve against their paper money. Several states in the West adopted constitu tional provisions prohibiting their legislatures to charter banks. Oth ers adopted strenuous limitations upon banking. Even so, governments remained entangled in the monetary situa tion. The federal government was minting gold coins and had set a ratio between gold and silver. Most states continued to charter banks which could and did issue paper money. Those states that did not were usually flooded with paper money from surrounding states. The paper money was not legal tender, of course, but it did pass as currency, or at least some of it did. It is prob ably true that good money will drive bad money out of circulation, in the absence of tender laws, but while it is doing so the paper continues to pass as currency. Moreover, during the 1840s and 1850s, as well as ear lier, there were usually plenty of new banks to put out some more.

Besides, some of the paper was not bad money, and it was not readily apparent which was which in many cases. In Massachusetts, the currency was stabilized by a consorti urn of bankers. In New York, the state en forced a reserve system that worked tolerably well. Elsewhere, there was usually chaos. A contemporary de scribed the situation this way: In the West, the people have suffered for years from the issues of almost every state in the Union, much of which is so irredeemable, so insecure and so unpop ular as to be known by opprobrious names ... There the frequently worth less issues of the State of Maine, the shinplasters of Michigan, the wildcats of Georgia, of Canada and Pennsylvania, the red dogs of Indiana and Nebraska, the miserably engraved notes of North Carolina, Kentucky, Missouri and Vir1982 THE CIVIL WAR AND POLITICAL NATIONALIZATION 39 ginia and the not-to-be-forgotten stump tails of Illinois and Wisconsin are mixed indiscriminately with the par currency of New York and Boston.... 5 For Lack of a CommonCurrency The main point that I would make is that there was considerable diffi culty in having a common market without a common currency, that trade between manufacturing cen ters, such as there were, and the hinterlands, for example, was made unusually difficult by the variety of currencies and the absence of up-to date discount rates. (Discount rates were published, but some of them were apt to be obsolete by the time they were printed.) In consequence of this, as well as other obstacles, most production of manufactured articles was for local markets up to the Civil War. As one historian says, "Most firms sold only in certain nat ural geographic regions, shipping only limited distances and depend ing upon consumer satisfaction and local advertising for the spread of their wares."6 With one or two exceptions, the federal government's posture was neutral toward economic develop ment. A good example of this neu trality is what happened following the Panic of 1837. Many states had become deeply involved in road, ca nal, and some railroad building in the 1830s. Large issues of bonds had been sold, especially to foreign investors, particularly the English.

When hard times hit, many of the states defaulted on the payment of the debts. Effprts to get the federal government to bail them out, to as sume the loans or enforce payment, were of no avail. In consequence, foreign sources of capital almost dried up for Americans. Not even the se curities of the United States could find subscribers in the 1840s. "You may tell your government," said one of the Rothscllilds, "that you have seen the man 'who is at the head of the finances of Europe, and that he has told you,that they cannot bor row a dollar, not a dollar."7 States did offer the means for the consolidation of capital from inves tors by way of the limited liability corporation. ·,In the early 1800s, however, corporate charters could only be obtained by special acts of legislatures. Such charters were dif ficult to obtain, were conducive to bribery, and '. were tainted because they were special privileges. To overcome these objections, a move ment began in the 1830s for states to pass general acts for incorpora tion. By 1860, the following states had passed SUCh acts: Connecticut, Maryland, New Jersey, New York, Pennsylvania,. Indiana, Massachu setts, and Virginia. 8 There was ai difficulty with state incorporation, however. It was not clear what rights a corporation chartered in one state would enjoy 40 THE FREEMAN January in others, ifit chose to operate there.

Would its property be secure there? Might it not be subject to disabling taxation, regulation, or other puni tive measures? Whether the United States government had the author ity to protect foreign (i.e., out of state) corporations, or whether it would if it could, were open questions. A Pro-Slavery Trend The political trends of the 1840s and 1850s were not very reassuring. This brings us to the major excep tion to the neutrality of the federal government toward economic devel opment, its position regarding slav ery. It is possible to argue that prior to the 1840s the government was neutral toward sla very, except for prohibiting the importation of slaves. But in the last decade or so before the war, the Southern leverage over the government was being used to expand and protect slavery. The annexation of Texas and the territorial acquisitions from Mexico following the Mexican War were viewed at the time as moves to ex pand territory open to slavery. A Fugitive Slave Act was passed in the wake of the Compromise of 1850 which put the government in the business of capturing runaway slaves and returning them to their owners.

The Kansas-Nebraska Act opened up Kansas to slavery, if the voters wanted it. The revelations of the Os tend Manifesto brought out into the open proposals for annexing Cuba as a potential slave state. The Dred Scott decision held that Congress had no power to determine where slaves could be taken in the United States. The trend was to circumscribe the powers of the federal government and augment those of the states. Southern leaders were becoming less and less willing to compromise, and they were bending the United States Constitution in the direction that they would write into fundamental law in the Confederate Constitu tion. A Republican Party The modern Republican party was brought into being to counter these trends and directions. It ran its first presidential candidate in 1856. The platform called for the repeal of the Missouri Compromise, the admis sion of Kansas as a free state, the stamping out of slavery in the un organized territories, federal aid to build a Pacific railroad, and a fed eral program for internal improve ments. The appeal of the new party was clearly demonstrated, for it car ried several Northeastern and Mid western states. 9 The Democratic party broke up in 1860. The Northern Democrats nominated Stephen A. Douglas, the Southern Democrats, John C.

Breckinridge, and a new party, the Constitutional Union, was devised 1982 THE CIVIL WAR AND POLITICAL NATIONALIZATION 41 for those who wanted neither. It nominated John Bell of Tennessee as its candidate. With the disruption of the Democratic party went almost certainly the Southern dominance of national politics. The Republicans seized the opportunity, nominated Abraham Lincoln for President, and adopted a platform which had no discernible appeal in the South. While the Republican platform did not come out in favor of the abolition of slavery, did not even condemn the Fugitive Slave Act or slavery in the District of Columbia, it did reaffirm its opposition to slavery expansion in the territories. It denied that Congress had the authority "to give legal assistance to slavery in the territories," viewed with horror the illegal reopening of the slave trade, and once again demanded the ad mission of Kansas to the union as a free state. In contrast to the plat form of 1856, it came out in favor of a protective tariff, declaring that duties should be adjusted so as "to encourage the development of the industrial interests of the whole country."l0 It opposed any change in the naturalization laws, i. e., fa vored a liberal immigration policy, and came out for a new homestead law which would make government land available virtually free. Or, as one contemporary newspaper ex pressed it, the platform offered pro tection for industry, "economy in the conduct of the government, homesteads for settlers on the public do main, retrenchment and account ability in the' public expenditures, appropriation for rivers and har bors, the adroi$sion of Kansas, and a radical reform in the govern ment."ll As soon as it became certain that Lincoln had been elected, Southern states began to secede to form a Confederacy . When all who would had seceded, control over the United States governntlent was fully in the hands of the Republican party. The control was consolidated during Re construction, .• mainly by Congres sional dictation of the terms of read mission to the! Union of Southern states. Not until 1884 was a Demo crat elected to. the presidency, and he was the only one to serve (if An drew Johnson be excepted) from 1861 to 1913. One or the other houses of Congress was .. from time to time Democratic, but in general Republi cans dominated 1the government from the Civil War to the eve of World War I.

The South Dis,possessed Not only was the South dispos sessed of most of its political power by secession, war, and reconstruc tion but also of much of its wealth and the basis of its economy. The ab olition of slavery resulted in a loss of capital (in slaves) reckoned at something on the order of $400 mil lion. The Fourteenth Amendment 42 THE FREEMAN January prohibited both the United States governments and those of any states from compensating owners for any loss of property in slaves. Moreover, neither were permitted to assume or pay any debts contracted for the prosecution of the war by the Con federacy. The Confederate money was then worthless as were all bonds and securities sold by the Confeder acy or states that were in rebellion. On top of this, many of the larger. cities were burned or destroyed, railroads destroyed, plantations pIundered, and so on. Whatever power and fortune there had been in the South to defend the powers of the states or thwart centralizing and nationalizing tendencies was, as Margaret Mitchell well said, Gone With the Wind.

With the South as an obstacle to centralization removed, with a war to fight and a South to remake, a large scale nationalization of power took place. The most far-reaching step toward nationalization was made in Section 1 of the Fourteenth Amendment, which said, in part: "No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or prop erty, without due process of law; nor deny to any person within its juris diction the equal protection of the law." In theory, at least, this gave Congress and the federal courts oversight over all state acts and leg islation, for there was little they could do that would not involve in one way or another, privileges and immunities or life, liberty, and property. When the courts later ruled that a corporation was a "person" in the sense intended by the amend ment, they also enjoyed this protec tion from state governments.

Protectionism But well before the Fourteenth Amendment had been either pro posed or ratified the government had adopted considerable legislation with a nationalizing tendency. The Re publicans in power moved with a right good will to use the govern ment to promote economic develop ment along lines congenial to them. While there is hyperbole in his sum mation, there is truth too in Wilbur 'Cash's harsh assessment of North ern aims, when he said: "The Civil War and Reconstruction represent in their primary aspect an attempt on the part of the Yankee to achieve by force what he had failed to achieve by political means: first, a free hand in the nation for the thievish aims of the tariff gang, and secondly, and far more fundamentally, the satis faction of the instinctive urge of men in the mass to put down whatever differs from themselves .... "12 Whether the aims were thievish or not, the Southern representatives were hardly out of Congress before 1982 THE CIVIL WAR AND POLITICAL NATIONALIZATION 43 the movement was afoot to adopt a fullfledged protective tariff. It came to fruition in the Tariff Act of July 14,1862, which "increased the rates on articles of non-American produc tion, gave protective increases in the case of many articles which could not be produced at home, and greatly reduced the free list. "l3 Tariffs reached a wartime peak after the passage of the Tariff Act of 1864.

The average of duties on imports was 47 per cent and some rose as high as 100 per cent. 14 Nor was Congress any slower in getting around to authorizing the building of a railroad to the Pacific. Federal corporations to be named the Union Pacific and Central P~ cific were authorized to build and operate the roads. Large induce ments were offered to the builders of the road, first in 1862, but these were supplemented by another act in 1864. Among the inducements were the full use of the power of the federal government to obtain rights of way: the extinguishment of any Indian titles to land along the route; the availability of armed forces to drive off any trespassing Indians; the power of eminent domain would be exercised to acquire land. In ad dition large land grants were made, and millions of dollars in bonds. 15 With such privileges in hand, finan ciers were able to raise much capital for the undertaking.

State bank notes were finally banished once and for all after the pas sage of the National Bank Act of 1864. This act authorized the for mation of national banks, granted them the power to issue bank notes, made them depositories of federal funds, and required them to pur chase United States bonds to the ex tent of one-tHird of their capital. When banks did not rush to become national bank~, Congress levied a 10 per cent tax on state bank notes, and those banks which remained state banks stopped issuing paper money. FinancialConcentration It should be noted that reserves against both bank notes and depos its had to be· kept in specified "re serve cities." So it was that much of the reserves of'llational banks came to be held in New York City banks. 16 It is worth pointing out, too, that af ter the war ba.nk note issues were concentrated i.n the Northeast. They were supposed·.to be distributed on the basis of population, or at least along those lines. It did not happen that way: New England and the Middle Atlantic states got the lion's share, and the ISouth hardly any at all. As one historian pointed out, "The little sta.te of Connecticut had more national bank circulation than Michigan, Wisqonsin, Iowa, Minne sota, Kansas,. Missouri, Kentucky and Tennessee3 H7 Much of the liquid wealth in the 44 THE FREEMAN January country was bound up with, tied to, and dependent on the national gov ernment in the course of the war and its aftermath. This came about mainly by way of the financing of the war. The National Bank Act was, in part, a device for financing a part of the cost of the war initially. The requirement that banks buy bonds served that purpose, and the bank notes augmented the money supply.

Taxes were more widely levied dur ing the war than had ever been the case under the Constitution. An in come tax was even imposed. Mainly, though, the war was financed by the selling of bonds and the issue of Greenbacks. The Greenbacks were not quite fiat money, for they did carry a promise of eventual redemp tion, though no time was specified. They were made legal tender both for the payment of government ob ligations, except interest on bonds, and for taxes to the United States. The largest portion of the cost of the war was paid for by the sale of bonds. Another way to look at it is that a great concentration of wealth, hence, of potential capital, took place dur ing the war. The instrument for this concentration was the federal gov ernment. The concentration was ac complished in two ways during the course of the war: by taxation and by promises to pay in the future. The national bank notes, the Green backs, and government bonds were promises to pay, or debt, and the concentration took place by way of the wealth they drew into the trea sury at the time.

Government Distorts the Economy This concentration had two major impacts on the accumulation and concentration of private capital. In the first place, it was paid out by the government for goods and services, for ships, for munitions, for army and navy supplies, for salaries and bonuses, and such like. Government contracts for supplies brought prof its, and, when they were saved, fu ture capital for industrialists. For example, in meat packing, one his torian says: "It was no accident that the men who obtained Civil War government contracts-Jacob Dold, Philip D. Armour, Nelson Morris were to emerge by 1865 ... as the packers of modern-day capitalist en terprise."18 The other major impact occurred as the debts were paid and the cur rency redeemed. Unlike what has happened since WorId War II, the government did not long continue most of its inflationary war prac tices. It moved toward retirement of the bonded indebtedness as the bonds matured. Eventually it redeemed, or offered to redeem, the Greenbacks in specie. National bank notes in circulation were reduced or retired as the government reduced its debt.

Since the bonds had floated in the market and the Greenbacks depre1982 THE CIVIL WAR AND POLITICAL NATIONALIZATION 45 ciated after they were issued, it was possible to trade in these for profit. Since interest on the bonds was al ways payable in specie, exceedingly good returns were possible by buy ing them at discount and collecting interest in premium money. There were widespread accusations, too, in the decades after the war that gov ernment bonds had been bought with 50-cent dollars and paid back with IOO-cent dollars. There was some substance to the charge, but my point is that handsome private accumula tions of capital could be had at the expense of taxpayers generally in this situation. Since it is easy to misinterpret these events, and since it has been done often enough, let me restate the broad point I am making and summarize what has been presented so as to bring it as directly as possi ble to bear on that point. The con ception I am working with is that when government intervenes in the economy it produces distortions and may have determinative impact on the direction of economic develop ment. Further, my broad point is that a sectional party, the Republi can party, came to power at the time of the Civil War, that it centralized power in the national government, and used that power to intervene in the economy so as to promote a na tionally integrated economy, espe cially by the promotion of capital concentration, manufacturing, and the developm¢nt of transportation.

The developm¢nts which followed in the latter part of the nineteenth century were shot through with the impact of government intervention. The Destructionof Wealth The most d~astic intervention, of course, was the destruction of a large portion of theiwealth of the South. The emancipa~ion of the slaves surely, a desirable outcome-was accomplished in the most disruptive and vindictive;manner conceivable, and the canceling of all debts left many Souther:q.ers in financial ruin. The protective tariffs were the most direct sort of intervention, aimed at discouraging fqreign trade and pro moting domestjc manufactures and goods. The gONernment commenced a policy of large grants for the pro motion of transportation. The inter ventions in the money supply were multiple: fostering national banks, giving precedence to their bank notes, stopping redemption in specie during the war,':issuing Greenbacks, and gaining na~ional control of the money supply. It was this surrepti tious financing! of the war rather than the later r~demptions that was the interventioh and the source of the ills.

It was these and other interven tions that contr~buted so heavily to the ills most historians have identi fied in the latter part of the nine teenth century: the greatly acceler46 THE FREEMAN ated, hasty and shoddy railroad building, the lopsided thrust to in dustrialization, the financial she nanigans, the surge of farmers into Western lands that could not sup port them, and the booms and busts that followed upon expansions and reductions of the money supply. Economic freedom does no more than provide opportunities; government intervention thrusts economic de velopment along political lines that are dangerous to the well-being of the populace. ® -FOOTNOTESIVernon L. Parrington, The Beginnings of Critical Realism in America: 1860-1920 (New York: Harcourt, Brace and World, 1930), p. 17. Emphasis added. 2Clarence H. Cramer, American Enterprise: Free and Not So Free (Boston: Little, Brown and Co., 1972), p. 145.

3/bid., p. 159. 4See Bray Hammond, "Banking in the Early West: Monopoly,Prohibition, and Laissez Faire" Causes of War in Thomas C. Cochran and Thomas B. Brewer, Views of American Economic Growth, vol. I (New York: McGraw-Hill, 1966), pp. 171-88. 5Quoted in Louis M. Hacker, The Triumph of American Capitalism (New York: Columbia University Press, 1947), pp. 333-34. 6Thomas C. Cochran, "Business Organiza tion and the Development of an Industrial Dis cipline" in Cochran and Brewer, op. cit., p. 227. 7Thomas C. Cochran and William Miller, The Age of Enterprise (New York: Harper & Row, 1961), pp. 48-49. 8Cochran, "Business Organization," op. cit., p.218. 9Hacker, op. cit., pp. 315-16. IOQuoted in James F. Rhodes, History of the United States, vol. II (New York: Harper & Brothers, 1893), p. 464. llQuoted in Hacker, op. cit., p. 338. I2Wilbur J. Cash, The Mind of the South (Garden City, N. Y.: Doubleday Anchor Books, 1954), p. 113.

I3J. G. Randall and David Donald, The Civil War and Reconstruction (Boston: D. C. Heath, 1961, 2nd ed.), p. 287. I4Ibid. I5/bid., pp. 288-89. I6/bid., p. 351. I7Quoted in ibid., p. 352. I8Hacker, op. cit., pp. 256-57. IDEAS ON LIBERTY REFERENCE to the just and unjust causes of war can be particularly valuable when we try to expose the fallacy in what is perhaps the "lib erals' " most persuasive contention: that the programs of the welfare state aim to help those who are really in need of great help. They usually do not deny that the "social gains" they are seeking are attain able only if the money of some is forcibly seized and granted to others. They do deny that any impropriety is involved in the process; on the contrary, they proudly announce, the welfare state merely enforces the undoubted axiom that one man's need has precedence over another man's luxury. CRAIG HOWELL, "Aggression Is Always Wrong"

John Montgomery ADAM SMITH'S ECONOM'IICS OF FREEDOM THE REPUTATION of Adam Smith's The Wealth of Nations has survived its bicentennial, which is not always the case with anniversaries of weighty scientific or literary works. But Smith's portrayal of the free market economy remains the cen terpiece of economic theory, often challenged but never replaced. And, even after the passage of more than two centuries, it clearly speaks to the economic dilemma of today. To start with one misconception, economics did not begin with the great 18th-century Scotsman, Adam Smith. Economic thought can be traced back through St. Thomas Aquinas all the way to Aristotle. Nor was Smith the first economist. In his time there was a group of theorists in France which antici pated some of his ideas. They are now known as the Physiocrats, ex cept that they called themselves Mr. Montgomery is a newspaperman and writer on socioeconomic issues who lives in Closter, New Jer sey.

economistes. In England at the time many pamphlets, tracts and books on economic questions were being written by businessmen, bankers and scholars of various sorts. The domi nant point of view then, Mercantil ism, thought of economics as strat egy in the comp~tition among trading nations. This fiJist epoch of the "sci ence" of economics did not begin with Adam Smith; it culminated in him. What Smith did in the watershed year of 1776 wa~ to come out with a great tome of a thousand pages with the abridged title of The Wealth of Nations. In time it was to become a blockbuster in eConomics and it has been called one of the world's truly great books. Wh.at Smith did in the book was to survey all the scattered ideas and writiDjgs about economics before him and· then assemble them into a coherent whole which, for the first time, compelled the recognition that economics was and deserved to be a single, speeial field. In Adam Smith political· economy, as it was 48 THE FREEMAN January known then, was the beginning of modern economic thought.

The complete title of his book was An Inquiry into the Nature and Causes of the Wealth ofNations, and that well describes his point of de parture. Economic debate in the 18th century focused on the source of na tional wealth. Was it agriculture, labor or commerce? The answer sug gested by the quickening of business activity in England at the time was commerce. Not Just Precious Metals, But All Items of Commerce The Mercantilists held that wealth was gold and silver, mostly acquired in foreign trade. But Smith saw it differently: Wealth was the nation's production of the "necessaries, com forts and conveniences of life" or, as he also put it, the "annual produce of the land and the labor of the peo ple." This is what is now called GNP, gross national product. As for the source of this wealth, Smith started with what economists would call a "labor theory of value." For Smith and his followers, and for all Marx ists to this day, human labor was the ultimate source of wealth.

Smith pointed out the great in crease in human productivity yielded by what he called the "division of labor ," that is, the growing practice of splitting up the job of making something into separate tasks as signed to different workers. In effect, he was describing an early stage in the development of mass produc tion and, to illustrate it, he chose the pin factory of his time. He asserted that "... a workman not educated to this business ... nor acquainted with the machinery em ployed in it ... could scarce, per haps, with his utmost industry, make one pin in a day, and certainly could not make twenty. But in the way in which this business is now carried on ... One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade in itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all per formed by distinct hands, though in others the same man will sometimes perform two or three of them. I have seen a small manufactory of this kind where ten men only were em ployed, and where some of them con sequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves, make among them about twelve pounds of pins in a day. There are in a pound 1982 ADAM SMITH'S ECONOMICS OF FREEDOM 49 upwards of four thousand pins of a middling size. These ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day."

Thus, Smith made his point about the productivity realized by means of the division of labor-and in a small shop employing ten men at the very beginning of the Industrial Revolution. Smith went on to describe how the division of labor operated not just in a shop or factory but also in a whole national economy made up ofdiverse, 'specializing firms and industries in the different localities and regions, taking advantage of local differ ences in climate, soil, location, nat ural resources, the characteristics of the local population: all of those things which can make possible more efficient and lower-cost production of particular goods than can be ac complished elsewhere. And, simi larly, Smith described an interna tional division of labor in the production of commodities for for eign trade among the diverse na tions and regions of the world. EconomicGrowth From that starting point, Smith went on to describe the system of production of goods in a national economy and outlined what he con ceived of as the forces which led to the "progress of opulence," or what today would be called economic growth. He saw the production of material wealtfu, that is, of goods, as requiring thre~ things: the division of labor, the widening and extension of markets for!the goods produced, and increasing ,"stock," his term for production equipment, machinery and working capital.

In Smith's scheme, it was the ac cumulation of capital which led to the progress of opulence from an ag ricultural econpmy to manufactur ing to commerce. The resulting in creased output of food and other goods necessary to life permitted the survival of a larger population which, in turn, meant further extension of markets, a larger and more skilled labor force, and further accumula tion of capital. ,In this way he saw the economy spiraling to higher and higher levels of development, rais ing the whole sQcialorder with it. It was an optimistic, almost buoyant view which was largely justified by the times he lived in but was not to survive its author by very long. It was Adam, Smith's description of how a mariklet economy worked which was the! starting point of a complex theoretical system which would become. the new "science of economics." HiE? theory of markets would be elaborated and refined by economists throughout the 19th century, and it bas remained center stage in the 20tb century, at least in the negative se~se of growing dis agreement and retreat from it after 50 THE FREEMAN January the debacle of theory in the Great Depression. But the theory of mar kets is too central a part of econom ics to be quickly set aside, and much of modern economic debate has amounted to repeated attempts to dislodge it in favor of corrective or alternative formulations.

Market Pricing In effect, Smith conceived of the economy of a nation as one vast whole with immense internal com plexity but with interaction and in terdependence, of internal forces which were self-adjusting and self regulating. In Smith's scheme the market was not a place but the to tality of exchanges-that is, of buy ing and selling-of the products of all the different occupations and in dustries in the national economy. At the center of this were prices, con stantly changing in accordance with the laws of supply and demand and, in turn, balancing supply and de mand not just for goods but for the resources, both human and ma terial, needed to produce them. As for those resources-land, la bor and capital, needed in varying proportions to produce each good their prices, mediated by supply and demand, directed them to those places and those employments where they would produce the most for the economy and the population as a whole. Of course, money spent by one person iS'money received by another. So, in Smith's system, those prices were also income: rent for the landlords, wages for laborers, and profits for the capitalists and busi nessmen. These people, making up the three great classes of the popu lation of Great Britain in his time, divided up the total income gener ated by the national economy, which amounted to the prices paid for all of the goods and commodities produced-that is, for all the "nec essaries, comforts and conve niences" of the people, the sovereign consumers for whom the system op erated.

The Role of the Businessman In Smith's market theory people were not only the beneficiaries but the moving parts of the system: householders, workers, farmers, land owners, manufacturers, merchants and traders, all of them rational eco nomic men (and they were almost solely male at that time) who were free to pursue their own gain, the best return for their own contribu tions to the economic life of their communities and the country. To Smith, the key to the success of the system was the capitalist business men, whom he referred to as "under takers," in the sense that they were the ones who undertook business ventures. For it was the "undertakers" who coordinated the movements and combinations of all the other participants in the econ1982 ADAM SMITH'S ECONOMICS OF FREEDOM 51 omy for their best possible employ ments under existing conditions. Smith mistrusted businessmen. In one of the best known passages in his book, he wrote: "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a con spiracy against the public, or in some contrivance to raise prices." But he gave them credit for being the sav ers who accumulated capital for new business ventures, without which there would be no economic growth.

He wrote that in contrast to the workers, who were forced to spend all they earned on the necessaries, and the idle rich, who squandered their incomes on the comforts and conveniences, the capitalist busi nessmen put off immediate spend ing for consumption to some extent and set aside part of their profits for investment in future undertakings, with no guarantee that the capital they risked might not be lost in an unsuccessful venture. Mobilityand Competition Smith set forth two linked and in dispensable conditions to be met if the economic system he described were to work: There must be free movement for all in the system so that each man might seek the best opportunity for his labor or re sources. And there must be free competition among all, for the buyer's shilling, for markets, for labor and for jobs. There must be no monopolies or icombinations in re straint of trade or limiting entry into new fields,:and no government granted privileges for a favored few.

Smith railed a.t! the dense thicket of government regulations and restric tions of his time, which he saw as preventing the :fluid and free move ment of men and capital throughout the economy that was necessary for prosperity and growth. Smith sensed, an order in the eco nomic universe:, not imposed from above but somehow the outcome of the almost infinite number of trans actions in the e~change economy. It has been said that the nature of this order was the "mystery" he set out to solve in his book. Instead of gov ernment directit1>nof the economy as the source of that order, Smith came up with his famous metaphor of the "invisible handJ" It was, he wrote, as though there were an invisible hand directing the efforts of every one-even though each man was pursuing his own gain-in a way that promoted the interests of soci ety as a whole. As a man of his time, Smith was a deist, and it was the hand of Provi dence he meant. It was not that he thought the invi~ible hand was tug ging on puppet strings to guide the economic behavior of each individ ual. To Smith, ,the invisible hand was a metaphor for the workings of the market economy in the setting 52 THE FREEMAN January of the institutions of political and economic freedom. It was Provi dence' he thought, that had en dowed mankind with the capacities and propensities which made possi ble such a society and such a system.

Today, what Smith called the invis ible hand might be thought of in cy bernetic terms as "feedback loops" for example, as market prices being regulated by negative feedback. Smith knew, of course, that his ideal of the invisible hand operating in a completely free, purely compet itive market economy was never a very realistic picture of an economy in the real world. But he contended that the more nearly the ideal was realized, the better the economy would work. And it was that ideal which was the unifying concept he applied to the wilderness of eco nomic phenomena to reveal an un derlying order. A Self-Regulating Arrangement By now the idea of the self-regu lating economy is a familiar one, whether accepted or not. And many of the elements contained in the idea had been described before Smith put them all together. But how did he come up with the whole "vision" and where did he get it from? In effect, it was already at hand, in the climate of opinion and generally held ideas of that time---,.although in a differ ent context.

In Smith's time the burgeoning commercial society of England was beginning to generate the Industrial Revolution, that great outburst of inventions which meant the end of the old system of hand-crafted pro duction and ushered in the modern age of mass production in factories equipped with power-driven ma chinery. England was harnessing water power and steam. Soon to come were the giant textile mills in the north of England where uprooted country people, and their children, tended looms which disgorged im mense quantities of cotton cloth for new world markets. In its "satanic mills," capitalism was to produce enormous quantities of goods and amass hitherto unattainable wealth-as well as great fortunes for a few. It was this great national wealth which, in effect, bought and paid for the British Empire, financing the Royal Navy, the troops and the co lonial administrations which would rule one-third of the world. But there was a vital question posed by capi talism, although the word was not yet then in currency. How was this incredible machine to be controlled?

It was showing signs of becoming a juggernaut. Smith had been professor of "moral philosophy" at Glasgow University in Scotland. Economics or, rather, political economy as it was known at the time, was still a branch of moral philosophy, which corre1982 ADAM SMITH'S ECONOMICS OF FREEDOM 53 sponded to the social sciences of to day. Besides moral philosophy there was natural philosophy, the physi cal sciences. The "Age of Enlightenment" Eighteenth-century philosophers, in the "Age of Enlightenment," be lieved they were beginning to make sense of the world in the light of sci entific thought, which had erupted in the century that preceded them. In the 17th century Isaac Newton's theoretical physics with its concept of the physical universe as a me chanical system and its theory of the "natural laws" of the movements of the heavenly bodies had seemed to show a harmony in nature, a cosmos with all its parts reliably perform ing their appropriate functions in the overall smooth working of the whole.

Inspired by that concept, the men of the Enlightenment believed there were also natural laws governing man's behavior. The social and moral sciences of that time were finding in the world of man the possibility of a similar, harmonious human-social cosmos, a world of free individuals pursuing the satisfaction of their natural desires and in so doing act ing in ways that would fit into an orderly system of natural social pro cesses. But, outside of the libraries and studies of the scholars of that time, there was change, ferment and disorder all around. The iron con straints of mediJevalsociety had long since given way, and the Protestant Reformation had rejected the abso lute authority Qver the individual of God's church. The people were be ginning to ask questions about their lot; there was'·a growing clamor for personal liberties and a chance to get in on the new opportunities to make money .• !The social philoso phers of the 17th century were forced to confront some less than theoreti cal questions: How does social order emerge from the potential chaos of an individualis~ic society? Is there a natural social. order? What should be the role of government?

By Adam Smith's time in the 18th century these questions had brought an answer: a theory of liberal de mocracy which ~as believed to rest on natural law like the laws of the physical world .•The theory harked back to the philosopher John Locke in the previous'· century and, along with many others, was advanced in Smith's time bylhis close friend and fellow Scottish .philosopher, David Hume. According to ~he theory, each in dividual was a:part of nature and therefore was e~dowed with "natu ral" rights: to life, liberty and prop erty. Further, he was endowed with God-given capaqitie§ and propensi ties which would flower in a society that served the ]Pest interests of all. To realize that society, a political 54 THE FREEMAN system of the rule of law rather than of a few powerful men was required. The laws would provide even-handed justice, personal freedoms, minimal government, private property, the sanctity of private contracts, eco nomic freedoms, and free trade, both domestic and foreign. In the kind of society made possible by such laws, free men would both compete with and cooperate with each other, ex ercising their rights to pursue their own visions and, at the same time, respecting the rights of others.

ClassicalLiberalism This doctrine of classical liberal ism was patterned after Newton's concept of the physical universe as a mechanical system embodying "nat ural laws"; the doctrine amounted to a similar vision, that of a human social system also embodying natu ral laws. And, in much the same way, what Smith did in his theory of a liberal economy was to pattern it, too, after Newton's system, using quasi-gravitational mechanics to explain the workings of a self-regu lating market economy. What made it possible for Smith to do this was his encyclopedic knowledge of eco nomic history and his authoritative mastery of the economic life of his own time, which he described in re alistic and convincing detail. Classical liberalism provided the vision for political and social re forms in England for two centuries. By the 20th century that time had largely passed in England and in the rest of Europe where intellec tuals and social reformers were con vinced by Marx's dissection of capi talism and excited by the utopian spell of socialism. But the Founding Fathers of this country were very much men of the Enlightenment and it was the ideas of classical liberal ism as expressed in the Declaration of Independence and the Constitu tion that gave shape to the Ameri can republic and have been the foundation of our liberties ever since.

On publication, Adam Smith's great tome was well received by his fellow scholars both in Britain and abroad. But government, under standably, was in no hurry to take its advice, with one notable excep tion: The younger Pitt, to become George the Third's prime minister, was deeply influenced by the book as a student and would be the first English statesman to be converted to the doctrine of free trade. Smith's death in 1790 attracted little notice. But the influence of his book continued to grow. By the time another 20 years had passed, his readers had become his followers and successors, and had established him as the father of classical economics. His· book routed the Mercantilist ideas that had prevailed in his life time and for a while virtually blot ted out the memory of those who had come before him. (i William Henry Chamberlin Some MistakeS of Marx "The evil that men do lives after them." This maxim applies with sin gular force to the work of Karl Marx.

The life of this apostle of socialism, communism, and class war was spent, for the most part, in obscure and sometimes squalid poverty. Marx was unable to make even a humble living as a writer and journalist; he had no other trade or profession. He would probably have' had to go on poor relief, in his time less generous in England than it is now, if it had not been for handouts from his dis ciple and collaborator, Friedrich Engels, who enjoyed the advantage of having a successful capitalist fa ther. Marx's record of political achieve ment at the time of his death seemed quite sterile. Because, in a moment of bravado, he renounced Prussian citizenship, he was unable to go to Germany or take any intimate part in the German socialist movement. He played no role in English poli tics. To put it mildly, Marx was not a mellow or lovable character. His habits of excommunicating from the socialist movement everyone who disagreed with nim kept his circle of friends very li~ited.

There is an abundance of histori cal evidence for Max Eastman's caustic profile of Marx in Reflections on the Failure of Socialism: If he ever performed a generous act, it is not to be found in the record. He was a totally undiscipliried, vain, slovenly, and egotistical spoiled!child. He was ready at the drop of a hat with spiteful hate. He could be devious, <Jisloyal,snobbish, anti Semitic, anti-Negro. He was by habit a sponge, an intri~er, a tyrannical bigot who would rather wreck his party than see it succeed und~r another leader. But if there. were few mourners, literally or figur~tively, at the grave of Marx the mall, the idea of Marx ism, the vision <>f a world in which the proletariat, loppressed by capi talism, was to become the architect of new millennial order, marched from success to.success. Before World War I Marx was re55 56 THE FREEMAN January vered as the founding father of the socialist parties which had sprung up in most European countries. Be cause a Russian genius of revolu tionary action, Vladimir Ilyitch Lenin, swallowed Marx's ideas whole without conscious reservation, Marxism became the creed of the new communist regime in Russia.

William Henry Chamberlin (1897 1969) was a frequent contributor to The Freeman.Author of the Russian Revolution and numerous other books and articles on world affairs, h~ was uniquely qualified to discuss Marxian errors by having lived and traveled where such mistakes ate obvious. It is especially timely to review what Chamberlin reported more than twenty-five years ago to be some of the mistakes of Marx. This article is reprinted from the May 1956 Free man. This regime, which has never wa vered in its belief that someday its power will encompass the entire world, represents a revolt against all the values of Western civiliza tion, against religion and the moral law, against civil and personal lib erties, against the right to own property, which is one of the first and most indispensable of human liberties. After World War II com munism, the offspring of Marxist teaching, extended its dominion over China, over the countries of Eastern Europe, so that today [1956] it has been imposed as a dogmatic faith on more than one third of the popula tion of the world.

And the influence of Marx is by no means restricted to nations under communist rule. The appeal of Marxian ideas to European social ists, to the half-baked intellectuals of newly emancipated countries in Asia has been considerable. And, al though the number of persons who can honestly claim to have read through with comprehension the dry and abstruse Capital must be small, the simplified version of Marxist theory presented in The Communist Manifesto and elsewhere possesses strong psychological appeal. Marx Sets the Proletariat Against the Bourgeoisie Marx professed to know all the answers, to offer a complete expla nation of human activity on the ba sis of historic materialism. In the Marxian scheme there is a hero, the proletariat, a villain, the bourgeoi sie; and the hero is represented as a certain ultimate winner. There is a vision of revolutionary victory that will transform the conditions of hu man existence and usher in a mil lennium, of the nature of which, to be· sure, Marx offers few and vague hints. To trusting minds which ac cept Marx's premises and assump tions without question there comes 1982 SOME MISTAKES OF MARX 57 ~ into~icating sense of being in step wIth hIstory, of professing a creed that is based on infallible science.

But it is just this myth of infalli bility that is the Achilles' Heel of Marx as a thinker, of Marxism as a system. An examination of the works of Marx and his collaborator Engels reveals ten big mistakes, of which some are so fundamental that they completely discredit, as a preview of the future, the whole superstructure of faith in capitalist misery and doom, and socialist prosperity and triumph, which Marx laboriously reared on a foundation of Hegelian metaphysics and minute research in government reports on the seamy sides of early British capitalism. These mistakes are as follows: (1) The doom of capitalism is as sured because under its operation the rich will become richer and fewer; the poor will becomepoorerand more numerous. To quote one of the more striking rhetorical passages in Cap ital: While there is a progressive diminu tion in the number of the capitalist mag nates, there occurs a corresponding in crease in the mass of poverty, oppression, enslavement, degeneration and exploi tation. But at the same time there is a steady intensification of the wrath of the working class-a class which grows ever more numerous and is disciplined, uni fied and organized by the very mecha nism of the capitalist method of production. Capitalist monopoly becomes a fetter upon the method ofproduction which has flourished with it and under it. The cen tralization of the means of production and the socialization of labor reach a point where they prove incompatible with their capitalist hu~k. This bursts asun der. The knell of c~pitalist private prop erty sounds. The' ~xpropriators are ex propriated.

These are resPunding words, but utterly empty words, in view of the fact that social ~nd economic devel opment in capit~.list countries has proceeded along.a precisely opposite direction from the one predicted by Marx. What was' in Marx's time a social pyramid hFlS become more like a cube. The capitalist system has brought to the working class not in creasing "oppres~ion, enslavement, degeneration anp! exploitation," but an increasing share of new inven tions and comforts that did not even exist for the wea~tlty a hundred years ago: automobiles" radios, television sets, washing m8Jchines, as well as money in the bank" stocks, and bonds. (2) Socialism cOrn only come about when capitalism has exhausted its possibilities of development. Or, as Marx puts it in his Critique ofPolit ical Economy: No form of society declines before it has developed all the forces of production in accordance with~ts own stage of de velopment.

But, of the three countries which, 58 THE FREEMAN January according to Marx, were ripest for the transition to socialism, as most industrially developed, the United States is still, by and large, the freest economically. The larger free part of Germany, after the terrific shock of the war, has achieved a remarkable recovery by shedding Nazi and Allied con trols and resorting to old-fashioned individualistic incentives. Great Britain has settled for a kind of so cialistic New Deal, without violence or outright expropriation and well short of Marx's "dictatorship of the proletariat. " On the other hand, the countries where violent revolutions were car ried out in the name of Marx, the Soviet Union and China, were, on Marx's own theory, completely un ripe for socialism. Capitalism was in a fairly early stage of development in Russia. Much of China lived in precapitalist conditions. Experience has shown that, in precise contra diction of Marxist dogma, capital ism is harder to overthrow as it strikes deeper roots and shows what it can accomplish. A plausible case can be made out for the proposition that, although political and eco nomic change would have come to Russia, there would have been no communist revolution if World War I had been avoided and Stolypin's policy of breaking up the old peas ant communes and giving the peas ant more sense of individual property had developed long enough to yield results.

(3) The "dictatorship of the prole tariat" is a just and feasible form of government. This is based on two false assumptions: that the "prole tariat," or industrial working class, has some kind of divine right to rule and that governing power can be di rectly exercised by this group of the population. Both are wrong. Marx never clearly explained why· the proletariat, for which he foresaw in creasing poverty and degradation, would be qualified to rule. ·And So viet experience and Red Chinese ex perlence offer the clearest proofs that dictatorships of the proletariat, in theory, become ruthless dictatorship over the proletariat, in practice. Ab solute power in communist states is exercised not by workers in facto ries, but by bureaucrats, of whom some have never done any manual work; others have long ceased to do any. (4) Under socialism the state will "wither away." This grows out of Marx's belief that the state is an in.;.

strument for the suppression of one class by another. In the classless so ciety of socialism, therefore~ there will be no need for the state. Events have played havoc with this theory. Nowhere is the state more powerful, more arbitrary, more of a universal policeman, snooper, 1982 SOME MISTAKES OF MARX 59 and interventionist than in the So viet Union. Yet it is here that the new regime has abolished private property in means of production, thereby, according to Marx, inau gurating a classless society. One is left to choose between two alterna tive conclusions. Either the Marxist theory of the state as an instrument of class rule is a humbug or the kind of class rule that prevails in the So viet Union must be uncommonly crude and ruthless. (5) Capitalism (in the nineteenth century) has exhausted its produc tive possibilities. This flat statement is made by Marx's alter ego, Engels, in his Anti-Duhring, written before the internal-combustion engine, X rays, aviation, synthetic chemistry, and a host of other enormously im portant additions to the productive process, brought into existence by the stimulus of capitalism.

(6) All ideas, all forms of intellec tual and artistic expressionarea mere reflection of the material interests of the class in power. This conception is expressed repeatedly in Marx's writings, notably in German Ideol ogy, where he writes: "The .class which has the dominant material power in society is at the same time the dominant spiritual power.... The dominant ideas are nothing but the ideal expression of material condi tions." One of the few wisecracks associated with the name of Marx is that the Church! of England would rather give up all its Thirty-Nine Articles of Faith than one thirty ninth of its possessions. The historical 1record shows that this interpretat1<>n of human con duct is crudely ope-sided and inac curate. Men die far more often for ideas than for material interests. The communist victory in Russia was not due to the fact that material condi tions for the m&sses became better after the Bolshevik Revolution. This was emphatically not the case. What did happen was that the organized, disciplined, communist minority ac quired an iron grip on the masses by its double weaponlof propaganda and terror, kept passions of class hatred and class envy at'·the boiling point, whipped laggards i ! into line by ruth less regimentation, and thereby pre served their regime through years of civil war and famine. Sometimes the materialistic, interpretation of history becomes s~eer absurdity, as in the case of a Moscow musical an nouncer, whom I' once heard offer the following bit: We will now he~r Glinka's overture, "Ruslan and LudmHla." This is a cheer ful, buoyant piece of work, because when it was written Russ~an trade capitalism was expanding and conquering markets in the Near East.

It would seem, 1that, in order to carry any semblance of plausibility, 60 THE FREEMAN January this should have been accompanied by proof that Glinka owned stock in the expanding companies-a highly improbable contingency, if one con siders the economic status of Rus sian musicians. (7) Production depends on class antagonism. To quote Marx, in The Poverty ofPhilosophy: From the very moment in which civi lization begins, production begins to be based on the antagonism of orders, of states, of classes, and finally on the an tagonism between capital and labor. No antagonism, no progress. This is the law which civilization has followed down to our own day. Like many of Marx's "laws," this is a mere unsupported assertion of a pedantic dogma. No proof is ad duced. The greatest human con structive achievements, the cathe drals of the Middle Ages, the great dams and skyscrapers of modern times, are the fruit of cooperation, not of antagonism.

(8) Nationalism is a negligible force. Marx and Engels lived in an age of rising national consciousness. Conflicting nationalism was the strongest force that let loose World War I. Yet in all their writings the attitude toward nationalism is one of contemptuous deprecation. As Isaiah Berlin, a fairly sympathetic biographer, writes (Karl Marx, p. 188): He consistently underestimated the force of rising nationalism; his hatred of all separatism, as of all institutions founded on some purely traditional or emotional basis, blinded him to their ac tual influence. (9) War is a product of capitalism. This idea has found some acceptance outside the ranks of the Marxist faithful. The temptation to seek an oversimplified scapegoat for war is strong. But while, theoretically, such Marxian motives as struggle for trade, colonies and commercial spheres of influence, might lead to war, there is no serious historical evidence that any major conflict was ever touched off by such considera tions. There were differences of eco nomic interest between the indus trializing North and the mainly agricultural South before the Civil War. But these could easily have been compromised. What made the fratricidal conflict "irrepressible," in Seward's phrase, were the two big political and moral issues: secession and slavery.

World War I was purely political in origin. There was the clash be tween Slav nationalism and Austro Hungarian desire to hold together a .multinational empire. A system of tight and almost automatic alli ances turned what might have been an Austrian punitive expedition against Serbia into a general war. World War II was the handiwork 1982 SOME MISTAKES OF MARX 61 not of any magnates of capitalism, but ofa plebeian dictator, Adolf Hit ler, pursuing aspirations of conquest and military glory that far antedate the modern capitalist system. The three countries that were best pre pared for war were the communist dictatorship in the Soviet Union, the Nazi dictatorship in Germany, the authoritarian military regime in Japan. Capitalism makes. for free trade, free markets, limited govern mental power, and peace. And the principal war threat today comes from the expansionist urge of com munist imperialism.

(10) The worker is cheated because the employer, instead of paying him the full value of his work, holds out on him profit, interest, and rent. Or, as Marx himself states his theory of "surplus value" (Capital, Modern Library edition, p. 585): All surplus value, whatever particular form (profit, interest, or rent) it may sub sequently crystalize into, is in substance the materialization of unpaid labor. The secret of the self-expansion of capital re solves itself into having the disposal of a definite quantity ofother people's unpaid labor. It requires little reflection or re search to realize that "surplus value," like many other Marxian catch phrases, is a myth. How, under any economic system-capitalist, fas cist, socialist, communist-could in dustry expand and provide more goods and more Jobs for more people if capital were· not withheld from immediate payment to finance fu ture constructioni? Perhaps the best refutation of Marx's rabble-rousing myth that surpl'Q.svalue is a pecu liar dirty trick of capitalists, prac ticed against wor}{ers,is that the ex traction of what might be called surplus value is ipracticed on a gi gantic scale in ,the Soviet Union through the medium of a sales or turnover tax that often exceeds 100 per cent.

A ClassicFailure It is amazing that, with such a de monstrable record of failure to un derstand either the world in which he was living or the direction in which that world, was going, Marx should be hailed as an unerring prophet. The truth is that there is nothing remotely scientific about Marx's socialism. 'He started with a set of dogmatic a priori assumptions and then scratched around in the British Museum for facts that would seem to bear out these assumptions. Like the EmperQIj in the fairy tale, Marxism, for all ~ts ponderous ap pearances, really has no clothes on when examined jlllight of realities, in Marx's time and in our own. His supposedly infallible system of in terpreting history ,and life is riddled with mistakes, of rwhich the forego ing ten are only the most obvious and the most glaring. I) A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN EnterpriseZones THE IDEA of establishing Enterprise Zones, small free trade enclaves with special tax concessions, in the slum areas of our decaying central cities, was brought to America by a British economist, Stuart M. Butler, who works for the Heritage Foundation in Washington, D.C. In a generous foreword to his book on the subject, Enterprise Zones: Greenlining the Inner Cities (Universe Books, 381 Park Ave. South, New York, NY 10016, 175 pp., $12.95), Mr. Butler credits the concept to the collabora tive thinking of Professor Peter Hall, a former President of the socialist Fabian Society, .and Sir Geoffrey Howe, a Conservative Member of Parliament.

For a Fabian "planner" to take part in advocating the creation of miniature Hong Kongs and Singapores in British cities that are more or less dominated by interventionist trade unions may seem passing strange. The British Trades Union Congress doesn't like Professor Hall's defection at all-it has predicted that "rogue employers" would capitalize on special tax concessions in Glas gow, Liverpool, Manchester and the Isle of Dogs docking area in London to reproduce Hong Kong's "horrors." But Hall is willing to take a calcu lated risk: "unorthodox ideas," he says, are sometimes called for. As for Sir Geoffrey Howe, the Conser vative, he doesn't regard the Enter prise Zone idea as any risk at all. Stuart Butler, while he remains fearful that the British will mess up a good idea, thinks the Enterprise Zone is just the thing for America. He has a thorough grasp of what has ENTERPRISE ZONES 63 happened to change demographic patterns in this country. Our north eastern and Great Lakes cities have suffered as industries and people have moved to the Sun Belt. Skilled and educated people, in search of more pleasant life styles, have emi grated to the suburbs. Port areas and railheads, while still important, cannot compete with interstate highways as a locale for new busi nesses.Fate has singled out special cities for special blows-Buffalo was by-passed by the opening of the St.

Lawrence Seaway, and Detroit is suffering from being a one-industry town that has lost much of its auto mobile market to the Japanese. Urban Blight Our political efforts to halt urban decay have been markedly unsuc cessful. The zoning that eliminates small shops from public housing areas has deprived city blocks of the variety needed to keep them alive. As Jane Jacobs has pointed out, crime ·doesn't flourish in mixed neighborhoods, where there are al ways watchful people on the streets and porches. But when "planning" segregates shopping and residential areas, the mugger and the rapist flourish. And when rent control is piled on top of everything, the whole housing picture deteriorates. Land lords can't afford to improve slum properties, and new builders are dis couraged. To end the blig~t, Mr. Butler sug gests that municilPal, state and fed eral governments'get together to al low islands of free competition to grow in such places as New York City's South Bronx. A general pack age of federal t~x and regulatory concessions (suspension of the mini mum wage, modifications of Social Security and thel,like) would be of fered provided tne city agreed on matching concessi9ns of its own. The tax concessions would combine with the plentiful existence of old build ings to lure smaUenterprises to semi abandoned areas.: There would be employment for l()~al people, and the welfare rolls would shrink.

On paper, the I, Enterprise Zone theory sounds good. In England, bigger companies have shown· more interest in it than small innovative firms. The dangeIt is that a big es tablished company would b~ inter ested in shifting: its location to an Enterprise Zone •. just to get away from taxes it has been paying else where. This would not result in any net increase in. employment. Mr. Butler doesn't think this sort ofthing would necessarily.happen in Amer ica, where there are plenty of inex pensive "make-do" iold buildings still standing in slums',where new ideas could be hatched' without raising capital for construction costs. New businesses need old edifices, says Mr. Butler. Tax incentives could be geared to favor new small compa64 THE FREEMAN nies over mature companies that would merely be trying to relocate. Jack Kemp Espouses Congressman Jack Kemp was quick to catch on to the Enterprise Zone idea. Significantly, he comes, from the Buffalo region of New York State, which has lost its importance as a grain terminal now that ships sail past it to the Atlantic by way of the St. Lawrence Seaway. Kemp is a Republican, but he found no diffi culty in getting a Democrat, Con gressman Robert Garcia ofthe Bronx, to join him in introducing an Enter prise Zone bill that has. had the fa vorable attention ofthe White House.

The Kemp support of the Enter prise Zone concept is attended with a bit of irony. For Kemp, more than anyone else in Congress, is commit ted to the idea that the whole United States should be one large Enter prise Zone. Kemp has thought of the 5-10-10 Kemp-Roth tax cuts as a mere beginning. If the annual in come tax of thousands of business men could be made sufficiently low to leave them with something tan gible to put into expanding their companies, the Enterprise Zone would not be able to compete with the rest of the country in job-mak ing. It could be, of course, that Jack Kemp, as an old professional quarterback, knows the value of having alternative game plans. His advo cacy of a return to the gold standard indicates that he doesn't believe tax cuts in themselves will solve our problems. The Enterprise Zone, with Kemp, could be a stop-gap proposi tion. The trouble. is that it is the sort of idea that Congress, with more pressing problems on its mind (not to mention the imminence of coming elections), can find very little time to debate. The big picture seemingly calls for an eternity spent on fight ing over budget cuts and the need for displaying "compassion." The talk is always of orphans and indigent old ladies who might suffer' if a tax rate is changed and an "entitle ment" cut. There is no attempt to look at things in dynamic terms. If Congress could hurry up and enact the legislation needed to create an Enterprise Zone in the South Bronx, Newark or Detroit, the need to worry about "safety nets" and "entitle· ments" could diminish.

Maybe the Enterprise Zone idea would come to little anyway. But i1 would be good to test the virtue~ which Stuart Butler claims for it. I: it were to succeed even in one littlE area, it would stand as an examplE for the whole country. The wholE nation would be that much closer tc becoming one big Hong Kong. @ t1le Freeman VOL. 32, NO.2.. FEBRUARY1982 Jobs-And How Not to Increase Them P.Oean Russell 67 The self-interest of employers affords a well-paying: job to anyone who produces and thus merits such a wage. The Moral Issue of "Honest Money" The case for a money redeemable in gold. Gary North 76 Bureaucracy, Productivity, and Inflation Mark D. Isaacs 88 Sound monetary policy determines the effectiveness of economic calculation and productivity. Reasoning on the Nature of Things ClarenCe B. Carson 94 How natural rights derive from basic concepts conoerning the nature of things. Freedom for Less Developed Countries Dennis Bechara 104 Why freedom is the best policy toward other countries.

Intellectuals, Moralists, and the Free Market John K. Williams 111 A scholarly defense of the market process against its "intellectual" executioners. Book Reviews: 122 "Instead of Regulation: Alternatives to Federal Regulatory Agencies" edited by Robert W. Poole, Jr. "Seeds of the Holocaust: The German Economy, 1916-1923" by Stanton Brody "Principles of Economics" by Carl Menger Anyone wishing to communicate with authors :may send first-class mail in care of THE FREEMAN for forwarding.

FOUNDATION FOR ECONOMIC EDUCATION Irvington-on-Hudson, N.Y. 10533 Tel: (914) 591-7230 Leonard E. Read, President Managing Editor: Production Editor: Contributing Editors: Paul L. Poirot Beth A. Hoffman Robert G. Anderson Bettina Bien Greaves Edmund A. Opitz (Book Reviews) Roger Ream Brian Summers THE FREEMAN is published monthly by the Foundation for Economic Education, Inc., a nonpo litical, nonprofit, educational champion of private property, the free market, the profit and loss sys tem, and limited government. The costs of Foundation projects and services are met through donations. Total expenses average $18.00 a year per person on the mailing list. Do nations are invited in any amount. THE FREE MAN is available to any interested person in the United States forthe asking. For foreign delivery, a donation is required sufficient to cover direct mailing cost of $5.00 a year. Copyright, 1982. The Foundation for Economic Education, Inc. Printed in U.S.A. Additional copies, postpaid: 3 for $1.00; 10 or more, 25 cents each.

THE FREEMAN is available on microfilm from University Microfilms International, 300 North Zeeb Road, Ann Arbor, Mich. 48106. Some articles available as reprints at cost; state quantity desired. Permission granted to reprint any article from this issue, with appropriate credit, except "The Moral Issue of 'Honest Money'."

P. Dean Russell JOBS~ and How Not to Increase Them WHEN jobs are plentiful, all other domestic problems of a nation can be solved. But when jobs are scarce, other problems automatically be come worse-especially social prob lems. The individual who cannot find a job will eventually become either hopeless or desperate. Ifhopeless, he degenerates into a permanent lia bility on society. If desperate, he is a likely prospect for revolution. These two possibilities are equally de structive of the person and his soci ety. Thus, from every viewpoint social, economic, moral, or what ever-it is vital that we understand what causes unemployment. For only then can we _work effectively toward solving this most pressing of all soDr. Russell is Professor of Management, School of Business Administration, University of Wisconsin at La Crosse. cial problems--jobs for all who want to work. As normal.human beings, natu rally we are distressed by the suffer ing that comes to the families of per sons without jobs. But fortunately for the unemploye~, our interest in the matter goes beyond mere pity. There is a far more vital reason why we want everybody in the United States to have a jobJlt is a selfish reason that directly concerns our own fam ilies. It is this.iWhen they have jobs they can buy more from us and our jobs are thereby made more secure and better paying. That's a powerful incentive and aprimary reason why we should support any policy, and participate in any program, that will provide more, permanent jobs at higher real wages.

When all is said and done, there is finally only i one reason why any 67 68 THE FREEMAN February person in the United States who wants to work can't get a job: His potential employers believe that the cost of hiring him is more than the anticipated income from his produc tion or service; for no one-neither you nor I nor any employer-will knowingly hire workers at a loss. An obvious way to test the valid ity of that statement is to assume that it's false, and then to examine the consequences. So let us assume that there are unemployed persons who want to work, and that the product of their labor will sell for more than the cost of employing them, and that the potential em ployers know this, and that they just deliberately and knowingly refuse to add to their profits by hiring these men. Such an assumption just doesn't make any sense; for no businessman really prefers lower profits to higher profits. Businessmen have been ac cused of many things, but never that!

The reason we can know with cer tainty that no businessman acts this way is because you and I don't act this way. You and I would like to have more money for many reasons; the desire for a Caribbean cruise is incl uded, as well as our wish to feed little children who are starving to death all around the world today. For in a "money economy" such as ours, the only thing that will keep them alive is money. That's why you and I will always choose more money over less money, if that is the only issue involved. And that's why business men will never choose smaller prof its over larger profits in the long run. For businessmen are people too-as are stockholders and employees-and we all have a use for more money. A Universal Principle This universal principle of human motivation and action applies to ev eryone, regardless of the use to which the additional money may be put. Obviously, we never hire a person voluntarily if we believe that the cost of employing that person will exceed the income from that person's pro duction or service. Stated positively, we will always hire a person when we believe that we can thereby in crease profits.

When you get right down to it, this same universal motivation of self interest is what causes the unem ployed person to search for a job in the first place. He, too, has a long list of desires that require money for fulfillment; and the fact that food and housing and medicine come ahead of his desire to donate to charity does not in any way deny this universal principle of human action. Now before we try to use this par ticular theory as an aid in solving the problem of unemployment, we first need to understand another (and closely related) principle that is also based on universal human action.

1982 JOBS-AND HOW NOT TO INCREASE THEM 69 The textbooks in economics usually list it under the heading of "mar ginal analysis"-in its various forms of cost, price, production, and so on. The explanations in those text books, however, sometimes become unduly involved with "tables and charts," and the authors tend to for get that what we are talking about is not mathematics but human beings and why and how we exchange our goods and services. All of us understand, ofcourse, that no two persons are ever equal in all things, including their desires and abilities to work. We know in ad vance that when we measure the production of a group of persons, some will have produced more than others-unless, of course, it is for bidden by some law or regulation. Over a significant period of time, there is always one person who produces less than anyone else in the group; he is called the marginal pro ducer or worker. That means simply that he's the one whose production results in the least profit. Presum ing that he's paid the same hourly rate as his fellow-workers, the cost of hiring him will (under certain conditions) sometimes exceed the income from the sale of his product.

Naturally this "marginal employee" is the one we let go first when some one has to be laid off. Obviously we don't layoff the best workers first, not if we have any real choice in the matter. The Marginal Unit While we observe and practice this procedure all ~he time, we often for get just why!we act this way. It's because we prefer profits to losses, higher profits i to lower profits, and higher wages [and salaries to lower wages and salaries. That's why ~o employee keeps his job if he coqtinually produces less than he is paid-other things being equal, of cours~, and presuming that his pay-produ¢tion ratio is the only issue involv~d. The jobs of these marginal workers are always in danger. Any iIllcrease in costs of em ployment (without an offsetting in crease in production and income) will always cause .~ decrease in jobs in any situation ivhere pay is based on production. This canno~ be otherwise; for since we human beiqgs are not equal, there is always a wqrker "at the margin"

where profit~hades into loss. And even a minor [increase in costs can push him acro~s the line. And when he loses his job, there is always an other "margi;njal worker" right be hind him. For] the purpose of illus trating how this works, assume that the "cost of employment" for a given worker is $4 :per hour, and "sale of his hourly proquct" is $4.10. As long as this relatiQD.ship continues to ex ist, that job is reasonably secure; for no company w~nts to decrease its in come, not eveniby ten cents an hour. Now increase payroll taxes-So70 THE FREEMAN February cial Security, for example-by four per cent, thus raising "cost of em ployment" above "income from sale of product." Presuming that produc tion and sales remain the same-and presuming no increase in the price of the product-that man loses his job. This must automatically follow; for a company will soon go bankrupt if its policy is to hire men who cost more than they produce. Such a pol icy would accomplish nothing except to throw all of that company's em ployees into the ranks of the unem ployed persons we wish to help. You might think that such a simple truism is understood by everyone; but as we shall soon see, it isn't.

There are a score and more other ways that this same loss of jobs can be achieved-wage increase with no increase in production, decreased production at the same wage, a de crease in price with no increase in sales, and so on. Always the mar ginal worker (including, of course, the marginal worker on the man agement level) loses his job when cost of employment increases relative to income from production. Nor does it make any difference whose fault it is-government, union, or manage ment; the job still disappears. And, of course, there are "marginal de partments" and "marginal compa nies" in exactly the same sense that there are marginal workers; the only difference is that groups of persons lose their jobs when costs of a department or company exceed income from the production of that depart ment or company. That's what "red ink" means-cost has exceeded in come; there are no profits, but only bankruptcies, loss of capital, and unemployment.

CreatingMore Jobs With this background on how and why you and I act the way we do and why managers of successful companies act exactly the same way-perhaps we are in a better po sition to study some of the measures now being proposed to increase jobs in industry. Among them are the shorter work week at the same (or more) pay, double time for overtime, increased minimum wages, longer paid vacations, earlier retirement with higher pensions, increased so cial security coverage, and a host of others. The argument in support of these measures is that they will force employers to hire additional men, or that the measures will increase in comes and spending and thus (indi rectly) will increase jobs, or both of these hoped-for results at the same time. Clearly, each of these proposals has an effect on costs of production. Thus, necessarily, each has an effect on jobs. Since the minimum wage is perhaps the most popular (and cer tainly the least understood) of these measures, let's here use it as repre sentative of all of them. Just what is 1982 JOBS-AND HOW NOT TO INCREASE THEM 71 the relationship between jobs and minimum wages?

Apparently the advocates of min imum wage laws are unfamiliar with marginal analysis and the fact that every human being has a long list.of unsatisfied wants. Even though the advocates of minimum wages will never knowingly spend two dollars to get back one dollar, they fail to understand that all businessmen are bound by this same principle of uni versal human action. For example, the overwhelming majority of the advocates of a minimum hourly wage of $3.35 for restaurant and laundry workers will not pay 30 per cent more than they now pay for a meal in a restaurant or for the work done by commercial laundries. Like you and me, they never spend their money for something they value less when they are free to spend it for what they value more. Thus because they need their money for more pressing desires (a new spring outfit, for ex ample), they will eat at home and patronize the local laundromat while continuing to advocate com pulsory wage levels above those that have been determined by their own voluntary spending practices.

They don't understand that every businessman who lays off a worker because of an increase in costs is acting just as they do when they eat at home because restaurant meals have increased in price but not in quality or quantity. The principle is not merely related, it is identical. Any person wqo has ever refused to make a purchase "because it cost too much" was following this universal principle of human motivation and action. Consumer Preferences Sometimes the advocates of in creased minimum wages argue that if all restaurants and laundries were compelled to pay the same wages, then no emplQY[eewould lose his job. The reasoning :q.ereis that since costs would rise equally for all, no restau rant or laundry would be put at a competitive dis~dvantage. Since sales and income would remain about as before-with the weakest (or mar ginal) firm ret~ining its former rel ative positionTthere would be no reason for laying off any workers.

That argument only demonstrates again the abs~nce of any under standing of how and why people (in cluding thems~lves) act as they do when they exc,Hangetheir goods and services. For when people are free to choose, any increase in costs-for any reason-will cause a decrease in sales and thus in jobs. The fact that costs and prices may have increased for everyone in the restaurant business is beside the point. You and I react to price increases by buying less or going without or using a substitute. Since at any given time, our in comes are allocated in a certain spending pattern, a hefty increase 72 THE FREEMAN February in laundry and restaurant prices will necessarily cause a reallocation of our customary spending. This can not be avoided. Since you and I value "music lessons for our children" nlore than we value that customary res taurant meal-and since we must now choose between them-we choose to eat out less often; and an other restaurant worker "at the margin" thereby loses his job.

There is nothing that any govern ment or law (or for that matter, union) can do to change how and why we human beings choose first to spend our money on what we value most. True enough, governments can (and often do) initiate measures that cause the appearance of more money in the economy than is called for by the annual increase in production of goods and services. This procedure tends to conceal or suppress for a while the customary marginal ef fects of increasing costs and prices; for a ten per cent increase in prices doesn't greatly affect your spending pattern if you get a ten per cent in crease in income at the same time. But since this procedure is in no sense a solution, the problem itself continues to be with us. In due course, this process of increasing the money supply usually begins to op erate on a sort of speeded-up "tread mill principle"; like Alice of "Look ing Glass" fame, we must then begin to run twice as fast merely to stand still. If "more money" could really solve our problems, obviously our government would have solved them long ago. Let us remember that in spite of a steady increase in money over the past half century, large-scale unemployment has continued to be our most pressing social problem in peacetime.

Please the Customer When all is said and done, there is only one way the unemployed per son can get a lasting job in an econ omy where we consumers are free to buy or not to buy. Obviously, he must offer a product or service at a price that someone else is willing to pay. The "asking price" for a product must be in harmony with the "market price" if the product is to sell; just so must the unemployed person reduce the "asking price" for his labor to a point where the income from his production will exceed the cost of hiring him-if he wants to be hired. When that happens, every potential employer will be pleased indeed to bid for his services because the em ployer himself thereby expects to have more money to spend for the goods and services he wants to buy; a self-interest factor is added. If the "market price" (that is, what you and I and others will volunta rily pay) for labor is below the min imum wage that is set by law, the unemployed worker necessarily re mains unemployed. For neither you nor I nor any potential employer will 1982 JOBS-AND HOW NOT TO INCREASE THEM 73 knowingly hire him at a loss; no hu man being spends $3 to get back $2.

An unknown number of workers without jobs today are unemployed because the minimum wage is above their productive capabilities as de termined by the actions of con sumers who are free to buy or not buy the product or service. That's too bad for the unemployed, but there is absolutely nothing that potential employers can do about it; clearly, the responsibility lies with Congress which made the law. Now it is true that employees in high productivity companies don't need to worry about minimum wage laws directly. Every such employee is paid more than the current or pro posed minimum; he's paid more be cause he produces more, and be cause the price that consumers are willing to pay for the product of his labor is more than the cost of his labor. That's why wages in such companies are so high. Thus an in crease in minimum wages doesn't affect those employees directly. An Indirect Effect Indirectly, however, there is an effect-a most undesirable effect.

When marginal workers in other in dustries lose their jobs because of uneconomic wage increases, they can no longer consume as much as be fore. And when sales of high produc tivity company products fall off, the marginal producers in those companies also lose their jobs-or take a substantial cu~ in pay. This must happen becausei the product of their labor no longer" sells at the price or volume needed to cover the cost of hiring them. It is too often forgotten that there are· marginal workers at every level ofpay. Thus it is that iminimum wage laws always cause a reduction in jobs be low what· they would or could be if there were no' such laws. Based on how and why you and I act, the re sult cannot be otherwise. For you and I (and others) simply will not pay the higher prices for certain prod ucts and services that have been caused by increases in minimum wages. We would rather spend our money for som¢thing else that we value more highly. Exhortations and wishful thinking won't make any difference. We 'won't-in fact, we can't-continue ito buy the product; for the increaseq prices compel us to re-allocate th¢ spending of our money, which !has not been in creased by the trlinimum wage laws.

It so happens that those products at higher prices turn out to be the mar ginal products'-"';the ones we give up first or decrease [the use of. Every employer acts exactly the same way you and I act, and for ex actly the same reason. He won't con tinue to pay $3.:35 for a product or service (wages fQr an hour) when he discovers that he can sell the prod uct of the labor, for only $3.00. He 74 THE FREEMAN February won't do it because his company would suffer decreased profits, and perhaps losses. That, in turn, would decrease his own earnings, perhaps drastically. Then he would have to give up some product or service that he wants-and that he values far more highly than he values hiring a worker at a loss! Thus the employer lays off the unfortunate marginal worker who has been "assisted" to ward a higher level of living by law. There really isn't anything else he can do. And to call him nasty names is about as logical as cursing your self because you refuse to buy a $15 item when you have only $10 to spend.

The Difference Between Coercive and Voluntary Measures Legal measures to increase wages and jobs simply do not do so-not in the long run and when all the effects are understood. Such measures can't bring the desired results because they do nothing to increase productivity or sales or profits. In a society where people are free to spend their own earnings, there is only one possible way to increase wages and jobs per manently: Make it profitable for one person to hire another person. Then-and only then-will there be an increase in real and lasting jobs. We can be certain that the employ ers will then hire more workers be cause they can thereby earn more money to be used to buy the things they want, including better educa tion for their children, donations to the Salvation Army, trips around the world, or whatever it is they value most. We cannot know what the em ployers will use the money for. We can know only that their motivation is identical to the motivation that causes you and me to act. When we refuse to buy the product they man ufacture, they, in turn, must refuse to buy the products that go to make it up-including, for the most part, human labor. But when we buy their goods and services at a price that is profitable to them, they then auto matically buy more of the "raw ma terials" that go to make up the prod uct or service, including, for the most part, human labor. To understand how you act is to understand how the employer acts. The motivation is identical.

And all along the way, each em ployer acts exactly as you and I act when we decide to buy or not to buy a given product. If we are getting more than we are giving up for it (in our opinion), we will buy; otherwise we won't buy. Whether the product is labor or the result of labor has no bearing. Whether the purchaser is an employee, employer, or consumer makes no difference; basically we all act alike when we voluntarily ex change our goods and services. While our tastes and value scales differ radically, no person ever gives up something he values more for some1982 JOBS-AND HOW NOT TO INCREASE THEM 75 thing he values less-not when all the factors are considered. Freedom to Choose Always and everywhere this rela tionships exists. This is as true in Russia as it is in the United States. The Russians, too, are people-and thus they will not willingly and knowingly spend two rubles to get back one. To the greatest possible extent, they will always arrange it the other way around. True enough, the Russians have less freedom of choice than we have. But to the ex tent that each is free to choose, each will always do his buying and hiring on this principle of universal human action. This applies to the Commu nist manager of a cement factory (with his positive production quota and his potential bonus) as well as to the non-Communist peasant who uses his little "privately assigned"

plot of ground to grow beets and cu cumbers to sell to the highest bid der. John Stuart Mill Again, all of.us have a real and selfish reason. for wanting every body in the United States to have a job; our own jobs thereby tend to be come more secure and better paying. That's why weiare anxious to find and support those policies that will provide more permanent jobs at higher real wages. And that's why we must ask this question about any program or policythat promises more jobs or higher ,pay. Do these pro grams and policies increase costs without an iden.tifiable increase in productivity and profits? If so, we know that jobs will be lost. We know this because nQ human being will spend his mon~y for something he values less (continuing to pay a worker to produce at a loss, for ex ample) when h~ is free to spend it for something hie values more. Any law or policy that increases costs ahead of income cannot be of value in solving problems of unemploy ment. Ii) IDEAS ON LIBERTY WHAT a country wants to make it richer is n~ver consumption, but production. Where there is the latter, we may b~ sure that there is no want of the former. To produce, implies that t~e producer desires to consume; why else should he give himself usel~ss labor? He may not wish to consume what he himself produces, but h~s motive for producing and selling is the desire to buy. Therefore, if the producers generally produce and sell more and more, they certainly also buy more and more.

Gary North THE MORAL ISSUE OF "HONEST MONEY" BECAUSE of the nature of the eco nomics profession-"guild" might be a better word-it is necessary to put quotation marks around the words, "honest money." Economists will go to almost any lengths to avoid the use of moral terms when they dis cuss economic issues. This has been true since the seventeenth century, when early mercantilistic pamphlet writers tried to avoid religious con troversy by creating the illusion of moral and religious neutrality in their writings. This, they falsely imagined, would produce universal agreement, or at least more readily debatable disagreements, since "sci entific" arguments are open to ratio© Gary North, 1982. Gary North, Ph.D., is President of the Institute for Christian Economics. The ICE pub lishes a newsletter, Biblical Economics Today. A free six-month trial subscription is available by writing to SUbscrjption Office, ICE, P.O. Box 8000, Tyler, Texas 75711.

76 nal investigation. The history of both modern science and modern eco nomics since the seventeenth cen tury has demonstrated how thor oughly unreconcilable the scientists are, morality or no morality. Nevertheless, traditions die hard. Economists are not supposed to in ject questions of morality into their analyses. Economics is still suppos edly a "positive" science, one con cerned strictly with questions of "if ... then." lithe government does A, then B is likely to result. lithe gov ernment wants to achieve D, then it should adopt policy E. The econo mist is completely neutral, of course. He is just an observer who deals with means of achieving ends. The economist can therefore deal with "complete neutrality," with this sort of problem: "If the Nazis wish to ex terminate 50,000 people, which are THE MORAL ISSUE OF "HONEST MONEY" 77 the most cost-effective means?" No morali ty, you understand, just sim pIe economic analysis.

The problem with the theory of neutral economics is that people are not neutral, effects of government policies are not neutral, social sys tems are not neutral, legal systems are not neutral, and when pressed, even economists are not neutral. Be cause societies are not neutral, the costs of violating a society's first principles have to be taken into ac count. But no economist can do any more than guess about such costs. There is no known way to assess the true costs to society of having its po litical leaders defy fundamental moral principles and adopt any given policy. And if the economists guess wrong-not an unlikely prospect, given the hypothetical moral vac uum in which economists officially operate-then the whole society will pay. (This assumes, of course, that policymakers listen to economists.) The inability ofeconomists to make accurate cost-benefit analyses of any and all policy matters is a kind of skeleton in the profession's closet.

The problem was debated back in the late 1930s, and a few economists still admit that it is a real theoreti cal problem, but very few think about it. The fact of the matter is simple: there is no measuring device for bal ancing total individual utility vs. to tal dis utility for society as a whole. You cannot, as a scientist, make interpersonal corp.parisons of subjec tive utility. THe better economists know this, but they prefer not to think about it.'i They want to give advice, but as s¢ientists they cannot say what policy is better for society as a whole.! This is why politicians and policy makers have tb rely on intuition, just as the eCOIllomistsdo. There is no scientific standard to tell them whether or notl a particular policy should be imposed. Without a con cept of morality-that some policy is morally superior to another-the economists' "if .~ . . then" game will not answer the Iquestions that need to be answered. Without moral guidelines, thete is little hope of guessing correctlyconcerning the true costs and benefit$to societyas a whole of any policy . .1'he economist, as a scientist, is in lilO better position to make such estimations than anyone else. If anythinig, he is in a worse position, since h~s academic training has conditioned him to avoid mixing moral issues and economic analysis.

He is not used to dealing with such questions. What Is HonestiMoney? Honest money is a social institu tion that arises from honest deal ings among acting individuals. Money is probalbly best defined as the most mark~table commodity. I accept a dollar in exchange for goods or services that I supply only be78 THE FREEMAN February cause I have reason to suspect that someone else will do the same for me later on. If I begin to suspect that others will refuse to take my dollar in exchange for their goods and ser vices in the future, I will be less willing to take that dollar today. I may ask the buyer to pay me a dol lar and a quarter, just to compen sate me for my risk in holding that dollar over time. A currency uni t functions as money-a medium of voluntary ex change-only because people expect it to do so in the future. One reason why they expect a particular cur rency unit to be acceptable in the future is that it has been acceptable in the past. A monetary unit has to have historic value in most in stances, ifit is to function as money.

Occasionally, meaning very rarely, a government can impose a new cur rency unit on its citizens, and some times this works. One good example is the introduction of the new Ger man mark in November of 1923, which was exchanged for the old mark at a trillion to one. But nor mally the costs are so high in having people rethink and relearn a new currency unit that governments avoid such an imposition. Historic Stability The question policymakers must ask themselves is this: To avoid the necessity of imposing a totally new currency unit on a population, what can be done to convince people that the future usefulness of the c·ur rency in voluntary exchange will re main high? What can be done to im prove the historic value of money in the future? In other words, when people in a year or a decade look back at the performance of their na tion's currency unit, will they say to themselves: "This dollar that I'm holding today buys pretty much what it bought back then. I think it's safe for me to continue to accept dollars in exchange for my goods and ser vices, since people trust its buying power. I have no reason to believe that its purchasing power will fall in the future, so I can take the risk of accepting payment in dollars to day." If people do not say this to themselves, then the dollar's pur chasing power is undermined. Peo ple will demand more dollars in pay ment, meaning prices will go up, if they suspect that prices will go up.

This, in turn, convinces more people that the historic value of their money has been unreliable, which then leads to higher prices. The economist will tell you that prices cannot continue to go up un less the government, working with the central bank, accommodates price inflation by expanding the currency base. The economist is correct in the long run, whatever the long run is these days, or will be in a few years. But governments have a pernicious tendency to accommodate price in1982 THE MORAL ISSUE OF "HONEST MONEY" 79 flation. Dr. Arthur Burns was forth right about this back in 1976: These days the Federal Reserve is now and then described as pursuing a restric tive monetary policy. The Federal Re serve is described as being engaged in a struggle against inflation. The Federal Reserve is even charged with being more concerned about inflation than about un employment, which is entirely false. It is by generating inflation, or permitting in flation, that we get unemployment on a massive scale eventually. But let us in the Federal Reserve ask this question: Are we accommodating inflation at the present time or not? The answer-the only honest, professional answeris that, to a large degree, we are accommodating the inflation; in other words, are making it possible for inflation to continue. 2 So we get a kind of self-fulfilling prophecy. The government expands the money supply in order to finance its deficits, or create a temporary economic boom, or whatever, and the prices for goods and services rise.

Everyone in the "great American auction" has more dollars to use in the bidding process, so prices rise. Then the public gets suspicious about the future value of money, because they have seen the loss of purchas ing power in the past. They demand higher prices. Then the Federal Re serve System is encouraged by poli ticians to accommodate the price in flation, in order to keep the boom going (to keep the "auction" lively). The dollar loses its present value, because it has lost its historic value, which encourages people to discount sharply its future value. The secret of retaining the pub lic's confidence iin any currency unit is simple enough: convince users of the money that the issuers are re sponsible, reliable, and trustworthy. Government and its licensed agents have a monopoly of money creation. Private compet!itors are called coun terfeiters. Sad\y, in our day, it is very difficult tolunderstand just what it is that count~rfeiters do, econom ically speaking, that governments are not alreadYldoing. Fiat money is fiat money. (P~rhaps the real legal issue ought to ibe the illegal use of the government's copyrighted ma terial. Copyrigh,tinfringement makes a much more logical casefor Federal prosecution th~n counterfeiting.) Who Guards tHe Guardians?

There is an. ancient question that every society must answer: "Who guards the gu~rdians?" Or in more contemporary· u.sage, "Who referees the referees?" 1I'he public needs an impersonal guardian to restrain the actions of thosel who hold a legal mo nopoly of money creation: the gov ernment, the c¢ntral bank, and the commercial bap-ks. The public can guard the guarHians if citizens have the right to go down to the local bank and receijve payment in gold, silver, or some I other money metal. The issuers of money need only stamp on the paper money (or check, 80 THE FREEMAN February or deposit book entry) that the holder of the currency unit has a legal right to redeem his warehouse receipt for a stated weight and fineness of a specific metal. 3 Whenever the issu ing agencies begin to issue more re ceipts than they have reserves of metal, the public has the option of "calling the bluff' of the issuers, and demanding payment, as promised by law. It is this restraint-implicit economically, but explicit legally which serves as the impersonal guardian of the public trust.

The government can always change the law. Governments do this 'all the time. Whenever there is a major war, for example, govern ments suspend specie payments. They also suspend civil liberties, and for the same reason: to increase the power of the state at the expense of the citizens. Governments in peace time are frequently unwilling to re establish pre-war taxes, pre-war civil liberties, and pre-war convertibility of currencies, long after the war is over. Civil libertarians have not generally understood the case for a gold standard as a case for civil lib erties, despite the obvious historical correlation between wartime sus pension of civil liberties and war time suspension of specie payments. When the authorities declare the convertibility of paper into specie metals "null and void," it sends the public a message. "Attention! This is your government speaking. We are no longer willing to subject our selves to your continual interference in our governmental affairs. We no longer can tolerate illegitimate re strictions on our efforts to guard the public welfare, especially from the public. Therefore, we are suspend ing the following civil right: the public's legal right to call our bluff when we guarantee free convertibil ity of our currency. This should not be interpreted as an immoral act on the part of the government. Con tracts are not moral issues. They are strictly pragmatic. However, we as sure you, from the bottom of our col lective heart, that we shall never expand the money supply, or allow the historic value of the currency to depreciate. It will be just as if we had a gold standard restraint on our printing presses. However, such re straints are unnecessary, and be sides, they are altogether too re straining. "

RedeemabilityRequired Critics of the gold standard tell us that the value of any currency is de pendent on public confidence, not gold. But what the critics refuse to admit is that the existence of the civil liberty of redeemable money is an important psychological support of the public's confidence in money. Even when the public does not un derstand the gold standard's theo retical justification-an impersonal guard of the monopolistic guard1982 THE MORAL ISSUE OF "HONEST MONEY" 81 ians-citizens can exercise their judgment on a daily basis by either demanding payment in gold (or sil·· ver, or whatever) or not demanding payment. Like the free market it self, it works whether or not the bulk of the participants understand the theory. What they do under stand is self-interest: if there is a profit to be made from buying gold at the official rate, and selling it into the free market (including foreign markets) at a higher price, then some people will enter the markets as middlemen, "buying low and selling high," until the government realizes that its bluff has been called, and it therefore is forced to reduce the ex pansion of the money supply.

What is the morality of a gold standard? Simple: it is the morality of a legal contract. A government's word is its bond. A government promises to restrain itself in the cre ation of money, in order to assure citizens that the monopoly of money creation will not be abused by those holding the monopoly grant of power. The gold standard is very much like a constitution: an impersonal, reli able institution which has as its pre mier function the counterbalancing of potentially damaging monopolis tic power. "Flexible" Money Flexible money is a euphemism for the government's ability to in crease (but, historically speaking, rarely to decrease) the money sup ply. The degree of flexibility is de termined by· the political process, not by the ditrect response of those affected, namely, individual citizens who would oth.erwise have the right to demand pa)1ment in gold. Flexible money means monetary inflation.

Very flexible money means a whole lot of monetary inflation. Monetary inflation means, within 24 months, price inflation~ Civillibert~rians instantly recog nize the danger of "flexible admin istrative law,~' or "flexible censor ship," or "flexible enforcement of speed traps." .Yet they have great difficulty in re~ognizing precisely the same kind of evil in "flexible mone tary policy."'Fhe threat comes from the same instjtution, the civil gov ernment. It comes for the same rea sons: the desire of the government to increase its arbitrary exercise of monopolistic power over the citi zenry, and tolhnit public resistance. The inflationary implications of "flexible monetary policy" can be seen in a revealing exchange between Arthur Burns rand Henry Reuss: DR. BURNS: Let me say this, if I may: the genius of m9netary policy-its great virtue-is that it is flexible. With respect to the growth r~nges that we project for the coming year, as I have tried to advise this committee from time to time-and as I keep reminding others, including members of my own Federal Reserve family-our go~l at the Federal Reserve 82 THE FREEMAN February is not to make a particular projection come true; our goal is to adjust what we do with a view to achieving a good perfor mance of the economy. If at some future time I should come to this committee and report a wide discrepancy between our projection and what actually happened in the sphere of money and credit, I would not be embarrassed in the slightest. On the contrary, I would feel that the Fed eral Reserve had done well and I would even anticipate a possible word of praise from this generous committee.

CHAIRMAN REUSS: You would get it, and the word of praise would be even louder and more deeply felt if you came up and said that due to the change in circumstances you· were proving once again that you were not locked on auto matic pilot and were willing to become more expansive if the circumstances warranted. Either way you would get praise beyond belief. 4 Praise beyond belief! Who wants anything less? Just take the mone tary system off"automatic pilot," and turn it over to those whose short-run political goals favor a return of the inflation-generated economic boom, once the boom has worn off because the printing presses are not acceler ating the output of fiat money-fiat money being defined as former warehouse receipts for metal, in which even the pretense of a ware house has been abandoned. Gold is a tough-minded automatic pilot. Politically, there is a great deal of flexibility in monetary affairs. Few people even pretend to understand monetary affairs, and most of those who do really do not understand the logic of the gold standard. The logic is very simple, very clear, and uni versally despised: It is cheaper to print money than it is to dig gold.

Problems with Fiat Money Fiat money is indeed more flexible than gold, especially in an upward direction. Fiat money allows the government to spend newly manu factured money into circulation. It allows those who gain early access to the newly created fiat money to go out and buy up scarce economic resources at yesterday's prices-prices based on supply and demand condi tions that were being bid in terms of yesterday's money supply. But this leads to some important problems. 1. Yesterday's prices will climb upward to adjust for today's money supply. 2. People will begin to have doubts about the stability of tomorrow's prices. 3. Producers and sellers of re sources may begin to discount the future purchasing power of today's dollar (that is, hike today's prices in anticipation). 4. The government or central bank will be severely tempted to "accom modate" rising prices by expanding the money supply.

5. And the beat goes on.

1982 THE MORAL ISSUE OF "HONEST MONEY" 83 Paying for the Guards It is quite true, as Milton Fried man has stated so graphically, that the gold standard is expensive. 5 We dig gold out of the ground in one lo cation, only to bury it in the ground in another location. We cannot do this for free. Wouldn't it be more ef ficient, meaning less wasteful of scarce economic resources, Dr. Friedman asks, just to forget about digging up gold? Why not keep the government or the central bank from expanding the money supply? Then the same ends could be accom plished so much less wastefully. Save resources: trust politicians. This is a very strange argument, coming as it does from a man who understands the efficiency of market processes, as compared to political and bureaucratic processes. The gold standard is the way that individual citizens, acting to increase their own personal advantage, can profit from any monetary inflation on the part of the monetary authorities. They can "buy low and sell high" simply by exchanging paper money for gold at the undervalued, official exchange rate, and hoarding gold in expectation of a higher price, or selling it into the free market at a higher price. Why is the price higher?

Because individuals expect the gov ernment to go back on its promise, raise the official price of gold (that is, devalue the currency unit), or close the gold window altogether. Citizens can becC!>me future-predicting, risk -bearing,! uncertainty-bearing speculators in a very restricted mar ket, namely, ~he market for govern ment promise$. It allows those who are skeptical about the trustworthi ness of government promises to take a profit-seeking position in the mar ket. It allows those who trust the government-. ~o deposit money at 6 per cent or 10 per cent or whatever. Each side cart speculate concerning the trustwortihiness of government promises con~erning redeemability of the currenclY,or more to the point, government promises concerning the future stabilitjYof the currency unit's purchasing power. Let the Market Function Defenders· of the commodity fu tures markets+-and this includes Dr.

Friedman-argue that the exis tence of a ma:r-ketfor future delivery and future payment of commodities smooths out· market prices, since it opens the market to those who are willing to bear the uncertainties of predicting th~ future. Those who are successful predictors increase their profits, and tl).erefore increase their strength in establishing market prices according to the true future conditions of! supply and demand. Those who ane less successful soon are forced out of the futures mar kets, thereby Ipassing along capital to those who: are more successful predictors. Th~ public is served well 84 THE FREEMAN February by such markets, for obvious rea sons. Prices adjust to future con sumer demand more rapidly, since accurate future-predictors are being rewarded in these markets. Then why not a market for future government promises? Why not a market which can test the govern ment's willingness to deliver a stated quantity and fineness of gold or sil ver (but preferably gold, given in ternational exchange)? The monop olists who control the money supply then are faced with a market which offers rewards to those who are will ing and able to "call the monopo lists' bluff' and demand gold for the government's warehouse receipts.

Why not just rely on the standard commodity contracts for gold in the commodity futures markets? Won't skeptics be able to take their profits this way? Why bring in the "spu rious" issue of a convertible cur rency? The answer is simple enough: once society has given a monopoly to the government to create money, then the full redeemability of the currency unit is a direct, immedi ately felt restriction on government power. Of course the free market in commodities allows speculators to take advantage of monetary infla tion, if their timing is correct. But this does not mean that the public at large will exercise effective action to force a political change in present monetary policy. There is no imme diate self-interest involved in expending resources in what could prove to be a fruitless, expensive campaign to stop the inflation. Fixingthe Responsibility In the commodities market, one investor wins, and one investor loses (unless the price stays the same, in which case only the broker wins). By establishing the gold standard-full redeemability of gold on public de mand-the government forces the Treasury to risk becoming an im mediate, measurable loser. It forces the Treasury's officials to come back to the politicians and announce, "Folks, we have lost the bet. The public has called our bluff. They have drained us of our gold. We can't go on much longer. We have to stop the inflation. We have to convince the public to start trusting the currency, meaning that they should start trusting our competence in securing them a currency with a future. We have to balance the budget. Stop in flating!"

An open commodities market in gold is desirable, of course. But it is no substitute for a gold standard, if the state has a monopoly of money creation (along with its licensed subcontractors, the banks). Unless there is full redeemability, the Treasury is not forced by law to "go long" on its promises whenever any one else wants to "go short." Without full redeemability, the Treasury, meaning the government, 1982 THE MORAL ISSUE OF "HONEST MONEY" 85 can keep on shorting its own prom ises, despite the response of orga nized commodities markets, until an expensive and successful political campaign can be launched to stabi lize the money supply. As free mar ket analysis tells us, these cam paigns are expensive to launch because of such factors as informa tion costs, costs of organizing pres sure groups, and the lack of an im mediate, short-run pay-off to "investors" who contribute money to such a program. Full redeemability allows market forces to work. Self interested forecasters can speculate in the government promises market.

The public never has to be told to vote, or send letters of protest, or do anything. The self-interested specu lators-a small but well-capitalized elite-will do the "policing" job for the citizens free of charge. 6 (Well, al most: there are transaction costs.) So when we are told that it is in efficient to dig gold out of the ground, only to deposit it in a vault, we are not being told the whole story. By tying the currency unit to that gold which is wonderfully expensive to mine, as any monetary brake should be and must be-the body politic en lists a cadre of professional, self-in terested speculators to serve as an unpaid police force. This police force polices the trustworthiness of gov ernment monetary promises. The public can relax, knowing that a hard core of greedy capitalists is at work for the publi~ interest, monitoring Federal budgets, Federal Reserve policies, and $imilarly arcane topics.

By forcing th~ Treasury to "go long" in its own promises market, the guardians a~ guarded by the best guards of all: I future-predicting, self interested sp~culators whose job it is to embarrass Ithose who do not honor contracts-monetary contracts. Conclusions' I suppose IIcould invest more time in presentingi graphs, or faking some impressive..]ooking equations, or citing innurPerable forgotten de fenders of t~e gold standard. But I think I have (reached the point of di minishing r~turns. The logic of the gold standarc1lis really fairly simple: Treasury moropolists, like all other monopolists~ cannot be trusted to honor their Pliomises.Better put, they cannot be trusted at zero cost. The gold standard is one relatively in expensive w~y to impose high costs on government monetary officials who do not hpnor their implicit con tracts with the body politic to moni tor and deliver a reliable currency unit that will have future value-a trustworthy :p1oneysystem.

There are' moral issues involved: honoring c(>t\tracts, preserving so cial stabili tYi, providing a trustwor thy governIAent. There are civil lib erties issue$ involved: protecting citizens from unwarranted taxation through monetary inflation, protect86 THE FREEMAN February ing citizens from arbitrary (read: "flexible") monetary policies, and restricting the expansion of govern ment power. There are economic is sues involved: designing an institu tional mechanism that will bring self interest to bear on political-eco nomic policies, to stabilize purchas ing power, to increase the spread of information in the community, and to increase the political risks for money monopolists. No doubt, I could go on, but these arguments seem sufficient. The real question is more funda mental: Do we trust governments or the high costs of mining precious metals? William McChesney Mar tin, Dr. Burns' predecessor as Chair man of the Federal Reserve Board, gave us the options back in 1968, in the midst of an international mone tary crisis: "It's governments that you have to rely on. Basically, you can't rely on a metal for solvency."7 Those of us who cannot bring our selves to trust the government with any monopoly over the control of money prefer to trust a metal. It may not be the best thing to trust, but it is certainly more reliable than gov ernments.

KeepingGovernmentHonest The case for a gold standard is the case against arbitrary civil govern ment. While politicians may well re sent "automatic pilots" in the sphere of monetary policy, if we had a more automatic pilot, we would have less intensive "boom-bust" cycles. When the "automatic pilot" is subject to tinkering by politicians or Federal Reserve officials, then it is not au tomatic any longer. The appeal of specie metals is not the lure of magical talismans, as some critics of gold seem to imply. Gold is not a barbarous relic. Gold is a metal which, over millennia, has become acceptable as a means of payment in a highly complex insti tutional arrangement: the monetary system. Gold is part of civilization's most important economic institu tion, the division - of - labor - based monetary system. Without this di vision of labor, which monetary cal culation has made possible, most of the world's population would be dead within a year, and probably within a few weeks. The alternative to the free market social order is govern ment tyranny, some military-based centralized allocation system. Any attempt by the state to alter men's voluntary decisions in the area of exchange, including their choice of exchange units, represents the true relic of barbarism, namely, the use of force to determine the outcome of men's decisions.

The gold standard offers men an alternative to the fiat money sys tems that have transferred massive monopolistic power to the civil gov ernment. The gold standard is not to be understood as a restraint on men's 1982 THE MORAL ISSUE OF "HONEST MONEY" 87 freedom, but just the opposite: a means of restraining that great en emy of freedom, the arbitrary state. A gold standard restores an element of impersonal predictability to vol untary exchange-impersonal in the limited sense of not being subject to the whims of any individual or group. This predictability helps to reduce the uncertainties of life, and there fore helps to reduce the costs of hu-· man action. It is not a zero-cost in-· stitution, but it has proven itself as an important means of reducing ar bitrary government. It is an "auto matic pilot" which the high-flying, loud-crashing political daredevils resent. That, it seems to me, is a vote in its favor. @ -FOOTNOTESIFor those who are curious about this great debate over the impossibility of making inter personal comparisons of subjective utility, see the exchange that took place between Sir Roy Harrod and Lionel Robbins: Roy F. Harrod, "Scope and Methods of Economics,"· The Eco nomic Journal (Sept., 1938) and Lionel Rob bins, "Interpersonal Comparisons of Utility: A Comment," The Economic Journal (Dec., 1938).

For some "new left" cQnclusions concerning the A Glut of Money results of this debate, see Mark A. Lutz and Kenneth Lux, The Challenge of Humanistic Economics (Men~o Park, Calif.: Benjamin/ Cummings, 1979),i pp. 83-89. For my own ob servations on its implications, see Gary North, The Dominion Cov~nant: Genesis (Tyler, Texas: Institute for Christian Economics, 1982), ch. 4. 2Federal Reserve Consultations on the Con duct of Monetary 'Policy, Hearings Before the Committee on Bapking, Currency and Hous ing, House of Representatives, 94th Congress, 2nd Session (July 127 and 28, 1976), pp. 26-27. Printed by the lJ.$. Government Printing Of fice, Washington, D.C. 30n money as a Iwarehouse receipt, see Mur ray N. Rothbard, M.an, Economy and .State (New York: New York Ut;liversity Press, fI96211975), pp.700-3. 4FederalReserv~ Consultations, p. 13. 5WritesProf. Fri~dman: "My conclusion is that an automatic commodity standard is neither a feasible nor a desirable solution to the problem of establishing mpnetary arrangements for a free society. It isnbt desirable because it would involve a large cQst in the form of resources used to produce the monetary commodity."

Capitalism and Freedom (Chicago: University of Chicago Press, 1962), p. 42. 6"By creating m~nitors with a vested interest in the maximization of a given set of values, property rights repuce the social cost of moni toring efficiency.",Thomas Sowell, Knowledge and Decisions (N~w York: Basic Books, 1980), p.125. 7William McCh~sney Martin, quoted in the Los Angeles Tim~~ (March 19, 1968), Pt. I, p. 12. IDEAS ON LIBERTY IT CAN, I think, be laid down as a universal rule that all inflation is caused by the acts or politics of government, aplOng which is any large increase in the debts of the central government. A large increase in government debt by borrowing at the banks Greates a glut of money, which causes money to lose value. SAMUEL B. PETTENGILL, "Inflation Is a Burglar"

Mark D.lsaacs BUREAUCRACY, PRODUCTIVITY, AND INFLATION WHAT IS WRONG with this country? American-made products, once the world standard for superior work manship and quality, are now re garded as "cheap and inferior." Many American workers are grumbling and demanding more benefits, longer coffee breaks, and a voice in com pany affairs. Managers on the other hand often complain that today's workers are less competent, depend able, and motivated than 10 or 20 years ago. Poor job performance, chronic absenteeism and theft of company equipment plague many domestic firms. Workers are now paid more than ever before (the average wage for a nonagricultural indus trial worker during October 1981 was a record $258.55 a week) and yet, American workers are still un happy. Money no longer seems to motivate, and traditional manage rial methods no longer seem to be effective. It seems, from the perspec tive of the business world, that things Mr. Isaacs is research economist with the American Institute for Economic Research, Great Barrington, Massachusetts. The views expressed here are his own.

88 are really falling apart. On the sur face it appears the Protestant work ethic, with its traditional virtues of hard work and thrift, does not apply to the "complex modern world." In the past few years, an increas ing amount of media attention has been focused on this latest domestic problem. Management experts, pol iticians, and other "opinion leaders" who professionally ponder and write about these momentous issues, have officially dubbed this the great "pro ductivity crisis." One common char acteristic of the "crisis" literature produced by these authors is that it usually manages to trace the source of the problem to some antisocial group or some strange mass meta physical affiiction. When they are not blaming society as a whole these thinkers often blame inferior pri vate sector management. Some claim it is the fault of greedy labor unions, others say it is the "new values" of the baby-boom generation, and a few attribute the problem to a lack of knowledge of Japanese manage ment techniques. The solution, say BUREAUCRACY, PRODUCTIVITY, AND INFLATION 89 these writers, must be found; it is an issue of "national pride,"and a prob lem that only a bigger federal gov ernment can solve.

Two Types of Management This productivity problem that has recently received such wide media attention is not due to society, infe rior private sector management, unions, "baby-boom" generation value shifts, or ignorance of Japa nese culture. As interesting as these theories are, perhaps in their efforts to assign blame, these "crisis" ex perts have missed the main prob lem: the insurmountable problem of trying to manage, produce, and market goods in an economic envi ronment polluted by the govern ment's depreciating fiat currency. To understand the ramifications of this, and its link to the "productivity problem," we must examine two ba sic terms employed by Ludwig von Mises in his 1944 book, Bureau cracy. These terms are: profit man agement and bureaucratic manage ment. Ludwig von Mises described profit management as that form of man agement directed by the profit mo tive and measured by economic cal culation. Economic calculation via the double-entry bookkeeping sys tem is the device profit managers use to allocate scarce resources and to make rational business decisions. In an unhampered market economy, the objective of ~very manager is to di rect production to achieve a profit and avoid a loss. Entrepreneurs hire managers (al specialized form of la bor) for this expressed purpose. Eco nomic calculation, measured in terms of money (the common medium of exchange) pnovides a standard unity of objectivelpr the endless variety of private-sectqr firms found in a free economy. Eimployees of business ventures ar~ clearly aware of this basically simple objective, I.e., "to make money." Accounting records are kept in these standard units of exchange. These records provide profit managers with detailed infor mation as to which area, or depart ments of the firm are in need of la bor or capital reallocation. In this way, errors, which will occur in any human system, will be corrected early in thelproduction process and inefficiency ~s thereby minimized.

Furthermore, because economic calculation ~s so precise, outstand ing managers, employees, and de partments can be directly and indi vidually rewarded for their superior performance'! and hard work. Eco nomic calculation also enables man agers to identify individuals that are not performing up to expectations. Once identifi~d, these individuals can be specially motivated, replaced, or transferred, idepending on manage rial discretion. This emphasis on di rect reward I for individual perfor mance is tHe special and unique 90 THE FREEMAN February attribute of the profit management system. Therefore, because merit alone is the measure of each individ ual, and because labor is a scarce resource, sexism, discrimination, nepotism, and other employment evils commonly found in economic systems where profit management is suppressed, become a costly luxury few firms could afford. Unchecked Bureaucratic Management Ludwig von Mises described bu reaucratic management as that form of management that cannot be mea sured and checked by economic cal culation. In the private sector, profit managers must generate all reve nues in voluntary transactions with free-willed consumers. Management decisions are directly linked to profit and loss figures. A bad management decision will be reflected as a decline in revenues. This direct relationship between satisfying consumer needs and the generation of revenues keeps profit managers "in tune" with their customers.

In the public sector, however, this direct relationship between serving consumer needs and sources of rev enue does not exist. Governments are political organizations of coercion. When governments need money, they do not offer goods and services to the public in return for voluntary con tributions. Governments generate revenues by levying taxes on the private-productive sector. In other words, public-sector revenues are derived by involuntary means, and are not linked in any way to positive performance or servicing consumer needs. As a result, the achievements and blunders of bureaucratic man agement are independent of mone tary incentive and disincentive. Bu reaucratic management decisions are therefore not restricted by "petty" consumer demands. In the public sector, the whims of political action displace economic calculation. Since bureaucratic managers do not have the benefit of economic cal culation as do their fellow private sector managers, public administra tion can never hope to be as efficient as the private sector management.

In fact, it is hopeless to expect the public sector to even approach pri vate sector efficiency levels. To manage at all, public administra tors are forced to employ inferior non monetary managerial methods. These methods are inferior for many reasons, but the most glaring is that the direct link between performance and revenue sources has been sev ered. Performance of public employees can not be measured in precise mon etary terms, so subjective yardsticks like peer review or political judg ment must be used instead. These methods are inferior because subjec tive standards of measurement vary from manager to manager and from 1982 BUREAUCRACY, PRODUCTIVITY, AND INF~ATION 91 bureau to bureau. It is not surpris·· ing then to see how at times these non-monetary "standards" can clash and cause conflicts between various bureaus or departments. In the public sector, because the concrete measuring mechanism of economic calculation is missing, inefficiency becomes chronic, and limited resources are wasted keep ing tabs on various non-monetary standards. Red tape chokes the sys·· tern, and corruption becomes ram·· pant. Administrative costs grow un checked, and errors go undetected.

and are compounded. The Anarchyof CentralPlanning Despite reams of historical evi·· dence documenting the total impos sibility of a successful non-monetary management method, the quest for the "ideal" non-monetary method continues unabated. Socialist and. interventionist academics are ex perts at producing elaborate non monetary schemes that attempt to manage and allocate resources. During the past 150 years, socialists of all parties have produced literally hundreds of various schemes that exclude economic calculation and replace it with a variety of more "humane" methods such as central planning by elite bureaucrats work ing in the "public interest." Indeed, this is the very cornerstone of social ist theory, to rid the world of de spised money and the social evils it allegedly causes. The problem is, once money has be~n destroyed, nothing remains but the anarchy of central planning to fill the void.

So what does bureaucratic man agement, and' profit management, have to do with the so-called produc tivityproblem in America today? Everything! Cpnsider this. In 1944 Ludwig von i\4ises wrote "Bureau cratic management is the only alter native available where there is no profit and loss management." The problem with productivity in Amer ica today is tq.at the private sector has become bureaucratic. The pri vate sector has become bureaucratic not becausedf some natural ten dency of capit~lism to form giant in efficient monopolies (as some inter ventionists have charged). Rather, the private sector has become bu reaucratic in 'reaction to years of systematic go'Vernmental interven tion. Governrilent intervention of course takes' many forms, but the form we are concerned with here is inflationism. Profit mana;gement presupposes sound money. ! Sound money is the yardstick profit managers use to perform their economic calculations.

Inflation (an ip.crease in the quan tity of money) I alters this yardstick. Money no longer is a standard unit of value, but instead a flexible unit; controlled bynolitical forces, it can rapidly depreciate over short peri ods of time.

92 THE FREEMAN February Inflation alters the real profits and losses of a firm. Profits are over stated, which attracts greater amounts of capital, which is then malinvested by misinformed man agers. Depreciation figures tend to be understated, and capital accu mulation is retarded or eroded. The private sector's double-entry book keeping system is basically crippled. Accounting data become so blurred that rational economic calculation becomes merely a business school theory. Inflation then is more than just an attack on sound money, it is an attack on profit management it self. For without economic calcula tion, profit managers are no better off than their hapless public sec tor counterparts who are forced to blindly manage and measure the bureaucracy by non-monetary methods. Real EarningsDecline Let's restate the basic problem once again: (1) workers are unhappy, (2) money no longer seems to motivate, (3) job performance is poor, (4) ab senteeism is chronic, and (5) youn ger employees seem to have aban doned traditional values. As we stated above, workers are paid more now than ever before. On the sur face, it would appear that today's workers have adopted new values and goals. This record wage figure however, is in current or nominal dollar units. When inflation is factored out, and average wages are measured in constant or real dollar terms (in this case 1967 dollars), a very different picture emerges.

The Department of Labor, Bureau of Labor Statistics, reported that during November 1972, the real weekly earnings of an average pri vate nonagricultural worker was $110.22. This figure reported for No vember 1972 is significant because this was and still is the record for this series. Since November 1972, the average nonagricultural worker has taken a cut in real wages virtually every month. By October 1981, the average nonagricultural worker in real dollars earned only $92.41 a week. Today's average worker then, earns $17.81 less in real dollars per week than he did during November 1972 for doing basically the same job! This category is perhaps too gen eral, because, of course, not every worker or employee fits into the "av erage." But, during this period, al most every profession or job class has been affected by similar cuts in real wage rates. U.S. News and World Report recently cited several specific occupations whose real wages have been cut by inflation. U.S. News re ported the average salaried lawyer suffered a 4.4 per cent loss in earn ings between 1971 and 1981, the av erage journeyman engineer earned 7.5 per cent less between 1971 and 1981 and a mid-level accountant lost 5.2 per cent in real earning power 1982 BUREAUCRACY, PRODUCTIVITY, AND IN~LATION 93 during the same period. The point here is that average real American wages in the private sector are less than they were ten years ago. This means most people in most occupa tions are worse off financially than in 1972.

How Workers Respond Individual workers react in differ ent ways to these cuts in real in comes. Some complain, or some stay home more; they figure "What's the sense in working when my money is worth less anyway." Some workers no longer care, so they do sloppy work on the job. When inflation destroys their real incomes, employees adjust to new comPensation conditions over time. "Minimum work for minimum pay" replaces honest work for hon est pay. Money no longer seems to motivate because many employees have realized they are no longer paid in real money. When real wages decline, under paid workers feel stuck, exploited and used by their employers. (This is beneficial to union organizers.) Mo rale suffers, and worker discontent further disrupts production. Values have not shifted, as some writers suggest; today's workers are ratio nally reacting to new market condi tions just as their forefathers would have done. As in the past, today's workers are merely substituting a more satisfactory state of affairs (leisure) for a less satisfactory one (declining wages). This is basically the productiv~ty problem from the labor point of ~iew.

In an infla~ionary business envi ronment, beh~vior of profit manag ers also changes. Because of the de struction of eqonomic calculation by the governm¢nt's inflationist poli cies the priv4te sector is forced to employ non-ntonetary management methods in' &n effort to keep the wheels of production rolling. This is why Japanese management (Theory Z), managem.ep.tby objective, worker self-management, and other such non-monetar~ schemes are so popu lar in the priv~te sector today. These methods are p$pular not because they are superior or more efficient, but because they 'are the only alterna tives. When :spund money has been destroyed, profit management and efficiency are i destroyed along with it. In closing~ Iwe should recall the words of Ludwig von Mises. In H u man Action Mises wrote, "For more than a hundred years the substitu tion of sociali~t planning for private enterprise has been the main politi cal issue." mhe issue here is not "productivity t but a continuation of this "planning" assault on the pri vate sector, vja depreciation of cur rency . Unless i sound money and eco nomic calculation are restored, "America's ~eat productivity prob lem" can onlyifurther deteriorate. , Clarence B. Carson Reasoning on~e Nature of Things SEVERAL YEARS AGO, a friend of mine suggested that there needed to be a renewed interest and emphasis on rights in the discourse on economic matters. It was all well and good, he said, to be told that it was not expe dient to regulate this or that or the other, that confiscatory taxation produced undesirable social conse quences, that redistribution of the wealth reduced incentives to work, that increasing the money supply resulted in the declining value of the money, and that government in tervention in the economy produced assorted social ills. He did not ques tion that such assessments were cor rect. But it was equally or more im portant, he thought, to get back to the basic concept of rights.

My friend was aware, of course, that there was hardly a shortage of Dr. Carson has written and taught extensively, spe cializing in American intellectual history. He is the author of several books and a frequent contributor to The Freeman and other scholarly journals. 94 talk about rights. Just about every sort of thing imaginable was, and is, being asserted and claimed as a right, ranging from the alleged right of women to abort unwanted pregnan cies to the right of prisoners to a pre cise number of cubic feet of space. Every session of the Supreme Court seems to bring forth a new crop of rights, if in no other way than by its refusal to entertain appeals from de cisions of lower courts which have elaborated some new set of rights. Even. acts of Congress sometimes contain provisions which take on the color of rights. He was not speaking of this new crop of rights, however, for he understood, I think, that however august the bodies which proclaim them they are but assertions of the will and power of men. These al leged rights have no more substan tial backing in right than do Federal Reserve notes now have in silver and gold. They are fiat rights much REASONING ON THE NATURE OF TH[NGS 95 in the same fashion as our money is fiat money.

Natural Rights The rights my friend had in mind were of much more ancient vintage and claimed something much more substantial for their authority. They were rights said to subsist in the na ture of things and to antedate gov ernments, courts, and constitutions even. The economic rights he had in mind consist of such things as the right of man to the fruits of his la bor, to exchange his goods freely with ot~r owners, to have, to hold, and to dispose of his property, and to be secure in his possessions without ar bitrary interference from any per son or governmental authority. The importance of his point has become much clearer to me in recent months. The election of Reagan to the presidency, the gaining of a Re publican majority in the Senate, and the increase of conservatives in the House, have been interpreted as a major change in the thrust of gov ernment. Also, Reagan has been most vigorous in promoting his economic program during the first six months or so in his term of office. There has been considerable talk of economic freedom, of freeing enterprise, of re moving government controls, and the like. But the justifications of these, so far as I am aware, have been made almost solely in utilitarian and pragmatic terms.

The justification for lowering taxes was not that! people have a right to the fruits of their labors but that it could result in more saving, capital formation, ltiore jobs, and increased production. Ip. short, the emphasis is wholly on tll-e social benefits to be obtained, not the vindication of the rights of individuals. Some of the weaknesses ~f this approach are al ready becom~ng apparent. It hinges everything pn good economic re sults, whicn mayor may not be forthcomingjshortly. Moreover, it is readily interpreted in the frame work of econ.omic planning, though different fro~ some that has pre ceded it. It makes it appear, too, that government 'is responsible for mak ing the ecop.omy perform well, a conception ~hat underlay the in creasing government intervention over the years. It is not my purpose, however, to make a criti1que of the Reagan pro grams. Rattier, I call attention to them only to make clear that there is something missing from the jus tifications bbing offered. Nor is it merely something incidental to them; it is critical" even essential to their justification land direction. The gap in the thin~ing of the Reagan peo ple, the omitted justification on the basis of righ~s, is not something pe culiar to tht)m, however. It is char acteristic Qfi our times. There is a gaping hole in modern thought.

Thinking In terms of the nature of 96 THE FREEMAN February things, which is essential to the dis covery and ascertainment of rights, while it occurs, is not in keeping with generally approved modes of thought. It is no less valid today than it ever was, but for many years now it has not been in keeping with intellectual fashion. It will be help ful, then, to examine how that came about and what was involved before giving some examples of how it works. The Natural Law Philosophy Reasoning on the nature of things was part and parcel of a complex of ideas which are sometimes referred to as the natural law philosophy. It needs, then, to be examined within that context. The natural law philosophy was largely abandoned in the course of the nineteenth century. Its aban donment signified a major shift in thought. Natural law doctrines had been a staple of Western thought since the time of the Roman Stoics, and its antecedents go back even further than that. Interest in it was not constant, of course; it waxed and waned over the centuries. But every revival of learning and renaissance (harking back to and rediscovering aspects of Ancient thought) brought renewed interest in natural law, up to and including the classical re vival of the seventeenth and eigh~ teenth centuries. Indeed, Otto Gierke declared that "The development of natural-law ideas ... attained its culmination at the end of the eigh teenth century. After that time," he continued, "we can begin to trace a process of collapse and disintegra tion in the natural-law system of thought. "1 I referred to it as a philosophy above, yet it was never quite that in an all-embracing sense. It did attain to the rank of a philosophy of law in ancient Rome, was revived as part of a more comprehensive scheme of law by Thomas Aquinas, and under girded the development of modern law from the Renaissance down through the eighteenth century.

Overall, though, it was more of a way of perceiving reality than a con sciously elaborated philosophy. As such, it was an offshoot of meta physics, from which it entered deci sively into the development of sci ence in the seventeenth century. Those who view it simply as a legal theory, or even more broadly, as a theory of society and the state, un derstate its claims and impact. In its varied applications it suffused thought in the eighteenth century, ranging from music and poetry to politics and science. The impact of the natural law idea is suggested in this summary by· a contemporary scholar: "It was a the ory which culminated in the Ameri can Declaration of Independence in 1776 and the French Revolution in 1789. It was a theory adorned by 1982 REASONING ON THE NATURE OF THINGS 97 many illustrious names-Hooker and Suarez; Althusius, Grotius and Pu fendorf; Milton and Sidney; Hobbes, Locke and Rousseau; Spinoza and Leibnitz; Thomasius and Wolff ...

Vico and Beccaria; Fichte and Kant."2 But if we examine the extended im pact of the concept, many more fa mous names should be included in the roll: Newton, Galileo, and Franklin; Haydn, Mozart, and Vi valdi; Jefferson, Adams, and Paine; Blackstone; Hume, Smith, Turgot, and Ricardo; Pope, Addison and Steele. Perhaps, the natural law theory can be best understood in terms of certain doctrines developed out of it. Underlying these doctrines was the belief that this is an orderly uni verse, that there is an underlying natural order that makes it so, that there is a law for man and a law for things,· that everything has its own nature imbedded in it, that these things account for perceived regu larities, and that there is a remark able harmony pervading all of Cre ation. The following are some of the natural law doctrines: state of na ture, the laws of nations, social con tract, and natural rights.

Natural Law Doctrines The key to the natural law doc trines is that they come into view when we focus our attention on the enduring features of reality. They are discovered by an act of the mind in stripping away all that changes, that is ephemeral, that is cultural, that is a result pf history, that is pe culiar to each ihdividual thing. It is in this fashion that we discover the nature of things, the laws that gov ern or pertain to them, the way they are and can bef For example, if we would know the nature of man, we must remove everything that is ac cidental to any particular man (or woman) in any particular time or age: dress, language, size, girth, how hairy he is, color, and what have you. Then, we.ask what the distinc tive features of his kind are. What are the potentinlities of his being? By such methods and with such questions we may come to a grasp of the nature of man. Much was lost, as I say, by the abandonment of the natural law concept by so many thinkers in the nineteenth century. I do not mean to suggest, of course, that it has been entirely aband9ned or that relics from it are notstill around. The nat ural law theories have been kept alive by some Catholic scholars, particularly Thomists. Such think ers as Joseph Wood Krutch, Leo Strauss, and Erlc Voegelin have kept some of the basic concepts alive in our time. And, so long as the United States Constitution or classical eco nomics, to take two examples, re main, something of the natural law natural rights' doctrines will re main.

98 THE FREEMAN February But from the early nineteenth century onward there was a decided shift away from the mode of think ing that nurtured the natural law concepts. Romantics continued to admire nature, indeed, many of them venerated it, but they concentrated on nature in the concrete rather than the abstract. They emphasized the particular and the unique rather than the general, the abstract, and the universal. One of the offshoots of romanticism was historicism, a movement to locate reality within the uniqueness of·.particular historical events. G. W. F. Hegel provided the philosophical ballast for locating reality within historical develop ment. The evolutionary theories of the nineteenth century had residues of natural law, but they were changed into laws of historical de velopment, and natural law became driving force rather than underly ing order. The outlook had shifted from a focus on the enduring to the placing of the whole attention on the changing. History had largely re placed philosophy.

The Utilitarians The abandonment of the natural law doctrines was not simply a mat ter ofa shift in outlook. Some think ers repudiated, denounced, and den igrated the very idea of natural laws. The utilitarians were among the more outspoken of these. Jeremy Bentham said of those who believed in natural law that they "take for their subject the pretended law of nature; an obscure phantom, which in the imaginations of those who go in chase of it, points sometimes to manners, sometimes to laws; some times to what law is, and sometimes to what it ought to be."3 John Stuart Mill attacked the very notion of a benevolent and orderly nature (attacking nature andcharg ing it with cruelties much in the manner that some attack or ques tion God). He said, "Nature impales men, breaks them as if on the wheel, casts them to be devoured by wild beasts, burns them to death, crushes them with stones ... , starves them with hunger, freezes them with cold, poisons them ... , and has hundreds of other hideous deaths in re serve .... " Moreover, "Even the love of 'order' which is thought to be a following of the ways of Nature, is in fact a contradiction of them. All which people are accustomed to dep recate as 'disorder' and its conse quences, is precisely a counterpart of Nature's ways. Anarchy and the Reign of Terror are overmatched in injustice, ruin, and death, by a hur ricane and a pestilence .... "4 Mill was, of course, dealing with nature in the concrete, as many ro mantics did, but without their ad miration of it. Bentham, too, was misconstruing the natural law the ory, to some extent anyway. All this is the more strange because none 1982 REASONING ON THE NATURE OF THINGS 99 were more devoted to the principles of economics than were the utilitar ians, and they surely did not believe that these were of man's devising.

My suspicion is that they both mis construed natural law and found it a nuisance in some of their endeav ors. In his efforts at legal reforms, Bentham encountered natural law exponents as an obstacle and simply repudiated the theory. Mill became a socialist, at the last, which was a logical culmination of his utilitarian premises unrestrained by a counter vailing belief in a natural order which made socialism impossible. This brings us to the crux of the matter. For socialism even to have a chance at being intellectually re spectable, .it was necessary for the belief in a natural order (and a re vealed Divine order), in a metaphy sical realm in which it subsists, and in natural law, to lose its sway. There must be a belief that men can devise a system unhindered by any under lying order. That is not to say that those who do not believe in natural law inevitably become socialists. It is rather to suggest that socialism arose in the wake of the decline in the belief in a natural order (ofwhich natural laws were believed to be the most precise evidence) and that the removal of this formidable obstacle prepared the way for it.

The economic rights to which my friend referred were natural rights in origin. The concept of natural rights was one of the natural law doctrines, andiwith the fall of natu rallaw went natural rights as well. Men continued to speak of rights, of course, but such support as they had now was only ~n positive law. That meant that they could be extended or withdrawn at the will of the rul ers, and only expedient arguments could be raised for or against them. But before looldng further at natu ral rights there' is a related point that needs to be made. Classical Economics Classical economics was born out of the belief in an ordered universe and the prevailing natural law doc trines. That is! another way of say ing that the idea of economic free dom was first given theoretical formulation out of this complex of ideas. Adam Smith's Wealth of Na tions, publish~d in 1776, was the landmark publication for the devel opment of classical economics. Smith maintained that the industrious in dividual in th~ pursuit of his own interest contributes to the well-being of others when he buys and sells goods in the lJlarket. He is bent to the pursuit of,his own interest by nature, and hiis condition in this world is such t~at if he pursues it in a productive w~y he must contribute to the general stock of goods.In doing this, "he intends only his own gain, and he is in this, as in many other cases," Smith said, "led by an invis100 THE FREEMAN February ible hand to promote an end which was not part of his intention."5 There is a natural order of things, so to speak, which makes it so.

It is not necessary for government to intervene to bring about these conditions of economy, and it would be presumptive and disruptive, Smith held, for it to do so. Instead, "All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws ofjustice , is left per fectly free to pursue his own interest his own way, and to bring forth both his industry and capital into com petition with those of any other man, or order ofmen."6 Smith arrived at these conclu sions by keeping his attention fo cused on the nature of things: the self-interested nature of man, the nature of production, the nature of society, and the nature of the mar ket. It is easy to be misled, however, by his statement that a "simple sys tem of natural liberty establishes it self of its own accord." This assumes a government which is attending to its proper business, that the "law of justice" prevails, and that individu als and voluntary groups are pro tected in the enjoyment of their rights. In short, it assumes that in dividuals have rights, and, given the intellectual outlook of the time, they were understood as natural rights.

The problem can be stated in this way: Given the existence of govern ment with its monopoly of the use of force, what is to keep it from inter fering in the economic undertakings of individuals? And, in any case, what is the boundary between the business of government and the business of individuals and volun tary groups? That is where rights come in. Like an Auto Without Brakes Government unrestrained by the rights of people under its jurisdic tion is like an automobile without brakes. It would be possible, of course, to build such an automobile, or even to remove the brakes from those already built. Such automo biles would work very well, too, in most respects. They would run as well as those with brakes, acceler ate, go up hills, and they might even get lucky passengers to their desti nations. But I would not want to bet on the safety of the passengers or of anyone else in their vicinity. Auto mobiles without brakes would be a constant threat to the lives and property of all who used them or those around whom they were being used. Pedestrians would be run down at crossings; horrible crashes at in tersections would be the norm; and even houses and buildings would be in perpetual danger.

Governments without brakes sup1982 REASONING ON THE NATURE OF THINGS 101 plied by the rights of their citizens are equally, or even more, danger ous. Property is at peril when gov ernment is unrestrained; trade is precarious; all sorts of interventions may hamper the production and dis tribution of goods.In a broader sense, the lives and liberties of all are in perpetual danger. That such behav ior by government would not be in the best interest of the people may indeed be a valid argument, but those with power in their hands are not likely to want for long justifications of every sort of depredation. Minus individual rights and the conception of a natural order, the arguments of Smith and the classical economists can be stood on their head. It is not necessary to imagine this reversal, of course; it has actually taken place. Adam Smith stressed the social benefits to be derived from economy. The title itself, The Wealth of Nations, suggests that this is the end of economy, though that was hardly the point of the work. None theless, this notion of the purpose of economy was planted, indeed, had already been planted by the mer cantilists, whom Smith devoted his major effort to refuting. Nineteenth century utilitarians added the con cept of "the greatest good for the greatest number" as the touchstone for the justification of an economy.

They repudiated natural law and with it all but remnants of a concep tion of a natural order. Enter, the Historicists The stage w~s set for the histori cists who would conceive of any economy as si~ply a result ofhistor ical developm~nt. The idea of public benefit as the ,goal of economic activ ity remained~ put with only partic ulars to guide it, it was easy enough to show that many people were not apparently benefiting much from a given economic system. Hence, the justification for government inter vention, or ev~n revolution. The so cial benefits ate to be achieved, in this scheme, at whatever intrusion upon the righ~s of individuals may be necessary to achieve them. Now, let us 'set Adam Smith up right once agaih. He did not say that the goal of so¢ial benefit was the cause of the we~lth of peoples and of nations. On the contrary, he de clared that he had "never known much good done by those who af fected to trade for the public good."7 Nor, I should! add, are economic principles thedause of the wealth of peoples and of ,ations. If they were, governments ntight conceivably ap ply them so as to achieve these ends.

The cause of tB.e wealth of nations, Smith said, is tljle application of their industry and c:1lpitalby individuals and groups to eI).richthemselves. The optimum conditions for these en deavors are firIPly established indi vidual rights. !The natural rights doctrine provided a foundation for such establishment.

102 THE FREEMAN February Natural rights are discovered, as I said, by focusing the attention on the nature of things. The traditional formulation of the position, at least that of the seventeenth and eigh teenth centuries, was that man has a right to life, liberty, and property. We can arrive at the justification of the right to life in this way. Who but a man has the right to his own life? In the very nature of things how could there be a prior claim upon it? In short, a man's own claim upon his life is primary. It is his by right. If it be forfeit, it must be by his own willing act. The Right to Use One's Faculties as One Wills for His Own Ends The right to liberty is most di rectly the right not to be restrained or imprisoned. To put it affirma tively, it is the right to go and come at will, without let or hindrance. In practice, it means the right to do this unless he must be restrained for some good reason, duly attested and proved. In its extended sense, the right to liberty is the right to use one's own faculties as one wills for his own ends. This, too, is founded in the nature of things. Only the in dividual is situated so as to use his faculties for constructive purposes.

He must command their use by his own mind and issue the signals through his own nervous system. Only he can direct his faculties to their highest and best use. The right to the use of one's faculties is an ad junct to the right to life, too, for it is by the employment of them to con structive purposes that life can be maintained. The natural right to property arises in this way. That which a per son has conceived in his own mind, made with his own hands, utilizing his own tools, from his materials, is his by right. It is his right, then, to keep it or dispose of it at will: to save, to sell, or to bequeath to whom he will. The right to private property in land is a corollary to the natural right to property. The right to improve ments on the land belong naturally to him who made them (unless he was otherwise compensated) but the right can only be secured by prop erty in the land itself. To put it an other way, he who owns the land owns the improvements on it as well.

If he does not own the land, he does not own the improvements. That is in the nature of things. There are many other things which can be learned by reasoning on the nature of things. Indeed, it is doubt ful if reason itself could long survive the abandonment of thinking in terms of the nature of things. More over, men have never stopped think ing in terms of the nature of things, though they have not done so nearly so fruitfully for many years because they have not generally openly avowed and accepted the full range of the premise of an enduring order 1982 REASONING ON THE NATURE OF THINGS 103 which is necessary to its validation. But there is only one other use that I would make of this mode of reason ing here. The use is to refer to the social contract, another of the natu rallaw doctrines. I mention the social contract be cause it is necessary to point out that natural rights are not absolute; they are limited. The rights to life, lib erty, and property are limited by the equal rights of others to theirs. When the rights of others are violated, the violator may suffer restrictions upon or loss of his rights. It goes further than that, however, as we can see by reference to the social contract.

The SocialContract The social contract is not a writ ten agreement, nor do we willingly and consciously enter into it. Rather, it is that agreement which is neces sary, in the nature of things, to the existence of society . It is everyman's tacit agreement not to use violence to get his way, to leave others to the enjoyment of the fruits of their la bor, not to trespass upon the prop erty of others, to fulfill the terms of his individually entered into agree ments, to honor his parents, to suc cor his children, to keep his word, to meet his obligations. The social con tract embraces, too, the obligation of the citizen to support the govern ment-with a portion of his means and, if need be, even his life-which protects him and his in the enjoyment of their rights. If these are limits on individual rights, they contain also implicit limits upon government. In conclusion, then, I agree with the friend who $uggested that there needs to be a greater emphasis upon rights rather than upon economic expediency, s~cial benefits, and practical measures by government.

The fount of prosperity, if Adam Smith was right, is in the individual and voluntary employment of indus try and capital. The ground of that is in individual rights. The rights of which I speak are not bestowed upon us bygovernm.ent. Rather, they are secured by restraining government. They are, as Jefferson put it, a gift of "Nature andlNature's God," and cannot be violated with impunity. @ -FoorrNOTESlOtto Gierke, Natu,ral Law and the Theory of Society, Ernest Bark~r, trans. (Boston: Beacon Press, 1957), p. 223. 2Ernest Barker, "Translator's Introduction" in ibid., p. xi. 3Quoted in John BowIe, Politics and Opinion in the Nineteenth Century (New York: Oxford University Press, A y.alaxy Book, 1964), p. 66. 4Quoted in Henry: Hazlitt, The Foundations of Morality (Los AIl:geles: Nash Publishing, 1972), pp. 204-05. 5Adam Smith, Th~ Wealth of Nations Edwin Cannan, ed. (New. :ij.ochelle, N.Y.: Arlington House, n. d.), pp. 29,30.

6Ibid., p. 290. 7Ibid., p. 30.

Dennis Bechara ~fF(Ifr~ I for Less • Developed ~ ~JIJ' THE PLIGHT of the less developed countries has become one of the most hotly debated issues in interna tional affairs. Worldwide organiza tions have been established with the common purpose of uniting the less developed countries to obtain re sources from the developed coun tries. Opinion leaders are almost unanimous in their belief that the developed countries have a duty to aid the poor countries. The debate, in fact, is not whether this aid is le gitimate, but what ought to be the extent of it. Conventional wisdom holds that the situation in the less developed countries is attributable to the industrialized countries. Is this assessment correct? Many reasons have been ad vanced to explain the poverty of the Mr. Bechara is an attorney in Mayaguez, Puerto Rico. 104 underdeveloped countries, and con versely to interpret the cause of the wealth of the industrialized nations.

A popular notion is that the rich na tions owe· their wealth to their ex ploitation of the poor countries. The argument is really an extension of the fallacy that in every transaction there is a winner and loser. The ide ology that has been erected to ex plain the alleged causes of poverty in the. underdeveloped world holds that the most direct cause of exploi tation is colonialism. Therefore, the argument goes, the colonial powers owe their lifeblood to the colonies. There is no correlation, however, between a country's standard of liv ing and its history of colonial power. Some of the countries in the world that presently enjoy a relatively high standard of living either never pos sessed colonies or, if they did, the FREEDOM FOR LESS DEVELOPED COUNTRIES 105 history of their colonialism is incon sequential. Switzerland, Denmark, Sweden, Norway and the United States are examples of this. Some of the great colonial powers, on the other hand, are presently facing eco nomic difficulties. Portugal, for ex ample, possessed colonies which en compassed a territorial area larger than itself. Yet, Portugal's economic position does not substantiate the charge that colonialism has en riched the colonial powers.

The Myth of Colonial Exploitation The historical evidence is simply nonexistent to demonstrate that the poor countries subsidized the devel·· oped countries' wealth. The argu·· ment, however, continues to flour-· ish, with a new twist. It is asserted. that the old colonial powers, aI-though having granted political independence to their former colonies, continue to exert an invidious con trol over the economies of the under developed countries. The relative prosperity of the old colonial powers is therefore attributed to the exer cise of this degree of power, which has been termed "neo-colonialism." According to this line of thinking, the industrialized countries have reached their present position of op ulence as a consequence of their in vestments in the less developed na tions. The belief is harbored that since developed countries have in vested tremendous amounts of money in the underdeveloped countries, the resources withdrawn from the latter have therefore yielded the investors fabulous profits. This argument is popular because it nourishes envy.

It is easier to blame foreigners for a country's misfortune than to recog nize that the country's governmen tal policies coIjltributed to the situa tion. However, when the available evi dence is analyzed, it becomes clear that the developed countries do not owe their prosperity to their trade relationship with the less developed countries. There is no correlation between a nation's present economic standing and its holding colonies in the past. The solutions espoused for the im provement of the underdeveloped countries' conditions reflect the re distributionist mentality on an in ternational scale. It is politically fashionable to. combat poverty with the compulsory transfer of income from the taxpayers to those deemed needy. Similarly, on an interna tional scale, the predominant ideol ogy is the same: to have the rich countries subs~dize the poor coun tries. Therefore, the concept of re distribution of income is essentially the intellectual underpinning for foreign aid. In light of this, one must question whether or not massive in come redistribution is the solution to the problem.

Aside from· the libertarian posi106 THE FREEMAN February tion that it is immoral to force peo ple to support others, the ideology of redistribution cannot be defended on grounds that it achieves what it sets out to do. Rather, the opposite is the case. Foreign Aid Often Fails to Reach Needy Individuals When a country receives foreign aid, it is a fallacy to presume that its citizens are necessarily any bet ter off. This is so because the aid is recei ved and handled by the host country's government, to use for its politically predetermined goals. For example, a country may wish to build an industry which is not economi cally feasible, but which grants prestige in the international com munity-such as an automobile in dustry or a steel mill. Foreign aid makes it easier for the governments of the less developed countries to embark upon these projects, since part of the funds util ized to finance them have come from abroad. Therefore, the local taxpay er's opposition, which could other wise have materialized, is lessened.

In addition, foreign aid ag grandizes the power of the less de veloped countries' governments. The state becomes the beneficiary of this process because it has the power to apportion jobs and subsidies to its political favorites. Foreign aid, therefore, becomes an unwitting in strument of intervention in the internal political affairs of the host country. Foreign aid is usually justified precisely on grounds that the recip ient countries will ultimately be come loyal to the country providing it; it is often proclaimed as an anti dote to Communism. However, his torical evidence fails to establish this. There is no causal connection be tween a nation's economic well-being and its vulnerability to fall under a Communist dictatorship. How var ious countries have fallen under Communist domination involves many historical explanations. Surely it cannot be argued that poverty au tomatically instills a pro-Commu nist attitude on the part of the pop ulation. If this were the case, most of the poor countries would have be come Communist.

The idea that one country can purchase the allegiance of another through foreign aid is pernicious. In fact, it is commonplace to see the re cipient countries become hostile to the donor countries. Foreign aid is viewed by the nationals of the recip ient countries as a more subtle ver sion of colonialism. Other factors, such as nationalism and cultural differences, account for a country's governmental attitude. It is, there fore, truly simplistic to assume that foreign aid can buy allegiance. Yet, those people who claim that one of the virtues of foreign aid is that it politically influences the recipient 1982 FREEDOM FOR LESS DEVELOPED COUNTRIES 107 country are really conceding the fact that aid is not granted to improve the economic conditions of the recip ient countries. Rather, the aid given is designed to obtain foreign policy goals, and consequently, no eco nomic considerations are necessar ily relevant in its granting.

The Need for Savings A country, and for that matter, any individual, may increase its wealth in the long run only if part of its consumption is deferred for a later time. In other words, it is essential to save in order to increase one's wealth. Why is this the case? Be cause savings finance projects which, if economically necessary, increase productivity. For example, let us say that a railroad connecting farm lands to a market needs to be built. The railroad will increase the mar ketability of agricultural goods, and therefore the costs to consumers will be lowered as a result of this more efficient mode of transportation. However, savings are needed in or der to finance the project. The individuals who construct the railroad need funds to defray the costs of the project. Clearly, the money utilized by them constitutes their abstention from consuming those funds. The investors have placed their savings in the form of a railroad. If the investors do not have the funds to carryon their project, they may entice others to lend such funds. Whether the funds originate domestically or from foreign sources, these funds r~present savings. A common way to finance many proj ects, however,. contains the element of governmenta~ coercion, or what is commonly called forced savings. This is the method of simply levying taxes or issuing paper currency to finance the projects. In 'either case, the citi zens are forced to consume less of their income, because the taxes im posed 'reduce •their disposable in come, or the pnice increases which result from the increase in the money supply reduce, their purchasing power.

The issue that is crucial to a na tion's development, therefore, is where the savings should originate. Foreign aid is another form of com pulsory saving,...---.byreducing the consumption of the donor country's taxpayers. But as we have seen, for eign aid is not economically moti vated when it becomes intergovern mental aid. Foreign investment, on the other hand" does utilize sound business justifications for its use. Foreign investors seek to place their capital in the most profitable lines of business. This benefits the recipi ent countries because jobs are cre ated, and the marginal productivity of labor is increased. This tends to raise wages in thJe recipient country. The guidepost o(profits, in addition, insures that scarce resources are not misallocated. When an activity is 108 THE FREEMAN February profitable, it means that consumers view its rendition in a positive man ner. The high profits attract more investors, and this in turn serves to lower the prices charged to con sumers. Foreign investment speeds up this process.

Increasing the amount of foreign investment available does benefit the recipient country, but is is not the only available solution to relieve the underdeveloped countries' position. For these countries to truly improve their condition, it is necessary for them to establish an institutional framework which will attract not only foreign investment, but en courage domestic savings and in vestment as well. The people best suited to know local conditions and local investment opportunities are the residents of these countries themselves. If the underdeveloped countries attempt to encourage sav ings and institutionalize the essen tial preconditions of a free market economy, there will be a sounder ba sis for growth. However, when one examines their record, the policies which have been followed are pre cisely contrary to the attainment of these goals. The Protection of Property Governments are instituted to safeguard pre-existing rights pos sessed by individuals. Among these rights is the right to own and pos sess property. This is essential because if a person is not entitled to his property, his right to survive is endangered. Since a person has the right to life, it follows that a person needs to keep the fruits of his labor in order to survive. Therefore, gov ernments must respect property rights. What is the record of the underdeveloped countries concern ing this?

The history of the less developed countries is scattered with instances of wide-scale nationalization of for eign-owned business enterprises. At the turn of the century, for example, Mexico nationalized its fledgling oil industry, which was prospering at the time precisely because the gov ernment had allowed private inves tors to place their capital there. In dia, after obtaining its independence from England, proceeded to estab lish onerous controls over foreign investments. Virtually every coun try in the "Third World" has exper imented with some form of state ownership of enterprises. Brazil, which many point out as a beacon of hope in South America, has a large segment of its economy under the direct control of the government. With these facts merely as an illus tration of the state of affairs of these countries, it becomes easy to under stand why foreign investment rep resents such a small percentage of the United States economy.

The less developed countries have also pursued a very dangerous pol1982 FREEDOM FOR LESS DEVELOPED COUNTRIES 109 icy which has, in effect, discouraged savings and eliminated the long term capital markets. The policy is uni versally known as inflation. This policy of increasing the money sup ply with its consequence of a rise in prices, helped diminish the role of savings in those countries. Constant increases in the money supply, cou pled with periodic devaluations of the national currencies and foreign ex change controls served to stultify growth. Other Interventions Aside from failure to protect pri vate property and aside from inflat ing the money supply, many of the less developed countries adopted other policies detrimental to a free market. The newly independent na tions created massive licensing re quirements, implemented regula tions and enforced policies that discouraged competition.

One of the most notable of the pol icies that were adopted by these countries was the progressive in come tax. TAis rather recent devel opment, however, is due to the influ ence the industrialized countries exert on the less developed coun tries. Under the aegis of the prevail ing academic wisdom, it was the pol icy of the United States government to advise these countries of their duty to eliminate the broad inequalities of income in existence and to adopt a progressive income tax. The effect of these taxes, of course, has been to discourage capital formation. It is not uncommon to I. discover many for eigners holding substantial wealth outside the borders of their own countries beca4se they are in search of a place whicp offers security and stability. Polit~cally, many of these countries have! experienced revolu tions, suddenichanges in govern mental policy, .. and this instability has added an element of risk, mak ing it less attrflctive for anyone to accumulate sav~ngs.

Another common feature in the less developed countries has been the prohibition of free foreign trade. This has occurred because it is feared that free entry of foreign goods could de stroy local industries and therefore produce unemployment. The fallacy here, however, ~ests in not recogniz ing that if foreign countries do make better and cheaper goods, this bene fits the country importing those goods. This is sol because the citizens of the importing country will have resources left over as a result of their acquisition of th~ goods that cost less, while other goods may be acquired as well. The principle, of comparative ad vantage is applicable to trade. This means that a country has, if permit ted to trade in a free environment, the incentive to specialize in the production of goods for which it is better suited. M<\lrewine is produced in France than in England, for ex110 THE FREEMAN ample, because of this principle. If England, however, were to enact a law prohibiting the importation of foreign wines, in order to encourage its domestic wine production, its consequent inefficient production cannot be said to improve England's economic posture. The less devel oped countries, unfortunately, as a result of misdirected policies, have become quite protectionist.

In conclusion, it must be said that, outside of the ravages of natural di sasters, or those brought about as a result of war, a substantial portion Hope for the Oppressed of the cause of the poverty of the less developed countries is directly at tributable to their own governmen tal policies. This is not to argue that voluntary aid to the needy in the less developed countries should not be granted. Rather, the discussion here has centered around what policy the governments of the less developed countries should adopt. In light of this, the best advice the developed countries may grant to the less de veloped ones is to encourage capital formation. This can best be accom plished by trying freedom. i IDEAS ON LIBERTY ONLY when the state is restricted to the administration of justice, and economic creativity thus freed from arbitrary restraints, will conditions exist for making possible a lasting improvement in the welfare of the more miserable peoples of the world. It is often this very lack of justice in the poorer countries that keeps the people in their low economic state.

An English economic advisor to an African state was shocked at the prevalent low wages and succeeded in securing a minimum wage law for the land. The result was that the thousands of workers who had earned forty to fifty cents a day were put out of work. Only the more efficient and essential workers remained and the whole economy suf fered. It had been interventions in the market by the government, a lack of justice, that had kept the wages down in the first place by pre venting capital accumulation and investment. Further intervention, in the form of the minimum wage law, only aggravated the situation, removing the one chance many had for some economic improvement. Were justice present in these lands, there would be no shortage of in vestment capital, for there would then be no fear of unjust confiscation or nationalization. Justice is the one condition that will lead to economic improvement.

FRANCIS E. MAHAFFY, "Social Justice"

John K. Williams INTELLECTUALS~ MORALISTS, AND THE FREE MARKET "Capitalism stands its trial before judges who have the sentence of death in their pockets. They are going to pass it, whatever the de fense they may hear; the only suc cess victorious defense can possibly produce is a change in the indict ment." So wrote the noted economist and social scientist Joseph Schumpeter in 1942. The situation he depicts is worthy of Lewis Carroll; indeed, the bizarre principle of "justice" advo cated by his "hanging judges" "Verdict and sentence first; indict ment afterwards" -is remarkably reminiscent of the slogan cham pioned by Carroll's Queen of Hearts at the trial of the tart-stealing Knave of Hearts: "Sentence first; verdict af terwards." The Reverend Doctor John K. Williams is chaplain and teacher of classics at St. Leonard's College, Brighton, Victoria in Australia. The irrationality of the situation described by Sqhumpeter is not con fined to a verdict and sentence des perately seeking for an indictment.

In the work fIiom which the above quotation is t~ken he .argues that the chances of' a free market econ 0my surviving are remote: "Can capitalism survive? No, I do not think it can." At the same time, however, he proffers a !compelling case for holding that capitalism is a uniquely beneficent economic system enjoy ing an unsurp!assed, and arguably unsurpassable, irecordfor raising the standard of living of an entire com munity and thereby dramatically alleviating the' penury and want of the worst-off.. 'fThe capitalistic pro cess," he asserts, "not by coincidence but by virtue of its mechanism, pro gressively raises the standards of life of the masses." He wryly ob serves that "Queen Elizabeth (the 111 112 THE FREEMAN February First) owned silk stockings. The capitalist achievement does not typ ically consist in providing more silk stockings for queens, but in bring ing them within the reach of factory girls in return for steadily decreas ing amounts of effort."

Schumpeter Confirmed An examination of the diverse and mutually contradictory charges lev elled against the free market con firms Schumpeter's judgment as to the desperation marking the critics' search for a plausible indictment. In Schumpeter's day the standard charge was that a free market econ omy had produced the Great Depression, creating economic stag nation and permanent mass unem ployment. The data later presented by such scholars as Milton Fried man and Murray Rothbard docu menting that the Great Depression was the creation of decades of gov ernmental interference with the market, had been conveniently ig nored (just as, in contemporary ver sions of a similar criticism, a pleth ora of studies documenting the consequences of minimum wage laws for those whose labor is of marginal value are ignored). With the publication of John Ken neth Galbraith's The Affluent Soci ety, however, a stunning change in anti-capitalist criticism made its de but: the free market was too produc tive, tempting men and women to sell their souls for an obscene afflu ence measured in terms of burgeon ing super-markets and automobile tail fins. Today's fashionable charge is either that such institutions as private property, the free market, and material incentives to produc tion, which once constituted a re markably successful means for deal ing with the problem of scarcity, are no longer necessary because we are living in a "post-scarcity" age, or that rapacious capitalism has greed ily depleted the earth's material re sources and, by ushering in a new era of worldwide scarcity, has brought about its own demise.

Quaintly, some critics parrot both charges, happily indifferent to their mutually exclusive nature. Schumpeter's case for the uniquely beneficent nature of the free market also stands scrutiny after four dec ades; indeed, his rebuttal of the bor ingly familiar claim that the pro ductive success of capitalism, and hence its unintended lifting of the standard of living of the poorest, was the result of a chance combination of fortuitous circumstances and wise governmental constraints, has yet to be answered. Further, those four decades have witnessed the demonstrable failure of a wide-ranging diversity of social ist experiments. Documenting the by now commonplace is tedious; suf fice to suggest that the comparative beneficence of an economic system 1982 INTELLECTUALS, MORALISTS, AND THE FREE MARKET 113 which, in the Soviet Union, results in the one-third of its working pop ulace employed·in agriculture being unable to produce the food .required by a population of 265 million, and of an economic system which, in the United States of America, witnesses the four p~r cent of its working pop ulace employed in agriculture vastly exceeding the food requirements of its 220 million people, is not hard to determine.

A PuzzlingAttitude Indeed it is simultaneously ironic and tragic that many Third World countries, in bold but fashionable defiance of observable empirical reality, should have opted for collec tivist "agrarian reforms" and thereby have reduced nations once enjoying thriving agricultural bases to the unhappy situation of being obliged to import basic foodstuffs. In passing, it is worth noting the moral astigmatism of such reports as the Brandt Commission's North South: A Program for Survival and numerous similar publications of the World Council of Churches: one might have thought that the inflic tion of chronic food shortages upon an entire population by ideologues might be perceived as a betrayal of "human rights" or as incompatible with "social justice" -or even, per haps, as a new and particularly vi cious form of "exploitation." That such is not the case-indeed, that policies seemingly designed to produce equal destitution for all should be warmly commended-is a sad commentaty upon the ideologi cal captivity of many Western intel lectuals.

It is that "Ideological captivity" highlighted by Schumpeter's gro tesque but perceptive image of capi talism's critics. as "hanging judges" blindly determined to sentence cap italism to deat~, that merits careful thought and discussion. Why do so many intellectlJals and moralists at tack so readily and so unremittingly an economic system the worst about which even the most dogmatic of so cialists can say is that it is the best yet, save for the particular untried version of socialism the socialist in question advocates? There is nothing irrational about judging an economicsystem, as many moralists do, o~ the basis of how it serves the worst-off; what is irratio nal is that those committed to this criterion ofjudgment should display an almost instinctive abhorrence of a system which, at least to date, has demonstrablyqone best what they value most. It. ~s this puzzlingly ir rational abhorrence of the free mar ket-an abhorrence not explicable in terms of some simple, factual dis agreement as t9 the productive ca pacity or social i consequences of an economic system-that the defender of the free market must seek to un derstand and to 'address.

114 THE FREEMAN February Who Are the "Intellectuals"? Attempts to define the notoriously vague term "intellectual" are le gion, and none of them is entirely satisfactory. Perhaps the best that can be said was said some years ago by Friedrich A. Hayek in his justly famous paper, "The Intellectuals and Socialism." The intellectual trades in ideas: "What qualifies him for his job is the wide range of subjects on which he can readily talk and write, and a position or habits through which he becomes acquainted with new ideas sooner than those to whom he addresses himself." Hayek goes on to note the truly astonishing number of contempo rary professions and activities which belong to this class: "The class does not consist only of journalists, teachers, ministers, lecturers, pub licists, radio commentators, writers of fiction,cartoonists, and artists all of whom may be masters of the technique of conveying ideas but are usually amateurs so far as the sub stance of what they convey is con cerned. The class also includes many professional men and technicians ... who through their habitual in tercourse with the printed word be come carriers of new ideas outside their own fields and who, because of their expert knowledge on their own subjects, are listened to with respect by most others."

This description· of the "intellec tual" is substantially the same as the description usually provided of what such economists. and social sci entists as Fritz Machlup, Peter Drucker, Daniel Bell, Peter Berger, and Irving Kristol have called the "New Class." Irving Kristol has ar gued persuasively that, since the early 1970s, the most significant "class struggle" in Western nations is the struggle between the old ''business class" and the "New Class," the ascendant elite based on the knowledge industry. Peter Berger, commenting on the power of this new elite, notes its "capacity to in fluence public opinion through the communications media and through the educational system." "This in fluence," he continues, "... even ex tends into the old business class it self: Corporation executives go to churches where they are preached at by New Class clergy, their wives read magazines written by New Class authors and editors, and their children go to colleges staffed by New Class professors."

Reasons for Irrationality Perhaps the first feature to note about the "intellectual" is his essen tially prescriptive stance. The jour nalist, the teacher, the minister, and the writer are more concerned to prescribe what "ought to be" rather than to describe "what is." To the extent that "what is" is described, it is described in terms of its departure from some norm defining what 1982 INTELLECTUALS, MORALISTS, AND THE FREE MARKET 115 "ought to be." Put more simply, the intellectual is committed to the es pousal and advocacy of values. Ayn Rand to the contrary, the free market is supremely indifferent as to values. It prescribes no overall vi sion of moral or aesthetic or intellec tual excellence; it aims toward no all-embracing end or purpose. It simply coordinates the activities and skills of diverse individuals seeking radically different goals and espous ing widely varying values.

It does, however, reveal popular tastes and preferences. Commodi ties valued by the masses can, for the most part, be mass produced and sold cheaply; commodities valued by a few can, of course, still be produced but only if the few are prepared to foot the bill. And the tastes of the masses are deplorable. They prefer Agatha Christie to Dostoevsky; they rank the performances of "Abba" ahead of those of Pablo Casals; they value the compositions of Johann Sebastian Here-today-and-gone-to morrow more than they value those of Bach. That the intellectual finds such a state of affairs profoundly disturb ing is not surprising. It is disturb ing. And it is quite proper for the intellectual and the moralist to de nounce vulgarity of taste and to at tempt to transform the masses' tastes. To blame the free market for what it reveals is, however, su premely irrational-as irrational as indicting wet roads for rainy weather or thermometer readings for fevered temperatures.

Blamingthe System Yet the temptation to such irra tionality is irresistible. To attribute deficiencies of tastes to the masses is to invite the ,charge of elitism, and that is a charge intellectuals will go to any lengths to escape. It is much easier, and much safer, to blame the "system," and the irrationality of the exercise can be disguised by ex traordinary arguments to the effect that advertising skillfully depraves the admirable' tastes and noble de sires of ordinary people. The self-ev ident fact that advertising must, if it is to succeed, address itself to ex isting tastes, and the prima facie implausibility.. of any advertise ment, however skillful, being able to sell and continue to sell food that is inedible, clothes that are unwear able, and gadgets that are unwork able, can conveniently be ignored as can a multiplicity of studies doc umenting the conspicuous failure of advertising to sell goods not satisfy ing the fickle tastes of consumers.

For such a strategy enables the in tellectual to hold to values which in truth are elitist, yet simultaneously to sustain the false belief that "really" his values are those of the "ordinary people." In the second place the intellec tual and the moralist are attracted 116 THE FREEMAN February to systems which are the conscious creation of trained intellects and work to the advantage of those deemed "morally worthy." The free market is neither. To be sure the free market is characterized by or der-it efficiently coordinates countless diverse skills, it automat ically draws upon a totality of infor mation embodied in innumerable individuals who for the most part never meet, it accurately indicates the tastes and desires of consumers and the most economic way of satis fying those tastes and desires, and it unfailingly indicates when random patterns of behavior "chance" upon new ways of more efficiently satis fying human needs-but this order is a spontaneous order, not a con sciously contrived order. Its subtle rationality is akin to the subtle ra tionality of language: a subtle ratio nality which no person or group of persons deliberately and consciously designed and which trained lin guists still strive to comprehend. In deed, the market coordinates skills no intellectuals could list and draws upon an ever-changing totality of information no intellectuals could synthesize.

That the random and uncoerced activities of the many could give rise to a system defying conscious imi tation by the gifted few is intrinsi cally threatening to the intellectual. And when that system "rewards" neither the best nor the brightest but those who actually satisfy the tastes and preferences of the mass es-however depraved or unenligh tened or tawdry those tastes and preferences might be-the threat ening becomes abhorrent. Conditions Change Connected to this almost uncon scious dislike of spontaneous as against contrived order, is the intel lectual's preference for the abstract as against the concrete. This is, per haps, nowhere more pronounced than in the enthusiasm of many econo mists for the abstract concept of "equilibrium." Such a concept presupposes a static world devoid of ordinary human fal libilities, where neither past nor fu ture human expectations matter. The concrete reality of purposive indi viduals seeking to improve their sit uation in a world characterized by imperfect knowledge and a conse quent lack of coordination, but a world in. which learning is possible, new opportunities for improvement can be perceived, and increasing co ordination can be realized, is effec tively ignored. Rather, the real world of purposive behavior in an environ ment of flux and change is sup planted by an eerie world of aggre gates the adjustment of which to their controlled and perfectly known environment is the entire story.

That any theory couched in terms of "equilibrium" cannot be tested by 1982 INTELLECTUALS, MORALISTS, AND THE FREE MARKET 117 measurements taken in a world of continuous disequilibrium, a world. of changing tastes, changing expec tations, changing technologies, changing information, changing op portunities, and changing material resources, was the great insight of such free market economists as Lud wig von Mises and Friedrich A. Hayek. Yet an enthusiasm for the abstract (and an addiction to what the philosopher A. N. Whitehead once called the "fallacy of misplaced concreteness") has led to a wide spread disregard-albeit no rebut tal-of the arguments leading to this conclusion. Galbraith'sOutlook The predilection of the intellec tual for the abstract finds a less technical expression in a recent, and quite charming, volume from the prolific pen of the much lauded op ponent of the free market, John Kenneth Galbraith. In Annals of an Abiding Liberal Galbraith writes patronizingly of those who, as an al ternative to the system of wage and price controls advocated by himself, argue for a return to a self-regulat ing market economy. "Conservative economists," he notes, "if suffi ciently archaic, have some justifica tion for this theology; the full em ployment equilibrium is basic to the conservative creed, and inaction is the way to realize that equilibrium.

Liberal economists must believe that they are of the chosen-that, as I've said often, God is a Keynesian Dem ocrat." Now it would be churlish to disal low Galbraith his much tried and frequently tes~ed rhetorical device of describing views·he dislikes in re ligious terms.! Yet when such rhe torical flak is dropped his utterance reduces to th~ fascinating proposi tion that a fully employed economy would be marked by "inaction." What has happened is clear: in boldly he retical defiance of The Shorter Ox ford English ,Dictionary Professor Galbraith has redefined the verb "to act" and the nouns "action" and "ac tivity." The words no longer refer to such concrete, flesh~and-blood realities as the labors oftl;le carpenter, the toils of the garbage collector; or the ex ertions of the transport driver. They refer rather to!the abstract rumina tions of those who determine what people "ought" to value, decree what men and women "deserve" to earn, and decide how much money "should"

be extracted fnom football fans and movie buffs to subsidize the extrav agant tastes o~ ballet and opera en thusiasts. A Vested Interest The "most active" people of all are, of course, members of the veri table army of Keynesian economists who, perceiving the economy as a potentially workable, but always 118 THE FREEMAN February troublesome and recalcitrant pa tient, with a continual tendency to hive off into greater inflation or un employment, function as Court Phy sicians, ever watchful of and ever tinkering with· the economic pa tient. (That the disease from which the patient is alleged to suffer is ia trogenic-that is, caused by the pro cedures purportedly fighting the disease-is the thesis of so-called "Austrian" economists; not surpris ingly, perhaps, such economists tend to be ignored in Court Economic cir cles.) That the tidy mathematical ab stractions so amenable to intellec tual manipulation give rise to con clusions serving their creators' class interests is, perhaps, the decisive cause for intellectuals' dislike of the market. The majority of intellec tuals derive their livelihood from public-sector employment; they ipso facto have a singularly tangible in terest in expanding such employ ment.

The enthusiasm of the New Class for such fashionable contemporary causes as consumer protection, the environment, and-of course-the "war on poverty" makes perfect sense when related to the intellectuals' class interests. If business interests are served by the proposition that open access of producers to the mar ket and ordinary laws prohibiting fraud are sufficient to protect the in terests of consumers, those employed by State-funded consumer protection agencies are no less served by a denial of that proposition. If in dustry and consumers have an in terest in holding back environmen tal protection measures that increase costs, the New Class has an equal interest in creating environmental protection agencies that provide its members with jobs and political power. If the participator in private enterprise has a vested interest in asserting that increased productiv ity proffers the only meaningful, long-term solution to the problem of poverty, those administering com plex welfare systems have every reason to claim that such proffers no solution.

Part of the Problem Interestingly enough, some of the most vocal critics of the "New Class" are to be found among those con cerned to improve the economic lot of the poorest and most vulnerable of the community. Such black, ghetto-born U.S. economists as Pro fessor Thomas Sowell and Professor Walter Williams have argued, and argued convincingly, that it is much more difficult for a disadvantaged minority in a "transfer society" to gain the political "clout" necessary to wrest substantial wealth from po litically sensitive redistributors than it is for such a minority to gain eco nomic power in a free market econ omy. Sowell has, in fact, gone much 1982 INTELLECTU ALS, MORALISTS, AND THE FREE MARKET 119 further, brutally stating that "The poor are a gold-mine. By the time they are studied, advised, experi mented with, and administered, the poor have helped many a middle class liberal to achieve affluence with government money." To suggest that the interests of the New Class, professional "poverty fighter" might not parallel those of his unhappy clients may be unkind; it is not, un fortunately, self-evidently untrue.

Enforced Equality: Reform the Tastes of the Masses Anti-capitalist clergy constitute merely a special sub-set of "intellec tuals"; the val ues they seek coer cively to impose upon a society are, perhaps, more explicit than those of their fellow opponents of the free market, but no substantial differ ence obtains. They too are anxious coetcively to reform the tawdry tastes of the masses; they too find the no tion of "spontaneous" as against "consciously directed" order threat ening; they too prefer the static ab stractions of an idealized world to the dynamic change of the real world; they too have a vested interest in a society proffering positions of power to moralists decreeing who "de serves" to earn and own what. They are, however, subject to two particular temptations. Firstly, the doctrine that all people are valued equally by God can easily lead to the notion that an economic system producing some "equality of distribu tion" is preferable to a system pro ducing substalltial inequities. Apart from obvious difficulties attending the very notion of "equality," the en thusiast for "equal distribution"

simply cannot· admit any liberty to dispose of initially equally distrib uted goods in his utopia. Consider, for example, a society of one thousand~ersons, each of whom possesses exactly one thousand dol lars. One me~ber of this society happens to be Joan Sutherland. Suppose Joan Sutherland were" to state that she was going to stage a concert and that any person wishing to forgo fifty do~lars and hence other goods for which that fifty dollars could be exchanged might attend that concert. Suppose further that all the remaining members of the society prefer to forgo: that sum of money (and alternatiye goods) and hear Joan Sutherland sing than to retain that money or, procure such goods and not hear, her sing. The ex change, in o~er words, is purely voluntary: each person surrenders what he values: less for what he val ues more. At the conclusion of the concert massive inequity obtains: Joan Sutherlalld possesses $50,950 whereas each. Qther member of the society possesses only $950. Yet if the initial state of affairs is deemed "just," and if i the voluntary ex change ofgoods ~s also deemed proper (and if people. are not at liberty to 120 THE FREEMAN February exchange what they value less for what they value more, the point of owning anything is obscure), it would seem to follow that the final distrib ution must be ''just.'' As noted, how ever, "equality of distribution" is no more.

The Good Samaritan In the second place it is extremely easy for clergy to glide from the claim that the carrying out of some action is "good" to the quite distinct claim that coercing others to carry out that action is good. It is instructive, how ever, to observe what such a glide does to a story familiar to all clergy. The wicked priest and Levite (inter estingly a clergyman and an intel lectual!) pass by a beaten victim of society, leaving him for dead. A Sa maritan traveller (again, interest ingly, a businessman prudent enough to have accumulated some capital) assists the stranger and funds his care and accommodation at an inn. The welfarist clergyman would, however, have to posit a "Better Sa maritan." On espying the beaten stranger this Samaritan would rap idly return to Jerusalem, call out the Roman armies,' coercively ex tract money from other wealthy businessmen, and establish an aid to-wounded-travellers' benefit. The moral excellence of this strategy is, surely, obscure; so, for that matter, is the coerced "charity" of those whose money is forcibly redirected.

Can the Accused Get a Hearing? Schumpeter was right to observe that capitalism is standing its trial, and standing it before judges with the "sentence of death in their pock ets." He said, however, nothing about a jury; yet there is a jury. It is true that that jury is more familiar with the caricature of capitalism created by its accusers than the actual de fendant, but while not warmly dis posed towards that caricature the jury is not unambiguously enthu siastic about "intellectuals" either. The jury, in other words, may well be ready to listen to a case for capi talism-especially if that case can stress that they, the ordinary con sumers, are the ultimate benefici aries and controllers of the free mar ket. There is good evidence that ordinary men and women are be coming impatient with the only al ternative to "profit management'" in a free market: bureaucratic man agement. There is good evidence that the level of taxation demanded in a "transfer society" has led to the re discovery of the core free-market principle of mutually benefiting vol untary exchange-whether that in volves barter or undisclosed cash payments. There is good evidence that the almost inevitable conse quence of a currency unrelated to the reality of the market and at the mercy of a State enjoying unre stricted, monopolistic control of the money supply is inflation-and in1982 INTELLECTUALS, MORALISTS, AND THE FREE MARKET 121 flation is not popular with the masses.

The time is ripe-indeed is over due-for the practitioners of the free market to enter the world of ideas and to promote the free market. Corporations simply must start sup porting thinkers who challenge the dogmas of Statists. And such think ers are not unknown. The collapse of the socialist ideal is a reality. The "new philosophers" of France (in particular Jean -Fran<;ois Revel and Bernard-Henri Levy) have mounted a devastating critique of Marxian thought. Faculties of economics, tom by disputes between Keynesians, neo-Keynesians, "neo-Classical Keynesian synthesists," Monetar ists, and Marxists are more pre pared than was, until recently, the case to give some voice to pro-mar ket economists. Dissenting intellec tuals, such as George Gilder (author of the widely discussed volume Wealth and Poverty), are making out new and interesting cases for a free market economy. That such materials are "trans lated" into terms accessible to ordi nary men and women is vital. That corporations should, both individu ally and collectively, aid the dissem ination of such translations is im perative. Michael Novak has put it well: "[The free market] is now en gaged in a war of ideas. The meth ods and means for conducting such a war successfully can be clearly discerned-they·. are well known, even if seldom set forth in system atic form-and the resources for em ploying them wisely . . . and in an atmosphere of freedom and diversity are plainly available. The next step is to make them operational."

The time for that "next step" is now, while democratic institutions still exist. "Hanging judges" tend to dislike such institutions, particu larly juries, for iordinary men and women are, so itiis claimed, the un happy victims of a "false conscious ness" which prevents their seeing the free market for what it is. Only the enlightened· few, the fortunate possessors of an "authentic con sciousness," are able to see the truth. It is not sufficient that such "true believers" simplty be judges. They wish also to be tiurors. And execu tioners. @ IDEAS ON LIBERTY John Milton FOR who knows not that Truth is strong next to Almighty; she needs no policies, nor stratagems, nor licencings to make her victorious, those are the shifts and the defences that error uses against her power.

A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN Instead of Regulation FOR all its good work in pushing tax cuts and putting a hold on some forms of public spending, the Rea gan Administration may be missing a bet in failing to give deregulation a high priority on its list of "musts." The costs of regulation are so far reaching that they must challenge the over-issue of money as a cause of stagflation. If they could be done away with, the drain on the federal budget would be considerably light ened, and David Stockman, Rea gan's budget director, might find his labors considerably more reward ing. Fortunately, the way to a wide spread dismantling of our regula tion agencies has been charted in a collection of eleven searching essays by experts assembled by Robert W. Poole, Jr. of the Reason Foundation of Santa Barbara, California. The book, Instead of Regulation: Alter122 natives to Federal Regulatory Agen cies (Lexington Books, D. C. Heath and Co., 125 Spring St., Lexington, Mass. 02173, 404 pp., $25.95), could, if its recommendations were to be acted upon, make eleven regulatory bureaucracies superfluous.

Lest his readers might feel that he is dealing with political impos sibilities, Poole makes Stephen Breyer's and Leonard Stein's ac count of an already partially accom plished airline deregulation the lead off piece in his collection. A phase out of the powers of the Civil Aero nautics Board has already begun, with the Board itself ticketed for burial in 1985. Despite many an guished predictions that small cities would lose their access to air trans port, the airline deregulation has been followed by an explosive growth of local-service and intrastate air lines. Former local-service carriers INSTEAD OF REGULATION 123 such as U.S. Air (once called Alle gheny), Hughes Airwest, Texas In ternational, Piedmont, Frontier, Ozark and Republic flew 32 per cent more revenue-passenger miles in 1979 than they did in 1978. Deregulation Under Way The airline success is not the only evidence that deregulation acts as an energizing prod. We are still pay ing for an expensive Department of Energy, but'the lifting of controls on oil prices has already had its effect on well-drilling in the U.S. "lower 48" states. And trucking deregula tion has already been authorized, with some semblance of compliance in the matter of accepting new en tries in a field dominated by the Teamsters Union.

The successes enumerated by Mr. Poole's contributors, however, are only a bare beginning. In spite of the start on truck deregulation, George Hilton, in his essay on "Ending the Ground-Transportation Cartel," la ments that the Interstate Commerce Commission-the daQ9YQof all our regulatory agencie.~~stifl prevents a real revolutiod' in surface trans portation. Containerization, which gets rid of stevedoring costs, has brought new vitality to ocean ship ping, but it has yet to hit the rail road freight business. If there were no ICC to prevent it, Mr. Hilton thinks there might be a prolifera tion of "true intermodel shipping companies." These would lease track rights from railroads, and freight would move to 'the ultimate con signee in containers that could be off-loaded between train and trucks with a minimum ,ofstrain. In the Energy Field The new oil wells that are being drilled as a result of the lifting of price controls give pleasure to Alan Reynolds, but his essay on "A Free Market in Energy" reminds us that we are still a lorig way from an un controlled energy market. Natural gas has not yet' been deregulated.

And there are continuing threats of investment controls. IfSenator Teddy Kennedy could have his way, hori zontal divestituIte would be forced on oil companies to prohibit their entry into coal, uranium, oil shale, solar and geothermal competition. Divestiture, says Mr. Reynolds, would be "an attempt to hold capital hostage-a form of political alloca tion of capital." When it comes to communica tions, we are technologically ready to end the curreht monopoly of the airwaves that is iperpetuated by the Federal Communications Commis sion. The FCC: has discriminated against pay-as-you-see TV for years, but the claims of cable-TV could not be denied forever. The use of satel lites in broadc&sting means that programs can be "bounced" into backyards anywHere. Property rights 124 THE FREEMAN February in wave lengths could be established without fear that a few companies would gain eternal monopoly posi tions. Ida Walters, in her essay on "Freedom for Communications,"

makes a most persuasive case for freedom in TV and radio broadcast ing. Her efforts to tell us how mon opolies in local telephone service can be ended are labored, and it is not entirely clear to this reader how es tablished phone facilities could be shared between competing compa nies without some degree of regula tion. Airline Safety Mr. Poole's essay on airline safety suggests that if air traffic control were to be turned over to private companies, such as Radio Schweiz in Switzerland, we might get better service with the taxpayer relieved of the cost. And the inspection of air craft might be more trustworthy if private insurance companies were to do the job. There is even a case for competi tion in pollution control and for es tablishing liability laws combined with free market insurance methods of bringing safety to drug manufac ture. It will take time for Mr. Poole's contributors to be heard in appropri ate Congressional committee hear ings. But Mr. Poole's book makes a glorious beginning. It will have its impact in saving us a big part of the $100 billion per year which Council of Economic Advisors Chairman Murray Weidenbaum says we now spend on maintaining 136 federal regulatory agencies employing 141,000 people who might be more productively employed in private in dustry.

SEEDS OF THE HOLOCAUST: THE GERMAN ECONOMY, 1916-23 by Stanton Brody. Edited by Don Venes. (Published privately, 1979. Glencoe, Illinois. Copies available from The Foundation for Economic Education, Inc., Irvington-on-Hudson, N.Y. 10533) 42 pages- $3.50 Reviewed by Bettina Bien Greaves THE GERMAN INFLATION of 1923 is the classic illustration of what to ex pect when a government pursues a policy of inflation to the bitter end. It evokes vivid pictures of panicky buying, wheelbarrows overflowing with the paper money needed to buy a day's food, workers' wives taking their husbands' pay each morning and rushing out immediately to buy something, anything, before prices rose still more. By the end of 1923, 1982 OTHER BOOKS 125 prices of many everyday items were reckoned in the billions and trillions of Marks. Fantastic! Incredible! But true! Yet these descriptions reveal little or nothing of the effects the in flation had on the people them selves-on their mental, psycholog ical and moral attitudes.

By the end of World War· I, the defeated Germans were war-weary, exhausted and famished. Millions had been killed, maimed or were missing in battle. The Allied block ade had reduced their diet to "er satz" foods, horse and dog meat. Many had not had a decent meal since 1916. The Kaiser was ousted. The new government was weak and insecure. Yet it did what it thought best to help the people recover from the ef fects of four long years of fighting and deprivation. It tried to increase food supplies by imposing land re forms, subsidizing cereal imports and buying produce from farmers to sell cheap to the poor. But these pro grams cost money. And the govern ment was as destitute as the people. Tax collections fell far short of what it spent. To finance its domestic ex penditures, therefore, it continued the practice of printing paper money. By 1921, the German Mark-worth about 24¢ in U. S. money before the war-had fallen in value to about 1/15th of the U. S. dollar (6.6¢). A year later it had dropped to 1/450th of the dollar.

When England and the United States brought t~eir wartime infla tions to an end, both experienced economic depressions. Many were out of work while bl;lsiness enterprises were readjusting in 1921-1922. As a result, German officials concluded that inflation was the way to insure "full employment" and to expand exports-as inde~d it was in the very short run. So th~ German govern ment continued inflating. By this time, every German was speculating on still more inflation and still higher prices for -all goods and services. No (pne was saving any more. The demands of the Allies for reparations was an added blow to a people already! beaten, impover ished and nervously exhausted by having to cope daily with the prob lems of inflation~ They grew bitter at the heavy pepalties exacted by the Allies. To pay the reparations, real goods-gold* minerals, factory products, investment securities-not paper money, ha«1l to be delivered to former enemies. The government had to impose heavy taxes for this pur pose. Yet little or nothing remained for domestic expenditures. So the government cont~nued inflating.

Discontent anq political turmoil, already rife thrCj)ughout the land, mounted. Restless agitators of every ideological hue-right, left, com munist, fascist-attempted periodi cally to overthrow national and re gional governments. Political mur126 THE FREEMAN February ders or assassinations were commonplace-about 300 in four years. Noone was able to escape the cat astrophic effects of the inflation and political unrest. The farmers, per haps in the best position to weather the storm, had their savings wiped out and they themselves were worn down by government regulations. Laborers and salaried employees be came destitute, for no wage or sal ary could keep pace with the spiral ling cost of living. Landlords and tenants suffered as the quality of housing declined, because the gov ernment imposed ceilings on rents while all other prices were rising through the roof. Universi ty profes sors and students had to dig ditches, work in mines and factories or on farms in the summer to survive, and the quality of their library and re search materials suffered. Because of the volatility of prices, business men found it impossible to calculate or plan. As they used up their in vestments, enterprises that had been profitable suffered losses. Even Ger man bureaucrats who had always enjoyed prestige and high salaries were destitute. Less food was brought to the stores to be sold and the avail able consumer goods were of poorer quality. Standards of nutrition de clined. Susceptibility to disease and infection increased. Children, al ways hungry, grew up undernour ished and physically debilitated.

Only those few Germans with in vestments abroad were able to avoid complete impoverishment. By October· 1923, the Mark was worth less than one four-billionth of its pre-war value. Inflation had ut terly destroyed the German people financially, economically and mor ally. A people long known for their energy, industry, education and cul ture were destitute and degraded. Traditional methods of providing for themselves and their families-hard work and saving-proved useless. The people were emotionally, men tally and morally prepared to wel come a charismatic leader who of fered hope. They were ready to believe HitIer's lies and promises of economic rescue and pride in the "Thousand Year Reich." By choos ing Hitler over the economic disas ter they knew, they accepted in time the consequences of that choice controls, censorship, war and even the "holocaust." Stanton Brody, the author of this booklet, was an established busi nessman in his mid-40s when he re turned to college to study history.

He became fascinated with this pe riod in German history. In his desire to bring readers the important mes sage-that inflation must be stopped lest we lay the groundwork for an other world war and holocaust-he wrote this account and published it privately. Mr. Brody's booklet is well worth reading. i 1982 OTHER BOOKS 127 PRINCIPLES OF ECONOMICS by Carl Menger (Reprintedby The Institutefor Humane Studiesand New York UniversityPress; distributedby ColumbiaUnjversityPress, 136 South Broadway,Irvington,New York 10533), 1981 328 pages- $20.00 cloth; $7.00 paper Reviewedby RogerR. Ream THE PUBLICATION of Adam Smith's The Wealth of Nations in 1776 is considered the starting point of the science of economics. However, it was Menger's Grundsiitze (1871), along with the works of Leon Walras and William Stanley J evons, that began the modern period of economic thought. Significantly, Menger's ideas provided the foundation for what.is today classified as the Aus trian School of economics. This im portant book of Menger's, not trans lated into English until almost eighty years after it was written, has now been reprinted by The Institute for Humane Studies and the New York University Press.

Menger is perhaps best known for his development of marginal utility theory, discovered almost simulta neously by J evons and Walras. However, to comprehend fully the importance of· Menger's achieve ment one must understand the con text into which it fits. It was Menger who elaborated the logical founda tionsof marginal utility theory and it was his Principlles specifically that served as the basic textbook for the Austrian econolmists (Bohm-Ba werk, Mises, and! Hayek in particu lar) who followed him. Menger beganj his formulations with a stress on methodology. He treated economic~ as a science: "The phenomena of economic life, like those of nature,. are ordered strictly in accordance with definite laws." The purpose of the study of econom ics is to understand "the conditions under which meJ\l engage in provi dent activity directed to the satis faction of their rieeds." Due to the scarcity of avaiUible means, espe cially time, but also labor and re source goods, indiyiduals must choose which ends to attempt to satisfy.

IVlenger calls thi~ choosing "econo lnizing" and focuses his study on the economizing individual. Value theory is I central to econom ics: What gives a thing value? Is value· intrinsic to ian object, as early economists surmiised?No, replies Menger, because ~'goods of the same kind and in the same place lose their economic character with changing circumstances." Is.ithevalue of a good related to the amount· of labor re quired to produce it, as Ricardo thought? No again, says Menger, for "experience tells us that many goods on which no labor was expended dis play economic character whenever they are available!!in quantities that do not meet our requirements."

128 THE FREEMAN Menger concludes that the value of goods "is entirely subjective in na ture." He continues: "Value is thus nothing inherent in goods, no prop erty of them, -nor an independent thing existing by itself. It is a judg ment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence, value does not exist outside the conscious ness of men." Contained in the previous passage is what Israel Kirzner calls Men ger's Law. It is an important aspect of Austrian economics. The value a person attaches to a good at his dis posal is based upon the value he places on the end it will enable him to satisfy. If certain goods cannot in any way satisfy a person's ends, he will not attach value to those goods. If, however, someone lacks only one good that is necessary to satisfy a specific end which presently is val ued more than any other end, and if no substitutes to that good are available, the value he attaches to the good (the means to his end) will be considerable.

From Menger's Law it follows that resource goods and producer goods are valued according to the value of the ends they serve. Furthermore, the ends they will ultimately serve are determined by the consumer. Therefore, the consumer is the source of value and the guiding force in a market economy. Austrian eco nomic thought places consumer de mand in the role of guiding the pro duction in an unhampered economic system. Although Menger is acclaimed primarily for his role in developing what is now known as "marginal utility" theory, his writings on methodological individualism, sub jective value,and the economic character of goods (Menger's Law) deserve more attention. His Princi ples is so lucid and understandable that it can serve as an introduction to economics for the intelligent lay men with no background in the sub ject. This new edition, with an intro duction by F. A. Hayek, should guarantee that the work that has served as the basic text of successive generations of Austrian students and scholars will continue to improve economic understanding for years to come. , the Freeman VOL. 32, NO.3 • MARCH 1982 EconomicGrowth in Taiwan Shih Cheng Liu 131 Invisible factors contributing to economic development in the Republic of China.

Choiceand Responsibility Thomas W. Knepher 139 A call for a resumption of personal responsibility for our choices. Mises and Keynes William! H. Peterson 142 A memorial to Mises, and a challenge to his students. Prescription for Expensive Education Clarence B. Carson 155 Exploring possible paths to improved education at less expense. Joe's Paycheck A friendly discussion of why wages rise. Brian Summers 165 The Sourceof Sovereignty RidgwayK. Foley, Jr. 167 A review of the origin of the concept of sovereignty and its relation to freedom and justice. ReaffirmingFreedomof the Seas WilliamR. Hawkins 176 The case for leaving to the market the decisions about the conservation and use of oceanic resources. Book Reviews: 186 "No Way to Run a Railroad" by Stephen Salsbury "When We Are Free" edited by Lawrence W. Reed and Dale M. Haywood "How Do We Know?" by Leonard E. Read Anyonewishing to communicatewith authorsmay send first-class mail in care of THE FREEMANfor forwarding.

FOUNDATION FOR ECONOMIC EDUCATION Irvington-on-Hudson, N.Y. 10533 Tel: (914) 591-7230, .. Leonard E. Read, President Managing Editor: Paul L. Poirot Production Editor: Beth A. Hoffman Contributing Editors: Robert G. Anderson Bettina Bien Greaves Edmund A. Opitz (Book Reviews) Roger Ream Brian Summers THE FREEMAN is published monthly by the Foundation for.Economic Education, Inc., a nonpo litical, nonprofit, educational champion of private property, the free market, the profit and loss sys tem, and limited government. The costs of Foundation projects and services are met through donations. Total expenses average $18.00 a year per person on the mailing list. Do nations are invited in any amount. THE FREE MAN is available to any interested person in the United States for the asking. For foreign delivery, a donation is required sufficient to cover direct mailing cost of $5.00 a year. Copyright, 1982. The Foundation for Economic Education, Inc. Printed in U.S.A. Additional copies, postpaid: 3 for $1.00; 10 or more, 25 cents each.

THE FREEMAN is available on microfilm from University Microfilms International, 300 North Zeeb Road, Ann Arbor, Mich.48106. Some articles available as reprints at cost; state quantity desired. Permission granted to reprint any article from this issue, with appropriate credit, except "Mises and Keynes."

Shih Cheng Liu 1&l ~ ~ ~ ~ ~ ~ .,' Taipei today, the capital ofthe Republic ofChina. ECONOMIC GROWTH IN TAIWAN: Invisible Factors Contributing to EconoD)ic Development in the Republic ofChin~ DURING the past 30 years, the out standing achievements in economic development within the Republic of China (ROC) have been recognized all over the world by leading econo mists and businessmen. Here in its base area of Taiwan, the ROC launched the first of a se ries of four-year plans in 1952. Since then, the obvious statistics are im pressive: GNP has increased by 11.2 times, with an average annual growth rate of 6.7 percent. Per cap ita income increased by a factor of five. These are calculated in real terms. In actual 1980 exchange rates, ab solute income per head for that year amounted to US$2102. As for foreign trade, its 1980 ex ports and imports totaled, respec tively, US$19.8 billion and US$19.7 billion as compared with the 1952 figures of U$$110 million and US$180 millio~.

By this bare outline, we gain a clear picture Of the magnitude of economic growth in Taiwan. What really i counts, of course, is the actual·livelihood of the people and it is easily seen that they are pursuing the s~andard of living com mon to the industrialized nations. Virtually no family is without a TV set, whether urban or rural. Most provide thems~lves with refrigera tors. It is rare ~o see a person wear ingpatched cl~thing. Indeed, cloth ing is no longer merely a covering for the body, Ibut is more often a fashionable s~bol of prestige or so cial standing. Fans abound, and air conditioning p~oliferates. Traditional eating habits are still 131 132 THE FREEMAN March changing, but we can already see large increases in the consumption of milk, meat, and wheat as people desire more nutritious, higher pro tein diets. Compared with only the very wealthy of 30 years ago, today even moderately successful businessmen and industrialists mostly own and drive relatively new cars.

