Date: 1950-01-01T07:00:00+00:00
Keywords: liberty
Description: The Foundation for Economic Education The Freeman 1985

The Freeman 1985

Foundation for Economic Education
the Freeman VOL. 35, NO. 1 • JANUARY 1985 Liberalism Stands for FreedomA Page on Freedom, No. 15 Towner Phelan 3 The new "liberals" seek an authoritarian state. Beyond the Market John A. Davenport 4 Concerning the moral elements that buttress the market. Justice versus "Social Justice" The idea of justice in the market economy. John Hospers 9 Competition and Capital Dean Russell 25 Bastiat offers clues on how to help "undeveloped" people. Let's Liberate Money Ernest G. Ross 34 Reasons why government should not be in the "money" business. The Negro and Free Enterprise: A March Forward Singly Judith Anne Still 40 Progress comes through personal effort and achievement. Employer of Last Resort Hans F. Sennholz 49 Unemployment is caused, not cured, by coercive intervention. Occupational Licensing Dirk Yandell 56 A critical review of licensing laws as applied in California. Book Reviews: 60 "The Spirit of Enterprise" by George Gilder "Civil Rights: Rhetoric or Reality?" by Thomas Sowell Anyone wishing to communicate with authors may send first-class mail in care of THE FREEMAN for forwarding.

IFreeman AMONTHLY JOURNAL OF IDEAS ON LIBERTY FOUNDATION FOR ECONOMIC EDUCATION Irvington-on-Hudson, N.Y. 10533 Tel: (914) 591-7230 President: John C. Sparks Managing Editor: Paul L. Poirot Production Editors: Beth A. Hoffman Amy S. Vanlaar Contributing Editors: Robert G. Anderson Howard Baetjer Jr. Bettina Bien Greaves Charles H. Hamilton Edmund A. Opitz (Book Reviews) Brian Summers THE FREEMAN is published monthly by the Foundation for Economic Education, Inc., a nonpolitical, nonprofit, educational champion of private property, the free market, the profit and loss system, 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. Donations are invited in any amount. THE FREEMAN 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 $10.00 a year.

Copyright, 1985. The Foundation for Economic Education, Inc. Printed in U.S.A. Additional copies, postpaid: single copy $1.00; 10 or more, 50 cents each. THE FREEMAN is available on microfilm from University Microfilms International, 300 North Zeeb Road, Ann Arbor, Mich. 48106. Reprints are available of "A Page on Freedom," small quantities, no charge; 100 or more, 5 cents each. Permission is granted to reprint any article in this issue, with appropriate credit, except , "Competition and Capital," "The Negro and Free Enterprise: A March Forward Singly" and "Employer of Last Resort."

A Page on Freedom Number 15 LiberalismStandsfor Freedom IN the last two decades, we have gone a long way from the liberal concepts of individual freedom, limited gov ernment, equality under the law and the rule of law as contrasted with the rule of men. This trend is the result ofneo-liberalism which has changed the popular meaning of the term "liberalism" so that to most people today it stands for a philosophy dia metrically opposed to traditional liberalism. Traditional liberalism regards government as a necessary evil. It fears government and seeks to im pose restraints upon its power. As Woodrow Wilson expressed it, "The history of liberty is the history of lim itations of governmental power, not the increase of it." Today's neo-lib erals believe in increasing the au thority of the state at the expense of individual liberty. Communists look upon the centralization of all power in the state as a necessary prelude to the police state which is their goal.

But, many neo-liberals abhor the po lice state. They merely want to do good and improve the lot of man kind. But they want the government to have unlimited power to do good. They look upon the citizen with sus picion and upon the government with approval. They seek to build a government of unlimited powers to control and regiment the individual for the good of society, to prevent the strong from taking advantage of the weak, to offset inequalities in in comes and wealth, and to play the historic role of Robin Hood who robbed the rich and distributed some of the proceeds to the poor. Neo-lib erals unwittingly are playing the communist game. They mean well but they fail to recognize the harsh truth of Lord Acton's dictum: "All power tends to corrupt, and absolute power corrupts absolutely." If we fol low them we shall end as slaves of an authoritarian state. That is not the goal of neo-liberals but it is nevertheless the destination toward which they are headed. @ - Towner Phelan, October 1948 THE FOUNDATION FOR ECONOMIC EDUCATION, INC.

IRVINGTON-ON-HUDSON, NEW YORK 10533 3 John A. Davenport Beyondthe Market WHEN the historian of the future comes to examine the mores and foi bles of current American society he will, we trust, at least drop a foot note on the increasing popularity of the Adam Smith tie. This bit of hab erdashery manufactured in blue and maroon colors and emblazoned with the profile of the founder of modern economics, has become the badge of honor of an increasing number of scholars, businessmen, and even pol iticians who have never struggled through the thornier passages of The Wealth of Nations. Its spread repre sents a quiet revolution in our affairs. This essay draws on a paper submitted to a recent meeting of the Mont Pelerin Society at Cambridge University in England on the topic of Moral Agree ment in the Free Society concerning which many di vergent views were expressed. The author was one of the founding members of the Society in 1947 and is a former editor of Barron's and Fortune.

4 Forty years ago when Nobel prize winner F. A. Hayek published his seminal tract, The Road to Serfdom, all Western Europe seemed doomed for socialization and even in the United States the case for central ized government planning ran high. Today, though governments every where continue to do many foolish things, the tide has turned. Social ists and planners we still have aplenty in our midst but they are on the defensive. The battle for the market economy has been largely won, intellectually speaking. This is an immense and hopeful turn in our thinking, presaging not only higher living standards for many of the world's societies but also a curb on the overweening power and inefficiencies of government bureau cracy. Yet there lurks in this revo lution of ideas a temptation and inBEYOND TH:E MARKET 5 deed a hidden danger. The danger is that we should come to regard the market as a kind of deus ex machina, attributing to it tasks it cannot rea sonably perform and, in that very act, avoiding the deep moral issues which confront a free society and multiply the more as freedom of choice and options multiply.

An Uncertain Trumpet On this score it would appear to me that the market, for all its healthy discipline, speaks with a very un certain trumpet. There has long been and perhaps, short of a New Jeru salem, there always will be a market for prostitution. There is a "clearing price" for cocaine and heroin no less than for the more beneficent Coca Cola. Free marketeers may argue that the profits of the drug trade and the pusher might be minimized by legalizing such drugs but this is a tactical point. The case against her oin is the same as against murder or suicide: it kills. Moreover it turns out that the market itself, to be efficient, is de pendent on a whole matrix of cus toms, laws, and moral convictions as to what is right and what is wrong. In his essay on "Our Moral Heri tage," Hayek points out that the market and the free society are de pendent on at least two institutions and one virtue. The first is the le gitimacy of private property without which there could be no capital accumulation or indeed capitalism as we know it, or for that matter much civility. Mark in this connection the high price we pay today for the spread of petty larceny which has brought in its train the security guard, the noxious office pass sys tem and, incidentally, a booming trade in all manner of electronic de vices to prevent burglary.

More interestingly Hayek pays tribute to the family as the means by which one generation passes on its experience and values to the next. Finally he has a good word to say for plain old-fashioned honesty, and one is glad to hear it mentioned. I call up my broker to buy or sell General Mo tors. He executes the order with no more than the sound of my voice as security. True, if either of us proved dishonest, legal action could be taken. But if we had to wait for the courts to decide such issues it is fair to say that the New York Stock Ex change would close down tomorrow and our intricate banking and credit system would collapse as well. Beneath the Hidden Hand The paradox thus emerges that while the market does not always generate ethical values, it is deeply dependent on them for its efficient functioning. This paradox has enor mous significance in maintaining the free and open society whose cen tral challenge is to grant liberty to individuals while still maintaining 6 THE FREEMAN January order and continuity in our affairs.

The great contribution of Adam Smith was to show that if citizens are free to follow their own self-interest they will be led "as by an invisible hand" to fulfill beneficent social pur poses that were no part of their orig inal design. But this faith in the in visible hand never led Smith to doubt the legitimate functions of government in enforcing the rules of the road. More important, his whole philo sophic outlook implies one further factor that tends to go unnoticed namely, the widespread acceptance of moral and indeed religious imper atives which in the England of his day were taken almost as a matter of course. It is these that have been undermined by what Walter Lipp mann once called the "acids of mod ernity" and their reinstatement is required if the market is to fulfill its promise. Pretty clearly that job lies beyond the purview of economists however well equipped with de mand, supply, and indifference curves.

The Greek Way The late Frank Knight, Nestor of what is today known as the Chicago School of economists, was fond of quipping that the less moral issues were talked about the better, since they defy rational determination. But the men who launched philoso phy on its wayward course, and who laid the foundations of logic, ethics and metaphysics, were subject to no such restraint. Living in Athens of the Fifth and Fourth Centuries B.C., they saw plenty of freedom around them, if we disregard the institution of slavery, but disliked what they saw: luxury, vice and the awful treachery of Alcibiades. Hence Soc rates' constant reference to the "in ner voice" of duty in his endless ar guments with the Sophist Thra symachus who cheered for mere self interest and the doctrine that "might makes right." Hence Plato's invo cation of the overarching concept of the Good in his delineation of a Spar tan republic. Hence, finally, Aristo tle's argument that the end of man is Happiness, but Happiness achieved through the pursuit of ex cellence and virtue.

Libertarians who of recent years have borne the heat of the day in trying to restore sanity to our eco nomic affairs may well view with suspicion these Greeks bearing gifts. For admittedly there is scarcely a governmental folly of our times that has not been committed in the spe cious name of "reform": the fair wage and the just price and the wel fare state. More generally one must guard against those who think they have a monopoly on virtue and then invoke the power of the state to fur ther their views. This is the sin, if it can be called such, of the Moral Ma jority who hopelessly mix up prin1985 BEYOND THE MARKET 7 ciple with pressure group tactics. Governor Cuomo of New York was quite right when he argued that his views on abortion as a Catholic gave him no license to legislate what many Catholics may not be able to enforce on themselves. Something might even be said for Thoreau's avowal that he would take to his heels if he heard that someone was coming to do him good.

Liberty Is a Gateway Nevertheless I would argue that the classical emphasis on ethical norms and standards is critical to our times and complements rather than contradicts the best of the libertar ian tradition. Liberty is a gateway, not a resting place. Its use or abuse has far-reaching political conse quences. The sharing of ideals may be of greater importance than the much discussed sharing or non-shar ing of wealth. Aristotle's Golden Mean-nothing too much-was a crude attempt to re store harmony in men's conflicting desires and passions. With the com ing of Christianity, the Golden Mean gives place to the Golden Rule-do unto others as you would be done by-and to Kant's categorical imper ative: treat others as ends, never as servile means. The truth is that Freedom and the Good are two in terdependent concepts in tension, and one will spin out of orbit without the other. The question remains as to whether morality requires buttress ing by religious faith. The Declara tion of Independence implies as much by its reference to the Creator and to the "laws of Nature and of Nature's God." But we all know of many good men who are today held back from this final leap, whether through dissatisfaction with current orthodoxies, the sad "politicizing" of our churches as evidenced by their most advertised National Council, or through the fact that faith- "the substance of things hoped for; the evidence of things not seen" -so clearly transcends the power of rea son. Yet there lurks here an even more important obstruction: the ten dency of modern science, or in Hay ek's phrase "scientism," to over reach itself and so make both religion and morality irrelevant.

Two heresies of Western origin must be discarded if we are to preserve freedom of religious choice as guar anteed by the Constitution. The first is the clanking materi alism of Marx which might not have to be taken seriously were it not to day armed with ICBMs. The 'second heresy is found, curiously, in modern Behaviorism. Behaviorism starts with the common sense notion that if we are to study man, we must take account of what he does no less than what he thinks and says. In the hands of John B. Watson and now of B. F. Skinner, behaviorism becomes 8 THE FREEMAN something quite different. Because body and brain are associated with consciousness, we must, on Skin ner's view, eliminate the latter en tirely from the discourse. Conscious ness, mind, willpower, emotion-all that makes man man-is swept away. The human being becomes simply a series of knee jerks in a mindless universe, the Fifth Sym phony simply horsehair scraped over catgut.

Needed: A New Metaphysics This naive and indeed impudent reductionism is not science, which requires a perceiver no less than the perceived. It is a false metaphysics as old as Democritus who conceived of the universe as only a whirl of at oms. As Alfred North Whitehead once intimated in his Science and the Modern World, what is needed is a new metaphysics that would rec oncile empiricism with man's inner apperception of self-hood and his higher aspirations. Such synthesis of new and old may well come, re storing, if not God in his Heaven, at least faith in the mystery and reality of the many-colored world around us from which scientist, artist, and the ologian make their start. When that breakthrough comes, it will outrank in importance the discoveries of Cop ernicus and Galileo. Meanwhile, in view of political turmoil without and intellectual dis cord within, it would appear that lib ertarian and Classicist, modern sec ularist and religious believer, face a considerable task in the immediate future: to honor Adam Smith's in visible hand as against the mailed fist of the tyrant; to reaffirm the dignity and indeed the sanctity of the individual person; to hold the bar barians, who have said they come to bury us, at the· gate and so preserve what Winston Churchill in a dark hour defended in the name of West ern Christian Civilization. ~ lDEASON LIBERTY Freedom as a Moral Principle THE most important among the few principles of this kind that we have developed is individual freedom, which it is most appropriate to regard as a moral principle of political action. Like all moral principles, it de mands that it be accepted as a value in itself, as a principle that must be respected without our asking whether the consequences in the par ticular instance will be beneficial. We shall not achieve the results we want if we do not accept it as a creed or presumption so strong that no considerations of expediency can be allowed to limit it.

F. A. HAYEK ~ John Hospers Justiceversus "SocialJustice" IT is individual human beings who are born, live, enjoy, suffer, and die. Individuals sometimes band to gether into groups; but groups as such do not live, love, or suffer; only their individual members do. The in dividual, not the group, is the unit. Individuals interact with one an other, in families and larger socie ties. Sometimes they act wrongfully toward others; and one kind of wrongful action is called injustice. But what does this mean? What pre cisely is involved in an action being just or unjust? Justice, in a tradition going back John Hospers is a professor of philosophy at the Uni versity of Southern California, Los Angeles. He is the author of numerous books, such as Human Conduct, Understanding the Arts, and Introduction to Philo sophical Analysis, as well as several anthologies and more than one hundred essays in journals and en cyclopedias. He is president of the American Society for Aesthetics, and was the first Libertarian Party candidate for U.S. president (1972). He is editor of the philosophical quarterly The Monist.

to Aristotle, means treating individ uals in accordance with their deserts. If a teacher gives a student a C when the student deserves a B, the low grade is an injustice to the student. It is equally an injustice when the teacher gives her an A which she doesn't deserve. Though the student is not likely to complain of her grade in the second case, it is an injustice all the same, since it is treatment that is not in accord with desert. Moreover, every case of an unde served high grade involves a dimi nution of the value of the grade; the more numerous the B students who get undeserved A's, the less the grade of A comes to mean, and the less it distinguishes the genuine A student from the others. There are some distinctions about justice which should be kept in mind before we apply them to particular cases. 9 10 THE FREEMAN January Distinctions About Justice 1. Justice has to do with the treat ment of persons by other persons.

The lion is not being unjust to the antelope in killing it. The lion is not a moral agent, and no right or wrong, no justice or injustice, is involved. If a child is born crippled or dis eased, this is a misfortune but not an injustice. Injustice requires some person or persons to perpetrate the injustice. (Even those who say that God caused the baby to be born crip pled or diseased are not likely to accuse God of injustice.) Congenital deformity is something that unfor tunately occurs, but it is not some thing that someone has done to someone else; no person has wronged another. 2. Justice depends on desert, and desert is a matter of past perfor mance, not of future possibilities. The grade a student deserves in a course depends upon his past record of achievement in the course. If a man deserves a punishment for a crime, it is because that person com mitted a crime in the past, not be cause (for example) it would be use ful to punish him as a scapegoat; punishing the inn~cent is always un just. Nor is it just to punish him be cause he might commit a crime in the future. Preventive detention of persons believed to be dangerous is sometimes used as a utilitarian measure, to prevent the commission of crimes in the future, but this is done from considerations of utility, not of justice. (Justice is not the whole of morality, and whether preventive detention is ever justified would have to be argued separately.1) 3. Sometimes a law itself is un just; if every driver who parked too long at a parking meter were to be given a prison sentence, such a law, however impartially administered, would be unjust because the sen tence is harsher than the offense de serves. But more often it is the administration of the law that" is un just; one man gets five years for armed robbery and another man guilty of the same offense is given a suspended sentence, or convinces the jury that he is insane, thus receiving an insanity verdict which may let him out in sixty days. Such malad ministration of the law is often called comparative injustice. Many prison ers who accept full responsibility for their actions and do not claim that their sentences are undeserved, still complain of comparative injustice: why were they sentenced when someone equally guilty was let go?

Their sentence may itself not have been unjust, but the injustice lies in the lightness or absence of the other person's sentence compared with theirs. Justice is compatible with forgive ness if the person deserves to be for1985 JUSTICE VS. "SOCIAL JUSTICE" 11 given. But the only person who can forgive the aggressor is the victim. If the offender asked the person he injured "Will you forgive me?" and the victim said "No," and a stranger then entered the room and said "That's all right, I forgive you," the stranger could only utter the words, not actually extend the forgiveness; only the aggrieved party can do that. "I don't want the mother to embrace the oppressor who threw her son to the dogs!" wrote Dostoyevsky. "She dare not forgive him! Let her forgive him for herself, if she will, let her forgive the torturer for the immea surable suffering of her mother's heart. But the sufferings of her tor tured child she has no right to forgive."2 As opposed to forgiving, pardoning is a legal act: a president or a gov ernor may pardon a criminal. Is par doning compatible with justice?

Again yes, if the person deserves to be pardoned. 4. Justice is a very different thing from mercy, and mercy may be at odds with justice. "But shouldn't jus tice be tempered with mercy?" Let us consider what this would involve. Suppose that five men have com mitted murder, but one of them is let go as an example of mercy. This is surely a comparative injustice to the other four, as well as an injustice to the one who is let go (assuming that he deserves the assigned punishment). If mercy is so wonderful, why shouldn't every criminal be let go? That would really be merciful! Why shouldn't every teacher give every student an A as an act of mercy? Be cause, of course, this would be a great injustice, especially to the students deserving A's. It would also be mercy to give everyone ajob demanding lit erary skill, even to persons who are illiterate-and more merciful still to give them wages for doing nothing at all. Mercy in this sense would mean a total abandonment of jus tice. (Mercy in a much different sense, such as "giving the defendant the benefit of the doubt" in criminal cases [procedural justice ], giving him a chance to improve his conduct, etc., is desirable enough, but these are al ready incorporated in the notion of just treatment; they are included in justice, they do not supersede it.) Justice vs. Collectivism 5. Most important of all, justice is individualistic: since the deserts of individuals differ from one another, so should their rewards and punish ments differ from one another. That is why Aristotle said that justice consists of "treating equals equally, and unequals unequally." If five per sons have committed no crime and five other persons have committed crimes with a one-year sentence at tached, it would be unjust to average out all their records and condemn all ten to six months in jail. The inno12 THE FREEMAN January cent do not deserve the sentence, and the guilty do. Justice is not a matter of averaging; it is a matter of as signing to each individual his or her proper desert.

The example just given illustrates the opposite of justice, namely col lectivism: that is, not considering a person's individual deserts but con sidering his behavior solely as a member of some group. Suppose someone in tribe A has killed a man in tribe B, and in retaliation the members of tribe B conduct a mas sacre of the entire tribe A. Only one of the members of tribe A was guilty of murder, but all his fellow tribes men are killed, not because they were involved in the killing but sim ply because they were members of the same tribe as the killer. Such tribal retaliations, though common in primitive societies, are grOE1S in justices because they involve the punishment of those who do not de serve it. (A variant of this occurs when the members of tribe B select a member of tribe A at random and kill him, even though the person killed was not. the person who was guilty; he was selected not because he was guilty, but simply because he happened to belong to the same tribe as someone who was.) Racism is a particularly perni cious form of collectivism. Persons who cast racial slurs on others are not considering the individual mer its or demerits of the person slurred; they may not know the individual at all, except that he is a member of some racial group (Jews, blacks, Ital ians, etc.). Though the person's in dividual qualities may be quite dif ferent from many other members of the group, all this is ignored: all they know or care is that he is a member of that group. "A genius is a genius, regardless of the number of morons who belong to the same race-and a moron is a moron, regardless of the number of geniuses who share his racial origin. It is hard to say which is the more outrageous injustice: the claim of Southern racists that a N e gro genius should be treated as in ferior because his race has 'pro duced' some brutes, or the claim of a Nazi brute to the status of a su peri or because his race has 'pro duced' Goethe, Schiller, and Brahms."3 Vagueness of "Desert"

All might agree that justice is treatment in accord with desert, and yet they might disagree on particu lar judgments about justice because they do not agree on what particular punishment, grade, compensation, etc. a person deserves. Everyone agrees that a murderer should be punished, but there is much disa greement about what specific pun ishment is deserved: should it be the death penalty? should it be life im prisonment? should it be imprison ment for a stated term with possi1985 JUSTICE VS. "SOCIAL JUSTICE" 13 bility of parole? should it involve incarceration in a prison, or would duty on a work farm suffice? There is general agreement about the severity of various offenses: mur der, which takes away the victim's life, is a worse crime than assault and battery, from which a victim may recover and resume his life thereafter; crimes against the per son are worse than crimes against property, which can usually be re placed; and so on. Yet this is not al ways so: there are forms of mutila tion that are worse than death, and the theft of a valued and irreplace able family heirloom may be a worse loss to the victim than being mugged. Since each case is unique, it is necessary to describe in detail the circumstances of each case in or der to form any estimate of the per son's desert.

Even with such a detailed descrip tion, along with a sincere attempt to empathize with the situation of both parties, there will be disagreement about desert. A woman will ordinar ily recommend a severer punish ment for rape than a man will. A wife will tend to be more sympathetic to the position of a wife in divorce court, and a husband will tend to be more sympathetic with the husband. Those who do not care about animals will tend to be immune to pleas about cruelty to animals. "Put himself in the other person's place" is a piece of advice that most individuals can practice only very incompletely; and even when they try, they will be likely to favor those who have been in situations similar to their own. A criminal will be likely to be more concerned with the treatment of prisoners, but a person who has been stabbed is more likely to identify with the victims of stab bing and less likely to be worried about how the aggressor is treated in prison. This ineradicable "human equation" will probably color all of a person's judgments about deserts even a judge's.

Is the Punishment Deserved? In all this, however, it must be kept in mind that the only consideration relevant to justice is whether the treatment (the punishment, the re ward, the grade, the compensation for work done) is deserved. Punish ment should be proportional to de sert, whatever that may be; it should not be proportioned to the usefulness of the punishment, as it is in utili tarian theory. The question for jus tice is "What punishment does he deserve?" not "What punishment would be most socially useful?" As a rule the two tend to coincide: the most serious crimes (involving the worst injustices) tend to be those that also require the strongest deterrent measures in order to prevent them from recurring. But it is not always so. It might be socially useful, es pecially during a crime wave, to con14 THE FREEMAN January vict an innocent person and punish him as an example, thus deterring potential lawbreakers and giving the members of the community a re newed sense of "law and order." But of course the conviction of an inno cent person, no matter what its so cial utility, is always an injustice, because the innocent person does not deserve to be punished.

When we turn our attention from the prison to the marketplace, we face equally pressing problems. What should be our criteria for de termining what compensation a worker deserves? Is there such a thing as a "just wage" and how do we determine it? Does justice com mit us to "equal pay for equal work"? Is discrimination in hiring unjust? Does the free market, when it is per mitted to function, result in injustice? "Equal Pay for Equal Work" Does justice require that employ ees receive equal pay for equal work? That depends on what "equal work" means: 1. If it simply means equal time spent, this has very little to do with justice. One employee may work dil igently throughout the workday, and another may spend half her time on the phone with her friends while let ting the customers wait in line (as frequently happens in government offices, such as the Department of Motor Vehicles). To give two such employees equal pay would be un just, though this is typically what occurs.

2. "Equal work" may mean equal effort expended. Two employees may each work to their full capacity dur ing the workday-they both "do their best." Should they receive equal pay? Again,. not necessarily. The one may have more background and ex perience and expertise in the job than the other; and ordinarily more experienced employees do, quite justly, receive more. Also, in any kind of job requiring imagination, one person may exert maximum ef fort and produce little or nothing, while the other may with less than maximum effort achieve brilliant re sults. Doesn't the second deserve a higher return? (If he didn't receive it, another employer who appreci ated ingenuity and initiative would probably hire him at a higher wage.) But if both exert that same effort, and the difference is that the second employee is brilliant and the first is dull and rather stupid, isn't it unfair (unjust) to penalize the dull em ployee for a quality, such as uni maginativeness, which he lacks through no fault of his own? If they're both doing their best, why give less to the dull one? Isn't this an injustice? No: it's true that it's not the dull person's fault that he is not as gifted, but his lack of intelligence 1985 JUSTICE VS. "SOCIAL JUSTICE" 15 is a misfortune (like a disease), not an injustice imposed on him by other persons.

3. But "equal work" can also mean the product of effort, namely achievement. A student who de serves and receives an A in mathe matics may have a great natural ap titude for it, and may work far less hard than a duller student d,idfor his B or C. But the grade is a 'measure of achievement, not of effort or time expended. The employee in a factory whose productivity is high (either in quantity or in quality, or both) de serves higher pay, having contrib uted the most to the organization that employs him. If high achievers receive higher compensation, this is hardly an injustice. Justice and Job-Discrimination But of course not everyone does re ceive higher pay for higher achieve ment. Some employees are compen sated less because of their race or sex; some are turned down as appli cants because of this, before they have a chance to achieve anything in a job at all. Isn't this an injustice?

And doesn't justice demand, as "af firmative action" programs insist, that the injustice be rectified by giv ing the victims of discrimination preference in jobs available now? That depends. (1) Ifit is not you but your ancestors who have been the victims of discrimination, then giving special consideration to you in no way helps them. To hire an under qualified applicant because his great-grandfather was a slave, is no help to the deceased slave; a grave injustice was done, but nothing can be done now to remedy that injustice. To reward someone now because an other member of the same racial group was once penalized is sheet collecti vism. (2) But if the person himself has been discriminated against in the past, measures can usually be taken to correct it: past injustices can often be corrected. (a) You may have been the victim of job-discrimination because the ed ucational facilities in your neigh borhood were poor; you never learned to write or add properly so as to be qualified for any decently paying job. To hire the underquali fied person anyway is no solution: it is not just to students to inflict on them a poor teacher because (for rea sons that are not, or not entirely, her fault) she was discriminated against in the past. And to the extent that such hiring is practiced, the stu dents in a school or fellow employees in a factory come to view the new employee as a case of "sympathy hiring," rather than hiring on the basis of genuine qualifications for the position; which does nothing whatever either to improve the qual ity of the instruction or to promote harmony among races.

16 THE FREEMAN January On-the-job training may help to remedy this defect-a device that many employers use. And in the longer run, changing the educa tional system so that these radical disparities in educational back ground no longer occur, is even more effective. But hiring an incompetent employee is only an attempt to cor rect one past injustice by perpetrat ing another one. Curing Past Discrimination by New Discrimination (b) Suppose, however, that of two applicants for a job, A, who is black, is more qualified than B, who is white, but B gets the job because he is white. This is certainly a case of job-discrimination on account of race. The question is how to remedy it. Suppose the position falls vacant; should A, who was turned down be fore, now be hired in preference to the other new applicant, C? If they are equally qualified, yes: this would help at least to correct a past injus tice. But suppose that C is more qualified than A is. Then hiring A rather than the more qualified C constitutes an injustice to C. (It's not C's fault that she is white, any more than it was A's fault that she is black.) There are many such cases in which acts of past discrimination can be corrected only by committing an other act of unfair discrimination in the present, thus perpetuating discrimination, not eliminating it. If a past act of injustice can be remedied by creating another one in the pres ent, it may be that the cure is worse than the disease; perhaps it would be preferable, rather than to commit a second injustice to correct the first, simply to say no to any such discrim ination in the future. In that case, we hire whomever is most qualified for the job, regardless of the race; and if by this procedure a past act of un fair discrimination remains uncor rected (for this time only), at least no future acts of discrimination need occur as a result. 4 Other Aspects of Job Discrimination 1. It has been assumed thus far that one's race or sex is irrelevant to one's qualifications for a job. But this, of course, is not always the case.

An employer is not necessarily treat ing an applicant unjustly if he hires a man rather than a woman as a bodyguard or as a bouncer in a bar; the woman is turned down not be cause of her sex but because she lacks the physical qualifications for the job. Similarly, a white actor is not being unjustly treated in being passed over for the role of Othello, which requires a black actor to take the part. If justice in hiring is based on one's qualifications for the job, sometimes a person may lack the qualifications precisely because of sex or race.

1985 JUSTICE V8. "SOCIAL JUSTICE" 17 2. It is worth noting that most ern ployers will not turn down a quali fied black applicant in favor of a less qualified white applicant, even if only for reasons of self-interest: his company will prosper only if he takes on the most qualified applicants, re gardless of race or sex. Why is the percentage of unemployed black teenagers almost 50% today, whereas it was less than 10% in the late 1940s? It is not because employ ers have suddenly turned racist; it is because government interferences in the marketplace, which were in tended to help minorities, have ac tually hurt them. For example, min imum-wage laws have prevented many teenagers from being offered summer jobs, and from receiving on the-job training (since before they acquire a skill the employer would lose money by hiring them at the le gal minimum wage). There are countless. examples of this, and a reading of Markets and Minorities by the distinguished black econo mist Thomas Sowell should be suffi cient to convince anyone of it, pop ular propaganda to the contrary notwithstanding. 5 3. One should keep in mind the dif ference between justice and rights.

Many would contend, as I would, that no one has a right to a job:. for example, no employer should be forced by law to hire an employee he doesn't need, or even to hire an employee he doesn't want on his pay roll; if it's his own money he's dis pensing (and risking), he is within his rights to hire whom he pleases. If he is a racist who refuses to hire blacks or Mexicans, he may well suf fer economically for his prejudices: if he fails to avail himself of many of his best qualified applicants, he will himself be the loser, especially when his non-racist competitor employs them; but that is a punishment he takes on himself by being a racist. Many employers may have racist feelings, but if they want to stay in business they do not let these feel ings get in the way of their pocketbooks. His failure to hire certain persons is, then, not a violation of the rights of those whom he fails to employ; no one has a right to a job that another person has to pay for. But in refusing to hire those applicants who are most qualified, he is committing an injus tice, because he is not treating oth ers in accordance with their deserts.

The right to so treat them is not in compatible with his being unjust in so treating them. Whether the law should prohibit so treating them de pends on one's view of the law: whether one believes, as the Found ing Fathers (on the whole) did, that the law should prohibit only viola tions of rights, or whether (as on more recent views) the law should intervene also whenever there are cases of injustice.

18 THE FREEMAN January Justice and the Market It has often been alleged that the free-market system is unjust. Criti cisms of the free market constitute a very high percentage of the content of most college courses in ethics and social philosophy. It may be granted at once that no system is entirely just in every detail; there will always be cases of injustice. But the market system is by far the least unjust of all economic systems. The Soviet Union does not have a market economy. A worker's pay de pends not on his actual merit or pro ductivity, but on what the bureau crats in charge decide to pay each worker in a given category. The gov ernment decides that teachers shall receive a higher wage than physi cians, and that factory workers shall receive a higher wage than filing clerks. Theoretically at least, each worker in a given category is sup posed to earn the same-the as sumption being that each one is maximally dedicated to the ideals of communism and therefore will exert maximum effort and achieve maxi mum productivity during his hou~s at work. How does this system work out in practice? A description by someone who defected from it pro vides a dramatic illustration: Nobody in the bus factory was in a hurry to work; the workers preferred to sit in the smoking room until the fore man appeared, when they all dashed to their places. "Why should we hurry for the money they pay us?" said the work men. "Work's not a wolf, it won't run into the forest!" In the mornings they were almost all drunk or hung over, and throughout the working day people would be regularly detailed to slip over the fence for some vodka. Only one man put in a full day's work. The rest hated him, and when pointing him out would rotate one finger meaningfully by the temple. They were always looking for chances to do him dirt, either by surreptitiously damaging his machine or by stealing his tools.

"Want to be a champion and raise the targets?" they said spitefully. It turned out that if one man exceeded the target, the target would be raised for·all of them the following month, and they would have to work twice as hard for exactly the same money. 6 The injustice of a system that pe nalizes the dedicated worker is too obvious to require comment-not to mention the effects on the worker himself: nothing ruins the morale of a human being more than being pe nalized for doing a good job. Market Rewards A market economy, by contrast, re wards initiative and enterprise. Not every employer recognizes talent immediately: there may be a period in which he pays a certain employee less than he would if he knew the employee's true worth. Yet the ten dency in a market economy is for each person to rise to the limit of his ability. Since there are competing employers, if one employer doesn't 1985 JUSTICE VS. "SOCIAL JUSTICE" 19 recognize his worth, another one is likely to do so.

Don't those who work in SOIne kinds of jobs deserve more pay than others? Yes, and the market sorts this out also. A person who does dan gerous work, such as walking along the catwalk of a high bridge for safety inspection, is not likely to take such a job unless in doing so he earns more than he would as a janitor. Nor is a person likely to spend years of his youth going through medical school if at the end of the road he earned no more than he would have as a dishwasher. And a physician with a good record of curing diseases is likely to have more patients than one with a bad record; and doesn't the first physician deserve his greater reward? There is no one wage which one can describe as ajust wage (surely this depends on the health of the economy, and what em ployers can afford to pay): if one wants a definition of ajust wage, one could simply say that it is the wage that one's services can command on a free market. The fact that some persons' labor is worth more than others' is largely taken account of by the market itself.

A foreman complains that the manager who sits behind a desk all day receives more pay than he does. But the manager has the responsi bility of coordinating workers' ef forts and turning out a quality prod uct. And the president of the firm, who earns more than the manager, has the awesome responsibility of trying to anticipate next year's mar ket, and thus deciding how much of what to produce, what materials to order and from whom; on such de cisions depends the continued exis tence of the firm. Doesn't the successful discharge of such respon sibilities merit a higher income? Workmen and foremen who later be come managers and members of the board seldom complain any longer about the disparity in income. There are those who say that no one deserves the high pay received by some executives and corporation heads-that such high incomes somehow constitute an injustice. But what if the executive who receives $500,000 a year is talented and in genious enough to save the company two million dollars a year without sacrificing quality of product? He has certainly been worth more than his pay to the company. The stockhold ers are anxious enough to pay him this, and even more rather than see him captured by another company.

Should they be prohibited from pay ing him what they believe he deserves? Misfortune vs. Injustice If someone is unemployed because there is no longer any demand for his skill, he will have to set about ac quiring another. But where is the in justice in this? Who is the perpetra20 THE FREEMAN January tor of the alleged injustice? The buggy-maker who no longer has any demand for buggies? Wouldn't it be unjust to the buggy-maker to force him to retain a worker he doesn't need, when most customers are buy ing cars instead of buggies? Or suppose a man does have a mar ketable skill but at the moment there are no openings in his area. Is this unjust? It is unfortunate for him that he must either be unemployed or change jobs or move to another area, but there is no one who can be accused of treating him unjustly. The more a free market is permitted to operate, the more likely it is that he will soon find an outlet for his skills.

Again, his unemployment may be a temporary misfortune, but not an injustice. Suppose a farmer decides to grow soybeans this year, endeavoring to enrich the soil and to increase the output of the same product that made him considerable money last year. But suppose that many other farmers have the same idea, and as a result there is an overproduction of soybeans and the price of soybeans this year suffers a sharp decline. This is simply a reality of the mar ket: "Given constant demand, if there's more of a product the value of each unit declines." Is this an in justice to the farmer? If the farmer's crops are lost through drought or flood, this is a misfortune, not an injustice; but the fact that other farmers also planted soybeans is a deliberately under taken human action, not a condition of nature. Still, where is the injus tice? If the farmer had been wise, perhaps he should have planted something else this year; but how is the fact that other farmers also wanted to make money by planting soybeans an injustice to him? If he can plant soybeans, why can't they?

It may be a misfortune that too many are grown this year and a surplus re sults; but where is the injustice? Who has been unjust to whom? If he had a reason to anticipate what other farmers would do, he is stuck with the results of bad planning on his part; but if he had no way of know ing, the financial loss can be de scribed only as a misfortune, not as an injustice. Justice vs. "Social Justice" Those who are engaged in "social engineering" often characterize the concept of individual justice, de scribed above, as outdated. What we need, they say, is social justice. 7 But what exactly does this term mean? If justice is treatment in ac cord with desert, and deserts are un equal, then justice demands that treatments also be unequal. If every one were given the same wage re gardless of effort or achievement, we would have a society in which hardly anyone would choose to work at all; in the end there would be nothing 1985 JUSTICE VS. "SOCIAL JUSTICE" 21 left to distribute, and starvation would stalk the land. The ideal of justice as complete egalitarianism everyone receives the same regard less of who does what or how much, or even if they do nothing at all-is contradicted by the most elementary facts of reality. It is not the idea of forcible redistribution that deters egalitarians-they have no objec tions at all to that-but only the fact that once the goose has been killed it can lay no more eggs.

Proponents of "social justice" do not, then, usually demand that every person (or every family) receive the same income. For reasons of sheer survival, this is not done even in the Soviet Union. What the proponents of "social justice" do demand, how ever, is that everyone, regardless of effort, ability, or achievement, re ceive a "decent standard ofliving" which in urban America may in clude not only food, clothing, and shelter, but a telephone, a television set, and convenient means of trans portation as "necessities of life." And who shall be required to pay for these things? Those whose income is higher; "justice demands" that those who are "more fortunate" be re quired to contribute to those who are "less fortunate." These are the pop ular name tags, and the underlying assumption is that if one person has more and another less, this is solely a matter of "luck" or "fortune," as if somehow individual ability and initiative had nothing to do with im proving one's lot.

It is far from clear, however, how A being forced to give part of his pay check to B is an example of justice: it would seem to be a case of injustice to A, and a windfall for B. And even if such transfer payments should be made, should they be done in the name of justice? The basis of justice is desert; the basis of charity is need: in charity, we give to others because they need it; in justice, we receive compensation (or punishment) be cause we deserve it. The difference between justice and charity should not be obscured. The "Underprivileged" and Why They Are Poor The poor are usually classified as "unfortunate" or "underprivi leged," as if those who earned more had purposely deprived them. But this label, which social planners au tomatically attach to everyone who is below a certain level of income, ap plies only to some of them, certainly not to all. We must first investigate, which social planners almost never do, why they are poor.

1. Suppose a neighbor of yours is about to make an investment which you know to be fraudulent: he will lose everything if he makes the in vestment. Undeterred by your pleas, he does it anyway, and the result is that he loses everything. Would most 22 THE FREEMAN January people, including champions of "so cial justice," be willing to hand over part of their paychecks in perpetuity to a person who has merely been foolish? 2. Suppose a lady has been thrifty all her life, saved for her old age, and has a small house and yard; a second lady, with considerably more in come, spent it all on riotous living and is now destitute. Should the first lady be required to give over part of her limited income each month to the second? (That is the way things work out under the current welfare sys tem; but is this justice?) 3. Assume that a worker has been able to pay into old-age insurance but simply failed to do so, spending everything she earned. Now she is destitute. Should others, who have provided in advance for their old age, be forced to hand over a portion of their savings to the person who has not so provided? To do so may be charitable, but is it just?

4. Now let us take a different kind of case. A person is ill or has a phys ical handicap which does not enable her to work; she would like to, but she can't and her family has no re sources. Shouldn't "society" take care of her? Coercive or Voluntary This is certainly the best case for welfare; but the question remains whether it should be government welfare (compulsorily paid by all wage earners) or privately financed welfare (voluntarily contributed by those who are able). Though the matter would require a lengthy dis cussion that is not possible here, I suggest that the persons who answer to this description are a compara tively small minority of the popu lation, and that, once the enormous ball-and-chain of high taxation (in cl uding social security payments) was removed from every wage earner, and would-be entrepreneurs could start small businesses and take on employees without the present high probability that their enter prises will be bankrupted by taxes and regulation, there would be such a resurgence of prosperity that gov ernment welfare would be quite un necessary: private funding would be quite adequate to the task, as it was during the first century of American history when the standards of living were much lower than they are now.8 Herbert Spencer was much wiser than today's planners when in 1884 he criticized "the tacit assumption that Government should step in whenever anything is not going right. 'Surely you would not have this misery continue!' exclaims someone, if you hint at demurrer to much that is now being said and done. Observe what is implied by this exclamation. It takes for granted, first, that all suffering ought to be prevented, which is not true; much of the suffering is cura1985 JUSTICE VS. "SOCIAL JUSTICE" 23 Supporters of Schemes THE hardworked and over-burdened who form the great majority, and still more the incapables perpetually helped who are ever led to look for more help, are ready supporters of schemes which promise them this or the other benefit by State-agency, and ready believers of those who tell them that such benefits can be given, and ought to be given....

Indeed the more numerous public instrumentalities become, the more is there generated in citizens the notion that everything is to be done for them, and nothing by them. Each generation is made less familiar with the attainment of desired ends by individual actions or private com binations, and more familiar with the attainment of them by govern mental agencies; until, eventually, governmental agencies come to be thought of as the only available agencies. HERBERT SPENCER, The Man VB. the State tive, and the prevention of it is pre vention of a remedy. In the second place, it takes for granted that every evil can be removed: the truth being that, with the existing defects of hu man nature, many evils can only be thrust out of one place or form into another place or form-often being increased by the change. "Theexc1amation also implies the unhesitating belief ... that evils of all kinds should be dealt with by the State. There does not occur the in quiry whether there are at work other agencies capable of dealing with evils, and whether the evils in question may not be among those which are best dealt with by these other agencies. And obviously, the more numerous governmental interventions become, the more con firmed does this habit of thought grow, and the more loud and perpet ual the demands for intervention."gTry Freedom With an unfettered economy, and a minimum of charity (and most Americans have more than a mini mum), the problem of poverty would become almost obsolete. Economist Thomas Sowell may have overstated the case, but he had a valid point when, in answering the question "How to get rid of poverty?" he an swered, "Hold a meeting of all the leading experts on poverty some where in the middle of the Pacific and not let them go home for ten years. When they came back, they 24 THE FREEMAN would discover there was no more poverty."10 It will be apparent by now that the demands of "social justice" are in compatible with those of individual justice; to the extent that the first demand is met, the second must be sacrificed. If the government takes money out of Peter's wallet to put it in Paul's, it may have achieved greater equality, but not greater jus tice. It is impossible for individuals to receive a just wage on a free mar ket and then be forced to part with a portion of it, for then they receive less than a just wage.

The final irony is that the ideals of the champions of "social justice" are not even achieved when they are put fully into practice. Because people will not-and cannot-produce in definitely without compensation, the final result of massive transfer pay ments is equality of zero-universal destitution. That, after all, is how the excesses of the late Roman wel fare state gave way to the desti tution of the Dark Ages. ll It has happened many times in history, and it could happen again if the proponents of "social justice" -that is, enforced collectivism-push their demands so far as to cancel out the requirements of individual justice. ® -FOOTNOTESlSee, for example, Frederick Schoeman, "On Incapacitating the Dangerous," in John Ar thur and William Shaw, eds., Readings in the Philosophy ofLaw (Prentice-Hall, 1984), and in Joel Feinberg and Hyman Gross, eds., Philos ophy of Law (Wadsworth, 1981).

2Fyodor Dostoyevsky, The Brothers Kara mazov, Modern Library edition, p. 254. (First published 1882.) 3Ayn Rand, "Racism," in The Virtue of Sel fishness (Signet Books, 1964). 4See Louis Katzner, "Is the Favoring of Women and Blacks in Employment and Edu cational Opportunities Justified?" in Feinberg and Gross, Philosophy of Law. - 5See also Walter Williams, The State Versus Blacks (McGraw-Hill, 1982); Warren Brookes, The Economy in Mind (Universe Books, 1982). 6Vladimir Bukofsky, To Build a Castle: My Life as a Dissenter (Viking Press, 1977), p. 123. 7See , for example, Richard Brandt, ed., Social Justice (Prentice-Hall, 1962); Nicholas Rescher, Welfare (University of Pittsburgh Press, 1972); Norman E. Bowie, Distributive Justice (Uni versity of Massachusetts Press, 1971); Robin Barrow, Injustice, Inequality, and Ethics (Barnes & Noble, 1982); Michael Bayles, Prin ciples of Legislation (Wayne State University Press, 1978).

8See , for example, Henry Hazlitt, The Con quest of Poverty (Arlington House, 1978). 9Herbert Spencer, The Man 'versus the State (Caxton Press, 1940), pp. 34-35. Originally published 1884. See also John Hospers, Liber tarianism (Laissez Faire Books, 1971), Chap ter 7. lOThomas Sowell, in Reason, December 1980 issue, p. 5. USee Ludwig von Mises, Human Action (Reg nery, 1945), esp. pp. 767-769; also Isabel Pa terson, The God of the Machine (Caxton Press, 1943), pp. 38-40.