Overall, this enhancement in the standard of living could not have been dreamed of 30 years ago. This is especially so because of natural factors: Taiwan is an island of 36,000 square kilometers en dowed with but a little coal, timber, and limestone. From this viewpoint, the potential for economic growth would seem poor. In other words, we may say that the main resources in volve the population-currently something over 17 million. The con clusion, therefore, is that if Tai wan's recent achievements are a miracle, it is a human miracle. This is why I want to explore the invisible factors. Attitudesand Conditions A number of economists, espe cially from abroad, have tried to ex plain this miracle. But they most of ten take the easy path in analysis. They focus upon the most visible factors, such as the quantity and quality of capital, of natural re sources; the structure and diversifi cation of transportation and comShih Cheng Liu is currently Chair man of the Board, Bank of Taiwan.

Mr. Liu was formerly a Professor of Economics at National Taiwan Uni versity and is frequently an editori alist for several Chinese newspa pers published in Taipei. Mr. Liu first offered this message as a lecture delivered in Chinese in mid-1980. Friends insisted it be translated and shared with a wider audience. ''As an economist," explains Mr. Liu, "I believe that entrepreneurial factors which have proven success ful in Taiwan are likely to be of simi lar value to other developing socie ties. Second, as a Chinese, I believe that these factors are psychologi cally compatible with human nature, regardless of race or culture." It is time to explore in greater depth the "miracle" in Taiwan. munications; the quantity and sources of power; the number of schools; the labor supply, and so on. All of these visible things are more easily counted, constituting a strong appeal to the economic experts.

It is, however, my thesis that the facts will show invisible factors to be more important to economic progress than are the visible factors. The visible factors are those tan gibles which are not so difficult to get or to build, provided the people devote their time to following the successful examples of the devel oped countries.

1982 ECONOMIC GROWTH IN TAIWAN 133 But what I refer to as invisible factors are those attitudes and con ditions that must grow within a so ciety itself; they take time, depend upon the nation's culture and tradi tion, and cannot be produced in or imported from a foreign country. Hence, for an underdeveloped coun try, the provision of these invisible contributing factors to economic de velopment is much more difficult than that of the visible factors. Have we not seen undeveloped and underdeveloped countries, full of natural resources, struggling with little success to become industrial ized? This is a good bit of evidence to support my view of the impor tance of the invisible over the visi ble factors of achievement. Here, then, we come to factors, in visible cultural and psychological factors, which I believe have not been mentioned by economists in previ ous analyses. of our economy.

MountingSelf-Respect In the first place, we must con sider the national self-consciousness that asserted itself after World War II within some previously colonized countries. Those societies felt that they had fallen too far behind the developed nations, in both indus trial, civilized standards and in the practical standard of living. Hence, they strongly desired opportunities for self-improvement. This was not only a reaction to the colonial policies of the past;!it was also an urgent pursuit of selfrexpression-and of self-respect-on their own. In conseque:p.ce, a driving force developed, as it were, a single will for a whole people. A great pressure was brought upon these govern ments to mak~ development a pre occupation. Just such a case is the Republic of Korea-and the ROC's Taiwan province, too. In response to this request, and with the suppoITtofthe vast majority of the people,.t~e ROC government began the first C!>fitsconsecutive eco nomic plans. Tney have been brought into effect, one by one throughout 30 years, while tlile people-the most important reso*rce-have been em ployed econom~cally and to efficient effect in coordination with the poli cies and meas~es established by the government.

But what at first sounds like stan dard political ,economy is not the whole story. Cultural ethics are also importantly involved. In Taiwan, people have grBfduallychanged their ideas about per~onal behavior. Ethicsand Economics There is both co-existence and contradiction in traditional Chinese attitudes toward ethics and eco nomic behavior,. Perhaps this is nat ural in all primarily agricultural so cieties. It is very similar to the co existence of internal and external 134 THE FREEMAN March ethics as pointed out by the noted German sociologist and economist, Max Weber. It is also something like the Jewish and Christian conflicts over usury, on the one hand, and rents, on the other. Especially after 1952, gradually growing attitudinal changes became apparent among the people of Tai wan. In one aspect, ethics continued to be seen as rules of social behav ior-but in the marketplace, it be came more acceptable to view eco nomic behavior as an aim to legally pursue maximum satisfaction or profit as a proper reward for the risks of entrepreneurship.

For our economic understanding, the most impressive changes are to be found in the new distinctions being made between obligations and personal rights; between charity and repayment of kindness. Virtually all are now aware that pursuing the good life depends pri marily upon one's own individual ef fort. A relative or friend may desire to extend support; but if he does so, it is a kindness, not any longer an ob ligation. From this develops the fur ther idea that it is better to be able to give than to be in a position of having to receive. These changes induced better and wider understanding of the risk/re ward relationship in entrepre neurial efforts. In another important aspect, too, we can see a drastic change from traditional attitudes toward, or judgments upon, social values. The Chinese have for long attached spe cial importance to intellectualism. More than 2,000 years ago, Mencius said, "Some labor with their minds, and some labor with their muscles.

The former rule; the latter are ruled." Naturally, then, manual labor however necessary-was to be de spised, and scholasticism-even when uttering pedantic nonsense was more likely to be revered. But the Industrial Revolution has taught all of its successful followers that such compartmentalization is wastefully inefficient. And so we see that economic development-mod ern industrialization-makes nec essary changes in various criteria of social values. Especially amongst the younger but also amongst the sharper of the older generation in Taiwan, we see strong consideration being given to the value of independently earning one's own way in profitable enter prise. Erasing Prejudice From these considerations there follows a marked decrease in preju dice as all honest and legal jobs are seen to be useful to'the personal goal. The manual laborer, educated and trained.to think, becomes semi skilled and then skilled. The college engineer, getting his hands familiar 1982 ECONOMIC GROWTH IN TAIWAN 135 'This electronics factory in Taiwan marks a shift from labor-intensive products such as shoes and garments.

with the inner workings of ma chinery and circuits, tempers theory with practicality and becomes a more efficient designer. And as both groups come into more frequent contact, old prejudices further diminish. All of these foregoing attitudinal changes in Taiwan have nicely con spired to bring forth extraordinary and unprecedented driving forces in both manual skills and in creativity. They are factors which are not eas ily quantified statistically and are, in that sense, invisible. But I would find it hard to overestimate the ex tent to which these valuable changes have exercised a favorable impact upon the economic development of the ROC on Taiwan. Underlying all of this, there must be, of course, a proper infrastructure that includes a work ethic, educa tion, law, and order. In some underdeveloped societies, particularly in warm or tropi cal areas, there is an attitude to ward work its~lf that can only be described as iIjLdolent. But the peo ple of Taiwan, ~n island classified as sub-tropical,are influenced by an age-old Chine~e ethic that is much more northerly. It strongly stresses "respectful attention" or a phrase that might be i translated into "sin cere, true, and faithful mentality,"

though it doe~ not emphasize the Western "exactness" or "precision." In America~ the coined "work aholic" is popularly applied to man agers and exe4utives who work ha bitually more ithan 50 or so hours per week. But ~n Taiwan, especially since the onset of industrialization, the newly arisjng entrepreneurs, in conjunction w~th their employees, expend great~ffort by assuming re spectful attention to their business; they watch ev~rything carefully and dare not be negligent in their duties. Today, visiting foreigners are usu ally amazed at the number of man agers and execiUtiveswho work long after suppertime and throughout the weekend. Better Educated and Trained Still, all of the above would be in vain were the, following generation to he no more advanced than the one before. Thus,~O years of expanding and improving education have pre pared myriads of sons and daugh ters not only to enter, but to improve 136 THE FREEMAN March our industries and services. On a competitive basis of high standards, application to undergraduate and graduate studies is publicly avail able. From these qualified young people, numerous men and women of high ability are equipped with the knowledge and skills required to run the businesses of design, production, and trading and shipping services.

It must, then, be concluded that suc cess in Taiwan's educational efforts is partly responsible for its achieve ments in economic development. Of course, schools and graduates can be quantified and analyzed and are, in that sense, visible. But there is an invisible aspect that I want to stress. Before being awakened to a specific sense of economic develop ment, most Chinese people were more or less satisfied with being "con stant-income earners"; meaning that they tended to run some business in a routine way, peacefully, safely avoiding risk where possible. But this could never have resulted in the tens of thousands of firms that now exist on Taiwan. Taking Entrepreneurial Risk For some, it began after schooling; for many, it began during school days: but as Taiwan's embryonic de velopment began to unfold, thou sands of youths acquired an attitude just the opposite of their father's at titude. Thousands and thousands of young people-and this does include women-began to seriously consider quitting jobs with incomes controlled by others in order to set up one-man or youthful-partnership companies. At best, of course, this is risky. But the young people have learned to do their best in forming optimum combinatiQns of the factors of production. And, in taking these risks, they have also learned that the entrepreneur is the most important factor in national economic expan sion. Recognizing the risk of failure, the potential satisfaction and profits ofsuccess are the basic, driving power that pushes the young person who sees the light of entrepreneurship.

So this is another thing that amazes the foreign visitor to the ROC on Taiwan: The very high percent age of one-man firms, of companies headed by a two-or three-man part nership, and so many of them. not yet 30 years of age. They total a huge contribution to domestic production and services and, of course, to over seas marketing. The growing dollar value of their efforts is statistical and visible. What is not so visible to for eign economists is the tremendous energy that our youth bring to dis covering new ways to get the job done. I do not hesitate to say that posi tive attitudes, particularly amongst the young, toward entrepreneurial effort all over Taiwan are enor mously beneficial to its economic achievements.

1982 ECONOMIC GROWTH IN TAIWAN 137 Some would avoid the issue of race; but, even avoiding it publicly, many will privately filter any analysis through their own biases. Allow me to openly declare that I believe the Chinese are among the more intel ligent races of mankind. Historical evidence places 16th Century China at least on the same level with other nations, both in cul ture and in economy; it is one of the oldest of nations, and one of the few not colonized by the western world. So far as I can see, the factor that caused China to fall behind the western world was the absence of an industrial revolution. Ah, yes; but, why this lack? Barriersto Trade Western societies and nation-states first arose around an inland sea that bordered upon the edges of three continents, permitting faster and somewhat less risky intercommuni cations between diverse peoples. For most of western history, there have ever been two, and sometimes sev eral, cultural systems in conten tion-which means a more fre quent, if not always constant, contest of ideas.

In contrast, the vast bulk of China was and is landlocked by formidable natural barriers on three sides, with an infinitely larger, and frequently angrier, ocean on the fourth. Too, a thousand years before Athens contested with the cultures of Asia Minor~nd Egypt, China was unified, and uf:lder the twin condi tions of unity and relative isolation, the Chinese form of feudalism and monarchism grew stronger and more ritualistic. These are the conditions that combined forces to restrain the kind of thought, action, and experi mentation that might otherwise have permitted an almost wholly agricul tural society toidiscover or learn the secrets of industrialization. I submit, then, that race has noth ing to do with the earlier failure of industrial development in China. For added proof, observe that from the very earliest emigrants, those Chi nese, individuals or families, who moved outward,.to South-East Asia, taking little or no capital with them, came quickly to positions of eco nomic prominence and sometimes to great wealth among the societies in which they worlked, and this is now observable all ever the world. Chi nese people are! as capable of entre preneurial activity as are the Scots of Adam Smith. And to this fact we may attribute much of the success in the development of Taiwan's economy.

A FavorableCliMatefor Industrial Development Finally, it is ~ basic premise that there must be a. good climate for in vestment, many trading opportuni ties, and a high probability of profit making. These, in turn, depend upon 138 THE FREEMAN a "rule by law and not by men." Given this, one expects a stable po litical environment that safeguards private property and legal economic activities, paving the way for har monious relations between labor and management. These will make it possible to produce and trade in compliance with planned, or at least reasonably anticipated, costs and sales. These also make possible the advancement of the laborer and the upward mobility of the young as they may risk striking out on their own. In the past 30 years, the Republic of China has impressed the world with its long-term stability. There have been no social upheavals or crippling strikes, largely because both labor and management see greater benefits for all through co operation and concession. Many for eign investors and traders have stated that such a favorable and sta ble climate can hardly be found else where in the developing world. Thus, this favorable image is projected and perceived internationally, with a re sult that enhances domestic capital formation and both foreign invest ments and trade relations.

For these reasons, many more fac tors of production become available and move steadily into Taiwan, pay ing back their fair and reasonable returns through the market func tions. No place is perfect; but a soci ety that approaches economic activ ity with a sense of fair play brings forth an additional factor which hastens its economic development. I began with the thesis that invis ible factors have contributed greatly to the economic achievements of Taiwan. The factors I have emphasized are not tangible. They are not well de scribed by charts, diagrams, or sta tistics. Yet they do indeed exist. And I am certain that they are more important than the visible fac tors so much beloved by so many. The biggest difficulty is: To begin! Economic development in the Re public of China was embryonic for many years. Then, as entrepre neurial attitudes took shape under a rule of law, it began rolling like a snowball down a favorable path, constantly accumulating both sub stance and velocity.

And, this has been witnessed and well understood by the young. Today, the young Chinese emerge -both men and women-stronger and better educated than their fa thers. They have no hesitation in taking full responsibility for moving for ward, moving upward, moving at full speed. Many of the results are statisti cally visible. But the entrepre neurial attitudes-the motivations and the inner achievements and sat isfactions-these are the invisible factors of success in the ROC. i ThomasW. Knepher WHAT is it that makes man unique among the creatures of the earth? This question i has been debated throughout history and has been an swered in many ways, but the one attribute that has consistently been mentioned is man's ability to make choices. Man is the only creature that can will~ngly choose to act against his self-interests. Other creatures are d:rlivenby instinct; man alone chooses his path. This ability to choose includes the ability to choose what appears to be the wrong path.

A person's decisions can be guided by a variety ofimpulse&-a long-term plan, a misunderstood set of circum stances, apathy, a clear vision of the future, or a momentary pleasure. His actions can be tri vial or cru cially important; they can be self sacrificing ors~lf-indulgent. In the long run, he may be better off, or he may end up with nothing at all. In each instance, however, it is the in dividual who i$ making the choice. And it is he Who is ultimately re sponsible in a i free society for the consequences of his choice. To be hu man is to be aole to choose, even if we choose wrongly. The classic eeonomic marketplace is made up of choices. Should I buy this good or th~t? Should I spend or save? Should I [put my savings in a bank or invest them in a new prodMr. Knepher is an instructional systems designer and freelance writer in San Diego. 139 140 THE FREEMAN March uct? These judgments are the es sence of the marketplace. There is no guarantee that my decisions will be the correct ones, but without op tions, there can be no marketplace.

Unfortunately, much of our recent political history consists of state ac tions designed to limit our choices, usually "for our own good." Products have been banned, industries regu lated, exports subsidized, imports restricted, the poor "assisted," the middle class taxed, and the income of the wealthy "redistributed," all in the name of a New Deal, a Great Society, "consumer protection," or the "rights" of some special interest group. The net effect in each in stance has been to reduce the op tions available to the individual. If the trend continues as some wish it to, we will all eventually drive the same kind of car (made in this coun try), live in the same kind of house, and brush our teeth with the same kind of toothpaste. The marketplace will be controlled out of existence. Although we usually associate the marketplace with goods and ser vices, there is, in a free society, a marketplace for ideas. Here, through magazines, books, motion pictures, people on soap boxes, and so forth, a WIde range of philosophies and ideas compete for our attention. As in the economic marketplace, some of these ideas are of high quality while oth ers are extremely shoddy. There are choices to be made, and the choices here are as difficult as those in the economic marketplace. And, as in the economic marketplace, a group of "consumer advocates" h:as arisen to, once again, protect us from our selves by limiting our alternatives.

One group would protect us by ban ning saccharin, the other by ban ningbooks. Both of these groups would have us believe that the choicesthey would deny us are really false ones. After all, they say, who in his right mind would want to buy an unsafe car or a pornographic book? But the fact remains that we as individuals no longer have the right to make that decision for ourselves. The choice has been made by someone else, and we are diminished by that fact. Some argue that the good to soci ety outweighs the loss to the indi vidual when some of these choices are removed. However, even if it could be proven that a given regu latory action would objectively im prove the lives of the members of so ciety, a strong case can be made that the very act of regulation does more harm to society than any benefits could offset. With each choice I make comes the responsibility for the consequences of that choice. If I must choose be tween two actions, or between ac tion and non-action, I will, to the de gree of impact of my choices, give the alternatives some thought (es pecially if there is no one else to lay 1982 CHOICE AND RESPONSIBILITY 141 the blame on if I mess up).'However, if the choice is nonexistent, so will, in many cases, be the thought about the alternatives. If I have no say in the decision, I have no responsibility for the outcome.

In so many areas of our lives, de·· cisions that once belonged to the in·· dividual are being taken over by thE~ state. We no longer have to choose how or whether to provide for our old age-the state has assumed that responsibility (or so the politicians tell us). We no longer need to make informed decisions in the market·· place-others will do our thinking for us. We no longer need to decide what our children should or shouldn't watch on television. Others who feel they know more than we do will de·· cide for us. Sadly, it would seem that the more responsibility the state takes frOIrL us, the more we are willing to give it. As Ralph Waldo Emerson points out in his essay "Politics," "Want of liberty stupefies conscience." It has become entirely too simple in our so·· ciety to say, "I have no control over that," or "That's not my responsibil·· ity-Iet someone else worry about it." We are no longer interested in mak· ing difficult choices and really don't want to know what is going on around us. But, as we let someone else worry about it, the crime rate rises and the streets become in·· creasingly unsafe. Our consciences become stupefied, the visionaries and bureaucrats who would run things for us cannot i cope, and those who would take advantage of the rest of us use as theilj" defense, "It's not my fault. I'm not responsible for my ac tions." They may be right.

Where does ithe responsibility for the condition of a society lie? It lies with the members of that society. Deprived childhoods and Twinkies are not the culprits. We are. We have allowed the state to take away so many of our choices and do so much of our thinking for us that we have forgotten what true responsibility is about. There will always be special interests-those who feel that they know more about what is best for us than we do. As long as there is a state mechanism that will allow these interests to make our deci sions for us, t:q.ey will continue to do so. And as lon.g as there are those who can avoid the responsibility for their actions, there will be crime. What is th~ answer? It is simple in concept but!difficult in execution. Return to a free society. Make each of us responsible for his own life once again. Remove the power of the state to make our decisions for us, and give us back the freedom to choose our own path as long as we harm no one else. And if we do harm another, make certain! that justice is swift, fair, absolutely impartial, and com pletely certai~. Make us think be fore we act. Tlie world will be better for it. And so will we. (f) William H. Peterson MISES and KEYNES MEMORIES clear, memories blurred.

Springs remembered, winters for gotten. Do I betray an onrush of years? For I look back, with special plea sure and reverence, at those verdant springs and golden summers when that giant of our age, Ludwig von Mises (1881-1973), walked and talked in our midst, when he shone in our lives and minds, when he gently schooled us on the meaning of praxeology and the pain of inter ventionism. Today we remember Lu Mises, we honor his name, we celebrate his Dr. Peterson is the director of the Center for Eco nomic Education and the Scott L. Probasco, Jr., Pro fessor of Free Enterprise at The University of Tennes see at Chattanooga. This article is reprinted and extended from a paper delivered at the September 10 and 11, 1981, confer ence at Hillsdale College, Hillsdale, Michigan, com memorating the centenary of the birth of Ludwig von Mises. 142 birth, we glory in his truth, we mar vel at his lonely and courageous struggle against heavy odds. The question remains, however, will the world remember? And in that ques tion, I have, if you will, a charge for you, his successors here on this earth.

Let me defer that charge to the end of my remarks. And let me borrow some lines from the 18th-century English poet, Wil liam Cowper, so as better to express my feelings at this moment: What peaceful hours I once enjoy'd! How sweet their mem'ry still! But they have left an aching void, The world can never fill. Our world is a perilous placeas much, I believe, as any time in hu man history. Look about you. Record high interest rates. A crime rate that has more than tripled in the last two decades. Federal transfer payments at some $400 billion yearly. Eight MISES AND KEYNES 143 million unemployed. Abroad, the French vote in socialism ... the Thatcher government in Britain contends with the IRA, rioting in the streets and three million unem ployed ... The Soviet Union men aces Poland ... Soviet advisers and Cuban troops infect Angola and Ethiopia ... Iran disintegrates. We Shapethe Future Still, there lives the spirit of Mises, this defender of human liberty and free enterprise, this leader of the Austrian School of economics, this foe of communism and intervention ism. So the die is not cast. Weare not, after all, prisoners of the future.

The future is what we, all of us, each of us, make it. I am reminded of the opening lines of Charles Dickens' Tale of Two Cities: It was the best of times, It was the worst of times, It was the age of wisdom, It was the age of foolishness ... It was the spring of hope, It was the winter of despair. So I repeat my question: Will the world remember Mises and what he stood for? Or will it continue to em brace, more or less,· the philosophy of that other, if misperceived, colos sus in this century, that purveyor of inflationism and interventionism, John Maynard Keynes? Let me couch these reflections, then, in the framework of the world that lies behind and before us, for Keynes pushed credit expan sion or his more formalistic con cept of the~ump-priming multi plier that wo~ld furnish national income suHicient to yield full employmentl my remarks iIljvolveboth retrospect and prospect. I speak of t~o revolutions: the Keynesian Revplution, which you all know about, ~ith its handiwork of inflation and o~her political and eco nomic trauma all about us; and the Misesian Revolution, which I hold is incipient but gtpwing, which may yet win for us a new birth of freedom and free enteJl>rise. Straws in the wind: Of late t~e American, South ern and Western Economic Associa tions hold-u:Q.precedentedly-pan els on Austrian economics at their annual meetings.

I remembet Lu Mises in three courses I tooki under him at New York University's Graduate School of Business Administration in the early 1950s. The courses were "So cialism and~he Profit System," "Government Control and the Profit System," and "Seminar in Economic Theory." (l attended the seminar many times af~er I was graduated.) In each cour,e he carefully estab lished, in a M~ngerian methodolog ical sense, the iprimacy of the indi144 THE FREEMAN March vidual and the indispensability of freedom in the marketplace. His fo cus was ever on social cooperation springing from individual human action, in turn springing from sub jective ends and limited means. He denied the concept implied in much of modern macroeconomic theory, that of standardized, homogenized human beings, of human beings amounting to so many mindless in terchangeable units. He concurred with Adam Smith's put-down of that universal omnipresent, omnipotent economic policy maker, who "wise in his own conceit," seems ... to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board; he does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, ev ery single piece has a principle of motion of its own, altogether different from that which the legislator might choose to im press upon it.1 Thus Mises started with the prax eological premise that man is a being unique in the animal kingdom, a being who alone has a vision of the future, a being possessed of abstract reasoning power and a broad range of subjective values, a being whose ends and means, whose thought and' action, are tightly integrated into cause and effect, a being whose human action is therefore always pur poseful and rational if not always logical and effective, a being who therefore belies the simplistic no tion of homo oeconomicus, of "eco nomic man," of a being driven to make the greatest possible material or monetary profit. All this was sub sumed under the title of his 900-page magnum opus, Human Action, first published in 1949.2 A Man of Influence I remember Mises the man in his tastefully decorated apartment on West End Avenue. There Margit and Lu kindly had Mary and me to din ner and occasionally our children, Mark and Laura. There we enjoyed the company of people like the Fer tigs, Hazlitts, Reads, Cortneys, Petros, Koethers and others. The parties were always sparkling af fairs, ever graced with the enchant ing beauty of Margit and the courtly charmofLu.

I remember the Mises seminar, first in the Wall Street area and later on Washington Square. I remember some of the Mises seminarians like Henry Hazlitt, Lawrence Fertig, Is rael Kirzner, Murray Rothbard, Ralph Raico, Robert Anderson, Hans Sennholz, Laurence Moss, George Reisman, George Koether, Sylvester Petro, Toshio Murata, Edward Fa cey, Leonard Liggio and Bettina and Percy Greaves. I remember Mises at meetings of 1982 MISES AND KEYNES 145 the Foundation for Economic Edu·· cation in Irvington, New York, with such FEE people as Leonard Read, Ben Rogge, Charlie Curtiss, Paul Poirot, Frank Chodorov, Ed Opitz, Bob Anderson and George Roche. 1 remember Mises at meetings of the Mont Pelerin Society with such stalwarts-some of them Mises' own students-as Friedrich Hayek, Fritz Machlup, Gottfried Haberler, Mil·· ton Friedman, John Van Sickle, Wilhelm Ropke, Bill Hutt, Phil Cortney, Albert Hahn, Jacques Rueff, Jim Buchanan, Frank Knight, George Stigler, Arthur Shenfield, Arthur Seldon, Ralph Harris, Gor·· don Tullock and John Davenport, among many others.

Again, I remember Mises the man and very much the individual. 1 re·· member his poise, his bearing, his European graciousness, his world view of things, his tremendous com·· mand of history and philosophy. I remember his kindliness and under·· standing to graduate students, even when they put inane questions to him. One such question in the 1960B followed his discussion of the infla tionary implications of deficit fi·· nance. He was then asked why Pres· ident Lyndon Johnson couldn't have both "guns and butter." But he can have both, replied Mises, adding with a twinkle in his eye, "ifhe is willing to pay for them."3 Yet I also remember as part of my intellectual development anothe:r name, another figure, a figure writ large by the: media and intelli gentsia, but one 1 never met, one whose thinking was ofa genre wholly alien to Lu's-Uohn Maynard Keynes (1883-1946). ] remember the name of Keynes first cropping up during the Great DepJressionin an econom ics course at the William L. Dickin son High Schbol in Jersey City in the late 1930s'and more often in my undergraduat¢ economics courses at New York Un~versity and graduate courses at Columbia University. The references wete reverential. Keynes was a savior. i He saved capitalism from itself-don't you see!

John MaynardKeynes Keynes was a sometime prophet, too. In 1935, he sent a note to George Bernard Shaw saying, "I believe myself to be writing a book on eco nomic theory Whichwill largely rev olutionize-not, 1 suppose, at once but in the course of the next ten years-the w~y the world thinks about econom~c problems."4 This is one Keynesian prediction that was right on the mark. Keynes the man is also of interest. Roy Harrod, his biographer, partly attributes Keynes' personal success to his lifelong "abounding and un failing enthusiasm."5 He made a for tune speculat~ng in financial mar kets, a lot ofit!on behalf of his school, King's College at Cambridge Uni versity. He i was a flamboyant 146 THE FREEMAN March kingpin in that snobbish, elitist, literary-intelligentsia group-the Bloomsbury Set. He married Lydia Lopokova, a prima ballerina of Di aghilev's Russian Ballet. He took pleasure in art, opera, drama and literary works. He enjoyed bridge.

He delighted in taking issue with professional economists and prime ministers, needling them left and right. In 1942 he was raised to the English peerage by King George VI. What a name to conjure with, this Keynes, this global architect, this messiah who, like Julius Caesar, did bestride the world and shook it to its very foundation and shakes it still with his legacy of tremendous infla tion and political trauma. Witness the plight of Western Europe today. Of America. Of Western Civilization itself. Keynes, you recall, from his Gen eral Theory of Employment, Interest and Money, published in 1936, had the answer to the Great Depression. The answer was, in a phrase, de mand-management, which really amounted to - eureka! - demand creation, Le., income-creation. MacroEconomics Keynes dwelt on macro-demand, on the aggregate national demand for goods and services that deter mines, supposedly, the level of na tional employment and, conversely, unemployment. He further sup posed that central governments could henceforward fine-tune demand to the level of "full employment"

through the magic dial of a "contra cyclical budget." That is, central governments were to run surpluses in good times and deficits in bad times. In short, government was to become the great equalizer, the bal ancing wheel when demand was de ficient, the knight in shining armor who would neatly banish joblessness forever. Keynes and government had to come to the rescue of unplanned capi talism, for-he reasoned-are not the act of saving and the act of investment two entirely different and dangerously unrelated activities, with oversaving, underinvestment and consequent mass unemploy ment likely developments?6 But of course. So to kill off over saving, heavy death duties and pro gressive income taxes were just the thing for wealthy countries like En gland and America. Keynes wrote that economic growth, "far from being dependent on the abstinence of the rich, as is commonly sup posed, is more likely to be impeded by it."7 Consumer and capital de mand would also have to be con trolled by the wise men in Whitehall or Washington: "The State will have to exercise a guiding influence on the propensity to consume" and achieve "a somewhat comprehensive social ization of investment."8 To bring off his call for govern1982 MISES AND KEYNES 147 mental demand-management, for his reconstitution of the nature of in come, Keynes sought to destroy Say's Law, the idea behind today's supply side economics, the idea that supply creates its own demand, the idea that goods and services are ulti mately paid for by other goods and services, the idea that consumption is strictly a function of production, the idea that a general overproduc tion of all commodities is simply im possible.

Pump-Priming How, then, would any deficiency in "full employment" income be met? No, not through sweaty production, nor through grubby capital forma tion, nor through that outworn prin ciple, Say's Law. Instead, Keynes pushed credit expansion or his more formalistic concept of the pump priming multiplier that would fur nish national income sufficient to yield full employment. So let the printing presses roll. In his puckish way, perhaps reflecting his admira tion for his friend and wit, George Bernard Shaw, Keynes wrote: If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enter·· prise on well tried principles of laissez·· faire to dig the notes up again ... there need be no more unemployment and, with the help of the repercussions, the real in·· come of the community, and its capitaJl There lives the spirit of Mises, this defender of human liberty and free enterprise, this leader of the Austrian School of eco nomics, this ifoe of communism and interventionism.

wealth also, would probably become a good deal greater than it actually is.9 Wonderment emerges from this reading of Keynes: Is income, at least initially, only pieces of fancy colored paper, greenjn this-country, orange in Britain? Can government print wealth? Why not? Yet more wonderment: Is capital ist efficiency really the road to sur vival? Why ndt make-work? Public works? Lofty ipublic monuments? Listen to Keynes again in his wag gish tongue: Ancient Egypt was doubly fortunate, and doubtless owed to this its fabled wealth, in that it possessed two activities, namely, pyramid-building as well as the search for precious metals, the fruits of which, since they could not serve the needs of many by being consumed, did not stale with abundance:. The Middle Ages built cathedrals and ,sang dirges. Two pyra mids, two mass~s for the dead, are twice as good as one; jbut not so two railways from London to ¥ ork. 10 Obviously in such a scheme of things there i$ not much room for a typical effici¢ncy-minded, profit seeking capitalist. Clearly this par148 THE FREEMAN March asite would have to be shipped off to Siberia or at least put out to pas ture. Thus Keynes proceeded to call for "the euthanasia of the rentier"

and consequently for "the euthana sia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital."ll Keynes went on in this let's-expropriate-the expropriators vein to declare, bra zenly if not logically: "Interest today rewards no genuine sacrifice ... [for] there are no intrinsic reasons for the scarcity of capital."12 With such notions at large, I think there's no question that Keynes greatly helped launch this age of economic planning and the Welfare State. Interestingly, he even looked on the rise of totalitarian states as countries lending themselves more readily to the application of his principles. According to his fore word to the German edition of the General Theory, he wrote on Sep tember 7,1936: The theory of aggregate production, which is the point of the following book ... can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of pro duction and distribution of a given· pro duction put forth under conditions of free competition and a large degree of laissez faire. This is one of the reasons that jus tifies the fact that I call my theory a gen eral theory. 13 As you know, the General Theory was a roaring success around the world. Somehow, though, theory and experience didn't jibe. In the ensu ing 45 years of the Keynesian Rev olution, worldwide central govern ment deficits-and inflation prolifera ted as never before. As I previously observed, political tor ment or painful economic tradeoffs have become commonplace the world over, today as much as ever, or more so. This is the legacy of Keynes.

Yet, as I noted earlier, there is a ray of hope and the highest intelli gence in the thinking of the man whose lOOth birthday we celebrate today. As Keynes stood to the left, so Mises stood to the right-and for the right. While Keynes would arm the government with extraordinary peacetime powers-oblivious to the Actonian principle that power cor rupts-Mises called for limited, non interventionistic government. Mises wrote: "In stark reality, peaceful so cial cooperation is impossible if no provision is made for violent pre vention and suppression of antiso cial action on the part of refractory individuals and groups of individu als."14 The Role of Government Mises took exception to the oft-re peated phrase that government is an evil, although a necessary and in dispensable evil. In The Ultimate Foundation of Economic Science, he reminded us: "Government as such is not only not an evil but the most 1982 MISES AND KEYNES 149 necessary and beneficial institution, as without it no lasting social coop·· eration and no civilization could be developed and preserved. "15 Even so, in the face of modern ten·· dencies toward greater empower ment and even deification of govern·· ment and state, Mises noted: "It is good to remind ourselves that the old Romans were more realistic in symbolizing the state by a bundle of rods with an ax in the middle than are our contemporaries in ascribing to the State all the attributes of God."16 In like manner, Mises opposed Keynes' attempted overthrow ofSay's Law, pointing out that with regard to ever-scarce economic goods there can be only relative overproduction"

Surpluses and shortages are short·· lived, savings and investment con·· verge-thanks to the sensitivity of the price mechanism, including in·· terest rates. Commodities are ulti .. mately paid for, not by money, but by other commodities-by, in other words, work, production, the erea·· tion of wealth. Money is, yes, a com.. monly used medium of exchange; it plays-or ought to play-only an in-· termediary if vital role; but it is not a tool or plaything of governments. Mises accordingly excoriated the Keynesian mentality denying Say's Law so that nearly all "governments are now committed to reckless spending, and finance their deficits by issuing additional quantities of unredeemable paper money and by boundless credit expansion."17 He derided "the p.ew prophet of infla tionism" that people saw in Keynes.18 He thought li~tle of the Keynesian "miracle" of ~urning "a stone into bread," as Keynes himself described credit expansipn on AprilS, 1943 in his Paper of the British Experts. 19 Courage and ~ntegrity The courage!and integrity of Mises can be seen in an incident during a meeting of the, Mont Pelerin Society in Seelisberg,·, Switzerland in 1953.

Mises express~d concern that some of the MPS members themselves were becoming inadvertently in fected by the virus of intervention ism-state ownership of transport, social insurance, minimum wages, contracyclical fiscal policy, etc. "But what would you do," a mem ber asked hilIl, "if you were in the position of our French colleague, Jacques Rueff/' who was present at the meeting a~d at the time respon sible for the fiscal administration of Monaco. "Suppose there were wide spread unemployment and hence famine and nevolutionary discon tent in the pr~ncipality. Would you advise the. goternment to limit its activities to police action for the maintenance of order and the pro tection of priv~te property?" Mises stood fast. He replied: "If the policies of nonintervention pre vailed-free trade, freely fluctuat150 THE FREEMAN March ing wage rates, no form of social in surance, etc.-there would be no acute unemployment. Private char ity would suffice to prevent the ab solute destitution of the very restricted hard core of unemploya bles."20 Again, Mises had no taste for the Keynesian notion of a "contracycli cal budget" so as to maintain "effec tive demand" and hence "full em ployment." He regarded the "G" in the Post-Keynesian "full employ ment" formula of Y = C + I + G (National Income = Consumption Spending + Investment Spending + Government Spending) as about the most unstable, inflationary, politics ridden, and unscientific balancing wheel that the economic managers could employ. For one thing, the for mula ignored the political propen sity to spend and spend, good times or bad. Moreover, it assumed the "pretense of knowledge," the statis tical or mathematical measurability of the unmeasurable, for how much consumers and businessmen will spend in year X is not given to the mind of man. Most grievously, it ig nored myriad market-sensitive cost price relationships, especially the proclivity of trade unions and mini mum wage laws to price labor out of markets-i.e., into unemployment.

Thus Mises held that Keynesian theory in practice leads, through fits of fiscal and monetary expansion, to inflation, controls, and ultimately stagnation. Further, "G" so used, generally meant the secular swell ing of the public sector and shrink ing of the private sector-a trend that spelled trouble for human lib erty. The Theoryof Money In a way, Mises anticipated and rebutted the 1936 Keynesian "gen eral theory" a quarter-century ahead of Keynes: In his 1912 work, The Theory of Money and Credit, Mises contended that forced-draft credit expansion, not so-called "mature capitalism," carried the seeds of boom and bust. 21 Here Mises praxeologi cally tied individual subjective val ues to price determination and to the quantity theory of money (but in ways much less mechanistic than in other schools of thought).22 In other words, he integrated· the supply of and demand for money to marginal utility theory. And he saw that gov ernment, Keynes to the contrary, has no magical money save what it taxes or borrows from the people. As he said in Human Action: At the bottom of the interventionist ar gument there is always the idea that the government or the state is an entity out side and above the social process of pro duction, that it owns something which is not derived from taxing its subjects, and that it can spend this mythical some thing for definite purposes. This is the Santa Claus fable raised by Lord Keynes to the dignity of an economic doctrine and 1982 MISES AND KEYNES 151 Long before Ralph Nader made consumerism a household name for Big Business supposedly bossing and doing in the con sumer, Mises propounded the doctrine of consumer sover eignty.

enthusiastically endorsed by all those who expect personal advantage from govern·· ment spending. 23 Of course Mises covered the world of human action, saying much out-· side of critiques of Keynesian doc-· trine. For example, long before Ralph Nader made consumerism a house·· hold name for Big Business suppos·· edly bossing and doing in the con·· sumer, Mises propounded the doctrine of consumer sovereignty, declaring: The direction of all economic affairs is in the market society a task of the entre·· preneurs. Theirs is the control of produc·· tion. They are at the helm and steer the ship. A superficial observer would be,· lieve that they are supreme. But they are not. They are bound to obey uncondition· ally the captain's orders. The captain is the consumer. Neither the entrepre·· neurs nor the farmers nor the capitalists determine what has to be produced. The· consumers do that. If a businessman does not strictly obey the orders of the public as they are conveyed to him by the struc ture of market prices, he suffers losses, he goes bankrupt, and is thus removed from his eminent position at the helm.

Other men who.did better in satisfying the demand of the consumers replace him. 24 Again, Mises held that censorship and drug control flow from the same interventionistic mentality. From Human Action: Opium and morphine are certainly dan gerous, habit-forming drugs. But once the principle is admitted that it is the duty of government to protect the individual against his own foolishness, no serious objections can be advanced against fur ther encroachments. A good case could be made out in favor of the prohibition of alcohol and nicotine. And why limit the government's benevolent providence to the protection of the individual's body only? Is not the. harm a man· can inflict on his mind and soul even more disas trous than any' bodily evils? Why not prevent him from reading bad books and seeing bad plays, from looking at bad paintings and statues and from hearing bad music? The mischief done by bad ideologies, surely, is much more perni cious, both for the individual and for the whole society, Uian that done by narcotic drugs. 25 To be sure,! many contemporary economists felt Mises was entirely too impolitic, ~oo adamant, too pure, too uncompromising with the real world on its ~erms and values. He lived in an i~ory tower, they said, and was simpj~y not attuned to the way the worlp works. In contrast, Keynes was seen as not only the Great Redee:mer but as a hard152 THE FREEMAN March headed realist, the pragmatist who knew how to translate politics and economics into practical action.

Unheraldedand Unsung The world did not take kindly to Ludwig von Mises, at least not while he was alive. Hayek reminds us that Mises never held an important chair of economics while he remained in his native Austria. A full professor ship at the University of Vienna was always denied to him. 26 As so it was in America that the greatest aca demic distinction that Mises could obtain was to have been a "visiting professor" at New York University. In fact, Mises "visited" that univer sity for 24 years-just under a quar ter of a century-with his salary never originating from the univer sity but from foundations and friends. Worse, his prolific writings and sub stantial contributions to the history of thought were, for the most part, ignored by the economics profession. Yet here was a man who made momentous discoveries in the field of economics. These included his pulling together monetary theory and marginal utility theory, his log ical proof that without market-de termined "economic calculation" so cialism was doomed to failure, and his insight that economics is a sub set, albeit a very large subset, of the broader field of praxeology, the sci ence of human action. Momentous contributions these, yet little recognition or stony silence from his professional peers or the world at large. As Henry Hazlitt comments: Anyone of these contributions, taken singly, would have entitled him to a high place in the history of economic thought; taken together, they made him the fore most economist of his generation. 27 To be sure, in 1969, thanks in large measure to Fritz Machlup, the American Economic Association named Mises a "distinguished fel low." In 1963 New York University awarded him an honorary doctorate of law, thanks in large measure to Lawrence Fertig, then a trustee of the university. And earlier Oskar Lange, then of the Universi ty of California and later chief economic planner in Poland's Politburo, even proposed a statue of Mises for hav ing directed socialist attention to the problem of economic calculation-a still very much unsolved problem in socialism, by the way. So here and there fame flickered for Mises.

Keynes, on the other hand, was lionized the world over and even el evated to the nobility-Lord Keynes. Doctoral dissertations and text books galore, literally in dozens of languages, echo his theories. In this country, Nobel Laureate Paul A. Samuelson's thoroughly Keynesian ized Economics, first published in 1948, translated into many lan guages, and now in its 11th Ameri can edition, is still going strong. 28 Samuelson has molded the thinking 1982 MISES AND KEYNES 153 of generations of Americans and non Americans, many of them now in positions of influence and power. LookingAhead But what of the future? Let's take a leaf from Edward Bellamy's Look ing Backward: 1887-2000. Let's suppose all of us here today achieve the turn of this millennium, that we reach New Year's Day in the year 2000, that we then look backwards. Will we, at that point in time, be able to say that the world perceived two giants on the stage during the 20th century-one, if you will, to the right, the other to the left, one a genuine giant, a genius of the rank of Aristotle, Shakespeare, Newton and Adam Smith, the other a pseudo giant, a messianic inflationist?

One giant speaks of the dignity of the individual, the ethic of work, the concept ofpersonal responsibility, the sanctity of contract, the sovereignty of the consumer, the limitation of the state, the necessity of a gold stan dard, the cooperation of society through individualism, the idea of world peace through. world trade, the efficacy and democracy of the mar ket, the bond between freedom and free enterprise-the fact that they are inseparable, that one without the other is impossible. The other giant-the pseudo giant-speaks of the thrift of the rich as aggravating the distress of the poor, the antisocial· nature of the hoarding of money, gold as a "bar barous relic," the stock market as a gambling casiI1o, the job of govern ment to control and direct invest ment, the duty 'Ofthe state to reduce the inequality of income and wealth, the source of real value as labor con tent, the idea that public debt is of no consequence since "we owe it to ourselves. "

Which of these two men will his tory accord the recognition of hero of this age? That is why I have reserved my charge to you. until now. Whether the remaining fifth of this century is to continue to l>e the age of Keynes or the beginning of the age of Mises remains to be s~en, but economic ed ucationas Leonard Read will tell you-is not a passive thing. It takes effort-very aetive effort. Capital ism does not destroy itself, Mises re minded us. Instead people attempt again and again to undermine or overturn it "because they expect greater benefits from socialism or interventionism. "29 Those attempts must be opposed. Yet opposition has been relatively reeble throughout this tumultuous cenjtury,especially on the part of the inteJligentsia, who by and large have e~hibited what Mises called an "anti -capitalist mentali ty."30 As Mises himself wrote in a somber mood in 1940: Occasionally I entertained the hope that my writings would bear practical fruit and show the way for policy. Constantly 154 THE FREEMAN I have been looking for evidence of a change in ideology. But I have never al lowed myself to be deceived. I have come to realize that my theories explain the degeneration of a great civilization; they do not prevent it. I set out to be a re former, but only became the historian of decline. 31 Hence my charge: I hold it as the duty of each and everyone of you to read, to think, to speak, to write, to realize that we are the descendants of, in Hayek's words, "a great radi cal,"32of a genius whose vision, whose light, whose torch should-indeed must-be passed on.

It is up to us, the living, not only to glory in the potential of man and reason but to stand up and speak out-as Lu Mises stood up and spoke out-for freedom and free enter prise, for the preservation of West ern Civilization itself. @ -FOOTNOTESIAs quoted by E. G. West, Adam Smith (In dianapolis: Liberty Press, 1976), pp. 118-119, from Adam Smith's The Theory of Moral Sen timents (1759). 2Available in a third revised edition from Contemporary Books, Inc.; 180 North Michigan Avenue, Chicago, Ill. 60601. 3Personal recollection. 4Quoted from Roy Harrod in his The Life of John Maynard Keynes (New York: Harcourt, Brace, 1951), p. 462. 5Ibid., p. 648. 6Cf. John Maynard Keynes, The General Theory of Employment, Interest and Money (London: Macmillan, 1954), pp. 64-65 and 84 85. 7Ibid., p. 373. 8Ibid., p. 378. 9Ibid., p. 129. lOIbid.,p. 131. llIbid., p. 376. 12Idem. 13From a translation by Robert H. Beebe and Mabel E. Na:rjes of the foreword to the German edition (Duncker & Humblot, Berlin and Mun ich, 1955).

140p. cit., p. 719. 15(Princeton, N.J.: Van Nostrand, 1962), p. 98. 160p. cit., idem. 17From the Mises contribution, "Lord Keynes and Say's Law" in Henry Hazlitt, ed., The Crit ics ofKeynesian Economics (Princeton, N.J.: Van Nostrand, 1960), p. 318. 18Ibid.,p. 306. 19Quoted by Mises, idem. 2°Paraphrased from the William E. Rappard contribution "On Reading von Mises," in Mary Sennholz, ed., On Freedom and Free Enterprise (Princeton, N.J.: Van Nostrand, 1956), pp. 18 19. 2ICf. Mises, The Theory of Money and Credit (New Haven: Yale University Press, 1953), pp. 14-15. 22Cf. Lionel Robbins in his 1934 introduction to the English ed., ibid., p. 13. 230p. cit., p. 744. 24Ibid.,pp. 269-70. 25Ibid.,pp. 733-34. 26See the Hayek contribution to Tribute to Mises, published by the Mont Pelerin Society at its Brussels general session, 1974, p. 5. 27Back cover, Mises, Notes and Recollections (South Holland, Ill.: Libertarian Press, 1978).

28New York: McGraw-Hill, 1980. 29Notesand Recollections, Ope cit., p. 115. 30Cf. The Anti-Capitalistic Mentality (Princeton, N.J.: Van Nostrand, 1956). 3INotes and Recollections, Ope cit., idem. 32See Hayek's tribute to Mises in Margitvon Mises, My Years with Ludwig von Mises (New Rochelle, N.Y.: Arlington House, 1976), p. 190.

ClarenceB. Carson Prescription for Expensive Education SOME years back, I ordered a typing table for my study from a large mail order house. It came in a few days, and I picked it up at the local store. It was the table I had ordered, was of the correct size and quality, and I was pleased with it. There was only one problem. When I looked at the bill, I discovered that it was for sev eral dollars more than the adver tised price. They had obviously billed me for a larger or higher quality model. I pointed out the error to a clerk at the store and suggested that they attend to correcting it. The problem was too complex for a clerk, and the store manager was sum moned to deal with it. He assured me that the best, if not the only, way Dr. Carson has written and taught extensively, spe· clalizing in American intellectual history. He is thEt author of several books and a frequent contributor te» The Freeman and other scholarly journals.

to correct the I error was to reorder the table. Then, when the new table arrived, I could return the other one, which would b~ shipped back to the mail order warehouse, claim the newly arrived. table, and all would be well, hopefully. I objected that this was the long way around, and expensive, to solve a simple problem. But to no avail. The manager '1Vas adamant: it would be dealt with lfLis way or not at all. I gave in. And, eventually, I got my table, exactly! like the one I re turned. For all I know, that man ager continued his climb up the lad der of managemal success, though my suspicion is that he had already risen a rung or two !above the level of his competency. Be that as it may, it is easy to see that the manager had followed an awkward and expensive route to the lfifi 156 THE FREEMAN March goal. There was not only the ex pense of shipping a table to and from the warehouse but also I had to go to the unnecessary trouble of re packing the other table, returning it to the store, and picking up a new one. It is not always so easy to detect the fact that something is being gone about in such a way as to make it much more expensive and difficult to accomplish than it might other wise be.

A MajorItem of Expense Many Americans are aware, of course, that education costs a great deal today, though the total cost in financial terms even, may not be fully felt because of the indirect ways in which much of it is funded. But ed ucation is the largest item of ex pense in many state budgets. It is often also the largest single item for many county and local govern ments. For a good many years now, it has been an increasing expendi ture of the federal government. In those states and localities where the property tax is relied on mainly in financing public education, rates have become so high as to provoke taxpayer resistance here and there. Still, the high cost of education is widely accepted as inevitable. For many years now, we have been set on a course which resulted in ever more expensive and inefficient methods of providing education. In deed, if I were assigned the task of devising the most expensive and ex tensive system of education I could conceive, I would have to think hard and long to improve on the one we now have. Nor would it be easy to conceive of a more ineffective one, though it might be done.

Lest I be misunderstood, however, let me hasten to point out what I do not mean by the above remarks. It is not my point that teachers are paid too much, that buildings are too expensive, that bus drivers are paid handsome wages, that busses are too costly, that too many frills have been added to education, or that there are too many high-paid administrators. Such criticisms may or may not be valid in some schools, in some school districts, or, for all I know, in a great many of them. But whether they are or not, such things are not the basis of the above obser vations. Nor is it my intention to set forth some general theory of education or in that or any other way to tell par ents how they should go about edu cating their children. It seems to me that the mind set which has produced such theories or prescriptions is one of the things which has led us into the present educational morass.

On the contrary, I shall assume what I believe to be true, namely, that children differ greatly from one another in their interests, in what they are likely to learn, in what they want to know, in the ways in which 1982 PRESCRIPTION FOR EXPENSIVE EDUCATION 157 they can come to any desired knowl edge, and that how, what, and when any particular person shall learn something is no more capable of being settled than is the question of how, what, and when we shall eat. If that be some sort of theory of ed ucation, then so be it, but it is cer tainly remote from any which would provide a regimen for all children to follow, willy-nilly. And that is the only point I want to get out of the way. A Formula for Waste Now, to my point. Here is my pre scription for expensive education. (1) Equate schooling with education. (2) Compel all children to attend school up to a certain age (i.e., take from parents and guardians the decisions about when, what kind, and how long their children will attend school). (3) Take the provision of schooling out of the market. (4) Provide free (Le., tax supported) schools, free text books, free transportation, and free (or subsidized) lunches. (5) Assem ble large numbers of students in centralized schools. (6) Provide a common regimen of grades and courses through which students are expected to go. (7) Make socializa tion a primary purpose of schooling (Le., make social promotion the rule, and try to hold all children to the same level of others of the same age).

(8) Have state certification of teach ers. (9) Pay teachers on the basis of amount of schQoling they have had and the numb~r of years they have taught. (10) Adopt uniform pay scales. There might be a few other things which are or are not done that might be added to the list, but those listed are virtually universally practiced thrQughout the United States, and they will serve ade quately as a p~escription for expen sive (and ineffiCient) education. Actually, the prescription for ex pensive educatlon can be succinctly stated this way: Take education out of the home an~ the market, special ize it, and separate it from the work aday world. At any rate, this latter formulation contains my central point, namely, ithat the way to make education expensive is to take it out of the home arid market. But there are some important subsidiary points to be made, so l~t the more extensive listing stand.

The equation of schooling with ed ucation set th~ stage for the devel opment of edu~ation along the lines it has taken. lit is usually assumed rather than asserted, for it will hardly stand up under analysis. Ed ucation is qualitative; schooling is quantitative. Schooling can be pre cisely measur~d, while education is never more precise than being a matter of degree. Children can be compelled to a~tend school. They can hardly be compelled to learn. Everyone w~o was educable and who lived long enough has always 158 THE FREEMAN March been to some degree and in certain ways educated, though a large num ber of people who have lived on this earth have never attended school. It is possible to be much schooled and have very little by way of education. On the other hand, it is possible to be well educated (whatever that may be taken to mean) and never to have attended school at all. The most that can be said for schooling is that it is one among many ways by which one may be educated. This is not, let me emphasize, a brief against school ing, only an effort to put schooling in the much broader context of edu cation.

Learning in the Home Much of the education of children has always taken place in the home and surrounding environs. It still does, though not nearly so much positive education as in former times. (Children are much more apt to be told what not to do in the home now adays than shown what to do. That is so because there is so little of the house and yard work that children can do, or that their parents want them to do. Complex and automatic machinery has either made it dan gerous for small children or unnec essary for anyone to attend it.) I do not mean by education in the home, schooling. Something akin to schooling has sometimes been ac complished in the home, and there are a few parents who are attempting it today. But the home probably never was an ideal environment for formal schooling, and it almost cer tainly is not today. Perhaps, the role that the home used to perform in education can best be discussed in the broader context of apprenticeship training. Much of the education that people acquired in the past began with their train ing as apprentices. The training of apprentices usually involved little or no expense either for the master or the student. In most jobs, the ap prentice could be helpful enough to defray the cost of teaching and su pervision from the very beginning.

Before very long, if he was apt, he could probably do simple jobs well enough that the master actually was the gainer in the relationship finan cially. We are accustomed to think of ap prentices today only in such lines of work as plumbing and carpentry, but most work used to be learned in this way from a master. This was true not only of such skilled crafts as shoemaking but also what are now considered to be professions, such as law and medicine. Indeed, the mod ern school is in derivation largely an abstraction and specialization of the master-apprentice relationship. In the process, of course, it was largely separated from the workaday world and began its march toward becom ing most expensive. But the home was the main place 1982 PRESCRIPTION FOR EXPENSIVE EDUCA'TIION 159 for the training of apprentices through the ages. To see this, it will be helpful to think of apprenticeship as going much beyond specialized skills. Girls usually served their ap prenticeship as homemakers and housekeepers in the home. Under the supervision of their mothers, they learned to cook, sew, wash, iron, clean, and do the myriad tasks as sociated with keeping a home. On the farm, boys usually learned the jobs of running a farm by serving as apprentices to their fathers.

On-the-JobTraining Education has been taken out of the market, largely, in two ways. The first one takes us back to appren ticeship. There are still some jobs that are learned by the apprentice route. Plumbing, carpentry, and bricklaying come to mind. A goodly number of others are learned mainly on the job, such as service station attendant, but there are now formi dable difficulties placed by law in the way of learning on the job. There is, of course, required school atten dance for the early years. In addi tion there are child labor laws, and, much more to the point, minimum wage laws. The minimum wage re quirement tends to make on-the-job training, or apprenticeship, too ex pensive for employers except where very simple tasks are involved. Often, too, there are schooling re quirements for licensing or certification. A major exception to this in the professiolls is legal training; many states require only the pass ing of the ban exams, not specific amounts of sCihooling. The trend, however, has ~ong been toward ex tensive schooli(ng, and that has be come the accepted mode for becom ing a lawyer. Both social and legal pressures hav~ long been in the di rection of exteIilsive schooling in the United States. In practice, on-the-job training has oecome too expensive for most emp~oyers. It has been largely taken qut of the market, and an inexpensive method of education is no longer geperally available.

Below-CostPricing In general, t~ough, education has been taken 0"ut of the market by pricing schoolipg far below its cost or giving it ~way. Free tax-sup ported element,ary and high schools (plus kindergattens, in most states) and heavily subsidized technical, college, and u~niversity schooling have driven most alternative modes of education o1.llt of the market and made it exceedjngly difficult for pri vate schools tq compete. To put it another way, i schooling has tri umphed as the!mode of education in the United St"tes. Compulsory at tendance and tax support have ac complished th~t. And, state sup ported schools !have tended to price all others out of the market. Schooling, per se, is probably the 160 THE FREEMAN March most expensive mode for getting an education, with the possible excep tion of hiring a tutor. We would all see that, probably, if education were freely available in the market at its market price. Not only does it in volve such costs as hiring a teacher, providing classrooms, transporta tion to the place where the class meets, and so forth, but it is also time-consuming for the students.

Schooling necessarily entails a reg imen of learning that includes much that a student may not want to know, and thus will learn only as a result of the most intensive methods of teaching. Other students are often a distraction to learning, and those who learn more quickly are apt to be held back to the level of the class as a whole. Even so, schooling would almost certainly be one of the alternative modes of education available in a free market. It has some advantages over other methods of education. The very fact that there is a regimen, or course of study, usually results in a broader education than would otherwise be obtained. Self-educated persons, for example, are likely to have gaps in their knowledge which may be less likely in schools. There are social di mensions to schools, too, which many might prefer and find beneficial. Other students may sometimes be a distraction, but they may also pro vide competition and a spur to learning.

Increasing the Options What we could expect, however, if schooling were provided in the mar ket, would be a great variety of schools. Instead of one elementary school in a neighborhood, and a large high school which has resulted from consolidation upon consolidation, would be many different sorts and sizes of schools. Many church build ings, whose Sunday School rooms are rarely used except for an hour on Sunday morning, would probably be used for schools. But there is no need, at the elementary level to have all grades or classes in a single build ing. Classes could be held in any suitable (suitable to the parents, that is) room or space that a would-be teacher could provide or rent. There might well be chains of schools to cater to those with a preference for uniformity or nationally recognized schools. But the variety would surely ex tend much beyond that of facilities. The competition for students could lead to much experimentation in the least expensive and most effective ways to teach courses. In any popu lous area, there would be a great va riety of emphases: there would be traditional schools, experimental schools, schools following this, or that, or the other plan. There would be one-teacher schools and, possibly, very large schools. Those who wanted a strong academic emphasis would find schools and teachers willing and 1982 PRESCRIPTION FOR EXPENSIVE EDUCATION 161 eager to provide it. Those who wanted various kinds of manual and tech nical training would have that pro vided as well.

The greatest changes, however, would most likely be in non-school ing education. This would be the case, especially, if all elements of compul sion were removed from education and the notion abandoned of educa tion as something to be publicly pro vided. It is difficult for any of us to imagine now the distortions that compulsion has wrought in the ac quisition of learning. Our system of education is the re sult of a century and a half of grad ual growth and proliferation. As a consequence, few, if any, of those now living have experienced education without decisive elements of com pulsion. It has conditioned our thinking to the use of force far be yond what the state requires. For example, privately financed schools are likely to be modeled on state schools, in ways that might be avoidable even in the present conl pulsory setting. In any case, we have become habituated to the use of compulsion in education and find :it difficult to imagine education with out it.

Ways of Self-Education There are many alternatives to schooling as a means of getting an education, both potential and ac tual. Training in the home and apprentice ship ihave already been dis cussed. Every sort of information imaginable iis available to anyone who can read. Books, magazines, and newspapers abound. Television of fers considerable potentiality for ed ucation. All sorts of mechanical de vices have been invented which can aid the willing learner. Seminars and lectures provide learning within a social setting. Once the ~ndividual and family assume the main responsibility for education and we begin to treat it once again as something to be de sired, sought after, and mastered, many new aids to learning may be made more g¢nerally available. The widespread practice, particularly by government, i of rewarding quantity of time spent at school rather than the quality of learning, may not ac tually discourage self-education, but it certainly offers no spur to it. A widespread r¢versal of this practice should do much to stimulate people to improve themselves.

My main point, however, is that tax-supported, subsidized, and com pulsory schooling is a prescription for expensiv¢ education. Not only does it place the major burden of paying for education on the public at large but ]t also bends us toward the most expensive method of pro viding it, namely, schooling. Above all, the provision of education, espe cially schoolilng, has been substan tially removen from the market.

162 THE FREEMAN March A Hampered Market We have a severely hampered market in education. It is hampered, in the first place, by compulsory at tendance laws. These, in turn, are supplemented by child labor laws and the minimum wage. In consequence, large numbers of children are forced to attend school who have little or no inclination or interest in learn ing. This hampers learning in the schools, turning them. into places of confinement rather than learning in many cases, and saddles the public with costs of the undertaking. The market is hampered by the difficulties which private schools have of going into and staying in business in the face of free public schools. It is hampered by teacher certification requirements which keep many who would teach .from entering the field. It is hampered by pay scales which place a premium on amount of schooling. It is ham pered because state rules force so much of the effort at education into the framework of schooling.

As a result of the severely ham pered market, there are many ques tions that cannot be answered. For example, how large is the market for schooling? Probably, it is much smaller than the number presently attending school, else compulsory attendance laws might be superflu ous. (It should be noted, however, that compulsory attendance serves other important functions for those concerned with maintaining state power over schooling. Compulsory attendance is the main basis for government controls over private schools.) There is just no way of knowing under the present system. Nor can we do anything other than guess at the market for other ap proaches to education than school ing because of the preference ac corded schooling. No Competitive Pricing How inexpensive could schooling be? The hampered market does not enable us to answer the question. There is not the level of competition that would provide the answer. Many would-be teachers cannot enter the field. Compulsory attendance pro vides an artificially higher demand than would actually exist. Fixed pay scales and union contracts take the determination of teacher and ad ministrator wages out of the mar ket. The use of buildings only as schools increases the cost of facili ties.

But even if we could determine under the present system how inex pensive schooling might be, we would still not know how inexpensive edu cation might be. And that is surely the most important question. The answers to all these questions can only be found in a free market for education. We have all.become accustomed to the use of force in the providing of 1982 PRESCRIPTION FOR EXPENSIVE EDUCATION 163 education. And, since we are accu.s tomed to it, we tend to accept the consequences as more or less un avoidable. Moreover, we tend to make comparisons only among state supported systems of education. Hence, we are unlikely to notice how expensive they are, if a system conn. pares favorably with other like sys tems. We think of paring costs and improving education within the sarrle framework as do members of boards of education of tax-supported schools. That is why I introduced this pie(~e with the story of the typing table.

Few of us are accustomed to return ing a piece of merchandise which we want to the store to pick up one just like it in order to have a price ad justment made. To do it that way is clearly a prescription for expensive merchandise. I wanted to invite at tention to the possibility that it is possible to go about something in an unnecessarily expensive and ineffL cient way. We know that, of course, but it requires some hard thinking to see how and why in a long-estab lished system. Education is, of course, different in many important respects from a typing table. It is infinitely more complex, more subtle, more varied, and requires much more effort to at tain, to mention a few of the ways. In one respect at least, however, they are alike. They are both economic goods. That is, both are scarce, are in demand, and are costly. FalseSignal$ The provision of education free or highly subsi<iized to the recipients, at taxpayer expense, ofcourse, makes it appear that education is not an economic good. It appears to be a surplus whioh must be sold at cut rates or given away to be rid of it.

More, since many of the recipients are compellep to partake, whether they will or not, it looks for all the world like an economic "bad." On the other hand, it has. been pro moted as soyp.ething of such value and importance that whether or not one should have it should not be left to the choice of childt:en or their par ents. In short, it was largely re moved from, the category of eco nomic goods. This was nowhere better signified than in a publicity campaign that went on for many years. Some orga nization would compile figures on how much each state paid teachers on the average, and how much was spent per ch~ld on the average. It might be supposed that the purpose of these figures was to discover which states were accomplishing the task most economically. It might be sup posed, further, that responsible offi cials from the states that were spending more would hasten to study how those states that were spending less were managing to do it. That was not the point at all, however.

Those states that spent the most got the highest ratings, while those that 164 THE FREEMAN spent the least got the lowest. That had all the cogency of attempting to prove that tomatoes taste better in the winter because they cost more. What it does prove is that those who publicized the ratings were deter mined to ignore economic consider ations. So far as I am aware, there is no necessary correlation between the amount of money spent and the quality of the education obtained. That it is an economic good simply means that, other things being equal, those minded to be economical will prefer the less expensive approaches to education to the more expensive. Two things mislead us as to what is economical in education at present. One is the effort to quantify educa tion by schooling. The other is that the recipients do not usually bear much of the cost of the schooling. Thus, so far as schooling is consid ered to be an economic good, it ap pears to be quite a bargain. To rem edy that, or rid ourselves of the illusion, it is necessary to think in terms of actual costs.

The prescription for expensive ed ucation is to take it out of the home and market. The prescription for in expensive and effective education is to restore authority and responsibil ity for it to the parents and recipi ents and permit it to be provided in the market. i IDEAS ON LIBERTY The Case for the Private School A CENTURY ago education was almost entirely privately supported and controlled throughout the United States. Indeed, it was not until the early years of the nineteenth century that the first free school (for Ne groes, incidentally) was established in New York City. Schools were operated by religious organizations or individual educators. The parents directly paid tuition with occasional benefactions from grateful alumni. The private schools turned out fewer graduates proportionately than now emerge from the government (public) school system, but there was no criticism that these could not properly read, write, spell, and figure, nor that they were ignorant of geography, civics, and the great Chris tian principles that motivate men. Under this diverse system based on various educational philosophies and with widely varying curricula, the percentage of literate persons was not only large and increasing but regimentation of instruction was impossible, and there was wide exper imentation. This diversity by its very nature enriched our culture.

GEORGE S. SCHUYLER Brian Summers 12.1 IW. MtUN ;f>HU$", JOE'S PAYCHECK //"/~~~~(>~~ EARLY one evening I was on my wa.y to the bank, when my friend Joe greeted me with some good news. "I got a raise today," he an nounced, holding up his pay enve lope. "I never thought I'd be able to support my family so well. Sure beats when I was a kid." "That's great!" I replied as we walked along. "These days we cer tainly do live better, even though our parents worked longer hours." "Ofcourse," he answered. ''We have better technology. The tools and equipment we use make us more productive. In the old days, workers had to perform most jobs by hand. It used to take a whole crew to do what Mr. Summers is a member of the staff of The Foun dation for Economic Education. one man now.does faster with a bull dozer." "But why does your company pay you more just 'because technology has made you more productive? Your employer, after all, is the one who provided the lnachines."

"I think m~nagement is afraid we might bring i in a union," he an swered. "Maybe so,~' I replied. "But what would you do if your paycheck didn't reflect your increased productivity?" "Look for a~other job." "Of courser I said. "Your com pany knows tpat you won't continue working for t~em if they don't pay a competitive! wage-union or no union." "You are saying that competition, 166 THE FREEMAN in addition to better technology, has a lot to do with my bigger pay check." "Yes. Many workers use the same technology year after year. Yet even they benefit when other workers are provided with better equipment." "How's that?" he asked. "In a free market, all employers compete for workers. When some employers can offer higher wage rates because improved equipment has made their employees more pro ductive, competition will raise the wages of all workers. For instance, if you want to keep your best laborer from going off to work in a new fac tory-or taking a job that has been vacated by someone who went to work in a factory-you had better give him a raise.

"Here is another way of looking at it," I continued. "Improved tools and equipment lead to increased produc tion. With more goods and services entering the market, everyone's paycheck buys more. Even if nomi nal wage rates should fall in a defla tionary period, real wages would continue to rise as long as investors make more capital available. "Capital is the key to real growth. Everyone benefits when savers fur nish the investment capital needed to create better tools of production." "If investment capital is the ulti mate source of higher real wages, what about labor unions?" he asked. "Many people think unions are the reason wages are rising." "Have you ever seen a picket line?" I asked. "Sure." "Who were they trying to keep out?" "Strike-breakers. " "Precisely," I answered. "Unions try to increase union paychecks by denying paychecks to nonunion workers. These excluded workers have to settle for whatever jobs are available in the nonunion sector.

Because of union obstructions, some workers are prevented from getting better jobs. "And to make matters worse, unions often wind up hurting the very workers they are supposed to help. Look at the auto and construc tion unions. Union wage demands have priced many union workers out of their jobs." "I see that some unions are trying to protect Ameri~an workers by sup porting import quotas," he noted. "Sure," I replied. "They want to protect union jobs by preventing other Americans from spending their own paychecks as they see fit. Are you and your family helped by such tactics?" "I never thought of it that way," Joe said as he cashed his check. "Maybe we should pay more atten tion to what people do, rather than what they say." i "Ridgway K. Foley, Jr. The Source of SovereigntY1 I. PERSPECTIVE THE concept of sovereignty-the monopoly of coercive power wielded by the statelies at the root of al most all statist dreams and schemes.

It provides the jurisprudential un derpinning to the thrust of political power. It seems to war with the es sential nature of justice, respect for free human choice. As such, it mer its investigation and analysis in an attempt to define the source sup porting the principle and to discover whether or not sovereignty and jus tice can reside in harmony. Measured historically, the analy sis of sovereignty experienced a rel· atively recent birth, although one can surmise that the existence and prac·· tical application of the tenet far an.. Mr. Foley, a partner in Schwabe, Williamson, Wyatt, Moore & Roberts, practices law in Portland, Oregon. tedated its recognition and analysis. Most commenltators have considered definitions aJ;1d location of sover eignty, with l~ttle attention devoted to the crucial" inquiry of the source of sovereignty. This essay peruses this critical qu.estion. As a work~ng definition, sover eignty is the, ultimate justification for the applic~tion of coercive force by the organized state to individuals residing withln the territorial pe rimeters of tihat organization or linked to it by means of birth, alle giance, contract or custom. Thus, one cannot comprehend sovereignty without attention to two interre lated concepts of state and citizen ship. The state is that unit which exercises sov~reignty: the applica tion of justified coercion within a given territor~. Citizenship refers to the relation of person to state: the lh7 168 THE FREEMAN March recognized rights, powers, duties and privileges of an individual subject to the coercive monopoly controlling within the perimeter in which that individual resides or is found.

Conflicting Forces of Civil Chaosand OrderedSlavery In pre-Reformation times, no one truly analyzed sovereignty. It ex isted. Tribes, city-states, and incipi ent nation-states applied coercive fetters to people (citizen and slave alike) subservient to the unit. Power often justified force without recourse to legal niceties; few if any philoso phers discoursed upon the reason or justification supporting the chiefs decision to punish or ostracize a cit izen for real or imagined crimes, derelictions of duty or just plain dif ferences of opinion. While nomadic hordes displayed little or no sense of property or ter ritory, they did reflect customary control over those persons annexed to the tribe by birth or fealty. This concept gained territorial status in addition to other links with the ad vent of manorial domains and like territorial units, units which even tually merged, often through bloody internecine warfare, into the mod ern nation-states. In other words, states pre-existed the articulated concept of sovereignty. Early, well developed civilizations offered inci sive and detailed doctrines of citi zenship without a clearly defined discussion of the attributes and problems of sovereignty.

While the multitalented four teenth-century physician, Marsilio of Padua, groped toward the modern notion of sovereignty in his The De fender of Peace (1324), it remained for Jean Bodin in his The Six Books on the State, published in 1576, to undertake the first systematic and clear excursion into sovereignty. Bodin Iived in a time of turmoil which caused him to hunger for peace, contentment and security. This drive undoubtedly fueled his desire for a strong government de signed to curb the excesses of plun derers and pirates so rampant in Reformation times. Yet those who desire imposition of such control of ten fail to perceive, or to deal effec tively with, the equally troublesome problem of a marauding govern ment committed to subordinating its people in the good name of order. In deed, the conflicting forces of civiI chaos and ordered slavery mark the development of the doctrine of sov ereignty.

Both Marsilio of Padua and Jean Bodin drew the critical distinction between "government" and the "state," the execution of sovereign functions (limited) from sovereignty itself (perpetual); sovereignty exists for as long as the state exists, re gardless of the changing forms, pol icies and personnel of the govern ment. Neither thinker, however, 1982 THE SOURCE OF SOVEREIGNTY 169 delved deeply into the source of his subject. Other political philosophers-Thomas Hobbes, John Locke, Jean Jacques Rousseau, G. W. F. Hegel, and John Austin, to name a few-· wrestled with the idea of state sov ereignty and citizenship, but their discussions tend to emphasize the obligatory nature of the state and the subject's duties to it and attempt to locate the sovereign in the mod ern complex state. Few ask the truly decisive questions related to the source of sovereignty: what is the basis for the existence of the state, how does that coercive unit harmo nize with the concept of justice as respect for free choice, and what limits ought to be placed upon the sovereign vis-a-vis citizens?

The tradition promulgated by the studies of the last four centuries has at least isolated six elements nor mally attributed to a sovereign state: (1) the justification for the collective use of force; (2) the existence of a state; (3) the boundaries of a circum scribed territory; (4) the absence of any competing and recognized coun tervailing political power; (5) the compulsory allegiance of the inhab itants to the state; and, (6) a legal equality, among the community of states, to carryon and judge its own internal affairs. Again, these defin itive elements merely describe sov ereignty; they do not purport to ex plain its source. II. POSSIBILITIES While many philosophers have expended considerable effort in the process of defhbng and locating sov ereignty, relatively few have rigor ously attacked! the seminal problem of the source or sovereignty and the reasons justifYJng imposition of lim its upon non~ggressive man. A working defini~ion sufficiently iden tifies the subject. The location of sovereignty poses an interesting but moot problem unless one assesses the utility of theiconcept altogether.

Several possible sources of the doc trine exist and merit consideration. Each of several theories possesses at least a glimmer of validity. (A) Does Sovereignty Derive from God? For the tradition represented by John Locke, sovereignty developed as a religious concomitant. Man re sided in a State and a Society be cause Divine Providence expected and directed such a venture. Reflection advises that no Super natural Being ordained any specific form of government nor did He ap prove the appilication of force to peaceable hum~n beings. One can not conceive of, an Ultimate Loving God imposing, a system upon His creation which leads only to oppres sion, injustice and bloodshed. Nonetheless, I, a grain of truth re sides in the postulate. Christians ac170 THE FREEMAN March cept the existence ofa.Natural Law, immutable and inexorable, govern ing the universe. Man possesses the capability of ignoring that Natural Law but, if he does so, he must pay the price sanctioned for disobedi ence. One fundamental rule of Nat ural Law-the second axiom of hu man action-is that man makes mistakes. If sovereignty derived from God implies that finite man can best govern his errant self in a struc tured state which reduces human friction and lessens or thwarts indi vidual impulses toward destruction then, to that extent, the Lockean tradition may be judged correct. The questions· remain, however: what of justice and what limits should be imposed upon free choice and ac tion? To attribute specific forms and regulations willy-nilly to a Supreme Being amounts to dictation to a Deity.

(B) A Social Compact The attitude that sovereignty re sulted from some sort of formal or informal 'contract or agreement be tween citizens for their mutual ad vancement and protection crops up in varying guises from ancient to modern times. From Bodin and Hobbes this discipline extends in some form or other to the Kelsenite theory today; perhaps the fact that it contains a partial truth accounts for its tenacity, yet the psuedo-ro mantic vision developed by Rousseau ought to be .quelled once and for all time, since it leads to the om nipotent state. Perhaps at some time lost in the dim past, a group of men in a given territory met and banded together for economicbetterment and personal protection, although one encounters grave difficulties in en visioning a "social contract" in the formal sense where all inhabitants solemnly vote allegiance and then inscribe their names on a dusty parchment. Moreover, one cannot assume total assent to all terms of the bargain, leaving one wondering the source of authority to bind dis senters (whither sovereignty).

The most devastating attacks upon the theory supporting a "social compact" emanate from the nine teenth-century anarchists, Lysan der Spooner l and Herbert Spencer 2 • Spooner cogently argued that as senting parties to a constitution or law cannot logically bind unborn fu ture generations even if one could stretch a point to urge that the as senting majority bound all persons residing in the same territory. (Since the franchise exists sparsely today, and even more scantily in antedilu vian times witnessing the develop ment of most constitutions, and since lSee Spooner, Lysander, No Treason: The Constitution ofNo Authority No.6 (Ralph Myles Publishers, Inc., Colorado Springs, Colorado, 1973). 2Spencer, Herbert, The Right to Ignore the State, (Cayman Press 1973).

1982 THE SOURCE OF SOVEREIGNTY 171 many of the enfranchised failed to exercise their right to accept or re·· ject the basic norm by voting for rea·· sons of dissatisfaction with the ap·· paratus or the alternatives, one cannot validly conjecture that rna·· jorities adopt constitutions. What is the source that binds the nonparti·· cipants to the result: sovereignty?) Spencer powerfully demonstrated that a dissenter cannot be made a party to an agreement in spite of his choice (if justice and morality are founded upon the respect for free choice). Thus, while the social com pact theory enjoys some practical value, it fails to withstand rigorous analysis and it fails to accord with known historical fact. Again, however, bits of value oc cupy the social compact theory. Many persons pledge allegiance to a state by choice or by indifference: they live under the laws of the state and par take of its social, economic and po litical system by use and active par ticipation. One could cogently argue that such persons have entered into a social compact, sub silentio, and ought to be bound by it. Such anal ysis does not deal adequately with nonaggressive dissenters in the ter ritory who merely wish to be left alone to choose their own destiny.

(C) A Natural and Necessary Process One could urge that territorial sovereignty represents a natural imperative-ev-ery bit of land must have a government. Recorded his tory reveals periods of time when civilizations ¢xisted in migratory fashion and no ownership of real property by tbje "state" was deemed important. Certain North American Indian tribes developed a relatively high degree qf culture and social structure sans' any tenet of absolute ownership of the territory on which they resided. European gypsies be tray identical tnores, as do some Af rican tribes. Hence, the argument of a natural pro~ess proves too much and cannot stand alone as the ulti mate justification for sovereignty. There is sonllething to be said for a more though~ful articulation of this proposition. Sovereignty refers to a concatenation 'of individuals, terri tory and poweri Within a given space occupied by human beings, destruc tive forces ana insoluble disputes arise. A natural process may recog nize the ... need for some accepted means of preventing the application of force to nonaggressive persons and finally ajudica~ing disputes between clashing inhabi~ts. After all, Great Britain and the United States both professed sovereignty over the Ore gon Territory i in the early nine teenth centuryi' but no official gov ernment existe~ until the Champoeg incident, provoked when the wealth iest man in the territory, Ewing Young, had the audacity to die with property, without a will, and sans 172 THE FREEMAN March heirs. Whether logically necessary or not, the inhabitants of the Oregon Territory believed that such an event required the formation of a govern ment unit to probate the estate and settle, once and for all, in an orderly fashion, who should receive Mr.

Young's property. (0) The State as the Source of Sovereignty Perhaps the least likely source of sovereignty resides in the state per se, although several of the early thinkers point in this direction. Sov ereignty represents an attribute of the state; is it not unreasonable to insist that that which is being de scribed also supplies the source of the attribute? To view the state as the fountain of its own power is to indulge in some sort ofHegelian view of an artificial entity as an organic being. Nevertheless, even here one can discern kernels ofwheat among acres of chaff. The state exudes power or force. Continued existence of the state and impelled allegiance of cit izens can be accounted for by the real or implied threats of coercion for noncompliance. Such coercion may take many forms, from ostracism, persuasion, refusal of favors or non recognition, to actual deprivation of personal property and unmitigated violence. Thus, in a very real sense, fear of power may supply some jus tification for the existence ofthe state and, hence, for the attribute of sov ereignty.

III. HYPOTHESIS I propose as a hypothesis that the source of sovereignty resides in a Rule of Necessity-a principle which seems to collide with justice but which, in fact, makes true justice possible. The Rule of Necessity ex tracts the value from the suggested sources of sovereignty discussed heretofore and blends them into a working theory. Let us commence with certain known factors: (1) Man acts and chooses between alternate courses of conduct based upon his subjective values; (2) No man possesses the capabil ity of making a better choice for any other individual than the actor him self; (3) Justice and morality require respect for individual free choice3 ; (4) Man is finite and fallible; one side of his nature is aggressive and violent, and that aggression and vi olence may, on occasion, be directed against other beings who seek no conflict and do no harm; (5) The state (or the government of the state) coerces free men by im posing restraint upon their volun tary conduct and by substituting the 3See Foley, Ridgway K., Jr., "In Quest of Justice," 24 Freeman (No.5) 301, 302 (May 1974).

1982 THE SOURCE OF SOVEREIGNTY 173 subjective values of one group or in·· dividual for those of another group or individual by means of force or threat of force. Positing these givens, we become cognizant of two facts: (1) The state violates the principle of justice by restricting absolute freedom of choice; and (2) The state appears necessary to curb man's sinister ex cesses and to permit untrammeled creative choice. These propositions compel some explanation. Man cannot be truly free if his range of alternatives re ceives limitation from his fellowman, acting either as an outlaw or under color of law. Neither a slave nor a victim of crime is free to the extent that his choice is impaired. To the extent that the state restrains every individual within its boundaries from acting in a forcible and fraudulent manner and decides disputes which the parties cannot adjust volunta rily, the state makes maximum freedom possible and provides the necessary condition for justice. Pro vision for these conditions consti tutes the only acceptable moral jus tification for the doctrine of sovereignty.

Thus perceived, a meld of the suggested sources of sovereignty (God,contract, natural process, state) seems to supply an apt answer to the inquiry: what is the true source of sovereignty? Sovereignty flows from man's fallible nature, his intrinsic predilection to violence. It relates to man's cogniz~nce of this shadowy side of his own being and his tacit or explicit agreement to band together with others tolprovide a mutual de fense against ajggressionby force and deceit. Necessity impels this result in the sense tn.at man alone cannot fend off a hord¢ of aggressors colored by the dark side of human action. ProperLimits~o Sovereignty Consideration of the rationale and the source of sovereignty stimulates an expedition iinto the topic of the proper limits to sovereignty. Lack ing logical an~ysis and troubled by a dangerous world, Bodin and his intellectual progeny imposed cum bersome and in~xplicable limits upon the concept. Why, for example, ren der the succe$sion to the French crown immutable? Or, how do we define and discbver the laws of God which cannot b~ ravaged by the sov ereign? What destroys the essence of sovereignty as punishment for these heinous crimes] when, by definition, the sovereign ppssesses no equals or inferiors? Totalltarian nations have all perpetrated \crimes against indi viduals and states of unparalleled bestiality and v.ciousness in the past 50 years, yet no one realistically would deny them their role as sov ereign nations.

Nevertheless, sovereignty re quires distinct limits else we come face to face with the Hobbesian ab174 THE FREEMAN March solute monarch or Rousseau's tyran nical general will. Allow me to sug gest the perimeters of sovereignty: a sovereign nation enjoys the legiti mate power to protect individuals living within a given boundary from the initiation of force and fraud by groups or individuals residing within or without those boundaries and to compel settlement of irreconcilable individual disputes according to common principles ofjustice. Within these narrow confines, the state reigns supreme; beyond these barri ers, the state possesses no moral au thority for the justifiable application of force. Acceptance of this definition im perils many subservient concepts of territory, of citizenship, of alle giance. No longer need the state own all property within a given border save that small portion carved out by pri vate citizens and held subject to the whim of the government. The state need own little or· no property; all other land unclaimed by individuals may stay in a natural state until claimed and employed by acting, creating human beings. The concept of state dominion over realty repre sents a curious atavism to feudal days where the lord of the manor owned all the land worked by his serfs; it does not harmonize with modern libertarian thought.

No longer need the resident of a given territorial unit pledge allegiance to a plunderer-state nor carry out its onerous obligations of citi zenship. Man must be free to move about the globe within a minimum of externally imposed restraint; he rightfully remains subject only to the cardinal principle of justice that he maintain respect for the free choice of others and not initiate force against them. Sovereignty need not affect the dweller in a given terri tory in the absence of two instances: (1) commission of a crime or initia tion of fraud, or (2) involvement in a dispute with another person or per sons which the parties cannot re solve by private means. JusticeInvolvesa Cost One who lives peaceably and without conflict need never touch the law nor encounter the sovereignty of the state, although he will benefit from life in a setting protected against initiation of force. Even a victim of force or fraud need not call upon public authorities to remedy the situation so long as the victim does not initiate force against the aggres sor. Like the litigant in a dispute, he may conclude his difficulties by private means. The victim of a theft may search out his oppressor, con front him, and induce restitution.

While seldom accomplished in vio lent crimes, the opportunity re mains. The preservation of justice in volves a cost, like every other choice 1982 THE SOURCE OF SOVEREIGNTY 175 or activity in this world. Inhabitants., ora territory could defray this cost either by means of general taxation or prorated payment by those who use the system. General taxation justifies on the ground that all dom iciliaries benefit from a peaceable community although it seems unfair to impose a burden on one who never directly employs the system. In a sense, however, all inhabitants do use the system since an apparatus of common justice benefits everyone by its deterrent effect and court-of-Iast resort aspect. User payments may be Laws Follow Rights fairer althOl:(gh indirect ben eficiaries will riot share the cost and the user system poses fiscal and ad ministrative p~oblems. In sum, one: need encounter sov ereignty only if he voluntarily transgresses upon the right of an other to exercise his free choice and either is unab~e or unwilling to ne gotiate and compromise the matter voluntarily. In !those instances, state must remain ready and able to pre vent civil chao~ by the application of collective force. @ IDEAS ON LIBERTY How do you determine a right action by gov¢rnment from a wrong action by government? Can you, without using ~he concept of majority vote, write out an answer that satisfies you? Ifypu can, I will apologize.

And I will happily include you among the increasing number of Ameri cans who are seeking a basis for collective governmental action that is more permanent and fundarn.ental than the passing whims and passions of imperfect people-whims and passions that ate too often inflamed by demagogues who are themselves less perfect than the people they wish to lead. Personally, I am convinced that the solution is to be found in the original American concept that all rights begin 'iand end with individu als; that every person has an inherent right ~o his life, liberty, and property; that he may exercise his rights fully, \so long as he does not violate the equal rights of others; that we may ~elegate the defense of these rights to our government; that any action!!that is illegitimate for persons is automatically illegitimate for governm~nt; and that we should never regard government as any more sacred iithan any other useful organization that provides us with specialized se*vices we want at prices we are willing to pay.

P. DEAN RUSSELL, "Sources ofGovernmental Authority"

WilliamR. Hawkins REAFFIRMING FREEDOMOF THE SEAS FREEDOM OF THE SEAS is one of the oldest principles of international law. It is the right to navigate through the global expanse of the oceans as one sees fit, carrying what cargo one wishes. It is also the right to extract resources from the seas by one's own efforts. Though not fully articulated until the publication of Hugo Gro tius' De Jure Belli ac Pacis in 1625, it was a principle that had been evolving since ancient times wher ever commerce flourished. It is a principle based soundly on property rights. Beyond a narrow strip of coastal waters (traditionally set by another Dutch jurist, Cornelius von Bynkershoek as three miles-the ef fective range of a 17th-century can non) the only claim to ownership is the private ownership ofvessel, cargo and equipment. No government William R. Hawkins is Assistant Professor of Eco nomics, Radford University, Radford, Virginia.

176 t'!:r claim of territoriality or sovereignty is considered legitimate. This concept of freedom was ide ally suited to the requirements of commerce and economicprogress and was the sea-going equivalent of the liberal principles of free trade and free enterprise. These three free doms provided the triad upon which European liberty and advancement was built. As Robert Gilpin has ob served in this regard: l In contrast to the cities of Asia and other continents, European cities have tended to be commercial centers rather than administrative capitals of great states and empires. As a consequence, the commercial and trading cities of Renais sance Italy, the Hanseatic League, the Low Lands and Rhineland Germany en joyed a degree of autonomy unknown to non-European cities. They became the strongholds of merchants and bankers and protected this rising class against pred atory feudal aristocracies.

REAFFIRMING FR:f~EDOM OF THE SEAS 177 It was a principle that took root early in American history and be came a basic tenet of United States foreign policy. Protection of the right of Americans to enjoy the free use of the oceans without molestation pro vided the reason for President Thomas Jefferson to send the first regular Navy patrols to the Medi terranean to combat piracy. It was the primary reason why the U.S. de clared war on England in 1812 and on Germany in 1917. Today, this principle of freedom is under attack in ways which are far more systematic than in the past when assaults were generally con fined to piracy or periods of war. To day the very basis of international law is being challenged in ways that could permanently end all individ ual rights on the oceans. Expanded Claims The threat comes in two main forms. The first is the steady en croachment of national territorial claims. In 1958, only 18 states claimed waters off their coasts be yond the standard three-mile limit, but by 1968 this number had grown to 43 nations claiming 12 or more miles. By 1978, this number had grown further to 69, eleven of which claimed territorial waters of 200 miles. The U.S. has viewed this trend with alarm for it obviously restricts movement at sea and threatens the free passage of commerce through vital straits and narrow seas which may be entire'ily swallowed up as closed national ipreserves.

The United States has refused to recognize such inflated claims. It has protested seizure of American fish ing boats off the coasts of Latin America and nas preferred to pay ransom for the ,release of such ships than to permit american captains to buy licenses which would legitimize these new territorial claims. But the U.S. has not always used merely passive methods of protest. In Au gust, 1981, U.S. Navy fighters shot down two Lib~an jets over waters which Libya c~aims but which the U.S. does not r¢cognize as anything other than opep seas. As yet, most of the coastal states that have ex tended their claims lack the means to enforce thent against determined opposition from a maritime power. Of more serlous import are at tempts to establish an international agency to who~ control of the pres ently open seal~nes would be trans ferred. Unfortup.ately, the U.S. gov ernment has b~en a party to this effort.

At the root oftthis new and serious threat is a philosophical twisting of the traditional' concept of the non territoriality of the oceans. Under this new appro~ch, anything that is not claimed byi a national govern ment must fall 'under the control of a supranational governing body, for it is inconceivable to the minds of 178 THE FREEMAN March reformers and bureaucrats that anything can fall completely out of the jurisdiction of some sort of gov ernment regulation. United NationsControl In 1965 the Commission to Study the Organization of Peace, a re search affiliate of the United Na tions Association (a lobbying group of "idealists" who work to extend the authority of the U.N.) recommended that the ownership of the oceans and their seabeds be vested in the U.N. as an alternative to the extension of territorial claims by states. With typical socialist logic, the Commis sion also concluded that the U.N.

could more efficiently develop the resources of the oceans than could private enterprise. 2 The following year, President Lyndon Johnson surprised both the U.S. and the world diplomatic com munity by describing the seas as the "legacy of all human beings," a phrase which would be modified by successive statements by Washing ton and U.N. officials to become "the common heritage of mankind"-the central term used to justify all ne gotiations on the subject since. Com mon heritage has come to imply the need for common ownership, a need to be met by some international body which will presume to speak for all mankind. Proposals followed in the United Nations, with most of the Third World hopping on the bandwagon. Vesting control of the oceans in the U.N. offered the less developed na tions the opportunity to counter what they considered to be an inequitable advantage possessed by the techno logically advanced Western states in terms of access to the seas. However, the initial reaction of the Congress was negative to such an expansion of U.N. authority. The State Depart ment, though it favored movement toward international regulation, at tempted to side-step the issue so as not to provoke a nationalistic reac tion which would halt all movement toward an agreement 3 Opposi tion also came from the Commerce and Defense Depart ments. The former sought to protect the interests of the oil industry which wanted free access to drilling on the seabed, while the latter was con cerned about possible restrictions on military uses of the oceans, particu larly as missile-equipped nuclear submarines became a vital part of the nation's deterrent force.

Common Heritageof Mankind Policy was thus blurred in the late 1960s, though trends were taking shape that would become ominous in the 1970s. On May 23, 1970, President Richard Nixon proposed that a treaty be adopted that would renounce all territorial claims to the resources of the oceans in favor of regarding these resources as "the 1982 REAFFIRMING FREEDOM OF THE SEAS 179 common heritage of mankind." The President called for the establish ment of an "international regime" which would collect revenues from ocean operations for use by the de veloping countries. This suggested regime was not to operate on the one nation, one-vote model of the Gen eral Assembly but was to reflect a balance ofinterests. 4 This statement of official policy opened a Pandora's box. In 1973, the Law of the Sea Con ference was opened under the aus pices of the United Nations to draw up a treaty in the general form out lined by Nixon. Providing the mus cle at the U.N. for the conference was the Group of 77, a bloc ofThird World nations which actually numbers 114 members. This is the same bloc which, in 1974, pushed for the Dec laration for the Establishment of a New International Economic Order.

The Group of 77 has never hidden the fact that it sees the U.N. as a device for redistributing wealth and power from the Western capitalist nations to the Third World. After eight years of negotiations, the rough form of the proposed treaty has become visible. Its centerpiece is the creation of a new supranational agency, the Seabed Authority which would be modeled on the U.N. Gen eral Assembly. It would thus oper ate on the principle of one nation, one vote and be guaranteed a per manent Third World majority hostile to the West~ The Authority would have exclusive control over the is suance of liceItses for the exploita tion of the deep seabed beyond ter ritorial waters.',The Authority would also have the power to tax compa nies engaged in ocean development, the revenues collected to go to the support of the Authority and to proj ects for Third World economic devel opment. The 4uthority would also have the powe~ to fix prices, set lim its on product~on and control the marketing of oqean resources. There would also be ptograms for the man datory transfet of technology from multinational corporations operat ing at sea to the Third World.

A Seabed Authprity The result would be the creation of a vast, unprecedented power in the hands of an international govern ment agency in! which the U.S. and other industrial countries would have minimal influence. The Authority would be self-supporting from its taxing power and would thus be largely immune from the only lever age that the Western states now have over supranational organizations: control of the pujrse strings 5 (though initially the U.$. is to provide $250 million in interest-free loans and loan guarantees in order to establish the Authority). It would be the ultimate redistributive mechanism. A Third World majority would be enthroned in a position to tax and regulate the 180 THE FREEMAN March corporate entities of the "haves" in the interests of the "have-nots." Even proponents ofthe treaty, such as Richard A. Frank who served the Carter Administration as head of the National Oceanic and Atmospheric Administration, have conceded that "even if amended by the United States, the treaty would represent U.S. acquiescence in multilateral and fairly democratic decision-making on resources and abandonment-in the first serious encounter over the new international economic order-of U.S. control commensurate with its interests as a producer, consumer and donor. The treaty would place re strictions on a previously free mar ket and require U.S. financing of a multilateral competitor."6 The multilateral competitor re ferred to is the Enterprise. The En terprise would be a supranational mining corporation established by the Seabed Authority which would operate in competition with private corporations to develop the oceans.

It would provide another source of income and control to the S"eabed Authority. It is envisioned that the Authority will require that private companies share their mining tech nology with the Enterprise and also do most of the exploration work for it. As bad as this seems, it was ini tially to have been worse. The Group of77 originally wanted to freeze pri vate enterprise out of the oceans entirely. In their proposal, the Enter prise would have been a monopoly with competition banned by treaty. It was not until 1976 that then Sec retary of State Henry Kissinger per suaded the Group to compromise and allow both private companies and the Enterprise to operate side by side. Yet, the Seabed Authority could very easily rig the game so that private companies could not compete on equal or even profitable grounds thus creating a de facto Enterprise mo nopoly. Unlimited Powers Certainly the existence of the En terprise will provide a constant temptation to the Seabed Authority to use its taxing and regulatory powers in such a discriminatory manner. For instance, despite a pro posed fee of $100,000 for a license and another $1 million per year for the right of exploration, plus addi tional fees and profit-sharing schemes should commercial devel opment begin, there is nothing in the treaty that requires the Seabed Au thority to ever grant a single li cense. If licenses are granted, one can well imagine what political terms the Seabed Authority might insist upon in addition to monetary payments.

Corporations might be required to halt trade with South Africa or Is rael or some other nation out of fa vor with the Third World majority 1982 REAFFIRMING FREEDOM OF THE SEAS 181 or be required to take on joint-ven tures with state enterprises of Third World nations. The Seabed Authority would also be a ready-made cartel. It is as sumed that the Seabed Authority would use its power to limit produc tion and control prices so as to pro tect underdeveloped nations, which presently mine minerals for export, from competition from new mining operations in the oceans. It is highly unlikely that in any of these situations the bureaucrats who would inhabit the Seabed Authority would take the side of the Western corporations. At the core of the elite which staffs the complex of interna tional organizations is, according to Richard G. Darman, a "profound aversion to unilateralism within the community of individuals (not states) involved in multilateral negotia tions." Darman was Vice-Chairman of the U.S. delegation to the Third Session of the Law of the Sea Con ference. He found that: 7 It was particularly characteristic of the Law of the Sea Conference community peopled as it is predominantly by inter nationalist lawyer-codifiers. The inter nationalist tendency to favor collective over individual actions is combined with the codifier's tendency to see the world in neat, static terms. Above and beyond practical considerations, there is an aes thetic antipathy toward the disorder of non-conformity and a general distrust of the possible benignness of self-regulat ing, dynamic processes.

This tendency of international bu reaucrats has Qeen remarked upon by others, most notably by econo mist P. T. Bauet who concluded that 8 International ~gencies have consis tently favored Third World governments who try to establish state-controlled economies and th~y have also often sup plied to these gov¢rnments personnel for running state export monopolies, state trading companies and state-run cooper atives. . .. The ihternational organiza tions also systemBiticallyattempt to unite less-developed co-pntries into a bloc in opposition to repr¢sentatives of the mar ket economy. The Seabed Au~hority would be the ultimate expression of this ten dency. Problems of Security It was intended that the Tenth Session of the Law of the Sea Con ference would b~ able to reach for mal agreement' on a treaty by the end of 1981. Hqwever, the Reagan Administration,! led by Secretary of State Alexande~ Haig on this issue, sent instructions to the U.S. delega tion not to allow!an agreement to be finalized that ye~r. The rationale for this action was.1 that the incoming Administration needed time to be come familiar wfth the negotiations and to appoint i~s own team of dele gates to the Conference. However, several factors would indicate that more than patroJ;lage was at work.

The Republican Platform adopted 182 THE FREEMAN March at the 1980 convention stated that "Multilateral negotiations have thus far insufficiently focused attention on the United States' long-term secu rity requirements" and specifically listed the Law of the Sea Conference as one of the problem areas which has "served to inhibit United States exploration of the seabed for its abundant natural resources." Fur thermore it is known that Secretary Haig is concerned with the possibil ity of a future Resource War which would threaten the American econ omy. Access to new supplies of vital resources is thus an important fac tor in the Secretary's thinking. Also the philosophical disposition of President Reagan on issues of in ternational economics is important to note. At the recent Cancun con ference, which brought together leaders from both advanced and underdeveloped nations in Mexico, the President made known his pref erence for private investment and trade and his opposition to any new international bureaucracies being created to regulate economic activ ity. Certainly something like the Seabed Authority would run counter to President Reagan's announced attitude.

There is a vast potential in the oceans. Attention has focused in the past on the drilling of oil and natu ral gas on the continental shelf. More recently attention has been drawn to the mining of manganese nodules in the deep seabeds beyond the shelf. It is believed that there may be two million square miles of shelf area where oil and gas might be found. Estimates of 500 billion barrels of oil and 1.5 quadrillion cubic feet of natural gas are not uncommon. Manganese nodules formed from manganese oxide precipitate con tain about 30 percent manganese but also nickel (1.4%), copper (1.2%) and cobalt (0.25%). While these percent ages may seem small, they become quite significant when the volume of nodules that are believed to exist is taken into account. Estimates run as high as 1,600 billion tons of nod ules in the Pacific Ocean. Nodules also are known to exist in the Atlan tic and Indian Oceans. 9 Production Thwarted The U.S. is dependent on imports for 98% of its manganese, 94% of its cobalt and 73% of its nickel. Man ganese is an important industrial metal used in steel making. Man ganese alloys are used in aircraft components and the manufacture of mining machinery, railroad track and heavy equipment of all kinds.

Presently there is no satisfactory substitute for manganese. Nickel is also an important metal for steel al loys as is cobalt. Cobalt is often used in conjunction with chromium to produce heat-resistant alloys used in jet engines. Presently, Zaire has a near monopoly on the export of co1982 REAFFIRMING FR]~EDOM OF THE SEAS 183 balt. However, Soviet-armed guer rillas have been mounting raids to disrupt Zaire's production. Even without the problems of the Seabed Authority and the Enter prise, the proposed sea treaty in fringes on ocean development. The treaty recognizes a 12-mile limit for territorial waters for all coastal states. This has been considered ac ceptable to the United States as the best limitation on territorial expan sion possible. However, the treaty recognizes an economic zone of 200 miles. In this zone, the coastal state will exercise sovereignty over all re sources, living and non-living. Free dom of navigation through this zone is still allowed, but neither fishing nor mining will be allowed without the permission of the coastal state.

While this would appear to give the United States many benefits due to its long coastlines, the advanced state of American technology is such that these· benefits· would be gained just as well under a system of complete ocean freedom. The effect of the treaty is to close off other areas or hold any investments in the conti nental shelf ransom to the capri cious and heavy-handed politics of Third World coastal states. The fundamental error in the American approach to these negoti ations has been the belief that the only alternative to the expansion of territorial claims was the creation of an international claim administered by a sup~anational body. Yet, these are not really opposite alter natives becaus~ both are rooted in the concept that the oceans can be (and/or should [be) government con trolled. Limits on Governments If we return i to the original con cept of freedolp. of the sea as ex pounded by Gr~tius we can find the source of this problem. According to Grotius, govemments could not ex ercise dominium (ownership) over property on la:~d or sea. Govern ments could ex~rcise imperium (sov ereignty) overpefined parts of the land and over! narrow coastal wa ters. They could not exercise imper ium over the oceans beyond. What a government cannot do in its own name, it canno~ delegate to be done by an internatiqnal agency. The Sea Conference is nothing more than a meeting of natiobal governments and cannot claim rights collectively greater than th,ey can claim sepa rately. Grotius ~ould no more have recognized the ISeabed Authority's claim to regulat~ the oceans than he would have reqognized a claim by Spain or England to do so.

This is the pfiradox. For the na tions of the wor~d to turn over to an international agency control of the oceans, they m~st first claim that control thems~lves as individual states. But once having done this, those states best able to make their 184 THE FREEMAN March claims effective would have little or no reason to turn them over to the U.N., the Seabed Authority or any one else. If territorial claims to the oceans are to be avoided, the only logical course is to return to the true meaning of freedom of the seas as understood in international law up to the present day. Safeguarding Property It is vital that a sound principle of law be articulated and enforced in regard to the seas. Commerce and fishing have always been important economic activities requiring the safeguarding of property afloat, but mining the material resources of the seabed makes such safeguards even more necessary. The amount of cap ital that will have to be invested to develop ocean mining sites is of such a magnitude that it is unlikely to attract very many entrepreneurs unless assurances are forthcoming that the mining property worked will be secure.

A maritime code recognized by the international community codifying property rights and giving legal pro tection to ocean mining companies so that they could proceed with con fidence would ,be highly desirable. Unfortunately, it would be unlikely for such a code to emerge in the cur rent environment. Certainly the proposed Law of the Sea Conference treaty does not fit this description. Operations through corporations can yield the same effects as terri torial claims in regard to the rights of property and law without violat ing the traditional freedom of the seas ban on the exercise of sover eignty. However, these concepts of private property rights which have a long tradition in Western law are alien in outlook to most Third World and socialist states. There is no prospect that the world community will come together in aphilosophi cal agreement on this matter. That is why the world community is not really a community at all. There is an insufficient body of common be liefs and values to form a true com munity.

Therefore, if mining operations are to commence in the oceans, those doing the mining will have to be as sured of their rights by the United States and other maritime nations. This could either be done on a uni lateral basis with each nation pro viding protection for the operations of its own citizens or by a convention among the maritime states. It is, af ter all, the Western maritime na tions whose citizens will be both the principal producers and consumers of ocean resources. Either alterna tive would be preferable to the sac rifice of the interests of the Western Industrial nations to a treaty and to a supranational organization domi nated by states and values hostile to capitalism. At various times during the Con1982 REAFFIRMING FREE:OOM OF THE SEAS 185 ference, American diplomats have made veiled threats to do just this. In 1978, Elliot Richardson told Con gress that "Seabed mining can and will go forward with or without a treaty .... We have the means at our disposal to protect our ocean in terests .... And we will protect those interests if a comprehensive treaty eludes US."lO As Robert W. Tucker warned in his important book The Inequality of Nations, "Either the old order will be reaffirmed by those who for the time continue to hold predominant power or a new order will be estab lished by those seeking to displace the established power holders."l1 ® -FOOTNOTESlRobert Gilpin, "Economic Interdependence and National Security in Historical Perspec tive," Economic Issues and National Security, Klaus Knorr and Frank N. Trager, eds. (Law rence: Regents Press of Kansas, 1979), p. 25.

Why Not Try Freedom? 2Edward Wenk, Jr.,iThe Politics of the Ocean (Seattle: Univ. of Washington Press, 1972), p. 259. 3Ibid., p. 267. 4Marine Science Aff(:lirs(Wash.: Government Printing Office, 1971), 5th Report, pp. 81-82. 5"While serving as a U.S.delegate to the UN (Senator Frank Church) prepared a report for the Senate Foreign &elations Committee, re leased February 20, 1~67, suggesting that the UN be made financially independent through ownership of the oce~m's mineral resources." Wenk, Politics, p. 259. 6Richard A. Frank, j'Jumping Ship," Foreign Policy (#43, Summer 1981), p. 135. 7Richard G. Darman, "Law of the Sea: Re thinking U.S. Interests," Foreign Affairs (Jan. 1978), p. 381. 8:p' T. Bauer, "Hostility to the Market in Less Developed Countries,". The First World and the Third World, Karl Br11I)Iler,ed. (New York: Univ. of Rochester Policy Center Publications, 1978), p.177.

9George A. Doumani, Ocean Wealth: Policy and Potential (Rochell~ Park: Hayden Book Co., 1973), Chapter 3. lODepartment of State Bulletin (Wash: Gov ernment Printing Offiqe,Feb. 1981), p. 57. 11Robert W. Tucker, The Inequality ofNations (New York: Basic Boo~, 1977), p. 96. IDEAS ON LIBERTY IN MOST spheres of human action, the state is already firmly established, with its vast array of rules and regulations, layers of bureaucracy, and well-established penalties for transgressors. With ,the seabed, however, the state is very late in catching on to what techn.ology is making pos sible .... The statists have had their chance: they have $pread their coercive bureaucracies over every square mile of land on e~rth. The oceans rep resent man's second chance-perhaps his last-~o solve the environ mental problems that, unchecked, threaten his ex\tinction. It is time past time-that men of integrity stood up and sai4, "Enough!" Laissez faire: hands off the sea.

ROBERT POOLE, JR., ~'The Wealth of the Oceans"

A REVIEWER'SNOTEBOOK JOHN CHAMBERLAIN NoWay to Run a Railroad Stephen Salsbury's No Way to Run a Railroad: The Untold Story of the Penn Central Crisis (McGraw-Hill Book Company, 1221 Avenue of the Americas, New York, N.Y., 10020, 363 pp., $19.95) is a story within a story. The author defines his fasci nating and tortuous book as a busi ness biography of David Bevan, the chief financial officer of the Penn Central Railroad who struggled against a thousand odds to avert America's largest business failure. Most of the time Mr. Salsbury, who once taught at the University of Delaware and now teaches in Aus tralia, manages the perspective of a close-up. You see Mr. Bevan, the common sense protagonist, as a le gitimate tragic hero who might have saved the railroad if only he had had more understanding superiors. 1 QA The perspective doesn't hold when, at odd moments, Mr. Salsbury looks at the bigger picture. Sensible though he may have been, David Bevan's efforts to stave off the bankruptcy of the Penn Central merger were doomed by a mind-set that took hold in the United States before he was born. Nobody could have saved the Penn Central as long as our Statist philosophy of regulation prevailed.

Mr. Salsbury casts the two chief of ficers of the merged railroads, Stuart Saunders of the Pennsy and Alfred Perlman of the New York Central, as obstructionist villains. But they were not villains, they were merely men who lacked the tools to reverse an historic situation. If they had lis tened to Bevan they might have failed with at least a show of honor. But they would still have been unNO WAY TO RUN A RAILROAD 187 able to escape the nemesis of a Washington, D.C., that does not be lieve in giving enterprisers freedom to compete. David Bevan came to the Penn syIvania Railroad with a back ground in finance. He was properly appalled at methods of bookkeeping that did not permit accurate analy sis and computerization. Budgets were haphazard affairs, and esti mates of cash flow had to be made by guesswork that might be shrewd or might not. The old Pennsy had been run by operators who couldn't go wrong for the simple reason that coal and iron had to be moved by rail in hilly territory if they were to be moved at all. Capital improvements in these circumstances always paid off.

A Declining Business The great days were coming to an end when Bevan, who worked well with President James Symes, man aged to install modern methods of cost accounting and control. With declining business it became impor tant to know where the cash account stood before projecting such things as the rehabilitation of freight cars and the investment in diesels. Be van had considerable skill in money raising, but he did not push his wiz ardry beyond the ability of the rail road to pay its operating expenses. The trouble, as Mr. Salsbury sees it, is that Symes, and President Stuart Saunders iafter him, had the fixed idea that die only way to save the Pennsy for profits was to merge it with the New "York Central, which served much ofthe same Middle West market. But th¢re was no proper planning for the Ip.erger.The Pennsy had a decentralized system that was held together by Bevan's good meth ods of accounting, which let Phila delphia headquarters know what was going on in the boondocks. The Cen tral, on the other hand, was a cen tralized road that: somehow got along with ancient Interstate Commerce Commission bookkeeping that made no effort to help budget makers an ticipate the future. An added hazard 'was that Alfred Perlman, who had been brought in i from the West by Robert Young to! manage the Cen tral, didn't wan~ the merger any way.

What happened when the two roads were put together was utter chaos. Cars were lost, and customers vanished. Up to the time of the lrnerger the Pennsy was able to pay its bills out of the investment in eome earned by !its wholly-owned subsidiary, the Pennsylvania Com pany. David Bev~n had followed a diversification~rogram that was generally succes~ful. And both the Pennsy and the <Central had profit able real estate in New York City, where "air righ~s" over trackage (~ould be turned tQ good account. But the blunders in operation, magnified 188 THE FREEMAN March by employees who simply did not like to work together as a team, could not be compensated for by outside investments. PersonalClashes Part of the time David Bevan functioned as a Cassandra. As Pro fessor Thomas Cochran notes in his foreword to the book, Cassandras are never believed. But, unlike the orig inal Cassandra, Bevan had a free will streak. At one point he had ar ranged to take early retirement, but he allowed himself to be persuaded that he might help avert doom by hanging on. He felt a loyalty to his benefactor, Richard Mellon, a Pennsy board member who asked him not to resign.

Mr. Salsbury makes it high per sonal drama, with the good guy (Be van) standing off the bad guys (Saunders and Perlman). But the personal drama collapses when the author, in a mournful commentary, remarks that "what no one knew in 1969 and early 1970 was the long term and severe nature of the col lapse of the northeastern rail roads .... It was evident that the Pennsylvania and the New York Central had long been marginal en terprises. It was also clear these railroads suffered from the general decline of the Northeast and were further damaged by Eisenhower's massive highway program, which diverted much of the high-value traffic still remaining in the region. Hindsight tells us that the operat ing failure created large operating losses ... " The difficulties went far deeper than anything connected with cost accountancy or cash flow pro jections. At one point the Pennsy, following Bevan's diversification ideas, invested in something called Executive Jet, a company that pro vided jet transport for corporations which lacked the resources to own jets of their own. Saunders, no vil lain at this point, caught a vision of a future given over to well-rounded transportation enterprises. Says Mr.

Salsbury, "he felt that it was only a matter of time before railroads would be allowed to control a thoroughly integrated transportation system that would mix trucks, pipelines, ships, inland barges and trains. To the north in Canada, the Canadian Pacific Railroad already did exactly that. In the West, Southern Pacific was coordinating trucks and pipe lines with its rail operations." So, on Mr. Salsbury's own show ing, Stuart Saunders wasn't quite a dummy. The big villain of the piece turns out to be government. If our regulators and antitrust zealots had only allowed transportation compa nies to expand into trucks, air planes, barges and pipelines at their own sweet will, we might have averted such bankruptcies as that of the Penn Central. ® 1982 OTHER BOOKS 189 WHEN WE ARE FREE Edited by LawrenceW. Reed and Dale M. Haywood (NorthwoodInstitutePress, Mid land, Michigan48640), 1981 403 pages- $15.50 paperback Reviewed by Brian Summers TEXTBOOKS supporting the freedom philosophy are few and far between.

Thus this book of readings, edited by two economics professors at the Northwood Institute, is a welcome addition to the literature offreedom. The readings consist of sixty es says, many of which first appeared in The Freeman. Leading off are several articles on property and the nature of man. Frank Chodorov ex amines the source of rights. Paul Poirot establishes the connection between property rights and human rights. And Roger Williams makes the case for treating all people as unique individuals. On this individualistic basis the role of government is examined, and different systems of economic orga nization are compared. Turning to history, Professor Reed describes the fall of Rome and draws some worri some modern parallels. Bettina Greaves shows how capitalism lib erated women, while Eric Brodin tells why he liberated himself from socialist Sweden. Ben Rogge, Hans Sennholz, and Ludwig von Mises describe the moral underpinnings of the free economy.

Several authors ~ispel myths of cap italism and exaJpine contemporary issues: immigration, energy, medi cal care, and for~ign policy. Finally, the essays conclude with Leonard Read's wise couQsel on the methods for promoting liOerty. This review can only hint at the range of topics cQvered. Such a wide selection, and c&reful organization, makes this an excellent choice as a primary text or for supplemental reading. We hop~ this book will see wide use in our n~tion's high schools and colleges. i HOW DO WE KNOW? by Leonard E. Read] (The Foundationfor,EconomicEducation, Inc., Irvington-on-H4dson,N.Y. 10533), 1981 117 pages- $6.00 Reviewedby Perry E. Gresham How Do We Knorp? is the catchy ti tIe for the latest book froJ:I:l the pro lificpen ofLeonarp E. Read. The book is a warm and g~ntle invitation to readers who wish to learn more about liberty. The titl~ might suggest a brief essay on epi~temology, but this iis far from the case. It is rather more 190 THE FREEMAN March of a modest testimony from a great man who has given his life to the pursuit of knowledge and under standing concerning individual freedom.

The cover of this striking little volume shows the face of an inquir ing person looking through the cir cular portion of a question mark. Many questions leap to the mind of a reader, the first being "Who is this Leonard Read?" The current volume of Who's Who in America shows him to have been born in Hubbardston, Michigan, September 26, 1898. Here were his school days and his first ef forts at business. After a short while as president of the Ann Arbor Produce Company, he became an or ganization executive for the U.S. Chamber of Commerce. His rare ability to work with people, his cre ative imagination, his tireless dili gence and his sterling integrity brought him to first place among his peers with the Chamber of Com merce and with other associations such as the Western Conference for Commercial and Trade Executives. Read is an inspiring leader who brings out the best in his associates.

Read was almost fifty when he de cided to give his life to the study of Iiberty. In 1946 he organized the Foundation for Economic Educa tion. This foundation is the length ened shadow of a man who exempli fies everything he writes concerning the study of human freedom as it applies to the field of political econ omy. To this concern he has invested his thought, his time and his genius. There is absolutely no arrogance in Leonard Read. This is his twenty eighth book on the practice of lib erty and yet he professes to know nothing. He is like Socrates who does not claim to be wise but loves wis dom with his total being. Those of us who have known him through these rolling years give testimony to the fact that his personality, his speaking and writing start a conta gious love of liberty. After fifty years in academics, my favorite quotation for high ceremo nies such as graduation and honors day comes from a student who said of his new degree awarded summa cum laude, "Nothing wilts as quickly as laurels that have been rested upon!" Read is pushing his middle eighties but he is not about to sit in the sun and disintegrate. He is like the Venerable Bede who, writing in his cold cell, answered the question, "Why do you write in these ad vanced years?" - and the brave old monk answered, "I do not want my students to believe a lie."

Every morning Read is at his typewriter whacking away, writing for the multitudes that look to him for the inspiration, knowledge and literature of liberty. His ideas are so cherished that his friends have said, "Why do you quote so many sources in your book?" (There are many quo1982 OTHER BOOKS 191 tations and 140 names.) On page three of How Do We Know?, Read answers the query, "I am often crit icized - in a friendly way - for so copiously quoting those whose wis dom is far superior to mine, Edmund Burke, for instance. 'Why don't you confine yourself to your own think ing?' My reason? Most individuals do not have available to them such resources as are available to us at FEE. So why not share the wisdom of seers - those who have seen what most of us have not - with freedom aspirants!" This wide-ranging little book deals with the pilgrimage toward a free political economy. The logic of the contents is a pleasant journey for the mind. It begins by urging us to read the great books; it warns against the corruptive influence of coercive power; it moves through the fields of happiness when one finds truth. He then sees America as an experiment in freedom based on morality, as the market works and the ideas possess the people.

He calls us to respond to our vi sions of greatness held before us by the prophets and seers. He argues for self-realization and stresses the importance of all-out dedication. He takes interest in education, peers into the future and, in the culminating chapter, "Strive To Be A Noble man," he challenges us to become honorable before God and human ity. Read is not content to argue for integrity. He lives it. This is suc eeeded by charity, intelligence, jus tice, love and h\llmility, which he lmentions on page' fifty-eight. He is a man of single mi:nd and calls other people to single-minded pursuit of truth and freedom. He has little r~gard for the pre tentious. His lovely aphorism is "The know-it-all is a It.now-nothing." He is poignantly aw(jre of his own limi tation. On page n~nety-three he says, "Who am I? Herfs one part of the answer: I am one octillion atoms 1 followed by twenty-seven zeros -- a number diffidult to grasp unless we use our imagination. Cover the surface of this eaIith - land and sea -- with dried pea~ to a depth of four feet and their nu~ber would fall far, far short of an octillion. Go out into the universe and qover 250,000 other earth-sized planets with four feet of peas and that woiIld be the number of atoms in my njlake-up. Mystery?

The atom? It is sq small that thirty trillion atoms could be placed on the period at the en~ of this sentence without overlappilng. Blow an atom up to one hundred yards in diameter and what do you behold? Radiant energy in the form of electrons, neu trons and the like, in wave se quences flying ab<j)utat the speed of light. In the center is the atomic nu cleus which, after being thus ex panded, is the size;of a pinhead. This and this alone is "stuff' and· no one 192 THE FREEMAN knows what it is, except that it ap pears 'solid.' All else is empty space. Mystery?" Out of this sense of mystery, how ever, come his sensible and practical doctrines in the field of political economy.He argues for sound money, limited government, individual freedom, reliance on the market, the importance of thrift, and the virtues of self-reliance. The person who takes an evening to read this book is not only in the presence of Leonard Read, but in the presence of the world's greatest peo ple in time and space, who offer their ideas on how to improve the quality of life in this fair land. There is a suggestion here that America can continue to be an exemplar of lib erty for the rest of the world.

The abiding influence· of Leonard Read could make this new American Dream come true! i HANDSOME BLUE LEATHERLEX FREEMAN BINDERS $4.00 Order from: THE FOUNDATION FOR ECONOMIC EDUCATION, INC. IRVINGTON-ON-HUDSON, NEW YORK 10533 the Freeman VOL. 32, NO. 4 • APRIL 1982 The Relics of Intervention: I. Populism ClarenceB. Carson 195 Signs today of the impact of the Populist movement of the late 1800s. Freedomand "Social-Democracy" Earl P. Holt III 207 Why economic freedom underlies all other expressions of personal choice. Scalping and Envy A careful look at the popular resentment against middleman. Gary North most helpful 214 Cutting the Budget Dennis Bechara 225 Examining the roadblocks against those who would curtail government spending and control. Teachingsof Soviet Experience Mark Hendrickson 229 Solzhenitsyn's Warningto the West affords important lessons to free men everywhere. Toward Radical Monetary Reform LawrenceW. Reed 239 A suggestion for putting monetary management back into the marketplace.

The New Bondage Jos.ph S. Fulda 243 The seen and the unseen consequences of government subsidy programs. Book Reviews: 249 "My Life and Wanderings" by Philip Mazzei "The Wayward Welfare State" by Roger A. Freeman "The Regulation of Medical Care: Is the Price Too High?" by John C. Goodman "Democracy and Liberty" by William E. H. Lecky Anyone wishingto communicatewith authorsmay send first-classmail in care of THE FREEMANfor forwarding.

FOUNDATION ·FOR ECONOMIC EDUCATION Irvington-on-Hudson, N.Y. 10533 Tel: (914) 591-7230 Leonard E. Read, President Managing Editor: Paul L. Poirot Production Editor: Beth A. Hoffman Contributing Editors: Robert G. Anderson Bettina Bien Greaves Edmund A. Opitz (Book Reviews) Brian Summers THE FREEMAN is published monthly by the Foundation for Economic Education, Inc., a nonpo litical, nonprofit, educational champion of private property, the free market, the profit and loss sys tem, and limited government. The costs of Foundation projects and services are met through donations. Total expenses average $18.00 a year per person on the mailing list. Do nations are invited in any amount. THE FREE MAN is available to any interested person in the United States for the asking. For foreign delivery, a donation is required sufficient to cover direct mailing cost of $5.00 a year. Copyright, 1982. The Foundation for Economic Education, Inc. Printed in U.S.A. Additional copies, postpaid: 3 for $1.00; 10 or more, 25 cents each.

THE FREEMAN is available on microfilm from University Microfilms International, 300 North Zeeb Road, Ann Arbor, Mich. 48106. Some articles available as reprints at cost; state quantity desired. Permission granted to reprint any article from this issue, with appropriate credit, except "Freedom and 'Social Democracy· ...

1.IPopulism THE RELICS OF INTERVENTION: Clarence B. Carson THERE is a story of World War II vintage which went something like this. It is about a particular bench on an army post, in Hawaii, I think, and was supposed to have taken place in the early 1940s. It seems that each day the guard whose rounds took him past the bench was issued a special order not to allow anyone to sit on the bench. Someone-probably an Officer of the Day who had nothing better to do once he had posted the guard-took it into his head to try to find out why no one was permit ted to sit on the bench. It turned out that during World War I, some twenty years earlier, the bench had been painted. On the day it was painted a special order was issued to prevent anyone' from sitting on wet paint. The paint had long since dried, but the order remained. The order was a relic. A relic is something that remains from the past. Ordinarily, it refers to something of great age or antiquity, but age is not all that essential. By ex tension, at least, a used tea bag may be a relic from a cup of tea. The re mains of a deceased person may be relics. That get~ nearer to the heart of the matter. A relic is something out of which the life is gone, if it ever had life. It is the leavings of something. Itrnay be retained as a keepsake or memorial. Or, it may survive only beqause no one has gone to the trouble to dispose of it, such as, -decrepit b4ildings on old farm sites. Or again,!relics may be the re mains of something brought into being out of ent\lusiasm, which never were effective, but which survive because they have been kept going by those who saw it to their advan tage to do so.

Dr. Carson has writteljt and taught extensively, spe cializing in American [intellectual history. He is the author .of several book$ and a frequent contributor to The Freeman and other scholarly journals. 195 196 THE FREEMAN April It is in this latter sense that I use the phrase, "relics of intervention." By "relics" I mean the vast assort ment of government programs, poli cies, regulations, controls, prohibi tions, enterprises, bureaus, offices, commissions, and departments which have resulted from government in tervention in the economy and lives of Americans over the past seventy or eighty years. I mean the huge regulatory bureaucracy which has been brought into being to enforce the intervention. I mean, to name a few, the Interstate Commerce Com mission, the National Labor Rela tions Board, the Federal Communi cations Commission, the Department of Health and Human Services, the Council of Economic Advisers, the Federal Trade Commission, the Federal Power Commission, the Se curities and Exchange Commission, and all those other bodies and per sons who intervene in various ways.

They are relics, in the first place, of nineteenth-century ideas born in the heated imaginations of utopi ans, revolutionaries, and reformers. It will be the burden of what follows to show that while some of the ills that reformers decried may have been real enough, the programs in volved an enthusiasm for the bene fits of government intervention in society and in economy warranted neither by history nor reason. They are relics, in the second place, be cause the shaky premises and fallacies underlying them have been ex posed in land after land time after time in the twentieth century. Most of the interventionist ideas ante dated the Bolshevik Revolution and the numerous socialist experiments in the twentieth century but came from the same fount of ideas. They are relics, in the third place, because they obstruct enterprise, strangle initiative, make it exceedingly diffi cult for governments to have bal anced budgets, and have fastened upon us an inflation which is de stroying the value of the money.

The Historyof Intervention The overall purpose of this study, however, is to place the whole body of the interventions, or so many of them as can be considered, in histor ical perspective. Much as the inqui sitive soldier sought for the origins of the special order about the bench, so it is the purpose here to examine the genesis and development of the interventions. There is some evi dence of a growing awareness that much of the intervention is today counterproductive. To unravel the skein of intervention may help in making an evaluation of this. It is true that many of the interventions are still very much a part of the ac tivities of government. It might be supposed, then, that they are not relics. It does not follow. The last soldier who guarded the bench pre venting anyone from sitting on it 1982 THE RELICS OF INTERVENTION: POPULISM 197 may have done so as vigorously as the first.

Populism is a good place to start the investigation. Not because po pulism was the first movement to ward this type of government inter vention. Nor because the ideas advanced by the Populists origi nated with them, for they did not. Not even because the grievances al leged were newly minted by them. As a matter of fact, the ideas, the alleged grievances, and even politi cal movements to advance them pre ceded the Populists. Rather, the Populist movement makes a good starting place because for the first time the interventions they proposed began to make some political impact. Not only did the Populists actually get candidates elected to office in several states, but they also played an important role in the shift of the Democratic Party toward intervention. Eventually, too, some of the particular programs they pushed were passed into law. In short, some of the relics of interven tion come to us by way of the Popu lists, however indirectly. It is impor tant, too, to examine some of these ideas in their crude formulations, for by so doing we can judge the quality of the materials from which inter ventionist measures were made.

The Populist, or People's Party, had only a relatively short period of political activity. It was brought into being by action in several states in 1890. It reach~d a peak of national political activity in 1892, when its presidential ¢andidate, General James B. WeaiVer, received over a million popular votes and 22 elec toral votes. Its denouement came four years later wh~n the Populists nom inated the De~ocratic candidate, William J enni 1ngs Bryan, as their presidential capdidate also. Its vig orous political: activity, then, was concentrated in a period of six years. The People's !Party was an instru ment mainly of the Farmer's Alli ances, which ,were organized by states and divided into Northern and Southern feder$.tions. However, they drew reformers and radicals from many other organizations, or none, into the Peopl~'s Party. For exam ple, at the Topeka Convention in 1890, in which the People's Party was organized, for lKansas anyway, the delegates consi~ted of "forty-one AI liancemen, tw~nty-eight Knights of Labor, seven P~trons of Husbandry, ten members 0f the Farmers' Mu tual Benefit A!ssociation, and four single-taxers."! To put it another way, the Populists drew into their ranks farmers with a bent for collec tive action, statists who sought re demption throlIgh government ac tion, industrial i unionists, those with some particular panacea for the ills of the people, hQpefulpoliticians, and discontented Qnes eager to blame their ills on thdse in power.

While the Populists had a consid198 THE FREEMAN April erable variety of programs and pro posals, what linked most of them with one another was their belief in a monetary solution to their main problems. The Populists were mon etarists. They held that the quantity of money in circulation was vital and crucial to general prosperity. It may well be that John Maynard Keynes devised the most complex and so phisticated justification for govern ment induced inflation, but infla tionist panaceas were around long before he was born. In the long per spective of history, Keynes's theory was just another set of wrinkles on an idea already hoary with age. An Early Monetarist The earliest monetarist proposal made in America, known to the present writer, was the one by Ben jamin Franklin in 1729. Pennsyl vania had some paper currency at the time, but Franklin argued that if the amount of it were greatly in creased it would facilitate trade and contribute greatly to the prosperity of the colony as well as the mother country.2 Thus, his argument con tained the gist of the notion that the quantity of money in circulation is a prime ingredient in prosperity.

However, .an historian of popu lism traces the Populist idea from an obscure writer of the 1840s, Ed ward Kellogg. He had been in busi ness in the 1830s but was ruined fol lowing the Panic of 1837. Since Jackson's Specie Circular had pre cipitated that crisis, Kellogg con cluded that fiat money would be the solution to the problem. He set forth his thesis in 1849 in a book with this interesting title: Labor and Other Capital: The Rights ofEach Secured and the Wrongs of Both Eradicated. Or, an exposition of the cause why few are wealthy and many poor, and the delineation of a system, which, without infringing the rights of property, will give to labor its just reward. 3 In short, if government wouldjust cause enough paper money to be issued everyone could be paid the amount each ought to have. Kellogg's ideas continued to be spread after the Civil War, and were eventually taken up to serve as the basis of the Greenback-Labor Party.

In the meantime, of course, the pa per money enthusiasts had been stimulated by the Greenbacks is sued by the government during the Civil War. However, when these be gan to be redeemed in gold and na tional bank notes retired, when prices began to fall, the monetarists began to gain some popular following. The Silverites Two other things conspired to whip up their energies. One was the "de monetization of silver" in 1873-the stopping of the minting of the silver dollar-which went· unnoticed and unchallenged at the time, but was later taken up as a political cause 1982 THE RELICS OF INTERVENTION: POPULISM 199 and became known as "the Crime of '73." The other development was the discovery of large quantities of sil ver in the West. Unlimited coinage of silver became an inflationist cause as well as that of getting the govern ment to issue paper money. In these matters, the People's Party was suc cessor to the· Greenback-Labor Party of an earlier decade.

At heart, however, the Populists were not silverites. They were infla tionists and, for the moment, unlim ited coinage of silver would be infla tionary, and they were for it. But their true love was paper money, made legal tender by government, and issued in sufficient quantities to raise prices and keep them high. In our time, caught as we are in the throes of inflation, their idyllic vi sion of the possibilities of inflation is unlikely to captivate most of us. But it needs to be revisited, because it underlay the inflationary thrust which has brought us to our present impasse. The Populists tended to attribute all economic ills to the shortage of money. Here, for example, are the ills which Sarah Emery attributed to the demonetization of silver: "Language fails in a description of the blighting misery that desolated the country. . . . From the demone tization of silver, in 1873, to its re monetization in 1878, may well be called the dark days of the Republic.

Bankruptcies and financial disaster brought in train their legitimate off spring, and the atatistics of those and the ensuing yefirs are voluminous with the most ~tartling and loath some crimes; mprder, insanity, sui cide, divorce, dtunkenness, and all forms of immorality and crime have increased from ,that day to this in the most appal~ing ratio."4 Appar ently, contraction of the money sup ply could be blamed for everything except, possibly!, earache, chilblain, and halitosis. Not all Populists were so imagi native as Mrs. Emery in the ills they attributed to constriction of the money supply, put they all agreed it had drastic consequences. Ignatius Donnelly had 3i character' in one of his novels desctibe the impact this way: Take a child a few years old; let a blacksmith weld around the waist an iron band. At first it oauses him little incon venience. He plays. As he grows older it becomes tighter; tit causes him pain; he scarcely knows what ails him. He still grows. All his .internal organs are cramped and displaced. He grows still larger; he has th,e head, shoulders and limbs of a man and the waist of a child.

He is a monstro~ity. He dies. This is a picture of the world of today, bound in the silly superstition of some prehistoric nation. But this i is not all. Every de crease in the quaQ.tity, actual or relative, of gold and silveri increases the purchas ing power of the dollars made out of them; and the dollar becpmes the equivalent for a larger amount (j)fthe labor of man and 200 THE FREEMAN April his productions. This makes the rich man richer and the poor man poorer. The iron band is displacing the organs of life. As the dollar rises in value, man sinks. Hence the decrease in wages; the increase in the power of wealth; the luxury of the few; the misery of the many. 5 Such claims as these informed the famous last sentence of William Jennings Bryan's peroration to the Keynote Address at the Democratic Convention in 1896: "You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold."6 An Ever-NormalDollar What Donnelly, and other Popu lists, failed to point out, of course, is that prices are the means by which the supply of money is adjusted to the supply of goods. There is no "iron band" or "cross of gold" if prices are free to fluctuate. It is true that long term debts may be more difficult to retire if the money supply is con tracted, and that, if creditors could get them paid off at face value, not very probable, they might be consid erably enriched. It is equally true that if the money supply is in creased, creditors may lose and debtors gain. These are better argu ments against long term indebted ness, however, than for anything else, so far as I can see.

If their more complex analysis is to be taken seriously, what the Populists apparently wanted was a dol lar that did not fluctuate in value. They were affronted by the notion that a dollar might buy a bushel of wheat one year, while fifty cents might buy a like bushel the next year. They wanted an "ever normal dollar," so to speak. They did not want prices, at least oflabor and farm products, to fluctuate in the market. We might suppose that they would have advocated taking the most di rect route to their goal, by way of price controls, but the thought may not have occurred to them. Instead, they proposed a mone tary solution. They particularized their proposal in what is known as "The Subtreasury Plan."7 This Plan was devised especially to deal with farm prices. The argument was made that farm prices immediately fol lowing harvests are likely to be at the lowest point during the year.

What farmers needed, they rea soned, was some means of holding on to their crops until prices would rise. Governments must intervene, they argued, to make this possible. Local governments should donate the land and build the structures for storing the crops. The United States government should then intervene by lending up to 80% of the current value of the crops to the farmers. The money lent would be created by is suing paper money which the gov ernment would declare to be legal tender. Somehow, this paper money 1982 THE RELICS OF INT1~RVENTION: POPULISM 201 would be secured by warehouse re ceipts which would have to be re deemed within a twelve month pe riod. (How all this would work out is by no means clearly set forth in the Plan.) Populists claimed that this would make plenty of money avail able when the crops were harvested, and that the amount of money would be reduced in the course of the year as it was used to buy the crops.

Whether the Plan would have worked as billed need not concern us. Probably not, but the important point about it was that it tied an in flationary scheme to the agricul tural situation, helping to sell many farmers on inflation. But however vigorously some of the Populists might push the Subtreasury Plan, it was government induced inflation they were selling in the final analy sis. And inflation would cure the ills of mankind. If there were only an interna tional paper money, Ignatius Don nelly said, "The world, released from its iron band, would leap forward to marvelous prosperity; there would be no financial panics, for there would be no contraction; there would be no more torpid 'middle ages,' dead for lack of currency, for the money of a nation would expand, pari passu, side by side with the growth of its popu lation. There would be no limit to the development of mankind, save the capacities of the planet; and even these, through the skill of man could be increased a thousand-fold beyond what our ancestors dreamed of. The very seas and lakes, judiciously farmed, would Isupport more people than the earth now maintains. A million fish ova now go to waste where one grows to maturity."8 A bountiful paper money would appar ently change ali that.

Call for Interve.,tion But the Populists had more than one string to thtHr bow. Most of them were monetarists, at least the lead ers were, but t\here was something broader than that impelling them onward. Many historians have treated the Poptulist movement as if it were simply the offspring of agri cultural (and perhaps, industrial worker) discontent. Discontent there undoubtedly was, but it only pro vided the fertile ground for the sow ing of an idea, not the idea itself. The Populist i leaders were under the sway of an idea. The idea, when its trappings are removed, is this: That if government will only inter vene in the economy on the side of "the people," i.e,.,farmers and indus trial workers, it can cure the ills be setting mankind. As Donnelly put it, "We have but to expand the pow ers of government to solve the enigma of the world.... There was a time when ev~ry man provided, at great cost, for tHe carriage of his own letters. Now the government ...

takes the business off his hands.

202 THE FREEMAN April There was a time when each house had to provide itself with water. Now the municipality furnishes water to all .... These hints must be followed out. The city of the future must fur nish doctors for all; lawyers for all; entertainment for all; business guidance for all. It will see to it that no man is plundered, and no man starved who is willing to work."9 Jacob S. Coxey, leader of "Coxey's Army" in 1894, declared, in a speech written to be delivered to Congress, but never delivered: "We are here to petition for legislation which will furnish employment for every man able and willing to work; for .legis lation which will bring universal prosperity .... We have cometo the only source which is competent to aid the people in their day of dire distress."lo Lorenzo Dow Lewelling said, "I claim it is the business· of Government to make it possible for me to live and sustain the life of my family."ll Some contemporary critics saw the socialist animus behind the move ment. A contemporary historian pointed out that "Populists may claim, as many of them do, that they are not socialists, and that they are opposed to socialism; the fact re mains that their attitude is social istic. Their demands for government interference for the correction of evils are socialistic. They believe that government can do better for indi viduals, in many cases, than the individuals can do for themselves.

Furthermore, their proposals are the very ones advocated by socialists."12 Signs of Socialism After the Democrats had adopted a Populist leaning platform in 1896, Archbishop John Ireland of Minne sota deplored the "spirit of socialism that permeates the whole movement which has issued from the conven tion at Chicago. "13 The Catholic bishop of Omaha denied that he called Populists anarchists. "But I did say," he declared, "and I now say, that Populists, Anarchists, and Communists must not be permitted to destroy the financial credit of our country."14 Most Populists· did not, of course, avow their socialism. Henry Dema rest Lloyd, who was both a Populist and an avowed socialist, expressed his irritation about the refusal of others to admit it in a letter to Ed ward Bellamy in 1896. "The move ment we are in," he said, "is Inter national Socialism .... Why not recognize it and say SO."15 Bellamy's utopian novel, Looking Backward, published in 1888, had such an im pact that one observer at the Popu list Convention in 1892 declared that readers of his book "were the brains of the convention."16 But the clubs formed to spread the word from Bel lamy were called Nationalist Clubs.

There can be little doubt that Pop ulists were collectivists. It comes 1982 THE RELICS OF INTE:RVENTION: POPULiSM 203 through rather clearly in the lan guage that they employed, even if their intent to use government for their ends be set,aside. In a speech in 1894, Lorenzo Dow Lewelling said: We have come here today pleading for truth against error. Men are nothing in a great contest of the people like this. It matters not who is the leader so that all the people stand together united for the great principles of humanity. 17 James B. Weaver, Populist presi dential candidate in 1892, made his collectivist position clear enough, when he said: "Capital possesses one thing which labor does not-ready cash. They will not hesitate to make the best possible use of it. But labor possesses that which capital does not-numbers. They should be made effective."18 A Class Struggle There can be no doubt that the Pop ulist programs were advanced in the most blatant class terms. The strug gle for which they girded them selves was of the masses with the classes, or as Populists were most apt to characterize it, "the people"

against "the interests." A hundred examples could be given, but this excerpt from a speech by Mary E. Lease in 1890 will have to suffice to give the flavor of so many others: Wall Street owns the country. It is no longer a government of the people, by the people and for the people, but a govern ment of Wall Street, by Wall Street and for Wall Street. The great common peo ple of this countrtr are slaves, and mo nopoly is the master. The West and South are bound and prostrate before the man ufacturing East .. i ••Kansas suffers from two great robbers,]the Santa Fe Railroad and the loan cOII)panies. The common people are robbed to enrich their masters .... There are thirty men in the United States whose aggregate wealth is over one and one-half billion dollars. There are half a million looking for work .... We want money, ·land and transportation. We want the abolition of the National Banks, and we want the power to make loans direct from the gov ernment. We want the accursed foreclo sure system wiped!out.... The people are at bay, let the bloqdhounds of money who have dogged us t~us far beware. 19 But the best evidence of Populist's beliefs is in the various platforms that they drew.' That they were for government intervention, that they tended to favor! government owner ship, and that they were monetar ists, comes out in every one of them.

One peculiarity ,oftheir platforms is worth noting. They were given to prefacing their planks with the phrase, "We demand." This phrase occurs in the !Farmer's Alliance platforms which antedate the for mation ofthe Pepple's Party and may well have been a"relic" carried over when they org~nized politically. At any rate, the People's Party plat form of 1892 is ~he penultimate one, and these excerpts from it recapitu late the substance of their demands.

204 THE FREEMAN April The 1892 platform was largely the work of Ignatius Donnelly of Min nesota. It read, in part: We demand a national currency, safe, sound, and flexible, issued by the general government only, a full legal tender for all debts, public and private, and that without the use of banking corporations, a just, equitable, and efficient means of distribution direct to the people. 1. We demand free and unlimited coinage of silver and gold at the present legal ratio of 16 to 1. 2. We demand that the amount of the circulating medium be speedily in creased to not less than $50 per capita. 3. We demand a graduated income tax. 4. We believe that the money of the country should be kept as much as pos sible in the hands of the people, and hence we demand that all State and national revenues shall be limited to the neces sary expenses of the government, eco nomically and honestly administered.

5. We demand that postal savings banks be established by the government for the safe deposit of the earnings of the people and to facilitate exchange. Transportation being a means of ex change and a public necessity, the gov ernment should own and operate the railroads in the interest of the people. The telegraph, telephone, like the post office system, being a necessity for the transmission of news, should be owned and operated by the government in the interest of the people. The land, including all the natural re sources of wealth, is the heritage of the people, and should not be monopolized for speculative purposes.... All land now held by railroads and other corporations in excess of their actual needs ... should be reclaimed by the government and held for actual settlers only.20 The Populists also expressed "sen timents" in favor of such measures to make the government more pop ular as the secret ballot, the direct election of Senators, restriction of Presidents to a single term, and the use of the initiative and referendum to obtain legislation. For organized labor, they favored shorter hours, immigration restriction, more strin gent enforcement of restrictions on contract labor, abolition ofthe Pink erton detective system, and, for fla vor' "we condemn the recent inva sion of the Territory of Wyoming by the hired assassins of plutocracy, as sisted by Federal officers."

RelatedActivities It would be an exaggeration, of course, to attribute all the programs since enacted which bear some re semblance to theirs to the Populist impetus. After all, most of the ideas that the Populists advanced did not originate with them. Moreover, the Populists themselves were never able to enact into law a single program of theirs on a national scale. Even so, they did give impetus to a sur prising number of ideas which have since been articulated in one way or another into the framework of gov ernment activity and intervention. To see this, it helps to focus on the goals of their programs rather than 1982 THE RELICS OF INTIJ~RVENTION: POPULlSM 205 sticking too closely to the specifics of their recommendations. Take their monetary program, for example. Neither the Populists, nor the Democratic silverites ever man aged to get free coinage of silver. But it would be a mistake to suppose that was anywhere near the ultimate goal. In the first place, they wanted to get off the gold standard. In the early and mid-1890s, free coinage of silver would have accomplished that in short order. This was well illus trated by the illfated Sherman Sil ver Purchase Act of 1890.

While this act did not provide for "free coinage," it did authorize large scale purchase of silver by the Trea sury, and the certificates issued for it were redeemable in either gold or silver. Since gold was undervalued at the prevailing ratio, a run on gold was precipitated, and a money panic ensued. The Cleveland Administra tion was only able to meet its gold obligations by extensive gold pur chases and, ultimately, by getting the Sherman Act repealed. Free, coinage at a ratio of 16:1 would have driven gold out of circulation quickly and decisively. But silverism was only a tactic for the Populists. What they sought was to be rid of gold so as to have a flex ible paper money system under the control of the government. Almost everything they sought has long since been achieved. The movement toward a flexible currency bore fruit first in the Aldttich-Vreeland Act in 1908, but that was shortly su perseded by the much more thor ough Federal Reserve System. Gold has long since i ceased to be legal tender and been replaced by paper money. On one! point, the Populist goal was appar~ntly thwarted, that of the abolition of the national banks.

But regulation i and control has ef fectively brougJ;1t them under gov ernment power. The Populists did not envision the po~sibilities of govern ment regulatio~, and, in that sense, they were not precursors of a major species of government intervention. ProgramsEnac~ed Many other ideas advanced by the Populists have~so been enacted. The graduated incQme tax has been a fixture since the early twentieth century. A Postnl Savings Bank was inaugurated. Direct election of Sen ators became the law of the land. An 8-hour work day and a favorable cli mate for labor unions became gov ernment policy. 'The government has not generally t~ken over by owner ship the means of transportation and communication~ but it has achieved much the same end by regulation. Land has not been directly appropri ated by government on a class basis from corporations, but the Federal government is today reckoned to be the largest lan~owner in the world outside Comm~nist countries, and the power of eminent domain is now 206 THE FREEMAN exercised to take private property from some who are not using it in an approved fashion to turn it over to others. Even Ignatius Donnelly's vi sion of government paying legal and medical bills is now being realized in such programs as the Public De fender system and Medicaid.

Equally, or more, important there is a residue of ideas from populism which is still very much alive. There is the notion that government should intervene on behalf of farmers, in dustrial workers, and the poor. There is the belief in monetarism and the associated quantity of money the ory. And, above all, the idea that wealth and corporate power are a menace to the Republic is so much alive today that it is more apt to be heard on Madison Avenue than from the stump in Kansas. In short, relics of populism abound today. Occasionally, one of them is decently interred. Crop loan pro grams, for example, have been largely abandoned. That financial dinosaur, the Postal Savings Bank, has finally been phased out. But for the most part, the relics of populism are still very much with us. The de predations of inflation are now worse than ever. The graduated income tax is an almost immovable fixture.

Corporate earnings are subject to virtually confiscatory taxation. La bor unions have grown increasingly strong among government employ ees themselves. But there is much more to the story of the relics of intervention than the early advancement of program.~ and ideas by Populists. Those had to be come law, and many other interven tions were advanced. These, too, need to be examined. I Next: Progressivism. -FOOTNOTESIJohn D. Hicks, The Populist Revolt (Lincoln: University of Nebraska Press, 1961), p. 156. 2See Ralph Ketcham, ed., The Political Thought of Benjamin Franklin (Indianapolis: Bobbs-Merrill, 1965), pp. 14-18. 3Lawrence Goodwyn, The Populist Movement (New York: Oxford University Press, 1978), pp. 13-14. 4George B. Tindall, A Populist Reader: Selec tions from the Works of American Populist Leaders (New York: Harper & Row, 1966), pp. 55-56. 5Ibid., p. 110. 6Ibid., p. 211. 7See Hicks, op. cit., ch. VII and Tindall, op.

cit., pp. 80-87. STindall, op. cit., p. 111. 9Ibid., pp. 114-15. IOIbid.,p. 161. llIbid., p. 149. 12Ibid.,p. 181. 13Quoted in Robert E Durden, The Climax of Populism (Lexington: University of Kentucky Press, 1966), p. 149. 14Ibid.,pp. 149-50. 15Quoted in Daniel Aaron, Men ofGood Hope (New York: Oxford University Press, 1951), p. 132. 16Ibid.,p. 130. 17Tindall, op. cit., p. 159. 18Ibid.,p. 72. 19Quoted in Hicks, op. cit., p. 160. 20Tindall, op. cit., pp. 93-94.

Earl P. Holt III FREEDOM and "SOCIAL-DEMOCRACY" AMONG certain circles in Western Europe and the United States eco nomic freedom is commonly per ceived as less morally elevated than other freedoms because it manifests in the "vulgar" pursuits of capital ism. Since economic freedom is pre sumed distinct from freedom broadly defined, the conclusion generally follows that it may be safely subor dinated to "loftier" social objectives without imperiling traditional dem ocratic liberties. This sentiment rather faithfully captures the prevailing attitude among those who bear the self-des ignation "social-democrat." By jux taposing its two terms, advocates of social~democracy suggest a poten tial compatibility between the two systems, and persist in resurrecting the myth of a "humane" socialism in which civil and political liberties might flourish. Mr. Holt is an associate editor of the Missouri Con servative Union's Front Une and a contributor to New Guard and Human Ellents.

In truth, however, social-democ racy is predicated on false assump tions which ignpre a profoundly sig nificant principle governing the relationship between man and state: Because activities deemed "eco nomic" bear on,practically every as-r pect of civil and politicalliberties,a nation's commitment to economic freedom is par*mount in determin ing both the quality and depth of its other freedomsJ Indeed, it has been as a result of this indivisibility of economic from other freedoms that British and American flirtations with social-de mocracy have' precipitated signifi cant erosions of civil and political liberties withill these two countries. Whatever social-democracy's al leged rationale-whether redistri bution or "socialaccountability"-its considerable powers are rarely used for such ideali~tic ends. Instead, its common experience has been to bra zenly consolidate the control of those in office by.granting special privi207 208 THE FREEMAN April leges to the relatively powerful ele ments of society, in exchange for the latter's electoral support.

Privileges for Labor in U.S. and Britain Organized labor represents a large, powerful and well-financed consti t uency, and for that reason has been a traditional beneficiary of this pro cess in the U.S. and Britain. This relationship was described by Nobel laureate Friedrich Hayek in his masterful treatise on collectivism, The Road to Serfdom: So long as the socialist movement in a country is closely bound up with the in terests of a particular group, usually the more highly skilled industrial workers, the problem of creating a common view on the desirable status of the different members of society is comparatively sim ple. The movement is immediately con cerned with the status of one particular group, and its aim is to raise that status relative to other groups.! Yet, as the U.S. has learned from its experience with "affirmative-ac tion" and racial quotas, elevating the fortunes of certain privileged groups through government is accom plished only by trampling the rights, immunities and well-being of others not so favored.

Reflecti ve of organized labor's special position in the U.S. is the so called "Davis-Bacon Act," whose primary effect is to qlandate that union wages be paid employees engaged in public works projects even partially benefiting from federal funding. 2 This unquestionably sup presses competition by smaller, non union construction firms which are less able to absorb such exorbitant labor costs; and in turn, shifts this work to unionized construction workers whose bargaining power is "strengthened substantially."3 Similarly, U.S. minimum wage legislation is now widely recognized as a major contributor to the har rowing unemployment rate of un skilled (thus politically powerless) minority teenagers. 4 This result is attributable to its establishment of a wage "floor" greater than the value of the unskilled labor it ostensibly protects, causing employers to layoff or never hire many unskilled work ers.

Despite its consequences, efforts at its repeal are invariably scuttled by the AFL-CIO and its minions in Congress, even though the AFL CIO's members command far more than the federal minimum wage dic tates and would appear to be unaf fected by it. In light of truly over whelming evidence of its sinister effect on minority employment, many economists such as UCLA's Jack Hirshleifer have become quite cyni cal when hypothesizing the reason for our retaining the minimum wage: The most significant political pressure for higher minimum wages seems to come from organized labor, in particular, the 1982 FREEDOM AND "SOCIAL-DEMOCRACY" 209 AFL-CIO .... A higher minimum wage raises the cost of unskilled relative to skilled workers. The consequence is to induce firms to employ fewer of the un skilled workers, raising demand for the skilled workers represented by the AFL CIO.5 As a corollary to the above, social democracy's granting of special sta tus to privileged groups greatly en hances the power of those interest groups, and-as in the case of Brit ain's trade unions--often enables the latter to frustrate the express will of the electorate.

BritishTrade Unions Passage of the Trade Disputes Act of 1906 accorded British trade unions "a position of legal privilege that is without parallel in any other coun·· try,"6 by granting them immunity from tortuous actions in all British courts. The Act thus cancelled what few checks there are to union power by prohibiting their prosecution for restraint of trade, conspiracy, and many of the various practices con stituting "intimidation" of non· striking workers. 7 Anyone familiar with modern Britain cannot fail to observe that as a result of their privileged status, trade unions have grown so power· ful they are now able to paralyze the gasping British economy, as they so successfully confirmed with massive and widespread strikes in 1978. Paradoxically, British publi(~ opinion clearly favors legal restric tions on tradel unions. According to internationally-respected journalist Robert Moss of the London Daily Telegraph, a series of public opinion polls conducted since 1958 have con sistently indicated majority support for even such harsh measures as banning all strikes. 8 During its!brief lifetime, more over, opinion polls also demon strated majori~y support for the 1971 Industrial Relations Act; the only post-war legi~lative effort to re strain trade -q.nion power, and one consisting primarily of numerous restrictions on the ability of unions to strike. 9 The! Act was nevertheless repealed in 1974 after intense pres suring of the ~ewly-elected Labour government by British trade unions.

Majority opposition to union power was again demonstrated in the mandate of the 1978 national elec tions, which brought Mrs. Thatcher and the Tories to power amidst pub lic outrage ov~r Labour's inability to stem a crippling nationwide strike. But even here imajority will has been thwarted by the entrenched power of unions, whose strike-threat weapon and im~unity from civil sanctions seem quite literally to ex empt them fro:m political reform. Recognizing that privileged sta tus, once granted, can neither be tol erated nor so easily revoked in a de mocracy, American economist Henry C. Simons once remarked of the 210 THE FREEMAN April frightening position of British labor: "... government, long hostile to other monopolies, suddenly sponsored and promoted widespread labour monop olies, which democracy cannot en dure, cannot control without· de stroying, and perhaps cannot destroy without destroying itself."lo Discriminatory Harassment The power of social-democracies to outlaw "economic" behavior must necessarily include the additional authority to attach sanctions for lack of compliance; which, themselves, have profound and direct conse quences for individual liberties.

In his classic Capitalism and Freedom, Nobel laureate Milton Friedman mentions the plight of a California retailer, imprisoned for selling "Alka-Seltzer" below its price established under so-called "fair trade laws."ll Consider also the more recent· case of the· Boston service-station owner who, in February of 1980, was sen tenced to one month in jail and fined $9,450 for selling his legally-pur chased gasoline to willing cus tomers, but at prices above the fed eral ceiling price then in effect. As The Wall Street Journal pointedly commented, he was convicted of what Soviet· authorities call an "economic crime."12 The unfortunate service-station owner's real offense was his misfor tune to be part of an industry that federal officials periodically find a convenient scapegoat for the gov ernment's own ineptitude in man aging energy. This suggests another consideration. If reasonable and traditionally le gitimate economic activities have no immunity from arbitrary whims of the state, no safeguard exists to pre vent the discriminatory harassment or ruination of unpopular industries by shamelessly demagogic politi cians promoting purely political ends.

Certainly the misnamed "windfall profits" tax, the steel industry's ex perience with price "jaw-boning," and the tribulations of the nuclear power industry suggest this very real threat. Similarly, when dissolving eco nomic freedom and destroying prop erty rights becomes a legitimate function of government, the state's power is dramatically enhanced, greatly expanding its opportunities to indulge in coercion and intimida tion against private individuals who are critical of or oppose the political agenda of those in power. To wit, it was reported in the Oc tober 31, 1977 edition of U.S. News & World Report that Energy Secre tary James· Schlesinger threatened oil industry officials with more reg ulation or divestiture if they didn't publicly support the Carter Admin istration's controversial "windfall profits" tax. Likewise, Internal Revenue Ser1982 FREEDOM AND "SOCIAL-DEMOCRACY" 211 vice Commissioner Jerome Kurtz threatened private schools with re vocation of their tax-exempt status if they did not conform to IRS schemes involving racial quotas. 13 The "chilling" of freedom-of-speech and freedom-of-association reflected in the above two examples would seem to be self-evident.

The Expanding Public Sector Opportunities afforded by a healthy private economy also pro vide refuge and immunity from gov ernmental caprice for individuals whose political party, lifestyle, viewpoint or values happen to of fend (or differ from) those in power. On the other hand, however, a de finitive characteristic of social-de mocracy is its "creeping" conversion of private sector into public sector. Conveniently overlooked by those who anxiously ascribe to it benign consequences, is that at some point in this process, individual freedonl of-choice becomes effectively pre empted by government actions inl pinging on the private sector. This creeping conversion of pri vate sector into public eventually diminishes the range of private choice available, and by thus erod ing private sector alternatives, ulti mately facilitates the imposition of state control over hapless individu als left without recourse: In The Road to Serfdom, Professor Hayek eluci dated this principle as well: We can unfortunately not indefinitely extend the sphere of common action and still leave the individual free in his own sphere. Once the communal sector in which the state controls all the means, exceeds a certain proportion of the whole.

... the effects of its decisions on the re maining part of the economic system be come so great that indirectly it controls almost everytqing .... There is, then, scarcely an inqividual end which is not dependent for i~s achievement on the ac tion of the stat,.14 Possibly the most frightening il lustration of! this eventuality in volved Winston Churchill's unsuc cessful efforts between 1933 and the beginning of iWorld War II to warn the British people of the imminent danger pose~ by Nazi-Germany' s massive peacetime military build-up. Although a member of Parlia ment and a former cabinet minister, Churchill was prevented from ad dressing the p.ation over British ra dio because his jaundiced view of Hitler clashed with the Chamber lain government's official policy of appeasementl His government was able to thwart Churchill's timely warnings (and freedom-of-speech) precisely bec(Luse British radio was a government-controlled monopoly administered! by the British Broad casting Corporation, which permit ted no privat~ competition. 15 The process by which U.S. federal courts have realized their current dominion ov~r public education fur ther vindicates Professor Hayek's 212 THE FREEMAN April foresight; albeit, in a more complex manner than Mr. Churchill's expe rience reflects.

The EducationMonopoly Through their respective fiscal powers over the past several dec ades, federal, state and local govern ments have successfully diverted enormous amounts of resources to public education from private sources. Since public education is, in this manner, financed by non-re fundable tax revenues rather than tuition fees, taxpayers are com pelled to finance public education whether or not their children ac tually attend public schools. This anomaly sharply reduces the range of available educational op tions for most parents, since few can afford the luxury of private tuition on top of a steadily mounting tax burden that already includes the $80 billion or so annually earmarked for ,public education. Hence, a large ma jority of parents have no alternative but to educate their children through what is, in effect, a public education monopoly. But public functions involve gov ernment control and interference. As a result, unelected federal judges routinely seize control of public school districts from their democrat ically elected local school boards and, with impunity, make a mockery of J efferson's "consent of the gov erned" by imposing onerous forcedbusing requirements consistently opposed by 80 per cent of the Amer ican people.

Moreover, the informal check that traditionally accompanies private sector functions-Le., the public's ability to withdraw its patronage and take it elsewhere-has simply been foreclosed by government's role as sponsor of the public education mo nopoly. In the final analysis, parents of public school students are a "cap tive audience" who have lost the freedom to decide even such basic matters as whether their children will attend neighborhood schools, or be bused across town at the whim of judicial social engineers. Finally, economic freedom plays an important role in the exercise of lib eral democratic procedure, and its erosion portends harm for certain aspects of the American political process. One of the hallmarks of liberal de mocracy is its provision of a formal institutional framework for political opposition, without which elections become merely pro forma. It is therefore disquieting that recent re strictions on campaign expenditures pose a threat to the vitality of polit ical campaigns by opposition candi dates.

That is, the greatest challenge facing non-incumbent presidential candidates lies in their ability to achieve sufficient media exposure to mount an effective challenge. Often 1982 FREEDOM AND c:'SOCIAL-DEMOCRACY" 213 this is accomplished only by spend ing far greater amounts than an in cumbent President, who enjoys the considerable advantage of free na tional exposure as an appurtenance of holding office. Hence, to the extent that the ex penditure limits imposed by the Election Campaign Act of 1974 serve to reinforce an incumbent Presi dent's already substantial advan tage over challengers, they make political opposition just that much more difficult for any candidate whose party is out of power. The Election Campaign Act also limits political campaign contribu tions by corporations and private in dividuals. Its chilling of First Amendment rights notwithstand ing, the law contributes even fur ther to the already substantial bur den borne by challengers for publi.c office.

Again, challengers must often outspend the incumbent by a sub stantial margin just to achieve equal name recognition. Any law limiting the size of individual contributions must, on the margin, work to reduce a challenger's opportunity to raise sufficient funds to compete ade quately against the advantages of incumbency. Clearly, economic freedom is more than merely a function of material wel~-being, it is an essential prereq uisite for the realization and enjoy ment of practically every aspect of democratic liberties. For a govern ment to interfere with so fundamen tal a freedom-as "social-democra cies" unquestionably do-is for it to simultaneously undermine a broader range offreedbms which it is the very purpose of democracies to protect. "Social-democracy" is, therefore, a contradiction!in terms. i -FOOTNOTESIF. A. Hayek, The Road to Serfdom (Chicago: University of Chicago Press, 1972), p. 114.

2Yale Brozen, "'The Law that Boomeranged," Nation's Business~ April 1974, p. 71. 3J. Gould and G. Bittlingmayer, "The Eco nomics of the Davis-Bacon Act" (Washington, D.C.: American Enterprise Institute, 1980), pp. 61,67. I 4F. R. Welch, "Minimum Wages: Issues and Evidence" (Santia Monica, Calif.: The Rand Corporation, 197~). 5Jack Hirshleifer, Price Theory and Applica tions (Englewood Cliffs, N.J.: Prentice-Hall, Inc., 1976), p. 377. 6RobertMoss, TIze CollapseofDemocracy(New Rochelle, N.Y.: Atlington House, 1975), p. 100. 7/bid., pp. 101-U02. 8/bid., p. 105. 9/bid., p. 105. l°Quoted in F: A. Hayek, The Constitution of Liberty (London: ~outledge, 1960), p. 267. llMilton Fried$an, Capitalism and Freedom (Chicago: Univer~ity of Chicago Press, 1974), p.9. 12Editorial, "The New Morality," The Wall Street Journal, F~bruary 7, 1980, p. 26. 13JohnLofton, "Private SchoolsFace IRS's New Despotism," Hu~n Events, December 9, 1978, p.8.

14Hayek,Road ~o Serfdom, pp. 60-61. 15Friedman, p. :19.

Gary North Scalpingand Envy "Scalpers." What a terrible-sound ing word. It almost rivals "scab." In each case, the detractors have sin gled out an important function in a free market society. The "scab" is anyone who is willing to work for a businessman for less than a labor union member is willing to accept. A "scalper" is anyone who wants to bear the uncertainties of the market for entertainment tickets. Every so often, especially the night of the regional "big game," we see a television interview on the evening news. The interviewer goes to the scene of the Big Event and starts asking people about ticket avail ability. Invariably, he approaches Gary North, Ph.D., is President of the Institute for Christian Economics. The ICE publishes a newslet ter, Biblical Economics Today. A free six-month trial subscription is available by writing to Subscription Office, ICE, P.O. Box 8000, Tyler,Texas 75711.

214 someone who complains about "all the scalpers who are ripping off the public." Once in a while, he may even get a "scalper" to discuss his busi ness. Another less familiar aspect of the scalping business also gets reported occasionally. The "patriotic" radio news commentator announces with glee that at the Detroit appearance of The Rolling Stones, scalpers could not sell all their tickets and had to take less than they had paid for them. Or: local T.V. announcer interviews scalpers; finds tickets "going beg ging." Big news. Man bites dog. Market bites scalpers. Justice reigns. The bad guys finished last. Why the hostility to scalpers? What is it about scalpers that makes people so angry? Why is "buying low and selling high" so reprehensible when amusement tickets are conSCALPING AND ENVY 215 cerned? After all, we are not talking about life and death. We are talking about "State vs. Tech." We are talk·· ing about the price of having one's ear drums blown out at a rock con·· cert.

Bad Vibrations The Los Angeles Times published a series on ticket scalping in April of 1976. The introductory para·· graphs of the April 8 article reveal the general attitude toward scalping ("Hard Day's Night at the Box Of·· fice"): There wasn't a single advertisement preceding the recent sale of tickets for Paul McCartney and Wings' two upcom.. ing Los Angeles concerts, but some 1,500 people were in line when the Forum's box office opened. And while only brief items in that day's newspapers announced tht~ sale, every seat in the 18,500-seat arena was gone in less than five hours. Box-officesmashes like that may makt~ a lot of people associated with the com·· ing McCartney tour happy, but they makt~ a lot of other people quite angry. So many fans are competing for so few spots to major rock concerts that selling tickets on a first-come, first-served basis is no easy task. Instead, determining just who's first and serving him or her has become a complicated and controversial affair.

Concertgoers, backed by legislators and law-enforcement officials, are concerned about how tickets are sold and, often, re,· sold. Some complain, for example, that by the time they hear that tickets arE~ going on sale, the event is sold out. Oth ers complain of waiting in line all night or longer to wind up with only fair seats. And nobody likes it when $9 or $10 prime tickets for sold-dut concerts emerge at li censed ticket brolkersfor $20, $30 or more. Let us examine some ofthe details of this critical ianalysis. (The author went on to con~ider in greater detail the actual sales of tickets in Los An geles, so the ~rticle was not totally hostile to "sca~ping.") First, Mr. M1cCartneyand the pro moters were ~isplaying eminently good sense in !not spending a small fortune on advertising when word of-mouth advertising was sufficient. They could b(~.nk on his fame as a former Beatle Ito draw the crowds to the Forum. :Noone would suggest that it would liavebeen wise for him to spend mon~y to jam up the box office with extira thousands of ticket buyers who w~re bound to be disap pointed.

The fact is,. at least 1,500 people had heard in itime to take steps to insure their ~resence at the Great Event. Or at least, they insured the legal right to ~ttend; if they decided to sell this pIjoperty right to some one else, then that legal title was transferred. E~ch ticket was a prop erty right to a ~eat at the Forum. It was true that "so many fans are competing for so few spots," that selling ticket~ on a "first come, first served basis i~ no easy task." From one viewpoin~, it is also no sensible task. Why selljtickets that way? Why not hold an auction?

216 THE FREEMAN April Competition No one wants to suggest that the fans are in competition with Mr. McCartney. Mr. McCartney is the seller of his services. He no doubt delegated the task of selling legal access to his performance to other profit-seeking entrepreneurs, who guaranteed him and Wings a spe cific price, plus (perhaps) a percent age of the gate. But the public does not perceive the initial seller as a competitor with the public. The pub lic sees the fans as competing against each other. This is the proper perception. Sellers compete against sellers. Mr. McCartney was not, I feel certain, the only performer scheduled to ap pear in Los Angeles that night, or that week, or whatever period oftime that affected the spending prefer ences of amusement-seekers in Southern California. Likewise, buy ers compete against buyers. All those fans lining up in single file were ac knowledging the reality of the com petition. The seller (Mr. McCartney) was not in competition with buyers (fans).

Concertgoers may well be con cerned with how the tickets are sold and resold. But why should legisla tors be concerned? No doubt, some people did complain that by the time they heard about the concert, it was sold out. Information is not a zero price commodity. It travels along pe culiar paths. No doubt others did complain about standing in line all night and only receiving mediocre seats. Mr. McCartney is a popular fellow. Is this blameworthy? Complaints About Price What people were complaining about was this: at zero price, not all those who wished to see Mr. Mc Cartney perform in a public audito rium could squeeze into the audito rium. But they did not want to admit this openly. So they complained about the price. Some complained by not attending. Others complained about having spent (the proper word) so much time waiting in line. They forfeited time, plus a few dollars, and got second-rate seats. Problem: there were not enough first-rate seats to go around. Any seat was a good seat in the eyes of those who wanted to go but who chose not to stand in line, and who then paid scalpers a higher price.

True, nobody likes to pay $30 for a $9 ticket. But, then again, nobody who is willing to pay $30 for a $9 ticket is happy when nobody will sell him the $9 ticket for $9. What is it that people like least? Paying $30 or missing the concert? Why organize sales of tickets on a "first come, first served" basis? Why not organize sales some other way? The article showed how devious the distribution was. Thousands of tick ets are set aside in the entertain ment industry for friends of pro1982 SCALPING AND ENVY 217 moters, or disc jockeys, or others connected to the industry. The pub lic is not aware of these sales (for the tickets eventually get sold, says the reporter). The public may know that college athletes at major universi ties are paid off in tickets each week, which are sold for cash, but that's only "innocent graft." Besides, they go to cheer these athletes, so who cares if athletes get a piece of the action? The seller, in this case, is the performer, and for some reason, no body ever regards the seller as a.n enemy of the attendee, when sports or entertainment is the market in question.

Boxing has ringside seats. Sports teams have "season tickets," where rich people, or entrepreneurial fans who expect a losing team to start winning next season, can "stake their claim" to the "mother lode," namely, the best seats in the house. The pub lic expects the best seats to be taken by others. The yelling starts when the second-best seats go on sale. (Note: the wealthy buyers are not envied-social distance.) The Risk Factor How are competitors channeled? How do profit-seeking entrepre neurs get the best return on their investments? By buying low and selling high. By seeing a factor of production which is presently being underbid in the producer goods mar ket, buying it at this low price, and then selling later into an enthusias tic final matket. But there is risk involved (more properly, unpredict able uncertainty). No one can be sure that the crowd will show up. In the case of rock eoncerts, no one can be sure that the, entertainers will show up. People bear uncertainty. They pay their mOlleyand they take their choice. Peopl¢ buy low, hoping to sell high. There are no guarantees.

Why not c~arge $30 at the box of fice for those' seats that everyone is willing to pay $30 for? Why sell $30 seats for $9? After all, in the final analysis, they were not $9 seats; they were $30 seats. They were $30 seats that sold for $9 originally, just as much as the~ were $9 seats that sold for $30 finally. Somewhere in be tween "originally" and "finally," there was a Ibt of uncertainty. "In the final analysis": what a loaded phrase. In the final analysis, meaning the night of the perfor mance, there was more demand for $9 tickets than supply of $9 tickets. So tickets traded at prices higher than $9. There were more buyers at $9 than sell¢rs at $9. Buyers were competing against buyers the night of the perfonpance. There was, how ever, one difference: the competing buyers were' no longer standing in line to buy. :They had entered the quiet auction market for tickets. (It had to be quiet, since it was offi cially illegal.') Cash had replaced the line.

218 THE FREEMAN April Lining Up There is some peculiar mystique about forming a line. All over the world, people dutifully line up. They line up in grade school, they line up at the Post Office, they line up to buy tickets. They certainly line up to spend ration coupons in socialist nations. In fact, a balloonist who lost his way in Europe could find out whether he was over a socialist na tion or a free nation simply by look ing down and checking the length and number of lines. People also line up to get out of socialist nations, in order to escape into nations that substitute other forms of economic competition. We line up when some one is charging below-market prices.! The concertgoers, on the night of the Great Event, know that all tick ets are sold out. There is no reason to stand in line any longer. So they substitute a different form of eco nomic competition. They offer $30 for $9 tickets, meaning tickets bought for $9 before the Great Event had sold out. These were tickets that cost $9 plus 15 hours in line. They were "$9 and 15-hour" tickets. They were "word of mouth information before the crowd shows up" tickets. Now demand at $9 is much higher.

For most people, $30 is a lot less expensive than 15 hours in a line overnight. Whose time is worth un der $2 an hour ($30, minus $9 = $21 for 15 hours)? Those who value their time more than they value $30 can exercise their preference in a vol untary transaction. Why do legisla tors try to ban such transactions? Why do voters demand that legisla tors pass laws against scalpers? Why is it considered legitimate to spend hours to buy a ticket, but not to spend money above the listed purchase price? Why are initial sellers the friends of the public, and secondary sellers the enemies of the public welfare? If Mr. McCartney is not the public's enemy, and the box office is not, then why is the scalper seen as the public's enemy? Motivated by Envy I will offer my suggestion: Be cause we are a nation of incipient socialists who are motivated by envy. We want those who are close to us socially and economically, and who prosper (perhaps) temporarily, to be deprived of their benefits. This has been pointed out by sociologist Hel mut Schoeck, in his brilliant book, Envy.

... envy is not directly proportional to the absolute value of what is coveted, but very often concentrates upon absurd tri fles to such a degree that, in some situa tions, the best means of protection against the envy of neighbour, colleague or voter is to drive, say, a Rolls-Royce instead of a car only slightly better than his, or, if Brighton is his resort, to choose a world cruise rather than a holiday in Sicily. In other words, overwhelming and astound ing inequality, especially when it has an element of the unattainable, arouses far 1982 SCALPING AND ENVY 219 less envy [than] minimal inequality, which inevitably causes the envious man to think: "I might almost be in his place."2 We worry about someone receiv ing $30 for his $9 ticket, but not at all about Mr. McCartney receiving $150,000 for three hours of work. If we view Mr. McCartney's perfor mance as having nothing to do with his years as a BeatIe, then he is earning, say, $45,000 an hour ($150,000, minus expenses, divided by three), while the person selling the so-called $9 ticket is earning un del' $2 per hour for his 15 hours in line. Yet we are outraged at the scalper. He has exploited the public.

What is the difference? The social distance between us and Mr. M<: Cartney. The awe and even rever ence we show for Mr. McCartney"s talents as a performer place him be yond envy. (Also, he has a British accent, making us feel terribly infe rior, thereby increasing his social distance.) But that scalper who makes someone pay 30 whole depre ciating dollars-there is a man to be squashed! We stand in line to 'see Mr. Mc Cartney. He has put us in our place. But the scalper has no right to put anyone in his place. He is a second ary seller, indicating his social prox imity to us. He seeks to deprive us of our funds, unlike the performer, who deprived the scalper of his funds. When standing in line is seen as a legitimate way to gain access to any event as a primary consumer, but asking someone else to pay money above the lis~ed purchase price is seen as exploitation by a secondary seller, then the ideology of socialism has done its work. When men refuse to acknowledge that they are un willing (or unable) to pay the price to become prip1ary consumers-i.e., people who will stand in line over night-and ljesent it when a pri mary consumer asks the secondary consumer to pay a premium for his own procrastination, or his unwill ingness to stand in line, or his late access to the ,news about the Great Event, or hi& impulse-buying atti tude, then the free market economy is in trouble.

Middlemen The late-night T.V. ad blares the message: "Yes, we can offer you these fabulous prices because we have eliminated tit!! middleman. We sell direct to the consumer, and we can pass along th~se bargains to you." What a fabulous opportunity! At last, we can tiuy direct from the pro ducer. No mqre having to shell out our hard-earned money for middle men. After all, what do middlemen ever do except stand around in the middle? At la$t, some inventive seller has found a: way to eliminate the middleman. And it only took 6,000 years! There are iproducers. There are buyers. Where did the middlemen get 220 THE FREEMAN April into the act? Why should we pay anything to them? Aren't they eco nomic exploiters? Why should busi ness tolerate middlemen? These are questions implicitly asked by those who despise scalpers. All right, there are producers. They made a decision to buy low and sell higher. They entered the market for producer goods-raw materials, la bor services, capital equipment, land, buildings, and so on-and bought up what they then believed were un derpriced goods. They now are sit ting on top of a pile of merchandise.

How do they get the highest return? The tried and true method is to sell it to non-producers (retail sales people) who in turn will market the finished products to the final con sumers. They take over the eco nomic burden of predicting an un certain future. The producer wants out. He takes his money and runs. Occasionally, some producer de cides to "sell direct to the con sumer." Fine. Who rents the ware house space? Who insures against fire and theft? Who decides how much to spend on advertising, and in which media? Who tries to predict the final purchase prices that the buyers will be willing and able to pay in the fu ture? Who rents the showroom space? Who dreams up the credit terms, lo cates the creditor, and convinces the buyer that "now is the time to buy"? Who, in short, enters the market in between originally and finally? Someone has to bear these expenses. Someone has to be compensated for bearing these uncertainties. Some thing "in the final analysis" has to lure people into the uncertainty-filled marketplace to pick up this burden.

That person is the middleman. He is also called the entrepreneur, or the speculator. And, in the case of tick ets, he is called a scalper. The Box Office Dilemma The box office sells at a specific price. Sometimes the people who own the box office are not sure what to charge. They want to fill the arena, so that everyone who wants to get in can do so, with nobody waiting out side, and not a single seat empty. That is accurate forecasting. That is the way to make money. And that is what nobody can do all of the time, or even some of the time, if the arena is large enough. A perfectly priced set of tickets will "clear the mar ket": a packed arena, and nobody left in line. So the owners of the box office, or the Ticketron outlet, or whoever is the primary seller to the primary buyer, decides on a price. The tick ets get sold, let us say. The market then determines what the proper price should be in the moments be fore the performance. Sometimes the price was set too high. Sometimes it was set too low. The middlemen lose, or they win. The middlemen bear the burdens of uncertainty.

1982 SCALPING AND ENVY 221 Why are the original sellers so foolish? Why did those who had the right to hire the services of Mr. McCartney in April of 1976-to be come the first middlemen in the dis tribution of Mr. McCartney's ser vices-not charge $30 per ticket right from the start? Why did they pass on the $21 per seat profit (or what ever it was) to secondary middle men? Why did they give up 18,500 times $21? Were they fools? Why were they, as professional middle men involved in the entertainment business, such poor forecasters? If they are so smart, why are there scalpers? Seekinga Scapegoat I have put this question to people associated with box offices,and I have never had a convincing answer. They are hiding something. I believe that they are hiding something very spe cific: the fear of envy. They do not want to become "middlemen"- "gouging" middlemen-in the eyes of local ticket buyers. They do not want to face the wrath of buyers at the auction, when buyers shout and claw to get access to the tickets. They want to be as unobtrusive as possi ble, collecting their percentage. They do not want to be seen as "enemies of the fans."

It is also possible that they do not want to have to guarantee an even larger fee to the performer, since the performer will know in advance the price of the tickets. If the box office man takes to<\) great a risk, and then cannot sell t])e tickets (rain, emer gency, or whatever), he loses a for tune. Another po~sibility: the performer is also guilt-nidden and envy-avoid ing, and he fears being labeled an enemy of the fans. They will blame him if he asks $30 per ticket, so he demands that ticket prices be kept low, meaning initially low. Thus, the brunt of the envy bur den is borne by the scalper, who per forms a fundamental function in so ciety, namely, envy-absorption. If the scalper is to fulfill his role, the box office managers, performers, and ticket buyers need to establish scalping as tmmoral, illegal, and against the public interest. They all agree that there should be a law against this wantonly antisocial act.

As the sociologist Kai Erikson notes, following a l~ne of thought in the writings of Emile Durkheim, one of the founders i of sociology: ". . . the term 'deviance' refers to conduct which the people of a group consider so dangerous lor embarrassing or ir ritating that they bring special sanctions to !bear against the per sons who exhIbit it.... The only way an observer can tell whether or not a given style lof behavior is deviant, then, is to learn something about the standards of the audience that re sponds to it."3 By establishing by law the devi222 THE FREEMAN April ance of scalping, those who would otherwise be faced with the problem of envy pass it along to another group, whose economic self-interest in profiting from the price· spread is greater than their fear of envy. In short, scalpers exist primarily be cause of economic uncertainty and widespread envy. The Price of Envy The hostility of the public against scalpers is indicative of almost uni versal hostility to entrepreneurship in general. There is an unstated as sumption in the minds of people that profits that come strictly from the successful prediction of the future demands of consumers, and from one's willingness to enter capital markets as a preliminary buyer, are immoral profits. We are still caught in the Marxist web of the exploita tion theory . We still act as though profits from anything except physi cal labor are "unearned profits."

The scalper is probably the least harmful "exploiter" in the world. He makes his profits from the purchase and sale of tickets to entertainment events. Ironically, the few profits any scalper can make, and the envy he receives from those who are helped by his actions (late-comers who would not be able to get in if someone else had not had the foresight and cour age to buy up tickets), are the direct result of Americans' unwillingness to stand in line. The very feature of socialism that is so repulsive to Americans-long lines-is encour aged by the potential envy shown toward box office managements, who become fearful of successfully fore casting future consumer demand. The auction market for tickets is one of the most resisted auction markets in America, yet those who resist the auction process are also repelled by lines. Below-market pricing creates lines. Scalping is not that critical to the daily lives of most Americans. We seldom attend sold-out perfor mances. We are too busy watching television. What we expect when we do schedule a night on the town is a price structure rather close to tele vision's pricing-without the ads, of course-and time spent in getting a ticket not much longer than the time spent in switching on the T.V. set.

When we find that others just like us have also waited until the last minute to show up, and the under priced tickets are all gone, we vent our wrath on the scalpers. They are, in effect, professional wrath-receiv ers, people who take the heat of envy off of the timid shoulders of perform ers and box office managers. If we all appreciated the economic service scalpers perform, the market for scalping would dry up rapidly. If there were no wrath, no envy, and no complaints about high prices complaints really against all of our competitors who are also trying to 1982 SCALPING AND ENVY 223 buy tickets to the Great Event-then performers and box office managers would get into the market and begin to "sell directly to the public." They would bear more of the burdens of middlemen. (Of course, they might announce that "We can sell you tickets at low, low prices because we have eliminated the middleman.") We would get professionals who ought to be the best forecasters of consumer tastes in entertainment to enter the forecasting market. We would see a better fit between the price originally charged and the fi nal size of the audience. There would be less waste. There would be far shorter lines. And there might even be more advertising, thereby allovv ing those of us who are always the last to hear about anything, to find out in time to get on board. But if the scalpers are going to make all the profits, why should the perform ers or box office managers adver tIse? Conclusion: with less envy, there would be better information· avail able to the general public .. Of course, such information is not free. W'e would all pay for it in the purchase price of the ticket. But isn't that bet ter than avoiding the advertising costs by not hearing about the op portunity in time? We will pay the scalper anyway. Or miss the event ..