Dean Russell Competition and Capital SEVERAL of Frederic Bastiat's para bles or satires deal with the thenle of unfair foreign competition, usu ally based on wage differentials (cheap foreign labor) but sometimes on other "unfair" advantages en joyed by foreign producers, e.g., nat ural resources, capital formation, and so on. In one of his stories, "The Candle makers' Petition," Bastiat picked the ultimate example of unfair compe tition-a foreigner with such low costs of production that he actually gave his product away free. Ob viously that price is difficult for do mestic producers to meet, and is thus unfair. So Bastiat argued (tongue-inDr. Russell, recently retired from a full schedule of academic work, continues freelance consulting, lec turing and writing from his home in Westchester County, New York. This is one of a series of articles examining current interventions of the welfare state in the light of warn ings from the French economist and statesman, Frederic Bastiat (1801-1850).

cheek) that his government should pass laws to protect national indus try against such an unscrupulous foreign competitor. Bastiat's 1844 "petition" on behalf of the candlemakers and other pur veyors of artificial lighting was ad dressed "To the Honorable Members of the Chamber of Deputies" in France, a group he himself joined in 1848. "We candlemakers are suffering from the unfair competition of a for eign rival. This foreign manufac turer of light has such an advantage over us that he floods our domestic markets with his product. And he of fers it at an absurdly low price. The moment this foreigner appears in our country, all our customers desert us and turn to him. As a result, an entire domestic industry is rendered completely stagnant. And even more, since the lighting industry has countless ramifications with other 25 26 THE FREEMAN January national industries, they too are in jured. This foreign manufacturer who competes with us without mercy is none other than the sun itselfl "Here is our petition: Please pass a law ordering the covering of all windows and sky lights and other openings, holes, and cracks through which the light of the sun is able to enter houses. This free sunlight is hurting the business of us deserving manufacturers of candles. Since we have always served our country well, gratitude demands that our country ought not to abandon us now to this unequal competition.

"We hope that you gentlemen will not regard our petition as mere sat ire, or refuse it without at least hear ing our reasons in support of it. "First, if you make it as difficult as possible for people to have access to natural light-and thus create an increased demand for artificial light-will not all domestic manu facturers be stimulated thereby? "For example, if more tallow is consumed, naturally there must be more cattle and sheep. As a result, there will also be more meat, wool, and hides. "Next, if more oil is consumed for lighting, we shall have to plant ex tensive olive groves and other oil producing crops. This will bring prosperity to agriculture. "In addition, our waste lands will soon be covered with pines and other resinous trees. As a result of this, there will be numerous swarms of bees to increase the production of honey. In fact, all branches of agri culture will show an increased development.

"The same applies to the shipping industry. The increased demand for whale oil will require thousands of ships for whale fishing. In turn, that will provide a myriad ofjobs for ship builders and sailors. In a short time, we will also have a navy capable of defending our country. And that, of course, will gratify the patriotic sen timents of us candlemakers and other persons in related industries. "The manufacturers of lighting fixtures will be especially stimu lated-candlesticks, lamps, cande labra, chandeliers, crystals, bronzes, and so on. The resulting warehouses and display rooms will make our present shops look poor indeed. "The resin collectors on the heights along the seacoast, as well as the coal miners in the depths of the earth, will rejoice at their higher wages and increased prosperity. In fact, gentle men, the condition of every citizen in our country-from the wealthiest owner of coal mines to the poorest seller of matches-will be improved by the success of our petition."* This argument for restrictions *I've done my own translating, and I've slightly condensed Bastiat's story to the essen tials needed to fully explain his brilliant point, Complete Works of Bastiat, Guillaumin, Paris, 1878 edition, vol. 4, pp. 57-62.

1985 COMPETITION AND CAPITAL 27 against foreign competitors because of their presumed cost advantages (usually, but not always, cheaper la bor) is the basic argument for tariffs, quotas, and other restrictions and prohibitions against international trade. Sometimes lip-service is paid to national defense arguments, health arguments, and a few others. But those arguments don't really carry much weight; our arms man ufacturers are the world's best, and no one seriously objects to sound rea sons for keeping infectious diseases and destructive bugs out of our coun try. The basic argument advanced by Bastiat in so many of his parables and explanations is the only argu ment the protectionists can really depend on, i.e., protection against unfair foreign competition that's de stroying American jobs. These "unfair" practices are sel dom spelled out in advance, since it would be difficult to know what they are until they happen. They are pos itively identified only after a domes tic producer loses business to a for eign competitor. When that happens, a "peril point" has been reached-always due to some unfair foreign practice, of course-and laws are passed (or called into action) to pro tect the domestic producer against the foreign producer. As a result of this "magician's tactic" of drawing our attention elsewhere, we never know the real reasons for the high costs of the domestic producer. Behind his protective law, there's no fi nal incentive for him to improve his operations.

Well, let's take a look at some of the possible reasons (at home and abroad) that have a direct bearing on this entire problem of competition and capital formation, e.g., "unfair" foreign competition, the effects of capital formation (machines) on jobs and wages, the differences between domestic and foreign trade, and the effect of laws against foreign capital. Since all of these issues are inex tricably mixed, I'll not here try to compartmentalize them but will use them as they come along. First, cheap foreign labor. Cheap Foreign Labor The most persuasive argument I ever heard for protection against competition from foreign labor didn't concern cheap labor at all but pro tection against expensive foreign la bor. You may be as surprised as I was when I encountered that argument while I was a doctoral student at the University of Geneva, where I'd made friends with a student from Egypt.

I knew his country had one of the highest tariffs in the world. As a "free trader," I sometimes chided him about it and suggested that since labor was already so cheap in Egypt, surely they didn't need laws to protect them against foreign com petition. He said I was wrong, that 28 THE FREEMAN January I was missing the real point entirely, that protection against cheap labor is indeed absurd, that the problem is competition from expensive labor, and that Egypt most definitely did need protection against that type of foreign labor. Here's how he ex plained it. He correctly pointed out that the low production of Egyptian workers was due primarily to their primitive tools, i.e., the absence of capital or machines. As a result of this, he said, the cost of labor in Egypt is one of the highest in the world when cor rectly measured, i.e., labor cost per unit of production. He then used the chalkboard to show me a mathematical compari son between the $25 an hour paid to the operator of a bulldozer moving sand-and the 25 cents an hour paid to 200 fellahin with shovels moving the same amount of sand. Even after the low cost of capital (the bulldozer) is paid, the real cost of labor in Egypt is almost double what it is in the United States.

He then argued that the workers in undeveloped nations simply can't compete against industrial workers with their efficient machines and the resulting high production. Always, he said, the cost of labor is lower (much lower) in nations with much capital than it is in nations with lit tle capital. If it weren't for laws pro tecting our high -cost Egyptian labor against your low-cost American labor, you'd move in and most of our low-paid laborers would soon lose their jobs to your high-paid workers with machines. He's right, you know, as far as he went. And in any case, it was a most refreshing argument which should (but most definitely won't) end that fallacious "cheap foreign labor" ar gument that's responsible for so many of our disastrous laws. In reality, of course, it's the trad ing itself (not the relative wage scales) that causes real wages to rise in all nations that participate. In or der to understand this better, let's start with a statement that's not subject to argument: No person in Egypt or the United States will vol untarily trade with a person in an other country (or even next door) un less he puts a higher value on what he gets than on what he gives up.

And thus both parties in any trade (domestic or foreign) necessarily benefit (or at least expect to benefit) from the trade. Trading Across Borders Actually, when all is said and done, there's no exclusively economic or theoretical justification for discuss ing domestic and foreign trade sep arately; they're identical in all re spects-except for the purely arbitrary and artificial interven tions of government. For example, in the United States, a manufacturer in southern California has no par1985 COMPETITION AND CAPITAL 29 ticular difficulties in trading with a company in northern Maine, some 4,000 miles away. But when the same manufacturer tries to trade with a company in Tijuana, Mex ico-perhaps four miles away-he encounters all sorts of frustrating, noneconomic, and cost-increasing prohibitions and compulsions that have been devised by the two governments. The problems of transportation and distance (as such) are not some thing peculiar to international trade.

Nor do differences of language and religion constitute special prob lems in trading across national boundaries. For example, a Catholic manufac turer who speaks only Italian in Lu gano, Switzerland, has no problem at all in trading with a Protestant retailer who speaks only German in Zurich. But when he attempts to trade with his Italian cousin just across the border (both speaking the same language and belonging to the same church), he encounters prob lems that are often insurmountable. All of these problems are created by government and are thus completely artificial, unnecessary, and cost increasing. Canada offers an example of how vast distances, different wage scales, different languages, different reli gions' and different cultural back grounds present no real trade prob lems at all. But let a Canadian try to buy an automobile from Detroit just across the border! Even different monies (yen, peso, dollar, whatever) present no real problem to any trader-if the var ious monies can be freely bought and sold. But when this is forbidden or restricted, problems do indeed ap pear. Again, however, they are ar tificial problems and are due en tirely to governmental rules and -regulations.

Why Some Are Hungry In short, I'm convinced that any argument for free trade within a na tion is automatically and necessar By an argument for free trade inter nationally. If a person advocates free trade domestically to increase our level of material living, he can't log ically advocate protective tariffs and other similar measures to prevent goods and services from moving freely across national boundaries; for that would contradict his argument that free trade within a nation is good for all. It's simply not true that a nation and a people are made more pros perous by compelling themselves to pay twice as much as they need to pay for goods and services they want. I'm convinced that these policies stem more from lack of understand ing than from evil intentions. For example, hunger is a fact of life all around the world. And since we all want to help, we identify the 30 THE FREEMAN January problem as "hungry people" and send food. You see the touching ap peals for more food (money to buy food) quite frequently on your TV set or in your newspaper. But this hun ger is the symptom of a problem, not the problem itself. Why are those people without food? Is their inabil ity to produce food (or to produce goods and services to exchange for food) due to their stupidity or lazi ness? I think not. Then just what causes their continuing hunger, gen eration after generation?

I suspect the following personal ex perience goes far in identifying the real problem that causes so much hunger and human misery: I have a small amount of liquid capital, i.e., dollars that can be converted by la bor into the real capital of machines, raw materials, and finished prod ucts. For various reasons, I would like to use this modest supply of cap ital in India. I'd like to take advan tage of the unemployed (and under employed) labor found there, to improve my own material well being, and (since I'm a reasonably compassionate person) to also im prove the material well-being of sev eral Indian families who are now ac tually hungry. Over the years, I've made the fol lowing proposal to several acquaint ances in India, including two gov ernment officials. If you will permit me to come in, I said, I'll immedi ately hire at least ten people at better wages than they are now earn ing. Their working conditions will be more pleasant-and their employ ment will be steadier-than is now the case for any of them.

It's self-evident I would have to fulfill those promises before I could possibly persuade anyone to use my machines; fDr obviously, no one would work for lower wages than he's already earning. Even so, I al ways include in my offer the posting of a performance bond. Solving the Problem What I propose to do is to try to solve the cause (the real problem) by showing a few hungry people how to produce enough goods and services to feed themselves and their families on a continuing basis. And please note that I propose to back my judg ment with my own capital, not the taxpayers' money. So why don't I do it? The answer is shocking. The Indian government refuses to let me in. "No foreign im perialist is ever going to exploit us again," they proclaim in various words and tones. And they mean it; they're firmly convinced that India was once a prosperous nation, and then the imperialist British came in and took it all back to the British Isles, thus leaving India poor again.

I sure do wish someone would iden tify that "it" for me. Anyway, I once visited India and lectured at four universities there.

1985 COMPETITION AND CAPITAL 31 And I was fortunate enough to get interviews with the prime minister of India, the vice president, and two ministers. They were all nice people, even though not one of them under·· stood what I was talking about. They think only in terms of applying to the United States Department of State for more government-to-government grants-in-aid. And they almost al·· ways get them. Their threat to turn to Russia is a sure-fire way to get us to agree. And thus they continue to treat the consequences of the prob·· lem (not enough food to feed starving Indians) instead of the problem itself (government intervention in the market place). True enough, two of those Indian acquaintances informed me that I can enter India with my machines, under certain conditions. First, I must produce what the government wants produced; I'm not permitted to make the decision alone. And I must locate where the government specifies; I can't make that decision for myself. Further, I can't just rush out into the street and hire whom I please at whatever wages we agree on; those are important matters that must be cleared with the proper gov·· ernment official.

While I will be permitted to try to earn a profit, it must be "reasona·· ble"; the figure of a four-to-eight per cent return on my invested capital was mentioned. But in return for all this, the Indian government is also willing to sacrifice a bit; it will guar antee not to nationalize my company for at least ten years. And then the leaders of the Indian government wonder why (private) foreign capital doesn't flow in! And the empty bellies continue to mul tiply far faster than any "green rev olution" can possibly increase the rice and wheat yields. And our gov ernment officials (as well as the of ficials of the Indian government) continue to treat the symptoms of the problem rather than to face up to the problem itself. In all fairness, I sus pect the fault is lack of understand ing, not joy in observing hungry people. Dntil quite recently, I taught a graduate course in International Business Problems. Naturally there were several lectures dealing with the material covered in this arti cle-foreign competition, foreign in vestments, how to measure and com pare wage rates, the effects of capital formation on standards of living, the effect of governmental intervention on capital formation, and so on. At the end of the course, however, stu dents always got my "never trust a politician" lecture. Since most of those students were already work ing for companies with considerable international business, I offered them a single idea they could take back to the boss, if they wished.

If you are ever involved in select ing a foreign country in which to 32 THE FREEMAN January build a new plant or distribution center for your company, I advised them, begin by ranking the "candi date countries" according to the ex tent of controls imposed by the re spective goverments on their own domestic economies. Since this is the most important measurement of all, do it first, before any other criteria are applied. The leaders of any gov ernment can logically be expected to lean internationally in the same di rection they deliberately follow in ternally. You can depend on it. Thus before you commit your company's capital (the final security for your own job) to an enterprise in another country, know what's likely to hap pen to it politically. Ephemeral Promises I'm increasingly astonished at how many leaders of private business in the United States ignore the clear evidence of what the leaders of for eign governments choose to do in their own countries, and believe in stead in their ephemeral promises.

What's the attitude of the Russian leaders toward private capital? Well, that's their attitude toward your capital, whatever they may say to you. Since private capital is not per mitted in Russia, what causes you to imagine your capital can be safely invested there? "But they promised .... ," you say. Yes, I know. And they can "unprom ise" just as quickly and sincerely. "But my own government leaders promised me that if.... ," they con tinue. Again, yes I know. I also know that the old American axiom "Never depend on political promises" is not just ajoke; it's based on hard reality, long observed. There's another "old saw" I rec ommend to your attention: Look at what they do, not what they say. That applies to the leaders of all governments. I frequently use just· two countries to illustrate my point - both close to home and reasonably well known, Mexico and Canada. When I exam ine the attitudes of those two gov ernments (their laws and traditions) toward private domestic capital, I have a reasonably good guide con cerning what's likely to happen to my own capital. I don't much care what promises the leaders of the re spective governments make. Even if they're sincere (they may well be), I put no faith at all in their promises.

They simply can't be trusted. It's not that they're bad people; they're just ordinary people who earn their liv ings being politicians. If the leaders of a "controlled econ omy" offer you great tax conces sions, beware. If the leaders of a free economy don't offer you any tax concessions at all, put that down as a plus, not a minus. Always look at the real picture, not the postcard; look at the internal controls over do mestic capital, which is what your 1985 COMPETITION AND CAPITAL 33 own capital becomes when you send it there. Do you really believe that the lead ers of a foreign country will favor you above their own people? If you're that gullible, I would say to my stu dents, this "investment advice" isn't for you; the odds are you don't have any capital anyway. Why should they offer concessions to get your money in, when all they need do to raise large amounts of capital is to repeal the restrictions on domestic capital? I'm baffled as to why our banking leaders (who may well rank higher in "intelligence tests" than any other group of leaders) didn't ask themselves that ques tion years ago.

Not too many of the students took my advice, of course. They mostly wanted to know if that idea would appear as a question on the final exam. I can't fault them for that; it's always good thinking when you try to find out as much as you can about events that can be profitable to you. Whatever, when I finished with that particular lecture on "capital for mation and international invest ment," I always felt they had at least gotten something for their tuition money in addition to an A or B in my gradebook. ® THE LAW by Frederic Bastiat The law, it has been said, is nothing more than the will of tyrants. So it has been many times in history. But just laws depend upon a law which underlies the law passed by legislatures or declared by rulers. It is a law which provides the framework of liberty. Emancipation from the doleful theories of the compulsive state awaits discerning readers of this brief treatise.

This remarkable volume, translated in 1950 by Dean Russell, has been a best seller since then-one of the most clear and concise ar guments of the case for limiting government in the cause of freedom. 76 pages Cloth $3.50 Paperback $2.00 Special offer: 60 cents each for 100 or more copies (paperback) to a single address. Order from: The Foundation for Economic Education, Inc. Irvington-on-Hudson, NY 10533 (Postage paid on prepaid orders; otherwise $2.00 per order for billing.) Ernest G. Ross Let's LiberateMoney ALTHOUGH the idea of returning to a gold standard has received consid erable attention in recent years, the general focus has been to return to some sort of government managed standard. For instance, there has been a great deal of talk about rein stating a variant of the Bretton Woods gold standard-which proved to be a terrible failure. (For details, see Henry Hazlitt's latest book, From Bretton Woods to World Infla tion, reviewed by Bettina Bien Greaves in the June 1984 issue of The Freeman.) The difficulty with any state-over seen approach to revitalizing and protecting the monetary system is Mr. Ross is an Oregon commentator and writer es pecially concerned with new developments in human freedom.

34 that it misses the essential point about sound money. Sound money in the long run requires separation of money from state. A state-run monetary system is self-destructing; it leads to its own eventual erosion as politicians grad ually give in to temptations to in flate. Over and over, history has shown the truth of this proposition. Despite any heartfelt promises they may make, there is no rational basis for expecting future politicians to be have substantially better than thei~ predecessors. Under any command money system, politicians solemnly promise to resist the seductive power of inflation. But government control of money supersedes their resis tance; government controlled money is a powerful attractive nuisance LET'S LIBERATE MONEY 35 which corrupts even the noblest of intentions. Therefore, if one wishes to discuss the best way to bring back sound money, he must seriously consider money privatization.

As the idea of money privatization is not one generally familiar to the lay reader, let us deal with the is sue by answering some common objections. 1. What does it really mean to privatize money? Privatized money is minted, issued and backed by the private sector-for instance, banks or mining companies-with govern ment playing no major role in the process. About all government does is what it does with weights and measures: sets the basic conversion rate for the dollar. In fact, a true gold backed dollar is precisely a question of a measured weight: a dollar would equal a specified weight of gold. Privatized money takes the infla tion machine away from the govern ment-by doing away with the ma chine entirely. It is well known that inflation is economicallydestruc tive. But inflation is in the final analysis a government caused prob lem arising from the government's monopoly over money. If you take away the monopoly, you take away the ability of politicians to print too much currency-currency which they use to serve a long list of "justifiable" purposes of wealth redistribution.

2. But wouldn't private money tend to be unstable, subject to market whims? No. First, remem ber that the government would still be responsible for seeing that a dol lar-any dollar, issued by anyone would represent a specific weight of gold. To .. say that private money would be unstable if private parties issued it is equivalent to saying that yardsticks would be unstable unless no one but the government manu factured them. Clearly, that is non sense. Private companies manufac ture perfectly accurate, reliable yardsticks; a yard is the same whether the yardstick is made by the government or a hundred private companies-because all use the same standard. There is another relevant point here: a different way of stating the elimination of the inflation of money is that it is precisely a stabilization of money. Money privatization has an inherent advantage over govern ment money. Economically, a free market is al ways more stable, healthier, than a controlled market.

A free monetary system, one of pri vatized money, separates money valuation from government and thus helps separate wealth-preservation from state authority and hence from state meddling. This means that 36 THE FREEMAN January savings and investment can be un dertaken with more confidence. Businesses can better plan and are less afraid of what a change of administrations or Federal Reserve governors might bring about every few years. In short, people across the nation, whatever their economic en deavors, are able to focus on market forces and not government force as far as money values go. (It is quite likely that under a pri vate money system, there would be no need whatsoever for a Federal Re serve. Money measurement stan dards could be maintained by the Bureau of Weights and Measures.) 3. Well, how would a system of private money work in actual practice? The use of money itself never changes in basic form. Money is simply a medium of exchange, used as a store of val ue. However, be cause private money is out ofthema jor turmoil of the political winds, it works much better than govern ment-monopolized, fiat money-just as any private market tends to work better than a government-run market.

Not only do issuers of private cur rencies use the pre-set gold-weighted measure for their dollars, the mar ket itself rapidly assures that there is no fudging, no unrealistic money expansion, involved. The private market sees that firms do not issue more dollars than they can reasonably back with gold. Better-valued currencies achieve greater accep tance and circulation, eventually dominating the markets. 4. But if all dollars were con vertible into a specific weight of gold, why would the issue of com petition among currencies even arise? For the same reasons that some people prefer to buy company A's yardsticks than company B's. People ask which dollar is "better made," esthetically and structur ally. Also the stockholders of a money-issuing firm have a powerful interest in monitoring the solvency and wisdom of the firm's policies. Beyond this, users of money sel dom all ask for their gold at once.

Thus, a company may issue dollars in excess of its actual gold holdings, in anticipation of being able to meet conversion demands-as long as the firm is prudently managed. If the market feels the company is not well-managed, or that the com pany is issuing more currency than it can reasonably be expected to con vert to gold, that currency quickly falls out of favor. 5. But this sounds a little un certain. How would the· market be able to keep up on the many competing currencies-and how would money users gain protec tion from potentially imprudent money-issuers? To answer the last 1985 LET'S LIBERATE MONEY 37 part of the question first, above and beyond the protection afforded by stockholders' monitoring of com·· pany prudence, there is no reason why currencies cannot be insured. Once you bring insurance companies into the picture, they immediately and necessarily seek to protect their investment by themselves monitor ing the money-firms' health and wisdom.

Further, rating services can playa role. There are already companies which rate various monetary instru ments, such as Moody's or Standard and Poors (in bond markets, for in stance). Rating agencies are com mon in the United States in many fields-such as Consumer· Reports, which rates an incredibly wide va riety of private consumer goods, and Underwriters Labs, which rates electrical products. There are no major difficulties for the private market to keep tabs on the solvency of private currencies. With modern computers, the equiv alent task is done minute-by-minute on millions of shares of stocks or on competing international govern ment-run currencies. No major in novations are needed in order to keep tabs on private U.S. currencies. 6. But wouldn't privatizing money be a massive, almost im possibly complicated task? Not really, for the private market does most of the work. While it is better to move directly from a fiat system to private money, even if we move from a government gold standard assuming for the sake of argument that we get one-implementing a private monetary system is no more difficult than it was for private com panies to take over the parcel post market, which they now largely run.

Money privatization requires no elaborate groundwork and virtually no government oversight or expen ditures. All that is needed is a sim ple piece of legislation ending the government monoply on money. The idea is to open the U.S. currency sys tem to competition-without neces sarily wiping out the government backed dollar right away. When parcel post was opened to private competition, it was not nec essary to wring our national hands over which specific companies would accept the challenge of parcel post delivery. This was not something one could rationally foresee. The mar kets decided. Companies that wanted to compete with the Postal Service did it. Over time, the more efficient private parcel post compa nies-such as United Parcel, Federal Express, and Purolator-came to dominate the market. But people still could use the Postal Service if they wished. In short, no bureaucrat can or should try to foretell who or what private individuals or firms will dominate the production of private 38 THE FREEMAN January currencies. The market will be the best arbiter. The gradualism of this type of transition is orderly and painless for the nation-except, of course, for those politicians used to paying for their free lunches with fiat money!

7. But how could the U.S. gov ernment pay for its services with out controlling the currency? Taxation and currencies are not nec essarily tied to one another; this merely indicates how closely most people have come to associate a fiat system with taxation-probably be cause they subconsciously realize, or have heard, that fiat money infla tion is "back door" taxation. Under private money, inflation is for all intents and purposes abol ished-but that in no way affects taxation for essential government services, such as national defense. Instead of confiscating taxes de nominated in U.S. Federal Reserve notes alone, the government takes money denominated in weights of gold. At tax time, you do exactly what you do now: write a check to Uncle Sam (but very likely drawn on a private-money account). If Uncle Sam has a question about the check, or if the check bounces, well, laws against bad checks already exist.

Nor are wage withholdings a prob lem. Withholdings are merely a per centage of earnings. The percentage and withholding payments are unaffected by whether the wealth of earnings is measured in governme1!t or private dollars, because, again, all dollars are by law claims for a spe cific weight of gold. 8. What about the international effects on the U.S. dollar? Wouldn't money privatization se verely shock the markets, and perhaps weaken the dollar? We must remember two things: This program would be gradually phased in and would necessarily result in a type of gold standard. As the program would not, could not, be instituted overnight, there would be ample time for interna tional markets to adjust to the situation. Gradual, prudent institution of a system does not psychologically lend itself to panic-but rather to calm. It's not when governments move to ward sounder money that markets are shocked, it's when they move away from sounder money-such as Nixon's closing of the (limited) gold window in 1971. It is not less gov ernment command of money that is feared, but more.

Because the move to private money would be perceived as a move to un tamperable money, the rest of the world would quickly perceive the birth of modern dollars of unprece dented strength. The world would understand that dealing with pri vate, gold-backed money would be no 1985 LET'S LIBERATE MONEY 39 more difficult than dealing with more than one type of stock or bond, with more than one parcel post com pany, with more than one maker of yardsticks. Returning to a gold standard is the American way. As Bernard H. Sie gan wrote, "The evidence is most convincing that the delegates to the Constitutional Convention of 1787 intended to devise a currency based on gold and silver. Their problem was draftsmanship; they did not write this purpose carefully enough into the Constitution to prevent the Supreme Court from applying an en tirely different interpretation." (Wall Street Journal, June 18, 1984.) Beyond the practical considerations of private money, there is the moral question: Is it right for gov ernment to hold total control over the medium of exchange? The an swer should be clear: It is no more morally proper for government to tyrannize the making of money than it is for government to tyrannize the economy as a whole. Such control is pure violation of individual rights, a substitution of command for consent in a nation's medium of exchange.

Is it not time for us to live up to the intended rationality and heri tage of the Founders? Returning to a gold standard is the American way. Returning to private money is the ultimate form of a gold standard for a free people. ® Reprints . .. A Page on Freedom Each of these brief messages is a handy way to share with friends, teachers, editors, clergymen and others a thought-starter on liberty. It also serves to introduce the reader to our work at 'FEE. See page 3 for this month's Page on Freedom. (Copies of previous messages are also available; specify title when ordering.) Small quan tities, no charge; 100 or more, 5 cents each. Or, feel free to reprint the message in your own format if you'd prefer. We hope you'll enjoy this new feature! Order from: FOUNDATION FOR ECONOMIC EDUCATION, INC. IRVINGTON-ON-HUDSON,NEW YORK 10533 Judith Anne Still The Negro and Free Enterprise: A March Forward Singly WHEN the signers of the Declaration of Independence surrendered the cause of slavery before the battle for freedom was engaged, they partici pated in a betrayal of the new na tion's full democratic potential. Man as a group marched forward; man as an individual was forced to retreat.

The mistreatment of the Negro was such an embarrassment to the American past that Thomas Jeffer son confessed to having "trembled for his country" when he considered the implications of slaveholding practices. 1 However, when the United States government was re turned to the concept of universal in dividual worth-when, with the Emancipation Proclamation, every The author is the daughter of William Grant Still (1895-1978), the "Dean of Negro Composers." Still was the first colored man to write a symphony which was played by a major orchestra in the United States, and the first to conduct a major symphony orchestra in America. 40 man was theoretically free to func tion within the economy-the Negro advanced rapidly· toward legitimiz ing the democratic promise and to ward expanding the meaning of the American Revolution. Operating singly and earnestly within the free enterprise system, the members of the colored race triumphed over slavery, illiteracy and discrimination in a shorter pe riod of time than any other people in history. Owing to the ability of man kind to seize opportunities where available and to excel where merit is required, the Negro has made strides which are phenomenal, es pecially in view of the gauntlet that the black man has run from the sev enteenth century to the present.

The Negro has been a victim of a subjugative economic system which was destined to fail, if not through industrialization or Civil War, cerTHE NEGRO AND FREE ENTERPRISE 41 I like America because-de spite all its imperfections it is the land of promise and the proof of progress. A part of something is better than all of nothing. Negroes have a part of the great promise; they are working to win all of it. -Edith S. Sampson, The Negro Digest, December 1950 tainly through the efforts of individ uals who would not be subjugated. Afro-Americans very early revealed themselves as men of initiative. Some few of the achievers were still in bondage, and therefore were not often credited with their advances: Eli Whitney's cotton gin, patented on March 14, 1874, was, in reality, invented by one of the Whitney slaves. Even so, most of the enter prising Negroes were freemen, who, like the white nation-builders, made use of their freedom to grow and prosper. In fact some 500,000 free Negroes resided in the United States by 1860.

Freeman Anthony Johnson, the first Negro capitalist, was the owner of 250 acres and 5 servants in 1651, a little more than thirty years after he made his home in Jamestown, Virginia. Paul Cuffe (1759-1817), whose father was a free Negro and whose mother was an Indian, edu cated himself and then set out to learn the skills of a shore whaling man. By the early nineteenth cen tury he was a ship captain, the owner of a trading schooner, and a mer chant capitalist. With a portion of the money that he saved from his livelihood he built a meeting house and a school for his community.2 Progress Among Freemen As the nineteenth century un folded, there were other Afro-Amer icans who found acceptance into the life and economy of the nation re gardless of slavery. One of Boston's largest clothing businesses was owned by Thomas B. Dalton, a Ne gro; John Forten, an Afro-American sail-maker in Philadelphia, had a forty-man interracial staff; and John Jones, a Negro in Chicago, devel oped such a prosperous tailoring business that he was worth close to one million dollars at the end of his career. 3 As the biographies of men like Paul Cuffe and John Jones suggest, most of these achievements in the days of slavery were individual efforts, al though some group projects were be gun. The first Negro mutual benefit insurance society was established in Philadelphia in 1787, and was called The Free African Society. Member ship cost 16¢ per week and benefits after a year were 57¢ per week. Af terwards came Philadelphia's Afri can Insurance Company in 1810.

At the onset of the Civil War, Ne gro businesses primarily provided 42 THE FREEMAN January personal services, and for awhile af ter the War these businesses contin ued to prosper. There were Negro laundries, secretarial schools, buggy factories, confectioners, livery sta bles, undertakers, hair dressers, res taurants, boarding houses, hotels, catering outfits, coal yards, tailor and barber shops, cleaning and dyeing establishments and carpet making and construction enter prises. A significant figure in the pe riod was Madame C. J. Walker (1867-1919), whose invention and manufacture of hair preparations made her America's richest Negro woman. PostWar Setbacks Post-Civil War industrialization and the enlargement of capitalism pushed the Negro out of the higher ranks of labor and even out of some of the personal service enterprises which had been his. In addition, though the Negro was gaining in farm ownership, the unscientific ag ricultural system in the South pro duced failures which impelled him to leave the land and to migrate to cities in the North and Midwest. This migration brought an increase in economic rivalry, labor discrimina tion and racial unrest. As a result, The Freedmen's Bank, a project of white philanthropists designed to give ex-slaves the means to purchase property, failed in 1873.

Clearly the post-Civil War Negro was facing incredible barriers against advancement. Most ex slaves lacked schooling and employ ment, and those who had jobs re ceived such low wages that they were unable to gather investment capital. They were, in truth, "the last hired and the first fired."4 Furthermore, there were laws restricting the col ored man's ability to own property, to use public facilities and to get re dress of grievances in the courts. Ne gro businessmen, excluded from the leading trade associations, were left to cater to an impoverished market. Into this atmosphere of unreason able confinement stepped the Negro churches and fraternal societies. Mi nority preachers and teachers began to encourage ex-slaves to become self-confident, to adopt an aggres sive but Christian attitude toward race relations, and to cooperate with one another in the establishment of new businesses.

Insurance Companies The surge toward cooperation led the fraternal orders and lodges to stimulate the creation of the first significant Negro insurance compa nies. In 1881 the "True Reformers" insurance company was organized in Richmond, Virginia. The True Re formers Bank was added to this en terprise, soon after the first Negro savings bank, Capital Savings, opened its doors in Washington on October 17, 1888. The True Reform1985 THE NEGRO AND FREE ENTERPRISE 43 ers organization was so solid that it managed to weather the economic traumas of 1893, and by 1900 it in sured 50,000. Moreover, it main tained ownership of a newspaper, a home for the aged, a hotel, several grocery and merchandise stores, and a real estate department with a handsome amount of property. 5 .By 1905 twelve banks had been opened by colored people, and the largest Afro-American insurance companies had been formed. The in surance firm which inspired the greatest faith in the future of Negro free enterprise was North Carolina Mutual.

In 1898, Dr. Charles Clinton Spaulding, a grocer, John Merrick, the barber to the head of the Amer ican Tobacco Company, and Dr. A. M. Moore, another barber, formed the North Carolina Mutual and Provi dence Association. This association was to become the biggest minority enterprise in the nation and gave impetus to the formation of numer ous other companies. Among these companies was At lanta Life, the second-ranked Negro insurance company, founded by Alonzo F. Herndon. Like Merrick and Moore, Herndon was a barber, and the owner of one of the most pros perous shops in the country. A third important firm was Liberty Life in Chicago, parented by Frank L. Gil lespie. Gillespie was so enthusiastic about his work that he secured the authority to sell $100,000 in stock for Liberty Life, then sold $300,000 in stock in just sixteen months. As one of the insurance men said in this era, there was a "missionary spirit"

among educated young Negroes about going into business. 6 Booker T. Washington Assuredly some of this missionary spirit was attributable to the Negro preachers. Some was also due to the work of Booker T. Washington, a po litical and social theorist who dom inated the thinking of Negro busi nessmen at the turn of the century. Washington felt that colored people could seek economic integration with white people, while giving up social integration. He promoted college training, "thrift and capital accu mulation,"7 economic opportunism and self-reliance. Ultimately his be liefs motivated him to organize the National Negro Business League. Washington's influence was so widespread that, by 1915, there were 600 chapters of the League, and he could point with pride to the steps that had been taken in the right di rection. He wrote, "Recently there was organized in Indian territory a company for owning and operating oil wells. In Jacksonville a company of colored men built and conducted a street railway. In Nashville a com pany has been organized to run a line of automobiles in opposition to the street railway company of that city.

44 THE FREEMAN January Since 1906 no less than 15 banks have been organized in different parts of the country. A large number of grocery and dry goods stores have been organized and conducted as joint stock companies."8 This mo mentum, coupled with the economic stimulation brought about by World War I, effectively generated the "Gilded Age of Negro Business" in the 1920s. Negro Business in the 1920s By 1924 there were 65,000 colored businesses with an aggregate wealth of $1,700,000,000. 9 New corpora tions proliferated, and their num bers included an oil company, a stock exchange, a steamship line and a fi nance association. Heman Perry, a Negro entrepreneur, built a mag nificent financial empire made up of banks and real estate development companies, as well as farming, fuel, construction and engineering firms. 10 Perry's business pyramid eventu ally collapsed due to overextension of his resources, but other firms sur vived difficulties by merging. Harry Pace of Northeastern Life in New Jersey, Earl B. Dickerson of Su preme Life and Casualty in Ohio, and Truman K. Gibson Sr., the Har vard graduate who began Liberty Life in Chicago, brought their en terprises together. They created Su preme Liberty Life of Chicago, which supplanted Atlanta Life as the second most profitable Negro business on the globe.

While the larger businesses im proved their financial status, indi vidual businessmen also prospered. Robert Goode built a fine Negro summer resort, and Edward Brand ford set up one of the most promi nent advertising agencies on the East CoastY The reason for the triumph of individual Negroes like Brandford and Goode over great odds was given by Paul E. Johnson, the manufacturer of Universal Physical Therapy Equipment for hospitals and physicians. Johnson declared, "I reject the dictum that color alone is ample to prevent patronage being secured from other racial groups pro viding merit is built into the prod ucts or services that are offered for sale. Such has been my experience in life."12 The ability of the colored busi nessman to gain mastery through merit was the primary source of his survival during the Depression. It was significant that only two Negro insurance companies failed during the lean years. In addition, there were many Negro intellectuals who spoke to the rank and file in oppo sition to a welfare economy. James H. Hubert, colored journalist, de nounced Negro farmers who de clared that their land was too sub standard to provide income. Hubert noted that his father had been al lowed to buy land in Georgia only be1985 THE NEGRO AND FREE ENTERPRISE 45 cause he purchased property so in fertile that no white person wanted it. It was only by virtue of his fath er's unstinting labor that the farm became one of the most-sought-after in the state.

James Hubert's conclusion, drawn from personal history, was that eco nomic security gleaned from an out side source was not a desirable goal. "The road to success," he observed, "is not always the road most dotted with service stations. Permanent se curity still seems to come to him who can do that which most people can not do, or can do very much better."13 As an example of this principle of "equality inspired by quality," Hu bert told the story of John Miller of Georgetown, Kentucky, the mer chant who attracted a 75 per cent white trade by selling products su perior to those of his competitors. Faith in Free Enterprise It was their faith in the effective ness offree enterprise and hard work that brought Miller, Hubert and oth ers through the Depression and World War II unconquered. By the late 1940s the colored man still fought the battle of retail competi tion with chain stores and mass marketing organizations, and he did not cease to have the problem of se curing credit. But his insurance companies, banks, real estate firms and cosmetic manufacturing plants continued to grow. Afro-American publishing flourished, particularly when John J. Johnson organized The Johnson Publishing Company, Inc., soon to be the third largest Negro business in the country.

From 1900 to the 1940s, the Negro population increased 46 per cent, while the number of Negro-owned businesses rose 116 per cent. 14 The high growth rate was collective, yet the source of the ascendancy was in indi vidual effort: that is, in singular men putting education, experience and energy above racial distinctions. For instance, designer Robert S. Blackburn, the developer of plastic books for children and other edu cational toys, said that he reached his professional goals by going after what he wanted without antici pating discrimination. While job hunting in New York he interviewed many personnel managers to ask what the chances were for his at tainment of a responsible position in their companies. When he finally found a firm which promised pro motion in spite of race, he accepted a job as a guard and worked his way up to designer. IS At mid-century Negro business was still small business, but its ac complishments were admirable con sidering the odds against it. Dis criminatory employment practices continued, and Afro-Americans still encountered problems in cultivating the general market; the only colored bank in the Federal Reserve System 46 THE FREEMAN January was Citizens Trust Company of At lanta. 16 In spite of obstacles, how ever, Negro purchasing power rose to $17% billion in 1954, having in creased 250 per cent since the early 1940s. 17 The 60 leading Negro insur ance companies had assets of $137,708,766, with over $20 million in first mortgage loans. 18 The fitness of the leading firms at tracted the interest of professional men who had money to invest. In 1965 a group of doctors, lawyers and dentists in Chicago established a bank surrounded by the first Negro built shopping center, a project which covered four acres. Also in Chicago in the 60s, a multi-million dollar car wash complex was built by colored people. And S. B. Fuller, the international Negro industrialist and publisher, covered an entire city block with his mammoth depart ment store, food mart and office building .19 In ,Chicago and beyond, some in roads were made into the general market by Parker House Sausage Company and Fuller products. The majority of Negro businessmen looked with favor upon attempts to integrate with the larger economy of the nation because, as Earl B. Dick erson put it, "Corporations have no color or complexion. We must get into the mainstream." Unless we do, "we cannot be free-economically or otherwise."20 Today the field of progress has been virtually won. Only a quarter of a century after the time that Spauld ing, the president of North Carolina Mutual, was prevented from pur chasing a soft drink at a stand in his own twelve-story building, North Carolina Mutual proclaimed assets of over a billion dollars 21 and re mained the largest Negro-owned business in the world. Afro-Ameri can firms have proved themselves in the corporate field, have entered trade associations, ~nd have made advances in mass retailing, manu facturing and wholesaling.

Successful Blacks The encyclopedia volume, 1,000 Successful Blacks,22 lists over 150 executives and owners of thriving businesses. Negro-owned enter prises include airlines, machinery leasing corporations, land develop ment companies, mortgage and investment companies, certified public accounting firms, an employ ment bureau for executives, mar keting and management consulting companies, computer operations firms, plastics manufacturing com panies, advertising agencies, con sulting engineers and so on. In addition, in the mid-1970s there were 72 Afro-American board mem bers of corporations such as IBM and General Motors. There were also nu merous Afro-American corporate ex ecutives in companies like Atlantic Richfield, General Foods, Chase 1985 THE NEGRO AND FREE ENTERPRISE 47 Manhattan Bank and Johnson Prod ucts Company.23 Other examples of integration into the mainstream are significant. Ad vertising men such as Vincent T.

Cullers hold accounts of major cor porations, including Sears Roebuck, Bristol-Myers, and Bell Telephone. Willie L. Daniels began the first Ne gro firm to become a member of the New York Stock Exchange. Negro Clarence C. Finley is executive vice president of Burlington House Prod ucts Group. E. Frederic Morrow, a vice-president of Bank of America, the world's largest bank, was the first colored man to become a White House aide when he was appointed to President Eisenhower's staff. Morrow has also served as a public relations analyst for Columbia Broadcasting System. George An thony Moore was the first of his race to become a producer and director of a United States television station. It is probably through the influ ence of these aspiring Negroes that the majority of Afro-Americans are moving into the middle class. In 1973 over 50 per cent of the black popu lation in the North earned more than $8,000 annually, and in the South over half made $6,000 per year. 24 There has been over a hundred per cent increase during the last ten years in the numbers of Negro col lege students, managers, officials, business owners, and professional and technical people.

Individual Advancement Clearly the Negro has advanced individually, and, owing to individ ual advancement, as a race. The col ored man's energetic functioning in the free enterprise system has been an indicator of his developing status, and an aid to his progress socially and politically. Furthermore, as each singular Afro-American entrepre neur has risen above his circum stances, he has extended the signif icance and reality of democratic principles in the United States. Undoubtedly, when each of these men is accepted on his own merits rather than as part of a group, the nation will be freed from the be trayal of democracy inherent in race prejudice. Bigotry is the main weapon of oppression. Meanwhile, freedom and humanity are compa triots in the democratic cause; if one exists, so will the other also, in an atmosphere of cooperation and de veloping excellence. The essence of the victory won by Negro individualism and enterprise is revealed in the achievements of Paul R. Williams, one of the first Ne gro architects in the country. Wil liams was noted for designing more than 3,000 elegant homes, hospitals and government buildings. He con tended that one of the reasons for his pre-eminence in his work was a fierce desire to prove himself in spite ofjob discrimination and institutionalized bias. When he was forced to ride in 48 THE FREEMAN Jim Crow cars he became committed to presenting evidence that he "as an individual deserved a place in the world."25 He concluded, "We march forward singly, not as a race. Deal with me, and with the other men and women of my race, as individual problems, not as a race problem, and the race problem will soon cease to exist!" I -FOOTNOTESlAlain Locke, The Negro in America, The Reading with a Purpose Series, #68 (American Library Association, 1933) p. 19.

2Roger Butterfield, "Search for a Black Past," Life 65 (November 22,1968) p. 92. 3"The Negro in Business," Ebony XVIII (Sep tember 1963) p. 212. 4lbid. 5W. E. B. Du Bois, "Possibilities of the Negro: Advance Guard of the Race," The Booklouers Magazine II (June 1903) p. 5. 6Ebony, p. 215. 70p cit., p. 214. 80p cit., pp. 214-215. 9C. C. Spaulding, 50 Years of Progress in Business (Pittsburgh Courier, 1950) p. 4. l°Ebony, pp. 215-216. llNimrod B. Allen, "He Built His Own Re sort," Opportunity XVII (May 1939) pp. 144 145. Individual Freedom Marjorie Greene, "The Story of Edward Brandford," Opportunity XXV (April-June 1947)pp. 108-109, 127. 12Kappa Alpha Psi Guide Right Commission, Exhibit on Negro Vocational Merit, 1941. 13James Hubert, "The Public Speaks, New Frontiers for the Negro," Flash! II (November 15, 1938) p. 24. 14Spau lding, p. 4. 15Catherine G. Otis, "Off the Beaten Track," Opportunity XXV (April-June 1947) pp. 57-58.

16Ebony, p. 218. 17J. A. Rogers, 100 Amzing Facts About the Negro, 23rd Rev. Ed. (Futuro Press, Inc., New York 1957) p. 45. 18 M. C. Clarke, 50 Years of Progress in In surance (Pittsburgh Courier, 1950) pp. 6-7. 19LewisA. H. Caldwell and A. L. Foster, Chi cago City ofProgress and Opportunity (Chicago Cosmopolitan Chamber of Commerce, 1963 64), p. 94. 2°Ebony, p. 218. 2lEdgar A. Toppin, A Biographical History of Blacks in America (David McKay Co., Inc., New York, 1970), p. 415. 22Charles L. Sanders, Ed., The Ebony Success Library I (Johnson Publishing Company, Inc., Nashville, Tennessee, 1973), 341 pages. 23Sanders, Ed., and Reprint from Time, "America's Rising Black Middle Class," Read er's Digest 105 (October 1974), p. 145. 24lbid. 25Paul Williams, "I Am a Negro," The Amer ican Magazine CXXIV (July 1937), p. 161. IDEAS ON LIBERTY To sustain the individual freedom of action contemplated by the Con stitution is not to strike down the common good, but to exalt it; for surely the good of society as a whole cannot be better served than by the pres ervation against arbitrary restraint of the liberties of its constituent members.