Men resent the fact that they are willing to pay "outrageous" prices for sports events and entertainment, meaning live entertainment, onenight-only e~tertainment. They re sent the fac~ that people get some profits as sec9ndary middlemen who cater to theiri"base" desires. The very rich-perfor$ers, Forum owners, and Sol Hurok ~ are entitled to their profits, but nQtpeople sufficiently like ourselves to pring out our envy, yet sufficiently uplike us to stand in line all night, origo out immediately to buy some extra tickets. Such people are our sworm enemies, so we wind up paying more for our base desires than we othelrwise might have paid, had the Forum or Ticketron been uninhibited by fear of the public's envy to charge "all the market will bear" right mom the beginning. Conclusion Are we res~ntful? Against whom? Do we resent! long lines? Then let us pay the high~r monetary price which will shorten ~he lines. By pressuring the initial se~lers of tickets to keep monetary pJl"ices lower than true market (auc~ion) prices, we grant a kind of subsldy to those who value their time sDent in lines relatively low. They get the tickets, either to use personal\y or to sell to those of us who valu~ our time more highly.

Below-market monetary pricing does not lower th~ economic price of any asset; it merely substitutes other forms ofpa}fment.The auction is merely delaY$duntil the night of the performance,iwhen late-comers and scalpers get together to transact 224 THE FREEMAN business at true market monetary prices. Time has its price. Do we resent the fact that we never hear about the Big Event in time? In time to do what? Stand in line? But we probably choose not to stand in line. If prices are set below the market's true monetary price, we still will miss the Big Event, unless we pay the scalpers their due. Hearing about the Big Event earlier cannot do us any good if monetary prices are set below market. Why not en courage higher monetary pricing for the initial sale-the prices stamped on the tickets-and thereby encour age the seller to advertise heavily to all of us who hate to stand in lines, and who are ready to pay for our preference? If we are not ready to pay higher monetary prices, why The Price System should we be resentful about not hearing in time? Time has its price.

In an age of envy, the scalpers will get their due. We live in an age of envy.4 No economic resource is free, including the indulgence of our pro pensity toward envy. The scalpers let us indulge ourselves ... at a price.' -FOOTNOTESIGary North, "Step to the Rear, Please," The Freeman (March, 1975). 2Helmut Schoeck, Envy: A Theory of Social Behavior (New York: Harcourt, Brace, Jovano vich, 1970), p. 62. 3Kai T. Erikson, Wayward Puritans: A Study in the Sociology of Deviance (New York: John Wiley & Sons, 1966), p. 6. 4Gary North, Successful Investing in an Age of Envy (Sheridan, Indiana: Steadman Press, 1981). IDEAS ON LIBERTY THE PROBLEM is whether to transmit the detailed knowledge of special circumstances to a central agency, or to transmit the general informa tion to the individuals who have the detailed knowledge .. The detailed knowledge is too voluminous and nebulous for transmittal or for assim ilation, and no one could know what parts should be selected. The gen eral information, however, is summarized in prices.

Just that part of the general data that is relevant to an individual's decision is summarized in prices. Ifa price goes up, that tells him every thing he needs to know to guide his action; he does not need to know why the price went up; the fact that it did go up tells him to try to use a little less or it tells him to produce more of the commodity, and how far to go in his efforts. Not only do prices convey information on how an individual should act, but they provide at the same time a powerful inducement for him to do so. W. ALLENWALLIS Dennis Bechara THE current attempt to curtail gov ernment spending has stumbled on numerous roadblocks. Any effort to reduce the size of government is al ways faced with an articulate and well-organized opposition. Scores of social scientists are willing to testify before Congress that if the govern ment eliminates this or that social program chaos will result. Con gressmen are bombarded with hys terical pleas from constituents not to slash pet government projects.

Public opinion polls and the press publicize the people's fear that "their program" will be cut. And beneath it all is the suspicion that only the .wealthy will truly benefit from a re duction in government spending. To succeed in reducing the size of Mr. Bechara is an attorney in Mayaguez, Puerto Rico. government, it ,is imperative to un derstand the nature of the demo cratic process 4nd the cause of the organized opposition to those efforts. A major reason for such opposition is that the be:q.efits of government projects are distributed to small groups of recipients, whereas the cost of such progtams is dispersed throughout the population. There fore, any single government spend ing program represents, to each tax payer, a small i~crement in his taxes or in the cost of government. How ever, to the beneficiaries of the pro gram, the prop0sed spending repre sents a significant infusion of capital.

So, it is logical for the proponents of the different sp~nding bills to mar shal their forcea and actively lobby for such measUres. The individual taxpayer, on the other hand, finds it 226 THE FREEMAN April more costly to oppose a given pro gram than he might save in taxes in its absence. To their further advantage, the champions of government spending are able to point to the specificproject as evidence that they have created employment and consequently have favored a group that is deserving of aid. The opponents of government spending, on the other hand, cannot show what jobs have been created or preserved in the absence of govern ment spending and intervention. R. L. Schreadley, Executive Edi tor of the Charleston, S.C., Post Courier, came to the point in his ed itorial of December 27,1981: "What we don't see, what nobody sees or records, are the buildings, the jobs, the hope that might have flourished within and without the cities had federal bureaucrats and their eager accomplices not succumbed so long ago to the dangerous business of be lieving. themselves more prescient than the market. . . . You do not make a bad investment good by salt ing it with taxpayers'dollars. (Ex cept, of course, for the lucky devel opers up front who are quick enough and smart enough to take the money and run.) You do not restore confi dence. in the financial future of the cities or of this country by requiring taxpayers to assume risks no pru dent private investor would take."

Since government has no re sources, it either taxes, borrows, or simply prints new paper money in order to finance its activities. Any government spending must neces sarily have a corresponding effect on the economy. If government were to tax in order to raise revenue, this represents a loss of investment and savings from the private sector, which is also translated into a loss ofjobs. Therefore, the jobs created in any government project which is fi nanced by taxation implies the elimination of jobs in the private sector. Similarly, if government spending is financed through bor rowing in the capital markets, this means that the funds which other wise could have gone to the private sector are being channeled into the government project. Higher interest rates are one of the consequences. If the printing of money is the alter native chosen by the state to finance its projects, that spells inflation.

The opponents of government spending projects thus appear to be the enemy of the deserving minori ties who are the object of the govern ment's largesse. Opponents are psy chologically disarmed because they cannnot show precisely who will be harmed by the government pro gram. The·Democratic Aura Those who would curb govern ment spending face one further hur dle. Governments have traditionally attempted to justify spending and 1982 CUTTI~G THE BUDGET 227 interventionist policies by placing the imprimatur of democracy on such activities. Governments have sensed the aura of legitimacy conveyed by the term, and they have disguised many of their economic policies in democratic garb. This tends to dis·· courage criticism. Examples of this are legion. The public school system exists as a re-· suIt of laws which provide that the taxpayers must support the school ing of the community's children.

Many taxpayers are opposed to the system, yet become involved in vot ing for membership in the local boards of education. Similarly, the raising of revenue has been democ ratized, as bond issues become en tangled in the election process. The National Labor Relations Act has instituted the system of demo cratic elections under which the em ployees of what the NLRB deems to be an "appropriate bargaining unit" may select a union as their repre sentative for the purpose of collec tive bargaining. In addition, the Landrum-Griffin Act contains what is known as the "Union Member's Bill of Rights" under which certain democratic values are upheld. Many other Acts of Congress, which call for government interven tion, similarly provide themselves with the shield of democracy. This happens because Congress, in decid ing to implement a program, does so after a process of consultation and after obtaining evidence through testimony in public hearings.

The impression that the process is democratic is ~lways present in any legislative eff~rt, because the Con gressmen whQ approved the differ ent spending proposals were popu larly elected. Therefore, if the people were truly opposed to policies imple mented by their elected officials,their recourse would be through the elec toral process. Interventionby Way of JudicialPowersof Government The judicial powers of govern ment are also prawn upon to legiti mize economic iintervention. Admin istrative tribunals have been created under which gqvernmental agencies exercise their c,ntrol. The people who are the object o~ this scrutiny are thus made to feel: that somehow the treatment was: fair and democratic, because due pifocess was followed. After all, notice was given to the parties, and an opportunity was af forded them to present evidence and to cross-examine the opponents' wit nesses.

However, th~ most important as pect of government intervention is blithely ignorea: its economic con sequences. Ren~ control is a classic example. A bur¢aucratic agency may treat each easel:individually, apply ing the same· formula to different landlords in order to determine the maximum prices they may charge.

228 THE FREEMAN The landlord in turn may be able to establish, through a quasi-judicial proceeding, that there are other fac tors which the government ought to take into account in computing the rent. But despite recourse to due process, the effect of rent control will be felt. This will be the reduction of the available capital which will be devoted to building rental space, and the improper utilization of space, as tenants discover they can occupy more than they actually need be cause the price they have to pay for it is lower than its market value. Similarly, claiming that govern ment policies are democratic just be cause a majority of the people opted to follow the practice does not change its economic consequences. When the labor union, which was elected by a majority of the employees, obtains wage concessions from employers that discourage further production, the inevitable result is unemploy ment.

However difficult the task of re ducing the size of government, it is Government Relief not impossible. Essential to any fun damental change of policy iseco nomic education. Once voters and taxpayers understand the economic implications of spending programs, the proponents of limited govern ment will be in a more persuasive position. The present economic crisis may well motivate us to discover the so lutions to these problems. We are witnessing today many efforts to re duce the scope of government. These efforts stem from the crisis that is the result of the failure of interven tionist policies. And this crisis, as Leonard Read says, "is sending up signals~messages loud and clear that our past is filled with errors which inexorably produced their evil results. The consequences we suffer now were caused by past mistakes, and we need to know what wrong actions are responsible for these bad effects. The fact is, we are being graced with warnings which, when and if read aright, can lead to our salvation." , IDEAS ON LIBERTY RESPONSIBILITY to oneself and family, coupled with the necessity of working to meet this responsibility, are the ingredients for human progress and the development of the individual personality. Govern ment relief is a proven failure, a social evil, a destroyer of human per sonality. The greatest and kindest deed government could perform would be to remove the temptation of something for nothing.

RAE C. HEIPLE II Mark Hendrickson Teachings iof Soviet Experienqe OF ALL the many lessons that the Free World can learn from the So viet "experiment" of the last sixty four years, the most urgent is that life under a socialist command sys tem is far from the "workers' para dise" promised by Marxian ideo logues. As Alexander Solzhenitsyn and many others have so thoroughly documented, the socialist order, trumpeted as the wave of the future, is maintained only by the most bru tal measures. The fact that the so cialist state depends upon force for its continued existence is powerful evidence that free individuals would promptly reject such an inhumane system. Economically, poverty has been institutionalized in the Soviet Union. Mark Hendrickson recently earned a master's d. greet with a thesis based on the works of Solzhenlt syn. This is condensed from a chapter of that thesis. Sociologically, ,a well-defined class structure has emerged, with special privileges accomed at the wish of the ruling elite. Pblitically, individual rights have be~n trampled upon and extinguished by ruthless despots.

Spiritually and morally, the beliefs that the state ~s supreme and that the end justi~es the means have taken human beings to the depths of depra vity, as many have become willing to betray, enslave, and even torture any number of innocent vic tims. Is it any wonder, then, that "Whoever can ~votes with his feet,' simply fleeing ifrom this mass vio lence and destruction"? Economic Les.ons Economic laws, like· the laws of physics, are di~covered, not devised by men. The Gommunist rulers of the Soviet Union have tried to rennn 230 THE FREEMAN April peal those inexorable laws, and, in spite of their repeated failures, they persist in issuing bureaucratic de crees that attempt to revise the way the world works. In their self-delud ing hubris, they act as though all action will conform to socialist plan ning. It is a fact of life that human beings value more highly and will husband more carefully what they own than what they don't own. That is why the small, privately owned garden plots which have been permitted in the USSR account for 62% of the po tatoes, 32% of fruits and vegetables, 47% of the eggs, and 34% of all milk and meat produced in the country, even though these private plots con stitute less than one per cent of the country's agricultural land.! Yet, in spite of this impressive record and the chronic problem of food short ages in their country, the Kremlin refuses to heed the sound advice of Russian exiled dissident Alexander Solzhenitsyn to "give up the forced collective farms and leave just the voluntary ones."

The productivity of industry also languishes under its socialist direc tors. One major reason is the lack of incentive for workers and managers when all profit goes to the state. "Technological improvements de veloped in costly research institutes are ignored because no one will profit directly by introducing them." Rus sians naturally want to profit as do all human beings. However, they don't stand much chance of profiting by honest means, so they sometimes resort to dishonest means for per sonal gain. Dishonesty, of course, occurs in all countries, but Yankee ingenuity would be hard put to du plicate this mind-boggling fraud re ported in a recent article: When senior party officials dedicated a long-awaited, badly needed tractor-re pair plant last year, "Pravda" (which means "Truth") extolled it as "not a fac tory (but) a beautiful work of art," and the responsible comrades awarded each other the usual round of medals. No such factory existed. 2 Soviet experience has conc1u sively demonstrated that socialist production is inherently inferior to capitalist production. Lack of incen tive is a major reason. But even if workers were uniformly motivated around the world, the socialist coun tries would be poorer because eco nomic calculation is outlawed (de facto if not de jure).

In a CapitalistOrder In a capitalist order, each individ ual demands what he values most in the marketplace. He indicates ap proximately how much he values different products by how much he is willing to pay for them. These ap proximate objectifications of value called "price"-are the signals which communicate to producers what they need to produce, and at what cost, if 1982 TEACHINGS OF SOVIET EXPERIENCE 231 they are to attract customers and stay in business. As consumers' hierarchies of values change mo ment by moment, these changes are transmi tted through the pricing network. Entrepreneurs then seek to re,organize scarce factors of produc tion so efficiently that they can offer a good that 'consumers want at a price which they are willing to pay, and still end up with a profit. Because goods which are valued highly cost dearly (depending on the available supply) they tend to be conserved and used efficiently, and so greater satisfaction (greater pros perity) results than would be the case under socialism where the value sensitive pricing mechanism has been rejected. Production under so cialism is grossly uneconomical be cause the decrees of state officials supplant and suppress the economic values of individuals as reflected in prices freely arrived at in the mar ket.

Socialist planning is uneconomi cal also because it is totally un suited for coping with change. Whereas the prices of commodities in the United States fluctuate mo ment by moment on the commodity exchanges, reflecting shifts ·in sup ply and demand, and so enabling each commodity to go to where it is most valued in the economy, in the Soviet Union, commodities are allo cated by state officials who are in capable of perceiving what the most urgent needs for any given good are at any given Jnoment. Politics su persedes economics. When consider ations of valu¢ are supplanted by considerations of power, chaos in production ensues. The only reason why the blind planning of the social ist commissarsi in the USSR has not resulted in total chaos and much more severe pqverty has been that the Soviet leaders have been able to observe the allocation of resources in the non-sociailizedeconomies of the world.

Copying Mark~t Gains Since Soviet industry is so notori ously unprodu~tive, one may won der why the USSR is nonetheless known as an in~ustrial power boast ing awesome n).ilitary might and a leading role in space exploration. First of all, since the individual in the USSR has rio rights, it has been relatively easYi for the state plan ners to build l!Jp the military and space industries at the expense of consumer-oriented industries.. Sec ondly, the Krem~in has imported vast amountsoftechnicalequipmentand knowledge from ~ore productive (i.e., capitalist) coun~ries, most notably, the United States. The Soviet rulers have.purchased~often on credit, and on terms more favorable than Americans caniobtain-everything from the miniajture ball bearings which are essential for the accurate guidance of intercontinental mis232 THE FREEMAN April siles to the capital, technology, and managerial expertise used at the Kama River truck factory (the larg est such factory in the world) where the tanks which have been used in Afghanistan were manufactured.

Thirdly, Soviet agents have suc ceeded in pirating technology from the West. Solzhenitsyn eloquently summa rizes the pathetic performance of production under socialist planning in his homeland: What kind of country is it, what kind of great power, with tremendous mili tary potential, that conquers outer space but has nothing to sell? All heavy equip ment, all complex and delicate technol ogy, is purchased abroad. Then it must be an agricultural country? Not at all; it also has to buy grain. What then can we sell? What kind of economy is it? Can we sell anything which has been created by socialism? No! Only that which God put in the Russian ground at the very begin ning, that's what we squander and that's what we sell.3 SociologicalLessons The social structure of the Soviet Union is an egalitarian's night mare. Far from eliminating class distinctions, the socialist system deepens and perpetuates them. Ob servers differ as to how many strata or "ranks" (to use a term which is apropos for the militaristically regi mented social order) but they are unanimous in acknowledging a class structure that is so rigid that Russian critics refer to "caste expe diency" and a "boss class." Favors are bestowed by the state; favors are taken away by the state.

Tremendous tensions must inevi tably exist because of the way the social organization, the USSR's body politic, is presently constituted. The idea of class exploiting class, which is little more than a fantasy in a capitalist system where individuals are free to excel in the competition of servicing the needs of their fel lows, is a cruel, ugly reality in the USSR. The elite minority plunders the masses, and the masses know it. Certainly, some of the victims are fatalistic about their plight, but many others bitterly resent their exploitation. The present system may endure, or it may not, but one way or the other, violence remains the central characteristic of the USSR's social organization. The use of forced labor in Soviet Russia is as characteristic of social ism as is the impossibility of calcu lating value. If the 40% of the Soviet population which are forced to work the collective farms as virtual serfs cannot feed the Soviet Union's pop ulation, and managers will take credit for the construction of facto ries which don't even exist, one can scarcely imagine how unproductive, or even counterproductive, the labor of the zeks (the prison camp in mates) is.

1982 TEACHINGS OF SOVIET EXPERIENCE In The Gulag Archipelago Two, Solzhenitsyn included several ex amples of the deliberate destruc tiveness ofzek labor, and concluded, in something of an understatement, that the Soviet state (Le., the peo ple) is poorer as a result ofusing slave labor than it otherwise would have been. He also dispels the myth of the glory and honor of working in a so cialist state, asserting, "The labor of the zeks was needed for degrading and particularly heavy work, which no one, under socialism, would wish to perform." Special Privileges Granted the Ruling Elite Many amenities which a citizen can procure in the marketplace in the West, a Soviet citizen can re ceive only through the state. The greatest perquisites are, of course, reserved for ranking officials of the Communist Party. Solzhenitsyn tells us that they have country estates and that they ban the noisy maneuvers of the Soviet Air Force over those estates.

Reporter David K. Willis writes in the Christian Science Monitor (Jan uary 14, 1981) of special stores stocked with imported treats, ofparty tailors, travel privileges, spacious apartments, private lanes on the highways for official cars (which are chauffeur-driven luxury models, of course) and an entire "network of exclusive polyclinics, hospitals, and health resorts" ("It's rather like liv ing in the West, only you're still here," explains Qne client) which the average citizen never even sees. The doling out of privileges has been one of the major Pavlovian tools-the "carrot" to go along with the "stick" of pqson camps-used by the Communist! rulers of the Soviet Union since the Bolshevik coup to further their designs. That they have been successful in winning alle giance (however precarious it may be in some cases) is apparent to all. Solzhenitsyn cynically writes of sci entists who "are rewarded with a life of plenty and p~y for it by keeping their thoughts at the level of their test tubes."

The antisoci~l (Le., anti-individ ual) acts ofplun<ler and robbery-of institutionalized class exploita tion-have prevented a genuine so ciety, based on i voluntary coopera tion, from deve~oping in the USSR. The present social organizationborn and bred in violence, and maintained by violence-will ulti mately perish ill violence. After decades! of having their ba sic rights of lif~, liberty, and prop erty restricted,: attacked, and de nied, the variolls ethnic groups masses of angry, abused individu als-may very well over-react, lash out in a fury of pent-up resentment, and try to seize i what they, in self righteous rationalization, believe to be theirs. That is why Solzhenitsyn 234 THE FREEMAN April believes that the Communist dicta torship in his country needs to be succeeded by an authoritarian gov ernment, which would keep various elements of the population of the USSR from killing each other off. By keeping the peace-that is, by pro tecting the life, liberty, and property of all individuals-a strong govern ment would protect those conditions which are necessary for the devel opment of a true society comprised of individuals freely cooperating so as to promote their mutual well being.

The most important sociological lesson to be gleaned from Soviet ex perience is this: when individuals band together with the intent of wringing natural individual ine qualities out of the social structure by unequal applications of force, the inevitable result is a command sys tem, a. system which is necessarily ruthless to the degree that it insists on trying to undo what nature has done. Such a system destroys natu ral social cooperation, sows the seeds of future violence, and, in a perver sion of its stated objective, eventu ates in a social organization in which class divisions are more pronounced and less flexible than is the case in a free society. PoliticalLessons In a system of free men, any indi vidual who excels at satisfying the needs of his fellowman is rewarded by an impersonal market for his achievements. In such a system, ser vice to one's fellowman determines wealth and privilege. In a socialistic command system, on the other hand, the way to privilege is to help keep one's fellowman under the subjec tion of Caesar. Personal favor deter mines wealth and privilege.

"In a country where the sole em ployer is the State, opposition means death by slow starvation. The old principle: who does not work shall not eat, has been replaced by a new one: who does not obey shall not eat." With those grim words, Leon Trot sky described the totalitarian grip which the communist rulers of the USSR hold on the populace of their vast territory. That is the reality of the political. order in a socialist sys tem-a system which Karl Marx viewed as progressive. As economist George Reisman has observed, "The complete and utter powerlessness of the plain citizen under socialism can hardly be exaggerated. Under so cialism, the plain citizen is no longer the customer, 'who is always right,' but the serf, who must take his ra tions and like it."4 In the Soviet Union, the individ ual citizen is virtually without rights. This has been so ever since the Com munist takeover. What the state (i.e., the ruling elite) wants, it takes.

Those who once resisted the expro priation of their property in Com munist Russia were liquidated. Those 1982 TEACHINGS OF SOVIET EXPERIENCE 235 who object too vocally today are banished to Siberia or otherwise si lenced. That is the nature of politics in a socialist state. The public ownership of the means of production includes the public ownership of labor. Solzhenitsyn writes, "We are slaves there from birth." The ultimate form of slavery in the USSR is the zek, who is sub jected to treatment far worse than that endured by most of the slaves throughout history. Most slaves in ancient Greece and Rome, and in pre Civil War United States were re garded as private property. As such, their owners at least had an incen tive to keep them healthy. The zek, on the other hand, belonging to the state, is in a position in which none of his supervisors finds it in his self interest to be concerned about the zek's well-being, and so millions of zeks have found their prison term tantamount to capital punishment.

PeopleAre Expendable The experience of applied social ism in the Soviet Union demon strates that the welfare of the prop ertyless citizen is of little concern to the state authorities. Subjugation is all that matters to the bosses. This has always been the case. Solzhen itsyn relates that the Volga famine of 1921 illustrated "a typical Com munist technique: to struggle for power without thinking of the fact that the productivity is collapsing, that the fields ~re not being sown, that the factories stand idle, that the country· is sinking into poverty and famine." In other words, the people are expendable. What had been her alded as the "dictatorship of the pro letariat" has in r~ality become a dic tatorship over those proletarians who manage to survive. For decades, the official rhetoric has assured Ivan that his grandchil dren would enjjoy unprecedented prosperity, yet that promise is still far from fruition, and the achieve ment of affiuenice remains in the ever-receding future. The modus operandi of thelpolitical leaders of the socialist state is to plunder its subjects in the present and offer them a rosy picture ofia distant future as compensation.

The despotism iofthe Soviet rulers is not an esoteric!matter for political scientists in thei We8t to debate as an academic issue. Rather, it is a phenomenon of tremendous import to every single Westerner, for the objective of the ~oviet Union's over lords is to exteJ)d their hegemony over the entire g~obe. Is it logical to suppose that tyrants who have shown no compunction~ about brutalizing and enslaving their compatriots would respect th~ life and property of peoples of fore~gn lands? Solzhenitsyn :las repeatedly re minded Westerners of one of histo ry's oft-repeated, seldom-learned lessons: that the evil of tyranny 236 THE FREEMAN April grows ever more aggressive until it is bravely confronted and defeated. Those who try to appease tyranny will eventually find themselves at tacked by those very tyrants, and if they are fortunate enough to be able to vanquish the aggressors, it will only be at a cost far greater than would have been necessary had an unflinching moral stand been taken against the tyranny at the outset.

Of the present incarnation of tyr anny known as Communism, Solz henitsyn writes, "... a concentra tion of world evil is taking place, full of hatred for humanity. It is fl;llly determined to destroy your society." That may sound like melodramatic hyperbole to the average American, but it corresponds completely with the stated nature and objectives of the Communist movement, and, more importantly, it corresponds to the anti-human reality of life in the USSR and other Communist-domi nated lands. Any thought that this menace will go away if it is ignored is wishful and dangerous thinking. It must be confronted. Moral and SpiritualLessons The well-documented villainies which characterize Communist rule are vivid examples of the destruc tiveness that results from accepting the relativity of morality. The es sence of moral behavior between in dividuals is a reciprocal respect for rights, upon which basis free individuals may enter into voluntary associations (contracts) with others.

On this moral basis, society and cul ture develop. Communist ideology claims to be a substitute for moral ity and rejects individual rights, traditional social bonds, and estab lished cultural mores. The goal of communist ideology is to bring om nipotence to earth in the form of a socialist state. Just as the Jacobins used appeal ing promises of liberty, equality, and brotherhood as an ideological justi fication for lawless violence, so also do the Soviet leaders use their ide ology-that Communism will result in the "most radiant, most happy so ciety" -as a justification for any act, including arbitrary mass murder. Part of Lenin's ideology was that traditional rights must be violently eliminated. When Lenin encouraged the Russian peasants to seize land for themselves in the early months of his reign, he achieved his objec tive: to plunge the countryside into anarchy. This anarchy, of course, paved the way for Lenin and his co horts to "save the day" and restore a sense of order. It is this divide-and conquer technique (the destruction of social bonds and subsequent ab sorption of weak, isolated groups) which has been the Communists' primary method of enslaving the Russian people ever since the days of Lenin. This is what the Commu nist rulers must do if they are to 1982 TEACHINGS OF SOVIET EXPERIENCE 237 achieve their goal of replacing a so ciety of individuals with a collective.

As Ludwig von Mises explained in his definitive work on Socialism (1922): To make Collectivism a fact one must first kill all social life, then build up the collectivist state. The Bolshevists are thus quite logical in wishing to destroy the social edifice built up through countless centuries, in order to erect a new struc ture on the ruins. The Marxian Religion The ideology that asserts that mo rality is relative, that materialism is the only truth, and that the state is supreme, is a religion. This Marx ist-Leninist ideology is not yet per ceived as a religion, but that is what it is. Like Christianity, it preaches a Savior-the socialist state-on the path to heaven-a stateless Com munist world; it teaches that man's purpose in life and his present and future salvation depend on how well he serves this master, and it con stantIy appeals to faith, for many of its prophecies have not yet been ful filled. Seen in that light, it is ironic that the thoughts of Jesus of Naza reth cannot be taught in the schools of the United States because of the separation of church and state, while the teachings of Karl Marx are sub ject to no such sanction.

The Soviet leaders do not tolerate any questioning of Marxian dogma. The official line is "He that believeth shall be saved." The problem is, when such major prophecies as: the workers of the West will sink stead ily into total poverty; Communist revolutions will break out in the more advanced iindustrialized coun tries; wars occur only in capitalist countries-when all these major predictions are contradicted by the historical record of Soviet experi ence' nobody believes in the old Marxist-Leninist religion any more. However, the priesthood (the Cen tral Committee lof the Communist Party) retains tl).e outward form of the religion, bec~use it dares not re linquish its powet and privilege. And so, like the Aztec priests of Tenoch titIan, who sacr~ficed human lives on the altar of th~ sun god, the Com munist Party leaders sacrifice hu man Iives on tla.e bloody altar of Marxist-Leninist ideology, and so maintain their r¢ign of terror.

In addition to iteaching the West the nature of the iCommunist threat, Solzhenitsyn te~ches us the most important lesspn of all: how to triumph over it. lie explains: We, the dissident~ of the U.S.S.R., have no tanks, no weappns, no organization. We have nothing. Our hands are empty. We have only our: hearts and what we have lived through in the half century under this system. 4nd whenever we have found the firmness within ourselves to stand up for our rights, we have done so. It is only by firmness of spirit that we have withstood. And if I am standing here 238 THE FREEMAN before you, it is not because of the kind ness or good will of Communism, not thanks to detente, but due to my own firmness and your firm support. They knew that I would not yield an inch, not a hair's breadth. And when they could do nothing they themselves fell back. Unceasing resistance is the lesson he would have us learn. And how, specifically, can the West resist the advances of Communism? Certainly by military means, but more impor tantly, by affirming a consistent moral position-practicing and pro moting freedom of individual eco nomic activity; not assisting the Kremlin through trade and aid; not signing treaties (such as the Hel sinki accords) which legitimize So viet aggression; refusing to live at the expense of one's fellow man; re jecting the insidious teaching that morality is relative and the end jus tifies the means; affirming in word The Lawyer's Duty and deed that all individuals have certain inalienable rights; being concerned with more than mere ma terial ease, for liberty, if not vigi lantly guarded, is lost. This is the message of Alexander Solzhenitsyn.

If we heed his warning and emulate his courageous stance against Com munist tyranny, the West shall in deed prevail against this aggressive, worldwide attack against individual liberty. ® -FOOTNOTESIHedrick Smith, The Russians (New York: Quadrangle/The New York Times Book Co., 1976), p. 201. 2George Feifer, "Russian Disorders," Harp er's, February 1981. 3Alexander Solzhenitsyn, Warning to the West (New York: Farrar, Straus and Giroux, 1976). 4George Reisman, The Government Against the Economy (Ottawa, Ill. and Thornwood, N.Y.: Caroline House Publishers, Inc., 1979), p. 164. IDEAS ON LIBERTY THE LAW is a "department of conservation," and you are one of its offi cers. Everything you do for a client, in your office or out, that is honor able and ethical, will be done to preserve his rights under God and the law. Your profession, therefore, is a conservative profession, because you are trying to keep this client as you found him, trying to preserve him, his person and his property and his liberty. The lawyer who is on the other side, who represents the state, in a criminal case, is trying to preserve the liberty of the man who was defrauded, or the man who was maimed, or murdered perhaps. From the beginning to the end of every lawsuit you are in the process of conservation. Consequently, I think that the division of our population into right and left, and conservative and liberal, is a fragmentation of the proper meanings of words.

CLARENCE MANION, "Right and Wrong-Not Right and Left"

Lawrence W. Reed Toward Radical Monetary Reform IN the late 19th century and early 20th, the issue which occupied cen ter stage ofeconomiccontroversy was "the money question." From the time of the Civil War greenbacks through Bryan's "Cross of Gold" speech of 1896 until the establishment of the Federal Reserve System in 1913, politicians, academics, editors, and business people squared off in heated debate over the proper monetary policy for the nation. After the dramatic events 'of the Great Depression and the creation of the post-war monetary system, the issue became relatively dormant as attention turned to other things. But recently, "the money question" has emerged in full force once again. Its Mr. Reed is Assistant Professor of Economics at Northwood Institute In Midland, Michigan and direc tor of the college's annual Freedom Seminars. He is co-edltor and co-author,· along with Dr. Dale Hay wood, ala new book When We Are Free.

resurrection has i come, not coinci dentally, as an aftershock of a finan cial earthquake ~f staggering· pro portions. What has haplpened is that the lmonetary chickeds have come home to roost. Decad~s of government managed· money', have produced a frightening flirtation with runaway prices. The American dollar has lost at least 80 per cent of its 1940 value. The bond market has suffered fan tastic losses. The devastation of dol lar-denominated a)ssets-savings, life insurance, pensi~n funds, and the like-in real terms is tremendous. Faith and confidence in the future purchasing powet of the dollar are everywhere in qu~stion. We have been witness to nothing less than the historic demonetiza tion of fiat money!. The damage this process has wrought may yet assign government paper to the status of 240 THE FREEMAN April ''barbarous relic" which Keynes once mistakenly ascribed to gold. Who can' honestly survey the wreckage and pronounce of the monetary authori ties, "This is a job well done"?

It is in this unfortunate set of cir cumstances that proposals for "mon etary reform" are proliferating. It is not the objective of this essay to pro pose yet another or to endorse any particular one already advanced. Rather, the objective is to illumi nate the intellectual path which any meaningful reform must take. The author leaves it to others to chart the specifics. To begin with, monetary reform ers must come to grips with some thing fundamental to the origin and history of money. They must redis cover what the Austrian economist Carl Menger told us in his path breaking Principles ofEconomics in 1871: "Money is not an invention of the state. It is not the product of a legislative act. Even the sanction of political authority is not necessary for its existence." Of Natural Origin The origin of money was entirely natural. It sprang from the awk wardness of barter and the desire for a marketable commodity to facili tate exchange. The first time man traded a good for something which he intended to use not for consump tion himself but rather as a means to acquire what he really wanted, a medium of exchange-money-was born.

It was a revolutionary inven tion - the economic counterpart to the wheel-and it made possible trade and a division of labor incon ceivable in a barter economy. It was truly an invention of the market place, of economizing individuals seeking to improve their well-being. All sorts of commodi ties have served as media of exchange at one time or another. Cattle, cowry shells, furs and skins, wampum beads, to bacco, whale's teeth, cigarettes, and even rats are examples. Primitive though these monies may seem, they had the qualities of familiarity and acceptability which made them marketable and hence, candidates for money. In most markets of the world, the precious metals emerged as the pri mary money commodities. Durabil ity, divisibility, high value in small quantities, and relative stability in purchasing power over time were characteristics which no other com modities could match. As early as 650 B.C., coins of gold and silver be came almost singularly synonymous with the term "money" in the trad ing world.

Paper arrived later on the mone tary scene as a "money substitute." It took the form of promissory notes which pledged real money in pay ment for goods. Issued by early banks, for instance, they were re1982 TOWARD RADICAL MONETARY REFORM 241 deemable or convertible on demand into the precious metals they repre sented. Inflation Involves Government Controlover Money Governments, afflicted with an insatiable appetite for revenue, have generated history's inflations by first assuming control over money. Then gold coins became only partially gold or without gold at all. Paper notes, stripped of their "backing," became "fiat"-their value tied to the whims of the inflating authority. Monetary history records no instance of a peo ple voluntarily choosing in the mar ketplace to use unbacked fiat paper as their money! The problem with so much of monetary economics today is that it does not fully comprehend the ines capable conclusion that money is a market phenomenon-that it origi nated in the market, that it evolved in the market, and that the market laws of supply and demand apply to money just as they do to any other commodity traded in the market. I submit that no monetary reform is likely to succeed if it treats money as the invention and exclusive do main of a political monopoly. The essential task of true monetary re form, then, is to find a way to divorce money from politics and make it as much a product of the market as pos sible.

In this vein, the many proposals which call for minor alterations of the government~s monetary function sound a little like rearranging the deck chairs on the Titanic. Simply putting a differ~nt crew in charge of the ship or experimenting with the compass are not radical enough. In this case, the market may be just the lifeboat we should be looking for. The objection may be raised, "Without a central authority, how will anyone kn~w what the supply of money should be?" Well, does anyone know what the supply of green beans sh(j)uld be? How many quarts of milk Should be produced? How many size 36 undershorts there ought to be? How is it that the mar ket is able to ~rovide these things without central planners and in just the right amounts? The answer, of course, is the mar ket's mechanism! of price. When costs are low and price is high, the signal to producers is,! "Make more!" Pro ducers know th~y should not pile up any more when! costs exceed price.

Why shouldn't money respond simi larly? When gold w~s money, this mech anism certainly, did work reasona bly well. As long as it was profitable to mine gold, piroducers did. "Too much gold" on the market caused the value of gold to' fall and the cost of mining to rise~a double whammy that prevented producers from en gaging in a continuous inflation. The supply of money, therefore, had 242 THE FREEMAN < something to do with the real market demand for money. With today's fiat money, the mechanism is short-circuited. Dou ble digit price inflation is the mar ket's way of signaling that there's too much of the green stuff around, but the signal never directly strikes the producer. There's no chance that he will go broke in the process of creating more than the market de mands. For the inflator of fiat money, the incentives are perverse: he grows bigger the more he does the very thing he shouldn't be doing!

It is no sure bet that the debate over monetary reform will deal fun damentally withthis question of po litical versus market money. We Currency Reform have lived for so long with the former and its ruinous consequences that suggesting the radical alternative may be tantamount to the impossi ble task ofteaching blind people what it would be like to see. Once it was believed that witches, warlocks, and demons were the causes of such calamities as bad weather. Elaborate contrivances were devised to drive them away. When men learned that it wasn't so, they looked for more natural, scien tific explanations. Perhaps it is time to relegate to superstition the idea that government should manage money and get on to the task at hand-putting money back in the marketplace where it belongs. , IDEAS ON LIBERTY UNDER present ideological conditions no one could possibly conduct a successful currency reform. To save the United States dollar would re quire a complete reversal of present economic and monetary policies of the United States government. It would not suffice merely to stabilize the currency through credit restrictions and the reduction of spending sufficient to result in balanced budgets. For such a solution· would im mediately throw the American economy, which has more than six mil lion unemployed even during boom times, into severe depression and unemployment. No political party would dare to recommend, much less administer, this medicine for monetary stabilization. Therefore, the cur rency reform necessitates a simultaneous economic reform that reduces the unbearable burden ofgovernment intervention. Business taxes, which are among the highest in the free world, would have to be lowered considerably, and the markets freed from bureaucratic intervention. At the same time, the numerous legal immu~ities and privileges of the labor unions would have to be abolished in order to restore a flexible labor market.

HANS F. SENNHOLZ,Age ofInflation Joseph S. Fulda THE NEW BONDAGE IN a courageous address to the dele gates of the NAACP convention, President Reagan spoke of "a new form of bondage" and offered blacks, as he did all Americans, a greater measure of economic liberty. The New York Times was quick to notice that the selfsame programs respon sible for the new bondage form the President's much-vaunted safety net. But there is no contradiction. The President was making a sensitive point about the nature of govern ment nets. "One moment they're un der you, the next moment they're on top of you," he was reminding us. The realization that dependence on the state invariably leads to subser vience to the state may come hard in countries whose democratic forms often lend themselves to a most misJoseph Fulda is an NSF Fellow at Columbia Univer sity. This analysis is based on a letter to The New York Times (August 2, 1981).

chievous confu~ion of government with society. BUjt as Hamilton noted, "power over a' man's subsistence amounts to a power over his will." Such power is what Hoover meant when he wrote of "the terror of effec tive deprival to ~ny man of his busi ness and his livelihood." These men understood that the dependence of free men and women on the state for their sustenance, what we might call the paradox of democratic socialism, would soon undermine the blessings of liberty in which they believed so fervently, each in his own way. It is in this context that the new bondage must be under,stood, for those to whom we give a$much as those from whom we take are stripped of some of their dignity and personal free dom. Let us exa~ine the underpin nings of the new bondage. The an nals of government intervention will 243 244 THE FREEMAN April show a decided propensity on the part of government to control what it does not support. Such diverse entities as local governments, business enter prises, private schools, and our lives come under this head. But rare in deed is the agency of government which proffers support without de manding a measure of control. Nor has such control been found uncon stitutional; as one judge wrote, "It is hardly lack of due process for the Government to regulate that which it subsidizes." One can even argue, as Senator Barry Goldwater has, that the appropriation of tax monies eth ically requires some regulation of their use. Legally, ethically, and historically, then, subsidy and reg ulation have been inextricably in tertwined. Such an observation, to be sure, is no argument for the reg ulation attendant upon subsidy, but rather an argument against subsi dies in the first instance.

Sacrificing Self-Reliance in Return for Government Aid Examples of the subsidy-regula tion nexus abound. New York City, the Chrysler Corporation, and the national endowments have each sacrificed something very dear to the American tradition in return for the financial blessings of the state: a tradition of self-government older than America herself, the autonomy of private enterprise, and artistic in tegrity. Under the system of regulated subsidies, government has extended itselfinto all the nooks and crannies of heretofore private life: charity, education, medical care, agricul ture, trade, production, scholarship, art, and family relations. We tell our poor where to live-in housing seg regated by social class-and how much to eat-and thus how much to weigh. We tell parents what their children must learn-the virtues of the state, the new morality, and our debt to ape-like creatures-and what they should eat for lunch. We tell our elderly what transportation to use and when to use it-malfunc tioning state-run systems at odd hours. We decide what medical pro cedures to allow-unnecessary op erations, for example-and when home care can be funded-when sal utary and relatively inexpensive, but even then only with presidential in tercession. We tell our farmers what crops are desirable-tobacco, for ex ample-and what crops must be re stricted-peanuts, for example. We tell our business community what merits encouragement-enterprises so forlorn as to attract no investors without subsidy-and what de serves discouragement-companies so successful that they can outprod uce and undersell their competition.

We fashion all these specifications and regulations as citizens of a dem ocratic state; we must live under them as members of a free society.

1982 THE NEVI! BONDAGE 245 Subsidies Lead to Control But inasmuch as the decision to accept a subsidy is voluntary, can the regulation attendant upon it truly he thought inconsistent with the philosophy of liberty? The an swer, I believe, is in the affirmative and for three reasons. First, we have already remarked on the tendency of the state to regulate that which it does not subsidize. Such regulations often arise from the proverbial transmutation of the carrot into the stick. All too often the real object of gov ernment is not to subsidize what the politicians believe a worthwhile en terprise or endeavor, but to regulate what is still a free enterprise or a social endeavor, with the subsidy a choice means to that typical end. Thus, what begins as a condition for Federal contracts may end as a con dition for doing business with one's neighbor. What begins with subsidy as the reward for compliance with social goals may end with fines as the punishment for deviating from public policy. What begins when the state has not yet exhausted its re sources and overtaxed its populace will remain long after the resources to support what has been taken over are gone.

It will be useful to contrast the regulated state subsidy with private employment or gifts granted in re turn for adherence to conditions es tablished by the giver. The private employer cannpt impose his condi tions of employiment on anyone who does not seek e~ployment with him. The giver of gifts can withhold his largesse but can impose no fines. The state, on the otb,erhand, is ever ready to cross the sh~rp moral line which divides not giv~ng from taking. It is for this r~ason, too, that those concerned witn the growth of gov ernment shouldibe wary ofthe state's assumption of ~dditional functions, even if they are completely volun tary. Thus, even those government services or enterprises which are used only by those iwho so choose and which are comp~etely funded by user fees are suspect. The Postal Service, after all, began with neither a mo nopoly nor a sl!Ibsidy, but has long since acquired both. As long as the entity which owns and operates an enterprise is ~lso the entity with coercive powers, what begins in freedom may end in compulsion.

A second objection to the regula tion which att~nds subsidy is that the regulations i issued often conflict with the rightfull management of the tax monies involved. Thus racial guidelines for companies with gov ernment contracts, while voluntary, are an inefficient-not to mention immoral-us¢ of public funds. Whether the contract is for sanita tion or defense~ it is best fulfilled without regard to social or political goals which miaallocate resources. Again the contrast with the pri246 THE FREEMAN April vate sector is helpful. A private business may indeed set any condi tions it desires for contractors who wish to do business with it, for it operates with its own funds, has no public trust, and will moreover likely be severely penalized by the market if it persists in operating by uneco nomic criteria. The state's funding, on the other hand, is obtained not by mutual consent based on recog nition of the efficient use of re sources, but by that unilateral sys tem of resource absorption known as taxation. Thus a public trust to util ize funds economically arises.

A Lack of Choice Third, there comes the realization that acceptance of the subsidy is of ten not, after all, a full and free choice. Is the decision to send one's children to public school-to accept the state education subsidy-fully voluntary, or is the decision influ enced by the forcible extraction of public school tuition monies via tax ation? Not only does one have the sense that one has paid for the sub sidy-that it is not a subsidy taken from others at all-one has been forcibly deprived of the resources to purchase the service on the market. State compulsory education laws leave no recourse, in the absence of such resources, but to patronize gov ernment schools. Consider, as another example, our beleaguered automobile manufacturers. These once-successful giants have been saddled with a myriad of uneconomic regulations. Their abil ity to borrow funds for needed mod ernization has been hampered by in cessant government issues. Their ability to use their own capital to modernize has been checked by a tax code biased against capital forma tion. Worst of all, for decades the de mand for their product lines was distorted by an energy policy of price controls; the false signals which en sued led these overly trusting com panies on down the road to ruina tion. After the state has thus crippled their ability to operate without sub sidies, it beckons, privilege in hand; all it asks for in return is yet more control. More often than not, the large, failing enterprises that gov ernment "saves" and ultimately runs are in need of saving only from the consequences of prior government intervention. Again, this is no ar gument for subsidies to such enter prises, but rather an argument against the controls accompanying such subsidies while they continue.

Likewise, the poor man will find his needs attended to by a host of paternalistic agencies offering in kind benefits that drastically cir cumscribe consumer choice. Why is it that in this fair land populated by a generous people, private charity, which the chroniclers of voluntar ism tell us was once plentiful, is no longer adequate? Government con1982 THE NEW BONDAGE 247 sumes the major portion of personal income, ostensibly for eleemosynary purposes, that is why. As Albert Jay Nock observed some fifty years ago, we are as likely to refer the man in need of aid to the appropriate gov ernment agency as to aid him our s(!lv(!s. By Rbsorbing 9uch a. la.rge portion of our resources, Nock con tinued, government usurps social and interpersonal initiatives as well. In deed, it is no small tribute to the American character that so much that is worthy is still supported pri vately, without subsidy or favor, de spite confiscatory taxation.

In sum, then, while the decision to accept a subsidy is not made un der duress, a great many coercive measures in some manner or other impinge on it. The element of voli tion in the regulations which are the price of subsidy is part of the insidi 0us and seductive nature of subsi dies, not a cause to disregard the President's warning. TreatedDisrespectfully Nor are the motive forces behind the new bondage entirely benign. In part, such programs as in-kind. ben efits, categorical grants, and regu lated subsidies derive from a decid edly illiberal view of those being aided. That is the view that having failed at self-sufficient production, the poor are not able to direct their own consumption wisely either. It is the view that the state, with the aid of professionals land social scientists who understan<ll such things, must therefore "help" them plan their lives. It is likewise the view that those local majQrities which dare to differ with the ~ational majority on such issues as, educational priori ties, the balance! between liberty and security, the balance between the free exercise ofrelimon and the proscrip tion of its establishment, or the pri macy of freedom. of association are not to be trusted with the customary full faith and credit. The farmers cannot farm, ~he traders cannot trade, and the frDanufacturers can not manufacture as well as can the "experts" in and around govern ment, proponents of this view seem to be saying.

To a greater eiKtent,though, these programs are th~ natural result of a corrupted democracy, in which the liberties and prCl>pertiesof individu als, once belie~ed inalienable, are regularly put to1the trial of a major ity vote. The election of representa tives by district rather than at large localizes their political base. Thus, social, economi~, ethnic, religious, occupational, qr interest groups, which in a larger area would. form insignificant mi~ority factions, are able, separatel~ or in coalition, to gain political c<)ntrol over the dis trict. ("By a faction," wrote Madison in the tenth Federalist paper, "I un derstand a nuimber of citizens, whether amounting to a majority or 248 THE FREEMAN a minority of the whole, who are united and actuated by some com mon impulse of passion, or of inter est, adverse to the rights of other citizens, or to the permanent and aggregate interests of the commu nity.") The factious spirit, further promoted by the hypostatization of groups so common in the political discourse of the day, is then re flected in the likes of quotas, entitle ments, and class action suits.

Serving Special Interests The turmoil of factions, which are today known as special interest groups, is also largely responsible for the new bondage. In-kind programs and categorical grants permit the easy identification, coagulation, and milking of these interest groups by politicians. Politicians, in turn, are easily swayed to commit ever-greater depredations on the public treasury by factions which form a substantial part oftheir support. Further, in-kind programs, categorical grants, and regulated subsidies are particularly amenable to the bureaucratic em pire building against which Jeffer son and Tocqueville warned. If a man Frederic Bastiat would have power over the activities of society, he would search no far ther than these baited hooks. In contrast, only the poor would benefit from a single cash grant pro gram, not the bureaucrats whose fiefdoms would be swept away, not the milk producers or construction workers assured a market without the fullness of competition, not the educators paid wages exactable from government only. Only the localities would benefit from block grants, not the supervising Federal agents, not the intermediating state agents, not the implementing local agents, nor again the natural constituencies of the many categories that· the Con gress has so painstakingly isolated over the years.

This should come as no surprise, \ for the system of unlimited democ racy in the name of charity is in reality a system whereby some ben efit from the failures, misfortunes, and dependency of others. When subsidies are granted without spec ification or regulation, only those subsidized benefit. That is why such subsidies so rarely emerge from the political process. , IDEAS ON LIBERTY OUR DEMANDS, therefore, place The State in an obvious dilemma! If it refuses to grant the requested benefit, it is accused of weakness, ill-will, and incapacity. Ifit tries to grant their requests, it is obliged to load the people with increased taxes-to do more harm than good-and to bring upon itself general displeasure from another quarter.

A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN World Citizen THE WORLD CITIZEN was an eigh teenth-century phenomenon. A child of the French Enlightenment, the World Citizen tended to put liberty ahead of country. Sometimes the World Citizen was bemused by those who rated equality ahead of liberty. This led many into J acobin snares, with the guillotine as their reward if they strayed from the gospel pro claimed by Robespierre or some other tyrant of the moment. But the more canny among the World Citizens came to see with Edmund Burke that liberty, in the abstract, could be a delusion. Burke, an anti-ideologue, was satisfied with English liberties in the plural, as defined by the tra dition going back to Magna Carta. Philip Mazzei, an Italian from Tuscany, was a Burkean, even though Burke gets only a bare foot note mention in Mazzei's autobiog raphy, My Life and Wanderings, which is now published for the first time in its entirety. The feisty Maz zei, who was cheated out of part of his patrimony by a rascally brother, became a wanderer early in life. He was inevitably attracted to London by the fact that, in England, "the only absolute power the government may exercise is ito expel in time of war a fore~gner ~hat is suspected of being a spy." "Personal freedom,"

Mazzei reflected,! "is more important for an individual than public free dom." The year in which he chose to settle in London: was 1756, and the Glorious Revol-qtion sponsored by John Locke had not yet surrendered to the "George be King" attitude of Hanoverians who held to the conti nental theory of Divine Right. In addition to being a World Citi zen, Mazzei was aborn trader whose urge to truck and. barter would have entirely. satisfieq his great contem porary Adam Slmith. As a boy in Tuscany Mazzei had studied to be a surgeon. He took!his profession with him to Smyrna in Asia Minor by way of Constantinop~e. But setting bro ken bones borea him. Sailing to London with an, intrepid Captain Wilson, who kept a wary eye out for ?AQ 250 THE FREEMAN April possible French interference, Maz zei set himself up as a teacher of Italian even though he himself had yet to learn English. His. pure Tus can pronunciation stood him in good stead as a teacher for an interim pe riod, but he soon discovered better ways of making money. He became an importer of oils and· wines, mak ing trips back home to Italy to ar range for a supply of Florentine wines that Englishmen might prefer to port and madeira for the summer.

Eventually he opened a London shop, but he put it under the name of Mar tini and Company in order to keep from being known to the Florentine aristocracy as "Philip the shopkee per." Mazzei was a happy Londoner for some fifteen years. His first disillu sionment with English liberties came when John Wilkes' election to par liament was declared invalid. This seemed to Mazzei. to constitute "a death blow to the solid and sacro sanct fundamental law of a free country, which is perfect freedom in the election of the representatives of the people." Mazzei Meets Franklin Mazzei's growing doubts about English liberties coincided with a first meeting with Benjamin Frank lin, the London agent of the Penn sylvania colony. The Grand Duke Leopold back in Tuscany had asked for two Franklin stoves. Franklin didn't like the alterations that En glish craftsmen had made on his stove. After some argument, Mazzei prevailed on a British stoveman to go back to Franklin's own design. The Grand Duke. Leopold got his stoves, and the improvements that went with the true Franklin model cre ated a thriving new business in "many parts of the Kingdom."

Philip Mazzei: My Life and Wanderings. Translated by S. Eugene Scalia, edited by Margherita Marchione. (Ameri can Institute of Italian Studies, 455 Western Avenue, Morris town, N.J. 07960), 472 pages, $14.95 cloth; $9.95 paperback. Franklin led Mazzei to Thomas Adams, a Virginian who was a great friend of Thomas Jefferson. Sympa thizing with the transatlantic colo nists who were insisting on their rights as Englishmen in refusing to honor the Stamp Act or to pay a mild tax on tea, Mazzei decided to go to Virginia. His plan was to take ten Tuscan peasants with him. Once settled in Virginia, he hoped to do mesticate Mediterranean crops in a New World setting. He bought a farm adjacent to Thomas Jefferson's own holdings at Monticello, and soon was raising wheat and Indian corn for shipment to Leghorn in Italy. Jefferson, who had learned Italian 1982 WORLD CITIZEN 251 for himself before he had ever heard a word of Italian spoken, became a great partisan of Mazzei, deeming him "of solid worth, honest, able, zealous in sound principles, moral and political, constant in friendship and punctual in all his undertak ings." When war came to the colo nies, Mazzei could not remain a sim ple farmer and exporter. He became a soldier, and it wasn't long before he had agreed to become Virginia's agent in Paris, where he joined Ben Franklin as an eloquent pleader of the colonists' cause at the French court.

After the war Mazzei lingered on in Paris, writing a four-volume work on the colonies. He had something to do with promoting Jefferson's Notes on Virginia, which was writ ten to answer questions proposed by Mazzei's friends, the Duke de La Ro chefouca uld and the Marquis de Condorcet. The French Revolution's course, so different from that of the American Revolution, had Mazzei worried the moment the J acobin Club presumed to dictate policies for the Third Es tate. When the French began to is sue paper assignats for money, Maz zei wrote a warning pamphlet to explain the workings of Gresham's Law. His general preoccupation with the specifics involved in maintain ing individual freedom recom mended him to Stanislaus Augustus II, the elected king of the aristocratic republic o~ Poland. Jefferson approved of Sta4islaus, so Mazzei took on the add~d job of becoming Poland's agent lin revolutionary Paris.

The Partitioning.f Poland The chapters devoted to the story of Mazzei's servic~ to Poland have a tremendous inter~st for the modern reader. As an agent Mazzei picked up some warning indications that the King of Prussia was about to con nive with Russia and Austria in the final partitioning of a most unhappy Polish buffer state. Journeying to Warsaw, Mazzei tried to convey the urgency of the situation. But King Stanislaus's military advisers could not believe in the!. King of Prussia's intended duplicity. When they were finally convinced i, that Poland was about to be erase~ from the map of Europe as an independent nation, it was too late. There was nothing to do for Stanislaus out to resign. Indecent as the partitioning of Po land was, there were still some cour tesies connected with it. The Czar of Russia eventuallyi assumed a part of the deposed King ~tanislaus's debts. Mazzei, in a terrifying posting trip to St. Petersburg ~ndertaken in his seventy-third year, retrieved some of the money he han loaned to King Stanislaus.

This makes a grand finale to a story that is full of meaning for any student of freedom. ~ 252 THE FREEMAN April THE WAYWARDWELFARESTATE by Roger A. Freeman (Hoover Institution on War, Revolution and Peace, Stanford, CA 94305) 511 + xvii pages - $35.00 cloth The book's principal findings and conclu sions are also available in a paperback vol ume, A Preview and Summary of "The Wayward Welfare State" 112 + xii pages - $8.95 Reviewed by William H. Peterson Dr. Freeman ponders the prospect of Western Civilization as he exam ines the enormous human and ma terial resources that the American people over the past quarter-century have invested in hundreds of gov ernmental programs, some of which originated in the New Deal but most during the New Frontier and Great Society eras. This book attempts to evaluate the cost of these programs as well as their returns, positive or negative. It is a masterful study by a man who has been an economist with Stanford's Hoover Institution since 1962, and is now Senior Fellow Emeritus.

Today the nation is faced with crucial decisions over the division of resources between the requirements of national defense and demands for domestic services. Aggravating the issue is the accompanying struggle for more or less redistribution of in come from the more productive to the less productive segments of society. These entitlement or transfer pro grams, including Social Security, grants-in-aid to state and local gov ernments, and subsidies to farmers and others, now cost Unde Sam in excess of $400 billion a year, or 56% of total federal spending, compared with only 35% in 1960 and 27% in 1955. This escalation in transfer pay ments can only undermine the drive to improve productivity, augment capital formation and restore pros perity. Total transfers are now far larger than total federal procure ment, defense and nondefense, and total federal payroll, civilian and mili tary. Indeed, they are greater than the 1981 defense budget and the 1981 total estimated expendi tures for new plant and equipment in the U.S. combined. Hence Free man's justifiable assertion that our welfare state is "wayward," i.e., out of control. Similar lack of control is evident throughout the West-in Canada, for instance, Scandinavia, Britain, France, Italy, the Nether lands, and West Germany-apart from, of course, Eastern Europe.

Witness the failure of social pro grams in health, education, hous ing, crime prevention and aid to families with dependent children. Welfarism has contributed to rising illiteracy, sagging productivity, more broken homes, more absent fathers, more unwed mothers, greater crime in all dimensions, and of course 1982 OTHER BOOKS 253 surging inflation and an increas ingly sputter-and-spurt economy. Rightfully, Freeman thus poses the question: "Can Western Civilization survive?" The problem President Reagan faces in trying to rein this wayward welfare state is an old one. Presi dent Roosevelt warned in his 1935 State of the Union message that "continued dependence on relief in duces a spiritual and moral disinte gration fundamentally destructive to the national fibre," and declared: "The federal government must and shall quit this business of relief." On signing the 1935 Social Security Act he said: "I can see the end of public assistance in America."

President Kennedy likewise urged Congress and the nation to reverse the trend of welfarism. He signed a bill on July 26, 1962, "shifting the emphasis of the nation's welfare program for the needy from the dole to rehabilitation," saying that it "makes possible the most far-reach ing revision of the public welfare program since it was enacted in 1935. This measure embodies a new ap proach-stressing services in addi tion to support, rehabilitation in stead of relief, and training for useful work instead of prolonged depen dency." Again, President Johnson, on signing the Economic Opportunity Act of 1964, said: "We are not con tent to accept the endless growth of relief or welfare 'rolls. We want to offer the forgotte~ fifth of our people opportunity and riot doles." President Cart¢r prepared a simi lar plan and stated in his accompa nying message ofAugust 6, 1977: "As I pledged during! my campaign for the presidency, i1 am asking the Congress to abollish our existing welfare system, and replace it with a job-oriented pr0$Tam for those able to work and a silmplified, uniform, equitable cash assistance program for those in need whoiare unable to work ... combine effective work require lnents and strongiwork incentives."

The most impressive. failure is So dal Security, who$e trust fund is fast approaching zero~ Freeman argues that Social Security is increasingly insecure. He notels that it has a de liberately built-in anti work bias, with its limits on wage and salary income that can ije earned by bene ficiaries from age$ 65 to 72. What is equally significartt: more than half of the workers no longer wait until age 65 to collect retirement benefits: half the men andi nearly two-thirds of the women who demanded and were awarded Soc~al Security in 1976 were 62 to 64 years old. The question w:HetherAmerica and Western Civilizamon can survive is indeed relevant. Welfarism has be come a state of ~ind; Washington has become a pub~ic trough. Govern ment, the problem, is still looked upon as a solutionl Can a people who 254 THE FREEMAN April voted themselves into this mess vote themselves out of it? New York economist A. Gary ShilHng noted that most Americans are now de pendent on government pay, gov ernment pensions, welfare aid, sub sidies, bail-outs or other forms of income derived from the public trea sury. Such dependency increased from 36.7% in 1960 to 50.2% in 1979.

Roger A. Freeman has performed a public service with this monumen tal work, which amply documents the foresight of Mr. Justice Brandeis who warned us a half century ago that: "Experience should teach us to be most on our guard to protect liberty when the government's purposes are beneficent ... The greatest dangers to liberty lurk in insidious en croachment by men of zeal, well meaning but without understand ing." THE REGULATIONOF MEDICAL CARE: IS THE PRICE TOO HIGH? by John C. Goodman (CATD Institute, 224 2nd Street, S.E., Washington, D.C., 20003), 1980 135 pages - $5.00 paperback Reviewed by Tommy W Rogers Dr. Goodman, assistant professor of economics and Director of the Cen ter for Health Policy Research at the University of Dallas, contends that most of the failures we encounter in the delivery of health care are not due to failure of the free market but are, to the contrary, the result of governmental interventions; re quirements, prohibitions, and regu lations with respect to medical prac tice.

Dr. Goodman, in point blank fash ion, accompanied by persuasive doc umentation, places much of the blame for this state of affairs on or ganized medicine which, according to him, has "for over 100 years, sought and obtained special privi leges from government." Dr. Good man's book is not an indictment of the medical vocation itself, but is a stinging indictment of what he sees as medicine's long and extensive in volvement with government to re strict free competition in the market place in the interest of medical care provisioners. Goodman traces the history of the American Medical Association from its initiation in 1847 as a scarcely veiled cartel through the 1910 Flex ner Report which was widely util ized by state legislatures as a ratio nale for drastically limiting the supply of physicians. Goodman follows with a discus sion of the purpose of licensing, re strictions on advertising, and re strictions on price competition. He questions the efficacy of the licen sure mechanism to promote medical care quality, challenges the breadth of medical school education (such as the limited knowledge of non-natu1982 OTHER BOOKS 255 ropathic physicians as to the heal ingpower of nutrition) and indicates that the free market has a moreeq uitable answer as to the providing of health care than is to be obtained by the decisions of groups and com mittees whose underlying objective is served by restrictive licensing.

Government, instead of using its leverage to remove the many legal obstacles which have kept a genuine free market .from working in the medical care arena, acted during the Nixon administration to impose ad ditional exemptions, privileges, and subsidies in the form of "health maintenance organizations." HMOs, Goodman feels, represent triumphs of "managerial, legal, political, fi nancial, marketing and negotiating skill" which may well be laying the groundwork for a federally regu lated health care marketplace. Although organized medicine and its allies have resisted the more ex treme .proposals for comprehensive national health insurance, there is no assurance they will continue to do so. Goodman detects a disturbing recent trend among providers of health care services, the recognition that socialized medicine under their control and on their behalf will give them unlimited access· to· utilize a controlled system in their interest.

"Many within the health care indus try want to shape and. mold national health insurance proposals to fit their own economic interests rather than oppose them outright," the author states. He adds that "As they have in so many other countries, the pro ducers of health care may soon be (~ome the architectS ofnational health insurance in the United States." Goodman's op~nion is that the hurden of protecting our health care nonsystem from further governmen tal intrusions vtill probably fall squarely on the! shoulders of the general public anp that if socialized medicine is ultiInately turned back it will be patients!, not practitioners, who will be prim~rily responsible. DEMOCRACY A~D LIBERTY by William E. H. Lecky Introductionby WilliamMurchison (LibertyClassics, 7440 North Shadeland, Indianapolis,Indiana!46250), 1981 Vol. 1, 479 pages; vql. II, 501 pages $18.00/set,cloth; $6iOO/set,paperback Reviewed by Tomm~ ~ Rogers William Edward .Hartpole Lecky (1838-1903), Irish historian, essay ist, and member:of Parliament, is sued DemocracyaruJ, Liberty in 1896.

Lecky was convin~ed that the statist radicalism which:asserted that only the majesty of the collective state <:ould·ensure well~being against the vagaries of the capitalist structure would eventually[ result in an en forced servitude of the citizenry.

256 THE FREEMAN Democracy and Liberty is an eclectic history which deals with the tendencies of the political world in many different countries. English representative government, French democracy, American democracy,-the functions of legislative bodies, labor questions, woman questions, the growth of socialism, are among the topics which Lecky discusses with a depth of knowledge and methods of reasoning which are helpful in eval uating contemporary issues. Lecky was particularly concerned with the effect of universal suffrage bestowed on the basis of posited ab stract "rights" rather than on char acteristics which defined the solid, trustworthy, educated, working cit izenry. A tenet of the older liberal ism which asserted the rights of the individual against the state was that primary political powers should be with the owners of realty. The doc trine that men to whom the land be longed, at least in minute or yeoman amounts, were the men who ought to govern was held by Dr. Franklin and by a large segment of the Amer ican colonists. Lecky felt a major danger of representative govern ment was its potential degeneration into a system of veiled confiscation of one class voting the taxes which another class would be compelled to pay.

Lecky felt that the privilege of suffrage rightly varied according to the special characteristics and circumstances of nations. That there is no certain and specific"natural right" of suffrage was said to be illustrated in the American experience. There were no uniform rules of suffrage in the colonies. Even subsequent to the adoption of the Constitution, the various States differed considerably in their qualifications for voting, al though property qualifications pre vailed in most states. Lecky felt that the organic emer gence of the right of suffrage in Western Civilization was aptly set forth by Chief Justice Story. In his Commentaries on the Constitution, which Lecky felt was one of the most valuable works ever penned on the science of politics, Story said that voting, irrespective of whatever foundation it may have in natural law, had always been treated as a civil right in the practice of nations, regulated by each society according to its own circumstances and inter ests.

Lecky endeavored to follow the tendencies that were altering the contours of the political world right up to the publication of his Democ racy and Liberty. All the eloquence and learning that Lecky mustered, Murchison writes in the introduc tion, was shouted into the teeth of the gale. Nevertheless, Lecky was a man worth listening to in 1896. And, his conversation, rooted in tradition and experience rather than frenzies of the moment, is still valuable. @ the Freeman VOL. 32, NO. 5 • MAY 1982 The Functional Role of Profits Arnold iW. Johnson 259 All of us should understand and approve the profit-an¢J-losssystem. The Role of Incentive Lawrence W. Reed 265 Why self-responsibility generally out-performs government intervention. Trickle-Down Economics Gary North 268 The wealth of nations depends not so much on the few rich but on what those of the middle class do with their money. Corporate Mergers: Method or Madness? Sheldon Richman 282 A study of the market processes behind the merger activity.

Semantic Confusion in Economic Regulation John Semmens 286 Statutory law is unsuited to the control of variable economic affairs. Free Markets in Chile Hans F: Sennholz 291 Freedom imposed under martial law is ~nder constant threat of explosion. The Day Welfare Hit the Classroom Steven N. Spetz 302 Applying principles of the welfare state to the grading of student papers. The Relics of Intervention: 2. Progressivism Clarence B. Carson 305 The Progressive movement of the early twentieth century carries over into the 1980s. Book Reviews: 318 "California, Inc." by Joel Kotkin and Paul Grabowicz Anyone wishing to communicate with authors may send first-class mail in care of THE FREEMAN for forwarding.

FOUNDATION FOR ECONOMIC EDUCATION Irvington-on-Hudson, N.Y. 10533 Tel: (914) 591,;,7230 Leonard E. Read, President Managing Editor: Paul L. Poirot Production Editor: Beth A. Hoffman Contributing Editors: Robert G. Anderson Bettina Bien Greaves Edmund A. Opitz (Book Reviews) Brian Summers THE FREEMAN is published monthly by the Foundation for Economic Education, Inc., a nonpo litical, nonprofit, educational champion of private property, the free market, the profit and loss sys tem, and limited government. The costs of Foundation projects and services are met through donations. Total expenses average $18.00 a year per person on the mailing list. Do nations are invited in any amount. THE FREE MAN is available to any interested person in the United States for the asking. For foreign delivery, a donation is required sufficient to cover direct mailing cost of $5.00 a year. Copyright,1982. The Foundation for Economic Education, Inc. Printed in U.S.A. Additional copies, postpaid: 3 for $1.00; 10 or more, 25 cents each.

THE FREEMAN is available on microfilm from University Microfilms International, 300 North Zeeb Road, Ann Arbor, Mich. 48106. Some articles available as reprints at cost; state quantity desired. Permission granted to reprint any article from this issue, with appropriate credit, except "Trickle-Down Economics."

Arnold W. Johnson THE FUNCTIONAL ROLE OF PROFITS THAT a considerable amount of anti business sentiment exists in certain segments of our society is a fact well known. Also, well known, is the ex istence of concurrent: (a) agitation against profits and the free enter prise system and (b) agitation pro moting attempts to more heavily tax the profits earned by corporations. One of the candidates in the 1972 presidential campaign, for example, called for an 82% excess profits tax on all corporate income exceeding 1970 earnings. More recently, the government of Manitoba proposed a tax on the mining industry: 1) A basic royalty of up to 33.33% of the value of mine production. 2) An incremental royalty tax of up to 50% of the net value of produc tion above "average profits" for the five years ending with 1973. Arnold W. Johnson, Professor of Accounting (Emeri tus), New York University, now lives and writes from Boca Raton, Florida.

3) A "basic Surcharge" of up to 100% of production exceeding oper ating levels authorized by the pro vincial government. Still more recently, Prime Minis ter Trude au required Canadian cor porations to trim their profits by 5%-this action being significantly modified in 1976 when Prime Min ister Trudeau expanded his wage price control system and decided that all profit margins must be reduced 15%. In France's presidential election (May 10, 1981)(the French elector ate voted for Francois Mitterrand and his platform calling for: a) the nationalization! of banks, insurance companies, and selected major in dustries, b) mo:re social egalitarian ism via such programs as substan tial taxes on personal property, increased taxation of the incomes of the rich, a reduced work week, a higher minimum wage, and so on. 259 260 THE FREEMAN May Mitterrand's platform obviously possesses ominous overtones for the future of free enterprise in France.

What is the meaning of actions like these-actions which are pointed in the direction of harassing and pe nalizing the profits earned by cor porations? Individually and collec tively, as concerned citizens, we should be greatly disturbed. The profit-and-loss system (i.e., the free enterprise system) of the United States is our expression of freedom. Private profit cannot be extin guished without extinguishing, also, personal freedom. Profit, in the last analysis, is simply an expression of liberty-that is, the freedom to work in one's own way and to do it better than someone else. The resulting benefit (i.e., profit) redounds to the advantage of the individual and our economic society in general. Profit is the well-spring and the determinant of production-and it is also the well spring of jobs. It follows, accordingly, that all of us should be staunch defenders and expositors of the profit and loss sys tem. We should aggressively cham pion the profit-and-Ioss system and we should also be able to explain it with tutorial understanding.

To impose upon corporate busi nesses an artificial "earnings ceil ing" measured by the yardstick of "a fair amount of profit" (a term diffi cult to define) would inject into the economic fabric a debilitating force potentially powerful enough to ulti mately destroy the delicate balance which, in a capitalistic society, de termines what and how much shall be produced. The same conclusion is also the consequence of unrealistic labor-union demands. The RegUlatedEconomy? If governmental "controllers" (i.e., governmental "regulators" of Amer ican business) should become the ac tive administrators of American business, what then? Will this con sequence bring with it the sacrifice of a free market capitalistic econ omy in favor of a command or social istic economy? The system of free enterprise, the very core of which is the profit mo tive, is surely the one fundamental basis for our having achieved the highest standard of material living ever attained by any nation in the history of the world. It seems strange, indeed, that the system of free en terprise (which has shown such de monstrable social benefit) should be: 1) Challenged by individuals and organizations espousing economic systems which are not only patently inferior but, importantly, are un proven and untried as well. These advocates seem to favor a devitaliz ing system of Big Brother govern ment-a government which owns, controls, or acts as miner, manufac turer, seller, shipper-and-trans porter, banker, insuror, accountant, 1982 THE FUNCTIONAL ROLE OF PROFITS 261 taxing authority, societal decision maker, and so on.

2) Penalized by, or threatened with, punitive rates of income taxa tion, labor prices, and controls. Our economic liberty can be easily lost by choking private business with the weeds of governmental inter vention. This is but to say that pri vate business is being increasingly stifled by the massive requirements of governmental red tape.! "Govern ment is destroying the individual incentives which are the well-spring of economic growth". 2 Never should it be forgotten that it is the men and women of free enterprise who have taken the risks and created the wealth which government can only consume. Government regulation (in 1977) cost consumers $100 billion or about 25% of the entire Federal budget. About $85 billion was the cost of compliance-to-regulation. To Gen eral Motors the cost-of-compliance was $1.3 billion.-Common Cause, Vol. 6, No.4, April 1980. The defense of the profit-and-loss system, unfortunately, is somewhat complex, somewhat difficult to ex plain, and somewhat difficult for significant blocks of people to under stand. In any discussion of the profit and-loss system, it is well to recog nize certain postulates: 1) Profits are essential to our eco nomic way of life. Profits represent payment for the beneficial use of capital-and, capital, in large amounts, is needed by society for the generation of tne production3 needed for fulfillment! of the demands of consumers.

2) It is a truism that too many of our citizens d~ not really under stand the func~ional role of profits. Too many of them seem not to un derstand that a given business must earn a profit a~ justification for its very existence. I(For any given busi ness, the incurring of successive op erating losses coupled with signifi cant increases! in debt portrays a deteriorating economic position,-a position which, lin turn, points to the conclusion that the business itself will likely not ~xist for long. When the factors of deficits and debt are those of the federal government, the malaise perme~tes the entire busi ness community.)4 3) Profits mlllst be explained not only to our associates but to people generally. People must be made to understand th~t profits are a social good-that profits are the fuel which makes the wheels of industry turn efficiently, the. furnaces burn effi ciently, the assembly lines hum effi ciently-all contributing to the cre ation of profit, employment, production and, collectively, to the material betterment of society gen erally.

4) If free enterprise, highly pro ductive, efficient and profitable, should falter, the inevitable sequen262 TH~ FREEMAN May tial threat becomes-nationalization with all of its inefficiencies. England has shown that nationalization produces monopolies and deficits. Stripped of the discipline provided by competition and by the entrepre neur's zest for profit, nationalization of English industry has generated high costs, decreased production, and alarming deficits-in 1975 nation alized industry lost $2 billion of which the average worker's share was $87. 5) In and of itself government is nonproductive. 5 The only valuable money that government can dis burse is that collected or received by borrowing. In the last analysis, gov ernment can give to some people only that which it has taken from others. A corollary to this statement is: Government cannot spend money without decreasing the amount of capital which otherwise would be used by the private sector for the generation of profits and the spawn ing of jobs sequential to the process of profit pursuance. Another corol lary is the following fact: inflation (like that of the 1970s) severs the vital cord between the effort-and abili ty of businessmen and their achievement of a compensating re ward (i.e. profit).

Summary Profits in our society are impor tant as an index of the success of indi vid ual businesses and of the American economy as the composite collection of all individual busi nesses. Profits are important • to the maintenance of job secu rity. Nothing is as hurtful to jobs as the inability of a given busi ness to earn a profit. • to the process of obtaining new investments of capital. • as proof of the economic justifi cation for the existence ofa given business or industry. • because it is the pursuit of profit that spurs the production-of weal th process and the concom itant fulfillment of consumer demand. All of us should understand the functional role of profits. All of us should be ready explainers of the profit system to all who will listen. If people understand how the profit system works, they will not be fooled by anti-profit propaganda. However, as previously stated, people gener ally do not really understand the functional role of profits. And the anti-profit forces are often very vol uble.

What is our responsibility? Only those who really understand the functional role of profits are quali fied to explain them. We must as sume the responsibility of explain ing the profit system. We must make the explanation so logical and so in teresting that people will listen, make it so clear and convincing that they must and will understand.

1982 THE FUNCTIONAL ROLE OF PROFITS 263 IN a country where capital is scarce and. business leadership talent is in short supply, profits will and must command a larger s~are of the national income than in a country where both capital and talent are relatively abundant. The failure to recognize this fact is the single most important deterrent to economic growth in the underdeveloped countries of the world today. The governments of those countries, inspired in part by the anti-profits bias of both the socialists and the modern! liberals, have tried to keep profit levels low, or have punished or national!ized the high-profit firms. BENJAMIN 4. ROGGE, "Profits" In short, as participants in and beneficiaries of the system 'of free enterprise, it is our responsibility to understand the functional role of profits; and, further, it is our respon sibility to uphold, defend, and im prove the procedures of our free en terprise system and all of the freedoms resting upon it. Never should it be forgotten that the system offree enterprise is the cornerstone of our whole political structure. 6 Forfeiture by Default Never should it be forgotten, fur ther, that free enterprise (i.e., capi talism) is the only kind of economic system compatible with individual liberty. Concurrently, we should constantly remind ourselves that no freedom has ever been maintained when its advocates have been passive and apathetic in its defense.?Passiv ity is an invitation to disaster be cause failure to defend our system of free enterprise is a failure to defend economic freedom and personal liberty. Freedom i~ not free. And "fail ure to defend tee enterprise" is a non-act which forfeits (by the pro cess of default) ~he economic debate which free enterprise involves. Fur ther, it invites ·'professional critics"

and demagogue$ to press their claims for the substitqtion of uncontrolled spending and cpmpassionate rheto ric in place of economic common sense. They seem not to understand ' for example, that government can not borrow or spend its way to pros perity or solveqcy. They seem, also, not to underst~nd that a declining economy which gives increasing ac ceptabili ty to the practice of taking from the productive in order to sup port the willing1y nonproductive can have one result bnly: a poorer United States of Ameliica because of a de cline in the amount of material pro duction per capita. 8 All of us sho~Ild be staunch and well-qualified· u\nderstanders of our profit-and-Ioss!economy and, also, should be equally staunch and well264 THE· FREEMAN qualified expositors, defenders, and improvers of the free enterprise sys tem-the system under which this nation lives. This action is obligatory-if we wish a third century of capitalism to materialize. We must accelerate our efforts to understand, preserve, and improve the most productive eco nomic system ever generated in all of the history of mankind. ® -FOOTNOTES1"... There are now no fewer than 87 Federal entities that regulate U.S. business, and to complete the 4,400 different forms they dis pense requires 143 million man-hours of exec utive and clerical effort each year. The regula tors are proposing so many new rules that the Federal Register has ballooned in size to nearly 70,000 pages annually ... Economist Murray L. Weidenbaum of the Center for the Study of American Business at Washington University, has estimated the total annual bill at $103 bil lion... " Newsweek, June 12, 1978, p. 86.

See also: Time to Control Runaway Regula tion by Murray L. Weidenbaum, Reader's Di gest, June 1979, pp. 98-102. "There are 88,200,000 Americans supported by government ... yet there are only 71,900,000 Americans (employed by the private sector) to foot the bill by paying taxes on their productive earnings."-Tax Target, Washington by Gary Allen, p. 19. 2policy paper, Center for Research in Gov ernmental Policy and Business, The University of Rochester, May 1976. 3When a business fails to earn a profit, "there are no dividends for stockholders. There are no quality products or services for customers. There are no jobs for employees.And there are no taxes to support the increasing number \)fthings our citizens now take for granted: educational facil ities for our children and ourselves, protection against fire, protection against crime, protec tion against illness, to name but a few of the public services paid for by corporate taxes as well as the individual income taxes that you and I pay."-Dimension, May 1968, p. 12.

4According to a report of the National Tax payers' Union, 1980, each citizen's share of the federal debt ($9.03 trillion) was over $112,000. 5"The Department of Energy '" will cost taxpayers $10.6 billion in its first year (and more in succeeding years)." This cost "is greater than the total amount of money that will be spent this year by all of the oil and natural gas producers in the United States for drilling and exploration. And it will not produce one drop of oil or natural gas."-American Cause, Vol. III, No.9, October 1977. 6" •••We in this country in the past half cen tury have been moving from a free society and toward an increasing degree of slavery. Not the kind of slavery that Lincoln talked about, but a kind that is no less destructive of the basic greatness and freedom of this country, a slav ery in the form of an increasing role of govern ment in our country, of an increasing extent to which we are the subjects and the government the master, instead of the other way around.

"If we continue the trend to a collective econ omy, a society controlled by government, we shall lose not only our economic advantage but also our political freedom ... " Milton Friedman: Address: National Association of Manufactur ers Congress of Industry, 1978. 7''Allthat is necessary for the forces of evil to win the world is for enough good men to do nothing." Edmund Burke, 1739-1797. 8"1fthe road to serfdom-government control and economic decline-is paved with ever-in creasing proportions of the earnings of individ uals taken by government, then the road to freedom and economic prosperity is paved with savings. It is the lifeblood of investment and economic growth." American Economic Foun dation, National and Informational Report, Vol. I, No.4, April 1980.

LawrenceW. Reed THE ROLE Of INCENTIVE THERE'S a great deal of talk these days about incentives. An incentive is something which incites one to ac tion. It is a spur, a motive, a provo cation, a goad, a stimulus. Econo mists have long understood that the incentive to act is the prospect of the action yielding benefits to the actor. Because of that fact, particular in centives and incentive structures explain a very great deal of the eco nomic world which swirls around us. People respond to incentives and to their opposite, disincentives. An individual will feel compelled to re spond favorably to something which promises great personal benefit at low cost or risk. The same individ ual will tend to turn away from those things which deliver little or no ben efit, especially if they do so only at high cost. He will positively shun those things which would set his Mr. Reed is Assistant Professor of Economics at Northwood Institute in Midland, Michigan. He is di rector of the college's summer Freedom Seminars.

Also he is co-editor of the recent college text, When WeAre Free. progress back, much as a hot stove is a disincentive to bare hands. Hu man choice is th'lrts influenced by eco nomic incentive$ and by changes in economic incentives. Let's take a look at "real world" happenings and see how this might ~xplain some things. Many people complain today about the poor schooli~g their children re ceive in public sdhools.Declining test scores and a bre~kdown of discipline in the classroo~, even as the costs of schooling rise, bear testimony to the failure of public education. Does this happen be~ause public school teachers and administrators do not wish to provide, a quality product? Not really. There is no reason to believe that public school teachers and adminis trators are any" less desirous than other people that quality education be imparted. They are, however, re sponding to a p~culiar set of incen tive structures. l:ask the reader, what would your performance be like if your business ~ould legally draft customers and compel them, under 266 THE FREEMAN May threat of penalty, to buy your prod uct? Suppose you could go a step fur ther and force even those who do not use your product in any way to pay for it - and to continue paying throughout their productive life times! Not exactly a prescription for creativity and productivity, would you say?

Why doesn't the Post Office de liver a better service? For the same reason! Where is the incentive to do better when you have a legal, sub sidizedmonopoly? Self-interest dic tates that humans pursue benefits along the paths of least resistance. Compulsory monopolies just do not light fires under too many people. One would be hard put to find any individual who would contribute his own money to encourage others to stop smoking and to promote the growing of tobacco at the same time. No one would regard such a contra diction as being in his self-interest. Yet Congress votes to do both. Why? Because no one spends someone else's money as carefully as he spends his own. I have every incentive to spend your money on my projects if I can get your money by taxing you. Why do industries and labor unions contribute heavily to political cam paigns? It isn't always to promote better government for everybody.

Such groups have an incentive to contribute if the expected returns (favors, protections, subsidies, im munities, and the like) exceed the value of their contributions. If gov ernment could not or would not pay off, the contributions would slow to a trickle. The charge is frequently heard that British and Swedish workers have become lazy. They don't work as hard as they used to. Studies indicate, however, tha t when these sarrie workers migrate to America, they work harder! The reason for the dif ference is that the incentives for work in America, in. spite of high taxes, are greater than in Britain or Swe den, where taxes are even higher. If one encourages something, one gets more of it and if one discourages something, one gets less. of it. That. applies to work as much as it does to any other activity. Nowhere is this more poignant than in the Soviet Union. There, 97 per cent· of farmland is cultivated "collectively." The output of the col lective farms belongs to' the State.

The other 3 per cent of farmland is in the form of private plots, whose owners are allowed to sell their produce in a relatively free market. The productivity per acre on the pri vate plots, which account for as much as a third of all agricultural output in the' country, is estimated to be 35 to 40 times higher than that on the collectively-farmed land. Workers on the collective farms are .not geneti cally or mentally inferior to those who have private plots. In fact, in many instances, they are the same 1982 THE ROLE OF INCENTIVE 267 people! The different incentive structures of collective and private farming explain the situation fully. What about pollution? Why would anyone dump his junk into Lake Erie? Doesn't he know that it doesn't belong there? Well, consider the in centives and disincentives a polluter may face. Dumping junk into the lake undetected may be much less costly than alternative methods of dis posal. And since no one "owns" Lake Erie, it may be some time before anyone takes notice and complains.

Cattlemen of the old West were accused of overgrazing on public lands. They would allow their ani mals to strip the land bare, leaving it vulnerable to erosion, and then move on. This was land they tempo rarily leased from the government or acquired free by government grant. With no incentive to main tain the capital value of the land, their actions were perfectly ratio nal. The same men seldom exhibited such callous behavior toward prop erty they bought and paid for and therefore owned outright. Incentives explain so many of life's events: why higher prices call forth greater supply and why lower prices do not; why racism is tempered in a free market wherein profit-seeking businessmen search for the best la bor at the lowest cost; why drug "pushers" appear when drugs· are made illegal and then must sell at high prices; why students work harder in a class where excellence is rewarded and failure is penalized; why capitalist ieconomies do better than socialist economies; why some people quit working and go on wel fare; and so fot1h and so on.

Finally, thOE~e who seek to im prove economiq life in America to day would do well to learn the im portance of in~entive. In order to stimulate imp~ovement, the disin centives for individual improvement must be abolished. In The Wall Street Journal, David M. Smick recently wrote: Growth involves ideas and thus is un predictable. All we can provide is buoy ancy-that senseiof economic boundless ness where a pers<!)ncan, with energy and initiative, take a new idea as far and as high as he or shei wants. If we can keep that initiative fro;m being stifled, as it is today by an inefficient tax and regula tory system, people may once again fol low their dream~. Allow entrepreneurs and potential en~repreneurs across-the board worthwhile! returns on their effort and they will staJ1t;taking risks. Our en tire economy will :gain in production and jobs, and the nation will regain the en ergy and opportlilnity and spirit upon which its greatne$s depends. * Incentive-nothing less than the interest one has!in his own improve ment-will mold the future just as surely as it shaped the past. @ *David M. Smick, i'What Reaganomics is All About," The Wall St'reet Journal, July 8, 1981, p.20.

Gary North Trickle-Down Economics "It's kind of hard to sell 'trickle-down,'" he [David Stockman] explained, "so the supply-side formula was the only way to get a tax policy that was really 'trickle-down.' Supply-side is 'trickle down'theory."1 DURING the Eisenhower adminis tration, critics of the Republican Party's economic policies called them the policies of "trickle-down eco nomics." There was even a lyric in a Joe Glazer "folk" song about "trickle down George" Humphrey, who was the Secretary of the Treasury. Trickle-down economics, the critics © Gary North, 1982. Gary North, Ph.D., is President of the Institute for Christian Economics. The ICE pUb lishes a newsletter, Biblical Economics Today. A free six-month trial SUbscription is available by writing to Subscription Office, ICE, P.O. Box 8000, Tyler, Texas 75711. said, was based on the theory that tax breaks given to the rich would multiply investment, provide jobs, and eventually create increased in come for everyone in the economy.

In other words, by "giving" the rich more after-tax income, the govern ment would foster economic growth, because the rich are more likely to invest than the poor, since any ad ditional money in their hands would not have to be spent on necessities. The critics resented the sugges tion that the rich should receive a reduction in their tax rates. They had campaigned long and hard for the "progressive" income tax-the grad uated income tax-and they were not happy with any suggestion that the reason why the American economy was not experiencing maximum eco nomic growth w~s because of the graduated income tax, which in the TRICKLE-DOWN ECONOMICS 269 1950s extracted a maximum of 91 per cent of "unearned" (investment) income. Value Theory It is one of the ironies of history that both the critics and the defend er~ of reduced tax rates in the high est brackets relied on the same view of income. What we call "welfare economics" was created at the turn of the century by a group of British economists, most notably A. C.

Pigou, who misused the crucial eco nomic doctrine -of marginal utility. They argued that since each addi tional unit of income (ounce of gold, dollar, pound sterling, etc.) is worth less to the recipient than the preced ing unit of income, we must con clude that it would increase total so cial utility within a society to impose graduated income taxes. Why? Be cause the goods bought by the thou sandth dollar received by a poor man are worth so much to him, whereas the goods that the millionth dollar will buy a rich man are valued very low by the recipient. The rich man will have purchased all those goods and services that were high on his value scale long before he receives his millionth dollar. Thus, con cluded the welfare economists, the civil government can increase total social utility in a society by taking (say) 75 cents of that final dollar away from the rich man and trans ferring the money to the poor man.

It took threepecades for an econ omist to come up with a theoreti cally precise rebuttal to this posi tion. Lionel Robbins, who had been influenced by t)le writings of Lud wig von Misesiearly in his career, provided the answer. Robbins ar gued that while it is legitimate for an individual tp compare the value to him of the fir$t, second, or nth dol lar of his own income, it is not legit imate for anyo~e to make interper sonal comparisons of subjective utility.2 We cap-not make scientifi cally valid state,imentscomparing the subjective value of the second dollar of income (or the millionth) in one person's incom¢ with the subjective value of the second, third, or nth dollar of another person's income. We cannot even m(~.ke cardinal (quanti tative) comparisons in our own minds-this is iworth precisely this much more to me than that-but only ordinal comparisons: this is my first choice, that is imy next choice, and so forth.

Common se~se may not accept Robbins' conclq.sion, but such is of ten the case in, matters of economic theory. Science!frequently produces conclusions that are in flagrant op position to comimon sense. We need to consider ani example regarding interpersonal c~mparisons of subjec tive value. The millionaire may value his millionth qollar very highly, if he has some iinvestment in mind which require~ a high initial pay270 THE FREEMAN May ment, or if he regards his income as a kind of measure of his value to so ciety. On the other hand, some mys tic or ascetic may not place a high value on his thousandth dollar of in come in any given time period. We do not have a quantitative measure of pleasure or utility; thus, we cannot, as scientists, make inter personal comparisons of subjective utility. Conclusion: it is not scientif ically demonstrable that total social utility within a society can be in creased by taking 75 per cent of the rich man's income in the highest tax brackets and transferring this money to a poor man (minus 25 per cent for government handling). There is no such thing, scientifically speaking, as total social utility. We cannot add up subjective utilities as if we were adding up a column of figures.

Admittedly, as policymakers we have to make judgments concerning the advisability of particular eco nomic programs. But Robbins' refu tation of welfare economics by means of the argument against the scien tific validity of interpersonal com parisons of subjective utility cannot be limited to the narrow case of the graduated income tax. It under mines all attempts to "tally up" so cial utility in the name of economic science. We cannot, as economic sci entists, say that any policy will in crease total social utility. There is no way to measure "total social util ity." So effective is this argument that it denies to economics the legitimacy of making estimates of the total value of any aggregates. What does Gross National Product mean, anyway, if we cannot assign any value (or meaning) to the columns of figures in a GNP index? If Robbins' thesis is correct-and since 1932, no econo mist has shown how it might be in correct-then most of what we know as modern applied economics, in eluding the formulation of economic policy, is an illusion.

Robbins had this pointed out to him by Roy Harrod, who later became Keynes' biographer, in 1938.3 In credibly, Robbins capitulated to Harrod and abandoned the obvious and inescapable logic of his earlier argument. 4 But he could never ex plain where he had been incorrect. He simply wanted to maintain the status of economists as scientific ad visors, so he abandoned the logic of subjectivist economics. Somehow, he and Harrod agreed, economists as scientists can make assessments of the total social utility of particular economic policies. Somehow, GNP (or other economic statistics) are mean ingful. They could not say exactly how, but somehow.5 It was a matter of faith. Capital Formation The welfare economists have long argued that if the State extracts a higher percentage of taxes from the upper income brackets, and then 1982 TRICKLE-DOWN ECONOMICS 271 transfers this money to poorer mem bers of society, total social utility can be increased. Robbins demolished the scientific validity of this statement, but his argument has never been taken seriously by economists, since it has so many implications that are unfavorable for the practice of ap plied economics.

On the other hand, advocates of capitalism have replied to the so cialist critics of the rich with this argument: the rich man has most of the food and clothing he can use, once he gets into the highest income brackets. Thus, he will be more likely to invest higher and higher propor tions of· his income as his income stream carries him upward. His "ne cessities" are taken care of early. Then his pleasures are taken care of. Finally, he has money left over. What is he going to do with it? He will be increasingly willing to invest it or give it to charity, the free mar ket economists have argued. The rich man has demonstrated his compe tence in making investments; thus, he acts as a public benefactor in his capacity as investor. What if the civil government at tempts to extract this money from him? He will then spend more time and effort in seeking out tax avoid ance schemes. He will be less inter ested in expanding his income. He will spend more money on luxuries.

For example, a person who was in the 98 per cent tax bracket in England, prior to ldrs. Thatcher's elec tion and the retluction of these con fiscatory top-br~cket tax rates, might have faced the: following decision. Perhaps he had:$50,000 to invest (or about 25,000 pqunds). If he thought he might get '10 per cent on his money-alway& a guess, given the inescapable un~ertainty of the eco nomic future~he could expect an income stream bf$5,000a year. But he would be allowed to keep only 2 per cent, or $lQO, after taxes. Or he could buy a Rolls-Roycefor $50,000 an asset which tends to appreciate over time. Wha~ was the real cost of driving his Roll$-Roycefor a year (not counting gasolline, insurance, and repairs)? The $100 he would have forfeited. Tell $e, if you could drive a Rolls-Roycefor $8.30 a month, plus insurance, maintenance, and gaso line, would youi consider it? So did a lot of rich Englishmen. 6 This, of course, increa~ed the demand for Rolls-Royces, thereby giving the buyer ownership of an appreciating asset. 7 Workers Lack Capital The problem facing British work ers is lack of capital investment. This problem always,faces all workers, but especially the British worker today.

The confiscat(j)ry tax rates have driven private capital into high pay off, high-risk i~vestments, into "off shore" (foreign) investments, which are less easily taxed, and into "con272 THE FREEMAN May spicuous consumption." Is this bad? Economists, as scientists, cannot le gitimately answer this question. It is a welfare question. But individual workers seem to want higher in come, and higher per capita invest ment-better tools-is the way we produce increased productivity. (This, at least, is Mises' contention. s The problem facing a consistent de fender of subjective utility theory is this: How can we divide the abstract idea of total capital-a statistical aggregate-by the total number of workers in a society, and come up with anything meaningful? Prof. Kirzner, Mises' student, has explic itly denied the legitimacy ofjust such a measurement. 9) So the defender of the free market argues that Britain's high taxes on the top income brackets are respon sible for the low rate of capital for mation in Britain. But is this argu ment correct? And if it is, haven't we granted too much credibility to the socialists' argument that the rich control sufficient capital to influence greatly the wealth or poverty of the average citizen?

Squeezing theApex Another problem faced by those who favor high graduated tax rates is this: there are not that many rich people. Also, the kinds of wealth that they hold are not generally cash as sets, but certificates of ownership in equipment, patented production processes, real estate, and similar capital. These physical assets can not often be cut into distributable physical units, except in the case of land. These assets provide a stream of income, so the things the State can redistribute most conveniently are legal entitlements (certificates of ownership) to the future income streams. But as income-seeking investors begin to see what is hap pening to their after-tax income streams, they tend not to reinvest. Without reinvested funds, the phys ical capital base begins to wear out, productivity falls, the income to workers therefore falls, and there is less wealth to redistribute.

Can we make the masses rich by confiscating the wealth of the rich? The socialists have officially argued that significant welfare gains can be achieved for the masses by such pol icies of wealth redistribution. Those who reject this contention point to the small number of wealthy people in capitalist societies. How can hun dreds of millions of people be signif icantly benefited by extracting the distributable forms of wealth held by the handful of super-rich? Debates then go on concerning the propor tion of a nation's wealth held by the richest 10 per cent or 20 per cent or 30 per cent of the population. Is it sufficient to make an impact on the total wealth of society? If this wealth is held in the form of distributable shares, what hap1982 TRICKLE-DOWN ECONOMICS 273 pens to the ownership of these shares after the initial distribution is com·· pleted? Will men be permitted to buy and sell these shares on an open capital market? If so, what is to pre·· vent the creation of a new class of wealthy owners? Will we not see the advent of "a new class"? Isn't the hi erarchy of wealth inescapable in a world filled with people of varying investment talents, organizational talents, and salable skills? Isn't the proper question this one: What is the most socially beneficial arrangement of ownership, private or socialist?

Which kind of hierarchy produces the greatest benefits? (Problem: we are right back to the question of social welfare, with its requirement that we make estimates concerning in terpersonal, subjective utility.) If the free market economists are correct in their contention that there are not enough rich people to squeeze for the benefit of the poor, then "trickle-down economics" has a problem. If the wealth of the rich is insufficient to enrich the poor under socialism, then how can the capital ownedby the richbe sufficientto en rich the poor under capitalism? If there is not enough wealth in the top income brackets to "go around," then why are the investment deci sions of the rich so important for the economic prosperity of the nation'? In short, what good is a trickle, whether the State squeezes the rich, or the rich are allowed to keep their income to invest one way or an other'? Whether the rich pay taxes, or buy tax shelters, or are allowed to keep large ichunks of their after tax income, why should it signifi cantly affect the welfare of the gen eral public? What difference will it make to the man in the street?

Getting Rich In a modern, welfare State, there is only one class with sufficient re sources to pay for all of the govern ment programs: the middle class. In a modern capitalist economy, with its tremendous demand for capital-if only to maintain the tremendous ex isting capital base in the modern economy-there is only one class with sufficient financial resources to maintain the ,capital base: the mid dle class. Middle-class societies have large middle classes. This is tauto logical, but significant nevertheless. Middle-class societies have to look to the middle iclass as the source of permanent, significant social change. Elites have their roles to play, as the sources of innovation, especially in the realm of ideas, but in the final analysis, the success or failure of a particular elite today depends on the fate of its innbvations in the culture of the middle ¢lass. What good ~oes the wealth of the rich do for sodiety? In a free market society, it serViesas a symbol of what efficient, market-serving producers can attain. In a collectivist society, 274 THE FREEMAN May it serves as a symbol of what the ruthless suppression of other peo ple's freedom can attain. It serves as a symbol of what relentless atten tion to bureaucratic forms, or politi cal intrigues, can attain. 10 The quest for the egalitarian so ciety has been a familiar one in ac ademic and utopian circles, but the quest is futile. Hierarchies are fun damental to human societies for many reasons, not the least of which are the varying talents of men. In a world of limited resources-where there is greater demand for than supply of certain goods at zeroprice men must compete for what they re gard as their share ofthe goods.They invariably regard their fair share in terms of certain gifts. or skills that they possess: good looks, strength, wisdom, a university degree, ability to forecast the future, commitment to an ideology, or a hundred other possible attributes.

Because men's skills differ, and because they view the legitimacy of property in· terms of differing moral or legal principles, they cannot agree on equality as a social goal. Equal ity of what? Wealth? But what is wealth? Is it capital? But what is capital? Money? Good looks? Strength ? We cannot equalize wealth without equalizing people. There is no way to equalize people, except by killing them. Men have equal skills only in the grave. People want to increase their wealth. They say they do, and they frequently act to do so. To increase their wealth, they must invest time, or .money, or both in a future-ori ented program of entrepreneurship. They must begin to forecast the fu ture more accurately. They may be forecasting the future demand of consumers on a particular private market. l1 They may be forecasting political shifts in the wind in some totalitarian society. But they have to deal with an uncertain future, with whatever capital they possess at any moment in time.

ResponsibleDecisions The free market economy opens the doors of economic opportunity to all those who believe that they can ben efit themselves by meeting the fu ture (uncertain) demands of the buying public. The free market so ciety does not say in advance who will be successful in the quest for greater personal wealth, nor does it specify the avenues that will offer the highest return on invested funds. The free market society does not even require that successful entrepre neurs affirm a particular ideology or religion. It does require that men abstain from the use of fraud or vio lence against each other in their quest for private gain. The free market society is a con sumer-oriented society. Those who produce what consumers are willing and able to buy at a price they are 1982 TRICKLE-DOWN ECONOMICS 275 willing and able to pay will prosper. The lure of profit is the control mechanism that other members of society have over producers. With out the hope of profit and the threat of loss, consumers would lose their leverage over the decisions of poten tial producers. Yet this leverage is strictly voluntary. Producers are not required by law to produce anything in particular. They are not even re quired by law to be producers at all.

(Vagrancy laws-laws that require people to produce evidence of "gain ful" employment-should not be re gardedas products of a free market philosophy.) But if they wish to en ter the markets as competing pro ducers, they must face the "whip" of the consumers: the threat of finan ciallosses. Consumers Offer Rewards to Prospective Producers By luring people into the produc tion markets, consumers benefit themselves. They tell prospective producers: "If you are more success ful than your. competitors in meet ing our demands in the future, we will make you rich." A society which does not allow consumers to make this offer to potential producers thereby discriminates against the interests of consumers. It takes away the key element in each consumer's quest to lure potential producers into the markets that serve his needs, namely, his legal right to make an offer to an entrepreneur, or a class of entrepreneurs, to make (and keep) a profit from serving his, the con sumer's, wants.

By allowing ipeople to make prof its through market competition, free market societies increase the likeli hood that consUmers will be able to lure into the JP.arkets all those fu ture-oriented 1 producers that the consumers can afford to reward. In fact, given the reality of uncertainty in market acti(>n,and the optimism of producers, more producers will enter the markets than consumers can actually a,"ord to reward. Some producers will,lose money. This in volves waste, hut uncertainty is the cause of this 'waste, not the free market. The ~ee market actually reduces waste py removing the least successful forecasters from the mar ketplace. Losses eventually take their toll. Producers are made responsible by the carrot. and! stick of the market. The larger the offer, the larger the number of futu.re-predicting entre preneurs who Will enter into the ser vice of consuIIlers. If a society tells producers that their efforts, if suc cessful, will be met with higher taxes, then some Plioducers will cease bearing the burdens of predicting an uncertain future. The graduated in come tax discrfminates against suc cessful entrepreneurs; it thereby dis criminate.s al1:ainst consumers. It reduces the lure of profit which con276 THE FREEMAN May sumers would otherwise prefer to of fer producers, in order to get them working for consumers.

Squeezinginto the Apex There are no "sure things" in the hard task of predicting future mar ket demand. The consumers are re lentless. They keep asking: "What have you done for us lately, and what will you do for us tomorrow? And at what kind of discount?" Producers are constantly misforecasting the market. They sustain losses. Even the best of them fail. The "Fortune 500" of one generation bears little resemblance to those of the follow ing generation. Innovation, shifting consumer tastes, price competition, and a baffling number of other mar ket changes can catapult an un known company into the economic stratosphere, or toss another firm into the mud. What benefits consumers is not some utopian (and self-defeating) program to redistribute the wealth of those who occupy a position in the economic apex at any point in time. There will always be an apex. Any political program strong enough to capture the wealth of those in the apex is also a program which will enable political (or bureaucratic) elites to take the place of those who have lost the political battle. After all, that is the goal of political elites: to replacethose who presently occupy the places of wealth and prestige. They adopt political techniques to achieve this re placement.

In too many cases, those presently in the apex adopt political programs in the name of "making the apex re sponsible," or even "making those in the apex pay their fair share," in or der to lock in their existing position. They feel the innovators nipping at their heels, and they turn to politi cal coercion to protect their position from market competition. 12 The Fed eral regulatory apparatus was adopted in the name of democratic justice and consumer protection, but again and again, the chief 15enefici aries (and behind-the-scenes pro moters) of Federal regulation have been the threatened members of a particular industry or professional association. 13 And once a regulatory commission has been in place for a few years, the loudest opponents of deregulation are the senior officials of the largest firms in the regulated industry. Thus, what those in the apex fear most is the threat of their own trick ling down as a result of increased market competition. If they see the possibility of maintaining their long term positions of power and status by means of political manipulation, they frequently take up the cry against "cut-throat competition," and "unfair exploitation of consumer needs," in order to gain a predict able position in the market. Even if this involves higher taxes or more 1982 TRICKLE-DOWN ECONOMICS 277 interference from Federal officials, once they have achieved their mar ket position, they are willing to pay (Le., to put up with less freedom in general for everyone) in order to achieve a relatively secure share of the market. They lose a portion of their economic freedom-the right to compete on an open market-but they are willing to pay this price be cause their proportional share of this general loss of freedom is less (in the short run) than their gains from government protection. Never for·· get: the market does not pay them.

to be ideologically pure; it rewards them for making profits. This is one reason why Benjamin Rogge was so pessimistic regarding the future of capitalism. 14 What benefits the consumers is a. social philosophy which affirms the right of all those who wish to com pete economically for a place in the economic apex to make and keep their profits. By affirming such a. philosophy as a moral ideal-and not simply as a technically efficient means of increasing per capita in·· come-consumers cannot be misled into voting for a political program which would substitute political competition for economic competi·· tion as the pathway into the apex. The consumers, by their decisions to buy or not to buy, determine in a free market social order who will go into the apex of wealth, and who will be forced out. If they abandon the social philosoppy of the free market, they will find j that their economic decisions no lo~ger possess the same influence in c4lling forth the skills and efforts of spppliers to meet their demands. By ~bandoning the free market, consumers transfer a por tion of their sovereignty as economic actors to the $lite corps of bureau crats who ex!ercise monopolistic power as officials of the civil govern ment. Produc¢rs will begin to re spond to the ittcentives provided by the State, ratlljer than to the incen tives offered in open competition by the consumers~ The State will begin to establish the terms by which pro ducers compet~ for a position in the apex.

Trickle-UpEconomics There are limits on the number of people who can be in the top tenth of the income!level. The amount of capital in the whole society is inde terminate. It c~n be large or small. I5 This depends on the willingness of a society's memlbers to save, and on their ability as economic forecasters (entrepreneurs). This means that only a minority ofentrepreneurs will be successful in their quest for a place in the economi~ apex. Only a few will "trickle up" injto the highest income or capital levels. Even fewer will re main there, le~ alone generations of their descendants. They will "trickle up" and "trickle down," depending on their abilities in forecasting fu278 THE FREEMAN May ture consumer demand and meeting these demands at prices lower, or quality higher, than their competi tors. The issue is not the amount of wealth held by the rich. The issue is rather the terms by which they hold such wealth. Are they meeting the demand of consumers, or the de mands of bureaucrats? Are they competing in a free market or in an economically controlled political market? Do citizens exercise control over producers directly, by means of their decisions to buy or not to buy, or do they exercise control indi rectly, through politics, and then (very indirectly) through the politi cians' ability to control the various bureaucracies?

If citizens decide that they should exercise power primarily through political means, they are going to be thwarted continually by the bureau cracy. The great German sociologist, Max Weber, commented on this in the years immediately following the First World War. "Under normal conditions," he wrote, "the power position of a fully developed bureau cracy is always overpowering. The 'political master' finds himself in the position of the 'dilettante' who stands opposite the 'expert' facing the trained officialwho stands within the management of administration. This holds whether the 'master' whom the bureaucracy serves is a 'people' equipped with the weapons of 'legislative initiative,' the 'referendum,' and the right to remove officials, or a parliament, elected on a more aristocratic or more 'democratic' ba sis and equipped with the right to vote a lack of confidence, or with the actual authority to vote it. It holds whether the master is an aristo cratic, collegiate body, legally or ac tually based on self-recruitment, or whether he is a popularly elected president, a hereditary and 'abso lute' or a 'constitutional' mon arch."16In short, the "amateur" pol itician, who may be out ofoffice after the next election, is no match for the entrenched power of the Civil-Ser vice-protected lifetime career bu reaucrat.

Modern Bureaucratic Methods The modern bureaucratic system of administration is far more cen tralized than anything in the past. The old administration by feudal barons or Near Eastern satraps was essentially decentralized. Local in come financed such systems of polit ical. rule. Only the surplus reached the central treasury. Not so with modern bureaucratic methods. "The bureaucratic state, however, puts its whole administrative expense on the budget and equips the lower author ities with the current means of ex penditure, the use of which the state regulates and controls."17 Thus, the expansion of State power over market forces has centralized 1982 TRICKLE-DOWN ECONOMICS 279 the economy in a way that the free market, because of its decentralized. source of financing-the economic power of millions of individual con sumer~annot possibly achieve. On this point, Weber was incorrect and.

Mises was correct: bureaucracy is different from profit management, since the source of the funding is dif·, ferent. 18 The rise of bureaucracy in private industry is always limited by market pressures, since consumer choices determine the fate of private firms. However, when government regulations begin to replace market demand as the source of a firm's sue·· cess or failure, the statist bureau·· cracies steadily recreate in their own image the management structures of private firms.19 Conclusions The hope of people in the eco·· nomic power of the rich to bring prosperity toa society, whether through redistribution or invest .. ment, is a false hope. The hope of a society should be in the willingness of large numbers of future-oriented people to forgo present consumption and to invest. An upper-class society is a future-oriented society, what·· ever the present income level of the bulk of its citizens. 20 When we read, for example, that the Japanese in·· vest 25 per cent of their income, we are not reading about a handful of rich Japanese who are future-ori ented, but about a large segment of the populatiom of Japan. This, un questionably, lS an important aspect of the "econo~ic miracle" of Japan.

The J apanes~ are future-oriented, and have b~en future-oriented throughout t~is century. It has led to the creationj of a huge capital base which has improved the productiv ity of J apanes~ workers. What is sigrlificant is not that rich people invest i a high proportion of their incomes~ but that large num bers of citize~s maintain a steady investment prpgram, whether in the hope of getting rich personally, or only in the hope of having a comfort able retiremellt, or leaving an eco nomic heritag~ to their children. The rich may inde¢d set the pattern. The example they! set as investors is no doubt import~nt indirectly. But un til the advocates of free market eco nomics focus their attention on the decisions of t\le middle class, they will be caughtlin an intellectual trap set for them qy the socialists. They will continue i to believe that what the rich minortty does with its money will "make on break" an economy.

They will continue to have faith in the "trickle-ddwn economy," and the socialists can !always use this faith against the defenders of the market. The critics of the rich can use the emotional appeal of envy-the de sire that no one benefit from wealth against the m+.rket itself, calling for universal redjstribution of private fortunes. 21 They can also appeal to 280 THE FREEMAN May THE spurious catchwords and fallacious doctrines of the advocates of government control, socialism, communism, planning, and totalitarianism cannot be unmasked except by economic reasoning. Whether one likes it or not, it is a fact that the main issues of present-day politics are purely economic and cannot be understood without a grasp of economic theory. Only a man conversant with the main problems of economics is in a position to form an independent opinion on the problems involved. All the others are merely repeating what they have picked up by the way. They are an easy prey to demagogic swindlers and idiotic quacks. Their gull ibility is the most serious menace to the preservation of democracy and to Western civilization.

LUDWIG VON MISES,Bureaucracy jealousy-the naive hope that there really is sufficient wealth held by the rich to increase the per capita in come of everyone by a wholesale confiscation of wealth by the State. The "trickle-down" economists are playing into the hands of the social ists, by providing opportunities for both the envious-"N 0 one should enjoy such advantages!" -and the jealous-"Let the less prosperous enjoy a per capita increase in such advantages!" -to justify the at tempted destruction of the economic apex. And without the lure of the apex, the efforts of the producers will be redirected: from satisfying present and future consumer demand, to satisfying present and future bu reaucratic demand (or satisfying black market demand). This is not to argue that we should not applaud the reduction of taxes in the higher brackets. But our sup port should be a matter of principle, a defense of the rule of law. No eco nomic group should be singled out as "the enemy of the social good,"

and therefore subjected to discrimi natory taxation. But the defense of lower taxes for the rich should not be made in terms of the supposed creativity and future-orientation of the rich, in their role as investors. It should be made in terms of each man's right to become rich, if he chooses and if he has the ability to do so in competitive markets. Our goal should be the creation of a non discriminatory tax structure that symbolizes the commitment of vot ers to the principle of the rule of law, the rights of private property, and the legitimacy of entrepreneurship. Everyone should be permitted to have a shot at the apex. Trickle-down 1982 TRICKLE-DOWN ECONOMICS 281 economics, as an explanation of the wealth of nations, is misleading. It is not what the rich do with their money that matters most; it is what the broad mass of citizens do with their money that shapes the wealth of nations. , -FOOTNOTES1William Greider, "The Education of David Stockman," The Atlantic Monthly (Dec., 1981), p. 47. Mr. Stockman is the Director of the Of fice of Management and Budget.

2Lionel Robbins, An Essay on the Nature and Significance ofEconomic Science (2nd ed.; Lon don: Macmillan, [1935] 1962), ch. VI. Re printed in the United States by St. Martin's. 3Roy Harrod, "Scope and Method of Econom ics," The Economic Journal, XLVIII (Sept., 1938). 4Lionel Robbins, "Interpersonal Compari sons of Utility: A Comment," Ibid., XLVIll (Dec., 1938). 51 have dealt with this theoretical problem at some length in my book, The Dominion Cove nant: Genesis (Tyler, Texas: Institute for Chris tian Economics, 1982), ch. 4. The problem of interpersonal comparisons of subjective utility is perhaps the most far-reaching epistemologi cal problem in modern economics. 6Thisexample was providedby economist Paul Craig Roberts. It is cited by George Gilder, in his book, Wealth and Poverty (New York: Basic Books, 1981), p. 173. 7When Prof. Roberts first offered this exam ple in The Wall Street Journal (August 1, 1978), the figure he used for a new Rolls-Royce was $50,000. Today, that figure is out of date. It is close to $100,000. Price inflation and high de·· mand have raised the stakes considerably.

8Ludwig von Mises, The Anti-Capitalistic Mentality (Princeton, New Jersey: Van Nos trand, 1956), pp. 5,38,87. 9Israel Kirzner,. An Essay on Capital (New York: Augustus M. Kelley, 1966), ch. IV See especially page 120. lOF. A. Hayek, "Why the Worst Get on Top," Chapter 10 of his 'book, The Road to Serfdom (Chicago: Univers~ty of Chicago Press, 1944). llFrank H. Kn~ght, Risk, Uncertainty and Profit (New York:] Harper Torchbook, [1921] 1965). See also ~udwig von Mises, Human Action (3rd ed.; Qhicago: Regnery, 1966), pp. 289-300. 12D. T. Armentano, The Myths of Antitrust (New Rochelle, New York, 1972). 13Gabriel Kolko, The Triumph of Conserva tism (New York:The Free Press, 1966). See also Frederic C. Howe,'Confessions of a Monopolist (Upper Saddle River, New Jersey: Gregg Press, [1906] 1968); How~, Confessions of a Reformer (Chicago: Quadrartgle, [1925] 1967). 14Benjamin Rogge, Can Capitalism Survive?

(Indianapolis, Indi~a: Liberty Press, 1979), ch. 1. 151 think we car" make estimates regarding the value of capiml, in contrast to Kirzner's view, but we make such estimates by means of assumptions that (Lre not strictly economic in nature. See my di~cussion in Chapter 4 of The Dominion Covenant: Genesis. 16MaxWeber, "aureaucracy," in H. H. Gerth and C. Wright MiUs (eds.), From Max Weber: Essays in Sociology (New York: Oxford Univer sity Press, 1946), RP. 232-33. 17Ibid.,p. 223. 18Mises, Burea4cracy (New Rochelle, New York: Arlington Hause, [1944] 1969). 19Gary North, '~Statist Bureaucracy in the Modern Economy,'~ in North, An Introduction to Christian Economics (Nutley, New Jersey: Craig Press, 1973); ch. 20. 20Edward Banfiield, The Unheavenly City Revisited (Bosto~: Little, -Brown, 1974), pp.57-59. 21Helmut Schoeck, Envy: A Theory of Social Behavior (New York: Harcourt, Brace, 1970). Cf.

Gary North, Succ~ssful Investing in an Age of Envy (Sheridan, Jndiana: Steadman Press, 1981), ch. 1. ' Sheldon Richman ~::::=~,,~ THERE is an easy way to tell when a person misses the fundamental point of economics: He or she discusses the subject in the metaphors of warfare and the animal kingdom. This is so common it goes unnoticed. But the significance of using terms of vio lence to describe voluntary ex change for mutual benefit should not be underrated. We're familiar with the terms cut throat competition, predatory pric ing and import invasion to describe processes in which people freely of fer to trade their property at the best terms they can find. How ironic that such processes are couched in these metaphors, while actual violent pro cesses are called "economic plan ning." Nowhere is this more vividly ilSheldon Richman is editor of Competition, published by the Washington-based Council for a Competitive Economy. This article is reprinted from the October 1981 issue of Competition.

?R? lustrated than in the coverage of and comment on the recent spate of cor porate mergers. The Du Pont-Con oco merger last summer set off an hysterical display of economic igno rance that still might find its way into law. Unfortunately, this igno rance is found not only in the writ ing of journalists and antimarket spokesmen, but in the articles and speeches of business spokesmen who themselves have fallen victim to the confusion. Typical of the way mergers have been discussed is this opening para graph from Newsweek's July 27 (1981) cover story (the italics are mine): One prominent banker called it a "feeding frenzy," and last week, as the biggest takeover battle in American cor porate history gained momentum, the description seemed right on the mark. Three giant companies-Du Pont, Sea gram and Mobil-were battling for conCORPORATE MERGERS: METHOD OR MADNESS? 283 trol of Conoco, Inc., the nation's ninth largest oil concern, and the bidding was fast approaching the $6 billion level.

Meanwhile, other cash-rich corporate giants were eying their own acquisition targets and frightened companies scram bled to protect themselves. By the end of the week, the hunters and their prey had stocked up war chests of bank credits worth more than $25 billion-enough to buy Detroit's Big Three automakers with $10 billion to spare-and many analysts predicted that the marauders were prE~ paring for a long-term merger binge of unprecedented proportions. "Having had that first taste of blood," said Larry Goldstein, chief economist for the Petro leum Industry Research Foundation, "it is hard to believe they will pull back." To take this sort of writing seri ously is to believe that firms are ra bid bears preying on defenseless Bambis in a gentle forest, or Attila the Hun pillaging a placid hamlet. If language was ever used to obfus cate and mislead, here it is. Merger by Consent Contrary to popular impression, a merger does not occur by one firm eating another against its will.

Mergers occur when a firm buys a sufficient portion of another firm's stock to enable the first firm to de termine the second's management and policies. The key word is "buys." Before a company can buy stock, the owners of the stock must be willing to sell; only the state and muggers think they may acquire property without the [owner's consent. To complain abol/lt mergers, then, is to complain about the stockholders' freedom to sell their property as they like. But what 'about "hostile take overs"? This, misleading term de scribes merg~rs in which the man agement (or s~me stockholders) don't want a contrplling share to be ac quired by so~eone else. It certainly is not hostile to those who find bids on their stock attractive. Economic historian Robert Hessen made an important potnt about hostile take overs when h~ testified in Congress about conglorperate mergers: If a company remains privately held, the owners tliereby guarantee them selves against la hostile takeover. How ever, if they gp public, that is, if they allow shares of their stock to be traded on public exchajD.ges,then they know that one of the inherent risks of being a pub licly traded company is that someone or some coalition of people can buy enough stock to be able to elect one or more di rectors and ultimately to change the pol icies and personnel of that company ...

There is a variiety of (private) options to keep a company, even a publicly traded company, froJiIl an adverse or hostile takeover without needing to ban con glomerate melj"gers.. . There are much more specific lj"emedies which any good lawyer could riecommend to a company to protect itself from the possibility of a takeover. Another t~ing about mergers that concerns some people is their effect 284 THE FREEMAN May on economic growth. Business Week, for instance, declared in a recent ed itorial that "mergers are not growth." Others say they do not create jobs or make better use of capital. The most fundamental answer to these com plaints is, so what? In a free society, people should be at liberty to trade their property without having to justify it to anyone in any terms. But the answer in economic terms goes further. Two parties agree to swap their property only when each sees prospective benefits as a result otherwise the exchange does not oc cur. Mergers entail the exchange of titles to capital goods, whose price is determined by the market's assess ment of their capacity to produce what consumers want most. One company does not acquire the assets of another unless it expects them to be profitable, that is, produce things consumers will be willing to pay enough for.

To believe that a transfer of capi tal goods from one person to another is unproductive is to miss the point of capital goods altogether. They are not merely physical things; in eco nomic theory, the essential charac teristic of a capital good is its role in someone's plan. As New York Uni versity economist Israel Kirzner writes, A capital good is not merely a produced factor of production. Rather it is a good produced as part of a multi period plan in which it has been assigned a specific function in a projected process of produc tion. A capital good is thus a physical good with an assigned productive pur pose. (The Foundations of Modern Aus trian Economics, Edwin G. Dolan, ed., p. 137) It stands to reason that two per sons or groups can have different plans for the same capital good; one may be more suited to future con sumer demand, (that is, more pro ductive for workers, among others), one less suited. We can't be certain prospectively, only retrospectively.

But we do know that the market tends to reward entrepreneurs who successfully forecast future demand. Mere observers of the economic scene have little standing to say what is and is not productive activity. If they think they know better, let them bid for the resources and execute their superior plans. Another concern of merger oppo nents is conglomerates-firms that make many different products. They have yet to explain why anyone should worry about one firm produc ing both, say, luggage and yogurt. But in expressing this concern, they expose their hidden agenda. You'll note that these same people vigor ously oppose companies' merging with other companies in their own or related industries. This is said to be anticompetitive. If a large com pany creates a new firm in an unre lated industry, it is likely to be ac cused of either wasteful duplication 1982 CORPORATE MERGERS: METHOD OR MADNESS? 285 or unfair competition with the exist ing firms. In other words, anything a company does that breaks with the status quo will likely bring criticism and perhaps an antitrust investiga tion.

And this is the point! Critics of mergers are defenders of the status quo and opponents of the dynamism inherent in the free market. This makes them, in essence, advocates of privilege, for they would freeze the economic system where it is today, shutting out the aspirants and shel tering yesterday's achievers. These critics will tell you they only want to preserve competition, but that is not what they will aCCOIIl plish. Mergers are competitive by nature. Competition is the coopera tive process in which entrepreneurs seeking profit try to predict future consumer demand and arrange pro ductive resources accordingly. When the law stops or hampers this activ ity, it cripples the process and hamls consumers. Freedomto EnterIs the Key The critics' related worry about market concentration is also off the mark. The interests of workers and consumers do not depend on a spec ified number of firms or market structure. They depend on freedom of entry, uninhibited by regulation, taxation, inflation, licensing and pa tents. Moreover, the notion of con centration is inherently arbitrary. It implies that ~n observer categorizes products, then counts the number of suppliers in each category. But the observer's categories are irrelevant to how conS\ilmers, motivated· by personal conslderations, respond to the array of products before them.

Unbeknownst to the observer, con sumers may regard seemingly dis parate produ:cts as substitutes for each other, yanking the rug out from under the concentration doctrine. Consumers, and no one else, ulti mately deterpiine the structure of markets; their shifting preferences guarantee th~t markets are always in flux and that temporary advan tage is the ~ost any producer can hope for. The reasonS for the current wave of mergers are many and complex. Undoubtedly, inflation-which makes acquiring existing assets preferable to },>uildingnew ones-has much to do with it. So does the thick web of reguliations and taxes that inhibit small~r firms. So, no doubt, do Reagan administration hints of "leniency" on] conglomerate mergers (but not on i"horizontal mergers"). The exact re4.sons are not so impor tant here. Th¢ important point is that the market ~s a decentralized, vol untarist infoirmation and decision making process in which people grapple withiuncertainty in pursuit of their well-being. To interfere with this in the Jl.ame of protecting the people is the cruelest hypocrisy. , John Semmens SeDlantic Confusion in Economic Regulation IN ACCORDANCE with the Motor Car rier Act of 1980, a Congressionally appointed study commission is tour ing the country to investigate the consequences wrought by partial deregulation. One of the lines of in quiry the study commission is pur suing deals with the semantic con fusion that appears endemic to the regulatory task.

It is not surprising that there is a considerable measure of uncertainty concerning the terminology used in economic regulation. The Motor Carrier Act of 1980 is, itself, chock full of terms that are subject to varying interpretations. The Act calls for regulation to achieve "reason able profit" for carriers, eliminate restrictions that are "contrary to the public interest," pursue "equitable" treatment of interstate motor carri ers, and so forth. These terms are not clear-cut directives for specific regulatory rules or requirements. Reasonable men may differ in their opinion of how to "equitably" reMr. Semmens is an economist for the Arizona Department of Transportation". 286 solve the issues relevant to the "public interest." That the Act suffers from ambi guity should not be taken as an in dictment of the literary talents of Congress. Legislatures are unable to write unambiguous regulatory laws because of the fundamental impos sibility of the task of governing eco nomic activity by statutory means.

The impossibility of the task stems from some fundamental economic and political realities. Statutes are laboriously arrived at expressions of the consensus of a majority of the people's representa tives. The difficulty in creating a major piece of legislation makes it impractical to modify statutes ex cept at long intervals. The word statute is derived from the same source as stationary. There is an im plied or intended notion of perma nence entailed in the creation of a statute. Unlike commodity prices, statutes cannot be revised on a daily or hourly basis. Because laws must express the consensus of a majority of the peoSEMANTIC CONFUSION IN ECONOMIC REGULATION 287 pIe's representatives, they are nec·· essarily products of compromise. People's views on what constitutes the public interest differ. Juggling divergent views and interests produces legislation aimed at satis fying numerous objectives simulta neously. Some of these objectives will be mutually exclusive. Laws at tempting to accommodate mutually exclusive objectives cannot help being ambiguous.

The Market Affords Options In contrast to statutes which must say one particular thing about the wayan activity is to be regulated, the market proffers numerous op tions. One Congress must enact one law for all. The market, however, can supply a wide variety of solutions to the varied economic needs of the participants. Law requires unifor mity of treatment as a means of pro moting equity. People's material needs are very nonuniform. A clear, concise law that specified one solu tion to nonuniform needs would be grossly inefficient, not to mention fundamentally inequitable. In addition to being diverse, the economy is also dynamic. Needls change over time. The methods of satisfying needs change as well. New technology revises the ways in which the market can satisfy material needs. The conditions under which economic participants operate to ca ter to material needs are frequently changing. Supply and demand for the factors of production fluctuate with changes in weather, political ten sion, consumer taste, and the vagar ies of chance.

Economic activity is not a sphere of human undertaking suitable to comprehensive regulation by statu tory means. Tp.e permanence of stat utes is incompatible with the dy namic, diverse nature of economic activity. The i existing inaptness of regulatory co~trol over motor car riage inspired Congress to attempt "to reduce unnecessary regulation." Perceptive observers could point out that merely reducing unnecessary regulation pqts Congress in a diffi cult spot. The language of the Act would appear to assure that at least some unnece~sary regulation will be retained. The remaining unnecessary regu lations that ~ave not been reduced are to be enforced by the Interstate Commerce Commission in a ''just and reasonable" fashion so as not to "un duly restrain" the market in a way that is "contIiary to the public inter est." Th.e de¢isions on equity have been passed, on to a Commission made up of ~en. These men will be asked to rendjer judgments and make rules based upon their opinions of what is just,! reasonable, and equi table-matters subject to wide var iances in opinion.

Given the latitude granted in the charge to be r "just and reasonable,"

288 THE FREEMAN May the Commission could make arbi trary rules. The power to regulate is the power to destroy. Denial of a rate change or enforcement of a bureau tariff could force some carriers out of business. If the Commission wanted to, it could use the inherent ambiguity of statutory laws pertain ing to motor carrier regulation to ride roughshod over the industry and the consumers who depend on it. If it seeks to be conscientious, the Com mission will become bogged down in minutiae trying to determine if rates are or aren't "compensatory," whether they are "discriminatory," and if they are, whether they are permissi ble as part of a broader scheme of "cross subsidization." When these terms are defined, they are often defined differently. Even if uniformity of definition could be ar rived at, the question of whether the defined act is allowable as a "rea sonable" practice· is still subject to difference of opinion.

The petitioners before the Com mission are rarely very helpful in defining terms. Words and phrases are used in a pejorative fashion. They become weapons to batter one's op ponents in the hearing process. A petitioner will ask the Commission to disallow a competitor's rates be cause they are discriminatory and show undue preference which upsets both rate stability and rate unifor mity. In a future case, the roles might be· reversed, and the original petitioner will have to defend the same acts it railed against in an earlier case. Defini tions of these terms are plentiful and inconsistent. There are two reasons for this situation. First, the terms are always situational in nature. Firms employ a double stan dard. If the other .guy does it, it's "discrimination." If we do it, it's "cross subsidization." "Discrimina tion" is, of course, impermissible. Whereas, "cross subsidization" is so cially beneficial. Pricing practices, which a third party would view as similar, will be defined in diametri cally opposed terms by contending parties.

. Second, the terms are difficult to define because the concepts are more imaginary than real. "Discrimina tion" and "cross subsidization" are so difficult to define because, like leprechauns, only some people can see them. The fact that few others can see them does not stop some peo ple from espousing, at great length, what they eat, what they wear, and where they live-i.e., leprechauns eat cross subsidies in order to maintain rate uniformity. Is the task of economic policy making a hopeless endeavor? Like everything else we've looked at, it depends on how that task is defined. As long as the aim of government economic policy. is to intervene in private transactions for the purpose of imposing trade conditions that the 1982 SEMANTIC CONFUSION IN ECONOMIC REGULATION 289 transacting parties would not have agreed upon themselves, the task of government's economic policymak ing is impossible.

NegotiableTerms In a market economy, all parties have the freedom to negotiate terms of their own transactions. Noone has the authority to impose mandatory trade conditions on anyone else. In such an environment, there is no as surance that the parties can get ex actly. what they want on their own terms. Losers in the competitive struggle find it easier to blame the "unfair" practices of their rivals than to face the prospect of failure. Eco nomic regulation is a manifestation of this response to unfavorable com petitive outcomes. Proponents of government intervention argue that if everyone can be made to conform to "fair" rules, then all can make reasonable profits and survive. In the absence of government in tervention to compel uniformity among competitors, members of the industry are reduced to whatever private agreements they can nego tiate. Rate bureaus and traffic pools are an almost ancient device for pursuing private agreements. Pri vate price maintenance agreements rankle antitrust lawyers, while pub lic price regulation is granted greater acceptance. Our public policies ought to be the exact reverse of what they now are. Namely, private price maintenance agreements ought to be allowed, but nQt legally enforceable.

Government enforced price mainte nance agreements ought to be abol ished. The old cOmfmon law practice in which pooling and price fixing were allowed, but not legally enforceable, has much to recommend it. Mem bers of the motor carrier industry claim they neep to arrange for rates in concert in order to facilitate in terlining. In many instances, this may be true. However, the need to discuss rates 3jnd reach agreements for interlining!purposes does not re quire that the agreements attain the force of law, th~t they be voted upon and collectiyjely imposed on all members of the rate bureau, with the threat of government sanctions for noncompliance. It is the desire to resort to govern ment coercion! that breeds the se mantic confus~on that Congress is now probing. ·]f no firm were forced to adhere to government imposed economic regulfitions, there would be no need to wr~ngle over the mean ings of terms like discrimination or cross subsidy.! As anyone familiar with actual bU$inessoperations must know, the real cost of a particular service is mu~h more complicated than the mere sum of the obvious factors. Firms imay legitimately em ploy apparent jbelow-cost pricing as part of a marl;tet penetration strat egy, as a loss leader, as a connecting 290 THE FREEMAN link in a longer route, as a portion of a larger shipment, and so on. There is no way that a third party can ob jectively assess a rate between transacting parties as "non-compen,;.

satory." Nei ther can the seeming difference in rates between similar moves be objectively labeled as "dis criminatory." In short, the prices charged in voluntary transactions are nobody else's business but the par ties to the transaction. SuggestedRemedies Problems with economic policy will persist as long as the alternative re mains of resorting to force of law to compel trade conformity. Collusion and price fixing would be insignifi cant if there were no legal barriers to entry. Because the public sector has sought to intervene in private economic acti vity, assorted minor market imperfections have been re placed by substantive difficulties. To address the specific question of where we go from here, let us sug gest the following semantic reme dies. The government should define any private voluntary economic transactions as "just and reason able." Any voluntary economic act between consenting adults should be considered "equitable" and "in the public interest." Government should cQp.cern itself with preventing the employment of coercion by criminal organizations or individuals. This is the sphere wherein government can exercise its legitimate police pow ers. Protecting the public from overt and covert coercion in business practices is the most productive realm for government action.

Semantic confusion stems from the lack of focus on what public power can accomplish and on the inherent incompatibility of attempting to control dynamic economic activity through static statutory means. If the government seeks to control mil lions of transactions through regu latory rules, public policy will fail to achieve either justice or efficiency. If the legal effort is focused on main taining a free market system, it can succeed. Creating the legal forms which will protect all free market transactions is a clear and attain able mission. It is free of semantic clutter and accounting headaches. That the Interstate Commerce Com mission should have to examine cost accounting systems, revenue data, industry profitability averages, and the like in an attempt to promote equitable regulations is a laborious and futile exercise. The government really needs to ask only one basic question: Is an economic transaction voluntary? If it is, government has no role to play.

If it isn't, the coercive act should be prosecuted as would any other act of extortion. In this way, government would perform the function for which it was established in this country: defending the people's freedoms. , * EVER SINCE September 1973, when a military junta seized power in Chile, the world has been treated to the rare spectacle of an unexpected restora tion of the market order by military fiat. Socialism with many of its ram ifications was summarily replaced with an individual enterprise order. National borders were opened to in ternational trade and commerce, markets and prices were set free from bureaucratic restraints and restric tions, government learned to live within its means, that is, balance its budgets, the national currency was reformed, and many public enter prises were returned to private own ership. Even in such fields as edu cation and old age insurance, government beat a hasty retreat and Dr. Sennholz heads the Department of Economics at Grove City College in Pennsylvania. He's a noted wri ter and lecturer on economic, political and monetary affairs.

Hans F: Sennholz FREEl MARKETS IN CHILE made way to the private property order. And yet, all these remarkable achievements, admired by the friends of individual enterprise everywhere, are seriously fl$.wed. They were at tained by ordeIt of a military junta and are safeguarded by armed power and might, thatiis, by an authoritar ian state, which is denying basic hu man rights to thousands of its citi zens and repressing important political rights i to all. To most ob servers, Chile atands condemned as an outcast in tl~e family of nations, a pariah country run by generals and colonels who lord over their sub jects. In the world press and the in ternational news media, Chile is a primary targetiof severe censorship and bitter condemnation. The friends (J)f the market order are bewildered and perplexed by the Chilean situation. If they hail the on..

292 THE FREEMAN May restoration of the enterprise system and the restitution of many property rights, they face the biting criticism of being "antidemocratic" and sup portive of a regime imposed by brute force. They are chastised for their ideological bias that allegedly sur renders basic human rights in order to achieve a particular economic or der. But if they choose to disapprove of the Chilean system they find themselves in the uncomfortable company of communists and social ists everywhere, and in agreement with radical critics and commenta tors. Allende Deposed Communists and socialists the world over spurn and despise the military regime because it over threw the Marxist-dominated gov ernment of President Allende. On September 11,1973, the armed forces arrested some 6000 known Marxist activists in the country, including several hundred foreigners. All re sistance by partisans of the Unidad Popular coalition of communist and socialist parties was crushed. Al lende died in the national palace, re fusing to surrender.

Salvador Allende had been the first freely elected Marxist president in the Western hemisphere. As candi date of the Unidad Popular he had won over two opponents with 36.3% of the vote in the September 1970 elections. In the March 1973 congressional elections, the UP had won 44% of the vote. But Allende never won majority control over the legis lature, which kept the Marxist ex ecutive branch at odds with a con gress dominated by the opposition parties. Nevertheless, he proceeded to socialize Chile. He expropriated the U.S.-owned copper companies and ordered wage increases of up to 40%. He imposed stringent price controls and ordered production to be dou bled. He inflated the currency at ac celerating rates. In 1973 inflation reached almost 1000% and the wholesale price index increased 1,147%.1 When the government ex hausted its financial reserves it de faulted on international obligations and sought aid and support from the Soviet Union and other communist countries.

As students of economics would expect, economic chaos soon de scended on Chile. Strikes and dem onstrations were crippling the coun try, and food shortages brought mass exodus from the cities. Farmers stopped producing for fear of either legal nationalization of their prod ucts or illegal seizure by roaming hungry workers. Businesses were failing by the thousands, unemploy ment was soaring, and living condiIJuan Carlos Mendez G., Chilean Socioeco nomic Overview, Santiago, 1980, p. 15; also Chilean Economic Policy, edited by Juan Car los Mendez G., Santiago, 1979.

1982 FREE MARKETS IN CHILE 293 tions were deteriorating every where. In short, the division of labor, which is an essential condition of human existence, was disintegrat ing rapidly, giving way to economic chaos and civil strife. Economic Reconstruction After the 1973 coup the junta headed by General Augusto Pinochet Ugarte hastened to make peace with Chilean businessmen and foreign investors. The nationaliza tion of American copper companies was declared irreversible, but the compensation claims of Cerro Cor poration, Anaconda Company and Kennecott Copper Corporation were settled amicably. A new foreign in vestment law was designed to lure foreign investors by guaranteeing remittance of profits and safeguard ing their property. The government also began to return private ,compa nies, seized by the previous regime, to their owners. In September 1975 Chile conducted a currency reform introducing a new monetary unit, the peso, equal to 1000 old escudos.

Gradually the government budget was balanced and the rate of infla tion reduced. In 1974, prices rose 375.9%, in the following year 340.7%, then 174.3%, 63.5%, 30.3%, 38.9%, 27.5%,and an estimated 10% in 1981. The central bank's stock of money, which stood at some 200 billion es cudos at the time of the coup, rose to 836.7 billion in December 1974, to 3,279 billion e$cudos (or 3.279 bil lion new pesos) in 1975, 9.6 billion pesos in 1976,118.3 billion pesos in 1977,30 ..5 billiQn pesos in 1978, 47.4 billion pesos ill 1979, and 50.3 bil lion in 1980.2 At its best,lsuch statistical evi dence is rather dubious and incon clusive. When i offered by govern ment it is espec~ally suspect of crude political manip-plation and interpre tation. Nevertheless, it may be con cluded withoutl much contradiction that the Pinochet junta indulged in rampant inflation throughout most of the 1970s. It (reported its first bal anced budget in 1979.

When labor!unions all over the Western world i threatened to block shipments to and from Chile the junta hastenedi to make peace with the labor union movement. It en acted the 1979 tlabor code which re stored the right! to form labor unions. But the code also established the right to work !Without labor union affiliation, and made union dues voluntary. It aUowed collective bar gaining although neg<?tiations were restricted to individual plant and company leveE Labor agreements were made leg~lly binding and had to be made fo~ at least two years. Strikes were p~rmitted after a se cret ballot, but Qnlyfor 60 days after which workers would be assumed to 2Encyclopaedia Br4tannica, Books of the Year, 1974-1981.

294 THE FREEMAN May have quit their jobs. The new code immediately led to a number of ugly strikes by unions protesting against the "union-busting" provisions in the code. WelfareStateala Junta The friends of the individual en terprise order who may rejoice about the return of some property to the legal owners and the restoration of some goods markets must not over look other junta policies that were designed to restore and strengthen the welfare state. Soon after the September 1973 coup the regime set out to make the tax system "more efficient and equitable." It pro ceeded to extract a larger share of tax revenue from the "wealthier sec tors." It repealed a great number of so-called "development" laws that were said to discriminate in favor of capital. It eliminated the tax ex emption on undistributed corporate profits, thereby including them in the taxable income base. While it was raising the minimum levels of tax exempt incomes it collected ever higher shares from larger incomes.

While it lowered its real estate taxes on many property units it raised them significantly on more valuable properties. While it lowered most tariff rates to 10%, it raised them on capital goods by eliminating their previous exemption from customs duties. It imposed a general system of monthly tax indexation which made it possible to extract more rev enue from business more quickly. It added a Value Added Tax which made collections from business more efficient and easy to manage. It em barked upon an intensive campaign to crush tax evasion by business men. Altogether, it worked fever ishly "to enhance the equity of the tax system" by redistributing the tax burden from the poor to the more affluent, from workers to business men and capitalists. The Burden Increases It is significant that the fiscal bur den of the junta state has risen markedly since the 1973 coup. In 1977 the gross national product of Chile was estimated at 313 billion pesos. Government revenue amounted to 120 billion pesos, or 38.5% of GNP, which probably came to some 45% of net national income.

That is, the military regime of Gen eral Pinochet is consuming some 45% of all goods and services legally produced in Chile. In 1972, the last full year of the Allende Administra tion' the government reported ex penditures of some 40.689 billion es cudos of a gross national product of 228.64 billion, or 17.8% gross and 21-22% net. Even official junta statistics re veal that economic activity after the junta tax reform in 1974 contracted severely. In 1975 GNP declined by 12.9% and output per capita by 1982 FREE MARKETS IN CHILE 295 3Juan Carlos Mendez G., ibid., pp. 40, 41. 4Ibid., p. 71. Bitter Fruits It was no surprise to the impartial observer that in 1981 the Chilean economy ran into new trouble, the worst in its eight years of "restora tion." Thousands of enterprises went 14.4%.The latter remained below the 1972 per capita product until 1980. 3 Transfer expenditures have changed little since the Allende Ad ministration. However, the source of revenue probably changed signifi cantly. While Allende supplemented his tax revenue with generous help ings from the printing presses (40.9% of 1972 spending), the generals were laboring successfully to rely in creasingly on taxation. Allende was seizing income and wealth from the middle classes, the primary victims of inflation, while in 1978 Pinochet was extracting ever more revenue from businessmen and capitalists.

bankrupt, min~s and factories were closed and far~s sold at public auc tions. Many banks and financial in stitutions are i~solvent; the govern ment had to sa\j'eeight in November. Unemploymen~ is soaring and is ex pected to exce~d 20% in 1982. Ac cording to Canlinal Raul Silva Hen riquez, head i of Chile's Roman Catholic Churcn: "I could be wrong, but never in my long life have I seen such a disastrous economic condi tion." Government economists blame the disaster on the ,world recession with its slump in c~mmodity prices, in cluding Chilean export prices for copper, timber, fresh fruits, and so on. But critics ppint out that the mon etarist policies ,bfthe economic team called "the Chicago boys" (because many studied at the University of Chicago under ,Nobel Laureate Mil ton Friedman) contributed to the di saster. The monetarists insist in af fixing their national currencies to the U.S. dollar whi~h, in their belief, af fords internatiQnal monetary stabil ity and order. They fixed the peso dollar exchange rate. at 39 to 1 in 1979 and then I clung to it although Chilean prices ~ubsequently rose 60% while U.S. prices rose less than half that rate.

In time the peso became greatly overvalued, w»ich did double dam age. It made Chilean products more expensive abrofid, while it made im ports cheaper. The overvalued peso Pinochet (1978) 172.75 179.20 67.58 341.56 456.12 51.34 1,268.55 SocialSpending4 (Millions of U.S. 1976 Dollars) Allende (1972) 242.36 41.14 156.20 372.75 502.98 17.91 1,333.34 Health Social Asst. Housing Welfare Education Regional Dev. Total 296 THE FREEMAN May brought devastation to Chilean ex porters. Hundreds of small mines and smelters were forced to close, throw ing thousands of miners out of work. But at the same time Chilean con sumers went on an import binge, buying foreign cars, home appli ances and television sets. The binge was financed primarily by foreign credits extended to Chil ean banks and consumer-finance companies. Chile's foreign debt, which for years had been the con cern of foreign lenders, being the second highest per capita in the world after that of Israel, increased by $4 billion in 1981, to $15 billion. Under President Allende Chile had gone bankrupt with a debt of just $3 bil lion.

Many Chilean banks are in grave difficulty today. The deepening recession is frightening foreign bankers, causing them to go slow with new credits. They are begin ning to have second thoughts about Chilean lending practices and on the future of the junta order itself. Struggling to survive the liquidity pressures the Chilean banks have raised their interest rates on 30-day loans to 4.6% a month, which is has tening the demise of many indus trial and commercial enterprises. For a while there was a feeling of hope and optimism, which came with the restoration of some features of the market order and its easy access to the world credit markets. Moreover, the peso pegging to the dollar ala monetarist recipe permitted the Chilean people to live far beyond their means. But, as always, over consumption can only be temporary; it must come to an end as soon as the limits of credit are reached. It is obvious that Chile has reached its limit and therefore faces the stren uous task of consolidation and re payment. Chilean levels of living must fall not only by the rate of pre vious overconsumption, but also by the amounts of necessary repay ment. The deterioration in living conditions now clearly visible throughout Chile is putting new strains on the credibility and popu larity of the junta regime.

Transgressions Against Human Rights To most observers of the Chilean dilemma such economic delibera tions have much lesser import than the consideration and observation of basic human rights. American lib erals who may even be tempted to applaud the restoration of the Chil ean welfare state and the redistri bution of income through progres sive taxation, are objecting strenuously to the junta denial of human rights and political rights. To them, property rights must always give way to the political rights of democratic majorities. If a popular majority acting through a demo cratic election process desires to seize 1982 FREE MARKETS IN CHILE 297 income and wealth from entrepre neurs and capitalists, or wishes to control prices and wages by political force, no property right must stand in their way. The political rights to seize and confiscate private property must be supreme. The junta's return of some business property seized by the Allende Administration ob viously violates their democratic maxim.

Property rights actually are basic human rights. They are derived froni the God-given right to life that must be sustained by man's labor and ef fort. To deny the right to the fruits of one's labor and effort is to deny his right to life. To create a political right to seize or confiscate private property not only negates this basic right to sustain life through labor and effort but also creates an insol uble conflict. When political rights are pitted against property rights, social conflicts arise that cannot be solved by majority vote. On the contrary, a society bent on seizing and confiscating the prop erty of its minorities must brace for a bitter economic, social and politi cal struggle not only with its minor ities but also among the benefici aries themselves. Ugly political battles. are likely to erupt about ac cess to the public trough at which the beneficiaries hope to partake of the transfer. The magnitude of the transfer tends to determine the se verity of the battle. When economic transfer by pol~tical might finally assumes ultimajte desperate signifi cance to the vi<etims as well as the beneficiaries, the political battle tends to erupt into bloody confron tations. When $ociety disintegrates into fighting mobs, the time has come for Caesar as t~ bringer of peace.

Political DictatOrship Thinkers and writers who would deny property rights or create polit ical rights over private property, are the ultimate heralds and harbingers of dictatorship. :Most nations of the world are led bYidictators of one color or another because they worship po litical might thiat negates property rights. To the~, political freedom means the right to seize and plun der, to inflict harm on each other by majority vote. Jt does not matter whether they ate guided by hatred, envy, greed, resentment, or merely by popular transfer ideologies; they all are heading toward the final bat tle in the streets where the biggest guns determine! the outcome. Human tragedy reaches its cli max in civil stIjife. All the political transgressions committed in years of peace are mere trifles compared with the evils stalking the streets in re volts and revolutions. Their out come does not ~aterially change the transfer system but merely read justs the order at the public trough.

For as long as political rights negate property rights and the transfer ide298 THE FREEMAN May ology leads men to prey on each other, the conflict will rage on in one form or another. The military coup of September 1973 was the first experienced by Chile in 49 years, which in South America was a long record of mili tary neutrality in political affairs. Chile was going from crisis to crisis, with chaos in the streets, daily dem onstrations, strikes, and bloody riots. There was hunger, deprivation and desperation in the homes and illegal seizures and confiscations of prop erty. For many people these events were raising the question of sur vival in Chile. Under such condi tions a few individuals may turn their backs on society so bent on self destruction, and emigrate to safer shores. But most people do not have this opportunity for lack of mobility, flexibility, knowledge, or the neces sary means. Moreover, even if they would want to leave their country, they are not welcome abroad. In des peration they may call on the armed forces to restore order and social co operation. When the military finally strikes, the people usually welcome and hail it as the restorer and guardian of peace.

For the generals the coup may be a patriotic duty which they reluc tantly assume in order to save the country. The multitudes may ap"" plaud their courage and devotion to duty, and admire their example of leadership, which in time may actually corrupt them and finally de stroy them. After all, they are not intellectual leaders who through pa tient teaching and preaching can change the hearts and minds of the people so that they discard their eco nomic and social conflict notions and embrace the philosophy of individ ual freedom and social harmony. The generals themselves usually cling to the very ideas that are tearing soci ety apart. They, too, favor economic redistribution by political force. But they want it in an orderly fashion without the fighting in the streets. The Chilean junta immediately re constructed, with minor variations, the Allende transfer-conflict system. Changing of the Guard A junta regime usually comes to a violent end when it loses the support of public opinion. When economic conditions deteriorate again for any reason, or when public sentiment strenuously disapproves of the ben efit order at the public trough, a vi olent reaction is likely. It may come from another general or colonel who senses the junta loss of popularity and, when successful, promises to be carefully guided by the popular will.

Some juntas may even resist the temptation and corruption of power and relinquish it as soon as they sense a loss of public support. They may return the instruments of polit ical power to the democratic trans fer state and then wait patiently for 1982 FREE MARKETS IN CHILE 299 the coming chaos when they will be needed again. By their timely with drawal they manage to safeguard the public esteem for the armed forces as the ultimate guardian of law and order. The seizure of power by the mili tary always entails the risk of vio lence and bloodshed. The risk is minimal when the administration in power has lost all respect and sup port by the disillusioned public. But it is serious as long as some ele ments of public opinion continue to give the administration their loyal support. Many communists and so cialists held to their Presidente to the bitter end. Thousands of them were incarcerated for several years, hundreds lost their lives, many were later expelled from the country. Po litical parties were dissolved, the news media placed under censor ship, the public subjected to rigid curfew.

In every case of civil rebellion the victor is quick to point at the sum total of social benefits created by his rebellion. When communists or so cialists prevail they may speak of a liberation of the proletariat from capitalist exploitation. When de fenders of the private property order prevail they may point at the resto ration of private property and free markets. Both invariably propose to weigh their open violations of hu man rights against the e~onomic and social rights which their violent actions are presumed to have gained. Both regularly l conclude that their actions were justified by the sum to tal of benefits tQ society. There surely fs such a scale in the realm of politic.l rights that negate individual rigqts, especially prop erty rights. But, by its very nature, it is an arena of perpetual social conflict that ultimately brings forth the strong man~ A society that rou tinely weighs political rights against property rights and finds them wanting ultimately will weigh the loss of human lives in revolution and rebellion again~t the sum total of collective benefits.

There is no s~ch scale in morality which is religi~n with its face to ward man. No: sum total of social utility and bel1efit whatever can outweigh the death of one human being or any suffering inflicted on him. No man oriassembly of men can secure well-being or happiness by violence against a single individual. Violence breeds violence and is an offense against God even when com mitted in the name of majorities. A Shadowy Future The ideological forces of social and economic conflict that led to the 1973 disintegration' of Chilean society continue to be alive and active at home and abro~d. Under their spell the junta hastened to restore the conflict system: that forcibly redis tributes income and wealth from the 300 THE FREEMAN May more productive members of society to its favorite beneficiaries. In fact, the junta's fiscal policies were de signed to impose ever larger bur dens on the business community, which for most of the seven years of junta regime has lingered in stag nation or recession. Wages· and sal aries throughout most of the decade have been lower than before. Some ·20% of the working people now are walking the streets in idleness and despair. Foreign credits have been squandered and must now be repaid.

And there is not a single voice of dissent that is explaining the road toward a brighter future. Surely, the political dissidents who escaped or were expelled are vocal enemies of the junta. Many Chris tian Democrats now are making common cause with the parties of Allende's former Marxist coalition. The Communist Party and the So cialist Party in exile are calling upon the people of Chile to continue their armed struggle against the junta. They have nowhere to go, they are told, but the Unidad Popular. All along, the "Chicago Boys" in the inner councils of government are keeping in touch with the world by writing glowing reports and pro jections about growing GNP's and rising incomes from work and pen sions. But the results of their efforts are surely disappointing. It seems that they are rejecting or ignoring the fruitful lessons learned in Chicago, but are applying diligently the errors of monetarist thought.

General Pinochet and his men are probably evaluating the situation correctly: there has been little or no progress in economic and social thought since 1973. The only dis senting voice they. hear is abroad, that of the Unidad Popular. They still loathe it and will not bear it. Therefore, they have been clinging to the reins of power as long as pos sible. And in lieu of promoting meaningful changes in social ideol ogy and political morality, which alone would change the course ofthe future, they have busied them selves-as well as Inany jurists and lawyers-with reshaping the form of government by rewriting the consti tution. In 1980, on the seventh an niversary of the military coup that overthrew the Allende government, they submitted a new constitution to a national plebiscite. Of the votes cast, 67.5% approved of the consti tution, which strengthened the presidential powers, created an eight year nonrenewable term for the president, and restored the bicam eral Congress composed of a Senate and a Chamber of Deputies. General Pinochet was elected the first presi dent.

But no matter what we may think of the Pinochet junta we must not forget that the generals aiways have been, and continue to be, viscerally opposed to the Unidad Popular anti1982 FREE MARKETS IN CHILE 301 U.S., pro-Soviet attitude. They are looking upon Chile as a Christian nation and a loyal member of West ern society, a willing friend and ally of the U.S. They are resenting American criticism of their barracks rule and denial of human rights. Af ter all, their intentions were so no ble, restoring law and order and re turning their country to the Western camp. Continuing Threats Dark clouds are hanging over the future of Chile. Ideologies of eco nomic and social conflict are tearing at the roots of society, straining so cial cooperation and the division of labor. The doctrines of conflict are permeating every aspect of social life. Similar conflicts springing from identical causes are visible also in neighboring countries, which is ag gravating the uncertainties of life in Chile.

Old wounds are festering and may break open at any time. Territorial disputes with both Bolivia and Peru frequently raise border tensions and threaten to erupt into open hostility. Bolivia wants access to the Pacific Ocean which it lost to Chile in the War of the Pacific in 1883. Peru de mands the return of its provinces lost in the same war. Chile's powerful neighbor, Argentina, is claiming territorial rights to the islands of Picton, Lennox and Nueva, south of the Beagle Ch~nnel. They all are awaiting their opportunity for mov ing on Chile, which often sends the Chilean governIjrlent scrambling for more planes an~ tanks from the U.S. and other coun~ies. Chilean weak ness through social disintegration may someday offer this opportunity. Ideas and beliefs are the invisible powers that govern man's actions. Ideas of economic, social, and na tional conflict h~ve made their way in silence and i swept around the globe. The Chile~n situation does not differ materially from that of other countries.

There is an alternative other than Unidad Popular and its armed struggle agains~ the junta. There is the road to individual freedom, which step by step retr~eves the freedom of each and every ~ndividual to pursue his own good, in :Pis own way, as long as he does not: deprive others of theirs. On that road, no political party or pressur~ group seeks to en rich its membens at the expense of others. There ib no transfer pro gram, in fact, 1\0 government that seizes income and wealth from some people in order to benefit itself and others. There iSfIlo public trough at which political Iiight and might de termine not only who shall feast at the trough but ~lso who shall labor to keep it ever well-filled and boun tiful. There is harmony and peace on the road to freedpm. i Steven N. Spetz The Day Welfare Hit the Classroom I HAVE OFTEN HEARD it expressed that the classroom should be a small window upon life and prepare stu dents for the world they will soon enter as adults. I accept this idea, and introduced a magnificent scheme of marking that would alert stu dents to economic factors they should appreciate. When I gave back a ma jor assignment, the students noted some peculiar entries on their pa pers.

"Sir, what does it mean, minus six marks for the Student Pension Plan?" "Well, Bob, the Student Pension Plan is one that I invented similar to a government pension plan. You Mr. Spetz teaches Economics at Bayridge Secondary School in Kingston, Ontario. This article, prepared some years ago for a teacher's magazine in Canada, merits further distribution. put aside some of your marks each week into a fund which will be available should you decide to retire toward the end of the school year." "Do I get them back?" "Yes, but in the meantime infla tion will have eroded the marks ter ribly, so you will probably get back only a small part of what you set aside. Yes, Mary?" "Sir, what does it mean, minus four marks for Unemployed Student In surance?" "Ah, good question. Suppose you are absent or for some reason fail to hand in your assignment? Then, you are authorized to draw marks from the Unemployed Student Insurance Fund to make sure you don't suffer a drop in marks."

''But what happens to my marks if THE DAY WELFARE HIT THE CLASSROOM 303 I do all my assignments-dol get my marks back?" "Certainly not. The marks are needed by the less fortunate." "Sir . .. Fred got a 55% on his as signment and he didn't even do it!" "Yes, I know . You see how the Unemployed Insurance works? Fred didn't do anything, but we can't let him fail, so I authorized him to draw 55 marks from the Insurance Fund." "But the reason he didn't do it was he went to the hockey game. He said to ---- with your assignment and . .." "It doesn't matter. Each of us owes a duty to our neighbors to see that they encounter no hardships. It's their birthright." "Even if they don't do anything?" "Perhaps he was unable to do it." "Sir, what would happen if we all didn't do the assignment? I mean, suppose we all just asked for 55 marks, what would happen?" "Tsk, tsk, Tom. I assume that each of you wants to work, that you seek work and savor it. I know none of you would deliberately tum down the opportunity to work."

"Sir, what does it mean, minus 5 marks for Student Health Plan?" "That is in case you are ill for a prolonged period of time. The Plan will pay you 60 marks a week while you are convalescing." "Why didn't you deduct any marks from Hilda for the Student Health Plan?" "She comes from a low-income family. Can't expect her to pay any thing, can you?"! "Sir, you tooki fifteen marks from me for Student Income Tax, but you only took four frQm Ralph." "Well, you are!in a higher bracket than Ralph. You! had a mark of 86% while Ralph only had a 57%. You should pay more]than he." "Why?" "Just because it always works that way." "Sir, I had a mark of 58%. After you deducted Student Income Tax, Student Health Plan, Student Pen sion Plan, and Unemployed Student Insurance I ended up with only 39%. I passed the assignment but all your deductions mad~ me fail. I would have been better!off if I hadn't done it at all like Freet. He'fliidn't do any thing but got a higher mark than I did."

"Yes, unfortunately there are a few cases where it ooes work out like that. Some people are financially better off not \\forking than work ing." "You mean it'~ better to refuse to work rather than work and get a low passing mark?" "Yes, but aga~n I want to empha size that I know each of you would not want to tak¢ advantage of such an idea. The thrill of the job alone should drive you onward even though you end up with fewer marks. Be sides, you wouldm't feel morally right knowing you were drawing marks 304 THE FREEMAN from your fellow students when you were perfectly capable of getting them yourself." "Sir, do people really live like this?" "Certainly, it's part of the great social scheme of life." As the bell rang, I knew I had suc ceeded beyond my utmost dreams. The students were actively talking about incorporating so they could defer taxes, bringing in large num bers of immigrant students to do their assignments at a low pay scale while they collected from the Un employed Student Fund year around, ..;i; Market Pricing applying for government assistance to pay their Student Health Plan premiums because they came from low-income families, and had started a Strike Fund to keep their marks up while they were busy picketing the school for higher marks, a four day week, and a student drinking lounge.

As I watched them happily think ing of ways to obtain extra marks from the Unemployed Student In surance Fund by enrolling in the plan under more than one name, I re called the words from the musical, My Fair Lady: "By George, she's got it!" ® IDEAS ON LIBERTY IN a maI:ket economy of private ownership, the most desirable use for the land (and other means of production) can be, and is, quickly decided by the highest bidder. If the beet grower outbids the office builder, the land is used for beets. If he has miscalculated and can't at least cover his total costs by the sale of his product to willing buyers who have freedom of choice, he goes broke-and some other person who is search ing for profit-making opportunities replaces him and produces whatever product he thinks the consumers will buy. Thus the consumers, by their buying or abstention from buying, will make sure that the land is used for a purpose that pleases them.

But under total socialism, there is no price and no market for any capital good, including land. No person is free to produce what he thinks the consumers would prefer. Thus all land, all natural resources, all building nlaterials, 'and all capital of any description must be arbitrarily assigned to whatever purpose happens to please the planner. Literally, there is no other alternative in a command economy. DEAN RUSSELL, "Play Store Economics"

THE RELICS OF INTERVENTION: Clarence B. Carson 2. Progressivism SOME of the major relics of govern ment intervention are still with us today as a result of the Progressive movement of the early twentieth century. The Progressives promoted and brought about intervention in three distinct ways. (1) They made the fateful link between the idea of progress and positive government action. (2) They adapted socialistic reform to the A·merican framework as gradual and mounting govern ment intervention. (3) They suc ceeded in getting some of their re forms enacted into law either as particular programs or constitu tional amendments. The Progressive movement began to make its political impact in the first years of the twentieth century and had largely spent itself by 1920. Some would date the beginning of that impact from 1901, when TheoDr. Carson has written and taught extensively, spe cializing in American intellectual history. He is the author of several books and a frequent contributor to The Freeman and other scholarly journals.

dore Roosevelt became President af ter the assassiqation of McKinley.1 The end of its thrust as a national movement can! be dated from two events which occurred in 1920: the election of WarIjen Harding as Pres ident vowing to bversee a "Return to Normalcy," and the adoption of the 19th Amendmeqt, which was the last ofthe Progresshte amendments to the Constitution. The peak of ;the movement was reached in 1912 when Woodrow Wilson, an avo~ed progressive, was elected Presid~nt as a Democrat, when Theodore Roosevelt came in second to him as the nominee of the Progressive Patty, and when Wil liam Howard T~ft, whom Roosevelt had chosen to succeed him in 1908 because of his iprogressive tenden cies, came in t~ird as the Republi can candidate. Most of the legisla tive triumphs which can be attributed to the Progressive move ment came during the years 1913 1916. 305 306 THE FREEMAN May Neither the public in general nor very many intellectuals in particu lar associated the idea of progress with government intervention in the economy before the twentieth cen tury. On the contrary, the prevail ing ideas in the nineteenth century opposed government intervention as retrogressive and reactionary. Polit ical and economic progress were to be attained by restraining govern ment and freeing the energies of peoples. The Progressives, then, ef fected a major change in thought by giving currency to the notion that progress could be made by forceful government action.

The Idea of Progress How important this change was for the thrust of intervention becomes clear only when we recall the lode stone-like attractiveness of the idea of progress over the past several centuries. Since the seventeenth century, European thinkers had be come increasingly enamored of the idea. Indeed, the belief that progress was .taking place goes back further than that. Men of the Renaissance believed that they were progressing far beyond their Medieval forebears. But their progress they attributed mainly to the recovery of the learn ing of the Ancients. Seventeenth-century scientific discoveries, however, began to point in a different direction. Thinkers were. now discovering laws and relationships not only unknown to thinkers of ancient Greece and Rome but also some of which ran counter to their assumptions, such as that the sun moves around the earth and that freely falling bodies accelerate at a uniform rate regardless of weight. However much their think ing might be buttressed by the ear lier work of Greek and Roman thinkers, the Moderns were now going well beyond them. They were making progress. (That there were still champions of ancient learning as .late as the eighteenth century to contend with the proponents of mod ern progress is at least suggested by Jonathan Swift's satire, The Battle of the Books, published in 1710.) The idea of progress gained in creasing sway in the course of the eighteenth century, especially among intellectuals. The idea of an orderly universe which was greatly bol stered by the findings of Kepler, Galileo, and Newton,among others, was now being extended into the so cial, political, and economic realms.

Everywhere men studied they found signs of underlying laws, laws sub sisting, as they said, in the nature of things. The belief took hold that by gaining knowledge of this natu ral order great progress could be made by men by bringing their be havior into conformity with it. There were many indications, too, that something like this was actually taking place.

1982 THE RELICS OF INTERVENTION: PROGRESSIVISM 307 In the nineteenth century, belief in the idea of progress was well on its way to becoming an article of faith. Cities began holding great fairs and expositions at which displays of the latest marvelous achievements from around the world could be made. Even so, a major change was occur ring in the ideological underpin nings of the idea of progress. EvolutionaryTheoriesGain in Social Impact Evolutionary theories, particu larly the biological theories of Dar win, were being substituted for or being used to support older ideas of progress. Herbert Spencer made the social interpretation of evolution that had the greatest immediate impact. But progress, on this view, was the result of the working out of natural laws for the development of society. Governments could not intervene so as to alter the course of develop ment. As William Graham Sumner, Spencer's American disciple, de scribed the situation, the Western world had moved into an industrial stage. It was a stage which, he be lieved, was bringing great progress.

The notion of intervening in it so as to change its course was absurd. "We have to make up our minds to it," he said, "adjust ourselves to it, and sit down and live withit."2 My main point, however, is that by the early twentieth century Americans generally had come to believe in progress. It had become, or was becoming, a word to conjure with and was re~dy to join that other word, "freedom:," which all politi cians who would succeed must avow as the aim of their programs. It was especially important for those who would use the power of government to $ake social improve ments to identifY their programs with progress. After ~ll, the only feasible justification for' making their inno vations was th3it they would lead to improvement or progress. Yet their path was doubly blocked in the late nineteenth centmry. In the first place, the case against intervention had been made by the Spencerians, who had made the i earliest and most plausible application of the Darwin ian theories. In the second place, much of socialist thought, which was the main sourc~ both of the critique of contemporary society and of the vision of a bett~r one, was equally set against goyernment interven tion. Karl Marx, for example, was so convinced of th~ futility of amelio rative measures achieved by gov ernment intervention that he be lieved socialism ¢ould only be reached by violent revolution.

The work of overriding these the oretical obstacl¢s to reform by way of government i:rp.terventionhad been largely accompl~shed before the Pro gressive movernent was well under way. It almost certainly had to be. While a goodly. number of thinkers 308 THE FREEMAN May contributed to the undertaking, Les ter Frank Ward, an obscure sociolo gist, made one of the most direct as saults on the Spencerian position. (American thinkers could, and did, usually ignore the Marxian argu ment against ameliorative reform.) Ward granted that in times past social change as well as biological changes had taken place without being consciously directed. But, he proclaimed, a new stage in evolution had now been reached as a result of thousands of years of movement in its direction. The new stage was the "advent with man of the thinking, knowing, foreseeing, calculating, designing, inventing and construct ing faculty, which is wanting in lower creatures .... " This development re pealed "the law of nature and en acted in its stead the psychologic law, or law ofmind."3 By the Mind of Man The vision that Ward held forth was one in which man could use the creative powers of his mind to take over the direction of social develop ment. By so doing, he could bring nature and natural law to heel, or, as Ward put it: ... When nature comes to be regarded as passive and man as active ... , when human action is recognised as the most important of all forms of action, and when the power of the human intellect over vi tal, psychic and social phenomena is practically conceded, then, and then only, can man justly claim to have risen out of the animal and fully to have entered the human stage of development. 4 In short, the path to progress now lay through man's taking over and directing the course of social devel opment.

It should be pointed out, however, that neither Lester Frank Ward nor anyone else has proved that govern ment intervention in general can produce progress, nor even that par ticular interventions will necessar ily do so. Indeed, the intellectuals Ward, Richard Ely, E. A. Ross, John Dewey, Walter Rauschenbusch, Thorstein Veblen, Herbert Croly, Oliver Wendell Holmes, Jr., Louis Brandeis, and others-were gener ally strong on assertion and weak on proof. By and large, they were en thusiasts, caught up in the vision of making all things new, eager to in novate, aware, perhaps, that most men do not so much require proof as vigor in assertion, and bent toward joining their word visions of the fu ture to political power. In any case, they prepared the way for linking the idea of progress to government intervention, not because they had proved the connection by evidence and reason, but by laying their claim on the basis of assertions about what could be accomplished. The politi cians did the rest.

Even though the linkage was made by little more than intellectual sleight of hand and political bom1982 THE RELICS OF INTERVENTION: PROGRESSIVISM 309 bast, it was nonetheless a political master stroke. Long after the Pro gressive movement had been rele gated to the pages of history reform ers continued to give impetus to their measures by claiming they were progressive and by denouncing those who opposed them as reactionaries desirous of returning to the unsa. vory past. Today, the linkage is a relic, a relic of intervention. Actually, the linking of the idea of progress to government interven tion was one of the ways that social istic reform was adapted to the American framework. It was, how ever, such an important element of that effort, and so distinctive, that it has been accorded separate discus sion. What needs discussing about the adaptation is how the Progres sives smoothed the way and pre pared Americans for the reforms and interventions.

AmericanizedReform Most of the basic reform ideas were promulgated by the Populists in the 1890s. However, they advanced them as immediate demands and made it appear that if they were adopted a virtual revolution would be accom plished. Their arguments were cast in class language; their denuncia tions of wealth, banking, and gold were clearly demagogic; their pro posals were rough hewn and heavy handed. Their monetary panaceas were at considerable remove from programs the generality of Ameri cans were likely to find acceptable. By contrast, j Progressivism was much more attuned to the American political motif. iDemagoguery there might be, but it:was toned down to a level that made it little different from the approach of !mostpoliticians. The class struggle w~s muted; wealth and property were riot attacked directly; the utopianism of populism was kept out of sight, and reform and gradual change were t~e only tickets pre sented.

However m~ch Populist ideas might be drawn from intellectuals, they had about them the aura of Kansas farms a:p.dChicago factories. Progressivism, ion the other hand, brought to th~ fore the reformer dressed in his! Sunday best, so to speak, ready to!take up his place in the American !mainstream. While Richard Hofstadter held that Popu lism merged into Progressivism in the early twentieth century, he de scribed the differences between them this way: "Populism had been over whelmingly run~.l and provincial. The ferment of the Progressive era was urban, middle"'1class, and nation wide. Above al~, Progressivism dif fered from Pop~lism in the fact that the middle classes of the cities not only joined the trend toward protest but took over ita leadership."5 Both Theodore Roosevelt and Woodrow Wilsqn, the most promi nent political leaders of a progres310 THE FREEMAN May sive bent, illustrate the point well.

They were of older American stock, respectable, and had their political careers in the established political parties. Roosevelt was a Republican, until his temporary break in 191Q, and Wilson was a Democrat throughout, as befitted a man who was born in Virginia and who grew up in the South. They were both col lege men, trained at old prestigious universities, Roosevelt at Harvard and Wilson at Princeton. Both, too, went to law school, Roosevelt at Co lumbia and Wilson at the Univer sity of Virginia, though neither was attracted to the practice of law. They were both historians, of sorts, though Roosevelt had no extensive formal training in the discipline in contrast with Wilson, who obtained a Ph.D. at Johns Hopkins. In short, they were nurtured in the most prominent of American institutions and were suc cessful members of the prevailing American society. To put it another way, they were ideally suited by background and training to help make reform re spectable in America, and they did.

Both were attracted to reform ini tially in opposition to what they took to be the corruption of American ideals and political principles. Roosevel t had been only a few weeks in his first political position as a member of the New York legis lature when he moved to have a well known judge impeached. The judge had made favorable rulings for some financiers and, although the im peachment move failed, Roosevelt did manage to make known his be lief that the legislature was being corrupted by what he called the "wealthy criminal class." One of the first acts Wilson man aged to get through the New Jersey legislature after he was elected gov ernor in 1910 was a Corrupt Prac tices Act. He also managed to get direct primaries instituted, a mea sure touted as "returning the gov ernment to the poeple." Such reform did have the appearance, at least, of being an effort to restore American ideals rather than to make radical changes.

"National Need" Comes First But both Roosevelt and Wilson, and Progressives in general, were something much more than simply reformers bent on rooting out cor ruption. They had hold of the vision of using the power of government to change the direction of the develop ment of America. What Roosevelt sought, according to Richard Hof stadter, was "A strong centralized State, extended government inter ference in economic life, freedom of politics from concern for special in terests .... "6 As Roosevelt himself stated it in his call for aNew Nationalism: "The American people are right in de manding that New Nationalism, 1982 THE RELICS OF INTERVENTION: PROGRESSIVISM 311 without which we cannot hope to deal with new problems. The New Na tionalism puts the national need be fore sectional or personal advan tage .... This New Nationalism regards the executive power as the steward of the public welfare. It de mands of the judiciary that it shall be interested primarily in human welfare rather than in property, just as it demands that the representa tive body shall represent all the peo ple rather than anyone class or sec tion of the people."7 Wilson said, "I believe that the time has come when the govern ment of this country, both state and national, have to set the stage ...

for the doing of justice to men in ev ery relationship of life.... Without the watchful interference, the reso lute interference, of the govern ment, there can be no fair play be tween individuals and such powerful institutions as the trusts. Freedom to-day is something more than being let alone. The program of a govern-" ment of freedom must in these days be positive, not negative merely."8 Since both men wanted to use government for large and extensive purposes the attack on corruption had for its specific purpose the building of public confidence in gov ernment. Only if the public had con fidenee in the uprightness of govern ment in general would it be likely to support such a great increase in re liance upon it. Moving Gradually Progressivesiwere reformers, me liorists- "impr~vers"-not revolu tionaries. They proposed to work within the existing framework, even to change the fIiamework, and some times posed as iconservatives, seek ing· to preserve i the inherited order by making changes. If they be con sidered as socia.ists, and a case could be made for it,' they were gradual ists, moving gr~dually toward a dis tant goal of socialism. The extent to which particular Progressives had such a distant gpal in view is largely undetermined. \The evidence exists mostly in bits!and pieces. For ex ample, Wilson was reported to have made these remarks to a confidant, while ruminati~g about the changes that would occur after World War I: The world is going to change radically, and I am satisfiedi that governments will have to do many things which are now left to individuals! and corporations. I am satisfied for inst~nce that the govern ment will have toltake over all the great natural resources l ••all the water power, all the coal mine$, all the oil fields, etc.

They will have to be government owned.9 He went on to peny that he was a socialist, but qis words speak for themselves. Be that as i~ may, the Progres sives served the function of accli mating Americans to socialism by the gradual proce~s. Moreover, the gradual method bad already been set forth when Wilson and Roosevelt 312 THE FREEMAN May were advancing their programs. The English Fabians had described how it was to be done at great length in the 1890s. Some American intellec tuals were not slow, either, to ex plain how it could be done within the American framework. Perhaps, the most thorough effort along these lines was made by Her bert Croly in The Promise of Amer ican Life, a book published in 1909. Croly's work is important in this context, too, for Roosevelt read and was influenced by it. lO The book is largely a reprise of American his tory written to show that certain seeds of a promise had been here in the beginning in the ideas of J effer son and Hamilton, but they had never been brought to fruition be cause Jefferson had been individu alistic and Hamilton had focused on the development of business. Croly's program has been summarized by one historian this way: It would es tablish "a tremendously powerful national state that would regulate corporations, unions, small busi nesses' and agriculture in the 'na tional interest.' "11 Croly admitted that in very im portant respects his programs might well be characterized as socialistic. 12 Most important, however, was his consistent gradualism. This is well illustrated by his description of how government might gradually get control of the railroads. He ex plained it this way: In the existing condition of economic development and of public opinion, the man who believes in the ultimate neces sity of government ownership of railroad and road-beds and terminals must be content to wait and to watch. The most that he can do for the present is to use any opening which the course of railroad development affords,.for the assertion of his ideas; and if he is right, he will grad ually be able to work out, in relation to the economic situation of the railroads, some practical method of realizing the ultimate purpose. 13 This gradualist approach has been taken by reformist politicians not only for regulation of the railroads but also for just about everything else. It is a premier relic of interv en tion from the Progressives.

Trustsand Monopolies The bete noire of the Progressives was what they most often called "the trusts," but which they also de scribed as "monopolies." By so doing, they promoted a confusion as to the meaning of these words which be came a part of the American lexicon. The businesses they castigated as "trusts" were not in fact trusts. The trust device had been employed at one time by Standard Oil to control companies not owned. However, the Sherman AntiTrust Act of 1890 prohibited the business use of the device, and it was abandoned. True, the holding company was eventu ally developed to perform a similar function, but whatever else might be 1982 THE RELICS OF INTERVENTION: PROGRESSIVISM 313 said about it, it was not a "trust." As to "monopoly," the word had been used in the past most com monly to refer to a legally estab lished exclusive right of sale of some good or service. The new use, which somewhat antedated the Progres sives, conveyed some such notion as a company becoming the "only" or "major" seller of some good or ser vice. In fact, the word lost all preci sion, and its vagueness down to this day has served mainly to make all enforcement of antitrust legislation arbitrary and punitive.

What the Progressives apparently meant, so far as they meant any thing specific, when they castigated "trusts" and "monopolies," were large nationwide businesses and espe cially those that had resulted from combinations of these. At any rate, everywhere they looked they saw ei ther potential or actual "trusts" and "monopolies." If there was not al ready a "trust" under every bed there soon would be, to hear them tell it. There was an "oil trust," a "sugar trust," a "steel trust," a "tobacco trust," probably a "telephone and telegraph trust," and so on. Above all, by 1913 there was something on the order of a "money trust," according to the Pujo Com mittee report. Two great confedera tions of Wall Street financial orga nizations' those of J. P. Morgan and of Rockefeller, occupied a dominant posi tion in finance, so this report concluded. By in~erlocking director ates they contr:olled huge banks, major insurance companies, large railroads and other industries, and investment firms. Prior to 1907, the houses of Morgan and Rockefeller had competed with one another, but after the panic: of that year they worked with one!another .14 Talk of a money monopoly was already ram pant before the ¢ommittee made its report.

DifferentDirecti<>nsof Reform Progressives 'were agreed that business combinations, concentra tions of wealth, iand Eastern finan cial institutions posed a serious and mounting threat to Americans and that the Federal igovernment should do something abbut it, but they dif fered on importapt points as to what should be done. Roosevelt and Wil son divided sharply in the campaign of 1912, and the!different directions they set forth have remained in the reform impulse ever since and often resulted in inconsistent lines of po litical action. Roosevelt had gained fame during his presidency as a "trustbuster." By 1910, or earlier, 1he had changed di rections in his thinking about this. He had concluded that combination and growth in b~siness was a natu ral development> that it was often the most efficien~ way to produce and distribute goods, ~nd that it was both futile and harmful to set out to break 314 THE FREEMAN May them up. Instead, he favored vigor ous government regulation of busi ness, in effect, government control of it. He favored government em powerment of labor unions and their regulation as well. Generally, Roo sevelt favored the establishment of commissions, such as the Interstate Commerce Commission, to accom plish the regulation. 15 By contrast, Woodrow Wilson was much more intent upon breaking what he conceived to be the power of the "trusts." His analysis convinced him that the "trusts" were not a nat ural growth so much as a product of government nurture. The tradi tional arguments of Democrats against the protective tariffs' could be rung in to support this view. He pointed out, too, that the corpora tion derives its powers "wholly ...

from legislation."16 He proposed to remove government supports, where appropriate, the use of government power to break them up, in many instances, and to prevent by law the development of industrial giants. The legislation of the Progressive years bore earmarks of both these strains of thought. Before discussing that, however, it may be well to em phasize that both Roosevelt and Wilson believed in a strong and in novative presidency. In his earliest studies, Wilson had described the potentialities of presidential power, and Roosevelt demonstrated how it could become actuality by hisenergetic involvement in all sorts of things. They initiated and devel oped the idea of presidential candi dates developing fullfledged pro grams, giving them a name, and campaigning on the basis of them what I have elsewhere character ized as "Four-Year Plans."17 Roose velt weighed in with the first pro gram under the rubric of a Square Deal. For the campaign in 1912 he came up with the New Nationalism.

Wilson followed suit by dubbing his program the New Freedom. Since that time, such program names have been devices used mostly by Demo crats. Regulatory Measures In the main, the reform legisla tion· of the Roosevelt-Taft years (1901-1913) falls into the regula tory pattern. Much of it had to do with increasing the power and sway of the Interstate Commerce Com mission. (The Commission was es tablished in the 1880s, but it was granted little power, and the courts tended -to restrain it even further.) In 1903, the Elkins Act provided statutory penalties for railroad offi cials who gave rebates and defined and prohibited discrimination be tween railroads. The Hepburn Act of 1906 empowered the ICC to set maximum rail rates 'and prescribe uniform. accounting procedures.- It expanded the jurisdiction of the ICC and gave to its decisions binding au1982 THE RELICS OF INTERVENTION: PROGRESSIVISM 315 thority subject to court review. The Mann-Elkins Act of 1910 extended the authority of the ICC to tele phone and telegraph facilities and further expanded its powers. The whole scheme of railroad regulation was finally rounded out by the Transportation Act of 1920, which gave the ICC the most comprehen sive control over the railroads that had ever been devised for privately owned companies.