JUSTICE GEORGE SUTHERLAND Hans R Sennholz Employer of Last Resort DURING the 1984-85 school year American high school debaters have been weighing an important resol ution: Resolved: That the federal gov ernment should provide employ ment for all employable United States citizens living in poverty. On the affirmative side students are expected to argue that the federal government shall strive to abolish poverty and, if necessary, act as em ployer of last resort; on the negative side they are likely to oppose the use of government for such ends. High school students at last are catching up with the political debate that has animated their elders since Dr. Hans Sennholz heads the Department of Econom ics at Grove City College in Pennsylvania. He is a noted writer and lecturer on economic, political and monetary affairs. the first New Deal. In 1935, Presi dent Franklin D. Roosevelt proposed to make the federal government the employer of last resort, proclaiming that "one third" of the American people were "underfed, under clothed, and underhoused." Thirty years later, President Lyndon B.

Johnson declared his "war on pov erty," which was to liberate some twenty percent of the population. President Jimmy Carter, during his term of office, waged his special war on poverty. All three made the pov erty of some 40 million Americans the central issue of their public pol icies. Indeed, all presidents have echoed a deep concern for the poor. And yet, the poor are still with us. Their faces have changed, but their numbers hardly ever vary. Armed with poverty statistics, their spokes men suggest that past government 49 50 THE FREEMAN January efforts were half-hearted and inde cisive. The war, they argue, must be carried on with unrelenting vigor and dedication until victory is won. They would make government the employer of last resort. Poverty in America Other observers may draw en tirely different conclusions. They may object that the poverty data it self may be erroneous and mislead ing. When compared with living con ditions throughout the world there may be no poverty at all in the U.S.

Most Americans have never seen the true face of poverty, which is visible in many other countries. It reveals hunger, disease and early death. In the U.S. even the least productive members of society live in relative abundance and comfort when com pared with their counterparts abroad. Among his foreign peers the American pauper is an object of envy and the U.S. the target of pauper immigration. American poverty statistics are built on levels of income. Families earning less than a stated dollar amount are defined as poor or pov erty -stricken; families earning more are believed to be above the poverty line. A brief observation of the living conditions of the American poor, however, may suggest a different conclusion. It may reveal that forty percent of poor families own their own homes; eighty-six percent of these "very poor" homeowners have no mortgage debt. Some fifty percent have liquid savings of $500 or more.

In Harlan County, Kentucky, the heartland of depressed areas, it was found that eighty-eight percent of the poor families have washing ma chines, sixty-seven percent have TV sets, forty-two percent have tele phones, and fifty-nine percent own cars. (Newsweek, February 17, 1964, p.20) Most Americans now designated as poor and indigent would resent the label if they actually· knew that the poverty warriors are talking about them. As a graduate student at New York University and a part-time ac counting clerk, I never earned more than $1,500 a year, which sufficed to pay $35 tuition per credit and put me through school. Even as a young col lege instructor, the poverty defini tion included me. With all my heart I resent this supercilious and derog atory description of those important years of my life. It is obvious that the poverty politicians who are accus tomed to spending billions of other people's money have lost touch with economic reality and the meaning of life.

In every society some people are more prosperous than others, some are poorer than others. In the eyes of a critical observer, anyone who earns less than he does, may be poor. To a millionaire anyone with less than a million may be a pauper. To 1985 EMPLOYER OF LAST RESORT 51 a poverty warrior anyone who be longs to the last 10 percent, 20 per cent or 30 percent of income earners may be poverty-stricken. In fact, the concept of inequality of income and wealth always comprises the poor. Government, Cause or Cure Lengthy unemployment may im poverish a person and put him in a poverty bracket. More than seven million Americans are mostly un employed, suffering declining in comes and living conditions. Alarmed L.t such statistics, the pov erty warriors managed to pass the Humphrey-Hawkins Full Employ ment and Balanced Growth Plan Act of 1978. And yet, unemployment continued to rise. Defining "full"

employment as no more than 3 per cent adult (4 percent overall) un employment, the warriors are now proposing to reach that level by us ing government as employer of last resort. Most government programs seek ing to alleviate poverty are treating the effects of unemployment; they never touch the causes. In fact, they completely reverse the cause and ef fect relationship by depicting the federal government as a source of employment rather than a primary cause of unemployment. They blame commerce and industry for the un employment and call on government to correct the evil. They propose to grant more power to politicians, officials and bureaucrats and call for extensive government intervention. And yet,by confusing cause and ef fect they fail to accomplish their stated objectives and even make matters worse. During years of rad ical government intervention un employment actually rises and lev els of living usually fall.

The champions of government power and intervention are sadly unaware that government is the pri mary cause of unemployment. They do not understand that employment is a price and cost phenomenon, and that mass unemployment is the in evitable effect of any government measure that directly or indirectly raises labor costs. A law or regula tion that boosts Social Security taxes, unemployment compensation taxes, workman's compensation taxes, or in any way raises the cost of labor, reduces the demand for la bor and creates unemployment. Boom and bust policies conducted by the Federal Reserve System may generate cyclical unemployment. Minimum wage legislation may deny employment to the least pro ductive workers. Labor legislation that grants restrictive powers to labor unions may bring stagnation and unemployment to unionized industries. Minimum wage legislation bars millions of young people from the la bor market. Although they have lim ited training and experience, the 52 THE FREEMAN January Employment, Unemployment and Government Projects compiled by Bettina Bien Greaves A booklet of articles, study questions and a bibliography of other readings concerning the national high school debate topic: Resolved: That the federal government should provide employment for all employable United States citizens living in poverty.

Useful to students of labor relations, regardless of age or school affiliation. 100 pages plus cover with index, attractively bound Postpaid for orders paid in advance $3.50 Order from: The Foundation for Economic Education Irvington-on-Hudson, N.Y. 10533 federal government may issue an or der that they be paid a minimum rate of $3.35 per hour. Moreover, it forces employers to pay a number of fringe benefits, from Social Security to national holidays, which may boost the worker's employment costs to $5 or $6 per hour. If a person does not add this amount to production, if he fails to cover his employment costs, he is a candidate for un employment. Before the days of minimum wage legislation high school and college students were always welcomed by commerce and industry. From the first day of vacation to the last, young people used to work in offices and stores, workshops and factories, working their way through school or supplementing family income. U n fortunately, these ways of the past have given way to minimum wage legislation, which condemns young people either to remain in school, to join the armed forces, or be unem ployed. At $5 or $6 an hour there may be no economic demand for their services.

Minimum wage legislation is the evil product of a political system that bestows favors and benefits on some classes of people at the expense of others. It favors the employment of 1985 EMPLOYER OF LAST RESORT 53 skilled workers who are earning more than the minimum by denying employment to unskilled workers earning less. This is why labor unions representing skilled workers are fervent champions of minimum wage legislation. Business Provides Employment Poverty warriors like to depict business as the culprit behind pov erty and unemployment. In reality, business is the only genuine source of production, employment, and in come. It is bidding for labor in order to serve its customers. It eagerly em ploys labor as long as it is "produc tive," that is, its net addition to out put is positive. In other words, as long as it does not cost more than it is producing, labor is in great de mand. When it costs morethan it is adding to the production process, when it takes income from investors and entrepreneurs, when it becomes "destructive" to employers, it is dis charged. In this case production is more productive without it.

Governments and unions are for ever raising labor costs and thereby causing unemployment. Business is adjusting continually inorder to pre vent the unemployment. When the federal government raises its Social Security exactions and state govern ments boost unemployment compen sation taxes, which may signifi cantly raise the cost of labor and thus the rate of unemployment, business is straining to prevent the unem ployment through cost adjustments. It may seek to offset the mandated costs with other cost reductions. In particular, it may reduce fringe ben efits, delay inflation adjustments, elicit greater effort and draw out more efficient production. Whenever and wherever business is successful in offsetting the boost in labor cost it succeeds in preventing threaten ing unemployment. If laws, regula tions and work rules prohibit the cost adjustment, business has no choice but to layoff loss-inflicting workers.

Production is more productive with out them. It is no coincidence that the strong holds of unions are also the centers of unemployment. In the steel and auto industries the union rates are more than double the market rates of industrial wages paid for similar labor throughout the American la bor market. Union rules generally deny efficient use of labor and pre vent cost adjustment. Ugly strikes by angry workers further increase labor cost. It cannot be surprising, therefore, that unionized industries are barely managing to stay afloat in an ocean of unemployment. Job Programs Destroy Jobs The unemployment generated by governments and unions is as severe and persistent as the force that is causing it. It is holding millions of Americans in its sinister grip and re54 THE FREEMAN January ducing them to poverty. To make government their employer of last resort is to put the culprit in charge and urge him to continue his transgressions. He will create more unemployment than he will provide jobs through a variety of make-work schemes. Facing mass unemploy ment, government may launch leaf raking and snow-shoveling pro grams, build highways and public buildings, embark upon slum re moval and urban renewal, or engage in any other economic activity. It may ostentatiously hire thousands of idle workers and become their em ployer of last resort. Unfortunately, the politicians who launch the pro grams and the poverty warriors who advocate them, are blissfully un aware of the consequences of their policies. They completely overlook two inevitable effects that tend to destroy more jobs than government can create: 1. When government appears on the labor market and engages idle labor it tends to support or even raise the labor costs that are causing the unemployment. It is removing the pressures for readjustment. By plac ing purchase orders for steel, auto mobiles, trucks and tanks it gives employment to idle steel and auto workers. But it also sustains their wage demands that exceed market rates, and thereby reinforces the cause of unemployment. Govern ment tends to prolong and intensify the suffering of idle workers by en couraging them to cling to unpro ductive labor costs.

2. Government has no source of income and wealth of its own. Every penny spent is taken from someone. It may be exacted from taxpayers, borrowed from lenders, or snatched from inflation victims. If it takes $50,000 to give employment to one idle worker, taxpayers, lenders or in flation victims must be reduced by that amount. Their reduction con sumes business capital, which in turn lowers labor productivity. Fall ing productivity, together with rigid labor cost, render more labor "un productive" and cause it to be un employed. And even ifit were to con sume no business capital, and labor productivity were to remain un changed, the losses suffered by tax payers and inflation victims would force them to curtail their consump tion and the employment they would otherwise provide. While govern ment may create one $50,000 job, which under bureaucratic condi tions and circumstances would be a low-cost job, it probably destroys the jobs of two or three workers serving taxpayers and inflation victims.

Federal Assistance Reduces Levels of Living Government reports are quick to point out that government assis tance is sustaining those truly in need. According to one study, with1985 EMPLOYER OF LAST RESORT 55 out any kind of assistance forty -one million people, or 18.8 percent of the population, would live below the poverty level. Cash assistance alone allegedly cut this number in half. If in-kind transfers are included, 13.5 million Americans are left in pov erty. If medical care is included in the calculation, the poverty level in cludes only nine million people, or 4.1 percent of the population. (Press Release, Executive Office of the President, Office of Management and Budget, March 12, 1982) In 1983 Federal cash programs supported 24.5 million elderly peo ple living in retirement, 4.3 million disabled workers and their depen dents, and 8.9 million survivors. They provided Medicaid and Medi care assistance to 47 million aged, disabled and needy Americans, ap proximately 20 percent of the total population and 99 percent of those over 65. They granted housing as sistance to 3.4 million American households, and subsidized approx imately 95 million meals per day, or 14 percent of all meals served in the country. They made available 6.9 million post-secondary awards and loans to students and their parents, and provided training for almost one million low-income disadvantaged people. They paid supplemental al lowances to more than 7 million peo ple, unemployment compensation to more than eight million, and granted food stamp assistance to 18.6 million individuals. Government sustained 3.5 million men and women on ac tive military duty and their depen dents, and some 27 million civilian employees and their dependents. Al together, some 80 to 90 million Americans are dependent on tax dollars.

The Burden of Dependents Whatever their numbers, the de pendents weigh heavily on the eco nomic well-being of their supporters, the taxpayers, lenders and inflation victims. Their inactivity and ab sence from economic production keeps society poorer than it other wise would be. It visibly reduces the levels of living of the providers, dis courages their productive efforts, and deprives them of the funds needed for productive investments. Surely, there cannot be any doubt that 80 to 90 million dependent Americans constitute a heavy bur den on productive Americans. Poverty warriors are encouraged by these transfer statistics. If 80 to 90 million Americans already are enjoying full support, another 7 to 10 million may not upset the transfer system. The warriors may be right. But they, too, must admit that there are limits to the burden the remain ing producers can carry. All transfer systems have limits beyond which economic production is bound to de cline and poverty is certain to multiply. I Occupational Licensing Dirk Yandell IN these "deregulatory" times, the ingenuity of governments and spe cial interest groups in constraining free enterprise is astonishing. Re cent legislation has continued to block entry into particular markets by requiring governmentally pro vided licenses as a condition for op erating in those markets. The licen sing of professional and occupational special interest groups is a signifi cant affront to a free economy. Li censing is defended by its propo nents as a means of ensuring minimum standards of competency or quality. More often it has been used as a means of restricting entry, to limit competition and preserve the high wages earned by the existing group of practitioners.

Dr. Yandell is Assistant Professor of Economics, School of Business Administration, University of San Diego. 56 Literally hundreds of occupations require licenses. Those of physician, lawyer, and mortician are well known. Many others are less well known, but each is administered by a state governmental board with its own set of rules and procedures. Not surprisingly, the boards are gener ally composed largely of current li cense holders. In California, the last several months have seen the following groups receive license protection: Auctioneers. The California Auction eer Commission was created, requiring that all auctioneers in the state be ex amined and licensed. Dieticians. A "Title Act" was passed to prohibit anyone from using the title "dietician" until examined and recog nized by the Department of Health Ser vices. Workers can continue to do the same work they have always done withOCCUPATIONAL LICENSING 57 out being "recognized," they just can't use the title "dietician."

Dog Patrol Operators. This bill re quires those who sell guard dogs tobe ex amined and licensed by the Bureau of Collection and Investigative Services. It also requires employees of protection dog providers to register with the Bureau. Real Estate Agents. Although li censed for many years by the Depart ment of Real Estate, the Legislature has recently passed a bill which will require additional educational training for pro spective real estate agents and brokers. Respiratory Therapists. A nine member Respiratory Care Examining Committee was established which re" quires examination and licensure of all respiratory therapists in the state. Soil Engineers. This is another "Title Act" to prohibit the use of the title "soil engineer" by anyone who has not been examined and certified by the State Board of Registration for Professional Engineers. Tax Preparers. The State Preparer Advisory Committee now exists to li cense California's taxpreparers.

These occupations now join the hundreds of others that have been granted license protection. The list of protected professions follows no apparent logic. Licensing is required for barbers and dentists, plumbers and accountants, architects and box ing promoters, building contractors and manicurists, employment agents and shorthand reporters, ge ologists and pest control operators. The list seems endless. Who Is Protected? Whenever restrictions are placed on new entry, the incumbent group is able to obtain an income above competitive levels. Legislators too often forget this fact, and succumb to the pressure of the special interest lobbyists. The lawmakers usually have good intentions. "Protecting the consumer" is the cry most often heard, as lawmakers continue to think that consumers need to be pro tected from shoddy quality and "un scrupulous" behavior. This protec tion is to be accomplished by passing laws. Of course, the law is to be ad ministered by the state board, con sisting of "experts" in the business who are generally licensed automat ically under a "grandfather clause"

which exempts those already in business from examination. This board typically has the power to es tablish the rules under which new licenses will be issued. They deter mine the minimum standards that potential entrants must meet and the number of new licenses to be is sued each year. The State Bar of California pro vides a striking example of the workings of a licensing body. The Bar was created in 1927, and was estab lished as a public corporation within the judicial branch of government. Membership is required for any at torney wishing to practice law in California. The State Bar currently has over 75,000 members, repre58 THE FREEMAN January senting over one-seventh of the na tion's lawyers. Law students are licensed after passing the California State Bar Exam. The traditional test was a three-day exam that contained essay and multiple choice questions cov ering different areas of the law. In July of 1983, the California Bar exam was modified to include a "per formance" section. The new section is supposed to measure practical skills, including problem-solving ability and case analysis. In addition to the more lengthy exam, the pass ing score on the July test rose from the usual 70 per cent to 71.1 per cent.

The higher limit resulted in dis qualification of 1300 prospective lawyers, who had met the tradi tional 70 per cent standard. One ex planation for these events is that the Bar found the number of practicing lawyers growing too quickly, and tried to control the entry of compet itors. If so, the action was unsuc cessful. Due to protests and poten tial lawsuits, those who scored between 70 and 71.1 per cent were eventually granted licenses. The grading system was clarified for sub sequent exams to avoid similar problems. Licensing Requirements Create Monopoly Power Licensing requirements create a legal cartel for the benefit of an oc cupational group. A cartel can only endure and maintain high profits for its members ifit is able to control the behavior of its members and limit the entry of potential competitors. Licensing boards accomplish both of these tasks. Licensing limits the number of practitioners in an occu pation by creating artificially re strictive qualifications for entry. The result is an induced scarcity of trained personnel. The licensing boards also establish a variety of rules and guidelines for their mem bers. These limit the freedom of many individuals. Contractors, for example, must be licensed in each of the specialties they intend to pur sue. Work cannot be performed in any other specialty unless consid ered "supplemental" to the work being done in the assigned specialty.

These monopolistic conditions re duce competition and increase prices. Consumers are not the only ones who lose. The unreasonable or arbitrary entry requirements for many occupations deny many skilled workers the chance of achieving the profession of their choice. Many have recognized that re straint of trade is inherent in Cali fornia's state boards and commis sions. This appears to be a clear violation of Federal antitrust laws. Antitrust exemptions are granted only where there is reasonable "state action." Constraints are considered lawful if they are authorized by the state and if there is independent 1985 OCCUPATIONAL LICENSING 59 state supervision of the occupation or trade. It stretches. the imagina tion to consider supervision "inde pendent" when an occupation is con trolled by a state board consisting mainly of licensed members of that profession. Need for Reevaluation It is time to step back and consider the need for the licensing and reg ulation of occupations for the pur pose of "protecting the consumer."

In a free society, consumers are well equipped to protect themselves. The market forces of supply and demand lead to an efficient allocation of re sources. A free exchange of goods and services, without the interferences and restrictions of government, is the· most effective means of promot ing efficiency and increasing public welfare. Workers providing services to the public have a direct incentive to perform well. A good reputation and satisfied customers are neces sary ingredients for the success of a business. Those who do not meet the expectations of their customers will not last in a competitive market. Our legal system exists to provide the consumer recourse if work is not per formed satisfactorily. Private prop erty rights, and a legal system to protect them, are all that is neces sary to "protect the consumer." ® REFERENCES Alchian, A. A., and Allen, W. R., Exchange and Production: Competition, Coordination, and Control, 3rd Edition, Belmont, California, Wadsworth Publishing Company, 1983.

Barron, J. F., "Business and Professional Li censing-California, A Representative Ex ample," Stanford Law Review, Vol. 18, (Feb ruary 1966),640-665. Mulroy, E. A., "Regulating Funeral Directors and Embalmers: What to Preserve," Califor nia Regulatory Law Reporter, Vol. 2, No.2, (Spring 1982), 3-16. ____ . "Is This Really Necessary?", Cal ifornia Regulatory Law Reporter, Vol. 3, No. 1, (Winter, 1983), p. 12-14. ____ . "New Rules for State Licenses," San Diego Union, Sunday, April 22, 1984. ____ . "Bar 'Performance' Test Helps, Hurts," San Diego Union, May 31, 1984, p. A-3. IDEAS ON LIBERTY The Monopoly Problem THE great monopoly problem mankind has to face today is not an out growth of the operation of the market economy. It is a product of pur posive action on the part of governments. It is not one of the evils in herent in capitalism as the demagogues trumpet. It is, on the contrary, the fruit of policies hostile to capitalism and intent upon sabotaging and destroying its operation.

LUDWIG VON MISES, Human Action A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN The Spirit of Enterprise WE are in the middle of an entrepre neurial revolution that has sur prised everybody, from monetarists such as Milton Friedman to the bud get balancers who fear that venture capital won't be forthcoming as long as billion dollar deficits hang over our heads. The econometrists haven't caught the pitch because they have not found a way to feed the X factor of human ingenuity into their computers. The true prophet of the age is George Gilder, whose The Spirit of Enterprise (New York: Si mon and Schuster, 274 pp., $17.95) proves the case for his contention that it is what individualists make and manage, not what economists measure, that constitutes the real economy. What struck me, when I was im mersed in writing a history of Amer ican business, was the way that new enterprises took off whether money consisted of greenbacks or gold, or whether the country had venture capital to spare or not. Bright ideas such as the Colt revolver and the 60 first Tin Lizzie made their own mar kets and found backers despite money panics and strikes and even governmen t-sponsored efforts to build railroads that led to nowhere.

This does not mean that questions of money are not important. But it does mean that the X factor of the human mind, if it is permitted to function freely, will override all the other fac tors that make for easy statistical tabulation. Gilder is convinced that we are in the middle of a so-called knowledge revolution whose boundaries defy charting. While the companies com prising the Fortune 500 were having their troubles, and actually employ ing fewer people, the new small busi nesses in the United States jumped from a 180,000 figure for 1963 to 600,000 for 1983. The publisher of Inc. magazin'e, Bernard Goldhirsch, notes that when big IBM was miss ing the mini-computer market, little Digital Equipment Company seized the opportunity to become a giant in its own right. California's Silicon THE SPIRIT OF ENTERPRISE 61 Valley phenomenon was born in the garages of students who had learned their physics and chemistry from some remarkable instructors at Stanford University. The Stanford students didn't have venture money of their own. But the microchip found its way into industry nonetheless.

Roundabout Creativeness George Gilder makes his points about the roundabout creativeness of the entrepreneurial process by telling some remarkable stories. He notes that while the pampered chil dren of "entitled" parents "ache at the burden of laboring from nine to five," the entrepreneurs, willing to hold three jobs at one time, rise be fore dawn and work happily from five to nine. The entrepreneurs ig nore politics. But the politicians who ignore the entrepreneurs are amazed when, in the periods when Atlas shrugs, "the great physical means of production ... dissolve into so much scrap, ruined concrete, snarled wire, and wilderness." In Idaho George Gilder ran into a character named Jack Simplot. Sim plot's father had scratched a living from 120 acres of sand grubbed out of the sagebrush mainly by hand. Though the young Simplot did not abhor work, he saw no need of pun ishing himself when there were more ingenious ways of making a living available. The adolescent Simplot made his first killing by collecting "bum" sheep (extra lambs from broods of twins and triplets that could not be suckled) from neighbor hood farmers. When the time was ripe he sold the sheep back to the farmers for the princely sum of$140.

When the price of pork went below the cost of producing it, Simplot used his lamb money to buy up runt pigs that might otherwise have been doomed to mass graves. He fed the runt pigs on unwanted potato culls. Meanwhile the disgruntled pig farmers were getting out of the pork business. Eventually Simplot was able to dispose of his pigs in a most favorable sellers' market. From his knowledge that even stored potato culls could be worth money, Simplot started to explore methods of keeping vegetables in cold storage. He also began drying potatoes and onions for the army. He emerged from World War II a"bold and happy business warrior," ready with the capital and the technical know ledge to take on a contract for supplying French fries for Ray Kroc's McDonald's chain of restau rants west of the Mississippi. It was at this point that the millions started to roll in. From Gold Mines to Silicon Chips George Gilder's point is that no econometrist in the world could have foreseen the happy accidents that led from Jack Simplot's first purchases of unwanted lambs and pigs to his 62 THE FREEMAN January connection with Ray Kroc's fast food business. The final chapter in the Simplot story is the most amazing.

With money burning in his pockets Simplot planned an adventure in Latin American gold mining. He vis ited the Dominican Republic, where the high price of gold had suddenly made a mine started by Christopher Columbus's son, Diego, extremely profitable. But the Dominican gov ernment proved to be too grabby about the split it demanded from mine profits. So it was back to Idaho for Simplot. Close to home he discovered some young scientists and entrepreneurs who had ideas about crowding more and more memory items on to a sil icon chip. Though he could not have made a semiconductor by himself, he liked what the "farm boys" of the Micron Company had to say. Decid ing to give them a run, he asked, "What'll it take to get her rolling?" The answer was "four million." "All right," said Simplot, "we'll go for it." So the lamb and pig and French fry potatoes money went into a high tech business that has flouted the belief that silicon chips can be as sembled into packages more cheaply in offshore plants than at home. The whole roundabout process bypassed the capital markets of the East and the computers of the econometrists in Cambridge, Massachusetts and Philadelphia.

Going on from Simplot, George Gilder proves that the process he has been tracing from an obscure begin ning in a potato patch is far from being singular. His account of how John Masters, a 1948 Yale graduate, hit upon a great natural gas reser voir in Alberta and British Colum bia is just as thrilling as the Simplot saga. Masters, an unemployed ex plorer from Tulsa, Oklahoma, had no money and owned no oil reserves. But he had some ideas and some bril liant friends. He went into the mountains of western Canada when all of the big oil companies were pulling out. As he summed up his problem, "The process of finding oil is essentially analytical reconstruc tion of geologic history in order to de termine the probable hiding place of oil and gas accumulations that are buoyant, mobile, and constantly seeking upward escape ... It has elements of a detective story, a spy mystery, the search for a hidden tomb."

To solve the labyrinthine puzzle in western Canada, Masters took the data from old electric log books and integrated the information with the knowledge acquired by fresh drill ing. Following from outcropping to outcropping, Masters hit upon some massive telltale cliffs of pebble con glomerate which had the "sorting and grading" of an ancient beach. "You could hear the sea gulls," Mas ters said. "They were screaming across a hundred million years of 1985 OTHER BOOKS 63 time." The conglomerate outcrop ping was the key needed to confirm Masters' theory of an immense basin of natural gas. Unfortunately the nationalistic policies of Pierre Tru deau have militated against the full exploitation of Masters' discovery. The new Proposition Two-and-one half property tax limitation in Mas sachusetts came in time to help one of George Gilder's heroes sell a cheap and effective water purification sys tem to the town of Pittsfield. As long as there was no limit to the tax money available to municipalities Milos Krofta could not persuade the politicians to listen to his claims that he had a better purification method that would cost the taxpayers less money. But when the law actually took money away from the town councils, Krofta began to get a hearing.

Gilder's sections on Japanese en trepreneurship point up his purely American chapters. The story of Honda, who owed nothing to govern~ ment, should surprise nobody who is conversant with the story of Henry Ford. Gilder has theories about the spiritual motivation of the entrepre neur, and in many cases they may very well be true. But motivation doesn't really matter as long as the entrepreneur's independence is re spected. The big lesson is to leave the enterprisers alone. If we do, they'll take care of all of us. @ CIVIL RIGHTS: RHETORIC OR REALITY? By Thomas Sowell (William Morrow & Co., Inc., 105 Madison Avenue, New York, NY 10016), 1984 164 pages _ $11.95 Reviewed by David M. Brown "Oh, what a tangled web we weave, When first we practice to deceive!" wrote Sir Walter Scott. Thomas Sow ell recalls this eloquent couplet as he retraces the tortuous path of civil rights legislation from equal oppor tunity to reverse discrimination.

Along the way he overturns many untenable assumptions, exposes con tradictions, and lucidly expounds the logic of liberty. Sowell acknowledges the historic significance of a great nation's vol untary repudiation of "its own oppression of part of its own people" in the 1954 Brown u Board of Edu cation decision, but he detects in the Brown case the seeds of subsequent "political, constitutional, and hu man crises." This institutionalized the pernicious practice of judging people as members of a group, rather than as individuals. It is observed that some groups within society are better off finan cially than other groups. The civil rights vision assumes that wealth differentials result from discrimi nation, which only political inter ventions can remedy. The view im64 THE FREEMAN plies that discrimination alone accounts for significant group eco nomic differences, and that discrim ination effectively suppresses the economic progress of those who are its target.

These assumptions are not re garded as hypotheses to be tested, but as axioms too obvious to be ques tioned. Overlooked in the civil rights vision are the cultural patterns which differentiate one group from another. Cultural patterns influence the lifestyles, and thus the financial situation, of a group's members, and these patterns transcend the imme diate context of any given society. Take the case of the Chinese mi nority of Southeast Asia, which "has been-and continues to be-the tar get of explicit, legalized discrimi nation in various occupations, in ad mission to institutions of higher learning, and suffers bans and re strictions on land ownership and places of residence. Nowhere in Malaysia, Indonesia, Vietnam, Thailand, or the Philippines have the Chinese ever experienced equal opportunity. Yet in all these coun tries the Chinese minority-about 5 percent of the population of South east Asia-owns a majority of the na tion's total investments in key industries."

Political action has been neither successful nor necessary in improv ing the conditions of various immigrant groups in America. Many have avoided politics during their rise from poverty to prosperity-the Jews and the Germans, for example. The Irish, on the other hand, are an in stance of a politically successful group whose economic rise was much slower than that of others until their political machines fell into decline in the 20th century. "It would per haps be easier to find an inverse cor relation between political activity and economic success than a direct correlation. Groups that have the skills for other things seldom con centrate in politics," writes Dr. Sowell. Civil rights legislation in general has not accelerated ongoing trends in the economic improvement of differ ent groups; statistics show that such laws have actually led to conse quences opposite to those intended.

Dr. Sowell does see a possible ben efit to be derived from the modern civil rights debacle. "If there is an optimistic aspect of preferential doc trines," he writes, "it is that they may eventually make so many Americans so sick of hearing group labels and percentages that the idea of juding each individual on his or her own performance may become more attractive than ever." Thomas Sowell's carefully documented re search contributes mightily to that end. @ the Freeman VOL. 35, NO. 2 • FEBRUARY 1985 I'm for the AchieverA Page on Freedom, No. 16 In praise of a winner. The ABC of a Market Economy Voluntary cooperation i$ the key. Miller Upton Henry Hazlitt 67 68 Capitalism-Yes and No Clarence B. Carson 75 Not so much the offspring of private property as a disease of socialism. The Demand for Labor Hans F. Sennholz 83 Nonmarket forces interfere with wages and cause unemployment. The Free Banking Alternative Donald R. Wells L. S. Scruggs 98 Why not try free banking rather than a partially deregulated financial system?

The Deficit Connection Ernest G. Ross 104 A deeper look into the causes and consequences of deficit spending. An Ancient Chinese Story Dean Russell 111 Protectionism and make-work schemes impoverish consumers. Trade Barriers Russell Shannon 120 John Stuart Mill explained the harm of intervention. Book Reviews: 123 "The Liberal Crack-Up" by R. Emmett Tyrrell, Jr. "Managing" by Harold Geneen with Alvin Moscow "Your Wealth in God's World" by John Jefferson Davis Anyone wishing to communicate with authors may send first-class mail in care of THE FREEMAN for forwarding.

IFreeman AMONTHLY JOURNAL OF IDEAS ON LIBERTY FOUNDATION FOR ECONOMIC EDUCATION Irvington-an-Hudson, N.Y. 10533 Tel: (914) 591-7230 President: John C. Sparks Managing Editor: Paul L. Poirot Production Editors: Beth A. Hoffman Amy S. Vanlaar Contributing Editors: Robert G. Anderson Howard Baetjer Jr. Bettina Bien Greaves Charles H. Hamilton Edmund A. Opitz (Book Reviews) Brian Summers THE FREEMAN is published monthly by the Foundation for Economic Education, Inc., a nonpolitical, nonprofit, educational champion of private property, the free market, the profit and loss system, 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. Donations are invited in any amount. THE FREEMAN 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 $10.00 a year.

Copyright, 1985. The Foundation for Economic Education, Inc. Printed in U.S.A. Additional copies, postpaid: single copy $1.00; 10 or more, 50 cents each. THE FREEMAN is available on microfilm from University Microfilms International, 300 North Zeeb Road, Ann Arbor, Mich. 48106. Reprints are available of "A Page on Freedom," small quantities, no charge; 100 or more, 5 cents each. Permission is granted to reprint any article in this issue, with appropriate credit, except "The Demand for Labor," and "An Ancient Chinese Story."

A Page on Freedom Number 16 "I'm for the Achiever" I HAVE just about reached the end of my tolerance for the way our society now seems to have sympathetic concern only for the misfit, the pervert, the drug addict, the drifter, the chronic criminal, the under-achiever. It seems to me we have lost touch with reality and become warped in our attachments. I feel it is time for someone like me to stand up and say, in short, "I'm for the upperdog!" I'm for the achiever-the one who sets out to do something and does it; the one who recognizes the problems and opportunities at hand, and endeavors to deal with them; the one who is successful at his immediate task because he is not worrying about someone else's failings; the one who doesn't consider it "square" to be con stantly looking for more to do, who isn't always rationalizing why he shouldn't be doing what he is doing; the one, in short, who carries the work of his part of the world squarely on his shoulders.

It is important to recognize that the quality of any society is di rectly related to the quality of the individuals who make it up. There fore, let us stop referring naively to creating a "great" society. It is enough at this stage of our development to aspire to create a decent society. And to do so, our first task is to help each individual be decent unto himself and in his relationship with other individuals. We will never create a good society, much less a great one, until individual excellence and achievement are not only respected but encouraged. That is why I am for the upperdog-the achiever, the succeeder. ® -Miller Upton THE FOUNDATION FOR ECONOMIC EDUCATION, INC. IRVINGTON-ON-HUDSON, NEW YORK 10533 67 68 Henry Hazlitt The ABC ofa Market Economy THERE are basically only two ways in which economic life can be orga nized. The first is by the voluntary choice of families and individuals and by voluntary cooperation. This arrangement has come to be known as the free market. The other is by the orders of a dictator. This is a com mand economy. In its more extreme form, when an organized state ex propriates the means of production, it is called socialism or communism.

Economic life must be primarily or ganized by one system or the other. It can, of course, be a mixture, as it unfortunately is in most nations today. But the mixture tends to be unstable. If it is a mixture of a free and a coerced economy the coerced section tends constantly to increase. One qualification needs to be em phasized. A "free" market does not mean and has never meant that everybody is free to do as he likes. Since time immemorial mankind has operated under a rule of law, written or unwritten. Under a market sys tem as any other, people are forbid den to kill, molest, rob, libel or oth erwise intentionally injure each other. Otherwise free choice and all other individual freedoms would be impossible. But an economic system must be dominantly either a free or a command system. Ever since the introduction and spread of Marxism the great major ity of people who publicly discuss economic issues have been confused.

THE ABC OF A MARKET ECONOMY 69 Henry Hazlitt, a frequent contribu tor to The Freeman, has been a Trustee of The Foundation for Eco nomic Education from its beginning in 1946. He is a noted economist, author, editor, reviewer and col umnist. Best known of his numer ous books is Economicsin One Les son, first published in 1946, with ten translations and with American sales of more than 700,000 copies, recently revised and available in in expensive paperback. He cele brated his 90th birthday November 28, 1984. His working library is now housed at FEE. This article is available, in pam phlet form, from The Foundation for Economic Education, Irvington-on Hudson, N.V. 10533. Single copy $1.00; 10 copies or more 25 cents each. Recently a very eminent person was quoted as denouncing economic sys tems that respond "only to the forces of the market place," and are gov erned "by the profit motive ofthe few rather than the needs of the many."

He warned that such a system could put "the world's food supply into even greater jeopardy." The sincerity of these remarks is beyond question. But they show how phrases can betray us. We have come to think of "the profit-motive" as a narrowly selfish drive confined to a small group of the already-rich whose profit comes at the expense of everybody else. But in its widest sense the profit-motive is one that all of us share and must share. It is our universal motive to make conditions more satisfactory for ourselves and our families. It is the motive of self preservation. It is the· motive of the father who is not only trying to feed and house himself but his wife and his children, and to make the eco nomic conditions of his whole family, if possible, constantly better. It is the dominant motive of all productive activity. Voluntary Cooperation This motive is often called "self ish." No doubt in part it is. But it is hard to see how mankind (or any an imal species) could have survived without a minimum of selfishness.

The individual must make sure he himself survives before the species can survive. And the so-called profit motive itself is seldom solely selfish. In a primitive society the "unit" is seldom the individual but the fam ily, or even the clan. Division of la bor begins within the family. The father hunts or plants and harvests crops; the mother cooks and bears and nurses children; the children collect firewood, and so forth. In the clan or the wider group there is even more minute subdivision and spe cialization of labor. There are farm ers, carpenters, plumbers, archi tects, tailors, barbers, doctors, lawyers, clergymen, and so ad infi nitum. They supply each other by ex70 THE FREEMAN February changing their services. Because of this specialization, production in creases more than proportionately to numbers; it becomes incredibly ef ficient and expert. There develops an immense system of voluntary pro ductive cooperation and voluntary exchange.

Each of us is free (within certain limits) to choose the occupation in which he himself specializes. And in selecting this he is guided by the rel ative rewards in this occupation, by its relative ease or difficulty, pleas antness or unpleasantness, and the special gifts, skills, and training it requires. His rewards are decided by how highly other people value his services. Free-Market Economy This immense cooperative system is known as a free-market economy. It was not consciously planned by anybody. It evolved. It is not perfect, in the sense that it leads to the max imum possible balanced production, and/or distributes its rewards and penalties in exact proportion to the economic deserts of each of us. But this could not be expected of any eco nomic "system." The fate of each of us is always affected by the acci dents and catastrophes as well as the blessings of nature-by rainfall, earthquakes, tornadoes, hurricanes, or what not. A flood or a drought may wipe out half a crop, bringing dis aster to those growers directly hit by No system can overcome the shortcomings of the human beings that operate it-the rel ative ignorance, ineptitude, or sheer bad luck of some of us, the lack of perfect foresight or omniscience on the part of all of us. But the ups and downs of the market economy tend to be self-correcting.

it, and perhaps record-high prices and profits to the gTowers who were spared. And no system can overcome the shortcomings of the human beings that operate it-the relative ignorance, ineptitude, or sheer bad luck of some of us, the lack of perfect foresight or omniscience on the part of all of us. But the ups and downs of the mar ket economy tend to be self-correct ing. Overproduction of automobiles or apartments will lead to fewer of them being produced the following year. A short crop of corn or wheat will cause more of that crop to be planted the following season. Even before there were government sta tistics, producers were guided by rel ative prices and profits. Production will tend to be constantly more ef ficient because the less efficient pro ducers will tend to be weeded out and the more efficient will be encour aged to expand output. The people who recognize the mer1985 THE ABC OF A MARKET ECONOMY 71 its of this system call it the market economy or free enterprise. The peo ple who want to abolish it have called it-since the publication of The Communist Manifesto in 1848 capitalism. The name was intended to discredit it-to imply that it was a system developed for and by the "capitalists" -by definition the dis gustingly rich who used their capital to enslave and "exploit" the "workers."

The whole process was grossly distorted. The enterpriser was putting his accumulated savings at risk af what he hoped was an opportunity. He had no prior assurance of success. He had to offer the going wage or better to attract workers from their existing employments. Where the more successful enterprisers were, the higher wages also tended to be. Marx talked as if the success of every new business undertaking was a cer tainty, and not a sheer gamble. This resulted in his condemning the en terpriser for his very risk-taking and venturesomeness. Marx took profits for granted. He seemed to assume that wealth could never be honestly earned by successful risk-taking but had to be inherited. He ignored the record of constant business failures. But the label "capitalism" did pay unintended tribute to one of the sys tem's supreme merits. By providing rewards to some of the people who risked investing their capital, it kept putting into the hands of the workThe label "capitalism" did pay unintended tribute to one of the system's supreme merits. By providing rewards to some of the people who risked investing their capital, it kept putting into the hands of the workers more and constantly better tools to increase per capita production more and more.

ers more and constantly better tools to increase per capita production more and more. The system of pri vate property and capitalism is the most productive system that has ever existed. The Communist Manifesto was an appeal to "the masses" to envy and hate the rich. It told them that their only salvation was to "expropriate the expropriators," to destroy capi talism root and branch by violent revolution. Marx attempted a rationalization of this course, built upon what he saw as inevitable deductions from a doctrine of Ricardo. That doctrine was in error; in Marx's hands the er ror became fateful. Ricardo con cluded that all value was created by "labor" (which might almost be true if one counted labor from the begin ning of time-all the labor of every body that went into the production of houses, land clearing, grading, plowing, and the creation of facto72 THE FREEMAN February ries, tools and machines. But Marx chose to use the term as applying only to current labor, and the labor only of hired employees. This com pletely ignored the contribution of capital tools, the foresight or luck of investors, the skill of management, and many other factors.

The Errors of Marx The theoretical errors of Marx have since been exposed by a score of brilliant writers. In fact, his pre posterous conclusions could also have been proved wrong even at the time Das K apita1 appeared by a pa tient examination of the available contemporary knowledge of in comes, payrolls and profits. But the day of organized, abun dant and even "official" statistics had not yet come. To cite only one of the figures we now know: In the ten years from 1969 to 1978, inclusive, American "nonfinancial" corpora tions were paying their employees an average of 90.2 per cent of the combined total available for division between the two groups, and only 9.8 per cent to their stockholders. The latter figure refers to profits after taxes. But only about half of this amount-4.1 per cent-was on the average of those ten years paid out in dividends. (These figures com pared with public-opinion polls taken at the time which showed a consensus of most Americans that Economically, communism has proved a complete disaster. Not only has it failed to improve the welfare of the masses; it has appallingly depressed it. Be fore its revolution, the great an nual problem of Russia was to find 'sufficient foreign markets for its crop surpluses. Today its problem is to import and pay for less than adequate foodstuffs.

corporate employees got only 25 per cent of the total available for divi sion and the stockholders 75 per cent.) Yet the fierce diatribes of Marx and Engels led to the Russian Revolu tion of 1917, the slaughter of tens of thousands, the conquest and com munization by Russia of some half dozen neighboring countries, and the development and production of nu clear weapons that threaten the very survival of mankind. Economically, communism has proved a complete disaster. Not only has it failed to improve the welfare of the masses; it has appallingly de pressed it. Before its revolution, the great annual problem of Russia was to find sufficient foreign markets for its crop surpluses. Today its problem is to import and pay for less than ad equate foodstuffs. Yet The Communist Manifesto and the quantity of socialist propaganda 1985 THE ABC OF THE MARKET ECONOMY 73 which it inspired continue to exert immense influence. Even many of those who profess themselves, quite sincerely, to be violently "anticom munist," feel that the most effective way to combat communism is to make concessions to it. Some of them accept socialism itself-but "peace ful" socialism-as the only cure for the "evils" of capitalism. Others agree that socialism in a pure form is undesirable, but that the alleged "evils" of capitalism are real-that it lacks "compassion," that it does not provide a "safety net" for the poor and unfortunate; that it does not redistribute the wealth "justly" -in a word, that it fails to provide "social justice."

And all these criticisms take for granted that there is a class of peo ple, our officeholders, or at least other politicians whom we could elect in their place, who could set this all right if they had the will to do so. And most of our politicians have been promising to do exactly that for the last half century. The trouble is that their attempted legislative remedies turn out to be systematically wrong. It is complained that prices are too high. A law is passed forbidding them to go higher. The result is that fewer and fewer items are produced, or that black markets develop. The law is ignored, or finally repealed. It is said that rents are too high. Rent ceilings are imposed. New apartments cease to be built, or at least fewer of them. Old apartment buildings stand vacant, and fall into decay. Higher rents are eventually legally allowed, but they are prac tically always set below what mar ket rates would be. The result is that tenants, in whose supposed interest the rent controls were imposed, eventually suffer as a body even more than landlords, because there is a chronic shortage of housing.

Wages are supposed to be too low. Minimum wages are fixed. The re sult is that teenagers, and espe cially black teenagers, are thrown out of work and on the relief rolls. The law encourages strong unions, and compels employers to "bargain collectively" with them. The result is often excessive wage-rates, and a chronic amount of unemployed. Unemployment relief and Social Security schemes are put into effect to provide "safety nets." This re duces the urgency for the unem ployed to find new or better-paid work and reduces their incentive to look. Unemployment payments, So cial Security and other such safety nets continue to grow. To pay for these, taxes are increased. But they do not raise the expected revenue, because the taxation itself, reducing profit incentives and increasing losses, reduces enterprise and pro duction. The spending and safety nets are increased. Deficit spending appears and increases. Inflation ap74 THE FREEMAN pears, demoralizing production further.

Sad to relate, these consequences have appeared in country after coun try. It is hard to find a single country today that has not become a bank rupt Welfare State, its currency con stantly depreciating. Nobody has the courage to suggest dismantling it or to propose reducing its handouts or safety nets to affordable levels. In stead the remedy proposed every where is to "tax-the-rich" (which turns out everywhere to include the middle-classes) still more, and to re distribute the wealth. Guided by Profit Let us return to our point of begin ning. The eminent person that I quoted then is mistaken when he tells us that we are governed by the profit-motive of the few rather than the needs of the many. The profit motive is simply the name for the practically universal motive of all men and all families-the motive to survive and to improve one's condi tion. Some of us are more successful at this effort than others. But it is precisely the profit-motive of the many that must be our main reli ance for supplying the needs of the many.

It is strange that so little recog nition is given to the fact that a man cannot grow richer without making others richer, whether that is his in tent or not. If he invests and starts It is only when each of us has provided for more than his own needs that he can acquire a surplus to help meet the needs of others. Voluntary coopera tion is the key. a new and successful business, he must hire an increasing number of workers, and raise wages by his own increased demand. He is supplying his customers either with a better product than they had before, or as good a product at a cheaper price, in which case they have more money left to buy other things. Even if he uses his own receipts only to in crease his own consumer demand, he helps provide more employment or higher pay; but if he reinvests his profits to increase the output of his business, he directly provides more employment, more production, more goods.

So let us be thankful for the suc cessful profit-motive in others. Of course, none of us should respond "only to the forces of the market place." Fortunately few of us do. Americans are not only among the richest people in the world today but among the most generous. It is only when each of us has provided for more than his own needs that he can acquire a surplus to help meet the needs of others. Voluntary coopera tion is the key. ® Clarence B. Carson CAPITALISM: YES and NO SOME terms and phrases are well sui ted to lucid discourse and even debate. This is generally the case when they have a commonly ac cepted meaning, when they are gen erally used-or are capable of being used-with some precision, and when they are not over loaded with con notations. The fact that people differ as to the value or desirability of what the terms signify does not disqualify them. Otherwise, debaters would have to employ different terminol ogy, depending on which side they were on. For example, it seems to me that "free market" meets the crite ria of a phrase well suited to dis course and debate.

That is, "free market" has a comDr. Carson specializes in American intellectual his tory. He has written a number of books, including Or ganized Against Whom? The Labor Union in America. His latest are volumes I and II of a series, A Basic History of the United States. monly accepted meaning, can be used with precision, and is not over loaded with meaning so as to be value laden. A free market is a mar ket open to all peaceful traders, one in which sellers are free to sell to the highest bidder and buyers are free to buy what they will from whatever seller they will. Or, to put it another way, it is a market in which buyers and sellers are free to contract with out obstruction or interference from government. Thus, when government inter venes in the market so as to restrict the number of sellers or buyers, to set prices, or to prescribe quality, it is not a free market. It is possible to oppose or favor such a market while agreeing as to what constitutes a free market. Nor do differences as to the extent of freedom entailed necessar ily rule out the use of the phrase in discourse.

75 76 THE FREEMAN February In a similar fashion "free enter prise" and "private property" gen erally meet the tests as terms of dis course. Enterprise is free when all who can and will may produce and dispose of their goods to willing buy ers. The opposite of free enterprise would be government granted mo nopoly over any field of endeavor, or the restriction of it through fran chises, licenses, or other devices which exclude some enterprisers. The phrase can be used both by those who favor and those who oppose it, though those who oppose it might prefer other language. Private prop erty is simply property that is pri vately owned, and the owner is pro tected in his enjoyment of it by government. I have not, of course, exhausted the distinctions nor cov ered all the areas about which dis agreement may exist, for any of these phrases, but it was my purpose only to make a prima facie case for them as terms of discourse.

Capitalism: A Value-Laden Word The same does not go, however, for "capitalism." It does not have a com monly accepted meaning, propo nents of it to the contrary notwith standing. As matters stand, it cannot be used with precision in discourse. And, it is loaded with connotations which make it value laden. Indeed, it is most difficult for those who use it from whatever side not to use it simply as an "angel" or "devil" word, i. e., to signify something ap proved or disapproved. Meanwhile, what that something is goes largely unspecified because it is hidden be neath a blunderbuss word. My considered opinion is that cap italism is not a descriptive word at all in general usage. Dictionary-like definitions may give it the appear ance of being descriptive. One dic tionary defines it as "a system under which the means of production, dis tribution, and exchange are in large measure privately owned and di rected." On the face of it, the mean ing may appear clear enough. We can come in sight of the difficulty, how ever, if we turn the whole thing around and look at what is supposed to be signified, shutting out of our minds for the moment the word used to signify it. Suppose, that is, that we have a set of arrangements in which the means of production, dis tribution, and exchange of goods "are in large measure privately owned and directed." I am ac quainted with such. arrangements, both from history and from some present day actualities.

But why should we call such ar rangements "capitalism"? So far as I can make out, there is no compel ling reason to do so. There is nothing indicated in .such arrangements that suggests why capital among the ele ments of production should be sin gled out for emphasis. Why not land?

1985 CAPITALISM-YES AND NO 77 Why not labor? Or, indeed, why should any of the elements be sin gled out? Well, why not call it capi talism, it may be asked? A rose by any other name, Shakespeare had one of his characters say, would smell as sweet. That argument is hardly conclusive in this case, how ever, nor in others similar to it. Granted, that when a phenomenon is identified it may be assigned a name, and in the abstract one name will do as well as another, if the name be generally accepted. In the concrete, however, the name should either follow from the nature of the phenomenon or be a new word. Oth erwise, it will bring confusion into the language. Marxist Derivations Capitalism, as a word, does not conform to these strictures. Its root is capital, an already well estab lished word in economics, used to re fer to one of the elements of produc tion. Moreover, capitalism gave a form to the word that already had a more or less established signifi cance. When an "ism" is added to a word it denotes a system of belief, and probably what has come to be called an ideology. It is highly un likely, if not linguistically impossi ble, for such a formulation to serve as a neutrally descriptive word for the private ownership of the means of production, and so on.

But we are not restricted to theory in our efforts to discover whether capitalism is simply a neutrally de scriptive word. It was given cur rency in the highly charged formu lations of Karl Marx and other enemies of private property. Marx's fame hardly stemmed from any pow ers he may have had for neutral de scription. On the contrary, he is best known for his extensive efforts to re duce all of reality and all relation ships to the point where they fitted within the ideological scheme of class struggle. He had the kind of mind that reduces everything to a place within a single dominant sys tem. Thus, the private production of goods is a system, a system reduced in his scheme to capitalism. In discussing the dictionary-like definition of capitalism, I dropped the word "system" used in the dic tionary and substituted the word "arrangement" for it. I did so be cause it seemed to me that a society could have arrangements in which the production of goods would be pri vately owned without this constitut ing a system. Arrangements for dis tinguishing between claimants of property and protecting such claims are necessary in society. But, "sys tem" is ominous when linked to cap italism on the one hand and the pro duction, distribution, and exchange of goods.

Private ownership of the means of production does not dictate any par ticular mode of production. In point 78 THE FREEMAN February of fact, a great variety of modes of production do occur under private ownership. A man may own his own land and cultivating devices and produce what he will by his own ef forts. Many have, and some do. Or, to take the other extreme, produc tion may be organized in great fac tories by intricate division of labor and under extensive supervision and direction. Between these two ex tremes, there are in fact a great range of ways in which production and distribution have been and are carried on. Indeed, it is only where private property is the rule that this variety is possible. In Marx's mental world this vari ety and diversity could not exist, or, if it did, it could not last. It must all be finally reduced to a single sys tem-capitalism. And capitalism led to greater and greater concentra tions of wealth until all was in a few hands. Then, of course, the apoca lypse must come, the revolution, in which an impoverished proletariat would rise up in its wrath and seize the instruments of production, and so on and on through the whole Marxian scenario. The word "capi talism" still carries the overtones of this Marxian analysis. For example, the dictionary from which was drawn the earlier definition gives as further definitions of capitalism: "the concentration of capital in the hands of a few, or the resulting power or influence," and "a system favoring such concentration of wealth."

Another dictionary says, "The state of owning or controlling capital, es pecially when tending to monopoly; the power so held." The High Cost of Salvage In sum, capitalism gained its cur rency from Marx and others as a blunderbuss word, misnames what it claims to identify, and carries with it connotations which unfit it for pre cise use in discourse. Even so, there has been a considerable effort to re claim the word for discourse by some of those who are convinced of the su periority of privately owned capital in the production, distribution, and exchange of goods. It is a dubious un dertaking. For one thing, Marx loaded the word, and when all that he put into it has been removed, only the shell remains. For another, lin guistically, it does not stand for pri vate property, free enterprise, and the free market. It is false labeling to make it appear to do so. Capital ism means either a system in which capital holds sway, which is largely what Marx apparently meant, or an ideology to juslify such a system.

It is not my point, however, that it might not be possible to use capital ism as a label for private property, free enterprise, and the free market. Indeed, I think it has been done at what I call the bumper sticker level of discourse in the United States. Undoubtedly, if enough effort were 1985 CAPITALISM-YES AND NO 79 put into it the name of roses could be changed to tomatoes. But I doubt that the game is worth the candle. Moreover, there is no real discourse, discursive reasoning, at the bumper sticker level. Bumper stickers as sert; they do not reason or prove. So do titles of books, for examples. But labeling is an inferior art, and name calling is a form of propaganda. Thus, the problem of discourse with a word such as capitalism remains. It is not my intention, however, to suggest that we should discard the word capitalism. Far from it. Rather, I see the need for the use of the word in its inherent sense in serious dis course. A word, certainly a word formed with an "ism" suffix, is gov erned by and takes its meaning from its root. Granted, words sometimes slip their moorings in the course of time and lose all connection with earlier meanings. This is apt to hap pen, I suspect, when the root word has fallen into disuse. That has by no means happened in the case of capital. Capital itself is as important today as ever, and the word is still in widespread use to describe it with considerable precision. Moreover, something that I would like to see correctly identified as capitalism is widespread, if not rampant, in the world.

Keeping in mind that capitalism, because of the "ism," is ideological in form, it means most basically an ingrained preference for capital over the other elements of production. That is, it means an imbedded pref erence for (or commitment to) capital over land and labor. Considered as a system, capitalism is the establish ment of that preference by the ex ercise of government power. To put it into more precise economic terms, it is the forced transformation of some greater or lesser portion of the wealth of a people into capital. In po litical terms, it is the legalization and institutionalization of a prefer ence for capital. State Capitalism Ironically, in view of Marx and so cialist doctrine generally, capitalism is most rampant in Communist countries. It is there that the most extreme measures are taken to ac cumulate capital. The Soviet Union, for example, has long used slave la bor to mine gold in forbidding climes.

It has done the same for cutting tim ber in the arctic cold of Siberia and for reaching other hard to get nat ural resources. The basic aim of much of this is capital accumulation to foster industrialization. There is perhaps no better way to visualize the preference for capital over labor than political prisoners (slave labor) working in gold mines. But it does take other forms. There is confisca tory taxation, in which most of the wealth of all who produce is taken away for use by the state. The cap ital hunger in Third World countries 80 THE FREEMAN February is ravenous today, as they reach out to try to obtain it from countries in which there is more wealth. The thrust is for industrialization, and the industries are usually owned by the government. Some writers who have noted this penchant of socialist and Commu nist countries for capital have called it state capitalism. While the phrase is not objectionable, it may well be redundant. If my analysis is correct, all capitalism is state imposed cap italism. Otherwise, it is most un likely that there would be an estab lished preference for capital over land and labor.

Granted, .some people in their pri vate affairs do evince a preference for capital over other sorts of expen ditures. I have known men, for ex ample, who were much more given to buying tools and various equip ment than clothes. But then the same men often spend more on au tomobiles, not usually capital expen ditures, than on either. Nor is it likely that businessmen, however enamored they may be with machin ery or computers, will make so bold as to ignore the market for long in determining the mix of the elements of production. Only governments, because they spend what they have not earned, can afford to do that or have the power to require others to ignore the market. Capitalism is a will of the wisp unless it is estab lished by the state. A Red Herring The notion that the conflict in the world is between capitalism and so cialism is a Marxian red herring. Whether Marx deliberately con ceived a perverse term to designate the conflict or not, it has had re markable success in confusing the issue. In Marxian terms, capitalism is not simply the private control over the instruments of production. It is the effective ownership and control over the instruments of production by a few men with vast concentrated wealth at their disposal. In Marxian terms, again, this great wealth was obtained by the ruthless exploita tion of workers. To argue the oppo site position is to risk falling into a fairly well laid trap. At the most ob vious level, it is to take on a varia tion of the old conundrum of whether or not you are still beating your wife.

Thus, the defender of "capitalism" begins by granting that, sure, 19th century capitalists were a hard lot. But that has all changed in the 20th century, he maintains; humane leg islation and genteel businessmen have changed all that. To sustain this argument, he grants more and more of the Marxist, or at least the socialist, case, and justifies the in creasing government control over private property. Those who argue in this wise have taken the socialist bait and rushed headlong into so cialism with it. But the heart of the difficulty is 1985 CAPITALISM-YES AND NO 81 that the word capitalism as it is em ployed is a semantic trap. On the one hand, it makes it difficult to keep the issues in focus, because it is used in a confusing and misleading way. On the other hand, it blocks from our view a mass of phenomena which we need to see clearly, and which capi talism used in its root sense would help to do. The issue is not between capitalism and socialism. There is an issue about private vs. public own ership of the means of production, but there is no logical connection be tween that and capital or capitalism.

Whatever Marx may have thought about capital, all too little appar ently, there is no substantial differ ence among the leaders in the world today over the necessity for and de sirability of capital to aid in both ag ricultural and industrial production. If anything, socialist countries are more determined to get their hands on accumulated capital and concen trate it than what remains of so called capitalist countries. Every device, ranging from the most sneaky to the most openly con fiscatory, is employed in this quest. I nominate as the most sneaky the monetizing of debt, by which wealth in private hands is sopped up by a process of monetary debasement. There exists now a vast series of banking-like mechanisms by which this money is sopped up and trans ferred to countries around the world where governments more or less own and control the instruments of pro duction. Capital is what much of this is about, and if we could call it by its proper name, it would be called cap italism. As matters stand, however, we are denied the use of the very word that could help to bring all this into focus.

Freedom ys. Tyranny The issue, I repeat, is not between socialism and capitalism, in any meaningful sense of the words. In the broadest sense, it is between free dom and tyranny. As regards cap ital, it is between whether men shall be able to keep the fruits of their la bor and dispose of accumulations of it as they think best, or have it con fiscated and used for politically de termined ends. It is between the free market and the hampered market. It is between free enterprise and state controlled activity under the direc tion of a vast bureaucracy. It is be tween dispersed wealth under indi vidual control and concentrated wealth used to augment the power of the state. It is between the right to private property and the might of centralized government thrusting for total power. There· are other di mensions, moral and social, to the contest, but the above are the major economic ones. Capitalism, as cur rently used, tends to act as a red her ring to draw us off the scent and dra w attention to largely extraneous issues.

82 THE FREEMAN So, I conclude, as regards the use of the word capitalism, sic et non, or, in English, yes and no. No, to take that part of the equation first, the word cannot be effectively used in discourse and debate in its Marxian or socialist sense. It cannot be used with precision because it is a loaded word, loaded with Marxian ideology. It has been severed from its root and made to connote what it does not clearly do. Nor does it have a com monly accepted meaning, or set of meanings, for Marxists and non Marxists. Its use obfuscates the is sues and conceals a major aspect of socialism (i. e., its capital hunger). No, capitalism is not an apt word for the use of defenders of private ownership of the means of produc tion. Linguistically, it does not mean private ownership, nor does the case for private property hinge upon its potential use as capital. The right to private property is grounded in the nature of life and labor on this earth, and it is, therefore, a gift of the Cre ator. Its use as capital is one of the possibilities of property. To defend private property from the perspec tive of the advantages of privately disposed capital is to approach the matter wrong end to. In any case, capitalism is still a misnomer for what the defenders are discussing; their flanks are exposed to the ad versary because it is his chosen ground; and when the defenders have loaded the word with their own meanings it does not have a com monly accepted meaning for use in discourse.

Socialists Seize Capital to Achieve Industrialization Yes, there is a place for the wora capitalism in the language. There is an ideology and there are practices which cry out to have this word stand for and identify them. The ideology is the established preference for cap ital over the other elements of pro duction. In practice, it thrusts to the use of government power to concen trate capital, to promote its accu mulation, and to confiscate the wealth necessary to that end. Used in this way, the word capitalism helps to identify and bring into focus developments which are otherwise difficult to construe. We can see clearly that capitalism is a disease of socialism, not the off spring of private property. It is not a system in which the instruments of production are privately owned, but one in which private property is taken to provide capital for publicly owned industries. Perhaps the most dramatic examples of it at the pres ent time are the grants and loans to Third World and Communist na tions by which wealth from the United States and European coun tries is being appropriated for their industrialization. That, by my un derstanding, is capitalism, and it should bear the name and onus. @ Hans F. Sennholz The Demand for Labor To SPEAK of a supply of labor may refer to the productive exertions by all those individuals, whether self employed or wage-earning, who do, or would like to do, any work for wage or profit. The potential supply in a given market depends on the size of population, the amount of time each individual spends work ing, and the skill and application which the workers bring to their jobs. The effective supply depends on the preferences and choices by the workers themselves.

The demand for labor springs from its usefulness in the satisfaction of human wants. The potential de mand is as infinite as man's wants and desires. Some are necessary to sustain his life, others to please his fancy. When his desires are boundDr. Hans Sennholz heads the Department of Econom ics at Grove City College in Pennsylvania. He is a noted writer and lecturer on economic, political and monetary affairs. less, his labors are endless. They set a task he can never accomplish, and create work he can never finish. The specific demand for labor de pends on the preferences and choices by entrepreneurs in the labor mar ket. Their bidding for labor in turn is dependent on their anticipation of the productivity of labor, which is the val ue consumers ascribe to labor ser vices. It provides an excellent guide and sets a definite limit to employer bidding for labor. Interdependence of demand and productivity does not imply a con stant relationship. It does not follow that a rise or fall in productivity must result in proportional changes in the demand for labor. Modern eco nomics rejects "quantitative anal ysis" because there are no constant relations that would permit quanti tative measurement. Even if a stat istician were to demonstrate that, at a given time and place, a ten percent 83 84 THE FREEMAN February rise in labor productivity brought forth a twenty percent rise in the de mand for labor, no such relationship may exist at other times and in other places. Human behavior toward la bor and every economic good is var iable. Different individuals ascribe different values to labor and the products of labor. In fact, the same individual may change his valua tions under changing conditions.

Production for the future must be ever mindful of the future and must anticipate future changes. Prices may change and affect the economic outlook. When wage rates are rising, employers must reflect on the pos sibility that the rates may soon re vert to the old rates, that they may remain where they are at the pres ent, or that they will rise still fur ther in the future. Employers must give thought to the future prices of the product, which may rise, fall, or remain the same. In short, employer bidding for labor always hinges on the anticipation of future labor productivity. The Productivity of Labor Consumers, who are the ultimate directors of the production process, attach value to labor services. They judge labor like any other factor of production, by the improvement it adds to their well-being. Economists put it succinctly, labor is valued ac cording to the anticipated improve ment expected from the employment of an additional laborer. They call it "marginal productivity." In simple words, a worker's productivity is de termined by the value consumers at tach to his services and achieve ments. Employees, employers and capitalists, all are subject to the whims and wishes of consumers who want to be served at the lowest pos sible price. Employers', therefore, are eager to buy all the specific labor they need for production at the low est price. But they must compete with other employers who are guided by similar considerations, offering wages high enough to attract the needed labor from their competitors.

To remain in business they must out bid competing employers and pay the market rate, which is forever ad justing to the "marginal productiv ity" for each kind of labor. If, for any reason, employers should offer wage rates that are lower than the productivity rates, a profit margin \\rould appear. People eager to take advantage of the mar gin would bid for more labor and thereby push wage rates back to the height set by productivity. Surely, employers are interested in buying labor at the lowest possible price. But no one alone, or together with others, can actually lower his rate without creating a profit opportu nity for competitors. Other employ ers and would-be employers seeing bargain labor would want to seize the opportunity and buy additional 1985 THE DEMAND FOR LABOR 85 labor, which would lift wage rates back to the rates set by productivity. Many economists have gone astray at this very paint of labor market competition. From Adam Smith to Jean-Baptiste Say, John Stuart Mill, Alfred Marshall, and a host of dis ciples, they all lamented a conjec tured failure of the competitive or der; they all devised their specious doctrines of labor's disadvantage and exploitation. Their doctrines and theories in turn gave birth to the la bor movement that commonly aims at replacing the competitive private property order with a political com mand system. They induced govern ments the world over to embark upon radical government intervention in order to favor laborers at the ex pense of the owners of capital. In time they caused governments to re strict labor market competition and bestow legal privileges on workers' combinations and unions. Contem porary policies continue to reflect their notions and prejudices.

Guided by such spurious doctrines modern man is eager to use the force of law to raise his wage rates and im prove his condition. Ever angry at his "disadvantages," he does not hesitate to use his political appara tus of coercion. His government may set minimum wage rates and man date expensive benefits; disobedi ence is visited with fines and prison sentences. His labor association may engage in violent strikes in order to raise wage rates and reduce labor output. In every case he brings forth the specter of falling demand and rising unemployment, that is, people willing and able to work but unable to. find employment at the coercive rate. Economists call it "institu tional" unemployment. It must not be confused with "temporary" mar ket-generated unemployment. Directed by Consumers Directed by consumer choices and preferences, employers buy definite performances at market rates. They do not knowingly buy labor at rates that can be expected to result in fi nancial losses, nor do they for long retain labor that usurps income from investors and entrepreneurs. In fact, they discharge submarginal work ers whenever they can, in order to preserve the production process and safeguard their own jobs as well as those of other workers.

Consumers acting on free markets may be responsible for fluctuations in wage rates. They may cause some to rise and others to fall and thereby reassign labor to various fields of production. Some rates may rise in reaction to rising consumer valua tion and appreciation. Others may fall in response to declining con sumer demand. But all such declines do not create mass unemployment unless wage rates are forcibly pre vented from readjusting. Industries may shrink and vanish because of 86 THE FREEMAN February changing consumer aspirations and changing production technology. They may cut wage rates and reduce fringe benefits until laborers prefer to seek other employment. But such changes do not cause institutional unemployment. At the market rate of wages anyone willing to work can find employment and anyone look ing for labor can find it. A worker may be discharged be cause his employer is readjusting the production process in response to changing consumer demand. Or, having failed to adjust in time, the latter may face liquidation in bank ruptcy, which releases all labor.

Workers discharged may not imme diately take another job; they may search for a better opportunity in other markets. They may want to re loca te in another community or move to another climate. For anyone of a thousand reasons they may choose to wait for a more propitious opportunity. Their unemployment, being the outcome of both market change and individual choice, is "temporary" and must not be con fused with "institutional" unem ployment, which is as persistent as the institutional force that is creat ing it. Temporary Unemployment Man is not free to choose perma nent unemployment. He must labor in order to sustain his life and pro vide some comforts of living. In an exchange system he must adjust his labors to the demands of the market where his fellowmen manifest their wants and desires. Failure to adjust promptly to changing conditions may lead to unemployment. There may be technological un employment, which always attracts a great deal of popular interest.

Technological progress may reduce the number of workers needed to perform certain operations. Com puter production and management may result in simplifying and short ening the production processes, thereby reducing the number of workers required to perform them. Labor-replacing machinery and me chanical handling may result in a reduction of the number of workers needed to man a workshop. The worker displaced by techno logical changes faces the risk of an extended period of unemployment unless he chooses to adjust quickly to the new situation. He may move to another industry that is expand ing and bidding for more labor. Or he may choose to wait until his for mer employer recalls him. After all, the new process of production that displaced him usually results in lower goods prices and an increased demand for the goods. It may lead to an expansion of business and may necessitate the rehiring of dismissed wor kers and the addition of new workers.

New tools of production need to be 1985 THE DEMAND FOR LABOR 87 manufactured, installed, serviced, and operated, all of which require human labor. The new machines need designers, draftsmen, manu facturers, truck drivers, program mers, installers, operators, and re pairmen. In most cases the laborer who is displaced by a machine may be qualified to work with it in some capacity. If, however, he makes no ef fort to learn and adjust, preferring to wait and see, the displaced worker may not get the job. Instead, it may go to a white-collar worker or a young school graduate who is eager to learn. In recent decades manufacturing employment has been declining while certain service industries have expanded rapidly and required ad ditionallabor. Supported by massive government spending, the health care industry, especially for the el der ly, has grown significantly. It has absorbed some labor set free by man ufacturing industries. In many in stances, however, displaced factory workers refuse to make the move to another industry in another loca tion; they had rather wait until they are called back or their unemploy ment benefits run out.

There may be seasonal unemploy ment. It is the composite effect of cli matic and institutional forces that are felt regularly each year. Farm employment in the United States, for instance, rises from early spring un til fall, then declines sharply as winter approaches. Many other activ itiesare subject to similar fluc tuations. Construction is affected di rectly by changing weather condi tions. In the snow belt a cold winter may bring most outdoor construc tion to a halt. Intermingled with the climatic variations are the effects of institutional factors. Industries as sociated with education, for in stance, are affected by the schedul ing of the school year from September to June. Retailers are af fected by the designation oftax dates by federal and state governments. Holidays have a wide range of eco nomic effects. Christmas and Easter have major impacts on the volume of business; other holidays, such as July 4, Memorial Day, and Labor Day usually are of less effect. They all create an annual cycle that is re current and periodic.

Seasonal Fluctuations The list of industries directly af fected by seasonal factors is surpris ingly large. Seasonal influence is clearly discernible not only in agri culture and construction, but also in iron and steel, automobiles, tires, ce ment, glass, shoes, appliances, con fections, men's and women's cloth ing, and many others. Many businesses shut down or curtail op erations during seasonal slumps. Industries subject to seasonal fluc tuations obviously need to compete for available labor with other indus88 THE FREEMAN February tries that offer more regular em ployment. They can compete effec tively only if their wage rates are high enough to induce a sufficient number of workers to prefer sea sonal over regular employment. The structure of wage rates reflects the seasonal irregularity in demand. Some workers prefer seasonal em ployment over year-round work; they may enjoy seasonal unemployment, which to them may be self-employ ment during the off-season. Most teachers love their seasonal unem ployment; they call it vacation. Some may prefer to be fully employed throughout the year; they may teach during the school year and labor in commerce and industry, or seek self employment during their vacations.

Migrant farm hands may bend their effort in custom grain harvesting, starting in Oklahoma and following the season north until it ends in northern Saskatchewan. Fruit pick ers may start in southern California and end up in British Columbia. During the winter they may retreat to their homesteads in Mississippi and Florida. In every case the wage and fringe benefit structure of the seasonal industry adjusts to the ir regularity and thereby secures the needed number of workers. There may be a great deal of un employment of older workers. Many make little effort to adjust to a new situation, which makes employers reluctant to hire them. This wellknown tendency is deeply rooted not only in custom and convention, but also in human nature itself. As he grows older, man may resist changes. When strength and energy wear away, his economic productivity tends to decline. But he may expect to be paid according to seniority, rather than productivity, which may make him more expensive than younger competitors. And even if he were to earn identical wage rates, his unit costs of production may rise as his productive efficiency declines.

Productivity and Income Self-employed people are much more aware of the direct relation ship between productivity and in come than employees. They are pre pared to face declining incomes when personal productivity declines in ad vancing age. The physician or den tist who attends to fewer patients readily accepts the fact that his in come may decline. The businessman knows that his profit will shrink when his output decreases. But his aging employees tend to forget it; they may expect a stream of raises and improvements until they choose to retire. Their costs continue to rise while their productivity declines, which makes them primary targets for disemployment. In other words, there are no employment contracts calling for wage cuts after age 40, 50, or 60, but there is a great deal of un employment. It also explains why 1985 THE DEMAND FOR LABOR 89 self-employed people generally con tinue to labor in their professions long after employees have retired.

Government usually compounds the trend by imposing laws and regula tions that aim at benefiting elderly employees. But benefits exacted by force merely raise employment costs and thereby disadvantage the in tended beneficiaries even more. Physical strength and prowess may diminish early in life, but man may continue to grow in experience, knowledge and wisdom throughout his life. As long as he is growing, his economic productivity may be ris ing. There is no specter of unem ployment, which appears only to submarginal workers. Unskilled la borers who have nothing to sell but their physical strength may become submarginal at an early age; they may become "old" in their thirties when youthful vigor is fading away. Factory hands who acquire their skills in a day or two become "old" early in life. Skilled workers who are masters of a difficult trade need not fear the competition of younger peo ple; they may enjoy highest personal productivity in their middle years.

Professional people who may be studying and learning all their lives may achieve their highest produc tivity in their fifties and sixties. The philosopher who inquires into the nature of things and synthesizes all learning may be at his best in his seventies and eighties. He has nothing to fear of the competition by his younger colleagues. And yet, they all may fall prey to cyclical unemployment, which throughout recent history has been one of the great economic and social evils. Workers are laid off en masse when business is caught in the throes of depression. Millions are idled, and in time are impoverished, as economic wheels grind to a halt. Depression time is readjustment time. Economic production is read justing to consumer demand, capital markets are correcting the mistakes made in the past, and labor markets are reassigning labor in response to changing demand. Cyclical Unemployment The public is poorly informed about cyclical unemployment. Un der the influence of Mainstream Economics, most people are led to be lieve that depressions are the evil fruit of the competitive order. In reality, depression and unemploy ment are the inevitable outcome of government interference with money and credit. They are the con sequences of boom-and-bust policies that lead to credit expansion, fol lowed by credit contraction. The harm is wrought during the eco nomic boom; it is corrected with much pain during the depression that follows.

Before the 1930s, when there was little government intervention, the 90 THE FREEMAN February depressions were relatively short and mild. There was little unem ployment. After all, there was no in stitutional restraint on the labor market, no minimum wage legisla tion, no unemployment compensa tion. When economic production was forced to readjust, labor would read just with equal speed and efficiency. It would freely move about the labor market and shop around for the best available position. Workers labored from dawn to dusk, especially dur ing depressions. Chronic unemploy ment was utterly alien to them. Institutional Unemployment The specter of mass unemploy ment first made its appearance when government became a back-seat driver. In 1930, when there was some cyclical unemployment, the govern ment urged business not to adjust, but to increase business spending. Municipalities and states were called upon to boost their spending for public works. The back-seat dri ver erected trade barriers, ran huge budgetary deficits, doubled in come taxes and raised business taxes, and in many instances, seized control over the car while denounc ing the driver. He set minimum wages, ordered fringe benefits, ex acted and paid unemployment com pensation, and introduced collective bargaining, all of which served to hamper the labor market. They gave rise to institutional unemployment.

Government is a necessary evil, like wheel-chairs and crutches. It protects the lives and property of its citizens from aggressors and wrong doers. Our need of it reveals that there is evil in the world. The evil is multiplied if government itself be comes the instrument of evil. It may govern too much and thereby kill the self-help and energy of the governed. It may neglect to protect the prop erty of the citizenry, or even prey on it for its own benefit or that of oth ers. It may engage in massive trans fer that seizes income and wealth from productive citizens and doles them out to its constituents. And in a moment of omnipotence it may in terfere with economic production and enforce wage rates that cause mass unemployment. Government may set minimum wages. For any number of political reasons, it may issue minimum-rate mandates and call on courts and po lice to enforce them. To judge the economic effects of this intervention it is important to determine the re lationship of the mandated rate to the market rate, that is, the mini mum rate imposed by courts and po lice versus the going rate paid in the labor market. There are three con ceivable possibilities with varying effects: 1. The police rate may be lower than the market rate; it may be $1 per hour, for instance, but everyone is earning more than the minimum.

1985 THE DEMAND FOR LABOR 91 No apparent ill effects may come from such intervention that actually does not intervene. It is potentially harmful, however, as the markets may change and cause some wage rates to fall below the minimum, in which case the minimum would now be higher than the market rate and. give rise to unemployment. More over, it is conceivable that some youngster may not yet produce the minimum, which would cause him to fall into unemployment or, if he chooses to ignore the mandate, be come a criminal in the eyes of the law. 2. The police rate may coincide with the market rate. Again, no ap parent ill effect may come of the mandate. However, market changes may cause the police rate to be higher than the rate the market would set. In this case the minimum costs of some workers would exceed their productivity; they would be come "submarginal" and face unemployment. 3. The police rate may be higher than the rate the unhampered mar ket would set. This is the normal case of minimum wage legislation.

After all, government means to lift the wage rates of poor people above the given rates in order to benefit them and earn their political sup port. It is unfortunate, however, that workers who produce less than the legal minimum tend to be unem ployed. Every time government raises the minimum it boosts the un employment rolls. It may want to raise the minimum from $5 an hour to $6 by mandating a higher hourly rate or adding fringe benefits. It may want to benefit millions of Ameri cans who are earning less than $6 an hour, by lifting their incomes by or der of court and police. The order is issued to all employers alike-prof itable employers, marginal employ ers who manage to cover their costs and earn a going rate of return, and submarginal employers who are earning less. Profitable employers earning re turns higher than the going rates, may be able to cover the higher labor costs. The minimum mandate merely prevents them from forming more capital and expanding their businesses, and may discourage them from hiring new labor. The marginal enterprises will become submarginal as a result of the min imum wage boost. They will be earn ing less than they could earn in fields that require no minimum wage la bor. In reaction, employer-entrepre neurs may choose to curtail their most expensive production. They may dismiss some labor, ineluding minimum wage labor. Submarginal enterprises may do the same. The pressure of competition may force them even more than the others to curtail loss-inflicting output and dis charge unneeded labor. The curtail ment by both, the marginal and sub92 THE FREEMAN February marginal enterprises, reduces the supply ofeconomic goods on the mar ket, which in time may raise their prices.

Consumers are the ultimate bosses of the production process. They set prices and determine the payroll. It is a wellknown fact that consumers usually buy fewer goods at higher prices, and therefore require less la bor. How much less? Noone can fore see the consumers' reaction, which may vary from product to product and may change over time . It is likely, however, that some are pre pared to pay higher prices, which will permit employers to pay higher wages. As no one can know in ad vance how high prices will rise in re action to the reduction in output and how many will pay the higher prices, no one can know in advance how many workers will find employment at $6 an hour. If 10 million people were to benefit from the wage man date, 8 million, perhaps, may enjoy the boost and 2 million may be cast from the employment rolls. At other times and in other places 5 million workers may partake of the boost while 5 million may be condemned to long years of unemployment.

Benefit Mandates Government intervention may take the form of benefit mandates for some or all workers. To be popular and "progressive" government may mandate new labor benefits. If wage rates are not reduced promptly to compensate for the boost in benefits, total labor cost may exceed the mar ginal productivity of some workers and, therefore, create unemploy ment. To reflect on employment and unemployment is to consider total cost, which usually comprises not only the workers' take-home pay and tax exaction, but also numerous em ployee benefits. Employers may be ordered to provide certain benefits or contribute to them. They may be directed to pay unemployment com pensation, workman's compensa tion, paid vacations, healthcare ben efits, and contribute to old-age and disability benefits and other labor causes. To ponder over the demand for la bor is to compare the productivity of labor with the cost of labor, that is, total cost. It is irrelevant to employ ers how the various shares of labor cost are to be distributed, as· take home payor fringe benefit, as pay roll tax or contractual contribution to Red Cross or the Little League.

What matters is a comparison of to tal cost of labor with its productivity. If the former is made to exceed the latter, unemployment sets in. Unemployment caused by benefit mandates may be temporary if other compensation is permitted to adjust. If a mandate raises labor cost by 10 percent and the unemployment in time depresses wage rates by 10 per cent, they cancel each other. In the 1985 THE DEMAND FOR LABOR 93 end, the mandate merely ordered benefits for workers and, by way of unemployment and wage rate ad justment, made them pay for the benefits. It is illusory to believe that government can for long force inves tors and entrepreneurs to grant ben efits without receiving labor in return. Some of the benefits accomplish the very opposite of what their po litical sponsors mean to accomplish. Unemployment compensation is de signed to alleviate the pains of un employment and facilitate the search for a job. But it is an unfor tunate fact that every boost in un employment taxation levied on em ployers raises the cost of labor and thus reduces the demand for labor.

In deep recessions with heavy un employment, state governments are quick to raise tax rates and bases, which invariably raises the unem ployment. States with high rates of unemployment taxation suffer from high rates of unemployment. Production Barriers Reduce Labor Efficiency Government may erect production barriers that reduce the productivity of labor. It may raise business taxes, boost environmental costs, erect trade barriers, impose regulations and controls. It may engage in def icit spending and consume business capital, reducing labor productivity. If labor costs are not reduced simultaneously they may exceed the mar ginal productivity of some workers and thereby create unemployment. To judge the import of production barriers it is important to distin guish between new and old barriers, between new and old government in tervention. New barriers are those to which the price and production structures have not yet fully ad justed. The new business tax has not yet raised goods prices, business may still be in the throes of adjustment through reduction in output and dis employment of labor. The new trade barrier may not yet have had its full effect on output, prices and wages.

The new budget deficit that is con suming business capital and reduc ing labor productivity, may not yet have run its course. Readjustment to new barriers takes time; it may take several years of painful readjust mentuntil the apparatus of produc tion has adjusted anew to consumer demand. Old harriers are those to which the price and production structures have fully adjusted. The painful readjust ment is over, wage rates are lower, goods prices are higher, and the un employment that forced the labor adjustment lies in the past. Present unemployment cannot be placed on the doorsteps of old barriers erected during the 1960s and 70s. The ap paratus of production has adjusted to them. Today's unemployment must be explained in terms of new 94 THE FREEMAN February barriers to which the labor market has not yet fully adjusted, and in terms of insurmountable barriers to which no legal adjustment is feasi ble. Price and cost adjustment can not easily overcome the minimum wage barrier that prevents the em ployment of much unskilled labor, nor can it readily compensate for the generous subsidies granted to the unemployed. For many workers their choice ofjob or joblessness may depend on the difference between la bor income and unemployment com pensation. For them, the utility of la bor tends to shrink and that of leisure may rise whenever leisure is subsidized.

Unemployment compensation con stitutes a production barrier in the sense that it may induce some work ers temporarily to withdraw from production. It reduces the supply of labor, which in turn raises the mar ginal productivity and wage rates of the remaining labor. The boost tends to be temporary unless the compen sation succeeds in creating a stand ing army of unemployed. In that case, it must not be overlooked that the increase is accomplished at the price of mass unemployment and grievous suffering of the unem ployed. It is financed by unemploy ment taxes exacted from the income of the employed, and is borne by all members of society who are made poorer by the idleness of some of its members. Unemployment compensation is a rather ineffective method of raising wage rates and improving the economic lot of working people. Interference with Prices Government may. interfere with the pricing process and thereby lower the productivity of labor. If la bor costs are not adjusted simulta neously some labor may become sub marginal. As government is most keenly interested in "essential"

products and services,· e.g., fuel, util ities, steel, and the like, it may for cibly hold their prices below market rates, thereby depressing labor productivity. Throughout the 1970s the Federal Government kept oil and gas prices far below world market prices. The price controls, together with a fuel allocation program, struck hard at economic production and employ ment. It brought Sunday closings of filling stations, created long lines on other days, lowered home and office thermostats, and reduced commer cial air service. It brought energy brown-outs, and energy-related in dustriallayoffs. Once self-sufficient in energy, the U.S. was forced by price controls to supplement gas and oil supplies with overseas purchases. By 1980 no fewer than 69 govern ment agencies and a dozen Congres sional Committees were exercising authority on energy questions. Un employment rose from some 4.1 mil lion Americans at the beginning of 1985 THE DEMAND FOR LABOR 95 the decade to nearly 6 million at the end.

This is not to imply that the en~ ergy chaos was solely responsible for soaring unemployment. There were many other policies that contributed to the evil. There cannot be any doubt that the comprehensive price and wage controls imposed in 1971 were largely responsible for the se~ vere recession that was to descend on all markets in 1974 and 1975. Av erage unemployment in 1975 was es timated at 7.8 million Americans. If it had not been for the rampant in flation that was to follow, the un employment undoubtedly would have ~own worse. Inflation and Unemployment Under the sway of Keynesian doc trines and recipes, governments the world over are practicing deficit spending and credit expansion in or der to alleviate unemployment. They are convinced that such policies con stitute an efficient method for grad ually lowering labor costs. Lower real wages raise the demand for la bor and actually reduce unemploy ment. But the success of Keynesian policies depends entirely on the abil ity to deceive the workers and their unions or, if this should fail, to per suade them to suffer losses in real income.

Inflation and credit expansion as an employment policy cease to be ef fective when the workers resist the obvious reduction in real income. They are foiling the Keynesian plan when they demand wage boosts that compensate for the rise in goods prices. In fact, they may create new unemployment pressures when their contract demands anticipate future purchasing power losses. This is why moderate dosages of inflation no longer cause real wages to decline and the demand for labor to rise. Application of ever larger doses of inflation must, in the end, lead to a complete breakdown of the mone tary system and to mass unemploy ment. Double-digit inflation causes businessmen to hedge for survival. They invest their working capital in inventory and capital equipment, or other durable goods that are .likely to escape the monetary depreciation. Investors buy real estate, precious metals, and collectors' items. Eco nomic output, especially for consum ers, tends to decline, which causes goods prices to rise and unemploy ment to soar.

The ultimate folly of the Keyne sian recipe is a combination of infla tion and price control. Both together instantly paralyze all markets, ham per economic production, encourage consumption, and create goods shortages. They cause the exchange system with its magnificent division of labor to disintegrate and give way to a primitive command sys tem. Disintegration causes mass unemployment.

96 THE FREEMAN February Labor Unions Long before there was a Keyne sian recipe governments began to rely on labor combinations for im proving labor conditions. Guided by popular notions of labor's disadvan tage they bestowed legal immunities and privileges on labor unions so that they would raise wage rates above those the unhampered market would set. Unfortunately, simple economics reveals that disemploy ment sets in wherever labor costs are forcibly lifted above market rates. It does not matter whether govern ment or union is imposing the coer cive rates. The effects are the same: institutional unemployment. The rates may differ according to the measure of coercion. Government edicts usually are more comprehen sive and, therefore, more restrictive than union rules. Minimum wage legislation may affect millions of workers. Union coercion may be lim ited to a few companies in a few in dustries, which obviously limits their restrictive powers. As long as unionism is a limited phenomenon, the disemployment it imposes may bring forth an adjustment in non unionized employment. The labor market may absorb the labor set free by unions and thus prevent mass unemployment.

Disemployed union labor reduces the marginal productivity of unor ganized labor and depresses its wage rates. It creates a visible difference between union rates and market rates, which is both boon and bane to unionism. The difference ob viously helps to promote the union ideology according to which unions do raise wage rates and improve the economic conditions of all working people. It is a bane because it gives rise to much suffering. It creates un employment among union members and depresses the wage rates of all others. When union rates amount to double or triple the market rates, the industry usually falls on hard times. With the demand for its products and services declining, it tends to con tract, releasing labor, until it ceases to function as a viable industry. For eign producers may ultimately fill the gap torn by union restriction and industry contraction. The decline of a unionized indus try is bound to accelerate when the quantity and quality of labor may decline as a result of diminishing ef fort and application by the workers themselves. They may choose to loaf and goof off, dally and tarry, or do shoddy and shabby work. They may steal from their employer, damage their tools and equipment, and oth erwise sabotage the production pro cess. Union labor usually is angry labor pressing its grievances. When labor productivity declines for any reason, wage rates must be reduced simultaneously. Failure to adjust la bor cost to declining labor productiv ity leads to unemployment.

1985 THE DEMAND FOR LABOR 97 An Invitation to Labor Human life is a constant want and a standing invitation to labor. In dic tatorships, the invitation becomes a command that is enforced by court and police. In free societies, it takes the form of business demand for workers. Employers are bidding for labor in order to serve consumers who are the directors of the produc tion process. Unemployment Consumers judge the efforts of every worker and determine his in come. They decide upon employment and unemployment. Being weighed on their sensitive scales of produc tivity and cost, some labor is found wanting. In free labor markets it is free to readjust. In markets con strained by onerous rules and reg ulations it is condemned to chronic unemployment. @ IDEAS ON LIBERTY REAL wage rates can rise only to the extent that, other things being equal, capital becomes more plentiful. If the government or the unions succeed in enforcing wage rates which are higher than those the un hampered market would have determined, the supply of labor exceeds the demand for labor. Institutional unemployment emerges.

Firmly committed to the principles of interventionism, governments try to check this undesired result of their interference by resorting to those measures which are nowadays called full-employment policy: un employment doles, arbitration of labor disputes, public works by means of lavish public spending, inflation and credit expansion. All these rem edies are worse than the evil they are designed to remove. Assistance granted to the unemployed does not dispose of unemploy ment. It makes it easier for the unemployed to remain idle. The nearer the allowance comes to the height at which the unhampered market would have fixed the wage rate, the less incentive it offers to the ben eficiary to look for a new job. It is a means of making unemployment last rather than of making it disappear. The disastrous financial impli cations of unemployment benefits are manifest. On the unhampered market there is always for each type of labor a rate at which all those eager to work can get a job. The final wage rate is that rate at which all job-seekers get jobs -and all employers [get] as many workers as they want to hire. Its height is determined by the marginal productivity of each type of work.