Progressive legislation moved into other areas during these years, too. In 1903, a Department of Commerce and Labor was established. It had within it a Bureau of Corporations which was empowered to investi gate corporate behavior, a first step toward control. An Expedition Act was passed in the same year, giving the Attorney General authority to place antitrust suits at the head of court dockets. A Pure Food and Drug Act was passed in 1906 which put the Federal government in the busi ness of regulating these. On the same day, a Meat Inspection Act was passed. The Aldrich-Vreeland Act of 1908 turned out to be a forerunner of the Federal Reserve, since it au thorized the issuance of currency on the basis of commercial paper and government bonds. The act also es tablished a National Monetary Commission, whose eventual report pointed hesitantly toward the set ting up of a central banking system.

In the same year, a National Conservation Commission was estab lished for the purpose of cataloging the natural resources within the United States. The Mann Act of 1910 put the Federal government into the business of regulating morals by prohibiting the transportation of fe males across state lines for immoral purposes. And, a Postal Savings bank was established i in the same year, bringing into being a system sought by the Populists nrst in 1892. ConstitutionalAmendment Four amendments to the Consti tution can be attributed to the Pro gressive impulse. Two were passed by Congress anq sent to the states for consideration during Taft's pres idency. The 16th,Amendment, whose ratification was completed in 1913, made taxes on incomes legal and has been used as the! basis for the grad uated income tax on individuals and corporations, thopgh there is no spe cific grant of power to do so con tained in it, or ellj;ewhere in the Con stitution. At any!rate, the stage was now set for a dinect assault by gov ernment upon the accumulation of wealth.

The 17th Amendment was a more indirect slap at wealth. It provided for the direct election of Senators. The charge had been repeatedly made that the Senate was a rich man's club, and! claims were made that since Senat~rs were elected by state legislatures wealth could eas316 THE FREEMAN May ily be used to influence elections. The much more important impact of the amendment, however, was to reduce the extent to which Senators repre sented states. The 18th and 19th Amendments were passed and ratified during Wil son's administration. The 18th-the Prohibition Amendment-was in several respects more revealing ofthe heart of the Progressive impulse than any other. It was an attempt to use the power of government to alter human behavior, perhaps, even hu man nature. Drinking had long been reckoned a major evil among re formers. Most Populists had loathed alcohol with as much fervor as the gold standard. The amendment, too, was an attack on business and trade, since the manufacture and sale of alcohol is a business. The Volstead Act, passed to enforce prohibition in 1920, looked more like the New Tyr anny than the New Freedom, but it was Wilsonian in spirit nonetheless.

It was an attempt to stop the liquor traffic, once and for all, root and branch. The Roosevelt approach won out in the end. Prohibition failed; the amendment was repealed; but the industry remains heavily regulated and highly taxed. That would have been Roosevelt's way. The 19th Amendment simply extended the franchise to women. Wilson moved quickly, with the help of a compliant Congress, to en act major parts of his New Freedom program. Probably, the single most important act was the one setting up the Federal Reserve system. It was passed in December, 1913. Although the act was supposed to break up the alleged money monopoly and decen tralize monetary sources, it actually set up a central banking system un der the auspices of the government. While state chartered banks did not have to become a part of the system, most eventually did, and national banks had to become members. Its establishment turned out to have been a gradualist move to give the national government full control of the money supply.

Curbing "Unfair" Trade Two acts passed in 1914 appear to have been more along the Roosevel tian lines of regulating business than the course Wilson claimed to be set on. The Federal Trade Commission was established to prevent what were called "unfair trade practices." It had similar investigative powers to those given to the Bureau of Corporations, which was now eliminated, and it was authorized to issue cease and desist orders. "Among the practices which the commission subsequently singled out were trade boycotts, mislabeling and adulteration of commodities, combinations for maintaining resale prices, and false claims to patents."18 The Clayton AntiTrust Act singled out and pro hibited a number of practices, such 1982 THE RELICS OF INTERVENTION: PROGRESSIVISM 317 as interlocking directorates, which were supposed to lead to monopoly. Ostensibly, it exempted from its provisions worker organizations. The tendency of this act was to discour age business cooperation and to en courage the organization of labor. It was certainly class legislation.

These acts, and supportive ones not discussed, demonstrate the deter mination of the Progressives to es tablish government control over the economy. There is a widespread misconception that intervention on any scale got underway with the New Deal. That is by no means the case. Progressives had not only worked out the intellectual justification and set forth the methods but also made headway in altering the Constitu tion and passing legislation. Most of this was done, too, without even the excuse of any emergency, economic or otherwise. The United States generally enjoyed unparalleled prosperi ty from the beginning of the century to World War I. The relics of intervention are from further back than is commonly supposed. Even so, the New Deal did make a more con certed effort toward a government managed economy than the Pro gressives ever managed (except, possibly, during World War I), and it is appropriate now to turn to that story. , Next: The New Deal Bent to Infla tion.

-F001NOTESlSee, for example, Daniel Aaron, Men ofGood Hope (New York: OxfoIil University Press, 1951), p.245. 2William G. Sumner, "The Absurd Effort to Make the World Over," in American Thought: Civil War to World Wa~ I, Perry Miller, ed. (New York: Rinehart, 1954)~ p. 81. 3Quoted in Henry S; Commager, The Ameri can Mind (New Have*: Yale University Press, 1954), p. 206. 4Lester E Ward, "Mind as a Social Factor," in .American Ideas, Ger~ld N. Grob and Robert Beck, eds. (New York: Free Press of Glencoe, 1963),129. 5Richard Hofstadter'i The Age of Reform (New York: Alfred A. Knopfj1955), p. 131. 6Richard Hofstadter, The American Tradi tion (New York: Vintage Books, 1954), p. 232. 7Theodore Roosevelt, The New Nationalism, William E. LeuchtenblJrg, ed. (Englewood Cliffs, N. J.: Prentice-Hall, 1961), p. 36. 8Woodrow Wilson, the New Freedom, Wil liam E. Leuchtenburg, ed. (Englewood Cliffs, N. J.: Prentice-Hall, 1~61), pp. 130, 164.

9Quoted in Hofstad~er, The American Politi cal Tradition, p. 278. 10See Charles Forcey, The Crossroads ofLib eralism (New York: Qxford University Press, 1961), p. 5. llEric F. Goldman, Q,endezvous with Destiny (New York: Vintage ~ooks, 1956, rev. ed.), p. 156. 12See Herbert Croly; The Promise of Ameri can Life (New York: C.pricorn Books, 1964), p. 209. I3Ibid.,p. 203. 14See Arthur S. Link, American Epoch (New York: Alfred A. Knopf~ 1955), pp. 51-52. 15See Roosevelt, op. ¢it., pp. 86-96. 16Wilson, op. cit., p. $5. I7See The Flight from Reality (Irvington, N. Y.: The Foundation !for Economic Education, 1969), ch. 22. 18Richard B. Mordls, ed., Encyclopedia of American History (New York: Harper & Bros., 1953), p. 275.

A REVIEWER'SNOTEBOOK JOHN CHAMBERLAIN California,Inc. California, Inc., by Joel Kotkin and Paul Grabowicz (Rawson, Wade Publishers, Inc., 630 Third Ave., New York, N.Y. 10017,312 pp., $13.95), is written by two authors who have had leftist literary connections, but, curiously enough, it ends up as quite a paean to the entrepreneurial spirit. The book is dedicated to the late Carey McWilliams, who knew his California but was never, in his ca reer as a journalist, interested in capitalist solutions. Kotkin and Grabowicz seem to be unaware of some of their own con tradictions, which involve them in condemning Ronald Reagan for fa voring businessmen during his term as governor and then, in a subse quent chapter, praising Governor Jerry Brown for going Reagan one better in putting entrepreneurs in his kitchen cabinet. The authors ev idently continue to hold an ancient antipathy to Ronald Reagan for his "coziness with the blacklisters" in the days of the Hollywood Communist scandals. But when Jerry Brown switches gears to take over the California tax revolt of Howard Jarvis, thus jettisoning the "radical dreamers of the Tom Hayden camp,"

Kotkin and Grabowicz are quite complacent about it. Brown, they say, "may yet emerge as the spokesman of an ascendant 'new class,' rich and powerful enough to sustain a long-term serious bid for national office." He has "finally stumbled on the secret of Califor nia's 'manifest destiny.' " Whether Jerry Brown can main tain any consistency over the years still remains to be proved. But the "new class," as Kotkin and Grabo wicz see it, is here to stay in Califor nia. Men of Action The Golden State was always hos pitable to new technologies. Kotkin and Grabowicz spend very little time on California's famed kooks. They prefer to concentrate on the "doers,"

CALIFORNIA, INC. 319 such as the men who brought water from the mountains to make deserts bloom. There was William Mulhol land, the outspoken chief engineer of Los Angeles who raised the money in 1913 to build the aqueduct that has made modern Los Angeles pos sible. There were the oil men, John Paul Getty and Henry Salvatori. There were-and are-the great en gineering firms of Fluor and Bech tel, who now build all over the world. And .there was Henry Kaiser, who formed the "six companies" that cre ated the sixty-stories-high Hoover Dam, which was completed two years ahead of schedule in 1936. The son of Italian immigrants, Amadeo Giannini, ran his Califor nia bank with the "homespun guile learned in the produce trade," mak ing loans to working-class people who would not. have qualified for money back East. With knowledgeable branch banks all over the state, Giannini had the information at his finger tips to enable him to shift funds to match the seasonal needs of different crops and different farm ers. When he retired he let his bank be controlled by an Easterner. He was quickly disill usionedby the Easterner's antipathy to innovative methods. To save the bank from col lapse Giannini had to return from an overseas convalescence to take charge again. By 1945 the Giannini Bank of America had become the nation's largest bank.

Hollywood to Sili~on Valley Kotkin and Grabowicz take the movie men, William Selig, Sam Goldwyn and Ado~ph Zukor, for what they were, great entrepreneurs who understood the \jVorld's "desperate need for fantasy.':' Howard Hughes, who had gone West to make his name as a film maker, i was a believer in the sales value of fantasy, too. But he was also inter~sted in airplanes. His Hughes Aircraft Company, orig inally started asia lark, was ready for World War II.; By the late Nine teen Forties Hughes, Northrup, Douglas, Lock~eed and North American Aviati~n were all reaping the benefits of military contracts, as Hughes had pred~cted. Litton Industries was the creation of "Tex" Thornton, a Hughes man who was one of the first to see the future in terms of data processing, guidance systemsJ digital computers and other advanced electronic de vices. The Califoirnia universities, notably Stanford,! have fed industry in novel ways; St~nford engineering students, working out of their ga rages, have crea~ed billion-dollar companies. And "~licon Valley," that stretch of coast south of San Fran cisco near Palo Allto, has become a synonym for wh~t is colloquially known as high-tec\h. The silicon chip, which can store thousands of mem ory bits within the space of a dime, has made the modern low-cost com puter age possible:.

320 THE FREEMAN JapaneseInfluence All of which brings Kotkin and Grabowicz to the Japanese, who are so good at taking over American in novations and improving on them. C:;llifornia does not see the Japanese a~ any great menace. As the ulti mate assembly point for imports from Asia, California's location on the "Pacific rim" has helped produce more than a million jobs. California looks forward to becoming the finan cial center of "the Asian commu nity." California agribusinessmen have built fortunes through serving as Japan's leading supplier of fruits and its second-largest source of cot ton. Governor Jerry Brown's advisers have counseled him to take the lead in making California a "Pacific rim" power, quite as if the state were a nation all by itself. Andy Safir, the director of the California Office of Economic Policy, puts the Brown Administration view in perspective. "There is a tendency," he says, "to look to imports for our industrial goodsthat used to comefrom the East Coast ... now we look to Japan ...

for us the Japanese are a close mar ket ... you have in Japan an econ omy that can respond to specialized demands of a place like California while you have no such ability in the East." The admiration for Japan has led to the adoption of Japanese-style management techniques by large numbers of California corporations. In the high-tech firms of Silicon Val ley, tennis courts, swimming pools and running paths are supplied to employees, quite in the Japanese style. At the new San Francisco high rise headquarters of the Shaklee Corporation one whole floor has been reserved as a sports and recreation center, all encircled by an indoor jogging path. "The purpose of the fu ture revolution in the West," says Action Instrument's founder Jim Pinto, "is to eliminate the difference between workers, managers, and the owners by making all the same. If you are part of the place, you can do everything you can to increase effi ciency and productivity. In many ways Action Instruments is very Japanese."

Despite their personal antipathy to Ronald Reagan and their partial ity to Jerry Brown, Kotkin and Gra bowicz see "Reaganism" as a contin uing wave of the future. The California style, they say, is taking over the whole United States. High tech enterprise will continue to keep the California spirit of entrepre neurship going strong. The odd thing is that Kotkin was born in West Germany and Grabowicz in Spring field, Massachusetts. But they are Californians now. , the Freernan VOL. 32, NO.6 JUNE 1982 Profits and Pollution John Jefferson Davis 323 A second look at some popular misconceptions concerning the source of pollution. New Dimensions of Population Growth Russell Shannon 332 Concerning the ability of man to produce as well as reproduce. Collectivism in Medicine: An Exception or a Hook? Jane M. Orient, M.D. 335 A thoughtful diagnosis of the doctor-patient relationship under alternative systems.

Big Little Governments Gary McGath 344 Local governments can also practice tyranny, if out of control. Cut-Throat Opportunities Gary North 347 How consumers bear the burden when new opportunities are prohibited by law. My Cup of Tea Jean L. Natale 365 A dream of schools free of government financing, and ,control. The Relics of Intervention: 3. The New Deal Bent to Inflation Clarence B. Carson 367 The depression paved the way for further regulation arid control. Book Reviews: 381 "Essays in Supply Side Economics" edited by David ~. Raboy "Everything You Have: The Case Against Welfare" by Jerome Huyler Anyone wishing to communicate with authors may send first-class mail in care of THE FREEMAN for forwarding.

FOUNDATION FOR ECONOMIC EDUCATION Irvington-on-Hudson, N.Y. 10533 Tel: (914) 591-7230 Leonard E. Read, President Managing Editor: Production Editor: Contributing Editors: Paul L. Poirot Beth A. Hoffman Robert G. Anderson Bettinc;lBien Greaves Edmund A. Opitz (Book Reviews) Brian Summers THE FREEMAN is published monthly by the Foundation for Economic Education, Inc., a nonpo litical, nonprofit, educational champion of private property, the free market, the profit and loss sys tem, and limited government. The costs of Foundation projects and services are met through donations. Total expenses average $18.00 a year per person on the mailing list. Do nations are invited in any amount. THE FREE MAN is available to any interested person in the United States for the asking. For foreign delivery, a donation is required sufficient to cover direct mailing cost of $5.00 a year. Copyright, 1982. The Foundation for Economic Education, Inc. Printed in U.S.A. Additional copies, postpaid: 3 for $1.00; 10 or more, 25 cents each.

THE FREEMAN is available on microfilm from University Microfilms International, 300 North Zeeb Road, Ann Arbor, Mich. 48106. Some articles available as reprints at cost; state quantity desired. Permission granted to reprint any article from this issue, with appropriate credit, except "Profits and Pollution" and "Cut-Throat Opportunities."

.................. JOhn Jefferson Davis PROFITSAND POLLUTION "Man is poisoning his world," de clares science writer Joseph Myler. "He has been labelled, with strong justification, the dirty animal." Ac cording to Myler, man has "... man aged to make his rivers rotten. He has transformed green pastures into deserts. He has clogged the air with chemicals which menace health and dust which is changing the climate. He is a menace to himself and other species." Such a litany of environmental woes has become familiar to anyone living in twentieth-century Amer ica. In many cases the unspoken as sumption is made that industrial capitalism inevitably produces in soluble problems of pollution. While Dr. Davis is Associate Professor of Theology at Gor don-Conwell Theological Seminary, South Hamilton, Massachusetts. This article is from the manuscript of a forthcoming book, A Land of Milk and Honey: Sibli cal Foundations 01 the Free Market.

such a perspective points to matters of genuine concern for anyone living in the modern world, such construc tions also have, their own limita tions. All too often such descriptions lack a sense of proper historical per spective, tend to exaggerate the magnitude of the problem, and fre quently ignore ~igns of significant improvement. Popular discussions of environ mental problems tend to give the impression, for ~xample, that pollu tion is a completely man-made and modern phenomenon, a· creature of the industrial age. This is hardly the case. A single vo[cano can release as much dust into! the atmosphere as several years' industrial activity.! An average hurricane releases the en ergy of 100,000 qydrogen bombs. The ten million tons of man-made pol lutants releasedj in the atmosphere must be measured against the 1,600 323 324 THE FREEMAN June million tons of methane gas emitted each year by natural swamps. For ests and other forms of vegetation discharge 170 million tons of var ious hydrocarbons into the atmo sphere each year. These latter fig ures, cited by historian Paul Johnson in his book The Enemies of Society/ do not mean that we should have no concern for the problems of indus trial pollution. They do, however, provide a much needed check against magnifying such problems out of all due proportion.

ExaggeratedCharges Examples of exaggerated claims of environmental hazards are not dif-' ficult to find. Rachel Carson in her famous book Silent Spring alarmed the public with warnings about the allegedly devastating effects of chemical pesticides such as DDT. According to a special committee appointed by the National Academy of Sciences, such claims by Carson and other environmentalists were exaggerated. The special committee, appointed to advise the Environ mental Protection Agency, con cluded that "the chronic toxicity studies on DDT have provided no in dication that the insecticide is un safe for humans when used in accor dance with commonly recognized practice."3 The agricultural scientist Nor man E. Borlaug, winner of the 1970 Nobel Peace Prize for his work on new strains of wheat which made the "green revolution" possible, gave the following testimony before a con gressional committee in 1971: "It is a tragic error to believe that agri cultural chemicals are a prime fac tor in the deterioration of the envi ronment. The indiscriminate cancellation, suspension, or outright banning of such pesticides as DDT is a game of dominoes we will live to regret."4 Similar sentiments are voiced by agriculture consultant William Boyd, who observed that "'DDT has saved more lives, pre vented more illness and protected more food, in the parts of the world where it is most needed, than any other chemical synthesized by man."5 While any chemical substance can be misused, the possible dangers of a pesticide such as DDT must be measured against the very real and quite vast benefits it has produced in the alleviation of human hunger and the saving of human lives. En vironmental alarmism would en danger more lives than it seeks to protect.

After a bad oil spill in the Santa Barbara Channel, Life magazine re ported that the channel was "a sea gone dead." Yet more careful studies by Dr. Dale Strangham found that such claims were exaggerated. There was no increase in mortality among whales or seals, and no ill effects on animal or vegetable plankton were detected. "Of 12,000 birds in the 1982 PROFITS AND POLLUTION 325 channel at the time of the spill, 3,500 to 4,000 died from all causes," ac cording to Strangham. "Yet by May," he noted, "the bird population had risen to 85,000 because of seasonal migrations. "6 Recent studies in oceanography have indicated that the seas have greater powers to cleanse them selves than anyone had imagined a decade ago. "There was a view ten years ago that the ocean was a very fragile thing," commented Derek Spencer, a researcher at the Woods Hole Oceanographic Institution in Massachusetts in a Newsweek inter view. "The ocean," he said, "has some important self-cleaning processes that we didn't know about until re cently."7 The dumping of industrial wastes must still be carefully moni tored, but fears of the imminent "eco death" of the world's oceans seem to have faded.

An Unbalanced Picture The reporting of environmental issues has focused on the "crises," and has tended to ignore areas of genuine improvement. The result has been to leave an unbalanced picture of environmental realities in the public's mind. In a detailed article in Science, Prof. J. L. Simon of the University of Illinois called attention to the fact that the total acreage in the United States devoted to wildlife areas and state and national parks increased from 8 million acres in 1920 to 73 million acres in! 1974. And despite fears among so~e environmental ists that the coqntry's open land is rapidly being turned into parking lots and shopping centers, it is still the case that all the land used for urban areas plus roadW'ays amounts to less than three percent of the area of the United States. i Lake Erie, pro nounced environtnentally dead some time ago by Barry Commoner, has improved signifi~antly, and the fish catch is actually' increasing. 8 Substantial g~ins have been made in the area of air quality. According to a report in the Los Angeles Times, many large industries, such as oil refineries and chemical plants, have already succeed¢d in controlling 90 to 95 per cent of their airborne emis sions. 9 The conventional wisdom as sumes that gre~ter energy use has led to a deterioration of the human environment. While there undeni ably has been spme environmental damage, such an analysis is far too simplistic and overlooks the positive gains. James A.' Weber has pointed to the fact that greater energy use, by reducing the; amount of danger ous and arduous work done by hu mans, has greatly reduced the occa sions for fatal or!disabling accidents.

He notes that tlhe National Safety Council has rep<;>rtedthat "between 1912 and 1977 accidental deaths per 100,000 population were reduced 41 326 THE FREEMAN June per cent from 82 to 48."10 These fig ures are all the more significant when one considers the dramatic in crease in the use of automobiles dur ing this period. Life Expectancy The most important single indi cator of overall environmental qual ity is life expectancy. In the United States, life expectancy has contin ued to rise, and at an increasing rate, as Prof. Simon has pointed out. Dur ing the period 1970-1976, there was a gain of2.1 years, compared with a gain of only 0.8 years during the en tire decade of the 1960s.11 The "environment" includes not only air and water, but also sanita tion, medical care, education, and working conditions. When twen tieth century conditions in America are compared with those of a cen tury ago, then the dramatic progress is apparent. The improved life ex pectancy figures bear witness to this improvement.

In all fairness it must be acknowl edged that the environmental lobby is to be given credit for some of the progress made. At the same time, however, we have seen that a good deal ofthe "environmental. crisis" has been overplayed by the media, and the real environmental gains over looked. In any case, the contention that a growing free market economy inevitably destroys the environment is simply not supported by the facts. A second major area of environ mental concern involves the prob lem of resource depletion. Isn't it the case that capitalism, predicated on continuing economic growth, threatens to deplete all the world's resources? Back in 1972, a team of Massa chusetts Institute of Technology sci entists in the headline-grabbing book Limits to Growth were sounding apocalyptic warnings: "Possibly within as little as 70 years, our so cial and economic system will col lapse unless drastic changes are made very soon." The implication was that either the capitalistic sys tem or economic growth or possibly both would have to be abandoned in order to avoid environmental and social catastrophe. The MIT scien tists have since dramatically re vised their predictions, but the impression lives on that our re sources are in imminent danger of running out.

There are at least four major weaknesses in the "resource deple tion-no growth" type of argument against the free market system. In the first place, history has shown that past estimates of resource reserves have tended to be notoriously inac curate. A 1944 survey indicated that by 1973 the United States would have exhausted its supplies of tin, nickel, lead, and manganese. 12 In fact, however, more deposits of these metals were discovered in the United 1982 PROFITS AND POLLUTION 327 States than during the previous 25 years. Progress in mining and refin ing technology has made possible the recovery of copper from ore that only a decade ago was worthless rock. A 1918 estimate at the site of the Climax molybdenum mine placed reserves at six million tons of ore. "Since then," noted an article in the Wall Street Journal, "426 million tons have been extracted. And today there are still 433 million tons of proven ore reserves down there."13 In 1975 the U.S. Geological Sur vey estimated that natural gas re serves were in danger ofrunning out shortly after the year 2000. Since then, deregulation of the industry and new computer-assisted explora tion techniques have dramatically altered the picture. New discoveries of natural gas in. the Rockies, the Appalachians, the Gulf Coast, and in Wyoming and Utah, have led some scientists to predict that known nat ural gas reserves can take the United States well into the twenty-first cen tury, and possibly even to the end of it. 14 PetroleumSupplies Events of recent years, especially the rise of the OPEC oil cartel, have focused the public's attention on our supplies of petroleum. Here again, estimates of known reserves have been wide of the mark. In 1942 esti mates of world reserves of crude oil were placed at 600 billion barrels. In 1970, geologists ,at Mobil were esti mating two trillion. In 1973, Peter Odell, reporting! in the Geographic Journal, was estimating a resource base of four tril~ion barrels by the year 2000. 15 Part of the pr<>blem lies in an in adequate definition used by the U.S.

Geological Survey, according to Dr. Joseph Barnea, a former director of natural resource studies at the United Nations. The Wall Street Journal editoriall citing Dr. Barnea notes that the Survey defines crude oil as "a natural mixture of hydro carbons occurriqg underground in a liquid state in i porous-rock reser voirs and remaining in a liquid state as it flows from a well at atmo spheric pressure~" According to Bar nea, this definition excludes perhaps 85 percent of th~ crude oil that can be brought up under pressure, plus all non-liquid petroleum found in tar sand and oil shale deposits. The re sult is that many published reports concerning recoverable oil overlook much of the oi~ actually in place. "There are plentf of hydrocarbons to last until solar power comes in," the editorial conclucjles, "so long as we will pay the cost <l>fretrieving them."16 A second weakness in many of the more apocalypt.c analyses of re source depletion is that they tend to overlook the nor;rnal workings of the law of supply· arnd demand. Rising prices for a commodity tend to keep demand in check. And, note William 328 THE FREEMAN June J. Baumol and Wallace Oates of Princeton, higher prices also pro vide increased incentives to recover and recycle used resources. 17 Since the quadrupling of oil prices of the OPEC cartel, oil consumption in the U.S. and other countries has been decreasing sharply. Fred Singer, a professor of environmental sci ence, noted that throughout the world "oil is being replaced wher ever possible by cheaper fuels ...

These shifts, coupled with conser vation, will cut world consumption of oil in half by the next decade."18 Singer expects North America to be come essentially self-sufficient in oil, with hardly any imports needed from overseas producers. Changing Conditions Predictions of imminent depletion of minerals and energy frequently overlook the significance of chang ing patterns of work. By the mid 1970s America's work force had ex perienced a remarkable transfor mation. More people were involved in the manipulation of information than were employed in mining, ag riculture, manufacturing, and per sonal services combined. In fact, ac cording to futurologist Alvin Toffler, only nine per cent of the American population (20 million workers) ac tually manufacture goods. The other 65 million workers provide services and manipulate symbols. 19 This dra matic trend toward an information and service-based economy means that economic growth and wealth are no longer primarily dependent on the direct extraction of resources from the ground. The burgeoning field of microcomputers is a prime example of how new jobs and income can be generated from new ideas and hu man creativity without destroying the environment.

Pessimistic forecasts concerning resource availability do not take ad equate account of the dramatic new gains in efficiency and productivity that are made possible through technological advances. While it is theoretically true that the earth's resources are finite, the practical question is how finite, and whether or not the "limits to growth" have actually been reached. History shows that human imagination and inven ti veness have again and again stretched those limits beyond what society thought possible. Today, a single communications satellite can provide the interconti nental telephone connections that in an earlier day would have required thousands of tons of copper. In real terms, a new invention has in creased the supply of copper avail able for alternate uses. New Technologies New technologies will be arriving during the 1990s, with great poten tial for dramatically altering the worlds of work and leisure. It is ex1982 PROFITS AND POLLUTION 329 pected that by 1990 computers will be one hundred times faster than to day's most powerful models. A sin gle thumbnail-sized silicon chip will be capable of holding not 65,000 bits of data, but 1,000,000. "Computers will be about the size of a basketball and will do more than today's larg est mainframes," predicted William G. Howard, Jr. of Motorola's Semi conductor Group in an interview with Business Week.20 New ceramics are being developed which will be ductile like metals, conduct electricity, and be much stronger and more durable than the products now available. These ce ramics are made from metal oxides which constitute almost 90 per cent of the earth's crust, thus assuring a virtually limitless supply of raw materials for the new products.

New techniques of corrosion con trol are being developed which could dramatically reduce the figure of $70-90 billion worth of damage done each year. New technology can thus mean entirely new plateaus for the conservation of goods and re sources. 21 In the field of biotechnology, ex citing new developments are in the offing. Researchers have created new varieties of bacteria that can con vert industrial feedstocks into sugar and turn wood wastes into alcohol. By the 1990s these new processes could represent new multibillion dollar industries. Significant new breakthroughs are on the horizon in the area of energy resources. Japan is already experi menting with :floating platforms which generate electricity from wave power. Technology for converting garbage to fue~ should become in creasingly com~on. Within a dec ade cost-efficient photovoltaic cells which convert spnlight directly into electrici ty shoQld be commercially available for home use. One firm, Arco Solar, claims that it will be selling econom}cal home-sized ar rays by the midt1980s. 22 Even the scientists who published the pessimistic ~imits to Growth in 1972 are now revising their former scenarios. In tHeir latest book, Be yond the Age of Waste, these scien tists now state that "nuclear energy alone is capable of supplying four times the present world population with twice the current U.S. level of per capita energy consumption." So lar and geotheItmal will add to the energy mix and substitutes can be found for the few raw materials which may be really scarce. Beyond the Age of Waste represents a re markable turnaround from the dire predictions of 1972.

Bad News Tends to Conceal the More HopefOIOutlook If there areiindeed some legiti mate grounds f~r a hopeful outlook on the world's ~nergy and resource future, why does so much ''bad news"

330 THE FREEMAN June The Ecological Panic I well remember when Rachel Carson's work, The Silent Spring, first appeared in The New Yorker, and the surprise and concern it rightly aroused. We were tending to ignore some of the destruc tive side effects· of very rapid industrial expansion. The wave of concern that followed was justified, and the steps then taken, notably the clean air policies, and the policies for cleansing lakes and waterways have been spectacularly successful. Thanks to smokeless fuel, London fogs, which were real killers, have been virtually eliminated. The last really serious London fog was in 1952. The Thames is now cleaner, and has greater quantities of fish, and more varieties in it, than at any time since before the days of Spenser or Shakespeare.Similar successes are now being registered in the U.S., which adopted such legally enforceable remedies somewhat later than Britain did. These are examples of what can be done by thoughtful, unemotional, systematic and scientifically justified application of conservation and anti-pollution policies.

PAUL W. JOHNSON, "Has Capitalism a Future?" abound in this area? This provoca tive question has been both raised and given some possible answers by Prof. Julian Simon. Some groups and individuals have, in effect, a vested interest in the dissemination of gloom-and-doom scenarios. "Bad news sells books, newspapers, and magazines," notes Simon; "good news is not half as interesting." Is it any wonder, he asks, that there are plenty of best-sellers warning about pollution, population growth, and natural-resource depletion, but few telling the facts about environmen tal improvement? What John Mad dox has called the "doomsday syndrome" has spawned a profitable growth industry in America. Sociologist Peter Berger has de scribed the growth of the "New Class" in America, a class comprising many in the media, the universities, and government agencies. The New Class has a vested interest in environ mental "bad news." Each new crisis helps to sell air time, create demand for new books, justify new studies and research grants, and new rules and regulations which increase the power of bureaucrats employed in government agencies. Members of the New Class, Berger notes, tend to be hostile toward the idea of eco1982 PROFITS AND POLLUTION 331 nomic growth and toward the busi ness community in general. 23 Apart from any vested interests involved, some environmentalists may be prone to paint darker pic tures than the facts really warrant out of a desire to mobilize individu als and institutions to action. In the longrun, however, such "crying wolf' will lead to a serious loss of credibil ity for the legitimate concerns of en vironmental stewardship. As Philip Handler, then president of the Na tional Academy of Sciences once commented, "The nations of the world may yet pay a dreadful price for the public behavior of scientists who depart from ... fact to indulge . . . in hyperbole."24 The Christian will certainly heed the legitimate warnings concerning possible threats to the environment, and will be supportive of efforts to conserve the world's resources. At the same time, in light of the biblical convenant of dominion given in Genesis, the Christian community should seek to combine an ethic of conservation with one of creativity and innovation. As image bearers of God, men and women are endowed with creative minds that can invent new processes and devices that can produce a richer life for all. "No growth" mentalities harm those who most need the fruits of new produc tivity, namely the impoverished peoples of the underdeveloped na tions. The biblical ethic of environmental stewardship challenges the Christian community to combine conservation a~d productivity, and to face the problems of the present with realism, while looking to the future with faith and courage and hope. ~ -FOqTNOTESIJohn Maddox, The Doomsday Syndrome (1972), p. 140.

- 2J>aul Johnson, The Enemies of Society (1977), pp. 91, 92. 3Maddox, op. cit., p. 131. 4/bid., p. 137. 5WorldResearch /""k, Nov./Dec. 1979, p. 17. 6/bid. 7Newsweek, Aug. ~1, 1981, p. 68. 8J. L. Simon, Scien¢e, June 27,1980, pp. 1431 37. 9£OS Angeles Times, Aug. 21, 1978, in World Research Ink, Nov./l1>ec.1979, p. 18. 10JamesA. Weber,'The Freeman, April, 1981, p.199. llSimon, op. cit., p~ 1436. 12Newsday,Aug. 2~, 1981, p. 62. 13WallStreet JouriJ,al,June 23, 1981, p. 53. 14James Miller, Reader's Digest, April, 1981, pp.65-71. 15WallStreet Journal, Sept. 14, 1977, p. 22. 16/bid. 17William J. Baumol and Wallace E. Oates, Economics, Envirqnmental Policy and the Quality ofLife (1979), p. 107. 18Newsweek, May 18, 1981, p. 33. 19BostonGlobe, May 12, 1981, p. 23. 20Business Week, J;uly 6, 1981, pp. 48-52, 56. 21/bid. 22MotherEarth News, July/Aug. 1981, p.124. 23Peter Berger, Wqrldview, April, 1978, p. 10.

24In Simon, op. citl, p. 1437.

Russell Shannon New Dimensions of Population Growth A CHART in the January 1982 issue of Reader's Digest predicts an explo sive growth in the world's popula tion. 1 Are we in dire danger of over populating the world and causing widespread famine? It all depends on how you look at things. About a hundred years ago, an Englishman named Edwin Abbott wrote a book called Flatland. In it he depicts a two-dimensional world populated by lines, triangles, squares, other polygonal figures, and circles. 2 In a thoroughly charming man ner, Abbott explains how the Flat landers organized society (those with more sides had greater rank), how they recognized each other (someProfessor Shannon teaches in the Economics De partment, Clemson University. 332 times by feeling), and how they built their homes (with narrow entrances for the women, who were all straight lines and could readily damage other members of society).

What Abbott's imaginative book clearly shows is that the assump tions we make about society have a great deal to do with the sort of fu ture we can predict. That certainly holds true for the problem of.popu lation growth. In his recent book, The Ultimate Resource, economist Julian Simon presents data that cast severe doubt on the likelihood that the presently rapid growth of population will con tinue. At least twice in history-once when men first began to use tools, and again about 10,000 years ago, when they started to farm-popula tion grew very rapidly, only to taper NEW DIMENSIONS OF POPULATION GROWTH 333 off and grow at a much slower rate. 3 But what if the present trend does continue? How will we feed and clothe ourselves-not to mention providing homes and energy? Again, the outcome depends squarely on how we look at things what assumptions we make about mankind's ability to produce as well as to reproduce.

Consider a family sitting down to share an apple pie. If another person arrives to join them, there will clearly be less for those who got there first. Such a view as this lies implicitly behind the thinking of all those peo ple who urge drastic birth control measures. But that view ignores the produc tive potential of new members of so ciety. After all, can't they add to the world's output of goods and services? Can we, though, anticipate that they will add a proportional amount? Two hundred years ago, Thomas Malthus predicted that they would not.4 Thus was applied the famous "law of diminishing returns" which still plagues the thinking of people who fear rapid population growth. Malthus's prophecy, however, did not come true. Instead of Iiving standards falling as population in creased, they have gone up. As Ju lian Simon and others suggest, there are several important reasons why this has happened.

One is the advantage of division of labor which Adam Smith described. It enormously enhances our ability to produ,ce.5 Moreover, denser population makes both transportation and com munication easier. Simon points by way of exampl~ to the agonizing dif ficulties oftran$porting food in early America; he al~o quotes one source as noting that! "it was cheaper to move a ton of iron across the Atlan tic than to carry it ten miles through Pennsylvania. ,,~ Most importantly, Simon argues, the growth or population simply means there will be more people to enjoy what lif~ has to offer and to conceive of dramatic new ways to deal with our pfroblems. In Abbott's fanciful book, one of the residents of Flatland takes an excursion into the world of three di mensions. Thus the book can be used-as Carl $agan employed it for his TV series "Cosmos"-as a device to provoke us ipto trying to imagine what a fourth dimension must be like. 7 So, too, witq the matter of popu lation growth. I We must not allow ourselves to~ecome trapped into thinking solely in terms of a future whose dimensions are limited.

Over the lortg run, Simon notes, resource costs' have steadily fallen as man has used his creative wit to contrive new rp.eans of coping with scarcity. He se~s scarcity, in fact, not as a formidabl~ barrier but rather as an exciting challenge.

334 THE FREEMAN Simon has left behind the flatland of the folk who despair at population growth. In his hopeful vision, "the ultimate resource is people-skilled, spirited, and hopeful people who will exert their wills and imaginations for their own benefit, and so, inevi tably' for the benefit of us all."8 f) -FOOTNOTESIJohn Noble Wilford, "The People Boom Off the Chart!" Reader's Digest, January 1982, pp. 114-15. Too Many People? 2Edwin A. Abbott, Flatland: A Romance of Many Dimensions (6th ed.; New York: Dover Publications, 1952). 3Julian Simon, The Ultimate Resource (Princeton: Princeton University Press, 1981), pp.161ff. 4T. R. Malthus, An Essay on Population (New York: E. P. Dutton & Co., 1958), Book I, Chap ter I. 5Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (New York: Modern Library, 1937), Book I, Chapter I. 6Simon, p. 191. 7Carl Sagan, Cosmos (New York: Random House, 1980), pp. 262-63.

8Simon, p. 348. IDEAS ON LIBERTY THE ANSWER to the question, "What is over-population?" is that it is an imbalance between the number of people living and their food supply. This is a condition the world has faced during most of its history. As a result, we can answer the question, "Does the world face over-popula tion?" that it indeed does face over-population, hunger, and famine pro gressively as it becomes more and more socialistic. Socialism has a poor record when it comes to eliminating problems: its answer adds up to eliminating people. In fact, one of socialism's major and chronic prob lems is simply people. Socialism on the one hand destroys production, and, on the other, breeds up the least desirable elements. Its answer is to find the people at fault. Socialism always faces over-population; a free economy does not. Socialism decreases production and it also causes a decline in the middle classes numerically by means of oppressive taxation; it is thus a means of population control with respect to the productive middle classes.

On the other hand, socialism increases population among the lower classes by means of its welfare subsidies. Thus socialism has an imme diate double impact on population. A third impact of socialism on pop ulation then becomes its effort to control and limit population. ROUSASJ. RUSHDOONY,The Myth of Over-Population SINCE the time of Bismarck, most schemes for collectivism have started with health care. Far more support can be garnered for national health insurance than for nationalizing steel factories. Many claim that medical care is not, or should not be, a kind of industry, governed by the same laws of economics as manufactur ing, trade, and other service enter prises. The thought of doctors prof iting from human suffering, or of a patient being turned away because of a "negative wallet biopsy," pre dictably arouses indignation. Any discussion of economics in medical care is emotionally charged, because people naturally fear sick ness, dependency, and death. Their fear may be exploited to cloud their powers of reasoning, making health care an excellent hook for introduc ing socialist ideas. Though the term Jane M. Orient is in the private practice ,of medicine in Tucson, Arizona. She also is adjunct assistant pro fessor of internal medicine at the University of Ari zona College of Medicine.

Jane M. Orient,M.D. COLLECTIVISM IN MEDICINE: An Exception or(l Hook? "hook" (as a verp) may have entered common parlance via popular books on transactiona1 analysis, the term (as a noun) derives from Lenin's Thesis on Tactics. The Communist International advises searching for and taking adv41ntage of all sources of discontent aI!llongthe masses. 1 Is Medicinea UniqueEndeavor? Essential to! the tactic of using medicine as a hook is to emphasize ways in which, it appears to differ from other actiNities. One inherent difference is asserted to be the influ ence of physici~ns on the use of ser vices. Though pljlysicians' fees in 1973 constituted only 19% of total health expenditures,2, it is believed that "physicians are in the unique posi tion of being aqle to regulate the de mand for their! services."3 They or der admission to the hospital, labo ratory tests, drl!lgs, and surgical pro cedures.

Although pe~ple can live without dishwashers and automobiles, or 335 336 THE FREEMAN June without hairdressers and teachers, medical care is felt to be a matter of life and death. In some cases, deny ing medical care may indeed be the equivalent of a death sentence. Therefore, health care has been de clared a "right," presumably as a corollary of the right to life. A "two class system of care" (such as one which provides public hospitals for those unable to pay for private care) is considered an infringement of "equal" rights. Because of its neces sity, health care must not be treated as a commodity. The doctor-patient relationship has been invested with an aura of the sacred. The physician must always act in the best interest of the pa tient, maintain his confidences, be have honorably, and take all care that is humanly possible in his treatment. Grubby business consid erations seem sacrilegious when the physician "holds your life in his hands." The idea of profits in propor tion to misery seems obnoxious.

Let us compare other human en deavors with medicine. The idea that physicians alone create demand for their services, though repeatedly proclaimed with great authority, is patently implausible. Physicians do not appear on television, advertis ing for patients. They employ secre taries to say: "I'm sorry, but the doc tor can't see you for three weeks." In contrast, many products would be without a market if advertising were not allowed. Automobile mechanics, insurance salesmen, and stockbro kers all may take advantage of our fear and ignorance to sell us more of their services than we really need. The most notorious group for creat ing a need for their own talents must be lawyers in legislatures and regu latory bodies, who invent laws no layman could possibly interpret. Limited Powers While doctors do sometimes save lives, their power over life and death is often exaggerated in the public mind. They neither give life, nor vanquish death. Their occasional triumph in the struggle with the Angel of Death is only temporary. A substantial part of the doctor's time is spent treating colds and back ache, which are hardly life-threat ening, or diseases" like terminal can cer or cirrhosis of the liver, in which he may offer comfort but not cure.

The need for a given medical service is seldom absolute. Many illnesses can be treated just as well at home as in the hospital; many diagnostic tests are of marginal value; and many treatments improve some what the probability of a good out come, at the price of introducing new risks of harm from the treatment it self. Not only do doctors have limited weapons against premature death; they are by no means the only pro viders of the necessities oflife. If their 1982 COLLECTIVISM IN MEDICINE: AN EXCEPTION OR A HOOK? 337 services are conscripted with the justification of the right to life, then what about those who produce food and shelter, which are continual, not merely episodic needs? And while the physician has the responsibility of trying to save the sick and injured, how much heavier are the responsi bilities of those who can kill people in the best of health, such as engi neers who design bridges or power plants, airplane pilots, and mechan ics who repair brakes.

Marketable Qualities Health itself is not a commodity; it cannot be purchased for any amount of money. Things which can be purchased include drugs, diag nostic tests (and the equipment which makes them possible), and the time of people with expertise. Medi cal devices do not undergo sponta neous generation. Since somebody must invest money in creating them, to say that one person has a right to their use is incompatible with an other's right to his property. Medi cine is labor intensive. The nurse, the x-ray technician, the electrician, the cook, and the janitor must be paid, or they stop coming to work. Even the doctor must earn a living, and to take in laundry would inter fere with the ability to see patients. Because the doctor intervenes in areas related to the patient's physi cal and spiritual integrity, and be cause the patient is often impaired by sickness or anxiety , a violation of trust in the doctor-patient relation ship is particularly reprehensible.

Nevertheless, •the fundamental de mands made on the doctor are not unique. Bankers and lawyers must maintain confidences and put the interest of their clients ahead of their own. Professors must refrain from seducing students. Plumbing con. tractors must give honest estimates and do careful work. Honor is re quired of men of every calling in their relationships with others. Medicine is aquasi-priesthood only to the extent that magic is involved. In fact, magic ~nd art remain impor tant ingredients in healing. How ever, patients rightfully demand science and technical skill in addi tion' and for tp-ese payment has tra ditionally been expected. (If technol ogy become$ the only aspect of medical care !that is well compen sated, the sciepce fiction writers may be prophets: In The Empire Strikes Back, all the' doctors appear to be robots.) Do doctors ireally profit from pa tients' misery? If the doctor deliber ately made the patient sick, then the accusation w!ould be just. Bakers don't profit from causing human hunger, but from relieving it.

Plumbers don't profit from the exis tence of human needs for drinking water and waste disposal, but for providing san~tary means for meet ing them.

338 THE FREEMAN June The ProfitMotivein Various PracticeArrangements To condemn the profit motive in medicine is a hook. By logical exten sion' one must condemn it every where. Yet the question .is not whether the profit motive will oper ate in medicine, as in any field of human action, but how, and to whose advantage, it will work. Profits are incentives, and may consist of money, power, prestige, or leisure time. Are incentives in a market economy more likely to benefit the patient than those in a socialized one? Aren't most hospitals and clinics nonprofit? Or weren't they before the intrusion of big health care corpo rations? Although many excellent voluntary hospitals exist, their non profit status does not exclude big re turns to some people affiliated with them. Returns may not be forth rightly called profits. For example, a dapper young man with a degree in social science is planning a health awareness program intended to pre vent illness by counseling people about their lifestyle. "It will be non profit," he emphasized.

"Oh, how will you make a living?" "I'll get a salary, of course." "What's the difference between your salary, and my taking home the profits of my business?" A benign smile was the only an swer. One difference, of course, is that the salary is paid regardless of whether or not there are profits. If income does not exceed expendi tures' then let the equipment sup pliers, the landlord, and the bank take the loss. Another difference is that he'll be charging more to tell people they are fat and flabby than I ask for a complete history and physical examination. Furthermore, he will not be paying personal prop erty or business license taxes. Given that doctors must earn a living (albeit not so much money that they must flaunt their conspicuous consumption), why should the pa tient want to pay him directly for each service, instead of by salary? The fee for service may encourage the doctor to prescribe unnecessary treatments. Unquestionably, some unscrupulous doctors make a lot of money from useles8 injections.

One reason for payment for extra services is that people are some times willing to do for money things they wouldn't do for love. Examples incl ude driving to the emergency room at midnight, listening to pa tients with endless vague com plaints, or looking up a bleeding rec tum on Christmas Eve. The tendency to "buff and turf' when confronted with an unpleasant and perhaps fu tile task is only human nature, es pecially when shirking is rewarded as well as volunteering. The importance of the fee as part of the treatment was first recognized by psychiatrists. If the patient hasn't sufficient investment in getting bet1982 COLLECTIVISM IN MEDICINE: AN EXCEPTION OR A HOOK? 339 ter, he may be evasive about coop erating with treatments such as psychoanalysis, which is demanding and painful. Perhaps the unshak able faith patients have in the en capsulated lake scum found in health food stores or in the bizarre pre scriptions of the quack is related to the outrageous price they pay. Free medicines often accumulate, un tried, in the cupboard.

The Patientas Employer The most important advantage to the patient in being responsible for his own bill is that he thereby be comes a customer, the physician's employer. While the physician is as sumed to have greater knowledge, the customer ultimately makes the decisions. If not satisfied, he may freely seek advice elsewhere. Al though the physician at times may be tempted to accede to harmful re quests, to avoid losing business, the challenge to his integrity is no greater than in a different system, where the threat may be a letter to a congressman. Just as an honest contractor may have to say "I won't put the roof on that way because it will leak; either do it my way or find another contractor," the physician can suggest finding another doctor. Both physician and patient are pro tected when they have freedom of association. The beneficiaries of public medi cine are no longer customers, but consumers. Unable to exert their in fluence directly with their dollars, they must be represented by a pa tient advocate.' The relationship be tween patient ~nd physician may in fact be involuntary for one or both parties. The agency dispensing the paycheck intrudes, dividing the physician's loyalty. The consumer may be considered an adversary of the agency, if he demands more than his "fair share" of services, while the physician is held responsible for preventing "overutilization." The doctor is the "gatekeeper" to expen sive consultations and diagnostic tests. The pati~nt has an investment in assuming aisick role, since more services and attention become avail able to him without additional charge. In a~repaid arrangement, that's the only' way to get his mon ey's worth. If the consumer is dis pleased, he cannot fire the physician as the customer would, but can com plain to the o~budsman, the chief of staff, or his s~nator. His influence may be negligible, or magnified out of all proportion.

Although many wish that medical care were aloof from the market place, market' phenomena invari ably occur even as efforts are made to insulate health services from market pressures. As the price bar rier is removed, demand skyrockets. Sitting in the: waiting room at the local Veterans! Administration hos pital reminds! one of the gasoline 340 THE FREEMAN June lines, and many people withdraw from prepaid health plans because of the lengthy waits. Waiting time seems inversely proportional to the price of goods or services offered. People in queues have a natural an gry reaction: they demand some au thority who will see that the greedy providers allocate resources more equitably. Somebody must set up a priority system, or print ration tick ets. SubsidizedDemand While complaints arise that med ical care is still not adequately available to some, others cry that al ready we spend too much on it. Few recognize the explanation: people are always less thrifty when spending other people's money than when spending their own. In collectivized payment plans (whether govern ment or insurance plans), some way of controlling expenditures is clearly imperative. Insurance companies have discovered the price of social izing risks while individualizing benefits. Though providing for ca tastrophes by means of insurance is responsible and rational, even this approach entails moral hazard, in that beneficiaries may try to extract more from the insurance than is jus tified.

Fire insurance may reward arson, and health insurance may reward disability. 4 To attempt to insure rou tine expenses compounds the problem. A patient who really doesn't need an x-ray may want one any way, "just to be sure," because the insurance will pay for it. The pa tient who says "spare no expense" is seldom planning to pay the bill him self. While our society encourages people to become risk-averse and de mand a Cadillac insurance policy, the Chevrolet makes equally good sense in insurance and in transportation. The insurance premiums are a given. If one chooses a minimum policy for disasters, and invests the difference in premiums, with luck one may have a profitable investment. If not so lucky, routine out of pocket ex penses may still cost less than a de luxe policy. Cost-ControlMechanisms Having the customer pay a greater part of the bill is generally not the favored proposal for controlling costs or stimulating competition. Usually some type of prepaid plan is envi sioned. Not only are the risks to be socialized, but also the benefits. The availability of services is to be based on cost benefit analysis. Since soci ety pays, society must benefit. Are pneumococcal vaccines to be cov ered? Let us calculate the cost in curred by society from x preventable cases of pneumonia. Lowered pro ductivity, expenses for x-rays and antibiotics, and even some deaths will occur. Is this price greater than that of y immunizations? The anal1982 COLLECTIVISM IN MEDICIN1H:: AN EXCEPTION OR A HOOK? 341 ysis is much more complicated than the process of saying: "This vaccine reduces your chance of getting pneumococcal pneumonia. Is it worth $15 to you?" The former also multi plies many times the impact of an error in calculation, which must be based on uncertain data.

Some of the cost control (ration ing) mechanisms in prepaid or pub lic health plans are administrative. An algorithm may be devised, di recting that a chest x-ray shall be ordered if (and only if) certain indi cations are present. The physician or other provider, such as a nurse practitioner, may deviate from the recommendations, but will have to justify his action if audited. A "has sle factor" may be introduced. At a Veterans Administration hospital, the signature of the chief of service was required on all requisitions for brain scans, when it was felt that that service was being ordered too often. If the consumer's incentive to save money has been eliminated, why not invent one for the providers? Many health maintenance organizations have done just that. Instead of pay ing people for doing tests and per forming services, they are paid for not doing them. Money that is bud geted but not spent may be divided up among the physicians as a bonus.

The profit motive is neatly· turned around. Unless we assume that pre paid plans attract only physicians of sterling char~cter, surgeons who previously wel1e tempted to do un necessary surgery may now be re luctant to do operations from which the patient wO\illdbenefit. When entrusting planning and decision-making to a central agency, one assumes that the planners are smarter than ,individual practitio ners and, most ~mportantly, have the right values. N~turally, they may not correspond to the values of certain patients. As 0Ile Veterans Adminis tration physician said about "too many" hernia operations: "Let them wear a truss." I have yet to find a patient who p~eferred that alterna tive. All rules aIlid regulations can be circumvented by ingenious people. If Medicare doesn't cover custodial care, the doctor can lorder an intravenous feeding, and clilange·the category to skilled nursipg. Since Medicare doesn't cover housecalls to give ene mas or transportation for outpatient diagnostic test~, the patient may elect to be admittetl to the hospital for some x-rays. CQstcontrol devices may ultimately increase costs, as people respond to incentives the planners hadn't recognized.

Should the Doctor Be a Slave, a Keeper, or a iServant? Collectivism in medicine will un doubtedly cha~ge the doctor-patient relationship as well as altering the distribution of services. Such pro342 THE FREEMAN June posals are based on the idea that medical care is a right. The strategy ofthis hook is to divert attention from the question of the impact on per sonalliberty, by not mentioning the duty corresponding to the right. Physicians potentially become slaves, with the amorphous public (repre sented, of course, by an authority) as the slaveholder. Rather more likely is that they will become the keepers, depending upon how much influence they exert on the central planners. An ominous development in the medical literature is the frequent use of the term "noncompliant." More familiar in its use by bureaucrats regarding adherence to regulations, it now refers to patients who don't take their medicine or follow their diet.

The emphasis placed on the im portance of lifesty Ie for health has disturbing implications. Normally, I am not inclined to care about how much my neighbor drinks, smokes, or exercises. But if I'm paying the intensive care bills resulting from his gastrointestinal bleeding, emphy sema, or heart attack, my interest in his private life mounts. In Com munist China, living a healthful life is considered a patriotic duty. Ev eryone becomes his brother's jailer, as he is taught to be responsible for the behavior of family and neigh bors. The physician will be the servant of whomever pays him (or risk his livelihood). All contracts are vali dated by "consideration," which is usually money. The same writers who condemn the avarice of physi cians under fee for service ask us to rely on the altruism of physicians under other economic arrange ments. As patients decline to pro vide the consideration, they relin quish their decision-making role, which many agencies are all too ready to take over.

Conclusions A hook is a condemnation of the status quo, without critical exami nation of the alternatives. Before dismantling our fee for service econ omy, we should outline our goals and see whether other systems can meet them better. Is the goal to reduce unnecessary surgery? The rate of tonsillectomies in China is very high, without the incentive of Blue Shield.5 Do we want to reduce hospital stays? The Mayo Clinic, a totally fee for service orga nization' has succeeded as well as prepaid plans. 6 The average length of stay is 15 days in the Soviet Union, compared with five in the United States. 7 Do we wish to distribute ex pensive equipment fairly? The re gional planners put the CT scanner, the cause celebre for cost contain ment, at St. Luke's Hospital rather than at Harlem, where head trauma victims are more commonly seen. As a result, in a single year only 14% of 1982 COLLECTIVISM IN MEDICINE: AN .EXCEPTION OR A HOOK? 343 the 1870 patients in whom the test was recommended actually received it under a "sharing" arrangement. 8 Are we concerned about reducing fear? Patients in the Soviet Union do not have to fear the cost of a se·· rious illness-they have prepaid in stifling if unacknowledged taxes. In stead, they fear the indifference of the doctor, the filth in the operating room, and shortages of the most ba sic drugs and supplies. 9 Are we in terested in making medicine re sponsive to consumer demand? In the Soviet Union, the logical endpoint of the total institutionalization of medicine has been reached: the Hip pocratic Oath is forbidden, because it might interfere with the physi cian's loyalty to the employer, the state. 10 "What about the poor?" is the most pervasive, recurrent question of the supporters of socialism. While med icine has a long history of helping the unfortunate, the results are called "inequitable," and the method "patching" or "reformist."ll Marx ists use our duty to help the poor as a hook for undermining the entire economic structure, with no concern for the observable consequences of worsening the plight of the poor and multiplying their number.

Once health benefits are social ized, on the basis that medical care is different from other economic ac tivities, the fundamental similari ties will become apparent. To be logically consis~ent, collectivization must be extended to other enter prises, or undpne in medicine. The former course is more probable; turning away I from collectivist mo rali ty is a pHenomenon rarely ob served to date. The hook is indeed a fearfulweapo~. Ii -FOOTNOTESIJames L. Tysom, Target America (Chicago: Regnery Gateway,!1981), p. 19. 2Cotton M. Lin<ilsay, ed., New Directions in Public Health Care: A Prescription for the 1980s (San Francisco: Institute for Contemporary Studies, 1980), p. 194. 3D. S. Brody, "Tpe Patient's Role in Clinical Decision-Making,'~ Annals of Internal Medi cine, vol. 93, 1980, pp. 718-722. 4GeorgeGilder, Wealth and Poverty(New York: Basic Books, 1981~, p. 108. 5William V. MGDermott, "The China Syn drome," Archives qf Surgery, vol. 116, 1981, pp.

245-246. 6Fred T. Nobrega, Iqbal Krishan, Robert K. Smoldt, et al., "Hospital Use in a Fee-for-Ser vice System," Joulrnal of the American Medical Association, vol. 2~7, 1982, pp. 805-809. 7William A. Kn~us, Inside Russian Medicine (New York: Everest House, 1981), p. 123. 8John C. M. Brust, :P. C. Taylor Dickinson, Edward B. Healton, "Failure of CT Sharing in a Large Municipal Hospital," New England Journal of Medicine, vol. 304, 1981, pp. 1388 1393. 9Knaus, op. cit. 10M. G. Field, Doctor and Patient in Soviet Russia (Cambridg~, Mass.: Harvard University Press, 1957), p. 1714. llHoward Waitzkin, "A Marxist View of Med ical Care," Annalsioflnternal Medicine, vol. 89, 1978, pp. 264-278.

Gary McGath BIG Little Governments COMPLAINTS about "big govern ment" are commonplace. And it is a genuine evil, if we take the term to mean government that has grown beyond its legitimate function of stopping force and fraud. But the sheer size of a government is a poor measure of how good or bad it is. The British colonial government in 1776, for example, wasn't unusually big for governments of the time but it certainly was oppressive. In watching for governmental activi ties that take away our freedoms, we should avoid being misled by a phrase; we should watch out for the abuses not only of the "big" federal government, but of "little" govern ments as well-that is local govern ments. Many actions which would be unMr. McGath is a computer programmer and freelance writer in Hollis, New Hampshire. 344 thinkable to the federal government are routinely performed by local governments. If Congress passed a law limiting the number of new businesses that could be started each year, or requiring every house to oc cupy a two-acre lot, or banning coin operated games, the result would be an avalanche of protest. Yet local governments commonly engage in actions like these.

This is not to imply that local gov ernments are worse overall than the federal government. What it does show is the existence of a division of labor between the federal and local governments. The federal govern ment devotes its attention, where possible, to activities that affect the whole nation or large parts of it; lo cal governments concentrate on the activities of such smaller units as individuals, households, and local BIG LITTLE GOVERNMENTS 345 businesses. This is a proper and ef fective division when the work being done by the governments is legiti mate; but when governments fail to respect individual rights, it puts lo cal governments into a position where they can exercise more de tailed (though generally less mas sive) control over people's activities than the federal government can achieve. The typical issue that faces a local government is not one that will af fect millions of cases, but one that deals with a single event-what to do about Second Street, whether to build a new library. And in dealing with such a localized issue, people will be more inclined to exercise their immediate preference and disregard broad principles than they might be if they were debating a question of national importance.

To take an example I know of per sonally, a small New Hampshire town was recently involved in a de bate over whether to amend the town's law regarding housing devel opments. The side that favored the amendment offered exactly the same argument as the side that opposed it; each side tried to assure the vot ers that its plan would do the better job of keeping real estate developers out of town. One side might have consisted of conservatives who be lieved, in national issues, that the government should not tell people how to use their property. The other side might have been liberals who would rebel at any federal policy smacking of discrimination against the poor. But in this debate, each side gave thought only to keeping "undesirables" !from moving in. Local governments are often much more "informal" than the federal government, and local leaders fre quently put thi$ informality to good use. I have seeJi the mayor of a large city and a town meeting moderator each selectively enforce the rules on closing debate. on the basis of the outcome he wished to achieve. Com pare this sort of free-wheeling ma nipulation to the strict observance of cloture rules that characterizes important debates in Congress.

Ironically, today's abuses by mu nicipal governments stem at least in part from sinc~re attempts to limit governmental power. Traditionally, advocates of l!imited government have tried to keep power from being abused by confining it to the local level. To a certain extent, this ap proach is valid~ even in a day when news from Washington travels at the speed of light. It's certainly easier to talk to local officials and try to change their minds than it is to in fluence Congress. The same can be said of appealing to local voters in comparison with making a dent in a national election. But if we forget that limiting gQvernment is the rea son for keeping'power close to home, 346 THE FREEMAN the slogans of "local control" and "home rule" raise a danger of their own. We can hope that local govern ments will. refrain from restricting freedom where the state and federal governments would show no hesita tion. But it is also possible that a local government will get carried away on a particular issue and im pose controls that people elsewhere will regard as unjust. If a state or federal government attempts to re strict the municipal authorities' il legitimate activities, it would be a serious mistake to defend those ac tivities in the name of "home rule"

or "local rights." Yet "rights" of this sort are often invoked, particularly in opposition to restrictions on tax rates. We have to remember that rights as a moral concept apply to indi vid uals, not to governments. Issues that pit one level of government against another should always be judged not by asking which side is violating the other's rights, but by asking which side is violating the rights of indi viduals. In saying so much about the perils of "little governments," I should make it clear that I am not claiming that local governments are worse of fenders overall than the federal gov ernment. (A look at the federal withholding tax on your paycheck stub can make anything the local authorities might do seem insignifi cant by comparison.) Rather, my points are these: that size alone is not the criterion of improper gov ernmental activity, that each level of government has its own distinc tive potential for diminishing free dom, and that the tactic of uphold ing the rights of the lower levels of government as a defense against the higher levels is an error that leads the debate away from the rights of the individual.

In addition, I would like to make one positive point: it remains true that one person can fight City Hall much more easily than he can fight the Capitol. Defending the princi ples of freedom in a local debate of fers much more of a chance of affect ing the outcome than defending them in a national contest does. Not only does this opportunity provide the psychological satisfaction of seeing results, it. allows these results to set precedents for further successes on a wider scale. Today, we can answer the claim that no city could survive without zoning laws simply by pointing at Houston. Future local successes would similarly serve as demonstrations that the principles of freedom do work. Let's not forget about the fight against "big government." But if, at the same time, we can work on lim iting the powers of "big little gov ernments," we will greatly increase the long-term hopes of freedom. ® Gary North Cut-Throat Oppo~nities "Cut-throat competition!" I suppose that when most people hear this phrase, they think of the bankrupt-· ing of some company. Whenever a "going out of business" sign appears in the window of a local store, some people may feel that the community has lost an important asset. The downtown district of almost any city is marked by empty storefronts. The consumer may think to himself, "Stores downtown are the victims of cut-throat competition. Something ought to be done about it."

Very often, something already was done about it. An obvious example is Federally financed urban renewal projects. The Federal government in the 1960s began an extensive pro-· ©Gary North, 1982. Gary North, Ph.D., is President 01' the Institute for Christian Economics. The ICE pub.. Iishes a newsletter, Biblical Economics Today. A free six-month trial sUbscription is available by writing to Subscription Office, ICE, P.O. Box 8000, Tyler, Texas 75711. gram of tearing down. older neigh borhoods' which disrupted the resi dents, many of whom were forced to move out. 1 Wnen the Federal budget constraints subsequently hampered the completion of downtown reno vation projec~s, some cities were stuck with gaping holes in the ground, or the scattered remains of demolished buildings. In the meantime, giant shopping malls were b~ing built in the sub urbs, closer to the more affluent neighborhoods in the community.

Parking space, always a problem for downtown businesses, was available in these residential shopping cen ters. Downtown businesses could no longer compete so effectively for middle-class dollars. The familiar business establishments of the inner city-pawnshops, taverns, porno graphic book stores and theaters, and discount stores selling low-quality ~47 348 THE FREEMAN June goods-began to take over the empty stores that had been vacated by those establishme:p.ts that had moved to the shopping malls, or that had gone bankrupt because they hadn't moved. City councils attempted to retal iate. They spent money on the con struction of downtown malls, reno vating the fading buildings that had once been the pride of the city. They established low-cost urban transit facilities, such as buses, that were supposed to bring lots ofshoppers into the downtown areas. They built benches for people to sit on and en joy watching the pedestrians. In most instances, these tactics failed. The more successful of these experi ments have been marked by private entrepreneurship, when profession als such as architects or lawyers, whose firms do not depend heavily on "walk-in" traffic, have bought or leased abandoned space, and have converted this space into office buildings. But the retail shops that cater to the middle class and upper class have not returned, despite the face-lifting operations of the reno vators.

The "Destroyers" Whose fault was it? Who killed off the downtown businesses? The orig inal town planners, who neglected to build sufficient parking space? The real estate speculators, who poured billions of dollars into shopping malls all over the country? Henry Ford, who created the initial mass-market demand for the automobiles that carried Americans into the suburbs? The designers and builders of tract houses, who made middle-class housing available to a generation of post-war buyers? Someone must have been guilty of unfair competition. Someone employed the tactics of cut throat competition. Who was guilty? The answer should be obvious. Consumers did it. Consumers de cided that they preferred to live in the suburbs, in three-bedroom, ranch style tract houses. They decided that they enjoyed the mobility offered to them by the automobile, rather than the limited-route, mass-transit trol lies and buses. They wanted the con venience of driving to one location and walking through huge air-con ditioned buildings that housed hun dreds of retail establishments. They grew tired of walking in the heat, or the rain, or the cold of winter, in or der to get to and from retail stores.

They decided that "free" parking in a large parking lot was preferable to paying for space in crowded down town parking lots, or worrying about putting a coin in a parking. meter every hour. (They actually do pay for parking when they make their purchases from the· shops in the shopping malls, since store owners pay for their share of the parking lot costs in their monthly rental fees, and consumers make the funds available to the store owners when 1982 CUT-THROAT OPPORTUNITIES 349 they make purchases. But few shop pers spend much time thinking about the hidden costs offree parking. They think of the shopping mall parking space as free. The space downtown clearly is not free, and this clarity makes a difference in the decisions of shoppers.) We can blame the shopping mall builders for the plight of the down town stores only by blaming entre preneurs for making available new opportunities for consumers. The builders and lenders took risks. They believed that their malls would be profitable because consumers would enjoy the advantages of shopping in suburban locations. They might have been incorrect. If so, the first malls would have lost fortunes, and few new ones would have been built. But the malls made fortunes, and the projects were imitated by entrepre neurs who wanted to make similar opportunities available to con sumers in their regions.

Kirznervs. Schumpeter Is a man who takes a risk and makes an opportunity available to consumers really a destroyer? Some economists have used this termin01 ogy. Joseph Schumpeter called the entrepreneurial process of innova tion "the process of creative destruc tion."2 But isn't it misleading to dis cuss the role of the entrepreneur primarily in terms of the process of destruction rather than a process of making available new opportunities to consumers! who might not have perceived theT1l? This distinction is the heart of I~rael Kirzner's impor tant critique pf Schumpeter's anal ysis. Kirzner writes: ... Schumpeter's entrepreneur acts to disturb an existing equilibrium situa tion. [Note: "equilibrium" is a technical term used here i to specify a hypothetical and actually unobtainable situation in which all market participants have per fect knowledge, of all prices, and there fore the economy offers no profit oppor tunities, except through technological or organizational innovation which leads to a new "production mix" of scarce eco nomic resourc~s-G.N.] Entrepreneu rial activity disrupts the continuing cir cular flow. The!entrepreneur is pictured as initiating change and as generating new opportunit~es. Although each burst of entrepreneurrial activity leads eventu ally to a new equilibrium situation, the entrepreneur i~ presented as a disequili brating, rather than an equilibrating, force. Econo~ic development, which Schumpeter of course makes utterly de pendent upon entrepreneurship, is "en tirely foreign to what may be observed in ... the tendency towards equilibrium."

[Schumpeter, The Theory of Economic Development (Cambridge, Mass.: Har vard University Press, 1934), p. 64.] By contrast 1:nY own treatment of the entrepreneur e~phasizes the equilibrat ing aspects of his role. I see the situation upon which th~ entrepreneurial role im pinges as one ot inherent disequilibrium rather than of equilibrium - as one churning with: opportunities for desir able changes rather than as one of placid 350 THE FREEMAN June evenness. Although for me, too, it is only through the entrepreneur that changes can arise, I see these changes as equili brating changes. For me the changes the entrepreneur initiates are always to ward the hypothetical state of equilib rium; they are changes brought about in response to the existing pattern of mis taken decisions, a pattern characterized by missed opportunities. The entrepre neur, in my view, brings into mutual ad justment those discordant elements which resulted from prior market ignorance. 3 Entrepreneurship The entrepreneur is anyone who struggles with the problem of uncer tainty. Anyone who tries to predict the future and then acts in terms of his prediction is an entrepreneur. He sees opportunities for profit that others miss. He can "buy low" and "sell high" because others do not recognize the existence of a higher than-normal price spread between wholesale and retail. They do not perceive that "producer goods" are underpriced in relation to what some consumer will be willing to pay for the "final product" in the future. (Of course, the "producer good" may be identical physically and technically to the "final product"-land, for ex ample, or a gold coin, or an an tique-but the purchase price for the entrepreneur is lower than what he expects to be able to sell it for in the future.) This means that entrepreneurs are not innately a separate class of peopIe within the economy. Every per son is to some extent a speculator, since we all make predictions about the uncertain future, and we all act in terms of our perception of that fu ture. There are those people, how ever, who are so adept at predicting the uncertain future, and acting in terms of unexpected (by others) fu ture consumer demand, that they can become specialists. They become full time speculators, in the sense that other people are full-time manual laborers or full-time accountants, or whatever.

Entrepreneurs deal in opportuni ties-specifically, opportunities that are not perceived as such by compet itors. The entrepreneur is like a per son who knows where a rare gold coin is lying in a gutter. He then makes plans: to walk to that gutter, bend down, pick the coin up, put it into his pocket, take it to a coin shop, sell it for cash, take the cash to a store, and make a purchase with it. He also hopes to do this without calling attention to himself, so that someone else who is physically closer to that gold coin than he is will not take action sooner. He also has to plan for the possibility that a robber will steal it before he can spend it. He must plan for "unforeseen con tingencies." Consider this question: Is the en trepreneur engaged in cut-throat competition when he picks up that gold coin, sells it for cash, and then 1982 CUT-THROAT OPPORTUNITIES 351 goes out and spends it? After all, anyone could have picked it up. All he had to do was to shout to a passer by: "Hey, buddy, look down in the gutter. Yes, that gutter. See that gold coin? Can you think of anything you could do with the money it's worth?

You can? So can I. So why don't we both go down to the coin shop, cash it in, split the money, and go our own ways?" Would you call atten tion to the gold coin under such cir cumstances? And if you would, do you think the passer-by would call out to a third person, and would that person call out to a fourth, and so on, until "cut-throat" competition becomes "friendly" competition, by mutual-let alone universal agreement? If you think it would be foolish to call attention to the coin lying in the gutter, but you also think it would be immoral to pick it up for your use, since this would mean engaging in cut-throat competition, you could leave it in the gutter. But who ben efits? Not the person who lost it. Af ter all, since you have decided to leave it in the gutter, you are in no position to call the police and tell them that you found a coin in the gutter, and ask them to inform you should someone report the loss. And even if you did this, as you should, what if no one claims it? Then what do you do? You refused to call atten tion to it as it sat there in the gutter.

Should you give it to the State? Should you give it to charity? Should you put it bac~ in the gutter? Who benefits now? Maybe it will be washed down adrain and out to sea. Maybe it will bie found by a criminal who will use the money to buy a gun and rob someone. In short, once you know about an iopportunity, you can not escape from the responsibility of taking advantage of it or misusing it. Taking Advantage This is true for every entrepre neurial possibility. Anyone who sees an opportuni~y to enrich himself must make a Q-ecisionabout taking advantage of the situ;ltion. Ques tion: Is takingiadvantage of a situa tion the same las taking advantage of a person? If you refuse to call out and tell a passer-by about the gold coin in the gutter, have you taken advantage of him? After all, the ad vantage was "within his grasp." He simply failed to recognize it. But if you refuse to qall out, and you also refuse to pick 'Up the coin, you are very possibly passing along the op portunity to someone else. Further more, if you miss this opportunity, and so does eyeryone else, and the coin washes down the drain, then you are responsible for not having of fered the coin qealer the opportunity of making avai[able the coin for pur chase by his c~stomers. No matter what you do, ypu are going to "take advantage" of someone, even if you only take away his option of taking 352 THE FREEMAN June advantage of the situation himself (e.g., the coin collector's opportunity to add to his collection).

What do we mean when we speak about "taking advantage" of some one? If we argue that by acting to benefit ourselves, we have hurt all those who might have made the same use of the economic resource in question, then the concept becomes ethically useless. Did my wife "take advantage" of all unmarried women when she married me? (My ego tells me it must be so; my mind sends out a warning against this approach to the question.) After all, she removed a tremendous opportunity - in my view-from the "market." If the mere personal use ofa scarce resource is understood as "taking advantage" ofanyone or everyoneelse, then life as such is morally question able. Those who are living above a subsistence level are "taking advan tage" of those on the margin of life. When I eat, a starving person is not eating. When I turn up the heat in my home, I am using fuel that might have saved a poor person whose fuel is gone. In fact, we, the living, are responsible, in this view, for the deaths of all those whose lack of funds or medical attention (at what ever price) led to their demise.

This is not a hypothetical exam ple. Consider the words of theolo gian-historian Ronald Sider, whose best-selling book, Rich Christians in an Age of Hunger (1977), has become one of the most influential books on seminary and Christian college campuses all over the United States. His introduction· to the book sets forth the problem: The food crisis is only the visible tip of the iceberg. More fundamental problems lurk just below the surface. Most serious is the unjust division of the earth's food and resources. Thirty per cent of the world's population lives in the developed countries. But this minority of less than one-third eats three-quarters of the world's protein each year. Less than 6 per cent of the world's population lives in the United States, but we regularly de mand about 33 per cent of most minerals and energy consumed every year. Amer icans use 191 times as much energy per person as the average Nigerian. Air con ditioners alone in the United States use as much energy as does the entire coun try of China annually with its 830 mil lion people. One-third of the world's peo ple have an annual per capita income of $100 or less. In the United States it is now about $5,600 per person. And this difference increases each year. 4 Production and Consumption I can remember reading textbooks written in the 1950s that affirmed the wonders of American capital ism, and that pointed with pride to the fact that 6 per cent of the world's population produced 40 per cent (or 33 per cent) of the world's goods. But that argument grew embarrassing for those who proclaimed the sup posed productivity of socialism. 801982 CUT-THROAT OPPORTUNITIES 353 cialist nations just never caught up.

So the socialist critics now complain that 6 per cent of the world's popu lation (Americans) annually uses up one-third of the world's annual pro duction, as if this consumption were not simultaneously a process of pro duction, as if production could take place apart from the using up of pro ducer goods. This is word magic. It makes productivity appear evil. It is true that Westerners eat a large proportion of the protein that the world produces each year. This has been used by vegetarian social ists to create a sense of guilt in Western meat-eating readers of so cialist literature. You see, our cattle eat protein-rich grains. "Corn-fed beef' is legendary -or notorious, in the eyes of the critics. Because of this, argues Sider, the "feeding burden" of the United States is not a mere 210 million (the number of human mouths to feed), but 1.6 billion. 5 "No wonder more and more people are beginning to ask whether the world can afford a United States or a Western Europe."6 The psalmist proclaimed a poetic truth about God's ownership of the world, by identifying these words as God's: "For every beast of the forest is mine, and the cattle upon a thou sand hills" (Psalm 50:10). But "lib eration theologians" are not im. pressed. You see, Sider informs us: "The U.S. Department of Agricul ture reports that when the total life of the animal is considered, each pound of edible beef represents seven pounds of grain. That means that in addition to aU the grass, hay and other food involved, it also took seven pounds of grain to produce a typical pound of beef purchased in the su permarket. Fortunately, the conver sion rates for' chicken and pork are lower: two or 'three to one for chicken and three or. four to one for pork.

Beef is the cadillac of meat products. Should we mpve to compacts?"? He would apparently prefer to rewrite the words of the psalm: "For every chicken of the!forest is mine, and the soybeans on seven thousand hills." (With the seven-to-one ratio in ef fect.) Changing Just One Thing Unquestio~ably, Third World populations &ometimes suffer pro tein deficienciies. But any program of "social sahration through protein exports" is going to encounter prob lems that the iwealth-redistribution ists never consider. People's food is fundamental to their culture. Trying to stay on a djet has confounded mil lions of Ameriicans. Eating habits are very difficult to alter, even when the eater knows that he should change. An education program to get Third World peasants to change their diets is going to be incredibly expensive, and probably futile. "Rice-eating people would <:>ftenrather starve than eat wheat or barley , which are un354 THE FREEMAN June known to them," writes biologist Richard Wagner. 8 This problem goes beyond mere habits. Sometimes we find that peo ple's diets. have conditioned their bodies so completely that the intro duction of a new food may produce biological hazards for them. This is sometimes the case with protein.

Wagner comments: Another even more bizarre instance was seen in Colombia, where a population was found with a 40 percent infestation of Entamoeba histolytica, a protozoan that generally burrows into the intestinal wall, causing a serious condition called amoe biasis. However, despite the high level of Entamoeba infestation, the incidence of amoebiasis was negligible. The answer to this puzzle was found in the high-starch diet of the people. Because of the low pro tein intake, production of starch-digest ing enzymes was reduced, allowing a much higher level of starch to persist in the intestine. The protozoans were found to be feeding on this starch rather than attacking the intestinal wall. If this pop ulation had been given protein supple ments without concurrent efforts to con trol Entamoeba infestation, the incidence of amoebiasis would probably have soared, causing more problems than the lack of protein. 9 Cultures are "package deals."

When a foreign culture introduces a single aspect of its culture into the life of another, there will be compli cations. Changing people's eating habits, apart from their understand ing of medicine, costs of production, agricul tural technology, risks of blight, marketing, and an indetermin ate number of other contingent aspects of the recommended change, is risky when possible, and fre quently impossible. The Third World peasants recognize the implications of this "cultural wedge" perhaps better than the Western "mission ary": it may have a far-reaching im pact on the culture as a whole-an impact which traditional peasants may choose to avoid. Unless the op portunity being offered by the inno vator is seen by the recipient as being worth the risks of unforeseen "ripple effects," the attempt to force a change in the recipient's buying or eating habits may lead to a disaster. Or more likely, it will probably lead to a wall of resistance. Missionaries, whether Christian or secular, whether sponsored by a church or the Peace Corps, had better under stand one fundamental principle be fore they go into the mission field: You cannot change only one thing.

The Sub-Sahara Sahel Famine One of the classic horror stories that illustrates this principle is the Sub-Sahara Sahel famine of the 1970s. For 25 years, from the early 1950s through the mid-1970s, the West's civil governments poured hundreds of millions of dollars into this region. Yet between the late 1960s and 1974, several hundred thousand people starved, along with 1982 CUT-THROAT OPPORTUNITIES 355 20 million head of livestock. Why? As with most agricultural tragedies, there was no single cause. But one factor stands out. The area gets lit tle rain: perhaps 25 inches in its southernmost regions, tapering off to an inch per year the closer you get to the Sahara. The nomads needed water for their herds, as they had from time immemorial. The West gave them water. It destroyed them. Beneath the rock and clay and sand, there is water. A subterra nean lake of half a million square miles underlies the eastern end of the Sahara. Mechanical rigs can hit water at 1,000 or 2,000 feet down.

These boreholes were drilled with Western foreign aid money, at $20,000 to $200,000 apiece. About 10,000 head of cattle at a time can drink their fill. Therein lies the problem. Claire Sterling describes what happened: The trouble is that wherever the Sahel has suddenly produced more than enough for the cattle to drink, they have ended up with nothing to eat. Few sights were more appalling, at the height of the drought last summer [1973], than the thousands upon thousands of dead and dying cows clustered around Sahelian boreholes. Indescribably emaciated, the dying would stagger away from the wa ter with bloated bellies to struggle to fight free of the churned mud at the water's edge until they keeled over. As far as the horizon and beyond, the earth was as bare and bleak as a bad dream. Drought alone didn't do that: they did. What 20 milliop. or more cows, sheep, goats, donkeys, a:pd camels have mostly died of since this :grim drought set in is hunger, not thirst; Although many would have died anyway, the tragedy was com pounded by a fierce struggle for too little food among Sahelian herds increased by then to vast numbers. Carried away by the promise of unilimited water, nomads forgot about the Sahel's all too limited forage. Timeless ~ules, apportioning just so many cattle toigraze for just so many days within a COW's walking distance of just so much wat~r in traditional wells, were brushed as~de. Enormous herds, converging upon ~he new boreholes from hundreds of miles away, so ravaged the surrounding land by trampling and ov ergrazing that ea~h borehole quickly be came the center of its own little desert forty or fifty mile$ square. lO In Senegal, soon after boreholing became popular, around 1960, the number of cows,:sheep and goats rose in two years froln 4 million to 5 mil lion. "In Mali, during the five years before 1960, the increase had been only 800,000. Over the next ten years the total shot up another 5 million to 16 million, more than three ani mals for every Malien man, woman, and child."ll It is not just Americans and West Europeans who raise and eat "protein on the hoof."

The tradition~l nomad way of life is dead. Western specialists know it; the nomads knowit. They live in tent camps no~, dependent on handouts from their governments, which in turn rely heavily on the West's for eign aid programs. The West and the 356 THE FREEMAN June nomads forgot to honor (and deal with) the principle: You cannot change only one thing. The Goal The goal of charitable organiza tions that deal in foreign aid should be to bring the culture of the West to the underdeveloped nations. This means that these organizations can not be run successfully by cultural and philosophical relativists. They should seek to impart a specifically Western way of looking at the world: future-oriented, thrift-oriented, ed ucation-oriented, and responsibil ity-oriented. This world-and-life view must not be cyclical. It must offer men hope in the power of human reason to understand the external world and to grasp the lawB of cause and effect that control it. To try to bring seed corn to a present-oriented culture that will eat it is futile. With the seed corn must come a world and-life view that will encourage men to grow corn for the future.

It does no good to give these cul tures Western medicine and not Western attitudes toward personal hygiene and public health. It does no good to send them protein if their internal parasites will eat out their intestines. The naive idea that we can simply send them money and they will "take off into self-sus tained economic growth" cannot be taken seriously any longer. 12 To at tack the West because it is somewhat less willing today to continue to honor the tenets of a naive faith in foreign aid-a faith in the power of confiscation, in the power of using Western tax revenues to prop up so cialist regimes in Third World na tionsis itself immoral. P. T. Bauer has made the study of economic development his life's work. He has emphasized what all econo mists should have known, but few acknowledged until quite recently, namely, that attitudes are more im portant for economic growth than money. His list of what ideas and attitudes not to subsidize with West ern capital is comprehensive. No program of foreign aid, public or pri vate' should be undertaken apart from an educational program to re duce men's faith in the following list of attitudes: Examples of significant attitudes, be liefs and modes of conduct unfavourable to material progress include lack of in terest in material advance, combined with resignation in the face of poverty; lack of initiative, self-reliance and a sense of personal responsibility for the economic future of oneself and one's family; high leisure preference, together with a lassi tude found in tropical climates; rela tively high prestige of passive or contem plative life compared to active life; the prestige of mysticism and of renuncia tion of the world compared to acquisition and achievement; acceptance of the idea of a preordained, unchanging and un changeable universe; emphasis on per formance of duties and acceptance of ob1982 CUT-THROAT OPPORTUNITIES 357 ligations, rather than on achievement of results, or assertion or even a recogni tion of personal rights; lack of sustained curiosity, experimentation and interest in change; belief in the efficacy of super natural and occult forces and of their in fluence over one's destiny; insistence on the unity of the organic universe, and on the need to live with nature rather than conquer it or harness it to man's needs, an attitude of which reluctance to take animal life is a corollary; belief in per petual reincarnation, which reduces the significance of effort in the course of the present life; recognized status of beg gary, together with a lack of stigma in the acceptance of charity; opposition to women's work outside the home. I3 A long sentence, indeed. If the full time promoters of Western guilt understood its implications, there would be greater hope for both the West and the Third World. What is remarkable is the extent to which these guilt-manipulators have adopted so many of the very attitudes that Bauer says are responsible for the economic backwardness of the Third World.

Guilt-Manipulation Yes, the West continues to eat. The Third World finds it difficult to grow sufficient food. But Christians in the West are complacent. They are well fed, while their "global neighbors"14 go hungry. It appears that the Christians and rich Westerners in general were very smart: they all moved to those regions of the world where food is abundant. The plains Indians, before the white man came on the scene, experienced frequent famines. There! were under half a million of them at the time. I5 Yet, somehow, the 'Westerners arrived just in time to ~ee agricultural pro ductivity flourish. They now con sume more· than their "fair share" of the food, and th~ir only excuse is that they produce it. iThis, it seems, is not a good enough answer-certainly not a morally valid answer. The West needs to come up with a cure for the hungry masses fOf the world, but not the one that worked in the West, namely, the prilyate ownership of the means ofprodut:tion.

Professor Sider (he teaches at a Baptist theological seminary) has a cure-if not fOIT the world's hungry masses, then at least for the now guilty consciences of his readers, not to mention the not-yet-guilt-bur dened consciences of the American electorate. "W~ ought to move to ward a personal lifestyle that could be sustained for!a long period of time if it were share<l by everyone in the world. In its controversial Limits to Growth, the Club of Rome suggested the figure of $1,800 per year per per son. In spite of the many weak nesses of that !study, the Club of Rome's estimate may be the best available."16 Apd which agencies should be responsible for collecting the funds and f$ending them to the poor in foreign' lands? United Na358 THE FREEMAN June tions channels. 17 Private charity is acceptable-indeed, it is better than the United States government, which sends food and supplies to "repres sive dictatorships"18-but not pref erable. We need State-enforced "in stitutional change," not reliance on chari ty, because "insti tutional change is often morally better. Per sonal charity and philanthropy still permit the rich donor to feel supe rior. And it makes the recipient feel inferior and dependent. Institu tional changes, on the other hand, give the oppressed rights and power."19 But if the United States government is not really a reliable State to impose such institutional change, what compulsory agency is reliable? He conveniently neglects to say. But the one agency he mentions favorably in this context is the United Nations. 20 The Zero-Sum Economy A zero-sum game is a game in which the winners' earnings come exclusively from the losers. But what applies to a game of chance does not apply to an economy based on vol untary exchange. Unfortunately, many critics of the free market so ciety still cling to this ancient dogma.

They assume that if one person prof its from a transaction, the other per son loses proportionately. Mises ob jects: ... the gain of one man is the damage of another; no man profits but by the loss of others. This dogma was already ad vanced by some ancient authors. Among modern writers Montaigne was the first to restate it; we may fairly call it the Montaigne dogma. It was the quintes sence of the doctrines of Mercantilism, old and new. It is at the bottom of all modern doctrines teaching that there prevailed, within the frame of the mar ket economy, an irreconcilable conflict among the interests of various social classes within a nation and furthermore between the interests of any nation and those of all other nations .... What produces a man's profit in the course of affairs within an· unhampered market society is not his fellow citizen's plight and distress, but the fact that he alleviates or entirely removes what causes his fellow citizen's feeling of uneasiness.

What hurts the sick is the plague, not the physician who treats the disease. The doctor's gain is not an outcome of the ep idemics, but of the aid he gives to those affected. The ultimate source of profits is always the foresight of future conditions. Those who succeeded better than others in anticipating future events and in ad justing their activities to the future state of the market, reap profits because they are in a position to satisfy the most ur gent needs of the public. The profits of those who have produced goods and ser vices for which the buyers scramble are not the source of losses of those who have brought to the market commodities in the purchase of which the public is not pre pared to pay the full amount of produc tion costs expended. These losses are caused by the lack of insight displayed in anticipating the future state of the mar ket and the demand of the consumers. 21 1982 CUT-THROAT OPPORTUNITIES 359 The "Montaigne dogma" is still with us. The economic analysis pre sented by Ronald Sider assumes it.

He can be regarded as a dogmatic theologian, but his dogma is Mon taigne's. Consider for a moment his statistics, such as the Club of Rome's assertion that $1,800 a year would just about equalize the living stan dards of the world. The capital of the rich in the West-roads, educa tional institutions, communications networks, legal systems, banking facilities, monetary systems, manu facturing capital, managerial skills, and attitudes toward life, wealth, and the future-cannot be divided up physically. Furthermore, there is little evidence that it would be suf ficient to produce worldwide per capita wealth ofthis magnitude, even if it could be physically divided up and redistributed. 22 RedistributionIs Temporary If we divided only the shares of ownership held by the rich-stocks, bonds, annuities, pension rights, cash-value life insurance policies, and so forth-we would see a mar ket-imposed redistribution process begin to put the shares back into the hands of the most efficient produc ers. The inequalities of ownership would reappear, rapidly.

The Club of Rome .assumes tre mendous per capita wealth in the hands of the rich-so much wealth, that a program ofcompulsory wealthredistribution could make the whole world middle class. The important issue, howevetr, is the Montaigne dogma. It view~ the world as a zero sum game, in: which winnings ex actly balance losses. Then how do societies advance? If life is a zero sum game, how can we account for economic growth? A free market economy is not ia zero-sum game. We exchange with each other because we expect to gain an advantage. Both parties expect ~o be better off after the exchange lias taken place. Each party offers an opportunity to the other person. If each person did not expect to bet~er himself, neither would make the exchange. There is no fixed quantity of economic bene fits. This is not:a zero-sum game. We understalnd this far better in the field of edu~ation. For example, if I learn that ,two plus two equals four, I have not harmed anyone. In the area of knqwledge, we all know that the only people who lose when someone gains new, accurate knowl edge are those Who have invested in terms of older~ inaccurate knowl edge. Could anyone seriously argue that the acquisition of knowledge is a zero-sum ga$e (except, perhaps, in the case of q competitive exami nation)? Would anyone argue that we should suppress the spread ofnew, accurate knowledge in order to pro tect those who have made unfortu nate investments in terms of old in formation?

360 THE FREEMAN June Suppressing Knowledge Sadly, the answer is "yes." There are people who advocate policies that do suppress new knowledge. They argue that it is immoral for one man to "take advantage" of specialized knowledge in order to reap a return on this knowledge. They want the civil government to impose restric tions on profits- "obscene profits," they are sometimes called-that one man or a firm can reap. But this re stricts the spread of the information that benefits consumers, and which they are willing to pay for. The exis tence of profits alerts other profit seeking entrepreneurs to the exis tence of specialized knowledge that had previously been ignored. Profits tell producers that an opportunity is available-an opportunity that they can take advantage ofby entering the producer goods markets, buying up producer goods, restructuring them (if necessary), and selling them, in the form of "final" goods and ser vices, to consumers. The lure of making profits is the control mech anism by which consumers get pro ducers to serve them efficiently.

High profits, in a free market economy, are normally associated with low prices and high wages. The classic example is Henry Ford's Model T. He offered wages of $5 per day-unheard-of in 1913, when hourly wages were as low as 15 cents 23-to lure men onto Ford's as sembly lines that were producing cars that middle-class families could at last afford to buy. (When men said "afford" in 1914, they meant "a Ford.") He made his money the same way Sears, Roebuck had made its money, and which Ford may have used as a production model.24 He used mass-production techniques, captur ing a huge market by means of price competition. This had been capital ism's distinguishing trademark from the 1600s, but Ford's implementa tion of the high-wage version cre ated a revolution. Drucker describes it: Before Ford changed the whole labor economy of the United States with one announcement, labor turnover at the Ford Motor Company had been so high that, in 1912, 60,000 men had to be hired to retain 10,000 workers. With the new wage, turnover almost disappeared. The resulting savings were so great that de spite sharply rising costs for all materi als in the next few years, Ford could produce and sell its Model T at a lower price and yet make a larger profit per car. It was the saving in labor cost produced by a drastically high wage that gave Ford market domination. At the same time Ford's action transformed American industrial society. It estab lished the American working man as fundamentally middle class. 25 What if the Federal government had passed a windfall profits tax on automobile production in 1912?

Would Ford have taken the risk of this revolutionary experiment? And if he had taken it, and the Federal 1982 CUT-THROAT OPPORTUNITIES 361 government had extracted its tax, would this revolutionary innovation have been imitated by Ford's com petitors? Fortunately for the Amer ican worker, and unfortunately for Ford's competitors in the automo bile business, the Sixteenth Amend ment had gone into force only that year, 1913, and the top rate of ex traction was only 6 per cent on all income above $500,000. There were no "windfall profits taxes" then. The Ford Formula Did Ford "take advantage" of all those people who had invested in auto firms that were bankrupted by Ford's successful experiment? Or did he simply make a better offer to work ers and automobile buyers? How can anyone distinguish "taking advan tage or' from "making a better offer to"? There is little doubt that Henry Ford's offer to workers represented cut-throat wage competition to all other buyers of labor services. There is also no doubt that his price-com petitive Model T represented a dev astating blow to the producers of hand-crafted, high-priced autos. Was Ford immoral in making his offer to consumers? And was he immoral in making a billion dollars-in pre-New Deal purchasing power-as a direct result of his grand experiment?26 Should we condemn the "greedy consumers," who bought Ford cars in preference to those produced by his competitors?

The success ofFord's grand exper iment drew imitators. How did they know that his experiment had been successful? By the astronomically high profits that his company was making. And how did they know in the late 1920s that the experiment was incomplete, ~nd that his old of fer- "You can get a Ford in any color you want, just so long as you want it :in black"-was no longer competi tive? By the losses Ford Motor Com pany sustained, and by the massive profits made by! General Motors, which was in the process of creating a managerial revolution almost as significant as Ford's labor revolu tion. 27 Another form ()f information -sup pression is the p(l)pular government expedient of price!controls. These can be price "floors,"· such as minimum wage laws, or price "ceilings," such as the rent contrqls or the ceiling on the price of natural gas. Price floors create "gluts": m~re supply of a par ticular item offered for sale than the market can absorb, at the legal, ar tificial price. Pri~e ceilings produce shortages: more demand for a par ticular item than the market can provide, at the legal, artificial price.

The artificial, State-enforced prices give offmisleadi~g signals that con fuse both potential buyers and po tential seUers-"potential" at the artificial prices. Walter Wriston offers an impor tant insight into one implication of 362 THE FREEMAN June price controls: their effect on the communication of vital knowledge. Prices and wages represent an essen tial form of econoniic speech; money is just another form of economic informa tion. When the freedom of this economic speech is restricted, we are not only pe nalized, we are misled .... Prices enable consumers to communicate with produc ers and tell them what they want or don't want. If prices are censored, or frozen, they cannot tell producers what goods or services people want or don't want to purchase. 28 The spread of consumer-satisfying information is enhanced by the lure of profits. The modern stock market is probably the most efficient and rapid communicator of new knowl edge in the history of man. 29 When civil governments attempt to put re strictions on profits, they· necessar ily restrict the consumers' access to information, and the economic re sults of information, that they, by their demonstrated preferences, are willing to pay for in the market place. The "marketplace for ideas" is not limited to newspapers, televi sion news rooms, and college class rooms, although some intellectuals employed by these organizations would have us believe so. The mar ketplace for ideas, above all, is found in the competitive interplay of mar ket offers and market responses.

Competition as Substitution When a person offers another per son an opportunity to spend money, or trade goods, or whatever, the ini tiator is asking the second person to alter his existing pattern of expen ditures. He is asking that person to take money that would have been spent or invested in one way, to spend or invest it differently. The initiator is asking the second person to sub stitute a new expenditure pattern for the previously dominant pattern. Competition invariably possesses this element of substitution. The prospective worker asks an em ployer to hire him, even if this should mean that another person in the employment line is not hired. It may even mean that someone already employed by the firm gets fired,or demoted, or transferred. He may of fer the prospective employer an in triguing offer:·"Hire me for less than you are paying somebody already on the production line." Or: "Hire me and I will work during hours that everyone else complains about." Or: "Hire me, and I will guarantee in writing that I will not join a labor union." Or (in a "union shop"): "Hire me, and I will guarantee in writing that I will join a labor union." In short, hire me. "Substitute me for someone on the production line or in the employment line; substitute me for the money that the firm intended to spend on labor-saving equipment, or advertising, or managerial bo nuses. It will pay the company to substitute me for any of those other possible expenditures."

1982 CUT-THROAT OPPORTUNITIES 363 THE "vulgar calculus of the market place," as its,critics have de scribed it, is still the most humane way man has yet found for solving those questions of economic allocation and division which are ubiquitous in human society. By what must seem fortunate coincidence, it is!also the system most likely to produce the affluent society, to move mankind above an existence in which life is mean, nasty, brutish, and short. But, of course, this is not just coincidence. Under economic freedom, only man's destructive instincts are curbed by la)N. All of his cre ative instincts are released and freed to work ttiose wonders of which free men are capable. In the controlled society only the creativity of the few at the top can be utilized and much of this creativity must be expended in maintaining control and in fending off rivals. In the free society, the creativity of every man can be expressed-and surely by now we know that we cannot predict who will prove to be the most creative.

BENJAMIN A. ROGGE, "The Case for l=conomic Freedom" Does anyone ever complain about "cut-throat substitution"? As a slo gan to call revolutionaries to the barricades, it lacks something. What about "cut-throat opportunities"? That one is even worse. It makes the process sound beneficial to con sumers. Better stick with "cut-throat competition." That one gets legisla tors concerned about the terrible damage being done by "ruthless ex ploiters" (another top-flight incan tation in the word-magic business) against innocent suppliers. It is not easy to get legislation "in the public interest" against cut-throat oppor tunities. So when we hear the phrase, "cut throat competition," we should think twice. Whose throat is being cut? The consumer's? Not very often. The supposed cut-throat-in pirate's garb, a knife in his teeth-is usually just someone who offers the consumers a better opportunity. No doubt, he is resented by his ~ompetitors, who are unwilling or unable to offer the con sumers a comparable deal. But this should not send us rushing to the barricades, or into the halls of Con gress, to demand action against these antisocial "cut-throats." Legisla tion against cut..throat suppliers re duces their freedom of action, and it ultimately reduces our freedom, as consumers, to r¢spond to offers that we might have 4ccepted. Legislation against cut-throat competition re364 THE FREEMAN suits in the cut throats ofconsumers: reduced opportunities.

Therefore, when we hear the phrase, "cut-throat competition," let us mentally substitute the word "op portunities" for "competition." It re minds us of what we are being asked to destroy through legislation: "New Opportunities: Void where prohib ited by law!" , -FOOTNOTES1Martin Anderson, The Federal Bulldozer (New York: McGraw Hill, 1967), ch. 4. This study was published originally by MIT Press in 1964. 2Joseph Schumpeter, Capitalism, Socialism, and Democracy (3rd ed.; New York: Harper Torchbook, (195011962), ch. 7: "The Process of Creative Destruction." 3Israel Kirzner, Competition and Entrepre neurship (Chicago: University of Chicago Press, 1973), pp. 72-73. 4Ronald Sider, Rich Christians in an Age of Hunger (Downers Grove, Illinois: Inter-Varsity Press, 1977), p. 18. This book was co-published by the liberal Roman Catholic publishing house, the Paulist Press. Unquestionably, it represents an ecumenical venture. Inter-Varsity is per haps the largest campus organization ofthe "neo evangelical" branch of Protestantism.

5Ibid., p. 152. 6Ibid., p. 153. 7Ibid., p. 43. 8Richard H. Wagner, Environment and Man (3rd ed.; New York: Norton, 1978), p. 523. 9Ibid., pp. 518-19. lOClaire Sterling, "The Making of the Sub Sahara Wasteland," Atlantic (May, 1974), p. 102. I assume she means 50 square miles, not 50 miles square (2,500 square miles). llIbid., p. 103. 12W. W. Rostow, The Stages of Economic Growth: A Non-Communist Manifesto (Cam bridge: At the University Press, 1960). This was a best-seller of the early 1960s. For a critique, see the essays by several economic historians in Rostow (ed.), The Economics of Take-Off into Sustained Growth (New York: St. Martin's, 1963). 13p' T. Bauer, Dissent on Development (Cam bridge, Mass.: Harvard University Press, 1972), pp.78-79. 14Sider,Rich Christians, p. 30. 15R. J. Rushdoony, The Myth of Over-Popula tion (Fairfax, Virginia: Thoburn Press, f19691 1978), pp. 1-3. 16Sider, "Living More Simply for Evangelism and Justice," the Keynote Address to the Inter national Consultation on Simple Lifestyle, En gland (March 17-20,1980), mimeographed pa per, p. 17.

17Sider,Rich Christians, p. 216. 18Idem. 19Sider, "Ambulance Drivers or Tunnel Builders" (Philadelphia: Evangelicals for So cial Action, no date), p. 4. 2°For a critical analysis of Sider's views, see David Chilton, Productive Christians in an Age of Guilt-Manipulators: A Biblical Response to Ronald Sider (rev. ed.; Tyler, Texas: Institute for Christian Economics, 1982). 21Ludwig von Mises, Human Action (3rd ed.; Chicago: Regnery, 1966), pp. 664-65. 22Gary North, "Trickle-Down Economics," The Freeman (May, 1982). 23Peter F. Drucker, Management: Tasks, Re sponsibilities, Practices (New York: Harper & Row, 1974), p. 338. 24Ibid.,p. 53n. 25Ibid.,p. 339. 26Dean Russell, "The Last Billionaire," The Freeman (December, 1959), p. 32. 27Drucker,Management, pp. 209-10,380-84. 28Walter B. Wriston, "Repressing Economic News," The Freeman (July, 1979), p. 394. 29Frederick C. Klein and John A. Prestbo, News and the Market (Chicago: Regnery, 1974).

On the ill-effects on the spread of information as a result of the government's attempt to re strict "insider trading," see Henry Manne, In sider Trading and the Stock Market (New York: The Free Press, 1966).

My Cup of Tea I HAVE A FANTASY in which all edu cational institutions are free of gov ernment financing, and control. They have been turned over to educators, and to entrepreneurs. All the fight ing stops. People stop making speeches, and marching with plac ards. They stop throwing rocks, and shouting obscenities. With the entry of schools into a free marketplace, the decision about what kind of education my child is to receive is now mine. I have to make compromises; I don't expect to have everything I want in one school. But, I'll come close. I think I will select a school that bans formal prayers. I pray, and en courage my children to, but prayers in school are not quite right for us. Mrs. Natale is an editor and writer in Lombard, Illi nois. Jean L. Natale I like a school that emphasizes phonics, and luckily for me, most of them do. A swimming PQol and gymnasium are important to some people, but those features bring the price up, and since I'm not too' interested, I think I'll look for a school that doesn't have them.

I think I would not mind a school that has an occasional Communist, or other controv~rsial speaker, but my neighbor's chUd attends a school that shuns them. I know a lot of people who use dis count schools, add they get a lot for their money. Als<), the "free" lunches they offer are an, inducement. How ever, I think I w<1>uld rather spend a little more, and ~ave smaller class rooms. There is a chain of schools that 366 THE FREEMAN emphasizes science. That is some thing I might look into. There is a little red, one-room schoolhouse near me which is tempting, but that is something I haven't made up my mInd about. The nice thing about this school is that for recreation and exercise, the chil dren are just turned out into a big empty yard to play. You'd be sur prised at the ingenuity those kids develop. Did you ever hear of "Run Sheep Run"? On the other hand, this school uses McGuffey's Reader. Some of us are not sold on that.

I like co-ed schools, but one of my friends sends her daughter to an all girl school halfway across town. I don't like busing. It's expensive, and time-consuming. I know a teacher who has a few students in her home. This is a bright, happy bunch, and the kids are getting a quality education. Education for 1984 About half the schools I am ac quainted with have sex education programs. Those who are adamantly opposed send their children to the schools that don't. My task is certainly· complicated. I must choose a school from among those that have smoking lounges; those that teach boys to crochet and girls to fix leaky faucets; those that have dress codes; those in which classes are conducted in Spanish, French, or some other language; those that have a portrait of George Washington hanging in the lobby, or Martin Luther King, or Jesus Christ, or Susan B. Anthony; those that guarantee to teach your child to read or you get your money back; those that ... well, you get the idea.

It's a complicated job, but I wouldn't have it any other way. It's a dream that could, and should come true. il IDEAS ON LIBERTY IN that terrifying novel by George Orwell, 1984, the Party of Big Brother developed the ultimate in ruthless dictatorship precisely because it de vised the means of enslaving men's minds. It began by undermining the discipline of history, setting all men adrift in· a world where past expe rience became meaningless. It continued by undermining the discipline of language, debasing speech until it could no longer be the vehicle of independent thought. And the crowning triumph of its torture chambers was the undermining of the disciplines of logic and mathematics, by which it finally brought its victims not only to assert but actually to believe that two plus two equals five. ARTHUR E. BESTOR, JR.

THE RELICS OF INTERVENTION: 3. The New Deal Bent to Inflation Clarence B. Carson The New Deal GOVERNMENT INTERVENTION came into its own with the New Deal. Not that the New Dealers invented the notion or developed for the first time the practice of government inter vention in the economy. Both the idea and practice have been around for a very long time. Even collectivist ideas of intervention so as to control the economy for social ends had come into increasing prominence over a period of a half century before the New Deal. But the New Deal fos tered intervention in such variety and on so large a scale, and much of it so swiftly, that it seemed new and different. In a sense it was. There tofore, except during World War I, Dr. Carson has written and taught extensively, spe cializing in American intellectual history. He is the author of several books and a frequent contributor to The Freeman and other scholarly journals.

intervention hau been piecemeal, scattered, and occasional. With the New Deal, it became central, and much that was qone became a per manent part of our economic land scape. The most prominent of the New Deal programs w¢re supposed to deal with economic pr<i>blemsarising from the Great Depression. Most of them were put forward as remedies for depression-related conditions, many of them in an i emergency atmo sphere. In consequence, the notion took hold that tlhe programs were shaped pragmatically and eclecti cally for the OCCalsion. Actually, the depression main~y provided the oc casion in which the programs could be enacted. Most of them were not concei ved originally as depression remedies, and they certainly did not 367 368 THE FREEMAN June remedy the depression. The New Deal was not born of the depression; it was made possible by the depres sion. The three main sources of the New Deal were: Theodore Roosevelt's New Nationalism, the war mobilization activities during World War I, and the socialist idea of a planned econ omy which was in the ascendant in the 1920s.

New Deal in the Guise of Liberalism The influence of Progressivism on the New Deal came mostly from the earlier Roosevelt's New National ism. New Deal Democrats did not, of course, call themselves Progres sives. Although there had been Democrats who identified them selves as progressives, usually with a lower case' "p," the Progressive movement was primarily a dissident move among those who had been, or still were, Republicans. In any case, New Deal Democrats had co-opted the term "liberal" to describe their ideological bent. "Liberalism" came into currency in the nineteenth cen tury as a term to describe those who favored individual liberty , free trade, national independence, expansion of the suffrage, and so on. New Dealers appropriated the term, along with much else, to describe a pro-govern ment interventionist position that had only a residue here and there of traditional liberalism.

This did not deter the New Deal ers, however, from borrowing liber ally from the earlier Roosevelt's na tionalism. So far as Franklin D. Roosevelt himself was concerned, family ties may have accounted for some of the influence. One historian says that as a young man he "looked up to Uncle Ted, and the relation ship brought Franklin Roosevelt a continuous suggestion that politics was a permissible career for a patri cian' that a patrician's politics should be reform, and that reform meant broad federal powers wielded by ex ecutive leadership in the pattern of the New Nationalism."I However that may be, there are many indi cations of the New Nationalism in the New Deal. Richard Hofstadter noted that "There are many occasions in its history when the New Deal, espe cially in its demand for organiza tion, administration, and manage ment from a central focus, seems to stand squarely in the tradition of the New Nationalism .... "2 There was the nationalistic fervor emanating from the pronouncements during the first couple of years. The word itself cropped up in such legislation as the National Recovery Act and the Na tiona I Labor Relations Act. There were the numerous commissions and boards established, such as the Fed eral Power Commission, the Securi ties and Exchange Commission, and the National Labor Relations Board.

1982 THE RELICS OF INTERVENTION: THE NEW DEAL BENT TO INFLATION 369 Theodore Roosevelt had been an en thusiast of the commission idea. Above all, the New Deal had philosophical links to the New Na tionalism. Theodore Roosevelt had proclaimed the necessity for regu lating and controlling industry and labor so that their actions would be brought in line with the national in terest. The New Deal was animated by what was basically the same idea. When New Deal insiders, such as Rexford G. Tugwell, talked of repu diating progressivism what they had in mind was Wilson's New Freedom, with its opposition to trusts and cor porations. For example, Tugwell ex pressed the fear in 1932 that if "the Brandeis progressives," i.e., the fol lowers of Wilson, should gain the as cendant the Democratic platform would be filled with "platitudinous and general remarks about free en terprise."3 Of course, "the Brandeis progressives" did have· considerable influence on the New Deal, espe cially by way of Felix Frankfurter,4 but it was rarely in support of free enterprise, and it could hardly rank with that of the New Nationalism.

The Wilson Influence From a different angle, though, the Wilsonian influence may have been greater than that of the New Na tionalism. That is, if the mobiliza tion of the economy during World War I be attributed to Woodrow Wilson, his influence was large indeed on the New Deal. Twentieth century liberals have been espe cially enamoreq of the war motif or war metaphor for their various in terventionist and distributionist un dertakings. Th~ most famous case was that of President Johnson's "War on Poverty," bllt even when they have not stated the matter so bluntly, it seems to haveibeen lurking around as a kind of ar~hetype for political activity. What impressed them, no doubt, was the:collective character of war, the use df government power to coordinate anJd mobilize the econ omy, and the .apparent productive successes of the efforts. Government mobilization during World War I was the primary source of this idea for the New Deal g~neration.

The Wilson Administration did not rush headlong into an all out mobi lization once war had been declared. However, before the war was over much of economic activity had been brought under the control and direc tion of the government. The broad est of the organizations which un dertook this was the War Industries Board under the direction of Ber nard Baruch. It$ authority was ex ceedingly largeqver manufacturing. As one history points out: The elastic powers conferred on Bar uch as chairman of the War Industries Board made him ,a dictator over large areas of the war economy. His authority to establish priodties on all materials except agricultural commodities gave him 370 THE FREEMAN June life-and-death power over business. If a manufacturer refused to convert from the production of horseshoes to trench shov els, Baruch couJd cut off his supplies of iron and shut down his assembly lines.

He could even commandeer the plant for the government and operate it. In coop eration with the price-fixing committee, he could exercise further leverage by set ting the prices of raw materials at whole sale. 5 In addition, there was a War La bor Board to settle industrial dis putes, a Food Commissioner, Her bert Hoover, with extensive control over food, feed, fertilizer, and fuel, a United States Shipping Board, a Railroads War Board, a War Trade Board, and so on. Moreover, the gov ernment took over and ran the rail roads for a time. Franklin D. Roosevelt was in the midst of this massive effort at con trolling the economy, for he was As sistant Secretary of the Navy during the war. General Hugh Johnson, first head of the National Recovery Ad ministration (N.R.A.) in the New Deal was even more closely involved in the effort: he served as Army Ii aison officer to the War Industries Board. The experience was certainly not wasted on him. "The War Indus tries Board had given him the con viction that it was possible for gov ernment to direct the national economy."6 His reaction immedi ately after the war was, "If coopera tion can do so much, maybe there is something wrong with the old competitive system:" He was in favor, then, of "self-government in indus try under government supervi sion."7 Indeed, people who had experi ence in the war mobilization were much in demand in the early days of the New Deal. As one account has it, "Only the veterans of the war mo bilization had much experience with the kind of massive undertaking Roosevelt had inaugurated. 'One cannot go into the Cosmos Club without meeting half a dozen per sons whom he knew during the war,' wrote one New Dealer."8 The War Image In his First Inaugural Address, Roosevelt evoked the war image re peatedly in his appeal to the Amer ican people. He declared that "we must move as a trained and loyal army willing to sacrifice for the good of a common discipline , because without such discipline no progress is made, no leadership can become effective." He threatened that if Congress did not act on the mea sures he would recommend, "I shall ask the Congress for the one re maining instrument to meet the cri sis-broad Executive power to wage a war against the emergency, as great as the power that would be given to me if we were in fact in vaded by a foreign foe."9 No commander ever exhorted his troops with greater fervor than did 1982 THE RELICS OF INTERVENTION: THE NEW DEAL BENt TO INFLATION 371 "We must move as a trained and loyal army willing to sacrifice for the good of a common disci pline ... "

-Franklin D. Roosevelt, March, 1933 General Hugh Johnson the people to adopt his banner, the blue eagle em blazoned on the N.R.A. sticker, which bore the legend, "We Do Our Part." In an appeal to women he pro claimed that "this time, it is the women who must carry the whole fight of President Roosevelt's war against depression, perhaps the most dangerous war of all. It is women .. ~ who will . . . go over the top to as great a victory as the Argonne."lo While much more evidence could be cited as proof that New Dealers found in war, and especially in World War I, a major set of images and ideas for their programs, perhaps the case has been sufficiently made. Since the idea of a planned econ omy as a source of the New Deal will be discussed in detail elsewhere, it can be dealt with summarily here. It may suffice to point out that many American intellectuals in the 1920s were greatly attracted by the idea.

The planned economy was what most caught their eyes in what was going on in both the Soviet Union and Fascist Italy. It was that aspect of World War I mobilization, too, that was most appealing to them. As an historian of theN ew Deal has said, "The New Dealers shared John Dewey's conviction that organized social intelligence could shape soci ety," and economic planning was at the forefront of their thinking at the time they came to power. 11 What did thel New Nationalism, World War I ~obilization, and a planned economy have to do with remedying the depression ? Nothing much, so far as I can see. Indeed, if I may turn the point around and state a conclusion in [advance of the evi dence for it, the~ ideas when imple mented had much to do with pro longing the depression. But at this place in the discussion, what I want to emphasize is that much of the vast governmental control and regula tory mechanism! brought into being by the New De~l is a relic, not of depression remedies, but of enthu siasms for kind~ of government ac tivity born and bred in the decades before the depression.

That is not to say that a great deal of mental energy, argument, and or atory was not pUl into trying to make these notions aq.d programs appear relevant to the! depression. It cer tainly was. Moreover, as a result of the effort most of the programs did have a thrust in ~he direction that it was claimed would bring the coun try out of the depression. To be spe ~ific, the thrust qf the New Deal was to raise prices, and that was what 372 THE FREEMAN June the seers believed needed to be done. Thus, whether the New Deal was authorizing commissions, in the mode of the New Nationalism, set ting up agencies patterned after those used during World War I, or at tempting to plan the direction of the development of the economy, they were all pointed toward raising prices and increasing what was called "purchasing power." The HooverYears Roosevelt was not the first Presi dent who sought to end the depres sion by maintaining or raising prices.

Herbert Hoover, who preceded him, had followed a similar course, though less dramatically. Hoover met with business leaders when the depres sion got underway and urged them not to lower wages. He approved the Smoot-Hawley Tariff, which had as its object the raising of American prices by keeping foreign products out. He undertook an extensive pub lic works program, which was sup posed to provide jobs so that workers would be less likely to lower wages by competing for jobs. The Agricul tural Marketing Act, passed during Hoover's Administration, provided for making loans so that farmers could withhold crops from the mar ket to keep prices Up.12 Roosevelt was undeterred by the fail ure of the Hoover programs to achieve their object. So far as they considered them in that light at all, the New Dealers thought the Hoo ver effort was too timid and much too piecemeal. In any case, they were much more convinced of the healing powers of monetary inflation than Hoover had been. Before indicating the course that they pursued, how ever, some generalizations about what Roosevelt accomplished and some analysis of the causes of the Great Depression are in order.

It has often been alleged that Roo sevelt saved American capitalism from its worst debacle. 13 If he did, I suspect it was accidental, but the generalization is too broad, too sub ject to semantic debates about the meaning of "capitalism," to be of much use one way or the other. It is reasonably clear, however, that the New Deal rescued numerous banks, saved fractional reserve banking, preserved the Federal Reserve sys tem and credit expansion based in considerable part on monetizing debt, and fixed an inflationary bias on the American government and economy from which they still suffer. ProlongedCreditExpansion The basic cause of the Great Depression was a prolonged credit expansion accomplished by monetiz ing debt. The immediate cause was a credit contraction. This set off the stock market crash which was ac companied and followed by a liquid ity crisis that sent a prolonged se ries of shocks through the world of 1982 THE RELICS OF INTERVENTION: THE NEW DEAL BENT TO INFLATION 373 "We are seriously concerned with the problem of creating buying power, which in turn, will have the effect of opening fac tories and stimulating business generally."

-Harold Ickes, March, 1933 finance, reaching eventually to al most every credit organization in the United States. One way of describ ing what had happened was that a severe deflation, or series of defla tions, had occurred. Another way of looking at it is to say the credit, in vestment, and spending declined precipitately. From late 1929 through early 1933 a vast adjustment in prices was taking place to compen sate for the deflation. However, gov ernment action in general and the Federal Reserve in particular tried to prevent the economic adjustment from taking place. Indeed, this effort continued throughout the 1930s, prolonging the depression. The New Dealers held generally that the problem was a shortage of purchasing power, or, at the least, a shortage in the hands of those who would spend it. In a speech at Ogle thorpe University in 1932, Roose velt said that there was "an insuffi cient distribution of buying power .... "14 After attending a cabinet meeting on March 31, 1933, Harold Ickes, S¢cretary of the Inte rior, recorded this conclusion: "We are seriously concerned with the problem of creajting buying power, which in turn, will have the effect of opening factories and stimulating businesses generally. "15 In the most obvious sense, tHere was clearly some sort of shortage of purchasing power by those who had great difficulty in providing for th~ir most direct wants.

That is, there was food, clothing, shoes, and other goods available in stores. Huge crops were produced on farms, much of ,which could hardly be sold. Factories that had the ca pacity to produce a great variety of goods stood idle, or were operated only occasionally. Yet, many people had to resort to ~haritable aid to get the wherewithal! to live. Surely, they lacked the purchasing power to buy the goods. Indeed, it may well be that an en demic shortage ~f purchasing power had plagued the American economy throughout th~ 1920s. I think so. Moreover, the shortage of purchas ing power is c~osely connected to what I have asserted was the root cause of the depression, i.e., a pro longed credit ,expansion accom plished by mon~tizing debt. But be fore explaining! that, let me make clear that I do not mean by shortage of purchasing ~ower a shortage of money. That is an illusion, an illu sion to which New Dealers were 374 THE FREEMAN June given and to which the Keynesians succumbed.

Money Defined Money, per se, is not purchasing power. Money is a medium of ex change. It is, then, a medium through which purchasing power is exer cised. To confuse money with pur chasing power is akin to confusing postmen with those who have writ ten the letters delivered to one's mailbox. A person who believes that way might have what he considered to be a letter shortage. In which case, he might reckon that the way to get more mail would be to have more deliveries or more postmen. If this were done, however, it would not in crease the amount of the mail. The postman is, in this sense, a medium through which mail is sent, as money is a medium for purchasing power. What is purchasing power, then? It is goods (or services, if the distinc tion be made). Ultimately, all ex changes are of goods for goods, as J. B. Say pointed out a good while ago. In a money economy, of course, goods are ordinarily intermediately ex changed for money, and money is then exchanged for other goods. The fact that money can be exchanged for goods gives rise to the illusion that money is purchasing power. But it is not; it is only an instrument through which the purchasing power is conveyed. A shortage of purchas ing power, then, is a shortage of goods, either to consume or to ex change for other goods.

Actually, the phenomenon which I wish to describe has no commonly accepted name. Rather, it has a name in international trade, but not in do mestic trade. In international trade, it is a trade imbalance. For example, a country which imports more goods than it exports is said to have an unfavorable balance of trade. In general, such a condition could only exist over any extended period of time because of two. things. Either the difference would have to be made up in some acceptable currency, gold, for example, or credit would have to be extended from the exporting countries to cover the difference. The imbalance can be described as a shortage of purchasing power in the country with an unfavorable bal ance of trade. And, in international trade, the reason for the imbalance is ultimately discernible as a short age of saleable goods. Monetary Intervention In the domestic market, however, an imbalance of trade is neither eas ily recognizable as such nor measur able in such terms. Certainly, it is not recognizable as a shortage of goods with which to trade, nor, in the sense in which I would use the phrase, a shortage of purchasing power. It is not a normal market phenomenon at all. It occurs only as a result of a large scale intervention 1982 THE RELICS OF INTERVENTION: THE NEW DEAL BENT TO INFLATION 375 in the market. Specifically, it occurs as a result of a credit expansion fueled by a massive monetizing of debt. The imbalance comes about in this way. Transactions take place in which goods are advanced, on the one hand, but for which no goods either have been produced or exist, on the other. The transaction is made to appear complete by the promise of the buyer to pay in the future. In economic terms, the transaction will only be actually completed-a bal ance restored-when compensating goods are produced in the future.

"It was a vital necessity to re store purchasingpower.... " -Franklin D. Roosevelt, July, 1933 This sounds for· all the world like any transaction based on credit. So far as the individuals or organiza tions involved in the transaction may be aware of it there is no difference. There is a great difference, however, between monetized debt credit and credit based on saving. Savings are accumulations from past production; someone defers his own spending in order to enable another to spend, for a price, of course. Monetized debt credit, by contrast, is based on noth ing other than a promise. It is wholly futuristic. Monetized debt credit expansion introduces a whole set of temporary imbalances in the economy. There is a trade imbalanCj:ebecause the goods to be traded for Qther goods have not yet been produc~d. There is a price imbalance bec~use prices are no longer in proportion to the money supply. There is a shortfall of real purchasing power, although the easy credit may give I rise to the illusion that there is an ~xcess of purchasing power. In the wake of the credit ex pansion there will be an imbalance of production, for many producers will be induced t,o increase their pro duction, and even their facilities for production, for there are many will ing buyers with the money, it seems, to pay for their wares.

Painful Adjustments The imbalances resulting from any single monetarY expansion, how ever large, will· be only temporary. The market tert-ds always toward balance, and if people are free to op erate the market, balance will be re stored. Prices will rise to compen sate for the increase in the money supply. People .will generally pay their debts out of production, if they can, and the tra<lleimbalance will be restored. HoweVier,at this stage the shortage of pu~hasing which was there at the ou~set will become ob vious. Much of :production must go into retiring debts. Moreover, even when the debts are retired, there may need to be a further interval for sav ings to be made before many new 376 THE FREEMAN June purchases can be made. Many plants may lie idle, and there will be a depression. The adjustments that must be made to restore the balance are often difficult and unpleasant. Let me emphasize that the villain of this piece is the credit expansion.

The late Ludwig von Mises stated the case forthrightly and succinctly in these words: The wavelike movement affecting the economic system, the recurrence of peri ods of boom which are followed by peri ods of depression, is the unavoidable out come ... of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the cri sis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system in volved. 16 Although a currency catastrophe is undoubtedly the ultimate out come of a persistently prolonged credit expansion, that was not what appeared to loom ahead in the early 1930s. What immediately threat ened was the collapse of the institu tions that had been the instruments of the credit expansion, namely, the banks. There had been a whole se ries of credit expansions in the 1920s.

A means for monetizing the debt had been established before World War I with the Federal Reserve system. One economist has estimated that the money supply in the United States was increased from $45.3 billion in 1921 to $73.26 billion in June of 1929.17 Buying on credit became a way of life for many people in the 1920s. "By the latter part of the dec ade ... there were some six billions of 'easy payment' paper outstand ing."l8 Optimism rose to new heights in the last years of the decade. Peo ple were betting on the future as never before, as billions of the easy money were poured into the stock market. "We had a bad banking situa tion. . .. It was the Govern ment's job to straighten out the situation and do it as quickly as possible. And the job is being performed. . .. We have pro vided the machinery to restore our financial system." -Franklin D. Roosevelt March, 1933 The Federal Reserve banks began to try to cool the fervor in 1928, when they began to raise the rediscount rates. They tried to zero in on the stock market bull. On February 2, 1929, the Board declared: "The Fed -eral Reserve Act does not, in the opinion of the Federal Reserve Board, contemplate the use of the resources of the Federal Reserve Banks for the creation or extension of speculative credit."l9 Apparently, this and other credit tightening policies finally bore 1982 THE RELICS OF INTERVENTION: THE NEW DEAL BENT TO INFLATION 377 fruit. At any rate, the stock market crashed in October, and a drastic de flation ensued. Men were thrusting for liquidity, for the means to meet their debts and obligation. The pres sure on banks was great and tended not to decrease with the passage of time. In 1929, 659 banks failed; in 1930, 1,352; in 1931, 2,294, and in 1932, 1,456.20 Banking Holiday When a bank failed, most of the deposits tended to vanish into thin air, as it were, thus reducing the money supply further. But the most frightening aspect of this was yet to come. As Roosevelt's inauguration approached, the banking crisis wor sened. On February 14, 1933, the governor of Michigan declared an extended banking holiday. On Feb ruary 24, the governor of Maryland declared a three-day banking holi day. "On March 1, the governors of Kentucky and Tennessee pro claimed bank holidays; that night the governors of California, Louisiana, Alabama, and Oklahoma pursued the same course. By March 4, the day of Roosevelt's inauguration, thirty eight states had closed their banks, and banks operated on a restricted basis in the rest. Shortly before dawn, Governor Herbert Lehman of New York and Governor Henry Horner of Illinois suspended the banks in the two great states that dominated the financial life of the nation."21 Most President Roosevelt proclaimed a national banking holiday and called a specif:llsession of Con gress ... to d~al with the bank ing emergency.

stock exchange$ and futures mar kets were also closed. American fi nance might not be out, but it was certainly down. President Roosevelt proclaimed a national banking holiday and called a special session of Congress, in tending primari~y to deal with the banking emerg~ncy. (The regular, "lame duck," session had already met for the year and adjourned.) Whether Roosevelt would ,be an inflationist or not was somewhat confused from the outset. It may be that the confusion arose from his: fail ure to connect government fiscal policy with mon etary expansion:. Or, he may have deliberately cho$en to treat them as if they were quite separate. As a candidate, he had promised econ omy in government, the cutting of expenses, and a ijalanced budget. His Budget Director was certainly of that persuasion, and i from time to time economy moves were got underway. What is not in doubt is that over all the monetarists around him won out generally. From the moment he came to office, too, he began to clear the ground for i~creasing the money supply and to take the steps for credit 378 THE FREEMAN June expansion. There is no doubt, either, that, above all, he wanted to raise prices and that he accepted a course of action which identified money with purchasing power. As soon as Con gress assembled on March 9,1933 in special session, the House of Repre sentatives was presented with an emergency banking bill by the Ad ministration. The bill gave the color of law to actions already taken by the President, such as the bank clos ing and the halting of gold transac tions. More, it gave him extensive authority over gold, provided penal ties for hoarding, authorized the is suance of new Federal Reserve notes, and provided for the reopening of those banks adjudged to be suffi ciently liquid to do so.

On the same day that the bill was introduced, "With a unanimous shout, the House passed the bill, sight unseen, after only thirty-eight minutes of debate."22 By early evening, the Senate had passed the bill by a vote of 73-7, and the Pres ident had set his seal upon it well before bedtime. Not even declara tions of war have usually been acted on so swiftly, or in such an atmo sphere of dire emergency. Calling All Gold Roosevelt moved swiftly in the en suing days and weeks to remove vir tually all restraints on credit and monetary expansion. In April, he is sued an executive order that all gold was to be turned in to Federal Re serve banks by May 1. On April 20, he ordered an end to the export of gold (usually referred to as going off the gold standard). On June 5, by Joint Resolution Congress repu diated all private or government clauses in contracts requiring pay ment of gold. Congress declared that such clauses were "inconsistent with declared policy of the Congress to maintain at all times the equal power of every dollar· ... in the markets and in the payment of debts."23 Meanwhile, the government be gan its move to bail out, shore up, control, expand, and eventually cre ate new credit expanding institu tions. A Federal Securities Act was passed May 27, 1933, requiring full disclosure on securities offered to the public and the registration of most of them. The Securities and Ex change Commission was set up the next year to enforce these and re lated regulations. During the spe cial session in 1933, the Federal De posit Insurance Corporation was set up to insure bank deposits. The act was intended to reassure depositors, and it did much to rescue fractional reserve banking.

The Reconstruction Finance Cor poration, which had got under way during the Hoover Administration, was used much more vigorously un der Roosevelt. Jesse Jones, a Texas banker, used it to fuel credit expan sion through existing banks. "In1982 THE RELICS OF INTERVENTION: THE NEW DEAL BENT TO INFLATION 379 stead of lending money to banks, and thereby increasing their debt, as had been done in the Hoover regime, Jones sought to enlarge their capi tal. By buying bank preferred stock, he bolstered the capital structure of banks, created a base for credit ex pansion, and made it possible for the deposit insurance system to func tion."24 Inflationary Measures The government moved quickly, too, to stop the widespread mortgage foreclosures and to rescue the banks and credit institutions from the bur den of carrying them. A Home Own ers Loan Corporation was created to refinance home mortgages and make other types of homeowner loans. By the time it went out of business it had made loans on over a million mortgages. A Farm Credit Admin istration enabled farmers to refi nance farm mortgages. The Com modity Credit Corporation was a new agency to make loans on crops. Other new credit expanding institutions eventually set up were the Federal Housing Administration in 1934 and the Farm Security Administration in 1937. The main thrust of these var ious organizations was either to ex pand credit or to make it possible for banks to do so.

In 1935, the Federal Reserve sys tem was revamped. The authority of the Federal Reserve Board over Federal Reserve Banks was increased, giving it greater control over rediscount rates~ and expanded the kinds of instruments that could be rediscounted. The last remaining bar to flooding the country with Federal Reserve notes had already been so lowered that it was hardly a factor in the 1930s. The gold reserve re quirement for b~cking the notes had been made into' more of an invita tion to money creation than an im mediate restraint on it. In 1934, the' price of gold was pegged at $35 per ounce. This was far above its price when there was a market in the Uinited States as well as above the world market price. Thus, existing supplies could serve as reserves against much greater note issues, and supplies of gold were greatly increased as much of the gold in the world flowed into the United States. Since t4e gold reserve re quirement was only a fraction of the dollar amount of notes to be issued, the Federal Reserve Board could now inflate, if not at' will, at least boun tifully.

What I have been describing, of course, are the measures taken by the New Dealers! to accomplish rein flation, or "refla~ion," as some econ omists called it at the time. Under the illusion that the cure for the depression lay in raising prices and that money is purchasing power, the New Deal inflatep away. This did not succeed in ending the depression in the 1930s. That could only be done 380 THE FREEMAN by producing what people wanted, not what they might be induced to buy by credit expansion. What the New Deal did succeed in doing was establish a bent for infla tion which has us still in its stran glehold and provide an institutional framework for continuing the infla tion indefinitely. Ever since, any slowing up of credit expansion or slight contraction has resulted in recession or depression. The reason for this is that the trade imbalance, or real shortage of purchasing power, which is temporarily obscured by credit expansion, rises to the surface unless there are incremental in creases in the money supply. Mean while, our money is progressively destroyed, and the credit on which we would live becomes ever more expensive. /I Next: New Deal Collective Planning.

-FOOTNOTESlEric F: Goldman, Rendezvous with Destiny (New York: Vintage Books, 1956), p. 252. 2Richard Hofstadter, The Age of Reform (New York: Alfred A. Knopf, 1955), pp. 300-01. 3Rexford G. Tugwell, The Brains Trust (New York: Viking, 1968), p. 175. 4See Arthur M. Schlesinger, Jr., The Crisis of the Old Order (Boston: Houghton Mifflin, 1957), p. 419. 5George B. Mayer and Walter O. Forster, The United States and the Twentieth Century (Bos ton: Houghton Mifflin, 1958), p. 248. 6Schlesinger, op. cit., p. 415. 7Quoted in Arthur M. Schlesinger, Jr., The Coming of the New Deal (Boston: Houghton Mifflin, 1959), pp. 87-88. 8William E. Leuchtenburg, Franklin D. Roo sevelt and the New Deal (New York: Harper & Row, 1963), p. 63. 9Ben D. Zevin, ed., Nothing to Fear: The Se lectedAddresses ofFranklin D. Roosevelt (New York: Popular Library, 1946), p. 30. lOWilliamE. Leuchtenburg, ed., The New Deal (Columbia: University of South Carolina Press, 1968), p. 44.

llLeuchtenburg, Franklin D. Roosevelt and the New Deal, p. 33. 12For a more complete discussion, see Clar ence B. Carson, The Fateful Turn (Irvington, N.Y.: The Foundation for Economic Education, 1963), ch. 9. 13New Dealers started this rumor, no doubt. See, for example, Frances Perkins, "The New Deal as Savior of Capitalism" in Leuchtenburg, The New Deal, ch. 8; for his version of much the same information, see The Secret Diary ofHar old L. Ickes: The First Thousand Days (New York: Simon and Schuster, 1953), pp. 30-31. 14Tugwell, op. cit., p. 172. 15Ickes,op. cit., p. 14. 16Ludwig von Mises, Human Action (Chi cago: Henry Regnery, 1966, 3rd rev. ed.), p. 572. 17Murray Rothbard, America's Great Depres sion (Princeton, N.J.: D. Van Nostrand, 1963), p.88. 18Frederick L. Allen, Only Yesterday (New York: Bantam Books, 1959), p. 119. 19Quoted in ibid., p. 217. 20Arthur S. Link, American Epoch (New York: Alfred A. Knopf, 1955), p. 359.

21Leuchtenburg, Franklin D. Roosevelt and the New Deal, p. 39. 22Ibid.,pp. 43-44. 23Henry S. Commager, ed., Documents of American History (New York: Appleton-Cen tury-Crofts, 1963), vol. II, p. 263. 24Leuchtenburg, Franklin D. Roosevelt and the New Deal, p. 71.

A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN Supply Side Economics WHEN John Maynard Keynes pro posed "government investment" as the cure for a sluggish economy, he thought of it as a flywheel. It would have a "multiplier effect" as boon doggle or bail-out money moved into consumption that might turn up as investment the second time around. But the Keynesians failed to reckon with the. fact that "divisor effects" might be more powerful in the long run than anything coming from the multiplier. Keeping a marginal farm going might sell a few hoes, maybe even a second-hand tractor. But it also might divert perfectly good in vestment money into sterile subsi dies that would deprive some inven tive soul somewhere of the capital needed to start a new business. For years, in pushing the "aggre gate demand" resulting from the combination of government and private spending, the Keynesians quite overlooked the impact of their poli cies on supply. l1hey did not see the distortions in pri¢es that were caused by inflation and. high taxes. And so they ran us into ahigh-cost economy in which the tax "wedges" and the bite of inflation <jlestroyedmore pur chasing power til-an they created.

Thus the stage was set for the emergence ofthe!"supply siders." The phrase may be :$isleading: econom ics' being fluid, qannot afford to for get that supply apd demand are both parts of an integral process. But af ter forty years of pumping up "ag gregate demand" by policies that have severely l!estricted entrepre neurship, it is time that someone should speak u.p for the tax-ha rassed and infl~tion-bedeviled pro ducer. To explain the current situation, 001 382 THE FREEMAN June six economists have collaborated on a stimulating though sometimes cloudy book, Essays in Supply Side Economics, edited by David G. Ra boy and with a foreword by Edwin J. Feulner, Jr. (Published by the In stitute for Research on the Econom ics of Taxation and the Heritage Foundation, 173 pages, $5.Q5. Available from IRET, 1725 K Street, N.W., Washington, D.C. 20006) Feulner, the head of the Heritage Foundation, says in his foreword that the conviction that supply side the ory will work "is for most people a matter of intuitive knowledge." But, aside from Jack Kemp and a few others, we don't send people to Con gress who are long on intuition. We need something to combat what Feulner describes as "the miscon ception that supply side economics is a political movement with little or no economic theory behind it."

Origin of the Concept The second essay in the book, written by David Raboy, traces "the theoretical heritage of supply side economics." Logically, this essay should have come first. Raboy, who is director of research at the Insti tute for Research on the Economics of Taxation, thinks "supply side" is more or less synonymous with clas sical economics in general. The sup ply siders believe that saving is the driving force of investment, and that without investment there can be no increase in real wages. This is what Adam Smith believed. J. B. Say, the French economist, was a supply sider when he argued that the overall level of demand in an economy is depen dent on the level of output and that as investment and production in crease, so will demand. (This is often summed up as "production creates its own purchasing power," which is obvious when you consider that pro duction pays wages and dividends that go into the stream of spending and new investment.) J. B. Sayan ticipated John Stuart Mill, another classicist, when he said that when any transaction is finally closed, it will be found that one commodity has been exchanged for another. Money, when untampered with, performs a neutral role-sales, according to Say, "cannot be dull because money is scarce but because other products are so." It is the multiplication of the "other products" -the supply side that keeps the economic process going.

The "marginalists" -Carl Men ger, Stanley J evons, Leon Walras, John Bates Clark-were all supply siders, as were Alfred Marshall and Vilfredo Pareto. "Menger's analy sis," says Raboy, "provides a crucial building block for supply side eco nomics ... economic decision mak ing occurs at the margin. Then the way in which taxes, monetary the ory, or government spending will af fect economic behavior depends on 1982 SUPPLY SIDE ECONOMICS 383 their effects at the margin, on the valuation of activities or commodi ties." Impact of Inflation on Taxes and Productivity In the opening essay, "Supply Side Analysis and Public Policy," Nor man B. Ture, whp is Undersecretary of the Treasury for Tax and Eco nomic Affairs, says the pertinent question "is how changes in real ag gregate demand can occur without a preceding change in total output." Taxes, of course, alter relative prices or costs. High taxes, reflected in prices, can change the whole "effort leisure tradeoff." Ture provides an intricate analysis of the drag on the economy that comes with Keynesian stagflation. Inflation, he says, aug ments the existing tax bias against effort and saving "by increasing the real marginal rates of income tax."

Mai Nguyen Woo, a research as sociate at the Institute for Research on the Economics of Taxation, de velops some of Ture's insights in her essay on "Taxation, Savings, and Labor Supply: Theory and Evidence of Distortions." Constructively, she offers a theory that a tax on con sumption would be a great improve ment over our present "hybrid" tax system that penalizes capital for mation. The remaining essays in the book are rather specialized. David G. Tuerck, formerly with the American Enterprise Institute, talks about "Rational Expec~ations and Supply Side Economics~ Match or Mis match?" He concludes that taxes "distort relative prices by forming a wedge between the price offered by buyers and the 'price received by sellers." This discourages employ :ment "by forcing the worker to hand over to government part of the wage employers offer f@r his services." Richard E. Wa.gner, who teaches at Florida State University, dis cusses "The Enteirprise System, De mocracy, and th~ General Welfare: an Approach to llteconciliation." He makes a distinction between "spe cial interest" de~ocracy and what he calls "consensual" democracy. The "consensual" deJ.I1locratwon't object to government ~pending for "gen eral" benefits sqch as police, fire, sanitation, recre<ition and transpor tation. But, after! digesting the sup ply side messag~, the consensual democrat will oppose "the use of government as a'l vehicle for trans ferring wealth."

Finally, Naom~ R. Lamoureaux, a professor of histQry at Brown Uni versity, offers an essay called "From Antitrust to Supply-Side Economics: The Strange History of Federal In tervention in the Economy." She notes that the "regulatory functions of government", have "destroyed business initiative and diverted the allocation ... of resources away from their most productive uses." i 384 THE FREEMAN EVERYTHING YOU HAVE: THE CASE AGAINST WELFARE by Jerome Huyler (The American Declaration, PO. Box 324, Brooklyn, NY 11219),1980 268 pages - $4.70 paperback Reviewed by Brian Summers THROUGHOUT our nation's history, there have been people who used the government for their private advan tage-a tariff here, a land grant there, a subsidy or two. But until recent decades, such special privi leges were limited to a powerful few. What has been the exception, however, is rapidly becoming the rule. Where Americans once sought a fair field with no favors, their de scendents now demand special ben efits.

This ever-widening system of leg islated privilege, Jerome Huyler shows, is destroying the American dream and bringing our economy to its knees. One man's special benefit is another man's burden. As these burdens have grown beyond the tax payers' willingness to pay, the fed eral government has resorted to def icit financing. When these deficits are monetized, prices tend to rise. And when the Federal Reserve System responds by tightening credit, the economy is plunged into a recession. But the price we pay for welfare exceeds all the taxes, all the Federal deficits, and all the jobs lost through inflationary recession. We also are losing our liberty. What the govern ment subsidizes it soon controls, as Huyler illustrates with the Medi care/Medicaid system. When these subsidies lead to rising prices, every American is threatened with con trols over his wages, prices, and the allocation of essential goods and ser vices. What begins with compassion ends as coercion.

Huyler completes his case against welfare by appealing to the concept of human rights. In some of his most compelling passages, he shows how the welfare state, imposed in the name of human rights, violates the rights of the benefactors while it drains ambition and self-esteem from the beneficiaries. These recipients, reduced to a life of dependency, are the ultimate victims of welfare. And, Huyler concludes, it is the truly needy among these beneficiaries who would best be served by private phi lanthropy. Ii the Freeman VOL. 32, NO. 7 • JULY 1982 Dear America Leonard Franckowiak 387 In praise of liberty. Pay More and Get Less P. Dean Russell 390 How to be hurt by a "favorable" balance of trade. Reaganomics and the Interest Syndrome Elgin Groseclose 395 A money of substance rather than perpetual debt. The Cure for Unemployment Roland WJ Holmes 398 Curb intervention and trust open competition.

How to Deal with Strangers Brian Summers 405 We help one another through trade. The "Right" to Education Douglas Wentz 406 The economics and politics of government aid. The Jonestown Syndrome Hal Watkins 410 Victimized by false promises of security. The Relics of Intervention: 4. New Deal Collective Planning Clarence B. Carson 414 New Deal planning still plagues us today. Legalized Immorality Clarence Manion 426 When personal virtue is transferred to government. Tax Expenditures John Semmens 428 How government spends what it fails to collect as taxes. LUdwig von Mises, Defender of Capitalism . George ,Reisman 432 The ideas and influence of one of this century's great economists. How Socialism Affects Charity Glenn L. Pearson 440 Coercive sharing destroys the foundations of true charity. Book Reviews: 444 "Locking up the Range" by Gary D. Libecap "The Midnight Economist: Choices, Prices and Public· Policy" by William R. Allen "Antitrust and Monopoly: Anatomy of a Policy Failure" by Dominick 1. Armentano Anyone wishing to communicate with authors may send first-class mail in care of THE FREEMAN for forwarding.

FOUNDATION FOR ECONOMIC EDUCATION Irvington-on-Hudson, N.Y. 10533 Tel: (914) 591-7231 Leonard E. Read, President Managing Editor: Production Editor: Contributing Editors: Paul L. Poirot Beth A. Hoffman Robert G. Anderson Bettina Bien Greaves Edmund A. Opitz (Book Re~iews) Brian Summers THE FREEMAN is published monthly by thl Foundation for Economic Education, Inc., a nonpo litical, nonprofit, educational champion of private property, the free market, the profit and loss sys tem, and limited government. The costs of Foundation projects and services are met through donations. Total expenses average $18.00 a year per person on the mailing list. Do nations are invit~d in any amount. THE FREE MAN is available to any interested person in the United States for the asking. For foreign delivery a donation is required sufficient to cover direc' mailing cost of $5.00 a year. Copyright, 1982. The Foundation for Economic Education, Inc. Printed in U.S.A. Additiona copies, postpaid: 3 for $1.00; 10 or more, 25 cents each.

THE FREEMAN is available on microfilm from University Microfilms International, 30( North Zeeb Road, Ann Arbor, Mich. 48106. Some articles available as reprints at cost; state quantity desired. Permission granted to reprint any article from this issue, with appropriate credit, except "Ludwig von Mises, Defender of Capitalism."

a; ~1I1111111 ~DearAmerica: LeonardFranckowiak PLEASE allow me to introduce my self. My name is Liberty. I am the way of life on earth which gives ev ery human being the freedom to fol low his special pathway to the pot of gold at the end of his own special rainbow. I am the way which en courages each person to fully de velop his God-given talents and abilities. In my way, people are free to create; free to grow in mind, spirit and heart; free to discover their own uniqueness and fulfill their own spe cial destiny. I engender expression of man's God-given free will in any way which is peaceful. You sing about me in your songs and my name is mentioned some time, somewhere every single day of the year: I pledge allegiance to the flag of the United States of America and to the Re public for which it stands, one Nation under God, indivisible, with Liberty and Justice for all. See. There I am, near the end of the Pledge of Allegiance, linked arm and arm with Justice. For centuries men have yearned for me but knew me not-except perhaps-for a fleeting moment in the freedom of the forest or on the blue waters of the lake.

Men have enjoyed my splendor, per haps, under the hot sun in the farm fields or in the, cool breeze on the hilltops. Centuries ago the Lord came down from heaven and!said, "I am the Lord, thy God; thou shalt not have strange gods before Me." Strange gods, how ever, did appearl There were the pa gan gods of fir~ and lightning but they would be struck down by the Oneness of Him who is in Heaven. More strange gods appeared in the form of kings, di~tators, and the lord high politburo. 'rhe God of Heaven would be usurped by interlopers and man would knee[ before two masters: the true God ofliIeaven and the false man-made god ~f earth. The God of Heaven would be as He always was merciful, just and good-and He would give to man the dignity ofhu mani ty in the expression of free will. Mr. Franckowiak is a businessman in Chicago. His business includes a weekly radio program in behalf of freedom, from which this article is drawn.

387 388 THE FREEMAN July The insidious god of earth, however, would declare himself sovereign and master over all those in his domin ion and declare: We are all mortals but you, my sub jects, are more mortal than I for you shall live or die at my command. You shall toil in the fields or vineyards or factories as I direct. And the fruits of your labors shall be taken from you, in part or in whole, and shall be spent, divided or appropri ated in accordance with my whims, fan cies, dictates and caprices. I am your king and master; you are my servant and slave. Men would do as their earthly masters directed but the burden was heavy upon them. Men would quest for me, Liberty, because I would have no man in bondage. It is the axiom of my way that all men are created equal in the image and likeness of God. Even though I held the promise that men of free will would indeed be free, still I could not be had.

But my time was to come. People would emigrate to a new land. They would be called Pilgrims and pi 0neers' visionaries and revolution aries. In 1776 they would declare: When in the course of human events ... We hold these truths to be self-evident; that all men are created equal, that they are endowed by their Creator with cer tain unalienable rights; that among these are Life, Liberty, and the Pursuit of Hap piness. I, Liberty, had been given a place of honor! Not only had I been recog nized as being directly endowed by the Creator, I at last belonged to man. And man belonged to me. Oh America, how I loved thee then! There would be a great war for In dependence. Though my fate was at the crux of the battle, I could but stand immobile as a trophy on the . mantelpiece. Patrick Henry would proclaim: "... Give me Liberty or give me death." Men and women, heroes all, would indeed sacrifice and die for me. Some say I was the source of their inspiration and strength. I do not know. Could my promise be so great that I should merit such high resolve?

When the war was over and the new nation was born I was given more fame and high praises. The Preamble t9/your new Constitution would allude to the fact I had bless ings to give. "... (T)he blessings of Liberty ... ", it said. Imagine that. I, Liberty, had been placed in a realm normally reserved for the Deity. I would have blushed with pride if I were able. In the years which followed the war I would become your central theme. In his farewell address to the Na tion, President George Washington would have me so great a source of happiness that people would find glory in recommending me to the applause, affection, and adoption of every nation which did not know me. Re would also express for himself and Congress: "... a love of liberty with every ligament of the heart ... "

1982 DEAR AMERICA 389 Oh America, we were ever so much in love! Together we would banish our false god of man on earth-no imperial king, no lord high polit buro, master be damned-slavery be gone. Together we created an atmo sphere offreedom and the free spirit. America would enter the era of the rugged individualist. It was an era of self-responsibility, self-reliance and self-esteem. As if he knew how all of this fit into a common mold, Captain Eddie Rickenbacker would say of America: The four cornerstones of character on which the structure of this nation was built are: Initiative, Imagination, Indi viduality and Independence. There was in fact much individu ality but of a very special kind be cause it was also an era of great co operation. Together, people would build farmhouses, towns, cities, rail roads and factories. Oh no, the time was not without its selfish or evil people; for in an imperfect world of imperfect people they would (and probably always will be) among us.

But how America would prosper during our great romance! Can you imagine how I felt at the time? Me, Liberty, on a high throne while all around me people would overcome hardship, diminish povert)~, find prosperity and bring about the high est standard of Iiving ever achieved by anyone, anywhere on the face of the earth. 'ro be sure, material well-being is to be appreciated ~ut was that the source of Americ~'s greatness? I think not, nor did yqur twenty-eighth president, Woodrow Wilson, who said: America is not a mere body of traders. Our greatness-built. upon freedom-is moral not material. We have agreat ar dor for .gain but we have a deep passion for the rights of man. See. There we are. together again. President Wilson d~dn't mention my name - he used the name of my counterpart, Freedom-but he did talk about the rights of man and that includes me. I belong to you. Thomas Jefferson, the man' who brought us together in the DeQlaration of Inde pendence, also reminded us: "The God who gave us lif~, gave us liberty at the same time."

I know not whether I am heaven sent or earthly boupd. I only know I am pleased to be in the hearts ofmen. If I am the source ,bf happiness, in.. spiration and strength, then I give thanks to the Lord. If I have bless ings togi ve, then· I bring them to you as His messeIjlger. For I, Lib.. erty, am just a spirit; but as a spirit given life in America, I beg you let me once again ride' the high crest of our mutual love ana admiration. As you feel me in YO\ilr hearts, please also know me in yqur minds and re member me in your actions. To getherwecan build a better world~' MYoId economics professor was ab solutely sure that a favorable bal ance of trade is good; and thus, of course, an unfavorable balance of trade is bad. He told us students that the trade arrangement of "more goods and services going out of a na tion than coming in" is called favor able because that's what it is. While I accepted that conclusion at the time, I'm now convinced that (if we must choose) an unfavorable balance of trade is the best arrange ment. That is, the people of a nation are better off if more goods and ser vices are coming into the country than are going out. Here's why.

Logically, you would expect each of us individually (and thus all of us Dr. Russell is Professor of Management, School of Business Administration, University of Wisconsin at La Crosse. 390 P. Dean Russe Pay More and Get Less collecti vely) to prefer to get mor goods and services for our mone: than we now get. But that's not th trade policy favored by our leaden Our national policy -enforced b: fines and imprisonment-is just th reverse of how everyone of us act when we have a choice. Astonishingly, we Americans co] lectively vote for leaders and law that compel us to pay more than w need to pay for many thousands c the products we buy. And we hav happily followed that procedure eve since Alexander Hamilton cOrJ vinced Thomas Jefferson and th other founding fathers that the ne, nation would be better off if all it citizens were compelled to pay mor for less. What Alexander Hamilton wante, was, of course, a favorable balanc PAY MORE AND GET LESS 391 of trade for the nation. He wanted laws that would increase the amount of products leaving our country and (by the use of various measures to restrict and to raise the price of im ports) decrease the amount of prod ucts coming in. This artificial scar city-i.e., fewer goods available within the nation because of in creased exports and decreased im ports-was endorsed by the very first United States Congress. And we professors of economics have gener ally been teaching that strange con cept in our classrooms ever since Alexander Hamilton spelled it out in his famous Report on Manufac tures in 1791. We honestly believe it is so, in much the same fashion as the doctors who treated George Washington believed that the dying president needed to be bled again when he really needed a transfusion of more blood to keep him alive.

Make-Work Schemes I think I first began to wonder about that almost universally ac cepted idea concerning favorable (and unfavorable) balances of trade when I was a soldier overseas. I knew that the civilians back home were work ing long hours to produce products of various kinds. Then they shipped large amounts of them overseas to us soldiers. We, in turn, worked long hours to destroy (in one way or an other) what they had produced. That procedure went on for several years. We Americans used ev ery possible incentive to increase production (the Gross National Product). Then we destroyed a large percentage of it! and produced it again. And everybody agreed that we had never had it So good. Everybody seemed better off than before. Everybody had a job. The economy was boo:ming. A lot of peo ple were becoming wealthy. Even my own pay had more than doubled. And for the first time in my life, I ac tually saved money. In addition to a steady job and niore pay, I also got free food, housing, medical care, clothing, and life insurance. And ap parently, most or this good fortune was based on a favorable balance of trade. A thousand times more goods and services were leaving our coun try than were coming in. Perhaps a million times more! It was perhaps the most favorable balance of trade ever recorded.

The logic of my old professor seemed sound indeed. He had taught us that a favorable balance of trade brings more jobs, more production, and more prospetity in general. And an unfavorable balance of trade de stroys jobs and! impoverishes the people. Therefore he (along with Alexander Hamilton) argued that the economic policy of our nation should be to have its people produce and ship out of the country more products than come in. If we want to prosper, he told us, we Americans as a group 392 THE FREEMAN July should (in the real terms of actual exchanges of goods and services) pay more and get less. In spite of what seemed to be ob viously true, however, I kept won dering if we could really become prosperous by shipping out more than comes in. Is it really true that the people of a nation are worse off be cause they get more goods and ser vices than they give? Doubts began to enter my mind.

But just at the moment those doubts became overwhelmingly nagging, the Marshall Plan came along. Again I observed another mass outpouring of goods and services from the United States going all over the world. And most of it was free to the people who got it. I saw us rebuild Germany and Japan and various other nations. This went on for many years. Policies Have Consequences We always had a favorable bal ance of trade. We shipped out hun dreds of billions of dollars worth of American products, raw materials, and labor-and got little or nothing in return. And as had been predicted by myoId professor, prosperity con tinued right on here at home. Ev erybody was working. The conven tional statistics on employment, production, and trade indicated clearly that we were more prosper ous than we had ever been. The economy was booming. And with minor ups and downs, it continued to boom year after year.

Then one day, the charade stopped. The nations with the unfavorable balances of trade (i.e., those that got the goods and services we produced) had become prosperous. And the na tion with the most favorable balance of trade the world had ever known (i.e., the United States that had produced the goods and shipped them out of the country) was in trouble. Reality displaced the mirage that had enticed us for long. I finally understood that myoId economics professor (and Alexander Hamilton) had been wrong all along., An unfa vorable balance of trade is not nec essarily bad. On the contrary, if one must choose, it is the preferred ar rangement. Without exception, ev ery consumer (everyone) is better off if he has more, not less. To use the ultimate simplification, observe that people with many goods and ser vices have more goods and services than do people with fewer goods and services-and where the goods and services come from is not necessar ily relevant to prosperity over a sig nificant period of time.

I simply cannot now understand how, for so many years, I failed to detect that simple truth. Along with most Americans, I had made the un believable error ofconfusing the work with the product. I thought it was the jobs, rather than the products, that created prosperity. Under our 1982 PAY MORE AND GET LESS 393 policy of encouraging a favorable balance of trade, it is true that we increased both the number of jobs and the amount of goods and ser vices produced. We accomplished that seemingly desirable goal, however, by shipping out of the country large quantities of the goods and services produced by the increased jobs. The simple truism that we thereby had less (not more) didn't occur to me. We paid people to produce. Then we exported the production. That left us with fewer goods and more money. And that, in turn, eventually re sulted in double-digit inflation and an economy in shambles. It became increasingly obvious that our appar ent prosperity had been based on a consumption of our capital, a de crease in our irreplaceable re sources, and a prodigal waste of our scarce labor . We were eating the seed corn in an all-out effort to increase jobs.

Balances and Jobs In truth, however, there is no de pendable correlation between bal ances of trade and employment. And the search for it is often like the similar search for a relationship be tween machines and loss ofjobs, i.e., it appears to be governed more by emotion than science. During our long years of favorable trade bal ances, we sometimes had much un employment. And sometimes we had labor scarcities. I have found this same situation in Argentina and various other countries. And the un favorable balances of trade in Eu rope sometimes !seemed to have a negative correlation with employ ment, i.e., the larger the inflow of goods and servic¢s from abroad, the more jobs at home in Europe. One permanertt relationship that can be shown between employment and trade balances, however, is this: If an American buys a foreign car, it's true that the work of producing that foreign ca~ was done by for eigners, not Am~rican workers. At the same time, however, jobs in gen eral in the United States may be high or low. And restrictions against im ports in an effort to induce us to buy domestic (inste~d of foreign) cars could cause us to buy fewer cars in general, rather than more American cars. There simp~y is no reliable cor relation between national employ ment levels and national balances of trade, either positive or negative.

You can find ~any examples to "prove" whichever viewpoint ap peals to you. Another relationship in this gen eral area that no one can deny is this: When we individuals volunta rily buy an imported article, we get a better product-or a better price than would have been the case if we bought a domestic article. If this were not so, we woul~n't voluntarily buy it. That's proof positive. The person who disagrees is necessarily imply394 THE FREEMAN ing that he knows what's best for us all of us-even if it costs us more money. I say no. Finally (and the reason for this article), we are now blaming our present economic difficulties largely on the fact that we ourselves have been running an unfavorable bal ance of trade for several years now. As a nation (and in real terms), we are getting more than we are giving. The politicians, the editorial wri ters, the labor leaders and, most of all, our business leaders are now claiming that we are poor for this reason: Those crafty foreigners are literally flooding our country with Threats to Progress products and services-much of it free and almost all of it of excellent quality at low prices.

Everywhere I go, I hear people saying that we can have prosperity again if we do something to decrease the amount of products and services we have. They also say we must raise prices to bring back prosperity. They are advocating laws to force us to pay more and get less. There's no way that such a policy can bring prosperity. It is a delusion that will soon drop us into a new economic category-the developed nation that is becoming undevel oped. i IDEAS ON UBERTY THE so-called "benefits" of tariff protection are illusory-the only con sequence of the tariff being that the domestic owners and workers are competing with one another in an industry erected on a false base. The base is false and weak because it is supported by the threat of force force which directs individual spending-instead of by voluntary choices. The force is directed against consumers, the friends and neighbors of those who seek special privileges for themselves. But consumers do not respond kindly to force or threats of force. They have only so much buying power, and they cannot be forced to buy more of everything. Nor will they buy a commodity as freely as before ifits price is forced upward by a "protective" tariff. Thus, tariffs serve merely to put the whole economy on an artificial foundation instead of on a sound business foun dation. No one really gains-and nearly everyone loses-by this ar rangement. It stifles progress.

w. M. CURTISS, "Serving Consumers"

Elgin Groseclose REAGANOMICS AND THE INTEREST SYNDROME THE Administration's efforts to bal ance the budget and reactivate the economy recall the county fair con tests of an earlier generation known as climbing the greased pole. Just as it appears that inflation is being brought under control, interest rates start rising again, bringing the seed of inflation, erosion of savings, re duced capital investment, slower business and continued deficits. How to control interest rates? Should the Federal Reserve lower its lending rate, push more reserves into the banking system, or use some other mechanisms? Professor Milton Dr. Groseclose, a financial consultant in Washington, D.C., is the author of Money and Man (1934, 4th edi tion 1976) and America's Money Machine (1966, 1980). He serves as executive director of the Institute for Monetary Research. Friedman, an advocate of steady in crease in what is c~lled money sup ply, has complained that the FED did not use the right tools, and ad ded that there was 'no historical pre cedent for the constant interest rate fluctuations of the past few years.

For decades the' Federal Reserve has assumed responsibility for de termining how much money/debt/ credit the country needs, and in 1978 was required by law to set and an nounce "targets" for money supply. An Open Market Committee-a group of twel ve-meets periodically and with the assistance of batteries of computers and r¢ams of charts de cides the amount qf "money" needed by the economy to maintain steady growth at reasonaple interest rates. Its main device is! to buy or sell in 395 396 THE FREEMAN Ju( the market its own debt instru ments (notes or deposit credits) which thereafter become money equi va lents and reserves in the banks. This system permits the banks to extend their own debt commitments through deposit liabilities and thereby in crease the "money supply." Whipping a Dead Horse "Money supply," taken to repre sent the current purchasing power in the economy, is generally defined as the note liabilities of the Federal Reserve Banks plus the demand li abilities of banking and like insti tutions; it is called Ml (or Mlb ). A simpler definition is the amount of demand debt in the economy.

The futility in trying to control "money supply," and thereby inter est rates, was illustrated by a speech by Anthony M. Solomon, president of the Federal Reserve Bank of New York before the American Economic and American Finance Associations on December 28,1981. Mr. Solomon pointed out that during the first eleven months of 1981, the money supply figure used by the Federal Reserve (Ml ) rose at a modest 2.5 percentage rate; the figure, how ever, was deceptive; other money equivalents in the form of Eurodol lars, money market funds and the like, called M2 and M3 , rose at 10.1 per cent and 11.1 per cent respec tively. In short, as Mr. Solomon conceded, "A fundamental re-evalu~ tion of our use of monetary target may be necessary." Vestigial Marxism This observation is one that shoull have been apparent years ago t monetary historians and students c monetary phenomena. That mone: supply through debt formation Cal be controlled by a select group of e:x perts sitting in a marble mausoleuTI on Washington's Constitution Av€ nue is a vestigial relic of Marxis economics-the theory that the statl is the repository of all economic wis dom and hence the ultimate author ity for economic planning.

The reason debt and money sup ply and interest rates can not h controlled, but will continue to in crease, lies in the nature of wha passes for money. The currency il circulation, apart from debased to ken coinage, consists mainly of Fed eral Reserve notes. Until 1934 thesl notes were payable on demand iI gold coin. Since 1934, the notes havl been redeemable only in otheJ notes-a perpetual rollover of deh without maturity, with the interes' payable only in more debt. Deb' multiplies upon itself without limit with each increment lowering thl purchasing power of the total. Here is the basic explanation 0 the upward pressure on interesl rates, the effects of which filtel through into the general price struc· 1982 REAGANOMICS AND THE INTEREST SYNDROME 397 ture. Until 1946 these effects were hidden by reason of the great influx of gold during the preceding decade, an influx that anesthetized the in flationary effects of Federal Reserve policy. The awakening came after the close of World War II, when the flow of gold seeking security here ceased, and a reverse movement began.

As prices rose, investors grew in creasingly reluctant to put funds out at long term except at the higher rates of interest required to offset the loss of purchasing power of the dol lars received at maturity. This is re flected statistically in the amount of government debt that increasingly had to be incurred at short term. In 1946, the mean interest rate on gov ernment bonds was 2.19 per cent, and 23 per cent of the public debt was at long term. In 1981, the mean inter est rate was 12.87 per cent, and only 6 per cent of government debt was long term. How Much Debt? The Federal Reserve System sits over the economy, breeding debt like a queen bee of a hive spending its existence in laying eggs. Can a sta ble price level and stable interest Francis Adams Truslow IDEAS ON rates be achieved while this debt creation continues? Total dollar debt that ten years ago was calculated at around $1.8 tril~ion is today around $5.5 trillion, thJ largest increase oc curring during the past 5 years.

During 198~, M3 , the broadest measure of "Ihoney supply," in creased by $222ibillion. Federal debt in the hands of ,the public increased by $93 billion. )Who were the other borrowers? Billions were lent to fi nance mergers :jl.nd acquisitions, like those by du Pont and U.S. Steel. One bank alone (First Boston Corpora tion) boasted that it had underwrit ten or particip*ted in mergers and acquisitions involving over $30 bil lion. Other amounts were sunk in loans to indigent foreigners, like Po land and Turkel)!. Reduction of interest rates, the price level, and, the debt burden, de mand what neither the Administra tion, nor the Federal Reserve, nor the monetarist school yet accept, namely, a restQration of a money of substance. The country can not prosper on a system ofperpetual debt, or a system in which the only means of debt paymen~ is another LO.U. @ UBERlY THE CITIZEN who calls on government to supplYihim with security from the cradle to the grave, thereby encouraging goyernment spending, is a danger to himself and his fellow citizens. If his;pleas are successful, he can lose his freedom and gain no security in exchange.

Roland W. Holmes The Cure for Unemployment THE cure under discussion here does not refer to the elimination of all unemployment. Some unemploy ment is voluntary and some is caused temporarily by unavoidable natural catastrophes such as earthquakes and floods, or by human error and misfortune. Rather, we are con cerned about those arbitrary, delib erately applied forces in the market place-attempts to raise wages above free-market levels. Such forces, to the extent that they accomplish their objectives, cause totally unneces sary and permanent unemployment. Bitter frustration and misery for countless thousands of would-be workers is the inevitable result. During the Great Depression of the thirties, the fear of unemployment panicked Americans into letting Mr. Holmes is a retired aeronautical engineer in Belle vue, Washington. He has written, lectured, and orga nized stUdy groups to help understand and preserve freedom.

398 down the bars to the so-called liber als; and for about five decades, these liberals have addressed almost ev ery conceivable human problem by being liberal with other people's money-collected, or printed, by the government. For a time it seemed that no great harm was being done. But now it has become apparent to more and more citizens that this kind of cure-all results in intolerable de grees of taxation and inflation, ac companied by a growing amount of unemployment. Current political philosophy, to a great extent, recognizes the crucial importance of reducing inflation. Consumers are disgruntled over constantly and rapidly rising prices. But suppose prices are forced to level off by restricting the increase in the money supply, while wages continue to be forced upward. Marginal em ployees will lose their jobs. Unem ployment will increase. If this should THE CURE FOR UNEMPLOYMENT 399 precipitate another wild orgy of di sastrous governmental intervention as it did in the thirties, it could lead to the ultimate extinction of the freedom of individuals that has made America the most desirable place to live on Earth.

On page 291 of his book, The Fail ure of the New Economics (New York: D. Van Nostrand Company, 1959), Henry Hazlitt defines the require ment for full employment in this manner: "No matter how low total monetary demand falls, full employ ment could exist at the appropriate relationship of wage-rates to prices. No matter how· high total monetary demand is pushed, unemployment will exist if an unworkable relation ship exists between wage-rates and prices." Free Competition for Jobs But what is the "appropriate re lationship" between wage-rates and prices? How can such a magic rela tionship be established? Nothing could be simpler. Allow every person looking for work to ac cept ajob at the highest wage he can get. Let him bid freely. This is a job for individuals. Only individuals, acting as free, responsible persons, can solve the problem. The cure for unemployment is free competition for jobs. Only a free market can arrive at "the appropriate relationship" be tween wage-rates and prices.

There is no reason for such an idea to put an end to labor unions. In fact, it could stimulate [the formation and growth of a wholeinetwork of unions ofa new breed, or pfone or two great labor organizations that would em brace all who contribute brains and brawn, from newsboys to top execu tives. The collective ~the union) would employ its resources to assist each and every individual member to make the best possible bargain, suitable to that person's tastes and desires. Computerized data covering national and worldwide conditions of vital importance to job seekers could be made available exclusively to rnembers. Such data could be cata logued by localities, industries and individual employers, and could in clude such aspec~s as weather con ditions, living cOI1lditions,prospects for growth and advancement, and how well individual employers treat their employees. IN0 attempt what ever would be made to bargain workers' services en masse, like selling a trainload of cattle. No at tempt whatever would be made to influence a wage !level as such. The practice of letting a completely free rnarket establish iwage levels would be held sacred.

An organization of this kind might prove to have far more appeal to the average workman: than most present organizations. Despite the coercive powers that unions currently pos sess, they have had trouble in their 400 THE FREEMAN July attempts to increase membership. Probably the reason is that a major ity of workers value their individual independence above any advantages that might be enjoyed by virtue of membership in a union. A few months ago, I experienced an example of this desire for inde pendence. I was having my car re paired in a shop that was being struck by the union in an attempt to obtain a closed shop. One of the union members, an excellent mechanic, was still in there working. When I asked him about it, he said "I'll be damned if they're going to tell me what I can and can't do!" The guarantee of com plete freedom of individual choice, and the assurance that no one would ever be asked to endure the trauma of a strike, would undoubtedly be at tractive to a great many prospective members.

Labor unions are correct in seek ing better economic conditions for their members. But they have failed to obtain the best possible condi tions for all of their members, be cause they have refused to recognize the hard realities of the market place. They have persistently ig nored the Law of Demand for Labor: the higher the wage asked, the fewer the number of workers that will be hired; and the lower the wage asked, the greater the number that will be hired. This law is rigidly enforced by the decree of millions of potential purchasers of the products of the labor involved-truly "dictatorship of the masses." The Law of Demand cannot be repealed. Collective bargaining, as pres ently practiced, attempts to raise the wage level of a group of workers above the current level. To the ex tent that the effort is successful, eventually-not immediately, but eventually-it will mean that some of the members of that group will be laid off, will be unemployed. At the higher cost of production, employers will find that higher prices must be asked in order to maximize profits.

The higher prices will result in de creased quantities purchased by the buying public. It will normally take considerable time for employers to learn to what extent the quantity purchased will be reduced due to the higher price, but the ultimate unhappy result is inevitable. "The mills of the gods grind slowly, but they grind exceed ingly fine." Unfortunately, this time lag obscures the cruel result of col lecti ve bargaining as presently practiced. Minimum Wage Laws Minimum wage laws have the same restrictive effect as collective bargaining. They destroy the natu ral right of certain persons to bid ef fectively for a job. By raising wages by force, or the threat offorce, above the free market wage, it is decreed, absolutely, that some will not be 1982 THE CURE FOR UNEMPLOYMENT 401 hired who wish to be hired. This is especially sad because it victimizes the young, the uneducated and the inexperienced-the very poorest of the would-be competitors in the la bor market. It keeps some from ever getting on the ladder of accomplish ment, and thus creates frustrations that often lead to drugs and crime.

Incidentally, these practices of bringing about artificially high wages point up the injustice of de ciding economic matters by m.ajority vote. Those who are still able to ob tain and hold jobs at the higher wages are normally in the majority. They can hardly be blamed for fa voring the process, even if they re alize the dire consequences for the minority who suffer. Furthermore, in the broader political arena, the majority of the voters probably fail to understand these causes of un employment. But whether they do or not, they salve their feelings, whether they be feelings of guilt or sympathy, by sanctioning further governmental violence in the form of robbing those still fortunate enough to have jobs, hopefully in fa vor of those who have been forced out. Fortunately, there are indications that there is a better climate of un derstanding in the political and in dustrial world of today than existed in the thirties. And it is especially encouraging that such improved un derstanding is present where it counts most: in' labor union leader ship. Evidence of this appeared re cently in a column on page one of the Wall StreetiJournal of Septem ber 30th, 1981~ entitled "Bargain Year," by Robert S. Greenberger. A chief economist of one major union is quoted as say~ng "I'd be surprised if there's a lot df demand for big in creases next year. Most of us will be happy just to h~ld on to what we've got."

That kind of [talk is sensible and heartening. But consider the prob lem that even the wisest and most considerate labor leader is up against in trying to sel] the services of tens of thousands ou workers in one big lump. There is ,no conceivable way in which anyone can know what the correct wage shpuld be for all those workers, eithe~ individually or en masse, even for: a day. And the cur rent custom is td try to establish such a correct wage for up to three years in advance! No wonder we are in trouble. Removethe Chains That trouble is haunting us in the form of the twin diseases of unem ployment and inflation. Only a free m.arket for goods and services can bring about the price and wage ad justments necessary to cure those diseases. Mod~rn development of data processing! and communication is rapidly beco~ing so potent that such essential adjustments can be 402 THE FREEMAN July accomplished in short order. Mil lions of individuals, each acting in his or her own best interest in view of his or her present circumstances, can arrive at the best possible solu tions pronto. All that is necessary is to remove the shackles.

The farsighted labor leader of the future will see that removing the impediments to full employment amounts to freeing the whole labor movement to grow and serve its members as never before. There is virtually no limit to the kinds of service that a free-market union could offer its members. Small businesses often find it difficult to offer their employees such benefits as insurance and pensions. They can only compensate for this lack by paying higher wages. A large union could furnish the opportunity to buy inexpensi ve group insurance, and could also set up efficiently operated retirement funds. The union could offer educational courses in self-improvement and economics. A thorough understand ing of the benefits and ultimate fair ness of a free-market system could do much for the peace of mind and contentment of union members. Such courses could explain that profits and losses are our only guide concerning what to produce and what not to produce, in accordance with the wishes of the whole buying public, and that this, incidentally, is why enforced communism can never work to the advantage of the citizens. It could be shown that the larger the profit, the sooner the adjustment to producing larger quantities of some thing that is suddenly discovered to be very desirable, pulling workers into newer fields by means of higher wages.

Minimizing Business Cycles It could be shown that, so long as we have fractional reserve banking, we seem bound to experience busi ness cycles, and that a practice of free competition for jobs and free competition for help tends to dampen the swings. Not only can full em ployment be hastened during the downswing by bidding wages down as necessary, but rapidly increasing wages during the upswing would have some tendency to lessen the overinvestment that occurs in times of euphoria. That a free market for help is superior to present-day col lective bargaining at such times was demonstrated in the upswing in the economy induced by the Kennedy tax cuts of the sixties. Wages in the un organized labor areas frequently rose more rapidly than in the unionized areas. A free-market union could have a beneficial impact on the attitude of employers toward their employees. For example, it might inform em ployers of mistakes they are mak ing' perhaps without even realizing it, concerning the treatment of their 1982 THE CURE FOR UNEMPLOYMENT 403 help. I am sure that many present unions are performing this kind of service that is of mutual advantage.

The union could assist employers in setting up systems for paying as nearly as possible according to value. I was once able to establish a method for doing just that. The re sulting beneficial effects on both morale and productivity were most gratifying. Men and women respect an employer who demonstrates con sistently that the employees are paid fairly relative to each other. And they know who's who. One of our super visors tried the experiment of ask ing each member of his group to evaluate his fellow workers relative to each other, simply representing values by lengths along a line. He found almost total agreement among them, and with his own evaluations. There is a great deal of room for im provement along these lines among employers. Mutual Assistance The attitude and contentment of workers will naturally improve as they are brought to realize that by increasing their value to their em ployers' they are increasing their value to all mankind-that by gain ing increases in their wages in this manner, they are doing the whole world a favor. In the last analysis, we are all working for each other, with employers functioning as the essential go-betweens, organizing the whole process. What a difference there is in gai~ing pay increases by increasing one~s value as compared with gaining them by forcing un known workersi out of competition by the threat of violence!

One of the Imost valuable and comforting truths that could be demonstrated to union members is the fact that producing a good or a service creates a demand for other goods and services. We trade our la bor for money, that we ultimately trade for other things. Before there was any such: thing as money, we can picture a hunter trading an ex tra deer for fis~ caught by a special ist in fishing. l3ut the hunter could not demand fisp until he produced a deer. His product was his source of demand. Suppose that more workers are hired at lower wages in the auto mobile industty. This would mean more cars to be.traded for more goods and services produced by other in dustries. So more cars mean more demand for goods and services produced by oither industries, and more goods an<1l services produced in other industries mean more demand for cars. Everyone has more, not less, because of the Jower wages. There is no such thing 'as a limited number of jobs, because each job creates its own demand. The only limit to this increased demand is the number of workers availaple. Full employment (for all who wish to be employed) and 404 THE FREEMAN maximum possible standard of liv ing for all is the natural condition in a free-market economy.

Incidentally,· the fact that there are always only so many workers avail able can be very comforting to any one who might be entertaining the fear that, in a free market, employ ers could drive wages down to bare subsistence levels. When all are hired who wish to be hired, that's it. Wages can go no lower. But of all the benefits and advan tages that could be realized by a member of a free-market labor or ganization, perhaps the most grati fying would be, surprisingly enough, the power to bargain! The pressure on employers to live up to standards of treatment of their employees dic tated by the market would be enor mous-far greater, ultimately, than any strike threat could be. Nothing can be more compelling to an em ployer than to see his better workers leaving him, one by one, for better jobs, especially if some union is recording such departures and noti fying its membership (and the em ployer) of his shortcomings.

The Power of the Market In the early days of the Industrial Revolution, as efficiency and pro ductivity increased with capital ac cumulation, this power of the mar ket to dictate higher wages and better working conditions became so annoying to employers that they succeeded in getting maximum wage laws passed. As troublesome as such laws must have been, they were no match, ultimately, for the dictates of the market. Living and working conditions for the working classes continued to improve, and the max imum wage laws were either re pealed or became dead letters. Now, some 200 years later, politi cal power has swung to the opposite camp. The same errors of trying to defy the natural laws of human ac tion are being committed, but this time in the opposite direction. In stead of a shortage of workers-the condition that confronteq. employers when they held wages too low-we noW have a shortage of jobs.

We can proceed toward the prom ised land of full employment only as the conventional wisdom becomes strong in the understanding of the virtues of a free market. We can reach our goals only when the mores of the community decree in no un" certain terms that the use of vio.. lence in the marketplace, even if le gal, is immoral; and that that principle is particularly apt in mak .. ing it possible for all who wish to work to obtain jobs. The cure for unemployment is free competition for jobs. To the extent that this simple fact is recognized in our society, to that extent will our effort to stem the growth of govern mental intervention receive an es sential boost. Ii Brian Summers HOW TO DEAL WITH STRANGERS WHEN we were young, our parents provided for all our needs. As we grew older, we learned to rely on our brothers, sisters, teachers, and friends. Strangers, however, were not to be trusted. Besides, who needed them?

Societies have developed along similar lines. In the earliest socie ties, people lived pretty much by their own wits. Later, they turned to their immediate neighbors for help with hunting, harvesting, and mutual protectibn. Strangers, however, were to be feared and driven away. Only in recent times have people realized that strangers have some thing to offer. Let us review what has been learned about dealing with strangers, in the hope that we won't repeat past mistakes. Strangers are different. They look different and sound different. They also produce different goods and ser vices. They have different skills, dif ferent natural resources, and grow their crops in different climates and soils. Ifwe want to share in the many Mr. Summers is a member of the staff of The Foun dation for Economic Education. things the world has to offer, we will have to deal with. strangers. It's harder to go it alone. Some times a stranger will offer a product that we Can make in our own com munity. But perhaps he can make it for less. We can get more goods and services by spec~alizing in what we do best, and trading for the products that others make best.

The carrot is betterthan the stick. If we want to get what a stranger has to offer, it i$ best 'to offer some thing in return .• We can take what he has by·force, but then he will stop producing. Weean place heavy bur dens on his output, but then newil1 trade with others. Some strangers are very smart. They try to figlllre out what goods. and services weiwill want,and then do their best to cut the costs of pro duction. When they fail,· they some times suffer great losses. But when they succeed, they often become rich. And because we are the ones who use and enjoy their products, we also benefit. It is smart for us to let oth ers work in freedom. We are all str&,ngers.Our customs and ways differ~rom those of every one else. But just as other peoplecof· fer their goods apd services to us, we offer our products to them. When we rely on someone as a trading part ner, he also relies on us. In free trade, each person provides for his own needs by helpilng provide for the needs of others. i Douglas Wentz The "Right" to Education I am a graduate student at an ex pensi ve Ivy League uni versi ty. The federal government's guaranteed student loan program already has fi nanced $5,000 of my educational costs, and substantial additional debt looms on my horizon. My father, an honest, hard-working bookkeeper, earns substantially less than does my mother, a public schoolteacher. Cer tainly I, if anyone, should join the ranks of those who, in their own self interest, have marched on Washing ton to protest cuts in aid to students.

Why, then, have I hesitated? Why have I, as one who stands to lose a substantial government subsidy, chosen to remain aloof and above the fray? The answers to such questions are many and varied. In part my action (or inaction) reflects a long develMr. Wentz is working toward a master's degree in pUblic policy analysis. 406 oped disgust at abuse of existing programs. Certainly, too, my stance reflects the belief that, in an age when both food stamps and entitle ments are facing the ax, no pro gram, least of all government aid to graduate students, should remain untouched. Significantly, however, my thoughts turn also to a more funda mental question-one concerning the very concept of government in a free society. I am prompted to wonder whether I, as my colleagues argue, somehow enjoy an intrinsic "right" to education. Does the American government "owe" me, in some prin cipled sense, unrestricted access to graduate loan assistance? Is it true that, as Norman Cousins noted: "It is no longer correct to regard higher education solely as a privilege. It is a basic right in today's world"?

My conscience thinks not, and deTHE "RIGHT" TO EDUCATION 407 spite the adverse effect on my pock etbook, therein lies my hesitation. For unlike national defense, police protection, and other aspects of life in society, education is not and never has been a purely "public" good. Though governments out of obliga tion and necessity may provide for defense and security, governments do not, therefore, owe me or anyone else funds for the pursuit of a master's or law degree. A Cousins-type argument for in tervention in the provision of edu cational services runs as follows. Governments, if viewed as distinct agents, may be defined in terms of their functions. An economist views Washington, then, as a factory for the production of "public" goods those services (such as national de fense, post offices, flood control, and so forth) provided for all citizens. The Problemof "Free Riders" Regulations, taxes, and other methods of economic intervention are levied by governments in response to situations in which universally desired goods are not produced by free operations of markets. Police of ficers and road fixtures, for example, are necessary everyday goods, but priv.ate systems may not provide them in amounts considered "opti mal" by many citizens.

Governments, it is argued, and not markets, then, ought properly to oversee the provision of public goods. Many services ~re nonexclusive in nature; once they are provided, it is difficult to prevent individuals from deriving benefits. An adequate de fense establishment protects every one in the country whether they like it or not. Markets in this instance are not efficient, and are thought to face peculiar allocational difficul ties, most notabllYthe so-called "free rider" problem.' Since market sys tems cannot compel payment for a collective good, ,there is no way to prevent a person from receiving the services of the good if he or she re fuses to pay for it. Organizations which provide benefits to, and confer obligations on, their members (such as governments., labor unions, and the like), then! resort to coercive methods for providing public goods. Workers in unionized plants, for ex ample, may attempt both to enjoy the benefits of unionization, and to avoid union membership and the subsequent payment of dues. To counter such temptations, many or ganizers insist op. "closed" or "union"

shops. Similarly, governments (as opposed to markets) are uniquely suited to eliminate free riders by mandating taxation. for the provi sion of public g%ds. The concept o,f government so de fined, it is easy' to see how Cousins and others viewjeducation as a right, and not a privilege. Education, they argue, is a public good; there are many ways in which all of society 408 THE FREEMAN July gains from the widest poSsible spread of education. Education may lead to universally recognized technical ad va-flees;the economic payoff to soci ety of investments in human capital is g.reat.- Further, education may m.ake democracy work "better," both by preparing an intelligent elector ate, and by creating citizens better trained and better able to cope with pressing social problems. Taken to gether; such benefits are nonexclu sive; individuals can not be pre vented from realizing the returns of overaUeducational improvements.

A government ought, then, in a nor mative sense, to provide for the ed u.cation of its citizens, in the same manner to which a government "'ought" to provide for a national de fense, or for any other public good. PerSOna:1Benefits What this argument fails to rec ognize, however, is that unlike the rewards of national defense and public safety programs, many bene fits of educational subsidies are pri vate, and not public in nature. Edu cated individuals earn higher incomes. They also may value their stay at a university because of cul tural or social reasons, or indeed be cause it delays the necessity of de cidIng what to do next. None of these benefits reflects significant exter nalities-citizens directly secure college degrees for themselves. In deed, since individuals can be exeluded from gaining these benefits (those who fail to pay tuition, fail to matriculate), the procurement of an educational service does not differ in a fundamental way from the pur chase of any other private good.

And is not the provision of private goods precisely the domain of the free market? It seems that education, correctly understood, is neither purely a pub lic nor a private good, but a mixture of both. One is left to debate, then, the extent to which this is true. If it were argued, for example, that ele mentary schools have important col lective aspects, then the govern .. ment, as a provider of public goods, might opt for subsidization. Alter nately, however, if the benefits of advanced degrees are especially pri vate, provisions for higher educa.; tion might be left to the free opera tion of the market. Unfortunately in practice it is difficult to draw such fine distinctions (particularly in light, for example, of recent success in the operation of private high schools), and so deter mining the correct amount of gov ernment support for education is a troublesome political issue. But this, of course, is precisely the point! For even if it is true that governments primarily are providers of public goods, since education in fact entails many elements which are private in nature, it does not follow that citi zens therefore enjoy a "right," in 1982 THE "RIGHT" TO EDUCATION 409 some absolute sense, to student aid.

Rather, the extent of educational as sistance is a matter of great contro versy, and is an argument in which there exist no foregone conclusions. The Members of the House Edu cation and Labor Committee may argue, for example, that it is inad visable to approve additional cuts in student aid programs, particularly those focused on assisting low and middle income college students. These very same members, how ever, might in fact conclude that ev idence of waste and fraud in the Rights for Robots gr~duate student loan program war rants its elimination. Significanay, whether either position is to "be adopted is a po~itical decision, and not one which turns on some quasi legal question ~fwhether anyope's "right" to educ~tion has be~n vio lated. Graduate stugents such as mys~lf do not, as sonl~ sugg_est, enjoy a "right" to education. The proper ex tent of government aid to students is a political question,and a point about which reasbnable men can, and fortunately do, disagree. tJ IDEAS ON UBERTY IN A SOCIETY of free men, each ~cting on his own rresponsibility, honesty is the best policy. But as we move furt:ber from th~ individualist position into compulsory associations, unions, districts, ~ounties, nations,and states, we tend to lose touch with that essentially personal quality honesty. Honesty may be described as a force governing dealings be tween individuals. When the transactions are between masses, they tend to become less honest; when between nationsi there is, indeed, little pretense of honesty about them. That simple circumstance arises not from evil intent but from the very nature of man'~ conduct.

All this concerns a philosophy; a point of vie'V from which to start. And if only individualism could get these foundations well laid in the minds of the people, we could then proceed witll our voluntary social services and other humanitari~n plans for the cOl;nfortof the less fortu nate minority. As it is-without these foundatiol).scharity, good feel ing, desire to help, sympathy, and many other virtues have been brushed aside. And in their place there has been set Up! the mean, unworthy, degrading, and destructive notion of rights for rotiots, which is mankind under complete government planning. SIR ERNEST BENN Hal Watkins THE JONESTOWN SYNDROME IN 1978 the world was shocked by the mass suicide of 900 people in a Guyana commune called Jonestown, named for their charismatic leader, Jim Jones. Information available to us indicates Jones seemed to have such power over the minds of the people that he was able to pressure them into taking their lives. Imme diately the question came to others of us: How in the world could a man gain that much control over the minds of men?

It was perhaps 25 or 30 years ago that we heard of another leader who called himself "Father Divine," a blasphemous name. But there seemed to be plenty of people flock ing to the "heavens" of this self-styled deity. He had "heavens" in several large cities in the United States, and The Reverend Mr. Watkins edits and publishes The Printed Preacher, a monthly gospel message, 303 North Third, Dayton, Washington 99328. A1f\ when he wanted to open another one he was able to pay hundreds of thou sands of dollars in currency, not checks. Sun Myung Moon, a Korean min ister, has come to America and re cruited hundreds of its young people for his cause. They commit them selves to him, live in his communes and work long hours every day to raise the millions of dollars which his projects require; and he, like all such leaders, lives in opulence. In the early part of the past cen tury Robert Owen established a commune in the Ohio valley. His glowing praises of socialism so in fected people that many of them left their normal pursuits and joined his enterprise, for a while.

In July 1981 an Indian guru call ing himself Bhagwan Shree Rajneesh paid $6 million for 100 square miles of Oregon about 180 miles from THE JONESTOWN SYNDROME 411 where I live. He and 200 disciples have applied for a city charter in the middle of the spread, and they are calling the town Rajneeshpuram. His followers, who called themselves sanyassins, don't have to turn all their property and pensions over to him, but most of them do. This al lows him to live in plush style which includes a Rolls-Royce, a convey ance that more or less stands out on the country roads of that part of Or egon. Why the Submission? History would supply us with many such efforts at communalliv ing or socialism. The feudal lords and their serfs were actually one variety of the same concept, and as we look back to those medieval days we wonder why anyone would be part of such a thing. Earlier in this essay we wondered how a man could get such control over people that they would submit themselves so totally to his will. But I think a better question is: Why do people allow themselves to be con trolled by one who exercises such to talitarian authority? Why do they surrender freedom of thought and movement to him? Even a hypnotist can't function unless his subject is willing to open his mind to the sug gestions of another.

First, there has to be the promise of something to be gained. No sane person will surrender himself to the authority of another unless he gets something in return. He either gets it immediately or he believes almost beyond doubt th{lt he will get it, on down the road. i In an economy of freedom of exchal\lge, trades are made because each one is willing to trade something for so;mething else which he values more highly. In the com munal example we have cited it is quite obvious that the person who elects to come under the total au thority of a Jim iJones is interested in security. Everybody wants material secu rity. No one lik¢s to live on the fi nancial edge of uothing. Most of us try to figure out! ways of saving up for the rainy dny when we can't produce the daily necessities. Banks are able to stay in business because their depositors ientrust their "nest eggs" in anticipation of a day when they can no longer work for salary or wages. This was the selling point in the '30s when '~social security" was sold to the American people.

Part of the Jonestown syndrome is the deep-seated desire for security, and there seems to be no shortage of people who are willing to surrender minds and freedom of movement in exchange for such security. Jones promised it; so did Father Divine. Moon holds out this carrot to his fol lowers, and the Indian guru does the same for his devotees. Perhaps you are thinking, "Well, this is all very interesting, but-af412 THE FREEMAN July tel' all-he is talking about a tiny percentage of the total population. Why get stirred t;lp about it? Let them do their own thing." True, the ex amples cited are minuscule com p«iiredto the whole of society, but they are actually an exaggeration of a more widespread symptom. Millions (?f Americans who are not in com munes have an overpowering desire for security,. and this desire shows itself on several fronts. 'Why do people join labor unions voluntarily?" They think by so doing they gainjob security, a pension plan, or a guaranteed annual wage. To get these benefits(?) they have to give something in exchange: part of their freedoll), their union dues and some of their intellectual integrity. Mil lions are apparently willing to pay such a price.

Why do so many defend the mini ... mum wage? Their answer? "Why, anyone who is worth anything at all is worth $3.50 an hourI'"'As it turns out, there are thousands of potential workers, especially among the young, who are worth nothing in the job market. They aren't worth $3.50, and no one is allowed to hire them for less; therefo~e, they are worth noth ... ing. This time it is a matter of wage scale security. r:rheyhave little or no concern for young people entering the job market, hut rather they want a floor under their own pay scale, hence the minimum wage laws. They set a price on a certain commodity (unskilled labor) which no one is will ing to pay. And all this results from a misguided lust for security. Shifting th~ Responsibility Another symptom of·· the Jones town syndrome, one that is interre ... lated with the above, is the desire to shift responsibility onto others. In this case I prefer the word unrespon sible rather than ilTesponsible. The same attitude is quite dominant in nursing homes among those who could take care of themselves but would rather not.

In the promotional pitch of the commune in Oregon which is run by the Indian guru is the line, "It is a place where people may live their lives. according to their own vision." Translation: "Do as you please." But the Associated Press investigative reporter arrived at a different con clusion from examining some of the 200 to 300 books supposedly written by the guru: "His philosophy is based on total loss of individual ego and no restrictions on individual actions." Obviously the Indian mystic has stumbled onto a good thing. By means of nearly total control of the minds and lives of his s\lbjects he is enabled to live on a very affluent level. How does this relate to our coun try as a whole? Uncomfortably well. Too many of your fellow citizens suf fer from the same mind set. "I don't care what kind of government we 1982 THE JONESTOWN SYNDROME 413 have, whether the people in author ity are virtuous or corrupt, or if the currency is stable or inflated. I'm not concerned about national defense or foreign relations. Just give me enough to eat, a color TV and a can of beer." Just what approach do you suppose a smart, opportunistic can didate will make to your unrespon sible neighbor? One guess is all you get on this one.

"Utopia now" is part of the Jones town syndrome. But the message of the New Testament is that this life on earth is not a utopia; it is not heaven. In this life we are pilgrims journeying toward something better than anyone has ever known, and Jesus came to show the way. The philosophy of delayed gratification has always been embraced by the people of God. The Serpent in the Garden of Eden said, in effect, "You don't have to wait; you can have it now!" Be your own god, and write your own rules. The same Serpent came to Jesus on the mount of temp tatioo: "Just bow down and worship me and you can have it all!" Leo N. Tolstoy Changingour Minds There is an; inherent problem in the Jonestown 'Syndrome. In order to become a victiJin,one must virtually quit thinking! or have his mental computer reprbgrammed with gar bage. Evidently the intellectual cli mate of our beloved land is ripe for this social malaise. Colleges and universities h~ve been preparing us for it. The "public" school, so sacred in the minds ot so many, is the Tro jan Horse within our midst. The powerful med~a are generally ori ented in the same direction. Basi cally our brains are as good as they have ever bee~, but if we fill them with misinforrpation we will inevi tably draw wrong conclusions.

The solution.? Somehow, as Leon ard Read tells I us, we must develop an elite, an aristocracy of morally and intellectUtally sound thinkers who can captu.te the attention of the youth and turn it to truth and integ rity. Ideas certainly have conse quences-wheJ;l they are assimi lated into the rPinds of thinkers, and translated into appropriate action. ® aDEAS ON UBERTY ONE FREE MAN will say with truth what he tijinks and feels amongst thousands of men who by their acts and wordsi attest exactly the oppo site. It would seem that he who sincerely expressed his thought must remain alone, whereas it generally happens tl~at everyone else, or the majority at least, have been thinking and feeling the same things but without expressing them.

ClarenceB. Carson THE RELICS OF INTERVENTION: 4. New Deal Collective Planning The New Deal RELICS of the New Deal are still very much a part of the political ma chinery under which we live. The bent to inflation, which is still in the process of destroying our money, was firmly established during the New Deal. The notion that it is the busi ness of government to support and look after a goodly portion of the population was articulated in par ticular programs, many of which are still in operation. The practice of government attempting to manage the economy is a relic of New Deal efforts to institute a planned econ omy. The preference for the collec tive over the individual is around in hundreds of government prescripDr. Carson has written and taught extensively, spe cializing in American intellectual history. He is the author of several books and a frequent contributor to The Freeman and other scholarly journals.

414 tions to this day. They are relics of enthusiasms of a bygone era. For none of them is this more clearly the case than for collective planning. At this remove in time from the early days of the New Deal, it is dif ficult to recapture, even in imagi nation, the heady enthusiasm among a goodly number of intellectuals for a governmentally planned economy. So far as can now be told, they be lieved that a bright new day was dawning, that national planning would result in an organically inte grated economy in which everyone would joyfully work for the common good, and that American society would be freed at last from those an tagonisms arising, as General Hugh Johnson put it, from "the murderous doctrine of savage and wolfish indi vidualism, looking to dog-eat-dog and NEW DEAL COLLECTIVE PLANNING 415 devil take the hindmost."l That eco nomic planning would arouse its own antagonisms, that it would have to be imposed by government, and that its tendency was toward totalitari anism was something that either these intellectuals did not know or would not accept.

An Exciting Experiment A part of this enthusiasm for col lective planning can be accounted for by the fact that it had not yet been discredited by recent experience. Fascist Italy was still in the forma tive years in its experiments with syndicalism when the New Deal was being shaped. The Soviet Union was just finishing its first five-year plan, and Stalin applying the brakes by proclaiming that those imposing it were "dizzy with success." The fail ure of "democratic socialism" in En gland was still fifteen years in the future. But to look at it that way is to back into an explanation of New Deal enthusiasm for a planned economy. National planning was in the wind at the time. More broadly, it consti tuted much of the intellectual weather for most radical and refor mist intellectuals. The main sources of this enthusiasm were in Europe. As I have pointed out in an earlier article, Theodore Roosevelt's New Nationalism and mobilization of the economy during World War I pro vided some of the impetus toward the planned econo~y. But Italian Fas cism and Soviet Communism were the models whi¢h excited the imag ination of many intellectuals as the 1920s gave way!to the 1930s. In this, Americans wer~ following the lead of European intellectuals. One his torian goes so far as to say "that many of the best minds of the West saw fascism and communism as the only real alternatives of their times."2 Those who took their orientation from Moscow were taught, of course, that those countries which persisted in clinging to capitalism would in evitably become fascist.

There is not much direct evidence, not much know* to me, anyway, that any considerable number of Ameri cans were enamored with Italian Fascism. An intellectual historian of Europe has said that "Mussolini was widely admireq even in the democ racies. Had he not produced an order in his nation which the democracies were apparently incapable of pro ducing? From, Churchill (who ex pressed his admiration as late as 1938) to those who praised the Duce for making tra~ns run on time, the wave of admiration accepted fascism as an alternative to ideologies which proclaimed a more thorough social and economic revolution."3 If that was the case in the United States, the admirers 'were mostly of the closet variety.' An exception that tends to prove the rule was Lincoln Steffens who had, by the 1930s, 416 THE FREEMAN July grown old in the socialist cause and could openly praise Mussolini in his Autobiography.4 Even so, there were overtones of Italian Fascism in the early New Deal, especially in the National Re covery Administration, the Agricul tural Adjustment Administration, and the semi-military Civilian Con servation Corps. There were the ap peals to national unity, the national planning motif, the military dis plays, on "NRA Days," the parades, the organization of farmers, work ers, and industries into groups, and so on. Some of the New Dealers, at least, were aware of parallels but tried to avoid calling attention to the fact. For ex:ample, Rexford G. Tug well notes that Roosevelt did not want mention made of the parallel between Mussolini's youth army working on rural projects when he set up the Civilian 'Conservation Corps.5 When General Hugh John son reviewed the day long "NRA Day" parade in New York City, he says that he took care not to raise his arm lest it be interpreted as a Fascist salute. That did not keep a photograph from being published, however, which apparently had caught him in the stance. Johnson surmised that it must have been someone else's arm. 6 But it was Soviet Communism which kindled the enthusiasm for many American intellectuals for collective planning. One historian who has explored some of these re lationships in a book has a chapter entitled, "Soviet Russia: Lodestone of the American Liberal."7 Another says that "The whole conception of a 'social experiment,' the whole notion of planned human intervention into social processes to raise the welfare of the people, had become linked in the minds of America's intellectual and social leaders with the practice of the Soviet Union." This was ac complished mainly, he says, by ar ticles and books written by some of the "several hundreds of travelers to the Soviet Union" in the 1920s.8 Eu gene Lyons said, "The fact is that American liberals were hopelessly dazzled by the idea of 'planning' ....

Nearly every college professor, poet, social worker, engineer or schoolboy who returned from Russia brought the stereotyped formulas and statis tical patterns to swell the shiny mountain of self-deception. The more articulate wrote books. Almost as many books on the 'Soviet experi ment' were published in 1931 as in the preceding thirteen years."9 The Russian Model Among these travelers to the So viet Union during this period were John Dewey, Rexford G. Tugwell, Paul Douglas, Stuart Chase, Jane Addams, Robert M. LaFollette, Maxwell S. Stewart, George Soule, Edmund Wilson, and many, many others. Among the abundant litera1982 NEW DEAL COLLECTIVE PLANNING 417 ture favoring economic planning, much of it written by people who had traveled to the Soviet Union, here is a sampling of titles from the period: John Dewey, Impressions of Soviet Russia (1929), Sherwood Eddy, The Challenge of Russia (1931), George S. Counts, The Soviet Challenge to America (1931), Bruce Bliven, "Rus sia Marches Up a Mountain," New Republic (1931), Charles A. Beard, "The Rationality of Planned' Econ omy," in America Faces the Future (1932), Rexford G. Tugwell, "The Principle of Planning and the Insti tution of Laissez-Faire," American Economic Review (1932), Stuart Chase, A New Deal (1932), Chester Davis, "Toward Planned Harvests,"

Review of Reviews (1933), and Max well S. Stewart, "Where Everyone Has a Job," Survey Graphic (1931). The impact of Soviet planning on American thinkers, many of whom influenced the New Deal, may come out even clearer from a few quota tions. The New York Times declared that Stalin's first Five-Year Plan was the "most extraordinary enterprise in the economic history of the world."lO Stuart Chase proclaimed that it was "exciting, stimulating, challenging."ll John Dewey said of the Soviet undertaking, "In some re spects, it is already a searching spir itual challenge as it is an economic challenge to coordinate and plan."12 "Why," cried Stuart Chase, "should Russians have all the fun in remaking a world."13qieorge Soule said, "We could not assimilate the hard dog mas and terminology of Marxism ... , but we were irtesistibly attracted by the idea of plcllnned use of modern industrial tecQnique."

Advisersto Roosevelt The New Deal was well equipped with enthusiasts for collective plan ning from the outset. Rexford G. Tugwell spent much time during 1932 with Root;evelt, and, whenever he could make' an opportunity to do so, worked to' convince him of the necessi ty for p[anning. After Roose velt's nomination, Tugwell sent him a memorandum in which he admon ished the futulte President to pursue planning, sayiillg, in part: "It is not proposed to have the government run industry; it is proposed to have gov ernment furnish the requisite lead ership; protect our resources; ar range for national balance; secure its citizens' acce~s to goods, employ ment and security; and rise to the challenge of planning that concert of interests of wl).ich I have spoken be fore."14 By the time, he was inaugurated, Roosevelt had i managed to attract a goodly number of people to the gov ernment, to join others already there, who were eag~r to initiate planning.

Henry A. Wallace, Secretary of Ag ricul ture, exprtessed his desire for a new era in mystic terms to Roose velt. "I feel for a short time yet," he 418 THE FREEMAN July said, "that we must deal with the ... 'flame less ones' who with one last dying gasp will strive to re-animate their dying giant 'Capitalism.' Mr. President, you can be the 'flaming one,' the one with an ever upward surging spirit to lead us into the time when the children of men can sing again."15 Much more prosaically, Senator Robert Wagner of New York said, while urging the passage of the Na tional Industrial Recovery Act: "I do not think we will ever have industry in order until we have nationally planned economy."16 Donald Rich berg, who eventually replaced Gen eral Hugh Johnson as head ofNRA, told a Senate committee that "A na tionally planned economy is the only salvation of our present situation and the only hope for the future."17 Ray mond Moley, a speech writer for Roosevelt, declared that what was needed was "a policy of cooperative business-government planning."l8 Jerome Frank, general counsel in the Agriculture Department, held that "Just as America took an important step forward when it rejected politi cal anarchy and integrated this con tinent into one nation, so it needs now to press forward to a deliberate economic integration."19 The NRA and the AAA The two most direct and extensive New Deal experiments in collective planning were those made under the National Industrial Recovery Act and the Agricultural Adjustment Act.

Both were passed during the Hun dred Days of the emergency session of Congress which met on March 9, 1933 and adjourned on June 16. Be fore discussing these, however, there was another act passed during this session which may make clearer the animus behind national planning, why it was considered necessary, and what view of economics sustained it. It was the act creating the Tennes see Valley Authority, an act autho rizing the creation of a whole series of dams and locks on the Tennessee River. There are two things that are es pecially strange about TVA. The first is that the act should have been passed in the midst of a special ses sion of Congress called to deal with an emergency. Even if it be granted that TVA might eventually bring benefits to a region, it is difficult to see its relevance to dealing with an emergency. The building ofdams and locks on a mighty river is not some thing done in weeks or months but in years. Nor is it at all clear that the most obvious products visual ized, electricity, water transport, and fertilizers would be of such great benefit, even when they came. Fer tilizer could be bought less, expen sively elsewhere; the capacity to produce more electricity than was being sold already existed, accord ing to private power companies; and 1982 NEW DEAL COLLECTIVE PLANNING 419 river transport had been largely dis placed. The second strange thing is that government ownership of TVA became sacrosanct, as those few na tional politicians who have ex pressed themselves in favor of di vestment discovered, to their sorrow usually. Indeed, no New Deal pro gram has ever been so secure from political criticism, unless Social Se curity might possibly be.

The TVA Idea TVA represents something other than what it is as an engineering feat or its economic value. It is a symbol. Therein lies the main ex planation for its having been under taken so expeditiously as well as for its treatment as a sacred object. It is a symbol of government planning. Arthur E. Morgan, the first chair man of the board set up to govern TVA, expressed the symbolic pur pose forthrightly. He said, "The TVA is not primarily a dam-building job, a fertilizer job or power-transmis sion job." It is an example of man's "efforts to bring order out of chaos." Or, as Arthur Schlesinger summa rized his belief, TVA "was an exper iment in social reconstruction .... "20 Whether any New Dealer ever for mulated the ways in which TVA symbolized government planning, I do not know, but what follows covers some of the ways it must. In the first place, the Tennessee River, as it was in 1933, is an apt symbol of the way New Dealers thought of a free economy. The sources of the Tennessee are in the mountains ofT~nnessee, North Car olina and Virginia. It is formed by the joining of the Holston and Clinch rivers at Knoxwille. From there it flows south to Chattanooga, thence southwestward to Guntersville, Al abama, then northwestward through Alabama into Mississippi, then northward bac~ through Tennessee, through the tip lof Kentucky to Pad ucah, where it empties into the Ohio.

It is approximately 650 miles long. In that whole length, there was only one dam, of consequence, in 1933, the one at Muscle Shoals, Alabama. It was, so to speak, largely in a "state of nature," wilq, and untamed. For much of its length it was unnaviga ble. When the snows melted in the mountains and the spring rains . came, it rampaged through cities, flooded the low lands, and washed minerals and topsoil away. In the summer and fan it dwindled so that it would not be qeep enough in places for navigation. Most of the vast force of its waters was wasted, and its navigational uses undeveloped. That is much the way New Deal ers thought or a free economy. It tended to get Ol.1lt of balance perpet ually, much as ia river does in wet and dry seasons'. As the river floods, so there is overiproduction in a free economy. Demand does not keep pace with supply. There are booms and 420 THE FREEMAN July busts. There is the waste of unem ployment. Goods go unsold while some people are in need.

In the second place, TVA symbol ized the New Deal solution to the problem. The solution was to use the power of government to control the river, to build dams, locks, and lakes, to stop the flooding by filling the lakes in the wet season and keeping a portion of the waters in dry season so that the level would he higher. The force of the river would be har nessed for electricity. Channels would be deepened and locks would be used to raise boats so that they could go up or downstream on wa ters that were level. Just so, the New Dealers expected to even out and balance the economy by planning. In the third place, the results of planning in the TVA were visible and concrete, by contrast with much of industrial planning, for example. So far as TVA was a symbol of govern ment planning, it was a symbol that could be looked at, touched, and heard. The locks and dams can be seen and touched. The water rush ing down the spillways can be heard.

The lakes are great bodies of water that can be seen from highways or bridges, or traveled on by boat. The AnalogyBreaks Down The analogy by which the TVA might be a symbol of collective plan ning generally does not stand up un der critical examination, of course. Men are not drops of water whose activities may be stopped by govern ment dams and whose energies may be impounded for later use. They are animate, sensate, and rational beings with minds and wills of their own. The employment of their energies is self-directed and guided by their own desires and p\lrposes. Nor is an economy analogous to a flowing stream, except in the loosest and most imprecise sense. Economy is that which results from the deci sions of people in producing, buying, selling, and consuming. Unless force intervene to prevent it, an economy will tend always toward balance through the continual adjustments that go on.

The New Dealers did not accept this view of the matter. They pro fessed to believe that the economy was out of balance and that this could only be corrected by planning and the application of force. Neither the National Recovery Administration (NRA) nor the Agricultural Adjust ment Administration (AAA) may have considered men as if they were drops of water, though they did con tain their energies as if by dam, and minorities in elective decisions were often given short shrift. The most immediate purpose of the NRA and AAA was to raise prices, especially of farm products, and wages of industrial workers. The main device for doing this was the reduction of production, though 1982 NEW DEAL COLLECTIVE PLANN1NG 421 monetary inflation was supposed to provide the means for it to occur. The NRA operated through industrial codes. Ideally, these codes were sup posed to be drawn up by represen tatives of companies and workers.

Thus, there would be a cotton textile code, a steel code, a shoemakers code, a farm equipment code, and so on. But the matter was not left entirely to these representatives. The Presi·· dent of the United States was autho rized to alter the codes, ifhe saw fit, or to provide codes if those within an industry failed to do so. To Restrain Competition These NRA codes were typically concerned with restricting competi.· tion within an industry, reducing hours of labor, and raising prices and wages. Employers were usually for·· bidden to employ children under 1E; years old. A minimum wage throughout the industry and a work week of 40 hours were ordinarily specified. Further, the Cotton Tex·· tile Code, for example, forbade em·· ployers to use "productive rna·· chinery in the cotton textile industry for more than two shifts of 40 hours per week. "21 Planning was supposed to be accomplished by the companies and workers acting in concert with government. Nor was it simply ma jor industries that were governed by codes initially; any and every sort of undertaking was included. Thus, "Code 450 regulated the Dog Food Industry, Cod¢ 427 the Curled Hair Manufacturing Industry and Horse Hair Dressing Industry, and Code 262 the Shoulder Pad Manufactur ing Industry. ~n New York, I. 'Izzy' Herk, executiJve secretary of Code 348, brought order to the Burlesque Theatrical Industry by insisting that no production could feature more than four strips."22 Apparently, they did not restriet the number of gar ments to be removed.

The AAA was expected to do for agricul ture much the same sort of thing that NRA would for industry, only more. F~rmers were reckoned to be in much, worse condition than manufacturer$ and industrial work ers. The firsti task with them, ac cording to the planners, was to bring farm income up to a parity (as it was called) with industrial income. The years 1909-1 914 were chosen as a base for most ifarm staple products, and the aim was to raise farm prices to a level that would give them an income equivalent to the ratio be tween farm apd industry that pre vailed in the base period. The main device for accomplishing this was reduction of pnoduction of staples. So dramatic was the need for reduction, New Dealers tthought, that a consid erable portion pf the 1933 cotton crop was plowed up and many small pigs put to death. i Thereafter, farmers were induced ito plant less by gov ernment subsioies for those who "co operated." Uinder the first AAA 422 THE FREEMAN July (1933-1936), the money to pay for the various benefits paid to farmers came from a tax on processors. Many farmers had long believed, of course, that the middlemen got the profits from their endeavors. The New Deal gave this spurious notion legal standing by levying the tax.

Collective Performance of Producers and Government The "collective" aspect of this planning had two facets. One was the participation of farmers, indus trialists, and workers in the pro grams. Farmers voted on such mat ters as crop controls, and there were local committees to oversee partici pation in the programs. Industrial ists and workers, as already noted, had representatives in drawing codes under the NRA. The other facet was in government participation. Here, New Dealers emphasized the demo cratic character of the government and, through a kind of collectivized democracy concept, even the acti v ity of government could be con ceived as collective. Most of this was window dressing. Government agencies bought compliances where they could and otherwise forced it upon many of those who would not otherwise have participated. Her bert Hoover observed rather testily, in 1934, that those in power had as sumed the authority "To enforce most of these powers where they affect the individual by fine and imprisonment through prosecution in the courts, with a further reserved au thori ty in many trades through li cense to deprive men of their busi ness and livelihood without any appeal to the courts."23 That the NRA was a failure in col lective planning is generally con ceded. It could be argued that it never had a sufficient trial. After all, the NRA only got under way in mid 1933, and the Supreme Court de clared its central authorizing provi sions unconstitutional in 1935. Chief Justice Hughes, speaking for most of the court, declared that "We think that the code-making authority thus conferred is an unconstitutional del egation of legislative power."24 But within the administration the use fulness of the code-making approach was being sharply questioned before the Supreme Court decision. 25 The hassle of getting the codes made and enforcing them was exceedingly troublesome from beginning to end.

The NRA was in retreat before the court decision, and no effort was ever made to revive collective planning by the industries themselves. Actually, the AAA, too, was de clared unconstitutional, or at least crucial provisions of the act bring ing it into being were. The challenge of the processing tax came before the Supreme Court in 1936. The court affirmed the judgment of an appeals court that the government could not collect the tax. Many books have 1982 NEW DEAL COLLECTIVE PLANNING 423 treated the decision as if it merely nullified the tax. But the court opin ion made clear that it was not the tax itself but the end for which it was used that was contrary to the Constitution. Justice Roberts, speaking for the majority ofthe court, declared that "powers not granted are prohibited. None to regulate agri cultural production is given, and therefore legislation by Congress for that purpose is forbidden." Further, he pointed out that "appropriations and expenditures under contracts for proper governmental purposes can not justify contracts which are not within federal power. And contracts for the reduction of acreage and the control of production are outside the range of that power."26 The Presi·, dent and Congress were undaunted, however, and major provisions of the act were reenacted in 1936, and the AAA itself was born again in 1938.

This last followed upon a counterat·· tack on the court in 1937. Their constitutionality and de mise or continuation aside, how ever, both the NRA and AAA failed in their missions. They made no sig·· nificant contributions-none at all but brief and temporary ones-to ending the depression. Indeed, they only helped to prolong it. Not only did they try to reduce production but also to freeze it in its recent pattern. New enterprises in old industries were discouraged. There were attempts to make employers keep the same number of employees and farm landlords to k~ep the same number of tenants. The Agricultural Adjust ment Act of ,1933 provided that farmers who 'made proper reduc tions in cotton acreage should not increase "commercial fertilization per acre." It also declared that cotton producers sho~ld not "use the land taken out of cotton production for the production fori sale ... of any other nationally produced agricultural commodity ... '."27 Counterproductive Measures The thrust of these programs was in the opposit¢ direction from what was needed. Ifi people have material needs, are unemployed or underem ployed, the solution for them is ei ther to produc~ for themselves what they need or produce for sale in the market enough of what is wanted to be able to buy what they need. These things require more, not less, pro duction and changes in production activities, not ithe freezing of them into patterns of the past. That is not to say that government would have had greater success in planning in creased production. Some things were already beingi produced in greater quantities than could be profitably produced for the market. Any gen eral effort to solve the problem was doomed to failure, for the problem was one of individuals, families, and other produciJng units. Only they could solve it.

424 THE FREEMAN July "Planning" vs. the Free Market PLANNING always involves compulsion. This may be disguised in various ways. The government Planners will, of course, try to persuade people that the Master Plan has been drawn up for their own good, and that the only persons who are going to be coerced are those whose plans are "not in the public interest." The Planners will say, in the newly fashionable phraseology, that their plans are not "imperative," but merely "indicative." They will make a great parade of "democracy," freedom, cooperation, and noncompulsion by "consulting all groups"-"Labor," "Industry," the Government, even "Consumers Representatives" -in drawing up the Master Plan and the specific "goals" or "targets." Of course, if they could really succeed in giving everybody his proportionate weight and voice and freedom of choice, if everybody were allowed to pursue the plan of production or consump tion of specific goods and services that he had intended to pursue or would have pursued anyway, then the whole Plan would be useless and pointless, a complete waste of energy and time.

HENRY HAZLITT Although the NRA was aban doned and the AAA was modified (and many particular programs re duced or abandoned over the years), they left most important residues which are still very much with us. The most important relic is the idea that government is responsible for the functioning of the economy. This undergirds the notion, which has surfaced in hundreds of ways since the 1930s, that government can take action and plan so as to make the economy work well. It surfaced in the idea that government can manipulate the currency to prevent depressions and insure prosperity, in the Employment Act of 1946 in which the government assumed the re sponsibility for following policies to assure full employment, in the Council of Economic Advisers which Presidents have, in controls over wages and prices, in attempts to maintain or increase purchasing power, in land use programs, in gov ernment empowerment of labor unions, in the still existent crop sub sidy programs, and so on and on. The idea of collective planning is present 1982 NEW DEAL COLLECTIVE PLANNING 425 in the government mandated hear ings which must be held before com munities make changes or institute programs. Government participa tion in collective planning is a major ingredient in the environmental protection rules and regulations. In deed, it would be an encyclopedic ef fort to explore all the ways that gov ernment is today involved in economic planning for Americans.

A Discredited Relic Government economic planning is a relic. It is a relic of the New Deal. It is a relic of enthusiasms which go back to the 1920s, to World War I, to Italian Fascism, to Soviet Com munism, and to World War II eco nomic controls. It is a relic of fas cism which was on its way to being discredited and was already in ill re pute before the New Deal programs were enacted. It is a relic of national socialism, which failed in Britain and led to massive oppression in the des~ perate effort to make it work in the Soviet Union. It has been discred .. ited in theory and practice. i Next: New Deal Welfarism. -FOOTNOTESIQuoted in Arthur M. Schlesinger, Jr., The Coming of the New Deal (Boston: Houghton Mifflin, 1959), p. 88. 2George L. Mosse, The Culture of Western Europe (Chicago: Rand McNally, 1961), p. 378. 3/bid., po 353. 4See Schlesinger~ op. cit., pp. 142, 208. 5Rexford G. Tug\fell, The Brains TrUst (New York: Viking, 1968), p. 71.

6Hugh S. Johnson, "NRA Ballyhoo" in Wil liam E. Leuchtenburg, ed., The New Deal (Co lumbia: University of South Carolina Press, 1968), p. 47. 7Frank A. WarrE;m, III, Liberals and Com munism (BloomiIligton: Indiaha University Press, 1966), ch. 4. 8Lewis S. Feuer, i"American Travelers to the Soviet Union," American Quarterly (Summer, 1962). ' 9Eugene Lyons, The Red Decade (New Ro chelle, N. Y.: Arlington House, 1970, originally pub. 1941), pp. 103+"04. lOQuoted in Wa.rr~n, op. cit., p. 70. ll/bid., p. 66. 12Quoted in Lyons, op. cit., p. 107. 13QuQtedin Warr¢n, op. cit.; p. 59. 14Tugwell, op. cit.., p. 527. 15Quoted in Schlesinger, op. cit., pp. 32-33, 16William E. Leuchtenburg, Franklin D. Roosevelt and the New Deal (New York: Harper & Row, 1963), p. 58. 17Quoted in Schlesinger, op. cit., p. 93. 18/bid; 19/bid;,p. 94. 2°/bid., p. 327. 21Henry S. Comtnager, ed., Documents of American History (New York: Appleton-Cen tury-Crofts, 1962), voL II, p. 277.

22Leuchtenburg, Franklin D. Roosevelt and the New Deal, p. 69. 23Herbert Hoover, The Challenge to Liberty (Rockford, Ill.: The iHerbert Hoover Presiden tial Libra.ry Association, 1971, originally pub. 1934), p. 78. 24Commager, op. cit., p. 281. 25See Schlesinger, op. cit., pp. 161-62. 26Commager, op. cit., pp. 250-51. 27/bid.,p. 243.

Clarence Manion 426 IT must be remembered that ninety five per cent of the peace, order and welfare existing in human society is always produced by the conscien tious practice of man-to-man justice and person -to-person charity. When any part of this important domain of personal virtue is transferred to government, that part is automati cally released from the restraints of morality and put into the area of conscience-less coercion. The field of personal responsibility is thus re duced at the same time and to the same extent that the boundaries of irresponsibility are enlarged. Government cannot manage these fields of human welfare with the jus tice, economy and effectiveness that is possible when these same fields are the direct responsibility of mor ally sensitive human beings. This loss of justice, economy and effec tiveness is increased in the propor tion that such governmental man agement is centralized ....

Government cannot make men good; neither can it make them prosperous and happy. The evils in society are directly traceable to the vices of individual human beings. At Clarence Manion (1896-1979) long served as Dean of the College of Law of Notre Dame University. This article is from his book, The Key to Peace, published in 1950. A paperbacked edition of the book, covering the ideas in the Declaration of Independence and the basic institutions and practices of the American way, is available at $2.00 from The Foundation for Eco nomic Education, Irvington-on-Hudson, N.Y. 10533.

LEGALIZED IMMORALITY 427 its best government may simply at tack the secondary manifestations of these vices. Their primary manifes tations are found in the pride, cov etousness, lust, envy, sloth and plain incompetency of individual people. When government goes far beyond this simple duty and deploys its forces along a broad complicated front, un der a unified command, it invariably propagates the very evils that it is designed to reduce. In the sweet name of "human wel fare" such a government begins to do things that would be gravely of fensive if done by individual citi zens. The government is urged to follow this course by people who consciously or subconsciously seek an impersonal outlet for the "primar ies" of human weakness. An outlet in other words which will enable them to escape the moral responsi bility that would be involved in their personal commission of these sins.

As a convenience to this popular at titude we are assured that "govern ment should do for the people what the people are unable to do for them selves." This is an extremely dan gerous definition of the purpose of government. It is radically different from the purpose stated in the Dec laration of Independence; neverthe less it is now widely accepted as cor rect. Here is one example of centralized governmental operation: Paul wants some of Peter's property. For moral as well as legal reasons, Paul is un able personally to accomplish this desire. Paul therefore persuades the government to.tax Peter in order to provide funds 'with which the gov ernment pays Paul a "subsidy." Paul now has what he wanted. His con science is cleariand he has proceeded "according to law." Who could ask for more?-why, Paul, of course, and at the very next opportunity. There is nothing to stop him now except the eventual exhaustion of Peter's re sources.

The fact that there are millions of Pauls and Peters involved in such transactions d(}es not change their essential and common characteris tic. The Pauls have simply engaged the government "to do for them (the people) that which they are unable to do for themselves." Had the Pauls done this indi yidually and directly without the help of the government, each of them would have been sub ject to fine an4 imprisonment. Fur thermore, nin~ty-five per cent of the Pauls would have refused to do this job because th~ moral conscience of each Paul would have hurt him if he ~id. However; where government does it for theJlll, there is no prose cution and no pain in anybody's con science. This encourages the unfor tunate impression that by using the ballot instead (}f a blackjack we may take whatever we please to take from our neighbor's store of rights and immunities. ® John Semmens TAX EXPENDITURES STIFLING, oppressive, and meddle some - these are the words which come readily to mind when one is forced to characterize the role mod ern government plays in the U.S.

economy. Bureaucrats, big spend ers, and neoliberals consider this a bad rap. The government can playa creative role in our society, they in sist. In one particular field of endeavor they may well be right. Interven tionistic government and its apolo gists have rarely failed to exercise the utmost creativity in devising misleading terminology to disguise government invasion of individual rights. Progressive taxation is the name given to a tax structure that penalizes progress by imposing high marginal tax rates on highly pro ductive individuals. Social justice is the phrase used to justify robbing Mr. Semmens is an economist for the Arizona De partment of Transportation. A'JQ some people in order to give money to others. While the invention of such clas sic abuses of the language as the aforementioned is a relatively infra,;. quent event, it is scarce grounds for encouragement. The invention of more specialized and esoteric terms should not be ignored. The up and coming phrase in this regard is the "tax expenditure."

From its obscure beginnings in the Congressional Budget Act of 1974, the phrase Htax expenditure" has risen to become part of the sophisti cated jargon of public policy debate. One might be expected to ask: "What is a 'tax expenditure'?" As the Con gressional Budget Office (CBO) sees it, a "tax expenditure" is the reve nue the government loses by not taxing designated income-producing activities to the full extent under the hormal tax structure. An example of a "tax expenditure" is the recently TAX EXPENDITURES 429 passed reduction of the marriage penalty that occurs under the eXIst ing tax code when both spouses earn an Income. The CBO attempts to define what it calls the "basic" tax structure. The CBO then uses this basic tax struc ture as the norm from which "tax expenditures" are "disbursed." Their argument is unconvincing. The dis tinction between basic and non-ba sic aspects of the tax code is arbi tra:ry. The CBO's own example on the marriage penalty reduction il lustrates the arbitrariness of the tax code. If the marriage penalty had been abolished in its entirety, the lost revenue would not have been classified as a "tax expenditure."

The lack of clarity as to what is or isn't part of the basic tax structure lends a great deal of credence to the charge that the whole notion of "tax expenditures" is merely an under handed attempt on the part of the government to lay· claim to all in come and property. Such a claim would not be without precedent. The government has been known to summarily seize and sell an individ ual's home for minor arrears in property taxes. Further, under the law of eminent domain, the govern ment reserves to itself the right to take private property for public pur poses. Examination of the use and expla nation of the phrase "tax expendi tures" indicates that, at best, its proponents do not rebut the charges of its critics: the phrase does imply that the governJJnent has a tightful claim on all in~ome and property produced with~n its geographic boundaries. For example, the size of the "tax expend~ture budget" is di rectly related to the basic rate of taxation. If the riormal tax rate goes up, the "tax expenditure budget"

automatically increases. This occurs because the so-called normal tax rate is deemed a true measure of how much of a person's income rightly belongs to the government. The Impact of Inflation The fact that inflation steadily pushes people in~o higher tax brack ets very conveniently also increases the normal tax rate. Thus, by merely mismanaging the money supply, the government cr~ates the inflation, which inexorably boosts the normal tax rates, and increases its so-called legitimate share of the incomes of all its taxpayers~ Naturally, the "tax expenditure bu~get" balloons along with the bloatedi tax rate. All of this is grist for the mill of "responsible" p<!>liticianswho only want to restrain!federal spending. If budget deficits!are forecast, then government speinding must be re duced. The opti~n of reducing "tax expenditures" is~ of course, very ap pealing. In fact, it is apt to be argued that reducing "tax expenditures" is the most potent way to attack the 430 THE FREEMAN July deficit, because each reduction in spending is an automatic increase in revenues. Neither cuts in actual spending nor increases in tax rates can accomplish two objectives in one act.

The simple truth of the matter is that the entire concept of "tax ex penditures" is a fraud. The phrase is expressly intended to confuse the distinction between private prop erty and government's claims against this property. Income in a free en terprise economy is produced by pro ductive effort in meeting the needs of consumers. Government plays a limited constructive role in main taining the legal framework within which productive enterprise can function. It can legitimately lay claim to only the smallest fraction of in come necessary to support this legal framework. The tip-off that those who use the "tax expenditure" terminology do, in fact, harbor notions that the govern ment has a right to all income and property is in the various explana tions of the ways in which tax policy can be used to allocate federal re sources. The CBO describes the pur pose of the "tax expenditure budget"

as a means of assisting government economic planning: "By accounting for the federal resources devoted to specific purposes through the tax code, it permits consideration of al ternative uses of those resources." The implication is clear. Income or property that is not taken by the government is still considered a fed eral resource. The protest that this is income or property that would have been taken under normal tax rates anyway is small comfort. As we have seen, the normal tax rate is what ever the government says it is. Whose Property Is It? There is some degree of lamenta tion that the allocation of govern ment resources via the tax code is inefficient. Government economists point out that using "tax expendi tures" to allocate government re sources is limited in that it can only channel money to businesses or in dividuals that would otherwise pay taxes. "Tax expenditures" can't be used to subsidize those who don't pay taxes. This would seem to refute the notion that "tax expenditures" dis burse federal resources. It would ap pear to establish the point that these resources are, in reality, the prop erty of those who produce them.

The CBO's proposed remedy for the government's inability to make "tax expenditures" on non-taxpaying businesses or individuals is the "re fundable tax credit." This remark able distortion of language pushes the case of total government control over all income and property. The "refundable tax credit" has nothing to do with refunding anything. Most people understand refund to mean a return of money paid out. This "re1982 TAX EXPENDITURES 431 fundable tax credit" would provide money to persons who paid no tax. The whole point of this device is to overcome the fact that there is no way the government is able to "not collect a tax" from someone who produces no income. The degeneration of thought and meaning reaches its climax in the notion that tax cuts have to be fi nanced. One must shudder to hear that the government must find a way to finance the tax cuts enacted in the 1981 legislative session. If govern ments are created by the people, rather than the other way around, then it is clear that men finance the government, rather than the other way around. Taxes are the vehicle by which the people finance the gov ernment. If taxes are cut, this merely means that the people are reducing government's revenue. It does not mean that the government is financ ing the people. The statement that the government must find ways to finance a lower level of taxation rep resents, at best, confused thinking.

Confused or worse, this thinking inverts reality and contradicts the American tradition that the role of government is the protection of its citizens' rights. Protection of their right'to the property of their own income is one of the traditional ob ligations of the U.S. Government. This role cannot be performed if the nature of the relationship between the individual, the government, and income is subverted by concepts like "tax expenditures." Terms of Convenience Perhaps the Toute to fallacious concepts was paved by terms of con venience like the "national income" or "income di$tribution." Sloppy thought processes can convert these terms of convenience into dangerous misconceptions. There is no such thing as a natiopal income. Nothing like income distribution ever occurs. Individuals and businesses earn in comes. The government doesn't dis tribute them. T~is truth may be un palatable to those of collectivist bent.

They'd like to irpagine that the gov ernment is a creative, nurturing force. To sustain. such fantasies, new concepts ofreaHty must be invented. Unable to pr~gress on its merits, collectivism is forced to rely on lin guistic pervers~ons. The term "tax expenditures" iis a classic illustra tion of linguistic perversion. While the concept of "tax expenditures" is intellectually Judicrous, it is not thereby rendered harmless. Dicta torships that are called "people's re publics" and "liberation armies" run by communists' are ludicrous con cepts, but they ~re not harmless. We acquiesce in the use of terms like "tax expenditures" at our own peril. Such language ,cannot be tolerated if we are to remain free. ® George Reisman Ludwig von Mises DEFENDER OF CAPITALISM SEPTEMBER 29, 1981, marked the hundredth anniversary of the birth of Ludwig von Mises, economist and social philosopher, who passed away in 1973. Mises was my teacher and mentor and the source or inspiration for most of what I know and consider to be important and worthwhile in these fields-of what enables me to understand the events shaping the world in which we live. I believe that he deserves to occupy a major place in the intellectual history of the twentieth century.

Mises is important because his teachings are necessary to the pre servation of material civilization. As he showed, the base of material civ ilization is the division of labor. Dr. Reisman is Associate Professor of Economics at Pepperdine University in Los Angeles and the author of The Government Against the Economy (Caroline House Publishers, ottawa, Illinois, 1979). This article, to mark the one-hundredth anniver sary of the birth of LudWig von Mises on September 29, 1981, first appeared In The Intellectual Activist, August 15, 1981,and is reprinted here by permission. Without the higher productivity of labor made possible by the division of labor, the great majority of man· kind would simply die of starvation. The existence and successful func tioning of the division of labor, how.. ever, vitally depends on the institu .. tions of a capitalist society-that is, on limited government and eco~ nomic freedom, private ownership of land and all other property, ex change and money, saving and in..

vestment, economic inequality and economic competition, and the profit motive-institutions everywhere under attack for several genera tions. When Mises appeared on the scene, Marxism and the other socialist sects enjoyed a virtual intellectual mo nopoly. Major flaws and inconsisten cies in the writings of Smith and Ri cardo and their followers enabled the socialists to claim classical econom ics as their actual ally. The writings of Jevons and the earlier "Austrian"

LUDWIG VON MISES: DEFENDER OF CAPITALISM 433 economists-Menger and B6hm Bawerk-were insufficiently com prehensive to provide an effective counter to the socialists. Bastiat had tried to provide one, but died too soon, and probably lacked the necessary theoretical depth in any case. Thus, when Mises appeared, there was virtually no systematic opposi tion to socialism or defense of capi talism. Quite literally, the intellec tual ramparts of civilization were undefended. What Mises undertook, which summarizes the essence of his great ness, was to build an intellectual de fense of capitalism and thus of civi lization. The leading argument of the so cialists was that the institutions of capitalism served the interests merely of a handful of rugged "ex ploiters" and "monopolists" and op erated against the interests of the great majority of mankind, which socialism would serve. While the only answer others could give was to de vise plans to take away somewhat less of the capitalists' wealth than the socialists were demanding, or to urge that property rights neverthe less be respected despite their in·· compatibility with most people's well·· being, Mises challenged everyone's basic assumption. He showed that capitalism operates to the material self-interests ofall, including the non·· capitalists-the so-called proletari ans. In a capitalist society, Mises showed, privately owned means of production serve the market. The physical benef).ciaries of the facto ries and mills ~re all who buy their products. And, Itogether with the in centive of profit and loss and the freedom of competition that it im plies, the existence of private own ership ensures ian ever-growing sup ply of products for all.

Thus, Mises showed to be absolute nonsense such. cliches as "poverty causes commu.nism." Not poverty, but poverty plus the mistaken belief that communism is the cure for pov erty, causes communism. If the mis guided revol u~ionaries of the back ward countries and of impoverished slums understood economics, any desire they might have to fight pov erty would m~ke them advocates of capitalism. No Basis for Economic Calculation Socialism, Mises showed, in his greatest original contribution to economic thought, not only abol ishes the incentive of profit and loss and the freedom of competition along with private ownership of the means of production, ,but makes economic calculation, economic coordination, and economic planning impossible, and therefore Iresults in chaos. For socialism means the abolition of the price system and the intellectual di vision of labor; it means the concen tration and centralization of all de cision -making in the hands of one 434 THE FREEMAN July agency: the Central Planning Board or the Supreme Dictator.

Yet the planning of an economic system is beyond the power of any one consciousness: the number, va riety and locations of the different factors of production, the various technological possibilities that are open to them, and the different pos sible permutations and combina tions of what might be produced from them, are far beyond the power even of the greatest genius to keep in mind. Economic planning, Mises showed, requires the cooperation of all who participate in the economic system. It can exist only under cap italism, where, every day, business men plan on the basis of calcula tions of profit and loss; workers, on the basis of wages; and consumers, on the basis of the prices of con sumers' goods. Capitalist Planning Mises' contributions to the debate between capitalism and socialism the leading issue of modern times are overwhelming. Before he wrote, people did not realize that capital ism has economic planning. They uncri tic ally accepted the Marxian dogma that capitalism is an anarchy of production and that socialism represents rational economic plan ning. People were (and most still are) in the position of Moliere's M. Jour dan, who never realized that what he was speaking all his life was prose.

For, living in a capitalist society, people are literally surrounded by economic planning, and yet do not realize that it exists. Every day, there are countless businessmen who are planning to expand or contract their firms, who are planning to introduce new products or discontinue old ones, planning to open new branches or close down existing ones, planning to change their methods of produc tion or continue with their present methods, planning to build up their inventories or run them down, plan ning to hire additional workers or let some of their present ones go. And every day, there are countless work ers planning to improve their skills, change their occupations or places of work, or to continue with things as they are; and consumers, planning to buy homes, cars, stereos, steak or hamburger, and how to use the goods they already have-for example, to drive to work or to take the train, instead.

Yet people deny. the name plan ning to all this acti vity and reserve it for the feeble efforts of a handful of government officials, who, having prohibited the planning of everyone else, presume to substitute their knowledge and intelligence for the knowledge and intelligence of tens of millions. Mises identified the existence of planning under capitalism, the fact that it is based on prices ("economic calculations"), and the fact that the 1982 LUDWIG VON MISES: DEFENDER OF CAPITALISM 435 prices serve to coordinate and har monize the activities of all the mil lions of separate, independent plan ners. He showed that each individual, in being concerned with earning a revenue or income and with limiting his expenses, is led to adjust his par ticular plans to the plans of all oth ers. For example, the worker who decides to become an accountant rather than an artist, because he values the higher income to be made as an accountant, changes his career plan in response to the plans of oth ers to purchase accounting services rather than paintings. The individ ual who decides that a house in a particular neighborhood is too ex pensive and who therefore gives up his plan to live in that neighbor hood, is similarly engaged in a pro cess of adjusting his plans to the plans of others; because what makes the house too expensive is the plans of others to buy it who are able and willing to pay more. And, above all, Mises showed, every business, in seeking to make profits and avoid losses, is led to plan its activities in a way that not only serves the plans of its own customers, but takes into account the plans of all other users of the same factors of production throughout the economic system.

Thus, Mises demonstrated that capitalism is an economic system rationally planned by the combined, self-interested efforts of all who participate in it. The failure of social ism, he showed, results from the fact that it represents not economic planning, but the destruction of eco nomic planning, j which exists only under capitalism: and the price sys tem. A Harmony of Interests Mises was not primarily anti-so cialist. He was pro-capitalist. His opposition to socialism, and to all forms of governJjnent intervention, stemmed from his support for capi talism and from his underlying love of individual freedom and conviction that the self-interests of free men are harmonious-indeed, that one man's gain under capitalism is not only not another's loss, but is actually others' gain. Mises was a consistent cham pion of the self-made man, of the in tellectual and business pioneer, 'whose activities are the source of progress for all mankind and who, he showed, can ftourish only under capitalism.

Mises demonstrated that compet ition under capitalism is of an en tirely different character than com petition in the animal kingdom. It is not a competition for scarce, nature given means of isubsistence, but a competition in the positive creation of new and addi~ional wealth, from which all gain. Fbr example, the ef fect of the c0In1petition between farmers using horses and those us ing tractors was not that the former 436 THE FREEMAN July group died of starvation, but that everyone had more food and the in come available to purchase addi tional quantities of other goods as well. This was true even of the farm ers who "lost" the competition, as soon as they relocated in other areas of the economic system, who were enabled to expand precisely by vir tue of the improvements in agricul ture. Similarly, the effect of the au tomobile's supplanting the horse and buggy was to benefit even the former horsebreeders and blacksmiths, once they made the necessary reloca tions.

Comparative Advantage In a major elaboration of Ricardo's Law of Comparative Advantage, Mises showed that there is room for all in the competition of capitalism, even those of the most modest abili ties. Such people need only concen trate on the areas in which their rel ative productive inferiority is least. For example, an individual capable of being no more than a janitor does not have to fear the competition of the rest of society, almost all of whose members could be better janitors than he, if that is what they chose to be. Because however much better janitors other people might make, their advantage in other lines is even greater. And so long as the person of limited ability is willing to work for less as a janitor than other people can earn in other lines, he has nothing to worry about from their com petition. He, in fact, outcompetes them for a job of janitor by being willing to accept a lower income than they. Mises showed that a harmony of interests prevails in this case, too.

For the existence of the janitor en ables more talented people to devote their time to more demanding tasks, while their existence enables him to obtain goods and services that would otherwise be altogether impossible for him to obtain. On the basis of such facts, Mises argued against the possibility of in herent conflicts of interest among races and nations, as well as among individuals. For even if some races or nations were superior (or inferior) to others in every aspect of produc tive ability, mutual cooperation in the division of labor would still be advantageous to all. Thus, he showed that all doctrines alleging inherent conflicts rest on an ignorance of eco nomics. He argued with unanswerable logic that the economic causes of war are the result of government interfer ence, in the form of trade and migra tion barriers, and that such interfer ence restricting foreign economic relations is the product of other gov ernment interference, restricting domestic economic activity. For ex ample, tariffs become necessary as a means of preventing unemploy ment, only because of the existence of minimum wage laws and pro1982 LUDWIG VON MISES: DEFENDER OF CAPITALISM 437 union legislation, which prevent the domestic labor force from meeting foreign competition by means of the acceptance of lower wages when necessary. He showed that the foun·· dation of world peace is a policy of laissez faire both domestically and internationally.

In answer to the vicious and widely believed accusation of the Marxists that Nazism was an expression of capitalism, he showed, in addition to all of the above, that Nazism was actually a form of socialism. Any system characterized by price and wage controls, and thus by short-· ages and government controls over production and distribution, as was Nazism, is a system in which the government is the de facto owner of the means of production. Because, in such circumstances, the government decides not only the prices and wages charged and paid, but also what is to be produced, in what quantities, by what methods, and where it is to be sent. These are all the fundamen tal prerogatives of ownership. This identification of "socialism on the German pattern," as he called it, is of immense value in understanding the nature of present demands for price controls. The Hazardsof Intervention Mises showed that all of the accu·· sations made against capitalism were ei ther altogether unfounded or should be directed against govern·· ment intervention, which destroys the workings pf capitalism. He was among the fin~t to point out that the poverty of the ,early years of the In dustrial Revolution was the heri tage of all previous history-that it existed becau$e the productivity of labor was stiU pitifully low; because scientists, in~entors, businessmen, savers and investors could only step by step create I the advances and ac cumulate the, capital necessary to raise it. He snowed that all the pol icies of so-called labor and social legislation were actually contrary to the interests of the masses of work ers they were designed to help-that their effect w~s to cause unemploy ment, retard capital accumulation, and thus hold down the productivity of labor and tHe standard of Iiving of all.

In a major original contribution to economic thought, he showed that depressions were the result of gov ernment-sponsored policies of credit expansion designed to lower the market rate of interest. Such poli cies, he showed, created large-scale malinvestments, which deprived the economic syst~m of liquid capital and brought on credit contractions and thus depressions. Mises was a lead ing supporter j of the gold standard and of laissez f¢tire in banking, which, he believed, would virtually achieve a 100% reserte gold standard and thus make impossible both inflation and deflation.

438 THE FREEMAN July What I have written of Mises pro vides only the barest indication of the intellectual content that is to be found in his writings. He authored over a dozen volumes. And I cannot recall reading a single paragraph in any of them that did not contain one or more profound thoughts or obser vations. Even on the occasions when I found it necessary to disagree with him (for example, on his view that monopoly can exist under capital ism, his advocacy of the military draft, and certain aspects of his views on epistemology, the nature of value judgments, and the proper starting point for economics), I always found what he had to say to be extremely valuable and a powerful stimulus to my own thinking. I do not believe that anyone can claim to be really educated who has not absorbed a substantial measure of the immense wisdom present in his works. Mises' two most important books are Human Action and Socialism, which best represent the breadth and depth of his thought. These are not for beginners, however. They should be preceded by some of Mises' popu lar writings, such as Bureaucracy and Planning For Freedom.

The Theory of Money and Credit, Theory and History, Epistemological Problems ofEconomics, and The Ul timate Foundation of Economic Sci ence are more specialized works that should probably be read only after Human Action. Mises' other popular writings in English include Omnipotent Gov ernment, The Anti-Capitalistic Men tal#y, Liberalism, Critique of Inter ventionism, Economic Policy, and The Historical Setting of the Austrian School ofEconomics. For anyone se riously interested in economics, so cial philosophy, or modern history, the entire list should be considered required reading. The Courage of His Convictions Mises must be judged not only as a remarkably brilliant thinker, but also as a remarkably courageous human being. He held the truth of his convictions above all else and was prepared to stand alone in their de fense. He cared nothing for personal fame, position, or financial gain, ifit meant having to purchase them at the sacrifice of principle. In his life time, he was shunned and ignored by the intellectual establishment, because the truth of his views and the sincerity and power with which he advanced them shattered the tis sues of fallacies and lies on which most intellectuals then built, and even now continue to build, their professional careers.

It was my great privilege to have known Mises personally over a pe riod of twenty years. I met him for the first time when I was sixteen years old. Because he recognized the seriousness of my interest in eco nomics, he invited me to attend his 1982 LUDWIG VON MISES: DEFENDER OF CAPITALISM 439 graduate seminar at New York Uni versity, which I did almost every week thereafter for the next seven years, stopping only when the start of my own teaching career made it no longer possible for me to continue in regular attendance. His seminar, like his writings, was characterized by the highest level of scholarship and erudition, and al ways by the most profound respect for ideas. Mises was never con cerned with the personal motivation or character of an author, but only with the question of whether the man'S ideas were true or false. In the same way, his personal manner was at all times highly respectful, reserved, and a source of friendly encouragement.

He constantly strove to bring out the best in his students. This, com bined with his stress on the impor tance of knowing foreign languages, led in. my own case to using· some of my time in college to learn German and then to undertaking the trans lation of his Epistemological Prob lems ofEconomics-something that has always been one of my proudest accomplishments. The Growth of Ideas Today, Mises' ideas at long last appear to be gaining in influence. His teachings about the nature of social ism have been confirmed in the first hand observations of honest news reporters with extensive experience in Soviet Russia, such as Robert Kaiser, Hedrick)Smith, John Dorn berg, and Henry Kamm. They are being confirmed by the actions of millions of angry workers in Poland. Some of Mises' ideas are being propounded by the Nobel prizewin ners F.A. Hayek (himself a former student of Mises') and Milton Fried man.They exert a major influence on the writings of Henry Hazli tt and the staff of the Foundation for Eco nomic. Education, as well as such prominent form~r students as Hans Sennholz. Mises~ monetary theori~s permeate the p(}ges of recent be;t selling books on personal invest ments, such as those by Harry Browne and Jero.me Smith. And last, but certainly not least, they appear to be exerting ciLn important influ ence on President Reagan, who has acknowledged r~ading Human Ac tion and has expressed his admira tion for it.

Mises' books deserve to be in ev ery college and ,university curricu lum - not justin departments of economics, but ~lso in departments of philosophy,. h~story, government, sociology, law, business, journalism, education, and the humanities. He deserves to rec~ive every token of recognition and: memorial that our society can best~w. For as much as anyone in historF, he labored to pre serve it. If he is widely enough read, his labors may succeed in helping to save it. @ Glenn L. Pearson How Socialism Affects Charity THE economic consequences of so cialism pale into insignificance alongside the moral consequences. It is infinitely more tragic that our government has presided over the moral decay of America than over its growing poverty. Of course, mo rality has not completely disap peared and total, abject poverty has not arrived. (We owe that to the remnants of a past that enjoyed a greater freedom.) But every govern ment program based on redistribu tion of the wealth for social or eco nomic improvement carries the seeds of moral and economic death.

One of the ways socialism (the use of government to solve social prob lems) adversely affects morality is in its destruction of the urge and ability to privately care for loved ones and neighbors. It can destroy this urge and ability by reducing the loftiness of soul which characterizes great people. That is, by relegating Mr. Pearson is recently retired after many years of writing and teaching at Brigham Young University and the Church Education System of Latter Day Saints. 440 all its efforts to the satisfaction of the belly instead of to the freeing of the mind and soul, the government can lead a people downward instead of upward-down into selfish grati fication of the body instead of up ward into selfless gratification of spiritual needs. A people which is blessed with many persons of lofty soul seem to obtain material prosperity as a sort of by-product of their pursuit of spir itual ends; whereas a people whose government has led them into a sys tem which attempts, by political manipulation, to gratify all their material needs succeeds in so com pletely crushing the qualities on which prosperity is sustained that poverty persists and grows. Alexis de Tocqueville saw this: Whatever elevates, enlarges, and ex pands the soul, renders it more capable of succeeding in those very undertakings which concern it not. Whatever, on the other hand, enervates or lowers it, weak ens it for all purposes, the chiefest as well as the least, and threatens to render it HOW SOCIALISM AFFECTS CHARITY 441 almost equally impotent for the one and for the other. Hence the soul must re main great and strong, though it were only to devote its strength and greatness from time to time to the service of the body. If men were ever to content them selves with material objects, it is proba ble that they would lose by degrees the art of producing them; and they would enjoy them in the end, like the brutes, without discernment and without im provement. (Democracy in America, Translated by Henry Reeve (New Ro chelle, New York: Arlington House) Vol ume Two, Second Book, p. 157) A specific example of how the gov ernment adversely affects spiritual qualities is in the difficulties it im poses on private charity through the IRS. Within certain limits a person may deduct donations to institu tions that have been approved as le gitimate charities; but the grim-faced bureaucrats who arbitrate deduc tions make it difficult for anyone who wants to help a destitute neighbor or relative. The regulations are many and difficult to surmount. The inev itable effects on souls are a devious ness that quenches honesty and a callousness that turns faces away from suffering. (After all, aren't the poor the responsibility of the gov ernment?) Those who run the IRS and the politicians who gave them their power seem to feel that they have a duty to siphon off most of our capability to practice private char ity and then set up rules that will discourage the "wasting" (as they seem to see it) of funds on the truly needy whose sholllders we rub daily.

I am personally and painfully ac quainted with a i man who has car ried a heavy farnily burden of this sort for years. l{e has a son who is marvelously gifted with musical tal ent. This son also was afflicted at age fifteen with an eye disease which was curable only by corneal trans plants. Special ¢ontact lenses were the prescribed treatment for, hope fully, the first fiffjeento twenty years. Then the only a~ternative to a life time of blindness was corneal trans plants. Only the 'transplants became necessary much earlier than ex pected. The boy was in college, mar ried and supporting himself. Then several years o~ economic and per sonal disaster ensued. It is not my phrpose to relate the bitter details, buit only to recite some of the governmetlt policies involved. Suffice it to say' that the father put out over $50,00Q in doctor bills, hos pital bills and fafmily support during the times his son was incapacitated.

Following is a partial list of adver sities he encoum.tered that directly or indirectly invblve government in terference in social and economic matters that sh~uld be none of gov ernment's business: 1. He got most of the money for his son by selling stock in a public company. (Of cQurse, he had to sell more than $50,000 worth of stock because of the tax bite.) Due to var442 THE FREEMAN July ious acti vities of the Securities and Exchange Commission, this stock was in a slump when he sold it. So he got one-tenth as much as he could have a few months after he sold it. (He also could have done much bet ter earlier than the time he sold it. The point is that the roller-coaster the stock had been on was caused, in this case, by SEC activities. The market activities had nothing to do with the value of the stock company. That didn't change. The honesty or dishonesty of the management didn't change. But the promotion of the company's stock by stock brokers changed as their perception of the SEC's approval changed.) 2. The son checked out all of the government agencies that were sup posed to help in his type of personal and economic tragedy. He found that none would help him unless he lied to them in some way. Maybe others lie. But he places a high price on integrity. The father, on principle, did not seriously consider govern ment help.

3. Due to IRS rules about capital gains taxes, the father had to pay capital gains on the entire proceeds from his stock sales. He did have a legal base in the stock; but it was his accountant's considered opinion that his records were not structured to prove it if a challenge ensued. So he reported the full proceeds with out any deductions and paid the ap plicable tax. 4. During most of the years of his son's trials, the father could not claim the level of deductions he could have claimed ifhis son could have contin ued his college education. Once the schooling stopped, the only deduc tion the father could claim was the dependent exemptions for his son's wife and children, which was only a fraction of what they were costing him. 5. Except for that short period when his son was in school, the fa ther could not claim any deductions for the huge hospital and doctor bills. This was because he could not claim his son as a dependent. His son had to file a separate tax return and his earnings were too low to take full advantage of the medical expenses.

6. The son never qualified for un employment compensation at any time because his eye problem made him unavailable for employment. At the times he could see well enough to work, he earned too much through piano tunings and other employ ment that he picked up himself. 7. The father retired during all this. The stock money had run out; but he had various other sources of income. However, they all counted against the amount he could earn without having his social security check diminished. The result was that those benevolent bureaucrats that sit over retirement regulations have deducted sums from his social security checks and are about to dip 1982 HOW SOCIALISM AFFECTS CHARITY 443 even deeper. They got him coming and going because the money for which they are deducting penalties was money he spent on his son and his son's family. So, even though he did not have that extra income to Iive on himself, Social Security treated it that way.

But don't waste any tears on this man. He does not believe in public charity anyway. He will find a way to go on supporting himself honestly and legally. The foregoing partial listing of how government agencies and policies adversely affected one man's life was meant to show how socialism tends to worsen social conditions by de stroying self-reliance and the prop erty base people must be able to cre ate if they are to be self-reliant. The majority of American people have been taught by a humanistic state supported and state-sponsored pub lic religion (in the guise of democ racy) that no end of economic bene fits deserve the title of civil rights. They overlook the fact that all of these pseudo civil rights require the redistribution of private property by a system of public robbery. This public robbery is a form of violence as real as that employed by those wicked persons who break into our homes increasingly these days and it is far more extensive both in quantity of goods stolen and psycho logical effect. Violence begets violence, no matter what name you give it. Thus government sponsors the deterioration of moral values in hu man souls. That, in turn, kills the human qualities and aspirations on which all forms of wealth, spiritual or temporal, are based.

If politicians and bureaucrats of a socialist bent were to get hold of this kind of problem and see that there is an illness th~t needs curing (a very unlikely probability), the medicine they would prescribe would be new tax regulations designed to give re lief to honestJy charitable people. (Imagine the confusion that would bring into our 'tax laws.) But that is not the cure. The cure is a stronger medicine: the withdrawal of past medicines and drugs that have put America into a spiritual coma. Eventually we must get back to where moral v~lues are more prized than the full ;belly and the warm back. When we do-and I, for one, am convinced that we will-the full bellies and the, warm backs will be a blessed by-product, not the main thrust of life. How can the government encour age the development of loftiness of spirit? Not so much by what it does, unless it be the restoration of the feeling that justice can be expected.

It mostly can exalt the souls of men by what it does not do. We must go back to the limited government originally provided by the Consti tu tion. ® A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN Locking Up the Range THE "lower forty-eight" states of the United States have always been two countries. One is the country of trees and abundant rainfall, reaching from the Atlantic coast to just beyond the tier of states that stretches from Minnesota to Louisiana on the west ern bank ofthe Mississippi. The other country, beginning with the Great Plains and continuing westward through mountain territory that collects some irrigation water, is predominantly dry. The different characteristics have invited a con fusion of counsel about title to lands, culminating in something that westerners know today as the Sage brush Rebellion. Gary D. Libecap, who teaches eco· nomics at Texas A&M University, has explored the implications of the Sagebrush Rebellion in a fascinat ing, though somewhat disjoint 0 d, book, Locking Up the Range: Fed eral Land Controls and Grazing, 444 which is published by the Pacific In stitute for Public Policy Research of San Francisco and marketed through the Ballinger Publishing Company of Cambridge, Mass., a Harper and Row subsidiary (109 pp.; $17.50 cloth, $8.95 paper). Briefly, Mr. Libecap's message is that public-which means bureaucratic - management of grasslands, far from controlling the waste that comes with overgrazing, is bound to increase it. It is just one more example of the old truism that when "everybody" is responsible for something, nobody really minds the store. No wonder that states such as Nevada, Utah and New Mexico, where the federal government is the big land owner, have tended to sup port Ronald Reagan's Secretary ofthe Interior James Watt in his conten tion, unusual for a government ser vant, that people on the spot might be better able to care for local re sources than bureaucrats trying to LOCKING UP THE RANGE 445 extend their paper empires some thousands of miles away.

In a condensation of his own book, Mr. Libecap remarks that private parties, leasing sections of the 174 million acres of public land from the Bureau of Land Management in the Department of the Interior, have not had the economic incentive to make necessary improvements on the range property that supports their cattle. The result is that the lands remain below their production po tential. The environmentalists, faced with the evidence that there has in deed been overgrazing and a conse quent depletion of range fertility, have reacted by calling for more regulation and "multiple use." But who can be trusted to regulate the regulators and to decide on alterna tive employment for acres which re sist the growth of anything but grass or lowlying brush? Private Ownership Secretary Watt's answer is to offer some of the western public lands for sale to private ranchers. He has, naturally, been excoriated for the very suggestion. Nevertheless, in his attitude, Watt is the true Jefferso nian. As Jonathan R. T. Hughes of Northwestern University points out in a foreword to Mr. Libecap's book, what the architects of our original national land policy wished to avoid was a "suboptimal use based on un certain tenure." In planning the Northwest Ordinance of 1785, Thomas Jefferson wrote that the federal governm~nt should sell all its vast domain ito private owners, guaranteeing in'the purchase con tract that it should "never after, in any case, reve'irt to the United States." What J:efferson wished to avoid, says Jon~than Hughes, was government ownership of the means of production.

What Jefferson could not guess, despi te the reports of the Lewis and Clark expedition, was that land laws designed for the well-watered East needed a special adaptation to the vast territories of what was then known as the :Great American Desert. In the Ohio Valley, which was "west" to Jefferson, a small family could do very well on a quar ter section or more of land. The quarter section dominated the thinking of the architects of the Homestead Act. !Homesteading did handsomely by tne generations that took up land on the so-called Middle Border reaching 'from Wisconsin to 'where the water began to run out along the hundredth parallel of lat itude that bisects the Dakotas and Nebraska. But, as Jonathan Hughes puts it in graphic language, "the American wave of settlers and homesteaders exhausted itself on the edges and in the :seams of the west ern deserts." Dry-land farming had to depend on irrigation water that was problematical. The semi-arid 446 THE FREEMAN July grasslands west of the hundredth parallel could only support stock on vast reaches of terri tory. A General Land Office accustomed to doling out the continent in 160-acre patches could not cope with the necessities of cattle and sheep ranchers.

Overstocking and Overgrazing Unclaimed Public Lands The first cattlemen lived by "pre scriptive right," using the open range on a first-come, first-served basis. The barbed wire enclosure of the small holding was naturally anathema to the first cowpunchers. Compromises reached by the late Eighteen Eighties combined deeded home steads with renewable grazing rights on still unclaimed public lands. But as long as the grazing rights were subject to political manipulation, the temporary possessors were inclined to get the most out of the land while the going was good. Where a profit minded rancher would, under pri vate ownership, refrain from de stroying his own estate by overgraz ing it, the temporary renter of public domain would have no qualms. Without secure tenure, says Mr. Libecap, "ranchers ... were reluc tant to invest in range improve ments ... expected returns were apt to be low since any benefits would be spread among all herders."

Overstocking paid off in good years-but large herds were vulner able to sudden drought. When the rains did not replenish the range, ranchers were forced to dump their animals, with consequent disrup tion of the market. Insecure tenure, says Mr. Libe cap, encourages overstocking and discourages investing in wells and fences. Ranchers have to contend with a situation in which the Bu reau of Land Management adminis ters 23 per cent of the acreage in the eleven far-western states. The BLM controls nearly 70 per cent of Ne vada, more than 40 per cent of Utah, and some 20 per cent of Wyoming, Oregon, Idaho, Arizona, California, New Mexico and Colorado. According to Mr. Libecap, 75 per cent of the world's grazing lands which are facing depletion do not have secure tenure arrangements. He calls on Secretary ofthe Interior Watt to transfer the 174 million acres of rangeland under BLM control to private owners who would have per sonal stakes in judicious manage ment. Since the purpose should not be to generate real estate profits, but to improve the land, the sale price should be nominal.

There would, of course, be a great hullabaloo if Secretary Watt were to offer the whole 174 million acres for sale at once. But sales in selected spots would provide good laboratory tests. The times are propitious-and Secretary Watt is just the man to stand the gaff of temporary criti cism. ® 1982 OTHER BOOKS 447 THE MIDNIGHT ECONOMIST: CHOICES, PRICES AND PUBLIC POLICY by William R. Allen (Playboy Press, 747 Third Ave., New York, N.V. 10017), 1981 295 pages - $13.50 cloth Reviewed by Edmund A. Opitz By DAY he is an academicaUy cre dentialed professor of economics at a prestigious university, and he also heads the International Institute for Economic Research. But when night falls he gets on syndicated radio for a three minute commentary as The Midnight Economist. He is William R. Allen, an exceedingly well-inte grated dual personality. For the past several years I have been reading his scripts regularly.

Each one has but a single point to make, and makes it brilliantly. Al len has such mastery of his eco nomic philosophy that he brings precisely the relevant considera tions to the topic at issue, and no others. His treatment is witty, down to-earth, and devastating. Who says economics can't be fun? There's basic stuff here; topics like private property, the free market, money, the corporation. And, there are critiques of communism, con sumerism, government tinkering, pollution, energy, unionism, infla tion, tariffs, environmentalism, and the like . We discover that economics is not so much ,a new subject matter as a new way of looking at all sub jects. Ecology?: We all want to pre serve our natu~al resources; we want to save the whale. Listen to the economist and we'll realize that ecology is a subdivision of econom ics-and this will keep a lot of en vironmentalist,s off the streets. You dislike smog? Allen clears the air.

And much more. Read separately and at intervals, Allen's brief talks were vastly en tertaining. In' book form they are addictive. ® ANTITRUST AND MONOPOLY: ANATOMY OF A POLICY FAILURE by Dominick T. Armentano (John Wiley & So~s, 605 Third Ave., New York, N.V. 10158), 1982 292 pages - $22.95 cloth, $12.95 paperback Reviewed by Brian Summers THIS is an extehsive revision of Pro fessor Armentano's classic 1972 study, The Myths of Antitrust. The cases have been updated and the ar guments reinfotced. A good book has been made even better. All the major antitrust cases are carefully analyzed and thoroughly critiqued. The' economic history of each case is given, along with the important court decisions. Most of 448 THE FREEMAN these decisions, the author shows, penalized companies whose only crime was that they reduced costs, improved products, and thus served many willing customers. But such competitive processes are ignored by the practitioners of anti trust. They view competition, not as a market process aimed at winning customer approval, but in terms of the size and number of firms in a given industry. On these grounds, it has been easy to convict firms which grew because consumers preferred their products.

If a company grows by efficiently serving the buying public, who is to complain? Frequently, complaints are led by the company's rivals. Sometimes they attack the success ful firm by filing antitrust suits. Other rivals seek government fran chises, certificates of public conve nience, licenses, tariffs, price-sup port programs, and similar barriers to entry. The companies that hide behind these legal barriers are the true monopolists, but they receive scant attention from those who claim to protect the consumer's interests. Since the publication of The Myths of Antitrust, several prominent au thors have joined Professor Armen tano in criticizing the efficacy of an titrust. But his books remain the only major studies which consistently view competition as a dynamic pro cess, and oppose all antitrust on principle. Only through such prin cipled, carefully reasoned opposi tion will the antitrust laws be re pealed. @ HANDSOME BLUE LEATHERLEX FREEMAN BINDERS $4.00 Order from: THE FOUNDATION FOR ECONOMIC EDUCATION, INC.

IRVINGTON-ON-HUDSON, NEW YORK 10533 the Freeman VOL. 32, NO.8 • AUGUST 1982 The Relics of Intervention: 5. New Deal Welfarism Clarence B. Carson 451 The growing welfare burdens largely began in the New Deal of the mid-Thirties. The Illusion of a Riskless Society Elgin iGroseclose 464 The risks increase as the government intervenes. Rothbard's liberty Reviewed A critical review of "The Ethics of Liberty." John Hospers 468 Mixed Economies a No-Man's land Glenn l. Pearson 485 In the war between freedom and slavery, political intervention tends to enslave. Public Policy and the Free Economy Thomas J. Dilorenzo 492 Only the free economy is capable of achieving equity and prosperity. Book Reviews: 510 "The Subterranean Economy" by Dan Bawly Anyone wishing to communicate with authors may send first-class mail in care of THE FREEMAN for forwarding.

FOUNDATION FOR ECONOMIC EDUCATION Irvington-on-Hudson, N.Y. 10533 Tel: (914) 591-7230 Leonard E. Read, President Managing Editor: Paul L. Poirot Production Editor: Beth A. Hoffman Contributing Editors: Robert G. Anderson Bettina Bien Greaves Edmund A. Opitz (Book Reviews) Brian Summers THE FREEMAN is published monthly by the Foundation for Economic Education, Inc., a nonpo litical, nonprofit, educational champion of private property, the free market, the profit and loss sys tem, and limited government. The costs of Foundation projects and services are met through donations. Total expenses average $18.00 a year per person on the mailing list. Do nations are invited in any amount. THE FREE MAN is available to any interested person in the United States for the asking. For foreign delivery, a donation is required sufficient to cover direct mailing cost of $5.00 a year. Copyright, 1982. The Foundation for Economic Education, Inc. Printed in U.S.A. Additional copies, postpaid: 3 for $1.00; 10 or more, 25 cents each.

THE FREEMAN is available on microfilm from University Microfilms International, 300 North Zeeb Road, Ann Arbor, Mich. 48106. Some articles available as reprints at cost; state quantity desired. Permission granted to reprint any article from this issue, with appropriate credit.

ClarenceB. Carson THE RELICS OF INTERVENTION: 5. New Deal Welfarism The:New Deal THE welfare state is largely a relic of the New Deal. That is, it was con ceived, advanced, and articulated in particular programs during the 1930s. It is a relic of a depression born animus to assert the power of the central government into the lives of Americans, of a faith in the benef icence of government intervention. For several decades before the Great Depression, reformers had been pro claiming the necessity for and desir ability of government action on be half of elements within the population. The depression provided an opportunity for them to use the power of government. The welfare state began as an idea, of course. This idea, though it has long since become an assumption, still undergirds the welfare state. It Dr. Carson has written and taught extensively, spe cializing in American intellectual history. He is the author of several books and a frequent contributor to The Freeman and other scholarly journals.

is the belief that it is the duty and responsibility of government to pro vide for the economic well-being and security of the people, especially that portion of them imost exposed in the modern world. It is premised upon the fact that goyernment can confis cate wealth by ,taxation and redis tribute it. Beyond that it can compel redistributions iby legislation even when the wealth never enters gov ernment coffers, as by fixing a min imum wage, for ,example. By various means, then, government could pro vide for the well-being and security of the people. New Dealers not only implanted the general idea but also placed heavy emphasis upon the leadership of the Federal govern ment in welfarism. Historians often speak of two New Deals. The First New Deal is usu ally located primarily in the years 1933-1934. Its, most characteristic feature was probably the National 451 452 THE FREEMAN August Recovery Administration (NRA) with its industrial codes and the impetus it gave to national planning within industries. In broad terms, the aim of the First New Deal was to stimu late recovery by cutting production, raising prices, and credit expansion.

The Second New Deal is concen trated in the years 1935-1938. In dustrial planning was sloughed off, and the emphasis shifted to even more direct government involve ment in finding ways for protecting and aiding farmers, labor unions, and the poor more generally. Actually, however, the New Deal cannot be broken up into any chron ological pattern into which all the measures will fit neatly. For exam ple, there is a continuity in the ag ricultural programs throughout the period that was broken only tempo rarily by Supreme Court decisions. National planning as an idea was never abandoned, though there were changes in emphasis. From the out set, too, there was a welfarist tint to the programs, although the emer gency confronting credit institu tions and national planning were in the forefront. But the shift toward the welfare state did become much more pronounced from 1935 onward. The most dramatic step in that di rection was the passage of the Social Security Act in 1935. Not only was the measure clearly welfarist in character but also it was not,a tem porary or emergency measure. It would extend indefinitely into the future if it were not nullified or re pealed.

Social Security In his message to Congress rec ommending the passage of Social Security, Roosevelt declared that the main objective "was, and is, the se curity of the men, women, and chil dren of the Nation against certain hazards and vicissitudes of life. This purpose is an essential part of our task."l He went on to enumerate the programs to be included in it: At this time, I recommend the follow ing types of legislation looking to eco nomic security: 1. Unemployment compensation. 2. Old-age benefits, including compul sory and voluntary annuities. 3. Federal aid to dependent children through grants to States for the support of existing mothers' pension systems and for services for the protection and care of homeless, neglected, dependent, and crippled children. 4. Additional Federal aid to State and local public-health agencies and the strengthening of the Federal Public Health Service. I am not at this time rec ommending the adoption of so-called "health insurance," although groups rep resenting the medical profession are co operating with the Federal Government in the further study and definite progress is being made. 2 In later pronouncements, Roose velt set forth in broad and compre1982 NEW DEAL WELFARISM 453 hensive terms the extent of his wel fare aims. In his Second Inaugural Address, delivered in 1937, he de clared: "In this nation I see tens of millions of its citizens ... who at this very moment are denied the greater part of what the very lowest stan dards of today call the necessities of life." He saw, he continued, "one third of a nation ill-housed, ill-clad, ill-nourished."

It is not in despair that I paint you that picture. I paint it in hope-because the Nation, seeing and understanding the injustice in it, proposes to paint it out. We are determined to make every Amer ican citizen the subject of his country's interest and concern .... The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little. 3 In short, not to put too fine a point upon it, he intended to use the power of government to see that the wealth was distributed to care for those who had the least. A Question of Constitutionality Before looking more closely at some of the acts by which the wel fare state was established, the ques tion of the constitutionality of all this effort needs to be examined. I do not raise the question of my own will, of course; it was a burning constitu tional issue in the period 1935-1938.

By 1936, there was every reason to doubt that much of the New Deal legislation woul<!l make its way suc cessfully throug~ the courts. During the years 1935.l.1936, lower court federal judges issued some 1600.in junctions preve~ting officials from applying New D~allaws. "At no time in the country'~ history," the Har vard Law Review opined, "was there a more voluminous outpouring ofju dicial rulings in restraint of acts of Congress than the body of decisions in which the lower courts, in vary ing degree, invalidated every mea sure deemed appropriate by Con gress for grappling with the great depression."4 Moreover, beginning in January, 1935, the Supreme Court began to nullify major acts. In the next six teen months, 10 major cases came before the court. "In eight instances the decision went against the New Deal. Stricken! down in succession were Section 9(¢) of the National In dustrial Recovety Act, the N.R.A. it self, the Railro~d Pension Act, the Farm Mortgage law, the Agricul tural Adjustm~nt Act, the A.A.A.

amendments, the Bituminous Coal Act, and the MiInicipal Bankruptcy Act."5 Of the acts challenged all the way to the Supreme Court, only the monetary acts qf 1933 and TVA had survived. Nor was most of this legislation struck down simply on technicali ties. The grav¢st of constitutional objections had! been raised in the court decisions. One history sum454 THE FREEMAN August marizes the objections this way: "First, the Court firmly rejected all attempts to extend federal authority over production. It denied in succes sion that interstate commerce, ap propriations for the general welfare, or taxation could be used to this end. Second, the Court denied the consti tutionality of legislative delegation to the executive on the scale at tempted in the N.R.A. or the Guffey Act. Third, and more broadly, the Court refused to accept the concep tion of constitutional growth, either by evolution or through economic emergency. "6 Not only had much of the legisla tion fallen, then, but there was good reason to suppose that such replace ment legislation as the National La bor Relations Act and new legisla tion such as the Social Security Act would suffer a similar fate. As Schlesinger has said, "The succes sion ofjudicial vetoes in critical areas of federal action . . . seemed to ex press a clear determination on the part of the Court to nullify the New Deal."7 Attacking the Court Ever since, most historians have laid the blame for this state of af fairs on several members of the Su preme Court. They made what amounted to ad hominem attacks on those justices who took the most consistent positions about New Deal legislation. Their ire has been most often focused on Justices Willis Van Devanter, George Sutherland, James C. McReynolds, and Pierce Butler.

While the following may not be quite typical of the attacks on these jus tices, it does illustrate the ad homi nem character of them: The four stalwarts differ among them selves in temperament. I think that Mr. Justice Butler knows just what he is up to and that he is playing God or Lucifer to keep the world from going the way he does not want it to. Sutherland seems to me a naIve, doctrinaire person who really does not know the world as it is. His in competence in economic reasoning is amazing .... Mr. Justice McReynolds is a tempestuous cad, and Mr. Justice Van Devanter an old dodo.s Justice Owen Roberts, who usually sided with the above four and wrote some of the most ringing opinions, has not usually been treated with so much disdain by historians. Nor has Chief Justice Hughes, who was most apt to shift back and forth between groups. Historians have usually been unstinting in their praise ofJustices Harlan Stone, Benjamin Cardozo, and Louis Brandeis, who usually dissented about the unconstitution ality of New Deal measures.

That way of treating it was an ex cellent ploy for evading the issue, of course. The question was not the competence of the Court to make de cisions. At least, no such question was ever raised to the relevant level of initiating impeachment proceed1982 NEW DEAL WELFARISM 455 ings. The question was whether or not the New Deal legislation was authorized by and in keeping with the Constitution of the United States. If it was not, and the Supreme Court had made that determination about much of it before the end of 1936, then the New Dealers were guilty of transgressing the bounds of the Constitution. The plausible course would have been to blame them for contempt of the Constitution, not the Court for applying it. UnprecedentedAction Several considerations make this the more plausible interpretation. In the first place, much of the New Deal legislation was either without pre cedent-decidedly different in im portant features from any passed theretofore-or applied government power to new areas. Such precedents as existed were mostly in emergency measures passed during World War I, and these were too shortlived to have undergone full court testing. (In any case, for wartime measures to serve as precedents, it would have been necessary to buy the analogy between war and depression.) Second, the acts nullified were not based on powers enumerated with any explicitness in the Constitution.

The New Dealers relied generally either on the interstate commerce clause or the power to tax for the general welfare, the vaguest and most imprecise authority. This is not prima facie evid~nce of their·uncon stitutionality, but it did mean that where they wer~ foraging into new territory, they ~ould expect sharp challenges. Third, the weight of precedent, so far as there was any, and the ten dency of court i decisions over the years made the! constitutionality of the New Deal legislation doubtful. For example, the courts had gone to great lengths ov~r the years to limit, confine, and d~fine the commerce power. In one great swoop, the New Deal acted to ov~rride these limits. The Duty of the! Court The majority on the Supreme Court had moved resolutely and with careful deliberation to halt the in trusions and to i affirm the constitu tionallimits on i the government. As Justice Roberts $aid, in United States v. Butler, "The question is not what power the feder$.lGovernment ought to have but what powers in fact have been given by the people." He ex plained the role of the Court this way: "The Constitutiqn is the supreme law of the land ordained and established by the people. ~ll legislation must conform to th¢ principles it lays down. When a~ act of Congress is appropriately! challenged in the courts as not cOlllformingto the con stitutional m~ndate the judicial branch of the qovernment has only one duty-to l$.y the article of the Constitution which is invoked be456 THE FREEMAN August side the statute which is challenged and to decide whether the latter squares with the former."9 President Roosevelt bided his time throughout the year, 1936, avoiding any public statements about court decisions. There was some talk of proposing constitutional amend ments which would clearly provide the New Dealers the power to do what they wanted to do. But no such amendments ever made it off the drawing board. To have proposed the amendments would have been a tacit acknowledgement that the courts were right in their interpretation of the Constitution. To have stated in blunt constitutional language the powers sought would have been to expose the power grab involved. Had such amendments been proposed in 1936 they would almost certainly have provoked controversies which might have had political conse quences unfavorable to Roosevelt and the Democrats. Besides, Roosevelt must have already had a different scenario in mind, one which would enable him to move from strength rather than weakness. lO At any rate, he waited until after the presidential election to make his move. He continued to push welfar ist legislation, even to getting part of the Agricultural Adjustment Act, which had been nullified, re-en acted. It was not done under the old name, not yet, but this did not fore stall charges that the New Dealers were acting in contempt of the Con stitution. The election results pro vided him with the background for action. Roosevelt won a landslide victory; only Maine and Vermont went into the Republican presiden tial column. The Democratic major ities in both houses of Congress were overwhelming.

Still, Roosevelt moved secretly and deliberately. First, he gave his Sec ond Inaugural Address with its vig orous call for government action to deal with the distress of one third of the nation. After that, work was be gun in secret on a Judicial Reorga nization bill which was sent to Con gress February 5, 1933. A few days before that, Roosevelt held a gala dinner for the members of the Su preme Court, among others. No word had yet leaked about the forthcom ing bill. Then, in the hours before the message and legislative pro posal went before Congress, Presi dent Roosevelt called a special meeting of his cabinet and congres sional leaders. He simply read his proposal to them and without signif icant discussion dismissed them. ll The Court Packing Scheme The Judicial Reorganization bill quickly became known as Roose velt's "Court Packing Scheme." It did indeed propose to enlarge the Su preme Court. In his message to Con gress, Roosevelt emphasized the old age of most of those on the Court 1982 NEW DEAL WELFARISM 457 and the alleged inefficiency that fol lowed from that. He proposed that when any federal judge reached the age of 70 and did not retire that the President be authorized to appoint another judge. For the Supreme Court, the number to be appointed was to be limited to 6 additional jus tices, so that the number could not go higher than 15 members of the Court. If a justice voluntarily re tired at the age of 70, no additional member would be appointed, of course.

Roosevelt took the case to the American people. On March 9, 1937, in a Fireside Chat (radio speech), he set forth his grievances against the present Supreme Court. He charged that the "Court has been acting not as a judicial body, but as a policy making body." He made it clear that in his opinion it was some of the men on the Court that were making dif ficulties. "Our difficulty with the Court today," Roosevelt said, "rises not from the Court as an institution but from human beings within it. But we cannot yield our constitutional destiny to the personal judgment of a few men who, being fearful of the future, would deny us the necessary means of dealing with the present."I2 It was necessary, Roosevelt de clared, "to take action to save the Constitution from the Court and the Court from itself."13 The probable impact of such a direct assault by the President on a few men in a publie speech could hardly be exagger ated. Moreover, it was made against men who, by traldition, could make no public answer.

Roosevelt's Interpretation That Roosevelt held a different view of the Constitution and of the role of courts in its interpretation from that traditionally held either by the courts or!the American peo ple should be made clear. A Roose velt biographer· reports that when Roosevelt took the oath of office, a few weeks before the above events, it was administered to him by Chief Justice Hughes.· The old Chief J us tice "read the dath with slow and rising emphasis· as he came to the words 'promise to support the Con stitution of the United States.' Roo sevelt gave the words equal force as he repeated the oath. At this point, he said later, h~ wanted to cry out, 'Yes, but it's the Constitution as I understand it, flexible enough to meet any new iproblem of democ racy-not the ~ind of Constitution your Court has raised up as a bar rier to progress ~nd democracy.' "14 Roosevelt dropped hints as to his view of the Constitution rather than making a legal argument for it. He said that "we mtist have Judges who will bring to the Courts a present day sense of the Constitution ... ,"

courts which wpuld take up their "high task of building anew on the Constitution 'a system of living 458 THE FREEMAN August law.' "15 More specifically, he pro posed a line the courts might take to validate welfare legislation. He noted that "In its Preamble, the Constitu tion .states that it was intended to form a more perfect Union and pro mote the general welfare .... But the framers went further. Having in mind that in succeeding generations many other problems then un dreamed of would become national problems, they gave to Congress the ample broad powers 'to levy taxes ... and provide for the common de fense and general welfare of the United States.' "16 Underlying Roosevelt's remarks was a theory, a theory known as le gal realism. Legal realism may also be described as legal relativism. On this view, the law at any given time is relative to the conditions which prevail and the aims and purposes of those who expound it. Rather than being fixed by constitution makers and legislators, it is growing, ex panding, and changing. The beliefs, ideologies, and predilections of those who expound the law are determi native. The ideals which had guided, or at least been claimed by expo nents of, American jurisprudence over the years were given short shrift by legal realists. Here, for example, is a more recent statement by a le gal realist of his attitude toward them: ... In the interest-balancing proce dure of constitutional adjudication, neutrality has no place, objectivity is achiev able only in part, and impartiality is more of an aspiration than a fact.... In mak ing choices among competing values, the Justices of the Supreme Court are them selves guided by value preferences. Any reference to neutral or impersonal prin ciples is ... little more than a call for a return to a mechanistic jurisprudence [which, he goes on to assert, never ex isted] .... Even in the often-quoted as sertion by Mr. Justice Roberts about the duty of the Court to lay the statute against the Constitution to ascertain if the one squares with the other, one would indeed have to be naive to believe that this statement in fact described the pro cess.17 It might be supposed that there would be no way for legal realists to distinguish between good laws and bad laws. That is not the case, how ever. A good law is one that is "pro gressive"; a bad law is one that is "reactionary." Of course, reformers had co-opted the idea of progress for themselves.

The Court Upheld Roosevelt did not succeed in get ting his plan for reorganizing the ju diciary through Congress. He la bored to do so through a rather lengthy session, for those days, but to no avail. The Senate Judiciary Committee recommended its defeat in the most vigorous language it could summon for a public docu ment. The report declared that "This bill is an invasion of judicial power 1982 NEW DEAL WELFARISM 459 such as has never before been at tempted in this country." So far as the majority of the Committee could see, "The only argument for the in crease which survives analysis is that Congress should enlarge the Court so as to make the policies of this ad ministration effective." Further, This is the first time in the history of our country that a proposal to alter the decisions of the court by enlarging its personnel has been so boldly made. Let us meet it. Let us now set a salutary pre cedent that will never be violated. Let us, of the Seventy-fifth Congress, in words that will never be disregarded by any succeeding Congress, declare that we would rather have an independent Court, a fearless Court, a Court that will dare to announce its honest opinions in what it believes to be the defense of the liber ties of the people, than a Court that, out of fear or a sense of obligation to the ap pointing power, or factional passion, ap proves any measure we may enact. We are not the judges of the judges. We are not above the Constitution. I8 The end did not come so dramati cally as the Committee apparently hoped, but the bill did not pass.

But neither the stirring words of the Committee report nor the re fusal of Congress to enact the bill into law came soon enough to bol ster the Court. The barn door had been locked after the horse had been stolen. The Court had shifted its stance before these decisions had been made. Justice Roberts appar ently succumbed to Roosevelt's pressure on the Court and changed sides. Chief Justice Hlilghes, who had wa vered back and forth in any case, went along with: him to form a new majority on the Court. In March, 1937, the new majority on the Su preme Court sustained a Washing ton minimum wage law, reversing its position in a New York case made only the year before. In April, the new majority on'the Court sustained the National Labor Relations Act in a series of decjsions. In May, the Court sustained, significant portions of the Social Security Act. In short order, too, the slim major ity on the Court was broadened. Be ginning with the retirement of Jus tice Van Devanter in May, 1937, most of the older justices retired or died over the n~xt couple of years.

They were usually replaced by such known New Dealers as Hugo Black, William O. Douglas, and Felix Frankfurter. Roosevelt had lost the battle for court reorganization but won the war for a Court that would sanction New Deal legislation. Bending the Constitution An historian of the New Deal has said, "On the whole, the Founding Fathers sought to contain govern ment, not promote change. It was remarkable that the New Deal was able to break through these care fully devised constitutional barriers for so long." 19 I' quote the above two sentences because they place the 460 THE FREEMAN August emphasis where it belongs, not upon the Courts but upon the Constitu tion. After all, the Supreme Court survived the assault, indeed, sur vived and prospered. But the break ing of the barriers in the Constitu tion to the establishment of a welfare state is a different matter. The New Deal assault was like punching holes in a dam. Over the years, the holes have widened, so that more and more legislation, much of it not autho rized by any stretch of the imagina tion by the Constitution, could get through.

That the clauses referring to the "general welfare" were grants of power to do anything, much less es tablish a welfare state, is highly doubtful. The reference to the "gen eral welfare" in the Preamble is not a grant of power. It is a part of the statement of the purpose of the gov ernment being established. The phrase occurs again in the :firstclause of Article I, Section 8. It reads, "The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States .... " The most plausible in terpretation is that the phrase is a limitation of the taxing power. Spe cifically, the term "general" is a lim itation. That is, it is the general wel fare for which taxation is authorized, not the local welfare or that of some special class or group of people. In any case, "welfare" did not then have the connotation that it has had since the New Deal.

Using the Powerof Government to RedistributeWealth The most characteristic economic feature of welfarism is the use of the power of government to redistribute wealth. It is true, of course, that any government activity may result in the incidental redistribution of wealth. But it becomes welfarist ac tivity when the main purpose is to transfer wealth from one group or class to another. The Revenue Act of 1935 signaled the welfarist direction, though it was not the first measure that year of this character. In his message to Congress asking for increased taxes, President Roosevelt made the aim of redistribution clear. He said, "Our revenue laws have operated in many ways to the unfair advantage of the few, and they have done little to pre vent an unjust concentration of wealth."20The revenue measure that was passed was blatantly discrimi natory toward those with greater wealth. It increased the surtax on individual incomes over $50,000; the tax on incomes over $1 million was graduated steeply upward to 75% for all income over $5 million. Estate and gift taxes were increased. Taxes on small corporations were lowered slightly, while the rates on corpora tions with incomes over $50,000 were 1982 NEW DEAL WELFARISM 461 Lack of Purchasing Power IN the early Nineteen Thirties, in the depth of the Gre4t Depression, the theory became fashionable that the cause of all depressions was Lack of Purchasing Power. The people just did not have en<!>ugh money, and because of unwarranted pessimism they were refusing!to spend enough even of what they had. The solution was therefore simple: at such a time the government should boldly increase its own spending,J"primethe pump,"

and "get things moving again." ... Unless there were some serious lack of coordinatipn among prices, costs, and wages, mass unemployment would not exis~ in the first place. When it does exist, the only appropriate cure is individual adjustment of prices, costs, and wages to each other-the return of! coordination. But this can be brought about automatically only if the competitive forces of the market are given free play. HENRY HAZLlTT,Man vs. the Welfare State raised. Taxes were also levied on profits above 6%. The largest scale redistribution effort in 1935 was undertaken under the Works Progress Administration (W.P.A.). It was set up under the Emergency Relief Appropriation Act passed in April, 1935. Harry L. Hop kins, an administrator with consid erable experience already in spend ing money, was placed in charge. Hopkins had said on one occasion, "Why accept the evil of poverty? ...

I believe they are poor because we haven't wit and brains enough to di vide up our national income each year so they won't be poor."21 At any rate, the WPA plunged vigorously into work relief pro grams. In the course of its career, nearly $11 billion was spent on 1,410,000 projects on which 8V2 mil lion different persons were employed. Althougn much of the WPA work was done qn projects which are customarily in !the domain of gov ernment' such as building roads and bridges, its primary purpose was the transfer of wealth to·those reckoned to be needy. A imeans test was ap plied in the selection of workers, which certainly 1W0uid not have been the case if the prtojectswere the main concern.~oreoever,much,probably most, of the building was on projects ordinarily finan<eedby local and state governments. A Resettlement Administration was set up in May, 1935, to move destitute families into new areas and foster subsistence homestead com munities. (This/was one of Roose velt's pet projeqts, enlivened by the idea of moving urban inhabitants to family farms, and such like. In the main, it provided temporary dwell462 THE FREEMAN August ings for transients.) In the same month, the Rural Electrification Ad ministration was organized to make electricity available by low interest loans to isolated rural areas. A Na tional Youth Administration, cre ated by executive order in June, 1935, made jobs for young people, especially for those in schools and colleges needing part-time work.

The NLRA It might not appear, on first ex amination, that the National Labor Relations Act, passed in July, 1935, was a redistribution program. This act, however, completed the work of empowering labor unions begun un der the National Recovery Act. It placed the power of government be hind the organization of labor unions, mainly by way of the National La bor Relations Board, weighted the legal scales in favor of unions, and signaled a determination by the fed eral government that unions should prevail. Thereby, unions were able to extort higher wages from employ ers than they could have received in the market. The differential is a re distribution of wealth from employ ers to employees. The provisions of the Social Secu rity Act have already been alluded to. Social Security redistributes wealth in several ways. First, un employment compensation is fi nanced by a payroll tax on employ ers. When it is paid out as unemployment compensation, it is a compulsory redistribution from em ployers to employees. For most of the old age and survivors program, em ployers are taxed an equal amount to that of the employees. This is a forced transfer from employers to employees. Moreover, although there is a Social Security fund into which receipts go, current benefits have been taken increasingly from cur rent receipts. Hence, the program has become virtually a device for trans ferring wealth from those presently working to retirees and their survi vors. (That is not to deny, of course, that those who contributed in the past have a just claim to some ben efits.) Also, the act authorized trea sury payments to aid states with old age pensions and for various classes of disabled persons.

Other Interventions Welfare programs continued to proliferate through 1938, as new ones were regularly added. The Revenue Act of 1936 placed a tax on undistri buted corporate profits. The Soil Conservation and Domestic Allot ment Act of the same year paid farmers to take land out of cultiva tion. This was a transfer from tax payers generally to farmers who complied with the program. The Na tional Housing Act of 1937 provided low interest loans to public authori ties for slum clearance and the building of low rent housing. It also 1982 NEW DEAL WELFARISM 463 provided rent subsidies for the ten ants. Finally, the Fair Labor Stan dards Act of 1938 required employ ers to pay minimum wages for work during a maximum 44-hour week (any work beyond that amount would have to be compensated at a higher rate), and forbade child labor. So far as wage rates were higher than they would have been in the market, this was a forced transfer of payments from employers to employees.

The welfare state, then, is a relic of the New Deal. The rudiments of it were established during the years 1935-1938. It is a relic of the deter mination to use the power of govern ment to redistribute and transfer wealth. It is a relic of the New Deal thrust to centralize and concentrate government power. Above all, the welfare state is a relic of the use of political strength to overawe the Federal courts and secure their en forcement of welfare and other leg islation. Since the days of the New Deal many new welfare programs have been added and others ex panded. Entitlements have now reached such a level that the budget is virtually out of control, and social programs are a huge burden on the economy. i Next: Conclusion: The Relic of an Idea. -FOOTNOTESIFranklin D. Roosevelt, Nothing to Fear, Ben D. Zevin, ed. (New York: Popular Library, 1961), p.55. 2Ibid., p. 57. 3Ibid., p. 105.

4Arthur M. Schlesjnger, Jr., The Politics of Upheaval (Boston: Houghton Miffiin, 1960), p. 447. 5Alfred H. Kelly ~nd Winfred A. Harbison, The American Cons~j,tution (New York: W. W. Norton, 1955, rev. ed,), p. 728. 6Ibid., p. 744. 7Schlesinger, op. cit., p. 452. 8Quoted in ibid., p. 457. 9Henry S. Commager, ed., Documents of American History, vq1. II (New York: Appleton Century-Crofts, 1963), p. 249. 10See James M. B~rns, Roosevelt: The Lion and the Fox (New York: Harcourt, Brace and Co., 1956), p. 295. USee ibid., pp. 2931-94. 12Roosevelt, op. cit., p. 115. 13Ibid.,p. 112. 14Burns, op. cit., p.' 291. 15Roosevelt, op. cit., pp. 112, 114. 16Ibid.,p. 110. 17Arthur S. Miller!& Ronald F. Howell, "The Myth of Neutrality i~ Constitutional Adjudica tion" in Judicial Revi¥!wand the Supreme Court, Leonard W. Levy, ed.! (New York: Harper Thrch book, 1967), pp. 212l..13. 18Ray A. Billingto~, et. al., eds., The Making ofAmerican Democreu:y,vol. II (New York: Holt, Rinehart and Winst~n, 1962),p. 338.

19Alonzo L. Hamby. "Introduction" in The New Deal (New York: We~bright and Talley, 1969), p.8. 20Quoted in Richard B. Morris, ed., Encyclo pedia of American History (New York: Harper & Bros., 1953), pp. 352-53. 21Quoted in Schle~inger, op. cit., p. 357.

Elgin Groseclose The Illusionof a Riskless Society THROUGHOUThistory the fear ofin security, from floods or famine, from enemies without or within, has dri ven mankind to erect barriers against the onset of disaster. Throughout history also such barri ers-from the barns that led the man of the parable to tell his soul to take its ease, to the walls that cities have built that eventually fell to some in vader-have proved illusory. In this country, protected as it is by the barriers of two great oceans, the search for security is no less fear driven, but its direction, in an in creasingly monetized society, is in a search for bastions. And since this is an increasingly socialized society, a chief aim of political policy has been to provide, through governmental Dr. Elgin Groseclose, a financial consultant in Wash ington, D.C., is the author of Money and Man (1934, 4th edition 1976) and America's Money Machine(1966, 1980). He serves also as executive director of the Institute for Monetary Research.

464 agencies and power, what is cur rently referred to as a "safety net" for every citizen. Yet as we may observe, the search for such security has proven illu sory-mainly because of decay of its fabric, that is, the monetary stan dard of which the net is woven. We may review a number of these ef forts by government. First Effort-Riskless Banking Throughout the latter decades of the nineteenth century, "check book money" came into increasing use as a medium of payments. But check book money depended upon the sol vency of the bank in which the real money was deposited. Bank failure~ became a periodic feature of eco nomic history. In 1913, following the "rich man's panic" of 1907, the result of over speculation and bank failures, pub lic outcry for a "flexible currency" brought forth the Federal Reserve System designed, in the words of the Secretary of the Treasury, to "make panics mathematically impossible."

Banking was to be made riskless for both banks and depositors by allow ing overshot banks with cash short ages to trade collateral for legal tender currency at the Reserve banks. With this assurance of li quidity, banks were now allowed to reduce their capital reserves against deposits from a standard 25 per cent to a sliding scale down to 12 per cent THE ILLUSION OF A RISKLESS SOCIETY 465 and as low as 5 per cent on time de posits. Under subsequent legislation and regulations, also, banks were able to shift more and more of their assets from short term self-liquidat ing commercial paper to long term mortgages and bonds, thereby im pairing their liquidity and ability to meet sudden withdrawals. This effort to create riskless bank ing collapsed in the securities mar ket panic of 1929 which led to the bank "holiday" of 1933 when every bank in the country was forced to close its doors.

SecondEffort-RisklessDeposits The country now concluded that, however feeble the banks might be, whatever extravagant lending they might indulge in, their customers, at least the smaller ones, should be protected and their deposits made riskless. This led to the enactment in 1933 of deposit insurance legisla tion by which eventually two mam moth government corporations, the Federal Deposit Insurance Corpora tion and the Federal Savings & Loan Insurance Corporation, were set up "to restore confidence in the bank ing system and protect depositors." By 1979 the futility of this effort became evident to the bank regula tors. Thus, in 1979, William M. Isaac, president of the FDIC Corporation, pointed out that the risk assets of the banking system-total assets less cash and equivalents-had risen from 22 per cent in 1945 to 80 per cent by 1978. ',He commented omi nously, "One would think that with banks assuming greater risks, and the economy more volatile, capital ratios would be increasing. Just the opposite." He cited that equity to risk, that was around 30 per cent in 1900, had dropped steadily to around 8 per cent in 1978.

Today. the eause for concern is greater. The New York Times for January 25, 1~82, noted that of the 15 largest bank holding companies, the equity to assets ratio ranged from 4.55 per cent to as low as 3.25 per cent; and we may add that if bank ers' portfolios!were valued at mar ket, the result: in many cases would be a negative ratio. Take, for in stance, a Aaa bond like AT&T 7s of 2001, issued ih 1971 at 99.25, that has sold recently for as low as 50. Presently the savings and loan as sociations are approaching crisis under the necessity of borrowing at rates up to 15 per cent against mort gage assets acquired when rates were as low as 8 per cent; and each day brings reports of new mergers and takeovers to. save failing associa tions from outtright default. The most recent merger was reported on March 24, 1982, "to:avert what would be the biggest bank failure in the na tion's history."

With custqmers' deposits now guaranteed up to $100,000, the $8 billion insurance fund of the two 466 THE FREEMAN August corporations has become totally in adequate as guarantee. This has led to legislation to back up deposits by the "full faith and credit of the U.S." regardless of the adequacy of the in surance fund. A bill to this effect was passed by the House with only 10 minutes of debate; its fate in the Senate has not (at this writing) been resolved. Other proposals are for the government to subsidize $210 bil lion in old low-interest mortgages by paying half the difference between the yield and the market rate on current deposits-a procedure that The New York Times estimates could cost the taxpayers from $4 to $5 bil lion a year for many years. Third Effort-Riskless Aging In 1933 the government under took to guarantee income for the aged through a Social Security system by which a percentage levy was laid on earned income, the proceeds of which were invested in government bonds, from which payments were made as the contributor reached retirement age. Starting out at a modest per centage of earned income, the levy has steadily increased to a 1981 tax of 9.3 per cent on income up to $29,700. Since the tax receipts were invested in government bonds, for nearly 50 years the system has been a means of covering federal budget deficits; today, however, due to steady increase in benefits, the system is facing bankruptcy unless relieved by further taxes either from the income contribution or general revenues.

When Joseph foresaw a famine in Egypt he stored harvest surpluses of the good years in granaries against the years of dearth. Such a method is impossible today in a system of debt money. Who is to provide cash against the bonds but the very ones who are in need? Fourth Effort-Riskless Prices Since 1922 government policy has been to stabilize prices in order to protect producers of goods and ser vices from loss from price fluctua tions. This is theoretically achieved by the Federal Reserve System in buying and selling government bonds to provide an even supply of money. But the essence of trade is differ ences in prices. If all prices were sta ble, enterprise would wither, as the effect of rent control on housing sup ply has demonstrated. If modern technology means anything it is to make goods cheaper. The secular effect of the policy of maintaining prices has been a steady increase in prices, with the increase steadily accelerating until it reached double-digit rates in 1980 and produced a voters' revolt.

Fifth Effort-Riskless Money All the efforts to remove risk from banking, from livelihood, from en terprise have been, as we have noted, through the agency ofmoney. Money 1982 THE ILLUSION OF A RISKLESS SOCIETY 467 is the foundation stone in the wall of security. But money, no longer a substance, like gold or silver, but an I.O.D. of the Federal Reserve Sys tem, a note without maturity, melts away like shifting sand under the cyclical rainfall of business. The last element of substance in money disappeared in 1971, when the "gold window" was finally closed on international holders ofdollars. Since then, holding money has become the greatest risk of all. This has become evident in the rising interest rate demanded by lenders to offset the erosion of the dollars due them. This rise in interest rates has been going on for the past 40 years, generally unperceived until the last decade. Sixth Effort-Speculation The disappearance of financial stability has led inevitably to a surge of speculation and gambling. As the Minority Report of the Gold Com mission points out, scheming, spec ulation, and sophisticated tax avoid ance have replaced productive effort, savings, and planning for the fu ture.

Trading in currencies, the Report adds, has become more rewarding to banks than conventional business of brokering loans from savings. The futures and options market has turned into a giant gambling game. Futures are sold in currencies, and more recently futures and options on stock-indexes. In 1980 more futures on Treasury bonds were sold on the Chicago BoardiofTrade than on cat tle. Billions of! dollars are obtained from banks by corporations for the purpose of "takeovers" of other cor porations with no indicated purpose of developing new industries or sources of basic wealth. Gambling has become a state enterprise. Ille gal for individuals, in 1980, over $2 billion was gained from official lot teries for the benefit of state govern ments. The High Road to Stability Despite the, evidence of an in creasingly unstable society due to the monetary standard in which busi ness is done-despite also a so-called "tight money policy" by the Federal Reserve-the printing press contin ues to roll and the amount of debt on demand continues to rise. Between February 28, 1981, and February 28, 1982, corresponding closely with the first year of the Reagan Administra tion' the legal itender circulation in creased from '$131,862 million to $140,525 million, while the demand debt of the Federal Reserve bank and banking system (called M1) rose from $424 billion to $447 billion. Since none of this debt is dischargeable in any legal ten,er but irredeemable paper, it is obvious that until the powers of the Federal Reserve to create fictitious money are cur tailed, no degJiee of stability will be achieved. ® John Hospers Rothbard's Liberty Reviewed The Ethics of Liberty by Murray Rothbard. (Atlantic Highlands, N.J.: Humanities Press, 1982), 268 + x pp., $15.95 hardbound.

THE long-awaited capstone to Pro fessor Murray Rothbard's series of books on political economy has at last appeared. His earlier two-volume work, Man, Economy, and State, was a systematic defense of free-market economics. His Power and Market was a defense of laissez faire capi talism against numerous objections. The present volume contains his poDr. Hospers was the first Libertarian Party candidate for President of the U.S. (1972). He is the author of (among others) two recent books, Understanding the Arts (Prentice-Hall, 1982) and Human Conduct (Har court Brace, 1982). 468 litical-Iegal philosophy. The word "ethics" in the title is not quite ap propriate, since the author does not attempt to discuss matters of good and bad, right and wrong; what he does undertake to discuss is what kind of actions should be prohibited and why. The Natural Law Tradition The first four chapters give an all too-brief account of the philosophi cal underpinnings of the political philosophy that follows. The author anchors his views in the "natural law" tradition set forth most force fully by Thomas Aquinas, but devel oped here without Aquinas' theolog ical framework. The crucial terms here, "man's nature" and "natural law," require more analysis than the author gives them. Just as it is catROTHBARD'S LIBERTY REVIEWED 469 nature to purr, dog-nature to bark, and the nature of both to prowl, so it is man's nature to use his rational powers: to form concepts, to inte grate them, to make decisions, to plan for the future.

Many questions arise, however, as to the meaning of the word "nature" in this context. (1) In one sense, "the nature of X" means whatever char acteristics are defining of X; thus, the "nature" of gold is stated when one lists the characteristics which define gold, those without which something would not be gold. Out of this arise numerous philosophical questions, such as the difference be tween "would not be gold"and "would not be called 'gold,'" and with it the whole question (not discussed here) of whether all definitions are lin guistic conventions or whether there are in some sense "true definitions." (2) In any case, the phrase "the na ture of' is generally used more widely than to include only defining char acteristics. "It is in the nature of cats to purr" could still be true even though some cats never purr, while yet continuing to be cats. Similarly, a person may be or become a "hu man vegetable" while yet remaining a human being. (This is the basis for the defense of a biological definition of "man" in terms of physical fea tures that distinguish human beings from all other animals-a kind of definition Rothbard does not discuss.) In any event, I believe that the phrase "the nature of," at least when applied to livirig things, is used to refer to fundamental dispositions to act and respond in certain ways. To call them dispo$itions is not to imply that they will always be actualized: to say that lions are disposed to hunt (whether or not this is defining of lions) is to say that they as a species possess this tendency, even though (as when they are fed all their meals in a zoo) they qever actually exhibit hunting-behavior. And to call them fundamental means that other dis positions can oe explained in terms of them: thus, :$ergson's definition of man as "the laughing animal" may uniquely identify man, ",but is less fundamental tHan the definition "the rational animal," since if a person lacked the intelligence to appreciate a humorous situation he would not laugh.

The term "rational" is a some what slippery pne, as illustrated by countless questions in ethics such as "It may be right to rescue a child from a burning building, but is it rational?" One manifestation of ra tionality, but inot the only one, is presumably reasoning. But even this relatively cle~r component of "rea son" is not cle'lrly unique to the spe cies we call man: Don D. Davis has given considerable evidence in his book The Unique Animal that some other creatures, such as chimpan zees, have the capacity to engage in 470 THE FREEMAN August elementary forms of reasoning. For this reason he defines man in terms of (1) the ability to symbolize (to de cide to assign a relationship be tween two dissimilar and previously non-contiguous events), and (2) the ability to hypothesize (to propose a relationship or connection between two or more non-contiguous events). No other creature on earth, he says, has these two abilities.

Neither does the term "natural law" bear its meaning on its face: it is conceived quite differently by those in the tradition ofAquinas from what it is by certain contemporary legal scholars, e.g., Theodore Benditt in Law as Rule and Principle. The con tent of what is allegedly known by insight into "natural law" is far from clear. Rothbard's example of wanton killing (at least within the tribe) being wrong is an unusually safe one: this is one of the few examples of a moral rule that would be upheld in virtually any society and on practi cally every ethical theory; in any case, a killing that one would wish to defend would not be called "wan ton," just as a killing that one con sidered justifiable would not be called "murder." But when we leave these "safe" examples, what specific rules of conduct does natural law enjoin or prohibit? Does it permit adultery? abortion? euthanasia? Does it insist on "one husband, one wife"? Does it prohibit cruelty to animals? It is far from clear what tenets allegiance to "natural law" commits one to. Nor will any reference to "an objective moral order" (p. 11), at least without coming to grips with the many over lapping meanings of "objective" in this context, help to fill the gap.

All Rights as Property Rights Then follows a lengthy discussion of rights. The term "a right" is nei ther defined nor distinguished from related terms such as "a liberty," but the philosophical literature on such definitions and distinctions is al ready endless. Instead, Rothbard comes at once to his most original and distinctive thesis: that all rights are reducible to property rights. For example, a person does not have the right of freedom of speech on anoth er's property, e.g., to shout "Fire!" in a crowded theater or to shout ob scenities in a cathedral. Most wri ters who insist on freedom of speech as a right have not been much both ered by considerations of property, and Rothbard" "sets them straight" with clarity and elegance. Whether free speech is limited solely by property rights, as Roth bard contends, will be a matter of continuing controversy. For exam ple, (1) courts have held that distri bution ofleaflets in a company-owned town should be permitted even though the company objects, be cause of the importance of the dis semination of knowledge and opin1982 ROTHBARD'S LIBERTY REVIEWED 471 ion. Nor would everyone agree that all forms of speech, even on one's own property, should be permitted: (2) If you gather a group together on your yard, across the street from a fac tory, all shouting "Burn the factory down!" most courts would call this incitement to riot (as did Mill), al though Rothbard contends (p. 80) that" 'inciting to riot' is a pure ex ercise of a man's right to speak."

Questionable Premises In order to preserve the thesis that all rights are property rights, Roth bard must interpret the concept of property in certain ways which, ac cording to some critics at least, in volves making square pegs try to fit round holes. Thus, (1) since crimes against persons (murder, rape, bat tery, etc.) are to be condemned as much as crimes against property such as burglary and theft, one must ac cept the Lockean view that "every man has property in his own per son." But many writers have argued at length that ownership is a rela tion between a person and some thing other than that person, in which case one cannot speak of self ownership. Moreover, (2) There are some kinds of activity which the laws of vir tually every nation have declared punishable although they do not fall under the heading of property, such as libel, slander, and blackmail. One's reputation, says Rothbard, is not one's property, and thus anyone should be fre¢ to say about you whatever they [ike. By contrast, vi olation of pateit and copyright is a violation of ot;le's property rights (one's right to reap the fruits of one's labor) and should be prohibited.

Many persons will not see that sharp a difference between the two classes of offenses. Even though the book you have written is your property and your reputatio~ (as opposed to your character) is not, allegations falsely made about you by others may cause you greater harm (e.g., the loss of your job) than [oss of your material possessions. And it could reasonably be contended that all infliction of harm on one iperson by another should be forbidden. ... a man may rightly come to own previously unowned land by "mixing his labor" with' it. Rothbard defends the Lockean view on property rights in land: that a man may rigl1tly come to own pre viously unown~d land by "mixing his labor" with it - "the homestead principle." (G~orgists allege that persons may own the crops grown on land but not the land itself, which is of course an invitation for govern ment to clai$ ownership of the land - a posiition against which Rothbard argues effectively.) Many persons who would agree that one 472 THE FREEMAN August should own previously unowned land if he clears the forest, tills the soil, and plants crops on it, would not agree that he should own it if by ac cident he has merely found some thing (e.g., valuable minerals) on it.

Rothbard argues effectively against this position as well: if the finder has no right to it, who does? But there are many other cases, which he does not discuss, in which the answer is not so clear. (1) What if a man does nothing to a piece of wilderness land but chooses to keep it in its wild state, defending it against trespassers with guns or trained dogs? (2) What if he runs around a piece of land twenty times without stopping? Has he "mixed his labor" with it then? (Need it be "so cially useful" labor like agricul ture?) (3) What if he does nothing to the land but purifies the polluted air above it? Does this entitle him to nothing? (4) What of riparian rights? How is the dispute to be settled be tween residents of California and Arizona as to whether both may use the waters of the lower Colorado River? Can anyone take what he likes where he likes, or can a man own a section of the river and drain it all off for himself, so that there is only a dry bed downstream? (5) Can one own a section of ocean by fishing in it or traversing it with a boat? Or, to use Robert Nozick's example, if a man owns a can of tomato juice and pours it into the ocean and waits till it has dispersed, can he claim own- ' ership of the ocean (provided it was previously unowned)? (Rothbard discusses some aspects of ownership of bodies of water in his Power and Market.) PossibleExceptions Even over what is clearly one's own property, one does not have the right of unlimited use or control. A man does not have the right to lure peo ple onto his property, kill them, and bury the bodies in the basement.

This, of course, violates their right to "property in their own persons." There are many other problems about what you may do with your house or yard: may you surround it with a moat containing piranhas, or set up an electrified fence that will kill at tempted trespassers? May you build your house uphill from another, so that when the rains come the prop erty below will have mud slides? Do policemen have the right to enter the property "on suspicion"? Rothbard says that if they do enter it and don't find the evidence that will incriminate, they should them selves be subject to arrest. I submit that if policemen were hamstrung by such a requirement, few crimes would be solved: that in the inter ests of finding the guilty party the owner does not have the right to forcibly evict them, and even if it turns out that the suspect is not guilty they should not be subject to 1982 ROTHBARD'S LIBERTY REVIEWED 473 prosecution for making a reasonable mistake. If the guilty party is not Jones but Jones' identical twin, should policemen really be prose cuted for stopping and searching J ones in the reasonable belief that they are apprehending the twin?

Nor, I would add, should a man have the right to use his property in such a way as to expose others to unreasonable risk. Should you be permitted to raise poisonous snakes in your back yard in the city? Is it really necessary for neighbors to wait until one of them has been bit? A person, as the owner of his own body, may take any kind of risk for him self alone; but the exposure of others to risk is surely a proper matter for legal prohibitions. Should a man be permitted to manufacture atomic bombs in his basement? or poison. gas? (One wonders whether Roth·· bard would use the criterion of neg·· ligence or that of strict liability in such cases-an extremely impor·· tant issue which remains undis·· cussed.) Laws regarding the transmission of property-by sale, gift, or be·· quest-are well discussed by Roth·· bard. If Jones' heirs claim property that has been seized from Smith and is now occupied by Smith's heirs, Jones' heirs have the right to dispos·· sess Smith's heirs of it, minus what·· ever movable additions and im·· provements Smith's heirs have made to it. The conditions under which Jones is entit,led to be an owner, however, are hot always so clear.

Should the present inhabitants of the United States be required to return the land to the Indians, who had it first? Or should such claims be de nied on the ground that the Indi ans-most North American Indi ans, at any rate-did not really reside in a certain place and grow crops there, but were nomadic, wandering about from one area to another, staying in one:place only as long as the hunting and fishing was profit able and then moving on? Hunting requires labor; does that labor con stitute ownership-of the animals only, or of the land as well? The Right of S~lf-Defense That a person has the right of self defense against aggression (as well as the right to defend others against aggression ifhe chooses) seems clear enough. What:is less clear is the ex tent to which· he is entitled to re spond to threats of aggression. If a man looks at you threateningly and moves to pull but what you think is his knife, have you the right to take a pessimistic view of his intentions and attack him first (the "pre-emp tive strike" problem)? Since most threats are not followed through, you presumably have no right to kill a man just because he says "I'll kill you," but at what point do you have the right to kill him, under the heading of self-defense?

474 THE FREEMAN August These are important and trouble some questions to which neither Rothbard nor anyone else has pre sented clear-cut answers. But I would make the point that it is not neces sarily physical aggression or threat thereof to which one's right to self defense is limited. If a man contin ually baits you, calls your wife a whore, or shouts that he has just raped her, and you finally take a swat at him, are you guilty because you started the physical fight? Might he not be called the initiator even though his aggression was only ver bal? This is surely clear in the case of theft: you catch a man stealing your tape-recorder and you forcibly take it back from him. You started the physical confrontation; he was only peacefully taking what belongs to you. The same point could be made concerning trespass-and possibly also the breaking of contracts. There are many forms of aggression,' and many proper (and many improper) forms of retaliation.

That punishment should be "pro portional to the offense" is a princi pIe Rothbard defends at some length, and quite rightly: you shouldn't be permitted to shoot dead the neigh bor boy who is stealing a water melon from your garden. But there is much dispute as to which offenses are the most serious and therefore merit the most serious punishment. Offenses against a person aren't al ways worse than offenses against Most troublesome of all are those cases in which damage or injury has been inflicted but the inflictor had no guilty intent. property-many people would rather be mauled or lose an ear lobe than lose a precious heirloom or their cache of gold. Most troublesome of all are those cases in which damage or injury has been inflicted but the inflictor had no guilty intent. Cases of accidental injury or damage are far more fre quent than those intentionally ad ministered, and the criteria for pun ishment much less clear. One wonders what Rothbard would do with "Typhoid Mary" cases: the women were carriers of a lethal dis ease, and communicated it to others by their mere proximity. The carri ers were guilty of no criminal act, but were nevertheless incarcerated for life because of the constant dan ger they represented to others. From the point of view of social utility, such incarceration was surely justified; but Rothbard, not being a u,tilitarian, would not accept such justification.

Yet from the point of view of crimi nal desert, there was no guilt at all, no guilty act which would constitute a just basis for such incarceration. To Be Taken on Faith In general, Rothbard's conten1982 ROTHBARD'S LIBERTY REVIEWED 475 tions on the many matters he dis cusses will seem most plausible to those who already have some knowledge of free-market econom ics. His statement of libertarian ax ioms and the consequences thereof will not be likely to carry conviction by themselves. Two examples must suffice: (1) If you had reason to believe that Rothbard's views about ownership of land would have as a consequence that most land-ownership would be·· come concentrated in the hands of a few owners, with the mass of people working for the owners, you might be less ready to accept Rothbard's views on the acquisition and trans mission ofproperty rights. You would be most likely to go along with his view if you had already been con vinced, through empirical consider ations (such as history), that such a result would not occur. (For exam ple, it was Gabriel Kolko's Triumph of Conservatism that convinced me that ownership without government regulation would result in the dis persal of ownership rather than its centralization in the hands ofa few.) (2) Ifyou believed that laissez faire would make a considerable portion of the population poorer even though it made some richer, you might well think twice about the acceptability of laissez faire: only after you had been shown by historical evidence that "a rising tide raises all boats"

would you be inclined to accept it. A philosophy in which liberty was the paramount value (as in Rothbard) alone would not do it: "What good is liberty to a man if he's starving?" you might say.' You would first have to be convinced that under laissez faire fewer people (or none) would starve than in any other economic system; only tHen would you be ready to accept the ,system. Doctrines of natural rightsi and property owner ship alone would not do it. In Quest of Justice Even so, m~ny persons will not follow Rothbard all the way in the way he traces! out his philosophy of liberty. In Rothbard, for example, a person should not be coerced into doing anything as long as he has not treated others ~oercively. He is quite consistent with this principle when he alleges that no one should be forced to do juty duty or appear as a witness at sOIneone's trial, even if his testimony would save the defen dant's life. There should be no power of subpoena, for subpoena means coercion of the innocent. Even the defendantneeQ.not appearat his own trial. Rothbarij is certainly consis tent with his bwn stated principles here, and does'not shrink from their consequences. 'Nevertheless the con sequences might be such as to lead one to re-thinlr or qualify the prin ciples. Many persons, including many of Rothbard's fellow libertarians, are convinced that the most important 476 THE FREEMAN August factor in the case is the determina tion of guilt or innocence of the de fendant-and that if a witness would be inconvenienced by appearing, he should nevertheless be required to appear, in the interests ofjustice.

Any voluntary exchange of goods or services (even lethal drugs), should be permitted, says Rothbard. If a blackmailer says to you, "I'll tell ev eryone your best-kept secrets, and thus cause you to lose your job and so on, unless you give me $10,000," this, says Rothbard, is a voluntary exchange, agreed to by both parties, and should not be prohibited. What Is Voluntary? In all this I fear that not enough attention has been given to the meaning ofthe term "voluntary." The fact that both parties agree to it is not enough to make it a voluntary transaction. For one thing, (1) coer cion may be involved in the agree ment, and when it is coerced it is not voluntary. Rothbard grants the coercion in the case of a robber who holds you up at gunpoint and says "Your money or your life" (though even here you have a choice, how ever unpleasant); he does not grant that coercion exists in the case of the blackmailer.

But there are other things besides coercion that can make an "agree ment" less than voluntary, such as (2) extreme forms of psychological pressure. If a man is starving and he is told to sign a contract for labor for the next ten years at 10¢ an hour in return for a crust of bread now, and he agrees, is the agreement vol untary? If there is widespread un employment and the only way a man can keep his job (there being no oth ers in the area which he can obtain) is by agreeing to a homosexual tryst with the boss, is that agreement vol untary? I would add that (3) having knowledge relevant to the case is also necessary: if the physician says to the prisoners "You'll all get out early if you let yourselves be inoculated with this vaccine," but doesn't tell them that the vaccine will have en during painful side-effects and may even kill them, is their agreement to the experiment voluntary? Any presentation of a philosophy of vol untarism, such as Rothbard's, must be extremely careful to state the conditions under which an agree ment, though assented to, is not vol untary. I would contend that the prisoners' agreement is not volun tary, since (as in cases offraud) they would not have consented ifthey had known the full facts of the case.

Just as Rothbard oversimplifies the concept of voluntariness by consid ering any arrangement voluntary if it is agreed to by both parties, so he oversimplifies (in my opinion) the concept of freedom by saying that a person is free as long as he is not coerced by others. (He is surely right, 1982 ROTHBARD'S LIBERTY REVIEWED 477 however, in taking Hayek to task for mixing up the concept of coercion with other ingredients.) One is weI·· come, of course, to use the word "freedom" to mean simply absence of coercion, but it is worth pointing out that in our actual discourse we regularly use the terms "free," "freedom," and "liberty" to include much more than this. ... the most general meaning of "freedom" is lack of constraint upon one's actions, and many things be sides coercion can constrain. I suggest that the most general meaning of "freedom" is lack of con, straint upon one's actions, and many things besides coercion can con strain: coercion is only one (rather extreme) case. If a man is a compul sive gambler and through psycho therapy is rid of this tendency, he may quite rightly say that he is now free from his addiction, although no one was coercing him. (There are countless such cases of what psy chologists call "internal compul sion.") If a woman obtains a divorce from her husband, she can now say that she is freed from her marriage bonds. Moreover, we are not only free from constraints of various kinds (negative freedom), we are also free to do certain things (positive free dom). The two are closely related: if I am free from the chains that bound me, I am free to walk about as I please. What others have called pos itive freedom) however, Rothbard does not call f~eedom at all.

If a man is i starving on a desert island, Rothb~rd would say that he is free because no one is coercing him; if a mountain climber has fallen into a crevasse, and. has no option but to wait for help! to arrive, Rothbard would say the :same, although there is clearly a difference between this man and one! who is able to walk about, a differ~nce which most of us would describe as the difference be tween being free and not being free that is, free to do things which the unfree person cannot. As we con stantly use th~ word "free," freedom does have something to do with the availability of options open to us in general, the!more options, the freer we are-alth(>ugh this very major ingredient of our ordinary concept of freedom is entirely excluded by Rothbard when he defines freedom in such a way:as to cut all this off. Utilitarianism!Challenged Throughout: his treatment of these issues, RothQard attacks utilitar ianism. In my: opinion he is justified in doing so utilitarianism would, for example,~ondemn an innocent person to deat\l if thereby some great social good (st).chas great happiness for others) could be realized. But this does not justify him in occasionally 478 THE FREEMAN August mischaracterizing the theory he is opposing. In Rothbard's example of the government officials who dis solve their government but as their last official act distribute all prop erty rights in the nation to the Rockefellers and Kennedys of the realm, he says that this distribution would have· to be accepted by utili tarians as a de facto accomplish ment. But it would not. Nor would the utilitarian view necessarily be the one Rothbard attributes to it in the other example he cites.

Utilitarians are committed to only one thing, that the sum of the con sequences of one's acts be the best possible when viewed in their total ity-and the best consequences might well occur not from recognizing such claims but by denying them. In each case, one would have to examine each possible alternative and see which one was likely to result in the max imum amount of happiness (or well being, or want-satisfaction, or what ever state is held by the individual utilitarian to be intrinsically good). It is not even necessarily true ac cording to utilitarianism that it would be better to save two lives rather than one: if greater total hap piness would result from saving the one (e.g., if he were an Einstein, or if the two had a predominance of misery in their lives), then the one should be saved: all that is required is that the greatest possible intrin sic good be achieved by one's action.

Even Bentham's stock formula Hthe greatest good of the greatest num ber" is inaccurate, for it sounds as if the happiness of the greatest num ber is to be preserved at the expense of the smaller number, whereas in fact everyone is to count in the total, the smaller number never being ig nored but often being outweighed. Indeed, the wishes of a minority should (according to utilitarianism) sometimes prevail, e.g., if the grant ing of their wishes produced in the long run a higher total of happiness (including, of course, less unhappi ness) than the granting of the wishes of the majority. The Need for a State There are policemen to enforce the law, and judges to interpret it. It would seem that there must also be legislatures whose function is to make the law. And doesn't all this require a government, a State? The State must be limited to a few essen tial functions, but isn't it necessary that a State, however limited, exist?

No, says Rothbard. Part 3 of his book is devoted to the extirpation of the State, root and branch. If to coerce people is to violate their rights, then the State as the No.1 coercer ofpeo pIe must be eradicated totally. The State is incompatible with liberty, because it (1) coerces individuals into conformity with its laws, whether or not they wish to obey (and even if they find certain laws stupid or im1982 ROTHBARD'S LIBERTY REVIEWED 479 moral), and it also (2) pays for its activities through the power to tax, that is, to take money earned by in dividuals without those individuals' consent, which is theft. How then are the rights of indi viduals to be protected without the State? Individuals voluntarily band together for their mutual protection into "defense agencies," in which other individuals are hired to pro tect their lives and property. These agencies are associated with "ar bitration agencies," to decide the guilt or innocence of accused aggres sors. The entire process of protection of rights could, according to Roth bard, proceed without the State, and much more justly and efficiently.

Anarchyvs. Law These contentions open up once again the long-standing dispute among libertarian theorists be tween anarchy and limited govern ment. The main arguments and counterarguments have been ban. died. about for so long that it would be tiresome to repeat them all here. (See, for example, Rothbard, For a New Liberty, vs. John Hospers, Lib ertarianism.) Given that an individ ual has a right to protect his person and property against aggression, it is quite a different question by wha.t means he can best do this - this would seem to be a matter of strat egy rather than of principle. It is true that the State currently does this through its power to tax, which is coercive. Some would say that for such necessary purposes a degree of coercion is ju~tifiable; others would try to work out (as some have) meth ods of voluntary contribution to sub stitute for c(j)mpulsory taxation.

Whichever solution is adopted, sev eral considerations. could be ad vanced for preferring a single power, such as the St~te, to a set of compet ing agencies hired by individuals. I shall briefly. ~ummarize only a few of them here. Chaos and Conflict 1. To havel competing agencies working in tle same geographical area would lead to chaos and conflict the moment they attempt to enforce different rules. And it seems to me virtually certain that this is what they would do, Different people have different ideals, and some of these ideals are held so strongly that their proponents would gladly use force to inflict them on others. This may be unfortunate, but as a feature of hu man beings it: seems to me quite in eradicable. In the Bible belt, many persons (perh~ps the majority) would gladly pay dues to agencies to en force the clo~ing down of X-rated movies and "a.duIt bookstores," per haps even arl!esting people for com mitting adultery or failing to be lieve in the literal inspiration of Scripture. Others would form an agency to protect themselves against 480 THE FREEMAN August all those who in their opinion consti tuted threats to "the morality of the community" or "those moral rules which keep together the fabric of so ciety." Indeed, a group of murderers might form an agency "Murder Inc."

and go about killing and looting. (I have never been convinced by argu ments that such agencies would not come into being, or even in some cir cumstances prosper.) As long as different people have different convictions and hold them strongly enough to be willing to use force to make others share them and the lessons of history show us quite clearly that they would-we would have, instead of true "defense agencies," competing vigilante groups, the strongest of which in a given locality would force their edicts upon everyone as law. It is true that libertarians would "live and let live" except for aggressors against per sons or property, but society is not composed exclusively of libertari ans, and as long as this is so (and there is every evidence that it will continue to be so in the foreseeable future), the prospect of different agencies enforcing different rules must be squarely faced. Not only would different agencies enforce dif ferent edicts, they would make them, in the response to the (often whim sical, often evil) demands of their paying clients.

Rothbard alleges that once you have a government, no matter how ... the tendency of limited govern ments is to become unlimited; that is why eternal vigilance is the price of liberty. limited, it will almost inevitably ex ceed its original powers (since it has the force to do so) and interfere coer cively with people's lives. I agree: the tendency of limited governments is to become unlimited; that is why eternal vigilance is the price of lib erty. But I am no more optimistic about the tendency of competing vigilante groups. Having the guns to defend you, they can use those same guns to attack you, and indeed to attack also nonmembers of their association who may be too weak to resist. What would prevent such an agency, or an alliance of such agen cies, from ceasing to defend you, if they can get their spoils by force without having to render you the services which they have contracted to deliver?

Advantages of One Agency 2. Quite aside from all this, there are distinct advantages in obtaining protection from a single political unit that protects persons and property throughout its domain. Suppose that Smith has minerals on his land worth $10 million, and that his neighbor, Jones, knows this. It will be worth 1982 ROTHBARD'S LIBERTY REVIEWED 481 at least $9 million to Jones to use his hired agency to take over Smith's land; and it would be worth at least $9 million for Smith to protect his land against such invasion. Such an expenditure would clearly be a waste of money for both parties. Would it not be preferable for both to have one agency, say the State, to protect each person's property rights? Both parties, knowing that the State would come to the aid of anyone whose rights were being violated, would usually refrain from violating them. Similarly, if you owned land along the Mexican border, you would have to spend so much of your in come protecting it against trespass ers that the price would probably exceed the income you could get from the land. No defense agency and no insurance company would be likely to take on such an expensive defen sive operation, except at enormous cost; but a government would.

There are certainly cases in which individuals would have been wiped out by gangs of marauders superior in numbers, and have been rescued from this fate by government troops. Would Rothbard approve the pres ence of such troops (for defensive purposes only), in spite of his oppo sition to governments? Presumably not. As Richard Taylor points out in his Freedom, Anarchy, and the Law, the State does not engage only in prohibitory activities (prohibiting certain kinds of,actions), it also en gages in what he calls enabling ac tivities. By having the legal bound aries to your yard duly recorded in City Hall, you :are enabled to call this property your own. You could indeed have a private agency record your ownership. somewhere, but an other claimant t9 your property could have the same piece of land recorded in his name at the offices of his agency. Who would actually take possession of the property would then depend on which.agency had the most guns to defend its claim.

Similarly, if you wanted to adopt children you could go around bring ing in homeless, children, but unless there were one agency (e.g.,the State) officially empowered to call them yours, what WQuid prevent another person's agency from taking those same children from you a week later on behalf of one of his clients who would then call ,the children his? (An arbitration agency would settle the matter, it is said. But which arbitra tion agency would win out? In the end, the one with fewer guns would have to submit to the decision of the one with the most. Through the en tire arbitratio~ process both sides would know wh.ichone was stronger. Force, not justibe, would become the ultimate arbiter of the dispute.) Degreesof Evil in Government 3. Rothbard is opposed to all kinds of gradualism in getting rid of the 482 THE FREEMAN August State. If he could do so by pressing a button, he would abolish govern ments at once. But there are prob lems about this also, similar to the problems of removing life-support systems from very ill patients. If so cial security and welfare were stopped at once, with no period of interim adjustment,many thou sands of people would probably starve. ·No police force would suffice to handle the looting and killing.

With no system of voluntary finan cial help yet in place-not to men tion the fact that Social Security re cipients have been forced to pay into the fund, and thus have a justified claim on the return of their money would Rothbard push a button that caused this to happen? Would Rothbard not prefer the sur vival of a limited government to that of a totalitarian government? or would he say "a pox on both your houses" because they are both gov ernments? Surely there are at least degrees of evil in governments. Would Roth bard not prefer the survival of a lim ited government to that of a totali tarian government? or would he say "a pox on both your houses" because they are both governments? Would he have been against the American Revolution because its outcome was after all a government, even though it was a much more benevolent one, and more dedicated to individual rights, than any that had thereto fore existed?

International Relations All these problems are multiplied when we come to. the matter of in ternational relations. Rothbard's position is simple: there should be no political units called· nations, hence a fortiori no relations among them. This, however, leaves numer ous questions unanswered concern ing the present world in which na tions conspicuously do exist. 1. There are numerous problems involving national defense. At the moment these are handled by gov ernments via taxation, and there is no foreseeable time in the future when this arrangement is likely to change. Will Rothbard tolerate na tional defense, at least pro tem, if the alternative is no defense at all? Suppose that (1) a nation stronger than ours attacks us, and that (2) no system of private voluntary defense is yet in place. Should the attack be countered with tax-supported de fense forces, when the only alterna tive is annihilation? Surely.to ask this question is already to answer it-unless the libertarian theorist is prepared to accept annihilation not only for himself but for everyone else, in the interests of his theory.

Libertarians, however, have con1982 ROTHBARD'S LIBERTY REVIEWED 483 ... even if it were true that there is no external threat to Americans, it would not answer the question, "What shouldbe done if therewere?" sistently downplayed this problem by alleging that there is in fact no real threat to the United States, and that therefore the problem does not arise. (But what about smaller, less pow erful countries?) They have habitu ally distorted the data and played fast and loose with the facts in order to hold on to this answer. But the ploy cannot work: even if it were true that there is no external threat to Americans, it would not answer the question, "What should be done if there were?" If the United States disbanded its armed forces today in the interests ofliberlarian theory, it would surely be ripe for the plucking by any ag gressive nation that saw its chance to defeat us before any voluntary system of national defense could be established (if it ever could). If de nationalization is to work, every na tion would have to do it simultane ously. The chances of this happen ing are so infinitesimal as hardly to be worth discussing. (Besides, there is a whole array of problems con cerning voluntary defense systems, such as the problem of freeloaders: enemy missiles will destroy the per son and property of payers and nonpayers alike, so! there is no obvious advantage, as there is in fire insur ance on one's house, in paying one's dues to the "national defense"

agency.) The fact seenis to me quite clear: survival is not' merely optional. In the 1930s most 'Western nations ap parently believed that if they re duced their defense forces, Hitler would do the same. More than 50 million deaths ln World War II re sulted from this mistake. The same mistake was m~de in the 1970s,of which we may yet reap similar con sequences. Only a strong deterrence stands between us and destruction. To say that there should be no deter rence because it is after all under taken by that greatest of evils, namely nationS, is to blind oneself to an even greater evil, namely an nihilation. MultipleNationalDefenders 2. If, for a siqgle national defense, one substitutes!a series of competing agencies to which people pay dues to defend themselves against external attack, other problems arise. De fense agency Aj may decide that na tion X is the igreatest potential threat, and agency B that nation Y is the principal threat-and their strategies will differ accordingly.

Even if both agree that nation X is the enemy, th~ means of defending ourselves against X may well be a matter for disagreement: the strat484 THE FREEMAN egies of various agencies might even get in each other's way, and the en tire attempt at defense might prove ineffectual as a result. There is surely an advantage in having one defense policy rather than a multiplicity of them whose total effect might be chaos. Competition in laundry soaps is healthy and productive; competi tion in defense strategies, with each one being implemented by a per centage of the population, could well prove disastrous. There are some things that it's better to have just one of, and it may be that official records of property ownership and unified defense strategies are among them. An Indefensible Position 3. There is an additional problem as well. Rothbard claims that the only justified war is one that does not involve even one person who wants no part of it. These are indeed heroic words, and a consistent appli cation of his own principles. But suppose now that a totalitarian na tion attacks us, and that the only way to protect ourselves is through a massive defense system (not retal iating by aiming our missiles at the aggressor, but simply neutralizing the aggressor's missiles against us).

Suppose, however, that as a result of undertaking this defense, just one person who wanted no part of it was inadvertently killed. Would Roth bard hold that therefore no such de fense should be undertaken? Appar ently he would. But what if the alternative to undertaking such de fense is that many people would be killed in the enemy attack? Would Rothbard say that the American Revolution should not have been undertaken, even though it was to a large extent a libertarian revolution, if in the course of its oc currence just one person who didn't want to take sides in the struggle was killed or maimed? No one, of course, wants to sanction the death of even one innocent person; but what if the only alternative, in the real world rather than that of libertarian theory, is the death of many more? Like Tolstoy in What Is Art?, Rothbard does not shrink from the consequences of his own principles; indeed, he traces them confidently and proudly. But some of these con sequences are so controversial, and some others so downright alarming, that, while accepting that they are consequences of the principles ini tially laid down, many readers will prefer to re-examine the principles themselves, and attempt to qualify them in such a way as not to yield the "wildest" and most "far-out" of the consequences. @ Glenn L. Pearson Mixed Economies A No-Man's Land IN a recent address at a local univer sity, a popular liberal explained that America had been forced to turn to a mixed economy because of the "ex cesses of free enterprise." These ex cesses, he explained, were caused by a lack of social conscience, evi denced by high profits.

He quite rightly defined our mixed economy as a combination of welfare statism, Keynesian money policies and rigorous business controls bu reaucratically enforced on the rem nants and tatters of a market econ omy - though he didn't. call them remnants and tatters. His descrip tion of what is left of the so-called private business community sounded more like a dinosaur with little brains, no conscience and an insa tiable appetite behind mass and muscle that will never run out no matter how much it is controlled or starved. This professor told his audience that our mixed economy is ade quately producti ve and more just and equitable than Ithe free market was or would be nQw if we still had it. But he left out!a series of facts that the typical university audience would not see, such as the following: 1. The introduction of a mixed economy was a declaration of war against freedom and property . "A mixed economy" is a euphemism for this state of w~r. It implies-as did this professor---,-that free enterprise and socialism! can exist together peaceably, tha~ by some kind of so cial compact this lamb can be caged with this lion $.nd we will wake up morning after D;1orningand find both animals purring and bleating hap pily together. In order to introduce any aspect of socialism the individ ual's right to own and control prop erty has to be breached. It must be legal for the government (that is, Mr. Pearson is recently retired after many years of writing and teaching ~ Brigham Young University and the Church Education System of the Church of Jesus Christ of Latter-day Saints.

AOl::: 486 THE FREEMAN August elected or appointed people) to seize private property and use it for some purpose that favors one class or per son over another. The government (that is, people with power) has to have this right to seize property for purposes that do not in theory or practice benefit all equally, and has to have the discretionary privilege of determining just which persons will be benefited at the expense of the rest of us. When this power has been granted, a potential for total socialism exists. That is, once we give the govern ment (that is, people) the power to tax for any purpose but justice and defense, we have unlocked the door to total socialism. It is only a matter of time until, in the discretion we have granted them, people in gov ernment will choose to go all the way. There really isn't any way we can give these politicians and bureau crats (we impersonalize them by calling them "government") a frac tion of this power to redistribute pri vate property. We gave them all of this power when we thought we gave them some of it. The past several decades are a well-documented his tory of this fact.

2. People, not economies, are con trolled. Any economic policy im posed by law or administered by bu reaucrats has all its effect on people. Remove all the people and what would be left? Would it do anything? Go on producing? Perpetuate itself? Of course not. Plants and sub-hu man animals would take over and struggle for survival in a world that would know nothing of economies, free or controlled. The possibility of economic up ward mobility was the condition that brought millions of immigrants to America. We cannot have economic upward mobility for long in a mixed economy, and not at all in socialism. The poor need property rights more than anyone else. We should not pass a law that we would not wish to affect us as we wish it to affect someone else. That is not just a restatement of the Golden Rule. It is a matter of prac tical application: we could be there and be affected by that wicked and unjust law that we wanted only for reasons of envy in the first place.

We should never endow a political officewith powers we would not want a wicked person to exercise; be cause, sooner or later, that wicked person will be in that office even if only temporarily. Wicked people are more prone to seek office than are good people~ And the more power and discretion we put in an office the more actively and vigorously will wicked people seek it. 3. People are mixed, not econom ies. That is, in what we call a mixed economy, what we have is a mixture of two classes of people-those who 1982 MIXED ECONOMIES A NO-MAN'S LAND 487 are in the socialist side and those who are in the non-socialist side. And they have different ends and differ ent means of reaching them. These two classes are at war with each other. Sometimes the bureaucrats are at war internally with themselves. While at work, they have to do things that are acts of war against them selves in their private lives. A mixed economy is a schizoid state of affairs that promotes no end of warfare and turmoil in souls and in society. It is a no-man's land. Imagine the tor ture to a Christian, for example, who tries to keep any significant mean ing for the Ten Commandments and the Sermon on The Mount and still pretends to see justice and equity in socialism.

4. Human nature isn't changed by a change of social or economic or ders. It can be improved by such things as persuasion and example; but people are not better or worse in a mixed economy or in a free econ omy except as the opportunity or in centive to sin is increased or de creased. The law is simply a standard that determines what is good or evil for ethical purposes in people of good conscience and for legal purposes in the judgment and punishment of criminals. If the law is perverted or unjust, it will destroy respect and increase crime. It will do this even if the per version and injustice are not perceived on a conscious level. The sub conscious also can sense perversion and recoil at illjustice. It may well be that the violation of conscience that is not dealt with openly does more harm and explains more vio lence than do p~oblems that are per ceived and dealtiwith rationally. That socialism which is found in a mixed economy is especially offensive to people of fine aI).d noble sensitivities because it is sd blatantly unjust to say that, by hlring a person as a government em.ployee, we can au thorize and san~tify all sorts of deeds of routine violence to property rights that a person cannot perform in the role of private I citizen without in dictment as a criminal.

5. In many W;,lYS mixed economies increase the in¢entive and opportu nity to commit 'crimes. In a free so ciety those rich who are selfish can only misuse their own money. In a mixed economyi,there is a great in centive for all kinds of criminals to get control of the government so they can use both money and power to achieve evil ends. The more bureau cratic positions a.vailable, the greater chance of criminals holding office; and this facilitg,tes the growth of all sorts of bribery. [t also opens the door to employment padding, nepotism, misuse of privileges (like franking mail and makiIlg long distance calls on WATS lines) iand all sorts of graft. Some of this graft is now so much a 488 THE FREEMAN August way of life that we just live with it. Many of those "awful, wicked, un conscionable" free enterprisers are now awful, wicked unconscionable bureaucrats. In fact, it may well be that the more incompetent and prone to evil they are, the more likely they will be to gravitate out of the risk, competition and governmental in tervention of business and into the security of government. Of course, not all bureaucrats-maybe not even most-are fearful, sneaky, lazy and prone to graft and bribery; but cer tianly such people are far more at home in government than out in the rigorous world of business. Else why the periodic and extensive purges in Russia and China?

In very recent times the Chinese Communists have declared the pres ence in their extensive bureaucracy of all the evils listed above, and they have tried to purge them out. l But, again, they can only purge people and replace them with people. It is a law of bureaucracy that the most evil men are the best at appearing good. Another bureaucratic law is that power corrupts most people. So, even if we replace bad bureaucrats with good ones, many of the good ones will get bad by and by. Enough will get lSee, for example, "Corruption, Scandals Prompt Chinese to Clean Up, Reform Party," by Victoria Graham, Associated Press Writer, The Salt Lake Tribune, Sunday, October 11, 1981, p. 12A. bad so that purges improve bureau cracies only temporarily. 6. The free market is not devious about profit. Without profit there is no reason to stay in business. That is an honest, up-front fact. But con sider this: the socialist sector in a mixed economy (TVA, public roads, postal system, public schools, and so on) have a substitute for profit: taxes.

They tax for all the reasons business seeks profit: large salaries and ben efits for management, plant expan sion, modernization, research, and the like. And taxes are not con trolled by the natural laws of the market place. 7. Capital is the basis of produc tion in all economies. It can be cre ated only by savings. Someone has to cut down on consumption and di vert savings to machinery, land and operating capital. Once capital has been created, it can be obtained by borrowing. It also can be obtained by stealing it. In that case, there isn't any overall increase of capital likely to ensue. It is just transferred from one person or segment of society to another. That is why the socialism we have in our mixed economy is such a burden - it steals (gets by taxation) all of its capital from the business sector. Then, to add insult to injury, the socialists accuse busi ness of inefficiency and lack of social conscience for seeking a profit that 1982 MIXED ECONOMIES A NO-MAN'S LAND-489 can rebuild its capital. When they .occasionally see that their taxing policies have prostrated business, they introduce tax reforms tempo rarily to help business get back on its feet. Each time the tax laws are changed, they get more confused and complex.

The so-called Third World is full of nations that are experimenting with socialism of various mixtures. They look with envy upon the capi tal of the American Business com munity and that of any other coun try which has had sufficiently free economies to accumulate capital. The United States government quite regularly accommodates that envy by plundering our business commu nity to start or perpetuate these so cialist experiments. Conceivably, for short periods, a socialist country might accumulate capital at great sacrifice and hardship to its citizens. But too much of the accumulation of capital in the slave world is being accomplished at the expense of whatever business in the "free world" there is left to tax. In the long run, of course, socialism will not work. 8. Justice and equity are ideals that are never fully achieved. How ever, they can be approximated in a market economy because the gov ernment in that case is not in the business of injustice. In a mixed economy, all that the government does to redistribute wealth is, by definition, injustice; because it is de signed to discriminate. In a market economy the government is confined to the task of p~otection from crimi nals and foreign aggression. The president is the high sheriff and commander-in-chief. He has no pro posals to improve the economy or bring relief to the poor and unfortu nate unless that relief is a matter of national or local defense that is clearly constitutional. And the more we attempt to change that state of affairs, the mor~ we introduce injus tice and inequity into society. We show an unfortunate misunder standing of d~finitions when we equate justice with economic equal ity.

9. There is reason to doubt that the establishment of a mixed econ omy was motivated only by mis guided concern· for the poor and af flicted. This dOljlbt is fed by at least three historical facts. The first of these facts is that the prime-mov ers-especially. those who were in tellectuals and. labor leaders (such as Thorstein V1eblen, John Dewey, Eugene Debs, and the like)-who were most effective in pushing us into a mixed economy were Marxists of some stripe or ~nother, whether or not they were m.embers of a Marxist society. The mixed economy usually was not and is n.ot a goal, but only a signpost on a much longer road. The second historical fact that casts 490 THE FREEMAN August a shadow on the motives of those who pushed us into a mixed economy is that the poor have increased as the mixing of the economy has in creased. The number who perceive themselves as poor has increased dramatically. This is because the welfare state philosophy feeds envy.

The number who are perceived as poor by those who administer state relief has increased dramatically. This is because there is personal ad vantage and gain for these bureau crats if their relief programs grow. But those who are objectively poor, in the life and health. threatening sense, have increased also. This is because a mixed economy cuts off avenues of upward mobility and tends to throttle private concern for the poor. The third historical fact is that bureaucracies are run for the good and the perpetuation of the bureau cracies, not for the help of those they ostensibly were set up to serve. Lud wig von Mises and many others have adequately proved this both ratio nally and empirically. Consider this one fact: if you divide the amount of tax revenue budgeted to the bureau cracies for the care of the poor by the number of poor these bureaucrats say we have, there is no way you can come up with less than $6,000 per person per year in 1982 dollars. Some studies have put the figure much higher. It is difficult to pinpoint a correct numerator or denominator because so much public charity is hidden in so many different places housing, food stamps, medical care, subsidies, student loans, and so on.

The breakdown of the federal bud get sent out in March, 1982 by Rep resentative Dan Marriott of Utah shows categories that are mixed in such a way that it is impossible to determine the dollar amounts meant for the poor. Nevertheless, the sums earmarked for a number of agencies and programs that were originally set up to relieve poverty and distress totals at least 577.6 billion dollars. However, an unknown amount of billions in this 577.6 billion is now meant for others than the truly poor and distressed; but nearly all of it is justified to the American taxpayers as absolutely necessary relief from some kind of hardship suffered by somebody. Just as a practical illustration, suppose you accept 34 million as the number who are so poor as to truly need immediate and continuing aid. Suppose you gave each one-men, women and children-$6,OOO annu ally. (That would be $24,000 per year for a family of four. No end of fami lies of six to ten in Utah and, no doubt, elsewhere, are doing very well on that much without public relief other than such indirect programs as FHA home loans. These families also are contributing ten to fifteen per cent of their income to private care of the poor or to other charita1982 MIXED ECONOMIES A NO-MAN'S LAND 491 ble causes.) Now multiply $6,000 times 34 million and you will get a product of $204 billion. That is only 35% of the $577.6 billion we started with. Remember, also, that every state is in the welfare business. Then you will see that $6,000 per year per person would leave a great deal for necessary administration.

And the truly poor don't get any where near $6,000 per year. Where, then, does the money go? Most of it goes to the care and keeping of the bureaucracy, which, in turn, helps perpetuate in office the kind of peo ple who will keep the budget rolling in to perpetuate and expand the bureaucracies. This is the sort of thing that creates doubt about the sincerity of those who say the poor need a mixed economy to save them from the wicked free enterprisers. One cannot help suspecting that the money is going just exactly where it was meant to go by those who got us into this mess. 10. The rich can get richer while the poor are getting poorer in a so cialist economy; because those with the power (the bureaucrats or ruling class) can divert whatever wealth they want to themselves for what ever purposes they choose. In a free market economy, the rich cannot get richer at the expense of the poor. In evitably they make the poor richer.

Everything they do with their wealth creates opportunities for others. The only way they can prevent this from happening is not doing anything with their wealth-not consuming any of it, not investing any of it, just hoarding it. An~ who does that? Only the very few who are insane. There is no l~gal way for a rich man to cause a poor man to get poorer while enriching himself in a market economy that· is protected from criminals and foreign invaders by a government that is limited to de fense by constitqtionallaw. True, our original Cons~itution looked the other way at sl~very, to put it char itably. That w~s a flaw that cost much more bloQd, both by the whip and by the sword, than was shed to prepare the way: for the original doc ument. So we $ust not forget that blood-and all the blood-that was shed to get us out of the very thing the socialists are working so hard to get us back intoL-slavery.

11. In a mixed economy, the so cialists can blame all failures on the business commlllnity":"'-andthey do. They do not puqlish the fact that all the same econotnic and social prob lems exist in an even more aggra vated state in· countries that are nearly all socialist. The professor who inspired this article tacitly agreed that a market economy is successful when he said that there was too much profit in a marltet economy. Social ist countries never have that prob lem. , Thomas J. Dilorenzo ~OIiCY TAXPAYERS in the United States, Great Britain, and several other democratic countries have become increasingly disenchanted with the unfulfilled promises of govern ments, the burdens of taxation and inflation, and the loss of individual freedom which public sector expan sion has generated. New constitu tional and statutory restrictions on governmental taxing and spending powers have been imposed in the U.S.

and both Ronald Reagan and Mar garet Thatcher were elected on plat forms which called for a relative re duction in the size and scope of government and the encouragement of free enterprise. But a dangerous scenario is being constructed in the U.S. and the U.K. Entrenched government bureau cracies along with labor unions and other powerful interest groups have prohibited any significant reduc tions in government spending, and Dr. DiLorenzo is Assistant Professor of Economics at George Mason University, Fairfax, Virginia. d,q? The Fre:'t Econo~ the basic government regulatory in stitutions which have placed such heavy burdens on the private econ omies of the u.s. and Great Britain remain largely intact. Left-leaning politicians now publicly express a desire for higher inflation and un employment which they hope will help to restore their political power, and the media routinely reports, in correctly, that both the Thatcher and Reagan economic platforms have been implemented, and have failed.

The danger in this situation lies in the fact that it is customary to hold the chief executive responsible for the health of a nation's economy, re gardless of what the causes of cur rent economic problems might be. The problems of inflation and un employment, which are primarily caused by past government inter ventions in the market economy, are being widely sold as the direct result of policies which encourage free en terprise and attempt to restore in centives to work and invest. It is PUBLIC POLICY AND THE FREE ECONOMY 493 therefore of utmost importance to set the record straight, to clarify this is sue, and to strengthen public sup port for the free economy. This pa per attempts to make a contribution toward that end by discussing the virtues of the free economy. A major theme of the paper is that in the (free) market economy individuals, acting in their own self-interests, are in duced by the spontaneous forces of the market to act in ways which serve to maximize social welfare; by con trast, it is shown how government control over the allocation of re sources redirects the forces of ratio nal self-interest in a way that allows elite groups within government to impose forcefully their will upon others, which in turn causes a re duction in wealth and in individual welfare.

The Sovereigntyof the Consumer In the market economy the pro duction and distribution of goods and services is determined by the deci sions of entrepreneurs, and this fact has generated much wrath on the part of many members of society, es pecially intellectuals, and especially those in the social sciences and the humanities. Entrepreneurs are of ten portrayed as being hard hearted and callous, and responsible to no one. But in the free economy they are not. Economic affairs in the market economy may be directed by entrepreneurs, but co,nsumers are the ul timate decision-makers. Consumers determine what! is produced and, as Mises has said, ~t is they who" ... in their capacity as buyers and con sumers . . . are hard hearted and callous without consideration for other people."! 'That is, consumers patronize thos~ who can offer the highest quality products for the low est prices. Those who do not meet the demands oficonsumers will suf fer losses or go bankrupt and will therefore be re~oved from their "po sitions of eminence," while those who cater to the desires of consumers will be rewarded wi~h profits. Both the carrot of reward and the stick of punishment (for ignoring con sumers' prefereqces) contribute to the success of the market economy.

Not only are entrepreneurs in duced by the market to satisfy con sumers' preferences for goods and services, but they are also motivated to provide goods and services at the least possible cost, for in a competi tive economy tHose who fail to do so will not survive, Entrepreneurs who do not make the best use of avail able time, kno'\V:ledge,and resources bear the risk of bankruptcy or, al ternatively, off being replaced by "takeover raiderrs" via the market for corporate control. There always ex ist enterprising 1 individuals who are willing to take' over, through stock purchases, private enterprises that do not adequately meet the demands 494 THE FREEMAN August of consumers, for the substitution of more efficient for less efficient man agement promises the reward of higher profits. Those opposed to cor porate takeovers would have us abolish the market for corporate control, but fail to acknowledge the damage such restrictions would in flict upon the consumer. Arguments against the market for corporate control thus appear to be nothing other than disguised protectionism.

How the MarketFunctions In the market economy the con sumer determines not only the pat tern of prices and production, but also the distribution of income. That is, the consumer ultimately pays the wages of all workers, whether they be professional athletes or street vendors. The greater the consumer demand for a good or service, the more an employer will be willing to pay the worker who can produce the product, as long as labor markets are competitive. The employer who pays his em ployees less than their marginal contribution to the firm's profits will not do well and may very well fail. The baseball team owner, for exam ple, who pays gifted, star athletes the salary of a college professor will most likely bear the burden of a poor record and consequently, lower prof its. The same can be said for the management of steel mills, textile plants, grocery stores and all other private enterprises. Thus, in a free economy one's income depends upon one's ability to satisfy consumers. It is in this way that the spontaneous forces of the market serve to maxi mize individual welfare.

The Hazardsof Consumer Protectionism The virtues of the free economy are amplified once they're compared directly to the vices of intervention ism, and an appropriate starting point is the example of "consumer protection regulation" which is quite prevalent in the U.S. and exists in most other industrialized demo cratic countries as well. The federal government is inti mately involved in the regulation of trade in the U.S., and has been ever since such muckrakers as Upton Sinclair (author of The Jungle), Ralph Nader, and Senator Estes Ke fauver (whose investigations of the drug industry led to the expanded powers of the Food and Drug Ad ministration) began attacking the quality of products manufactured by private producers. Self-appointed "protectors" of the consumer now staff hundreds of government agen cies, and under the guise of con sumer protection perform tasks which unequivocally make the con sumer worse off, as can be illus trated by the example of the Con sumer Product Safety Commission, which serves as a prototype for scores 1982 PUBLIC POLICY AND THE FREE ECONOMY 495 of other "consumer protection agen cies."

The Commission is mandated to perform a task it cannot possibly achieve - "to protect the public against unreasonable risks of injury from consumer products ... " Its au thority covers "any article produced or distributed except for certain items already regulated by other govern ment agencies." The objective of safer products is desirable, but the impor tant question is: At what cost and by whose standards? A safer auto mobile which is slower, heavier, and more expensive than others may have some advantages, but how can a government bureaucrat possibly know how much safety individual consumers are willing to trade off for speed and lower prices? Besides, it is .not clear that "safer" vehicles cause fewer accidents. It may be true that safer vehicles induce careless ness by drivers which leads to more accidents which are mainly caused, after all, by human error. The gov ernmental banning of various "dan gerous" products deprives the con sumer the right to make the relevant tradeoffs, which only he can make, and therefore reduces his welfare.

A rather blatant example of how the "consumer protectionist mental ity" has gone to extremes is the ap pearance of the recently dethroned director of the National Highway Transportation Safety Administra tion on a popular television program. The ex-director was accom panied by a m1asked man with a sledge hammer and an automobile produced by a private engineering firm, employed ,by the government, which was alleg~dly crash-proof. Af ter observing the masked man fail to dent the automobile with the sledge hammer, the ex-director opined how wonderful it would be if the government were to require all automobiles to! be just as sturdy. When pressed by a member of the audience, the i ex-director reluc tantly stated that the cost of such a car is approximately $200,000 hardly a. price, which would "pro tect" the consumer. Only freedom of choice, and only a free market econ omy is capable of accomplishing that task. So-called consumer protection ism is merely a way of forcefully substituting the will of a few non elected government bureaucrats for that of the general public.

ProductInformationand the Free Economy There are m~ny who claim that private advertising is misleading, and induces consumers to purchase things they wQuld not otherwise purchase. Therefore, so it is claimed, advertising should be controlled or regulated by government, if not abolished, in order to avoid "con sumer exploitatjon." But how can a consumer be exploited if he volun tarily purchases one brand of say, 496 THE FREEMAN August toothpaste over another? As long as advertising is competitive, and the consumer is free to compare and contrast the competing claims of ad vertisers, it is impossible for him to be "exploited." In fact, quite the op posite is true. It is the absence of advertising which is detrimental to the con sumer, since one of the major rea sons for advertising is to publicize price and proQuct quality. Take, for example, the case of law firms in the U.S. which until recently were banned from advertising. Such a ban on advertising is nothing more than special interest legislation which benefited existing, established law firms at the time the legislation was put into effect, to the detriment of newer firms and consumers. The older, established firms had little need to advertise the price and qual ity of their product, for their repu tations had already been estab lished, and the most prominent members of the legal profession are much sought after by these firms not only for their skills, but also for the right to place their names on the firm's letterhead to send out the de sired market signal.

Newer, less established firms who must compete with the more expe rienced firms must do so by offering a "quality" product at a competitive (lower) price. The ability to adver tise lower prices is one way to. in duce consumers to make use of their services. After all, many consumers would prefer not to have "Cadillac quality" legal services at Cadillac prices, but would prefer a wider range of choice. Bans on advertising preclude the consumer from making any such choices and therefore allow the established firms to charge higher prices than otherwise. As another contemporary exam ple, it is difficult to believe that one of the largest hotel/motel chains in America is actively lobbying against roadside advertising "for the pur pose of enhancing the beauty of the environment" rather than a desire to stifle price competition from less well-known hotel chains. In sum, the idea that consumers can be led by the nose by advertising has been proven false time and again.

"Regardless of how much Ford Motor Company advertises another "Ed sel" automobile, it won't sell. As economist Harold Demsetz of UCLA has found, the profit maximizing firm will find it more sensible to first find out what consumers want, and then produce and advertise it. Surely, this would be more lucrative than spend ing millions trying to convince con sumers to buy green wigs or lead tennis balls. The Price System As the Friedmans have said, the key insight to Adam Smith's Wealth of Nations is misleadingly simple and, unfortunately, widely misun1982 PUBLIC POLICY AND THE FREE ECONOMY 497 derstood: In a free market economy, voluntary exchange will not take place between two parties unless both believe they will benefit from it.2 It is not true that one party can benefit only at the expense of another or that, in international trade, firms in one country benefit at the expense of those in another. Free trade is mutually advantageous. This in sight is obvious when one considers trade between two individuals, but it is more difficult to understand how people living all over the world can cooperate to promote their own in terests. It is the price system which accomplishes this task in a market economy, without any need for cen tral direction of prices or production by the coercive powers of the state.

Thus, Adam Smith's crowning achievement was to recognize that the prices which emerge from the voluntary transactions between buyers and sellers in a free market could coordinate the activities of millions of people in a way in which everyone, acting in his own self interest, is made better off. Two major functions of the price system are to transmit information and to provide incentives to adopt least-cost methods of production. Consider the effects of say, an in crease in the consumer demand for bicycles. Retailers will find that they are selling more bicycles and that consumers are willing to pay more for them. They will therefore order more from whoilesalers who in turn will order mo~e from manufactur ers. Manufacturers will order more steel, rubber, chrome, plastic, and all the other materials used to produce bicycles. In order to induce the sup pliers ofthese inputs to produce more, manufacturers will have to offer higher prices. The higher prices in duce input suppliers to employ more people to meet the increased de mand. To do so will require that they offer higher wages or fringe benefits or better working conditions. Thus, in this way the price system trans mits the message that there has been an increased demand for bicycles and that consumers now prefer the ad ditional use of 'resources to produce them. There is i. no need for anyone person or agency to "coordinate" any or all of the above activities. Such an effort would indeed be fruitless, since no one individual or group of computer programmers could possi bly gather and use all of the rele vant information.

Information Fldws Both Ways Prices not only transmit informa tion from consumers to retailers, wholesalers, manufacturers and re source owners; they also do the op posite. For example, if for some rea son imports of tubber into the U.S. were reduced Of cut off, the reduced supply would increase the price of rubber and of all rubber products. It will not pay to 'produce as many bi498 THE FREEMAN August cycles as before. The smaller supply of bicycles will increase the price which will inform consumers to take better care of their bicycles and to keep them longer or to consider al ternative forms of recreation. Any governmental controls which prohibit prices from expressing changes in supply and demand con ditions stifle the dissemination of important information. For exam ple, price ceilings placed on oil and other fuels in the U.S. prohibited in formation about the effects of the OPEC cartel from being conveyed to producers and consumers. Price ceil ings on oil artificially stimulated the demand for oil and gas and reduced supply, creating shortages which were compensated for by increasing imports even more. Because of price controls, the real price of gasoline actually fell from November 1973 to May 1979, which conveyed to con sumers the message that gasoline had not become more scarce, and that it was not worthwhile to conserve more energy than previously. The automobile industry, in responding to the demands of American con sumers, did not significantly in crease production of smaller, more fuel-efficient cars.

Now that the real price of gasoline has risen since the controls have been lifted, the auto industry finds itself at a severe competitive disadvan tage in international competition. American consumers were also forced, because of price controls, to finance through taxes the activities of a Department of Energy which spent about $10 billion in 1979, em ployed 20,000 people, and admits (optimistically) to having no posi tiveeffect on energy problems. A further virtue of the market economy is that the price system provides producers with incentives to seek the most efficient means of production-those means which use the least resources, leaving more re sources for other uses. For example, there are literally thousands of dif ferent types or grades of steel. When the supply of one type of steel is cur tailed, which raises its price relative to others, producers of automobiles and other products will substitute the less costly types of steel. Reducing the cost of production enables the producer to increase the gap be tween revenues and costs. Any gov ernmental controls over the prices of factors of production-via mini mum wage laws, by trade unions, taxes, subsidies-distorts informa tion transmitted by the price system and makes it impossible to discover least-cost production techniques.

ConsumerSovereigntyvs. Politician'sSovereignty In the market economy consumers are said to "vote with their dollars." Unlike the political market place, where one level of output is provided to all, producers provide different 1982 PUBLIC POLICY AND THE FREE ECONOMY 499 amounts of goods and services to consumers, depending on their in come and preferences. Those who are willing and able to pay can consume all they want at the existing market prices and, as described above, the production and distribution of goods and services is dictated by the wishes of consumers. There are many, of course, who are dissatisfied with the way in which the free market allocates resources. Among the most frequently cited ob jections are that the market gener ates "inequities," does not suffi ciently protect "the poor," is based on greed (read the profit motive) rather than selflessness, and leads to shortsighted outcomes which lack long-range perspectives. As a result of these alleged problems, so the in terventionists argue, there is a need for greater political control of the al location of resources by those who are wise enough, selfless enough, farsighted enough, and sufficiently egalitarian to correct these prob lems. In short, according to this view, social problems are best dealt with by a delegation of benevolent and omniscient despots, if any can be found. This is a caricature of the conventional view of public policy in the U.8. and in many other demo cratic countries, and illustrates the dominant themes of the "public ad ministration" literature from Con fucius and Plato to Woodrow Wilson and their contemporaries.

Failuresof Intervention The miserable failures of govern ments to effectively deal with the problems of poverty, the low quality of primary and secondary education, energy, housing, and so on are usu ally explained 'ip. terms of the per sonal attribut~s of politicians and bureaucrats: They are evil or stupid, lack sufficient authority and fund ing, or lack sufficient information. The problems of social policy are then merely a matter of selecting suffi ciently wise and benevolent despots and giving them power and knowl edge. But the harsh lessons of recent history have shown that good men do not guarantee good government. It is most unfortunate that much of the American public has become enchanted with :the "Platonian" view of government intervention and seems to have forgotten the impor tant principles upon which the fed eral constitution was based. Namely, the authors of the Federalist Papers were concerned with giving govern ment enough power to carry out its responsibilities, but not so much power that the rights of individuals would be infringed. They 'held that one cannot control the excesses of government by. merely electing the "right" people, as the following statement by James Madison illus trates.