LUDWIG VON MISES Donald R. Wells L. S. Scruggs The Free Banking Alternative ON MARCH 31,1980, a major piece of legislation was passed by Congress to deregulate commercial banks and other deposit-type financial institu tions. This deregulation took the form of phasing out interest rate ceilings on various types of time de posits and of extending the type of assets thrift institutions were au thorized to hold. However, this act took three steps in the opposite di rection: it required all banks, mem ber and nonmember, and all thrift institutions offering checkable de posits to hold the same percentage of these checkable deposits as non interest reserves, either in vault cash or on deposit with the Federal Reserve; it increased federal deposit insurance to $100,000 per account; Dr. Wells teaches in the Department of Economics and Dr. Scruggs in the Department of Finance at Memphis State University, Memphis, Tennessee.

98 and it allowed all these institutions to borrow from the Federal Reserve. It is apparent that Congress did not intend to unleash the forces of com petition on the financial system. If this had been Congress' intention, it would have phased out, rather than increased, deposit insurance and would have left the amount and lo cation of reserve holding to the in dividual institutions. The purpose of this paper is to ex plain how a completely free banking system would operate. Under free banking, all financial institutions are subject only to the general laws of incorporation and against fraud. They would not be restrained by the rules of a central bank and not be audited by any government agency, nor be protected by any government deposit guarantee. The first part of this paper hypothesizes how individTHE FREE BANKING ALTERNATIVE 99 ual banks would thrive in this com petitive environment, while the sec ond part shows how the most serious problem this economy faces-infla tion-can be controlled without any government agency doing the controlling.

The Individual Financial Institution in a Free Banking Environment In a free banking system, any firm can enter the banking business by acquiring funds in any non-fraudu- ' lent manner and can put those funds to any legal use it wants. A bank may attract funds by offering bank notes (currency) or deposits convert ible on demand to specie (gold or sil ver coin). The bank's success would depend upon its gaining public con fidence for holding its banknotes and other bank liabilities, and on the probability that it can use its funds profitably. No bank would have any special privileges, like those cur rently enjoyed by central banks, such as a monopoly of the note issue or the protection of a legal tender law, giv ing its notes forced currency. There would be no government agency or central bank on which the bank could rely as a lender of last resort; it would have to borrow in the pri vate market at a rate consistent with the risk involved.

Under free banking, both notes and deposits would be promises to pay on demand some generally accepted medium, such as gold or sil ver.I The particular combination of notes and deposits issued in lending by each bank would be determined solely by public preference. The bank would be indifferent between the two, but the total amount of sight li abilities would by limited by its re serves of specie. No government reg ulation would specify that a bank had to hold certain assets, such as low-yielding government bonds, as backing for its banknotes, as was the case under the National Bank Act. Not only free entry, but freedom of exit is a necessary condition of free banking. Banks unable to redeem their demand obligations, and una ble to obtain private credit, would be forced to liquidate. This market pressure, along with the knowledge that there is no central bank acting as a lender of last resort, would force banks to act prudently.

Without a central bank, the check clearing process would be privately operated at its true cost, to the mu tual benefit of banks and the public. Any cost reductions resulting from innovations would, by force of com petition-, be passed along to the pub lic. Banks would have total freedom to branch anywhere. They would ex tend their operations nationwide, as have banks in Canada, England and other countries. The unit bank system was not a natural development but a result of restrictive legislation. The unit bank 100 THE FREEMAN February system led to correspondent bank ing, not only for holding reserves, but also for performance of services which small unit banks found too ex pensive to undertake individually. In the United States, these reserves tended to accumulate in financial centers, where they were subject to the fluctuations of speculative mar kets. But with a branch banking sys tem, even if a remote bank's re serves did find their way to financial centers, they would be held at a branch of the remote bank, which would retain total control over the funds. Each bank's own liability structure would determine how these funds were invested and in what maturities, in order to main tain adequate liquidity. With no need for a correspondent relation ship, nonbank corporations could have a single banking connection nationwide as in Canada.

Branch Banking Evidence from the depression clearly shows that branch banking was safer than unit banking, but that safety increased with the wid ening of the geographical area over which a bank could branch. Without branching, few banks could grow to a size large enough to handle the more desirable accounts. One study showed that 80 percent of the bank closings were in unit bank states, 2 and furthermore, that two-thirds of the branch banks that did fail were those that were restricted to a city.3 Canadian branch banks gained mil lions of dollars of American deposits, especially in border cities like Wind sor, Ontario. Another study on California bank ing in the depression demonstrated that the diversity of California's economy, accompanied by statewide branching, enabled that state to achieve one of the lowest bank fail ure rates in the country. Again, the two small branch bank systems that failed in that state were those that restricted branches to one city.4 This study also pointed out that the strong branch banking system in California also strengthened that state's unit banks by competitive example. 5 Under a free banking system, it might be possible for a well-run unit bank to prosper, but it would have to do so without the currently avail able privilege of issuing govern ment-guaranteed liabilities. The FDIC coverage is probably respon sible for making the deposits of many small banks acceptable at par whereas they might not be so ac ceptable in a free market.

The specialized financial institu tion would be unlikely to exist for very long under free banking. In vestment banking was part of com mercial banking until forcibly sep arated by the Banking Act of 1933. Many activities of one-bank holding companies are merely tactics for cir1985 THE FREE BANKING ALTERNATIVE 101 cumventing laws which restrict banks to a narrow line of business. Thrifts, such as savings and loans, mutual savings banks, and credit unions, may have developed because banks were not interested in some particular lines of lending at first, but whenever those activities be came profitable, it would have been the natural course of events for thrifts and banks to have merged. The public would be much better served by a more diversified finan cial institution than by a single·· purpose lender. A legally imposed distinction between deposit-type in stitutions does not serve the public well, because it leads to further gov ernment assistance to these single purpose lenders, such as Regulation Q, the Federal Home Loan Banks, the FSLIC and the NCUA. None of this intervention is costless: funds are channeled into areas that oth erwise would not receive them ex cept at higher interest rates, while other erstwhile borrowers are crowded out of the capital market.

Under free banking, some of the strongest competition for existing banks may be provided by large re tailers, brokerage firms and credit card companies. Sears and Roebuck, Merrill-Lynch, and American Ex press already have in place nation wide offices from which to conduct a banking business. Automatic teller machines could give a depositor in stant cash anywhere in the country. The one-bank holding company has already been responsible for combin ing banking with other financial ser vices, so free banking would only re move the artificial restraints. The Market Decides The market would eventually de cide which of the many new services offered by banks would be profitable, but the chief beneficiary would be the consumer. Not only actual com petition but potential competition from new entrants would work more to the consumer's advantage than most of the "performance" laws that were specifically designed for con sumer protection. Under free bank ing, there would be no legal require ments for "truth in lending," "equal credit opportunity," or "community reinvestment," and no restrictions on debt collection practices. These performance standards add substan tial reporting and regulatory costs, which are at least partially passed on to the consumer. 6 Compared to a single governmen tally issued currency, private bank notes might present a greater temp tation to counterfeit. Counterfeiting was prevalent before the Civil War when there were so many different banknotes being used. However, a single government currency does not guarantee a counterfeit-free econ omy either: today's overdrafts and forged checks are analogous to the antebellum counterfeiting of state 102 THE FREEMAN February banknotes. Furthermore, modern communication technology would strongly discourage counterfeiting.

At any rate, insurance companies can underwrite any losses the public may suffer, as they do now for stolen or forged credit cards. With different banknotes being used, some company or group of re tailers might sell fractional coins to be used for small purchases and plastic tokens with electronic mark ings to be used in vending machines. 7 How Free Banking Would Prevent Inflation Deregulation of bank money alone will not give us an environment free of inflation unless there is some way to stop the unlimited creation of the money base by the central bank. When gold or silver is the base into which all banknotes and deposits are convertible, there is a limit on the money supply, because this base can not be created at will as fiat money can be issued by a central bank. 8 Central banks, being politically sen sitive, use their monopoly of the money base to help organized sectors at the expense of the general public, often under the guise of lowering in terest rates. It was recognized long ago that free banking restricted credit expansion, whereas central banks were tools for creating an easy-moneyenvironment. 9 The imposition of a money-growth rule on a central bank is not the cure for inflation. Congress has never shown any inclination to impose a fiat-money growth rule as mon etarists have advocated, and the Fed could not be trusted to follow it,judg ing from experience with gold re serve requirements. In 1913, the Fed was ordered to hold gold equal to 40 percent of its note liabilities and to 35 percent of member bank reserve deposits. Every time the limit was reached, these requirements were either suspended (1933), reduced (1945), or abolished (1965 & 1968).

Emergency currencies without gold backing were issued in the depres sion and in World War II. Prudent Practices Encouraged By contrast, commercial banks in a free banking system could never go off gold as could a privileged central bank with legal-tender banknotes. A private bank would be forced into liquidation if it could not convert its sight liabilities into specie. How ever, there is another limit to over expansion in a free banking system besides exhaustion of gold reserves, and that is the reflux of banknotes. Each bank would only payout its own notes over the counter, because unlike the notes in the National Banking System, these notes would be distinctive. Therefore, a bank that expanded its lending beyond pru dent limits would have its notes and deposits presented for payment faster than those of its rivals. If a 1985 THE FREE BANKING ALTERNATIVE 103 bank wanted to protect its "brand name capital," it would have to cur tail its lending or face the possibility of its notes circulating at a discount.

The marginal cost of printing bank notes may be zero, but the marginal cost of keeping them in circulation clearly is not zero. Central banks could try and com pete with private banknotes, but the public would only hold the central bank's notes if they retained their value relative to the private notes. However, the central bank could not monetize government deficits at will, nor bail out any bank or industry in trouble, because an oversupply of notes would result in depreciation. One might envision the Fed and pri vate banks competing through ad vertising the way the u.s. Postal Service and private package carriers do now. I The Source of Money -FOOTNOTESIVera C. Smith, The Rationale of Central Banking (London: P. S. King & Son, 1936),p. 149. 2Gaines T. Cartinhour, "Branch Banks ver sus Unit Banks," Annals of the American Academy of Political and Social Science 171 (January 1934): 36.

3Ibid., p. 37. 4John P. Wernette, "Branch Banking in Cal ifornia and Bank Failures," Quarterly Journal of Economics 46 (February 1932): 371. 5Ibid. 6Catherine England, The Case for Bank De regulation, (Washington: The Heritage Foun dation, 1982), p. 24. 7F. A. Hayek, Denationalization of Money The Argument Refined, 2nd ed. (London: The Institute of Economic Affairs, 1978), p. 48n. 8Lawrence H. White, "Competitive Money, Inside and Out," Cato Journal 3 (Spring 1983): 296. 9Ludwig von Mises, Human Action: A Trea tise on Economics (New Haven: Yale Univer sity Press, 1949), pp. 443-44. IDEAS ON LIBERTY UNLESS the creation and issue of money is withdrawn from the State and restored to the private banking system, I believe that parliamentary government and democracy will become impossible to maintain. John Maynard Keynes, in Essays in Persuasion, referring to the fa mous statement of Lenin as to the best way to destroy the capitalist system, wrote: "Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch its currency. This process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one in a million is able to diagnose."

The strange thing is that it appears never to have occurred to Lord Keynes that, under a free economy, it is impossible to debauch the currency. GEORGE WINDER, 1958 Ernest G. Ross The Deficit Connection FROM the man-in-the-street, to econ omists, to politicians, to academics, near ly everyone seems worried about federal deficits. During Presidential campaigning, Walter Mondale called deficits "a travesty"; in more reserved tones, Ronald Reagan called deficits "a problem." Distinguished professors write grave tracts warning of deficit re percussions "in the out years" (Le., in the longer run). In an informal tel evision tabulation of my own, in a single week over 100 interviewees and speakers from different walks of life were quoted making disparaging comments about deficits. That deficits seem destined to be Mr. Ross is an Oregon commentator and writer es pecially concerned with new developments in human freedom.

104 with this nation for awhile is hardly disputed. Even the more optimistic forecasts project several hundred billion dollars in deficits added to the national debt before the end of the decade. Some estimates push a tril lion dollars. While most people regard deficits as bad, there is considerable contro versy over whether deficits are con nected-that is, whether they must lead-to higher prices, to what cur rent political jargon terms "an infla tionaryenvironment." Many analysts, such as economist Fred D. Kalkstein, warn or imply that deficits are ultimately con nected to higher prices via interest rates. Accelerated borrowing to pay for the deficits pushes up interest rates, and the borrowing tends to temporarily dampen or "hide" the THE DEFICIT CONNECTION 105 effects of extraordinary levels of monetary growth. (M1 money supply-primarily cur·· rency in circulation and checking type accounts-averaged over 10 per cent annual growth from mid-1982 to mid-1984, the highest sustained two-year rate since World War II; M2 and M3, much broader money mea sures, also showed abnormally rapid growth.) "The longer the combination of disinflation [meaning less rapidly rising prices] and high interest rates persists ... [a]t some juncture,"

wrote Kalkstein, "the money win begin to flow from our shores ... the dollar will fall ... and the inflation inherent in the Fed's monetary stirn·· ulation will come home to roost." (The Wall Street Journal, 31 July, 1984.) Other economists remain san guine about deficits. For instance, in an August 31st Wall Street Journal letter Hoover In stitution Senior Research Fellow, Milton Friedman, said, "I do not re gard the deficit as a major issue or cause for concern." Coming from the man who has been one of the na tion's more popular and vociferous although less than consistent-mod ern opponents of inflation, this was quite a statement. While Friedman has many times contended that higher money growth and higher taxes lead to price increases, he ap parently found no worrisome connection between deficits and higher prices. Purported gold standard advocate, Congressman Jack Kemp, is another leader of the camp which takes a rel atively benign view of deficits.

Kemp even went so far as to say that the way to handle deficits is through much more rapid monetary growth; he thus proposed to "fight" deficits by inflation-although, as can only be true in the bizzare world of political double-think, Kemp steadfastly stated that this actually amounts to a policy of combatting inflation. Anti-Deficit Magic There are many who share Kemp's view that with enough economic growth, deficits will eventually "take care of themselves." If this sounds strangely similar to the old (but apparently not yet worn out) no tion that monetary stimulus (i.e., in flation) is a good play for prosperity, read on ... On its own terms, how would this "modern" notion work its anti-defi cit magic? To use a sports analogy, perhaps as a skilled slalom skier averts ob stacles, growth will bypass all the impediments of (ever-increasing) government interferences in the economy and skim along joyously unabated for the next several years.

But in order to make a continuous uphill run possible, our growth-skier 106 THE FREEMAN February will be endowed with a jetpack con taining a clever mixture of "supply side" and Keynesian doctrines. So powerful, yet controllable, will this mixture be, that the skier will not only effortlessly avert obstacles and speed ever higher, he will be able to tow a bobsled full of happy, taxable workers and producers behind him. In short, through this enormous economic ingenuity, growth will per mit continued expansion resulting in the U.S. Treasury's ultimately taking more revenue from more freshly employed workers and prof itable companies. Under this view, the new revenue would supposedly be used to pay for what are now deficits. Naturally, if somehow this won derful theory did not produce quite enough growth-generated taxation if growth proved a little too slug gish-it might be "necessary" to raise taxes outright.

Sound economics says higher taxes would inhibit growth, but-perish the thought. Economic history sug gests the accelerated money supply portion of the jetpack' s fuel would be unstable and likely explode into higher prices, but-perish the thought. In "answer" to these "dangerous" thoughts, the public is treated to an interesting argument: 1. It will not be necessary to raise taxes if the Federal Reserve "cooperates" and doesn't, as Kemp put it, "flirt with deflation," Le., if the Fed keeps pumping up the money supply. 2. The money supply will not be vola tile if there's enough growth to "ab sorb" the new money. Hence, one point conveniently supports the other: More money is needed for growth, which will then justify the money supply increases. This argu ment deserves an economic "Circu lar Reasoning Award." Actually, most economists now ac cept the view that monetization of debt eventually leads to higher prices. But this does not get to the core of the matter at hand. For what if deficits were entirely financed by borrowing or taxation-i.e., without monetization?

Political Factors This question forces us to refocus on a broader context, to include in our economic view at least some of the major machinations of modern politics. Politics is inextricably in tertwined with any economy and the nature of political favor-brokering is inextricably intertwined with a full understanding of the connection be tween deficits and higher prices. Without getting into the "I'm hon estly coercive" arguments fro~ the morally smug advocates of "openly" higher taxes, let's move on to those advocates who believe that if deficits are financed out of existing supplies of money, inflation (by which they mean rising prices) cannot rear its 1985 THE DEFICIT CONNECTION 107 ugly head to strike at America's pocketbook. In other words, if the Fed does not add greater quantities of money to the economy and the government only borrows or taxes to meet its overspending, there is no "inflationary impact."

How would this work? The borrowing portion of the ar gument holds that those who lend to the government would have lent the money to someone anyway; whoever gets the borrowed money will in some fashion spend it. For example: if a savings and loan is lent money, the firm relends the money to a homebuyer, who then spends the money in the housing market; if a car manufacturer is lent the money-perhaps by sale to the public of corporate bonds-the com pany uses the money to purchase what it needs to make automobiles. So, what's the difference if the gov ernment is lent the money-through sale of Treasury bills, notes, or bonds? Doesn't the government then turn around and spend the money just as the savings and loan or car company would? Isn't this just a "macroeconomic" reshuffling of the cards? No, it is not. But the argument rests on an interesting premise-out of the same epistemological grab bag that so reliably gives us levitation, clairvoyance, and mental spoon bending. The premise is that gov ernment can, in theory, reliably spend money for purposes which are productive, for instance, delivery of mail, road maintenance, dam con struction, courts of law, police, and so on.

Marking the Deck in Favor of Government But despite the theory, often mo tivated by desperate binges of Roo seveltian political nostalgia (Le., of how Roosevelt "pulled us out of the Depression," which he did not), most government money in fact goes into nonproductive-or at best, far less productive fields-than does money which is left in the private economy. And this is an important clue to dis covering the deficit connection to higher prices. This is where we be gin to get involved in political mach inations. Increased lending to 'gov ernment is not a question of reshuffling the economic deck, but of marking the deck in favor of govern ment growth. (Incidentally, Roosevelt knew of the unproductiveness of government spending, but he was the "Great Communicator" of the emerging Keynesian liberals and successfully exploited a combination of public ig norance about economics and dis guised appeals to something for nothing in order to shift blame from government to the bleeding and bat tered remnants of 1930's business, thus terribly prolonging, rather than relieving, the Great Depression.) 108 THE FREEMAN February The reason most government directed money tends to end up in unproductive ventures is precisely because it is politicized money, money governed mainly by the whims of politicians rather than by the judgments of markets. In most of today's studious tomes of economic analysis, this fact is at best given to ken treatment. (To his great credit, Milton Friedman gave the subject prominent, if incomplete, treatment in Tyranny of the Status Quo.) Not only does government lack the foresight and standards by which to rationally prejudge what is or is not productive (the most fundamental practical reason for having free mar kets), but no matter how it acquires its money, government does not really have to suffer failure in the marketplace.

Witness the Postal Service, which has historically been a money-losing operation, and yet grows larger and continues to require government subsidies or abnormal price hikes for its services year after year. As of this writing, the postal primates are en gaging in a new round of typical gov ernment monkey business, demand ing a 23-cent first-class stamp as well as steeper rate hikes for some other classes of mail. If the Postal Service were truly private, investors and users would long ago have relegated it to the marketplace junkyard. Even worse, look at the various "entitlement" programs. The agencies which disburse money for all manner of purposes, ranging from medical care to food stamps, have conspicuously limited connections to the marketplace. For instance, as economist Alan Greenspan noted in a column (WSJ, 4 September, 1984), Medicare and Medicaid operate un der hundreds of price controls-con trols which virtually divorce con sumers of medical services from true medical costs.

The Ticket to Success Modern political history shows that regardless of the money it squanders, if an agency is popular with politicians, it will survive-and grow. The prevailing, though seldom admitted, standard of what is good becomes what is approved; what is good becomes what those in power say is good; a pat on the head from a politician becomes more precious than profits, more prized than prices; politics, not markets, become the agency's "ticket to success." When one discounts expenses for the legitimate government func tions of defense and courts of law, all the rest, a majority, amounts to re distributing purely politicized money, coercively gathered from millions of individuals, to special in terests selected by the favoritism of those in power. Despite decades of glorious cam paign rhetoric from both major par ties to the contrary, government con1985 THE DEFICIT CONNECTION 109 tinues to grow and now comprises about one-quarter of the total econ omy (GNP), up from about one-fifth just four years ago.

As men ranging from Bastiat to Smith to Mises to Hazlitt have il lustrated, it is a political rule of thumb that regardless of how it gets it, the more government gets to spend the more it becomes accus tomed to spending. I admit it is hardly an attractive analogy, but government's appetite is much the same as that of a grow ing pig; the more you feed it, the big ger it grows and the more food it de mands. And remember that it doesn't matter at all to the pig's metabolism how you went about getting the food; the animal will grow just as well on borrowed food as it will on food gath ered by "legitimate" means. Just as increased taxes lead to in creased inflation and expand the government's appetite, so does a bor rowing-financed deficit. Each year of deficit spending accustoms politi cians to a new, higher level of spend ing-spending to redistribute to powerful supporters, whom the pol iticians hope will constitute a grate ful voting majority.

Given the outlandish modern po litical appetite, taxes, inflation, and borrowing reinforce each other. When one becomes insufficient, pol iticians switch to another. This is precisely why we see so many demands for "standby" (higher) taxes and why Ronald Rea gan-with ample Congressional "en couragement" -signed several tax increase measures in the three years after signing into law near the be ginning of his administration a per sonal income tax reduction. As sad and disgusting as it may be, in good times or bad times for the citizenry as a whole, politicians want only good times for themselves. This is why no matter how badly the econ omy is doing, the politicians refuse to cut overall government spending. They make cuts in some programs, but others increase; they accept a change of diet, but squeal in protest at a reduction of diet. The Inflation Tax When the economy slips into reces~ sion, and people are not able to lend the government enough to take care of deficit spending, the government resorts to increased taxation or inflation.

Of course, higher taxes are ex tremely unpopular during reces sions, so inflation commonly be comes the answer to deficit financing. But because the effects of inflation are usually not seriously felt for about two years after it be gins, higher prices are put off to times of prosperity. During such times, because people are at least temporarily better off, they are more generous-including toward govern ment; therefore, it is during eco110 THE FREEMAN nomic recoveries that taxes are nor mally raised and fresh borrowing is begun, firing up government's share of economic activity to an acceler ated, higher level. Eventually, exploding prices and an updraft of taxation create a mushroom cloud of malinvestment and the deadly economic fallout be gins to mutate and kill healthy growth-and recession returns. This gloomy scenario always comes about when government takes more money from the private sector.

Perversely, as we had during the ear ly 1980s, the new round of reces sion usually occurs as prices are still rising. Price increases may slow, but in a fiat-money economy, even dur ing recession, prices seldom actually decrease. In modern vernacular, we get "disinflation" but not general "deflation." Almost any form of financing gov ernment's deficit-growth provides more incentive for government to ex pand-and that expansion leads to inflation. Deficit-borrowing thus be comes just one of several forms of government financing leading to inflation. In sum then, always it is into the process of steadily increased politi cal confiscation of wealth that the question of borrowing-financed def icits must be figured. Financing def icits through borrowing is not a con textless phenomenon. To return to my earlier analogy, borrowing to fi nance deficits is a time-tested way of making Government-the-Porker fat ter and increasing its appetite.

How to regain control and put the porker on a diet is really another subject-outside the scope of this es say. But until our profligate politi cians awaken to the dangers of def icits-no matter how financed-a provocative bumper sticker might be: IF YOU LOVE DEFICITS-OINK! I Reprints . .. A Page on Freedom Each of these brief messages is a handy way to share with friends, teachers, editors, clergymen and others a thought-starter on liberty. It also serves to introduce the reader to our work at FEE. See page 67 for this month's Page on Freedom. (Copies of previous messages are also available; specify title when ordering.) Small quan tities, no charge; 100 or more, 5 cents each. Or, feel free to reprint the message in your own format if you'd prefer. We hope you'll enjoy this feature! Order from: FOUNDATION FOR ECONOMIC EDUCATION, INC. IRVINGTON-ON-HUDSON, NEW YORK 10533 Dean Russell An Ancient Chinese Story IN this particular satire or parable, Bastiat illustrates the ever-present and always-popular concept that government can create jobs and prosperity by means of useless (even destructive) make-work schemes, e. g., digging post holes and then fill ing them in, as was frequently done by our government in the 1930s to get the economy going again. This story is based on the same idea.

There were in ancient China two large cities, Tchin and Tehan. They were con nected by a magnificent canal that had been built to encourage more trade at less transportation cost between the cities. Dr. Russell, recently retired from a full schedule of academic work, continues freelance consulting, lec turing and writing from his home in Westchester County, New York. This is one of a series of articles examining current interventions of the welfare state in the light of warn Ings from the French economist and statesman, Frederic Bastlat (1801-1850). But during a depression in that section of China, the Emperor decided to create jobs and prosperity by ordering large blocks of stone thrown into the canal, thus making it useless. The Emperor's Prime Mandarin, when ordered to carry out this plan, said to him, "Son of Heaven, this is a mistake!" The Emperor replied, "Kouang, you talk nonsense!" ("I am here giving you only the substance of their conversa tion," said Bastiat.) At any rate, the quarrying, transporting, and throwing of those blocks of stone into the canal did clearly provide jobs for many Chinese.

And that isn't all. At the end of three months, the Em peror summoned his Prime Mandarin and said, "Kouang, look across the old canal." Kouang looked and saw a multitude of men at work. On the other side of the old canal, workers were busily excavating, filling, leveling, and paving. They were building a new highway between the two cities to facilitate trade! 111 112 THE FREEMAN February When another three months had elapsed, the Emperor again sent for his Prime Mandarin and said, "Kouang, look." And Kouang looked. He saw the road completed. Crowds of carts were carrying goods from one city to the other. And a multitude of Chinese porters were car rying on their tired backs enormous bur dens from Tchin to Tchan, and from Tchan to Tchin. He also noticed that builders were busily constructing inns for travelers along the new highway. Kouang was beginning to be convinced that his Emperor's scheme to create prosperity by filling in the canal was a brilliant and practical idea. But there is still more.

Another three months passed, and the Emperor sent again for Kouang and said, "Look." Kouang looked. In addition to all the activity he had seen before, there was now a great deal more. The hostelries were now completed and full oftravelers. And to supply their needs, there were butcher shops, bakers' stalls, shops for the sale of edible birds' nests, and so on. There were also tailors, shoemakers, sell ers of parasols and fans, and many more. And as those service-people also needed houses, there was a plentiful supply of masons, carpenters, and roofers. Then, of course, there were policemen, judges, and other necessary officials. There was even an increase in the number of persons who employed themselves as smugglers and robbers. Finally Kouang was fully convinced that his Emperor was indeed the most brilliant genius who had ever lived. The Son of Heaven had proved conclusively that prosperity ... [and] jobs can be cre ated by obstructing trade.

As usual, Bastiat followed his sat ire by applying the principle to some current law or governmental scheme designed to create prosperity by ob structing the free market economy. In this particular case, he featured the concepts that, as a result of the make-work scheme, "The people as a whole in Tchin and Tchan were now working harder· and producing less; that prices had gone up and real wages had gone down because of the increased transportation and labor costs of moving goods between the two cities." Less Production, Higher Wages, and Lower Prices These governmental interventions in the market place (including make work and other legal-plunder schemes) are producing precisely the same results in the United States to day. If I'm right, that idea certainly deserves a closer look. So let's briefly develop the results predicted by Bas tiat, i. e., less production, higher prices, and lower wages-all caused by substituting a more expensive factor of production (labor) for a less expensive one ("machinery"). Since all those ideas are inextricably mixed, I'll just include them as they come up.

My students at the University of Wisconsin were usually baffled when I argued that we American people are indeed working hard but, as the government increasingly moves into 1985 AN ANCIENT CHINESE STORY 113 the economy, we're producing less and less. They found that concept hard to grasp; it seemed contrary to what they could actually see around them. As near as I can figure, the reason was this: The students were looking at the Gross National Product, i. e., the amount of products and services produced and sold, whatever the type or quality or cost. That's not too sur prising since, in their courses in ma croeconomics, that's precisely how they were taught to look at it. And true enough, by that measurement, the yearly increase in goods and ser vices is usually impressive; and, of course, we can buy only what's available to be bought. By that GNP measurement, how ever, our government can (literally) increase national production and na tional income by paying people to de stroy what they've already pro duced, e. g., plow the crops under, or kill the little pigs, or build a new and expensive canal alongside an exist ing and under-used and lower-cost railroad (one part of our famous TVA project). Thousands ofprojects of that nature most definitely did create jobs and increase the GNP during the 1930s, and we're still following that same policy today.

To my way of thinking, the net re suI t of those uneconomic projects (and most other similar governmen tal schemes) to increase work and jobs is a constantly decreasing rate of growth of goods and services we can use for the improvement of our material welfare. Unfortunately, we have no reliable figure for the amount of wanted goods not pro duced because our money is spent by government on something our con gressmen quite openly refer to as "pork barrel" projects, i. e., uneco nomic projects designed primarily to create jobs in their congressional districts. Sometimes they even joke about it. The Auto Industry Restrictions against trade are, of course, imposed by government for this same purpose of creating jobs. The automobile industry offers an excellent example. We're all familiar with quotas and tariffs against foreign cars. And as advertised, that policy most defi nitely does create more jobs in the automobile industry in the United States, as well as more "tariff jobs"

in government. Surely all of us are also familiar with the fact that the constantly-rising prices we must pay for our cars (both foreign and do mestic) is due directly to that make work scheme. But just in case there's one person somewhere who hasn't made that connection, I'll here de velop it briefly. We'll never know precisely how much more we must pay for our cars because ofthis governmental scheme to increase jobs and production in the 114 THE FREEMAN February United States. We can't know it be cause the only accurate measuring device (i. e., you and I buying cars in a free economy) has been abolished by government in this particular area. Even so, we can look at histor ical prices and compare the perti nent relationships when there was a free market. And we can compare prices in existing protected and non protected industries in general. By those measurements, we can esti mate with reasonable accuracy that almost all of the $3,500 (average) price increase (since 1981) you paid for your new car was the direct re suI t of our government's policy to bring prosperity to our country by restricting trade.

We're talking many billions-of-dol lars that you and I and all the rest of us would have spent for goods and services we want but can't buy be cause we must pay several thou sands of dollars more for our car than would be the case if the market were free. It's doubtful, of course, that prices on all protected products have increased by more than one-third (the automobile rate) because of these governmental "prosperity schemes." But surely a figure of 15 percent is realistic. By any economic measurement, however, we're in the range of hundreds-of-billions-of-dol lars of lost production of wanted goods and services that'll never be produced because our government is protecting us from competition. That's why I'm convinced that the production of wanted goods and ser vices in the United States is going down, not up. Backed by Force Most people obviously disagree (sometimes almost violently) with my reasoning. They're the ones who have such sublime faith in our gov ernment officials. I'm impressed with their sincerity, and a couple of times I've been tempted to give some credence to their arguments for in terventions by government. But then I remember where I last saw a large number of them; they were leading the parade to cut our defense budget by at least $100 billion.

At that point, I get the strange feeling they've stolen my argu ments. They count in great detail all the real (i. e., consumer-productive) jobs that would be created if that $100 billion of "useless spending" were cut from the defense budget. They sometimes even. refer to ar mament production as a vast make work scheme to make the rich even richer! I'm not about to get involved in the "defense controversy," but I'm al ways astounded when I hear the op ponents of that "wasteful military budget" actually using Bastiat's ar gument of the "broken window fal lacy," i. e., recounting what can't be seen because what is seen blocked it out. I do wish, however, they'd sug1985 AN ANCIENT CHINESE STORY 115 gest the "saved money" be returned to you and me. Instead, however, they just want it transferred to the various "social service depart ments." At that point, they re-find their faith in the omniscience of the officials of government-and, of course, they immediately adopt ar guments directly opposed to the ones they were just using against the de fense budget.

I wonder if they'll accept this fact: The government officials in any de partment are no more (or less) effi cient or omniscient than the officials in any other department. They're just you and me-with their deci sions backed by the police force. Per sonally, I'm always distrustful of people who want to have that power over you and me. If that sounds a bit harsh, I'll happily apologize to the offended officials of government, but I doubt I'll change the sentiment. I'm convinced that Lord Acton was correct when he spoke of the cor rupting influence of power, and said that "absolute power corrupts absolutely.' , When it comes to administering "justice," I'm aware we must give power to our officials. But let's keep it restricted, slow, and inefficient, with all sorts of checks and balances. I'm quite willing to pay the high cost of that vital but noneconomic ser vice on behalf of "justice." But when it comes to economic goods and ser vices, I'm after the lowest possible price for the best possible product in the shortest possible period of time.

The last mechanism I look to for that performance is our cumbersome form of government with its frequent and disruptive elections that remind me of a particularly vicious proxy-fight to take over a company. Costly Intervention I'm aware of the contrary argu ments. And I'm especially aware that many people argue quite sin cerely that, "Man, I'm an American. I was born here. And I'm entitled to a job that pays a living wage. If that means more governmental interven tion in the economy and higher prices for you, so be it." While I won't endorse that popular argument, at least I can understand why poor and sometimes-ignorant people frequently use it, i. e., legal plunder is acceptable if it's for needy and deserving people. But when our highly educated politicians and in dustrialists try to hide their own greed and lust for power behind fal lacious economic arguments-or be hind a plea for plunder "to help oth ers" or even behind patriotism itself-I become unhappy. The auto mobile industry offers an excellent example of this trend.

Three or so years ago a leading au tomobile company executive was pleading with Congress for "tempo rary breathing room" to get his com pany going again. The "law factory"

116 THE FREEMAN February in Washington produced what he or dered. Today, he's dropped the "breathing room" simile for the even more poetic one of laws to insure "a level playing field," i. e., permanent restrictions against competition, so that the less-talented players can compete on equal terms with the bet ter players, a sort of golfer's handi cap arrangement in the production of goods and services. Or to phrase it brutally: To bring the highly automated and more efficient Japa nese automobile industry down to the level of the comparatively labor intensive and less efficient Ameri can automobile industry-at your and my expense. The result of that first grant of "le gal plunder" was (and is) easily pre dictable. Since Congress awarded it in 1981, the prices for automobiles to you and me have gone up by more than one-third, more than $3,000 per car. And if he and his fellow-execu tives who've joined him are success ful in the current campaign to make that "breathing room" permanent, the prices for automobiles in the United States are likely to go up again by another $3,000 or so per car.

Now for a brief look at the primary reason American cars cost more to build and buy than do Japanese cars. You may recall that "the emperor son of heaven" in Bastiat's story be gan his job-creating scheme by first hiring men to destroy the canal with its cheap transportation costs. Then he created still more jobs by building a new road from Tchan to Tchin. This, in turn, created a vast number of additional jobs for men to pull loaded carts from one city to the other or (the traditional method of transportation before those canal barges came along) to carry the goods on their backs. He replaced a cheaper factor of production (a waterway and wind-power) with a more expensive factor of production (human labor). In short, he hit on the ancient (but ever-present and always-popular) idea of creating jobs by destroying machines. And that's precisely the reason the cost of American-made cars is at least one-third higher than the cost of Japanese-made cars. The Japa nese use as little as possible of the most expensive factor of production (labor) and as much as possible of the cheapest factor of production (capitaD.

Capital Creates Jobs As you doubtless know, the result of this low-cost method of production is not fewer jobs. Actually, more jobs are thereby created; they're better jobs but found in other areas that support the cheap machines and the highly paid people who produce and run them. There're far more jobs to day in highly-mechanized Japan than ever before, and those jobs pay as much as ten times the pre-World War II wage rate. The result of mas1985 AN ANCIENT CHINESE STORY 117 sive capital formation in a free mar ket economy is more jobs, shorter hours, higher pay, and better prod ucts at lower prices-in any country that follows the principles of free trade, domestic and foreign. Try to tell that to the president of the United Automobile Workers union-or to the president of any American automobile company. Save your breath. The answer will invar iably be that those sneaky Japanese are just "dumping" their cars in the United States by selling them cheaply-"probably below the cost of producing them." (There's that old joke: "If they sell below their costs, how do they make a profit?" The an swer: "Mass production; they sell so many of them.") There's just no way that our in dustrial and labor leaders are going to admit that the Japanese are bet ter managers than we are, or that the Japanese understand the reali ties of production-costs and market pricing better than do the American managers, or even that low-cost ma chine production provides more and better jobs for people in general.

I suspect you'd even put your phys ical safety at risk if you made those comments in any UAW meeting, es pecially if you concluded with the flat statement that the reason our cars are more expensive to build than the Japanese cars (and also probably inferior mechanically as well) is that we use too much of the most expensive factor of production (labor) and too little of the less ex pensive factor (machines). Now for a summary of those spe cific predictions Bastiat made in his "Ancient Chinese Story," i. e., less production, higher prices, and lower wages. 1. Well, obviously we're produc ing fewer goods and services we our selves would select if the inefficient and protected and subsidized com panies were compelled to meet mar ket demands instead of merely gov ernment requirements that permit them to continue to receive the legal plunder. Our laws are surely protecting millions of jobs that would soon dis appear if you and I could decide in the market by voluntarily spending our own money. That automatically incl udes all jobs in any company that must have tariff protection to con tinue to exist. Without it, they would all fail or be radically reorganized. I have no count ofjust how many com panies are being kept alive by those noneconomic subsidy and tariff laws; it could quite easily run into more than one hundred thousand.

We'll never find out as long as we permit them to hide from reality. 2. In 1980, prices were rising at the yearly rate of as much as 20 per cent. The new administration initi ated unpopular measures to bring the yearly rate of increase down to 118 THE FREEMAN February less than five per cent, but it's still a situation of steadily rising prices and there seems little doubt but that the increase will accelerate again. 3. While jobs are indeed increas ing, there are millions of Americans whose current pay won't buy as much as their pay did a few years ago, i. e., there has been a decrease in real wages for a large percentage of the American people. Free to Try In short, our rejection of a free, open, and competitive economy has cost us dearly, and will cost us even more as time goes on. It's not that we're bad people; we most definitely aren't. In fact, there's good evidence to support the belief that the pri mary reason we favor these "make work" measures is a misguided ef fort to help people who need help.

But if we continue to confuse charity and economics, I wonder if we'll con tinue to produce enough to go around. Perhaps the following short story of two young Americans who set out to "make their fortunes" more than three-quarters of a century ago will demonstrate what made America great, and how far we've now degenerated. My Uncle Elliot was an excellent harness and saddle maker. In 1908, he went into business for himself in Burlington, North Carolina-The Russell Harness Shop-with $5,000 capital, a whale of a lot of money at that time and place. By chance, an other skilled artisan (a wagon maker) also went into business for himself that same year-Frederick J. Fisher, in Detroit; The Fisher Body Company. Both those young men-each a hardworking and skilled artisan with an eighth-grade education-had an equal chance to "make their for tunes." And that's what they set out to do. The founder of the Fisher Body Company realized his dream. The founder of the Russell Harness Shop didn't. After several years as a fairly successful businessman with four employees, he went broke; his big gest account, the Burlington Fire Department, changed from horses to trucks. And when Uncle Elliot died, we had to "pass the hat" to get enough money to bury him.

It would've been nice if my uncle had been the one who bet on the car instead of the horse. But it's not im portant. The vital element at stake is this: Both were free to try. Noth ing else is of any great consequence. It doesn't really make much differ ence how it comes out-just so long as everyone is free to try. And that's the vital mainspring (freedom to try) that's being eroded in America today. And of all things, it's being destroyed in the name of giving everyone an equal chance! There's just no way everyone can be equal (we aren't) or have an equal 1985 AN ANCIENT CHINESE STORY 119 chance; for there's no possible ar rangement whereby unequal people can have equal chances. And there's nothing our government can do about it. But we can quite easily arrange for everyone to be free to try. All we need do is repeal all subsidies, tariffs, and similar interferences by government in the market economy. Then any one can try who wishes. How he goes about it is his problem and privilege.

Ifhe "bets on the car instead of the horse" and produces a product or service you and I want at a price we're willing to pay, he'll get rich and provide good jobs for the many people who throw in their lots with him. If he fails to provide you and me with what we want, however, he'll fail, as he should. And, of course, all those who bet on his success will suf fer the consequences of their poor judgment. I simply can't imagine a better ar rangement to encourage maximum production at minimum prices for the largest number of people-just pass no law that prevents anyone from trying. @Rl THE LAW by Frederic Bastiat The law, it has been said, is nothing more than the will of tyrants. So it has been many times in history. But just laws depend upon a law which underlies the law passed by legislatures or declared by rulers. It is a law which provides the framework of liberty. Emancipation from the doleful theories of the compulsive state awaits discerning readers of this brief treatise.

This remarkable volume, translated in 1950 by Dean Russell, has been a best seller since then-one of the most clear and concise ar guments of the case for limiting government in the cause of freedom. 76 pages Cloth $3.50 Paperback $2.00 Special offer: 60 cents each for 100 or more copies (paperback) to a single address. Order from: The Foundation for Economic Education, Inc. Irvington-on-Hudson, NY 10533 (Postage paid on prepaid orders; otherwise $2.00 per order for billing.) Russell Shannon Trade Barriers WHEN he wrote Wealth ofNations in 1776, Adam Smith referred to "a cer tain propensity in human nature ... to truck, barter, and exchange one thing for another."! Even children are known to be prone to swap such items as stamps, bubblegum cards, marbles, and other items of mutual desire. But enjoyable and beneficial though trade may be, there is also a propensity to stifle it. Even the Rea gan Administration, with a strong and outspoken penchant for free markets, has succumbed to pres sures to curb imports of cars, steel, textiles, motorcycles, and other products from foreign lands.

About 50 years after Adam Smith wrote, John Stuart Mill in 1829 clearly explained and soundly de nounced such restrictive policies in Professor Shannon teaches in the Economics De partment, Clemson University. 1?() an admirable essay entitled "Of the Laws of Interchange Between Na tions." Mill was following in the footsteps of Smith, who openly op posed the mercantilistic policies whereby European nations had in terfered with trade. As the basis for his arguments, Mill expounded the ideas of his more recent predecessor, David Ricardo, who had demon strated that there is mutual benefit for countries which specialize and trade on the basis of "comparative advantage." This simple and fundamental prin ciple can be readily illustrated by the examples of the businessman who hires a secretary, the doctor who em ploys an accountant, or the working mother who turns her child over to a baby sitter. The businessman may be a better typist, the doctor may have superior calculating abilities, TRADE BARRIERS 121 and the mother may excel in provid ing affection and entertainment for her child. But by directing their time and energy to their professional du ties, these three people will earn more than enough to pay their em ployees. The businessman and doc tor will have even more time for lei sure, and the working mother will be better able to provide her child with needed food and clothing.

Yet, what we all implicitly accept and practice in our daily lives, we are pathetically apt to forget when we read or hear news about how some American industry is "hurt" by for eign competition. Nonetheless, the same principle applies. If the Japa nese can produce cars and motor cycles more efficiently relative to other products such as beef, then we should buy our cars from them in ex change for our beef. If the Chinese can produce textiles by giving up less of other products than we must forgo here, then we should buy from them. Not only will ,we enable our consum ers-especially the poorer ones-to improve their living standards; we will also provide jobs for our produc ers of wheat and soybeans, items in which we have a comparative ad vantage. If some people criticize the Chinese for "underselling" our pro ducers, they should take note of Mill's words: "the world at large, buyers and sellers taken together, is always a gainer by underselling."2 Yet, despite the common sense of the free-trade argument, we con tinue to erect barriers to impede trade. Just as Ricardo and Mill ad vocated free trade, they reviled re strictions. In 1817, Ricardo had writ ten that "the sole effect of high duties on the importation either of manufactures or corn ... is to divert a portion of capital to an employ ment which it would not naturally seek."3 Mill similarly deplored bar riers which have "the effect of en couraging some particular branch of domestic industry," for, he said, they are "purely mischievous."4 We Hurt Ourselves Sometimes it is argued that since foreign governments impose bar riers and provide subsidies of their own, they have rendered laissez faire unfair. Certainly, such policies abound and they surely hurt our ex porters. Shouldn't we engage in "tit for tat"? If we do, we are sure to suf fer for it; as Mill put it, trade bar riers are "chiefly injurious to the countries imposing them."5 The loss to American consumers when our government restricts im ports outweighs the gain to the pro tected industry. Trade barriers such as quotas and tariffs raise the price on all the protected products, whether their origin is domestic or foreign. That is the clear impact, for example, in the case of the agree ment by Japan to limit the export of cars to the U.S. Both American and 122 THE FREEMAN Japanese producers can hike their prices; both Chrysler and Toyota gain. The costs to our consumers ex ceed our producers' benefits.

Moreover, by setting up trade bar riers, we abdicate the opportunity for setting a good example. As Mill wrote in his essay, "A country can not be expected to renounce the power of taxing foreigners unless foreigners will in return practice to wards itself the same forbearance."6 We should expect foreign countries to do as we do, not as we say. Until we renounce our own protectionist sins, how can we justify throwing stones? Before yielding further to the temptation to plunge deeper into the web of trade restraints, it helps to remember that basic fact of all eco nomics: our resources are scarce. We simply cannot produce all the goods and services people want and need. Thus we must bend all our efforts to ward employing our resources to their utmost efficiency. Mill said it well: it is "the common interest of all nations that each of them should ab stain from every measure by which the aggregate wealth of the com mercial world would be dimin ished."7 On these grounds we should oppose all laws requiring our cars to be manufactured on the basis of "lo cal content" and others forcing us to "buy American." Suggesting that they simply emulate the practice of others is to argue that two wrongs make a right.

Of course, it may be sadly true that if the Reagan Administration had not acted, Congress would "beat it to the punch" with even more punitive legislation. In that sense, the Administration's policies may well be a lesser evil. But there is another option. The Administration could, instead, devote some time and effort to explaining to the American public the folly of such policies. Then, just like the businessman, the doctor, and the working mother mentioned be fore, President Reagan and his staff would be making the best use oftheir resources. And if they need any as sistance articulating their ideas, they will find ample help in an essay more than 150 years old written by John Stuart Mill. @ -FOOTNOTESlAdam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (New York: Modern Library, 1937), p. 13. 2John Stuart Mill, Essays on Some Unsettled Questions of Political Economy (2nd ed., 1874; New York: Augustus M. Kelley, 1968), p. 36n.

3David Ricardo, The Principles of Political Economy and Taxation (first published in 1817; New York: E. P. Dutton, 1911), p. 210. 4Mill, p. 28. 5Mill, p. 38. 6Mill, p. 29. 7Mill, p. 31.

A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN The Liberal Up NOT so long ago R. Emmett Tyrrell, Jr., the editor of The American Spec tator, wrote a very funny book called Public Nuisances. Its humor was Menckenian, which is to say that it relied on hilarious burlesque. Whereupon his editor, Midge Deeter, began chivvying him to deal in more systematic terms with the ideas be hind the proliferation of the nui sances. Tyrrell, an accommodating soul, capitulated at once. Surprisingly, in his review of origins, Tyrrell found little fault with such liberal pragmatists as Franklin D. Roosevelt, Harry Tru man and John F. Kennedy. It was a good thing in his estimation that Roosevelt had stood up to Hitler and that Truman had moved to "con tain" the Soviets. As for welfare, there was reason behind FDR's de sire to get apple sellers off the streets. No ideologue, Tyrrell is actually a believer in the idea of the "vital cen ter," which once allowed for reason able compromises with doctrines coming from the extremes. The Americans for Democratic Action could have been his brothers-in arms. He could have broken bread with the Arthur Schlesinger, Jr. of 1950. But, alas, the New Day liber alism that developed in the Sixties couldn't stay on the common sense level. It went off the track by in dulging all manner of enthusiasms that actually perverted the aims of the Roosevelt-Truman-JFK past.

Tyrrell's concessionary offering to Midge Deeter, The Liberal Crack-Up (New York: Simon and Schuster, 256 pp., $16.95), is the story of how the enthusiasms of "post-JFK times" combined to make up a crazy set of blotches of ideas that Tyrrell thinks were noble in their first manifesta123 124 THE FREEMAN February tions. Number One is the blotch the New Age liberals made of civil rights. Number Two is their perver sion of welfare. Number Three is the mess they made out of Southeast Asia, where we had a just cause in our desire to save the South Viet namese and the Cambodians from a Red-inflicted genocide that has out done anything decreed by Adolf Hit ler himself. Civil Rights to Special Rights The civil rights movement went off the rails because the New Age lib erals turned it into a movement for the promotion of special rights. "Re verse discrimination" fostered a new racialism by its insistence on ethnic quotas. Where the New Dealers had tried to save capitalism by Keyne sian means that, unfortunately, had devastating monetary conse quences, the New Day liberals were secretly enamored of a more funda mental socialism. They hid their basic animosity for the "system" by devious stratagems. Their undis criminating environmentalism went the Barry Commoner route of blam ing pollution on the big corpora tions. Their anti-nuke enthusiasm was a derivative of their larger preoccupation with the notion that wicked profit takers wer.e bent on killing off their own purchasing clientele. The feminists- "women of the fevered brow," as Tyrrell calls them-were as chauvinistic as any gang of macho males. The peace mongers agitating for a nuclear weapons "freeze" without consider ing the record of the Soviets for sys tematic violation of previous agree ments put the whole West in jeopardy by leaving it vulnerable to blackmail.

Legacy of Fabianism The Liberal Crack-Up is such hi larious fun to read that it leaves one with no desire to criticize its basic acceptance of the idea that special laws were necessary to save us way back in the Nineteen Thirties. Nevertheless, as a I more doctrinaire libertarian than Tyrrell, I feel duty bound to point out that the liberal crack-up was an inevitable legacy of the older Rooseveltian and Kenne dyesque Fabianism. There was a whole group of libertarians in the Britain of the Eighteen Eighties who accurately predicted what would happen if the voters were to accept the State welfarist philosophy that was being promulgated by Bernard Shaw, H. G. Wells and Sidney and Beatrice Webb. The idea that social ism would founder because it would fail to solve the problem of calcula tion without a free market system (including private property) was known in the Eighties. This was some thirty years before Ludwig von Mises had worked it out in detail.

So let not readers of The Liberal Crack-Up be deluded into thinking 1985 THE LIBERAL CRACK-UP 125 that there is any safety in returning to aNew Dealism that predates John Fitzgerald Kennedy. Privatization Must we be ready then to say farewell to compassion? Actually there is nothing the State can do for us in terms of offering welfare that couldn't be done much better by pri vatization. Unlike public welfare, private welfare does not involve what William Rickenbacker has called the death of the dollar. It be came ridiculous for Geraldine Fer raro to complain of the lack of "com passion" among the Republican rich when she, as a Democrat, had three houses to Iive in and a few million dollars at her disposal. She and like minded friends could have set up pri vate foundations to help the poor without seizing other people's money to do it. Teddy Kennedy might have helped her. As for Social Security, it ought to be floated off in some sort ofprivate insurance that would leave large blocks of capital available to the economic system that supports us all. It was a liberalism that pre dated Tyrrell's "crack-up" by many years that gave us a social security scheme that is headed for bank ruptcy as the elderly live longer and the young are subjected to taxation and inflation that drastically limit the jobs that are available to them.

The liberalism that is so wonder fully spoofed by Bob Tyrrell was a botch from the very start. To begin with, it stole its name of liberalism from the much sounder anti-State liberalism of the Adam Smith fol lowers in England and the Aus trian economists of the European continent. The liberal crack-up as it has man ifested itself in the colleges is the substance of another delicious book, Poisoned Ivy, by Benjamin Hart, foreword by William R Buckley Jr., (New York: Stein and Day, 254 pp., $16.95). Hart, the son of National Review editor Jeffrey Hart, loves Dartmouth as F. Scott Fitzgerald loved Princeton. But, as a founding editor of the dissenting Dartmouth Review (a paper that the college administration sought to kill), Hart was scandalized by the way the "ethos" of the American university would allow for only one opinion when it came to discussing "race, feminism, pacifism, homosexuality, the Third World, U.S. oppression, re verse discrimination-the whole McGovern menu."

What Ben Hart does not tell us is that the "ethos" is already crum bling on the American campus in sofar as faculties are concerned. Bur ton Pines, in his Back to Basics, has discovered that Keynesianism is no longer the rage in the economics de partments. If the news hasn't reached Dartmouth already, it won't be long before it does. r.tJ 126 THE FREEMAN February MANAGING by Harold Geneen with Alvin Moscow (Doubleday & Company, Inc., 501 Franklin Avenue, Garden City, NY 11530) 1984 297 pages _ $17.95 cloth Reviewed by Melvin D. Barger FEW business leaders can ever hope to match the dazzling record estab lished by Harold S. Geneen in his 17 years as chief executive officer of ITT. Although some of his corporate decisions were reversed by succes sors after he stepped down in 1977, none will dispute that ITT's spectac ular growth and quickened vitality of the 1960s and early 1970s were entirely the results of Geneen's bril liant leadership. He was so highly regarded as a managerial wizard that some feared ITT would self destruct without him.

In the 197Os, however, Geneen be came tagged as "controversial" by an often hostile press. Critics glee fully pounced on the company's po litical contributions and alleged in vol vement in the overthrow of Chile's Allende government to dis credit both Geneen and ITT. In this tumultuous period, Geneen was usu ally too busy running his company to explain himself to the public. But in retirement, Harold Geneen with his collaborator Alvin Moscow has produced an excellent book that goes far in revealing Geneen's view of himself and his world of business. Unlike the picture of cunning ma nipulator and power broker pre sented by his enemies, the Geneen who emerges in Managing is a man of simple beliefs whose driving force is an almost religious devotion to the principles and practice of good man agement. Geneen found his greatest self-expression and enjoyment in his work, which completely absorbed his life and most of his waking hours.

The book carries little mention of family and friends, and even his rec reational interests had a business tie-in. Some would consider his life austere and narrow, despite his great business success, but it's obvious that Geneen found his business ca reer immensely satisfying and re veled in its problems and challenges. Although Geneen is a modern manager, he has little patience with management fads such as the cur rently popular "Theory Z" on the art of Japanese management. "The se cret of how to succeed in business or life is that there is no secret," he as serts. "No secret at all. No formula. No theory." But then his own secret starts to come through in a number of highly interesting chapters, and it becomes clear that hard work, efficient plan ning, close attention to certain de tails and unwavering pursuit of spe cific business goals were the elements of his great success. There 1985 OTHER BOOKS 127 was no way that Geneen himself could have fully grasped the prod ucts and operations of the 250 profit centers in the ITT tent, but he man aged to control this empire by de manding careful planning from his managers and holding them ac countable for hitting growth and profit targets. The cardinal sin for an ITT manager was to be surprised by events such as strikes and short ages which he had not anticipated in his previous planning.

Geneen, a financial executive in his earlier years, devotes a complete chapter to the importance of "The Numbers" in managing a business. Geneen believes that "the numbers" have a language of their own and can reveal the facts about a business if a person studies them enough. In fact, however, such "numbers" are best understood by executives like Geneen himself, who was really a born manager and drove himself to understand and use the tools of management. Managing also carries a brief ac count of Geneen's own early life and business career. There is a bit of the Horatio Alger, Jr., success story in Geneen's dogged trek to the heights. Although he appeared in his ITT years as the completely self-confi dent leader who could not possibly fail, Geneen actually had a lonely childhood and years of painful strug gle before he was able to seize the brass ring at ITT. Geneen even had to earn his college degree by attend ing night classes over an eight-year period. But his experience at a pub lic accounting firm and several ma jor companies finally brought him, as if led by an invisible hand, to the opportunity at ITT. Under Geneen's leadership, ITT became a major world corporation, and it's not hard to believe that Geneen's early strug gles to perfect his talents were needed to prepare him for this re markable task.

Beyond explaining how ITT suc ceeded in the tortuous and confusing world of conglomeration, Managing also reveals Harold Geneen as a man of high character and decency who wanted only to be left alone to run his company in the most efficient way. Geneen is the sort of person whom the public often misunder stands, and yet needs if we are to maintain and strengthen our busi ness heritage. Geneen takes it for granted that running successful, profitable business operations is a form of high service to the commu nity, and he sees little need to argue this point. Like Thomas Edison or General George S. Patton, Jr., Geneen is something of an eccentric who has, nonetheless, amazing gifts in his own special field of interest. We don't have to understand these gifted ec centrics completely in order to ben efit from their services. The late Benjamin Rogge used to argue that 128 THE FREEMAN we would all be better off if we would simply let the superior business manager do his own thing. Maybe Geneen's Managing will help get that message across, along with of fering splendid advice on how to run a business. ::;fd YOUR WEALTH IN GOD'S WORLD by John Jefferson Davis (Presbyterian and Reformed Publishing Co., Box 817, Phillipsburg, N.J. 08865) 1984 134 pages _ $4.95 paperback Reviewed by Buddy Matthews THEOLOGIAN John Jefferson Davis' new book is a call to look at the free market from a Christian and bibli cal perspective. Though he does not see the Bible as a text book on eco nomics, he does see some economic principles involved. "The Bible makes it clear that spirituality and economic life are related. God con trols both and uses economic events to teach His people spiritual truths."

His major premise is that the free enterprise system is itself patterned after the Christian life. "[The] bib lical pattern of humble service and subsequent reward lies at the heart of the free enterprise system at its best." As a rebuke to Christians, Davis feels that much of what we know as the welfare state today has come about because Christians have failed to follow Jesus in His concern for the lowly. "The early church cared for its poor. Widows who had no other means of support were to be cared for by the church. Families were to take care of their own, and children were to help their elderly parents. If the Christian church were to consis tently apply the provisions today, much of the taxation for social welfare programs would be un necessary. " Davis views the major cause of poverty as ultimately ethical, noting that the family has lost its role in teaching moral values in Western societies. It is instructive here to see how several Asian countries, be cause of their close family ties and character building efforts, have be gun to prosper. "One of the ironies of the modern world is that the 'Prot estant work ethic' seems best ex emplified by non-Christian states such as Japan, Singapore, South Ko rea, Taiwan, and Hong-Kong. Inso far as these new industrial giants of Asia have applied virtues com mended by the Bible, they have enjoyed remarkable economic pros perity."

Economic prosperity reflects the efficiency of the free market, as nearly everyone agrees. But beyond efficiency, Dr. Davis argues, the free market embodies high ethical val ues, and thus should recommend it self to churchmen. GtJ the Freeman VOL. 35, NO. 3 • MARCH 1985 The Individual in SocietyA Page on Freedom, No. 17 Ludwig von Mises 131 Buyer and seller depend upon one another. Free Markets and Human Freedom Dean Russell 132 Where the market is the freest, human liberty is highest. A Credit Expansion Economy Clarence B. Carson 141 A search behind the inflation that disrupts the market. The Forgotten Man Robert Awenius 153 A century-old warning by William Graham Sumner. Protectionism and Unemployment Hans F. Sennholz 159 Foreigners are not the cause of domestic unemployment. Highways: Public Problems, Private Solutions John Semmens 172 The prospects for privately owned and managed highways.

Battle for the Mind Edmund A. Opitz 182 The contrast between the collectivist and the individualist view of the world. Book Reviews: 189 "The Apocalyptics: Cancer and the Big Lie" by Edith Efron Anyone wishing to communicate with authors may send first-class mail in care of THE FREEMAN for forwarding.

IFreeman AMONTHLY JOURNAL OF IDEAS ON LIBERTY FOUNDATION FOR ECONOMIC EDUCATION Irvington-on-Hudson, N.Y. 10533 Tel: (914) 591-7230 President: John C. Sparks Managing Editor: Paul L. Poirot Production Editors: Beth A. Hoffman Amy S. Vanlaar Contributing Editors: Robert G. Anderson Howard Baetjer Jr. Bettina Bien Greaves Charles H. Hamilton Edmund A. Opitz (Book Reviews) Brian Summers THE FREEMAN is published monthly by the Foundation for Economic Education, Inc., a nonpolitical, nonprofit, educational champion of private property, the free market, the profit and loss system, 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. Donations are invited in any amount. THE FREEMAN 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 $10.00 a year.

Copyright, 1985. The Foundation for Economic Education, Inc. Printed in U.S.A. Additional copies, postpaid: single copy $1.00; 10 or more, 50 cents each. THE FREEMAN is available on microfilm from University Microfilms International, 300 North Zeeb Road, Ann Arbor, Mich. 48106. Reprints are available of "A Page on Freedom," small quantities, no charge; 100 or more, 5 cents each. Permission is granted to reprint any article in this issue, with appropriate credit, except "Free Markets and Human Freedom" and "Protectionism and Unemployment."

A Page on Freedom Number 17 The Individualin Society SEEN from the point of view of the individual, society is the great means for the attainment of all his ends. The preservation of society is an essential condition of any plans an individual may want to realize by any action whatever. Even the refractory delinquent who fails to adjust his conduct to the requirements of life within the societal system of cooperation does not want to miss any of the advantages derived from the division of labor. He does not consciously aim at the destruction of society. He wants to lay his hands on a greater portion of the jointly produced wealth than the social order assigns to him. He would feel miserable if antisocial behavior were to become universal and its inevitable outcome, the return to primitive indigence, resulted. Liberty and freedom are the conditions of man within a contractual society. Social cooperation under a system of private ownership of the means of production means that within the range of the market the individual is not bound to obey and to serve an overlord. As far as he gives and serves other people, he does so of his own accord in order to be rewarded and served by the receivers. He exchanges goods and services, he does not do compulsory labor and does not pay tribute. He is certainly not independent. He depends on the other members of society. But this dependence is mutual. The buyer depends on the seller and the seller on the buyer. (t~ -Ludwig von Mises THE FOUNDATION FOR ECONOMIC EDUCATION, INC.

IRVINGTON-ON-HUDSON, NEW YORK 10533 131 Dean Russell Free Markets and «<='\..(5, i. .,5) p....,. , , <;;>'* <?8 " 8~ "\F' ) Human Freedom WHERE the market is freest, human liberty is highest. If labor is con trolled (e.g., slavery), there is nei ther a free market nor freedom. If capital is controlled (e.g., govern ment ownership), you can't produce without permission; that's not free dom. The free market economy and human freedom are mutually depen dent; destroy one, and the other au tomatically falls. Frederic Bastiat didn't write those precise words, but he clearly saw and described the relationship. And in the process of identifying the var ious institutions that have plun dered the French people over the centuries, he dwelled at length on the disastrous consequences stem ming from the actions of the only inDr. Russell, recently retired from a full schedule of academic work, continues freelance consulting, lec turing and writing from his home in Westchester County, New York.

This Is one of a series of articles examining current interventions of the welfare state In the light of warn ings from the French economist and statesman, Frederic Bastlat (1801-1850). 132 stitution that can plunder legally the government. Woe to the people who cannot limit the sphere of action of the state! Freedom, private enterprise [i.e., the market econ· omy], wealth, happiness, independence, personal dignity, all vanish .... Through. out history, plunder has been practiced through abuses and excesses of govern ment. . . . The only remedy is the pro gressive enlightenment of public opinion .... [which Bastiat believed to be "sov ereign"] until the people finally come to realize that it is better to leave the great est possible number of goods and services to be exchanged by the interested parties at freely negotiated prices in the market economy.* While Bastiat developed his theme well indeed in that particular essay *This extract (condensed and translated by me) is from the essay, "The Physiology of Plun der." The Complete Works of Bastiat (Guillau min, Paris, 1878; vol. 4), p. 141 ff. This essay is also in the translation of Bastiat's book, Eco nomic Sophisms (Foundation for Economic Ed ucation, 1964).

FREE MARKETS AND HUMAN FREEDOM 133 (and I especially recommend it to you), my objective is to apply the same principle to the activities of our own government in the United States today. I'll begin with a state ment I'll be repeating several times in this chapter: Governments never control prices. No government ever has controlled a price. No govern ment ever will control a price. It sim ply can't be done. Governments control people (you and me) and nothing else. Govern ments tell the seller ofa loaf ofbread (or the owner of a rental apartment) what price to charge. Thus it's ob viously the owner who's controlled; the price itself couldn't care less. Freedom and the Market Sometimes the specific price the owner must charge is the minimum. Sometimes it's the maximum. Some times the same price is both mini mum and maximum. Whichever, it's never the price that would be deter mined by peaceful people freely ex changing their goods and services in the market place. And always the control is on the person who owns the product or service. The process is one of "people control," and (as Bastiat said) the inevitable result is loss of freedom, independence, and per sonal dignity-as well as the pro duction of fewer goods and services.

Few Americans (when asked to identify the foundations of their freedom) will agree with me that it's basically the free market economy. Instead, they identify the source as our Constitution, or democracy in general, or religious teachings, and so on. In every case, however, they're identifying the results, not the cause. If you have a market economy, all of these desirable attributes necessar ily exist or soon appear. If there's no free market, however, there's no pos sibility of a free press, or elections to change leaders, or any of the other freedoms we enjoy. For all freedoms (repeat all) depend on the existence of private ownership ofthe-meaIls of production ina free market economy where production is directed by the desires of the owners to earn a profit. Since most people consider that statement both startling and ques tionable (admittedly it is a minority viewpoint), let's see how a reason ably well-educated and rational per son could arrive at such a conclusion in today's socialistic world. In short, why do I persist in such an extreme viewpoint when probably more than 90 per cent of our educators, com municators, and religious leaders hold the contrary viewpoint?

Let's begin with this: Freedom for both religious and nonreligious ac tivities is guaranteed in the Russian constitution. It's a meaningless guarantee, however, because of the absence of private ownership and control of the means to implement freedom of religion in practice. For example, how can you have freedom 134 THE FREEMAN March of religion when you can't own a church? Or even rent one? Since all resources (all buildings). are owned in common, necessarily you must have the permission of the owner (government) to use the church building. Do you imagine that (even if the government gave you permis sion to use one of its church build ings) you could preach in it a sermon on "private ownership with respon sible stewardship" as recommended in the Bible? Private Ownership When the Russian government as sumed ownership of all the syn agogues "for the benefit of all the people," freedom of religion for Jews automatically and necessarily dis appeared, Le., since their temples were henceforth to be used in the best interests of all the people, ob viously they couldn't logically con tinue to be used by a group of zealots with a religion contrary to the idea of government ownership of all buildings and resources. True enough, the Jews are sometimes per mitted (given permission by govern ment) to attend services in one of the several synagogues owned and still maintained by the communist au thorities. That arrangement is not exactly what we ordinarily mean by freedom of religion, however.

My thesis is that the free market economy is the key to all freedoms. In fact, the market and freedom are really synonymous terms. If the market is totally free, all presses and churches and assembly halls and speaking podiums are privately owned and are operated for a profit. Thus, each person can preach (or hear preached) whatever appeals to him. And anyone can pay to have published whatever idea he wants to write and circulate. But if private ownership is abolished, there's no possibility offreedom in those or any other areas, Le., everything is nec essarily by permission of the owner the government, the police force. For example, let's apply this idea to two nations where the economies are currently almost totally con trolled, where all resources and all means of production and distribu tion are owned in common by all the people-Russia and Cuba. There is no freedom of any kind in either of those nations today. Freedom is a physical and mental impossibility that can't even be imagined there.

While certain actions by the people (including church attendance) do have the appearance of freedom of choice, we must remember that those actions are necessarily by permis sion of the government, and can be rescinded arbitrarily tomorrow "for the good of the people who own everything." In those unfortunate countries, no person can write what he pleases and have it published, or even send it through the mails to his own friends, 1985 FREE MARKETS AND HUMAN FREEDOM 135 without police permission. Nor can you hire. a hall to make a speech, or to assemble together to hear a speech, without police permission. In neither country is there even a mechanism to establish a news paper, much less a newspaper in op position to government. Nor can you establish an opposition political party. Where would you meet? It's doubtful the government would offer you one of its halls to denounce the government. You couldn't even meet in a park or the woods; they're also owned by the people, i.e., the government.

No Personal Choice There simply is no possibility of human freedom ofchoice when there is common ownership of all re sources, ineluding a place to stand on. When all resources must be used for the benefit of all the people in stead of for the profit of the "greedy private owners," there's simply no "mechanism" you can use to prac tice your own brand of freedom of anything. But imagine, if you will, what would be the inevitable results ifthe government could exercise no con trol over the peaceful economic ac tivities ofpeople in general. In short, imagine a market economy in those nations. Publishers and editors could then be either for controls over the econ omy or against them. Even the editor who favored a controlled econ omy would be free to say so, if the market were free. Of course, many people would doubtless denounce those editors and publishers who made such proposals. But in a mar ket economy where presses are pri vately owned and operated for a profit, there is nothing more they can do about it, except to refuse to buy the newspapers they disagree with and hope those papers go broke from lack of subscribers. In short, the press cannot possibly avoid being free in a free market.

Now reverse the situation again and imagine that all newspapers are owned in common (by the govern ment) and are operated for the ben efit of all the people. Imagine that private ownership and the market economy have been abolished. Ob viously, there cannot be afree press under that arrangement. Just as the owner of The New York Times will never denounce himself in his own newspaper, just so will the owners of Izvestia and Pravda never denounce themselves in their newspapers. The situation presents a physical and in tellectual impossibility for a free press when the government owns all of the presses. As another example, try to imag ine the existence of freedom of reli gion in a controlled economy of com mon ownership. Just how would you go about it mechanically? For ex ample, the Latter Day Saints (Mor136 THE FREEMAN March mons) send their missionaries all over the world-literally to any na tion they can get into. For the most part, those people preach personal responsibility for one's own eco nomic welfare, the private owner ship of property, the free market economy, and the responsibility of individuals and of the church (not the government) voluntarily to feed the hungry and house the homeless.

Just where could they preach that philosophy in Russia, Poland, and Cuba? All pulpits are owned in com mon in those common ownership countries. Will "the people" (govern ment) turn those pulpits over to a group dedicated to the opposite phi losophy? They may do it-if you'll share your church equally with the devil worshippers. Your church "(whatever it may be) endorses private ownership and re sponsible stewardship. That reli gious philosophy cannot possibly be permitted unrestrained expression in any nation that endorses the con cept of common ownership of prop erty. If it were permitted to flourish, that subversive idea would quickly lead to revolution and the overthrow of government. In short, the public utterance of the free market philos ophy could no more be tolerated as a religion than as an editorial policy in the controlled economy of com mon ownership. The same reasoning holds true for speech, vote, and family life-as well as for every other human activity that involves differences of opinion.

All the history I've yet read bears witness to that truism. And I can find no other answer" in logic. Nor can any constitution or bill of rights permanently stop the inevi table verdict. No legalities concern ing freedom of press, speech, and re ligion have ever been able to stand permanently against the realities of an economy controlled by govern ment. Obviously, the judicial branch of government can't long be permit ted to pursue a course in direct opposition to the legislative and administrative branches of govern ment, even in the unlikely event it wanted to. In one way or another, there must necessarily be at least a rough balance of agreement among all branches of government; other wise, there could be no government. Free Unions in Poland? Lech Walesa discovered that real ity in Poland when he had to use a government building for his union headquarters. (Remember, you can't buy, build, rent, or own a building in a "common-ownership" nation.) And when he wanted to print and dis tribute a pamphlet defending his union and denouncing the govern ment's union, he necessarily had to go to a government printing press and ask them to do it. That arrange ment simply couldn't last.

I spent five weeks in Poland dur1985 FREE MARKETS AND HUMAN FREEDOM 137 ing the build-up period that led to "Solidarity." I was astonished that so many Polish people (along with the vast majority of the American people) believed that a free union could exist in a common-ownership country. It's possible to have a free and vol untary union in a market economy ofprivate ownership. But there's just no way (even mechanically) it can ex ist under common ownership. "Sol idarity" or common ownership (one or the other) had to go. I was sad dened (but in no way surprised) at which one lost. Incidentally, I watch with great interest the ongoing and far-from-settled conflict between church and government in Poland. In due course, one of them has to go; for obviously, a free church can't ex ist under common ownership. If the presses, auditoriums, and church buildings are owned or con trolled by government, it is childish to imagine that there can be any freedom of press, speech, and reli gion. President Reagan saw this "press, speech, and assembly" real ity when he was a presidential can didate in New Hampshire in 1980.

Remember when he was scheduled to debate George Bush alone, and the sponsors of the debate wouldn't let the other candidates onto the plat form? Ronald Reagan picked up the microphone and (on national televi sion) announced that he had paid the private owners for the use of it, and that he would say who could use it. At home from my easy chair, I stood up and cheered. For that's the essence of all freedoms. Someone owned the microphone, the podium, and the assembly hall-and rented them out at a profit. Freedom in a market economy works so automat ically and smoothly that, if you were to thank. the owner of that hall for his deep interest in preserving free dom of assembly, he wouldn't even know what you were talking about. His sole interest was the possibility of profit. And that's why you and I have freedom of assembly. Farm Price Supports Just as the government can't con trol prices (but only people), just so is it absurd to imagine that the gov ernment can support prices. Without exception, the only thing that any government can ever do is (in one way or another) control people, i.e., to prevent us from doing what we want to do, or to compel us to do what we don't want to do. Thus, it follows that the government's price support program for agriculture necessarily deprives farmers of their freedom.

And it most surely does just that. Here is a harsh and little under stood fact: Because of price supports, freedom of agriculture in the United States really doesn't exist. That is, you can no longer grow what you wish to grow on your own land. Ifyou have any doubt, try this experiment: 138 THE FREEMAN March On any land that will grow tobacco, plant a few acres of it (even for your own use instead of to sell) without getting permission from govern ment. You'll be fined or jailed (or both) for your antisocial and illegal action. Again, freedom follows the free market. When it's not free, nei ther are you. And so it is with tariffs, subsidies, aid to all kinds of dependent people, and other government interferences with freedom of exchange. In every case, peaceful persons are deprived of their freedom to exchange their goods and services on mutually agreeable terms. In every case, we are deprived of a bit more of our free dom of choice.

All of us have lost our hard-won freedom to join or not to join orga nizations of our own choosing. Cur rently some 20 million Americans must belong to labor unions, whether the individual member likes it or not. The fact that you, yourself, may not now belong to a union is purely academic and per haps temporary; the essential prin ciple of no freedom of choice in the matter has now been firmly estab lished and written into the law ofthe land. It is legally enforced by strikes, threats, and even bloodshed against those who are still naive enough to imagine that employers and employ ees in the United States are still free and responsible persons. Perhaps you'll better understand the fearful danger we are in when you contemplate the implications of this fact: Compulsory unionism has long been broadcast to the world by our State Department's "Voice of America" as the very essence offree dom itself. Actually, that's what "Solidarity" in Poland was all about, Le., it was a revolt against the com pulsory unionism imposed by gov ernment on all employees. They ob jected, and tried to set up their own voluntary unions that no one had to join. That endeavor was no more suc cessful in Poland, however, than it is in most states in our own country.

Let it be recorded that the card carrying members ofthe Communist Party did not, and could not, do this to us, even though they surely wanted to. It was done primarily by our best people-our ministers, our teachers, our editors, our business men, and our most honest legisla tors. And it was inspired by the best of all reasons, Le., the human desire to help one's fellow man. Control of People Those good people forgot, however, that the only thing any government can ever do, even in its proper func tion of preserving the peace, is to control people-to compel us to do what we don't want to do, or to pre vent us from doing what we want to do. That procedure is, of course, the proper way to stop murderers and thieves and rapists; for clearly, the 1985 FREE MARKETS AND HUMAN FREEDOM 139 police powers of government should be used to prevent those antisocial people from imposing their desires upon others by violence. But when the same powers are used against peaceful persons in their peaceful ac tivities, freedom is always and un deniably infringed.

For example, every American has lost his freedom to save or to spend his earnings as he pleases. Our gov ernment compels ~ll of us to "save" (actually, it's a tax) a portion of our wages and salaries-that is, the gov ernment taxes away a portion and promises to give it back (sometimes more, sometimes less) at some later date. This compulsory scheme is called Social Security, and. it is gen erally cited as the essence of true freedom for the people. Perhaps as many as 75 per cent of the American people are now in favor of this loss of personal choice (freedom) and would categorically oppose any sug gestion to return to a situation in which each person is responsible for his own welfare in a market economy. And so it goes-through hundreds and thousands of government pro hibitions and compulsions in the peaceful economic affairs of men and women. Without exception, every one ofthem is a direct loss offreedom of choice and responsibility.

Again (remember, I promised to re peat this several times) the only con trol that any government can exercise is people control. Any attempt to control things must necessarily involve the control of people, and that is undeniably a loss of freedom. Most of the editors in the United States scoff at my fears. "We will al ways preserve freedom of the press," they say, as they advocate additional government compulsions and pro hibitions in the market, including postal subsidies to themselves. In their sermons, most of our min isters promise us that "our hard-won freedom to worship as we please will never be lost." At the same time, they suggest that the police powers should be used to perform still an other charitable service that was once believed to be the responsibility and pride of our churches. And invariably, as the legislator demands still another interference in the market place, he thunders this familiar theme: "The people will never lose their right to vote as they please."

And true enough, those four pre cious freedoms of press, speech, fran chise, and religion appear to be strong in the United States today, even though freedom itself is in great danger. That seeming contradiction is explained by this fact: We still op erate within the framework of a market economy. It still survives in spite of the increasing attacks upon it. In spite of the fact that govern ment now taxes and spends more than one-third of the combined in140 THE FREEMAN comes of all persons, the market pro cesses of competition, pricing, profit and loss still generally prevail. In spite of the fact that governmental controls over the economic affairs of all of us are steadily i~creasing, the long-established order of the market still prevails to a large extent. (Per haps we should be thankful that the federal government doesn't yet ac tively produce anything, except elec tricity in Tennessee and money in its mints.) But somewher~ along the line, our essentially free economy must drift into an essentially controlled econ omy, if the present trend continues.

That will be the end of human free dom in the United States, and prob ably in the world. All other free doms-press, speech, franchise, religion-must necessarily disap pear with the loss of the free econ omy. For the fact remains: In a to tally controlled economy, it is not the economy but the people who are to tally controlled. @R) THE LAW by Frederic Bastiat The law, it has been said, is nothing more than the will of tyrants. So it has been many times in history. But just laws depend upon a law which under lies the law passed by legislatures or declared by rulers. It is a law which provides the framework of liberty. Emancipation from the doleful theories of the compulsive state awaits discerning readers of this brief treatise. This remarkable volume, translated in 1950 by Dean Russell,has been a best seller since then-one of the most clear and concise ar guments of the case for limiting government in the cause of freedom.

76 pages Cloth Paperback $3.50 $2.00 Special offer: 60 cents each for 100 or more copies (paperback) to a single address. Order from: The Foundation for Economic Education, Inc. Irvington-on-Hudson, NY 10533 (Postage paid on prepaid orders; otherwise $2.00 per order for billing.) Clarence B. Carson A Credit Expansion WE have a penchant for naming things around my house. For exam ple, at one time we owned two Chev rolet Impalas. The more ancient of the two we dubbed The Old Impala, and the one of more recent vintage The New Impala, though the latter was only "new" by comparison. These names evolved as a shorthand for distinguishing between the cars. Of course, we name any pets who take up with us,.though lately we ap pear to be running out of names. At present, we have an all white tom cat, whose name is Kitty, and a ter rier ofsome sort whose name is Mutt. Dr. Carson has written and taught extensively, spe cializing In American Intellectual history. He Is the author of several books, and currently Is working on the third of a five-volume text, A Basic History of the United States.

The way things are going, it would not surprise me that if we had a male child he would be named Boy. While we may be unusually defi cient in devising imaginative titles, my family is not much different from other people in its penchant for nam ing things. It is a trait common to the human race, and one which aids discourse greatly. By naming things we distinguish them from others, provide a convenient individual ref erence for them, and either recog nize or accord individuality to them. The more precisely we identify them with names the more accurate is our discussion about them, assuming that accuracy is our aim. This last is especially the case when it comes to such things as patterns of action, trends, developments, and other so141 142 THE FREEMAN March cial phenomena. These tend to be somewhat amorphous quite often, and naming is a part of the process of getting a handle on them.

Now to the subject at hand. Ours is a credit expansion economy. In deed, credit expansion may be the feature which distinguishes it best from others and is in many ways the most crucial aspect of our economy. A credit expansion economy is one tha t is geared to and more or less de pendent upon continual (if not con tinuous) credit expansion. That is not to deny the applicability of such terms as interventionist economy, welfare state, a managed economy, and the like, to describe our present hodgepodge economic system. The Moving Force But I am not looking for a new term or phrase to describe the whole ve hicle, so to speak. Rather, I am trying to get a handle on the mainsail, the oars, the propeller, the motor, or the motive power that is peculiar to our economy. Not, mind you, what moves people to produce or trade-these are market phenomena, not peculiar to any contemporary economy-nor what moves government to inter vene, but rather the key or central mechanism of the intervention. I be lieve that an apt name for it is credit expansion, and that the use of the name may help to bring some thing~ into focus more clearly than we can without it.

It may be objected that what I am here calling credit expansion has al ready been clearly identified and has a name. It is none other than infla tion, and an economy geared to it could be called an inflationary econ omy. That might be so, if certain things were accepted. If it were com monly accepted and generally agreed that inflation means increasing the money supply (including credit expansion) the terms might be made to serve the descriptive purpose I have in mind. However, that is by no means the case. When President Reagan declares that his administration has brought inflation under control, he is clearly referring to price increases, not to monetary or credit expansion. News casters and almost all public com mentators use the word in that meaning, as do most people in con versation. Even those who are aware that monetary increases are the cause of the general price rises are inclined to think ofthem as the cause of price increases rather than infla tion. Trying to use the word in its original signification is somewhat like spitting into a contrary gale force wind. It doesn't get very far.

But even if the term inflation had not been so widely appropriated for referring to price increases, I think it would be useful -to refer to our economy as a credit expansion econ omy. However it is employed, infla tion is a generic term, and histori1985 A CREDIT EXPANSION ECONOMY 143 ans, at least, need terms to refer to particular cases. It is highly useful, for example, to name each particular war, for instance World War I, al though generically.it was clearly a war. All credit expansions are prob ably inflationary (whatever the word is taken to mean), but not all infla tions have been achieved by credit expansions. In any case, we need a name for the central operative feature by which government attempts to exert con trol over and spur our economy. My nominee is credit expansion. There can be no reasonable doubt that we have had, and have, an ongoing credit expansion in the United States. The impact of the credit ex pansion, and its ongoing character, can be seen most clearly in the rise of the national debt since the early 1930s. At the end of the fiscal year 1930 the national debt was slightly under $16.2 billion. By 1940 it had risen to nearly $43 billion; by 1950 to over $256 billion; by 1960 to over $284 billion; by 1965 to just under $314 billion; by 1970 to over $370 billion; by 1975 to over $533 billion; and by 1979 to over $826.5 billion.

Between 1979-1984, the national debt has approximately doubled, and in recent action Congress raised the debt ceiling just above $1.8 trillion. If this continually mounting debt were plotted on a graph, it would provide about as clear a picture as we could get of what is perhaps the most important dimension of the on going credit expansion. Obviously, if there is debt, there must be credit which has been ex tended in equal amount from some source or sources. And if the debt has continually mounted over a period of more than fifty years, there must have been a credit expansion which made it possible. In fact, that has been the case. The means did not ex ist in 1930 from all available sources to provide $1.7 trillion, say, in credit to the United States. Nor have the liquid resources been adequate to provide the credit increase from $16 billion to $1.7 trillion. The major portion ofthe increase has come from credit expansion. To put it another way, the major portion of the debt in crease did not result from borrowing from savings; it arose instead from the expansion of credit, per se.

Monetizing Debt The credit expansion, per se, takes place by monetizing debt. Monetiz ing debt can be visualized concretely in this way. A borrower executes a note for a certain amount of money which he proffers to a creditor. The creditor runs offthe amount of paper money desired on a printing press and gives it to his debtor. Thus, a debt would have been monetized. Credit would have been expanded by increasing the supply of currency. The trouble with this simple illus tration is that it is misleading. It 144 THE FREEMAN March equates the increase of the supply of currency with credit expansion. Whereas, in our system, the increas ing of the supply of currency, Le., Federal Reserve notes, is an adjunct only to credit expansion, not the thing itself. The total of currency in circulation is to the total credit as cash flow is to the total assets of a corporation, say. Indeed, credit ex pansion is much more nearly an in crease above the amount of currency in circulation than it is any increase in the currency. The increase in cur rency is always only a small portion of the total of the credit expansion.

In our system, it is usually that amount reckoned to be sufficient for cash holdings and transactions. What I am here calling credit ex pansion usually occurs upon a basis of a fraction of reserves of savings against the total of the amount of credit. Credit can be expanded either by increasing the reserves of savings or reducing the fractional amount required against credit extended. From one point of view, then, the credit expansion (that portion of credit extension beyond the actual savings) is created out of thin air. In effect, however, the credit expansion is achieved by debasing the cur rency. In practice, as the credit is ex panded, each unit of our savings is reduced in the amount it will buy to give the created credit its buying power. Hence, credit expansion is the other side of the coin, so to speak, of the debasement of our currency and its declining purchasing power. The expansion of credit is done by banks in the United States. Indeed, banks, or bank-like institutions, have exclusive franchises to expand credit by fractional. reserve proce dures. Although commercial banks, i.e., banks of deposit, are central to this undertaking, an. assortment of other banks, public and private, play some role in it. The lynchpin of the credit expansion system is the Fed eral Reserve system, whose active arms are the regional Federal Re serve banks. These banks can ex pand credit in a variety of ways: by rediscounting the notes held by member banks, thus increasing their reserves; by raising or lowering the reserve requirements of member banks; and by buying government securities. Federal Reserve notes are our paper money now, and they can undergird credit expansion by in creasing the currency supply.

A Spending Spree This credit expansion system pro vides the life blood of the American economy today. It has made credit expansion the key ingredient to such prosperity as we can expect to have. Credit expansion not only fuels an increasing proportion of government spending but also much of private spending as well. While the national debt best exemplifies the vast credit expansion that has taken place, 1985 A CREDIT EXPANSION ECONOMY 145 credit expansion is entailed in public and private debts, as well as foreign loans and support by the United States of international lending in stitutions. (Private debts differ sig nificantly from public, in that pri vate indebtedness fluctuates, and individuals and organizations ac tually retire portions or all of their debts from time to time. Thus, pri vate debts are not dependent on an ongoing increasing credit expansion to the same extent as the govern ment debt is.) Credit expansion pro vides the means for the purchase of a large portion of durable goods in the country, fosters the concentra tion of wealth to provide the capital for industrial expansion, and spurs demand through government redis tribution programs.

But to see most fully that the American economy has become a credit expansion economy, it is nec essary both to consider the role of money in the economy and the im pact of credit expansion on the money. Money plays, or has played., three fairly distinct roles in society. It is, first and foremost, the medium of exchange. That is, it is ordinarily that through which exchanges of goods for goods are effected. Second, money is that in which the prices of goods are expressed. (This has some times been described as the "stan dard of value," but since this is somewhat more controversial as a form ulation, I will say only comparative valuations get expressed in the market as prices.) Third, money has historically been used for saving, or, in the conventional phrase, for the storage of wealth. A Money Economy Ours is basically a money econ omy. That is, our economy is based on exchanges of goods for goods and services (or goods)for services. As in dividuals and families we ordinarily produce only a few, if any, of the nu merous goods that we use. Instead, we usually specialize in producing some goodfor the market and in turn buy in the market the goods that we want. The medium through which we effect the exchanges is money.

Hence, ours is predominantly a money economy. Today, however, 'to say that we have a money economy translates correctly as a credit expansion econ omy. Our currency today is not money in any but a residual sense of the word. It is the paper residue of a long term credit expansion which has turned our money into credit. Thus, when we make exchanges, we exchange our goods for credit and ex change credit for goods. I am not re ferring simply to the widespread use of credit cards and checks in trans actions. They are excellent symbols of what has happened, but if every transaction was made in cash the above statement would still hold. Our currency is no longer backed by 146 THE FREEMAN March anything; it consists of bills of credit, to use a phrase from earlier times. This may be made clearer by de scribing how the transformation took place. Early Days of the New Deal The first major steps toward de monetizing United States currency occurred in the early days and months of the New Deal (1933).Prior to that time, the main currency had been redeemable in gold. The gov ernment called in all gold and all currency redeemable in gold. These were paid for with Federal Reserve notes, which thereafter became the general currency in this country.

These notes were forced into circu lation by making them legal tender, invalidating all contracts calling for payment in gold, and prohibiting ownership or transactions in gold ex cept for those especially licensed to do so. Even so, the currency was not completely demonetized in 1933 and the immediately ensuing years. The Federal Reserve banks were still re quired by law to hold gold reserves in some sort of relationship to their issues of notes. Moreover, the gov ernment put itself in position to de fend the dollar abroad in gold, when it became necessary to do so. Ac tually, it was not necessary for quite a while. The government raised the price it would pay for gold from $20 to $35 per ounce (devaluing the dol lar technically), and in the ensuing years much of the gold in the world was drawn into the United States. The dollar had been only partially demonetized. In a roundabout way it was still being partially backed by gold. It had some silver backing as well. The subsidiary coins, several of them, had significant silver content.

Also, the government issued $1 sil ver certificates which could be re deemed in silver. No doubt about it, the currency had been debased, and the situation would Worsen in the ensuing decades, but it was still in some degree monetarily backed. Moreover, control over the money had shifted from the people to the government. However, with the ongoing credit expansion and the supporting in crease of the currency, the monetary base of the currency could not be maintained. In the late 1960s and early 1970s, the government ceased to support the dollar at any fixed ra tio of precious metals, both at home and abroad. The subsidiary silver coinage was replaced with a base metal alloy-cupra-nickel. The gov ernment called in the silver certifi cates by fixing a date after which it would not redeem them in silver. This was followed by refusal to de fend the dollar abroad at any fixed ratio to gold. Not even the residue of backing in gold or silver remained after 1971.