It is in vain to say that enlightened statesmen will be able to adjust these 500 THE FREEMAN August clashing interests and render them all subservient to the public good. Enlight ened statesmen will not always be at the helm ... We well know that neither moral nor religious motives can be relied on as an adequate control. 3 Alexander Hamilton was also re luctant to rely on the innate good ness of man, for to do so ... would be to forget that men are am bitious, vindictive, and rapacious ... Has it not, on the contrary, invariably been found that momentary passions, and im mediate interests, have a more active and imperious control over human conduct than general or remote considerations of policy, utility, or justice?4 Because of these views, the fram ers of the Constitution were careful to adopt institutional arrangements which would constrain the coercive powers of government, for as Madi son argued, . . . what is government itself but the greatest of all reflections on human na ture? If men were angels, no government would be necessary. If angels were to govern men, neither external nor inter nal controls on government would be necessary. 5 In reflecting upon the secular growth of governmental powers in the U.S. a contemporary student of constitutional reform, James Bu chanan, has further observed, Politicians are politicians because they want to be. They are no more robots than other men. Yet the politician who would do nothing other than reflect the preferences of his constituents would, in fact, be robotlike in his behavior. Few, if any, politicians are so restricted. They seek office because they seek "profit," in the form of "political income," which will normally be obtained only if their behav ior is not fully in accord with the desires of electoral majorities. Those men who are attracted to politics as a profession are likely to be precisely those who have considerable interest in promoting their own version of good government, along with those who see the opportunities for direct and indirect bribes, and those who evaluate political office as a means to ward other ends. 6 PoliticalControl Thus, it has long been recognized that when political resource alloca tion replaces the market allocation of resources, the results are not likely to be either equitable or efficient, unless by sheer accident. How re sources are allocated depends largely on the different opportunities for "political profit" which alternative allocations present to the political decision-maker, for politicians, like all other human beings, act so as to pursue their own self-interests.

Consumers' sovereignty is replaced by the sovereignty of the politician/ bureaucrat, and the two often do not coincide. Consumer demand no longer determines the pattern of production and distribution. In stead, an individual or group's abil ity to receive goods and services de pends not only on their ability to 1982 PUBLIC POLICY AND THE FREE ECONOMY 501 "compete with their dollars," but on other forms of competition as well, which are expressed through politi cal power and influence, violence, and various forms of bureaucratic ma nipulation. Political resource allocation, con sequently, often entails effects which most would consider perverse and inequitable. As one example, con sider the decision made by the U.S. Congress in 1949 to grant the gov ernment a greater role in the provi sion of housing by embarking on a program of "housing and urban re newal" which was aimed at provid ing benefits for the poor. In the early history of urban renewal the evi dence clearly shows that more hous ing for the poor was demolished than was replaced. Between 1949 and 1963 the 106 completed urban renewal projects had demolished about twice as many units as were replaced, and only 8 percent of the replacement units were in public housing where "the poor" could gain access.7 Evi dently, middle and upper income groups are not only better able to vote with their dollars than are the poor, but are also more politically influential and have been major be neficiaries, along with government administrators, of the many urban renewal programs in the U.S. Simi lar outcomes have resulted from government interventions in the areas of energy, education, welfare, and so on.

The inequities which often stem from political resource allocation are made more cleaJrwhen one observes resource allocation in nondemo cratic, or socialist countries such as the Soviet Union where those in power, along with their families and friends, are at the top of the income scale, while in !the name of "egali tarianism," nearly everyone else is put in his place at the bottom, and is kept there by: threat of violence or imprisonment, ias recent events in Poland illustrate. Inequitableand Inefficient When the market allocation of re sources is repl,"ced by political re source allocation the results are of ten inequitabl~ and inefficient, in that more resoUrces tend to be ex pended on activities which merely redistribute wealth rather than cre ate wealth. Government, after all, does not produce much of anything; it takes from some and gives to oth ers, keeping as much as it can for itself in the form of discretionary revenues. 8 In democratic:countries there is an asymmetry between the benefit in cidence of politi~al decisions and the tax incidence. ffhat is, beneficiary groups or recipients of government financed transfers tend to be concen trated, or organized, and capable of influencing poUticians. By contrast, taxpayers tend to be widely dis persed, with little incentive to ac502 THE FREEMAN August tively oppose individual transfer programs. As a result of this asym metry there is a structural bias to ward expanded levels of government spending and taxing. As the govern ment sector expands, more and more resources are used by all the various interest groups to lobby for transfers rather than to produce goods and services, which serves to diminish the total wealth of nations. As wealth transfers increase, the private sec tor, which is the sole source of wealth creation, is increasingly crowded out.

The Problem of Monopoly The virtues of the market econ omy are partly undermined by tl,1e existence of monopoly power. A mo nopolist who, by definition, is the sole supplier of a product for which there are no close substitutes will restrict output, thereby raising his price above what would be paid if markets were competitive. Consumers are made worse off because some of their wealth is transferred to the monop olist, and because fewer resources are devoted to the production of the mo nopolized good (and more to other goods) than what consumers would prefer with freer trade. Over the past several decades many have claimed that the alleg edly increased concentration of in dustry in the U.S. and in other dem ocratic countries has led to increased monopoly power and therefore calls for a greater degree of governmental control, regulation, or outright own ership of industry. Even though there is no evidence that American indus try has become increasingly concen trated over the past century or that concentration per se leads to monop oly profits, such unfounded senti ments can be understood if one rec ognizes that it is the interventionists themselves who intend to become the regulators, the controllers, and the managers of nationalized indus tries.

The claims that government reg ulation of industry is a necessary condition for the prevention of mo nopoly power have ignored history and reality. Adam Smith himself was among the first to recognize that government regulation of industry is the sole cause of monopoly, not a remedy for its ill effects. Smith viewed the regulation of industry as a means of redistributing income to potential monopolists who would in turn provide political and economic support to the government. He ob served that the various trades in eighteenth-century Britain which were granted a monopoly status gained such status because ofa com parative advantage in lobbying. Country gentlemen and farmers, dis persed in different parts of the country, cannot so easily combine as merchants and manufacturers, who being collected into towns, and accustomed to that ex clusive corporation spirit which prevails in them, naturally to endeavour to ob1982 PUBLIC POLICY AND THE FREE ECONOMY 503 tain against all their countrymen, the same exclusive privilege which they gen erally possess against the inhabitants of their respective towns. They accordingly seem to have been the original inventors of those restraints upon the importation of foreign goods, which secure to them the monopoly of the home market. 9 Smith's strongest attack on mon opolies was aimed at the entire sys tem of mercantilism and protection ism in foreign trade. In his words, "Monopoly of one kind or another, indeed, seems to be the sole engine of the mercantile system."10And, "It is the industry which is carried on for the benefit of the rich and the powerful, that is principally encour aged by our mercantile system. That which is carried on for the benefit of the poor and the indigent, is too of ten, either neglected, or op pressed."ll And further, condemning mercantilism on moral grounds, To hurt in any degree the interest of anyone order of citizens, for no other purpose but to promote that of some other, is evidently contrary to that justice and equality of treatment which the sover eign owes to all the different orders of his subjects. 12 These lessons were well heeded in the latter eighteenth and early nineteenth centuries by many citi zens, and, as history reveals, one of the causes of the American Revolu tion was the attempt by the British government to enforce the Trade and Navigation Acts, which were intended to monQpolize certain acti vi ties for Englishmen living in the British Isles.

Modern Trade Restrictions Unfortuna tely, the modern -day mercantilists hiave succeeded in di verting the puli>lic'sattention away from this reality, and in imposing a vast array of "neomercantilist" pol icies of trade liestrictions. Perhaps the most regulated activity in the U.S. economyi is transportation, which serves aa an example ofmon opolies recently created by govern ment. 13 The Interstate Commerce Com mission (ICC) limits the number of firms allowed to engage in common carrier transportation. In addition, it actually sets, minimum rates be low which transportation companies are not allowed to sell, which per mits the companies to enforce a car tel pricing arrallgement. The Civil Aeranautics Board (CAB) has set minimu~ air cargo rates and passenger rates. It has even at tempted to reglilate the service pro vided at these rates to prevent one airline from offering a more com fortable seat or more legroom at a given price than another.

The Federal Maritime Board forces steamship lines into the ocean con ferences-the 1 privately operated cartels that regulate ocean freight rates and attempt to prevent rate cutting.

504 THE FREEMAN August Forty states regulate intrastate trucking and prevent rate cutting, and most cities regulate the taxicab business, with the same result. In terestingly, Washington, D.C., home of many of the regulators, is the only major city in the U.S. where one can enter the taxi business simply by demonstrating that the necessary li ability insurance is covered. Taxi fares in Washington are among the lowest of all major cities in the U.S. In sum, government regulation of industry is today, as it was in Adam Smith's time, often for the benefit of the regulated firms, to the detri ment of consumers, potential com petitors, and workers who are barred from employment by the various li censing restrictions which exist and apply to thousands of trades, from taxi driving to fortune telling and the practice of medicine. 14 Only with the sanction and coercion of govern ment can a producer, if a monopo list, reduce output and raise prices indefinitely. If the government does not prohibit competition, any mo nopoly profits will soon be bid away by competing entrepreneurs and workers. The free economy is incom patible with the existence of monop oly power.

Profit Management vs. Bureaucratic Management As mentioned above, one of the most basic virtues of the free econ omy is that the market induces private sector entrepreneurs to produce goods and services at least cost. Pri vate sector managers are the resid ual claimants to both profits and losses - cost reducing innovations which increase profits often lead to direct salary increases and enhance one's human capital as a manager, while economic losses cause one to forgo salary increases and run the risk of losing one's job tenure. In sum, the private sector manager is moti vated by both the carrot and the stick, in that he is rewarded finan cially and promoted for reducing costs, and may be "punished" for un satisfactory performance. By contrast, many goods and ser vices which are produced by private sector producers are also provided by government enterprises in many countries. As history shows, govern ment-operated enterprises in both democratic and non-democratic countries have been monumental failures when compared to private enterprise. The effects of bureau cratic (government) management have long been recognized. For ex ample, nearly four decades ago Lud wig von Mises began his book, Bu reaucracy in the following way: The terms, bureaucrat, bureaucratic, and bureaucracy are clearly invectives.

Nobody calls himself a bureaucrat or his own methods of management bureau cratic. These words are always applied with an opprobrious connotation. They always imply a disparaging criticism of 1982 PUBLIC POLICY AND THE FREE ECONOMY 505 persons, institutions, or procedures. No body doubts that bureaucracy is thor oughly bad and that it should not exist in a perfect world.15 The "bureaucratic methods" that Mises referred to are familiar to ev eryone. Less clear is why these methods persist. The basic reason is not that government bureaucrats are innately lazy, slothful, or dishonest, but that both the carrot and the stick are missing from the public sector. The public manager who reduces cost recei ves no reward, for there are no profits, by definition, in the public sector. In addition to this, it is diffi cult to terminate government em ployees for poor performance, as the low rates of employee turnover in the public sector attest. The manager of a government bureau has, at best, minimal incentives for economic ef ficiency. In fact, the incentive sys tem facing government bureaucrats in the U.S. and in most democratic European countries is rather per verse, for as Gordon Tullock ob served, ". . . in most American and European bureaucracies ... a bu reaucrat is rewarded for simply in creasing the number of persons he supervises."16 Increased Spending Increases Bureaucratic Power The budgets allocated by the leg islative sponsors of government bu reaus are typically exhausted by spending on perquisites of office, salaries of subordinates, and so forth.

If the bureaucrat' serves his own in terests, he will always spend the en tire budget allocated to his bureau, regardless of th~ cost of providing the service which is under his man agement. Promotions, prestige, and salary increases! depend largely on increasing the Dumber of subordi nates, which req~ires an increase in the appropriated budget. The bu reaucrat would !find it difficult to justify budget increases next year if he does not spen(1 his entire budget this year, and for this reason gov ernment enterprises tend to maxi mize rather than minimize produc tion costs, as do their private sector counterparts. Relative to the private sector, the incentive structure of the bureau cratic "public" manager is perverse, since every bure~ucrat is inherently an empire builder who seeks to en large the size ancl scope of his agency in order to increase his salary and prestige. Unlike: the private sector, where the managers and owners of inefficient firms 'bear the burden of poor performance themselves by for feiting profits, a government-owned monopoly, which most government enterprises are, can not only charge a monopoly pric~ and exhibit gross inefficiencies, but can also force tax payers to pay the price. Govern ment-operated enterprises therefore pose a major threat to the free econ omy and to personal freedom.

506 THE FREEMAN August The Myth of Stabilization Policy Despite all the world's dismal ex periences with attempts at replac ing the market economy with "cen tral planning," the dream of many an interventionist is to institute some form of "planning" in the U.S. That is, what is politically defined as "economic planning" is actually the "forcible superseding of other peo ple's decisions by government offi cers."!? It is often lamented that planning is needed to protect the public from "accident, chance, and uncoordinated institutions" which lead to "helplessness" as the econ omy lists. 18 Central planning is seen as simply a matter of "technical co ordination by experts" using "sys tematic analysis" whereby some un definable "public interest" can be discussed along with "objective analysis ... of what is really desir able."19 Although the U.S. has never ac tually experimented with compre hensive central planning, monetary and fiscal policies since the 1940s have been hybrid attempts at "fine tuning" the economy by small groups of planners. This predominant ap proach to economic policy, usually referred to as "Keynesianism," takes as its point of departure a philoso phy similar to that described in the above quotations of Nobel prize winning economist Wassily Leontief and the late Senator Hubert Hum phrey. "Stabilization policy," as a form of planning, is merely a matter of getting the "right" people into of fice, and providing them with ade quate technical information. In other words, this view is based on the pre sumed existence of a group of bene v olent and omniscient despots.

It is now widely recognized, how ever, that the so-called stabilization policies of the past have not worked, and have even destabilized the econ omy.20 One reason for this is that it is simply impossible to forecast the effects that changes in monetary and fiscal policies will have on an econ omy 2 years, 1 year, or even 6 months in the future with much precision, as the performance of economic fore casters demonstrates. A second rea son is that in a democratic country, the time lag between the recogni tion of a problem (high inflation, un employment) and the final impact of whatever policy is implemented to address the problem is unpredict able, due to political realities. A pol icy aimed at stimulating demand may not actually be felt until after the economy has emerged from a recession and entered into an infla tionary peak of the business cycle, which would only make things worse.

The failures of government stabili zation policies have been described, by their architects, as the result of simply not having sufficient infor mation at hand. But there is a strong basis for be lieving that stabilization policies 1982 PUBLIC POLICY AND THE FREE ECONOMY 507 have not worked simply because it is not in the interest of policymakers to make them work. For example, expansionary policies (such as gov ernment spending financed by money creation) increases political support by dispensing benefits on concen trated constituent groups now, and dispersing and deferring the costs, in the form of higher inflation, in the future. Federal politicians have every incentive to createinflation and the further economic instability (stagflation) which follows, espe cially since the "progressive" in come tax (a phrase coined by Karl Marx) generates additional in creases in real tax revenues with in flation-induced "bracket creep."

Policies Modified in Proximity to Elections Relatedly, there is good reason to believe that economic policy is based not on any long-term stability goals, but rather on the proximity to elec tions, which creates further insta bility. The theory of the "political business cycle" holds that by con centrating expansionary policies be fore an election, the incumbent party may be able to strengthen its elec toral prospects. 21 Expansionary pol icies will tend to be pursued more vigorously before an election, with the pursuit of contractionary poli cies left to after an election, the re sult being economic instability. In sum, it is the government's monopoly power over 'the money supply coupled with the pursuit of political self-interest which often creates eco nomic instability. The predominant view of the fail ures of stabilizatlion policy, which is informed by what one might call a "central planning mentality," is not that existing institutions create in centives for poli¢ymakers to gener ate economic instability, but that such failures are simply the result of accident or error. Economist Her schel Grossman> in reviewing the work of James Tobin, one of the chief archi tects of Keynesian economics over the years, summarizes this view: Tobin presume~ that the historical record of monetary and fiscal policy in volves a series of avoidable mistakes, rather than the: predictable conse quences of personal preferences and ca pabilities working through the existing constitutional process by which policy is formulated. Specifi¢ally, Tobin shows no interest in analysis of either the econom ically motivated behavior of private in dividuals in the pQlitical process or the behavior of the government agents who make and administer policy.22 In essence, the: predominant view of stabilization policy, like the so cialist dream of the centrally planned economy, is based on a vision of a utopian society run by angels who automatically serve the public in terest (however defined), and there is no agency problem. But if one ac cepts the notion· that policymakers 508 THE FREEMAN August are human beings, and therefore act in their own, self-interests, it be comes necessary to face the question of why governments would pursue any of the competing goals of mone tary and fiscal policy. As economist Paul Craig Roberts stated, What do policymakers, especially in a democratic political system, have to gain from an efficient, stable economy that is maximizing social welfare? Such a suc cessful economy would cut into their abilities, as entrepreneurs, to build the spending and regulatory constituencies that are the basis of their political power.

If people can get ahead through the mar ket, and the tax system allows them to accumulate wealth, what happens to the demand for all the welfare handouts, food stamps, housing subsidies, and income security programs? Without all these programs, what would government do? How would politicians carryon their demagogy and set group against group, class against class, and race against race if the tax system were actually used to bring about an equal distribution of in come and wealth?23 There is certainly much evidence of this. How else can one explain the extreme opposition by entrenched government bureaucracies to sup ply-side economics which attempts to restore incentives to work and in vest and to alleviate poverty by the only means known to man-stimu lating economic growth and wealth creation in the private sector? In short, those who benefit from public sector expansion have found it essential to undermine the activities of and public confidence in the pri vate sector.

Stabilization policy, a watered down version of central planning, has served, and will continue to serve to destabilize the private sector of the economy and to transfer resources and power to the government. After all, why should one expect govern ment bureaucrats to solve the prob lems which justify their very exis tence? While the free economy may not be void of economic fluctuations, government attempts at "fine-tun ing" have only destabilized the economy even more than what would have otherwise taken place, and will continue to do so as long as they are used. Conclusions The free economy is most condu cive to maximizing consumer wel fare, as defined by consumers them selves. In the free economy it is ultimately the consumer who deter mines the pattern of production and distribution, the distribution of in come, and induces entrepreneurs to produce goods and services at least cost. It is precisely for these reasons that interventionists are so opposed to the free economy. When political resource allocation replaces the market allocation of resources the result can only be the forceful im position of the preferences of gov ernmental agents for those of con1982 PUBLIC POLICY AND THE FREE ECONOMY 509 sumers, which is neither efficient nor equitable.

Political resource allocation, rela tive to the market, is wasteful and severely limits individual freedom and welfare. Furthermore, attempts at "fine-tuning" or "planning" are nothing more than attempts to sub jugate consumers and taxpayers to the preferences of those who have seized political power, and have se verely reduced the wealth of na tions. As a glance at any map of the world reveals, only the free economy is capable of achieving equity and prosperity. @ -FOOTNOTES1Ludwig von Mises, Human Action: A Trea tise on Economics, 3rd Ed., (Chicago: H. Reg nery Co., 1966), p. 270. 2Milton and Rose Friedman, Free to Choose: A PersonalStatement (NewYork: Harcourt Brace Jovanovich, 1979), p. 13. 3James Madison, The Federalist, 10. 4Alexander Hamilton, The Federalist, 6. 5James Madison, The Federalist, 51. 6James M. Buchanan, "Why Does Govern ment Grow?" in T. Borcherding, Ed. Budgets and Bureaucrats: The Sources of Government Growth, (Durham, N.C.: Duke University Press, 1977), pp. 3-18.

7Jerome Rothenberg, Economic Evaluation of Urban Renewal (Washington, D.C.: Brookings Institution, 1967), p. 65. 8This is a dominant theme of the economics of bureaucracy. See, for example, William Nis kanen, Bureaucracy and Representative Gov ernment (Chicago: Aldine, 1971). 9Adam Smith, The Wealth of Nations, Can nan Edition, (London, 1960), vol. II, p. 427. lOIbid,p. 129. llIbid, p. 143. 12Ibid,p. 152. 13The following examples are cited in Yale Brozen, Is Government the Source ofMonopoly? and Other Essays (San Francisco: The Cato In stitute, 1980). 14A detailed discussion of occupationallicen sing is found in Walter E. Williams, "Govern ment Sanctioned Restraints That Reduce Eco nomic Opportunities i for Minorities," Policy Review, (Fall 1977), pp. 1-29. 15Ludwigvon Mises; Bureaucracy (Westport, Conn.: Arlington Hou$e, Reprinted 1969), p. 1. 16Gordon Tullock, The Politics of Bureau cracy (Washington, D.C.: Public Affairs Press, 1965).

17Thomas Sowell, Knowledge and Decisions (New York: Basic Boo~s, 1980), p. 214. 18Wassily Leontief and Leonard Woodcock, "The Case for Planning," in The Politics of Planning, p. 348. 19Hubert H. Humphrey, National Economic Planning: Right or W~ong for the U.S.? (Wash ington, D.C.: American Enterprise Institute, 1976), p. 3. 2°Even Franco Modigliani, perhaps the chief inventor of Keynesiari economics in the U.S. came to this conclusion in his 1977 presidential address to the American Economic Association, "Should We Forsake Stabilization Policies?" American Economic Review (May 1977). 21See, for example, Itichard E. Wagner, "Eco nomic Manipulation for Political Profit: Ma croeconomic Consequences and Constitutional Implications," Kyklos, 'Vol. 30, (1977), pp. 395 409. 22Herschel Grossman, "Tobin on Macroecon omics: A Review Arti¢le," Journal of Political Economy 83 (August 1~75), pp. 845-46.

23Paul Craig Robert$, "Taxation and the In duced Demand for Lev~athan," paper presented at the 1980 meetings of the Mont Pelerin Soci ety, The Hoover Institt/.tion, Palo Alto, Califor nia.

A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN The Subterranean Economy NOT so many years ago my 35-year old horse Toy died in the middle of a frozen January. Digging a grave for him in the snow-blanketed ground with ordinary tools was a manifest impossibility. A man with a back hoe, hearing of my plight, offered to do the job for me. I was about to ask his name in order to make out a check for an agreed-upon $100 when he said, "If you have ninety dollars in cash I'll take that." I don't know whether that $90 ever figured in the Gross National Prod uct, but I have wondered about it. Similarly I wonder about the in comes of all those street hawkers who sell everything from women's hand bags to polished red apples in and around Grand Central Terminal in New York City. In businesses where there is little overhead and no doc510 umented inventory how much of any given transaction produces a statis tic that is recorded?

At the other end of the scale we have computers spewing out thou sands of documents that go into files far too voluminous for any correla tion. In a suggestive book called The Subterranean Economy (New York: McGraw-Hill, 187 pp., $19.95), Dan Bawly, an executive partner of an Israeli certified public accountant firm, says that Americans produce 72 billion documents annually. There are, so Bawly tells us, approxi mately 18,000 papers for every white collar worker in the United States, and the total number of records, vouchers and other documents on file must exceed three billion. As an international accountant with business in Europe, America THE SUBTERRANEAN ECONOMY 511 and the Middle East, Mr. Bawly has good reason to believe that no Gross National product statistics are reli able. Between unrecorded transac tions, mislaid files and untotalled slips of paper, the job of making a science of macroeconomics becomes a joke. In computer language, it's "garbage out."

Just GettingEven There can be no science without measurement, said Lord Kelvin, and Mr. Bawly would be the first to ad mit that The Subterranean Economy is not a scientific book. But he is sat isfied in his own mind that, with the proliferation of tax-consuming and inflation-creating welfare state bur eaucracies, thousands of individuals have come to regard their political representatives as crooks. Tax eva sion is no longer regarded as im moral; it's just getting even. To describe the new attitude, Ar thur Seldon of the Institute of Eco nomic Affairs in London has coined a new word. It is "avoision," com pounded of "avoidance" and "eva sion." Tax avoidance has always been legitimate. But now Mr. Seldon sees a moral blurring of avoidance and evasion. The higher the tax rate, the more popular the "avoision" schemes. The Gross National Product sta tistics either underreport or totally exclude many activities that should be relevant to any meaningful sci ence ofhuman action. Mr. Bawly lists a few of these activities. There is, first of all, moonlighting. In both Europe and the Upited States there is the illegal employment of aliens.

Barter is a big i_em. There is tax evasion through! manipulated ex pense accounts. ~nd there are the myriad "laundering" activities re lated to the dope traffic and the cul tivation, in California and Hawaii, of big unrecorded cash crops of mar ~juana. Money from heroin, cocaine and marijuana p~sses from hand to hand and into bank accounts for subsequent "laun<Iered" investment in legitimate business. And where is the farmer who i~ meticulous about recording roadsi~e stand sales? In parts of Canada, i for example, the unrecorded exch~nge of farming, fishing and forestIt commodities only rarely leaves an audit trail the Ot tawa government: can pick up. The "guesstim~tes" of the extent of the American underground econ omy naturally va;ry. Fortune maga zine has figured that $50 billion a year in taxes are ~ost to government. In 1976 the Intetnal Revenue Ser vice said the covett economy was ap proximately one-tenth of the surface economy. In 1981ithe Department of Labor estimated ~hat nearly one in twenty workers Held more than one job during a parjticular survey pe riod. Presumaoly, much of the "moonlight" income went unre ported. The Gen~iral Accounting Of fice has estimated that some $30 bil512 THE FREEMAN lion in taxable income remains "off the books," which means a substan tial loss in annual Federal income taxes.

The probability is that govern ment estimates of the underground economy err on the conservative side. If "authorities" were to admit their inadequacy to the job of tracking down every unrecorded dollar, it might encourage more people to be more brazen about practicing "avoi sion." Police state measures would then be necessary, and the Ameri can people wouldn't stand for that. Tax Avoidance Is Common In Other Countries In other countries there is less reticence in speaking about "avoi sion." Despite the recent jailing of Sophia Loren on a tax evasion charge, the Italians boast that their . underground economy has saved the nation from collapse. In spite of the fact that the Italian government in 1978 was close to bankruptcy, the country imported more Rolls-Royce cars and caviar than any other Com mon Market nation. It was second only to Britain in its consumption of French champagne. There is much less labor unrest in Italy's clandes tine businesses than in the open economy, where the Communist unions are strong. The presence of moonlighting in Italy gives the en trepreneur access to a flexible labor force that is' willing to work overtime. There is no registered glove factory in Naples, yet this city ex ports five million pairs of gloves an nually. The unmeasured Naples shoe industry is supposed to be just as large as the glove industry.

Macroeconomic data in Italy are meaningless. Things are not much different in France, where a quarter of the 25 million labor force is thought to be in moonlighting. Un recorded labor in France has, says Mr. Bawly, contributed materially to the construction of highrise build ings in cities from Paris to Nice. Pay in the unrecorded economy goes up, with the employer and the employee sharing the amount of tax avoided between them. In supposedly moral Britain the "unmeasured" economy is estimated as 7.5 per cent of the surface econ omy. Scotland reports an unemploy ment rate of ten per cent, but the London Economist suspects the fig ures. The "largest industry north of the border," says the Economist, "lies in the penumbra of services relating to providing Bed and Breakfast, and most of them avoid the taxman's eye." And the illicit whisky still in Scotland has always been a healthy sector of highland output. As for fish, "far more are landed than are offt cially sold."

The underground economy, says Bawly, will continue to grow until the Welfare State is cut back. It is as simple as that. , the Freeman VOL. 32, NO.9. SEPTEMBER1982 The Brigands and the Bargainers The case for trading rather than plundering. Ernest G. Ross 515 Small Business and Entrepreneurship E. C. Pasour, Jr. 520 How the competitive market process best serves consuimers. The Elements of a Fair System of Taxation Ridgway K.. Foley, Jr. 528 In search of a better way to finance limited government. The Relics of Intervention: 6. Conclusion: The Relic of an Idea Clarence.B. Carson 542 The idea persists that government should actively int~rvene in our lives. The Lessons of History John Jefferson Davis 554 Comparing the records of capitalism and socialism from a Christian perspective. The End of Schooling John K. Williams 565 A survey of the origins, the growth, and the results of state-school systems.

Book Reviews: 573 "The Public School Monopoly: A Critical Analysis of Education and the State in American Society" edited by Robert B. Everhart "Private Gold Coins and Patterns of the United States" by Donald H. Kagin Anyone wishing to communicate with authors may send first-classmail in care of THE FREEMANfor forwarding.

FOUNDATION FOR ECONOMIC EDUCATION Irvington-on-Hudson, N.Y. 10533 Tel: (914) 591-7230 Leonard E. Read, President Managing Editor: Paul L. Poirot Production Editor: Beth A. Hoffman Contributing Editors: Robert G. Anderson Bettina Bien Greaves Edmund A. Opitz (Book Reviews) Brian Summers THE FREEMAN is published monthly by the Foundation for Economic Education, Inc., a nonpo litical, nonprofit, educational champion of private property, the free market, the profit and loss sys tem, and limited government. The costs of Foundation projects and services are met through donations. Total expenses average $18.00 a year per person on the mailing list. Do nations are invit~d in any amount. THE FREE MAN is available to any interested person in the United States for the asking. For foreign delivery, a donation is required sufficient to cover direct mailing cost of $5.00 a year. Copyright, 1982. The Foundation for Economic Education, Inc. Printed in U.S.A. Additional copies, postpaid: 3 for $1.00; 10 or more, 25 cents each.

THE FREEMAN is available on microfilm from University Microfilms International, 300 North Zeeb Road, Ann Arbor, Mich. 48106. Some articles available as reprints at cost; state quantity desired. Permission granted to reprint any article from this issue, with appropriate credit, except "The Lessons of History."

Ernest G. Ross The Brigands and the BargcJiners IMAGINE a nation at civil war. Imagine two great armies, inter mingled guerrilla-style, battling in every city, every day, year in and year out. Imagine the two factions' spokes men, the intellectual lieutenants, interviewed every night on national television, calmly commenting on the terrible, destructive results of the chaos perpetuated by their opposing ideas. Imagine the people looking on, be wildered and increasingly bitter, as the war divides them-splitting families, neighborhoods, universi ties, cities and states. See in your mind's eye the citizens' raw frustra tion as the civil war first propels their lives into stagnation and finally, into Mr. Ross is an Oregon broadcast commentator and news editor especially concerned with new develop mentsin humanfreedom. a slow disintegration. Conceive of these people drawn by the call of survival into r~sentful, envious gangs, looting o.e another's prop erty and livelihoods.

If you can envision this, you have grasped not an i~aginary war, but a real one. The war is not in North ern Ireland, Beirut or EI Salvador. It is the civil war of economics in :modern America. The two armie$ represent diamet rically opposed ethics-the ethics of the Brigands anU the ethics of the Bargainers. The outcome of the war is far from decided. Both sides are energetically trying to convince more,!people to join their camps. Their intellectual lieuten ants are the econpmists, who also act as high-level r~cruiters. They are doing their best' to persuade influfilfi 516 THE FREEMAN September ential politicians, teachers, stu dents, businessmen and workers to ''join up." Choices About Right and Wrong Of course, the economists have by and large already decided which camps they favor. They have done so on the basis of a fundamental ide ational force which motivates all men. That ideational force is ethics.

Ethics is the branch of philosophy which deals with choices. Specifi cally, ethics is concerned with choices about right and wrong. No one escapes the motivations of ethics. It is literally, by the nature of things, impossible to do so. In order to live on this planet at all, each of us must make choices about what he considers right for his survival or wrong for it. Indeed, for mal ethics, as codified sets of stan dards for living, undoubtedly evolved from observations of fundamental choices' about what was prolife or anti-life. Therefore, in judging which camp to join in the American economic civil war, we must decide which side is governed by the ethics favoring hu man life and which side is governed by the ethics destructive to human life. My contention is that the ethics of the Bargainers is prolife and that the ethics of the Brigands is anti life. But how do I know? Who are the Brigands and the Bargainers? What, in practice, do they stand for?

I recently sent spies into each camp. Here are the summaries of my agents' observations. First, the report of my spy in the Brigands' camp: "The first thing I noticed upon in filtrating this enclave is an air of pervasive tension. It is not the heal thy tension of minds eager to engage in exciting new work, but the corrosive tension of fear. "After surreptitiously observing and interviewing everyone from lowly workers to top brass bureau crats, I have concluded that a fun damental premise underlies all eco nomic actions in this camp: Everyone believes that the way to 'get things done' is to force someone else to do them. This is the ethical heart of those you have tentatively desig nated the Brigands. I believe the designation is appropriate. "If a bridge or hospital or road or store is needed, the labor is con scripted. The money to pay for con struction is taken from the people either directly through a penalty on wages or production (called 'taxa tion') or indirectly through expan sion of the fiat monetary system (called 'inflation'). These things are implemented at the discretion of the state-often under threat of fines, imprisonment or worse against those citizens foolish enough to resist.

"You must understand that all 1982 THE BRIGANDS AND THE BARGAINERS 517 wealth is considered to be first and foremost the property of the state. As one elderly gentleman cynically put it to me, 'Everyone's belongings belong to everyone else.' The official state euphemism is, 'All wealth be longs to the people.' In practice, it is the state-or rather, those privi leged few who govern it-which owns the wealth. "I have observed that the psycho logical/economic consequences on the average individual are extreme. No man feels that his possessions, his residence or his work's products are secure (despite official slogans that the Brigands' system provides the ultimate in 'Social Security'). Each man is perpetually suspicious of others, fearing that they may be, or have connections with, politically more powerful people who could, on almost a moment's notice, uproot all that he has. As a consequence, this is a staggering, stagnant economy.

"Except among the young, fire-eyed idealists (who believe the slogans because they've not yet been worn down by the system), there is simply no individualincentiveto work hard. As one weary middle-aged man told me, 'I should work my hands to the bone? For what, when what I make today they will take tomorrow?' "What real work people do engage in is in 'The Underground,' the black market. Compared to the official state economy, I must say, The Un derground flourishes. Even with the severe, crushing penalties for par ticipation in black: market ventures, The Underground alone offers the promise of signifiqant improvement in one's personal and family life. Even so, the black market is not truly a free economy; psychologically, the fear of discovery 1 by the Brigands' agents always hangs heavily and gloomily in the background. "This was the ef?senceof my obser vations. Details of the mismanage ment, shortages, inefficiencies, breakdowns and 80 forth, follow... "

The Bargainers' ~amp And here is th~ report of my man sent to the Bargainers' camp: "Well, sir, first I must say that you gave me an unexpectedly easy and exhilarating assignment! At no time did I feel like a spy! I didn't have to 'infiltrate' anything. I simply walked or drove (transpqrtation for a quick and reasonable fee is readily avail able everywhere) and no one both ered me. In fact, the atmosphere was one of cheerful' helpfulness, even though everyone! seemed quite busy. "After interviewing a representa tive cross-section of this enclave, I have concluded that most everyone believes the way!to 'get things done' is to do them y<j>urself-and if you can't, then you negotiate with some one else to do tbje work or help you. This negotiation process-which they call 'bargainin~' - is largely auto matic. Or, perhaps it just seemed that 518 THE FREEMAN September way to me because they do it so nat urally.

"For example, if an individual wants to buy a television set, he simply walks into a store (or several stores, in a process called 'shopping around'), looks over the types of T.V. sets (called 'brands,' representing different, private manufacturers), decides which one he wants and then pays for it. Often he will pay with small, privately minted metal cast ings called 'coins,' usually of gold or silver. But more often, he pays by 'check' or 'credit card,' systems which act as claims on gold or silver (or notes for same) which the citizen has stored in any of a dozen varieties of private institutions called 'banks,' 'S and L's,' 'brokerage houses' and so on. There is no official government currency. "(As a side note, I ran into my counterpart from the Brigands' camp. He told me that there were always long lines at state stores-except those run especially for the bureau cracy. I never found this to be true in this enclave, although I did once have to stand in line for nearly two hours to see a popular anti-tyranny science-fiction movie called 'Star Wars IlL') "The way things work here is like this: "If a bridge or hospital or road or store is needed, people pool their wealth to build it-usually with the hope of charging other people for the use of the facility, eventually offset ting the original investment and all the while bringing in 'profits' (a type of income for entrepreneurs). Some times, incredibly, these people will build certain facilities-as to house the indigent-with money raised entirely through donations; there seems to be no shortage of private generosity!

"The Bargainers' system, I have observed, provides enormous incen tives. Virtually everyone feels that if he works hard, he can, sooner or later, significantly improve his per sonal and family life. As paradoxical as it may sound, the ever-present opportunity to risk their economic necks makes these people feel se cure! (They even have a name for that opportunity-freedom, and a popular slogan to express it-'The Land of Opportunity. ') "I cannot honestly say there is an 'underground' economy here; it is all above groundl The state does not en ter the picture by either restricting or subsidizing trade. "There does appear to be a mini mal state here. I wish to emphasize, these people are not anarchists. But the state's activities are strictly de fined and limited to defensive-re lated actions-military, police, courts. The people seem constantly watchful to keep the state in check. Indeed, to my surprise, they have devised innovative systems to han dle things which might otherwise be 1982 THE BRIGANDS AND THE BARGAINERS 519 state functions, such as private courts and some private police. Even the military is handled through private financing (a type of insurance pol icy), the people feeling that their liberty is a good investment.

"This conc1udes the basic summa tion of my observations. Details of the efficiencies, high productivity, variety and quality of goods and ser vices and financing methods fol low... " Of course, in our modern America, the camps of the Brigands and Bargainers are intertwined; they are our mixed economy. ,Often the ethical loyalties of individuals themselves are stretched and bounced between the Brigands and the Bargainers. Whether we wish it or not, we are all in the fray, all involved in the American civil war of economics. Free economics is the banner of the Bargainers; coercive economics is the banner of the Brigands. I'm joining the Bargainers. Where do your ethical loyalties lead you? i IDEAS ON LIBERTY Man's Destiny: Forced or Free? FROM the colonial and frontier days down to die more recent times, when a tide of mostly poor immigrants from Eurppe swelled the popu lation, America's national success story has been an amalgam of the individual success stories of boys, born in poor families, who started at an early age to help their parents and themselve~ by taking any avail able odd jobs, combining this with school and college study, and later becoming more or less prominent business and p~ofessional men. Look ing back to their boyhood, these men almost invariably recognize that this early experience in work and self-reliance was immensely benefi cial to them in adult life.

But today's well-meaning lawmakers have added so many minimum wage and other restrictions that it is impossible" in many cases, for an employer to hire young people without paying th~m more than they are worth. Here is one of the most obvious artificially created causes of youth unemployment and of juvenile delinquen¢y. For it remains just as true now as in the days when the proverb was more frequently quoted that Satan finds plenty of mischief for idle hands!. WILLIAM HENRY CHAMBERLIN E. C. Pasour,Jr. Small Business and Entrepreneurship BUSINESSNEWS in the United States focuses on economic activities of giant corporations. In recent years, for ex ample, politicians and newspaper editors have castigated the ~~obscene profits" of ~~Big Oil." A large in crease in profits by Exxon, IBM, and other large corporations frequently evokes calls for divestiture. The con ventional wisdom is that the Amer ican economic system is dominated by large corporations because big business firms are so productive that small firms cannot compete. In this view, ever vigilant government reg ulation of these large firms is re quired to prevent exploitation of workers and consumers.

In addition to the concerns about ~~big business," there is a growing feeling that the entrepreneurial spirit has lost its vitality in the ~~new Dr. Pasour is Professor of Economics at North Caro lina State University at Raleigh. 520 industrial state." The rate of in crease in labor productivity has been decreasing over time, and Uni ted States business firms have become less competitive with foreign manu facturers in the production of a wide range of products including auto mobiles, watches, steel, and televi sion sets. Current economic prob lems including financial difficulties on the part of Chrysler, Interna tional Harvester and other large companies, the slowdown in labor productivity, and a rising level of unemployment have evoked calls for the U.S. Government to underwrite a ~~reindustrialization" policy. More central economic planning is held to be necessary to revitalize American industry and provide jobs both for the unemployed and for new en trants into the labor force.

The purpose of this paper is to show that the preceding scenario is not an SMALL BUSINESS AND ENTREPRENEURSHIP 521 accurate description of the business environment in the United States or in other countries where entrepre neurial incentives are not stifled by inflation, taxes, economic regula tions, and other factors contributing to an unfavorable business climate. Small business, already the most important source of innovative ac tivity and new job opportunities in the United States, can play an even more important role with an easing of the restrictions on entrepreneu rial incentives. A market economy is a dynamic discovery process gen erated by the competitive entrepre neurial scramble for profits. Entrepreneurship and the Market Process In a free enterprise economic sys tem, expected prices and profits pro vide incentives for entrepreneurial activity. If market participants had perfect information, all market ac tivity would be perfectly coordi nated and there would be no profit opportunities nor role for profit seeking entrepreneurs. In a dy namic economy, however, market conditions are constantly changing due to the invention and introduc tion of new products, changes in pro duction technology, changes in con sumer preferences, and so on.

Consequently, there are always profit opportunities available for alert in dividuals with innovative ideas. Entrepreneurship may be aptly defined as an alertness to profit op portuni ties whi:ch have not been grasped and acted upon by others. It should be stressed that the potential for (and expectation of) profits in the competitive marj{.et process creates powerful incentives for profit seek ing individuals t~ discover and make use ofinformatio,n before it is widely known by other people. In a fundamental sense, entrepre neurship is the key to market cre ativity. Busines$ firms are induced by the profit motive to search for a unique profitable niche. This search for profit may take a number of quite different forms. An enterprising firm, for example, rna)" invent and produce a new product. Henry Ford, the founder of the Ford automobile com pany, provides cl. classic example of successful entrepreneurship based on this approach. However, the crea tion and development of a new prod uct does not ensure financial success for the inventor.' Of the thousands of inventions each) year in the United States, only a handful prove to be an economic success. In order for a new product to be profitable, the pro ducer must be able to sell the prod uct and at a price high enough to cover the ·production costs (includ ing a return to management).

Another possible road to profits is to advertise or market a product in a way that differentiates the prod uct in the eyes of the consumer. McDonald's, for example, reaped 522 THE FREEMAN September substantial profits as a pioneer in the production and selling of ~~fast food" hamburgers. This profitable busi ness organization soon spawned a host of close competitors. Regardless of the road to success, the effect of profits on competition is predictable. Profits invite competition and en sure that rival firms will compete to erode the profit advantages of the innovating firms. The result is that profits, whether due to the nature of the product, the conditions under which the product is sold, or to other special advantages, are invariably short lived unless the profitable firm can obtain the aid of government to restrict or exclude competition. In all countries in the developed world, there is a long history of the use of tariffs, patents, franchises, and other government enforced restrictions on competition. The conclusion is that monopoly advantages which persist over time are invariably due to gov ernmental restrictions on entry by potential competitors.

Entrepreneurshipand Job Creation The preceding discussion empha sizes that entrepreneurship is not a sure and certain road to profits. In a dynamic economy where economic conditions are constantly changing, entrepreneurship is, by its very na ture, a high risk activity. Economic growth in a rapidly changing econ omy depends upon a large group of individuals who are willing to en gage in risk-taking activity. It is es timated that more than two-thirds of all new business ventures in the United States collapse within five years. Despite the high failure rate of new firms, it is small firms rather than large corporations which are primarily responsible for economic growth and technological innova tion. Small firms appear to be both more flexible and more inventive. New developments seldom emerge from the leading companies in an industry, and even if a break through is made by a large well-es tablished firm, the new item is often launched by smaller firms. The re sult is that the more dynamic the local economy (e.g., Houston, Texas), the greater the risk-taking and the greater the proportion of firms that fail. A recent study ofjob creation in the United States by a group of re searchers at the M.LT. Program on Neighborhood and Regional Change found that the most successful busi ness areas of the country were those having the highest rate of innova tion and business fail ure-not the lowest.

The implications of these findings for job creation are startling. Large firms in the United States are not the major source of new job oppor tunities. The study alluded to above found that two-thirds of the net new jobs in the United States from 1969 1976 were created by small firms 1982 SMALL BUSINESS AND ENTREPRENEURSHIP 523 having fewer than 20 employees. A closely related finding revealed that 80 per cent of net new jobs were cre ated by businesses no more than 4 years old. The fact that most new jobs are created by small business should not be surprising since, as suggested above, small firms have the capacity to start up and expand rapidly. Shifting Job Requirements There also has been a shift in the kinds of these new job opportunities. New jobs are predominantly associ ated with the production of services as opposed to jobs in the traditional "goods" industries-manufactur ing, agriculture, construction, and mining. This shift in production from goods to services implies a shift from "brawn to brain" and an increasing dependence on education and train ing rather than physical capital.

Other countries are experiencing shifts in the nature of job require ments similar to those observed in the United States. Accompanying the shift toward the service sector has been a shift in the method of financ ing. As Nobel Laureate Milton Friedman points out, risky ventures have almost invariably been fi nanced by small groups of individu als risking their own funds or funds of their relatives and friends. This method of financing contributes to ward the increased flexibility and adaptability of small business. The preceding discussion should not be taken to, suggest that large corporations are hot important in the U.S. economy. Large firms playa vi tal role, both as ia source of jobs and in consolidating the advances pi 0neered by small firms. There ap pears, however, 'to be little basis for the widespread feeling that large firms have increased their competi tive advantag~ over time due to technological developments. George Gilder in his recent best seller, Wealth and Poverty, finds that aside from communication satellites, there is no evidence that recent changes in technology have worked to the advantage of large firms. It is the small firms thait are best able and most likely toirespond to rapidly changing economic conditions.

Implications for Economic Planning In view of the crucial place of small firms in job cr~ation, what are the implications fot the role of govern ment in fostering economic growth? The political muscle of large firms makes it more idifficult for market signals to opera~e. Chrysler and other large corporations in financial diffi culty generate attention by the news media and bring calls for govern ment aid. The number ofjobs at stake in such cases means that the fate of these firms is qkely to hinge on po litical considerations rather than on basic economic conditions. Propping 524 THE FREEMAN September up large scale noncompetitive firms through governmental assistance is to subsidize incompetence. A small business employing relatively small numbers of workers is more likely to have the opportunity to succeed or fail on the basis of economic fac tors rather than political expe diency.

Since most new jobs are created by small firms, it might appear that government should intervene di rectly. A policy of direct government intervention to assist small firms, however, is difficult to formulate even in theory. The success of any particular firm hinges not only on what that firm does but also on what its current and future competitors do. Thus, success hinges on technologi cal developments as well as on busi ness conditions. There is no way to predict tech nology or future knowledge of any kind since, if this were possible, fu ture know ledge would become present knowledge. Since the risk of failure is very high for small firms, in a policy of direct government in tervention a decision would first have to be made as to which firms to as sist. However, there is no accurate way to predict firm success, and gov ernment assistance of large num bers of unprofitable firms would be both politically unfeasible and eco nomically unwise. Thus, direct gov ernment intervention becomes less and less feasible in an economy where small service-oriented firms are increasingly important in pro viding job opportunities.

In view of these problems associ ated with direct intervention, a more feasible alternative is for govern ment to stress the creation of a fa vorable business climate-to adopt policies which are consistent with risk -taking and entrepreneurial ac tivity. In this business climate ap proach, the role of government is largely passive and necessarily lim ited. Consequently, the suggested approach involves a definite change in government policies. There is a consensus that high in terest rates, high marginal tax rates, and government regulations have actively discouraged risk-taking and innovative activity in the United States. During the past decade, sav ings by individuals and business firms have been discouraged be cause gains were taxed at high mar ginal rates even though such gains were, in many cases, not real but due solely to inflation. High Interest Rates Hamper Entrepreneurial Activity Entrepreneurial activity in the United States in recent years also has been hampered by high and rap idly changing interest rates. It is al ways difficult for business firms to make decisions based on anticipated future conditions. The difficulty and the cost of mistaken forecasts in1982 SMALL BUSINESS AND ENTREPRENEURSHIP 525 crease when interest rates are high.

There is a direct link between infla tion and interest rates. Nominal or money interest rates consist of two parts. The first part, a real interest component, is based on time preference-the extent to which people place a higher value on con sumption in the near future relative to the more distant future. Although there is no way to measure the real interest rate, economists have gen erally assumed this rate to be around 3 percent. The money rate of interest equals the real rate of interest plus a sec ond part, the anticipated rate of in flation. This inflation component has been the dominant factor in the money rate of interest in recent years, and reduced inflation is a nec essary condition for a reduction in interest rates. Thus, governmental monetary and fiscal policies to con trol inflation along with a reduction of taxes and regulations are impor tant in establishing the economic climate necessary for increased sav ing, investment, and capital forma tion.

What are the implications of the preceding analysis for central eco nomic planning? It is sometimes maintained that while a limited role for the state was feasible in sparsely settled nineteenth-century Amer ica, it is inevitable that government must playa larger role in economic planning in an increasingly urbanized and industrial society. How ever, as shown below, information problems intensify as the complex ity of society incteases which makes reliance on market prices more nec essary and govemment planning less feasible. Price Signals Market prices are the signals which direct economic activities for consumers and producers in a mar ket economy. When the price of or anges increases relative to other fruits, for exaIIllple, consumers re duce their consumption of oranges. When the price' of small cars rises relative to that! of large cars, auto producers shift :more resources into small car production. It is through this market p~ocess that relative prices induce individual decision makers to respohd to changes in eco nomic conditioIlS regardless of firm size.

The market integrates and mobi lizes information automatically without any peI1sonhaving to gather information together in one place. The housewife ip New York City, for example, may Wnow nothing about a poor coffee crow in South America, but she adjusts p.er actions to it when the price of coffee rises. At the same time, price an~ profit signals pro vide incentives! for the discovery of new facts whicll improves the adap tation of mark~t participants to ever changing circumstances. Thus, mar526 THE FREEMAN September ket prices convey an immense amount of information to market participants which makes possible the utilization of more data than is possible through any other known means of coordinating economic ac tivity. The factors which cause prices to change and thereby guide the be havior of decision-makers in a mar ket economy are influences which would need to be taken into account in any conceivable system of coordi nating economic activity. Moreover, no other way has been discovered for coordinating and transmitting in formation in the organization of pro duction to accommodate consumer's wants which even approaches the efficiency of the market process.

Thus, there is inevitably a loss of information when price signals are suppressed or overridden by mini mum wages, rent controls, price ceilings, or other forms of wage and price controls. Prices are important information signals in any market economy and information becomes more impor tant as society becomes more com plex. Consequently, the importance of market prices in coordinating eco nomic activity increases with the complexity of society. The result is that central economic planning is more difficult and less feasible in a modern industrial economy charac terized by rapidly changing eco nomic conditions. Conclusions and Implications A generation ago, a famous econ omist, Joseph Schumpeter, pre dicted the withering away of the en trepreneur. In a view later adopted by many economic analysts, Schum peter considered entrepreneurship to be crucial only in the early stages of capitalist development. In the "ma ture" phase of capitalism, economic activity was to be dominated by a combination of large corporation and government bodies leaving no scope for individual entrepreneurship. To day, many people still feel that the small inventors and fabled entre preneurs of early capitalism are a dying breed having no role to play in the "new industrial state."

The actual situation concerning entrepreneurship and small busi ness bears little resemblance to the scenario just depicted. Although large corporations dominate the business news, small business pro vides the dominant source of new job opportunities in the United States. Small firms, by their very nature, are more flexible and better able to adapt to ever-changing but unpre dictable economic conditions. Under these conditions, pleas for a "rein dustrialization" policy guided and aided by government are fundamen tally misplaced. Rather, emphasis should be placed on improving the investment climate ·as a means of fostering entrepreneurship and small business activity.

1982 SMALL BUSINESS AND ENTREPRENEURSllIP 527 Inflation, high taxes, and wide spread government regulations in hibit entrepreneurial activity for firms of all sizes. Entrepreneurship is especially difficult under infla tionary conditions both because the uncertainty created by inflation makes planning· more difficult and because inflation causes income to be overstated for tax purposes. Con sequently, the government can con tribute importantly toward a favor able business climate through non inflationary monetary and fiscal policies. Small business now plays a cru cial role in the rapidly changing modern industrial society. If, as seems to be the case, there is a fur ther shift away froJll the production of autos, steel and other products in which the United States once had a comparative advantage, the solu tion lies not in trade barriers .and protection or other attempts to in sulate these industries from market forces but in developing those prod ucts in which the United States is competitive.

The United States, for example,is the leader in producing "thoughtware" (software i as compared with hardware) upon! which so much of new technology is based. New tech nologies such a~ the laser and mi crobiology are o~ the horizon. How ever, the precis~ direction of these developments iSiunknown and any one who predic~s the technological future is sure to ~oon appear foolish. Consequently, tij.e importance of en trepreneurial act~vity in ferreting out profit opportun.ties will continue. Moreover, regar~lless of which prod ucts prove to be, most profitable for U.S. business, there is little ques tion that small business with its in herent advantages of flexibility and adaptability will be at the cutting edge of these new developments. @ -REFERENCESBirch, David L. "Wh<:> Creates Jobs?" The Pub lic Interest 65 (198~): 3-14. Friedman, Milton. Market Mechanisms and Central Economic Planning. Washington: American EnterPI1se Institute, 1981.

Gilder, George. Weal~h and Poverty. New York: Basic Books, Inc., ~981. Kirzner, Israel M. Competition and Entrepre neurship. ChicagQ: University of Chicago Press, 1973. Competition Equals Freedom IDEAS ON COMPETITION is nothing but freedom looked at up~ide down. In a market ~ where buyers are free to shop around, sellers m~st outdo each other to UIU get and keep customers. Through competition jthere is produced the LIBERTY maximum of goods and services that the public wants most. HART BUOK, "Freedom to Shop Around"

Ridgway K. Foley, Jr. The Elements of a Fair System of Taxation THE current mania for tax limita tion, tax reform or tax protest pro vokes the more intense inquiry into the rationale and justification for any system of taxation and the proper structure of a fair conceptual frame work for exercise of this state power. This essay presents a brief analysis of the issue and poses a simple solu tion much more in harmony with the idea of individual freedom than any existing dogma. The·Basis and Uses of Taxation The ideological roots of taxation rest in the good earth of sovereignty, that compelling state power over the rights of individuals.! Traditionally, the three common attributes of sovMr. Foley, a partner in Schwabe, Williamson, Wyatt, Moore & Roberts, practices law in Portland, Oregon. 52R ereignty consisted of the power of police,2 of taxation, and of eminent domain. From tribute paid involun tarily to the most evil or cunning or powerful by members of the tribe, to the king in his counting-house, to the modern exchequer and internal revenue agents and audits, the the ory of taxation has changed little: those in control of the apparatus of the state exact assets and value from serf or citizen in order to pay for governmental obligations and ser vices.

It becomes possible to identify three uses of the sovereign power to tax: the raising of revenue, the loot ing of citizens, and the implementa tion of social policies. Reason would suggest that only the first rationale deserves support, although one could THE ELEMENTS OF A FAIR SYSTEM OF TAXATION 529 cogently urge that the appropriate analysis of that concept does indeed implement a social policy, the policy of nonintervention in voluntary hu man action. Taxation of persons as a means of raising revenue probably pre-exists recorded history. Operating on the assumption that all mankind within a given perimeter benefit from the existence of the order of the state, princes and their modern counter parts have long demanded tribute under force of law. Simply stated, taxation supports the state by sup plying necessary revenue. Like collecting revenue, the em ployment of taxation as a means of systematic looting and banditry an tedates the dawn of history. Derived.

from the sinister side of the human. actor, taxation can be enlisted as a handy label to obscure outright thievery. By its very nature, taxa·· tion requires coercion, not voluntary action, on the part of the subject; therefore, the master can appeal to law or theology or some other strat agem to justify his confiscation of the wealth created by another. History is replete with examples of the pow erful and banal invoking "law" to line their pocketbooks and purses. The practice of taxing to encour age or induce "social" policy appears of more recent origin, yet it is quite as wicked as the habits of the pick. pockets of yore. The tactics are siro. ilar: those in power determine a "good" or "just": end and rob the pro ductive to pay for that goal. For ex ample, the popiulists in power may perceive that tlJ-e wealthy individu als in society <ilo not deserve all of the assets which they have secured through hones~ trade; therefore, by the means of progressive tax laws, the more wealth created and em ployed, the higher the tax payments levied, so as tp achieve a leveling process and a ~isplaced, false egal itarianism. The entire modern pro gram of entitlements owes its gene sis and continued vitality to this very simple tactic Qnce mada famous by Robin Hood; the only difference re sides in the fact that the modern counterpart of the Sherwood Forest rascal enjoys ~mmunity from prose cution since he' defines the issues and makes the rules.

The FirstQue$tion:Is Taxation Proper in Any!Form? The rapidity of modern life en courages thinkers to leap to incom plete conclusipns without plodding through the necessary intermediate steps. The initial question under the topic consider~d is not, what is a fair system oftax~tion? Rather, the fun damental inqqiry must be, is any tax structure phi~osophically permissi ble as harmonious with the freedom philosophy? Only if the seminal in quiry is answ¢red in the affirmative may we proce¢d to another question. I have addressed this key question 530 THE FREEMAN September in general terms elsewhere 3 ; it would not do to repeat the analysis at length here. For me, a justification for the existence and life of the state arises from a Rule of Necessity premised upon the incontestable nature of man. The socialist and the anarchist fall into the same trap: they fail to observe that man is not capable of perfection; rather he is possessed of a wicked side and while able to im prove he is never endowed with the inherent ability to achieve perfec tion.

The Rule of Necessity augurs that a free and orderly society must pos sess a state force to prevent internal and external fraud and aggression and a mandatory court of last resort to settle otherwise insol uble dis putes. Without these limited state powers enforced by the monopoly of coercion, mankind would always be at the mercy of the strongest and most vicious members of the world. Beyond these necessary restraints, the state should not interfere with the market for creative human en deavor. The anarchist argues that the need for personal protection and. dispute resolution can be met by private de fense agencies and private judicial arbitration. But what if someone re fuses to play by the rules? What if an aggressor, convinced of the pro priety of his position, employs force and wipes out your defense agency? What if a disputant refuses to come to arbitration or to abide by the ar bitrator's decision? There must be some community-recognized and supported court of last resort to pro tect rights and enforce judgments, else the world will quickly trundle into civil chaos, mountain feuds and mob warfare, with no rules except "might makes right."

Why Voluntary Taxation Is Not a Feasible Concept The realm of tax policy has intro duced a like idea which must be mentioned, analyzed, and discarded: the concept of voluntary taxation. Of course, "voluntary" taxation repre sents an impossibility, a contradic tion in terms, because by accepted definition, taxation is never volun tary but always coercive (although members of society may acquiesce in the form of government and its ap plication of coercive powers). The doctrine of voluntary taxa tion proposes that public works proj ects be submitted to the vote of the electorate for approval; those cast ing a negative ballot may show that vote to the clerk and receive a certif icate of exemption from taxation·for the particular project should it pass. Without discounting the proce dural difficulties in administration of such an enterprise, voluntary tax ation in this form suffers from a more serious defect: it tends to approve government intervention in eco nomic enterprises in which it has no 1982 THE ELEMENTS OF A FAIR SYSTEM OF TAXATION 531 business. If it is wrong for the state to build and maintain port facilities, airports, municipal auditoriums, domed stadiums, hydroelectric proj ects and a host of other endeavors, then it remains wrong even if the dissenters are saved from taxation to support the businesses. Those ac tivities beyond keeping the peace and settling wrangling can be done much more efficiently privately and with a higher moral tone and the voter should not be forced to lend tacit ap proval to government meddling where it doesn't belong.

Moreover, justice demands that all participants in society pay a fair share of the cost of maintaining or der in that society. The exemption described heretofore disparages that principle by excluding the dissenter from the cost, albeit for a laudable purpose. If the function is properly one which the state should perform, all should· pay equally; if the func tion resides beyond the limited pow ers of government, then none should be mulcted for that purpose and the matter-ifworth doing at all-should be left to private entrepreneurs. The Role of the Voluntarist Properly viewed, then, govern ment, the repository of organized coercion, possesses certain legiti mate functions: keep the peace, pre vent the application of force or fraud by one man against another, and provide a fair, common and equal system for settling disputes and ad ministering just~ce. These functions require funding: judges and poli¢emen must be paid a fair salary in ~rder to induce com petent people to! serve; records must be maintained Ifor public observa tion; the machinery of government must be housed jin appropriate quar ters; the necessary and proper im plements for catrying on these obli gations-firearms, paper, gavels must be purcha~ed.

Believers in freedom often suffer the accusation of negativism. True, the consistent voluntarist thinker seeks to reduce! a government to its proper minimum. In searching for reductions, he! must, of necessity, oppose spending of public monies for improper and wasteful functions and ask that well-meaning programs be achieved by cooperative action, not coercive sanction. Nevertheless, the adherent of lim.ted government need not always fit the mold of unsway ing opposition, for he recognizes that true state responsibilities require government activity and, within the ambit of the legitimate conduct of government, he seeks ways to per form the job w~ll. After all, for more than 6,000 yeats of recorded history, no state has approached perfection in performing the proper, i.e., legit imate, but limtted functions of gov ernment. The tax system represents one place which demands constructive 532 THE FREEMAN September affirmative action from the free in dividual in our society. Creativity and ingenuity proceed from adher ence to fundamental principles; the voluntarist should possess those eternal values which enable him to construct a mode of taxation accord ing to the rigors of a free society.

Thus, like Diogenes' quest for an honest man, our search for a fair tax system (to support a legitimate, lim ited government only) goes forward. Typesof Taxationin the Present World Modes of taxation proliferate, re strained only by the limits of human ingenuity or imagination. As we ap proach the waning years of the twentieth century, more than two centuries into our nation's history, the United States bears witness to a plethora of taxing devices. State and nation tax net income in progressive fashion. States collect fees, licenses, franchises and permits. States levy sales and use taxes upon the pur chases of some or all commodities. Congressmen clamor for a value added tax so prevalent in Europe which imposes a national sales fee on each step of the production and distribution process in our complex world. Net estates of deceased citi zens suffer the ignominy of another progressive assessment, usually by both the federal and (sometimes more than one) local government. High way use taxes apply to gasoline consumption. Even gifts beyond a lim ited exemption are taxed on a progressive scale. Real property, as sailed by a bewildering variety of measures, bears a disproportionate burden at the state and local level.

Certain luxuries carry additional taxes. Customs duties on imports add to the cost. In some jurisdictions, personal property or goods held for sale are assessed once a year. A mere litany would unduly lengthen this treatise and boggle the mind to boot. DisguisedForms of Taxes Beyond these specific taxes lie the more invidious assessments im posed by the state-more invidious because they are not called by their proper names. Social Security offers a prime example. Truly a tax, this exaction bears the label of an "in surance" payment, a misleading term since the law provides neither fund nor true voluntary insurance. 4 Esti mated income taxes and withhold ing payments likewise constitute disguised methods of increasing taxes: a citizen's income tax bill falls due 31/2 months following the close of his tax year yet, by these devices, the federal and local authorities de pri ve the taxpayer of the income he could have earned on his funds be tween the time he acquired them and the tax due date.

Surely, inflation constitutes the most invidious and unfair tax of all. We properly call inflation a tax be1982 THE ELEMENTS OF A FAIR SYSTEM OF TAXATION 533 cause it results strictly from govern mental meddling with the market system. Ancient monarchs clipped coins and practiced other petty de basements. Our government for many decades has ruled by deficit spending and, when the powers that be wish to fund their little schemes, they debase the currency (no longer bound by the market laws associ ated with the gold standard) by churning out tons of paper dollars. The increase in the federal money supply causes the phenomenon we label "inflation": the more dollars in circulation relative to the value of created goods and services, the less each individual dollar is worth and the more dollars it takes to purchase a given good or service. 5 Inflation operates as the cruelest tax of all because (1) it is not labeled as a tax, (2) it penalizes the thrifty, and (3) although occasioned by gov ernment policies, the politicians ha bitually blame other alleged causes and thus misdirect the anger and corrective powers of the citizens. One cannot imagine a more unjust situ ation than a hard-working laborer who, by thrift and foresight, saves up to $50,000 during his working life, by forgoing luxury expenditures and restricting his consumption, in or der to provide for his family when he is too old or too ill to work, only to discover that his hard-earned fund will only buy $5,000 worth of goods.

Yet that is precisely the result according to the decline in the dollar purchasing po~er since World War 11.6 Outright tl1lievery would seem less painful. The Elusive "Fair Share" Reflection suggests that a fair tax system might oontain two basic in gredients: First, each citizen should pay his fair share of the costs of gov ernment; seco*d, the government should only tax real value, not fiat money inflation. What constitutes fairness in tax ation? In the first place, the proceeds should only b~ used to pay legiti mate costs incurred by a limited government. III the second place, since every citlzen receives theoret ical benefits from the functions of the state so every citizen should contrib ute on a relati~ely similar scale as his neighbor. Acardinal rule in tax ation should r~quire those persons who benefit fro~ government activ ities to pay therefor. Advocates of progressive taxation assert that "from each according to his ability to pay, to each according to his need." In other words, those who produce more value should pay progressively greater taxes.

This postula~e rests on both spo ken and silent fallacies. The creator of-value benents no more from the proper functions of the state than does the derelict; to each man, safety of person and: ability to settle dis putes without civil chaos represent 534 THE FREEMAN September ultimate values. Since the producer secures no greater benefits, justice does not demand larger payments. The "ability to pay" justification dwells, in final analysis, upon the "principle" that "might makes right," that it is just and proper to band to gether to take by force from one man that which he has produced and to give these ill-gotten gains to an other individual without the volun tary action· of the producer. Since the justification fails, the proposition should lose vitality.7 Likewise, exactions levied against certain kinds of property or pur chases to the exclusion of others bear little fidelity to fairness. Thus a property tax levied against residen tial and commercial real property exclusive of that owned by the state and its minions, falls too heavily upon one group of people to the ex clusion of others in society. Those who do not own property pay a lesser share of the tax (through rent) par ticularly in an interventionist soci ety where rent, wage and price con trols flourish. Luxury, sales, and use taxes fall more heavily upon users of the taxed goods (hence the term "regressive" usually applied pejora tively to these taxes).

Elements of Confusion Since income, estate, gift, and in heritance taxes generally partake of the progressive feature, they suffer from the "ability to pay" malaise. Moreover, these taxes also suffer from unequal application since se mantic and definitional problems inhere in deciding what constitutes "income" (is a scholarship, fellow ship or prize "income"?) or a "deduc tion" (should medical expense and other taxes be deducted?) or an "ex emption" (should a person be enti tIed to a tax break because he con tributes to the support of another person?). In addition to rampant fundamen tal unfairness, modern tax systems suffer from gross inefficiency and waste of precious scarce resources. The amount of human energy which could be creatively em ployed-wasted on regulating and complying with unreasonable and unnecessary rules and orders as tounds even the casual observer. The various governmental units employ countless persons to write, interpret and decipher the revenue regula tions, regulations which are so vast that no living creature can under stand them fully. Those same public agencies utilize even more coercers in the form of auditors and agents and the like, men and women bent on enforcement of needlessly com plex laws.

The taxpayer, on the other hand, must spend large amounts of time and energy mastering the rules and regulations and complying with the regulatory process all at the expense of his creative endeavors; after all, 1982 THE ELEMENTS OF A FAIR SYSTEM OF TAXATION 535 human time and energy represents the most productive and precious of our scarce resources which should be husbanded for higher endeavors. Again, the beleaguered taxpayer must hire a veritable army of tax preparers, certified public accoun tants, tax specialists, attorneys, bookkeepers, clerks and the like, just to satisfy the maze of rules and or ders which pockmark the fair face of justice. Truly the cost of the present system, in economic terms of waste and inefficiency and in natural law terms of morality, represents too high a price to pay. Indexing to a Constant Dollar: False Security Measurements of income, assets, and expenditures in fiat currency produce several unenviable distor·· tions in tax laws, leading to the sug..

gestion by prominent authorities that the tax base-whatever the revenue program adopted-ought to be mea sured in constant dollars of unin Bated value. In a modified form, for example, the Canadian Conserva tive Party proposed such an infla tion discount in the 1972 elections and came within an eyelash of over turning the Liberal Trudeau gov ernment on this issue alone. Of course, the plan was hackneyed be yond all recognition with the politi cal shenanigans so common to poli ticians who neither know nor care about sound economic theory. Nevertheless, the harassed Canadian taxpayers responded so favorably to the inherent equity of the idea that the Liberal goyernment adopted a modified versiqn of the plan as an essential part dfits program. On the surf~ce, such a plan ap pears to possess merit. As the emi nent economist, Henry Hazlitt, has long advocated4, capital gains should be taxed in reat dollars, not inflated currency. For i example, suppose I purchase 100 shares of ABC stock in 1940 at $10 a i share, establishing $1,000 as my basis. I sell the stock in 1980 at a Ilrice of $100 a share (sales price $1~,000). Under current legislation, I would be assessed a tax based on a long-term (more than one year holding period) capital gain of $9,000, although varying distor tions in the law currently treat cap ital transactions somewhat favor ably . Yet my gain is illusory because 1982 dollars are worth less than 10 cents in 1940 dollars. 9 Mr. Hazlitt $uggests that the gov ernment should tax only the real (uninflated) gain on the constant dollar value cind thus discount my $10,000 sales price to $1,000 (value stated in 1940: dollars). Thus, in the example chos¢n, I have realized no real gain, no~ a $9,000 inflation wracked charade. Under this the ory, if my sale discounted to con stant dollars :revealed a deficit posi tion, I should li>e entitled to a tax loss for I have truly suffered a loss mea536 THE FREEMAN September sured in real dollars, or dollars of constant value.

Other imbalances caused by infla tion appear less readily but just as viciously. For example, the gradu ated income, gift, estate and inheri tance tax schemes promote what is euphemistically termed "bracket creep," creating an evil sibling to the distortion discussed by Mr. Hazlitt: As the nominal wages of a taxpayer increase, he moves to a higher bracket or tax rate on his base al though inflation has robbed him of any real gain and, in many cases, has placed him in a deficit position. The result: higher fiat income, higher tax rates, less real spending power, and a windfall to the taxing author ities. Recent Proposals to Achieve Fairness in Taxing As a result of these patent ineq uities, proposals have appeared in the past decade to apply a constant dol lar approach to all tax forms. 1o For instance, the Oregon-based Re search Committee Against Inflation proposed a net receipts tax on an in dexed basis in the early 1970s. In such a proposal, the tax rate should be levied upon receipts valued with out the inflation factor so that the taxpayer pays his share of the cost of government based upon what he really earned and what his receipts or "income" (in the broad sense) really will buy in the marketplace.

The proponents argued that it makes little sense, and certainly does not accord with common fairness, to tax a man on money substitutes in terms of money substitutes which have been debased by the taxing authori ties. Let us consider a common exam ple. Our taxpayer earns $15,000 in 1980 from all sources. That $15,000 will buy equivalent goods and ser vices in 1980 to those which could be purchased in 1940 for $1,500. Now, does it harmonize with justice to levy any kind of tax on the $15,000 income when it is really only worth $1,500 in 1940 market power terms, particularly where the loss of pur chasing power is solely attributable to the policies of the same body which now levies the tax? To state the question answers the inquiry.11 Application of this novel idea educes at least three complex issues. The first issue: What base year or years to use from which to measure inflation, since, according to Dr. Pick, "We started to project the financial syphilis all over the world in 1776 when Ben Franklin began the Con tinental dollar which became worth less after four years."12 In the ex amples, 1940 has been used as the base year because, according to Dr.

Pick, that represented the last infla tion-free year in this country. Undoubtedly, other economists using other measuring devices could disagree with Dr. Pick and suggest 1982 THE ELEMENTS OF A FAIR SYSTEM OF TAXATION 537 their own base years, inflation-free years, and rates of inflation. One could make a strong case for using 1914 (before the twentieth century wars and after a long period of peace during which time a relatively free economy existed), 1933 (before the nation left the gold standard, which imposes certain natural law imped iments restricting currency non sense), 1957 (subsequent to the Ko rean war and during a time of relatively balanced budgets) or any one of a number of other key years. A Shifting 10-YearAverage as a Basisfor Taxation Probably the fairest approach re quires the use of a 10-year average which shifts the burden forward each year. For example, the inflation dis count could be determined by using the federal government's own statis tical studies for the years 1957-1966, averaging the inflation factor, and applying it to receipts during 1980.

For 1981 receipts, the base-year av erage could be shifted forward to 1958-1967; for 1982, we could use 1959-1968; and so on. The use of the shifting 10-year av erage strikes a relatively fair bal ance necessitated by the realities of the situation. No year forms a per fect measure, and no state-produced econometric tool offers an exact yardstick. Reaching too far back into antiquity may unfairly hamper the government because of intervening crises not truly the responsibility of the present men in power. Using a base period too close to the fact (Canada propos~d 1970 as a base year for 1972) destroys the efficacy of the system which is designed to aid the taxpayer who has accumulated fiat currency. A single year can disproportion ately affect the i currency because of worldwide fiscal, emotional, and natural disast~rs while a 10-year average should !balance out the hills and valleys which beset any eco nomic chart. Tbe period 1957-1966 supplies a happy medium from which to start. Although budgets were never in balan¢e at the outset, and the Vietnam war had not yet heated up, these inflationary factors pro ceeded apace a~ the period wore on; the real glut of currency production did not take pl~ce until the advent of the Nixon administration.

MeasuringCap!italGains The second issue concerns the in terrelationship i between assets pur chased, held fo~ a period of time, and sold, and other receipts. Capital as sets, as explained, might be treated to a discount fa¢tor between the year of acquisition aind the year of trans fer. All other ~eceipts could be dis counted from tl1Le year of acquisition and the base-year period. Although gifts and inheritance could be treated similarly to ca;pital assets, ease of application might require that they 538 THE FREEMAN September TAXMANSHIP, a term sometimes applied to avoidance in its more intricate forms, might be called the active response to today's crushing tax burdens. It involves waste and irrationalities that may be as great a drag on growth as is the passive response of avoid ing taxes by choosing not to earn to full capacity. The toll in man power alone is impressive .... Since government must have rev enues, and compliance with tax laws of any kind will involve bookkeeping and other administration, some drain of human re sources in the process is inevitable. But the degree to which present taxation forces the defensive deployment of time and talent rep resents a deplorable waste.

The Morgan Guaranty Survey, November 1962 be considered as general receipts in the year of acquisition. The third issue: what should be the first step in implementation of the constant dollar approach? As suming that most legislators will decide that an indexed tax plan, as outlined in this paper, would not re flect their vested interests, the citi zens can still take steps to effect some of these proposals. The obvious: elect better representatives. The less ob vious:in states, enjoying a system of direct legislation, enact a measure to tax only real income by means of the initiative process. Once such a measure is enacted by the people, the government will learn to live within its means. The state example or ex amples will demonstrate the sound ness of fair and credible tax policies and, hopefully, will induce the federaI government, through its elected representatives, to follow suit.

Despite the appeal and lucidity of a constant dollar approach, its de fects impel that it be discarded in favor of a better plan. Human na ture dictates that such a device tends to encrust inflation into the political system rather than defeat it, by ameliorating the patent evils of pa per money. Like the insidious with holding tax, a constant dollar offset would render currency debasement relatively painless to all but the per ceptive observer; thus, it would serve as an opiate to mask the real cancer of government run amok. In addi tion, there exists little chance that a fair constant dollar credit would be enacted and maintained by elected officials who benefit greatly from the social schemes induced and encour1982 THE ELEMENTS OF A FAIR SYSTEM OF TAXATION 539 aged by inflated currency. More over, the system raises complexities which would defeat the desired end of eradicating obfuscation and cre ating a simple yet fair tax structure.

A Proposal: Proportional Gross Receipts Taxation Review the elements necessary for a fair system of taxation: First, the law should raise the necessary rev enue to fund only the legitimate purposes of government, the preven tion of aggression and the settle ment of insoluble disputes. It should not act as a tool for looting the citi zenry nor should it constitute a de vice for implementing social policy such as the redistribution of income and the satiation of the ends of envy, greed, and covetousness under the facade of egalitarianism and entitle ment. Second, it should operate to collect a fair and equal share of the legitimate costs of government from each benefiting citizen. Third, it should be simple to administer so as to save the time and energy now needlessly expended on compliance and enforcement. Given the flawed nature of man kind, no perfect system emerges, yet one concept seems better qualified than all others to fulfill these appro priate ends: Each person should con tribute a proportionate amount of his gross receipts each year from each and every source to defray the legit imate and limited functions of his government; th~ government should be circumscrib~d from acting be yond its limite4 authority and from spending or pledging funds in excess of its income. Mr. John Chamber lain has delineated the justification of a proportional theory of income taxation, a rationale which can be carried to its logical conclusion by applying the sound idea of propor tional taxation Ito gross receipts: Under the prolPortional theory of tax equity, a rich man would pay more taxes than a poor maJ{l, naturally. But every dollar of assessep property value, or of income, or of speJ!lding,would be taxed in equal amount, ~t flat percentage rates.

Dollars would be treated equally, no matter who own~d them, or spent them. Thus the citizens would be accorded the "equal protection!of the laws"-and their "privileges and !immunities" would be equal, as provide<ilfor in the United States Constitution. Ariy other way of treating taxation was regarded as discrimina tory, or as puttipg penalties on ability, ambition, and sQccess.13 Under the I)roportional gross re ceipts tax syst~m, every person, cor poration, foundation, or other entity (save for governmental units) would pay a flat perc¢ntage (e.g., 1%) of its annual gross receipt of funds from every source. rnhere should be no ex ceptions' limitations, exclusions, de ductions, credits or exemptions, thereby greatly) simplifying the whole tax preparatio(rl. process. This plan system would i>roducesufficient rev enue to support necessary govern540 THE FREEMAN September mental functions and would result in a great saving of creative energy now utilized in the regulatory and compliance process.

Commentson the Plan Several aspects deserve comment, for the proposal does not lack flaws. First, why should all institutions be subject to tax? The answer: The tax will not be onerous because the rate will not be graduated; the burden of government should fall equally upon individuals qua individuals and upon individuals operating in concert as entities or aggregates because the latter enjoy the protections of a properly-restricted government. There exists no good reason to ex elude hospitals, foundations, churches and the like from the pay ment of the cost necessary to solve disputes and to maintain order and safety; indeed, cogent arguments can be made that· taxation will impel those institutions to operate on a more businesslike and sound basis. Second, will the plan unduly re strict the state? I think not. While the actual income to the govern ment from a 1% gross receipts tax is not clear, 14 preliminary studies demonstrate that such a rate should be ample to carry out the proper functions of government. No moral reason exists to permit the state to live beyond its means and to mort gage the future of its citizens, nor to allow it to carry out functions which ought better be left to the private endeavors of the citizenry if indeed they are worth doing at all.

Third, what constitutes gross re ceipts, and why not apply the tax to net receipts only? Gross receipts en visions all income of every kind and nature accumulated during the tax year: Wages and salaries, inheri tances, gifts, prizes, scholarships, transfer payments, to name a few items. Simplicity demands no exclu sions; exemptions breed special in terest legislation and inherent un fairness. Fourth, is it fair to tax proportion ately so that a man earning $1,000,000 pays 1% or $10,000 in tax while a welfare recipient receiving $1,000 pays only $10 to the state? Probably not, but the concept is ever so much better than what now exists that some slight deviation from philosophical precision might be ac ceptable. A case can be made that each person and entity in a territory gains an equal value from the pro tection of his person and the estab lishment of order so that each ought to pay a flat rate, e.g., $100 a year, for government services.

The proportional gross receipts tax incorporates a progressive feature in that each person pays a flat percent age of his receipts, and the receipts by definition may vary. The Liber tarian Party fell into an identical trap during the 1980 presidential campaign when it decried unfair 1982 THE ELEMENTS OF A FAIR SYSTEM OF TAXATION 541 taxation yet produced a plan which still incorporated some progressive features. In the end result, the pro portional gross receipts tax is ac ceptable because the person or en tity with greater receipts may have more at stake in material things and thus may require justice services more often or in greater intensity than one possessing lesser wealth. Conclusion No system designed by fallible in dividuals will produce perfection in this orderly world. However, much remains to be done in the restriction of the state to its proper functions and in the restraint upon untram·· meled taxing and inflating powers ..

Adoption of the proportional gross receipts tax will mark a long step toward sanity and morality in the concept of sovereignty. i) -FOOTNOTESIFoley, Ridgway K., Jr., "The Source of Sov ereignty", 32 Freeman 167-175 (March 1982). 2Policepower is discussed at length in Foley, Ridgway K., Jr., "Police Power: Sovereignty's Sledgehammer", 25 Freeman 677-687 (Novem ber 1975). 3See, e.g., Foley, Ridgway K., Jr., "Individual Liberty and the Rule of Law", Freeman 357-378 (June 1971) and 7 Willamette Law Journal 396-418 (December 1971), and "The Source of Sovereignty", op.cit. note. 1. 4See Ellis, Abraham, The Social Security Fraud, (Arlington House, New Rochelle, New York (1971) passim. 5Admittedly this, conclusory statement does little justice to the l3ubjectof the root causes of inflation but it will suffice for the purposes of this article. The foBowing works, among oth ers, discuss the protlems in great detail: Mises, Ludwig Von, Hum~n Action (3rd revised edi tion, Henry Regnety Company, Chicago 1966) p. 780 et seq.; Rot~bard, Murray N., What Has Government Done ito Our Money?, 27 et seq.; Hoppe, Donald T., }Jow to Invest in Gold Stocks and Avoid the PitffLlls (Arlington House, New Rochelle, New Yor~, 1972) Part 1.

6"Franz Pick's 'Crises Seminar': Gold and Silver and the Co~ing 'Upheaval'," The Invest ing Professional (J-une1973) 56. Dr. Pick states that the last relat~vely inflation-free year was 1940 and the 1940,dollar is worth less than 10 cents today. 7A well written !article which discusses the problem of the progressive income tax in detail is Chamberlain, Jofm, "The Progressive Income Tax," IX Essays 011) Liberty 277-296 (1962). 8See, e.g., Hazlitt, Henry, "How to Achieve a Fair Tax Structure~" Human Events (March 17, 1973) 9-10. 9See Note 6, op. cit. lOIndeed, a moqified indexing proposal ap pears in the Economic RecoveryTax Act of 1981 although, at this -writing, the National politi cians are reconsidering the wisdom ofthis norm. lIIf anyone doub~s that only the United States government can fl~od the marketplace with fiat currency, let him print his own dollars and try to use them. Rather severe penalties attach to such conduct.

12See Note 6, op. cit. Actually, debasement and inflation far lantedate the history of the United States. Se~, e.g., Hoppe, Note 5, op. cit. 13Chamberlain, bp. cit., Note 7, page 281. 14Government ~ecords are not available to make the exact d~terminations necessary for a precise answer. State records have been stud ied in the years 1~73-1976 which demonstrate that 1% may yield much more return than nec essary to fund state functions in Oregon.

Clarence B. Carson THE RELICS OF INTERVENTION: 6. The Relic of an Idea Conclusion MANY interventions which have been embodied in programs that go back at least to the early twentieth cen tury are still with us as relics in 1982. Some even go back to the nineteenth century, to a period not covered by this series. For example, the Inter state Commerce Commission, which was authorized to regulate the rail roads, was set up in the 1880s. To day, it is a relic not only of regula tory zeal but also of a time when the railroads were the dominant mode of land transportation. But the most heady intervention has come in the twentieth century, and some of it going back to the early years of the century is still very much with us. The Federal Reserve system, which antedates World War I, was sup posed to regulate the money supply, Dr. Carson has written and taught extensively, spe cializing in American intellectual history. He is the author of several books and a frequent contributor to The Freemanand other scholarly journals.

542 and it is still busily trying to do that. The graduated income tax, which dates from the same period, is still being used to penalize profit making and other earnings, a habit formed during World War I. A few interventions have been permitted to expire. For example, The Works Progress Administration and the Civilian Conservation Corps, relief programs of the New Deal, were abandoned and have never since been revived. Mostly, though, interventions once undertaken have been continued in one form or another. Some, such as government-subsidized low-income housing, go through various permu tations as enthusiasm for them waxes and wanes. Even crop subsidies and parity programs are still going on. Meanwhile, new interventions, such as environmental protection and ur ban renewal, have had their days when they occupied the center of the CONCLUSION: THE RELIC OF AN IDEA 543 stage. However dramatic the fail ures of intervention, hope seems to spring eternal in the breast of the interventionists that some new twist or turn, some modification of the mechanism of intervention, some new wrinkle, will bring success.

The Basic Idea Ultimately, though, all these par ticular programs of intervention, even all those that survive today as relics, are less important than some thing else. All these relics are but the progeny of another more endur ing and persistent relic. It is, so to speak, the relic of relics. However thoroughly particular programs may be discredited, however great the failure of some government inter vention, however disastrous some government effort, the bent to inter vention continues unabated. Inter vention is like the mythical hydra headed serpent of ancient lore. It had nine heads. Chop off one of its heads, and two would come back in its place., There is one difference, however: what provides the animus for the hydra-like intervention is an idea. The relic that sustains all the other relics of intervention is the idea be·· hind government intervention it self. The idea behind intervention em,· braces the concept of an active role for government in society, and es pecially in the economy. That is, government should play an active role in shaping aociety and in direct ing the economy. While such a con ception was n@t original with re formers of the nineteenth and twentieth centuries, it did depart from the basic fradition for thre of government in America.

Herbert Hooter suggested on sev eral occasions that a good analogy for grasping toe traditional Ameri can conception' was that of an um pire in baseball. Though this anal ogy has some pitfalls that might well be avoided, it ,can be illuminating when used car~fully. The umpire is not supposed to participate in the game. His task is to enforce the rules. He is expected~o be impartial in his rulings and nqt take sides between the teams. It isinot his job to see that the game is clpse. He does not dis tribute or redistribute the players to see that the' teams are even in strength. The l)lmpire is there to set tle disputes which arise, not to alter the course of the game by intruding himself into it.' In that sense, his role is similar to the traditional role of government. But a baseball game is a contrived situation. Its rules are conceived to make a contest of the game. In these things, it is nqt parallel to life, soci ety, or economy. Moreover, the um pire looms much larger in a baseball game than Americans have gener ally conceived! it would be desirable for government to do in their lives.

The umpire is supposed to have all 544 THE FREEMAN September the players .under surveillance dur ing the whole course of the game. Such government surveillance would amount to tyranny. Moreover, in most cases, players have no role ei ther in bringing the umpire into the decision-making role or in arriving at their own settlements without him. The traditional role of govern ment in America is not at all like that. Keepingthe Peace The primary role of government is to maintain the peace. It is activated when there is aggression, when one of the parties to a dispute calls upon it, or when life, liberty, or property are endangered. Except when fraud, violence, or disputes come to its at tention, it remains passive. This is no doubt a somewhat idealized ver sion of even the American tradition, but it is in basic accord with it. By contrast, interventionists are moved by the conception of an active role for government, as I said. They see it as an active participant in the game, as it were, as continuously imposing its version of what ought to be, as reordering society and the economy. This active role for gov ernment is apparent in the follow ing quotations from intervention ists: In 1910, Theodore Roosevelt said: "I believe that in every part of our complicated social fabric there must be either national or state control."

In 1912, Woodrow Wilson said: "But we are coming now to realize ... that the law has to step in and create new conditions under which we may live." General Hugh Johnson, head ofthe National Recovery Administration, declared: "The very heart of the New Deal is the principle of concerted ac tion in industry and agriculture un der government supervision looking to a balanced economy." President Roosevelt announced in 1933 that "We had a bad banking situation. . .. It was the Govern ment's job to straighten out this sit uation and do it as quickly as possi ble." In 1954, Arthur F. Burns, Presi dent Eisenhower's Chairman of the Council of Economic Advisers, stated that "it is no longer a matter of se rious controversy whether the Gov ernment should playa positive role in helping to maintain a high level of economic activity. What we de bate nowadays is not the need for controlling business cycles, but rather the nature of governmental action, its timing and its extent."

These statements affirm the belief in an active role for government, but they do not explain why. Government action is the method; the why of intervention lies deeper. From one angle, thinkers became convinced of the necessity for gov ernment intervention because they lost confidence, or faith, in a natural 1982 CONCLUSION: THE RELIC OF AN IDEA 545 order and in the social order which takes shape when men are free. From. another angle, it is equally correct to say that many thinkers in the nineteenth century came to believe that the traditional order in society is unjust and that there are no nat·· ural laws working to produce order. Although there may be some ambi·· guity in the statement of it, Frank·· lin D. Roosevelt laid hold of the crux of the changed outlook in these two sentences read to the Democratic Convention in 1932: "We must lay hold of the fact that economic laws are not made by nature. They are made by human beings." That is a way of saying, I think, that the only law is positive law, that the only laws are those promulgated by govern-· ment. And, the only order that there can be is an order imposed by gov·· ernment. The point is nailed down.

by the next sentence, in which he declared that "the Federal Govern·· ment will assume bold leader·· ship .... " Laws of HistoricalDevelopment These views were the culmination. of a century-long social and eco·· nomic analysis which preceded them. While it would not be practical to go into this in detail here, the conclu sions toward which this analysis moved need at least to be pointed out. As many intellectuals rejected or abandoned the belief in a system of natural law-natural order they replaced it with a quest for the laws of historical: development. They shifted their attention from the en during order, if you will, to the laws of change and, development. Econo mies, looked ajt in this way, tended to be viewed as particular develop ments, or the results of institutions at some stage i of historical develop ment. At any rate, thinkers began to discern flaws i in particular econo mies. Indeed, ~ome discerned rather large flaws w~ich, if allowed to go on unchanged~ would produce cata strophic results. Karl Marx and Friedrich Engels were at the fore front, of course, of such analysts.

Bourgeois arrangements, as they described them, led to the impover ishment of the proletariat, the con centration ofi wealth, monopoly, periodic depr~ssions, and eventual revolution. Mahy other thinkers who did not share with Marx and Engels this apocalypt~c vision for the future nonetheless described flaws and in justices in th~ working of the pre vailing economic systems. By the end of the ninete~nth century, many thinkers had c~me to the conclusion, from whatever premises, that gov ernment must intervene in econo mies and in s<!>cieties in general in order to make justice prevail. What made !these interpretations plausible, so f~r as they were, were two ideas or iaeals shared by such intellectuals, ideas which were usu546 THE FREEMAN September ally implicit when they were not ex plicit. They were the belief in "so cial" justice and substantive equality. I say "social" justice because other wise the phrase might be taken to mean something different from what it does. From time immemorial, jus tice has had to do with individuals getting their due. It was not called "individual" justice; it was called justice. Undoubtedly, there were senses, too, in which such justice was social, since it involved others quite often and involved means made available in society for attaining it.

But it was not referred to as social justice. "Social" Justice and Substantive Equality "Social" justice is a class-oriented or collectivist concept. It refers to justice for some class, order, or group of people, such as "labor," "the working class," women, low income groups, ethnic minorities, or what have you. Such a concept makes a kind of sense if you start with, say, Marx's Labor Theory of Value. Marx held that all value was imparted to goods by "labor." It followed then, that labor should have the income from the sale of goods, and, if it did not, the system of division of the proceeds was unjust. Of course, Marx's theory of value is nowhere conscientiously applied in an econ omy, nor could it be but for the brief est span of time. I cite it only to illustrate the fact that the idea of "social" has no built-in means of de termining what is just. Justice for individuals is defined in terms of what is just, but justice for groups, if it is to have any meaning, must come from outside the concept.

The supplementary idea to which interventionists on behalf of "social" justice usually appeal is substantive equality. This, too, is basically a class or group concept. That is, it does not mean that each individual receives the same pay, income, and perqui sites, or whatever, as every other in dividual. Rather, it tends to be in terpreted to mean that all those of the same category, the same rank, the same education and experience, who do comparable work, and so on, should be paid the same. This con cept of class or group equality is of ten modified or supplemented by such phrases as the "right to a decent wage" or "living income" for all groups and peoples. For example, notice the language in which Presi dent Roosevelt enunciated his "Eco nomic Bill of Rights" in his annual message to Congress in 1944. He said, in part: In our day these economic truths have become accepted as self-evident ....

Among these are: The right to a useful and remunera tive job in the industries or shops or farms or mines of the nation; The right to earn enough to provide adequate food and clothing and recre ation; 1982 CONCLUSION: TH}I; RELIC OF AN IDEA 547 The right of every farmer to raise and sell his products at a return which will give him and his family a decent liv ing ... ; The right of every family to a decent home; The right to adequate medical care and the opportunity to achieve and enjoy good health .... The class concept is there in his ref erences to farmers, industrial work ers, and business. The ideal of sub stantive equality is muted but present in such phrases as "the right to a decent home." Nor did Roosevelt leave in doubt his belief that to se cure these rights would require gov ernment intervention. He said, "I ask the Congress to explore the means for implementing this economic Bill of Rights-for it is definitely the re sponsibility of the Congress so to do."

The Call for Intervention The idea, then, which undergirds government intervention in the economy and society is this: That government must actively intervene in the economy to balance it and in society to bring justice; that govern ment must continuously intervene else the disorders to which these are prone will reassert themselves; that the purpose for intervention is to provide "social" justice and substan tive equality for classes, orders, and groups of people. While this series has focused on intervention by government in the domestic economy, it has become in creasingly clear since World War II that the penchant for intervention has many other Idimensions. Even the extent of economic intervention was somewhat obscured in the 1930s by the depression framework of so much of the new government activity. So much legislatton was passed as emergency and recovery measures that it was har~ly clear what was to be more or less ipermanent and what temporary. It turned out, however, that about the only things tempo rary were acts ruled unconsti tu tional and the, length of time that the money from particular appropri ations lasted. By and large, then, economic intervention survived the depression and has been expanded over the years. IBut intervention has expanded far beyond the domestic economy.

International Intervention It has become commonplace for the United States ito intervene in var ious countries land conflicts around the world since World War II. The United Nations, located in and sponsored by the United States, was to have been:the supreme instru ment for collectivist intervention. From the beg~nning almost, how ever, UN inteIientionist efforts were usually stymietI by Soviet vetoes. In consequence, 4mericans have usu ally intervened on their own or in concert with such other nations as 548 THE FREEMAN September would join them. Foreign Aid was the device most widely used to ac complish the intervention. It may be objected that American intervention has usually been with the consent, and often by the invi tation or request, of the govern ments of the countries. Granted, but that does not keep it from being in tervention. Indeed, this only made it dual or multiple government inter vention. The home government in tervened in the lives of its own peo ple with the help of the United States. It did so in myriad ways: by planning economic development, by augmenting its military power (and hence potential control over its peo pie), by building public service facil ities, and so on.

The underlying idea for interven tion in other countries was roughly the same as for domestic interven tion. It was to protect the weak from the strong, to redistribute wealth, to plan economies, and to establish, or move in the direction of, interna tional "social" justice and substan tive equality. Until all this has been done, things are conceived as being dangerously out of kilter. The thrust of communism gave added impetus to the intervention, of course. Just as some historians will have it that the New Deal programs circum vented domestic insurrection, per haps even revolution, so it is alleged that the way to prevent communist revolutions is by interventions which support milder and more democratic socialism. But domestic intervention in the United States has gone much be yond the economic intervention of earlier years since World War II. How far it has gone may be illus trated by an announcement on tele vision recently. The announcer said that there is a Public Law which re quires that schools provide physical education for the handicapped who attend them. It is highly doubtful that in his wildest flights of imagi nation Franklin D. Roosevelt would have supposed that the Federal gov ernment had the power to lay down any such rules. After all, the public schools are the creatures ofthe states.

Neither the Constitution itself nor precedent provided any opening for such a Federal intervention. Above all, such intervention was remote from New Deal concerns. This is a way of saying that intervention which was initially advanced as a cure for pressing national problems has now been worked into every nook and cranny of American life. Judicial Activism One of the sources of this exten sion was what has come to be called judicial activism. More broadly, it can be viewed as an extension to the courts of the interventionist idea of government as an active and shap ing force on the American economy and society. This judicial acti vism 1982 CONCLUSION: THE RELIC OF AN IDEA 549 flowered under the leadership of Chief Justice Earl Warren in the 1950s and 1960s. In a series of land mark decisions, ranging from Brown us. Board ofEducation to Gideon us. Wainright to Baker us. Carr the Su preme Court not only broke with precedent after precedent but also carved out an active role for the courts in reshaping America. No de cision illustrates this more clearly than Baker us. Carr (1962).

In Baker us. Carr, and a string of Supreme Court decisions which fol lowed it-Wesberry us. Sanders, Reynolds us. Sims, and Wright us. Rockefeller-the Supreme Court claimed and asserted jurisdiction over states in the matter of appor tionment and the determination of election districts. The principle which the Court elucidated was that each vote of each person should have as near equal weight as that of every other voter. No matter that this rule did not apply to the mode of select ing many of those in the Federal government, it was proclaimed as the operating principle for the states. Since that time, United States Dis trict Courts have occupied them selves with the superintending of state reapportionments so as to as sure equality. That the discretion ary powers of the states have been greatly reduced by these and nu merous other Federal court inter ventions is undeniable. By the mid-1960s, the Tenth Amendment to the Constitution had become virtually a dead letter. The Amendment re~ds, "The powers not delegated to the, United States by the Constitution, nor prohibited by it to the States, are ~eserved to the States respectively, or ~o the people." It was, and is, no long~r clear what powers might not have been delegated to the United States, lif the interpretation of recent courtsibe taken as the mea sure. Indeed, if my reading of the impact of these] decisions is correct, the Tenth Amendment has been ef fectively reveIised. This reversed reading would gp something like this: "The powers hot specifically re served to the S~ates or to the people are hereby del~gated to the United States by the Constitution."

The Great Society At any rate, iby the early 1960s there was no longer any likelihood of court restraint of all sorts of inter ventionist measures which Presi dents might prqpose and Congresses might dispose. 'After all, if Federal courts were vested with such exten sive powers, they were unlikely to deny powers of Congress to exercise those along line$ they approved. One other major eveIilt,or series of events, set the stage for the greatest surge of interventionist programs since the New Deal. That surge came during the presidency jof Lyndon B. John son. What set the stage for this surge 550 THE FREEMAN September of intervention was the assassina tion of President John F. Kennedy in November of 1963. There was no predetermined reaction built into that event itself. But the handling of it by television prepared the way for heady government action. For several days after the assassination, all regular television programs were canceled, and the networks devoted themselves to John F. Kennedy, his assassination, his life, his aims, and so on. He was lionized, made a hero, a symbol, an embodiment of Ameri can youth and ideals. The frustra tion he had experienced in getting his legislative recommendations through Congress became a wrong to be righted, and President J ohn son became an instrument, for a time, to right those wrongs.

This was especially so in Civil Rights legislation. Otherwise, the Kennedy assassination may have provided some of the impetus to Johnson's own War on Poverty and interventionist action which was supposed to lead to the Great Soci ety. The following is not a complete list of the interventionist measures, nor was each of the measures en tirely new, but it will give some idea of the scope of the intervention dur ing the Johnson years. SpecificMeasuresTaken In 1964, measures dealing with the following were passed: InterAmeri can Development Bank, Federal Airport Aid, Farm Program, Pesti cide Controls, International Devel opment Association, Civil Rights Act of 1964, Urban Mass Transit, Crim inal Justice, Truth-in-Securities, Food Stamp, Housing Act, Interest Equalization, Wilderness Areas, Nurse Training, and Library Ser vices. But 1965 was an even better year for intervention. Fresh from a land slide victory over Goldwater and with comfortable margins for the Demo crats in both houses of Congress, Johnson moved onward toward the Great Society with renewed vigor.

Among the programs inaugurated (or newly funded) were Medicare, Aid to Education (first large scale Fed eral aid to elementary and high schools), Higher Education (inau guration of a general scholarship program for college students), De partment of Housing and Urban De velopment created, Voting Rights, Heart, Cancer, Stroke Program, Law Enforcement Assistance, Mental Health Facilities, Vocational Reha bilitation, Arts and Humanities Foundation, Aid to Appalachia, Highway Beauty, Clean Air, Water Pollution Control, High Speed Tran sit, Manpower Training, Regional Development, Aid to Small Busi nesses, Water Desalting, Commu nity Health Services, Juvenile De linquency Control, and so on and on. In the following years, there was Truth-in-Packaging, Teacher's Corps, 1982 CONCLUSION: THE RELIC OF AN IDEA 551 Asian Development Bank, Air Pol lution Control, Urban Fellowships, Safety at Sea Treaty, Fair Housing, Commodity Exchange Rules, U. S.

Grain Standards, International Monetary Reform, Vocational Edu cation, and what have you? If any thing was not authorized, con trolled, subsidized, regulated, intervened in, messed with, studied, had a commission appointed about it, offered assistance, or sustained during these years it was surely an error of the head and not of the heart. been aroused, find what it does falls far short usu(l1ly of the hopes and longings ofthdse who depend on it. Here is an iJh.cidentwhich may il lustrate the point. Several years ago I broke my wrist. During the time when I was w~aring the cast I had occasion to go to the bank to talk to an officer of th.e bank. He was busy when I arrived, so I sat down in a waiting alcove until he was free. The man next to ~e was black, and he undertook to ~ngage me in conver sation, or, mote precisely, to share his complaint~ with me. He noted An Established Habit that my arm i was in a cast and The habit of government inter-pointed out that he had broken a limb vention is now deeply imbedded in (I have forgotten which) at some time our outlook. If a problem is identi-. in the past. I h$.d great difficulty un fied that involves more than two' derstanding what he was saying, people it has become almost second both because hie spoke in spasmodic nature to expect government to do rhythms whic~ my ears refused to something about it. The promises sort into words and because, if my that promoted intervention have suspicions were well founded, he was given rise to great expectations. A nearly drunk. As well as I could make picture of government has been pre-out, his compl~int was that he did sented which would have it to be a not receive as much government or concerned and almost loving orga-other aid as h~ should have to help nization, dispensing "human ser-him get throug~ his difficulties with vices," as the argot has it, and ready a broken limb.: He alleged that the to meet all and sundry needs. It is a reason for this was discrimination seductive notion. But those who be-against Blacksi In order to substan lieve it are doomed to disappoint-tiate this, or so Jsurmised, he wanted ment when they come athwart ac-to know what sort of help I had re tual government. The gap between ceived.

expectations and reality constantly My irritation had got the better of breeds surliness and cynicism, if I me by that tiJl1le, and I asked him, discern aright. Government could not rather sharpl~, I think, what he meet all the expectations that have wanted of me. My voice must have 552 THE FREEMAN September risen above the mandatory hush which prevails in banks at all times, for one of the bank personnel came forward to deal with the man. He asked him his business, told him the bank had nothing for him at that time, and led him away as gently as possible. Although I was in no mood to explain it, it happens that I had neither received, asked for, nor ex pected any government aid to help me through the trials of a broken arm. I have a private hospitalization and surgical policy which paid most of the medical costs. Otherwise, I managed as best I could, failing even to take advantage of the govern ment's Bent Coathanger Program to enable those with fractures to scratch under casts when it itches.

The Disappointing Results One of my reasons for telling this story is its man-bites-dog aspect. Many whites are convinced that Blacks are the prime beneficiaries of government welfare programs. By contrast, here was one black man, at least, apparently convinced that he had been short-changed in his quest for aid because of discrimination against Blacks. All he knew, I sus pect, was that the government was spending a lot of money, providing a lot of aid, and he wasn't getting much of it. He was right, of course, on all counts. So are most of the others, of whatever race or color, who believe much the same. Which brings me to my main point, namely, that government aid is dis appointing and government inter vention is a failure. Government aid must disappoint most who fasten their hopes upon it, because govern ment resources are limited. How ever large the appropriations, the benefits are almost always a disap pointing dribble when they have been distributed to all the recipients. Be yond that, when "social" justice is the animating purpose, help for in dividuals is secondary. It is classes and groups that are supposed to be benefited. Thus, benefits are arbi trarily distributed, and such help as any receive depends upon the cate gory in which they fall.

Above all, though, government intervention is a failure. Govern ments cannot balance economies. They can only disrupt, distort, and unbalance them. They cannot inter vene so as to provide a flexible money supply which will meet all needs. They can only provide a system in which the money supply is alter nately expanded and contracted, causing booms and busts, among other things. Government interven tion cannot provide parity for farm ers' full employment for workers, solvency for shopkeepers, just prices for purchasers, and all the goodies that have been promised over the years. Government has no magic wand that it can wave to cure all the ills of a society. Even if government 1982 CONCLUSION: THE RELIC OF AN IDEA 553 be vested with plenary powers so that it is inevitably tyrannical, it cannot do these things. The IllusionPersists Government intervention isa relic. It is a relic of the heated dreams of nineteenth century intellectuals who professed the notion that they could by taking thought build a just soci ety. It is a relic of an unwarranted belief that government action was the cure for the ills of man. It is a relic of communist and fascist na tional planning. It is a relic of the discredited hopes of collectivists.

Even before interventionists had gained full sway in America the idea was already producing its totalitar ian fruit in Europe. It is a relic of the contradiction that by doing in justice and wrongs to individuals "social" justice can be achieved. It is a relic of a faith in an imposed substantive equality which can never have any more substance than a re flection in water ~ It is a relic today of politicians who know of no other way to get elected than to buy votes 'with our money, xaising once again expectations by tneir promises which they cannot fulfill. Nonetheless, the relics will sur vive, the programjs will continue, and new ones will b~ conceived so long as the idea that gives rise to the in terventions is b¢lieved. So long as people believe ,that governments must intervene to balance the econ omy, to impose: equality, to bring "social" justice, to bring order out of disorder, we wiU continue to have such programs. In the final analysis, so long as so many continue to be lieve that when :there is a problem or difficulty government must do something, intervention will con tinue apace. ® IDEAS ON LIBERTY Morals and the Welfare State IF one is free to have what he has produced and ~arned, it then follows that he also has the moral right to be free to choo~e his work. He should be free to choose his work, that is, so long as he does not violate the moral code in doing so by using in his productive iefforts the property of another person through theft or trespass. OtherWise he is free to work as he will, at what he will, and to change his work;when he will. Nobody has the moral right to force him to work when he does not choose to do so, or to force him to remain idle when he wish~s to work, or to force him to work at a certain job when he wishes to work at some other available job. The belief of the master that his j~dgment is superior to that of the slave or vassal, and that control is "for his own good," is not a moral justification for the idea of the Welfare State.

F.A. HARPER John Jefferson Davis THE LESSONS OF HISTORY "LENINGRADcan be overstocked with cross-country skis ... and yet go several months without soap for washing dishes. I knew a Moscow family that spent a frantic month hunting for a child's potty while ra dios were a glut on the market."! These observations by Hedrick Smith, former Moscow Bureau Chief for the New York Times, highlight the persistent problems of a planned socialist economy. We will be examining here the re specti ve track records of the free market and socialist economic sys tems. Marx believed that history would demonstrate the inherent su periority of socialism. He predicted that capitalism would lead to the Dr. Davis is Associate Professor of Theology at Gor don-Conwell Theological Seminary, South Hamilton, Massachusetts. This article is from the manuscript of a forthcoming book, A Land ot Milk and Honey: Bibli cal Foundations ot the Free Market.

554 progressive impoverishment of the workers, and that the system itself would be destroyed by a succession of boom-and-bust cycles of increas ing intensity. Leon Trotsky, one of the key fig ures in the earlier phases of the Russian Revolution, had even more grandiose hopes for socialism. He believed that in a socialist society man would become "... incompara bly stronger, wiser, finer. His body more harmonious, his movements more rhythmical, his voice more musical ... The human average will rise to the level of an Aristotle, a Goethe, a Marx. Above these other heights new peaks will arise." History has not been kind to the utopian hopes of Marx and Trotsky. The "New Socialist Man" is yet to appear, and, as we shall see, the his torical record shows that capitalism has been far more effective than soTHE LESSONS OF HISTORY 555 cialism in improving the lot of the common man. We will also be examining some popular but mistaken notions about the track record of the free market system. Did not the "Robber Bar ons" of the nineteenth century dem onstrate that industrial capitalism is a predatory and oppressive sys tem? Did not the Great Depression demonstrate once and for all the in herent instability of the free mar ket? We will attempt to show here that the common perception on both these questions is mistaken, and only serves to obscure the real merits of the free market approach.

The Longer View Without an adequate knowledge of the past it is easy to lose sight of the fact that the material abun dance produced by industrial capi talism is a very recent phenomenon in human history. Poverty has been the usual lot of mankind for most of recorded history. The concept of a steadily growing economy was vir tually unknown in ancient times. Growth rates through most of hu man history have been very low, zero, or negative. Pre-industrial societies were caught in a Malthusian trap of slow growth, increasing population, outstripping of food supplies, and demographic disaster. As the British historian Paul Johnson has pointed out, prior to the eighteenth century, "it was rare for even the most advanced economies, those of Engialld and Holland, to achieve one per !cent growth in any year."2 Beginniqg in the 1780s, En gland achieved a then-unprece dented annual gnowth rate of two per cent. By the end iofthe decade a rate of four per cent ~ad been attained a rate which waS to be sustained for the next 50 year~.

During the nineteenth century Britain increased the size of its work force by 400 per cent. Real wages doubled during i the period 1800 1850, and doubled again from 1850 1900. "This meant," notes Johnson, "there was a 16@O per cent increase in the production and consumption of wagegoods during the century. Nothing like this had happened anywhere before in the whole of his tory."3 After 185p, even higher rates of growth were] being attained in Belgium, France, Austria-Hungary, Germany, and ~he United States. Marx's predictipn that industrial capitalism woulp progressively im poverish the workers was falsified by the facts of history. Technological and Intellectual What produced this great "lift off' in the Western nations? The experi ence of England!, the pioneer in the new industrial revolution, is quite instructive. The, sources of the dra matic progress were both technolog ical and intellectual. Harnessing the new energy of coal and steam lifted 556 THE FREEMAN September English society to a new plateau of productivity far higher than the old economy based on the muscle of horse and man.

The new ideas of Adam Smith ex ploded the old mercantilist notions which measured the nation's wealth by stocks of silver and gold amassed through plunder and the cumber some operations of a centrally con trolled economy. Adam Smith's Wealth ofNations portrayed a vision of a society in which the initiative, energy, and imagination of count less enterprising individuals would produce a more abundant society for all. The Protestant Reformation, and later the Wesleyan revival, rein forced the biblical values of work, thrift, and personal responsibility, and thus helped create a moral cli mate which contributed to economic progress. "In short," writes Paul Johnson reviewing the trend of events, "after nearly five recorded millennia of floundering about, in relative or ab solute poverty, humanity suddenly in the 1780's began to hit on the right formula: industrial capitalism."4 And the progress was indeed dramatic.

During the 1780s, 80 per cent of the people of France were spending 90 per cent of their income on bread, merely to stay alive. Today France has more automobiles per capita even than Germany, and more second homes than any other European country. It is important to keep facts such as these in mind as we examine some particular issues relating to the nineteenth century experience. "Robber Barons" and "Dark, Satanic Mills" Despite the impressive historical evidence for dramatic economic progress in Western society during the last several centuries, there is the widespread belief in the popular mind that capitalism produced enor mous degradation, impoverishment, and oppression for the common man. This view can be found in novels, textbooks, newspapers, and televi sion and radio productions today. How did it arise? Curiously enough, this view was spread not only by Karl Marx and his followers, but also by countless nineteenth century social reformers, educators, writers, and clergymen who had no particular sympathy for the doctrines of Marx.

One can recall the lurid descriptions of the factory system in the novels of Charles Dickens, and the English poet William Blake's characteriza tion of these factories as "dark, sa tanic mills." The English industrial revolution had not only improved the living conditions of the masses, but also produced a fundamental alteration in society's perception of poverty. Since poverty no longer appeared to be the inevitable lot of mankind, in stances of it seemed all the more to call for vigorous reform. Industrial 1982 THE LESSONS OF HISTORY 557 capitalism produced a "revolution of rising expectations," and its very success provoked an outpouring of criticism. A social conscience quick ened by the evangelical revivals of the nineteenth century was made more sensitive to such criticisms. But were the English factories really "dark, satanic mills"? There is no question that conditions in many of the factories were far from ideal, but careful historical research has exploded the myth that the sys tem led to the progressive impover ishment of the workers. Exactly the opposite was the case. Economic his torians W. H. Hutt and T. S. Ashton have demonstrated that while there were some areas of unevenness, the general trend for English workers in the nineteenth century was one of improving standards of living. Real wages were increasing; the price of textiles fell, increasing the avail ability of clothing; after 1820, the price of consumer items such as tea, coffee, and sugar fell substantially.

Ashton concludes that "the number of those who were able to share in the benefits of economic progress was larger than the number of those who were shut out from those benefits."5 Countless thousands of English men and women voluntarily left the farms in order to work in the factories, be lieving that the new system offered greater opportunities for economic betterment. And more often than not, those hopes were realized. In 1837 or 183~, Thomas Holmes, aged 87, gave t~ a member of the Liverpool Statist~cal Society his rec ollections of the ¢hanges in English society during His lifetime. "There has been a very great increase in the consumption of IIlreat,wheaten bread, poultry, tea and sugar," he said. "The poorest are not s~ well fed. But they are better cloth~d, lodged and pro vided with furniture, better taken care of in sickness and misfortune. So they are gainers. This, I think, is a plain statement of the whole case."6 Robber Barons It is a commoI\lly held belief that nineteenth century America was the age of the "robb~r barons." John D.

Rockefeller, Comeli us Vanderbil t, Leland Stanford~ and other preda tory capitalists ,were milking the country dry with their rapacious, dog eat-dog form of i economic warfare. This is the pictur~ presented in Mat thew Josephson'~ influential 1934 book, The Robben Barons. According to Josephson, the l capitalistic system was the proble~, and government intervention was the solution. In spite of Josephson's claims, how ever, a closer e~amination of the record discloses tp.at the real culprit 'was not the free, market system as such, but governril£nt intervention on behalf of privileged business interests. . A good case iIi point is provided by the "Credit Mobilier" scandal of 558 THE FREEMAN September the 1860s. The Credit Mobilier was a "construction" company directed by those who had controlling interests in the Union Pacific Railroad. Through their political influence Congress passed the Pacific Rail road bill in 1862, granting the Union Pacific Railroad 12,000,000 acres of land and $27,000,000 in six per cent, thirty-year government bonds as a first mortgage, and 9,000,000 acres of land and $24,000,000 in govern ment bonds to the Central Pacific Railroad. The project was to estab lish rail connections between Omaha, Nebraska and the Great Salt Lake.

Financial interests in the Union Pacific Railroad used the Credit Mobilier to subcontract the con struction work to themselves, and when construction costs mysteri ously skyrocketed, the profits reaped by the Credit Mobilier were enor mous. When the swindle became known, the public outcry against "laissez faire capitalism" was im mediate. But as Susan L. Brown and other authors in The Incredible Bread Machine have pointed out, capital ism was being blamed unfairly. The promoters of the Credit Mobilier raised their capital not by private investment but by government sub sidy-by "subsidies, franchises, land grants and associated government involvements which are not charac teristic of laissez faire capitalism."7 The Credit Mobilier was not a true example of the free market, but of its perversion through the use of government power for the sake of special privilege. In this case "big business" was reaping profits not through fair competition on the open market, but through manipulating the political system for its own ends.

John D. Rockefeller's Standard Oil Company is frequently cited as the prime example of the evils of mo nopoly capitalism in the nineteenth century. According to the authors of one popular college text, "Rockefel ler was a ruthless operator who did not hesitate to crush his competitors by harsh and unfair methods." Rockefeller's Efficiency As economist Lawrence W. Reed has pointed out, such charges present a distorted picture of the reasons for Rockefeller's financial success. Ac cording to Reed, Rockefeller's profits stemmed not from a coercive monop oly produced by government grants of exclusive privilege, but from an efficiency monopoly-a concentra tion of the market produced by a company's excellence in satisfying its customers. Even Ida Tarbell, one of Rockefeller's most persistent critics, admired the efficiency of his opera tions. Tarbell, describing one of Standard Oil's refineries, admitted that it was "a marvellous example of economy, not only in materials, but in time and in footsteps." Eco nomic historian D. T. Armentano has pointed out that between 1870 and 1982 THE LESSONS OF HISTORY 559 1885 Standard Oil reduced its refin ing costs for kerosene from 3 cents per gallon to less than .5 cents per gallon. "Clearly," notes Armentano, "the firm was relatively efficient, and its efficiency was being translated to the consumer in the form of lower prices for a much improved product, and to the firm in the form of addi tional profits."8 Did Standard Oil ruthlessly drive out its competitors through preda tory price cutting? Reed cites the conclusion of historian Gabriel Kolko: "Standard attained its con trol of the refinery business primar ily by mergers, not price wars, and most refinery owners were anxious to sell out to it. Some of these refin ery owners later reopened new plants after selling to Standard."

Unlike the Credit Mobilier, John D. Rockefeller's profits did not de rive from special subsidies and priv ileges granted by the government. While it was certainly the case that Rockefeller wanted to make money, a fair reading of the facts discloses that he succeeded in doing so by the socially beneficial mechanism of the free market-by efficiently produc ing a quality product that the public really wanted to buy. The Great Depression More than any other event in the twentieth century, the Great Depression succeeded in convincing a generation of Americans that the free market system, left to itself, simply could not work. The social impact of this ev~nt was enormous. Some 12 millioq Americans were unemployed; so~e 5,000 banks and 86,000 business~s failed; in 1932 alone, 273,000 families were evicted from their hom~s. Despair and a sense of helplessness gripped the country. People kp.ocked on doors for handouts, and some even fought over leftovers in the ~lleys behind res taurants. The jOlflrnalist Saul Pett expressed the co:(nmon view of the lnatter in his observation that the Depression was "the watershed, the great turn in history in which lais sez-faire died and the basic philoso phy of American, government was profoundly altered."9 Only the re sources of the federal government, so it seemed, coulclirescue the nation from the wreckag~ of the free enter prise system.

But was this r~ally the case? Re cent economic research has been questioning this common view, and presenting facts ,which show that government intenvention was more a cause than a cure of the nation's economic crisis. A good measure of the blame must be laid at the feet of the Federal Resetve System, which presided over a ~eckless expansion of credit during th~ years 1924-1929. Professor Hans •$ennholz, a noted conservative econpmist, has argued that this credit e~pansion made the crash of 1929 inevitable. "Inflation 560 THE FREEMAN September and credit expansion always precip itate business maladjustments and malinvestments that must later be liquidated," he writes. lO Even after the monetary collapse began, the Federal Reserve did not take re sponsible countermeasures. Accord ing to Prof. Milton Friedman, the evidence is now quite conclusive that "the System not only had a legisla tive mandate to prevent the mone tary collapse, but could have done so if it had wisely used the powers that had been granted to it in the Federal Reserve Act."11 The Lesson of 1929 The Smoot-Hawley Tariff Act of 1930 represented another mis guided government intervention which only served to deepen the eco nomic crisis. By raising U.S. tariffs to record levels, this action virtually closed our borders to foreign goods, provoked retaliatory tariffs on American products, and contributed to unemployment at home and abroad. Sennholz points out that U.S.

exports dropped dramatically from $5.5 billion in 1929 to $1.7 billion in 1932. The federal government com pounded the nation's economic woes with the Revenue Act of 1932, dou bling the federal income tax burden. This sharpest tax increase in the na tion's history designed to "soak the rich," contributed greatly to the downward spiral. "This blow alone," notes Sennholz, "would bring any economy to its knees, and shatters the silly contention that the Great Depression was a consequence of economic freedom." Franklin D. Roosevelt's "New Deal" received the lion's share of credit for lifting the country out of the Depression, but it was really due to circumstances beyond govern ment's control-the beginning of the Second World War-that the na tion's unemployment problems were solved. The real lesson of 1929 is not that the free market system can't work, but that misguided govern ment interventions in the market can produce far more damage than they propose to cure.

The Recent Past Karl Marx expected industrial capitalism to produce increasing im poverishment of the workers, and fi nally to destroy itself in a series of boom-and-bust cycles. History has demonstrated that Marx was wrong on both counts. As George Taber has noted, "Rather than pushing work ers deeper into poverty ... capital ism has lifted the vast majority of laborers into the middle class. "12 Workers in free market economies have far more influence on manage ment's decisions than their counter parts in Marxist societies. Capitalism has weathered some severe fluctuations in the business cycle-the worst being the Great 1982 THE LESSONS OF HISTORY 561 Depression-but the predictions of its demise have turned out to be pre mature. Even its critics have been forced to admit its staying power as :;in economic system. Writes Robert Heilbroner, a left-leaning economist and persistent critic, "History has shown capitalism to be an extraor dinarily resilient, persisting and te nacious system, perhaps because its dri ving force is dispersed among so much of its population rather than concentrated solely in a governing elite."13 In the Soviet Union, the inherent problems of a centrally planned economy have become increasingly evident during recent years. After dramatic productivity gains from initially low bases in the 1950s and 1960s, economic growth in Russia dropped to two per cent in 1979, the lowest since the 1930s.

Lagging farm productivity has long been a weak spot in the Soviet sys tem. In 1930 the peasants revolted against Stalin's forced collectiviza tion and confiscation of their land and livestock. The subsequent fam ine was one of the worst in history, costing an estimated two to five mil lion lives. Problems with the collective farms have persisted down to the present day. In 1980 Soviet planners set a goal of 235 million tons of grain, but the actual harvest was only 189.2 million tons, according to official fig ures. Socialist Russia on many occasions has had to depend on the capitalist economies of the United States and Canada to provide bread for its own people. Late in 1981, fac ing another poor grain harvest, So viet authorities mounted a public relations compa~gn designed to con vince Russian hOllsewives of the vir tues of cooking with stale bread. "You will be rewarded by delicious, un usual dishes," ian official govern ment leaflet promised. 14 The system pf forced collective farming has no~ succeeded in extin guishing the spirit of free enterprise in the hearts of!the Russian people.

Privately farm~d plots in Russia, averaging less than an acre in size, represent only tihree per cent of So viet farmland, ~nd yet produce an astonishing on~-fourth of all Rus sian farm prod~cts.15 The "New So viet Man," when left on his own, can be as energetic and productive as his American counterpart. PersistentShortages The chronic inefficiency of a cen trally planned e~onomy shows itself in persistent sh<>rtagesof consumer goods in the retail stores. Towels, toothpaste, axes, locks, vacuum cleaners, irons, kitchen china, cam eras, or cars-the list is virtually endless. Soviet) women are accus tomed to spendi~g two hours in line, seven days a week, in hopes of find ing the items ~hey want. "I have known of people who stood in line 562 THE FREEMAN September ninety minutes to buy four pineap ples," writes former Moscow corre spondent Hedrick Smith, "and three and a half hours to buy large heads of cabbage, only to find the cabbages were gone as they approached the front of the line."16Bribery of clerks is a common way of trying to obtain retail items in short supply.

The political unrest in Poland and the rise of the independent labor union Solidarity has made the West much more aware of the economic problems in that socialist society. The frustrations of the ordinary Polish citizen express the crisis of the sys tem in a very personal way. "I do not even want to talk about food sup plies," said one elderly man on a shopping trip. "There is nothing to buy, beginning with milk and end ing in detergents. You have to have plenty of time or very good connec tions, but they do not even work anymore."17 Concern over a possible Russian invasion and maneuvers by Soviet troops on Poland's borders during 1981 were often overshadowed by a preoccupation with food shortages. "Maneuvers? Yes, I'm making maI neuvers-trying to get some ham for me and my daughter," commented Iadwiga Glowacka, a Warsaw tech nician standing in a meat shop line.1s A Christian minister from the United States was visiting in Gor zow, Poland during the summer of 1981. The hostess prepared a generous Polish meal, even borrowing sausage from a neighbor. But at the table she broke down and cried, "Forty years after the war, and this is all we have." The Polish people are not starving, but staples are scarce, and meat is "all going to feed the Red Army," as one person at the table said. 19 Crisis in Cuba In our own hemisphere, theCu ban economy is a prime example ·of the failures of a socialist system.

Prior to Castro's revolution Cuba was fourth among Latin American na tions in per capita GNP; now it is 14th, with one-third the rate of Puerto Rico. Rationing, inefficiency, and waste characterize the system. Milk, fruit, and vegetables are in short supply, and rice is rationed at five pounds per person per month. The Cuban economy is being kept afloat by massive Soviet aid, to the tune of $3 billion a year, or $8 mil lion a day. Castro's socialist revolu tion failed to deliver the equality and abundance that it promised. "Cuba today is a totalitarian society in which nearly every form of dissent is severely punished," writes John W. Cooper, a researcher for the American Enterprise Institute in Washington. "Castro and his ideol ogy not only supress the self-deter mination and freedom of conscience of the Cuban people; they have also created a stagnant economy with 1982 THE LESSONS OF HISTORY 563 perpetual shortages, which is com pletely dependent on a foreign power, the Soviet Union."20 In socialist states of Asia the spirit of free enterprise persists. A recent television newscast from Vietnam showed bare state-controlled food markets in Hanoi. The private street markets had plenty of food, and Vietnamese communist leaders have admitted they need Western help for economic development. In China, nearly 5,000 older entrepreneurs from an older generation have been given new jobs as factory managers and advisers. Hu Qiamu, director of the Chinese Academy of Social Sci ences, has admitted that China has had to adopt such free market prin ciples as "the pricing system, the rule of value, and the advantage of ma terial incentives."21 Asian states such as Japan, South Korea, Taiwan, Singapore, and Hong Kong, which have given free rein to free market principles, have surged far ahead of their socialist competi tors. George Taber notes that the economy of Hong Kong grew at a phenomenal 12.75 per cent annual rate during four recent years, in creasing per capita real income by 25 per cent. During the last twenty years the economy of Singapore has increased fivefold, giving its people a standard of living second in Asia only to Japan. So many new jobs have been created by Singapore's free market economy, notes David Reed, that the residents shun menial work, "and reportedly some 100,000 'guest workers' had to be recruited from Malaysia for this purpose. "22 Capitalism Prod!uces The record of history, then, seems clear. In the competition between capitalism and ~ocialism to provide both individual freedom and ma terial abundan~e, capitalism wins hands down. Even its critics have admitted the fre~ market's ability to produce and have reluctantly adopted some of its prinCiples. The free en terprise system·, is consistent with biblical teachings concerning the rights and dignity of the individual, and heeds bibli¢al warnings about the dangers of concentrating power in the hands of the state. "By limit ing the state," '. argues theologian Michael Novak,! "democratic capi talism liberates 1the energies of in dividuals and whole communities."

Greater abundance for all is the re sult. The free mark~t has its imperfec tions and failings, to be sure, but history shows th~t those of its com petitors are far worse. George Taber is surely correct i in his assessment: "For all its obviious blemishes and needed reforms,' capitalism alone holds out the mqst creative and dy namic force that finy civilization has ever discovered: tp.e power of the free, ambitious indivldual."23 When the dynamism of a society of free indi564 THE FREEMAN viduals is tempered and permeated by biblical values, the resulting sys tem would appear to be the best one attainable by imperfect individuals still living under the conditions of history. ® -FOOTNOTESIHedrick Smith, The Russians (New York, 1976), p. 60. 2Paul Johnson, "Has Capitalism a Future?" The Freeman, January 1979, p. 48. 3Ibid. 4Ibid.,p.49. 5F. A. Hayek, ed., Capitalism and the Histo rians (Chicago, 1954), p. 159.

6Ibid., p. 158, n. 26. 7Susan L. Brown, et al., The Incredible Bread Machine (San Diego, 1974), p. 13. 8Lawrence W. Reed, "Witch-Hunting for Rob ber Barons," The Freeman, March 1980, p. 169. The American Concept 9Macon Telegraph and News, June 17,1981, p.1. lOHans F. Sennholz, "The Great Depression," The Freeman, April 1975, p. 206. llMilton and Rose Friedman, Free to Choose (New York, 1979), p. 85. 12GeorgeTaber, "Capitalism: Is It Working?" Time, April 21, 1980, p. 55. 13Ibid.,p. 45. 14MaconTelegraph and News, September 13, 1981, p. lla. 15Shawn Tully, "Mapping the 'Second Economy,'" Fortune, June 29, 1981, p. 40. 16Smith, op. cit., p. 64. 17BostonGlobe, March 2, 1981, p. 3. 18MaconTelegraph and News, September 13, 1981, p. 14a. 19Professor Gordon Fee, personal communi cation, 1981. 2°John W. Cooper, "The Cuban Revolution," Christianity and Crisis, July 21, 1980, p. 203. 21Time, April 21, 1980, p. 53.

22David Reed, "Singapore: Jewel of Prosper ity," Reader's Digest, November 1979, p. 226. 23Taber,op. cit., p. 55. IDEAS ON LIBERTY The American concept of government did not spring into being full blown from a few brains; it was hammered out in the course of long experience and debate. By the middle of the eighteenth century Ameri cans were protesting that the exactions of the British crown were vio lating their rights as men, whereas but a generation earlier they had demanded their rights as Englishmen. A revolution in thought and outlook separates the former concept from the latter. In drawing the lines of battle on their rights as Englishmen, the colonists had in mind the concessions which their ancestors, beginning with the barons at Runnymede, had wrung from their sovereigns. In standing on their rights as men, the colonists drew upon another dimension, the theolog ical. This is probably what de Tocqueville had in mind in 1835 when he wrote of Americans that "religion ... is the first of their political insti tutions."

EDMUND A. OPITZ, "Capitalism and Our Culture"

John K. Williams THE END OF SCHOOUING FEW people in western democracies are happy with their state-school systems. Teachers are unhappy, believing that they are not appreciated by the community and are puppets con trolled by failed teachers who have engineered an escape into the pro tected, bureaucratic worlds of ad ministration, curriculum develop ment, and educational research. Parents are unhappy, lamenting their children's lack of basic skills and tired of helping their offspring prepare countless "projects" about dinosaurs or the environment. Em ployers are unhappy, having failed to exorcise a strange desire for sec retaries who can spell and office workers who, communing with their The Reverend Doctor John K. Williams has been a teacher and currently does freelance writing and lec turing in Australia. calculators to determine the product of 30 and 20, se~se that an answer of 1.5 might suggest that the wrong button has beenj pressed. Academics are unhappy, asserting that first-year college students are barely able to produce coheren~ essays.

Educationalists are not slow to proffer excuses for such a state of affairs. Schools, ~t is pointed out, are expected to solveinearly all social ills, ranging from ~enereal disease to disrespect for tQe environment. Lit tle school time r~mains for such trivia as reading, writlng, or arithmetic. Maybe. None.heless, the average Australian parent and taxpayer had cause for concern when a massive research progra¢ carried out by the Australian Council for Educational Research discovered, among other disturbing facts~ that 27% of 13,000 children tested. could not, after at 566 THE FREEMAN September least six years of schooling, divide 56 by 7 and that 20% could not com prehend the simplest of newspaper stories. The Swedish people have witnessed the steady erosion of the Swedish University Entrance Cer tificate, which once almost guaran teed admission to any European university, to the point where it rarely satisfies the entrance re quirements of such a university. A recent volume edited by Gerald Ber baum (Schooling in Decline; Mac millan, 1979) testifies to "wide spread disillusionment about the effectiveness" of state-controlled, compulsory schooling in the U.K.

The U.S.A. tells a similar tale. There, such tests as the Iowa Tests for Basic Skills and the Scholastic Aptitude Test reveal that good stu dent performance in the 1930s dete riorated sharply in the late 1940s, improved slightly in the decade 1953-1963, declined rapidly from 1964 until 1978, and showed a mod est improvement in 1979-1980. The massive overall decline is not confined to particular States, re gions, or population groups; is not caused by an increasing number of students taking the tests (the "spread" of scores does not widen); and cannot be attributed to statisti cal random chance. An increased "drop out" rate cannot be postulated as the reason for the decline: the most able of students are registering deI clining scores; they also have declined at late elementary and junior high school grades where atten dance is compulsory. Unfortunately, debates on school ing tend to focus upon incidentals.

"Progressive" methods of teaching are attacked or defended. Teachers are sometimes condemned for lazi ness and ineptitude, sometimes hailed as heroic souls attempting an impossible task devised by people who have, since their own school days, never been thrust into a class room. Both a shortage and a glut of educational technology have been blamed by those troubled about schooling. What is rarely discussed is the in stitution of compulsory, state~con trolled schooling as such. It is widely agreed that this institution is the backbone of a civilized, democratic society. Yet a perusal of its history is disturbing. Espoused by Martin Luther Effectively, the case for such schooling was launched in the six teenth century by Martin Luther. "I maintain," he wrote, "that the civil authorities are under obligation to compel the people to send their chil dren to school. ... If the government can compel such citizens as are fit for military service to bear spear and rifle, to mount ramparts, and per form other material duties in time of war, how much more has it the right to compel the people to send 1982 THE END OF SCHOOLING 567 their children to school, because in this case we are warring with the devil, whose object it is secretly to exhaust our cities and principalities of their strong men."

Luther's argument is simple. He knows the truth: Satan is waging war against humanity. He knows that weapons are necessary for victory against Satan: an ability to read the Bible and an acceptance of Luther's theological views. Men and women holding views contrary to those of Luther and instructing, or support ing schools which instruct, their children in these views are corrupt ing their children and subverting a godly State. Since error has no "rights" those in possession of "the, truth" must correct such parents and compel them to send their children to schools where they will be in structed in the tenets of the "true faith" and enabled to read their Bi bles. Melanchthon, a disciple of Luther, drew up in 1528 an edict demanding that every town in Germany estab lish at public expense a school where conscripts in the war against Satan could be prepared for battle. In Ge neva another Protestant reformer, John Calvin, was similarly making a case for schools where all children were to be instructed in the "true faith" and "in the languages and worldly sciences" which served as a necessary preliminary for such in struction. Like Luther, Calvin was supremely confiq.ent that his posses sion of "the trutli" gave him warrant to override the wishes and desires of parents who did not share his be liefs.

State Schools hi Prussia The first natiqnal system of com pulsory state-cqntrolled education emerged in Pru~sia. Kings Freder ick William I, Frederick the Great, and Frederick' William III suc ceeded, by the nineteenth century, in discouraging! non-state schools, establishing an ~laborate system of state-controlled $chools, and placing the supervision of such schools un der the direction of the Minister of the Interior. In 1810 State certifica tion of teachers iwas instituted and in 1812 children were prohibited from leaving sc:ij.ool until they had passed a State-s~t and State-admin istered examination. A complex bu reaucracy checking on schools and presiding over tflis examination of necessity emerged. Once again the "rightness" of such educational consqription seemed self evident. Rulers 'knew what was in the best interest$ of the ruled, hence recalcitrant parernts whose vision of the "good life" (or themselves and their children was not in accord with their "real" well-being could coer cively be corrected by the State.

A rationale fo:r, this had been pro vided by the eighteenth-century philosopher Jean Jacques Rousseau.

568 THE FREEMAN September Calvin and Luther claimed to know "the truth" because God had re vealed it. Rousseau did not claim such privileged access to the deity, but he postulated a reality which, in its wisdom and beneficence, ex ceeded the knowledge and goodness of any individual person or group of people. Over and above the many "wills" of individuals, valuing and seeking different goals, there ex isted a "general will." An intellec tual elite was able to determine the edicts of that "general will" and, by virtue of that knowledge, coercively implement those edicts. Rousseau's "General Will" Although frequently depicted in texts dealing with the philosophy of education as an advocate of child centered learning, Rousseau's edu cational philosophy in truth de pends upon the existence and au thority ofthis "general will." In Emile Rousseau does, it is true, depict the ideal educational system in terms of a child who, freed from the con straints of an adult's will, explores nature and its necessities (which, being "natural" constraints will not be resented) and thereby learns all he needs without being directed by any person.

Yet this is but part of the story. Emile has a tutor. His task it is to create situations in which nature will "teach" his charge precisely what he, the tutor, wishes it to teach. With a complacency bordering upon cyni cism' Rousseau notes that "[there] is no subjection more perfect than that which retains the appearance of lib erty" and that "[no] doubt [the pu pil] ought not to do anything but what he wants to do, but he ought not want to do anything but what you want him to do; he ought not to take a single step that you have not foreseen." By systematically "hiding his hand" the tutor avoids any clash between his own will and that of the child. The pupil thus equates his will and the tutor's will. He is thereby conditioned to equate his own will with the "general will." The nineteenth-century philoso pher G. W. F. Hegel went further. The State, through which the "gen eral will" found expression, was the earthly manifestation of the "Abso lute" or "God." Liberty was found by individuals who recognized the State "as their own substantive mind" and took the objectives of the State as "their own end and aim."

Freedom in the U.S. Compared with this exalted no tion of the State, the view of govern ment set forth in the U.S. Declara tion of Independence and Constitution seemed pedestrian and simplistic. The authors of these doc uments perceived liberty in terms of the rights of individuals and groups to formulate, and strive to realize, any noncoercive vision of the "good 1982 THE END OF SCHOOLING 569 life." The important but limited role of government was to enjoy a mo nopoly of coercive power and to use that power against individuals or groups who sought to impose their vision of the "good life" coercively upon others. Freedom was equated with the liberty of individuals, not the rule of the majority. Given such an understanding of government, schooling was purely private. The early colonists, usually refugees from religious persecution, naturally established schools which would impart their faith to their children. In addition to such schools parents, tutors, and non-denomina tional private schools saw to the ed ucation of children. It would seem that they were, in terms of basic lit eracy, remarkably effective: those who, in the early and mid nine teenth century sought to establish a state-controlled system of schooling did not, in their voluminous writ ings, refer to any widespread illit eracy which had to be combatted.

Similarly, those advocating state controlled schooling in the U.K. did not defend their cause by reference to widespread illiteracy among the poorest. Indeed Professor E. G. West has pointed out that in early nine teenth-century England a fright ened government imposed steep taxes upon paper to discourage the poor from exercising their capacity to read by communing with such volumes as Tom Paine's Rights of Man. "Here ... we have," writes West, "the par adox of a public: managing to edu cate itself into l~teracy competence from personal motives and private resources, despit~ the obstacle of an institution called government which eventually begins to claim most of the credit of the educational suc cess" (Education and the State: A Study in Political Economy; London, 1970). Precisely ~he same situation held in Australia where the case mounted for state-controlled school ing in no way qepended upon any alleged illiteracy cursing the poor est (and again it is worth noting that radical political!groups produced a multitude of pamphlets directed to the poorest-pr~sumably poor but literate).

Social Benefits ~f Schooling: The Views of HoraceMann The key to the case for state-con trolled schooling which so excited intellectuals was the belief-not unlike the belief!of Luther and Cal vin-that they, an elite, were in the possession of a 'i'truth" which obli gated them to direct, guide, and if necessary correct the views of the masses. By link~ng Rousseau's no tion of the "general will" to "major ity rule" nineteenth-century U.S. intellectuals beHeved that they had discovered in th~ "will of the major ity" (as, of COUI1se, interpreted by themselves) a r~ality marked by a wisdom and a goodness not to be 570 THE FREEMAN September found elsewhere. Schooling con trolled by that "will" would result in nothing but good for the community. Horace Mann, one of the foremost advocates of state-controlled school ing in the U.S.A., was not perturbed that the growth of the state-con trolled system of schooling in Prus sia he so admired had been paral leled by a growth in militarism and despotism. He was confident that the "quiet, noiseless development of mind" nurtured by that system would, in time, lead to "the people [asserting] their right to a partici pation in their own government."

Indeed the benefits Mann. asserted would flow from state-controlled schooling to the community ex ceeded the blessings Luther and Calvin expected would be enjoyed by their godly commonwealths. "[N]ine tenths of the crimes in the penal code would become obsolete; the long cat alogue of human ills would be abridged; men would walk more safely by day; every pillow would be inviolable by night; property, life, and character held by a stronger tenure; all rational hopes respecting the future brightened." That such a system of schooling would be expensive did not deter its advocates. Asked John Quincy Ad ams, "Shall monarchies steal a march on republics in the patronage of that education on which a republic is based?" He answered his own ques tion: "On this great and glorious cause let us expend freely, yes, more freely than on any other." Adams' advice that a nation should "expend freely" upon a state-con trolled system of schooling has been heeded, and not only in the U.S.A.

Most developed nations are pouring ever-increasing sums of money into their schools. Yet, as already noted, it would seem that the community is receiving less and less for its in vestment. Whilst some people still perceive, with Mann, the school as the remedy for all social ills, the ex pectations of the majority are more modest. They expect the school to train their children in basic skills, educate their children in the habits of critical and creative thought, so cialize their children, and mind their children. Planned Conditioning, Lack of Education Schools do succeed in "minding" children, keeping them "off the streets" where they might "roam" (whereas adults "walk") or "loiter" (whereas adults "stand"). They suc ceed in "socializing" children, al though the current wisdom would have it that such must not involve conditioning children in patterns of behavior specified by an adult.

(Whether this lack of planned "con ditioning" simply leads to random "conditioning" by the mob, and ex plains why teachers in some U.S. and U.K. schools are demanding guards 1982 THE END OF SCHOOLING 571 and "danger money," is an interest ing speculation.) Blandly to assert that state-con trolled schooling neither trains nor educates overstates the case: doubt lessly those of us who can read must acknowledge the truth of the bumper sticker asserting "If you can read this, thank an elementary teacher" and number among our benefactors such teachers. (Fortunately, those who cannot read are unable to de code the bumper sticker and con clude that they should blame an el ementary teacher!) Yet the fact is that too many children are showing fewer and fewer skills after invest ing more and more of their years in schools consuming larger and larger sums of taxpayers' money. A mas sive empire has been spawned, ruled by a priesthood of administrators, research workers, curriculum devel opers, "resource personnel," and bu reaucrats. They, not children, have proved the beneficiaries of compul sory, state-controlled education.

Those concerned with the quality of schooling are forced, inexorably, to question state-controlled school ing. So are those who take pluralism seriously. If liberty is understood in terms of the rights of individuals to formulate, and strive to realize, their own noncoercive visions of the "good life," then state-controlled educa tion is anathema. What skills must be taught? Who is to say, for example, that reading, wri ting, and arithmetic are more valuable than catpentry? Could one not imagine a relligious group which regarded reading, writing, and arithmetic as sigtls of an evil, worldly wisdom? Does the majority have the "right" coercively:tocorrect this value judgment? If so, ,is it conceded that such a group, w~re it to constitute the majority of the populace, would have the "right" 'to make the teach ing of reading, writing, and arith metic a crime? Again, even! assuming total agreement as to i the value of liter acy, who is to spepify what books are read? Is Little Black Sambo a banned book or compul$ory reading? Are primary readers ,to depict "normal"

families or lesbi8in couples who have adopted or conceived by artificial in semination a child? A neutral teacher antiseptically presenting all con ceivable human life styles embodies a hidden, and therefore all-embrac ing, curriculum: the notion that value judgments are ~erely the idiosyn cratic expressions of individual tastes, a viewpoint which, although popular, is simPily unacceptable to most religious believers and many humanists. Returnto the MarketPlace Those concerned with the quality of schooling, and those concerned with individual ,liberty, are led by different routes' to one conclusion. Schooling must be returned to the 572 THE FREEMAN market place. Consumers, at long last, would be free to register dissat isfaction with incompetent schools and teachers by the withdrawal of paying custom and, conversely, would again learn to value compe tent teachers and schools. Diversity in schooling would be encouraged a diversity which can be dismissed as "divisive" only by people holding to an ideal of cultural homogeniza tion which is sadly anachronistic in a pluralistic society. Schools freely chosen and privately funded would become "mediating structures"

which, like churches, unions, corpo rations, and associations, foster a sense of identity and belonging; a reality which in a pluralistic and highly mobile society, is no longer fostered by "society as a whole." Restoring Personal Choice The market would encourage teachers to improve their profes sional skills, would indicate ap proaches to teaching which "work," and would stimulate creative people outside the present educational sys tem to devise and market learning materials which, because of their ef fectiveness, would be purchased by schools and teachers. Specialized schools developing particular skills could be created by gifted teachers, students spending only part of their educational day and educational dollar at such schools. The poorest, assisted by voluntary associations to pay school fees, would have re turned to them some control over their own decisions for their chil dren and thereby recover some of the self-esteem which a well-inten tioned State and its minions under mined when decisions once made by individuals and families were made for them by the "experts."

Most importantly, the dream of Martin Luther and John Calvin that they, an elite, could use the school system to impose their vision of the "good life" upon others would be ended. That dream evolved into a nightmare which flourished in Fas cist Italy and Nazi Germany, still curses the U.S.S.R. and other Marx ian countries, and threatens to en velop nations which once knew what liberty meant but are sleepwalking their way back into captivity by an allegedly all-powerful, all-knowing, and all-present State. Those who still cherish liberty face the mammoth task of wresting con trol of schooling from the State and returning it, not to some abstraction called "the people," but to flesh and blood men and women whose visions of the good life vary and whose hopes for their children differ. Fortunately such people should be joined in this task by all who care about the qual ity of schooling available to their children and their children's chil dren. i A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN T'HE PUBLIC SCHOOL MONOPOLY IF, as Leonard Read has suggested, the "freedom philosophy" calls for the separation of school and state, we are in for a struggle that will last well into the next century. The sixteen essays collected by Robert B. Ever hart for his The Public School Mo nopoly: A Critical Analysis of Edu cation and the State in American Society, published by the Pacific In stitute for Public Policy Research of San Francisco and marketed by the Ballinger Publishing Company of 54 Church Street, Cambridge, Massa chusetts 02138, a Harper and Row subsidiary (583 pp., $30.00 cloth, $13.95 paper), offer little hope that government can be effectively de nied a licensing function that makes even the most independent of our private schools subject to political will.

There are, to be sure, some miti gating factors-the "monopoly" al luded to in the Everhart title must currently conte~d with the strug gles between th¢ "federalizers" and the proponents i of local state and community control; and there are some 5 million ~hildren in private schools, many of which are church affiliated. As always, opportunities for freedom lurk in the interstices of a diversified system. But in our in flationary age the money for educa tion tends to be sopped up by the public educators. :Private schools can hope for vouchers or tax credits or outright state grants (as in British Columbia), but the price that must be paid for such ~elp includes a cer tain conformity to quota system thinking about sex and minorities. Some of Everhart's contributors eome close to say~ng that the public school must alw!ays be an instru Inent of control in the hands of a rul i.ng class. If what:.these contributors are trying to tell us is that the schools, in any given period, will re574 THE FREEMAN September flect a prevailing ethos, they are ob viously right. Historically, this has not made for any oppressive unifor mity in American schooling-the "ruling class" in nineteenth-and early twentieth-century society be lieved in Horatio Alger individual ism, and our teachers took it for granted that what the Constitution guaranteed was freedom of opportu nity, not a God-given right to level ing "entitlements."

Rule by Professionals When the ethos changed with the rise of the "regulative" state, the schools changed with it. Curiously, this did not put "political content" into the schools. One of Everhart's contributors, Joel Spring, complains that the popular belief in profes sional "experts" breeds an apolitical citizenry that is willing to "let George do it." This has "stripped the schools of meaningful political content and directed their purposes toward the production of apolitical citizens who would accept a managed political and social system." What Joel Spring is saying is par adoxical. Ideology has been ban ished from the public schools in or der to facilitate the rule of professionals in our society. This amounts to a triumph for the tech nocratic ideologist. "A free society," says Mr. Spring, "cannot afford to let schooling be come an instrument of power." His pitch for an expanded private school system is implicit in his statement that "it is now important for society to consider whether or not it wants to continue with government-oper ated schools which are used to jus tify the power of those who control the schools."

Some of the Everhart contributors hope that the current revolt against over-regulation will encourage di versification by way of tuition tax credits, vouchers and tax codes. But Michael Apple, who is something of a leftist ideologist in his thinking, fears that the use of vouchers may "fragment" specific "progressive" movements. If "pluralism" is what we are after in an educational sys tem, what is the objection to "frag mentation?" Do we want cookie-cut ter schools? Vouchers and Tax Credits The most interesting essays in the Everhart book are those written by E. G. West ("The Prospect for Edu cation Vouchers"), Donald Erickson ("Disturbing Evidence About the 'One Best System' "), and Roger Freeman ("Education Tax Credits"). Mr. West has high hopes that the $500 grant scheme as established in British Columbia will enable us to test predictions about whether par ents can exercise the responsibility of free choice in their children's ed ucation once they are allowed the resources to do so. Mr. Erickson has 1982 THE PUBLIC SCHOOL MONOPOLY 575 his doubts about the "one best sys tem" of the public schools, but he is not too sure that the British Colum bia use of government grants to pri vate schools will prove helpful to private education in the long run.

Teachers with "two masters," the province and the parent, may be torn in different directions. They may be come less committed to parents and eventually to students. Erickson fears the growth of teacher "union mentality." And parents, "sensing more and more that their contribu tions and involvement are not only unneeded, but resented, may with draw to the sidelines ... Students, treated more like patients under treatment than members of a func tioning community, may perform ever more inauthentically ... Even tually, private schools could lose all the social climate characteristics that once distinguished them from public schools." What Erickson wishes to retain are the things that "money cannot buy, such as commitment, a consensus, community, accomplishment, and exceptionality." He hopes that "Canada's experiments will provide clues for the improvement of all schools," but wishes that British Co lumbia had chosen to help private schools by tax credits going to par ents instead of by direct government grants to the schools.

Partisans of public education fear that any help to private schools will tend to impoveri$h the public school system. If privat~ education were to become univers<jll, this would ob viously be true. i But if it is just a question of enalMing some private schools to survive in an inflationary epoch in which parents can't afford to pay twice for education, the granting of $450 ~o $500 in tax cred its per private ~chool pupil would actually be of fin~ncial benefit to the public schools. Roger Freemarfs arithmetic shows why this is true., It takes $2,200 of taxpayer money, to support a child in public schooL, A $500 grant en abling a student to shift to a private school would leave the public school system $1,700 ex~ra to spend on the students who s~ick to state-run schools. With mo~e money to be spent on fewer pupils,' the public school could supply better teaching and smaller classes. Mr. Freeman t~ckles the question of the constitutionality of vouchers and tax credits tp Catholic parents head on. Since ithe First Amend ment guarantees ifreedom of religion as well as freed~m of speech, how can the courts a$sert the unconsti tutionality of help to Catholic par ents in retainingi, some of their own lnoney for churc~-supported educa tion? People nowiget tax credits for donations to churches without being accused of helpiq.g the government to "establish" a state religion. Where is the courts' consistency? , 576 THE FREEMAN PRIVATE GOLD COINS AND PATTERNS OF THE UNITED STATES by Donald H. Kagin (Area Publishing, 219 Park Avenue South, New York, N.V 10003), 1981 432 pages - $29.95 Reviewed by Brian Summers THE MARKET is a great problem sol ver. Where there is a need, and peo ple are free to fill that need, solu tions soon appear.

One such problem is the need for a stable, reliable medium of ex change. When the government has failed to provide such currency, and private minters were free to fill the void, the mintmasters performed admirably well. But, until now, the story of the private minters has received little attention. They aren't mentioned in books on money and banking, even though in the years 1830 to 1862 they minted an estimated $75,000,000 in $1 to $50 denominations. Coin books contain only a few paragraphs, while numismatic magazines run an occa sional article. Now, however, Donald H. Kagin, the first American to earn a Ph.D. in Numismatics, has written a de finitive study on the private minters and their coins. The result is a fas cinating history of rugged individu als, frontier towns, and feisty com petition. Private minters coined gold in Georgia, North Carolina, Califor nia, Utah, Oregon, and Colorado.

Their coins weren't legal tender, so no one was forced to accept them. How well were the coins received? Just like any other product offered in the market. The good ones were readily accepted and used. The bad ones quickly fell into disuse. In a free market, good money drives out bad the exact opposite of what happens to legal tender coins. More than a century has passed since the federal government im posed its legal monopoly over coin age. The needs of commerce have changed. Yesterday's gold coins might not prove popular if today's markets were suddenly freed from government intervention. But certain principles remain. When competition is permitted, it is still the great discipliner of monop oly. When markets are free, they still bring forth solutions. And when people have a choice, they still pre fer a stable, reliable medium of ex change. i the Freeman VOL. 32, NO. 10 • OCTOBER 1982 A Question of Being Productive Clarence B. Carson 579 A quest for more constructive categories of those in or out of the work force.

Deficits Are Not the Only Problem Biill Anderson 587 The amount of government intervention and spending is the critical factor. The Development of Puerto Rico Dennis Bechara 592 A review of the factors for and against progress in Puerto Rico. Canada Damaged by Faulty Theories Kenneth McDonald 605 Some refreshing new alternatives to the interventions that have plagued Canada. The Social Role of Business Ridgway!K. Foley, Jr. 611 Not to pose as moral arbiter but to serve the subjective needs of the populace. The American Idea Ralph Bradford 627 The spiritual, political and economic antecedents of flreedom. Book Reviews: 632 "Back to Basics" by Burton Yale Pines "The Dominion Covenant: Genesis" by Gary North "Productive Christians in an Age of Guilt-Manipulators" by David Chilton "Marketsand Minorities"by Thomas Sowell "The Pursuit of Virtue and Other Tory Notions" by George F Will Anyone wishing to communicate with authors may send first-class mail in care of THE FREEMAN for forwarding.

FOUNDATION FOR ECONOMIC EDUCATION Irvington-on-Hudson, N.Y. 10533 Tel: (914) 591-7230 Leonard E. Read, President Managing Editor: Paul L. Poirot Production Editor: Beth A. Hoffman Contributing Editors: Robert G. Anderson Bettina Bien Greaves Edmund A. Opitz (Book Reviews) Brian Summers THE FREEMAN is published monthly by the Foundation for Economic Education, Inc., a nonpo litical, nonprofit, educational champion of private property, the free' market, the profit and loss sys tem, and limited government. The costs of Foundation projects and services are met through donations. Total expenses average $18.00 a year per person on the mailing list. Do nations are invit~d in any amount. THE FREE MAN is available to any interested person in the United States for the asking. For foreign delivery, a donation is required sufficient to cover direct mailing cost of $5.00 a year. Copyright, 1982. The Foundation for Economic Education, Inc. Printed in U.S.A. Additional copies, postpaid: 3 for $1.00; 10 or more, 25 cents each.

THE FREEMAN is available on microfilm from University Microfilms International, 300 North Zeeb Road, Ann Arbor, Mich. 48106. Some articles available as reprints at cost; state quantity desired. Permission granted to reprint any article from this issue, with appropriate credit.

Clarence B. Carson A Question of Being Productive IF we must have statistics (a doubt ful proposition), and if there must be a Bureau of Labor Statistics to col lect, collate, and expound them (equally doubtful), it strikes me that there are potential statistics of con siderably greater economic import than those being bandied about by the Bureau. The best known of the Bureau's calculations, of course, are those dealing with unemployment. Although they are less likely to get muchnoticefrom the media,the Bu reau also releases figures from time to time on the number of people who are employed. The Bureau must compile other interesting tidbits, Dr. Carson has written and taught extensively, spe cializing in American intellectual history. He is the author of several books and Is working at present on A Basic History of the United States to be published by Western Goals, Inc. otherwise it probably would not qualify for such exalted status among government unqertakings, but those items rarely attract attention.

Although the hest I can do amounts to no more tha~ lukewarm support for any of them. this is not intended as an attack on $tatistics, per se. Still, it might be well to point out some of their shortcomings at the begin ning. The most! general objection to statistics is th~t they are reduction ist in character. That is, statistics are compiled b~ lopping off all the individual ways in which things dif fer from one andther to arrive at their common traits. I What emerges is al most inevitabllY a lowest common denominator for all of them. All too often, too, the cpmmon feature is the least revealingl and least important aspect of what is being categorized. fi79 580 THE FREEMAN October Take the matter of statistics on unemployment. When they are re ported in the media, they are made to sound as' if they were absolute numbers. We may be told, for ex ample, that during the past month there were 8,250,000 unemployed in the United States. The figures are further broken down into percent ages for cities and regions. For ex ample, the Bureau may announce that 12.7 per cent of the work force in an area was unemployed. That sounds precise, exact, certain, and beyond doubt. This apparent preci sion is achieved, however, by the ex tension of figures collected in sur veys, by the acceptance ofself-serving claims, and by the adoption of a coni venient fiction.

Lumpinginto Groups The convenient fiction concealed in unemployment statistics, let me hasten to explain, is that there is such a thing as a completely, or to tally, unemployed person or that if there is, they are very numerous. It is conceivable, of course, that there are some persons who spend their waking hours seeking jobs: going over want ads, writing letters of ap plication, making telephone calls, going to places of employment to get on their lists, and so on. It is even conceivable that some people might do this for as much as several weeks or even longer. But that such people exist by the millions in the United States is a fiction which is able to parade as fact only by lopping off large portions of reality. Among those listed as unem ployed are those for whom the status is essential for them to continue to draw unemployment compensation. Their claims to being unemployed are self-serving. That is, they expect to benefit from the acceptance of the claims. In fact, many of them are working, part time or full time, for themselves or someone else. The 1n temal Revenue Service has an nounced, even, that the number of those who are working at some thing, or something extra, and not reporting their incomes is legion, and that their earnings may amount to several hundred billions annually.

Many of these are undoubtedly listed as unemployed. It is not my point, however, that the category, unemployed, is mean ingless. There are undoubtedly many people who do not have regular em ployment for which they receive a regular and predictable paycheck. There are those who have difficulty finding employment in their profes sion or trade. There are some who would consider themselves partially or temporarily employed, when em ployed at all. The figures of the Bu reau of Labor Statistics may even reflect, roughly, the fluctuations in all of this. My point is that the real ity is much less precise than the sta tistics suggest, or declare, and that 1982 A QUESTION OF BEING PRODUCTIVE 581 the condition is rarely the one that is sentimentalized for the popular imagination. But the labor statistics duality of employment-unemployment has at least two other major difficulties pe culiar to it. One is that it leaves out of account a considerable portion of those with whom it might be ex pected to deal. It not only· fails to account for the whole population, but also leaves out of account a portion of the potential work force, what ever that may be taken to mean. To put it more directly, the employ ment-unemployment figures do not balance with the population figures.

Suppose, for example, that we are told in a report that there are 1121/2 million people employed and 81/2 million unemployed. That adds up to 121 million. But if there are 230 million people, say, in the United States, 109 million of them are missing from the statistics. Un doubtedly, they can be placed in this or that or the other category, but they are still in an employment-unem ployment limbo. Misleading Categories The other difficulty, too, tends to disqualify the dual employment-un employment category. The trouble is that it is not a very apt economic category, if it is an economic cate gory at all. It does not tell us any thing much that is applicable to eco nomics. Economics has to do with the effective use ofs~arce resources-i.e., land, labor, aqd capital-so as to provide those goods that are most wanted. Emplqyment and unem ployment figures may appear to get at that, but th~ appearance is de ceiving. Wheth¢r those who are em ployed are aid~ng in the economic endeavor is noil revealed. As to the unemployed, the statistics them selves are sile~t on the impact on the economy.

What is wanted, it seems to me, are some diffe$nt categories, cate gories which ¢mbrace the whole population, wh~ch are economic in focus,and whicq are more nearly self explanatory. (If the new categories present problems of quantification, they will not d~ffer in that from the present ones. Tpe distortions in sta tistics are inhetent, hence, unavoid able.) Since th~ production and dis tribution of goodsis the main concern of economics, it would be quite ap.. propriate to have the categories con centrate on thlat rather than em ployment and unemployment. Therefore, the following three cat egories are hereby nominated as re placements: (1~ the Productive, (2) the Unproductive, and (3) the Coun terproductive. ~veryone falls in one or the other of! these categories, or some variant ofiit. The categories are unquestionabl~ economic in charac ter. Classifying people according to them poses no greater difficulty than those in use. Above all, the third 582 THE FREEMAN October category, a highly important one, gets entirely ignored in the present classification.

The Productive The Productive consist ofthose who produce the.goods on which they live. They may produce the goods for themselves or for sale in the market, or, what is most common, some com bination of these. No distinction need be made between goods and ser vices, and the provision of a service is here considered as the production of a good. Thus, the housewife is as much the producer of a good when she prepares a meal or vacuums a room as when a factory worker con tributes to the production of a wid get. The crucial distinctions pertain to whether or not what is produced or provided is an economic good and whether or not what is produced constitutes what they live on. The productive, then, provide their own livelihood, either individually or as a family, and they do so with the goods they produce, whether they consume or sell what they make. It might be well to emphasize, too, since such distinctions have some times been made, that those in cluded in the productive category may do work that is predominantly physical or mental, may be em ployed by others or work for them selves, may work on assembly lines or be presidents of corporations, may be doctors, nurses, homemakers, farmers, miners, millers, butchers, bakers or candlestick makers. None of these distinctions matters in the determination of whether or not anyone is productive. Nor does it matter whether the productivity was in the past or is going on in the present. That is, those who are liv ing off savings, a surplus from past productivity, have a residual claim to be classified as productive.

The Unproductive The Unproductive consist of those who do not (or did not) produce the goods on which they live. This is a hodgepodge category. One of the categories had to be if everyone was to be fitted in somewhere. It in cludes the partially productive as well as those who produce nothing. It overlaps with the third category. That is, some people would fall in both categories logically, though since the counterproductive is the stronger category, those who fall there basically need not be listed among the unproductive. Since the Unproductive category is so diverse in its makeup, those who fall into it should probably be di vided into sub-classes. The partially productive might well be distin guished from the wholly nonpro ductive. This latter class would in clude infants and small children, students (not otherwise employed), the aged infirm, the temporarily un employed, and so on. A more contro1982 A QUESTION OF BEING PRODUCTIVE 583 versial sub-class would consist of those who are fully employed but economically unproductive. Among these could be listed such pursuits as those of the police, full time poli ticians, judges, soldiers, bureau crats, and the like.

These categories are not devised to reflect on the importance of some occupations vis avis others or for the purpose of making moral judg ments. I take it that the police per form vital functions, even functions that make possible more effective economic activity. So it may be with soldiers, politicians, and some of the others. Students may be preparing themselves to be more effective at their work in the future. It is no re proach to infants that they are not economically productive. My intent here is·to describe, not prescribe or proscribe. The point is that police men, as policemen, students, as stu dents, and so on, are not economi cally productive. Nor, though these categories do emphasize production, do I mean to suggest that production is the only or most important of hu man functions. ShiftingCategories But place it where you will in your scheme of valuation, there can be no reasonable doubt that production is essential to our lives and well-being.

Nor are there any plausible grounds for doubting that all who continue to live are dependent for their livelihood on what, is produced. More over, they eith~r produce it them selves or get it! from that which is produced. Mor~ succinctly, the un productive mus~ be provided for from the labors of t:pe productive, or, if you will, from the land, labor, and capital of the pvoductive. Thus, the changing proportions between the pr~ductive and the un productive are ~fmore than passing interest. Such ~vidence as we have indicates that ~he proportion of the unproductive t~ the productive has been increasing over the years. No statistics are available for this, but there are statisUcs and there is evi dence which provide clues. Proba bly, at the time of the founding of the United Sta~es as much as 80 per cent of the population was produc tively employe~ much of the year. Most people liv~d on farms, and only infants, very sD;iallchildren and the bed-ridden were excused from work ordinarily. In tOwns and cities, too, the young usually went to work as soon as they w~re able to do much, and worked until they were no longer able. Most of ~his work, of course, was performed py families.

By contrast,~he National Taxpay ers Union saiq a while back that there are "only ~bout 50 million real taxpayers left. the rest of our people are living off ofrecycled government money - federa~ payroll, pensions, grants, contraqts, loans, subsidies, revenue sharing ... ," and the like.

584 THE FREEMAN October While that does not absolutely dis tinguish the productive from the un productive, it gets close to it, and it may suggest that something less than one-fourth of the people do the bulk of the work. (The major distor tion in these figures is that house wives do not pay taxes in connection with that endeavor but, in my view, are productive.) The Counterproductive Even so, the Counterproductive may be a much more important cat egory in many respects than the un productive. The counterproductive are those who place obstacles in the way of those who would be produc tive. Although it would be interest ing to know the number of them and whether they are actually increas ing in proportion to the population or decreasing, it must be admitted that their impact on society is much greater than their numbers. Indeed, many of those who would have to be classified as unproductive are in that category because of counterproduc tive forces. I say "forces,"because the counterproductive are not just peo ple, but people acting with force.

Who would be classified as coun terproductive? Let me begin with two important sub-classes in the cate gory. One is made up of those who criminally' obstruct production and interfere with commerce. Among them are thieves, embezzlers, sabo teurs, terrorists, extortionists, intimidators, and all who make free dom of movement and commercial activity difficult. Crime deters all peaceful undertakings, and crimes of violence have been on the upsurge generally for years now. The second sub-class of the coun terproductive is labor unions. The most dramatic activity of labor unions in obstructing production is the strike. Strikes often stop all pro duction in a factory, sometimes an industry, and often interfere with (when they do not shut down) re lated businesses. Boycotts can have similar results. More broadly, though, virtually the whole power of unions derives from their ability to hamper production. They do this not only by strikes, boycotts, and violent activities but also by slowdowns, by work rules restricting production, by featherbedding, by specifying the limited types of work which may be assigned to a given job, by minimum wages, and by time-consuming meetings and negotiaton sessions.

But the greatest and most exten sive obstacles to production in the United States today are placed there by governments. It has already been noted that most, if not all, govern ment activity is unproductive. That is, the basic business of government is not the production and distribu tion of goods. Beyond that, though, much of government activity today is counterproductive. This has not always been the case. In 1840, say, 1982 A QUESTION OF BEING PRODUCTIVE 585 very little ofgovernment activity was counterproductive. The United States government did levy a tariff on im ports, and, though it was not high, it may have limited some kinds of commercial activities. Beyond that, state and local governments would have had some restrictions, but they were usually minor. In the twen tieth century, however, there have been mounting regulations, restric tions, inhibitions, limitations, and prohibitions on productive activity by all levels of government.

Away from the Productive In one way, at least, all govern ment undertakings tend to be coun terproductive. So far as they are supported by taxation, wealth is taken from its potentially produc tive use to an unproductive use. That is counterproductive. It follows, too, that all expansion of government activity tends to increase the unpro ductive sector at the expense of the productive. Thus, the growth of gov ernment tends to be counterproduc tive in its impact. This is not meant to suggest that there may not be le gitimate reasons for an increase in the size of government. Rather, it is to point out that in respect to taxa tion, at least, the economic impact is away from the productive. But much of government activity today is counterproductive, the fi nancing of it aside. The most ob vious of the counterproductive impact occurs when people are prohibited to be productive. The most striking exampl¢ of this is child la bor laws, which prohibit children from engaging in most productive efforts. Compulsqry schooling, which is a counterpartrto this, pushes chil dren into the unproductive category, willy-nilly. Gov¢rnment encourage ment of schooling, or retirement, and such like, is alsQ counterproductive.

It is also obviously counterproduc tive when govelfIlment deliberately restricts production, as in crop re strictions, mark~ting quotas, or any other device fori holding down pro duction. Minimum w$.ge and maximum hour laws are also counterproduc tive. Minimum 'Wage laws are coun terproductive b~cause they tend to price the unsklilled, the partially disabled, and the less productive out of the labor maItket. Maximum hour laws are count~rproductive in two ways. Where they actually reduce the number of hours that can be worked at a job, as fot commercial pilots, flight attendants, truck drivers, and others, they may reduce production directly. In many instances, how ever, maximum. hour laws are not absolutely proh~bitive; they only re quire higher p~y for hours above a certain maximlllm. This has a simi lar counterprodiuctive impact to that of the minimum wage. Anything th~t hampers or makes production more difficult is counter586 THE FREEMAN productive. Licenses, franchises, schooling requirements for occupa tions, government granted monopo lies, and restrictions on entering any field of endeavor are counterproduc tive. Government regulatory activi ties, such as are carried on by the Interstate Commerce Commission, Federal Trade Commission, Food and Drug Administration, Occupational Safety and· Health Administration, Environmental Protection Agency, and many others, are counterpro ductive. All business and personal record keeping for government, such as employment records for the Equal Employment Opportunity Commis sion, are counterproductive. So, too, are all business tax collection for or payment to government, such as So cial Security, unemployment com pensation, sales taxes, withholding taxes, and so on. They require the use of time and energy for govern ment, which is unproductive, rather than the use of them for production.

Among the sorts of people who would be counterproductive, either part or full time, would be inspec tors, enforcement personnel, admin istrative law personnel, judges (while enforcing regulations of production), Justice Department officials, politi cians and their aides (while consid ering and enacting such laws), and the numerous bureaucrats that have something to do with them in one way or another. Whether all busi ness personnel directly involved with looking after the regulatory and other hampering activities should be classified as unproductive or coun terproductive is an interesting ques tion. No effort has been made here to evaluate from every angle all gov ernment programs which hamper production. Whether this one or that one or the other might be justified on adequate grounds was not my concern. Rather, I proposed to look at the matter only from the perspec tive of the question of being produc tive. That does not mean, of course, that production is all that matters.

In that regard, my point is that pro duction matters, that it is impor tant, that it should be taken into consideration. Nor was it my purpose, ul timately, to spur the issuance of statistics on whether people are pro ductive, unproductive, or counter productive, though I think they would be interesting and revealing, if it could be done. Rather, by delin eating the categories in some detail, it was my hope to focus attention on whether people are productive, un productive, or counterproductive in their undertakings. Our livelihood and well-being depend upon the weight of the answers to this ques tioa , PITY the poor Federal deficit. What was once hailed as a western eco nomic savior has been relegated to a public whipping boy. Politicians and liberal economic writers who a decade ago declared that deficits were "actually desirable because this meant the federal government was pouring funds into the economic stream" now declare with equal sin cerity that these same fiscal short falls are a menace to economic growth.!

How, an astute observer of our po litical economy might ask, can the Federal deficit have fallen into such disrepute, especially among its one time supporters? Did not Keynesian economists tell us in triumphant Mr. Anderson is a teacher of social studies at Ross ville, Georgia, Junior High School. He is the 1982win ner of the Olive W. Garvey essay contest on "The Virtues of the Free Economy" involving a fellowship to the general meeting of The Mont Pelerin Society. Bill Anderson DEFIICITS ARE NOT THE ONLY PROBLEM words that the i so-called capitalist problems of boom and bust were to be solved by government fiscal pol icy of which thel deficit was an inte gral part?2 Consider one l economist's claim that the 1964 F1ederal deficit was a "desirable" element of the nation's economy. The basic explanation for our achieve ment (a prosperotls economy), I think, is that, in 1964, our politicians finally "grew up" into mid-20th century fiscal policy thinking. As a result, there was nothing less than a revolution in economicthought at the highest poli~ymaking levels of our government.

In the past, oUr politicians have al ways considered it imperative to hail an annually balancep budget as economic purity, to condemn a budget deficit as fis cal sin, and to sh~nk from tax reduction in the face of budget deficits as unspeak ably reckless. Bujt in 1964, the federal budget deficit waS accepted as actually 588 THE FREEMAN October desirable because this meant the federal government was pouring funds into the economic stream, and this money would help lift us to levels of full employment and full use of our great industrial ca pacity.3 One is hard pressed today to find a description of the present Federal deficit made in such hushed, rever ent tones.' But, then, the numbers have changed as well. In 1964, the Federal deficit to which Ms. Porter attributes such sterling results as "full employment" and "full use of our industrial capacity" was $5.9 billion, or roughly five per cent of the total budget. 4 The proposed Fed eral deficit for the coming year (and remember, proposals usually fall way short of real spending) is about $100 billion, nearly 15 per cent of the ten tatively-approved U.S. Government budget. Even allowing for the gal loping inflation since 1964, the present numbers are clearly out of hand. The "harmless" (or helpful, depending on one's point ofview) def icits of two decades ago have grown into what seems to be an uncontrol lable monster.

The problems resulting from the size of the Federal deficit are not in dispute. For example, in 1965, when President Lyndon Johnson greatly expanded domestic Federal spend ing, the U.S. Treasury took approx imately 18 per cent of available funds from the nation's credit markets. Today that number stands at nearly 80 per cent. Funds for investment, our economy's seed corn, are being devoured at an alarming rate which can only spell out a real decrease in standards of living for most Ameri cans. Rates of inflation, though re cently somewhat diminished, have severely depreciated the dollar, caused malinvestment and brought about economic decline. The Real Issue: Spending But the real issue of the Federal budget is lost in a semantic word game which, at best, diverts people's thoughts from the main sickness that being Federal spending-to def icits, which are only a symptom of the disease. This is not to say that budget shortfalls are not dangerous.

They are. But when one simply con centrates on condemning the deficits while ignoring the dangers of gov ernment overspending, it is, to para phrase the New Testament, strain ing at a gnat and swallowing a camel. A recent editorial of a nearby ma jor metropolitan newspaper demon strates this kind of naivete. In the editorial, titled "Tax Hike or Reces sion," the writer accurately noted that the shortfalls would have to be covered either by creation of fiat money-and thereby inflation-or by Federal borrowing from hard pressed credit markets. Both "solu tions," he pointed out, would effec tively raise interest rates and limit capital expenditures.

1982 DEFICITS ARE NOT THE ONLY PROBLEM 589 His solution? Raise taxes, ofcourse. Thus, he indicated, the deficit would be eliminated in this relatively painless manner, interest rates would fall and the economy would recover. The only barrier to prosperity, he reasoned, was the lack of courage by politicians to reverse the tax cuts they had given us last year. This editorial writer has not been the only one to endorse tax increases as the way to solve the budget prob lems. Radio and television commen tators, both liberal and conservative politicians, and economists who should know better have also jumped onto this shortsighted bandwagon declaring that tax increases are the only way to prosperity. But they ig nore the fact that deficits are only a symptom. The disease is too much spending. None of the Alternatives Is Acceptable When the Federal budget is dis cussed on the news, the ultimate point of discussion is the proposed $100 billion deficit. Few commenta tors-and economists-ever discuss the gargantuan size of the Federal budget. This year Federal spending will most likely exceed $800 billion.

The officialFederal debt is more than one trillion dollars. 5 But why, one might ask, is it not better to tax in order to curb deficits than to borrow or print money? Af ter all, the perils of inflating are widely knowneiVen to the most eco nomically illiterate persons, while excessive Federal borrowing not only "crowds out" capital but also diverts money from prqductive uses to non productive ones!. The answer is that none of these 'i'alternatives" is ac ceptable. While past budget deficits were often run deliberately in order, as Ms. Porter writ~s, to pour "funds into the economic st~eam," there is plenty of historical evidence to show that governments inflate even when their budgets are offi~ially balanced. Dur ing the 1920s, as Economist Murray Rothbard has Ijloted, the U.S. Gov ernment raisedlthe money supply by nearly 62 per cent in the face ofbal anced Federal budgets. 6 From 1977 to 1980, the nation of Colombia suf fered an annual increase in inflation of more than 25 per cent, despite the fact that its talK revenues exceeded government ~xpenditures.7 The problem here is not deficit spending, but rather government monopoly over the supply of trz,oney. Governments may use deficits as an excuse to print money, but wij.en government con trols the "cre8ition" of money, any reason will do. I Nor vlould i increased taxation eliminate gov~rnment borrowing, either at localjor Federal levels. As long as governments continue to in volve themsel~es in enterprises be yond protectio:p' of citizens' life and property, there will always be dams 590 THE FREEMAN October to build, school buildings to erect, canals to dig and individuals to sup port. Such multi-million (and bil lion) dollar ventures require vast sums of capital which can only be borrowed. 8 Thus, deficit or no deficit, governments will continue to suck capital from private markets in or der to fund projects that could be handled more efficiently and with less expense by the private sector.

One is left, then, with the ques tion of taxation. The issue is not, as many "born-again budget balan cers" have declared, choosing "less painful" taxation above borrowing or inflation. Increasing taxes to bal ance a budget is not a panacea for our economic ills, as many would tell us. Consider economist Alan Rey nolds' warning. In the depths of the Great Depression, Wall Street and the financial editors agreed that restoration of confidence re quired a balanced budget. In 1932, the Hoover administration complied by sign ing the biggest percentage increase in tax rates in peacetime history. Needless to say, that did not strengthen the econ omy, calm financial markets or balance the budget. 9 UnseenConsequences People are often shortsighted on the evils of heavy taxation. They can see the credit markets being drained of capital by the government. They can see the leap in prices as inflation takes hold on the economy. But taxes go beyond their visual effects. One can see public treasuries fill up with tax revenues. What is not seen, how ever, is the loss of funds that might have gone into capital markets, the loss ofpotential investments, the real loss of income for individuals who pay huge portions of their earned in come to government. Money that might have been invested in profit able, wealth-creating projects is used, instead, for government consump tion. To increase the level of taxa tion would not enhance investment opportunities. Indeed, to confiscate revenue through taxation is no bet ter than to devour it straight from the markets or to print it on the printing presses at the Bureau of Printing and Engraving. The dam age done to the economy will not be lessened by choosing taxation over borrowing or printing.

Heavy taxation also encourages people to take their income from productive investments-which of ten fall in the reach of the Internal Revenue Service-and place them in less productive tax shelters. Again, this problem is an invisible one, since people cannot see· the factory that was not built, the invention that was not marketed or the entrepreneur's dream that was unfulfilled. No doubt, as Reynolds writes, the Federal budget, all $800 billion of it, could be balanced as "a matter of sheer bookkeeping."lo He points out: ... we could probably balance the U.S. budget by disarming, or by doubling the 1982 DEFICITS ARE NOT THE ONLY PROBLEM 591 corporate tax, or by confiscating all in come above $50,000 a year. In practice, any of these options would probably de stroy the country. 11 InterventionBringsStagnation Economic stagnation is not the price of "curing deficits." Rather, it is the price the people of a' nation must pay when its federal govern ment spends far more than its citi zens can afford, taking from Peter to give to both Paul and Peter-minus a hefty commission.

This is not to say that budget def icits are not a problem. They are. But the issue at hand in discussing deficits is not just bookkeeping, but also ignorance and arrogance. Since the 1930s economists have promised that budget deficits will permit pol iticians to circulate new money into the economy, thereby "spreading the wealth," and politicians have ea gerly obeyed. But, as a decade of runaway inflation has demonstrated beyond a doubt, dumping fiat money into an economy creates only the il lusion of wealth, not wealth itself. Since deficits became a staple of government fiscal policy, people have deceived themselves into believing that increased prosperity, the rise in real income, and a rising standard of living were due to their politi cians' spending more than was taken in taxes. But as deficits have widened and seemingly run out of control, it has been equally de~eptive for people to believe that prosperity will return as soon as the books are balanced.

Prosperity will! return only when citizens stop dehtanding their gov ernments give them a standard of living that the~ cannot themselves produce, as indhtiduals acting within the free market~ ® -FOOTNOTESISylvia Porter, "Fqcus on the Economy," The World Book Year Book, 1965, p. 27. 2Austrian economists, particularly von Mises and Rothbard, have iconclusively demonstrated that government mopetary policy is usually the cause of boom and bpst cycles. It can hardly be expected, then, that erratic fiscal policies can somehow solve the vrery problems they create. 3Porter, p. 27. 4Source: Statisticp,l Abstract of the United States, 1980. The f~deral budget in 1964 was approximately $118ibillion. 5Economic writers such as Irwin Schiff and others have estimat~d that the liabilities of the Federal governmen~ are up to 10 times greater than the officially-apmitted debt. 6Murray Rothbar~, America's Great Depres sion (Kansas City, ~963), p. 86.

7Alan Reynolds, 'fThat Budget Deficit Is Not the Problem," WalliStreet Journal, October 5, 1981, p. 28. 8Contrary to what some may believe, govern ments usually pay for public projects with bor rowed money. The payments are paid back with tax revenues (except in the case of New York City in 1975, whic1jJ. paid back borrowed funds with more borrowe<ilfunds). 9Reynolds, p. 28.. lOIbid. I1lbid.

Dennis Bechara The Development of Puerto Rico THE DEVELOPMENT of the Puerto Ri can economy sheds light on the true causes of economic growth. The his tory of the island's development is peculiar to it, but the policies imple mented in Puerto Rico to achieve progress hold universal appeal. A review ofthe economicsituation since the turn of the century may help us grasp the lessons of the Puerto Ri can experience. Historical Background As a result of the Spanish-Ameri can War, the United States assumed jurisdiction over Cuba, Puerto Rico and the Philippines. Subsequent events led to the political indepen dence of Cuba and the Philippines, but the relationship between Puerto Rico and the United States contin ues. Economic conditions were· dismal in Puerto Rico at the turn of the cenMr. Bechara is an attorney in Mayaguez, Puerto Rico. 592 tury. Life expectancy in 1900 was 32 years. The literacy rate at the time was only 15 per cent. The island's economy consisted of subsistence agricultural efforts. The production of coffee,once one of the island's most successful crops, began to languish when access to the Spanish market was lost. .

The nature of the political rela tionship between Puerto Rico and the United States began to change as Congress gradually granted more autonomy to the island. In 1917 American citizenship was granted to Puerto Ricans and certain measures of self-government were enacted. The President, however, continued to appoint the governor and it was not until 1948 that the people were al lowed to elect one. In 1952, Congress approved a Puerto Rican-drafted constitution, and the island became known as the Commonwealth of Puerto Rico.

THE DEVELOPMENT OF PUERTO RICO 593 Puerto Ricans are allowed to elect a non-voting member of Congress. Though they are citizens, they are not allowed to participate in Presi dential elections. The Sugar Economy One of the immediate effects of the Spanish-American War was to place Puerto Rico within the U.S. tariff wall. In 1870, Congress had enacted a tariff to protect domestic produc ers of beet sugar, and this had the effect of driving many of the island's sugar producers into bankruptcy. Once the United States acquired ju risdiction over Puerto Rico, how ever, there was free trade between the two. Capital flowed into Puerto Rico with the effect of modernizing its sugar processing mills. A glance at the production figures illustrates the magnitude of sugar in the Puerto Rican economy. In 1899, approxi mately 40,000 tons of sugar were produced, whereas in 1934, Puerto Rico produced approximately one million tons. By 1940, the sugar in dustry employed one-fourth of the labor force. "Sugar ... paid the ma jor part of the insular taxes, em ployed the major part of its workers, created the major part of its busi ness, supported seventeen of Puerto Rico's twenty seaports in the sense that those seventeen handled sugar exclusively and had no warehouses or other facilities for anything else."!

In spite of its importance in the island's econOlllY,sugar became the subject of ma~y attacks. Puerto Rico was not immp.ne to the ravages of the Great D~pression. The island, which was pqor to begin with, had made some pEogress but it was nev ertheless insufficient to drastically change matteIts. The rise of the sugar industry, however, provided the scapegoat upon which to blame the poor conditioll-sof the island. There is no ~oubt that Puerto Rico, during this time, was impoverished. Theodore Roosevelt, Jr., who in 1929 was governor of the island, wrote the following in The New York Herald Tribune: "We:were and are a prey to diseases of many kinds. In the fiscal year ending June 30, 1929, 4,442 of our people d~ed from tuberculosis. Our death rate from this disease was 4V2 times thel death rate in the con tinental United States. Our death rate from malaria was 2V2 times the rate in the com.tinentalUnited States.

Some 35,000 people in our island are now sufferi~g from tuberculosis, some 20,000 ~rom malaria, and some 60,000 from Q.ookworm." The prevaHing conditions during this period of time, however, were not unusual! given the historical background Of Puerto Rico. To put the blame oni the sugar industry for conditions which existed before sugar became the most prominent indus try is glaringly unfair. The island, moreover, did. make strides in many areas during this time which bene594 THE FREEMAN October fited the entire population. As an example of this, life expectancy had risen to 42 years in 1930 and 46 years in 1940; economic conditions had improved concurrently with these developments. Stumbling Blocks Erected The sugar industry confronted its first obstacle when in 1934 Congress enacted the Costigan-J ones Act. This statute empowered the U.S. Secre tary of Agriculture to administra tively determine the sugar con sumption requirements of the country and to set production quotas from the different areas that sup plied sugar to the U.S. market. A consequence of this statute was to freeze the growth of Puerto Rico's sugar industry. This, coupled with future land reform, served to cripple the industry permanently.

During the later part of the 1930s, public discussion revolved around the low wages paid by the sugar indus try as well as by the industry's large landholdings. In 1937, for example, the average hourly wage rate of ag ricultural employees in the sugar industry was 12 cents. This was thought to be convincing enough ev idence to condemn the industry, and served as a justification for the gov ernment'scontinued intervention. Yet, the Bureau of Agricultural Economics reported the average hourly wage rate for agricultural employees for that year in Puerto Rico to be higher than prevailing farm wage rates in fourteen states. Another of the perceived evils of the sugar industry was its alleged displacement of thousands of farm ers who became unable to support themselves after losing control of their land. The statistics concerning land ownership, which are men tioned below, are sufficient to refute this. However, it should be pointed out that as a result of the implemen tation of modern sanitation and health practices, the island's popu lation nearly doubled by 1930. Even had the sugar industry not flour ished, it is doubtful that the island would have been able to be agricul turally self-sufficient. In fact, now that land has been redistributed· in order to curb these alleged injustices of the sugar industry, the island is still not agriculturally self-suffi cient.

Land Reform As a result of the desire to uproot the perceived evils of the sugar in dustry, a land redistribution pro gram was enacted in 1941. During a frenzied period of time, the Land Authority, the administrative agency empowered· to take over all corpo rate lands that exceeded an arbi trary 500 acre limit, acquired thou sands of acres and either administered the land on its own or subdivided it into smaller plots and transferred them to those deemed 1982 THE DEVELOPMENT OF PUERTO RIqO 595 T~e old Spanishfort "EI Morro" in ISan Juan'souter harbor. Be gyn in 1539and completedover a period of two and a half cen turies, the fort was one of the principalbastionsof the Span isl!l Empirein the New World. deserving. By 1950, the Land Au thority had "acquired nearly half the corporate holdings in excess of 500 acres and was operating 48 propor tional-profits farms, as well as two sugar mills."2 Why corporate holdings in excess of 500 acres were repugnant may be traced to a Congressional Resolu tion pertaining to the Foraker Act of 1900, which established Puerto Rico's position with regard to the federal government. Under this fed eral statute, Congressmen ex pressed a fear that Puerto Rico's in clusion within the U.S. tariff system would encourage corporate holdings by the sugar and tobacco "trusts" that would dwarf the local population.

Consequently, Congressional Reso lution No. 23 of May 1, 1900 was ~.nacted whereby Congress ~x:pressed its qispleasure about the matter. Years later, an energetic politician, Luis Munoz Marin, who was later to !become Puerto Rico's first popular~y elected governor, campaigned op a platform of enforc ing this Congressional Resolution. True, in ord.er for the sugar indus try to effic~ently compete and produce, it w~s altogether necessary for modern stilgar processing equip ment to utilize large holdings of land in order to l@wer the unit costs of raising sugar cane. As a result of this, the average y;ield per acre increased from a half a ton of sugar per acre in 1899 to 3.3 top.s of sugar in 1937. According to the U.S. Soil Conser vation Servic~, Puerto Rico has a to tal of 2,103~000 acres, of which, 1,222,284 are I tillable. The four larg est sugar cQrporations controlled, 596 THE FREEMAN October before 1941, an estimated 166,000 acres, which represented less than 20% of all tillable land. If one inves tigates the available data more deeply, one can discover the aston ishing fact that in 1899 there were 39,021 farms in Puerto Rico whereas in 1935 the number increased to 52,790. In 1910 there were 539 farms which exceeded 500 acres, whereas in 1938 the number had decreased to 335. On the other hand, farmland with an area of no more than twenty acres had increased during this same period of time from 38,274 to 42,004, which represented over three quar ters of all tillable land. 3 However convincing these statis tics may be, when confronted with an emotional "share-the-wealth" ar gument, the downfall of sugar be came inevitable. No sugar mill was able to compete efficiently with a 500 acre limitation. Interestingly, in recognition of this, the govern ment's position after acquiring all of those landholdings was to drasti cally reduce the scale of any further significant land expropriations. But by then the damage was done. Sugar never recovered from these set backs. One by one all of the sugar mills in Puerto Rico either closed or declared bankruptcy. Naturally, in the 1970s the government, recogniz ing sugar's importance to the econ omy, stepped in and created a gov ernment agency called the Sugar Corporation which leased some ofthe mills and proceeded to run them on a profit and loss basis. Predictably, the Sugar Corporation has suc ceeded in amassing substantial losses, at the present totalling more than $600 million dollars.

Collectivist Influences The long term effects of the Great Depression are still being felt in Puerto Rico. As a result of the New Deal's welfare-oriented policies, the Puerto Rican economy became the object of governmental intervention with land reform as only one of its consequences. In 1933 the Federal government created the Puerto Rico Emergency Relief Administration, which by 1935 became the Puerto Rico Reconstruc tion Administration. This agency was endowed with an operating yearly budget of $40 million with which it began social experimentation. One of the PRRA's first activities was to purchase a sugar mill owned by a French corporation, called the Lafayette Central and proceeded to operate it as a model plant. As is usually the case whenever govern ment operates a business, this did not prove to be profitable. Subse quently, the agency proceeded to subdivide the 10,000 acres it had purchased and to let the farmers who acquired these lots run the mill as a cooperative. Once again, the experi ment proved to be a failure and the mill ceased to operate.

1982 THE DEVELOPMENT OF PUERTO RICO 597 But the efforts of the PRRA went beyond operating a cooperative farm. The agency commenced building subsidized housing and built a ce ment manufacturing enterprise and a hydroelectric system. The agency became defunct by 1939 and most of its projects floundered. However, it set a pattern future island govern ments would follow. Fair LaborStandardsAct In 1938, Congress extended the Fair Labor Standards Act to Puerto Rico. The immediate effect of this law was devastating. The U.S. Com merce Department, certainly no en emy of the minimum wage law, ad mits this in its 1979 Economic Study ofPuerto Rico: "Significant job losses followed the introduction of Feder ally mandated minimum wages on the island, the most serious being a drop in home needlework exports from $20 million in 1937, to $5 mil lion in 1940."4 As a result of the devastating ef fects of the minimum wage law in Puerto Rico, Congress approved an amendment, in 1940, whereby in dustries operating in Puerto Rico were allowed to pay wages below the federally mandated minimum, and tripartite committees, which repre sented industries, unions and the government, were set up to periodi cally upwardly revise the. mandated minimum wages.

Parallel with this development, the island's goveIinment proceeded to enact provisio*s for mandatory paid vacations, sic~ leave and other con ditions of employment to be appli cable on an' industry-by-industry level. The justification for this was that since the (ederal minimum wage was not completely applicable to Puerto Rico, !local legislation was needed to supplement this measure. Subsequent 1amendments to the Fair Labor St*ndards Act, however, have elimin~ted the exemption granted to Puerto Rico. As of now a substantial a~ount of industry which affects interstate commerce in Puerto Rico must coptply with the provi sions of the Fair Labor Standards Act. The ma~datory decrees insti tuted by the lPuerto Rican govern ment to grant vacations, sick leave, and other conditions of employment, however, havle not been abolished. Instead they oontinue to be amended in order to raise the benefits con ferred therei*. In addition to this, the Puerto ~ican government has subsequently i enacted provisions re quiring employers to pay maternity pay, dismissa~ pay, nonoccupational disability coverage as well as a mandatory C~ristmas bonus.

The economic consequence of this so-called soci~l legislation has been to raise the c~st of hiring employees with an inevitable high unemploy ment rate. Upemployment has con sistently beep. in the 10 to 12 per cent range during t~e past forty I 598 TH~ FREEMAN October years. Presently, the unemployment rate exceeds 20% while the rate for those in the 14-24 age group is nearly double that figure. Rexford G. Tugwell In 1941, President Roosevelt ap pointed Rexford G. Tugwell gover nor of Puerto Rico, and with this ap pointment the welfare-oriented policies initiated by the Roosevelt administration took hold in Puerto Rico at a dizzying speed. Tugwell's administration truly revolutionized the island, as he took an active part in the drafting of in terventionist policies which have held Puerto Rico captive to this day. Under his leadership, countless statutes were enacted which fol lowed and even exceeded in their zealousness the tenets of the New Deal.

Tugwell's administration was in fluenced in part by World War II, which had a substantial economic impact on the island. This was so because as the production of whis key was curtailed in the continental United States by the federal govern ment, the sales ofPuerto Rican rum in the mainland soared. As part of the Organic Act that governed Puerto Rico's relationship with the United States, it was specified that all ex cise taxes collected in the mainland from any products originating from Puerto Rico would be returned to the Puerto Rican treasury. This meant that during the course of World War II the Puerto Rican treasury re ceived a bonanza in excess of $160 million. As Henry Wells, author of The Modernization of Puerto Rico, put it: During 1940-41 the Puerto Rican gov ernment received only $4.5 million from federal internal-revenue payments, but a year later it got $13.9 million. Enemy interference with shipping in the Carib bean during 1942-43 held the federal payments to $13.6 million, but with the resumption of more normal trade in 1943 44 the amount turned over to the insular treasury came to a phenomenal $65.9 million. After that peak year the main land thirst for Puerto Rican rum slack ened and federal excise-tax yields de clined accordingly, but in 1944-45 the insular government still received $38.6 million, and $35.3 million the following year.

The funds available from the rum excise tax served to finance many projects which were commenced af ter the War ended. According to Earl Hanson: Puerto Rico's budget, which before 1940 had been around $22,000,000, shot up to as high as $150,000,000; with such funds the government could build factories, purchase lands held in excess of five hun dred acres by the sugar corporations, provide machinery for the working and distribution of those lands, stimulate its public-health service, implement its new social legislation, foster cooperatives, and engage in all the multiple activities of a stricken society reshaping itself ...

1982 THE DEVELOPMENT OF PUERTO RICO 599 Government Agencies Assume Role in Economy During Tugwell's tenure, numer ous government agencies were cre ated which in turn assumed an ac tive role in the economy. Among these were the Development Com. pany and the Development Bank. Under their leadership, the govern ment acquired the cement company which had been founded by the PRRA, as well as a pulp board fac tory, a paper company, a glass fac tory, a clay products company and a shoe company. The experience of governmen.t handling and management of all of these enterprises, however, was very disappointing to the planners; even tually, by 1951, all were sold to pri vate enterprise. This decision wa.s motivated by the fact that those en terprises were inefficient, incurred losses and created only approxi mately 2,000 jobs, when the unem ployment level stood at 200,000. The local politicians reluctantly came to the conclusion that govern ment investment was not the pana cea it was thought to be. A change in policy was formulated, which could not be implemented because Tug well opposed it. According to David F. Ross: "Governor Tugwell was firmly and emphatically opposed to the kind of development prograrn which relied primarily on the offer ing of inducements to private capi tal and enterprise."5 Governor Tugwell, however, re signed on June 29, 1946, and this paved the way for the enactment of the Industrial JIncentives Act of 1947, which granted tax exemption status to any companjythat settled in Puerto Rico to produ~e or manufacture des ignated articl~s.

Operation Bootstrap The enactm.ent of the Industrial Incentives Act of 1947 marked a new episode in tne development of the Puerto Rican economy. The law took advantage of! the fact that Puerto Rico is exemRt from federal income taxes, and cop.sequently, plants op erating on the island would be free from this exp~nse. The provisions of the Internal ~evenue Code applica ble both then ~d now permit United States comp~nies to transfer the profits gener,ted by their subsidi aries in Puerto Rico to the mainland tax free. Ther~ is presently a contro versy betwee:p.the IRS and some of these compa~ies over the matter of intra-company pricing and its effect on profits. However, its resolution is not expected to adversely affect the tax exemption program. The effects of Operation Boot strap, as th¢ incentive system is called, have qeen outstanding. Over 2,000 manuf.cturing entities have established plants in Puerto Rico as a result of th¢ tax advantages, with more than 100,000 jobs created. This has been cortsidered the economic 600 THE FREEMAN October miracle of the century, comparable to Germany's recovery after the war.

The GNP figures for the applicable years are similarly impressive. In 1940 the GNP was $287 million, by 1952 it had risen to $963 million, in 1964 it was $4,531 million, and in 1981 it had reached $11,780 million. However prosperous or fortunate the policy of granting tax exemption was, it was nevertheless insufficient to overcome the tremendous unem ployment problem which has chron ically affected Puerto Rico. As the 1979 U.S. Commerce Department study put it: "In the fifties, as the economy was engaged in the first phase of the transition from a mon ocrop agricultural system to an in dustrialized system, total employ ment contracted ..The absorption of labor into the newly developed man ufacturing sector fell behind the rate at which agricultural workers were being laid off. It was only after 1963 that a persistent employment ex pansion was underway. Under the momentum, spurred mainly by cap ital investment induced to enter the economy under the revisions in the Industrial Incentives Act, employ ment improved for a decade. Be tween 1963 and 1973 it increased on the average nearly 3 per cent a year.

In that span of years, the average rate of unemployment dropped to just over 12.5 per cent as an average still highly unsatisfactory, how ever." Petrochemical Developments in the 19605 and 19705 In light of the fact that unemploy ment was still at politically unac ceptable levels, the Puerto Rican government redefined its industrial promotion in the 1960s and pro ceeded to attract oil-related indus tries. This approach was encouraged by the complex federal legislation which, in pre-OPEC days, placed a tariff on foreign oil but permitted the introduction into the country ofcheap foreign oil, once it was processed and refined in Puerto Rico. During the early 1970s oil was imported to Puerto Rico at $2.00 a barrel, and this led to the massive construction of petrochemical complexes in the island. As a result of OPEC's poli cies, however, imported oil is no longer cheap, and Puerto Rico's dis tance from the mainland market has made most of those industries non viable. Over 155 oil related plants alone closed operations in the years 1973 to 1975, and many of the re maining petrochemical complexes have filed for bankruptcy.

Migration has relieved the unem ployment problem in Puerto Rico. Since American citizenship was granted in 1917, there areno barri ers to migration to the United States and nearly one million Puerto Ri cans now reside in the United States. During the 1950s, the average yearly migration was approximately 50,000 persons. The Planning Board, an 1982 THE DEVELOPMENT OF PUERTO RICO 601 agency of the Puerto Rican govern ment, in commenting on the effects of migration on the unemployment statistics during the 1940s said the following: "Without emigration dur ing the decade ... unemployment would have mounted to 201,000 as compared to the actual unemploy ment figure of 101,000 in June, 1950." Yet, in spite of the government's concerted effort in attracting foreign capital to Puerto Rico and the effects of migration on unemployment, the economy has reached a standstill since 1973. Fewer industries have settled in the island and many of those that were already operating have closed their operations.

Institutional Obstacles Reasons for a stagnant Puerto Ri can economy can be traced to insti tutional factors. The laws of Puerto Rico, coupled with federal regula tions, are very burdensome on busi ness. Labor legislation is indeed one of the causes of unemployment in the island. But beyond that, the massive amounts of federal aid have served to create malinvestments of the greatest magnitude. The Puerto Ri can government presently receives over $200 million a year in excise taxes from the U.S. Treasury. This sector provides about 9% of the Commonwealth's budget. During the 1970-77 period alone, over $1,000 million was thus received. This has been sufficient to perpetuate the government's power and to expand its role, while ~inimizing the tax payer's cost of tJ1e government. As a result oif Federal aid, which represents approximately 30% of the island's GNP, the local government has been able ! to engage in many functions beyond the scope of the traditional role! of government. The Federal gover*-ment is currently providing Puerto Rico with such generous beneflts that a majority of the island's families receive food stamps. The V.S. Commerce De partment has a~knowledged the role of federal aid when it stated that "Federal funds directly and indi rectly supply such a large share of total Puerto Ri¢an income that per sonal income exceeds the value of all goods and finall\)ervicesproduced and remaining in the Commonwealth."

Puerto Rico offers certain statis tics that confound anyone knowl edgeable in economics, but which portray the m~gnitude of Federal assistance to the island. As is well known, in order to purchase im ports, any country must export goods or services to pay for the imports. Puerto Rico,however, during the past thirty years h~s consistently run a deficit in its balance of payments. Economists sir4ilarly decry the fact that there is nd internal saving, but rather that Puerto Rico has become a "net dissavert" over this period of time.

602 THE FREEMAN October The local government, following Tugwell's example, has continued its welfare orientation and conse quently controls a large area of the economy. Government is by far the largest employer in the island-em ploying 20% of the labor force. The sugar corporation, the electric com pany, the· shipping lines, the tele phone company and other enter prises are owned by the government. Not unrelated· to this, a Federal Power Commission study indicated that Puerto Rico's electricity rates were the highest in all of the United States. This undoubtedly places the island at a disadvantage in attract ing capital for energy-intensive in dustries. The government's impressive stature in the economy, however, has not followed a classic pattern. Many of the government's functions are performed by so-called public corpo rations which in turn are able to float bond issues. The Commonwealth government's debt, as a percentage of GNP was 15% in 1978. But if one adds the debt of all other govern mental agencies and entities, the figure exceeds 70%. It is apparent that the government's future bor rowing capacity is very limited.

Trade between Puerto Rico and the United States, which represents over four-fifths of the island's commerce, is governed by the Jones Act, a fed eral statute which requires that all trade between domestic ports be conducted in U.S.-flag ships. The ef fect of this statute has been to re move foreign competition from do mestic shippers and to strengthen the grip of the maritime unions on this industry. Consequently, cargo rates of domestic shipping lines are among the highest in the world. This legis lation has also served as an institu tional roadblock impeding Puerto Rico's growth, since Puerto Rico's trade is so dependent on shipping. The WelfareMentality Yet, the most serious of all of the obstacles facing Puerto Rico today is the inculcation of the collectivist and public welfare ideology which was started during the New Deal. This ideology views private enterprise negatively. Conventional wisdom in Puerto Rico holds that the government, ei ther Commonwealth or Federal, is the source of all wealth. This is not hard to understand in light of the fact that government is so omni present in the economy. The "share the-wealth" philosophy has become so embedded that subsidies of all types abound for substantial por tions of the population. It would be beyond the scope of this article to mention the different subsidies that exist in Puerto Rico today. However, historically the most important one was the expropriation on the part of the government oflarge tracts ofland and their subsequent subdivision and 1982 THE DEVELOPMENT OF PUERTO RICO 603 transfer to thousands of people. The power of eminent domain in Puerto Rico is very strong and undOl,lbtedly its effects have shaken the island's economy. The largest landholder at the moment is the government, which owns 130,000 acres of land.

Perhaps a reflection of the welfare mentality that is rampant in Puerto Rico is the flurry, over the past decade, of land squatters claiming their alleged right to hold property. After all, government had· been ex propriating land for so long that it seemed altogether natural to simply take over the land. It has been esti mated that there are over 2,000 acres of land that have been squatted on during this period of time. Politi.:. cians have rushed to the scene in many cases to show their compas sion for this, and it has not been un known for the legislature to enact benefits that reward the efforts of the squatters. The economic crisis which pre vails in Puerto Rico today cannot continue for long without further adverse consequences such as an ap~ palling crime rate and a continued increase in unemployment. The much-publicized tax cuts that were implemer..ted recently, following the advice of Arthur B. Laffer, have been quietly interrupted. The last phase of the tax reduction has been re scinded for fear that it might create a deficit. The miraculous· effects it was supposed to create were non·· existent because the government's role in the ecqnomy has continued to assume a greater importance.

Tourism, wh~ch represents an im portant industry for the island is nevertheless liJriited in what it may be able to achieve for it represents only 5% of GNP. Agriculture is sim ilarly situated. Prospectsfor the Future As a result lof receiving massive infusions of federal funds as well as experiencing the effects of migra tion into the i continental United States, Puerto' Rico's policymakers were able to a.ttenuate the conse quences of their economic policies. As the Commonwealth's govern ment enacted more restrictive regu lations, as it encroached more and more into the workings of the econ omy, the results of these decisions had to be maUnvestments and un employment. But precisely because migration served as a safety valve, and federal funds assumed a major importance in Ithe economy, the pol icymakers became convinced that the interventionist legislation they fa vored could ndt adversely affect the economy. When the federal mini mum wage became completely ap plicable to enterprises that operated in interstate !commerce in Puerto Rico, for example, the government's position was tlaat this could have no adverse effect on unemployment. The government obviously was wrong.

604 THE FREEMAN Many factors influence the work ings of an economy, so that one gov ernmental policy may partially off set the effects of another. This has been the case in Puerto Rico. As progress was taking place in the is land during the decades of the 50s and 60s, people became convinced that the main reason behind such progress resided in the collectivistic policies enacted by the politicians who followed Tugwell's lead. The Effects of Freedom Yet, in analyzing all of the gov ernmental efforts at promoting the local economy, one can fairly say that most of them achieved distortions and malinvestments in the econ omy. However, when private enter prise was granted a substantial tax holiday which offset many of the other costs implicit in starting an operation in Puerto Rico, growth spurted. Foreign visitors came to study the economic miracle that was taking place. Unfortunately, the costs of operating in Puerto Rico, in large part due to the local government's policies, have finally caught up with the tax exemption program, the re sult being that fewer industries are willing to locate in the island.

If there is anything to be learned from Puerto Rico's experience dur ing the past four decades, it is that private enterprise has been the most efficient mechanism for increasing the productivity and the wealth of the people. Policymakers should recognize this and attempt to dereg ulate the economy in order to permit the private sector to bring its dyna mism into the economy. It is encouraging to observe that, in spite of the spending policies of the federal and local governments, the entrepreneurial spirit has not been completely quashed. Regard less of all the subsidies, privileges and controls that exist in the econ omy, people are willing to invest and take risks. The effects of these ef forts would be magnified if the econ omy were freed of all the restraints that hold back its growth. The most significant change, however, is that the collectivist mentality which has been so successfully ingrained must be erased if individualism and lib erty are to prevail. @ -FOOTNOTESlEarl Parker Hanson, Transformation: The Story ofModern Puerto Rico (New York: Simon and Schuster, 1955), p. 31.

2Henry Wells, The Modernization of Puerto Rico (Cambridge: Harvard University Press, 1969), p. 148. 3Cayetano ColI Cuchi, "La Ruina de la Indus tria Azucarera," El Mundo, August 1938. 4United States Department of Commerce, Economic Study of Puerto Rico, 1979, p. 218. Statistics not otherwise footnoted were ob tained from this U.S. Department ofCommerce study. 5DavidF. Ross, The Long Uphill Path: A His torical Study of Puerto Rico's Program of Eco nomic Development (San Juan: Talleres Grafi cos Interamericanos, 1966), p. 79.

KennethMcDonald Canada Damaged by Fau_ty Theories TRADITIONALLY, Canada's economi(~ performance has trailed that of the United States. Markets and produc .. tivity suffer the consequences of a much smaller population spread thinly astride a narrow band that stretches 3,000 miles from New·· foundland to British Columbia. In recent years, however, Cana·· da's relative performance has slipped markedly. The Canadian dollar has fallen, inflation is much higher in Canada, and the budgetary deficit, in proportion to population, is much larger than that of the U.S. Yet Canada's policymakers, and the economic establishment that ad·· vises them, stick manfully to theo·· ries which are plainly at odds with the facts. Mr. McDonald is a Toronto freelance writer on eco-· nomic and political affairs. For the la~man, the contradic tions appear the moment he asks himself some questions. How can rising prices be attrib uted solely to their historic ingredi ents-cost of capital, materials and processing, cost of labor and profit when the effe¢t of taxes, which are rising faster than the rest, is ig nored?

How can the provision of govern ment service~ be continually ex panded withoujta comparable rise in the cost of pro-yiding them? How can th~t cost rise be paid for except througn taxes? How can wages ever "catch up" with the recipients' cost of living when no account is taken in those wages of the! unseen government services from Which the wage earner benefits?

606 THE FREEMAN October So long as such services are un priced, and assumed to be either free or supplied at someone else's cost, what is to stop society's pressure groups from demanding more of them? How can the raising of interest rates bring prices down when the higher cost of borrowing pushes up not only prices but also the cost of the unpriced government services that prices include? When elected representatives are regarded primarily as redistributors of income, how can they fail to sup port the structure which enables them to redistribute it? In a democracy, changes in policy, and in establishment thinking that shapes policy, are presumed to come about as a result of arguments that persuade the policymakers. But what if the establishment and the policymakers refuse to listen? AlternativesIgnored There is ample evidence that an swers to the layman's questions, and alternative policies that are sug gested by the answers, have been presented to policymakers. Expla nations that fit the facts are avail able to the economic establishment in books and discussion papers. Of any sign that the alternative poli cies or the explanations have been given serious consideration, there is no evidence at all.

Let us call the innovators the new men, though they are not young, to distinguish them from the men of the establishment, many ofwhom are not old. Prominent among the new men in Canada are Verne Atrill and Wil liam Krehm, who are businessmen and economists, and Arthur Bailey, who is a senior civil servant. Running. through their work is a common theme: nothing is free; ev erything must be .paid for; obliga tions must be met. That fundamental truth is ob scured every day, but especially at election times, by politicians whose business it is to suggest the con trary. "The state," as Frederic Bas tiat reminded us a century and a half ago, "is that great fiction by which everyone seeks to live at the ex pense of everyone else." The purpose of this article is to bring the new men's work to the at tention of a discriminating audience in the hope that its significance will come to be understood in time.

It is no exaggeration to say that there is not much time left. If the present policies are not changed, Canada's transformation into a col lectivist state, consuming fatal quantities of what Atrill calls our precious economic energies, will have passed the point of no return. The establishment, though it makes much play with the complex ities of the economy it presumes to direct, is deaf to argument as it steers 1982 CANADA DAMAGED BY FAULTY THEORI~S 607 toward the simplest solution of all: the age-old institution of Hilaire Belloc's Servile State ("Socialism's essence consists in vesting in trust with the politicians what is now pri vate property").! Making Socialism Work Unlike the men of the establish ment, the new men recognize that combining man's creative instincts with his desire for individual free dom, and doing so within a society that still permits him a say in how he is governed, is a very complicated business.

In their books2 they are concerned not with dismantling government, for there are many things that only government can do, but with mak ing it work better than it does now. Atrill explains how the solvency of entities is reflected in their debt structure ratios: the ratio between what is owed to, and owed by, the entity. All obligations are met, if only by the creditor. The wholesale transfer of economic energy from in·· dividual entities, which must retain solvency as a condition of existence, to governments which are increas ingly insolvent, threatens the sur vival of individual enterprise. Praising the money market as "man's noblest creation," Atrill shows how the private banking system has been subverted by central banks (Bank of England, Bank of Canada, Federal Reserve Board) whose prime function has qecome the mainte nance of inflat~on so that the gov ernments they $erve can meet their obligations.

His Objectiv~ Economics demon strates the r~Hationship between economics and; natural law which engaged the ~8th-century physi ocrats. Its essential difference from the establishment's subjective eco nomics, which i tries to insert deci sion-making man at the center of economic events, is that it shows how those events o~cur and proves the demonstration Iby extracting, over a seven-year peIiiod, the appropriate ratios from the!balance sheets of the 300 companies1in the Composite In dex of the Toronto Stock Exchange. Like Atrill,! Krehm exposes the fallacies that ~og the economic es tablishment. Both men show how the tool of matheIlnatics, which the es tablishment has misused to deter mine equilibrium points that do not in fact exist, apd which are then ap plied to the c6nstruction of equally fictitious econ(j)metricmodels, can be used properly ~o our advantage. Both have reasoned their way from the establishIhent's obsession with Newtonian ca~culus, and with look ing upon priQe as an invariant, to the realization that the right tool is tensor calcul-qs as used by Einstein in his develop,lmentof relativity the ory.Atrill se~s the "major mathe matical probl,ms posed by Objective Economics and the dimensionless 608 THE FREEMAN October science of observation of which it is a part" as forming the basis for an understanding between East and West. "I believe that neither Marx ian catechism, nor the Leninist po litical eclecticism, nor the Stalinist brutality, nor the Maoist dogmatism will be able to stop some of the com munist world's great intellects from involving themselves in those prob lems."

Krehm takes us through the de velopment of physics and its appli cation to economics. Showing how the efforts of central banks to "stabilize" prices are "a simple rewrite of Boyle's Law linking the volume, pressure and temperature of a perfect gas" he shows how, by ignoring new subsys tems that intermesh with tradi tional components of price (supply and demand, materials, capital, wages), the establishment is in the same boat as pre-Einstein physi cists. "There is, for example, nothing more obvious to common sense than the invariance of time and space. Experiment, however, proved that the speed of light was the invariant; and to reconcile that with the known laws of physics Einstein showed that time and space were not invariant. The case of price is similar ... "Economic science should be seek ing the real invariants of the new world that is evolving around us. But by setting up price as an absolute invariant, economists have made it impossible to carry on any serious investigation of our problems ...

"Instead of dealing with the catch all concept of 'inflation', we should have examined the very different factors that make for price rise. We should have studied the circuits through which these operate, and how they intermesh. Had we plotted these relationships, we could then have turned to the computer to help us ascertain how much each of them did in fact contribute to the price bulge. Such an effort, however, was ruled out by our faulty theory." A Host of Contradictions Faulty theory has led us into a host of contradictions. For example, civil service pensions are indexed to the cost of living while business profits are tied to the original rather than the replacement cost offixed capital. Because government services are unpriced, the benefits in wages and salaries are unseen; their recipients try to keep up their take home pay while rejecting the tax increases that should pay for the benefits-taxes which are in everybody's cost and which, while unpaid, consume the society's capital.

Both Atrill and Krehm are drawn to physics for guidance out of the blind alleys into which faulty theory has led us. Just as the concept of space was changed by an under standing of the forces inherent in mass, matter and energy, so must 1982 CANADA DAMAGED BY FAULTY THEORIES 609 the concept of an idealized market be changed to accommodate the non market subsystems that distort it; new equations are needed. How Arthur Bailey and Douglas Hull apply these concepts to the government sector is conveyed by their book's sub-title: "A More Rev enue Dependent Public Sector and How It Might Revitalize the Process of Governing." Their theme is the need to con struct a new model of public financ ing that allows citizens some choice. Instead ofthe appropriations method, which accords to a small group the power to decide a broad range of so cial policies and consequently the appropriations which it then forces Parliament to approve, revenue de·· pendency would link many of the government services to cost by pric·· ing them.

Thus to the extent that enough citizens judged the benefits to be worth the price, and bought them, the services would be self-financing, as would the administrative over heads of the government depart ments concerned. (This would not preclude citizens who were in a state of dependency from being subsidized individually to secure the provision of common services.) Political leaders and their perma. nent advisers would be relieved of the hopeless task of trying to plan the unplannable; government would be concerned with defining the limits and structures within which the citizens could go freely about their business. This meets Belloc's defini tion of a free sbciety, "consisting in nothing else b~t the enforcement of free contracts."3 Revenue dependency would re move from m~ny of government's activities theiripresent advantage of monopoly. Required to pay their way in competition with private enter prises, the departments concerned would have to trim their costs ac cordingly; esti~ates would be based on true costs I rather than on as sumptions that merely added incre ments to those!of the year before.

Trust to Comp~tition In the writers' view, substituting competitive for the present monopo listic delivery 9f services would yield dramatic gains in productivity. Real responsibility, would devolve upon departmental imanagers. Instead of decisions being pushed up to the po litical level, many would be dele gated to, and! made by, the people responsible fqr the activities. De partmental m~nagers would be un der the same! compulsion to econo mize as their competitors in the private sector; The introduction of price and choice to government services would stifle the temptation upon politi cians to prom~se more than they can deliver and toiforce upon the citizens "services" that are neither asked for 610 THE FREEMAN nor needed: the test would not be one vote every four or five years, but millions of votes every day. In a federal system, where much time and effort is wasted in jurisdi~ tional disputes between three levels of government, the introduction of revenue dependency at all levels would show which was most effi cient in the delivery of interlocking or competing services; many of the present redundancies would be eliminated. In the writers' words: "Under revenue dependency the most appropriate scale of operations would be settled more by public choice than by constitutional negotiations. Thus increased public choice could con tribute to a more functional feder alism."

The Methods Are Unsuited The new men have advanced al ternatives to theories that have proved faulty. The layman's hope is that policymakers will examine the alternatives with open minds and have the courage to test them. , -FOOTNOTESIHilaire Belloc, The Servile State (Indianap olis, Ind.: Liberty Classics, 1977). 2Verne Atrill, How All Economies Work and The Freedom Manifesto (Toronto: Dimension less Science Publications, 1979 and 1981). A. R. Bailey/D. G. Hull, The Way Out (Montreal: The Institute for Research on Public Policy, 1980). William Krehm, Price in a Mixed Econ omy, Babel's Tower,and How to Make Money in a Mismanaged Economy (Toronto: Thornwood Publications, 1970, 1975 and 1977). 3Belloc,op. cit. IDEAS ON LIBERTY IN PRACTICE, therefore, a socialist society is one in which the vast major ity of men are controlled by the tiny minority which has power to direct their economic activities. We might put the matter differently by saying that the socialist dream is based on the delusion that men's other free doms will be enhanced if they are deprived of economic liberty. By eliminating economic liberty and replacing it with a planned economy socialists hope to usher in a brave new world.

It hasn't worked out that way in practice because the theory is all wrong. "Economic control is not merely control of a sector of human life which can be separated from the rest," writes F. A. Hayek, "it is control of the means for all our ends." Eliminate economic liberty in a society and you begin to institute a master-slave relationship. EDMUND A. OPITZ, "Socialism-Substance and Label"

Ridgway K. Foley, Jr. THE SOCIAL ROLE O!F BUSINESS THE current fashion is to pontificate, sometimes to excess, concerning the social role of modern business and the social responsibility of trade en tities in late twentieth-century so ciety. Given this tendency, the na ture and appropriate role of business in any social setting deserves atten tion. At the outset, let us propose a working definition of business: the methods of voluntary action utilized to conceive, produce, transport, and distribute scarce goods, services, and ideas from those who create such products to those who wish to trade some value they have created in ex change for those products. It is at once a structure, device or institu tion as well as a process. It serves Mr. Foley, a partner in Schwabe, Williamson, Wyatt, Moore & Roberts, practices law in Portland, Oregon. those who wish to trade; it exists solely in a ma*ket; it does not par take of coercion; it exacts no penalty from those whcr> prefer not to share their produce.

All too often., observers tend to limit their thinking of business to modern corpo:r:ate giants exempli fied by Exxon,' Standard Oil Com pany of California, or General Mo tors. While these entities do represent spec~fic examples of one successful mod~ of business, such a myopic view tlistorts reality and conjures up th~ inaccurate premise that all business consists of large aggregations ofipeople, machines and capital, mass-producing integrated or disparate goods for consumption. In fact, busi~ess includes numer ous corporation~ unlisted on the New York Stock Exchange and virtually 612 THE FREEMAN October unknown beyond the boundaries of a local or provincial area. It also en compasses myriad family enter prises, close corporations, general or limited partnerships, and individual proprietorships, all providing a host of desired goods, services and ideas. It further embodies such activities as farming which raises, transports and sells needed foodstuffs in the market yet which often receives un deserved discrete treatment in the political and economic realms. It en velops professional men and women who offer their services to others in exchange for value.

In the broad sense, business en folds within its grasp anyone and everyone engaged in trading his ideas, his services, his goods, that which he creates and owns, with other individuals who possess goods, or services, or ideas which they con sider expendable or less desirable than the exchange goods offered by others. Thus, every person who per forms gainful employment in ex change for a wage, salary or other kind of remuneration really partici pates in business: he trades his time, energy and creative efforts to an other for payment which, in turn, can be used to fulfill his needs and de sires. Economic Laws and Business Man displays the curious commu nicative tendency to employ the identical term to convey quite disparate concepts. The word "law" of fers a striking example.! Positive, or human, law generally refers to a system of rules and orders, emanat ing from a sovereign, directed to subject people, commanding or pro scribing human action, and exacting a penalty or sanction for known noncompliance or disobedience.

Natural law (of which economic law forms a part), on the other hand, re fers to certain causal relationships which flow from human action. Like positive law, natural law enforces conduct and wrests a sanction for human action, but there the analogy terminates. Positive law emanates from mankind with its inherent fal libility; natural law reflects reality and neutrality rather than individ ual bias. Commoner and King both bleed when cut with a knife. Natu rallaw makes no value judgments; it merely levies a cost related to uni versal truth by means of cause-and effect consequences for human ac tion. The three fundamental economic laws concerning business form a part of the natural law rather than man kind-enacted and enforced norma tive rules. The First Law of Economics: Scarcity The first law of economics dictates that this science deals with the cre ation and distribution of scarcegoods, services, and ideas. Where free goods 1982 THE SOCIAL ROLE OF BUSINESS 613 exist, the study of economics disap pears.

Imagine an island paradise, blessed with clean air, fresh water and an abundance of tropical fruit. Here business exists only in the most rudimentary form since little effort need be expended by the inhabitants to secure their daily foodstuffs and water. Yet, even that condition and the minimal effort reveals that busi ness in some form may be necessary. A supply of fruit and water, while sufficient, is finite, not endless. Some method must be utilized to divide and distribute the existing or potential scarce goods to the islanders. Busi ness represents a method, the best and fairest means of distribution, where each individual, acting vol untarily, offers to exchange that which he possesses for that which he desires. Where wants exceed the free (not scarce) goods available, the ex change economy develops. An ele mentary specialization and division of labor arises, where, in place of each inhabitant carrying his or her own water, gathering fruit, and handling all needs, one member of society de velops a skill in the production of grass skirts or handmade thongs which he or she exchanges for man goes delivered to the door.

The law of scarcity introduces yet another salient economic concept: la bor. Labor consists of the productive expenditure of human energy and provides the necessary base for busi ness. Even on t;he tropical isle of our hypothesis, th~ rudiments of labor exist: picking ,breadfruit, carrying water, sewing ~lothing, and thatch ing a hut all require some effort. Viewed broa<illy,all business rests upon labor, past or present. Present labor appears (j>bvious: the physical and mental efforts of men and women engaged in the ,creation, production, transportation! and distribution of scarce goods, services and ideas. Yet business enterprises also use past labor, stored-up and unconsumed la bor, often termed capital. The pro ductive resultsl of labor may be con sumed or saved; those efforts which are saved are invested in tools and machines to b¢ used in future pro ductive efforts. Capital renders present labor tnore productive and efficient. Past and present labor ap plied to existip.g resources creates new and desirable scarce goods for trade.

The Second Law of Economics: Insatiability The second l~w of economics pro vides that maJl.'s needs, wants, and desires are insatiable, dynamic and never-ending. Man's acquisitive na ture mandates that his individual and collective ~ravings always out strip his production. In short, he is never satisfied With the current state of affairs. Recur to the example of the iso614 THE FREEMAN October lated island. As man grows, he be comes more acquisitive; good food and plentiful drink, an adequate hut and basic clothing may not be enough. He will seek variety in his diet, distinguished and distinguish ing feature in his living quarters and class or style in his clothes. He may hanker after a plow, a conveyance, a book or a whole host ofother things. Faced with an array of scarce goods, services and ideas, his wants are in satiable. The Third Law of Economics: Cost The third law of economics follows from the roots of scarcity, labor, cap ital and insatiability: every thing possesses, and occasions, a cost. This immutable norm of natural law flows from the fundamental natural law rule of consequences, of cause-and effect. Denial of the principle cannot destroy it.

Some state this premise in homely fashion, such as, "it's time to pay the fiddler" or "there ain't no such thing as a free lunch." The cost analysis of natural law provides that no one can secure scarce and desired goods, ser vices or ideas without effort-even a taking by force or fraud requires risk of retribution, clever cunning action, and physical and mental ef fort. The effort constitutes the cost of the product, whether it represents effort by the producer in making the device, or effort by the trader in manufacturing trade goods, or effort by one (donor) on behalf of another, third party beneficiary. In a free society, a business or market society, the cost of an ex change amounts to the intersection of that which someone who pos sesses the desired good, service or idea will demand from the buyer in trade, and that which the latter will voluntarily transfer to the producer in exchange. In simple economic terms, price represents the intersec tion ofthe supply and demand curves.

But lines on a graph, being abstract, obliterate reality; the reality of price is cost, and cost stems from the nat ural law of the universe. In a command society, the cost of an exchange will be disguised be cause of the avoidance of a market mechanism. 2 Nevertheless, each good, service, and idea will com mand a cost under the natural law as surely as men in power try to command their fellows. The cost re quired amounts to the effort ex pended-the past and present la bor-in production, and the alternative courses of action avoided. Each human action (including eco nomic or business activity) requires a choice and each choice produces moral consequences. The conse quences constitute the cost of the ac tions. In what manner do these three fundamental economic laws decree the need for business? Business-the 1982 THE SOCIAL ROLE OF BUSINESS 615 structure and the process-deals with the rules of scarcity, insatiability and cost in a voluntary and efficient way.

The allocation of scarce, desirable and valuable goods, services and ideas must be secured in some man ner. Basically, two methods exist: coercion or voluntarism. Because men and women choose diffferent ways to satisfy their ever-expanding wants, property can be divided in two ways: (1) each person can bid for the goods and services sought against all competing uses (the nonaggressive method) or (2) some person or group can seize power and forcefully de cide (choose) for others by allocating scarce goods, services and ideas to satisfy those insatiable wants (the coercive method). The coercive method allows some individual or group to use force to distribute these products in a forceful manner, ac cording to their subjective value judgments. The voluntary method allows each individual to act with out force to provide for his own ends and to pursue his own brand of hap piness. The state represents the coercive method; business provides the voluntary method.

Property, the Creation of Value, and the Pursuit of Happiness Business provides the structure and the process which creates and distributes property. Property con stitutes the name given to those goods, services and ideas created by men and worpen, acting produc tively by themjselves or in a group. One does a dijsservice if he limits property to land or "things," like furnaces and machine tools; prop erty includes the corporeal and the incorporeal, th~ tangible and the in tangible: legali and accounting ser vices and man~gement ideas as well as books and cmairs. In a broad s~nse, property may be described as the human creation of value. The worl~ exists. Man can only create by taki*g existing things or elements and *ltering their charac ter or transporting them so as to make those th~ngs or elements, or a combination o( them, useful to him or to others, or lby conjuring up ideas about existing j things or documents useful to him or to others. Property sometimes connotes elements in a natural state:: game or wilderness land or miner~ls. This presents too narrow a view= fauna or dirt or iron ore provide no~hing of value-they just exist-un~il used by men to sat isfy their needs and wants. In the more salient sense of the term, ele ments become! property when they become useful to mankind, when men and women apply their value struc ture upon thes~ existing matters.

How do human beings value items? The fundamental of business is that men and women value everything subjectively. ~ach person attaches worth to goods~ services and ideas in accordance with his or her unique 616 THE FREEMAN October character and individual judgment. Mankind rates merit of various matters on individual and ever shifting scales of preference, fueled by internal measurements, assess ments, perceptions, desires and mo tivations which no one else can re produce or appreciate. As a concomitant natural rule, one rec ognizes that objective value does not exist; no one can conceive of a uni versally defined and accepted "good chair" or "good city" or "good con cept" which will rate equally with each person. Value Is SUbjective If objective or inherent value ex isted, a single producer for each kind of product would suffice: everyone would prefer Borden's to General Foods and the latter would go out of business. Since men value every thing subjectively, business devel ops to supply and service these in satiable and increasing wants related to scarce and costly items. As a re sult, several producers of similar goods will find their adherents in a market. Cost diminishes as compet ition between vendors keeps only the most efficient in the market. Profit appears, maintaining the sellers, as the buyers bId in competition with other potential users for wanted products.

Some who recognize that all value is subjective confuse value with reali ty and deny the existence of absolutes or truth. The two concepts do not war and are not coincident. Truth exists; it represents a facet of natu ral law which is no more than the face of reality. The concept ofsubjec tive value means that men-pos sessing the power of ultimate choice over their own destiny-may disre gard truth and believe in, and value, fiction. The great lesson of liberty is that freedom implies the freedom to be wrong, to err. Because man is free to choose, he maintains the freedom to choose badly, to value fallacy over truth. Truth is not value, and value is not truth. Value represents an in ternal scale of preference while truth represents a natural law which ap plies a cost or consequence for choice freely made. Business does not engage in moral value judgments except to the ex tent that business decisions repre sent moral choices of the producers who must (like all men) live with their consequences. Business pro vides goods, services and ideas to those who wish to purchase or trade for them, without acting as a moral arbiter of the choices of the con sumer. If a business distributes harmful automobiles or addictive drugs, the maker must bear the moral results of his part in the pro cess, but unless his conduct par takes of force or fraud, the state should not step in and restrain a free transaction. The wisdom of the choice of the buyer cannot be measured by 1982 THE SOCIAL ROLE OF BUSINESS 617 fallible men since (1) each element in the universe incorporates the po tential for harm and (2) no person possesses the ability to supplant an other actor's choice-making process.

Hence, except as indicated regard ing coercion or deceit, business re mains morally neutral and the buyer must also bear the moral conse quences of his choice. Our Declaration of Independence did not promise eternal bliss and ethereal well-being; it recognized as supreme the inalienable human rights to "life, liberty and the pur suit of happiness."3 It rests within each person to seek his own ends and to achieve happiness. No one, in cluding the state, can promise an other happiness; it cannot even de fine happiness for another. The proper role of the state is simply to leave man free to pursue his happi ness in response to his subjective value system. Business merely ex ists as the most effective and effi cient mechanism by which men can pursue happiness, compatible with natural law principles of inalienable rights. The Multiple Roles of Individuals in a Business Society Less perceptive observers tend to fragment society into sections like ''business,'' "labor," "consumers" and "farmers." Actually, all members of a modern market society play many roles: most are shareholder-owners, worker-producers) and consumer users and some are officer-managers of business. Frag¢entation distorts reality and serves!no useful purpose.

Many people create value, directly or indirectly, and t(ill consume. To the extent that they ~ave some of what is produced, they become owners: every possessor of an insurance pol icy, bank account, I pension plan, bond or stock is an owner of business in society. The meaning of these roles may be both seen and ~seen, obvious and obscure. The visible m~aning: class war fare destroys U$ because we are fighting oursel~es. Antibusiness legislation or litjgation attacks all who own a share of that business. Moreover it des~roys the structure and the process, which fulfill our wants and desires as consumers most effectively. The hidden me~ing requires some thought. In which of these roles may members of soci~ty use the state to enforce their desires? Man merits no right to use force! in anyone of these roles except in t!Wo limited circum stances: he may band together to prevent and putiish aggression, the initiation of forc~ and fraud, and to secure common ijustice, the settle ment of otherwise insoluble dis putes. Beyond th+se limited roles, the state intervenes iin business only at the peril to all who reside in society; each inhabitant~ in one or several 618 THE FREEMAN October roles, derives exceptional benefit from the existence of business.

Consider two of the many aspects of this hidden or secondary truth. First, mankind in a free society retains the absolute right to refuse to trade with those one wishes to avoid for whatever reason. If a party does not desire to drive a Ford, he need never buy one. If he does not believe that he has received proper recompense for his toil and his pro duction of value, when his contract terminates he may go elsewhere and sell his services for whatever the market will pay. Business in a free society is noncoercive: has anyone, even in this euphemistically-la belled "mixed economy," ever forced another to buy a Chrysler instead of a Volvo, or to purchase Colgate Palmolive products in place of a competitor's offering? Second, the absence of business would render trade abominably slow, tedious, and uncertain. Imagine the difficulty you would encounter in this country of 225,000,000 souls if you attempted to satisfy your wants by trade without a business structure.

Each of us would surely starve na ked in the dark; as Leonard Read has so convincingly demonstrated, not one among us can construct start to finish~an item as simple as a common pencil. 4 Business defines the means by which we voluntarily speed up and apply precision to the many transfers which make our lives productive and satisfying as we pur sue happiness. Three myths pervade the study of business: the myth of the windfall profit, the myth of the private mo nopoly, and the myth of the evil en trepreneur. Each fantasy accounts for much· common misunderstanding of the role of business in society yet, in unmasking these chimeras, a nub of substance remains to be explored. The Myth of the Windfall Profit The consideration of the trading transactions of business introduces another term: profit. Profit repre sents the most misunderstood por tion of business endeavors. Profit describes the excess trade value transferred to a party in a transaction, beyond the value of the matter exchanged. Seller conveys a book to buyer for $5.00; the seller's profit is the excess of value received over the value of the book to him.

Such a value may consist of tangible or intangible matters. For example, the book may be a fungible item, one of many almost exactly the same; in this case, the seller may trace his profit to the amount in excess of the cost of the book. After totalling the charges for typing, proofreading, printing and publishing the tome and adding on a figure for the labor in volved in writing, the seller may conclude that his cost is $4.75 and his profit $0.25. In different circum stances, where the book could be 1982 THE SOCIAL ROLE OF BUSINESS 619 classified as a collector's item or a first edition, other factors will enter into a determination of profit. Often, analysts overlook the fact that all parties profit in all free transactions. The seller may receive a stated sum of money or goods of a value which represents his cost of goods sold pIus an increment for the u~e of his time, capital and entre preneurial abilities. He expresses willingness to trade his goods for their return; for any lesser amount, he would rather keep what he has produced. On the other hand, the buyer will trade a stated sum of money or goods of a value which represents the value the buyer places upon the seller's offer. If the seller's goods are worth less to the buyer, he will not make the trade and, in stead, will keep his trade goods or money substitutes. If the trade takes place without coercion or fraud, both parties profit because each one re ceives something he values more from the other than that exchanged.

This possibility takes place because of the doctrine of subjective value: individuals value things differently. The ExchangeRatio Price is not value. Price is an in dicator of value at a particular time for particular individuals in a par ticular setting. But value shifts, so price merely marks the intersection of the supply and demand curves at that time. Given this understanding, "ex c:ess" or "windfall" profits or prices c:an never exist unless a transaction possesses an element of coercion. Each party to a ,transaction freely and voluntarily e~tered receives the result he desires, and each profits in his subjective scp~me of value. A windfall occurs when someone re eeives something undeserved or eoerced; one cannot describe a gain as a windfall whete both parties vol untarily agree add trade: in the ab sence of fraud, ea¢h receives that for which he bargained. "Excess" indi cates a standard;, if the standard of value is subjectivte, the gain cannot be excess in a volpntary situation.

Studies indicate that many indi viduals hold an i unreal vision of business profits. Depending upon the poll, the sample Bind the source, peo ple may believe) that the average business receives up to 45 per cent of each sales doll.r as profit. In fact, the average manpfacturing concern receives something like $0.05 of each gross sales dollar as profit depend ing upon the me~suring technique. Studies also indicate a misunder 8tanding about t~e amount of busi ness cost related to labor and to gov ernment compli$,nce. In addition, most profit figur~s contain the mis leading assumption of ~easurement by a constant standard of value, whereas inflation causes a reduction of real value and: an incorrect set of figures. Yet even if profit truly 620 THE FREEMAN October reached the imagined heights, one could not term them excess in a free society for the fact would merely be token that the seller was supplying a needed service or good or concept desired so much by the purchaser that the latter was willing to trade a larger amount of goods or services or ideas in return. The greater the profit, the higher the need fulfilled.

The Myth of the Private Monopoly A myth persists that, without governmental intervention in the business world "to assure competi tion," private monopolies would re sult. 5 This would leave society at the mercy of a few large enterprises free to raise prices at will and to impose their corporate desires upon un happy consumers without recourse or restraint of any kind. Such pur veyors of nonsense fail to under stand basic economics, the free soci ety or the concept of subjective value. If everyone derived perfect satis faction according to his or her sub jective value structure from a single product, a single producer would dominate the field for that item. Yet this simplistic analysis ignores real ity. In the first place, subjective value varies among individual actors, leading to the need for many pro ducers of a single type of product to offer a range of economic choices. Even where goods are fungible, such as steel, over 250 American enterprises appear as sellers, not to men tion many foreign entities.

In the second place, if a producer satisfies a great number of con sumers with a single product, his profits, far from being a windfall, merely demonstrate that he is as suaging a true demand. In the third place, in a free soci ety, without state-imposed barriers to market entry, subsidies, favorit ism in distribution, and the like, high profits will tend to attract compet ing producers into the field, leading to innovation, improvement, and lower prices. Monopoly, even if pos sible, would constitute an ephem eral instance in the true private property order. New creators of value will hasten to share in a lucrative market, given the self-improvement and acquisitive nature of mankind. In the fourth place, consumers vote in a dollar democracy among a great array of products and services.6 Thus, not only do creators and traders compete in the market with manu facturers of like goods and services, but also each business must compete in the broader field among a wide variety of substitute, noncompeting products; further, each enterprise must compete for the finite con sumer dollar (stored-up labor or trade goods) which can be spent or saved.

Remember: people tend to vote their own trade dollar more carefully and more in harmony with their true self interest than they do in the polling 1982 THE SOCIAL ROLE OF BUSINESS 621 place on election day, when many fall prey to the sins of greed, envy, covetousness and coercion. On the market, the consumer-voter trades his or her produce for that which he or she desires the most, based upon the trader's enlightened subjective value. In the fifth place, the market pro vides an amazingly resilient and ef ficient apparatus for determining the employment of scarce and finite re sources for the satisfaction of hu man wants at the lowest cost and on the most praiseworthy and effica cious basis. Business ought to produce what the user wants. Con sumer desires rest on subjective value. Thus, the business which prospers best serves the greatest number of subjective value struc tures at a given time. Those enter prises which do not satisfy the needs ofthe buyers receive a command from the market: go and employ your scarce resources, your capital, your labor, your time, your inventiveness elsewhere. Thus endeth the Kaiser, the Fraser, the Tucker, the Edsel, and the Imperial, to name a few ex amples from the American automo tive industry in the post-World War II years.

Signalsfrom the Market If no one, or too few persons, buy a product even at a low price, that fact indicates to the seller that his merchandise does not accord with the subjective value system of the public at the present; iIi a word, there ex ists no demand fQr the stock. A hy pothesized privat~ monopolist occu pies the other enq of the continuum: by presuppositiort and definition, he serves a real nedd and best accom modates the fancies of the public in that arena. Ho~ever, as indicated heretofore, if the imarket provides a return for such a good,service or idea, the. monopolist will not remain the lonely producer f~r long; he will find ]plenty of compatiy as new entrants into the field try to outdo him for the reward of profit. lf these newcomers succeed, the pric~ drops by virtue of increased competition; if they fail, the market signals that the former supplier still sla}tes the customer's thirst best of all. i In the sixth place, while price does not constitute the sole determinant to trade, it does represent a register of value so that tjhe producer-even an averred monopolist-who gener ates great numbers of goods and holds them for a!too-high price (be yond what the s~bjectively-valuing public wishes to pay) will find him self burdened with a useless inven tory. Since the management at Gen eral Motors canIiot eat Pontiacs or use Skylarks for shelter without in convenience, we witness a reduction in price by mea~s of lower finance charges (encouraging payment over time in fewer reall dollars, given the inflationary sweep of the economy), 622 THE FREEMAN October rebates (price reductions by another name) and similar actions. Even these price diminutions have proved of remarkably minor assistance to Chrysler, which has reported losses in recent quarters in significant amounts and which would probably have left the field of automobile manufacture and sales without the existence of a governmental sub sidy.

Thus monopoly represents a chi mera in the real world in, the ab sence of state intervention in the economy. The only true monopoly: the government monopoly of force. The Myth of the Evil Entrepreneur Television, radio, newspapers, magazines, books and plays all por tray the American businessman and woman as evil, cunning, treacher ous, crooked, greedy, immoral and, sometimes, downright murderous. Think back to the last time one of these media pictured a person in business as wise, decent, helpful, and virtuous. Few can recall such a dis play. - This unfortunate characteri zation has embedded the populist notion of the evil entrepreneur deep into the fabric of our society, to the extent that it far overshadows real ity and truth and does a gross injus tice to many millions of upstanding individuals. In fact, in a free society, people in business are neither better nor worse than their counterparts in education, labor, agriculture, the profes sions, or the social services. Busi ness people partake of the same flaws which afflict all of us and demon strate the identical virtues which render us little lower than the an gels. Indeed, those who engage in business may often exceed some of their fellows in virtue because the entrepreneur, seeking profit from the satisfaction of wants by the deploy ment of scarce resources, helps his fellowman pursue the latter's sub jective vision of happiness.

Again, the traducers of business focus on the 'seen and ignore the un seen. They tend to overlook not only the role of business but also the multiple roles each of us plays in the real economic world: as worker, em ployer, owner, user, investor, in short, as businessmen and women. By chastising the business commu nity, the unreflective writer or poli tician demeans us all-yet curi ously, they invoke their little statist schemes as a prescribed nostrum for society's real or feigned ills, artifices which assume perfectibility of the very mankind they disparage. The Grain of Truth Behind the Myths A nubbin of truth reposes in these three myths of business: since the business person is no better nor worse than the mill run of people gener ally, he like his peers may seek an edge, an advantage conveyed by 1982 THE SOCIAL ROLE OF BUSINESS 623 government to one but not to others. It is the entry of the state into the affairs of business and the free flow of the market which leads to unfair profits, monopoly and wicked ad vantage. Business is designed to function best in a free society; the state represents the viperish inter loper in the market Garden of Eden, corrupting what it touches when it exceeds the bounds ofproviding a fair field to all and special privileges for none.

How does the government disrupt the political economy? The ways and means are too numerous to count. However, the use of the law for fa voritism generally takes one of two broad forms: limitations upon any entry into the marketplace or bene fits for some entrepreneurs at the expense or to the exclusion of others. In the first category reside license fees, public utility franchise laws, rules favoring cartels and "natural" monopolies, norms restricting the admission and practice of specified professions, and the like. In the sec ond category one finds subsidies, tariffs, government contracting and purchasing requirements, beneficial tax treatment and rules, and a whole host of curtailments stemming from the shibboleth "self-regulation" where certain members of an indus try cloaked with the mantle of law under the guise of a quasi-public en tity receive jural authority to make rules and. issue orders which govern the-conduct of others in that disci pline. The variatiojns on these themes are constrained o*ly by the ingenu ity of the minds of men propelled by greed and envy.

Finding a Scapegk>at The populist Who rails at "big business" often faUs to discriminate between business ,operating in a free society and busin~ss maneuvering in a command society. Noone· will at tain complete sat~sfaction and hap piness in any economy, free or slave, for that is not toe lot of mankind. Nevertheless, the ,purveyors of busi ness myths oftep. decry business practice as a suppqsed cause for their own shortcomings; failures, or losses. It is quite one thlng to challenge a private economic! enterprise which receives subsidies, land grants, fa vorable tax treatment, and a restric tive franchise fro:m the state or fed eral government. [t is quite another matter to preach hatred for a busi ness which becomes successful and highly profitable! not by virtue of special favors butpy dint of meeting customer needs ~nd subjective de sires. The acorn of tnuth from the oak tree of myth m¢rely advises the thoughtful that tpe mandate state may taint the people who partake in the business proc~ss and structure.

Thus, profit is notjexcessive where a freely acting sellejr and buyer reach a. mutually-acceptable price without 624 THE FREEMAN October coercion; profit becomes an unfair transfer payment where the govern ment limits the number of sellers or artificially enhances the price by means of law. Thus, monopoly ought not be feared nor even exist in a free society where the state merely acts as an impartial arbiter and police man; the monopoly to be feared is the monopoly of power possessed by the government and utilized to favor one producer over others. Thus, the entrepreneur perceived as evil de serves no such incantation when he merely serves his purchaser without a forced exchange, for Adam Smith correctly saw that myriad persons, each following their own selfinter est, are guided by an Invisible Hand to achieve the desired public result; the businessman merits opprobrium only when he seeks and gains an ad vantage by use of force or fraud, ei ther individually or with the aid of a compliant state.

The Social Role of Business We arrive at the seminal inquiry: what represents the social role of business in our community? Since "social" and "society" stem from the same root, the proper answer com pels an understanding of two dis crete concepts, the state and soci ety.7 Society constitutes a voluntary, sharing, exchanging fraternity among consenting human beings. By nature, society is free and open-textured, permitting growth or termi nation at will as dictated by the mo res, consciences and values of the participants. Simply put, one may enter or leave society at any time for any reason without penalty. On the other hand, the state rep resents a coercive territorial body issuing commands which must be obeyed by all subjects. It rests on power, not contract. It is closed; one cannot debark without sanction, sometimes quite severe penalties. The state's existence derives from the nature of mankind and a Rule of Ne cessity: flawed and finite people pos sess destructive tendencies which must be curbed, ere freedom is lost for all.

Society and state co-exist and complement each other, each re flecting one of the dual aspects of human nature. Society fosters man kind's creative desires; the state ob structs the human disposition to coerce and destroy. Open Competition In the true sense, business only involves voluntary, nonaggressive human action. Thus, it provides the means for carrying out the concept of society. The state's role: provide a fair field and no favor. When the state takes a hand in business, it taints the process and the structure be yond recognition. Instead of retard ing force and fraud, the interven tionist state uses its power to tilt the 1982 THE SOCIAL ROLE OF BUSINESS 625 field and afford special privileges to the few. Business hannonizes with the open texture which delineates society. One may dissolve a business relationship without sanction, subject only to self imposed contractual restraints and the reasonable promissory expecta tions of the parties. A consumer may cease using a manufacturer's prod uct; a worker may stop laboring for a concern; a shareholder may sell his stock; all without reason or for any reason at all. Society fosters the cre ative inclination by providing har monious surroundings and stimu lating circumstances within which to live, work and exchange ideas, goods and services and to develop friendship, harmony and warmth.

Business provides the mechanism by which such goods, services and ideas are created, transported and distrib uted under the voluntary exchange system which distinguishes society. In the societal sense, then, the so cial role of business is simply busi ness, to produce the best possible goods, services and ideas at the low est possible cost and at the greatest possible profit for the entrepreneur. When business fulfills this role, it acts in harmony with society and its own nature by carrying out the function for which it is well and solely suited. In a word, society favors har monious interchange of scarce eco nomic goods to satisfy the most pressing subjective wants of mankind at the natural law cost; busi ness provides the process to facili tate that intercqange. How Business~erves Society Because business performs volun tary, creative aqd productive accom plishments by its very nature, it necessarily acts in the highest social role when it doe$ what it is supposed to do. On the ot4er hand, business is poorly equipped, to achieve or carry out some sort qf egalitarian social justice (which is] not justice at all) or to redistribute i,tncome or wealth by means of transfer payments or to pe nalize less thanivirtuous conduct on the part of some individuals in soci ety. Those who ~ssign the foregoing aspects as business' social role fail to comprehend 'the nature of busi ness: imposition of "social policy"

normally embodies the dictation of A's value structure upon an unwill ing B, a function best left to the state (the monopoly of coercive force) if to be performed at all. Creative enti ties and processes, like business, cannot easily expedite the destruc tive functions associated with the state. All of this d~es not portend that business is not,)and should not be a good neighbor., Most persons en gaged in business normally act har moniously wit~ the universe and kindly toward! their compatriots. They must obey the same moral laws as the rest of. us do or suffer the 626 THE FREEMAN identical moral consequences. How ever, the businessman ought not be forced to act as the moral arbiter of society: such a task would remain a blatant impossibility since no two persons maintain synonymous value standards at any time. If business misbehaves remedies exist: the con sumer who disagrees possesses the perfect retort by nonviolently with holding commerce, and the state re strains the use of force and fraud by any predatory endeavor. By im pressing these restrictions and no others upon the world of trade, we avoid the stultifying effects of prior restraintS which stifles creative en terprise and we accord business the freedom to serve the subjective needs of the populace. , -FOOTNOTESIBy reason of the limitations of this paper, I confine my analysis of positive law and natural law to its most rudimentary form, reserving for Capital Formation separate treatment this most interesting and absorbing subject.

2This is the great teaching of Dr. Ludwig von Mises in his work on Socialism, which proves that a socialist society must import a market concept in order to price, plan and distribute economic goods. See Mises, Ludwig von, Social ism (Liberty Classics, Indianapolis [1936], [1951], [1969], 1981). 3Declaration of Independence of the United States of America. 4See Read, Leonard E., "I, Pencil" (The Foun dation for Economic Education, Inc., Irvington on-Hudson, New York). 5Severa l significant thinkers much more gifted than I have debunked the monopoly charade. See, e.g., Sennholz, Hans, ''The Phantom Called 'Monopoly' ", VII Essays of Liberty 295-317 (1960) and D. T. Armentano, The Myths ofAnti Trust (Arlington House, New Rochelle, N.Y., 1972). 6Interestingly, the greatest diversity in prod ucts and widest range of choice exists not in the socialist economy allegedly designed for con sumer protection but in the market economy characterized by freedom.

7See my detailed exposition of the nature and interrelationship of these two concepts in Foley, Ridgway K., Jr. "The Texture of Society", 27 Freeman 495-504 (August 1977). aSee Foley, Ridgway, K., Jr. "Prior Re straint", 31 Freeman 609-614 (October 1981). IDEAS ON LIBERTY IT has often been found that profuse expenditures, heavy taxation, ab surd commercial restrictions, corrupt tribunals, disastrous wars, sedi tions,persecutions, conflagrations, inundations, have not been able to destroy capital so fast as the exertions of private citizens have been able to create it. THOMASBABINGTONMACAULAY Ralph Bradford The American Idea THE really significant American Revolution was not the military re volt that led to political indepen dence from England, but the philo sophical about-face which freed the developing American economy from the deadly shackles of bureaucratic control, and by liberating the crea tive energies of the people, made possible the miracle of American production.

That was the real American Idea the idea of the Free Market. To some people that phrase had, and still has, only a commercial connotation; but in reality it had, and still has, a much broader significance. It refers not only to the free trading of goods in Ralph Bradford, noted poet, writer, speaker and busi ness organization consultant, is now retired in Ocala, Florida. the market pl8!ce, but to the un trammeled exch~nge of ideas, and to the fullest possible development of the human min4 and spirit. It refers to such added aspects of liberty as freedom of spee~h and of the press. It means also fr~edom to write, and to create a literature. That was the true essence and spirit of the Amer ican Revolution. Such concepts, it must be noted, were not new in 1 the world. Here and there they had blossomed, and men had grown in spirit, and had pros pered materially. We know this be cause, wherever and whenever this occurred, men were free in the large sense to followthe creative urge that resides deep in the human heart.

They made pict1.Jlres,they carved im ages, and, sooner or later, they wrote!

628 THE FREEMAN October On the skins of animals, on papyrus, on rock walls, on stone steles, on clay tablets-they wrote! Using pic tures, or crude cursive script, or ideograms, or hieroglyphics, or cu neiform indentations-they wrote! What the chief said, what the king decreed, what the priests pro nounced, what the artisan created, whether the harvest was good or bad, what the laws were-they wrote! They set it down. And thus in signs and symbols we have history far 'be yond any literature or language of the present century, or in the his toricage of man. Flashes of Freedom Yes, freedom, which is a timeless torch, glowed brightly here and there through the centuries-obscured and destroyed now and then in one black era after another, to reappear and relive elsewhere as the fortunes of man, the developing animal, rose and fell with the ages. But it had never been so carefully expressed, or as extensively imple mented, as it was in America. It had even gained a foothold in parts of Europe for a time; but it was snuffed out there in the dark medieval cen turies, and as a consequence the scale of human production, comfort and well-being had sunk to the level of general impoverishment and priva tion.

By the same token, the literary output of those times is practically nonexistent. Only the troubadours survived the general intellectual impoverishment; and their songs, while sometimes poetically beauti ful, are concerned mainly with the ephemeral splendors of court life, and with the evanescent beauties and languors of romantic love, usually of an illicit and clandestine character. Getting back to America, it should be noted that the recent departures from the original American Idea namely, the so-called "modern" no tions about the need for governmen tal management and supervision of all our' economic processes, are not modern at all. Incidentally, they are not "lib eral," either, though they are so termed by their supporters. The classical liberal concept was that of a government of sharply limited powers. The true liberal, from Thomas Jefferson to Woodrow Wil son, was afraid of big government.

Jefferson, indeed, was afraid of any government. "The best governed," he once declared, "are the least gov erned." And as for Wilson, he wrote: "The history of liberty is a history of limitations of governmental power, not the increase of it." And as to the "managed econ omy"-the idea of substituting the decisions of bureaucrats for the op eration of the free market-all this is not new, or modern, or original, but very old. Examples are not hard to find, both in the literature of the 1982 THE AMERICAN IDEA 629 Romans and in that about the Ro mans. In the latter category, Gib bons' Decline and Fall is perhaps the most voluminous-and ponderous. Much easier to handle and digest is a book called The History ofthe World in 300 Pages, translated from the French of Rene Sedilot. In one sec tion he describes the situation in an cient Rome. It sums up thus: Under the Emperor Alexander Severus laws were decreed to control all businesses that were operated on accumulated capital, and loans were made by the government to people in certain categories for use in buy ing land. Under Domitian, in order to prevent overproduction of wine the State ordered a portion of the grape vines to be uprooted. Under Vespasian, on the theory of spread ing employment, a ban was laid on mechanization. Under Diocletian, in an effort to keep down the cost of living, both wages and prices were fixed by a state official.

Needless to say, all this created a vast and expensive bureaucracy. It also resulted in debt, inflation, and monetary devaluation. The denar ius had its silver content progres sively reduced. The weight of gold coins was scaled down by 50 per cent. Rome's balance of payments (due partly to her extensive foreign op erations) showed a mounting deficit; and her gold and silver reserves melted away. Need I go on? It all sounds very "modern," doesn't it? Yet it hap pened many yealis ago! And of course it had all occurred in similar fashion long before that+-as in the state so cialism of Egypt~ with its "ever nor mal granary" op~ration; or as in the pre-Babylonianiculture of the Su merians, arounq 3000 B.C. It was also repeated la~er, with many re pressive variatiqns, in the guild sys tems of Europe's! Middle Ages. That Sumeria.n culture, by the way, has been substantially recon structed by ent~rprising archeolo gists. They not ~nly unearthed the capital city of Lagash, but found and deciphered the Irecords of the Su merian people. )And it is in those records that we fjnd some of the first expressions of what I consider to be the essence of i what became the American Idea.

Free from Oppr~ssion, Free to Achieve; I said at the outset that that Idea was freedom, bu~ we need to be ex plicit as to what we mean by that term. We associaJtefreedom with the abstractions ofpqliticalliberty - very properly so. How~ver, that is not the entire meaning ~nd content of free dom. To be free ~s not just to escape oppression. The ~rue free man is free from something, of course-from tyranny, from aUuse, from overtax ation; but he islalso free for some thing - free for the purpose of self development, of fulfillment, of self630 THE FREEMAN October expression. He is free to think, to question, to doubt, to believe, to speak, to write. But the word "freedom" was not written down by some scribe for the inspiration and guidance of our co lonial ancestors. It didn't have to be! They knew it, as it were, by instinct. It was born with them by reason of what they and their ancestors had suffered in its denial.

I have no wish to over-idealize those colonial days. Some of them were very dark days, indeed. There was privation, and hardship, and danger; there were cruelties and treacheries-for our ancestors were not all great and noble. Some came here to enjoy religious liberty, only to deny it to others who desired to live among them. But if I am realis tic about the seamy side, I am also not disposed to discount the impor tance of those days in making pos sible the miraculous decades that followed. Self-ResponsibleIndividuals The secret was that in the devel opment of most of North America men were on their own. This was not true farther south. The Spaniards and Portuguese were nearly all sent out by the state, and that meant a curtailment of freedom at the very outset. When Columbus set out on his voyage, Queen Isabella fur nished the ships and paid the crews. Columbus was to get a cut and receive certain honors; but he didn't defray the cost. In contrast, Queen Elizabeth didn't outfit Sir Walter Raleigh when he headed for what was to become Virginia. He had to "find" his outfit.

The same thing was true with re spect to the other colonies in the North. They were "chartered" by the King or Queen, of course, but the state didn't finance the enterprise. That was done privately. Companies were formed. Shares were sold. Those who put their money into such en terprises were known as "adventur ers" -not because they were person ally going offto settle the wilderness, but because as investors they had "adventured" their money. If the trip paid off, if the Colony was success ful, well and good. They would get their money back with interest and maybe with a profit. But they had no guarantee. The thing was not un derwritten by the State. If it failed they took the loss. And it was similarly so with the colonists themselves. Nobody guar anteed them against failure. They were face to face with wilderness reality. It was sink or swim. It was root hog or die. It was a rough, tough school; and of course it would be ut terly repugnant to a certain type of politician and intellectual today people who want the State to be a kind of universal Sugar Daddy. But it taught a great lesson. It was the essential conditioning for what fol1982 THE AMERICAN IDEA 631 lowed-namely, the formalization and institutionalization of the American Idea in a structure of gov ernment. This was the mechanism for realizing the American Heri tage.

In part, to be sure, that heritage consisted of a vast new continent, enormously rich in natural re sources. But the same thing could be said of other lands-of South Amer ica, of Africa, of India. What made the difference? Freedom! Not just freedom from colonialism, not just political liberty, but freedom for growth, for development; freedom for the individual life to develop its ca pacities. How? Through freedom from too much government! The FoundersHesitatedto Put Their Trust in Government Now to a generation that has grown up under an almost ceaseless propaganda for more and more gov ernment, it comes as a profound shock when I assert that the Archi tects of the American State had a deep distrust of government itself. But so it was; and the quotations I have cited above from Jefferson and Wilson were fairly representative of the attitude of most of the Founders. It was in their bones, from the talk of fathers and grandfathers, who told vividly of State usurpations in the older countries. The Founders them selves had lived their lives under the relatively pettYibut persistent and cumulative tyra~nies of the British Crown. They w~re determined that the new State they were creating should be limitea. in its powers, re sponsible to thel people, and never allowed to dominate and control the lives of its citizens.

So what happ~ned? It is no form of jingoism but a simple statement ofhistoric fact to say that in less than 200 years the people of this country achieved a great~r efficiency in pro duction, and a more abundant dis tribution of the necessities, comforts and luxuries of !life than had been attained anywh~re, at any time, in all the centuries! of history taken to gether. The explanation of this paradox includes a numb~r of factors; but the overriding elem~nt is the simple fact that we have b~en free to make a better use of 04r energies and re sources than most other peoples. And that freedom came from the circum stance that in aJI the period of our great growth and expansion as a na tion, our government, by the delib erate design of i~s founders, gave us the protection of.aw-and left us free to achieve. That was the! American Idea in principle and tqat was the Ameri can Idea in prac~ice.

Shall we keep i~ that way-or shall we trade it for the imagined com forts and benefitsiofthe welfare state?, A REVIEWER'S NOTEBOOK Back to Basics JOHN CHAMBERLAIN IT has been called the Reagan Rev olution. But the movement that Burton Yale Pines describes and analyzes in his Back to Basics (New York: William Morrow, 349 pp., $13.50) goes much deeper than poli tics. It is a cultural movement that is invoking a return to tradition in religion and ethics and educational methods; and its support of free market economics has more to do with its belief in the moral value of free choice than with any purely economic concern with efficiency. Mr. Pines once wrote cover stories for Time magazine, which presum ably brought him into prolonged contact with Eastern Establishment ways of looking at things. But some where along the line he began to have sympathy for the large groups in so ciety that had a feeling the so-called counterculture was pushing them to the brink. A first-rate reporter, he persuaded the American Enterprise Institute in Washington to support him in an eighteen-month job of measuring the depth of the tradi tionalist resurgence.

As luck would have it, he caught innumerable people at the very mo ment when they were moving from thinking into action. Ideas, said the late Richard Weaver, have conse quences. And Mr. Pines began combing the country at a time of consequences, when businessmen were beginning to fight back against excessive regulation, when taxpay ers were organizing to put a cap on both taxing and government spend ing, when parents were objecting to sloppy methods of teaching and ag gressive anti-religious secularism in the schools, and when the New Right in Washington began to make its first BACK TO BASICS 633 fruitful contact with the Moral Ma jority at the grassroots. Nomenclature bothers Mr. Pines a bit. The New Right and the Moral Majority are "rightist" in a political sense, but Mr. Pines properly ob serves that there is nothing political about the return to basics in educa tion, or the quest for spirituality in religion, or the pro-family move ment. "Conservative," Pines says, fits the movement better than "right ist," but there is nothing peculiarly conservative about a concern for na tional defense. Many liberals share a distaste for abortion with conser vatives.

The Old-FashionedLiberalismand The TraditionalistMovement Looking for an umbrella word, Pines settles for "traditionalist." He notes that tradition, in America, in cludes a faith in conquering fron tiers and building better societies, in political democracy and free mar ket capitalism, in a federal system that protects the separate states, and in a "public ritual" that celebrates patriotism. In his discussion of names, Pines shows he has no quar rel with the old-fashioned liberalism of the nineteenth century. But to be useful today it has to be labeled "traditional liberalism," which makes out a tacit case for "traditionalist" as against such obfuscating descrip tions as "neo-conservative." Mr. Pines doesn't do much with the intellectual pioneers of" the tra ditionalist movement beyond noting that George Nash p.as profiled many of them in his 19'16 book, The Con servative Intellectual Movement in A.merica. Of the pioneers he says, "prolific though they were, conser vative intellectual~ generally had but limited impact on: the public policy process." This majy seem a bit un generous of Mr. Pines, for, as the history of Britain! shows, a Fabian Society must com, before there can be any Fabian su~cess at the polls.

But Mr. Pines' decision to take for his starting line the emergence of such conservative or traditionalist institutes as the fIeritage Founda tion, the Hoover Ipstitution and the American Enterprise Institute was correct for his putpose. What he is giving us is con~emporary report age, which is not yet history. Pines' account of the epic fight of the Illinois Power 1 Company against the Columbia Broadcasting System over an alleged rpispresentation is battlefield reporting at its best. Business is only now beginning to break out of its silences, and Mr. Pines is an engaged man in his ef forts to keep the momentum going. The battle of the W. R. Grace Com pany's Peter Graqe for a change in the capital gains !tax had an enor mous impact: wh~n 106 papers had published stories about Grace's em broilment with President Jimmy Carter, Congress cut the maximum 634 THE FREEMAN October rate from 49 per cent to 28 per cent.

With businessmen turning to activ ism, students are also getting into the fight. There are 6,000 members of the new Students In Free Enter prise at 150 colleges, which is a big switch from the campus scene of the Nineteen Sixties and early Nine teen Seventies. Keynes Losing Ground Mr. Pines' front-line reporting took him to the University of Minnesota, whose economics department has been identified with Walter Heller, described by Pines as "America's best-known, most visible Keyne sian." Well, Walter Heller is still at Minnesota. But he is "out of step with most of the exciting work now going on in the department." Pines notes that the new "glittering lights" at Minnesota now-Edward Prescott, Thomas Sargent, Christopher Sims, Neil Wallace-have all turned their backs on Keynes. Pines quotes Tom Sargent, an en thusiastic advocate of the new "ra tional expectations" school of eco nomics. "When I started teaching,"

said Sargent, "I gave my students the standard Keynesian stuff." But the "moment of truth" came for Sar gent while he was working with Neil Wallace on a project at the Federal Reserve Bank in Minneapolis. A study that began as the "apotheosis of Keynesianism" started to crum ble after eighteen months of work. "It was a tragic realization," so Sar gent recalls. What Sargent and Wallace discovered was a funda mental flaw in the Keynesian ana lytical method itself. Sargent con cluded that Keynesian "economic models do not work well; they give bad predictions." Looking back to the days when he was teaching courses based on Keynesian analysis, Sargent says: "It makes me sick to my stomach." "I looked up to them," he says of the Keynesian "giants." "I would .not have believed that these men could have been so wrong. It's been like discovering that your parents are wrong." Mr. Pines wrote about the Equal Rights Amendment before it had en countered its doomsdate on June 30 of this year. But he accurately notes that in fighting to keep ERA out of the Constitution, Phyllis Schlafly, Lottie Beth Hobbs, Jo Ann Gasper and other supporters of the "tradi tionalist" family proved that women could exercise their rights of free speech just as effectively as men even without a new amendment. Since the Constitution already guarantees the "equality" of all citizens without ref erence to sex, the ERA would have been redundant. Its proponents said it was needed as a "symbol." But the fight against it by Mrs. Schlafly in favor of the "traditional" family was symbolic, too. And traditionalism, says Pines, will go on winning. ® 1982 OTHER BOOKS 635 THE DOMINION COVENANT: GENESIS by Gary North (The Institute for Christian Economics, P.O. Box 8000, Tyler, Texas 75711) 1982 496 pages - $14.95 cloth Reviewed by Edmund A. Opitz GARY NORTH'S name is well known to readers of The Freeman as the au thor of a score of articles, lucidly written and well argued. His fort nightly newsletter, Remnant Re view, contains brilliant analyses of current economic and political trends, and offers sound advice for those who are struggling to hold body and soul together during this trying period in the world's history. His Institute for Christian Economics issues four publications, one monthly, three bi monthly. It also publishes books, tapes and home study courses. A Di vinity School is on the drawing board.

Dr. North seems to get more things done than any two ordinary people, and all is done well. But central to his life's purpose is the writing of a multi-volume economic commentary on the Bible. Of ordinary exegetical works there is a profusion, but no one, to my knowledge, has ever gone through the Bible book after book to see what the whole Bible has to say about the way our economic activi ties should be organized. Dr. North has dedicated himself to this task, and the formidable book before us is volume I. Gary North's dpctoral thesis ex plored the econon#c thought of the New England Puritans. His theolog ical convictions li~ in this area, that is, within the ort:podoxy laid down by John Calvin. Calvinism strikes some as a legalistic and cheerless creed. But that C*lvin's was a pow erful mind no one can deny, and it is equally true that Calvinism has at tracted minds of the highest caliber from its early days to the present time. Basing their theology on an infallible Book, Galvinist thinkers put modernity to ~he test and find it wanting; it is man~centered not God centered and this causes everything to be more or less skewed.

Gary North sta.rts at the begin ning, with Genesis 1:1, and by the time he reaches Genesis 50:20 he has written a book of 496 pages and dis played a sure-footed understanding of Biblical theology, science, sociol ogy, free market, economics, Dar winism, Marxism,! and sundry other issues. There is he~vy stuffhere, but the writing is lively and heavy does not mean dull. There will be readers who will find som¢thing to disagree with on every other page, but even the most sceptical-+-if they can think at all-will find much to ponder. Readers who want a basic course in Austrian econ~mics will find it here, supplied w~th Biblical rein forcement of key points. If it is light 636 THE FREEMAN October on the Creation vs. Evolution con troversy, there is a 77-page appen dix with 203 footnotes. There are strong opinions on almost every page, and a twenty-page index enables the reader to find his way around in the book.

Twentieth-century socialism has made deep inroad among the more liberal church bodies, and it has re cently gained a foothold among Evangelicals. Which makes it ap propriate to note here the appear ance of a second edition of David Chilton's fine polemic (Productive Christians in an Age of Guilt-Ma nipulators, I.C.E., Box 8000, Tyler, Texas 75711). The New Preface is by Dr. North. , MARKETSAND MINORITIES by Thomas Sowell (Basic Books, Inc., 10 East 53rd Street, New York, N.V. 10022) 1981 141 pages - $12.95 cloth, $5.95 paperback Reviewed by Tommy W Rogers THOMAS SOWELL demonstrates that many of the things we "know" about ethnicity and economic status are not so. Variables commonly thought of as decisive, skin color, for example, prove on examination to be far from determinative. Orientals and black West Indians are more economically successful than are some white groups. Commonly overlooked vari ables, such as fertility, socialization, and attitudinal and behavioral dis position, have a significant impact on incomes and occupations.

Sowell presents some revealing facts: The incomes of ethnic minori ties differ so widely within the group as to call into question the meaning fulness of comparisons based on na tional averages; discrimination can not account for the incomes of minorities who earn more than the national average; the lower earn ings of some groups are not neces sarily explainable by discrimination since other factors may be determi native. With respect to the application of this analytical process, Dr. Sowell outlines his methodology: In applying the general logic of deci sion-making to particular social pro cesses, we will examine the peculiarities of those processes but will treat human beings as similar, whether they are in politics or business or the schools ... We will also avoid making "the market" an automatic producer of certain results, but will instead consider what kinds of mar kets are being analyzed, and what incen tives and constraints exist in such mar kets. The whole emphasis will be on the specific characteristics· of particular de cision-making processes-not on a vague figure of speech called "society."

Sowell examines the operation of incentives and constraints as influ1982 OTHER BOOKS 637 enced, for example, by intergroup differences, job markets, consumer markets, and government regula tion. Groups with strong family and community ties-such as Chinese, Japanese, and Jews-have been prominent as entrepreneurs, setting up businesses drawn from resources within the ethnic community. Jews often started as pushcart peddlers, Chinese as operators of laundries. Blacks, Sowell observes, have sel dom set up independent businesses, but the subsets of Blacks who have (Black West Indians, Black Mus lims, and followers of Father Di vine's religious sect) contrast sharply with the massive failures in the prosperous 1960s and 1970s of Black businesses financed by the federal government in programs created by "experts" and often receiving pref erential treatment by banks and private and governmental pur chasers.

Dr. Sowell calls attention to the fact that some of the most dramatic rises from poverty to affluence in the United States have taken place among groups who did not follow the political route to economic advance ment, i.e., the Chinese,Japanese, and generally, the Jews. The most polit ically successful American ethnic group-the Irish-were the slowest rising of the nineteenth-century Eu ropean immigrant groups. Dr. Sowell also calls attention to the important role of the values peopIe cherish; the ~ehavior pattern of group is a cruci~l variable in both racial and non-racial contexts. He quotes the ruefu~ conclusion of re former Jacob Riis that some people "carry their slun1s with them wher ever they go." :Or. Sowell believes there is no compelling reason to be lieve that goverrtment activity has benefited ethnic i minorities on net balance, even when that has been its purpose. Futihermore, the fick leness of gover:qment policy sug gests that determining its purpose over some meaningful span of time is not easy, since "whatever the merits or demerits of government policies (relating to minorities), nothing seems ~urer from history than that those pqlicies will change."

Contrasting th~ results of volun tary economic transactions ("the ltnarket") with gqvernmental inter vention which fqrces, penalizes, or subsidizes decisions different from those which the; transactors would have preferred, he finds numerous instances where! even well-inten tioned interventions have thwarted the efforts of etljlnic groups to ad vance. As Dr. Sowell points out, eco nomic analysis qoes not make hu man beings better or more moral, but it does offer insight into the way dif ferent economicjinstitutions affect the well-being of human beings as they are. Dr. Sowell is without question one of the leading economists in the 638 THE FREEMAN October United States. When he writes or speaks he is worth heeding. Milton Friedman describes Markets and Minorities as a breath of fresh air on a topic which is often prejudiced by unreasoning emotion. Sowell's book deserves to become a classic in the literature on the economic and so cial problems of minorities. If it does not so become, it will not be due to any deficiency of analysis or presen tation. , THE PURSUITOF VIRTUEAND OTHER TORY NOTIONS by George ~ Will (Simon and Schuster, Inc., 1230 Avenue of the Americas, New York, N.'f. 10020) 397 pages - $16.50 cloth Reviewed by Joseph S. Fulda WHETHER one follows his twice weekly columns, reads his bi-weekly essays, or enjoys his lively com ments as a television panelist, one cannot fail to be impressed with George Will's expressive erudition.

No other contemporary columnist has quite his way with words or quite his ability to extract, in a thousand words or so, that which is " 'inside' public matters: not what is secret, but what is latent, the kernel of principle and other significance that exists, recognized or not, 'inside' events, policies and manners." Will's latest collection of essays and col umns is truly a restorative for those with Tory sensibilities and "the un derstanding that education consists primarily of arguing from, not with (one's) patrimony." In more than six score finely fash ioned, tightly reasoned pieces, two distinctly different Tory sensibili ties emerge. The first is the con science of the cultural conservative lamenting "the decline of almost ev erything since 1914" of "stained glass minds" which, not altogether jok ingly, "mourn the passing of the thirteenth century: feudal codes, he raldic banners, serried ranks of bishops ..." This is Will at his best, Will the social critic, conveying his urgent concern that Americans not lose what he terms "social sympa thy": "the ability to comprehend, however dimly, how other people (must) live."

This is the Will educated at Ox ford ("Like civilization, it is cumu lative, complicated, old and densely packed.") who reminds us that edu cation "presupposes students who acknowledge their incompleteness and teachers who believe that the purpose of education is to put some thing into students rather than to let something- 'self-expression' out." But there is a second Tory voice which makes itself heard in Will's 1982 OTHER BOOKS 639 pages, and it is political. This is the argument that since "social and cul tural anxieties find their way onto a society's political agenda" it is well to use government as "an instru ment of conservative values, tem pering and directing social dyna mism." Will believes, indeed, with much of the New Right, that the "nation's moral makeup is, today, soft wax on which national leadership can leave a long-lasting impress." Need less to say, this is not the classical liberal's view of the rightful role of, the state, and George Will does not present it as such. "The overriding aim of .liberalism, properly under stood, is the expansion of liberty ...

Conservatism, properly understood, rejects the idea of a single overrid ing aim. Real conservatism is about balancing many competing values ... " Well, life is about balancing competing values, but the classical liberal does not want such decisions made in the political realm. Not all of us have the same values, simi larly ranked, and it is thus that lib erty is not only itself a value but also the sine qua non for all personal value choices: it is not the role of government to undertake .the bal ancing of competing values. To Will, "... libertarianism is a recipe for the dissolution of public authority, social and religious tra ditions, and other restraints needed to prevent license ... '? To call one self a "libertarian conservative," he asserts, is a label as contradictory as "promiscuous celilPate." But few lib ertarians are nihilists, and those who are never redeemi themselves with the nobel label "cbnservative." The truth is that conftksion is being pro nloted here at a ~ather elementary level: the doctri:p.e that morality ought not to be ~mposed is philo sophically distinc~ from the doctrine that there is no mprality.

If Will sees lib¢rty in general as the antithesis of! sustained virtue rather than as ffu.e crucible out of which virtue is fotmed, his attitude towards capitalis~ is even less sat isfying. It is no~ animus, by any means, but ratqer what George Gilder aptly labeUed "the dirge of triumph." The 1980 Rep~blican platform, Will argues, is woven from two in compatible stranqs. "One is cultural conservatism. Th~ other is capitalist dynamism. The .latter dissolves the former." This, says Will, is perhaps the only point Marx got right. Capi talism, he continqes, is a "relentless engine of chang~, a revolutionary inflamer of appetites, enlarger of ex pectations, and aiminisher of pa tience." "Republic4ns," he warns, "see no connection be~ween the cultural phenomena they! deplore and the capitalist culture they promise to intensify." For Will this tension be tween the bourgeois ethic and con serving social v~lues presents an "especially vexing" dilemma-that 640 THE FREEMAN of "deciding what is to be conserved, and how."

Mainstream conservatives can, however, and for the most part do, accept the position of Frank S. Meyer and Friedrich A. Hayek, that the al leged tension between social conser vatism and economic freedom is largely given the lie by history. The first century of our nationhood saw both morality and piety, on the one hand, and freedom and the private property order, on the other. Rather than working against each other, freedom and tradition reinforce each other as Hayek so beautifully expos ited in The Constitution of Liberty. Will writes that "Capitalism means the liberation and incessant flaming of appetites," the "predictable con sequence" of which is "social disin tegration." But, as Will should know, HANDSOME BLUE LEATHERLEX that is not the way things worked out. Social disintegration was brought on by slavery, not liberty, and later by intervention, not eco nomic freedom. But these are subordinate mat ters, among philosophical soul mates, for on almost any specific policy issue, Will's instincts are not with the statists. In essays such as "Government and the 'Cheerleader Problem' ," "The FTC as Federal Nanny," and "Sexism in the Car Pool: DOT Rides to the Rescue," Will proves himself as witty an antista tist as ever was. But perhaps his fin est writings are his legal analyses, which give one "the joy, than which there is nothing purer, of an argu ment firmly made, like a nail straightly driven, its head flush to the plank." I FREEMAN BINDERS $4.00 Order from: THE FOUNDATION FOR ECONOMIC EDUCATION, INC.

IRVINGTON-ON-HUDSON, NEW YORK 10533 the Freeman VOL. 32, NO. 11 • NOVEMBER 1982 The Fine Art of Cheating Ridgway K. Foley, Jr. 643 How coercive programs invite corrupt practices an'long beneficiaries and victims. Keynesism in a Nutshell l1enry Hazlitt 650 Keynes failed to see the disastrous consequences of continued inflation. Economic Democracy Biill Anderson 651 How political intervention perverts the economic process. The State Wades In Steve H. Hanke 660 A case study of the high cost of government assistance. A Rebirth of Economic Freedom: The De-Bureaucratization of American Business Jack D. Douglas 662 How business is turning toward smaller operations for better results. Capitalism and Greed James Doti 673 A personal experience brings home the lesson that selfjinterest serves others as well. First-World Wealth and Third-World Poverty John Jefferson Davis 678 How production and trade help to overcome poverty.

The Genial Mr. Nock EdmUlndA. Opitz 685 A guided tour of the highlights of the wisdom of Albert Jay Nock. Socialism Eats the Seed Grain Glenn L. Pearson 694 The tragedy of a system focused on consumption. Book Reviews: 700 "Blaming Technology: The Irrational Search for Soapegoats" by Samuel G. Florman "The Man versus the State" by Herbert Spencer Anyone wishing to communicate with authors may send first-class mail in care of THE FREEMAN for forwarding.

FOUNDATION FOR ECONOMIC EDUCATION Irvington-on-Hudson, N.Y. 10533 Tel: (914) 591-7230 Leonard E. Read, President Managing Editor: Production Editor: Contributing Editors: Paul L. Poirot Beth A. Hoffman Robert G. Anderson Bettina Bien Greaves Edmund A. Opitz (Book Reviews) Brian Summers THE FREEMAN is published monthly by the Foundation for Economic Education, Inc., a nonpo litical, nonprofit, educational champion of private property, the free market, the profit and loss sys tem, and limited government. The costs of Foundation projects and services are met through donations. Total expenses average $18.00 a year per person on the mailing list. Do nations are invited in any amount. THE FREE MAN is available to any interested person in the United States for the asking. For foreign delivery, a donation is required sufficient to cover direct mailing cost of $5.00 a year. Copyright, 1982. The Foundation for Economic Education, Inc. Printed in U.S.A. Additional copies, postpaid: 3 for $1.00; 10 or more, 25 cents each.

THE FREEMAN is available on microfilm· from University Microfilms International, 300 North Zeeb Road, Ann Arbor, Mich. 48106. Some articles available as reprints at cost; state quantity desired. Permission granted to reprint any article from this· issue, with appropriate credit, except "The State Wades In" and "First-World Wealth and Third-World Poverty."

Ridgway K. Foley, Jr. The Fine Art of Cheating PERIODIC REVELATIONS of academic scandal enliven collegiate commu nities and titillate followers of cur rent events. Every few years, the popular press reveals a consortium between university ballplayers and professional gamblers designed to predetermine the outcome of school athletic contests to benefit the knowledgeable •inside bettors, to "beat the point spread." Recently, particularly on the West Coast, other instances of fraud and deceit have come to the fore. "Student athletes" receive college credit for unattended classes often held at nonexistent in stitutions or in places little more than diploma mills. Standins take tests and write term papers for the pam pered few. Teachers award high grades for little effort. Coaches offer illicit monies to encourage the fa vored to participate in sports for the dear old alma mater. Grades or de grees in exchange for sexual, politi calor monetary favors are not be yond the realm of reality.

Righteous indignation comes into immediate conflict with pious justi fication concerning these endeavors. The offended rail against unethical conduct, only to be met with excuses from the groves of academe belabor ing the fine educational efforts put forth on behalf of the college com munity. Poverty-stricken and dis advantaged students and overMr. Foley, a partner in Schwabe, Williamson, Wyatt, Moore & Roberts, practices law in Portland, Oregon.

644 THE FREEMAN November worked, underpaid faculty members apparently encounter great diffi culty in differentiating right from wrong and, in any event, focus on these minor misadventures obscures the wonders worked by public edu cation greatly benefiting the world. A Sacred Cow Certain subjects reside beyond the bounds of fair comment in this topsy turvy world: challengers to these unassailable institutions and myths find themselves pilloried by the press and ostracized by polite society for even suggesting that the emperor traverses the highways and byways stark naked. Public education rep resents one of those sacrosanct sub jects above reproach. Nevertheless, at the risk of censure and misunder standing, allow me to opine that the American public receives, at best, a dime's worth of education for every dollar spent, that the myriad exam ples of common cheating portend a much more serious moral ill, and that public education, far from constitut ing a Heaven-ordained precept, is just plain ineffective, indifferent and wrong. Moreover, attempted re forms (like the voucher system) do nothing more than perpetuate the evil rather than scourge it.

The true victim of academic ex cess will not be found by the unob servant many; the real injured par ties are those honest, upright, producing members of society who involuntarily contribute part of their privately-created property to the plunderers who exact tribute and transfer that wealth into the maw of public education. Certainly the hon est student or teacher loses too, but one cannot afford much sympathy for willing participants in misdoings; the seminal harm befalls the simple taxpayer-citizen who funds the transfer payments so that rowdy, lazy and rotund muscle-men live well and recei ve college degrees for learning how to move chairs in an audito rium. The depth of the art of cheating in the twentieth-century educational system taxes the fainthearted. Many students receive tuition waivers, book allowances and housing grants (not to mention food stamps) from the state or federal government.

Their classmates collect reduced in terest or free student loans, most of which are never repaid. Tuition de frays but a slight share of the cost of modern teaching; the remainder emanates from a variety of federal, state and local subsidies. Professors procure a plethora of tax monies by way of research grants, often em ployed in the most abysmal, waste ful or shocking endeavors. Schools intercept other forms of public fund ing to facilitate compliance with various entitlement and social pol icy programs mandated by govern ment. In short, an endless litany of perversions, diversions and boon1982 THE FINE ART OF CHEATING 645 doggIes blemish the once-fair visage of the grand old dame of education. ControlsFollowSubsidies Stealthy but iron-fisted state con trols accompany the current mania of intervention in the educational process: the carrots of grants and loans convoyed by the sticks of sanc tions and penalties for noncompli ance. Thus, a furor arises because the federal government in its egali tarian wisdom decrees equal fund ing and opportunity for male and fe male sporting events, participants and teams. Detractors of this lofty premise point out that college foot ball and basketball-played by men-produces high revenues; therefore, these grieved alumni, fans and participants decry the funda mental unfairness in taking monies generated by male sports to fund women's teams. By a parity of rea soning (apparently obscure to the multitudes) is it not also fundamen tally unjust to plunder the taxpayer citizens to support athletic contests or, indeed, schooling for other peo ple? If it is wrong to pay halfbacks to run off tackle, is it not equally wrong to compensate scholars from public monies to study the mating instincts of armadillos?

The aspect of governmental con trol exceeds the simple examples employed. The state pervades the entire educational process: it de crees who shall teach, who shall attend, what shall be taught, and what subjects are an~thema; in a phrase, it determines tljle participants and sets the agend~. It punishes non compliance or deviation by a series of sanctions, from. the withdrawal of grants to the revocation of accredi tation to the threat of imprisonment of dissenters. With the aid of a com pliant media, those who jostle the public educational process are shamed, ridiculed or mistreated. Once tax dollars are expended for a stated public purpose, one can make a stronger case j for implementation of governmental controls to assure adherence to announced state social policy and the avoidance of apparent unfairness or discrimination. The next logical step: coerce into compli ance those few institutions which accept no state recompense whatso ever and which ~erely wish to teach their charges ~o follow their own stars.

Thus, a perceptive observer can chart issues on a continuum: (1) What should be done about overt cheating in public education? (2) Should some st~dents be permitted a degree for attendance upon courses without intellectual content? (3) If nonchallenging ~ourses exist, should public funds be employed in any manner in that endeavor? (4) To what extent should state social policy de rive enforceme:pt from the public school arena? (5;) Should the govern ment control education in the purely 646 THE FREEMAN November private and voluntary realm? (6) What constitutes the proper role of the state in the teaching process? Each of these questions (and the myriad sub-issues intervening on the scale) deserves separate treatment on the merits, increasing as they do in difficulty and importance from beginning. to end. The modern nos trums prescribed for the earlier in quiries constitute mere placebos which hinder analysis by obfuscat ing the seminal concern expressed by the last question. Thus, the much heralded voucher system would pro vide a tax credit or similar subsidy allowing parents to choose the schooling for their offspring; yet, that system, in all of its varieties, would continue to assign the state a cen tral role in the learning process: the government would merely broaden the agenda, but it would still decree the boundaries and the participants, and it would proceed to transfer wealth involuntarily from the pro ductive into the educational process.

Again, the debate over content (be it sexual education, evolution ver sus creationism, Biblical studies, or something else) merely constitutes a skirmish over who shall control the calendar and the substance; it does nothing to dethrone government and return it to its proper place. Fur thermore, the recent attempts to remove tax-exempt status from in stitutions not currying favor with the educational establishment represent one more attempt to police sub stance. I Defenders of public education as sure all who will listen that Hercu lean efforts by the faculty and administration have wrought won drous results, leading to the conclu sion that modern students are bet ter, brighter, and more learned than anyone else. Pure bunk! The public educational miasma stifles initia tive and dampens creativity so that those lucky few who do learn any thing do so in spite of the system and not by reason of it. The adher ents simply confuse cause and con sequence and, more importantly, by virtue of their vested interests they are unable to judge critically.

Standards Have Declined The fact of the matter is that to day's standards and students have declined dangerously in the main; the best and the brightest cannot read, write, spell, divide or think analyti cally; they receive pap not chal lenge, and they respond in illiterate lockstep. Ask any discriminating employer who must interview appli cants for positions of promise and trust: the mill run may be nice folks but they are woefully ill prepared to meet and surmount intellectual challenges. Moreover, another more subtle and sinister attribute mars modern pub lic education: the thwarting by the state of dissent. Oh, certainly, we 1982 THE FINE ART OF CHEATING 647 mouth the pleasing phrases of the First Amendment and Milton's Ar eopagitica,but when it comes down to the nub of the matter, our chil dren learn not critical analysis but unquestioning recital of faded fact and patent fable.

For example, how many economic departments across this land still preach the discredi ted Keynesian faith? Or, more to the point, how many such classrooms see a fair comparative exposition of Austrian, Keynesian and monetarist ideas? Again, in political economy, how many students receive training solely from professed. Marxists to the ex elusion of even an introduction to the axioms of the private property or der? Or, if one of one hundred fac ulty members pronounces the mer its of a voluntary society, is he well qualified and amply endowed in in tellect, or more likely, is he a ridic ulous and inane caricature of a true believer in liberty? These questions bear repeating in all disciplines. The frightening truth: by and large, public schools teach values and theories which perpetuate that sys tem and which sanctify the precepts of those in power and, by reason of state mandate, no discerning stu dent is free to go elsewhere in a quest for knowledge. The inquiring pupil must tolerate and survive and at tempt to overcome the babble which assails his eyes and ears in every classroom. 2 Look to the Arguments Proponents of public education advance three arguments in support of the state schdol: (1) the education of the young constitutes a proper and inalienable function of government; (2) without state intervention into the realm of edliIcation, most pupils would go untaught; and (3) since so ciety as a wholejbenefits from an ed ucated populace, all persons should contribute toward the teaching of the progeny of the. few. Reflection re veals that all of these reasons lack merit.

First, consider the appropriate functions. of government: education is not among them. The state-the public monopoly of force-is suited only to channelHng conduct by means of coercion. Destlructive elements are ill suited to creative challenges. Force proves effective only in restraining undesirable conduct, not in occa sioning virtue. As Edmund Opitz re marks, "to educate" is not a transi tive verb. Leam~ng requires an adept teacher and a Willing student. Com pulsion plays no ,vital or effective role in the process. i Hence government possesses neither a natural aptitude nor a necessary adroitness regard ing the enlightenment phenomenon. Second, no reason exists to. sup pose that children would learn less in a private and, voluntary system of education. Leonard Read has noted recently that learning occupies a high point on the value scale of most par648 THE FREEMAN November ents from every walk of life, so high in fact that no one when queried ever advised him that they would forgo education of their offspring in a free society featuring a voluntary school system. 3 Surely the structure, content and performance of a freely functioning private school system would differ and improve upon the present op pressive endeavor: after all, freedom has the open texture which accom modates creativity and fosters inge nuity. Learning would develop in untold and unpreordained paths; those who desire to improve would find great benefits in the system whereas those who merely take up space by reason of illogical laws would find another enterprise-such as honest toil for fair recompense more to their liking.

Perhaps those athletically in clined individuals would continue to delight their partisans by their periodic gridiron feats or court ex ploits, but it seems likely that school teams would soon revert to students playing ball for fun and recreation, not as a subsidized and masked business fortified by the taxpayers, many of whom care naught for the weekend antics of Saturday's he roes. In short, those who can and wish to learn would do so, without the im moral application of force to compel endowment of the system by unwill ing participants. Third, should society (or, more correctly the productive individuals in society) pay for education as a matter of justice? The argument proves too much. Society represents an open -ended exchanging frater nity which fosters trade and ex change of goods, services and ideas, as well as warmth, friendship and harmony. Each person in a society benefits from free exchanges of value with others, yet that very advantage would be substantially abased by the introduction of force in an atmo sphere which requires liberty.

Voluntary Exchange Is Best Voluntary exchange of value di minishes where the element of coer cion creeps in: compulsion restrains the free development of ideas and predetermines the end, thereby shutting out the enormous possibil ities for creative activity. Again, in a shortsighted sense, A benefits when B learns to be a doctor, but A pays for that benefit voluntarily by ex changing some of the value he cre ates for the application of B's skills. Each person gains from the devel opment of his or her virtuosity; who can employ some sort of social· cal culus to decide whether A benefits more than B does when the latter secures his diploma in surgery? Furthermore, formal education does not serve as the sole or even the highest means of personal develop ment. All of us know of wonderful people who mastered a craft or im1982 THE FINE ART OF CHEATING 649 parted great virtue and knowledge without a degree or, indeed, with very little schoolhouse training. Each person or family should choose the type and extent of nurture from an ever-widening shelf of illuminating choice. Society, and the individuals in society, benefit the most from the vast creativity fostered by such a reign of freedom.

Rampant cheating and chicanery in the academy serve not only to be tray proper morality but also to dis close a greater malevolence within. Public education induces such wickedness simply because it is con structed on wrong principles: force, not freedom. In a free society, the sting abates and true wisdom flour ishes. ® Wise Strategy -FOOTNOTESISee, e.g., Kaus, Robert M., "How is Bob Jones U. Like Ms. Magaziine," The American Lawyer 63-64 (April 1982).' Of course, the key issue of whether any institution should receive tax-ex empt treatment is never addressed. See my "The Elements of a Fair System of Taxation," The Freeman, September, 1982. 20n my venture toward degrees in "higher education," I developed an interesting tech nique: I divided my notebooks into two parallel columns; on the left, I wrote down that which I needed to regurgitate to pass the course; on the right, I took notes 'of thoughts which, for me, approximated the truth. The content of the competing columns differed vastly! I have found the right hand section of help in life after col lege.

3See Read, Leonard K, "One Way to Assess the Future," appearing as Chapter 25 in How Do We Know? (The Foundation for Economic Education, Inc., Irvington-on-Hudson, New York, 1981), 105-109. IDEAS ON LIBERTY TRYING to answer an involved question about some socialist panacea in one or two minutes is hopeless and unfair by the test of intellectual justice, for the same reason. Unless ample time is available and will ingly offered by those who will be judging your case, it is probably better not to enter that particular courtroom at all; it would be better to refuse to accept its jurisdiction. In other words, it would be better to refrain from offering your views on all these questions ,at that time and place. The wise libertarian is one who uses his tim~ to the best advantage, who employs whatever honest strategy will best defend the concepts he holds dear. To do that is not cowardice. Why $uffer bruised shins bat tling the keepers of the sacred cows in an arena of injustice and disad vantage while so many fertile fields for libertarian talent remain un tilled?

F. A. HARPER, "Sacred Cows and Bruised Shins"

Henry Hazlitt Keynesism in a Nutshell Henry Hazlitt, a frequent contributor to The Freeman, has a long and distin guished career as an economist, jour nalist, editor, and literary critic. Best known of his numerous books is Eco nomics in One Lesson, originally pub lished in 1946 and since translated into eight languages with sales of more than 700,000 copies. The recently revised edition is once more available in in expensive paperback. JOHN MAYNARD KEYNES was, basi cally, an inflationist. This has not been clearly recognized because he never spelled out, step by step, the consequences of his proposed remedy for unemployment and depression. That remedy was deficit spending by the government. He recognized that increased govern ment spending paid for by equally increased taxation would not "add purchasing power." The increased taxation would offset any "stimu lus" that the increased government spending would provide. What counted, he confessed, was the gov ernment deficit. But he failed to take his readers beyond this step. How 650 would that deficit be financed? Ei ther the money would have to be borrowed, or new (paper) money· or credit would have to be created. But if the· money were borrowed, then the previous spending stimulus would be reversed by a deflation when the borrowing was repaid. The only thing to prevent this reversal would be to allow the new spending to remain outstanding. In other words, the Keynesian solution to every slow down in business or rise in unem ployment was still another dose of inflation.

I may point out (if that is still deemed necessary in this inflation ary era) that no inflation of which we have historical know ledge re sulted in sound and continuedbusi ness expansion but only in currency depreciation, a wanton redistribu tion of profits and losses, disorga nized output, and economic demor alization. This has been true whether we begin with the coinage debase ment of ancient Rome or the paper money scheme of John Law in 1716. The lessons of inflation are soon forgotten. They apparently must be relearned in every generation. ® Bill Anderson ECON'OMIC DEMOCRACY DEMOCRACY is a hallowed word in our society. Its very name denotes free choice, relief from oppression'i self-determination, civil liberties and. rights of expression. Indeed, the word, according to theologian Mi·, chael Novak, is considered "so fa·· vorable that even the least demo-· cratic of nations insist upon calling themselves by the name which most condemns them."l Yet, at the same time, it is a misused term, one that all too often brings semantic confu·· sion rather than enlightenment to the social agenda. "Economic De·· mocracy" is such a term, a "hook"

Mr. Anderson is a teacher of social studies at Ross·· ville, Georgia, Junior High School. He is the 1982 win·· ner of the Olive W. Garvey essay contest on "The Virtues of the Free Economy" involving a fellowshiJ) to the general meeting of The Mont Pelerin Society. that gives the ,promise of liberty in the marketplace while in reality it promotes the opposite: collectivism. 2 Economic Democracy in the 1980s comes in many forms. There is a well known political movement concen trated mostly on the West Coast that has received much publicity not only for its doctrines of political economy but also for tne celebrity status of many of its leaders and supporters. 3 The term is also used by politicians and public figures not officially as sociated with ithe western political movement, but who "favor some sort ofplan in which workers have a share in either the management of their industries, or ~rofits, or both."4 Ad vocates of Economic Democracy have also been called social democrats.

Whatever the degree of associa651 652 THE FREEMAN November tion, one can assume that those be holden to the term Economic De mocracy have a common belief about the economy and how it should be run: the marketplace, they say, should be taken from the control of private individuals-or "private in terests" -and placed in the hands of democratically-elected legislators and officials who will steer it in the direction of the "public interest." Now, the use of "democracy" to pro mote forms of collectivism is not new. For example, Upton Sinclair, the writer whose works had a vast im pact on the Progressive Movement of the early 20th Century, once said: Of course, when I talk to anybody im portant like Henry [Ford] I have only one thought in mind, and that is to make a socialist out of him. So I told him [Ford] what I thought were the responsibilities of the great masters of industry and how industry must ultimately be democra tized. It has been my life thesis that au tocracy in industry is absolutely incom patible with democracy in politics, and that the two struggle with each other and one or the other will win. I wanted de mocracy to win, of course. 5 Sinclair's remarks, along with the dogma of today's followers of Eco nomic Democracy, bring many im portant questions to mind, the first being: Are they right? Is the free capitalist system in reality a system of autocracy that operates within and constantly struggles with-the framework of democratic politics?

One might also ask: Is collectivism as part of a system of democratic politics the social arrangement that most allows the common character istics of democracy-free choice, self determination, and the like-to op erate within an economy? In answering these questions and in critiquing the movement of Eco nomic Democracy, one cannot just stop with exposing the fallacies of neo-collectivism. It does no good simply to prove an opposing ideol ogy as wrong; one must also demon strate his own ideas are correct, or at least nearer to the truth. Indeed, the burden upon adherents to the free market is great, for they must show that an economic system which de pends upon individual ownership, individual initiative and limited government is compatible with a po litical system which emphasizes pluralism, public accountability and equality under the law.6 CollectivistFallaciesExposed Socialism, central planning and other forms of collectivism have been thoroughly unmasked by the world's most able economists from Adam Smith to Ludwig von Mises to Mil ton Friedman. It is unnecessary to retrace all their devastating argu ments against socialism, since the volumes written against this eco nomic heresy explain collectivism's shortcomings far better than can be done in this short essay.

1982 ECONOMIC DEMOCRACY 653 However, it might be valuable to deal with at least one major fallacy of collectivism, while also examin ing the claim that Economic Democ racy, because it operates within a sphere of political free choice, is the logical extension of political free dom into the economy. As Lawrence Reed has aptly noted, forms of collectivism adhere to nu·· merous economic fallacies. 7 Perhaps the greatest fallacy of collectivists is their assumption of production for its own sake, that production is somehow more important than con·· sumption. As Adam Smith once pointed out, the sole end of produc·· tion is consumption. In other words, people produce in order to consume. But the dogma of those involved in the Economic Democracy move·· ment (and collectivist movements before them) deals with individuals in society not as consumers or recip ients of goods and services, but as employees, or, to use Marx's terms, workers or proletariat. What con cerns the neo-collectivists is not the quali ty of goods and services produced, but rather how they are made, where they are made, and who produces them. For example, nu merous Economic Democracy lob bies are attempting to convince law makers to create laws that make it difficult, if not impossible, for em ployers to close obsolete, noncompe titive factories. s That the products created in such outdated plants are not competitive in the marketplace is of little concern to these people.

What matters i to them is that em ployees not lose their jobs because of economic dislocations. To deal with the inevitable prob lems of less-expensive, foreign-made goods competing with domestic products made in outdated plants kept open by fiat, the Economic De mocracy lobbies also support high protecti ve tarIffs to discourage con sumers from! buying abroad. 9 Of course, the damage done to domestic exporters by the imposition of tariffs would also be 'a serious problem, al though one cBin most likely assume that industries hurt under those cir cumstances would receive govern ment subsidies. In the end, con sumers-who are also taxpayers and employees-would be deprived of freedom of choice, along with a goodly share of their incomes. WorkersAre Consumers Other socia~ plans that ultimately divide an economy into employers and employe~s again miss the fun damental point of production: the fi nal purpose of production is con sumption. To ignore that fact is fatal, for a productive, competitive econ omy cannot exist in the framework of a legally static society. When pro duction is held to be more important than consumption, the workers themselves, supposedly protected by restricted legislation, cannot truly 654 THE FREEMAN November enjoy the fruits of their own labor.

After all, workers, too, are con sumers. One ultimately works so that he or she may eat and possibly enjoy the finer things of life. Few persons work just for the privilege of staying busy. However, Economic Democracy adherents may argue that a person's life, his very being is tied up in his work. No doubt, that is true in part. Most persons find work that they be lieve fits their own goals and per sonalities. But the very quality of their work is dependent upon the in novation and creativity that are sti fled when creative, entrepreneurish outlets are blocked by the law. For example, few steel workers would prefer the hot, dangerous plants of the late 19th century to the modern facilities of today. Likewise, most automobile workers find the modern assembly line far superior to the monotonous, labor-intensive conveyor process that was dominant in the days of the Model T. The im provements in those factories, and, indeed, in most areas of production are due not to following the laws of legislatures but rather to following the laws of supply and demand.

Modernization has come because economic progress and innovation have demanded it. Of course, some workers have been temporarily dis placed in the process of moderniza tion' but in the long run workers have benefited not only as employees but also as consumers from the very system that many say runs counter to their best interests. The Assaulton Capital It can well be argued that labor unions have often sought to sup press the introduction of work-sav ing capital (which often makes the workplace safer) in order to preserve their power-all for the short run, of course. And, indeed, capital is one of the targets on the Economic De mocracy "hit list," as collectivists seek to make industrial plants more labor-intensive. lO The suppression of capital, unfortunately, has perverse effects upon those who are on the bottom rungs of the economic lad der. For one, to suppress capital to keep industries labor-intensive also tends to suppress wages, since capi tal creates wealth and rising wealth is what brings high wages. Sec ondly, by keeping wages low and ba sic industries labor-intensive, such policies retard the growth of the ser vice economy, including meaningful jobs in medical care, education and recreation. 11 Thus, by assaulting capital, pro ponents of Economic Democracy ac tually lessen options of employment for workers and retard consumer choice, which is the antithesis oftheir stated goals. The economic collapses of socialist countries such as Tanza nia, China and others that have fol lowed policies of production for its 1982 ECONOMIC DEMOCRACY 655 So effectively did muckrakers mingle fact and fiction, reporting and righteous indignation, open descriptionwith dovert prescription that the historian who would disentangle the reality of these years from the myth has a formidable undertaking.

There were movements, too, which took up the cudgels for collectivism and helped to spread these ideas. Prominent among these was the Social Gospel movement. Religioli1,which had long offered the most profound bases for individual liberty, was substantially changed as a result of this movemient.Out of moral conviction, out of concern for social and economic conditions, under the influence of the theories of evolution and the sociological findings of the effect of environment upon men, preachers and thinkers formed their thought and started the movement. Instead of being individualistic, this movement was sparked by men who conceived of society as an organism. The life of an individual, they held, is inextricably bound up Within this organic unity. Clarence B. Carson, The Fateful Turn own sake are grim reminders that economic laws must be obeyed-or else. However, as Sinclair argued, is not socialism or Economic Democracy more compatible with political de mocracy than free market capital ism? After all, Sinclair and present day Economic Democracy adherents argue, is not business today just an autocracy run by a few men who sit in the boardrooms of New York· and.

Chicago and collaborate with the Congress and the Presidency to con·· trol the lives of most individuals? Such beliefs--and they are legion today-demonstrate a profound misunderstanding not only of capi talism' but of 'democratic socialism as well. First, 'and most important, socialism, wh~ther or not it is en forced by democratic means, is not democracy in )the marketplace be cause consumers are ultimately de prived of free choice, or at least their choices are limited. Because social ism operates on the premise that production is more important than consumption, existing producers are usually favored over consumers, 656 THE FREEMAN November which means tariffs or import quo tas, restrictions for new entries in the marketplace and policies to en hance the power of labor unions. An excellent example of this can be seen in the Western European steel industries. Last year, those in dustries combined, including both nationalized and subsidized private firms, lost more than $2 billion, which, in essence, means that Eu ropeans were forced to lower their standards of living for the privilege of producing steel. 12 European steel company executives and members of steel-making unions were no doubt pleased by their governments' poli cies of subsidizing losses and "pro tection" from steel products of other nations, but the real costs of such government plans were borne by European taxpayers and consumers, who were given no choice in the matter.

While it is true that in a social democracy, voters are free to choose the politicians who then choose the economic· planners, once the plan ners hand down their economic dic tums, those policies then become law. Voters, who are also consumers, are not legally free to break those laws. Therefore, the exercise of free choice at the political polls ultimately leads to either a lessening or deprivation of free choice in the marketplace. Of course, consumers, when faced with legislation that impedes upon their free economic choice, often choose to become lawbreakers, which brings underground economic activity that is not just confined to dictatorial so cialist states such as Tanzania, the Soviet Union and China, but also to politically-free democratic socialist nations such as Sweden, Italy, France, Great Britain and even the capitalist United States. The Underground Economy The implications of the ever-in creasing amounts of illegal business activities are sinister, for such un derground transactions undermine respect for law, order and the very foundations of trust that undergird a society. And yet, this spurning of the law happens precisely because of the laws that are passed supposedly to make an economy more just, more humane and more productive. In reali ty, most restrictive economic legislation is not created to improve economic prospects for consumers, but rather to satisfy members of po litically-strong special interest groups. 13 In contrast to the stifling eco nomic controls enacted under Eco nomic Democracy, it can be strongly argued that the free market. is the ultimate economic democracy. Up ton Sinclair was simply wrong.

Henry Ford's automobile company was not an autocracy that controlled the car market, but rather was sim ply a cog in the wheel of economic freedom.

1982 ECONOMIC DEMOCRACY 657 While Ford may have been an au tocrat within his company (he also paid the highest wages in American industry), he could not give orders to the consumers. For a while Ford ruled the automobile roost with his black, inexpensive Model Ts and Model As, but when General Motors began to offer various-colored cars that were given yearly design changes--and could be bought on credit--in contrast to the uniform Fords that could be purchased only with cash, car buyers voted with their money to give GM the lion's share of the market. The process was totally democratic; the results may not have been to Henry Ford's liking, but fOll all the power Sinclair believed Ford allegedly owned, he could not force consumers to change their minds. Ford had no choice-- if he wished to stay in business--but to give pro spective car buyers a greater selec tion from which to choose.

In a free market consumers de cide, by choosing from the array of goods and services made available to them, which businesses are to become successful and which are not. This democratic aspect of the mar ket has been clearly driven home by William H. Peterson in his booklet "Who Is the Real Employer? /The True Source of Jobs"; By your decision to purchase or not, you, in concert with your fellow con sumers across the land and, in fact, across the globe, decide what is to be produced and who will produce it. In effect, you decide who will be employed, how much they will be paid, who is to be promoted, who demoted. 14 Contrary to popular belief, pro ducers do not :control the free mar ketplace. Consumers do; and all of us who live and breathe and eat are consumers. Notes Peterson: Businessmen, you see, are agents of you, the consumer. They must do your bidding-or else. They must produce the quality you demand-or else. They must turn out goods ~nd services at the price you are willing to pay-or else. I5 For exampl~, throughout most of my teenage and adult life I have heard time and again that the American automobile manufactur ers are monopolies that have stran gled the V.S. economy for most of this century. Indeed, for most of my life domestic: car producers have dominated the V.S. market. This phenomenon was not due to coercion on the part :of the producers but rather the exercise of free choice on the part of coIl-sumers.Now, with the success of Japanese, German and Swedish auto producers evident in our nation today, it seems prepos terous at best:to suggest that domes tic manufacturers have a "strangle hold" anywh¢re in this country. To paraphrase an oft-repeated state ment from a former General Motors executive, what j.s good for the American consumer may not always 658 THE FREEMAN November be good for GM (to its credit, how ever, GM has still advocated free trade in the automobile industry in contrast to the positions taken by the other two major U.S. producers and the United Auto Workers).

The Market Is Democratic If the essence of democracy is free choice, then the free market is truly democracy in action. Indeed, as N0 vak has aptly pointed. out, capital ism is most qualified to be exercised in a politically-democratic society because of its own democratic na ture. The free market, he notes, pro tects individuals' "economic liber ties as democracy protects their political liberties." 16 Socialism, as Novak demon strates, "fuses the economic system and the political· system into one." And in so doing socialism limits the choices of the individual, an action that is not democratic but rather au thoritarian. To politicize the deli cate, intricate actions of the market place in reality subverts the democratic process. Choice is taken from consumers-and ultimately workers-and placed in the hands of government agents. An excellent case in point is the Lada, the Soviet Union's version of the automobile. The Lada, which is available to Soviet citizens at a few years' wages, has been carefully drawn up by economic planners who supposedly have the "people" in mind. The car, however, has a few flaws. First, and foremost, it is in credibly expensive. Secondly, it is quite noisy. It also breaks down quite easily and buyers are given a hand crank upon purchase because the electric .starter inevitably stops working. No doubt Russian con sumers would rather place their ru bles on a Toyota or a Chevy, but such is not their liberty.

Barriers to Growth One might argue that because Economic Democracy is laid into place by the permission of voters, the market breakdowns that plague dic tatorial socialist nations· like the So viet Union could not happen under Economic Democracy. Yet, since Economic Democracy places produc ers. ahead of consumers in prefer ence, innovation and change that are so necessary to economic growth are less likely to happen. Protection of existing producers and their unions demands the keeping of the status quo. Economic Democracy promises a static society, one in which the eco nomic pie does not.expand, but rather is divided .into politically-popular sections. There is an ironic note of gloom in the discussion. of Economic Democ racy that undermines ,the promise of democracy itself. Writes Novak: Governments can govern today only insofar as they meet the exigent ma terial needs· of their peoples. Given the 1982 ECONOMIC DEMOCRACY 659 new historical possibilities, the economic policies of governments will be rejected if their peoples cannot glimpse the real probability of a future better than the past. Governments depend upon the pro ductivity of their economic system. More than philosophers and theologians have recognized in the past, the promise of de mocracy depends upon high levels of eco nomic productivityY When government intervenes in the marketplace-whether or not it acts in the name of democracy-it does so at the expense of the essence of democracy, that is, free choice.

That it intervenes in the name of freedom is deceptive; that the public accepts such intrusion as part of the democratic process is nothing short of tragic. Yet, in truth, political democracy needs real economic democracy in order to survive. And authentic eco-· nomic democracy is nothing less than the free market. I -FOOTNOTESIMichael Novak, ''The Economic System: The Evangelical Basis of a Social Market Econ omy," The Review ofPolitics,Vol. 43 (July, 1981), 369-370. 2For a look at misused terms or "hooks" in medicine, read Jane M. Orient, "Collectivism in Medicine: An Exception or a Hook?" in the June, 1982, Freeman. 3For an in-depth investigative view of the Campaign for Economic Democracy, an organi zation headed by Thm Hayden and Jane Fonda, read Justin Raimondo "Inside the CED" in the February, 1982, edition of Reason. 4'~ Atari-Age Agenda," Newsweek (June 28, 1982),46. 5UptonSinclair, "How I ReformedThree Great American Families," The Thirties, ed. Morton J. Frisch and Martin Diamond (DeKalb, Illi nois, 1968), pp. 150~15l.

6While the essence of democracy is one man, one vote, the present-day promoters of democ racy have emphasized solely the collective as pects of it, such as "public good," "public inter est," etc. 7Lawrence W Reed, "Seven Fallacies of Eco nomics," Freeman (April, 1981), 213-214. BJustin Raimondo~ "Inside the CED," Reason (February, 1982), 24L 9Raimondo, p. 2l. lORaimondo,p. 2l. Hln an ironic twist, Ronald J. Sider, author of the popular Rich Christians in an Age of Hunger, suggests in his book that the creating oflabor-intensive industries instead of capital intensive ones will ;lctually create more jobs in the service sector, a view also promoted by the late E. F: Schumacher in his Small is Beautiful. The reason for thelr beliefs, in my opinion, is that both men saw work-saving capital as a device that put people out of work, thereby causing unemployment and poverty. Neither recognized that capital creates wealth, and the more wealth that i~ created, the more employ ment possibilities exist.

I2We continue tol marvel at the French who manage to lower t~eir real standard of living by creating such technological wonders as the Concorde SST and the bullet trains. French taxpayers ultimately foot the bill for such de vices. I30ne may argue that price controls have the consumer in mind, but, for the most part, price control legislation !is written so that producers charge on a cost-plus basis, thereby allowing for profit margins. The price-control legislation also, for the most part, restricts entry into the marketplace by neyv producers. I4William H. Peterson, Who /s the Real Employer? (Washington, D.C., 1976), p. 10. I5/bid. 16Novak,pp. 377'-378. I7Novak,p. 368.

Steve H. Hanke The State Wades In MANAGEMENT of water resources by the government can often encumber their wise development and use. To illustrate this problem, I offer a case study about the life and death of a private water company. A small private water company was created in 1936. Its purpose was to supply, through a central system, potable water for 300 connections in a stable, rural community. To protect the public interest, the state regulated the company through its Public Service Commission. The rates charged by the company re quired the Commission's approval. As a result of the Commission's de cisions, the company's water rates were less than the real cost of sup plying water. These artificially low prices re Steve Hanke is a professor of applied economics at the Johns Hopkins University. He served as a senior economist on President Reagan's Council of Eco nomic Advisers.

This article is reprinted by permission from Cornell Executive, Spring 1982. Facts in this study are from a recent federal court case. suIted in two problems. First, cus tomers were not given the proper in centives to conserve, so their water use increased. This growth taxed the system's capacity, particularly dur ing the hot dry summer months. Lacking the Commission's approval to raise prices or to expand capacity, the company was forced to institute water-use restrictions periodically. These were viewed by the Commis sion, local politicians, and cus tomers as symptoms of inadequate water service and poor manage ment. Deterioration of the system-the second problem-began to appear in the 1970s, when components of the original system began to leak. In 1977, the company recognized that capital improvements costing $500,000 were necessary to assure adequate service, and it planned to make these improvements in three stages.

The company's revenues for 1977, THE STATE WADES IN 661 however, were only $30,000. These were not adequate to cover its oper ating costs. Since the company could not generate investment funds ei ther by self-finance or by a new bond issue, it applied for a rate increase. This additional revenue would have allowed it to attract financing for capital improvements. The Commis sion, however, denied the rate re quest, even though the rates had not been changed since 1968. After denying the request, the Commission held hearings to deter mine the adequacy of the existing system and the need for improve ments. During these hearings, a government agency alleged that it could obtain a federal grant and that it could use the grant to purchase the company's assets, to make im provements, and to provide water at an annual cost of only $15,000. The Commission concluded that, even if the water company could fi nance its improvements, the result ing rates would be burdensome, and that the consumers would be better serviced if the government agency assumed the responsibility for water supply. So the Commission revoked the water company's right to exer·· cise its franchise. It also ordered the agency to assume operation of the system and to apply for the federal grant.

After several months, the agency discovered that it could not meet even its out-of-pocket operating expenses with the existing rates, which gen erated $30,000 per year. It, there fore, raised rates to $60,000 per year-the level that the Commis sion had earlier denied to the pri vate water company. The agency could do this because its rates were not regulated by the Commission. Shortly after assuming responsibil ity for the new system, the agency discovered that money from federal grants could not be used to purchase existing systems. This money could be used only to make new capital investments. The agency correctly concluded that its least costly option was to use a federal grant, which covered 75 percent of any new capi tal works, to construct an entirely new, duplicate system. A new sys tem was built for $1.2 million. It was financed by $900,000 from a federal grant and $300,000 from the agency.

The mismanagement by the gov ernment of a local water problem had produced three unanticipated-and unfortunate-results. A private en terprise was asphyxiated, customers received the same service at a higher price, and re~ources were wasted, since a govern$ent agency spent $1.2 million for a service that could have been provided privately for only $500,000. Moral: If you allow the govern ment to manage a water problem, you may at fir$t find the solution at tractive. In the end, however, you will pay and pay. ® Jack D. Douglas A REBIRTH OF ECONOMICFREEDOM: The De-Bureaucratization of AmericanBusiness WE AMERICANS have always cher ished our economic freedom as a vi tal pillar in the foundation of our "natural system of liberty." As in Britain before us, we have always cherished the spirit of the indepen dent yeoman or freeholder as the embodiment of this value. As the typical American would put it to day, "I don't like taking orders from anyone. 1 want to be my own boss."

The independent farmer·· ("free holder") was both the ideal and the overwhelming economic reality in American life until late in the nine teenth century. (After the invention Dr. Douglas is Professor of Sociology at the Univer sity of California in San Diego, though his studies of human action range beyond the usual professional or academic bounds of anyone discipline. He has written and edited twenty-five books on various as pects of the social sciences and his articles have appeared in many professional journals and other pUblications. 662 of the cotton gin in 1793 much of the land of the South became large plantations worked by slaves. But Southerners were far outnumbered by Northern freeholders.) These in dependent farmers were the back bone of the Jeffersonian -Jacksonian "empire of liberty." Being depen dent on no one for their livelihood, as Jefferson argued, they could be counted on to assert their real inter ests and, thus, to maintain the re publican freedoms enshrined in the Bill of Rights.

Jefferson and his successors feared that this republic could not long en dure if the freeholder vanished and workers became dependent on oth ers. The corporate concentrations of capital and employment that devel oped over the century, fueled largely by changes in government laws, es pecially the introduction of high tarTHE DE-BUREAUCRATIZATION OF AMERICA~ BUSINESS _ 663 iffs after the 1830s, limited liability for corporations and huge land grants to the railroads, and partly by new capital-intensive technologies de·· manding many workers (as in steel), was a severe challenge to this entire "natural system of liberty." It looked to an increasing number of Americans as if the economic freedom of a few Big Businessmen was destroying the economic free dom of the many, turning them from independent freeholders into depen dent wage earners, thus threatening liberty in general. While few Amer icans. heeded the. prophecies of peo ple like Marx, who believed monop oly and its exploitation of workers would be the inevitable outcome of capitalism, ever more of them turned against business because of this Bigness. They turned to government and unions to protect them by con. trolling Big Business.

Antibusiness Sentiment By the early part of this century social thinkers, especially those in fluenced by the "institutional econ omists" of Germany, began to see business in general in the form of Big Corporate Bureaucratic Busi ness. Progressives, including such diverse thinkers as the young Wal ter Lippmann and Herbert Hoover, called for more and more restraint on business and more and more planning by government. In the 1930s the great upsurge in antibusiness sentilnent triggered by the Great Depressjon combined with the argument of some economists that Big Business! was now thoroughly bureaucratized and divorced from ownership to. convince ever more people that government bureaucra cies could just ,as well own and man age them efficiently. Joseph Schumpeter, originally a member of th~ extremely free-mar ket oriented Austrian School of Eco nomics (of which Ludwig von Mises and Friedrich Hayek are the best known members), argued in his fa mousbook on !Capitalism, Socialism and Democracy that Big Business was successful because it minimized risks (especiailly those from reces sions) and its, success through bur eaucratization was .preparing the way for government bureaucracies to take them over. Big Business, then, had prepared the way for So cialism.

This kind of argument was most successful in ,the 1930s in Britain, Sweden, Fas~ist Italy, and Nazi Germany. In Britain the govern ment started, intentionally encour aging the so-called "Rationaliza tion" of business, that is, concentration into Big Bureaucra cies. In the 1940s government then started nationalizing Big Business, completing the Schumpeter sce nario. By the 1960s, and continuing up to today, our college students, in664 THE FREEMAN November cluding many of our graduate stu dents of business administration being groomed for Big Business, were looking at business through the so cialist-tinted spectacles of John Kenneth Galbraith, who proclaimed in The New Industrial State that Big Bureaucratic Planning was inevita ble. "By all but the pathologically romantic, it is now recognized that this is not the age of the small man." Given his personal preconceptions and wishes, and living in the first great period of corporate conglom eration of the 1960s, Galbraith failed completely to see that the Age of Big Business was already dying.

Revolutionof Littleness The "Revolution of Littleness" had already begun in business around the world, but especially in the United States. This Revolution was first clearly sighted and proclaimed in 1976 by Norman Macrae in The Economist. But its realities are still largely unnoticed. The early reali ties of even the most sweeping rev 01utions are normally unseen. Even the scientific and Industrial Revo lutions were a hundred years old or more before many people began to realize that something of profound significance was happening. Our traditional preconceptions and our situationally limited views of the broader developments in society conspire to hide the newness and scope of such changes until they are so advanced that they become sud denly obvious. Our Revolution of Littleness has gone unnoticed by most people both for these usual reasons and because our headlines and network stories paint the opposite picture. Most ex perts and politicians providing these stories are too versed in and re warded for the traditional ideas about the Age of Big Business to see how rapidly the tide is now running against Bigness. So are many of our Big Businessmen, but they learn very quickly when the tide starts sweep ing them away.

Mega-Mergersversus LittleRealities The great increase in mergers in the last few years has been the most misleading appearance. Businesses last year put up approximately $80 billion for mergers. Many of these were very Big Mergers indeed in which very Big Businesses bought up much smaller ones. U.S. Steel's $6 billion takeover of Marathon Oil was the Big Headline of business news for weeks. On the surface this certainly shows Big Steel getting much bigger. But look beneath the surface. This move itself shows that, just as the United Steelworkers have claimed angrily, U.S. Steel is trying desperately to diversify away from the steel industry. The really big story in the steel industry, as Jeff Blyskal shows in 1982 THE DE-BUREAUCRATIZA,]~ION OF AMERICAN BUSINESS 665 Forbes (January 4, 1982), is diversi·· fication away from steel and the rapid rise in profitability and growth of the smaller steel companies. The most efficient and rapidly growing steel producers in the U.S. (and in some other countries, like Italy) are generally small and slim-and-trim, with low debt-to-equity ratios and small, highly skilled, highly produc·· tive and non-unionized work forces..

Over the last five years U.S. Steel has ranked 18th in growth and 21st in return on equity in the American steel industry. Once-huge Kaiser is quitting steel entirely. Some gov·· ernments, notably Mexico, are pour·· ing billions into huge, centralized steel mills. But these mills will al· most certainly be uncompetitive White Elephants kept alive, if at all, by vast subsidies. This might still mean that, even if steel is getting littler-decentral izing, U.S. Steel will get bigger. But that is not even the plan. U.S. Steel hopes Marathon, with its vast oil re· serves, will provide 51% of its cor·· porate sales and 83% of profits. Mar·· athon, they hope, will make up for their overall shrinkage in steel sales. Those of us who believe the market forces unleashed by the deregula tion of oil and natural gas will de stroy OPEC's monopolistic pricing suspect this merger will prove as di sastrous as most mergers do.

Of course, we must be careful about generalizing from steel to our whole economy. Those still mesmerized by Bigness might'insist that steel, tires, and autos are ~'dying" because of for eign competition, so they are symp toms of the "de-industrialization" of America. Actually, there is no "de industrializati~n" going on, not even in the steel industry. There is only change, above all a shift to smaller, more specialized producers and to mills processing the vast quantities of scrap steel.. Even basic steel pro duction may· eventually resume growth. Prospects for ,Growth Once inflation is wrung out of the economy and· interest rates come down, the new tax incentives (de creased marginal rates, more rapid depreciation, and investment credit) will probably lead to investment in new production technologies. But this investment will very likely be in the smaller and newer firms, using much automation and small, nonunion ized-thus flexible and produc tive-work fo~ces. (Even without the new incentives, industries like tex tiles and watclhes went through this process in the 1960s and 1970s.) But the skeptics have a serious point. So let's look at the other ex treme, that of the very new, high technology world of computers. Here there is indeed a giant to fixate the glare of the believers in Bigness. IBM remains huge' and formidably crea tive, efficient and profitable. It is 666 THE FREEMAN November probably the best example one could find in the world today to support by appearances--the nineteenth century argument that the econo mies of scale (of Bigness) give the Big an inherent advantage over the little and doom a free economy to ever greater concentration.

But even IBM is partially a mi rage of Bigness power. Though it ranks thir~ in return on equity, probably because of its great back..; log of successes, it ranks only ninth in growth over the last five years in the U.S. computer industry. Even in huge and very fast computers, where Bigness gives its greatest advan tages because of the vast capitaliza tion and many specialties de manded, companies like Amdahl (7th in growth) have been very success..; ful competitors. A.T. & T., trying desperately to shed organizational fat through divestiture, .·may soon be come a formidable competitor. And so far IBM has been badly bested in the most rapidly growing new realms of computers, such as personal com puters, by total upstarts like Apple. Apple was created by two whiz-kids with a bright idea and no bureau cratic planning and budget-alloca tion committees. The Big Picture of the Little Trend Is Clear Because of the long-standing ob session with Bigness, conglomera tion and the takeovers of little companies by Big ones get the headlines and airwaves. But deconglomera tion and divestiture (selling off parts of a company) go unnoticed by al most everyone except investment bankers. Who· noticed when Bendix sold its forest products subsidiary for $425 million? Or its holdings in Asarco for $340 million? Or Skagit?

Or United Geophysical Corpora tion? Almost certainly not Teddy Kennedy or John Chancellor. Partly because of this lack of con cern, and even more. because most decentralization (re-littling)of busi ness is not reported outside of the companies, we don't know exactly how much is going on. But we do know a great deal about the trends. Very importantly, the recent "mega-acquisitions" are .not the re sult of any economies of scale that doom us to more Bigness. As econo mists like Dan Orr of Virginia Poly technic Institute have long argued, the conglomeration and general growth of Big Corporations has been due very largely to our tax laws, unions and massive regulations in some segments of the economy (rail road, trucking, air lines) which have severely penalized new and small firms. One of these many incentives, the double-taxation of corporate div idends (first as corporate income and then as individual income), has been very important as an incentive for individuals to let corporations rein vest profits within the company, even 1982 THE DE-BUREAUCRATIZA~rION OF AMERICAN BUSINESS 667 when higher rates of return could be gotten elsewhere (say in money funds). This way only corporate taxes are paid until much later (perhaps after retirement). When the individ ual does receive the dividends or sells the stock he pays the lower tax on capital gains. Even some of the Rea gan economic renewal tax changes compound this government incen tive to Bigness. Worst of all, the leaseback provision subsidizes the dying dinosaurs.

High Inflation Encourages Merger Activity The recent surge in mergers is pre dominantly a result of high inflation and other investment uncertainties that make it less risky (or make it seem less risky to those who believe inflation, OPEC, and so forth, will continue) to buy already established businesses (or proven reserves) than start new ones or expand old ones. Royal Little, who as Chairman in the 1950s made Textron the first of the famous modern conglomerates, and is now part owner of a venture capi tal firm helping companies to decon glomerate, has noted, "This [up surge in mergers] is one of the results ofdouble-digit inflation, which makes it so costly today to go out and buy something new." But note that, in spite of these government generated incentives to Bigness, even today outright decon glomeration and divestiture are probably not. too far behind the mergers in money terms. The fact is, as Peter DruQker has argued, most mergers do nolt make good economic sense and are far more the result of vanity than profit motives. Even with the government generated incen tives, most mergers fail and are fol lowed by outright divestitures, by partial spin-oft's, by radical restruc turing which !decentralizes decision making, or by bankruptcy.

In an unusual study of the out comes of mergers, Arthur Lewis (Fortune, May 3, 1982) found that the ten largest mergers among For tune 500's largest corporations in 1971 were overwhelmingly failures over ten years: "Most of the acquisi tions produced appallingly low re turns during ~981. In three cases ... the estimated return on investment was less than 5%. In three more cases ... the return was between 5% and 10% ... and none of them matched the 13.8% median return for all the companies in this year's Fortune 500. If we go beyond the statistics and consider the 'paths of some of these corporate marriages, the case for conglomeration looks even bleaker ... [Our study] strongly supports the notion that investing in unfamiliar businesses is unduly perilous-just as the critics maintain. Most of the acquirers evidently were lured into buying unstable companies, or into committing .foolish mistakes that harmed stable ones. Only two merg668 THE FREEMAN November ers remained trouble-free from be ginning to end of the decade."

The trend to littleness is equally clear even in companies that are growing in the shares of their mar kets. The old stereotypic view of Big Business as a monolith run by rig idly centralized, top-down command the wayan army is thought to be run (but actually is only by the los ers) has never been true for many. The dominant form has been the General Motors model of decentral ization of most decisions, with cen tralization only of those (such as au diting and financing) required to keep control. Contrary to some of the popular soul searching going on in the aftermath of the Japanese chal lenge, a high degree of decentraliza tion and its concomitant of individ ual decision making has probably always been the dominant form of management in American business, but the degree has varied vastly from one segment to another and over time. The RevolutionTriumphant This variation in decentralized decision making has probably been due mostly to differences in technol ogy and markets. In general, the more complex and changing a tech nology, and the more competitive and changing a market, the more the in centives are for littleness, and, thus, the more decentralized the decision making.

American industries, faced with little European or Japanese compet ition, dominated their markets until the 1960s or, in some cases (like au tos), the 1970s. In addition, in some industries, notably steel and autos, technology changed little. When the technology did change in steel man ufacturing, dominance in the do mestic market was partially main tained by the union wage at the big firms and then by protectionism both the result of government. These conditions combined with the gov ernment generated inducements to bigness to produce growing Bigness in some segments, especially in au tos and steel. But even in that period competi tion was so great and technological development so rapid that in general there was no increase in concentra tion in our overall industry (regard less of the conglomeration headlines and the pronouncements of anti business ideologues). At the same time autos and some other segments got more concentrated, the more technical and competitive segments, like electronics and cameras, frag mented-littleness was rampant.

And within companies like IBM and Polaroid the growing proportion of technical specialists were increas ingly free to create their own jobs and work in small teams-and were thus more efficient at creating new products and keeping down costs. Today, even with those govern1982 THE DE-BUREAUCRATIZATION OF AMERICAN BUSINESS 669 ment generated incentives, all really Big corporations are severely threatened by the more slim-and trim ones, especially the new ones. Even General Motors, which a few years ago seemed a secure Goliath, is severely threatened by the much smaller, highly decentralized and automated automakers of Japan-approximately ten of them, not one. Without the government's "orderly trade agreements" with Japan, who would bet on this Goliath surviving David's onslaught? Meetingthe Challenge The Big Businesses that are meet ing the challenge are doing so by systematic decentralization, partial spin-offs, and subcontracting to small teams both within and outside the company. One of the most effi cient and rapidly growing compa nies, 3M, continually decentralizes even its manufacturing plants (to keep employees down to a few hun dred at each plant) and increases its incentives for individual initiative and creativity. Gordon Engdahl, 3M's vice president for human resources, summed up their view for The Wall Street Journal (Feb. 5, 1982): "We are keenly aware of the disadvan tages of large size. We make a con scious effort to keep our units as small as possible because we think it helps keep them flexible and vital.

When one gets too large we break. it apart. We like to say that our SllCcess in recent :years is due to multi plication by division." In his study of Digital Equipment (Fortune, May 3, 1982), Geoffrey Colvin noted the general principle of diminishing returns-and eventual death-from growing size: "In busi ness, as in nature, there seems to be a law that things slow down as they grow toward the elephantine." How has DigitallIlaintained its dazzling growth rate tHis long? First, note that it's still only 137th on the list of 500, is still reasonably young and a pi 0neer in the (most rapidly growing major segment of the world econ omy. Beyond· those factors, the sys tematic pursuit of littleness-de centralized decision making - is crucial. Theyfve never acquired any company. The corporation is broken down into 18 largely autonomous units. Says security analyst Stephen Dube with Dean Witter Reynolds, "It's not one big business-it's 18 small ones. " The heart of any high technology :firm is its engineers.

Digital keeps them efficient and cre ative by decentralizing its 5000 into quality teams of about 30, by avoid ing almost aU bureaucratic rules and forms, and ~y keeping them in di rect contact iwith the equipment in use and with. customers. Subcontracting to outsiders is not only the now.;.famous"secret" of much of the success of Japanese auto mak ers, but is also growing rapidly in businesses a.round the world. Much 670 THE FREEMAN November of the programming for computers, especially the new personal ones, is being created by Lone Ranger entre preneurs in their home studies, and then marketed by the computer firms or retail outlets. Even once arrogant IBM has moved more to use these outsiders and make its products compatible with those of other firms. Today almost all office work could be done at home-or anywhere in the world where a computer console can be plugged into the Worldwide Electronic Net-and thus sub-con tracted out to the most efficient.

The ElectronicRevolution The Electronic Revolution is now rapidly transforming business in all economically advanced societies, and most rapidly in the United States. Computers wed to robots are rapidly making it possible for mini-factories to efficiently manufacture products with far greater flexibility than has been possible, thus allowing a far greater variety in the end products. It is also more efficient now for com panies that once needed to be cen tralized because of their specialized products to decentralize. The Elec tronic Revolution makes decentral ization even more efficient and this will quickly eliminate our ancient bureaucratic dinosaurs. This is one major reason why companies have been moving from more expensive cities like New York to less expen sive smaller ones, especially in the South and West, and even to non urban areas. For years Harcourt, Brace, Jova novich, a major publisher, has been decentralizing its corporate head quarters from New York City to San Diego, Orlando, Paris, Canada and elsewhere. By 1982 only 2,000 of its 8,300 employees were still in New York. In February of that year Wil liam Jovanovich, the chairman and chief executive officer, announced that almost all the remaining 2,000 would leave the City, thus saving an estimated $20 million a year just by moving all publishing functions to San Diego: "The notion that we have to be in New York City to conduct business is a shibboleth. With the modern electronic techniques of in stant communication by video ter minals, satellite communications and conference calls, it is no longer nec essary to be in one place and not an other."

These subcontractors of bigger businesses are predominantly ser vice workers, by far the most rapidly growing segment ofour economy. The Secretariat of the General Agree ment on Tariffs and Trade found that "Between 1970 and 1980 there was a net increase of 19 million jobs in the U.S. (24%)." Roughly 87% of these were service jobs and the great majority of these were in small firms-some ofone person. One study of data on 5.6 million firms by an MIT group found that, between 1969 1982 THE DE-BUREAUCRATIZATION OF AMERICAN BUSINESS 671 and 1976,66% of new jobs in the U.S. were in firms with fewer than 20 employees. New Jobs with Small Firms Since the underground economy has been growing extremely rap· idly, and since almost, all of these consist of one or only a few individ·· uals, far more than two-thirds of all new jobs are in very small firms. By contrast, the U.S. Census Bureau's "County Business Patterns" surveys show that the proportion of Ameri·· cans working for companies with ove]~ 500 ,employees was '27.6% in 1967 and shrank to 22.4% in 1979-a de crease of one-fifth in a mere 12 years.

In the 1970s the number of employ ees at U.S. Steel shrank by one fourth, from 531,000 to 399,000. The same thing is happening in the other, industrialized nations. In Japan one Japanese worker out of six has his own business, and some of these are one-man robot-run fac tories. Even in the big companies the emphasis 'is strongly against' top down, bureaucratic decision making and, very much on individual and team decision making. As Harvard's Ezra Vogel notes, "The essential building block ofa Japanese COIIl pany is not a man with a particular role assignment and his secretary and assistants, as might be the case in an American company. The es sential huilding block of the organi zation is the section. A section might have perhaps· eight or ten people. Within the section there is not as sharp a division of labor as in an American company. To some extent, each person in the same section shares the sa~e overall responsibil ity."

Vogel errs only in failing to real ize that the most creative, efficient, profitable and growing American companies in i high technology and with highly competitive markets have been doing this for decades. Thomas Edison, who created the first modern research lab early in this century, ran ilt entirely on the prin ciples of team. spirit and individual initiative. He is continually quoted for his apocalyptic, anti-bureau cratic pronouncements: "Organiza tion! Hell! I'm. the organization! ... Hell! There ain't no rules around here! We are tryin' to accomplish somep'n'." They did and later high technology firms like IBM followed in their path. The Japanese bor rowed these. ideas and sometimes improved on ·them. Big Bureaucra tized Business in America was al ways partly a figment of the imagi nations of socialistic critics and the rest was ovrerwhelmingly due to government · mandates on union powers, taxes, regulation and even direct· procurement policies by the Defense Dep,rtment.

In a recent update on his earlier prophecy (TJ"e Economist, April 17, 1982), Norman Macrae finds that the 672 THE FREEMAN Revolution is rapidly gaInIng mo mentum. In addition to the acceler ating rate of decline of the Big and creation of the little, he finds the re maining Big are seeing the hand writing on the wall and are rapidly introducing "intrapreneurial prac tices": that is, more and more firms are breaking themselves up into largely autonomous teams that compete with each other in bidding for company projects. The New Message The general point is to internalize losses and profits into the smallest idea-creation and product-manufac turing team possible-bring the market incentives to each individual as directly and immediately as pos sible, while at the same time opti mizing all the powerful motivating forces of team work ("fellow feel ing"). As Macrae is well aware, this idea has long been used by very suc cessful American companies like Regulatory Taxation Arthur D. Little. But what is new is the rapid spread of the practices and-even shoaking - the spread of the message. There are now consul tants in Sweden and the U.S. (such as Mr. Bob Schwartz's Tarrytown School for Entrepreneurs outside New York) and even professors (such as Reg Revans at Manchester Col lege of Science and Technology) who are propagating the message. And even Prophet Macrae is being ho nored in his own day, having been invited to give talks on the Revolu tion of littleness in twenty nations.

As technology and competition in crease, what is now an early but powerful trend will become a tidal rush. If the government ever stops mandating inflation and punishing small business, the Revolution of Littleness will sweep all before it. And the Age of Little Business will be an age of greater economic free dom, thus of ever greater creativity, efficiency and growth for all of us. ® IDEAS ON LIBERTY TAXES on profits interfere with these important signals. They weaken the signal of encouragement to a profitable business and confiscate the means needed for expansion. Thus, taxes frustrate the adjustment the market demands, destroying the dynamism of competitive enterprise, protecting inefficient operators at the expense of more capable competi tors. The capitalist economy thus loses its characteristics of quick adapt ability, managerial efficiency, and keen competition. The fundamental pillars of the free market are dangerously weakened by the present taxes on business profits.

HANS F. SENNHOLZ James Doti CAPITALISM AND GREED BEFORE ECONOMICS became a science ofeconomicmodels, theoretical proofs and irrational rationality it was called moral philosophy and dealt with how individuals live their lives. A comprehensive philosophy of life was presented during the latter part of the eighteenth century by Adam Smith. In his path breaking work, The Wealth ofNations, Adam Smith described an economic system based on self-interest. This system which later became known as capitalism is described in this famous passage: It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their re gard to their own interest. We address ourselves, not to their humanity but to Dr. James Doti is Associate Professor of Economicsi and Director of the Center for Economic Research, Chapman College, Orange, California. their self-love, and never talk to them of our own necessities but of their advan tages. (Smith, p. 14, Modern Library edi tion, 1937).

Thus, the forces of self-interest determine individual actions. It is difficult to reconcile this practical religion of capitalistic societies, however, with any system of thought or morality that can be described as Christian. Surely, an underlying theme in Christ's teachings is that love and charity toward one's neigh bors rather than self-interest should guide an individual's actions: But I say this to you who are listening: Love your enemies, do good to those who hate you, bless tl10se who curse you, pray for those who treat you badly. To the man who slaps you on the cheek, present the other cheek too~ to the man who takes your cloak from you, do not refuse your 674 THE FREEMAN November tunic. Give to everyone who asks you, and do not ask for your property back from the man who robs you. Treat others as you would like them to treat you. And if you lend to those from whom you hope to receive, what thanks can you expect?

Even sinners lend to sinners to get back the same amount. Instead, love your ene mies and do good, and lend without any hope of return. (Luke VI: 34-38, Revised Version ofLa Bible de JerusalemJ. Christ also taught us to "... be on your guard against avarice of any kind, for a man's life is not made secure by what he owns, even when he has more than he needs." (Luke XII: 15-18) Christ's message certainly seems to conflict with Adam Smith's belief that striving for personal gain is a natural human trait that should be given almost free rein in society. But though the underlying moral basis of Christianity and capitalism may contrast sharply, it can be argued that the outcome of an economic sys tem based on capitalism has socially redeeming characteristics. The Challenge To understand this argument, let us set the following goal: To better society and benefit our fellow hu man beings. Attaining this goal by living a Christian life seems straight forward. But how can one achieve such a goal in a capitalistic .society where self-interest is the ruling eco nomic dogma?

Adam Smith answers this ques tion in the most famous passage from The Wealth ofNations: ... every individual necessarily labors to render the annual revenue of the society, as great as he can. He generally, indeed, neither intends to promote the public in terest, nor knows how much he is pro moting it ... he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. (Smith, p.423) This principle was vividly demon strated to me when I was an under graduate student in Chicago during the "Great Snowstorm" of 1967-a storm not to be confused with the "Great Chicago Snowstorms" of 1965, 69,70 ... 81. At the time, I was living in what generously could be described as a hovel. It would not be wide of the mark to conjure up images of the bleaker passages in a Dickens novel to have a reasonably correct impres sion of the place. My routine in life consisted of.going to school or work and studying endlessly, or so it seemed. One of the simple joys in life that· helped to break the monot ony was my noon day trip to the lo cal deli where the greatest Italian beef sandwiches in the world were made.

1982 CAPITALISM AND GREED 675 During one weekend in January, as I crammed for final exams, I anx iously awaited my noon day repast. At 12:00 noon sharp, as I opened the door for what would be a short stroll to "Salvatore's Deli," a solid wall of snow blocked my path. Now for any one who has lived in Chicago for, at least, a couple of years, this kind of experience is not uncommon. What made this situation unique, how ever, was my discovery so late in the day of the snowstorm's occurrence. Since my windows were boarded up to prevent cold from entering (a sort of makeshift storm window), I had no idea a massive storm hit the city the previous night. Quickly sizing up the situation, I quietly chortled as it dawned on me that final exams would be cancelled, and I would have another week be fore I again would have to start cramming. Upon further reflection, my initial elation was dampened as I looked at my inventory of food stuffs and realized that restocking would be my first order of business.

Worse yet, "Salvatore's Deli" would undoubtedly be closed since Sal would never be able to make it in from the suburb where he lived. My only recourse would be to shovel myself out and go to the nearest "Mom and Pop" grocery store. After a good deal of shoveling and trekking through the snow, I finally reached the store. But what I found looked like "The Twilight Zone." Shelves were emptied and all that remained were :several tins of an chovies and cans of artichoke hearts. Panic was beginning to set in and a cold sweat that defied the elements broke out over my face. There was only one other grocery store in the area, but I held out little hope that the scene would be much different. You can well imagine my surprise, therefore, when I entered the store to find an adequate, albeit depleted, supply of groceries on the shelves. It was like a scene from a Key stone Cops movie as I sped around the aisles stocking up on Cokes, Twinkies, Snickers and other ne cessities of life. But, again, my brief moment of joy was dashed as I en tered the checkout line and saw a sign that read: "Prices for all grocer ies are temporarily doubled." My joy gave way to outrage as I stormed out the door empty-handed.

Several feet from the door, how ever, as I gazed upon miles of snow and drew several breathfuls of icy air, principles ~nd ideals gave way to reason and survival. It should not be surprising, therefore, when I tell you tha.t I returned to selectively purchase my needed provisions. The only "idealism" that remained within me was my abil!ityto muster up some grumbling as I trekked back home through the snow. A footnote to this story is that the store stayed open and was somehow able to sell groceries during the en676 THE FREEMAN November tire week that normal deliveries were cut off. It was only later that I found out that the grocery store owner had paid children to take their sleds to the closest vegetable and meat warehouse to stock up on whatever the children could buy and fit on their sleds. Capitalism in Action The Wealth ofNations is replete with examples like my snowstorm experience. But, perhaps because of the eighteenth-century setting, Adam Smith's examples never af fected me as much as my first-hand experience with the workings of a capitalistic system. What greater support could I have for the theory that private vice leads to public vir tue? Here we have one store owner who in the interest of fair play does not change his prices but quickly sells all his merchandise and closes shop for the rest of the week. I am sure he experienced a great feeling of self satisfaction because he had done the decent and proper thing by not ex ploiting his customers during a time of urgent need.

In sharp contrast to this example of high-minded idealism, we have the case of a capitalist who would seize upon any opportunity to maximize profits. Yet, in doing so, he forced people to limit their purchases to what they really needed. In addi tion, the higher prices allowed the greedy grocery owner to pay children to put their sleds to a new use, thereby increasing the supply of food available for sale. As Adam Smith stated in the quote noted earlier, "By pursuing his own interest he fre quently promotes that of society more effectually than when he really in tends to promote it." It could, of course, be argued that high prices, while admittedly con taining some inherent benefits, dis criminate against the poor. In ad dressing this argument, I can assure you that no one in the neighborhood was poorer than I. Yet I benefited greatly from the forces of selfinter est. I should also note that high prices give way to low prices as capitalists scramble to supply more of the high priced goods to increase their prof its.

What we see here is capitalism in action, and at first glance, it is not a pretty sight. Capitalists motivated by greed seek their own gain by maximizing profits. The forces of the market place, however, convert this private vice into public virtue. Thus, living a life based on greed, which appears to be the antithesis of Christian morality, can do quite well in accomplishing the goal set forth above-that is, to better society and benefit our fellow human beings. In fact, Adam Smith's contribution in the history of intellectual thought was not inventing capitalism but providing theoretical insight into how self-interested individuals ulti1982 CAPITALISM AND GREED 677 mately benefit society more than they benefit themselves. I would now like to carry the ar gument one step further . Not only do I believe that self-interest bene fits society, but I also contend that it is the only efficient way goods can be produced and distributed in a modern economic system.

To see this, think of all the goods purchased in our society. Think of all the goods we consume on a daily basis. Do we know who produced these goods? Do we even know how or where they were produced? Prob ably not. A modern society requires specialization of labor with millions of individuals contributing to the production ofgoodsand services. This contribution on the part of laborers does not come about as a result of an altruistic desire to serve society but from a basic desire to serve oneself. At times, of course, altruism can serve as the prime motivating force for individuals. This force is strong est in relationships between family members or friends, but it can also exist for others. An example of this is someone who contributes to "Food for the Hungry." Indeed, contribut ing to help relieve world hunger is a charitable act that embodies the love, Ludwig von Mises IDEAS ON compassion and 'respect that a per son can feel for humanity. Yet, such a charitable act [s essentially a vol untary redistribution of income. It does not, however, represent the ac tual production, of the charitable good. Ultimately, any relief of world hunger comes about as a result of countless farmers, food processors, distributors, shippers and other dis interested indiviJduals producing the food that charit~ble individuals may purchase for the hungry.

Adam Smith said all of this in a more lucid and eloquent way in my favorite quote from The Wealth of Nations: "In civilized society he [man] stands atJall times in need of the cooperation and assistance of great multitudes, while his whole life is scarce suffi~ient to gain the friendship of a few persons." (Smith, p.14). It is unfortunate indeed, that "greed" has acquired such a bad con notation. Without it, we would not have clock rad~os, disposable dia pers, or even waiter in Southern Cal ifornia. Alas, that means some of us would be in' Chicago suffering through a few more "Great Snow storms"! ® LIBERTY THE accumulation of new capital through saving initiates the chain of actions that results in an improvement of economic conditions. Saving is the first step on the way toward improvement of material well-being and toward every further progress on this way.

John Jefferson Davis FIRST-WORLD WEALTH AND THIRD-WORLD POVERTY "In one world, as in one state, when I am rich because you are poor, and lam poor because you are rich, the transfer of wealth from the rich to the poor is a matter of rights; it is not an appropriate matter for char ity." Such are the angry claims of Julius Nyerere, president of the Af rican nation of Tanzania. 1 His sen timents are echoed by the Third World revolutionary Frantz Fanon: "The question which is looming on the horizon is the need for a redistri bution of wealth. Humanity must reply to this question, or be shaken to pieces by it."2 Are the charges of Nyerere and Fanon supported by the facts? Do we as members of the more affluent na tions have a moral obligation to give Dr. Davis is Associate Professor of Theology at Gor don-Conwell Theological Seminary, South Hamilton, Massachusetts. This article is from the manuscript of a forthcoming book, A Land of Milk and Honey: Bibli cal Foundations of the Free Market.

678 "reparations" to the poor of the Third and Fourth-World nations? Does our wealth cause their poverty? The World Outlook It is useful to recall some basic facts about poverty in the past and present for the sake of gaining historical perspective. As twentieth-century Americans, it is easy to lose sight of the fact that poverty has been the normal lot of the vast majority of mankind for most of recorded his tory. As the economic writer Henry Hazlitt has observed, "the history of poverty is almost the history of mankind."3 Poverty was the order of the day in the ancient world. Greek dwell ings had no heat in winter, no ade quate sanitary arrangements, and no washing facilities. The average Ro man house was little better. Recur ring famines took thousands of lives. In a famine in Rome in 436 B.C., thousands of starving people threw themselves into the Tiber River, so great was their desperation. 4 General and widespread poverty was also characteristic of the middle ages. "Alternations between feast ing and starvation, famines, crime, violence, scurvy, leprosy, typhoid, wars, pestilence and plague were part of medieval life to an extent we can hardly imagine today," wrote histo rian E. Parmalee Prentice. The homes of typical medieval laborers were hovels. The walls were made of FIRST-WORLD WEALTH AND THIRD-WORLD POVERTY 679 boards cemented with mud and fact that "In spite of spiraling infla leaves; there was no sewage or wa-tion, and energy costs, socioeco..

ter supply. The entire family was nomic data now shows that less than crowded into a single room or. per-7 percent of all i Americans live be haps two, together with the family's low the U.S. poverty line, and even animals. 5 this 7 percent live better than 85 The Encyclopedia Britannica listed percent of the ,rest of the world's some thirty-one major famines from population." While it may be true ancient times down through 1960.- that the U.S., with only 6 percent of Famines are still common in the less the world's population uses over a developed countries. In modern so-third of the wor~d's energy, Brookes cialist nations food shortages are still points out that the critics usually fail a recurring problem, as this recent to mention that the U.S. produces 40 headline attested: "Rationing of percent of the world's food, and sup Sugar and Meat in Poland." ports nearly 80 percent of the world's The fact of poverty as the "nor-private charities. 6 mal" condition of the human race Dr. Michael J. Boskin, a professor began to change with the rise of the of economics at Stanford University, Industrial Revolution in the mid-has recently called attention to fea eighteenth century. Through the tures of the government's "poverty benefits of modern science and tech-index" that tend to exaggerate the nology, in the Western industrial size of the problem. While the index nations poverty has been changed is adjusted for inflation, family size from the normal condition of the and location, i~ excludes the actual majority to the abnormal condition cash value of tr~nsfer payments such of the shrinking minority. It is easy as food stamps, subsidized housing, to forget what a dramatic change this and medical care. "Even conserva transformation· has meant for the tive estimates, of the cash-equiva average person. The less developed lent value of th.ese programs result nations are responding to a "revolu- . in a startling d~scovery," writes Prof.

tion of rising expectations" created Boskin, "only: about 3 percent of by the advances of the Industrial Americans live below the poverty Revolution. line."7 If Boskin's analysis is correct, Here in the United States sub-then the "war Qn poverty" in Amer stantial progress has been made in ica is a war that has practically been the effort to reduce poverty to a re-won. sidual level. Warren Brookes, eco-In the world j as a whole, it is un nomic writer for the Boston Herald deniable that there are multitudes American, has called attention to the of poor and hungry people. But even 680 THE FREEMAN November here there are signs ofhope, and well meaning reformers at times inad vertently exaggerate the magnitude of the problem. In a recent issue of Commentary Nick Eberstadt argued that the fig ure of 30 million children dying of starvation each year quoted by World Bank president Robert McNamara was four times too high. The World Bank figures failed to take into ac count local variations in caloric needs. With the World Bank's meth odology caloric deprivation would be ascribed to 48 percent of the popu lation of Taiwan and to 40 percent in Hong Kong, but life expectancy in both places is over 72-about the same as in Finland or Austria. 8 The world hunger situation has shown signs of improvement. In the past 30 years life expectancy in the less developed countries, excluding China, has risen by more than a third, and China's may be up by 50 percent. Since 1950 worldwide per capita food production has risen by about 40 percent, in spite of dra matic population growth. Between 1950 and 1980 the world's arable land area grew by more than 20 per cent, and even more rapidly in the poor countries as a whole.9 These figures do not minimize the tragic proportions of the hunger and pov erty that still exist in today's world, but they do caution against careless exaggerations that in the long run only retard the mobilization of the moral concern necessary to alleviate the problems.

The experience of the modern Asian states of Taiwan, Singapore, Hong Kong, and South Korea dem onstrates that determined and en ergetic societies can overcome con ditions of poverty. These once-poor societies have been notably trans formed in the last 20 years through initiative and hard work. Singapore, a city-state hardly larger than Memphis, Tennessee, and without natural resources, has won 25 per cent of the global backlog of orders for oil rigs, second only to the United States. South Korea is already the world's largest producer of black and white television sets. These Asian states are rapidly moving from tra ditional reliance on the man ufac ture of cheap garments and toys into the high technology areas, offering stiff competition to Japan. lO Their experience shows that poverty can be overcome not through exploiting others, but through initiative, en terprise, efficiency, and hard work.

The Causes of Poverty One popular theory about the cause of poverty might be called the "rob ber baron" theory. According to this theory, if I am rich and you are poor, it must be the case that you have been the victim of my exploitation and oppression. This point of view was popularized by Karl Marx, who believed that the relationship be1982 FIRST-WORLD WEALTH AND THIRD-WORLD POVERTY 681 tween capital and labor was inher ently that of oppressor and op pressed. Now it is certainly the case that the poor can be exploited by the rich. The fact of oppression in human ex perience can not be denied, and it is common enough to make the "rob ber baron" theory plausible. We have heard such sentiments voiced by Ju lius Nyerere ofTanzania in the words quoted at the beginning of this arti cle. It would be a fatal error, however, to believe that all poverty is the re sult of oppression. The "robber baron"

theory misunderstands the nature both of wealth and a free exchange in the market economy, and slan ders the character of those who have become wealthy through personal initiative, insight, and hard work. It is important to understand the nature of wealth in the modern world. Most wealth today is derived neither from exploitation nor from digging material resources out of the ground, but from discovering new ways of producing goods, organizing work, or processing information. As Max Singer and Paul Bracken of the Hudson Institute have observed, "much modern wealth isn't based on things at all, but on ideas, tech niques, information, and other in tangibles, such as new ways of mo tivating people or organizing work." They note that Japan's economic success "is the most dramatic evidence that wealth does not have to be based on natural resources."ll The invention of the computer chip has spawned a whole new industry and created thousands of new jobs.

The computer chip represents a new source of wealth derived not from exploitation, but from human in ventiveness which transformed or dinary sand into: an instrument for processing information faster and more efficiently and in a tinier space. The latest development along these lines is the "seeing eye" or "imager" chip. In a growing number of lumber mills logs are sized up by imager chip cameras linked to computers that control the i cutting saws. The result is five to ten percent more lumber per log. !Again, the gain is the product not of "exploitation," but of human creativity. Both Traders Benefit Notice also that a free-enterprise economy is based on free exchange. The Beatles freely chose to write music and produce records, and mil lions of young people freely chose to exchange their money for those records. One mayor may not like the music of the' Beatles, but never theless it is the ,case that these mu sicians became millionaires many times over not through theft and fraud, but by freely producing a product that millions freely chose to purchase. A genuinely free ex change is not a "zero-sum" or "I win682 THE FREEMAN November you lose" situation, but a relation ship in which both parties benefit.

Unless both parties value what they receive more than what they give up, the exchange will not take place. The teenager valued the record more than the money required to purchase it, and the producer the money more than the record. In a free exchange disturbed by neither force nor fraud, both parties benefit and increase their sense of personal satisfaction. The "robber baron" or "rip-off' the ory of poverty and wealth fails to understand the dynamics of a free exchange economy. Another popular but mistaken idea today is that the wealth of the West ern nations is the cause of the pov erty of the Third-World nations. This contention is simply not supported by the facts. Some of the most afflu ent nations, such as Switzerland and Sweden, never had any colonies. at all. Others, such as Germany and Japan, became wealthy only after losing their colonies. Some of the most economically underdeveloped nations-Afghanistan, Tibet, Ne pal, Liberia-never were colonies of the West.12 And in general, the Third World nations that today are the most economically advanced are precisely those which have had the most extensive contact with the West.

As Professor P. T. Bauer of the London School of Economics has pointed out, "Before colonial rule there was not a single cocoa tree in the Gold Coast (Ghana); when colo nial rule ended, cocoa· exports, en tirely from African -owned and op erated farms, totaled hundreds of thousands of tons annually." In the 1890's, Malaya was a sparsely· pop ulated land of fishing villages and hamlets. "By the 1930's," notes Bauer, "it had become a country with populous cities, thriving commerce, and an excellent system of roads, primarily thanks to the rubber in dustry brought there and developed by the British."13 The fact of the matter is that the colonial system benefited the colo nies as well as the ruling countries. Colonialization brought the intro duction of schools, roads, banking, and business know-how without which much of the former .. colonies' present economic development would have been impossible. Resentful "robber baron" theories applied ·to.the West by Third-World leaders influ enced by Marxist ideology distort the historical record and short-circuit the personal initiative needed for up ward economic mobility in their so cieties.

While scripture clearly recognized that poverty may be caused or ag gravated by external circumstances such as oppression and injustice, it is equally clear that the Bible teaches that individual character is a cru cial factor influencing one's state of poverty or affluence. It is clear that 1982 FIRST-WORLD WEALTH AND THIRD-WORLD POVERTY 683 poverty can be caused by sloth and laziness. "A little sleep, a little slumber, a little folding of the hands to rest, and poverty will come upon you like a vagabond, and want like an armed man" (Proverbs 6:10, 11). "Slothfulness casts into a deep sleep, and an idle person will suffer hun ger" (Proverbs 19:15). The sluggard neglects his own fields and vine yards, and suffers impoverishment as a result (Proverbs 24: 30-34). The scriptures clearly call upon all to assume personal responsibility for their own lives and circumstances, rather than depending on govern ment to provide for their basic needs.

Rather than blaming impersonal environmental and structural con ditions for one's poverty, the Bible encourages the individual to take personal initiative and actively ex ert the effort necessary to better one's personal circumstances. A PersonalProblem In 1966 Professor James S. Cole man stunned the educational world with his massive study, Equality of EducationalOpportunity,perhaps the second most expensive social re search project in U.S. history. The conclusion of Coleman's study was that there was no measurable im pact that public schools had had in eliminating or even modifying com parative achievements among stu dents. This was a stunning blow to one of the basic liberal assumptions which had undergirded U.S. social and educational policy during the 1960's, namely, that spending more money on the public schools was an effective means of reducing poverty. This assumption saw the primary roots of poverty Jin the child's social environment, and the assumption proved to be mistaken. Coleman's results pointed, instead to family values as the prime factor in educa tional achievement. It turned out that the character formation pro vided by a sound family structure, rather than "federal money thrown at a social problem" was the key to motivation and achievement in the public schools~a result that many people have suspected all along.

In 1970 Professor Edward Ban field of Harvard! earned the wrath of much of the academic profession with his book The Unheavenly City. Ban field argued, contrary to the conven tional wisdom,! that the primary cause of poverty in the ghetto is not external but internal, and in partic ular, the self-chosen lifesty Ie of the majority of ghetto inhabitants. The problem according to Banfield is "present orientation," a set of values oriented toward "action" and imme diate gratification, rather than planning, saving, and extended ef fort. Such a value orientation can not be changed merely by bigger schools or better job :training, but only through a more fundamental moral and spiritual reorientation-a "con684 THE FREEMAN version." Banfield's insights under score the fact that poverty is basi cally rooted in a state of mind rather than in external circumstances. The Work Ethic It is intriguing to study modern history and notice how nations such as the United States, Canada, En gland, Germany, the Scandinavian countries, and Switzerland, which were significantly affected by the Protestant Reformation, have en joyed great economic prosperity.

Many factors were at work, of course, but nevertheless the sense of per sonal responsibility encouraged by the Reformation gospel was a pow erful stimulus to economic improve ment. One of the ironies of the modern world is that the "Protestant work ethic" seems best exemplified in non Christian states such as Japan, Sin gapore, South Korea, Taiwan, and Hong Kong. Insofar as these new in dustrial giants of Asia have applied the biblical work ethic they have en joyed remarkable economic prosper ity. This is no confirmation of a doc trine of "salvation by works," but of the simple principle that God can grant temporal blessing to righteous behavior wherever it may be found. When Kim Kyang Won, secretary general to South Korea's president, was asked about the reasons for his country's progress, he replied, "It's the culture of discipline and postponing immediate satisfaction for the future-even for posterity."14 Such character traits have encouraged a national investment rate of 25-35 percent of the Gross National Prod uct, twice the U.S. rate.

Americans of all faiths can learn from the Asian example of diligence and future-orientation. Being the "salt of the earth" in our own society implies the demonstration of such character traits. God's temporal blessings can then be directed not toward needless self-gratification, but toward the meeting of legitimate needs in the wider human commu nity. @ -FOOTNOTESlCited by Charles Krauthammer, "Rich Na tions, Poor Nations," New Republic, April 11, 1981, p. 20. 2Cited by Jim Wallis, "Of Rich and Poor,"Post American, February/March 1974, p. 1. 3Henry Hazlitt, "The Problem of Poverty," Freeman, June 1971, p. 323. 4Ibid. 5Ibid., p. 324. 6BostonHerald American, December 21, 1979, p.A9. 7Michael J. Boskin, "Prisoners of Bad Statis tics," Newsweek, January 26, 1981, p. 15. SNick Eberstadt, "Hunger and Ideology," Commentary, July 1981, p. 41. 9Ibid., p. 43. lOLouis Kraar, "Make Way for the New Ja pans," Fortune, August 10, 1981, p. 176.

llMax Singer and Paul Bracken, "Don't Blame the U.S.," New York Times Magazine, Novem ber 1976, p. 34. 12Ibid. 13p. T. Bauer, Western Guilt and Third World Poverty (Washington, D.C., 1976), pp. 3-5. 14Kraar, op. cit., p. 179.