The United States had fullfledged fiat money, Le., money by govern1985 A CREDIT EXPANSION ECONOMY 147 ment decree, money because govern ment by its tender laws proclaimed Federal Reserve notes to be money. While the phrase does aptly describe the relation of government power to the currency, it is doubtful that this paper currency should, be dignified by the name of money. The only base on which it is issued is credit. It is basically credit extended to the gov ernment in return for debt instru ments, Le., government securities. Thus, the older phrase, bills of credit, much more precisely describes Fed eral Reserve notes. These notes do serve some money like functions; they are in that sense as-if money, if you will. They can be used as if they were money. Thus, Federal Reserve notes serve in a fashion as a medium ofexchange. We exchange goods for them, and take them in exchange for our goods, or at least to the casual observer, that is what we appear to be doing. That is more appearance than reality, however. What we actually do is give credit for payment to those who give us the notes in return for some good, or receive credit for payment from those who have sold us some good.

This character of the transaction is borne out by the language on Federal Reserve notes: to wit, "This note is legal tender for all debts, public and private." Granted, one of the func tions of money is to extinguish debt; it is an after-the-fact function of a medium of exchange. Indeed, it attributes much more to a medium of exchange than the market ever would. It is a legal concept, not a market concept. In the market, the creditor and debtor may fix by agree ment what amount of goods will sat isfy the debt. Any legal good or ser vice may be specified. By contrast, Federal Reserve notes are legal ten der for all debts. Be all that as it may, Federal Reserve notes do serve as a medium of exchange for extinguish ing debt. Federal Reserve Notes In this sense, Federal Reserve notes are a simulacrum ofa medium of exchange, bearing a faint or re sidual resemblance to a medium. They offer credit only in exchange for goods, not a quid pro quo. That in itself might not matter, but they are not promises to pay in any spe cific amounts ofany good. Hence, the person who accepts them does so in the hope only that he can trade them for some good that will provide him his quid. Of course, if he is going to extinguish a debt with the Federal Reserve notes he receives, which is more than likely in a credit economy such as ours, he does get a known quantity. Otherwise, he has ac cepted a raffle ticket, so to speak, in exchange for his goods. It will bring only what it will bring, if anything, when it is offered in the market for goods. If it be objected that such is the case, too, with goods, the answer 148 THE FREEMAN March is, yes, but they are goods already and do not need to be exchanged for something to have that status; whereas, paper currency-Federal Reserve notes-is not a good. It is only credit.

But if our bills of credit are unsat isfactory in their. prime function as a medium of exchange, they are even less so in performing the other func tions of money. The second function of money, as I said, is to serve as that in terms of which prices are ex pressed, or relative valuations of goods are made. Our Federal Re serve notes do that job very poorly and often produce confusion rather than clear signals in the economy. Prices of goods fluctuate in any case. Normally, however, the fluctuations of prices indicate changes in supply or demand or both (at different rates) of particular goods. Thus, a rise in price of a good may signal to producers the desirability of increasing their production. On the other hand, a drop in price may signal declining demand for a par ticular good. When the currency con sists of bills of credit in an ongoing credit expansion, rises in prices may signal nothing more than another expansion of credit. Relative valua tions may be more than a little con fused as well. While prices may be rising in general, they do not do so in lockstep fashion but rather within the exigencies of particular busi nesses as the effects of the expansion are felt there. Prices tend to become ephemeral, continually changing, usually upward, with no readily dis cernible distinctions among the things impelling them on their course.

A Store of Wealth? In regard to the third function of money-as a storage of wealth-bills of credit tend to be much more nearly anti-money devices than they do money. In an ongoing credit expan sion such as ours, the currency is al most continually depreciating. As the credit expands, any given unit of the currency tends to buy less and less. In consequence, storing it is somewhat like storing a perishable commodity. It must be used imme diately after it is obtained, or it will become progressively worth less and less. A dollar earned in 1970, say, and simply saved without interest, would have shrunk in purchasing power to about 30 cents by 1984. And that does not take into account any appreciation that might have taken place in a stable currency as the re sult of efficiencies in production. In sum, then, it is highly doubtful that our Federal Reserve notes qual ify as money. To call them fiat money is almost equally doubtful, for the phrase suggests that government can create money by fiat, when in fact it has only created bills of credit.

These bills of credit are to money as cupra-nickel is to silver. To call.them 1985 A CREDIT EXPANSION ECONOMY 149 money only serves to hide from us the full function of a commodity money. It obscures, too, the working of the process by which our currency becomes worth less and less as it sinks to its true level, which is worthless. Worst of all, by calling Federal Reserve notes money, we hide from ourselves the fact that we do not have any money. We have credit instead, and that credit rests on the one hand on our desiccated savings in dollars and on the other on our mounting national debt. We have a potential avalanche of paper which is ever increasing as credit is expanded and debt increases. This precarious condition has been arrived at by taking away from the American people control over their own economic affairs. Government has usurped that control over their affairs which people had when they had a currency based on precious metals. It has taken their money from the people and given them in its place bills of credit. The currency has been thoroughly institutional ized by making virtually all banking and credit institutions the instru ments both for putting the! currency into circulation and for credit expan sion. Since much of this;' has come about gradually and has been going on for the better part of a lifetime, it is difficult for most of us to conceive how things could be different from what they are, or begin to grasp the full advantages of having actual money in our possession. We have been thoroughly acclimated to play money, as it were, or, as children would say, "play like" money.

Precious Metals Lend Stability Money backed by precious metals can be saved, and, even if it is not loaned out for interest, the amount it may buy may increase with pro ductivity. Since the amount of it does not increase at will, prices which are measured in it tend to remain fairly stable except for shifts in supply and demand. Thus, changes in prices tend to be good market signals. Wages may increase in the amount of goods they will buy even though the monetary amount of them may remain the same. Raises in wages or increases in income indicate real in creases rather than futile attempts to catch up with the depreciation of the currency. Transactions can be completed on a quid pro quo basis, although one party pays in money, for when the currency is either pre cious metals or redeemable in them, goods have been traded for goods, even though the money may be used later to purchase other goods.

Moreover, unless some fractional reserve system is used to increase the currency, there need be no busi ness cycles occasioned by expansions and contractions of the currency. And, government indebtedness can be checked by the necessity of ap pealing to those private persons or 150 THE FREEMAN March groups willing to make loans. The debt could not grow and grow, for none could be found to make the loans to sustain it. Both public and private would have to live ulti mately on current income plus sav ings, not upon credit expansion. As matters stand, however, gov ernment power has been vastly aug mented by its arbitrary control over the currency. It can increase the cur rency at will, and thus ultimately destroy what we have by way of a medium of exchange. It can expand credit more or less at will, and with that power often exercise decisive control over the economy. Attempts of government to manage the econ omy are centered in this power to ex pand or contract credit and to in crease the currency. It can often spur economic growth by expanding credit, or slow it down by contracting credit. More precisely, it can take ac tions aimed at doing these things and create havoc within the economy.

How Monetary Manipulations Affect Individuals Economy is an abstraction, of course, and the actual impact of these manipulations falls upon peo ple. Individuals, families, and groups are caught in the matrix ofthese ma nipulations. Their freedom and in dependence is curtailed and circum scribed by the credit activities of government. Since their currency continually deteriorates, they turn to all sorts of expedients to minimize the impact and to somehow guard what they have gained from dissi pating. They buy common stocks, in vest in land, purchase jewelry and precious stones, seek the highest in terest rates they can find on their savings-ever questing for some thing that will appreciate to offset the currency depreciation. The credit expansions and con tractions produce wave-like altera tions in industrial activity, tempo rary expansions alternating with contractions with their shutdowns and bankruptcies. Farmers shift from crop to crop in desperate efforts to read correctly the confused sig nals of distorted markets. But of course there are hundreds of inter ventions in the market, in addition to credit and currency expansion. All these interventions confine eco nomic activity and channel activi ties within the framework of what freedom remains.

The master intervention, however, the intervention by which govern ment has planted its power at the heart of all productive and exchange activity, is control over the supply of credit, upon which we must depend for facilitating exchanges in the ab sence of commodity money. Thus, we have essentially a credit expansion economy. There are a host of infelicities, in equities, and dangers in a credit ex1985 A CREDIT EXPANSION ECONOMY 151 pansion economy. Many of them have been detailed by writers who have explored them, usually in con nection with inflation. But I will conclude this discussion with some remarks about what I suppose is the greatest economic danger. I have suggested already that this vast credit expansion can be thought of as a mountain of paper precariously perched so that it can become an av alanche. Our system of credit expan sion built upon fractional reserves and a fraction of currency to the to tal of the debt is highly vulnerable to a liquidity crisis. To put it bluntly, if a large number of people de manded cash for their claims at the same time, the mountain of credit would come tumbling down.

FDIC Offers No Safeguard Against LiqUidity Crisis The United States government has erected safeguards against such a liquidity crisis, the most notable of which is the Federal Deposit Insur ance Corporation. The great diffi culty with this, however, is that in this case the very safeguard could become an instrument of destruc tion. If large numbers of people de manded cash from credit institu tions, the most immediate result would be a great credit contraction as the reserves against credit were withdrawn. If the FDIC intervened, as it almost certainly would, both to make good on its insurance promises and in a desperate effort to forestall some sort of crash and depression, it would quickly exhaust its own re serves. If the government came to the rescue by printing large quan tities of paper money, it could well set off hyper-or runaway-infla tion. In short, our intricate and vast credit expansion has us poised be tween a debilitating credit contrac tion and runaway inflation. The great expansion of branch banking in many states in recent years, the portending interstate banking, and huge loans, both foreign and domes tic, increase the likelihood of the kind of bank failures which could trigger a liquidity crisis.

The above is not a prediction; it is only a scenario of what may be the most probable course to a collapse. How and when the collapse will come, or what particular conse quences will follow, we cannot know in advance. That it will collapse is approximately as certain as that a balloon will eventually burst if more and more air is blown into it. If, in stead of an indirect credit expansion, we had inflated more directly by is suing huge quantities of unbacked paper currency, a runaway inflation would long since have wiped it all out. By resorting to an intricate, complex, and sophisticated credit ex pansion, supported by a fractional increase of the actual currency, the whole process has been strung out almost indefinitely. But indefinitely 152 THE FREEMAN does not mean forever; it only means that we do not know when the string will run out. Whatever the future holds, it is high time we face squarely what has been going on with as precise lan guage as can be had. It needs to be very clear that the villain ofthe piece is not rising prices. We need to un derstand, too, that there is more in volved than increases of the cur rency; that is a necessary adjunct to it but not the whole thing. The vil lain of the piece is an ongoing credit expansion which has produced a credit expansion economy. When we think of it that way we can see more clearly that we have substituted credit for money, and built a Frank enstein credit economy which holds us in its grip. Once we see that clearly, we may be able to see that Reprints. ..

the way to loosen that grip and re gain control of our own financial af fairs is to restore commodity money, reduce our debts, and bring credit under control. One of the lesser credit organiza tions sponsored by the United States government is entitled the Produc tion Credit Association. I think the United States government has be come a Credit Production Associa tion. We need to get the government out of the business of credit produc tion, allow the economy to be de voted to its appointed task of pro ducing goods in terms of supply and demand, not pushed this way and that by credit expansion, and allow prices to signal the market condi tions. To call what is going on credit expansion helps me to see that more clearly. ~d A Page on Freedom Each of these brief messages is a handy way to share with friends, teachers, editors, clergymen, employees and others a thought-starter on liberty. It also serves to introduce the reader to our work at FEE.

See page 131 for this month's Page on Freedom. (Copies of previous messages are also available; specify title When ordering.) Small quan tities, no charge; 100 or more, 5 cents each. Or, feel free to reprint the message in your own format if you'd prefer. We hope you'll enjoy this feature! Order from: FOUNDATION FOR ECONOMIC EDUCATION, INC. IRVINGTON-ON-HUDSON, NEW YORK 10533 Robert Awenius The Forgotten Man IN the last ten years of the 19th cen- . tury and the first ten years of the present the American republic was thrust into a great drama of Amer ican Destiny carried to the far reaches of the world. America breached the trade barriers of Japan and China, and after winning the Spanish-American War, wrenched Cuba and the Philippines from Spain. The Philippines became an American colony and the idea of American Destiny moved strongly across the Pacific Ocean. We wit nessed American imperialism; we were told it was our duty to carry the American concept to the world.

We strongly backed freedom for the Philippines, placing at one time as many as seventy thousand troops Mr. Awenius is a retired attorney and freelance writer in Tulsa, Oklahoma. there and later sending ten thou sand young American teachers and experts on sanitation, nutrition, tropical medicine, and agriculture to improve living conditions and wipe out disease. This Philippine adven ture was a great pivot-point in American history, and as was stated by Richard O'Connor in his book Pa cific Destiny: It signaled our determination to gain and hold supremacy in the Pacific and over as much of Asia as our military power could sustain. The consequences of that move have involved us in three wars so far and promise an unending, possibly unavailing conflict on the Asian littoral. 1 Not all persons approved this stated American notion of world power. One great voice in opposition was a crusty conservative Yale Uni153 154 THE FREEMAN March versity professor named William Graham Sumner, who based his op position on humanist grounds. His voice was prophetic because what he said also relates to the title piece of this article. Sumner's reasoning is put this way: The Forgotten Man, to whom he re ferred continually in his essays, was not the slum-dweller but the person who paid his bills for what later sociologists would term the disadvantaged. The Forgotten Man of Sumner's canon was the one who "just when he wants to enjoy the fruits of his care, is told that it is his duty to take care of some of his negligent neigh bors, ... but the point now is, that if preaching and philosophizing can do any good in the premises, it is all wrong to preach to the Forgotten Man that it is his duty to go and remedy other people's ne glect. It is not his duty. It is a harsh and unjust burden which is laid upon him, and it is only the more unjust because no one thinks of him when laying the bur den so that it falls on him. The exhor tations ought to be expended on the negligent-that they take care of themselves."2 Sumner was saying that the mil lions of dollars of American wealth and resources spent on military and civil affairs at home and abroad were paid by the Forgotten Man, and that this burden was imposed upon him as a duty. His thesis went beyond ap plication to the bellicose events of his era, since he meant his general the ory to be applied broadly to all acts of the state.

So, likewise in the field of political science and sociology, the Forgotten Man is the common man who after working hard and paying his bills and taxes is told by the liberal es tablishment (oftentimes his govern ment) that it is his "further" duty to become responsible for all the unfor tunate persons, institutions, or other entities who, through negligence on their part or for other reasons, look to the government for their support. Here, for example, is the teenage girl who becomes pregnant outside of wedlock. In the view of many, if she has no funds for an abortion or for childbirth, these expenses must be paid by the state. And, further, when she goes on welfare she will re ceive Aid to Dependent Children (ADC) until the child's eighteenth birthday. All of this is to be paid by the state from taxes of the Forgot ten Man. The Forgotten Man is told, also, that his taxes are needed to provide housing for families whose bread winner fails to provide.

The farmer who produces more grain than the market will absorb at support prices is told by his govern ment that his grain can be stored as collateral for a commodity loan, with the loan proceeds coming from the Federal treasury, and supported by the Forgotten Man's taxes. The arts and humanities groups (museums, symphony orchestras, theaters, painters, sculptors, writ1985 THE FORGOTTEN MAN 155 ers, etc.) claim they are entitled to receive-and do receive-millions of dollars of government aid. And all this comes from taxes paid by our Forgotten Man. He is told that certain categories of citizens-and even non-citizens are entitled to have legal counsel furnished by the government, and this expense is to be borne by him through his taxes. He is told that certain classes of citizens are entitled to food stamps, and he must pay for this through his taxes. Our Forgotten Man is told that when a large national bank in a great city makes ill-advised energy loans that jeopardize the bank's cap ital structure, the federal govern ment should infuse billions of his tax dollars into that bank in order to save it.

In short, he is advised by liberal spokesmen that all the poor and un fortunate of the land should be taken care of by the government, and that he (the Forgotten Man) should pay for all this. Never mind whether many of the poor and unfortunate became so through their own negligence. The Forgotten Man is told that be sides managing his own life he also should manage others' lives. In that regard the late Leonard E. Read stated, "Managing one's own life is complex enough; managing the lives of others is impossible."3 And to support all this govern ment spending again the Forgotten Man is called upon: He is the Forgotten Man. If we go to find him, we shall find him hard at work tilling the soil to get out of it the fund for all the jobbery, the object of all the plun der, the cost of all the economic quackery, and the pay of all the politicians and statesmen who have sacrificed his inter ests to his enemies. 4 Human Motivation The Forgotten Man of whom we speak is in fact a very uncommon man in view of the burden cast upon him. He is a man of utmost integrity, and he has been so since civil social experience began. He has searched for certain ends and purposes in life and sought to reach them. He does not welcome all the burden that so many well-meaning people impose on him, since he places first in all his thoughts the provision for his own family's welfare. The history of man kind shows this strong incentive is continually reduced by the state, as well stated by Russell Kirk in his book on Conservatism: A ... motive always has been the de sire to provide for the welfare of one's own family and heirs; but the assumption by the state of the functions of education, economic management, and responsibil ity even for foods-supply and housing, has diminished the responsibility of the in dividual here, while taxation has hacked at the very foundation of the idea of bequest. 5 156 THE FREEMAN March Today, as at the turn of the century in Sumner's time, the Forgotten Man is paying the public cost of those who do not pay their share. In the For gotten Man we behold the principle of dualism present in every person who pays his expenses and also those of the state. "He will ... accept heavy taxation if he feels it neces sary for the maintenance of Society, yet make every legitimate effort to keep his own contribution as low as possible."6 This is the same Forgotten Man who durIng the war years of the na tion does all of the fighting and most of the dying. In many of these wars he is told he is fighting for democ racy, when in many cases the coun tries he is trying to save do not know the meaning of democracy.

When we are discussing the rights of our Forgotten Man, we are deal ing in the field of civil liberty. In this respect William Graham Sumner ably stated it this way: The notion of civil liberty which we have inherited is that of a status created for the individual by laws and institu tions, the effect of which is that each man is guaranteed the use of all his own pow ers exclusively for his own welfare.7 All of history and philosophy tells us that the free citizen in a democ racy should be guaranteed the ex elusive enjoyment of all that he pro duces through work. It certainly is not the function of the state to make men happy; they must do it in their own way, and at their own risk. The Oppressive State For the Forgotten Man to be told by his own government or by other spokesmen that he has a duty to sup port others who do not support them selves, is to accept dictation by a privileged class that is asserting it self to create an immoral political system. This imposes upon his earn ings an ill-defined duty to make oth ers happy. Our Forgotten Man rebels at this duty others cast upon him be cause he wants the state to be kept within reasonable bounds of power and function. He full well knows that the state has a tendency to become oppressive.

The social doctors focus their at tention on a group of people-the poor, minorities, workers-appeal ing to sympathy and imagination, and devising programs to care for them. They (the social doctors) set in force motion and forces that react throughout the entire fabric of so ciety, and in the furtherance of their grandiose plans ignore the effect upon other members of society. They have developed the myth of a gov ernment competent to solve prob lems. They forget "that the State cannot get a cent for any man with out taking it from some other man, and this latter must be a man who has produced and saved it. This is the Forgotten Man."8 1985 THE FORGOTTEN MAN 157 Their programs thus shift capital from one group of men to another. The men from whom the capital is taken, individually, are the Forgot ten Men. This transfer takes from one and gives to another, who per forms no productive effort to earn the property that comes his way.

The property transferred-usually money-is diverted from productive use. The person who produces this property is our Forgotten Man. This largess brings to mind the illustra tion of a man who gives a hungry man a fish. The better plan for the small philanthropist to follow here would be to give the hungry man a fishing pole and teach him how to fish. When he is hungry again, he will fish for his meal and not ask for a handout. Sumner phrases the sit uation in this manner: There is an almost invincible prejudice that a man who gives a dollar to a beggar is generous and kind-hearted, but that a man who refuses the beggar and puts the dollar in a savings-bank is stingy and mean. The former is putting capital where it is very sure to be wasted. 9 In the above example the man who placed the dollar in a bank will start a process of the dollar going into the labor market as a demand for pro ductive services. The real party in interest is the man who performs the productive service. He is the Forgot ten Man. He is the one who the social doctors never think of when they lay their plans.

The way to keep the state within bounds is to restore to the individual his sense of self-reliance and the con trol of his private property and right to inheritance: The conservative is no anarchist; he knows that the just state, kept within reasonable bounds of power and function, is a force for our common betterment; but today the danger is that the state shall become all, quite as oppressive as the danger, in other times, that the state might waste away to. nothing. 10 The state certainly has a proper in terest in expanding the opportuni ties for its free citizens to pursue their happiness. In this free demo cratic society, of which we speak, the only duty a free man has to other men of his same rank and standing is to render the others respect, cour tesy, and good-will; here his duty ends. In other words, what we are saying is that men who have not done their duty to others in the world never can be equal to those who have done their duty tolerably well. The class distinction which we see in a democratic society results from the different degrees of success whereby men have utilized their chances from opportunities placed before them.

Sumner, again, says it well: "In stead of endeavoring to redistribute the acquisitions which have been made between the existing classes, our aim should be to increase, mul tiply, and extend the chances."ll 158 THE FREEMAN If, as a nation, we try to satisfy every demand put forth by the social .planners who endeavor to help the "poor," we'll learn that there is no way to meet such a ravenous appe tite. We might just as well try to bail out the Atlantic Ocean with a sieve. At every step in the process of gov ernment, we should examine the ef fect on the Forgotten Man, since on his economic and political health de pends the safety and security of our nation. G!J -FOOTNOTESlRichard O'Connor, Pacific Destiny (Little Brown & Co., Boston-Toronto, 1969), p. 258. Leonard E. Read 2Ibid. 3Leonard E. Read, Meditations on Freedom (The Foundation for Economic Education, Inc., Irvington-on-Hudson, New York, Feb. 1972), p.

22. 4William Graham Sumner, What Social Classes Owe to Each Other (The Caxton Print ers, Ltd., Caldwell, Idaho, 1978, Eighth Caxton Printing, 1978), pp. 125-126. 5Russell Kirk, A Program for Conservatives (Henry Regnery Co., Chicago, 1954), pp. 106 107. 8Karl Mannheim, Freedom, Power, and Dem ocraticPlanning (Oxford University Press, New York, 1950), p. 282. 7Sumner, op. cit., p. 30. 8Sumner,op. cit., p. 108. 9Sumner, op. cit., p. 109. lOKirk, op. cit., p. 120. l1Sumner, op. cit., pp. 144-145. IDEAS ON LIBERTY THE IDEA that each person has an inherent and inalienable right to life becomes meaningless when a person loses the authority for his own de cisions and must act according to someone else's decisions. Unless a per son holds the power of self-control, his life is not truly his own. Before a life can be valued for its own sake-and not just as a means to someone else's goal-that life must have its own power of choosing, its own qual ity, its own dignity. Without such a basis for love, respect, and friendship, the needy person is soon regarded as a puppet or a millstone around one's neck. Unless it is voluntary, even a mother's love in caring for an invalid child cannot exist. Aged persons and others who have come to depend for their survival upon the state's power of confiscation become merely numbers in the confused statistics of political bureaus. Statistics and bureaus have the capacity for neither love nor charity.

We should realize that the end pre-exists in the means. An evil means inevitably leads to an evil result. Related to the thesis under discussion, evil, not good, must come to persons who attempt to benefit from the confiscated property of other persons.

THERE is a disturbing thing about foreign affairs: they are foreign. They do not conform to the world we admire, which is our own. Foreign matters are viewed with suspicion, yea, even dislike and contempt. Pro tectionism, which proposes to use the authority of government and its in struments of coercion to restrict trade with foreigners, builds on this psychological foundation. In the minds of many people the ancient association of foreigner with enemy still lingers. Foreigners are blamed for all kinds of evil, real and imagined. They are censured for being inscrutable and unpredictable in their trade relations, engaging in ruthless competition, gouging their trade partners through prices too high or too low, exploiting their Dr. Hans Sennholz heads the Department of Econom ics at Grove City College in Pennsylvania. He is a noted writer and lecturer on economic, political and monetary affairs.

Hans F. Sennholz Protectionism and Unemployment workers through sweatshop wages and conditions. But above all, trade with foreigners is believed to be most disruptive to commerce and indus try, ever changing in composition and structure, requiring painful readjustment. Protectionists offer instant gains through removal of foreign compe tition and protection from the pains of readjustment. Appealing to people who do not care to change and others who uphold domestic changes, but are set at odds with foreign changes, they promise peace and profit through legislation, regulation and the use of police power. But despite all the opposition to change, the world is a scene of changes. Today is not yesterday. We ourselves change as do our thoughts and works. Change may be painful, yet ever needful. In our economic lives we may face important changes that require our 159 160 THE FREEMAN March attention and adjustment. The tastes, habits, choices and prefer ences of consumers may change, which may dictate production ad justments. The worldwide pattern of division of labor may change, which affects the structure of trade and commerce. The costs of produc tion may change either here or abroad, which may create competi tive advantages or disadvantages.

There may be a never-ending se quence of changes in labor costs, cap ital costs, material costs, transpor tation costs, government costs, and many other costs. Man faces changes in interna tional trade and commerce to which he must adjust. After all, foreign trade is merely an extension of do mestic trade, which is a corollary from the principles of division of la bor. Cooperation and specialization bring the same kinds ofbenefits to all people regardless of race, religion or nationality. They make human la bor more productive through ex change rather than direct produc tion. If trade between the people in California, Texas, Florida and Maine is advantageous, it follows that free trade between people in Guatemala and Mexico, or Canada and Costa Rica may also be advantageous.! Protectionism, Old and New Most of the arguments in favor of restriction stem from the distant past. Many are crudely Mercantilistic; they favor exports and oppose imports. Mercantilists are con cerned about an unfavorable bal ance of trade which, they believe, in flicts loss and waste. In the past they restricted imports and promoted ex ports in order to bring money into the country. The Neo-Mercantilists of our time favor exports for bring ing in jobs and profits, and oppose imports for taking them out.

Mercantilistic notions, although discarded by most economists, live on regardless of the criticism that is levied against them. Businessmen remember them when they are en countering difficulties and calling on government, pleading protection from foreign competitors. The agents of labor retreat to the armory of Mer cantilism when they are enmeshed in depression and unemployment. And government officials may plead the case for Mercantilism when they impose their regulations and con trols on foreign trade and commerce, or grant subsidies, set rates, or gather information to promote ex ports and limit imports. They all hold to the persistent belief that ex ports are especially beneficial and praiseworthy, and imports ipso facto harmful. The recrudescence of Mercantil ism dates back to the early part of this century, and came to a head dur ing the 1930s. Guided by a spirit of nationalism it sought national self sufficiency through restrictive tar1985 PROTECTIONISM AND UNEMPLOYMENT 161 iffs, import quotas, and exchange re strictions. It differed from the older Mercantilism in that it received strength and support from a philos ophy of militant nationalism and economic welfarism. It was associ ated with comprehensive central planning by powerful governments engaging in economic warfare and military struggle.

The Neo-Mercantilism of the 1970s and 1980s differs from the 1930s' version in two important respects: it is devoid of the blatant nationalism of the first half of the century and its beggar-my-neighbor attitude; but it is saturated with the notions and doctrines of full employment by gov ernment fiat. Mindful of interna tional sensibilities, it resorts to more subtle but equally deadly restric tions, to subsidies rather than tariffs and quotas. It does not· aim at eco nomic autarky for nationalistic ends, but at income and employment in fa vored industries. It does not spring from international confrontation, but from an inter-industry conflict that pits some industries against all others. In the American steel industry, for example, capital and labor together conspire to restrict imports in order to boost corporate earnings and la bor benefits. Embarassed by the low rates of production and the high rates of unemployment, they both call on government to restrain com petition in any shape or form. They both plead as ardently for minimum wage legislation, which is designed to handicap other industries, as they argue forcefully against the compe tition of foreigners. For labor unions especially, government protection is of crucial importance. After all, to win substantial boosts in wages and benefits and subsequently suffer from staggering unemployment is casting serious doubt on the ration ale of unionism.

Workers' Rights Movements in Europe and the U.S.A. The labor movement in the U.S. closely resembles the workers' rights movements in the European welfare states. They both expound the doc trine that workers have an inherent right to a job, in their particular in dustry, at their present location and at rates of pay that exceed the mar ket rates. To secure their right, gov ernment is expected to restrain for eign competition in any possible way and~ if needed, subsidize both labor and capital. 2 In this respect, protec tionism is a symptom of relatively weak national governments cater ing to powerful domestic interest groups, especially labor. Protectionism also draws strength and support from the Keynesian mandate that government is respon sible for full employment and that it must use its fiscal powers in a con tracyclical manner. Such use of pow ers for purposes of market interven162 THE FREEMAN March tion may necessitate protection from foreign competition. After all, Keynesian recipes are national rec ipes that differ from those for world markets and international division of labor.

When Keynesian efforts succeed in raising goods prices, domestic pro ducers suffer in competitiveness at home and abroad. Threatened by for eign competition, they may call for protection through import restric tions. When Keynesian efforts fail to achieve full employment the Keyne sian planners further express their faith in government intervention as they turn to protectionist measures. The failure of Keynesianism breeds protectionism. Many Keynesians are joining the workers' rights move ment and lending new luster to the promises of protection. 3 Old Notions in New Garb The labor movement and its Keynesian allies like to parade as champions of the less-developed countries. They are quick to dis burse foreign aid to any and all ap plicants and finance their schemes of government enterprise. But many immediately draw the line when jobs are "exported" for the benefit of for eigners. They are dead set against capital and labor mobility that per mits capital to move to less-devel oped countries and labor to more productive countries. 4 In all such matters they plead for restrictions that are said to bestow net benefits on society.

Man often errs through selfish ness. Economic restrictions always benefit some people at the expense of others, and inflict net losses on so ciety. Protectionists do not look be yond the range of direct involvement and dealing. American steel workers may see only their own wages and benefits which trade restrictions are meant to protect. They point at the market of goods and services cater ing to the steel industry in general and to steel workers in particular, and warn of dire consequences if these markets be permitted to de cline. They completely ignore all other consequences and ramifica tions of restrictions, and refuse to admit that any favor bestowed on the steel industry is a disfavor to all oth ers. Domestic trade is substituted for foreign trade, and domestic steel for foreign steel. The quantity of steel offered in exchange for other goods is reduced, which makes economic society universally poorer. The sell ers of food, clothing, housing, edu cation, and the like receive less steel in exchange for their goods and ser vices. They would have been better off if they had been permitted to trade with foreign steel makers.

The protection argument for full employment is similar to that for net benefits. To working people it seems self-evident that import restrictions add to the demand for labor, and that 1985 PROTECTIONISM AND UNEMPLOYMENT 163 steel and automobile quotas provide employment for steel and auto work ers. Such evidence, unfortunately, is rather shallow and deceptive; it fails to consider other effects that are bound to follow. Import restrictions are restraints imposed by politicians and enforced by the apparatus of coercion, the courts and police. They constitute the use of brute force against people who voluntarily and peacefully are engaged in interna tional exchange, in order to force them to act in a way they would not act if they were free. Methods of Restriction Are Widely Available The methods of restriction may vary greatly, from monetary exac tions to outright confiscation of pri vate property; they are highly effec tive in setting bounds to human action. When trade restrictions are imposed, the protected industry may temporarily enjoy special gains, which may cause it to expand and hire more labor, or retain more labor than it otherwise would. But this ex tra demand for labor, for instance, steel labor, is marred by a simulta neous decline in the demand for other labor, e.g., for food, clothing, housing. After all, the extra money spent on steel and steel products cannot be spent on other products, and the economic resources em ployed in the production of steel can not be employed in other production.

And the labor needed for the pro duction of steel is no longer avail able for the production of food, cloth ing, housing, and so on. At this point protectionists are quick to object that there is always unemployed labor and capital wait ing to be called provided govern ment lends a helping hand by re straining foreign competition. They point at mass unemployment in basic industries, such as steel, autos, mining, and transportation, and de mand immediate correction through protection. Unemployment undoubtedly is a great social evil that concerns us all. It is an economic phenomenon of loss and waste that harms not only the jobless but also their fellow workers who are forced to support them. In time it tends to turn into a political issue that breeds confrontation and conflict. To alleviate the evils of un employment becomes an important political task. But it also raises the basic question of the suitability of the policies that are to create em ployment. In particular, it poses the question: can tariff barriers and other trade restrictions raise the de mand for labor and alleviate the evils of unemployment?

Unemployment is a cost and wage phenomenon; foreign trade is ex change by individuals separated by political boundaries. The former is a manifestation of the law of price, which rests on the valuations by all 164 THE FREEMAN March members of society; the latter per tains to the scope of the division of labor which man is willing to prac tice. This scope does affect goods prices, including the price of labor. Improvements in the division of la bor generally raise labor productiv ity and wage rates; deterioration re duces them. When government imposes trade restrictions it reduces the marginal productivity of labor and thereby lowers wage rates. If, in this situation, workers should refuse to suffer wage cuts, they are invit ing mass unemployment. When seen in this light, trade barriers are ef fective instruments for causing unemployment. In many respects production re strictions and trade barriers are like natural obstacles that thwart hu man effort and impair man's pro ductivity. They both may increase the demand for specific labor. De struction of housing by war, flood, earthquake or fire increases the de mand for housing material and con struction labor. But it also reduces the demand for a myriad of other goods which the destruction victims now must forgo. Similarly, import restrictions on steel may boost the demand for domestic steel, but they also reduce the demand for other goods which the restriction victims, that is, consumers must forgo. Steel producers and their workers may benefit from the new barriers; but the producers and workers in all other industries are likely to. suffer losses.

Many workingmen welcome trade restrictions in the same way as they greet the breakdown and destruc tion of labor-saving tools and appli ances. They are aware of the demand for their particular kind of labor' and know how to increase it through pro tection and elimination of labor-sav ing tools. They apply the particular to the general and conc1ude that pro tection provides employment and de struction creates jobs. U nfortu nately, they fail to see that both, restriction and destruction, are bound to reduce the marginal pro ductivity of labor throughout the la bor market. If, in this situation, af fected workers should resist a prompt reduction of wage rates, which organized labor is likely to support with conviction and force, they face mass unemployment. After all, unemployment always visits that labor the cost of which exceeds its productivity. Trade Restrictions Offer Temporary Relief Trade restrictions may temporar ily create new employment oppor tunities for a protected industry while other industries are forced to contract. But even in the protected industry they do not provide long term employment, as the root causes of unemployment continue to be at work. The basic industries suffering 1985 PROTECTIONISM AND UNEMPLOYMENT 165 from stagnation and unemployment generally are unionized industries with wages and benefits far in excess of nonunion market compensation.

Labor unions enforce their rates through restriction of labor compe tition; the basic effect is unemploy ment. They apply their unrelenting pressures until they are enmeshed in depression and unemployment. To come to their rescue and grant them protection from foreign competition is to invite new restriction and more unemployment. In a profound study, M. Kreinin re cently demonstrated that labor com pensation in the American automo bile industry, in 1982, amounted to some 165 percent of that in all man ufactures. To become competitive with Japanese car makers, he con cluded, United Auto Workers' com pensation would have to fall by 24 percent, which would leave their compensation still 25 percent above the U.S. manufacturing average. Similarly, in iron and steel produc tion workers' wages and benefits amount to 189 percent of those in all manufactures. To restore competi tiveness with Japan they would have to fall by 39 percent, which would leave their compensation still 15 percent above the U.S. manufactur ing average. s But no such solution to the chronic unemployment in the steel and auto industries is under consideration. Instead, their spokes men are clamoring ever louder for protection from "unfair" foreign competition.

Trade barriers destroy more jobs than they create. And yet, they have retained their popularity because most workers are convinced that they safeguard wage rates from the competition of low-cost labor. With out trade barriers, many Americans believe, foreign products made by cheap labor would flood the markets and force American labor to suffer substantial wage cuts or face un employment. Free trade is said to be advantageous only between coun tries that have similar wage rates and similar standards of living, but thought to be harmful to people with high wages trading with people earning less. Americans and Cana dians can trade with each other be cause they are similar in income and living conditions; but they must not trade with Mexicans who engage in unfair pauper-labor competition and cause U.S. living conditions to fall. There are few arguments in favor of protection that are more popular and yet so specious and fallacious.

When carried to its logical conclu sion the wage-rate argument bars all trade across political boundaries as no two countries are identical in la bor productivity and income. U.S. wage rates are generally higher than Canadian rates, which would call for American government protection from low-cost labor competition in Canada. Labor conditions may differ 166 THE FREEMAN March from state to state, yea, from com munity to community. Wage rates in New York state are generally higher than in Maine and Mississippi, which would call for government in tervention in favor of labor in New York. Differences in Productivity and Income Lead to Trade In freedom, differences in labor productivity and income lead to ex changes of goods and services. As in dividual inequality brings forth man's division of labor so does his inequality in national productivity and output lead to international di vision of labor and goods exchanges.

Adam Smith already taught that it is advantageous for a country to specialize in the production of those goods in which it has a cost advan tage. David Ricardo added the law of comparative cost according to which it also is advantageous to a country to specialize in those items in which it has a comparative· advantage. To reap the advantages of an in ternational division of labor a coun try may concentrate on production with greatest comparative advan tage, importing even some items that can be produced at lower cost at home than abroad. 6 Improvements in international division of labor raise labor productivity and, wher ever institutional restrictions have created unemployment, may ac tually lift some labor over the threshold of employability and thereby create jobs. The competitive position of an in dustry may depend on the capital labor composition of the product. A labor-intensive product, such as a hand-embroidered tablecloth, may be manufactured most advanta geously in a low-wage country. A capital-intensive product requiring the application of large sums of cap ital may be manufactured most ef ficiently in the country with the largest per capita supply of capital and lowest interest rates. The man ufacturers of Hong Kong, where wage rates are rather low when com pared with U.S. standards, have a clear advantage in the production of hand-embroidery; U.S. manufactur ers who benefit from efficient capital markets and relatively low capital costs have a clear cost advantage in the manufacture of capital-intensive products, for instance, $50-million airplanes.

Trade advantages may change when factor costs change. Where capital is being formed and made available at ever lower interest cost, capital-intensive industries are likely to prosper and expand. Where society and its political institutions consume productive capital, the in dustries can be expected to contract and discharge labor. When Toyota may secure capital for moderniza tion and expansion at 7 percent while General Motors is forced to pay 1985 PROTECTIONISM AND UNEMPLOYMENT 167 To ABOLISH the market determination of wages-that is, the commodity character of labor-it would be necessary to destroy private enterprise and resort to socialism. Then the worker really would become a chattel. No longer would his wages depend upon his individual ability to make himself useful, as determined ultimately by the current state of industrial productivity, but upon the will of a political master, from whose decision there would be no appeal. No longer would he be free to choose his occupation, or even his place of residence; he would have to work at his assigned task, whatever and wherever it happened to be, at the bidding of the same political master.

The true "Magna Charta" of labor lies in the very fact that labor is "a commodity or article of commerce," not a pawn in a totalitarian game. From The Guaranty Survey, July 1956 14 percent in a depleted capital mar ket, it becomes rather obvious that Toyota will continue to expand and employ more labor while GM must be expected to contract and dismiss some labor. Many Factors Affect the Degree of Competition The costs of capital and labor are merely two of many factors that de termine the competitiveness of an industry. There are many other fac tors such as the methods of produc tion and the state of technology, transportation costs for materials and supplies and for products to their markets, government regulation, taxation, environmental costs and other institutional costs. A change of anyone, at home or abroad, may ma terially alter the competitive posi tion of an industry. The formation of capital per head of the population generally raises labor productivity and reduces unemployment; the con sumption of capital lowers labor pro ductivity and depresses wage rates.

Where labor resists the reduction and insists on remuneration that ex ceeds market rates, it invites mass unemployment. It is significant that governments generally do not protect industries with relatively low rates of produc tivity and wages, industries with a great deal of unskilled labor. In the U.S. these industries are forced to la bor under great difficulties created by minimum wage legislation. The U.S. government, under the influ ence of powerful labor interests, ap parently prefers foreign imports from low-wage countries such as Ko rea, Hong Kong, and Taiwan over domestic production in the South and especially Puerto Rico. But it is granting considerable protection to 168 THE FREEMAN March industries that are known to pay the highest wage rates in the world. The U.S. government is guided by the doctrine of "no injury," which brought into being the "escape clause" where injury is reported, and the "peril points" below which im port duties must not be reduced. Pro tectionism is visible in the trade ad justment assistance granted to workers, in agreements with foreign exporters, the establishment of the International Trade Commission, and other concessions granted to in terests with congressional clout.

Protectionism springs ever anew from the efforts of "distributional co alitions," which use political power to restrict competition and output. U.s.-Japanese Trade Relations Protectionists in the U.S. spend a great deal of time and effort worry ing and complaining about Japanese trade practices. They focus their con cern on Japan with which the United States is running a huge deficit in its merchandise trade account. Accord ing to the Council of Economic Ad visers Annual Report, the 1976-83 deficit amounted to some $95 billion primarily as a result of Japanese sales of textiles, television sets, au tomobiles, motorcycles, radios, pho tographic equipment, video tape re corders, watches, machine tools, and steel. 7 A Business Week cover story calls it "America's Hidden Problem: The Huge Trade Deficit is Sapping Growth and Exporting Jobs." (Au gust 29, 1983) American complaints about Japa nese trade practices may have some merit, but they do not lead to the conclusions drawn by Business Week and other protectionists. They do not justify making Japan the "whipping boy" for trade deficits for which the U.S. government is primarily re sponsible. After all, it is an undeni able fact that U.S. trade restrictions completely bar Japanese buyers from important U.S. markets and thereby inflict visible losses not only on American producers but also on the Japanese people as consumers.

Trade deficits may spring from a number of causes among which dis ruptive policies conducted by the U.S. government must not be overlooked. There is transcendent power in ex ample. U.S. leadership in interna tional policy-making may be slip ping because the U.S. example is unconvincing. The U.S. surely is no free-trade country; the U.S. govern ment has entered into international trade agreements on cocoa, coffee, rubber, sugar, and tea. It has built trigger price mechanisms in steel and imposed "voluntary" quotas on autos and textiles. The maritime in dustry represented by seamen's unions and unionized domestic ship builders has managed to obtain leg islation that forces Alaskan oil pro ducers to ship their products in high1985 PROTECTIONISM AND UNEMPLOYMENT 169 cost U.S. tankers to uneconomic des tinations in the U.S. The legislation hit hard at Japanese levels of living by cutting the Japanese people off from Alaskan crude oil. It is esti mated that, under free-trade condi tions, they could be expected to buy s,ome $15 billion annually, which alone would eliminate the merchan·· dise trade deficit with Japan. s The Japanese people must import almost all of their oil. In a free world unhampered by trade barriers Alas kan producers would be their least cost suppliers. In the political world of trade restrictions special interests in the U.S. deny them access to the Alaskan market. The Trans-Alaska Pipeline Authorization Act of 1973 and the 1977 and 1979 amendments to the Export Administration Act virtually shut the Alaskan door to foreigners and forced them to seek supplies in far-distant Arabian and African markets. It is obvious that transport charges per barrel of Saudi oil are substantially higher than for Alaskan oil, and materially higher for Alaskan oil shipped to the West Coast and the Gulf Coast than for oil shipped to Japan.

Higher Shipping Costs The higher transportation costs visibly raise total cost, which in creases world prices, reduces labor productivity and impairs economic well-being. But a few American sea men and shipbuilders are enjoying a windfall through trade disruption. It is estimated that more than 90 per cent of U.S. shipping capacity, mea sured in deadweight tonnage, and probably more than half of all Amer ican seamen serve to carry oil from Alaska to U.S. ports. 9 Notions of full employment and fa vors to organized labor have led the U.S. government to impose an em bargo not only on the shipment of Alaskan crude but also on the sale of timber to Japan. There are 20,000 saw mills in Japan, supplying hous ing and furnishings for .120 million people, but U.S. legislation passed in 1968 practically bars them from American markets. It bans exports of unfinished logs cut on Federally owned land, which amount to some 65 percent of the softwood sawtim ber inventory in the U.S., and dic tates that all such logs must be pro cessed prior to export. The law even prohibits "substitution," that is, the purchase ofFederal timber by Amer ican merchants who export timber cut on private lands. 10 Surely, such measures neither re duce the U.S. merchandise trade def icit with Japan nor improve U .S. Japanese relations. And yet, they continue to spring forth from the pri mitive notion that the log export ban forces foreigners to purchase fin ished products and thereby provides employment to wood processors and furniture makers. Fortunately, po litical force does not produce sales 170 THE FREEMAN March and employment; both obey only the laws of the market. The timber leg islation actually has reduced em ployment in the American timber in dustry and prevents employment in cutting and shipping timber to Ja pan. It serves to reduce the marginal productivity of labor, to lower wage rates in both the U.S. and Japan and, wherever labor resists the down ward pressure, contributes to mass unemployment. It puts the misun derstood interest of a powerful spe cial-interest group ahead of national interest and gives much ammuni tion to the Neo-Mercantilists who are fretting about the merchandise trade imbalances.