BRING TOGETHER the shades of Er asmus, Shakespeare and Goethe and try to imagine what they would do. Play poker? Visit the Stock Ex change? Absurd! They would talk together. The precious converse of noble minds is the most truly hu man of all human relations, and de mands at least as much artistry as Kreisler brought to the Mendels sohn Concerto. It need not be argued that Albert Jay Nock belongs on the same plane as the aforementioned to assert that he was of their spirit and that he did bring a considerable fi nesse to any discussion. Nock loved good talk; kindled by a responsive companion he was a brilliant con versationalist. He loved good food as well, but a meal was primarily a The Reverend Mr. Opitz is a member of the staff of The Foundation for Economic Education, a seminar lecturer, and author of the book, Religion and Capi talism: Allies, Not Enemies. Edmund A. Opitz The Genial Mr. Nock means of lubricating the flow of ideas.

To the table hie brought a mind trained and tuned to concert pitch, a mind well stockep with ideas gleaned from great literature and broadened by wide experience here and on the continent. Nock's ideas were perhaps not so original as he was, but he had made them his very own; his thinking ran along lines quite at variance with the familiar channels scooped out by the popular pundi ts of the nine teenth and twentieth centuries. Having framed: his convictions in dependent of an(Y school or party, he was able to view the intellectual passions and battles of the day with clinical detachment. Consequently, he appeared to many of his contem poraries as a man of monumental prejudices, almost an anachronism. Convictions or prejudices, Nock orchestrated his brilliantly, and 686 THE FREEMAN November would on occasion-I am told-dis course over food barely touched while his dinner companion downed a hearty meal. "Lingering over the ta ble," writes Felix Morley, "we touched on many subjects, all ofthem irradiated by the light of his bril liant mind and mellowed by the warmth of his personality." "Ideas never failed him," Ellery Sedgwick adds. "Others have their store houses of learning, but Nock's men tal files were available on the in stant. The classics, all of them one might say, French memoirs, learn ing polite and impolite, everything neatly classified and pigeonholed."

All this is as it should be. In "The Decline of Conversation," an essay in the collection entitled On Doing the Right Thing, Nock remarks that "The civilization of a country con sists in the quality of life that is lived there, and this quality shows plain est in the things people choose to talk about when they talk together, and in the way they choose to talk about them." In good conversation there is a symphonic quality, themes and variations, a blending and harmony of widely ranging minds which take delight in ideas for their own sake, minds able to play freely over and around ideas without prepossession and willing to follow an argument wherever it leads them. In a debate there's a loser, but in a discussion there are only winners. Nock projected some quality-we'd call it charisma today-which caused those in his company to surpass themselves. "You find yourself com ing out with things you didn't know you had it in you to say," recalls a friend.

A Living with Others Conversation is "a living with others," the dictionary tells us, "a manner of Hfe." It's a cultivated way of handling leisure, and it has a syn ergistic effect on the people in volved-provided they meet Rabe lais' test, being "free, well-born, well bred, and conversant in honest com panies." For it is the amiable who shall possess the earth, sang the Psalmist CPs. 37); not the sectaries who see things through the distort ing lens of the ego and try to con script every idea into the service of a faction. The True Believer cannot become a good conversationalist, for "conversation depends on a copious ness of general ideas and an imagi nation able to marshal them." It's an intellectual dance of reciprocal inspiration, exhibiting "a power of disinterested reflection, an active sense of beauty, and an active sense of manners." AJN thought of his Freeman as a sort of conversation, "a fellowship offine minds in all parts of the globe."

Nock came into full possession of his powers during his editorship of The Freeman, 1920-1924, from his fiftieth to his fifty-fourth year. He 1982 THE GENIAL MR. NOCK 687 had had a solid grounding in the classics at St. Stephens, and his valedictory address to the class of '92 reveals a remarkably disciplined mind for one so young. He went on to earn a graduate degree in theol ogy, then furthered his education informally during the next two decades by reading and travel steeping himself in the worlds of scholarship, culture, and affairs. As his inner life ripened the visi ble man followed suit; slim, poised and assured, impeccably attired-a commanding presence. He became the Albert Jay Nock his friends knew during his Freeman days and after; a man of immense reserve, a person around whom legends cluster, a wri ter .whose erudition and prose style earned him a select following-larger now than the corporal's guard he had a generation ago. It was not in him to become a popular thinker and writer; he wrote for the Remnant and tried to do a solid body of work for the future. "The first rate critic's business," he wrote, "is to anticipate the future, work with it, and look exclusively to it for his dividends."

The future Nock worked for is catch ing up with him! Autobiographyof Ideas Nock was a virtuoso in these mat ters, and we shall not see his like again. But we can follow his devel opment as meticulously set forth· by the man himself in Memoirs ofa Superfluous Man. 1jhis book (whose ti tle summons up Turgenev) is not an autobiography in the usual sense of that term. Every suggestion that he write a book about his life was re jected with annoyance-until a friend suggested "a purely literary and philosophical autobiography." Nock fell in with this j notion because, as he said, "every person of any intel lectual quality develops some sort of philosophy of existence; he acquires certain settled views of life and of human society; and ifhe would trace out the origin and course of the ideas contributory to that philosophy, he might find it an interesting ven ture." Thus, the Memoirs, "the au tobiography of a,mind in relation to the society in which it found itself."

11....·.' ";" The N',',.•!oCkian Society, "~.~. .. 30 South Broadway, . " J Irvington, N.V. 10533, offers Nock's Memoirs at a discount price of $3.00. Nock closes his final chapter, pri vacy still intact; but the attentive reader's mind has been subtly in vaded, and it wOluld be a dull fellow indeed who could!deny that the hours spent with this book were not among his mostmemoI1'able reading expe riences. Nock discourses on educa tion, literature~ women, politics, economics, religion and death, and he does so in 'matchless, eighteen 688 THE FREEMAN November carat English prose, spiked with apt quotations and laced with allusions. Nearly a lifetime of reflection had been spent on each of the topics here aired, and this book is Nock's final statement and testament. It is the book by which he will be finally judged, the one in which he himself took most satisfaction. It is a book to be enjoyed and then mastered; and as the dyer's hand is stained by the medium he works in so does the magic of the Memoirs work on a per son's whole outlook and philosophy.

His Life Abroad Nock's Freeman has an enviable reputation in American journalism, ranked as the high water mark by many. After four glorious years it ceased publication with its issue of March 5, 1924, having bade farewell to its readership a month earlier. An item in AJN's final Miscellany col umn offers a rueful reflection on the contemporary civilization. Nock notes that deep grooves are worn in the wooden counters of the change booths in the older elevated railway stations, and muses, "There seems something symbolic about them. They are in their way, a tes timony to the nature of our civiliza tion; they are our counterpart of the grooves worn in the stone steps of European cathedrals by the feet of innumerable devotees." With this parting shot he left these shores to live and work abroad for long periods during the next fifteen years. These were fruitful years, marked by his brilliant Rabelais scholar ship, his classic essay on Jefferson and another on Henry George, his book on the State, A Journal of These Days, and numerous articles in magazines like Harper's, The Atlan tic, and The American Mercury.

World War II brought him perma nently back to these shores, where he lived his final years. A month before his death he wrote to a friend, "I have been really quite ill, feeble and worthless, and have now reached the point of letting the quacks roll up their sleeves and do their worst ... I'll keep you in formed, or some one will, but I fore see I shall not be writing much at length. On his last day Lord Hough ton said, 'I am going to join the ma jority' and you know how I always prefer the minority.' Witty fellow!" The minority lost AJN on the nine teenth of August, nineteen hundred forty five. It is Nock's attitude toward life that chiefly interests us, the de mands he put upon it, his expecta tions of what it had to offer him, his tactical approach as he sought to avail himself of its bounty. Open the Memoirs. It is a fair presumption that the quotation Nock selected for the title page of this book had a special meaning for him. We read the famil iar testimony of Sir Isaac Newton: "I do not know what I may appear to 1982 THE GENIAL MR. NOCK 689 the world, but to myself I seem to have been only like a boy playing on the seashore and diverting myself in now and then finding a smoother pebble or a prettier shell than ordi nary, whilst the great ocean of truth lay all undiscovered around me."

The seashore is broad enough to support a related analogy, having to do with the search for truth. This time imagine that the man at the water's edge is blind. He's just been told that a message of enormous im portance from someone he loves is written in the sand in Braille, and that the incoming tide will soon obliterate it. There's no time to spare, so no wasted motion! Loss of vision has keyed up the man's other sen ses, and the heightened expectancy generated by this crisis situation pushes alertness and sensitivity still higher. But he restrains himself. He knows that if he thrusts his fingers too rudely against the sand his con tact with the letters will erase them; so, he gets himself out of the way and deliberately, with the utmost delicacy, eases his hands over the sand until he establishes tactile con tact with the Braille, at which point he brings all his finesse into play and lets the message seep through his fingertips.

Alert-Passivity This points to the attitude or pos ture of alert-passivity, of interest affection, which some people are occasionally able to bring to bear. Nock exemplified this kind of receptivity no matter what his immediate pre occupation-writing, reading, edi torial work, cQnvivial relations. "They have helped the truth along without encumbering it with them selves," said Artemus Ward of men of his stripe. Nock was fond of this sentence, for it defined his style, and suited his temperament. Would his style have been different if Nock had been one of Sheldon's mesomorphs, inclined toward, somatotonia? The speculation is vain. He was what he was, and we can say only that bodily make up and chemistry did not stand in the way of his characteristic ap proach. Most of our contemporaries are arrayed on the other side of the fence. They are what H. G. Wells used to refer to as "gawqsakers." Nervously apprehensive that the world is about to go to hell in a handbasket the typ ical Modern runs around yelling "For gawdsake let's dd something!" He has wearily accepted the joyless task of straightening out the cosmos, and the first step is to improve others. The incomparable John Dewey gave us marching orders when he an nounced a new role for the intellect.

No more for us j the old delights of knowledge to be' enjoyed for its own sake; mankind has come of age, hav ing graduated '~from knowledge as an esthetic enjQyment of the prop erties of nature regarded as a work 690 THE FREEMAN November of divine art, to knowing as a means of secular control ... [Nature] is now something to be modified, to be in tentionally controlled." Mr. Nock would have none of this, for he knew that a culture which denies or perverts the claims of in tellect and knowledge will pay dearly for it. So, within the limits of his native reserve he took a refined de light in people and things as they really are, to be enjoyed for their own sake. He knew that joy is not only the first fruit of the spirit but the first business of the critic as well; "his affair is one only of joyful ap praisal, assessment, and represen tation," as he put it in the essay on Artemus Ward. Nock goes on to say, "that for life to be.fruitful, life must be felt as a joy; that it is by the bond of joy, not of happiness or pleasure, not of duty or responsibility, that the called and chosen spirits are kept to gether in this world."

Underlying an attitude such as this is a profound confidence in the cos mic process. The Universe is biased in our favor so we are entitled to en joy the scene while nature takes its course. This is not dull passivity; it is akin to the alert-passivity a skilled horticulturalist displays as he nurses along an exotic bloom in order that the plant might become what it really is. The Reformer forgets that only God-or Nature-can make a tree ... or a society. Society is not some entity that can be gotten at directly to improve it; a good society is a bo nus, a by-product of men and women pursuing with some measure of suc cess the life goals appropriate to hu man nature. If the major social in stincts and drives are not given harmonious and balanced expres sion the society is warped and un lovely as a result. The social drives in Nock's catalog are five in number, and he indicts modern culture for allowing the claims of only one of them. The claims of intellect and knowledge have been disallowed; likewise the claims of beauty and poetry, religion and morals, social life and manners.

Only the instinct for making money and getting on in the world has been turned loose, he charges, and a civi lization mired in "economism" is the result. This is a consequence of ideas, wrong ideas, and any cure must be gin by repairing our faulty think ing. Society cannot be improved by working on the level of events; once things have gotten this far they are in the past tense. Reformers work on events, which is why the world is periodically wrecked by those who set out to save it. Talleyrand, watch ing one such series of events unfold, pointed to the person who had set them in motion and remarked sar castically: "I knew· that man would save the world, but I did not know he'd do it so soon!" The only enduring reforms are 1982 THE GENIAL lV1R. NOCK 691 those which take place below the surface of events; that's where the future is being born. And all you can reform there is yourself-provided you start early enough and live long enough. The only thing you can do for "society," Nock contends, is to present it with one reformed unit.

Having sounded this hopeful note, what was Nock to do except declare for superfluity? Letting Things Alone It is not Nock's way to make a point by means of a philosophical disqui sition; his teaching method is para bolical. He let people alone and he let things alone, believing that there are forces at work in them which make for integration and growth if we don't interfere. Interfering comes naturally, however; letting things alone is an acquired skill. A taste for this skill seeps in as we be gin to understand how vast are the regions beyond conscious human control and how well things function in those realms. Turn to the essay entitled "Snor ing as a Fine Art" found in the col lection bearing that title. General Kutusov commanded the Russian forces arrayed against Napoleon. No question about Kutusov's compe tence or his courage, but why didn't he provide some action? Why didn't he engage the French army head on and give Napoleon a thorough trouncing? Why did he snore through staff meetings? Well, Nock con tends, it was because the General was playing hunches;, he "sensed" what the little Corsican was going to do and that's what Napoleon did! The French made one blunder after an other-as Kutusov knew they would-and virtually engineered their own defeat.

The point is that some people have the ability to quiet the conscious in tellect and let other parts of the mind supply guidance. Nock is more nearly on his own ground when he cites the instance of Wordsworth. "Words 'worth unquestionably had some thing; and when: he was content to leave that something in charge of his poetical operations-when he reso lutely bottled up the conscious and intellectual Wordsworth, and corked it down-he was a truly great poet. When he summoned up the con scious Wordsworth, however, and put it in charge, as unfortunately he of ten did, the conscious Wordsworth was such a dreadful old foo-foo that the poetry churned out under its di rection was simply awful." Nock does not disparage the intel lect and the "knowing" peculiar to it when he writes: "Socrates knew nothing, and was proud of it. He car ried the magnificent art of Not Knowing to the jlegallimit, and oh, my dear friend, ,what an incompar ably great and splendid art that is!"

It has been pOInted out by Michael Polanyi and others that there is a 692 THE FREEMAN November "tacit dimension" in all knowledge, that in any epistemological situa tion we actually know more than we are consciously aware of. A great diagnostician examines a patient and, in addition to observing specific symptoms, takes in the person as a whole before offering his conclusion. After the conscious intellect has done its job you work from the "gut," the place where you store "useless" knowledge. Acquiring Vast Knowledge and then Forgetting It The essay entitled "The Value of Useless Knowledge," found in the collection entitled Free Speech and Plain Language, draws a sharp dis tinction between Pedantry and Cul ture. "The pedant's learning re mains too long on the surface of his mind; it confuses and distorts suc ceeding impressions, thus aiding him only to give himself a conventional account of things, rather than leav ing his consciousness free to pene trate as close as possible to their reality, to see them as they actually are ... Culture's methods," on the other hand, "are those of exercising the consciousness in a free and dis interested play over any object pre sented to it." And this, Nock affirms, "Means acquiring a vast deal of use less knowledge, and then forgetting it."

Nock is talking about residual knowledge, so thoroughly known that we do not need to attend to it; it at tends to us. Analogously, years of training have educated a pianist's fingers to the point where, if he tried to direct them individually over the keyboard, they'd rebel and refuse to play even the simplest melody. It is not to diminish the role of the con scious intellect to point out that there is layer upon layer of mind beyond the intellect, and that for some pur poses the intellect must be stilled if we would avail ourselves of this pool of "useless knowledge." When this thought finally sinks in the Social Planner with his "rational controls" will be an extinct breed. Adam Smith's Invisible Hand can be trusted, the market works, there's coherence in the nature of things and its wisdom is put at the service of those willing to cooperate with it. An essay in Snoring invokes the court jester to illustrate the tactic.

The jester, because of his outlandish appearance and his wry humor, could say things to the king which would cost the court philosopher his head. Today's counterpart of the fool is the cartoonist and the witty newspaper paragrapher. Nock says he gets more sound sense out of these men than from the editorial writers, for the best of them have "an intuitive sense of the plain natural truth of things," and they deliver it up to us in a mode we can accept. "They arouse no ani mosities, alarm no pride of opinion, nor do they seek to beat a person off 1982 THE GENIAL MR. NOCK 693 his chosen ground-under their in fluence his ground imperceptibly changes with him." Suzanne LaFollette was the editor of The New Freeman, which began publication with the issue of March 15, 1930, and ran for a little more than a year. Nock contributed a col umn called "Miscellany," using the pseudonym Journeyman. These va grant paragraphs were later col lected and published as The Book of Journeyman. Nock viewed contem porary American culture with a critical eye, finding little to like in it. He referred to it as an idea-less world. Education, music, manners, religion, business, politics-his rail lery played over them all. He sur veyed Europe and reflected ruefully that everything about it he admired came out of a philosophy at variance with his own. Besides sound theory, he muses, you have to have the right kind of people to work it, and where are you going to get 'em? We look for a new formula when what is needed is a new vision of the human person, his powe~s and his potential.

In the course o~ this survey we've picked up only a jfew bits and pieces as we've skirted the shore ofthe main body of Nock material; the next step has to be total immersion. He's to be read, mainly because he's fun to read; even when he's wrong he's delight ful. Most of the time he is right, I believe; his judgments are sound. And the spirit and temper which pervade his pages gently nag at the reader until he i agrees that "edu cate" is not a transitive verb. The only education i$ self-education and Albert Jay Nock has already blazed that trail. , IDEAS ON LIBERTY THERE IS NO social engineering that can radicallyirenovate a civilization and change its character, and at the same time keep it going, for civili zation is an affair of the human spirit, and the direction of the human spirit cannot be reset by means that are, after aU, mechanical. The best thing is to follow the order of nature, and let a, moribund civilization simply rot away, and indulge what hope one can that it will be followed by one that is better. This is the course that nature will take with such a civilization anyway, in spite of anything we do or do not do. Revolts, revolutions, dictatorships, experiments and i~novations in political practice, all merely mess up this process and imake it a sadder and sorrier business than it need be. They are only so much machinery, and machinery will not express anything beyond the intentions and char acter of those who run it.

ALBERT J. NOCK, A Journal ofForgotten Days Glenn L. Pearson Socialism Eats the Seed Grain ONE of the moral tragedies of social ism is that its economics is not built on savings, but on consumption. And this, also, is one of the main reasons it always has failed and always will fail. Economic failure is tragic be cause it means deprivation that can disrupt human plans and go even so far as to take human lives. In fact, starvation is a common aspect of life in countries where some type or an other of socialism has been in oper ation long enough to have dissipated whatever wealth had accumulated prior to the socialist takeover. In those countries where poverty was already present when socialism was introduced, such as in some post World War II African nations, starMr. Pearson is recently retired after many years of writing and teaching at Brigham Young University and the Church Education System of the Church of Jesus Christ of Latter-day Saints.

vation began immediately. Of course, starvation of the body is not as great a tragedy as starvation of the soul, if you believe in a soul. The materi alistic socialists, who theoretically believe only in this life, should be especially offended by starvation the ultimate indignity if there is no soul. Some will point to Russia and China as examples of socialist coun tries which have accumulated capi tal and passed the starvation point. But those who do so are very unin formed about how much capital was already there. Perhaps they do not know about how much outside help Russia and China always have re ceived by fair means and foul. Also, they must not know about how much free enterprise is actually allowed in Russia and China and how impor tant it is to their survival. And, fiSOCIALISM EATS THE SEED GRAIN 695 nally, they are tragically unaware of how well Russia and China con ceal the realities of life in some areas within their spheres of influence.

Hints of horror continually drift out of the nations that have been caught in the webs of these giant spiders. With a few oft-repeated and care fully-selected releases, the liberal media, which preside over the minds of most of the West, tell us what they want us to believe as· the following comments from one who was once one of them reveal: It is not surprising, in view of this state of affairs, [The ruthless power Russia ex erts on the foreign press.] that the world has been consistently misinformed about Russia, and that the Soviet Government has been able to put across a lot of bogus propaganda. It is fantastic, for instance, that there should still be any doubt about the question of forced labour and rell gious persecution, and Val uta [Money, especially gold and silver coins, that has other than fiat value.] extortion, and peasant shootings, and, in general, the character of corrupt dictatorship. But there is. (Like It Was, The Diaries ofMal colm Muggeridge, Selected and Edited by John Bright-Holmes; William Morrow and Company, Inc.: New York, 1982, p.

54) ... I managed to make my way by my self to the Ukraine and the Caucasus to report on the famine conditions there as a result of Stalin's enforced collectiviza tion of agriculture. The. articles I wrote describing the suffering and privations of the peasants, and the monstrous bru tality of their treatment, were dispatched to the Guq,rdian by diplomatic bag to avoid the censorship, and I knew that when they were published my posi tion would be untenfible. The articles duly appeared, heavily sub-edited, but even so caused some stir. In. both the Guardian and the New Statestnan letters were pub lished calling me a liar. For confirmation of the truth of my report I had to wait for Khruschev's speech at the 20th Party Conference in 1956~ in which he gave his account of the 1938 famine and its con sequences, showing mine to have been, if anything, an understatement .... (Ibid., pp. 73, 74.) ... Winter In Moscow had appeared and been reprinted, but, if anything, it ham pered my efforts to get a job in Fleet Street. As I discovered, taking a strongly critical view of the! Soviet regime and its bosses was a handicap rather than a help as far as the nat.onal press was con cerned; the more so in my case because my abhorrence of a Marxist dictatorship as operated from 'the Kremlin did not make me any better disposed towards a capitalist economy as operated from the City of London or Wall Street. Although I did not recogni~e it then, the liberal consensus which was to provide the or thodoxy or Party-Line of the so-called free world, was already in process of forma tion, and beginning to be enforced. (Ibid., p.77.) But physical silIffering is never as tragic or long-l~sting as spiritual suffering. Great [spiritual damage is done to people who are led to believe that economic problems can be solved without savingsr-the accumulation of capital. The virtue of frugality and the evils of profligacy are the subject 696 THE FREEMAN November of many pages in the great religious books of all world religions. The rea sons are· easily seen by thoughtful people of all faiths, and even by those who claim no faith. In the early days of the American frontier there was a saying worth pondering long: "Don't eat the seed grain." Socialism regularly eats the seed grain.

The Steps to Progress The free market proceeds in a very orderly, step-by-step, manner. Step one is vision. The poor, but free, man sees himself improved by his own la bor. His is not the vision of a robber whose soul covets the rewards of an other man's toil. And it is not the vision of a fool who can be enticed into a get-rich-quick scheme: he doesn't plan to give his meager sur plus, when he has saved it, to some one who presents an image of clev erness and strength superior to his own. He will rely on his own arm. and the help that lies at the end of it. So his vision is clear and specific. He knows always just what he needs in order to do more efficiently just what he does well already. Step two is to go through the sac rifice and self-denial of living on less than he earns for however long he must to save enough to purchase some tool or capital good that he needs to increase his productivity.

He has vision for muscle and hope for fat to keep him going. He even may have to beg to get to the point where he can save. The socialist world has forgotten that it is better to beg than to steal, that it is better to give what is your own than what you took from another, and that it is better to look for those in need than to wait until they unite and break down your door. Socialists visualize a utopia where hungry mouths are filled with legal plunder. And they forget the blood and tears that fol low the plunderers, the tax men. Step three is the purchase of the capital item. It may be nothing more than a cultivator to take the place of a hoe to use in a garden that will now produce more-maybe enough for a wayside fruit and vegetable stand. Or it may be enough to pur chase a fast-food franchise so the family can have a business instead of a lifetime of the bondage of wage earning and unemployment lines. To a nineteenth-century Jewish or Ital ian immigrant it may have been a push -cart for a vending business which, from that humble beginning, could have grown, in one lifetime, to a million dollar enterprise ifthe same virtues that started the business were perpetuated when it succeeded.

Self-Control The common element of all vir tues is self-denial. If you would not murder, deny yourself the luxury of anger. If you would practice moral rectitude, deny your mind evil thoughts and your eyes enticing im1982 SOCIALISM EATS THE SEED GRAIN 697 (~onsumption an end in itself or he will lose the virtu.e that saved him from starvation in the first place. ages. If you wish to possess the soul of one who can be trusted with other men's money and goods, kill your covetousness by being quick to give the poor what they need when they rhe Socialist Program ask if you are able. Don't send them The first step in the socialist pro away with a promise of future gen-gram of improvement also begins erosity if you have the means to do with vision. But it is not the vision it right now. This will make it pos-of an individual itrying to improve sible to be wealthy and yet not feel his lot with his own labor and his guilty in your wealth like the rich own capital, saved, begged or bor prophets of socialism do. Socialism rowed. It is the !Vision of conspira takes this pleasure and virtue of tors who have looked at the misery giving away from you. Remember, a of mankind and have appointed bitter fountain cannot bring forth themselves as the saviors of the un good water. Charity must be volun-fortunate. Calling them conspira tary to be virtuous. Those who prac-tors is neither overly dramatic nor tice voluntary charity are improved an exaggeration. They fit any rea by it. The reason it works is that sonable standard for the use of the self-denial becomes a habit, a way of word. It is an interesting fact that it life; and it is the fuel which runs all is almost impossible to get good peo those who achieve great and good pIe to conspire to do anything. They goals-those whose labor is the mostly want to be about their own foundation of all the good produc-business and rarely presume to know tion of this world. enough to plan the lives of others.

Step four, of course, is that careful Yes, "big business" has been and industrious use of the capital caught in conspiracies quite regu item purchased from savings. And larly during the :wastseveral decades. step five is the same process all over But, other than those cases that are again-vision and self-denial prac-misrepresentations and of the sort ticed on a high enough level to in-that fit the damned-if-you-do and sure replacement of the capital item ' damned-if-you-don't dilemmas served when it is worn out. And more: there up by government agencies, it can must be a greater savings than be-be shown that g~vernment planners fore because there is greater income. either handed them the opportunity And one who can start this kind of or forced them into it. Almost noth program for the purpose of greater ing that is going on in American consumption-improvement of the business today 'is pure free enter living standard-must not make prise. Indeed, no business activity is 698 THE FREEMAN November untouched by the laws, bureaus and regulations that burden and warp the free market. However, set American business aside and think of the typ ical model of socialism. In that case, you surely have a set of planners who have come into power by a conspir acy. It is their vision that is step one in the socialist plan of improvement.

Step two is the production plan ning session where they decide how many cars, widgets, tooth brushes, and the like they shall manufacture. They never get it quite right even though they peek at the free mar ket, as Ludwig von Mises was the first to point out. Step three is the allocation of re sources. Of course, step two and step three have to be coordinated or done together. The one asks, "What shall we make?" The other asks, "How much capital will we be able to get our hands on to do it?" Step four is the confiscation of or gathering of capital. Theoretically a socialist state already has all the capital that exists in the country. But, since there is never enough capital to wage the perennial wars of socialism and feed, clothe and shelter the masses, the socialists must be ever alert for new sources of revenue. There are the countries they have "liberated" to be stripped and an eye must be kept on the sneaky peasants who find ways to save from their meager allotments.

So socialist countries have taxes, too. And they have rules against hoard ing things that could add to capital for socialist production. After all, it takes capital to produce whether the economic system is socialist or pri vate. In the socialist system the cap ital is "appropriated" by some com pulsory (involuntary) means. In the private enterprise system, it is ac cumulated by savings based on vol untary self-denial. The socialist step five is the pro duction step. It is common knowl edge that production rarely meets any of the goals set by the planners. This has led to many purges. The socialist mind tends to believe that the solution to greater production lies in the quality of the supervisors rather than in the quality of the sys tem. This results in grave injustices in who knows how many cases. And it creates a system of cruelty and jeopardy. Also, it trains the masses to lay blame on the government for all problems instead of developing self-reliance.

SavingDiscouraged That's how socialism eats the seed grain: it uses up and eliminates all desire to save. It punishes and dis courages all savers. There is no mo tivation to do anything but con sume-get one's share and eat it up. It is like opening day of fishing sea son: many fishermen want to follow the stocking trucks and get "their" limit. They expect the state to keep 1982 SOCIALISM EATS THE SEED GRAIN 699 the waters stocked with catchables. If the fishing is bad, they grumble and feel that the state has failed them. The care of the back and the belly becomes the immediate and pressing need, the whole object of occupation and preoccupation ex cept for the circus. There must be the circus in addition to the bread. It comes in different packages from country to country and time to time. People are the most important as set of a nation when they are free to be productive and responsible for their own capital. But, when weak and discouraged, they are the great est liability. Then a man may just as well be an alimentary canal with a funnel for a mouth, wrapped in an overcoat and housed in a mobile la trine. All the things of the soul cease to have meaning. (f) IDEAS ON LIBERTY Saving, Foreign Aid, and Growth THE MAIN resources and the main effort for growt~ must come from the growing nations themselves. American aid can !usefully complement, but can never replace, their own means and endeajVors.Indeed, gifts and loans are not the major contribution we can ma~e to economic growth abroad. More important is that we maintain a fully and efficiently em ployed and expanding economy of our own and ~hat we maintain free access to this economy by the rest of the world. In neither good sense nor in good conscience can we expend our resources on foreign aid while at the same time leaving clogged the channels of foreign trade and investment.

Finally, we must appreciate that the world is acomplicated place. In important respects, it is far more complicated and discouraging for to day's economically underdeveloped countries than it was for the under developed nations, including the U.S., of 150 or 200 years ago. In America, the cultural background; the supp1y of acquired skills of workers and of experienced investors and managers; the legal, religious, and economic institutions; the climate; the end0wment of natural re sources; the ratio of population to other resources-all were favorable to growth and, by and large, remain favorable to continued growth. Not all areas of the world are so blessed. And even if they were, the living standard of this part of the world is now far higher than that of most regions-and it is very likely that the size of t:Qe gap will grow much larger during the next several decades. WILLIAMR. ALLEN A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN BLAMING TECHNOLOGY WHEN Samuel C. Florman, the vice president of a construction com pany, wrote a provocative book called The Existential Pleasures of Engi nee"ring,he found himself invited to take part in dozens of debates with proponents of the anti-technological movement. Visiting the college campuses, he discovered that profes sors could be deceptively serene. Jo vial at dinner, they nonetheless car ried theories "under their tweeds like stilettos." Their students, "after dis arming a visitor with wide-eyed veneration," delighted in tossing up "challenging statements like cherry bombs." A scientist by training, Mr.

Florman decided that academia was not a likely place to hunt for the truth. It somehow got under Mr. Flor man's skin when he heard a young man, with professorial encourage ment, disparage farm tractors in comparison with oxen. But Flor man's mood really soured when a young woman solemnly arose to an700 nounce that the building they were meeting in should never have been built since it was constructed on ter rain sacred years ago to an Indian tribe. Florman's adventures in acade mia provoked him into writing a second book, Blaming Technology: The Irrational Search for Scapegoats (St. Martin's Press, 175 Fifth Ave nue, New York, N.Y. 10010,206 pp., $12.95). It is a markedly gentle book considering some of the violent speeches that moved Florman to un dertake a work that had to be done. Florman concedes that we live in a world filled with ambiguities and paradoxes. The good points of oxen can be admitted: they don't consume gasoline, and they provide manure to enrich the soil. Their only draw back is that they are no longer ca pable of ploughing Kansas in a way to feed the world. As for the Indians who once hunted in Michigan woods, Florman does not quarrel with the idea that they were wronged. But BLAMING TECHNOLOGY 701 Hiawatha has been a long time dead.

Demolishing a modern building would not give him back his tepee. Whatever ails business in the United States today, it is not the fault of engineers. Simply by analyzing Who's Who in America Mr. Florman deftly refutes the notion that we are run by technocrats. Despite John Kenneth Galbraith, who thinks power resides with the planning staffs of a "technostructure," our in dustries are still guided by gradu ates of liberal arts colleges who, in many instances, have gone on to law school. During the past thirty years only 7 per cent of our college gradu ates have had engineering majors. Lawyers, not engineers, make our laws in Congress. Mr. Florman con cludes, quite sensibly, that "the myth of the technocratic elite is an expression of fear, like a fairy tale about ogres." The army engineers, who have a direct impact on the environment, have been called Public Enemy No. 1 by Supreme Court Justice William O. Douglas. Florman does not deny that there is such a thing as "big dam foolishness" in some parts of the West. But the environmentalist in him is pleased every time he sees a barge being propelled gently along a .man-made waterway. If we didn't have barge canals-and deepened rivers-we would have to compen sate by building more concrete high ways for roaring trailer trucks. On balance, the army engineers haven't done such a bad job in developing our inland waterway system. If they have done harm to wetlands, it was in a day when the worth of wetlands was not clearly qnderstood by any body.

Florman understands the phe nomenon of nuclear Angst. When, some three months before the Three Mile Island disaster, he visited the Connecticut Yankee nuclear plant in :Haddam, Connecticut, he felt that Angst as he gazed at the pale blue glow of the nuclear pool. It seemed unearthly. He recognized his dread as irrational, but he understood the general hysteria that was to come in the wake of Three Mile Island. With people thinking as they do, he takes the need for providing for the dis posal of nuclear waste very seri ously. The apprehensions of ordi nary people, he says, must be factored into our nuclear decisions. Florman is for mixing boldness and caution in going ahead 'with nuclear proj ects, but he would take it as a polit ical blessing if fusion (a safe process) would come alop.g to make power from fission academic. Small Is Dubious in an Age of Mass Production When Florman encounters small ness in the shape of a canal barge, he delights in it. :aut the whole "small is beautiful" ~ovement, which produced a book by E. F. Schu702 THE FREEMAN November macher that sold a million copies, does not impress him. "Small is du bious," he says, for it results in such silly business as installing wind powered pumps in India where they have long seasons of windlessness.

The ironies that attend the "small is beautiful" craze are practically lim itless. Large technologies and small are inevitably intertwined. The backpack, for example, is what Flor man calls "the very essence of the counterculture lifestyle." Yet the backpack is made of aluminum and nylon, both of which require very large energy-intensive, mass-pro duction technologies. Even the bi cycle depends on large-scale mining and metallurgy. Florman pays his attention to reg ulation as practiced by the Federal Trade Commission. He discovers that it is over-legislation, not over-regu lation, that is the basic cause of the FTC's troubles. If our Congress were not so "over-Iawyered" and "under engineered," the regulatory agen cies would be provided with better rules. They would not be compelled to keep plastic pipe out of buildings in deference to the plumbers' unions, which prefer the more labor-inten sive cast-iron pipes.

Florman thinks the Club of Rome, which was started by Aurelio Pec cei, an Italian industrialist, to give quantitative expression to such things as population growth, min eral resources, food supply, pollution and poverty as they affect each other, is well-intentioned. The Club is looking for nothing less than a mathematical model for the whole world. As a beginning, its first pub lication, The Limits to Growth, was designed as a report to the Club, not as a statement of Club policy. Un fortunately, the statement of expo nential growth trends was taken as a slap at the very desirability of growth. The Third World countries considered this an affront. "How," so the Third World nations asked, "can you have the effrontery to talk about limiting growth while we are starv ing and impoverished, just planning to embark on some growth of our own?" The Third World's fears are well taken. Florman considers the publi cation of The Limits to Growth to be valuable in a negative way. "Peo ple," he says, "will indeed take ac tion, not only because of automatic factors such as price changes (whose effect the report has possibly under estimated), but because of reasoned programs resulting from forecasts such as the report itself."

In other words, exponential curves are never a proof of the inexorable. Population trends can be reversed or be made static; new metals can be substituted for old; plant geneticists can give us higher corn yields, and so on. There is even a possibility that the world will cease to spurn the professorial engineer.

1982 OTHER BOOKS 703 THE MAN VERSUS THE STATE by Herbert Spencer Foreword by Eric Mack; Introduction by Albert Jay Nock (Liberty Classics, 7440 North Shadeland, Indianapolis, Indiana 46250) 518 pages - $13.00 cloth, $6.00 paperback Reviewed by Edmund A. Opitz IT was Albert Jay Nock who ac quainted me with Spencer's book on the State. Nock used to appear reg ularly in Paul Palmer's old Ameri can Mercury, and in 1938 devoted one of his columns to Man versus the State. This book, Nock averred, was the best single volume ever written to counter the New Deal ideology, and it said little for the perspicacity of the conservative and business op ponents of the welfare state, he added, that they had let this book go out of print. Shortly after reading this essay on Spencer I wandered into a little bookshop on Copley Squareled by the invisible hand, no doubt-and for one buck picked up a copy of the last American edition of Man versus the State published in 1916 by the house of Mitchell Kennerley in New York.

This edition was edited by Truxton Beale, and Mr. Beale's personal card was still in the book, which ap peared to be unread. Herbert Spencer wrote four essays for The Contemporary Review in 1884 and brought them out in book form the same year, aqding a Preface and a Postscript. A ~econd edition ap peared in 1892. ,Americans had to wait twenty-four ~ears for their own version, and a vastly expanded ver sion it was. Mr. Beale not only added five more Spencer essays to the orig inal four, but he had each essay in troduced by a distinguished public figure: William Howard Taft, Charles W. Eliot, Elihu Root, Henry Cabot Lodge, David JalYne Hill, Nicholas :Murray Butler, Judge E. H. Gary, Harlan F. Stone, and Augustus P. Gardner. This blue ribbon crowd contributed 72 pages of text, which might be regarded as a representa tive sampling of American opinion in the pre-WorldiWar I era: the pub lication of this book in 1916 attests to the nation's individualism and its dedication to political and economic liberty.

The American mind was radical ized during the two decades between the wars; the oHler ideas were not rebutted, they were simply ignored as a new set of ideas swirled around them. A novel (for America) ideol ogy was grafted into place during the thirties, and men like Nock were be coming superfluQus. It was of little i consequence that I read Nock's praise of Spencer, but it was of great mo~ent that the Mer cury essay was also read by James Gipson of Caxton Printers in Boise, 704 THE FREEMAN Idaho. Many years after the event Gipson told me that he wrote to Nock, whom he did not know but admired, to say that he'd never heard ofSpen cer's book but that ifit was all Nock said it was he'd publish it-if Nock would edit and write a Preface. Nock agreed, added two essays to the orig inal four, and the Caxton edition came off the presses in 1940. It got several reviews, an especially fine one from a well known literary man of the period, Benjamin De Cas seres, who reviewed for the Hearst chain. The review took a full tabloid size page and appeared in papers coast to coast. And the book sold un der two dozen copies the first year!

The same dismal sales record was repeated each year until 1944 when the Los Angeles Chamber of Com merce under Leonard Read bought a thousand copies and laid its mem bers under heavy persuasion to buy. The book sold moderately well dur ing the fifties and sixties and went out of print a few years ago. This handsome new Liberty Clas sics edition thus comes at an oppor tune time, and at a time when more and more minds are attuned to what Spencer has to say. The binding and paper are superb, and the price is friendly. This edition adds six Spen cer essays to the original four, re tains the Albert Jay Nock Introduc tion and has a helpful new Foreword by philosophy professor Eric Mack. There is also a full index, which ear lier editions lacked. Spencer championed a laissez faire society, where personal relations are free from feudal domination, where political power is not available to some to enrich themselves at the ex pense of others, where industry and trade enjoy fair competition and op erate within the controls of the mar ket. Spencer wants a society of equal freedom for all persons, and demon strates that the needs of a commer cial and industrial nation turn it away from war and colonialism, both of which he denounces fiercely.

Freedom and justice within nations lead to peace between nations, and conditions are established wherein individual virtues may flourish.. I am impressed by the earnestness and moral passion which suffuse these pages. Spencer had caught a vision of what might be in store for mankind if its potential were free to realize itself. With this part of his mind he was an optimist and a be liever in some sort of a planetary surge carrying mankind onward and upward. But he also had premoni tions of bad times coming, and late in life he foresaw a process of rebar barization looming just ahead. His forebodings have been amply real ized in our time, but his great truths still await their day. , the Freeman VOL. 32, NO. 12 • DECEMBER 1982 Beyond the Christmas Story Clarence B. Carson 707 Christ exemplifies the message of freedom. The Key to Success: Do Unto Others Raymond Mi. Burnham II 714 To achieve one's aims through service to others.

Argentina on the Brink Hans F: Sennholz 716 An expert view of the history and the prospect for freedom in Argentina. A Guide to Principled Self-Defense Robert Jamies Bidinotto 728 Suggestions for working out the free market philosophy. To Communicate Ideas on Liberty Ernest G. Ross 735 Guidelines for effectively sharing ideas with others. The Abstract Concept of Human Liberty Robert LeFevre 742 A guiding star beyond the levels of people, events and things. Industrial Hostages Brian Summers 748 The seen and the unseen costs of prohibiting business mobility. Capitalism - Hero or Culprit? The origin and blessings of trade. Rallph Bradford 750 Book Reviews: 755 "The Economy in Mind" by Warren Brookes "The Path of Duty" by Leonard E. Read "The Ominous Parallels:The End of Freedom in America"by Leon ard Peikoff Index for 1982 761 Anyone wishing to communicate with authors may send first-class mail in care of THE FREEMAN for forwarding.

FOUNDATION FOR ECONOMIC EDUCATION Irvington-on-Hudson, N.Y. 10533 Tel: (914) 591-7230 Leonard E. Read, President Managing Editor: Production Editor: Contributing Editors: Paul L. Poirot Beth A. Hoffman Robert G. Anderson Bettina Bien Greaves Edmund A. Opitz (Book Reviews) Brian Summers THE FREEMAN is published monthly by the Foundation for Economic Education, Inc., a nonpo litical, nonprofit, educational champion of private property, the free market, the profit and loss sys tem, and limited government. The costs of Foundation projects and services are met through donations. Total expenses average $18.00 a year per person on the mailing list. Do nations are invited in any amount. THE FREE MAN is available to any interested. person in the United States for the asking. For foreign delivery, a donation is required sufficient to cover direct mailing cost of $5.00 a year. Copyright, 1982. The Foundation for Economic Education, Inc. Printed in U.S.A. Additional copies, postpaid: 3 for $1.00; 10 or more, 25 cents each.

THE FREEMAN is available on microfilm from University Microfilms International, 300 North Zeeb Road, Ann Arbor, Mich. 48106. Some articlesavailableas reprintsat cost; state quantitydesired. Permissiongrantedto reprint any article from this issue, with appropriate credit, except "A Guide to Principled Self-Defense" and "The Abstract Concept of Human Liberty."

Clarence B. Carson BeY90dthe Christmas Stol!Y CHRISTMASis many things. It is the time of the celebration of the birth of the Christ child. It is a season when many preparations are being made. Gifts must be bought, cards sent, decorations put up, food as sembled, trips made, and much work done. It is a vacation time, a time of feasting, a time of the gathering of family and friends, a time of giving and receiving. As the long awaited day approaches, small children can hardly contain their eagerness, and older people feel, if they cannot en tirely share, their excitement. And, if Christmas is not a time of unal loyed joy, much effort is given to making it have that appearance. For adults, Christmas is apt to be Dr. Carson has written and taught extensively, spe cializing in American intellectual history. He is the author of several books and is working at present on A Basic History of the United States to be pUblished by Western Goals, Inc. .

entangled in a. bundle of childhood memories. It is a memory of crisp wintry mornings, with a sprinkling of frost or snow glistening on roof tops. It is a memory of an all-too brief vacation fin the midst of the school year, of special programs at school and church, of Christmas trees, and, for those who grew up in the country, going into the woods to find and cut a 'cedar, fir, or pine to bring home an<ll decorate. Above all, it is the memory of a time in our lives when the $ense of mystery, awe, and wonder was still alive to numer ous possibilities, and the poetic had lost little ground to the prosaic. For children especially, Christ mas is a season of special sights, sounds, and ar~mas. Much of the ap peal ofChristm.as is to the eye. There is the Christmas tree with its glit tering balls, tinsel, strands of col ored lights, topped, perchance, with 707 708 THE FREEMAN December an angel or a star, and surrounded by brightly wrapped packages. There are often wreaths on the doors of houses, candles in the windows, col ored lights strung around them, and even nativity scenes on lawns or a Santa on the roof in a sleigh pulled by reindeer. Churches, too, often feature nativity scenes, and busi ness districts have their decorations in cities. Wreaths, bells, and colored lights are prominently displayed.

Stores often have Christmas trees, frosted windows, wreaths and tinsel hung in conspicuous places. But the sounds of Christmas are as impressive as the sights, and of ten more moving. The bell is almost as much. a symbol of Christmas as the candle, for the ringing of bells signals the glad tidings that a child is born. Church chimes render car ols, Salvation Army stations have bells that are rung, and, in some climes, when snow has fallen, sleigh bells can be heard in the distance. The most joyous sounds of Christ mas, though, are the music. There is Handel's incomparable Messiah and its thrilling "Hallelujah Chorus." There are the great Christmas hymns: "Joy to the World," "0 Holy Night," "Hark! The Herald Angels," and "Silent Night," among many others. There are secular favorites, such as "Winter Wonderland," "Nutcracker Suite," and "White Christmas," as well as those in be tween, such as "God Rest Ye Merry Gentlemen" and "The Little Drum mer Boy." There are sounds, too, which have the flavor of Christmas: the ringing of the doorbell announc ing the arrival of guests, the clink ing of glasses, the joyous cries of children as they open presents, and the murmurs that are only partly intended as words as relatives and friends renew contact with one an other.

Then, there are the smells of Christmas: of wood burning in the fireplace, of the tallow melting on the candles, of cedar or fir as the Christmas tree is warmed, and of leather, paint, perfume, lotions, new fabrics, and the like, from newly opened gifts. There is the aroma of special foods being prepared: of the turkey baking, of all the ingredients that go into the stuffing, and the ta ble laden with puddings, pies, sauces, and other delectable dishes. There are Christmas tastes, too, but with these we go beyond anticipation, which is the essence of Christmas, toward fulfillment. A Feeling of Sadness And yet. And yet. As we grow up and grow older there is a sadness associated with Christmas, a sad ness that makes us reluctant to think about the one that is coming, a sad ness that can overwhelm and be come depression, a malaise of the spirit which, when it is upon us, makes it difficult, if not impossible, 1982 BEYOND THE CHRISTMAS STORY 709 to recapture the sense ofjoy we think we should feel. However deeply peo ple may feel this malaise, they usu ally touch it lightly, if at all. They tend to disparage their own emo tions with such statements as "I just don't have the Christmas spirit" or "It doesn't feel like Christmas to me yet." Or, a husband or a wife may ,say one to the other: "I wish we could go on a trip somewhere and let Christmas come and go without us."

The poet Frances Ridley Havergal touched this feeling in her poignant poem, "Bells Across the Snow." The opening verse reads: o Christmas, merry Christmas! Is it really come again, With its memories and greetings, With its joy and with its pain? There's a minor in the carol, And a shadow in the light, And a spray of cypress twining With the holly wreath to-night. And the hush is never broken By laughter light and low, As we listen in the starlight To the "bells across the snow." She goes on, too, to suggest some of the sources of the pain. There are people missing from the circle, she says, which bring a tinge of sorrow to the occasion. The weight of age, too, is upon us, and so far as the merry Christmas of childhood mem ory goes: This never more can be; We cannot bring again the days Of our unshadowed glee. Toward New Hope and Joy But it is not my purpose here ei ther to dwell upon the sadness or to attempt to ma~e any extended ex planation of it.llather, I wish to point the way beyond the sorrow to new hope and joy. For that, we may be gin with but we must go beyond the Christmas story. Children have been taught, perhaps inadvertently, to view Christmas as an end in itself, as a fruition, a £ulfillment, a comple tion. They have anticipated the day for days, weeks, and sometimes months, and our customs supply them a culmination. It is the open ing of the presents. It is not uncom mon, however, :for an older child to open his presehts, look them over, and turn to the,gi vers to ask, "Is this all?" The seedsiofthe sadness which many feel abou~ Christmas lie in that question.

But Christmas is not an end itself, nor a fruition or fulfillment. It is the celebration of a beginning. The birth of every child lis a beginning. It is often a joyous occasion, as friends and relatives gather to marvel at the wonder that is! a newborn baby and congratulate tme parents. Even so, it is the beginnip.g of something, not the end. Nor would any adult think of looking at. the tiny infant and asking, "Is that all?" We know it is not; it is only the beginning. Just so, the story of the child whose birth we celebrate at Cihristmas did not end with that event. It was a beginning, 710 THE FREEMAN December an auspicious one, a beginning with a star bright promise, if you will, but a beginning nonetheless. Ahead lay the fulfillment of a mis sion for Jesus. It was to teach the ways of God to man. These He taught by example and in words. Before He could do that, He had first to grow up, to learn by experience, to make it a part of second nature, so to speak, how people think and talk and act.

Above all, He depended for the suc cess of His undertaking upon its meaning being grasped and acted upon by flawed men. Jesus provided an answer to the child who asks of his gifts on Christ mas day if that is all, though a child who would ask it may not yet be ready for the answers. No, that is not all, He would surely reply; it is hardly even a beginning. Those poor gifts are but an uncertain key to a paradox, indeed, to a whole bundle of paradoxes. Here are some of them. It is better to give than to receive. It is better to serve than to be served. The first shall be last, and the last shall be first. He who would gain his life must lose it. If you are struck on one cheek, He said, turn the other to the assailant. Greater love hath no man than to lay down his life for a friend. The Ways of Peace Jesus came not to impose a peace treaty but to teach men the ways of peace. He came not to take up the sword but to sacrifice His life for others. He came not to govern but to make men governable. He taught that it is better to serve than be served by becoming a servant Him self. He fed the hungry, healed the sick, restored sight to the blind, en abled the lame to walk, and did good deeds wherever He went. He taught that it is better to give than to re ceive by giving of Himself without stint. No one was too lowly to get a full measure of His attention. Even small children He welcomed, for of such, He said, is the Kingdom of Heaven.

Jesus taught many things, far too many even to allude to in a sum mary. There was much that He did not teach, however. He did not teach statecraft, the arts of warfare, eco nomics, sociology, biology, physics, medicine, or even religion, as we un derstand such things. Instead, He taught those things that apply to all people, whatever their station in life, occupation, or calling. He taught love, compassion, concern, helpful ness, generosity, sacrifice, humility, faith, hope, and charity. Above all, He taught about life and a way of life. He came, it is written, that men might have life, and have it more abundantly. This life, He taught, is lived in voluntary giving and ex change. It is necessary to go beyond the Christmas story to leam His teach ings. It is necessary to go beyond the 1982 BEYOND THE CHRISTMAS STORY 711 Christmas story, too, to encounter the full measure of hope He brought to the world. These promises ring with hope for those who might otherwise be hopeless. "Blessed are they that mourn: for they shall be comforted.

Blessed are the meek: for they shall inherit the earth. Blessed are they which do hunger and thirst after righteousness: for they shall be filled. Blessed are the merciful: for they shall obtain mercy. Blessed are the pure in heart: for they shall see God. Blessed are the peacemakers: for they shall be called the children of God." Gifts under Christmas trees are but baubles beside such goodly rewards. It is appropriate, even so, that there should be a sadness as we look beyond Christmas, and the thought may be comforting to those who may be guilty about their own feelings. It is written that Jesus was a man of sorrow and acquainted with grief. In varying degrees, this is so for ev ery man born of woman. Every child is brought forth in pain, and it is not a matter for surprise if much heart ache, tribulation, struggles, and failures lie ahead. Undoubtedly, it is an occasion for rejoicing when a healthy child is born, but if the trials that lay ahead for many a baby could be foreseen, as happily they cannot, we might well be overcome with grief. For none other was this so true as for the Christ child.

The angelic chorus of "Peace on Earth" had hardly been completed before the troubles· began. The sec ond chapter of Matthew's Gospel re lates· that when rumors of the birth of the child reached King Herod he began plotting Cllgainstthe baby. He sent Wise Men tp search for the baby, but when they Ihad seen the Christ they returned ~o their own country without making a repdrt to Herod. The child was taken secretly to Egypt. Not kno)Vingthis, Herod pro claimed that all the male children in Bethlehem who were under two years ofage should be slain. The child Jesus was kept lin Egypt until Herod died. Despisedand lfIejected The trials of Jesus as He was growing up and of His young man hood, such as they may have been, are not a part lof the record. We do know, however, that during the brief period of His ministry He was con tinually being i tested, having traps set for Him, and kept on the move to evade His enemies. Even at the height of His pppularity, when mul titudes gathered to hear Him speak, when crowds f9110wed in His wake, when, as one writer says, His fame spread througqout all of Syria, there were murmuriJ1l.gsand charges made about Him. WhienHe returned to His home community to speak after triumphant jo~rneys through other lands, people ~sked how one of His origins had tije temerity to speak with suchauth!ority. Jesus lamented 712 THE FREEMAN December that a man is not without honor ex cept in his·own country.

But the worst, incomparably much the worst, came at the end. He died in disgrace. It is of this time that it is said He was despised and rejected of men. He was betrayed by one of His beloved disciples, arrested by Roman soldiers, and tried before the representative of the might of Rome, Pontius Pilate. Though Pilate found Him guilty of nothing, he yielded to the pressures of the mob and con demned Jesus to an ignominious death by crucifixion. Few, if any, could be found to defend Him now. Even that disciple who had seen so deeply earlier, turned his back upon Him, cursed at his questioner, and denied that he had known the man. The depth of Jesus's disgrace is de scribed this way in the 27th chapter of Matthew: And when they had crucified him, they divided his garments among them by casting lots; then they sat down and kept watch over him there. And over his head they put the charge against him, which read, "This is Jesus the King of the Jews."

Then two robbers were crucified with him, one on the right and one on the left. And those who passed by derided him, wag gingtheir heads and saying, "You who would destroy the temple and build it in three days, save yourself! If you are the Son of God, come down from the cross." So also the chief priests with the scribes and elders, mocked him, saying, "He saved others; he cannot save himself. He is the King of Israel; let him come down now from the cross, and we will believe him. He trusts in God; let God deliver him now, if he desires him; for he said, 'I am· the Son of God.'" And the robbers who were crucified with him also reviled him in the same way. Of His suffering and agony, none who understand may write or speak ex cept in deepest grief. But the shame was not His; the shame was the shame of the world. He came to His own, and His own did not recognize Him. He was innocent of wrongdo ing; He taught and did only good.

But beyond these events lies not sadness but gladness and joy. Jesus bore our sorrow as He bore our guilt. As the Apostle Paul said, "Death is swallowed up in victory." He meant that Jesus rose again from the dead, that He was seen by many after the resurrection, and that His resurrec tion was surety for the life after death of all believers. Therefore, Paul con tinued with the Good News (15th chapter of I Corinthians): "0 death, where is thy sting? 0 grave, where is thy victory?" The Good News For some, of course, the anticipa tion does end with Christmas. It was that way in ancient times, and it still is. Those who anticipated that Jesus would come as an earthly king and would rule with righteousness bringing peace to all the earth were doomed to disappointment. Those 1982 BEYOND THE CHRISTMAS STORY 713 who think in terms of the transfor mation of nations by the use of force are still fated to have their hopes dashed and to be disappointed.

But for those who accept and be lieve the Good News, the anticipa tion does not end with Christmas; it has a new beginning in an incom parably greater anticipation. For those who do not believe that peace can be brought by the sword, that nations are not transformed except to the extent they may be one by one in the hearts of individuals, that de sirable changes come, as it says in Zechariah, "Not by might, nor by power, but by my spirit, saith the Lord of hosts," every day can be an adventure. It is an adventure in dis covering how things can be accom plished in peaceful ways. It is an ad venture in discovering new evidence that force fails in economic produc tion. It is an adventure in learning of individual growth and transfor mation. There is the broader picture, too. That the Christmas story was only a beginning is evidenced in the an nals of history. The Good News has indeed now been carried to all the world. From those beginnings nearly two thousand years ago in a remote town where people gathered to pay taxes, hundreds, thousands, tens of thousands, and millions upon millions have professed their belief in the teachings and life ofJesus Christ.

Of the impact of this, we know so little, but the fact itself is a cause for wonder and jhope. Of Things to Come But there is! an anticipation be yond all these anticipations. It is the anticipation of ~hings to collie after this life. There, is the promise that however hard the road in this life, however much of trial and tribula tion, however great our disappoint ments, however numerous our fail ures, however much there is of sorrow and sadness, there will come a time for the faithful when, as it says in the 21st chaptet of Revelations, "God himself will be with them and be their God. And 1God shall wipe away all tears from their eyes; and there shall be no more death, neither sor row, nor crying, neither shall there be any more pain: for the former things are passed away." That is the fruition of Christmas. That is the fulfillment. That is the end that is the last beginning. The Christmas that small children an ticipate so hop~fully is only a fore taste. Looked at in that way, when we examine. the story beyond Christmas, we learn of the possibil ity for people of all ages to have a Merry Christmas. @ Raymond M. Burnham II THE KEY ((}a-~ TO SUCCESS: Do Unto Others SET ASIDE YOUR ENVY. Set aside your prejudices. Today, in terms so sim ple, with logic so irrefutable, you'll discover the key to financial success, understand the two moral impera tives to its attainment, and learn who best serves his fellow men. And, you'll see how you can be successful and why you should be.

If someone satisfies your wants or needs, you're willing to pay him. The more and the better products he pro vides you, the more you're willing to pay him. That obvious truth .also works in reverse. Our economy is so intricate and so complex that most people, through envy and prejudice, have lost sight of this simple truth: We are all paid Mr. Burnham is an insurance adviser and author (CPCU and CLU) in Southbridge, Massachusetts. 714 in exact proportion to the service we render others.. The more anyone wants your products, the more he will pay you. And, the more people who want what you have to offer, the more they will pay you. So, to achieve fi nancial success, simply offer. more and. better products to more people. Remember, and this is important, you must offer what others do want~ not what you think they should want. If you want something you have exactly four choices: 1) produce what others want and trade with those who produce what you want, 2) make it for yourself, 3) do without, or 4) steal it-either directly and illegally, or indirectly and legally by having the government take it for you. through taxation or regulation.

THE KEY TO SUCCESS: DO UNTO OTHERS 715 Stealing is unethical and counter productive whether you steal for yourself or hire someone, with your vote, to steal for you. Other people won't produce as much when they don't get to keep and control the frui ts of their labor. And, you'll di minish your own self-esteem. Doing without doesn't do you any good and leaves everybody else worse off too. You won't be as happy and they'll have to do without whatever you would have traded with them. Making it for yourself is an ac ceptable alternative except that it lacks all the advantages inherent in producing what others want and trading with them. Finally, producing what others want and trading with those who produce what you want benefits ev erybody. Why? For three reasons. First, by specializing in the areas we do and like best, we are each as pro ductive and happy as we can be with our work, so total wealth and hap piness are maximized. Second, in every voluntary exchange, each party gives what he values less for what he values more, so total satisfaction is increased. And, third, such trad ing builds good-will, decreasing the frequency and severity of both crimes and wars, so the prospect of peace is increased.

Upon understanding these simple truths, some people are surprised to discover that it's not the well-inten tioned social workers, the unfail ingly honest government workers, or the hard-working labor classes of the world who best berve humanity. In stead, it's the inquisitive inventors, the profit-seeking capitalists, and the self-interested . entrepreneurs who best serve humanity. In fact, the best single indicator of how well a pri vately-employed person serves his fellow men is his income. People don't earn high incomes by rapaciously crushing the little guy. They earn high incomes by efficiently filling the needs and satisfying the wants of others. To sum up, y;ou should seek your own self-interest. Why? To promote your natural right to survive and prosper. How? By serving others. You should serve o~ers. Why? To bene fit yourself. How? By trading better goods and services with more peo ple.

Do unto others as you would have them do unto YQu. Satisfy their wants and needs. It's the best way to attain the riches of this world. i IDEAS ON LIBERTY Immanuel Kant ACT only on that maxim through which you c~n at the same time will that it should become a universal law . ' Hans R Sennholz ARGENTINA ON THE BRINK IN MANY RESPECTS Argentina moves ahead of other Western countries. While the U.S., Great Britain, France, Italy, and others suffered double-digit rates of inflation in re cent years, the government of Ar gentina managed to inflate its peso at triple-digit rates. In the U.S., ex perts estimate that underground economic activity has risen to some 10 to 15 per cent of national income; in Argentina it is estimated to ex ceed 50 per cent. In the U.S., smug gling is limited by and large to the illicit importation of large quan tities of narcotics and medicines; in Argentina it probably covers the whole range of moveable goods. In the U.S. political terrorism, which is Dr. Sennholz heads the Department of Economics at Grove City College in Pennsylvania. He's a noted wri ter and lecturer on economic, political and monetary affairs.

716 the use of violence and intimidation to achieve political ends, led to 1313 bombings in 1975, killing 69 people and injuring 326. At the same time and for the same reason Argentina suffered the armed aggression of terrorism and Marxist guerrillas that killed more than 1,000 people and left scores injured and mutilated. It defended itself from an organized onslaught of international commu nism without the help of any friendly power. Argentina, like so many other countries in the world, suffers from a puzzling discrepancy between eco nomic potential and political real ity. The country is graced with nat ural resources that surpass those of most other countries of the world. Its greatest asset is the economic spirit of the people, their will to win and their courage to work. But ArARGENTINA ON THE BRINK 717 gentina also has become a synonym for political instability and govern ment mismanagement. Since 1930 there have been more than 20 pres idents, only two of whom completed their elected terms. Some were con stitutionally elected, others ap pointed by military juntas. All con tributed to the political disorder, to social factionalism and economic disintegration. Most recently, the junta waged a popular but illfated foreign war and, as if it were bent on suicide, reacted to the debacle by applying the most destructive poli cies conceivable.

EuropeanRoots Argentina is by far the "most Eu ropean" country in Latin America, with 97 per cent of the population of Spanish, Italian, British and Ger man ethnic origin. Large-scale Eu ropean immigration in the decades after 1880 reaffirmed the European ties, spurring modernization and de velopment. European intellectual thought has had, and continues to have, a pervasive influence on Ar gentine political, social and eco nomic life. The turbulent history of Argentina remains incoherent and perplexing unless it is related to Eu ropean intellectual thought. In its formative years Argentina, like Europe during the 19th cen·· tury, was torn by conflicting philo sophies on the nature of government and its constitution. Influential groups sought to establish a monar chical govern~ent until they were defeated by others who favored a re publican formJ Violent disagree ment continued!on whether it should be centralized orr federal. The consti tution of 1853" modeled mainly on the Constitution of theU.S., sought to forge a compromise between the two. But despite all the political conflict and str~fe, economic freedom prevailed throughout the country.

With the aid or foreign capital and technology economic production ex panded by leaps and bounds. Rail roads were bUilt, agriculture and commerce prospered, fostering a ris ing tide of imm.igration. During the 1890s two new politi cal parties, wh.ich were to play im portant roles in the future, derived great strength from the new Span ish and Itali~n immigrants. The Radical Civic Onion, often called the Radical Party, i appealed to all social classes for sociialreforms, especially on behalf of labor and labor unions. The Socialist Party, whose doctrinal roots were cle$.rly Marxian, limited its appeal to, a single class, the workers. It did not gain mass sup port even in its stronghold, Buenos Aires, until Wprld War II. The Radica~s coming to power in 1916 conductep economic policies of far-reaching government interven tion, which, in U.S. parlance, gave Argentina its l"New Deal." It led to economic confusion and social up718 THE FREEMAN December heavals and fostered antidemo cratic sentiment that was coming from abroad. During the 1920s Ar gentineans began to admire the It aly of Mussolini, the Spain of Primo de Rivera, even the Russia of Lenin.

And the military sensed a new mis sion to regenerate the nation it thought debased by inept and cor rupt parties and administrations. It struck in 1930. General Jose F. Uri buru, who had been converted to Fascist ideas, overthrew the Radical regime in a military coup. But lack ing popular appeal and support by a large part of the army, he soon had to yield the reins of power to an elected conservative administration which conserved the New Deal and busied itself with full-employment and economic recovery measures. The Peron Years Recent Argentine history begins with Juan Domingo Peron who, in 1943, with a group of government officials and a military junta, over threw the conservative government. Elected president in 1946, he set out on a course of nationalism, social ism, industrialization, and anti-U.S. agitation. He nationalized the banks, the railroads, and other utilities, and embarked upon public works on a large scale. He squandered the cap ital substance accumulated in the past and, upon its depletion, en gaged in massive currency and credit expansion. He commanded the army, the police, the labor unions, and his Peronista party, which permitted him to dictate the political life ofthe nation. He eliminated most consti tutionalliberties, such as free speech and free press, and ruled supreme until he was overthrown by an army navy revolt in 1955. Thereafter, the country oscillated between military juntas and elected governments that did little to dismantle the Peronist system. Peron returned to power in 1973, died in 1974, and was suc ceeded by his wife Isabel. In the face of widespread unemployment, se vere shortages, riotous inflation, civil strife, and bloody raids and assassi nations by terrorists, the military returned to power in 1976.

The War Against Terrorists The bloodless coup of March 24, 1976, was welcomed by most Argen tineans, living precariously between the terrorism and kidnappings of rural and urban guerrilla organiza tions and the fascist Alianza Anti communista Argentina. "Death squads" were executing hundreds of their political enemies and threat ening to kill more. Tp.e Marxist Leninist Montoneros were kid napping eminent bankers and industrialists, including several U.S. citizens, murdering them when blackmail demands remained un met or releasing them for stagger ing ransoms. They even mounted major attacks against the army and 1982 ARGENTINA ON THE BRINK 719 its arsenals. During Isabel Peron's 21 months in officepolitical violence was responsible for some 1700 deaths. The primary goal of the new gov ernment was the eradication of ter rorism and subversion. It estab lished the death penalty for political murder and launched a massive campaign against guerrilla strong holds. By the end of 1978 it had crushed most terrorist forces and re stored law and order throughout the country. The junta had earned the gratitude of nearly every Argentin ean and was riding high in esteem and popularity.

International critics of the regime denounced .the campaign against terrorism as a countercampaign of violence against individuals. consid ered subversive, and pointed at evi dence of torture and arbitrary ar rest. In its first 12 months in office the junta was accused of having killed 2300 persons, held as many as 10,000 in prison for political rea sons, and caused between 20,000 and 30,000 to disappear. The govern ment promptly rejected the validity ofthese foreign reports, claiming that they were communist efforts to dis·· credit it. It invited the InterAmer·· ica Commission on Human Rights of the Organization of American States (OAS) to investigate the allegations. A Commission report was pub lished in Argentina in 1980, and promptly rejected by the government for being 'fneither objective nor balanced." The pfficial answer given by President V~dela did not clarify the situation, bllLt tried to explain the reasons for hunjLanrights violations: there has been a"civil war" and "all wars are dirty." His successor, Gen eral Viola, later clarified the junta position: as a b~sic condition for the restoration of, a civilian govern ment, there must b~ "no revision of what has happened during the fight against terrorism." His minister of the interior ad({ed bluntly that "no victorious armty was ever asked to explain its behavior during a war."

Civilization Threatened Objective ob~ervers who abhor vi olence in any form and by any party cannot escape! the conclusion that political terrorism constitutes a dec laration ofwar:against society, which cannot exist without law and order. Terrorism, wh~ch is endangering the lives of countl~ss people around the world, is mor~ than unlawful activ ity by common criminals. It is a po litical movement that does not seek destruction for,its own sake, but aims to destroy the private property or der. It is org4nized communist ag gression laun~hed against the free world. If it is true that Western Civ ilization rest~ solidly on private property, then terrorism must be viewed as a war against civilization itself. As the individual has the right of 720 THE FREEMAN December killing in self-defense, society has the right to wage war for its own preser vation. But even if the terrorists vi olate all principles of virtue and commit heinous atrocities against humanity, the forces of law and or der must not violate "due process,"

i.e., fair procedure as to life, liberty and property. They must defend so ciety in a civilized manner and, as guardians of civilization, act beyond reproach. An EconomicDebacle In 1978 the junta was riding high in public acclaim and respect. Hav ing restored law and order, it now could set about the restoration of the economic foundation of social coop eration which had been shattered by years of senseless destruction. A ba sic choice had to be made: to pursue the Peronist system, making it work with military order and discipline or restore the competitive private property order that is working so well in other countries of the West. The generals are not political econo mists, but having endured the chaos and corruption of the Peron regimes, they seemed to opt almost instinc tively for the private property order. Three junta presidents have since struggled with the crippled econ omy. They reduced the number of state-owned enterprises by a few hundred, recast some labor legisla tion, and banned the political activ ity by the powerful labor confederation. Piece by piece they sought to whittle away the excesses of the Pe ronist system and restore some mod eration. All along they, like so many of our politicians, were talking in glowing terms about an early return to private enterprise under govern ment supervision.

The military was deeply con vinced of its historic mission to lead the nation to regeneration after so many years of party corruption and ineptitude. There was to be no re turn to civilian rule before the 1990s. But "to strengthen future demo cratic institutions" President Videla established a Ministry of Planning which, in consultation with various economic and intellectual sectors, was to develop a "national recon struction plan." It would be difficult to distinguish the Videla plan of reconstruction from similar plans designed by Juan Peron, or for that matter, by any dictator anywhere in the world. It provides for more government plan ning, more ministries, more bureaus and bureaucrats, and more govern ment power over the lives ofindivid uals. His thought and language are those of Caesars who lack all under standing ofthe nature offreedom and a free society and who have lost all respect for humanity .

Surely, to facilitate a speedy eco nomic recovery from the morass of radical government intervention is a difficult and demanding task. It 1982 ARGENTINA ON THE BRINK 721 would tax the ability and courage of any statesman and leader. But the Argentinian junta hardly made a beginning. In fact, it made matters worse by utterly destroying the Ar gentinian currency and by launch ing a disastrous war. While the government was nib bling at labor unions because of their potential threat to junta power, it indulged in the worst inflationary practices seen in a generation. It doubled its quantity of money nearly every year and, in the end, en meshed the economic lives of its peo ple in the most stringent govern ment controls. The exchange rate moved from 140 pesos to the dollar in 1976 to an estimated 15,000 to 1 in March 1982. Incredible Ingenuity Economic life in Argentina has never been more disrupted, dis torted, and disorganized than it is today. If it were not for the incredi ble ingenuity and hard work of the Argentinian people who learned to survive on black markets and in the economic underground, using for eign money, especially U.S. dollars, human survival would be at stake.

In the eyes of visitors from the U.S., the working people of Argentina are performing a miracle that deserves admiration. The country is in the grip of its worst economic crisis in decades. Argentina has a record $39.1 billion of foreign debt and lacks the finan cial resources to meet the obliga tions falling que this year. The cen tral bank is negotiating with foreign creditors seeking extensions and new loans to meet! interest payments. In this respect Argentina has joined scores of underdeveloped countries in Africa and Asia. The junta government has turned the Falkland Jslands debacle into a national disaster more serious by far than that inflicted by the British troops. President Reynaldo Bignone, a retired army general, was named president on' June 22 following a government shakeup. While main taining the old nationalistic position toward the iFalkland Islands, he abandoned aU pretense of return to a market order. He dismissed the brilliant economist, Roberto Ale man, who was struggling to keep government expenditures under control, and appointed Jose Dagnino Pastore Economic Minister. Pastore promptly opened the floodgates of inflation, introduced multiple ex change rate~, fixed interest rates, boosted all wages, and devalued the peso by 22 ,per cent. He thereby dashed all hopes for an early recov ery.

The Falkland Islands War War is a $ad game some people love to play. It is nothing less than a temporary repeal of all reason and all principles of virtue. Surely, the 722 THE FREEMAN December Argentinian junta that ordered the military occupation of the Falkland Islands at the beginning of April re acted to a minor incident involving a small group of Argentinian work ers on one of the islands. It reacted by landing a full-scale invasion and incorporating the islands into the Argentine state. But the junta com pletely misjudged the British reac tion, which was swift and efficient in contrast to the Argentine mili tary operation, which proved to be ill-planned, ill-prepared and ill-exe cuted. The Argentine debacle illus trated again the old maxim that a military force that is preoccupied with running the political, social and economic affairs of a nation loses its ability to serve the purpose and jus tification for its existence.

The generals may have had ur gent domestic reasons for their de cision to occupy the islands. The country was sinking ever deeper into the morass of hyperinflation and economic disintegration caused by inept economic policies of successive junta presidents. The Peronistas and their labor unions were flexing their muscles, openly demonstrating against the military regime. There fore, some diversion was needed to reunite the nation on a popular is sue, and give the junta more time. President Leopoldo Galtieri gam bled as a general-and lost. It is especially sad that the junta adventure was applauded by the vast majority of the Argentine people. Even most intellectuals who other wise observe and analyze Argenti nian problems rather dispassion ately, proudly acclaimed the return of "our Malvinas." Their arguments in support of invasion invariably were taken from history: Spanish sailors discovered the islands, and "we" are the legitimate heirs to Spanish sovereignty.

A court of law surely would need to investigate the succession of claims. But man's contemporary af fairs are not shaped by distant his tory. In the name of history nearly every government may lay claim to foreign territory-the Spanish gov ernment to Argentina and the Ro man City Government to Spain. Above all, the American Indian tribal chiefs may reclaim all the Americas, including Argentina. A Claim Deeply Rooted in Nationalism and Collectivism The popular notion that the Mal vinas are "ours" reflects a deeply rooted blend of nationalism and col lectivism. In no sense of the word can an Argentine citizen claim own ership rights over the property of the islands. Even if his government were to rule the islands, and he would be taxed heavily to sustain the rule, he would have no property rights what ever. But he would be poorer indeed. Long before the invasion the Ar gentinian government was spending 1982 ARGENTINA. ON THE BRINK 723 considerable funds taken from Ar gentinian taxpayers and inflation victims to subsidize the 1700 Falk land Islands' residents. It built an expensive runway at the Port Stan ley airport, financed two weekly flights of big transport planes be tween the mainland and the islands, rendered airmail and air freight ser vices, and installed an expensive ra dio system to guide the air traffic to and from the mainland.

But these expenditures were mi nuscule when compared with those the Argentinian government would have incurred if the islands had be come Argentine. They can be sur mised from the proposals submitted to the British government long be fore the invasion, billion dollar pro posals that would have delivered the islanders into the grip of Argentine statism and socialism: Establishment of a branch of the Banco de la Nacion Argentina, Establishment of a branch of the Caja Nadonal de Ahorro y Seguro, Financial support for housing construc tion by the Banco Hipotecario Na cional, Establishment of fish breeding stations by the Argentine Ministry of Culture and Education, Installation of a radio station, Establishment of an oceanographic re search station by the Universidad Na cional, Installation of a satellite station, Installation of a government telephone and telegraph service, Installation ofa government breeding farm, slaughter house and cold storage plant.

And as if to inject nationalistic linguistic coqflict the government proposed to establish a bilingual school managed by the Ministry of Culture and, Education, create a professional training center and a school of arts and crafts. All that for 1700 islanders! No friend of individ ual freedom anywhere would want to extend such a system to any part of the world. A Flawed Arr,ngement To many Argentineans the present island system is naked colonialism and imperialism that should be abolished immediately. Ofcourse, the terms are ta~en directly from the armory of Marxism-Leninism and imply the extension of the labor contract system to foreign countries. Although m~st governments and their UN delegates assembled in New York may d~sagree, the labor-con tract market:system constitutes the most productive system on earth, bringing fortll the highest wage rates and levels of ~iving. The alternative is a political:command system that assures misery and poverty for all.

And yet, in the heat of debate it must not be overlooked that the Ar gentinian pepple have good reason for complaints about the Falkland government.: Throughout its 149 years of adrr).inistration it has con724 THE FREEMAN December sistently denied basic human rights to all people, except natives, which has been exceptionally painful to Argentineans. Argentineans are not free to move about the islands, own real property, buy or build farms, houses, apartments, hotels, office buildings, or sail and fish in the wa ters of the islands. They are treated as alien outcasts in a country they consider their 'own. The Japanese who could not con quer Hawaii in World War II are free today to move about Hawaii, to own real property, to buy or build hotels, office buildings, apartments, and whatever their hearts desire. They do not have political rights, but en joy basic human rights that make political rights irrelevant and im material. Even aliens who enter the U.S. illegally are guaranteed "due process" under the law. In fact, a re cent Supreme Court decision ex tended all constitutional rights to il legal aliens. That is, no government can make or enforce any law which abridges the privileges or immuni ties of residents, nor can any gov ernment deprive any person of his liberty or property without due pro cess, nor deny anyone the, equal pro tection of the laws.

Basic Human Rights If the citizens of Argentina were to enjoy such basic human rights in the Malvinas, all causes for alien ation and conflict would disappear. The issue of sovereignty over the is lands becomes unimportant where the basic rights of every human being, regardless of race or nation ality, are safeguarded. Sovereignty does not matter where every indi vidual can move about freely with out government permit, license or visa, where he can freely exchange his goods and services, engage in a business of his choosing, sell his la bor or buy labor, own land and structures, or cultivate the soil. To paraphrase the British philosopher, John Stuart Mill, he is free to pur sue his own good, in his own way, so long as he does not attempt ·to de prive others of theirs or impede their efforts to obtain it. To return to the prewar conditions in the Malvinas is to perpetuate the danger of conflict and deny the basis for a permanent and peaceful settle ment. Self-determination is flawed where it aims at denying basic hu man rights to everyone but a privi leged few. Self-government for 1700 islanders is neither democratic nor peaceful when it deprives millions of neighbors of their human rights and impedes their efforts to pursue their interests.

The solution to the Malvinas cri sis cannot be found in a mere change of sovereignty, or a United Nations trusteeship, or a multinational force that guards and guarantees the is lands' tranquility. Mrs. Thatcher's plan of some kind of elected self-gov1982 ARGENTINA ON THE BRINK 725 ernment for the islanders offers no lasting solution, nor does Argentine ambition of sovereignty which is state power. Lasting peace, which is the natural state of man and the de sire of all the peoples, depends on a universal reduction of such powers. It springs from individual freedom. Towardthe Brink Argentinian history, like any other national history, can only be under stood as a history of ideas seeking realization through individual ac tion. Political, social and economic ideas slowly filter into the minds and consciences of men and govern their actions. Ideas are men's great guideposts that lift civilization or destroy it.

The intellectual history of Argen tina has been similar to that of all other Western countries. Toward the end of the 19th century, the media of education and communication, the schools, churches, and political par ties were teaching and preaching the virtues of nationalism, which is de votion to the interests of the nation and its government. Later they added the doctrines and theories of social ism in all its variations and colors. By the time the Radical Party came to power, in 1916, most Argen tineans were espousing Marxian no tions of dialectical materialism, of class conflict and class wars, of labor exploitation by businessmen and capitalists, of concentration and monopolization. A few years later many welcomed Lenin's line of thought about colonialism and imperialism. All classes ofisociety, but especially the educated; classes, were imbued with the urgent need of social and economic ref<1>rm. Even those who passionately )attacked world com munism because of its atheism em braced the ideas of the Communist Manifesto and the program of the Communist International.

rhe generaas, most of whom came from middle-class families, attended the same sc4ools, belonged to the same church~s, and were influenced by the same political parties as all their countrymen. Their social and economic views never differed one iota from those of others. Even their political faith. in political salvation through stropg leadership differed from that of' party politicians only on the matter of who the savior was to be. They, too, believe in every point of the Communist Manifesto. When I interviewed the commanding gen eral of the War Academy for senior officers, in April, 1982, he promptly rejected the: suggestion of elemen tary courses in market economics and the private pi;operty order on grounds that "both sides must always be pre sented." In smort, he felt at sea with out mainstream economics, which is socialist, Peronist, and Marxist. Knowledge and education are the only cure for/the political, social and economic diseases the modern world 726 THE FREEMAN December has engendered. But people who do not know and cannot find the dis ease cannot develop a remedy. If they, as if to make matters worse, prevent others from searching, the disease may indeed become fatal. But this has been the Argentinian policy for more than half a century. Public education on all levels has been state education, that is, by the state, of the state and for the state. Compet ing private and parochial schools have been severely restricted, regu lated, and often even outlawed.

All PartiesProposeGovernment EducationalPrograms The educational programs of the political parties reveal a sad state of intellectual affairs. The important Radical Party (UCR), which has been in power longer than any other party, is proposing to raise educational outlays to 25 per cent of the govern ment budget. It would make govern ment education obligatory through first years of high school. Private ed ucation would be controlled severely and diplomas and licenses be awarded only by government insti tutions. The Democratic Socialist Party (PSD), too, would boost government expenditures for government edu cation, limit degrees, titles and li censes to state universities, and make all teacher training and professional education the exclusive function of the state. It differs from the UCR program only in that it would em phasize sex education in all schools. The Popular Christian Party (PPC) would raise government expendi tures by 25 per cent, reshape the public educational system to the needs of the community, grant state subsidies to parochial education, and restrict or outlaw all profit-oriented education.

The Intransigent Party (PI), while advancing a similar program, would introduce higher education without budgetary restraint or limitation. The Progressive Democratic Party (PDP) would raise government ex penditures for government educa tion to 4 per cent of GNP, build enough schools to cover all national needs, and use the mass media to offer civic education to the general public. The Integration and Development Movement (MID) would "fortify" government education and promote national culture in order to strengthen national traditions. (Cf. Ricardo Zinn, Argentina, Robert Speller & Sons, N.Y., N.Y., 1979, p. 187-189.) There is not one political party in Argentina that favors a free ex change of ideas or open competition between different educational sys tems. No eminent politician, gen eral of the armed forces, or leading clergyman openly urges a repeal of countless strangling restrictions and bureaucratic controls over the edu1982 ARGENTINA ON THE BRINK 727 cation of the people. The few voices for individual freedom are drowned out by the deafening propaganda for statism and government omnipo·· tence.

Argentina is hovering on the brink of political and economic disaster. One-third of the Argentinian elec torate long for a return of Peronism, another third are eager to cast their votes for the Radical Party, and most others would lend their support to Government Intervention democratic socialism, Christian so cialism, or even communism. But it would be a dreadful mistake to wal low in misery:and despair. After all, Argentina is a Western society that springs from j the roots of Judeo Christian civJilization, with divine sparks of irnepressible individual ism. A few clear voices are heard throughout the land. No political force on earth can forev~r suppress those voices. i IDEAS ON LIBERTY IN A NATION without a thriving business community, private wealth is generally stored in vaults, or used in conspiquous consumption, or in vested in real estate, or placed with business icommunities abroad. But where a country's private business is not su~ject to Procrustean mea sures of control, this private wealth is less likely to be shipped abroad, buried, or otherwise diverted into circuits of low economic potential. It is likely to come out of hiding, or to be br<j)ught home from abroad, particularly since the prospects of profit are ~ormally higher in a poor country if the political environment is good.

Private enterprise never expires, even under the most rigid controls. But much of it goes to surreptitiously conducting the current of eco nomic energy under, round, and through tile backdoor of the control system, in such forms as smuggling, black marketing, personal influ ence, and straight corruption. The fact that a high degree of control, and; a low rate of energy flow, occur together, is explained by Socialistic gov,ernments as necessary but temporary. The low energy flow, they say, requires controls so that what little there is shall not be wasted. But it qoes not seem likely to be temporary. The converse side of a Five-Year Brogram for planned growth is five prospective years of economic repression. The more the state plans, the less practice the private citizen gets in planning. HAROLD M. FLEMJNG, States, Contracts and Progress RobertJames Bidinotto A Guideto Principled Self-Defense A FRIEND approached me recently, concerned about a course he was taking that was being taught by a Marxist. My friend had been as signed a speech topic: "Who should own/control the workplace?"

My friend accepts the free market philosophy, and knew of my special interest in such issues. He wondered if I had any information that might help him prepare a talk. A week or two later I gave him a written analysis of the question. He seemed somewhat astonished at its seeming complexity, and intimated that he felt inadequate to achieve similar results on his own. He sug gested that since I had read more than he had on such topics, I had a specialized knowledge he could not match. This got me thinking. Actually, Mr. Bidinotto is a freelance writer in Milford, Massa chusetts. 728 most of my argument had rested not upon vast scholarship, but upon a reasoned analysis of the question it self. Certainly a knowledge of the free market literature is extremely valuable. But while some might have the time and inclination to acquire such an education, most busy people do not; and some, such as my friend, are inclined toward individualism and capitalism based upon limited reading, general experience, and "common sense." These people feel vulnerable to technical arguments from collectivists who are educated specialists in the humanities.

Can an engineer, housewife, or computer operator effectively de fend himself against professors of economics, political science, and philosophy? Can the individualist layman hope to hold his own against the collectivist professional? If successful intellectual self-deA GUIDE TO PRINCIPLED SELF-DEFENSE 729 fense depended upon education alone, the amateur would always be a pushover for the professional. But all of us share the capacity to reason. No matter how well informed a col lectivist may be, his doctrine re mains irrational; so no matter what the relative scales of knowledge, the individualist need not be over whelmed by a collectivist oppo nent-ifhe employs valid principles of thinking. It is not possible to discuss all such principles here. So I shall discuss just a few, then illustrate how I applied. them to my friend's speech topic: "Who should own/control the work place?"

1. Define your terms. It is astonishing how many dis cussions are based upon concepts whose meaning nobody bothers to specify. Most people literally "don't know what they're talking about." Their concepts-the building blocks of every statement-are left open to implication. Politicians are especially guilty of this, since their careers are erected upon a foundation of ambiguity. A classic relic in their verbal collec tions is "the public interest." Speci fying nothing, it permits anything. One of the best defenses against being steamrollered is to require an opponent to define his terms. A good definition distinguishes a concept from all others, by (1) identifying the factual basis of the abstraction, (2) specifying the] context in which it arises or applies, and (3) naming the essentials, the fundamental charac teristic(s), upon which most of the concept's other characteristics de pend.I For example, a good defini tion of "justice" is: the act of evalu ating human character and/or actions solely on the !basis of factual evi dence' by reference to an objective moral standard. This states pre cisely the referents, context, and fundamental essence of '~ustice" and thereby distinguishes it from any other virtue,! such as "honesty"

(which is not'limited to character evaluation, i.el., a social context). Since facts" context, and funda mentals are the very elements ab sent from collectivist doctrines, the act of defining terms may be suffi cient to dem~lish most arguments based upon th~se doctrines. 2. Determine the context. Is the discussion about politics, economics, or philosophy? Does it concern factual knowledge (cogni tive concepts):or evaluations of facts (normative concepts)? Is it a funda mental issue, or does it rest upon some moreoasic, implied premise that must be addressed first (Le.,does it involve "question begging")? One must determine the context of the discussion by answering such ques tions as these. In cognitive issues, conclusions 730 THE FREEMAN December depend entirely upon logical pro gression from established facts. The chief responsibility is to determine the relevant facts, then to reason from them, admitting no logical con tradictions.

Normative issues are built upon cognitive concepts. The tipoff to any normative or ethical issue lies in its (implicit or explicit) advocacy of some action or choice; frequently, norma tive premises signal their presence in a discussion by the words "should" or "ought" ("There ought to be a law ... "). There is nothing wrong with ethical advocacy as such. The dan ger begins when ostensibly political or economic debates "beg the ques tion" of a moral standard, as they almost always do. The reason is that political discussions are, at root, dis cussions of social ethics; and most people are either unwilling or un able to specify and justify their un derlying moral premises. Ethical arguments-open or dis guised-must be identified and val idated. This means they must be tied to basic facts of human nature and of man's basic relationship to exis tence. This is true of any alleged "political" question which involves advocacy of some action that "should"

or "should not" be taken. No advo cacy position can be taken seriously that evades the answers to the ques tions: "By what standard?" and "For what purpose?" Failing. an intelligi ble response to these questions, a person's position may be dismissed out of hand, as an arbitrary asser tion. Unless the context of discussion is clearly established, it will be impos sible to know which principles can be applied to resolve· the issues in volved. 3. Establish the burden of proof. Once definitions and context are determined, the burden of proof can be established. That burden always rests with the person asserting or advocating something (the person "taking the positive"). The person to whom an opinion is merely asserted, without sufficient evidence and proof, is under no obligation to demon strate or disprove anything: nobody is obligated to "disprove" an arbi trary assertion ("prove a negative").

Whoever is making the case, whether collectivist or individualist, bears the burden of proof. Since an swering a question usually requires an asserted position from the person answering, he assumes the burden of proof. Thus in any discussion with a knowledgeable adversary, it is wise to follow the example of Socrates and ask a lot of questions. Two excellent questions are: "What do you mean?" and "Why?" The first forces an opponent to clarify his terms; the second forces him to jus tify his position. Both, used repeat edly, can reduce a vague discussion to clear-cut essentials while keeping 1982 A GUIDE TO PRINCIPLED SELF-DEFENSE 731 an opponent under the burden of proof. 4. Beware of smuggled-in "con tradictions in terms." One ofthe most prevalent and least understood logical fallacies consists of using concepts while denying their very roots and meanings. 2 A classic political example is Proudhon's infamous statement that "property is theft." Observe that the word theft has meaning only if there is a legitimate concept of property: "theft" means "the forcible acquisi· tion of somebody else's legitimate property." [fthere is noproperty, there can be no theft! Thus Proudhon's statement is a contradiction in terms.

The concept "property" is smuggled into the meaning of the concept "theft," while Proudhon denies that property even exists. Such sophistry has become a standby technique in philosophy discussions. If an opponent finds himself losing a debate, he may fre quently challenge the very grounds of debate, proof, and even thought itself. There are many modern philosophical doctrines that claim to "know" that knowledge is impossi ble, that claim to "disprove" the va lidity of logical proof, that deny the "reality" of existence, that claim no "awareness" of consciousness, that "reason" to the conclusion that ra tionality is an illusion, and so on. Every such assault on the foundations of knowledge and rational de bate entail smuggled-in "contradic tions in terms": they utilize the concepts they ~re denying. And such aS$aults are also self-in clusive, Le., they must include the person stating them. To argue against reason, logic, existence, awareness, and knowledge, means: to concede that oneself and one's po sition are devoid of any of these things.

All concepts and principles are structured in $. hierarchy. Make sure that an educated opponent's flowery prose does not bloom while he yanks up its roots. 5. Demand logical consistency. If concepts are the building blocks of thought, l(j)gic is its mortar. All arguments must be grounded in es tablished facts; and every conclu sion must gtow from these roots without contradiction. This is what we mean when we say: "Prove it!" Contrary tq current academic fad, logic is not some arbitrary system of rules unconnected to fact. It is based in the very nature of reality. All things exist ~n a specific, particular way. And be~use things have a spe cific nature and identity, they can not have a c9ntrary identity at the same time. The system of logic de fined by Aristotle is built upon the non-contradi~tory identification of things. To admit contradictions into discussions is to claim the impossi732 THE FREEMAN December ble, and thus to invalidate one's con clusions.

The ubiquity of irrational politi ~al and economic ideas is largely due to the fact that while they are re quired subjects in schools, logic is not. A good book on Aristotelian logic is a must for anyone serious about principled self-defense. In discussions, the basic approach is to take the opponent's premise to its logical conclusion, or to regress his conclusions back to their logi cally antecedent premises. In so doing, any follies should become ap parent. To summarize the principles: 1. Define your terms. 2. Determine the context. 3. Establish the burden of proof. 4. Beware of smuggled-in "contra dictions in terms." 5. Demand logical consistency. How do these principles apply to my friend's classroom topic, "Who should own/control the workplace?" The first thing I noticed was that the question was "loaded" with smuggled-in premises and assump tions. The word "Who" implies that "the workplace" is up for grabs-that no legitimate owner exists. This begs a question, thereby implying an equal burden of proof upon both support ers and opponents of private owner ship rights. Observe what happens when the begged question is asked: "Should there be any changes in current ownership of the work place?" Now the burden is upon those who would advocate such changes.

But to accept the question as worded by the Marxist professor is to accept the smuggled-in premise that cur rent ownership rights are dubious, and to assume (unnecessarily) some burden of proof. Secondly, the word "should" is a tipoff to a normative (ethical) con text, while the topic appears, super ficially, to deal with a political or economic question. Because of to day's ethical relativism and the ab sence of any agreed-upon morality, it is likely that no answer is going to be accepted as final. The purpose of asking such a question, then, seems to be to spread doubt and uncer tainty about current ownership rights to "the workplace." This is all accomplished by begging the ques tion:"By what moral standard can issues of ownership be resolved?" which helps disguise the essentially ethical context involved. Thirdly, observe the interesting usages of the concepts "own" and "workplace." "Own" (when defined) means "the exclusive right to keep, use, and dispose of something." Yet, as we have already seen, the ques tion itself implies that such an ex clusive right to keep "the work place" under control of its current owners is in doubt. Translated, the question means: "Since the exclu sive right to own the workplace is in 1982 A GUIDE TO PRINCIPLED SELF-DEFENSE 733 question, who should own the work·· place?" The Marxist professor is us·· ing the concept "own" while ques·· tioning its validity. (A clue that even he grasps what he is doing lies in his inclusion of the modifier or alterna tive concept, "control." But every thing I have said about the word "own" is true of the word "control.") It is a smuggled-in "contradiction in terms" -and a most subtle example at that.

As for the term "workplace," it is an ambiguity or euphemism for the concept "capital." Now consider the question. If i.t means: "Who should own the capi tal?"-the meaning is utterly triv ial (Answer: "Those who own it"- ownership being a moral claim of right). If it means: "Who is morally entitled to capital to which some men already hold moral title?"-the meaning, and the point, is utterly absent. If the question means: "Who should take the capital?"-the meaning is utterly clear, and utterly sinister. Remembering that the word "should" is a moral concept, and the idea of taking something from an owner (theft) is an immoral notion, the last interpretation is another smuggled-in "contradiction in terms." But supporting speculation that this is an accurate interpretation of the professor's question is the fact that he is a Marxist. In fact, the only intelligible mean ing of the question is that all currently held private capital is up for grabs, and "should" be redistributed on (unspecified) moral grounds.

That six words can beg several questions, obliterate the burden of proof, leave terms ambiguous, use a concept self-.,contradictorily, and sneak implied moral premises into an ostensibly) political-economic is sue, is a marvelous achievement of some sort. Notice that the foregoing analysis involves no s~ecialized political or economic knowledge, yet is suffi cient to deal with the professor's question. But!knowing that the pro fessor might pretend that all of this somehow "ducked the issue," I pro ceeded to employ a strictly logical analysis on the collectivist position as if the question could be taken at face value. L~t us assume that capi tal is up for grabs, and that our (un specified) motal standard behind the "should" is the collectivist "general welfare." Would a change of capital ownership promote "the general welfare"? ' This switclJ-esthe argument to an economic context. Any proposed so lution to th~ question that would deny private: capitalists the right to own and inv~st capital would make economic calculation impossible, thereby creating an economic chaos that would undermine the "general welfare." Why?

Human well-being is only possible if the economy fills human needs.

734 THE FREEMAN And this necessitates economic cal culation: the purposeful production of goods and services to fulfill con sumer demand. Economic calcula tion is only made possible by prices the signals established by the inter action of the forces of supply and de mand, in terms of money. The means by which these forces interact is competition in the marketplace. The competitors are entrepreneurs, who struggle to control the factors of pro duction, in accordance with con sumer demand. This means they must produce and market what they hope will bring the best return (profit) on their invested (risked) capital. But profit-seeking can only occur in the context of private own ership of capital. Without private ownership, there is no profit motive; hence, no invest ment; hence, no competition; hence, no prices; and hence, no possibility of rational economic calculation. This would create chaos and the harm of "the general welfare."

Without prices, the factors of pro duction must be allocated by decree, i.e., by political instead of economic considerations. Supply and demand forces can no longer interplay; pro duction is severed from consump tion. This means overproduction of the unwanted, and shortages of the needed. There is simply no way to duplicate the complexity of the au tomatic signaling system of market prices; but without private capital ownership, competition does not arise to establish prices, and that system breaks down.3 Thus the contradiction in collec tivism is that collectivist politics (public ownership or control of capi tall"the workplace") necessarily contradicts collectivist economics (maximizing "the general welfare"). The foregoing economic discus sion illustrates how one might pro ceed with a strictly "cognitive" is sue. While some basic knowledge of economic principles was required, exhaustive erudition was not: merely a clear grasp of the hierarchy of the relevant concepts and principles.

The Great Equalizer In the early days of America, the most urgent need was for some means of physical self-defense for the average man, and the revolver was regarded as "the great equalizer" of men. But today, men need the means of intellectual self-defense even more urgently. And the principled man's guide to self-defense-his "great equalizer" - is his power to reason.' -FOOTNOTES1For a most useful discussion of how to define concepts, see Ayn Rand, Introduction to Objec tivist Epistemology (New York: Mentor/New American Library, 1979). 2Described elsewhere as "the stolen concept." Ibid., Chapter 6. 3This argument was formulated by Ludwig von Mises. See Socialism (London: Jonathan Cape: Revised, 1951), pp. 520-1.

Ernest G. Ross To Communicate Ideas-om Uberty THERE'S an old, obscure saying at tributed to an Oregon backwoods man, who, after listening to a flov~ ery speech by a stumping politician, remarked, "I think I'd've agreed with him if I knew what he said!" When confronted with new ideas, most people are like that back woodsman. They will accept con cepts only if they are sure of them. If not, they will continue to hold their old ones-even if they are wrong. In a way, you can't blame them. One should not make it a habit of accept ing ideas he does not fully under stand. To do so prevents the devel opment of any sort of integrated world view, turning one's mind into ,an intellectual feather, forever buf fet~'"t:l bx the winds of fashion and acMr. Ross is an Oregon commentator and writer es pecially concern&d with new developments in human freedom. cident. Whileithere are always those who find such a flighty mental state attractive, the majority of Ameri cans do not. i. They want to anchor their lives to solid ideas. Conse quently, they!will not pull up anchor and drop it in a new location unless the new location is convincingly more secure.

Above any other, this is the atti tude advoca~es of liberty must be prepared to deal with. It is the par amount obstacle to be overcome if one is to sen. people on the benefits of freedom. Therefore, :if one is to persuade people of the value of freedom, the first rule must be: address issues as clearly and cleanly as possible. There is no way you will be an effective communicator of liberty especially to laymen -unless you can put your ow~ ideas into either spo735 736 THE FREEMAN December ken or written language straightfor wardly and unambiguously. If you can't state your own views clearly, how can you rationally expect some one else to understand them, much less accept them? If you can't clearly state what you mean, others will as sume you don't know what you mean-or worse, are trying to fool them. In either case, by using con fusing language, you undercut oth ers' confidence in you. That makes it even more difficult to gain their at tention in the future.

Of course, it is easier to tell people to speak clearly than it is to do it. To do it, and do it well, some simple but crucial guidelines are needed. You must have standards of clarity, standards by which you can objec tively judge your own statements before you present them to others. This will help you eliminate embar rassing errors and pitfalls. Four Rules of Clarity The first rule of clarity in com munication is clarity ofthought. You will never be able to state anything well if you haven't spent some time thinking about it. And the most im portant guideline for obtaining the clear, crisp thoughts that will even tually translate into clear, crisp statements is this: Always ask your self, "What is the essence of what I'm trying to say about this subject?" Using this guideline forces your mind to focus. Focus enables you to weed out those things which are peripheral or irrelevant to the subject matter. This, in turn, gives your thoughts and statements much more efficiency.

Side issues and irrelevancies are like nicks and dull spots on a knife blade; a sharp knife always cuts better. If you're going to try to persuade someone on the virtues of deregula tion' for example, keep your thoughts focused on that subject; don't wan der off into a diatribe on Aristotle's ethics or taking sarcastic pot shots at political opponents-those are subjects deserving their own arena. The second rule of clarity in per suasion is to write and speak simply. Thoughts simply put are more likely to be absorbed. The human mind is an integrating organ; it must put things together one step at a time. Simply-stated thoughts help the mind to do this, presenting neat lit tle mental "bites" that can be easily taken in and swallowed. The third rule of clarity in com munication follows directly from the second: Present your ideas as logi cally, as non-contradictorily as pos sible. If your readership or audience is at all perceptive, contradictions are like a rancid odor on food for thought.

If those to whom you are appealinfg smell a contradiction, they will "'very likely immediately stop sw2iIlowing your arguments. It is as natural for the mind as it is for the/body to balk at the smell of contraminated ma1982 TO COMMUNICA'fE IDEAS ON LIBERTY 737 terial. Succinctly put, in trying to persuade people of the benefits of freedom, don't use arguments which advocate premises or means which undercut .freedom. The fourth rule of clarity derives from the close relationship between thinking and words: Write down your thoughts as often as you can-make it a habit. As the great communica. tor, Jacques Barzun, once said, "the act of writing is itself an exercise of thought." (Simple & Direct, Harper and Row, 1975, p. 118) Writing things down will help you put your thoughts into order in a way impos sible by mere reflection. As Barzun put it, as your thoughts are written down and "are added, one by one, they will so clearly show up gaps, inconsistencies, confusions in the se quence of thoughts-all quite hid den before you wrote-that you will inevitably come to see how writing is an instrument of thought."

Of my four rules of clarity, this has perhaps been the most difficult one to convince people to follow, es pecially those who are not profes sional writers. But the fact is, any advocate of liberty-anyone who in tends to be an active communicator on behalf of liberty, whether he is a layman or professional in another field-will find writing to be a sure way of sharpening the knife-edge of his thoughts, and thereby enhanee his abilities of persuasion. The best argument I can give to encourage people to get into this valuable habit is this: Words are objectified thoughts, thoughts brought into permanent form and laid bare for you to see, whenever you wish, exactly as they were when you first came up with them. Using Examplesand Analogies As smart as we humans are, we cannot hold more than a few items in conscious awareness at anyone time; and we' forget a lot. Writing out your thoughts helps to overcome these limitations. By putting thoughts to paper, our minds are freed to concentrate on new thoughts-without the fear of los ing old ones. It enables us to locate, and rapidly explore, the nooks and crannies and. side-tunnels of previ ous thoughts-and thereby exam ine, compare, unify, and improve them. Writing out your thoughts on liberty-even if no one else ever reads them-will make you a more effective communicator with friends, acquaintances, business associates, politicians, and anyone else you might wish to influence.

While clarity is the cardinal rule of effective communication, there are other major tools which the advo cate of ideas on liberty ought to use: Factual examples. It has been said that nothing persuades like the truth. I would refine that statement to read, "Nothing persuades like the truth backed by concrete examples." If you 738 THE FREEMAN December wish to advocate the truth that lower taxes enhance the freedom of the in dividual, for instance, show specifi cally how this works. You might, perhaps, list all of the things a fam ily could buy-video tape decks, books, better schooling for the chil dren, new furniture, works of art, higher quality food, more clothing with the money it would save from a thousand-dollar tax reduction. Concretizing the truth brings it home to people, turning an otherwise ab stract statement into a living, breathing reality. People do, after all, live in the real world; you must show them how principles of liberty are specifically applied in their world.

Analogies. An analogy is an illus tration of how something works or looks by showing how it is similar to something else. For instance, Isabel Paterson wrote an entire book (The God of the Machine) showing how similar the workings of a free soci ety are to the workings of different kinds of machines. An analogy in this vein would be: Just as a car can only continue to run ifit has an open fuel line and will roll to a stop if the line is blocked, so a market can continue to run only if its trading remains free and open and will come to a stop if trade is blocked. You can make the analogy shorter by using similes and metaphors. A simile would be: When freedom was curtailed, the market rolled to a stop like a car with a blocked fuel line. A metaphor would be: The market was a car, rolling to a stop, its fuel line of freedom blocked. Similes use "like" or "as" to make the point; metaphors are more poetic, saying that some thing is or was something else, even though it's obvious it is really not that thing.

The reason analogies are good, basic tools of persuasion is because they tie something unfamiliar to something familiar by showing their similarities. Again, as with factual examples, analogies bring the point or principle into the real world. The OptimismFactor And now a word about something you won't find in most "how to" books on effective communication. It is an idea tailored specifically for the pur pose of selling liberty. From my ex perience in writing thousands of ra dio commentaries on liberty, I consider this one of the great over looked devices of effective commu nication and persuasion. I call it The Optimism Factor. The optimism factor appeals to people's desire to improve their con dition in life. They will listen to someone who can tell them that. The optimism factor also appeals to peo ple's desire to look up to some thing-especially to achievement and what makes it possible.

To take advantage of the opti mism factor, you must, quite simply, look for and collect success stories1982 TO COMMUNICATE. IDEAS ON LIBERTY 739 stories of the success of freedom. These stories then become a power fqlportfolio with which to illustrate the concrete benefits of liberty. Items in the portfolio can become a special classification of factual examples which inspire, spur, and stimulate your readership or audience. As a whole, I personally believe that speakers and writers on liberty dwell too much on the bad effects of statism (the political system oppo site liberty). Certainly, there is a place for detailing the horrors of cir cumvented freedom. But as someone once said, fear is a poor motivator especially for Americans. The American spirit looks upward and forward; it is a positive spirit. Amer icans like to hear about how to make things right. They will acknowledge horror stories you might tell them about systems which abrogate free dom, but then they will want to know how freedom can do a better job. If you can tell them this-with opti mistic, factual illustrations-you will take a giant step toward winning your case and their minds.

The power of certainty. This is the last of the major points with which I wish to leave you in this thumbnail sketch on effective communication. If you are going to persuade other people of the value of liberty, you must act, speak, and write as though you are already firmly convinced of its value. Naturally, the indisput able prerequisite here is that you are convinced! But, you must also strongly convey this to others. You must be confident in your approach, otherwise, in ways both subtle and overt, you will surely give the per son you're trying to persuade the impression that you harbor doubts about your own position. That is di sastrous to persuasion. If your lis tener or reader does not think you firmly believe im what you're saying, he'll automatically question either your sincerity or the quality of your ideas and evidence. Speak with Conviction So, how do you convey certainty?

There are several ways. First, know your case; knowledge is the best promoter of certainty. Second, don'~ equivocate with lan guage; make your words ring with directness. Third, and too often by-passed, speak in the active voice, rather than the passive. Say, "I believe this," rather than, "This is believed by me." (When you use the active voice, you always give the impression of mov ing forward; the passive voice con notes retreat and even reluctance to assign or take on responsibility.) Fourth, when speaking, practice (into a tape recorder if possible) say ing things firmly, in'a strong, assert ive (but not belligerent or strident) tone. If you are going to do a lot of verbal communication, this speak ing practice will be very valuable.

740 THE FREEMAN December People read a lot into voices. Whether you are born with a good voice or not is irrelevant; people are less con cerned about the esthetics of your voice than with the certainty of con viction behind it. You can and should develop this sound if you will be doing much speaking, especially public speaking. Points presented in a weak, hesitant, or passive manner are points just as well never made; they will simply not be respected nine times out of ten. And finally, one of the best ways of conveying certainty is to practice speaking up. This is most applicable ' to that kind of communication in which we all find ourselves engaged throughout our lives: personal con versations, direct "one-on-one" com munication at parties, business meetings, conventions, seminars, and so forth. Make it a habit of not let ting attacks on liberty slip by. If you disagree with someone, say so. If you do this regularly you will create a deserved reputation as a person "who knows his own mind." This will gain you respect as a communicator of liberty; you will be building a track record of conveying certainty, a record which will carryover into fu ture efforts of persuasion.

Know whom you are addressing. This does not mean you have to have detailed know ledge of everything about everyone you address-it means only that you should be care ful to write or speak in ways you know are likely to be accepted by the listener or reader given his gen eral background. For example, don't use metaphysical technical terms with an audience of lumberjacks, or, conversely, backwoods language when addressing a distinguished group of philosophers. Don't use ex amples, language or anything else likely to be outside the experience of your audience or readership. Above all, always assume that your audi ence is intelligent; talking down to people is a communication killer! Know Your Audience One more word on this subject. When I say to write or speak in ways likely to be accepted by those you address, I do not ever mean to sug..; gest that you should compromise your principles-I simply mean that you are better off not ignoring the cultural, professional, or educa tional make-up of your audience or readers. It means to retain an awareness of (to use a currently pop ular parlance) where those you ad dress are coming from-for it is only by starting from where they are that you will be able to lead them, through effective communication, to where you want them to be.

There are many other, more de tailed or specialized points about ef fective communication and persua sion. But they are basically matters of "fine tuning" the fundamentals outlined in the preceding pages. One 1982 TO COMMUNICATE IDEAS ON LIBERTY 741 could talk about tone, diction, the composition of outlines of articles and speeches, the use of visual aids of various kinds, and so forth. But the purpose of a thumbnail sketch is to provide a handy guide dealing with the things most needed. Without clarity of thought and word, without attention to logic, without the use of factual examples and analogies, without the optimism factor or the power of certainty and an awareness of those you address, all of the fine tuning in the world won't help you to communicate your case for lib erty. Much in the way of fine tuning can be ignored without fundamentally impairing your persuasive efforts; it is the essentials of communication which will, when ignored or forgot ten, be most lik~ly to cause your ef forts to fail. SO,i stick first to the es sentials; they will IQake you into a much stronger advocate of liberty which is, after all, a cause emi nently deserving a strong presenta tion! ® IDEAS ON LIBERTY The Personal Practice of Freedom You can practice what you profess to believe. There never was a sales man who really went to town if he didn't believe in his product enough to use it himself. You can't sell Fords effectively if you ride up to see your prospect in a Chevrolet. You can't sell Camels convincingly with a package of Chesterfields sticking out of your pocket.

Your friends and acquaintances may not always believe what you say, but none will question for one moment the fact that your personal con duct and consistent personal practices speak the truth as you see it. You cannot convince your neighbor by word of mouth that you are a believer in temperance if he sees you staggering around your house each Satur day night. You cannot convince him that you are in favor of government economy and then sign resolutions calling for fe«jleralfunds with which to build your town a bathing beach or even a hospital. You cannot convince him that you believe in economic freedom and independence for the individual and then ask that Washingtol'l underwrite your per sonal or business risks. The first step, then, is to make certain that we actually believe in this thing. We have got to want it enough to practice it personally. If not, the answer is already given as far as we are concerned.

ED LIPSCOMB Robert LeFevre THE ABSTRACTCONCEPT OF HUMAN LIBERTY WHEN it comes to using their brains, people fall into various classifica tions depending on their respective interests. By far, the majority think and talk about people, themselves and oth ers. The focus may range from be havioral examination all the way to gossip. The topic of humanity, either individually or in groups, is fasci nating to most of us and to some will generate so much interest as to pre clude inquiry at any other level. In a number of instan~es, how ever, the events which are promul gated by human beings become a separate level of interest, thinking and discussion. The focus shifts to a degree and human happenings pro vide a stage for concentration and inquiry. The various news media Mr. LeFevre founded and for years presided over the Freedom School in Colorado and has lectured and written extensively in behalf of freedom and the mar ket.

742 concentrate at these two levels. Most of what we hear about and remain aware of in our day-to-day lives moves at the level of people or events. Here and there, a different level appears. It is neither "higher" nor "lower" than the stratum of events but it is different and distinct from it. This is the fascination many find in material things, almost as though they were entities in themselves. It is the'iniser who is so interested in coins that he cannot bear to spend them. Rather, he hoards them all, running avid fingers through them and adoring them as though they were members of his personal harem. It is the engineer, who is so captured by electronic gadgetry, for example, that he can think and talk of little else. It isn't what the gadgets could do that seizes his attention, it is their existence, per se. It is often the art ist who sees in his creations, or at THE ABSTRACT CONCEPT OF HUMAN LIBERTY 743 times, in the creations of others, the be-all and the end-all of human pur pose. People and events may come and go, but artistic creation goes on forever. Whether the musician, the sculptor, or the painter is consid ered, there is a magnetic pull from the works themselves. The only event worth chronicling is the creation of more music, statuary or pictures. The only person worth knowing is he who forms the new.

Most human beings, I may pre sume, have at least a passing inter est in all three strata, but find them selves increasingly drawn to one of them. They are caught up with peo ple, with events or with things, sin gly or in combination. But there is a fourth tier of inter est, and in consequence, a fourth tier of thought. In the Realm of Ideas There is a small remnant of man kind who are concerned with the ab stract. It is in the realm of ideas that their minds flourish and reach ful fillment. While most ask about the who, the when, the what and the where, those who are lured by ideas themselves are challenged and in spired by the why and sometimes by the how. It would be a vain conceit to refer to this meager few as an elitist group, for that provides elevation which may not be deserved. Plato would have been a member, yet his views of the ideal society and perfect jus tice may be th~ source of many of mankind's ills. Karl Marx was clearly inspired 'by ideas and so was Hegel. It would hardly be fitting to award the former with elitist status, and the latter was often so obscure in what he wrote that it has been said that Hegel himself did not un derstand the ideas with which he la bored.

If one may take up boldness with both hands, it might even be pointed out that the greatness of the Chris tian faith is to he found, not so much in the events l'eportedly surround ing the dramatic .life of its origina tor, but in the ideas set forth. The vast num.bers of humanity do not deal with those ideas. They are captivated by events and personali ties. So, with the passing of time, the church and its symbolism, its great art and its inspirational music receive what attention there is and the simple messages, such as "love thy neighbor as thyself," are either forgotten altogether or spurned as nonsense. Who believes that? We have to be practical. Let the govern ment do the loving, I'll take what ever I can get! Minds Wasted The human mind, as we are told repeatedly, is a dreadful thing to waste. I am sorry to say that the po tential mental. power we could be generating is often shunted onto a 744 THE FREEMAN December siding by reason of the direction given to education in our school sys tem. I do not charge conspiracy. But it almost seems that conscious effort is behind what is going on.

The national educational edifice, not yet a state monopoly, gives ev ery possible encouragement to on the-job training, rarely mentioning the thinking that should be occur ring both on and off the job. The government encourages us all to jog. It is a dandy way to encour age a kind of euphoria in which the mind goes into neutral and we im prove our health. Surely, anyone who owns slaves would seek to engender the same result. If slaves are physi cally healthy and innocent ofthought they are more readily made to work and to produce for their masters. This emphasis upon getting a job accompanied by encouragement to go jogging, is not an evil in itself. But, in process, we are becoming a nation only half alert. The country is filled with technicians, athletes, artists and artisans so specialized that it rarely occurs to them that their specialty might become obsolete and they will have to fend for themselves. They presume that the job must be found to accommodate their specialty; they do not fit themselves, the job must be tailored to fit them.

Aside from their respective spe cialties, all have become spectators. We are "laid back," almost in re pose, except when prodded. Never has a people existed which knows so much, and understands so little. How Fares Freedom? With this melancholy view as background, what is the status of freedom in the United States? It is clear that the grip each individual should have over the products of his own labor is gradually slipping over the last knot in the dangling rope. We still look good insofar as speech and press are concerned, if we com pare our situation with conditions abroad in most countries. But eco nomic freedom is almost a thing of the past. The regulators bestride our affairs like the Colossus of Rhodes and few can make reasonable calcu lations for no one knows what the government will do next. What of freedom? Unhappily, it seems to me that there are few who support it for its own sake. The vast number of those speaking up for freedom appear to have a clone men tality. They like to list themselves as supporters of liberty because they admire other individuals who are already so recognized and wish to be like them. "If it's good enough for __ , it's good enough for me." To understand ideas is to cope with ab stractions. But those who function at the level of people-interest rarely take the time to comprehend what freedom is all about.

They understand the broken body 1982 THE ABSTRACT CONCEPT OF HUMAN LIBERTY 745 of a war-victim carried from some battlefield. They know that person has had his freedom violated. They can tell. They see the blood. But they do not see into the heart of their neighbor, who, by tireless effort, great personal restraint and long years of rigid self-discipline has brought a business into existence. They do not recognize his loss of freedom when he is set upon by agents, attacked in the press, brought to trial, ridiculed and smeared be fore his peers for some ex-post-facto failure, such as "excessive" smoke emission. At the time the business was built science hadn't decided that smoke was all that bad. Now he will be fined, pilloried as a vicious, greedy exploiter. He may! lose his business. Or, he may man age to survive by plunging into debt from which he might never emerge. What was his crime? Providing a good that people voluntarily pur chased and, in process, keeping the cost within reason so his customers could benefit by the best then known.

A Concern for Power Who knows about his loss of free dom? Those impressed by personali ties are rarely moved. And few are more fickle. Reputation is built by the adoring masses who think and talk at people-to-people level. And let one cloud of suspicious circum stance arise and their heads pivot like the dandelion turning toward the sun seeking some new personality i.dol on whom to throw their latest doak of fame. Such thinking pro vides no spine for freedom lovers. They see no principles. Popularity and prestige provide the single lure. What is the status of those inter ested in events within a freedom context? These are the lovers of ex citement and their natural arena is politics. Their concept of abstrac tions is often limited to Machiavel lian maneuvering and back door di plomacy. Those concerned with events are most likely to decry the merit of any principle. "Promise them anything, but win," seems to be the universal clamor.

And, having won, what then? Why, then they must keep on winning. Those interested in events are inter ested in power. And once power is obtained, it must be forever-kept and always enlarged and extended. Those who think at this level clearly see the loss of freedom we all experience when other hands than theirs are on the tiller of the ship of state. "Give us the scepter!" they cry. "We will throw out those rascals and provide a government which will en force freedom. We will reward the just and punish the unjust! Only those of us who understand freedom can be entrusted with the power to impose our wills upon all by force. The taxes we levy will be rightful taxes. The regula.tions we impose will be only for the good of Society."

746 THE FREEMAN December At this level, freedom and victory are equated. The positions of the serf and the master of the serfs are jus tified. Each has what he deserves. Focus on Moneyand Profits What of those who find fascina tion of things uppermost in their minds as they consider freedom? Or dinarily, the fascination here tends to centralize and focus on the ques tion of money. Freedom becomes im portant because it means profits. Those thinking at this level usually forget that a free market has its merit because the customer is king. And, as customers rule, it is cus tomer choice that finally determines who will profit and who will lose. A free market is a profit and loss sys tem, with only the customers mak ing the final decision. In short, if one is free, one will have more money with which to buy more things with which to get more money. Here are often found those businessmen who speak from both sides of their mouths. They favor a free market until they face effective competition. Immediately, they clamor for protection against the dollar losses which will now accrue to them. The important item in their thinking is the dollars to be gained rather than the importance of de serving those dollars.

In fine, it seems to me that only that remnant which has taken the time to study freedom as an abstraction, as a body of thought, has any real comprehension of what it is all about. This group, by the very na ture of the human mind, will in the foreseeable future be scant of num bers. These are the thinkers who rec ognize that it is not their ability to be handsome, to be glib, to be ele gant of manner, charming and poised which makes them important. That which makes them important is what they take to heart. They can be rough and crude so far as their exteriors are concerned. But if they compre hend freedom they will be loved, not because they can make headlines or because they know the "right" peo ple. They will be loved because they are lovable; they live without violat ing the freedom of others· and they extend and expand the abstract vir tures of honesty, truthfulness, hard work, fortitude and individual cour age, despite having to act alone on most occasions. In short, they set an example of personal merit and in tegrity with which the latent nobil ity in all of us can happily identify.

These are the same thinkers who will recognize that events, however dramatic and breath-taking, unless they adhere to principles, are per formed almost by rote. There is a certain sameness to be found in all errors, large or small. Only those with principles blaze new trails, the most find excitement in each new cast of characters; yet the drama being 1982 THE ABSTRACT CONCEPT OF HUMAN LIBERTY 747 played is the same old tragedy of er ror. Our relatively free press is still around to give us the key. Here we will find a constant reiteration both in war and in elections. A murder is a murder; rape is rape and theft is theft. Only the names of the partic ipants change. Firm in the center of all such headlined events is the vio lation of the freedom of some by oth ers. Abstract thinkers know this and avoid such karmic repetition for themselves. These same thinkers recognize that success in the accumulation of wealth does not relate to one's ability to grab; but in one's ability to attract the patronage he desires because of the meri t of his offering. Deserved suc cess is awarded like a prize. The fact that it is deserved is more important than the level of attainment, for such success arrives within the bounda ries of freedom.

Human liberty is an abstraction. It is a concept not yet attained in any final way. Indeed, it will probaAlbert Jay Nock bly never be attained as a total con dition, for there will always be mal functioning human beings, just as there are well-functioning children who know nothing at all of any ab straction until they are taught. The abstract concept of human liberty is one of the mightiest and rnost important intellectual attain rnents of our species. It provides us with a comprehensible, visible star of such celestial magnitude that all viho wish can see iJt;. As such, it serves the function of Polaris for those who comprehend its use. You can steer your life by it, even if you cannot reach it. But until you can see it deanly, despite the mist of multi tudes, the storm of events, the scud ding clouds of things, until it stands out stark and bright in your own sky, you will probably find that you are pursuing some flickering lesser pur pose. Should that be the case, the problem is readily resolved. Take a new sighting and steer closer to the full abstract meaning of the word. , IDEAS ON L1BERfY WHEN the historian of two thousand years hence, Qr two hundred years, looks over the available testimony to the quality qf our civilization and tries to get any kind of clear, competent evidence concerning the sub stratum of right-thinking and well-doing which he knows must have been here, he will have a devil of a time finding it.' ... A Remnant were here, building a substratum like coral insects-so :much he knows-but he will find nothing to put him on the track of who and where and how many they were and what their work was like.

Brian Summers WITH unemployment afflicting many communities, political leaders are proposing .that businesses be pre vented from closing their plants and moving to new locations. In several states, bills have been introduced which would require severance pay to laid-off· workers and restitution payments to the surrounding com munity. These proposals have been exam ined by several leading economists, most notably Richard B. McKenzie of Clemson University. Let us ex amine their findings, so we can bet- , ter judge the merits of legal restric- .' tions on business mobility. Mr. Summers is a member of the staff of The Foun dation for Economic Education. 748 Restrictions on business mobility are costly. Suppose, for example, a manufac turing firm in the North is pre vented from moving to the South, where taxes, wage rates, and other business expenses may be lower. This places the manufacturer at a com petitive disadvantage compared with firms in less costly regions. His profit margins decline and his stockhold ers suffer losses. Eventually he may have to close.

In addition, there are hidden costs. With capital held hostage, other sec tors of the economy can't expand. New businesses, new products, and new jobs won't appear because the needed resources are tie~ up in inINDUSTRIAL HOSTAGES 749 efficient production processes. In the long run, restrictions on business mobility lead to greater costs, higher prices, and lower real incomes. Less mobility means less competi tion. When a business firm moves into a region, it competes with local busi nesses and bids up the wages of local workers. Restrictions on business mobility prevent firms from enter ing new areas, thereby reducing competition in those regions. As time passes, competition is also reduced in areas companies wish to vacate. New firms are reluctant to enter a region that may, at some fu ture date, prevent them from leav ing. Taking hostages scares away potential employers. Restrictions on business mobility increase the monopoly power of unions.

When businesses are prevented from moving, the threat ofjob loss is reduced, and unions can increase The Driving Force their demands. The industrial hos tage is at the mercy of the union, while nonunion workers in other parts of the country are prevented from bidding for jobs. In the long run, restrictions on business mobility are futile. If business firms are prevented from moving to II,lore hospitable lo cations, the profi~able opportunities there will be exploited by others. New firms will open and existing firms will expand. These businesses will be able to undersell the industrial hostages. The hostage firms will have to contract or go out of business. As the new firms grow and the hostage firms decline, employment patterns will shift in spite of the re location rules. Brut, because of the dislocations caused by the restric tions on busines~ mobility, the ad justment procesS will be far more costly than woulcloccur in a free and open market. , IDEAS ON LIBERTY THE driving force behind the free market is the enterprise of the busi nessman. He is the man who sees a chance to turn unused resources to account, and produce something out of them which the public will want.

He buys materials, secures tools, hires helpers, and sells his product in the hope of recovering all his costs; including the cost of his own time and the cost of any tools that may be his .... Profits are the business man's return for trying something new and desirable. When it is no longer new, profits stop. Profits are temporary only, but the gain to consumers, investors, and workers is permanent. i HART BUCK, "Freedom to Shop Around"

Ralph Bradford CAPITALISM Hero or Culprit? PICTURE in your mind a large, gross man, with a huge paunch, heavy jowls, wicked, pig-like eyes, and a scowling face. Clothe him in gaudy but expensive garments, decorate his vest with dollar symbols, and drape it with an elaborate gold watch chain. Let him hold an over-size ci gar in a bejeweled left hand, and put a bullwhip in the other. If you want to add a really effec tive touch, let him be standing with one foot on the neck of a prostrate widow in front of the house from which he has just evicted ,her; and let her ragged children be standing by, weeping and wringing their emaciated little hands. Mr. Bradford was a noted poet, writer, speaker and business organization consultant. He returned cor rected galleys of this article a few days before his death on October 17,1982, in Ocala, Florida. 750 I think I need hardly emphasize that I have just taken you for a brief excursion into a scene out of the past-a picture that is rarely in voked in these times, but is not so distant in time as to have lost much of its effect on the mind and heart of those who once saw it. For many years that was the classical leftist concept of "the Capitalist," as rep resented by thousands of cartoons, and as portrayed by anti-capitalistic artists, orators and writers.

And while it has now gone out of fashion as a newspaper stereotype, and while leftist speakers are less blatant in their portrayals, the impression created by that old smear technique lingers in the minds of many. To them "capitalism" is still a kind of dirty word, and the capi talist is generally a reprehensible, if not a monstrous, character.

CAPITALISM-HERO OR CULPRIT? 751 So ... let's spend a little time ex amining some of our pet monsters. Take capitalism. Is it an economic culprit. or a social hero? Good ques tionand I hasten to answer, with stentorian emphasis-neither! To be a hero or a cuIpri t; to be innocent or guilty; to be noble or base;-this requires the attributes of person and personality. And capital ism has neither. It is a device, a socioeconomic mechanism. It has no traits of char acter, good or bad. It is not capable of either guilt or innocence. It is an impersonal piece of economic ma chinery that men have devised and developed, to help them in the con stantly changing, ever evolving pro cess of producing and exchanging goods and services. Managedby Human Beings If you want to say that there are bad capitalists-that there are self ish, stupid, avaricious, shortsighted, antisocial men engaged in capital istic enterprise-you will get no ar gument from me. Indeed, out of my own experience I could supply you with some derogatory adjectives that may not have occurred to you!

But that is just another way of saying that capitalistic enterprise is managed by human beings. Such characters are not bad, selfish, stu pid, avaricious and so forth because they are capitalists, but because they are men. They would display precisely the same objectionable traits under socialism or communism would, and do; for the law courts of the socialistic countries are heavily docketed with both civil and crimi nal cases. As for communism, in the Russian Paradise itself the con trolled press used to inveigh con stantly against the "criminals" who are sabotaging industrial or agricul tural production. 'rfhe alleged crime there is to divert materials from government factories and convert them into luxury; items for sale on the black market. Within a decade after Khrush chev decided to impose the death penalty for such offenses, 163 viola tors were executed by firing squads. And it was soon discovered that peo ple (supposedly good communists) were setting up a !secret knitting op eration to turn out sweaters and shirts. The yams and raw wool were, of course, stolen c-from government vvarehouses, and the promoters net ted the ruble equivalent of over three lnillion dollars in about four years time. The leader and three others were sentenced to be shot, and the others to long terms in prison.

In passing, we might note here that nothing better illustrates the differ ence between capitalism and com munism than what I have just re lated. I do not mean the circumstance of applying the death penalty for a civil offense. I mean the fact that capi talism is an economic system, 752 THE FREEMAN December operating under government and law, whereas communism is the government and the law, to which every commercial and industrial process must be subordinate and subservient. The Development of the American BusinessSystem The thing that has emerged as the American Business System-or as American Capitalism (for practi cally all businesses, even very small ones, are operated on accumulated capitan-this thing we call Ameri can Business is an evolution, with values added as the years have passed, and with further changes and evolution yet to be made, no doubt, as our economy develops and our needs expand. I suppose the best ev idence of its utility and permanence is that it has survived and developed during nearly two centuries of trial and error.

The whole experience of man, of course, has been a struggle, a grop ing upward. His primary physical need, aside from biologic demands, was for food, clothing and shelter. Later, comforts, conveniences and luxuries were·added. To provide this in all its ramifications, man devel oped a set of mechanisms-trade, transportation, markets, money, credit .. Of first importance among these was trade, the great civilizer. Some years ago I wrote and pub lished a little book of verse that I called "Heritage." It was my effort to express in metrical measures something of the physical, moral, religious and political legacies that have come down to us from the past. Well, leaving aside its poetic mea sures, let me summarize here the guess I made in it as to the real ori gin of the thing we call trade. One day a hairy hunter staggered home to his cave, under the weight of a small venison-happy to have provided some food for his cave and its inmates, but distraught because, in killing the deer with a well-aimed arrow, he had broken his last flint head, and must now spend a lot of time and effort to find and fashion another to replace it.

His neighbor, however, had a dif ferent kind of problem to worry about. With all the instincts and needs of a good hunter, he was how ever, lame from a broken hip, and could not go afield to hunt big game. Instead, he had to content himself with wild fruit, and with easily caught small fish, for food. This handicap, however, allowed him plenty of time to sit before his cave and chip pieces of rock into flint heads-an occupation at which he had become rather expert. As his hunter friend drew near, he had sev eral such flints all shaped and ready to become spear or arrow points. But ... he had no food; and he was hun gry! And then, suddenly: 1982 CAPITALISM-HERO OR CULPRIT? 753 The thought elusive that had burned With smoking smudge, remote and dull, Within each thick and troubled skull Burst forth at last in vocal flame. Each gave a start, and then a shout Of wonderment; and each held out, The one his flint, the one his game, And thus a mighty force was sired.

Man's life would never be the same, Each gave the thing he least required, And gained the thing he most desired! The Process of Exchange Well ... in some such fashion the principle oftrade was discovered, and a first long step was taken toward civilization. For that (or some expe rience like it) was the beginning of specialization, which was the con venience under which individuals no longer had to supply with their own hands all they needed, but each could specialize in what he did best, easi est, and with most pleasure. This gave to those who wanted it freedom for leisure; and with leisure, even a little of it, came time to wonder, to think, to dream, to question, to doubt, to createin short, to begin to be civilized. That was trade-exchange; and it is still at the heart of business. It has almost infinite ramifications finances, credit, production, distri bution, salesmanship, advertising, competition, legal observances and restrictions,-but it comes down fi nally to an exchange between two -people.

The two cave men of my little po etic fable stood face to face. In mod ern commerce th~ original producer and ultimate consumer almost never see each other .•A score, maybe a hundred, intermediaries may stand between them. But the principle and the results are the same. Namely, Mr.· A has produced something far in excess of his need for that particular thing. He re ceives tokens for the time and skill he has expended in producing the thing. These tokens are called money. Another man, Mr. B, has done the same thing with ·someother product. On the open market each exchanges his tokens-his money-for what he needs of the other's product,-and so do millions of others,-with some grumbling, some cheating, some chiseling going on, no doubt; but with general satisfaction, benefit and convenience to all concerned. Some years ago I saw this graphi cally illustrated. A television com mercial was extolling the superior grade of cotton. in a product being advertised. It showed two men in a raw cotton wareroom-a seller and a buyer. Many samples ofcotton were spread out on tables-handfuls oflint that had been pulled from bales in a distant warehouse, each sample tagged by number to its. far-away parent bale.

The seller demonstrated the qual ity of the various samples-long staple, freedom from dirt, etc. After 754 THE FREEMAN some haggling back and forth as to price and number of bales available, the buyer said okay-and the deal was closed. And as the scene closed, I remarked to my wife, who hap pened to be with me, "Multiply what we have just seen by a thousand, and you have that mysterious thing called the cotton market." Back of each of those men was a small army-farmers, truckers, weighers, graders, ginners, com press men, railroaders, weavers, spinners, salesmen-and hundreds more. But the whole business was built around the point where two men strike a bargain for X bales of cot ton. That is trade; that is business; and The Businessman's Morals that, in these modern times, is capi talism. Business is more than a store, or an office, or a bank, or a stock exchange. It is the whole, vast, infi nitely complicated yet essentially simple matter of exchanging the ex cess goods and services provided by a million John Does, for the similar excess of other goods and services produced by a million Richard Roes to the benefit of all.

Finally, it is summed up in a cou plet from my little poetic analysis: Each gave the thing he least required, And gained the thing he most desired. These men are capitalists. What about your capitalist? Is he a hero, or a culprit? , IDEAS ON LIBERTY BUSINESSMEN are a cross section of the whole society, neither more nor less moral than the whole. The function of business is to feed and clothe and house and serve the people. It could do a better job if it were freer to meet that responsibility, with less lecturing and backseat driving by the innumerable army of monitors of business. Let the whole people share in carrying the conscience of society. There is an inclination to believe that when an action is contem plated, two alternatives will present themselves-one clearly labeled "Right," and the other "Wrong." Actually, there may be a choice of several courses of action, each of which has elements of moral sanction and other aspects of doubtful propriety. In short, we do not have just black and white indicia to guide our moral instinct, but also a large area of varying shades of gray. It is in this setting that a businessman must decide. He is called upon continually to exercise managerial judg ment,· not only in the economic zone, but in the ethical as well.

FRED DE ARMOND A REVIEWER'SNOTEBOOK JOHN CHAMBERLAIN TheEconomy •In Mind THE double entendre in Warren T. Brookes's title, The Economy in Mind (New York: Universe Books, 381 Park Avenue South, New York, N.Y. 10016, 256 pp., $15.95) is presum ably intentional. Quite literally Mr. Brookes, a former Boston business man who has recently set up shop as our most lucid economic columnist, means that wealth starts with ideas in people's heads. This truth, unfor tunately, is not at all apparent to the majorities that control our des tinies. So, with the future of the economy in mind, Mr. Brookes pa tiently points out to the erring mul titudes certain facts which, if acted upon, could restore us to an old American heritage of free choice in plentiful circumstances. The significance of the first mean ing of Mr. Brookes's title is particu larly obvious from the author's own Massachusetts vantage point. All along Route 128 outside of Boston little companies exploiting the new knowledge that comes out of elec tronics and the computer have grown fat. The so-called high tech origins of these companies are in the Amer ican university world as exemplified by nearby institutions such as M.I.T., the University. of Massachusetts, Boston University, Boston College and (though Mr, Brookes has a low opinion of certain Harvard profes sors of political science) Harvard.

High tech comes out of the labora tories and off the blackboards of chemists and physicists-it is pre eminently of the mind. The money that is to be made from the proper application of such aca demic sources so far outruns what Massachusetts can derive from cod fish and cranberry juice that it is ri diculous to think about it. Even so, the application of mind to the pack aging of cranberry juice in water and airproof paper! containers and the wrapping of fish in plastic bears out Mr. Brookes's thinking. Indeed, as 755 756 THE FREEMAN December George Gilder points out in a fore word, Mr. Brookes's career as a businessman consisted largely of re educating the entire meat industry in its marketing practices. Believ ing in Cryovac, a saran-type plastic package used mostly for frozen poul try, Mr. Brookes showed his col leagues that saran could be used to wrap and box all the appropriate cuts of fresh red meat at the slaughter house, thus doing away with much of the work done expensively by re tail butchers.

Erhard Advises Kennedy The trouble with the politicians who represent Mr. Brookes's state in Washington is that they still think in terms of a retail butcher constit uency. This was not always true of the Massachusetts politico. Mr. Brookes has a great fondness for the memory of President John F. Ken nedy, who believed in the Laffer Curve before Laffer. .Brookes re minds us that it was Chancellor Ludwig Erhard of West Germany who first impressed it upon young John Kennedy that ciItting high marginal tax rates would payoff even more for the masses than the classes. When Kennedy visited Germany in 1961, Erhard, a Mont Pelerin disci ple of Mises, Roepke and Hayek, told him to avoid the British high tax model, to stop punishing wealth cre ation and to cut America's "egre giously high wartime tax rates." Kennedy took Erhard's advice, overriding his own "liberal" advis ers. He made his tax-cut case in words that would "have delighted both Andrew Mellon and Ronald Reagan." When his tax bill passed in the early days of Lyndon John son, before the high spending of the Great Society and the Vietnam War was inflicted upon us, America, in Kennedy's words, "began moving again." Personal savings jumped from an average annual growth rate of 2 per cent to 9 per cent. Business investment went from 2 per cent to more than 8 per cent. Within two years the Gross National Product had increased 20 per cent, and unem ployment had declined by 33 per cent.

Even Walter Heller, the Keynesian economist who had tried to stay Kennedy's hand, had to admit that the tax cuts, anticipating Laffer, had paid for themselves "in increased revenues." Thus "trickle down" trickled out to help government it self as well as the little man strug gling to make it to a higher income tax bracket. A Democratic governor, Edward J. King, got the idea and proceeded to put Massachusetts on the Laffer Curve by reducing local taxes. Un fortunately, Senator Edward Ken nedy and his House of Representa tives colleague Tip O'Neill have failed to appreciate the wisdom,that Ludwig Erhard conveyed to John F. Kennedy a full generation ago.

1982 THE ECONOMY IN MIND 757 The Case For Deregulation A lesson for OPEC What Warren Brookes tries to bring home to his readers in Boston and elsewhere is as old as Adam Smith and J. B. Say, who believed that ideas could payoff in unham pered production if they were al lowed to flow without the attention of the politico in· search of special privilege for a limited constituency. We have seen what could happen to please the almost universal constit uency of automobile owners when Jimmy Carter and Ronald Reagan deregulated oil prices. OPEC has never been the same since. Brookes, not satisfied with the trouble we have already made for the OPEC energy cartel, wants to ex tend deregulation to natural gas sooner rather than later. He notes that three separate studies, one of them by the Colorado School of Mines, show that there is plenty of gas in the continental United States to make oil imports from the Middle East unnecessary once factories and utilities have been converted to nat ural gas or easily accessible coal.

According to Dr. Paul Hastings Jones, "geo-pressured methane" gas in deep Gulf Coast brines could con,. tain 50,000 trillion cubic feet of gas. This is for the far future when we really need to drill deep. There are much more available reserves that would be tapped quickly if the price were permitted to swing free. Mr. Brookes goes to Canada to prove his point. When Canada dere gulated new gas:it completely trans formed western Canada's "lei surely" petroleum industry within two years. The new gas discoveries piled up a surplus that Canada was happy to sell to the United States at enhanced prices, meanwhile freeing oil for gasoline use in cars both in the U.S. and in Canada itself. Reagan know~ all this, but he has not yet mustered the political cour age to do for gqS what has already been done for oil. So we continue to have a natural gas shortage. As William Tucker of Harper's maga zine, quoted by Brookes, puts it, "without the fqreign oil needed to make up for th~ natural gas short age, OPEC would be about as impor tant to the American economy as a Turkish bazaar.'"

Brookes is marvelous when it comes to using. statistics, but he is just as good when he deals in moral categories. No ipdividual or nation, he says at one point, "ever became rich through envy. Nothing useful or constructive was ever created through envy. No business ever suc ceeded through! envy. No jobs were ever created through envy. Envy in reality is the single most impover ishing attitude of thought." This is only one of Brookes's small sermons. A preacher could live off the grist provided by this book for·a year. , 758 THE FREEMAN December THE PATH OF DUTY by Leonard E. Read (The Foundation for Economic Education, Inc., Irvington-on-Hudson, N.Y. 10533), 1982 128 pages - $7.50 Reviewed by Perry E. Gresham Leonard Read has done it again. His new book is called The Path ofDuty. Most tables of contents are dull de scriptive material, but this one is as exciting as the fetching illustrations that appear in a seed catalog. Each one suggests a bright and winning idea which is well-nigh irresistible.

Here they are-all 26 ofthem-fol lowed with a very useful index. 1. The Path of Duty 2. The Purpose of Wealth 3. How To Become a Millionaire 4. Vanity and Virtue 5. The Limits of Knowledge 6. Poverty Has Its Advantages 7. The Enjoyment of Truth 8. Several Facets of Freedom 9. Education For Virtue 10. My Rights Are Your Rights 11. Fearless and Free 12. Self-Improvement 13. Exalting The Common Good 14. Choose Statesmen, Not Politicians 15. The Source of Progress 16. Say "Yes" To Life 17. Kindness and Intelligence 18. Sublime Example 19. Earnest Resolution 20. Attraction 21. A Benefactor To Mankind 22. Govern Thyself 23. There Is Time Enough 24. Sweet Land of Liberty 25. To Aspire After Virtue 26. Greatness Walter Scott inspired the titIe es say with his shrewd remark, If you have no friends to share or re joice in your success in life-if you can not look back to those to whom you owe gratitude, or forward to those to whom you ought to afford protection, still it is no less incumbent on you to move stead ily in the path of duty; for your active exertions are due not only to society; but in humble gratitude to the Being who made you a member of it, with powers to serve yourself and others.

His chapter "The Purpose of Wealth" contains an autobiographi cal insert which suggests the reason for Leonard Read's success in found ing and maintaining the Founda tion for Economic Education. Said Read, My annual salary when General Man ager of the Los Angeles Chamber of Commerce in the early forties was $18,000. One day the head of the coun try's largest insurance company offered me the job of heading their affairs in the seven western states. Said he, "Leonard, I do not know how much you will earn but I guarantee it will not be less than $100,000." I replied, "No, thank you." Read turned down this offer because his life was devoted to the under standing and the promulgation of freedom as a way of life.

1982 OTHER BOOKS 759 Leonard Read's contention is that a person can become a millionaire by thinking a million great thoughts. This is not only a sublimated mil lionaire but an actual one, for these million great thoughts payoff in the marketplace. This little volume continues to range over such interesting thoughts as the advantages of poverty. One of our very great Americans was called to Harvard University where his son was in school. The son was in trou ble. The father, whose name is a household word in America, was outraged by his son's behavior and said to the student, "Why on earth would you do this? Such action would have been unthinkable in my stu dent days." The student answered, "Dad, I did not have the advantage of being poor." For Read one of the great values of the philosophy of liberty is the en joyment it brings to the people who attempt to practice it. There is noth ing grim and dour about Read's eco nomic philosophy. No one would have ever called ·economics "the dismal science" had Read been the princi pal writer at that time. Liberty and truth are to be enjoyed-not en dured.

In chapter 8 Read reaches back to John Stuart Mill who says, "T}:1eonly freedom which deserves the name, is that of pursuing our own good in our own way, so long as we do .not at tempt to deprive others oftheirs, or impede their efforts to obtain it." That genius who wrote so clearly about liberty was so schooled that he studied himself into a contradic tory socialist viewpoint. Fortu nately, his great book on liberty makes amends for his other mis takes. One particularly helpful passage in The Path of puty' has to do with the penchant of 4mericans to choose second-rate people for high public office. Leonard Read uses Burke for his opening statement in chapter 10 and proceeds to. show how we can stay free in spite of the politicians. There is a destiny above and beyond us which brings, us back to liberty time and time again. One of my best friends in his later years said, "When I was young, I judged people o~ the basis of what they could do. Now that I am old, I judge them on the basis of how kind they are." Leonard Read's little book is a shining example of his kindly personality. He has no time to put people down, but only to identify the best in those around him in order that they might: be inspired to nob ler things.

The book concludes with a series of 15 quotatiolls pertinent to the qualities that. mark a pilgrim through this life with greatness. In this Read has performed the func tion that Plato ~entioned for every great teacher, which is to "hold be fore the young, a vision of great760 THE FREEMAN ness." This little book, The Path of Duty, does just that and each reader will be inspired. THE OMINOUS PARALLELS: THE END OF FREEDOM IN AMERICA by Leonard Peikoff (St~in &Day, Scarborough House, Briarcliff Manor, N.Y. 10510), 1982 383 pages - $16.95 Reviewed by Robert James Bidinotto GERMANY was the "land of poets and philosophers" -an educated, indus trialized, civilized nation that took pride in its artists, thinkers, and culture. Yet it first appeased, then elected, then obediently followed a man who led it into a global, sys tematic campaign of aggression, racism, horror, and mass extermi nation that defied all reason, values, and precedent.

Dr. Peikoffs thesis is that the seemingly incomprehensible mad ness of National Socialism seized Germany not in spite of, but pre cisely because of, her "poets and phi losophers." The "ominous parallels" are that similar ideas-and the cul tural consequences-are sprouting in America today. , It is a sobering thesis, and controversial: few readers, even those sup porting the free market, will fail to be challenged by at least some of Dr. Peikoffs indictments. As the chief spokesman for the late Ayn Rand's Ojectivist philosophy, he attacks some popularly accepted philosoph ical and moral ideas. But therein lies much of the book's value. Nobody can come away from this work without a better grasp of how ideas rule the practical lives of men, and without a deep re-examination of his own basic convictions. Perhaps the most impressive as pect of Dr. Peikoffs analysis is its scope. It is a wide-scale synthesis of the history of certain philosophical ideas, and their cultural manifesta tions, in both the Old World and the New. Among the fields traversed are the arts (from music to architec ture), science, religion, political and economic theory and history, educa tion, psychology, even cult fads, in both Germany and America. The writing is clear, colorful, and well organized; and the many subjects are always linked by reference to a few basic principles.

Dr. Peikoff concludes his book with a short, systematic summary of the Objectivist philosophy, a neo-Aris totelian theory offered as an anti dote to the doctrines he has indicted. Even those who might disagree will find within these pages the best brief condensation of Ayn Rand's system in print. @ Index THE FREEMAN-Volume 32, January-December 1982 Prepared by BETTINA BIEN GREAVES of the Foundation staff NOTE: In page references, the number preceding the colon designates the month, those following refer to pages. All articles have at least three entries-author, subject, and title-except in a few cases when title clearly indicates subject matter. Books reviewed are listed on page 768. A ABSTRACTconcept of human liberty (LeFevre) 12:742 747 ADAM SMITH'S economics of freedom (Montgomery) 1:47-54 AFRICA Cut-throat opportunities (North) 6:347-364 First-world wealth and third-world poverty (Davis) 11:678-684 AMERICAN idea (Bradford) 10:627-631 ANARCHY Elements of a fair system of taxation (Foley) 9:528 541 Rothbard's liberty reviewed (Hospers) 8:468-484 Source of sovereignty (Foley)3:167-175 AND now for some good economicnews! (Shannon) 1:12 14 ANDERSON, Bill Deficits are not the only problem. 10:587-591 Economic democracy. 11:651-659 ANTIBUSINESS/capitalistic bias Capitalism-hero or culprit? (Bradford) 12:750-754 Corporate mergers: (Richman) 5:282-285 First-world wealth and third-world poverty (Davis) 11:678-684 Intellectuals, moralists, and the free market (Wil liams) 2:111-121 Relics of intervention, #2 (Carson) 5:305-317 Social role of business (Foley)10:611-626 ARGENTINA on the brink (Sennholz) 12:716-727 ASIA Economic growth in Taiwan: invisible factors con tributing to economic development in the Republic of China (Liu) 3:131-138 First-world wealth and third-world poverty (Davis) 11:678-684 ATHLETICS, college Fine art of cheating (Foley) 11:643-649 B BECHARA, Dennis Cutting the budget. 4:225-228 Development of Puerto Rico, The. 10:592-604 Freedom for less developed countries. 2:104-110 BEYOND the Christmas story (Carson) 12:707-713 BlDINOTTO, Robert James Guide to principled seW·defense,A. 12:728-734 See also Book reviews (PeikoID BIG BUSINESS Corporate mergers (Richman) 5:282-285 Rebirth of economic freedom (Douglas) 11:662-672 BIG little governments (McGath) 6:344-346 BRADFORD, Ralph American idea, The. 10:627-631 Capitalism-hero or culprit? 12:750-754 BRIGANDS and the bargainers (Ross) 9:515-519 BUREAUCRACY, productivity and inflation (Isaacs) 2:88-93 BURNHAM, Raymond M., II Key to success, The: do.unto others. 12:714-715 c CAMPAIGN for EconoJn1.cDemocracy (Fonda & Hay den) Economic democracy (Anderson) 11:651-659 CANADA damaged by. faulty theories (McDonald) 10:605-610 CAPITALISM and greed (Doti) 11:673-677 CAPITALISM, defender ,of-Ludwig von Mises (Reis man) 7:432-439 CAPITALISM-hero or qulprit? (Bradford) 12:750-754 761 762 THE FREEMAN December CARSON,-Clarence B.

Beyond the Christmas story. 12:707-713 Civil War and political nationalization, The. 1:32-46 Prescription for expensive education. 3:155-164 Question of being productive, A. 10:579-586 Reasoning on the nature of things. 2:94-103 Relics of intervention, The (serialized): 1. Populism. 4:195-206 2. Progressivism. 5:305-317 3. New Deal bent to inflation, The. 6:367-380 4. New Deal collective planning. 7:414-425 5. New Deal welfarism. 8:451-463 6. Conclusion-the relic of an idea. 9:542-553 CHAMBERLAIN, John. See Book reviews CHAMBERLIN, William Henry Some mistakes of Marx. 1:55-61 CHANGE, flexibility, mobility Cut-throat opportunities (North) 6:347-364 Industrial hostages (Summers) 12:748-749 Rebirth of economic freedom (Douglas) 11:662-672 Small business and entrepreneurship (Pasour) 9:520527 CHARIT'Y,how socialism affects (Pearson) 7:440-443 CHEATING, fine art of (Foley)11:643-649 CHILE, free markets in (Sennholz) 5:291-301 CHINA, Republic of Economic growth in Taiwan (Liu) 3:131-138 CHODOROV, Frank Humanity of trade, The. 1:23~29 CHOICE and responsibility (Knepher) 3:139-141 CHRISTMAS story, beyond the (Carson) 12:707-713 CITY/LOCAL governments Big little governments (McGath) 6:344-346 CIVIL War and political nationalization (Carson) 1:32 46 CO-DETERMINATION in West Germany (Sennholz) 1:15-22 COERCION, compulsion, command society Brigands and the bargainers (Ross) 9:515-519 Co-determination in West Germany (Sennholz) 1:15 22 See also Government interference COLLECTIVISM in medicine (Orient) 6:335-343 COMMUNICATION, conversation, ideas Abstract concept of human liberty (LeFevre) 12:742 747 Genial Mr. Nock (Opitz) 11:685-693 Guide to principled self-defense (Bidinotto) 12:728 734 1b communicate ideas on liberty (Ross) 12:735-741 COMMUNISM. See Socialism COMPETITION and consumer80vereignty Cut-throat opportunities (North) 6:347-364 Jobs-and how not to increase them (Russell) 2:67 75 Public policy and the free economy (DiLorenzo)8:492509 Rebirth of economic freedom (Douglas) 11:662-672 Trickle-down economics (North) 5:268-281 See·also Prices/pricing CORPORATE mergers (Richman) 5:282-285 CURE for unemployment (Holmes) 7:398-404 CUT-THROATopportunities (North) 6:347-364 CUTTING the budget (Bechara) 4:225-228 o DAVIS,John Jefferson First-world wealth and third-world proverty. 11:678 684 Lessons of history, The. 9:554-564 Profits and pollution. 6:323-331 DAY welfare hit the classroom (Spetz) 5:302-304 DEAR America (Franckowiak) 7:387-389 DEFICITS are not the only problem (Anderson) 10:587 591 DEREGULATION Semantic confusion in economic regulation (Sem mens) 5:286-290 DEVELOPMENT of Puerto Rico (Bechara) 10:592-604 DiLORENZO, Thomas J.

Public policy and the free economy. 8:492-509 DOTI,James Capitalism and greed. 11:673-677 DOUGLAS, Jack D. Rebirth of economic freedom, A: the de-bureaucrati zation of American business. 11:662-672 E ECONOMIC democracy (Anderson) 11:651-659 ECONOMIC development/progress Development of Puerto Rico (Bechara) 10:592-604 Economic growth in Taiwan (Liu) 3:131-138 First-world wealth and third-world poverty (Davis) 11:678-684 Freedom for less developed countries (Bechara) 2:104 110 ECONOMIC planning Bureaucracy, productivity and inflation (Isaacs) 2:88 93 Economic democracy (Anderson) 11:651-659 Lessons of history (Davis) 9:554-564 ECONOMICS Adam Smith's economics of freedom (Montgomery) 1:47-54 Social role of business (Foley) 10:611-626 EDUCATION, public and private Day welfare hit the classroom (Spetz) 5:302-304 End of schooling (Williams) 9:565-572 Fine art of cheating (Foley)11:643-649 My cup of tea (Natale) 6:365-366 Prescription for expensive education (Carson) 3:155 164 "Right" to education (Wentz) 7:406-409 1982 INDEX 763 ELEMENTS ofa fair system of taxation (Foley) 9:528 541 END of schooling (Williams) 9:565-572 ENTREPRENEURS, entrepreneurship Cut-throat opportunities (North) 6:347-364 Economic growth in Taiwan (Liu) 3:131-138 Exploitation and knowledge (North) 1:3-11 Scalping and envy (North) 4:214-224 Small business and entrepreneurship (Pasour) 9:520 527 ENVIRONMENT Profits and pollution (Davis) 6:323-331 ENVY, scalpingand (North)4:214-224 EXPLOITATION and knowledge (North) 1:3-11 F FALKLAND ISLANDS dispute (1982) Argentina on the brink (Sennholz) 12:716-727 FINE art of cheating (Foley) 11:643-649 FIRST-world wealth and third-world poverty (Davis) 11:678-684 FOLEY, Ridgway K., Jr.

Elements of a fair system oftaxation, The. 9:528-541 Fine art of cheating, The. 11:643-649 Social role of business, The. 10:611-626 Source of sovereignty, The ..3:167-175 FOREIGN policy Argentina on the brink (Sennholz) 12:716-727 Free markets in Chile (Sennholz) 5:291-301 Freedom for less developed countries (Bechara) 2:104110 Reaffirming freedom of the seas (Hawkins) 3:176 185 FRANCKOWIAK, Leonard Dear America. 7:387-389 FREE enterprise, production and productivity Economic democracy (Anderson) 11:651-659 Key to success (Burnham) 12:714-715 Lessons of history (Davis) 9:554-564 Mixed economies, a no man's land (Pearson) 8:485491 Question of being productive (Carson) 10:579-586 Social role of business (Foley).10:611-626 Socialism eats the seed grain (Pearson) 11:694-699 They solve tomorrow's problems (Summers) 1:30-31 FREE markets in Chile (Sennholz) 5:291-301 FREEDOMlliberty Abstract concept of human liberty (LeFevre) 12:742747 American idea (Bradford) 10:627-631 Dear America (Franckowiak) 7:387-389 10 communicate ideas on iiberty (Ross) 12:735-741 FREEDOM and "social-democracy" (Holt) 4:207-213 FREEDOM for less developed countries (Bechara) 2:104 110 FREEDOM of the seas, reaffirming (Hawkins) 3:176 185 FULDA, Joseph S.

New bondage, The. 4:243~48 See also Book reviews (Will) FUNCTIONAL role of profits (Johnson) 5:259-264 G GENIAL Mr. Nock (Opitz) 11:685-693 GERMANY; West, co-deterffiination in (Sennholz) 1:15 22 GOVERNMENT interference/intervention/regulation Civil War and political nationalization (Carson) 1:3246 Development of Puerto Rico (Bechara) 10:592-604 Industrial hostages (Summers) 12:748-749 New bondage (Fulda) 4:243-248 Public policy and the free 'economy (DiLorenzo) 8:492 509 Relics of intervention, 6 parts. See Carson Semantic confusion in economic regulation (Sem mens) 5:286-290 State wades in (Hanke) 11:660-661 GOVERNMENT, role of Elements of a fair system of taxation (Foley) 9:528 541 Source of sovereignty (Foley) 3:167-175 GOVERNMENT spending Canada damaged by .faulty theories (McDonald) 10:605-610 Cutting the budget (Bechara) 4:225-228 Deficits are not the only problem (Anderson) 10:587 591 Keynesism in a nutshell (Hazlitt) 11:650 Tax expenditures (Senunens) 7:428-431 GREAVES, Bettina Bien. See Book reviews (Brody) GRESHAM, Perry E. See Book reviews (Read) GROSECLOSE, Elgin Illusion of a riskless soci~ty, The. 8:464-467 Reaganomics and the interest syndrome. 7:395-397 GUIDE to principled self-defense (Bidinotto) 12:728 734 H HANKE, Steve H.

State wades in, The. 11:$60-661 HAWKINS, William R. Reaffirming freedom of the seas. 3:176-185 HAZLI'IT, Henry Keynesism in a nutshellL 11:650 HENDRICKSON, Mark 'Thachings of Soviet experience. 4:229-238 HISTORY, lessons of (Davis) 9:554-564 HOLMES, Roland W. Cure for unemployment. The. 7:398-404 764 THE FREEMAN December HOLT, Earl P, III Freedom and "social-democracy." 4:207-213 HOSPERS, John Rothbard's liberty reviewed. 8:468-484 HOW socialism affects charity (Pearson) 7:440-443 HOW to deal with strangers (Summers) 7:405 HUMANITY of trade (Chodorov) 1:23-29 IDEAS/ideology, importance of Argentina on the brink (Sennholz) 12:716-727 Genial Mr. Nock (Opitz) 11:685-693 Intellectuals, moralists, and the free market (Wil liams) 2:111-121 IDEAS/innovations/inventions And now for some good economic news! (Shannon) 1:12-14 New dimensions of population growth (Shannon) 6:332-334 Profits and pollution (Davis) 6:323-331 Rebirth of economic freedom (Douglas) 11:662-672 Role of incentive (Reed) 5:265-267 ILLUSION of a riskless society (Groseclose) 8:464-467 INCENTIVE, role of (Reed) 5:265-267 INDIVIDUAL action/choice/responsibility Choice and responsibility (Knepher) 3:139-141 Economic growth in Taiwan (Liu) 3:131-138 How socialism affects charity (Pearson) 7:440-443 Jonestown syndrome (Watkins) 7:410-413 INDIVIDUAL rights and private property Argentina on the brink (Sennholz) 12:716-727 Rothbard's liberty reviewed (Hospers) 8:468-484 INDUSTRIAL hostages (Summers) 12:748-749 INTELLECTUALS, moralists, and the free market (Williams) 2:111-121 INTEREST syndrome, Reaganomics and (Groseclose) 7:395-397 INTERSTATE Commerce Commission Semantic confusion in economic regulation (Sem mens) 5:286-290 ISAACS, Mark D.

Bureaucracy, productivity and inflation 2:88-93 J JOBS-and how not to increase them (Russell) 2:67 75 JOE'S paycheck (Summers) 3:165-166 JOHNSON, Arnold W. Functional role of profits, The. 5:259-264 JONESTOWN syndrome (Watkins) 7:410-413 JUSTICE, concept of Mixed economies, a no-man's land (Pearson) 8:485 491 Rothbard's liberty reviewed (Hospers) 8:468-484 Source of sovereignty (Foley)3:167-175 K KEY to success: do unto others (Burnham) 12:714-715 KEYNES, Mises and (Peterson) 3:142-154 KEYNESISM in a nutshell (Hazlitt) 11:650 KNEPHER, Thomas W. Choice and responsibility. 3:139-141 KNOWLEDGE from pricing system Cut-throat opportunities (North) 6:347-364 Exploitation and knowledge (North) 1:3-11 Scalping and envy (North) 4:214-224 Small business and entrepreneurship (Pasour) 9:520 527 L LABOR/wages/employment Co-determination in West Germany (Sennholz) 1:1522 Cure for unemployment (Holmes) 7:398-404 Exploitation and knowledge (North) 1:3-11 Jobs-and how not to increase them (Russell) 2:6775 Joe's paycheck (Summers) 3:165-166 Question of being productive (Carson) 10:579-586 LATIN America Argentina on the brink (Sennholz) 12:716-727 Development of Puerto Rico (Bechara) 10:592-604 Free markets in Chile (Sennholz) 5:291-301 LeFEVRE, Robert Abstract concept of human liberty, The. 12:742-747 LEGALIZED immorality (Manion) 7:426-427 LESSONS of history (Davis) 9:554-564 LIU, Shih Cheng Economic growth in Taiwan: invisible factors con tributing to economic development in the Republic of China. 3:131-138 LUDWIG von Mises, defender of capitalism (Reisman) 7:432-439 M MANION, Clarence Legalized immorality. 7:426-427 MARX, Karl-ideas of First-world wealth and third-world poverty (Davis) 11:678-684 Free markets in Chile (Sennholz) 5:291-301 Guide to principled self-defense (Bidinotto) 12:728 734 Some mistakes of Marx (Chamberlin) 1:55-61 Teachings of Soviet experience (Hendrickson) 4:229 238 1982 INDEX 765 See also Socialism/communism McDONALD, Kenneth Canada damaged by faulty theories. 10:605-610 McGATH, Gary Big little governments. 6:344-346 MEDICINE, medical care Collectivism in medicine (Orient) 6:335-343 How socialism affects charity (Pearson) 7:440-443 MISES, Ludwig von-ideas of Bureaucracy, productivity and inflation (Isaacs) 2:88 93 Mises and Keynes (Peterson) 3:142-154 Ludwig von Mises, defender of capitalism (Reisman) 7:432-439 MIXED economies, a no-man's land (Pearson) 8:485 491 MONETARISM Free markets in Chile (Sennholz) 5:291-301 Relics of intervention, #1 (Carson) 4:195-206 MONEY, inflation, banking Civil War and political nationalization (Carson) 1:32 46 Deficits are not the only problem (Anderson) 10:587591 Illusion of a riskless society (Groseclose) 8:464-467 Keynesism in a nutshell (Hazlitt) 11:650 Moral issue of "honest money" (North) 2:76-87 Reaganomics and the interest syndrome (Groseclose) 7:395-397 'Ibward radical monetary reform (Reed) 4:239-242 MONTGOMERY, John Adam Smith's economics offreedom. 1:47-54 MORAL issue of "honest money" (North) 2:76-87 MORALITY/ethics/religion Beyond the Christmas story (Carson) 12:707-713 Brigands and the bargainers (Ross) 9:515-519 First-world wealth and third-world poverty (Davis) 11:678-684 Guide to principled self-defense (Bidinotto) 12:728 734 Intellectuals, moralists, and the free market (Wil liams) 2:111-121 Legalized immorality (Manion) 7:426-427 MY cup of tea (Natale) 6:365-366 N NATALE,Jean L.

My cup of tea. 6:365-366 NATURAL law tradition Adam Smith's economics of freedom (Montgomery) 1:47-54 Reasoning on the nature of things (Carson) 2:94-103 Rothbard's liberty reviewed (Hospers) 8:468-484 NATURAL resources, use of Profits and pollution (Davis) 6:323-331 Reaffirming freedom of the seas (Hawkins) 3:176 185 State wades in (Hanke) H:660-661 NEW bondage (Fulda) 4:24$-248 NEW Deal Relics of intervention (Carson) #3, 6:367-380; #4, 7:414-425; #5, 8:451-4$3 NEW dimensions of population growth (Shannon) 6:332 334 NOCK, Albert J., genial (Opitz) 11:685-693 NORTH,Gary Cut-throat opportunities. 6:347-364 Exploitation and knowledge. 1:3-11 Moral issue of "honest mQney,"The. 2:76-87 Scalping and envy. 4:214+224 Trickle-down economics. 5:268-281 o OPITZ, Edmund A. Genial Mr. Nock, The. 1~:685-693 See also Book reviews (Allen; Chilton; North; Spen cer) ORIENT, Jane M., M.D. Collectivism in medicine: an exception or a hook?

6:335-343 PASOUR, E. C., Jr. Small business and entrepreneurship. 9:520-527 PAY more and get less (Russell) 7:390-394 PEARSON, Glenn L. How socialism affects charity. 7:440-443 Mixed economies, a no-man's land. 8:485-491 Socialism eats the seed grain. 11:694-699 PETERSON, William H. Mises and Keynes. 3:142-154 See also Book reviews (Freeman) PLANNING, government vs. individual. See Economic planning POLLUTION, profits and (Davis) 6:323-331 POPULATION growth, new dimensions of (Shannon) 6:332-334 POPULISM Relics of intervention, #1 (Carson) 4:195-206 POVERTY, third-world, a~d first-world wealth (Davis) 11:678-684 PRESCRIPTION for expen~ive education (Carson) 3:155 164 PRICES/pricing , Capitalism and greed (Doti) 11:673-677 Collectivism in medicin~ (Orient) 6:335-343 Cut-throat opportunitie~ (North) 6:347-364 766 THE FREEMAN December Public policy and the free economy (DiLorenzo)8:492 509 Scalping and envy (North) 4:214-224 Small business and entrepreneurship (Pasour) 9:520 527 PRIVATEproperty. See Individual rights PROFIT and loss system Bureaucracy, productivity and inflation (Isaacs) 2:8893 Cut-throat opportunities (North) 6:347-364 Exploitation and knowledge (North) 1:3-11 Functional role of profits (Johnson) 5:259-264 Small business and entrepreneurship (Pasour) 9:520 527 Social role of business (Foley) 10:611-626 Trickle-down economics (North) 5:268-281 PROFITS and pollution (Davis) 6:323-331 PROGRESSIVISM Relics of intervention, #2 (Carson) 5:305-317 PROTECTIONISM Economic democracy (Anderson) 11:651-659 Humanity of trade (Chodorov) 1:23-29 Pay more and get less (Russell) 7:390-394 Rebirth of economic freedom (Douglas) 11:662-672 PUBLIC policy and the free economy (DiLorenzo)8:492 509 PUBLIC utilities State wades in (Hanke) 11:660-661 PUERTO Rico, development of (Bechara) 10:592-604 Q QUESTION of being productive (Carson) 10:579-586 R REAFFIRMING freedom of the seas (Hawkins) 3:176 185 REAGANOMICS and the interest syndrome (Grose close) 7:395-397 REAM, Roger. See Book reviews (Menger) REASONING on the nature of things (Carson) 2:94 103 REBIRTH of economic freedom: the de-bureaucratiza tion of American business (Douglas) 11:662-672 REED, Lawrence W.

Role of incentive, The. 5:265-267 'Ibward radical monetary reform. 4:239-242 REISMAN, George Ludwig von Mises, defender of capitalism. 7:432-439 RELICS of intervention, 6 parts. See Carson RELIGIOUS cults Jonestown syndrome (Watkins) 7:410-413 RICHMAN, Sheldon Corporate mergers: method or madness? 5:282-285 "RIGHT" to education (Wentz) 7:406-409 RISKLESS society, illusion of (Groseclose) 8:464-467 ROGERS, 'Ibmmy W. See Bookreviews (Goodman,Lecky and Sowell) ROLE of incentive (Reed) 5:265-267 ROSS, Ernest G. Brigands and the bargainers, The. 9:515-519 'Ib communicate ideas on liberty. 12:735-741 ROTHBARD'S (Murray N.) liberty reviewed (Hospers) 8:468-484 RUSSELL, P. Dean Jobs-and how not to increase them. 2:67-75 Pay more and get less. 7:390-394 RUSSIA Lessons of history (Davis) 9:554-564 Socialism eats the seed grain (Pearson) 11:694-699 'Thachings of Soviet experience (Hendrickson) 4:229238 s SAVINGSand investment Socialism eats the seed grain (Pearson) 11:694-699 Trickle-down economics (North) 5:268-281 SCALPING and envy (North) 4:214-224 SCHUMPETER, Joseph-ideas of Cut-throat opportunities (North) 6:347-364 Intellectuals, moralists, and the free market (Wil liams) 2:111-121 Rebirth of economic freedom (Douglas) 11:662-672 SECURITY, guaranteed-desire for Illusion of a riskless society (Groseclose) 8:464-467 Jonestown syndrome (Watkins) 7:410-413 SELF-interest Capitalism and greed (Doti) 11:673-677 Key to success (Burnham) 12:714-715 SEMANTIC confusion in economic regulation (Sem mens) 5:286-290 SEMANTICS/terminology Corporate mergers (Richman) 5:282-285 Cut-throat opportunities (North) 6:347-364 Guide to principled self-defense (Bidinotto) 12:728 734 Tax expenditures (Semmens) 7:428-431 'lb communicate ideas on liberty (Ross) 12:735-741 SEMMENS, John Semantic confusion in economic regulation. 5:286 290 Tax expenditures. 7:428-431 SENNHOLZ, Hans F.

Argentina on the brink. 12:716-727 Co-determination in West Germany. 1:15-22 Free markets in Chile. 5:291-301 SHANNON, Russell And now for some good economic news! 1:12-14 New dimensions of population growth. 6:332-334 SMALL business and entrepreneurship (Pasour) 9:520 527 SMITH, Adam-ideas of Adam Smith's economics of freedom (Montgomery) 1:47-54 1982 INDEX 767 And now for some good economic news! (Shannon) 1:12-14 Capitalism and greed (Doti) 11:673-677 Public policy and the free economy (DiLorenzo) 8:492 509 Reasoning on the nature of things (Carson) 2:94-103 SOCIAL role of business (Foley) 10:611-626 "SOCIAL-democracy," freedom and (Holt) 4:207-213 SOCIALISM eats the seed grain (Pearson) 11:694-699 SOCIALISM/communism Argentina on the brink (Sennholz) 12:716-727 Economic democracy (Anderson) 11:651-659 Ludwig von Mises, defender of capitalism (Reisman) 7:432-439 Mixed economies, a no-man's land (Pearson) 8:485 491 Some mistakes of Marx (Chamberlin) 1:55-61 Thachings of Soviet experience (Hendrickson) 4:229 238 SOCIETY, social cooperation Capitalism and greed (Doti) 11:673-677 Humanity of trade (Chodorov) 1:23-29 SOLZHENITSYN, Alexander-ideas of Thachings of Soviet experience (Hendrickson) 4:299238 SOME mistakes of Marx (Chamberlin) 1:55-61 SOURCE of sovereignty (Foley) 3:167-175 SPECIAL interests, favoritism, subsidies Cutting the budget <Bechara) 4:225-228 Legalized immorality (Manion) 7:426-427 New bondage (Fulda) 4:243-248 Teachings of Soviet experience (Hendrickson) 4:229 238 SPETZ, Steven N.

Day welfare hit the classroom, The. 5:302-304 STATE wades in (Hanke) 11:660-661 STATISTICS Question of being productive (Carson) 10:579-586 SUMMERS, Brian How to deal with strangers. 7:405 Industrial hostages. 12:748-749 Joe's paycheck. 3:165-166 They solve tomorrow's problems. 1:30-31 See also Book reviews (Armentano, Huyler, Kagin, Reed/Haywood) SUPPLY-side economics And now for some good economic news! (Shannon) 1:12-14 Reaganomics and the interest syndrome (Groseclose) 7:395-397 Small business and entrepreneurship (Pasour) 9:520 527 Trickle-down economics (North) 5:268-281 T TAIWAN, economic growth in (Liu) 3:131-138 TAX expenditures (Semmens) 7:428-431 TAXES/taxation Deficits are not the only problem (Anderson) 10:587 591 Elements of a fair system of taxation (Foley) 9:528 541 '!'rickIe-down economics (North) 5:268-281 TEACHINGS of Soviet expetience (Hendrickson) 4:229238 THEY solve tomorrow's protilems (Summers) 1:30-31 THIRD world. See Economic development/progress TO communicate ideas on liberty (Ross) 12:735-741 TOWARD radical monetary!reform (Reed) 4:239-242 TRADE, voluntary Brigands and the bargain¢rs (Ross) 9:515-519 Capitalism-hero or culprit? (Bradford) 12:750-754 How to deal with strangelis (Summers) 7:405 Humanity of trade (Chodorov) 1:23-29 Pay more and get less (Ruissell) 7:390-394 TRICKLE-down-economics (North) 5:268-281 u UNEMPLOYMENT, cure fqr (Holmes) 7:398-404 UNITED STATES history American idea (Bradford) 10:627-631 Civil War and political na~ionalization (Carson) 1:32 46 Relics of intervention, 6 parts. See Carson v VOLUNTARISM Capitalism-hero or culprit? (Bradford) 12:750-754 Rothbard's liberty reviewed (Hospers) 8:468-484 Semantic confusion in economic regulation (Semmens) 5:286-290 w WATKINS, Hal Jonestown syndrome, The. 7:410-413 WELFARISM Development of Puerto Rico (Bechara) 10:592-604 Relics of intervention, #5 (Carson) 8:451-463 Trickle-down economics (North) 5:268-281 WENTZ, Douglas "Right" to education, Th~. 7:406-409 WILLIAMS, John K.

End of schooling, The. 9:.565-572 Intellectuals, moralists, iand the free market. 2:111 121 768 THE FREEMAN BOOK REVIEWS (Reviewer'sname in parentheses) ALLEN, William R. The midnight economist: choices, prices and public policy (Opitz) 7:447 ARMENTANO, Dominick T. Antitrust and monopoly: anatomy of a policy failure (Summers) 7:447-448 BAWLY, Dan. The subterranean economy (Chamber lain) 8:510-512 BRODY, Stanton. Seeds of the holocaust: the German economy, 1916-23 (Greaves) 2:124-126 BROOKES, Warren. The economy in mind (Chamber lain) 12:755-757 BUTLER, Stuart M. Enterprise zones: greenlining the inner cities (Chamberlain) 1:62-64 CHILTON, David. Productive Christians in an age of guilt-manipulators (Opitz) 10:636 EVERHART, Robert B. (ed.) The public school monop oly: a critical analysis of education and the state in American society (Chamberlain) 9:573-575 FLORMAN, Samuel C. Blaming technology: the irra tional search for scapegoats (Chamberlain) 11:700 702 FREEMAN, Roger A. The wayward welfare state (Pe terson) 4:252-254 GOODMAN, John C. The regulation of medical care: is the price too high? (Rogers) 4:254-255 GRABOWICZ, Paul (co-author) See Kotkin HAYWOOD, Dale M. (co-ed.) See Reed HUYLER, Jerome. Everything you have: the case against welfare (Summers) 6:384 KAGIN, Donald H. Private gold coins and patterns of the United States (Summers) 9:576 KOTKIN, Joel and Grabowicz, Paul. California, Inc.

(Chamberlain) 5:318-320 LECKY, William E. H. Democracy and liberty (Rogers) 4:255-256 LIBECAP, Gary D. Locking up the range: federal land controls and grazing (Chamberlain) 7:444-446 MAZZEI, Philip. My life and wanderings (Chamber lain) 4:249-251 MENGER, Carl. Principles of economics (Ream) 2:127 128 NORTH, Gary. The dominion covenant: Genesis (Op itz) 10:635-636 PEIKOFF, Leonard. The ominous parallels: the end of freedom in America (Bidinotto) 12:760 PINES, Burton Yale. Back to basics (Chamberlain) 10:632-634 POOLE, Robert W Jr. (ed.) Instead of regulation: alter natives to federal regulatory agencies (Chamberlain) 2:122-124 RABOY,David G. (ed.) Essays in supply side economics (Chamberlain) 6:381-383 READ, Leonard E. How do we know? (Gresham) 3:189 192 _____ . The path of duty (Gresham) 12: 758760 REED, Lawrence and Haywood, Dale M. (eds.) When we are free (Summers) 3:189 ROTHBARD, Murray. The ethics of liberty (Hospers) 8:468-484 SALSBURY, Stephen. No way to run a railroad: the untold story of the Penn Central crisis (Chamber lain) 3:186-188 SIMON, Julian. The ultimate resource (Shannon) 6: 332-334 SOWELL, Thomas. Markets and minorities (Rogers) 10:636-638 SPENCER, Herbert. The man versus the state (Opitz) 11:703-704 WILL, George F. The pursuit of virtue and other 'Ibry notions (Fulda) 10:638-640

About this edition

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Title: The Freeman 1982

Author: Foundation for Economic Education

First published: 1950

Series: The Freeman, volume 32

Source file: The Freeman 1982.pdf

Source page: https://freecapitalists.org/books/the-freeman-1982/

Converted: 2026-08-09 by The Liberty Archive (freecapitalists.org), converter v6

Table of Contents

The Freeman 1982

- Exploitation and Knowledge; G. North

- And Now for Some Good Economic News; R. Shannon

- Co-Determination in West Germany; H. Sennholz

- The Humanity of Trade; F. Chodrov

- They Solve Tomorrow's Problems; B. Summers

- The Civil War and Political Nationalization; C. Carson

- Adam Smith's Economics of Freedom; J. Montgomery

- Some Mistakes of Marx; W. H. Chamberlin

- Book Reviews

February

- Jobs - and How Not to Increase Them; P. Dean Russell

- The Moral Issue of Honest Money; G. North

- Bureaucracy, Productivity, and Inflation; M. Isaacs

- Reasoning on the Nature of Things; C. Carson

- Freedom for Less Developed Countries; D. Bechara

- Intellectuals, Moralists, and the Free Market; J. K. Williams

- Book Reviews

March

- Evconomic Growth in Taiwan; S. C. Liu
- Choice and Responsibility; T. W. Knepher
- Mises and Keynes; W. H. Peterson

- Prescription for Expensive Education; C. Carson

- Joe's Paycheck; B. Summers
- The Source of Sovereignty; R. K. Foley, Jr.
- Reaffirming Freedom of the Seas; W. Hawkins
- Book Reviews

April

- The Relics of Intervention; C. Carson

- Freedom and Social Democracy; E. P. Holt III

- Scalping and Envy; G. North

- Cutting the Budget; D. Bechara

- Teachings of Soviet Experience; M. Hendrickson

- Toward Radical Monetary Reform; L. Reed
- The New Bondage; J. Fulda
- Book Reviews

May

- The Functional Role of Profits; A. Johnson
- The Role of Incentive; L. Reed
- Trickle Down Economics; G. North
- Corporate Mergers; S. Richman
- Free Markets in Chile; H. Sennholz
- The Day Welfare Hit the Classroom; S. Spetz
- The Relics of Intervention; C. Carson
- Book Reviews

June

- Profits and Pollution; J. J. Davis

- New Dimensions of Population Growth; R. Shannon

- Collectivism in Medicine; J. Orient
- Big Little Governments; G. McGarth
- Cut Throat Opportunities; G. North
- My Cup of Tea; J. Natale
- The Relics of Intervention; C. Carson
- Book Reviews

July

- Dear America; L. Franckowiak

- Pay More and Get Less; B. Dean Russell

- Reaganomics and the Interest Syndrome; E. Groseclose

- The Cure for Unemployment; R. Holmes
- How to Deal with Strangers; B. Summers
- The Right to Education; D. Wentz
- The Jonestown Syndrome; H. Watkins
- The Relics of Intervention; C. Carson
- Legalized Immorality; C. Manion
- Tax Expenditures; J. Semmens
- Defender of Capitalism; L. v. Mises
- How Socialism Affects Charity; G. Pearson
- Book Reviews

August

- The Relics of Intervention; C. Carson

- The Illusion of a Riskless Society; E. Groseclose

- Rothbard's Liberty Reviewed; J. Hospers

- Mixed Economies A No-Man's Land; G. Pearson

- Public Policy and the Free Economy; T. DiLorenzo

- Book Reviews

September

- The Brigans and the Bargainers; E. Ross

- Small Business and Entrepreneurship; E. C. Pastour, Jr.

- The Elements of a Fair Tax System of Taxation; R. K. Foley, Jr.

- The Relics of Intervention; C. Carson
- The Lessons of History; J. J. Davis
- The End of Schooling; J. K. Williams
- Book Reviews

October

- A Question of Being Productive; C. Carson

- Deficits are not the Only Problem; B. Anderson

- The Development of Puerto Rico; D. Bechara

- Canada Damaged by Faulty Theories; K. McDonald

- The Social Role of Business; R. K. Foley, Jr.

- The American Idea; R. Bradford

- Book Reviews

November

- The Fine Art of Cheating; R. K. Foley, Jr.
- Keynesism in a Nutshell; H. Hazlitt
- Economic Democracy; B. Anderson
- The State Wades In; S. Hanke

- A Rebirth of Economic Freedoml J. D. Douglas

- Capitalism and Greed; J. Doti
- First-World Wealth; J. Jefferson Davis
- The Genial Mr. Nock; E. Opitz
- Socialism Eats the Seed Grain; G. Pearson
- Book Reviews

December

- Beyond the Christmas Story; C. Carson
- The Key To Success; R. Burnham II
- Argentina on the Brink; H. Sennholz

- A Guide to Principled Self-Defense; R. J. Bidinotto

- To Communicate Ideas on Liberty; E. Ross

- The Abstract Concept of Human Liberty; R. LeFevre

- Industrial Hostages; B. Summers
- Capitalism - Hero or Culprit; R. Bradford
- Book Reviews

Index
Book Reviews
About this edition