"Buy American" There are many more U.S. bar riers to trade with Japan and other countries. The most noticeable prob ably are "Buy American" statutes that give preference to domestic products in Federal and state gov ernment contracts. Federal agencies are required to pay up to 6 percent more for products made in the U.S. The Federal aid program to mass transit systems requires that only American materials be used. The foreign aid program requires that at least 50 percent of the gross tonnage of all commodities thus financed be carried by American flag vessels. At least 18 states restrict the use of for eign steel and aluminum and order the purchase of domestic. products. Many require state bids to carry a clause restricting the use of foreign materials and calling for American made products. Many local authori ties enact building codes that ban the use of foreign materials. Countless Federal statutes and regulations prevent or limit imports of agricultural products such as beef, dairy produce, mandarin oranges, and sugar. In recent years the U.S.

government sought voluntary re straints of foreign sales, which were as voluntary as a judge's temporary restraining order. In recent months it finally dispensed with the pre tense of voluntarism. Protection from foreign competition now covers all basic industries that are forced to compete in U.S. markets. Its costs to American consumers in the form of higher goods prices amount·to many billions of dollars. A recent study es timated the 1980 costs at more than $58 billion, or $255 per American consumer. ll They probably have more than doubled since then. Its costs to American workers in the form of lower labor productivity and higher rates of unemployment can only be surmised. The pressures for protection from foreign competition continue to grow in the U.S. and other countries. Well organized groups, especially orga nized labor, use the political appa ratus to reap economic gains through political force. Unable to compete ef fectively and suffering from depres1985 PROTECTIONISM AND UNEMPLOYMENT 171 sion and unemployment, for which they deny all responsibility, they seek refuge with government and its coercive powers. They noisily de mand protection from foreign com petition that is held responsible for their plight. Economists do know, however, that mass unemployment, no matter how painful it may be, cannot be placed on the doorsteps of foreigners. It is a self-inflicted evil of radical interventionism that cannot be alleviated by beggar-thy-neigh bor policies. Protectionism only ex acerbates it. ~1 -FOOTNOTESlCf. theoretical works: Gottfried Haberler, The Theory of International Trade (London: Hodge, [1933] 1936); also his Survey of Inter national Trade Theory, Rev. and enl. edition, (Princeton University International Finance Section, [1954] 1961); James E. Meade, The Theory of International Economic Policy, Vol.

2; Trade and Welfare (New York: Oxford Uni versity Press, 1955); Ragnar Nurkse, Problems of Capital Formation in Underdeveloped Coun tries (New York: Oxford University Press, [1953] 1962); Jacob Viner, Studies in the Theory ofIn ternational Trade (New York: Harper, 1937); LelandB. Yeager, and David G. Tuerck, For eign Trade and U. S. Policy: The Case for Free International Trade (New York: Praeger Pub lishers, 1976). Cf: also the classical historical work of Frank W. Taussig, The Tariff History ofthe United States (New York: Putnam, [1888] 1931). 2See Melvyn B. Krauss, "Ill Fares the Wel fare States," Policy Review 18 (Fall 1981), pp. 133-38; also The New Protectionism: The Wel fare State and International Trade (New York: New York University Press, 1978). 3Robert B. Reich, "Beyond Free Trade," For eign Affairs 61 (Spring 1983), pp. 773-804; Bob Kuttner, "The Free Trade Fallacy," New Re public, 28 March 1983, pp. 16-21; G. William Miller, ed., Regrowing the American Economy (Englewood Cliffs, N.J.: Prentice-Hall, 1983); Leonard Silk, ]'he Economists, (New York: Avon Books, 1978); see also Allied Industrial Worker, Official Newspaper of the Allied In dustrial Workers of America (AFL-CIO) Inter national Union, Milwaukee, Wise.; September, 1984; CWA News, Communication Workers of America, AFL-CIO, Washington, D.C., Sep tember 1984.

4See Melvyn B. Krauss, Development Without Aid (New York: McGraw-Hill, 1983), especially Chapter 7. 5Mordechai E. Kreinin, "Wage Competitive ness in the U.S. Auto and Steel Industries" Contemporary Policy Issues 4 (January 1984), pp.39-50. 6Cf. David Ricardo, Works and Correspon dence, Edited by Piero Sraffa (Cambridge Uni versity Press, 1951-1955), Vol. I, On the Prin ciples of Political Economy and Taxation. 7Council of Economic Advisers, Annual Re port (Washington, D.C.: Government Printing Office, 1984). 8Beth deHamel, James R. Ferry, William W. Hogan, and Joseph S. Nie, Jr., The Export of Alaskan Crude Oil' An Analysis of the Eco nomic and National Security Benefits (Cam bridge, Mass.: Putnam, Hayes, and Bartlett, Inc., 1983). 9Steve H. Hanke, "U.S.-Japanese Trade: Myth and Realities," Cato Journal, 3/3, Winter 1983/84, p. 762. lOBarney Dowdle and Steve H. Hanke, "Pub lic Timber Policy and the Wood-Products In dustry," in Forest Lands, Public and Private, ed. M. Bruce Johnson and Robert Deacon (Cam bridge, Mass.: Ballinger Publishing Co., 1984).

USee Murray L. Weidenbaum, Business, Gov ernment and the Public, 2nd ed. (Englewood Cliffs, N.J.: Prentice-Hall, 1981), pp. 253-55; also "The High Cost of Protectionism," Cato Journal, Ibid, pp. 777-791.

John Semmens Highways: Public Problems Private Solutions EARLY in 1984 an article in The Wall Street Journal was headlined: "In terstate-Highway Building Projects Are Threatened by Political Stale mate." The gist of the story was that House Speaker Tip O'Neill was hold ing a highway appropriations bill hostage in an attempt to get more money for a project in Boston. The struggle over appropriations is a political struggle over the divi sion of tax receipts. This type of struggle is both a manifestation of the "infrastructure crisis" and a contributing factor in perpetuating infrastructure problems. The "infrastructure crisis" can be roughly defined as the observed or anticipated deterioration of public facilities like highways, bridges, Mr. Semmens is an economist for the Arizona De partment of Transportation. The views expressed here are those of the author and do not necessarily reflect Departmental policy.

172 dams, and the like. The phenomenon becomes a "crisis" because the cost to repair or forestall the deteriora tion is projected to exceed the avail able tax revenues. A middle range estimate of the tax revenue shortfall in the case of highways alone has been pegged at $60 billion per year. The magnitude of the forecast of needs easily dwarfs the recent in crease in revenues of about $5 bil lion per year generated by the 1983 5-cent-per-gallon Federal gas tax hike. The implication of such a huge gap between revenue and cost is that huge tax increases are necessary, perhaps even inevitable. However, before we get swept away in a stampede to throw money at the problem, it might be worthwhile to examine the situation more closely. If the infrastructure problem is truly as large as some of the figures indicate, it is clear that mere tax hikes within the existing opera tional structure would be an inade quate answer. In the instance of highway finance, substantial effort was required to pass a 5-cent-per gallon gas tax increase. Yet, this tax hike generates only $5 billion per year. Raising $60 billion would ne cessitate another tax increase of 55 cents (or more, allowing for some de cline in fuel consumption under higher taxes). Such a large tax in crease must be considered highly unlikely.

HIGHWAYS:PUBLIC PROBLEMS,PRIVATESOLUTIONS 173 Since it is unlikely that such huge estimated highway needs can be met from tax revenues, the task of mak ing do with less is of critical impor tance. Obviously, we cannot accom plish all that some think we "need" to accomplish. Choices will have to be made. Scarce resources devoted to some projects will unavoidably be denied to other projects. How these choices are made will deter mine whether the "infrastructure crisis" becomes the "infrastructure disaster." ChangesRequired One point that should be crystal clear is that "business as usual" cannot be maintained. A premise be hind the $60 billion annual gap be tween highway needs and revenues is that all existing facilities must be preserved. Since there won't be a $60 billion tax hike, this premise be comes infeasible and no longer valid. The notion that a highway, once built, must be preserved in perpe tuity is both impractical and illogi cal. There is no way that a society can progress if it is to be constrained to carryon the upkeep of every in vestment it ever made. Roads, be cause of their long, useful lives, give the impression of permanence. How ever, there is a crucial difference be tween longevity and immortality.

Times change, and the economic needs of a society change. The in vestments that were suited to an earlier era are not necessarily suited to the present or future eras. No vital industry in a dynamic economy attempts to perpetuate every capital facility it ever built. Factories, offices, stores, machines all wear out, become obsolete, or are replaced by other uses for resources. In fact, failure to anticipate the ob solescence of old facilities is a major drain on an industry's ability to cope with changing economic conditions. For example, the U.S. steel industry is plagued by aged facilities that threaten the survival of many firms. Failure to deal with the fact of ob solescence in highways is a definite threat to the public infrastructure. Funds poured into the maintenance and preservation of obsolete road ways are funds that cannot be used to provide new roads. Highway seg ments that may have had substan tial economic justifications when originally built may evolve into eco nomic dinosaurs that consume dis proportionate amounts of scarce re sources. This endangers the viability of the entire system. Dealing with this situation poses a serious prob lem for public highway agencies.

While the phenomenon of obso lescence poses difficulties in both public and private sectors of the economy, institutional factors make it much harder for the public sector to cope with these difficulties. The common perception is that govern ment is better situated to deal with 174 THE FREEMAN March problems like the infrastructure cri sis. After all, the federal govern ment has more revenue than any other entity in our economy. It has sovereign power to tax. It can borrow more money more cheaply. The fed eral government can even print money, if necessary. Despite this seemingly unlimited claim on re sources, government is severely handicapped in dealing with eco nomic problems. Unlike government, private firms are forced to rely upon resources voluntarily obtained. Customers cannot be taxed. They must be per suaded to buy. Investors must be in duced to provide capital. Resources are harder to come by and more costly than they are for the govern ment. Yet, it is these constraints faced by the private firm that pro vide the institutional incentives for better economic performance.

Market Discipline Restricted to only voluntarily ob tained resources, private firms must respond to market demands. Their products must fulfill genuinely felt needs or they won't make any sales. Their operations must be efficient or their competitors will undersell them. Their investments must pro duce profits or their capital will be depleted. The market provides strict discipline. Resources are channeled to those firms that make the best use of them. The importance of this market discipline can hardly be overempha sized. The absence of this discipline in the public sector makes it impos sible for even the most well-inten tioned public official to efficiently employ resources. The products and services government provides are not really marketed to willing cus tomers, so public officials have no feedback on real demand. True com petition doesn't exist, so there is lit tle pressure to improve efficiency or demonstration of how to do it. There is no requirement to operate-profit ably, so capital is depleted on in vestments with negative rates of return.

The private sector transaction be tween seller and buyer is clear-cut. The customer is not expected to pay for products or services he doesn't re ceive. Likewise, businesses are not expected to provide products or ser vices to those who don't pay for them. The public sector transaction is not so clear-cut. Customers or even non customers are taxed to pay for ser vices they mayor may not receive. Even in the case of public roads in which the user tax approach is em ployed, these types of inequities exist. To begin with, nonusers have been paying a growing share of the total revenues devoted to highway pur poses. A 1983 U.S. DOT study indi cated that by 1980, nonusers were providing nearly 40 per cent of the 1985 HIGHWAYS: PUBLIC PROBLEMS, PRIVATE SOLUTIONS 175 funds spent on highways at all levels of government. The nonuser per centage has nearly doubled since 1960. The trend is clearly away from the strict user charge principle.

InequitableUser Charges Even among highway users, the charges vary widely from the esti mated cost of service for each type of vehicle. Imbalances between the cost to provide service and the revenues earned imbed inequities and ineffi ciencies into the user tax structure. For example, the current Federal tax structure charges heavy trucks less than the cost of service. A report by the Federal Highway Administra tion estimated that this year the heaviest trucks will pay 71 cents in taxes for each dollar's worth of ser vice. At the same time, smaller trucks would be paying up to $1.31 for each dollar's worth of service. While this discrepancy may give the appearance of balancing out, the reality is that such a tax structure encourages an expansion of con sumption by the heaviest vehicles. Since heavier vehicles are paying less than a compensatory use charge, the highway trust fund takes a loss on the transaction. These losses will tend to grow over time as more users are encouraged to consume these under-priced highway services.

Despite the fact that the charges for the heaviest vehicles do not re cover the cost of highway services, intense lobbying to reduce these charges has occurred. This lobbying was successful in altering the tax structure to shift more of the tax to ward smaller trucks. Thus, even though highway officials might like to charge compensatory rates, they will not be allowed to do so. In effect, Congress is mandating that the heaviest vehicles be served at a loss. Congressional intervention in the pricing of publicly provided services presents some economic problems. The rates selected by Congress may make political sense, but be econom ically destructive. A private firm faced with such intervention by gov ernment would sustain serious losses. Government regulation of railroad rates helped make it a sick industry. Political control of high way user charges is having these same effects on the health of the highway system.

This is not to say that the highway agency will go bankrupt. These losses have been, and probably will continue to be, made up from non user subsidies and deferred main tenance. While the agency will not go bankrupt, the evidence does in dicate that existing investments in highways are not yielding a positive return. The importance of obtaining a positive return is that capital is regenerated and increased. If the economy is to grow, regeneration of capital is necessary. Failure to re generate capital leads inevitably to 176 THE FREEMAN March decline. The decline in one area could be forestalled by subsidies from other sources. This will, though, involve an opportunity cost in some other economic activity. Some other area would have to forego growth or suf fer decline in order for highways to receive a subsidy. Some will argue that highways provide much more in benefits than they consume in resources. Unfor tunately, this is merely an assertion.

The evidence indicates that the cost exceeds the value as represented by user charges paid for the service. Granted, the current user tax sched ule may not adequately assess the users for services rendered, but it is the only quantifiable measure that we have. It is only by observing the actual paid-for use that we can begin to get an idea of the value of the ser vice rendered by the highway system. Improved Accounting So-called cost/benefit studies that presume to sum up consumer sur plus and indirect benefits that then exceed the costs of highway invest ment are not adequate substitutes for positive financial returns. The reason for this inadequacy is that values are subjective. An analyst's estimate of what he thinks the in vestment conveys in terms of bene fits is only an opinion. Every form of economic activity produces con sumer surpluses and indirect benefits. However, none of these benefits are included in the financial returns reported for various investments. To include them only for highway in vestments or only public sector in vestments is a distortion that sys tematically biases the results.

Namely, it makes the public sector use of funds appear more productive than it actually is. To help put the concept of cost/ben efit in perspective, if such an ap proach were used for all prospective uses of capital, the policy implica tion would be that every undertak ing deserved to be subsidized by every other undertaking. Obviously, this is not possible. Consequently, attempting to economically ration alize investments with cost/benefit calculations cannot provide valid guidance for the allocation of scarce resources. Cost/benefit analysis can reveal how alternatives among a strictly limited list compare to each other. Such analysis cannot deter mine whether an investment is a productive use of resources. The only valid means of determin ing whether an investment is a pro ductive use of resources is to observe whether the revenues obtained from sales cover the cost of providing the services. Private sector enterprises get this sort of feedback on a regular basis. Unsurprisingly, the private sector has evidenced an accumula tion of capital and growth of re sources over time. In contrast, the 1985 HIGHWAYS: PUBLIC PROBLEMS, PRIVATE SOLUTIONS 177 public sector exhibits a propensity to consume capital. Public sector high ways, rather than accumulating capital to meet future growth, seem to require constant infusions of re sources from nonusers.

Competitive Pricing There is the prospect of increasing user taxes to cover full costs of pub licly provided services. While this has its positive aspects, it does pre sent some problems. We could prob ably hike user taxes substantially and thereby generate a positive re turn on the highway agency finan cial statements. This would be due, in part, to the fact that the services provided by highways are more val uable than the cost under the higher tax structure. However, the im proved financial returns would also be due, in part, to the monopoly po sition enjoyed by the public agency. In the private sector, competition limits the ability of individual firms to charge excessive prices. The fact that customers could resort to com peting suppliers gives the customers a strong bargaining position. The lack of competing suppliers in the provision of highway facilities elim inates the possibility of effective bar gaining power for the driving public.

Consumers cannot easily demon strate their preferences in the public sector monopoly environment. That these preferences are significant can be discerned from the wide variations in earnings generated on dif ferent road segments. Even though the existing tax structure for highway user charges leaves a lot to be desired in terms of pricing strategy, observing how these taxes translate into earnings on a segment-by-segment basis is in structive. For example, some high way segments yield returns far in excess oftheir cost. Others earn mere pennies on each dollar invested. In Arizona, State Route 181 is projected to lose 95 cents out of every dollar put into it. In contrast, urban por tions of U.S. Route 60 are likely to produce substantial surpluses over cost. The implication of these discrep ancies in yields on various segments owes much to erroneous pricing of the services. Urban highway users are stuck with high prices for rela tively poor service. At the same time, many rural segment users are pay ing far less than the cost of the ser vice. The monopoly position of the public highway system promotes this cross subsidy of rural facilities. In a competitive market, urban consum ers would be less vulnerable to this type of exploitation. Profit seeking entrepreneurs would be encouraged to offer attractive alternatives in the urban areas.

In addition to inefficient and ex ploitive pricing structures, the pub lic sector monopoly over highways reduces incentives to control oper178 THE FREEMAN March ating costs. In the private sector, competition prompts firms to re strain overhead costs. Lean opera tions allow for a better service/price offering to the consumer. Firms that allow overhead to get out of control will be unable to offer as good a deal and still maintain profitability. Mo nopoly removes the pressure to con trol internal costs. The effect of pub lic sector highway monopoly on overhead cost is as would be pre dicted. In the early 1960s, the ratio of overhead expense to actual con struction was about 7 per cent. By the early 1970s overhead expense was up to 12 percent of construction outlays. By the 1980s, overhead had reached 17 per cent of construction outlays. With no competitive pres sure to encourage restraint, the pub lic sector high way monopoly has allowed greater proportions of re sources to be consumed in adminis tering programs. This means less is available to provide usable facilities and services.

The Privatization Option Examination of the status and per formance of the public highway sys tem reveals an operation plagued with problems. Operational ineffi ciency, an inequitable tax structure, inability to discern and serve con sumer demand, and malinvestment of scarce resources are pervasive characteristics of public sector own ership and control. In fact, Federal law goes out of the way to mandate practices that unnecessarily impede efficiency. A classic example is the Davis-Bacon Act. The Congressional Budget Office estimates that the procedures required by the Act add 4 per cent to the cost of highway con struction. While 4 percent may not sound like much, on a multibillion dollar construction budget it is sub stantial. The annual cost of road con struction in the United States is probably around $1 billion higher than it has to be as a result of Davis Bacon. Bad as the record of public sector ownership and control is, the alter native of privatization is usually portrayed as impractical. Critics of privatization plausibly ask: "Who would be willing to buy and operate roads?" Although the "obvious" an swer to such a question is supposed to be "no one," there are other possibilities.

To begin with, if the real answer is that no one would under any circumstances be interested in acquiring and operating any road segment, the facilities must have no economic value. Such a conclusion is patently false. Roads do provide im portant services having definite eco nomic value. The existence of self sustaining toll roads and bridges would seem to indicate that at least some properties could be operated profitably. From a historical per spective, it could be pointed out that 1985 HIGHWAYS: PUBLIC PROBLEMS, PRIVATE SOLUTIONS 179 privately owned and operated toll roads were common in the United States in the early 1800s. So, the no tion that privately owned highways are infeasible is unfounded. There are many existing highways that could be effectively adapted to a toll operation. The key advantage of a toll facility is the strong link beween revenue and need. Only those who use the highway are re quired to pay. Service need not be provided at less than cost. The strong link between revenue and need pro vides the wherewithal and the in centive for better maintenance of the roadway. As a result, toll roads are almost always better maintained than nontoll roads serving similar traffic. Interestingly, Federal law explicitly prohibits the charging of tolls on highways that have received any Federal aid.

Tolls and Access Charges It seems likely that privately op era ted toll roads could be an ap pealing option in some instances. In other instances, toll roads might ap pear unattractive. Opponents of the toll road concept lampoon the idea by conjuring up a vision of congested urban traffic brought to a standstill by toll booths at every intersection. Obviously, such a method of opera tion would be insane. Fortunately, there are some prospective reme dies. First, access to urban road sys tems could be sold in larger units than one block of travel at a time. For example, the city of Singapore sells access to the central business district road system on a monthly basis. Many private sector busi nesses operate on this type of a mar keting system. Access to health club facilities is a prime example of this method of charging for services ren dered. Customers usually pay a monthly, quarterly, or annual access charge, not for each dip in the pool, weight lifted, or yard jogged. Fi nancing some road services via ac cess charges would seem a feasible option.

Second, payment for road use could be automated, with traffic electron ically recorded and billed periodi cally. The technology has already been developed for individualized vehicle identification, travel mea surement, and billing. A test of equipment in an urban setting is al ready underway in Hong Kong. The private sector makes use of a related approach in automated scanning of uni versal product codes to speed traffic flow at retail cash register lines. Third, highway facilities could be financed by indirect user charges. A frequent argument against the idea of privately owned roads is the prob lem ofthe "free rider." Some contend that roadways must be public goods because of the difficulty of excluding nonpayers. On the one hand, this dif ficulty is exaggerated. Public agen180 THE FREEMAN March cies already exclude would -be users who don't pay assorted charges like vehicle registration and driver's li cense fees. On the other hand, even assuming that collecting directly from the user is difficult, there is an other way.

In the twentieth century, the broadcasting industry grew from nothing to a pervasive part of mod ern life. Television and radio are multibillion dollar industries. Yet, their services are consumed for "free." Viewers and listeners pay no money to broadcasters. Anyone with a receiver can consume the broad casts without paying a dime. The in dustry is able to thrive by selling ac cess to the audience of free broadcasts. The millions of viewers and listeners are of interest to advertisers. Highways have millions of drivers and passengers on them every day. This provides the opportunity to sell space for communications. Bill boards are one means of communi cating. Though billboards can be seen from roads right now, they have been neglected as a source of reve nue for sustaining the highway facility. Tapping Real Estate Values Another variation of the indirect means of finance would be similar to the method in which shopping cen ter owners charge for lease space.

High volumes of traffic improve retail sales and, consequently, lease rentals. Highway facilities could link up with real estate developers to improve the traffic flow to and from a location and receive compen sation from the property owners based on the traffic· volume. As it now stands, public sector highway construction creates improved real estate values, but receives no reve nues based on these values. Windfall gains are created for the lucky or the well-connected real 'estate holders, while the highways end up losing money. The above suggestions are meant to show how privately owned high ways could conceivably succeed. Af ter so long a period of public sector monopoly, there is no immediate, universally obvious alternative method of operation. Because we cannot now specify exactly how pri vatization would work for all situa tions does not mean that privatiza tion is not a viable option. The whole point of privatization is that it will expose the problems of highway transportation to the initiative ofen trepreneurs. The creativity of entre preneurs in a market environment is the key advantage of privatiza tion. That we cannot precisely pre dict what they will create is but fur ther evidence of the shortcomings of centralized planning.

A transition period of experimen tation and gradual change would seem advisable. A potential starting 1985 HIGHWAYS: PUBLIC PROBLEMS, PRIVATE SOLUTIONS 181 point for a transition to privatiza tion could begin with the public sec tor's divestiture of poorly yielding facilities. Why would a private firm want to acquire such facilities? Many business ventures are money losers. Yet, in the private sector, purchasers can usually be found for the dispo sition of the "assets" of failed ven tures. Just because the government loses money in the operation of a fa cility does not necessarily mean that a subsequent owner won't be able to earn a profit. New management, combining old assets in new ways, can often turn losses into gains. Sellingthe Losers A program of divestiture would need to take a realistic approach. For one thing, public officials should not expect to recover the sunk costs of money-losing facilities. Assets of this kind can only be disposed of at a dis count. In fact, for road segments that don't even generate enough cash to cover out-of-pocket costs, the public highway agency would actually im prove its financial condition by giv ing such segments to whomever will take them.

In addition to discounted prices for divested facilities, the public sector agency will have to avoid the temp tation to heap debilitating restric tions on the operation of the priva tized facility. Since the very reason for divestiture is the fact that the public agency cannot operate the facility in a cost effective manner, it would be unreasonable for the agency to impose restrictions on the new owner. Besides, the fewer the re strictions, the more salable the· as sets. The public sector will get better prices for divested properties if they are less encumbered. As divestitures proceed, both pub lic and private sector participants and observers can learn from expe rience. Successful techniques for transferring ownership and for op erating the privatized assets can be imitated and improved upon. Un successful examples can be analyzed to provide guidance for reducing negative outcomes in the future.

Over time, the highway transpor tation system should show marked improvement. The public agency's financial condition will benefit from unloading deficit-ridden highway segments. Both savings in operating costs and revenue from the sale of assets will serve to relieve some of the financial strain. As facilities pass into different hands the prospects for service innovation and experimen tation will increase. Highways could begin to be integrated into the more dynamic private sector economy. The successful highway entrepreneurs will make their investments grow. This will enable them to buy or build more segments. The infrastructure, instead of facing a future of deteri oration and decay, would have an op portunity to grow and flourish. :!J Edmund A. Opitz Battlefor the Mind THE term Weltanschauung is noth ing more than a highfalutin label for "world view." Everyone has a world view, although not everyone is fully conscious of it or aware of its impli cations. In other words, everyone conducts his life on the basis of some fundamental premises he takes for granted. The premises may not be explicitly stated, in which case they can be deduced from observations of the way a person habitually acts.

Your Weltanschauung is analogous to the contact lenses you are wear ing; you don't see the lenses while you are using them to see other things. The late Cornell philosopher E. A. Burtt put it well when he said: "In the last analysis it is the ulti mate picture which an age forms of the nature of the world that is its The Reverend Mr. Opitz is,a member of the staff of The Foundation for Economic Education. This article is from a paper delivered at the Leonard E. Read Con ference on Freedom at the Tarrytown Conference Center, December 2, 1984. 182 most fundamental possession. It is the final controlling factor in all thinking whatever." That is why it is so important. We are in the midst of a battle for men's minds. This is obvious at the level of the news, where we read and hear about a confrontation between Communism and what, for want of a better term, is labeled The Free World. The battle for the mind goes on at the level ofofficial propaganda, and it is also fought out in the class room, on the podium, from the pul pit, in books-wherever the intellect is engaged and ideas are wrestled with.

The Communists are pretty clear about their world view, Dialectical Materialism, and strongly moti vated by it. The people of The Free World, on the other hand, are so un clear about their basic beliefs that little dedication is aroused. Once it was different. Two centuries ago the BATTLE FOR THE MIND 183 philosophy of freedom was in the as cendant and clear thinkers declared that "We hold these truths to be self evident." And they spelled them out in detail. The Free World today gives little more than lip service to its her itage, half-heartedly accepts a milk and water version of the opposition's world view. That makes for a lop sided contest, for the side that seems to be in focus and dynamic can al ways recruit fellow travelers from among the lackadaisical. Two world views are in conflict: Materialism, intellectually insub stantial but passionately adhered to, versus non-Materialism, which gen erates only lukewarm devotion de spite its intellectual and moral strengths. This paper exposes the weakness of the Materialist's case and demonstrates the strengths of the contrary world view.

Everyone, to repeat, entertains some picture of the entire scheme of things; everyone has a mental image of what the cosmic totality is like in the final analysis. During the past couple of centuries the most popular world view has conceived the uni verse along the lines of a mecha nism-an immense and intricate piece ofclockwork, each cog and gear meshing with the others in a self contained system. If you like labels, this world view has been called Mechanism by some, Positivism by some, Materialism by others. Karl Marx adopted the belief that only matter is genuinely real, and he gave this doctrine enormous momentum. The Marxist version of this theory is called Dialectical Materialism, and Dialectical Materialism is the most widespread religion in the world to day, numbering among its adherents millions who are not Marxists-ex cept at the rock-bottom level of be lieving that matter is the fundamen tal reality in this universe.

I believe that Materialism is in tellectually incoherent and de monstrably untrue in four essential areas. In the first place, this world view has no genuine place within it where mind, reason, and free will can find their rightful niche. Sec ondly, Materialism cannot accom modate the idea of inherent rights immunities belonging to each per son in virtue of his humanity. Thirdly, the idea of a moral order is incompatible with the notion that only material things are real. And finally, no one can achieve a proper view of himself as a person who ac cepts the Materialist teaching that he is merely a chance collocation of atoms, a by-product of physio-chem ical interactions. Materialism is genuinely compatible with collectiv ism, but it is incompatible with the freedom philosophy. The free society and market economy need a world view which has a sound theory of mind, reason and free will; a logi cally grounded doctrine of inherent rights; a firmly based belief in the 184 THE FREEMAN March moral order; and an authentic un derstanding of personhood.

If we believe that only matter is genuinely real, we are logically com mitted to the corollary that mind is secondary, a derived thing depen dent on that which is more basic than itself, namely matter. Mind, then, is not sui generis; it does not exist in its own right; it is not a pri mary ingredient ofthe cosmos. Mind, for the Materialist, is merely an epi phenomenon; it is matter in a late stage of development. Mind, intel lect, consciousness, cognition, rea son, rationality, will-are offshoots of matter; shadow, not substance. The really fundamental stuff of the universe-according to this theory consists of the particles of matter which we can see, touch, count, weigh and measure. The Reality of Matter Depends upon Reason It is a peculiar quirk of the modern mentality to affirm without question the reality of matter, but to deny reality to mind. The catch is that it is only by using our mind that we know that matter exists! A rock does not know that stars exist; a tree is unaware of the oceans. Only we hu man beings know these and other things, and we know them by exer cising our cognitive faculties upon the impressions gained through the senses. But our own mind is so close to us, it is so intimately a part of our very self, that we allow ourselves to be misled into downgrading our minds into something-subservient to matter.

Matter is indisputably real; that is obvious. But the reality of the men tal activity by which we come to know this is equally obvious; every attempt to prove otherwise must be self-defeating. Downgrade the mind, even by the tiniest degree, and you discredit any conclusion you pre sume to reach by the exercise of your mental powers. A r~tional case against reason is a contradiction in terms, for the more airtight your ar gument against reason the stronger the proof-contrary to your inten tion-of the efficacy of reason. My proposition may be put in the form of Aristotle's Law of Identity: Mind is Mind. Mind is not a mere attribute of something sub-mental. Mind is a primordial ingredient of the universe at the most basic level. To reduce Mind to the non-mental is to declare that Mindis non-Mind, which is nonsense. Because Mind is Mind we human beings are able to understand, to make choices, to take charge of our own lives, and to order our lives in line with human pur poses. If we believe anything less than this about ourselves we lower our capacity to resist those mis guided authoritarians who would make us their creatures.

Our Declaration of Independence talks about "unalienable rights ...

1985 BATTLE FOR THE MIND 185 endowed by the Creator," then goes on to say that governments are in stituted to secure these rights. It ap pears to be one of those self-evident truths that no people would make a valiant effort to structure the laws of their society so as to protect each person's private domain and render justice for all, unless they first be lieve in individual rights-the idea that each person possesses an in violable region at the core of his being. The old-fashioned Whig idea of the Founding Fathers was to limit the reach of the law to the task of securing and preserving freedom of individual action within the rules of the game, and the rules were de signed to maximize liberty and op portunity for everyone, allowing everyone the elbow room each of us needs to pursue his personal goals. Only thus may each person's rights be secured. The Nature of Rights The word "liberal" today is the op posite of what the word meant when it first entered the vocabulary about two centuries ago, and a similar fate has befallen the word "rights." For merly, rights signified individual freedom and personal immunity from arbitrary interference with peaceful action; the popular belief today is that "rights" are legal priv ileges entitling people to housing, medical care, education, equal pay, or whatever. How may we recover the sounder idea which was once the keystone of our political system?

There are three schools of thought as to the nature of rights. The pop ular "liberal" belief today is that so ciety is the dispenser of rights, but this viewpoint depends on the verbal sleight of hand which confuses rights as immunities with "rights" as en titlements. If you define words to mean whatever suits your purpose, anything can be made to mean any thing else. As Dr. Johnson said, if you call stones plums you can make plum pudding out of stones! The second school of thought de clares that nature is the source of rights. Let it be noted that rights, whatever they might be, are not ma terial objects. Your liver, your brain, your heart are material objects; they have mass and extension, and can be weighed and measured. Likewise your body; when life has departed, your carcass can be reduced to $1.98 worth of chemicals! But your rights are like your ideas, in that neither your rights nor your ideas occupy space, nor can either be reduced to a chemical formula.

Now, nature is the material world; it's a marvelously intricate combi nation and recombination of the 105 chemical elements from actinium to zirconi um. To speak of chemicals as the source of our rights makes as lit tle sense as to speak of the chemical origin of mind and thought. Nor does it make much sense for the Materi186 THE FREEMAN March alist to speak of human nature as the source of man's rights, because his philosophy has first subordinated human nature itself to physical nature. The world view of Materialism, I argued earlier, has no genuine place within it for Mind and thought; nor does it have a valid ground for the concept of rights-which is why it twists them into entitlements. There is a radical alternative to Material ism, but what shall we call this other world view? Call it whatever you like, but it's the religious or theistic world view in its affirmation of the reality of a non-material, mental, or spiritual dimension of the universe.

Call it the sacred or divine order, if you like. Or refer to the Mysterium Tremendum Fascinans explored by Rudolph Otto in his seminal book The Idea of the Holy. Our forebears were not afraid of using three-letter words in public so they used the term God for the cre ative Power. This Power also worked within-the word enthusiasm is de rived from two Greek words mean ing "the god within"-and thus each person participates in an order of reality beyond society and beyond nature. He is thereby endowed with an inner sanctum which is his alone, any trespass upon which is taboo. His rights are endowed by the cre ative Power. The world view which declares that only material things are real, has no place for an independent moral order, and this leads to moral relativism. Theories of moral rela tivism have seeped into the popular mentality to emerge as slogans and bumper stickers such as "Whatever turns you on," "If it feels good, do it," "Do your own thing." The result is that the shrewd, the wily, the clever, the unscrupulous doing their thing have the rest of us over a barrel.

Moral Relativism The U.S. News and World Report for October 8, 1984 has a story head lined "Nearly 1 in 3 Gets U.S. Ben efits." It listed the eleven biggest programs from Social Security to in fants' nutrition, involving 66 mil lion people. Many of these recipients are into several programs, for 129,299,000 checks are mailed out from Washington regularly to these 66 million people. The report did not cover farm families, or union mem bers, or the government bureau crats, or those employed in schools paid for by taxpayers, or p.eople in tariff protected industries, like those in Detroit who charge us thousands of dollars extra for the cars we buy. And there are others. We are now a nation where alm~st everyone is trying to live at the expense of every one else. We have written a form of theft into our statutes. Why? Be cause there's a little larceny in our souls!

1985 BATTLE FOR THE MIND 187 It's too easy, and too false, to blame the politicians. They're only our hired hit men, and in cases of this sort the principal is at least as guilty as his agent. Large chunks of the American electorate decided that living off government handouts is easier than working for a living and safer than stealing, so they created political parties in their own image and elected politicians who promise them an inside track to the public treasury. Moralists in former periods in veighed against this sort of thing, but in the modern world they were no match for the theoreticians of communism and socialism who con vinced almost everyone that legal plundering was the wonderful wave of the future. Intellectuals today are not so sure, and many now side with the free society -market economy team. And it is our good fortune that many men and women in public life, people of integrity and intelligence, are fighting in their own way the same battle we are waging.

Reason to Believein An Objective Moral Order Is there an objective moral order? That is not possible within the world view of Materialism! Is it probable within a theistic world view? I think so. Your individual physical sur vival depends on several factors. You need so many cubic feet of air per hour, or you suffocate. You need a minimum number of calories per day, or you starve. If you lack certain vitamins and minerals, specific dis eases appear. There is a temperature range within which human life is possible; too low and you freeze, too high and you roast. These are some of the requirements you must meet for individual bodily survival. They are not statutory requirements; nor are they mere custom. They are laws of this universe; they are built into the nature of things. This is obvious. And it is just as obvious that there are certain requirements and rules built into the nature of things which must be met if we are to survive as a civilization characterized by per sonal freedom, private property, and social cooperation under the division of labor. It would be impossible to have any kind of a society where most people are constantly on the prowl for opportunities to murder, assault, lie and steal. A good society is possible only if most people most of the time do not murder, assault, steal and lie. A good society is one where most people most of the time tell the truth, keep their word, fulfill their contracts, don't covet their neighbor's goods, and occasionally lend a helping hand.

No society will ever eliminate crime completely, but any society where more than a tiny fraction of the population exercises criminal tendencies is on the skids. To affirm a moral order is to say, in effect, that 188 THE FREEMAN this universe has a deep prejudice against murder, a strong bias in fa vor of private property, and hates a lie. We may not like living in a strin gent universe which lays down a tough set of rules for individual and social survival. But let's face it; no body has ever come up with a better alternative to living here and now. Of course we know that this pla netary home of ours is where we be long; and it's a pretty good place to be, even if at times it's a pretty tough test run. Each of us came into this world chock full of potentialities and with an immense capacity for learn ing. At birth we were, in effect, handed a do-it-yourself kit, a do-it yourself kit for the manufacture of a human being. And then we were given a life sentence in order to transform this raw material into a fullfledged mature adult. In the na ture of the case this has to be an in side job, for each person is the cus todian of the time, energies and talents which are uniquely his own.

Each individual is in charge of his own life, constructing, by the choices he makes hourly and daily, the per son he has it in him to become. No outsider can take over this respon sibility for us. The collectivist promise that if we give them the power they will fash ion a new social environment which will create a new humanity, is a damnable lie-and I've chosen the word deliberately. Becoming a human being is a full time job, and it's for life. But there is that perennial urge in the human psyche egging us on to bigger things, like the latest dream of empire, like a "brave new world," like one more desperate try at some newfangled model of the Tower of Babel. Every collapse of these megalomaniac dreams hurts, but it does provide some people with a clue that human fulfillment lies in a different direc tion; we have to begin from within. Gerald Heard used to say that we must grow as big inside as the whale has grown outside! A cartoon shows a man paying the final installment on his psychiatrist's bill. As he hands over the money the former patient says to the doctor: "You call this a cure? When I came to you I was Na poleon; now I'm nobody." We know that this former patient is on his way, but a gain of this sort feels at first like a loss!

Man is not God; he did not create himself, nor did he write the laws of his being; but men and women do make themselves. And as we seri ously take ourselves in hand, we be gin to discover who we are and what we may become. "That wonderful structure, Man," wrote Edmund Burke, "whose prerogative it is to be in a great degree a creature of his own working, and who, when made as he ought to be made, is destined to hold no trivial place in the creation." I; A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN The Apocalyptics EDITH EFRON'S remarkable The Apocalyptics: Cancer and the Big Lie (New York: Simon and Schuster, 589 pp., $19.95) is the story of a scan dal within a scandal. It is worked out in detective story fashion, with Miss Efron, a consummately able re searcher, zeroing in after the perusal of thousands of documents on the culprits who have been misleading us about the extent of the cancer threat. Her book does not make for light reading, for it is densely packed on every one of its pages. But it is a richly rewarding study of misuse of the press by scores of people, both in government and out, who pretend to speak in the name of science.

The big overall scandal that en gages Miss Efron's attention before she gets into the meat of her book is the one perpetrated by the environ mentalists who think the earth is doomed by capitalistic industrialists who put profit ahead of human life. Her "apocalyptics" include Rachel Carson, Barry Commoner, Rene Du bos, Paul Ehrlich and George Wald, as well as a group of scientists at MIT who conducted a famous study for the Club of Rome. In her Silent Spring Miss Carson portrayed na ture as good and attacked industrial man as the great defiler of our soil and atmosphere. Barry Commoner, the biologist, made the "ecological crisis" the burden of his testimony before the Muskie Committee, claiming that our capitalistic indus trialists and pesticide-using agricul turalists were destroying the world's ecosystem. In a book titled The Pov erty of Power, Commoner said that socialism offered the only way out.

The report done by MIT scientists for the Club of Rome purported to prove that if we did not mend our profli gate consumption, the earth would be running out of fuels and minerals by the year 2,000 A.D. The universal doomsayers set the stage for Edith Efron's second scan dal, the propagation of the theory that ninety per cent of our cancer is due to industry-made chemicals that get into the food we eat, the water 189 190 THE FREEMAN March we drink, and the air we breathe. This, in Miss Efron's extremely well documented opinion, is the "big lie" she refers to in her title. Miss Efron knows as well as any body else that many artificially made chemicals are dangerous. But the idea that nature itself is pure and only man is vile can't stand up for a moment against the evidence that Miss Efron summons from her vast reading. The world is full of natural carcinogens that predate the birth of all our modern chemical manu facturing companies. Silicates and "asbestiform minerals" are wide spread in our bedrocks. Our mines are full of radon, a radioactive gas.

We get skin cancer from the sun. Our foods, whether organically grown or not, contain elements that could be cancerous. Miss Efron's list of nat ural carcinogens takes up many pages. What she demonstrates is that everything is chemistry, and much of chemistry, both natural and man-made, can be dangerous if ge netic dispositions combine with cir cumstances to cause cells to go hay wire in a still unexplained way. When Miss Efron says, "there is nothing we can breathe, eat or drink without encountering carcinogens," it made me wonder how the human race has come as far as it has. Isaac Berenbl um, who discovered there was such a thing as anticarcinoge nesis, provides a hopeful answer. There are cancer inhibitors. And to set a carcinogen in· dire motion a "promoter" may be necessary. If the "promoter" can be evaded, there will be no cancer. The whole thing is ex tremely complex. Yet our laws are based on what might be called "one on-one" theory. "Regulatory" sci ence is not like true science: it de mands black-and-white answers to questions that still baffle even the most careful of our laboratory workers.

QuestionableTests The whole business of using ani mals to test for carcinogens poses many conundrums. What will cause cancer in mice may not necessarily induce tumors in rats or hamsters. If there can be differing susceptibili ties in animals, how can we gener alize about man? Then there is the question about high and low dosage. In one experiment on the sweetener cyclamate, test animals were given the human equivalent of 552 bottles of soft drinks a day. Herman Kray bill, a dissenting member of the Na tional Cancer Institute, says the data dra wn from such tests as related to man "are almost science fiction." Despite random variations, and the opinion of many scientists that two or three species of animals should be used if a test is to be con sidered anywhere near conclusive, OSHA considers that "a substance may be classified as a Category I Po tential Carcinogen on the basis of 1985 THE APOCALYPTICS 191 scientifically evaluated positive re suIts ... in a single mammalian spe cies in an adequately conducted long term bioassay ..." So the mice have it all on their lonesome. And Con gress listens.

The scandal, as Miss Efron sees it, is that our scientists have not spo ken up to refute the simplistic no tions about cancer and cancer pre vention that have been spread by the apocalyptics. They have not told the world that a study of various socie ties shows no correlation between the rise of industrialism and the prevalence of cancer. The dinosaurs had cancer. Socialism is no cure, nor is Third World rusticity. A study of cancer in Ethiopia and Chad would Freeman binders be meaningless simply because mil lions in those countries are dying of malnutrition before they could ever contract the diseases of old age. Miss Efron, who wrote The News Twisters, has been extremely critical of the press-the "media" -in the past. Curiously she does not blame newspapers and television for misre porting on cancer. Reporters are de pendent on official sources for their cancer news. When government agencies lead reporters down the garden path, it is the duty of scien tists to protest. That they have failed to counter the "apocalyptics" is the true scandal. Edith Efron's book should do much to correct the situation.M • handsomeblue leatherlex • each binderholds twelve issues • a handy way to organize currentand past issuesof The Freeman Order from: THE FOUNDATION FOR ECONOMIC EDUCATION, INC.

IRVINGTON-ON-HUDSON, NEW YORK 10533 $5.00 each 1985 Summer Seminarsat FEE June 23-29 July 14-20 August 4-10 For twenty-two years our annual summer seminars have offered a thor ough introduction to the principles of limited government and the mar keteconomy. Our sessionsattract livelyand diverse groups of people including students, teachers, business proprietors and employees. The week includes thirty-five hours of lecture and discussion, with ample time for participants to meet informally with both staff and dis tinguished guest lecturers. The Foundation, situated on a five-acre es tate in a quiet suburb near New York City, provides an ideal setting for a week of study and reflection. The charge for a seminar-tuition, supplies, room and boardis $400. Fellowships (including partial travel grants) are available. A de tailed seminar brochure will be sent on request. Pleaseaddress all requests for applications and further information to: Summer Seminars Foundation for Economic Education Irvington, New York 10533 (914) 591-7230 the Freeman VOL. 35, NO. 4 • APRIL 1985 Winners and LosersA Page on Freedom, No. 18 In free trade, both parties win.

Profit-Maker-Friend or Foe? How the market economy serves us. Inflation: Soviet Style, 1945 A runaway market in fiat money. Some Things to Think About The coercive versus the voluntary way. Brian Summers Howard Baetjer Jr. William H. Peterson Hal Watkins 195 196 207 209 Limited Government Steven E. Daskal 215 National stability through limited government and market freedom. Laws Against Plant Closings Hans F. Sennholz 219 Labor unions and government combine to thwart business adjustments. Essay on Caring Ridgway K. Foley, Jr. 230 Pitfalls in the political process of caring for others. Do Machines Destroy Jobs? Bastiat's lesson on the blessings of capital. Dean Russell 235 Set the Standard High Dennis L. Peterson 243 Social improvement comes through self-improvement. Information in the Market This information may be harmful to you. Joe Cobb 247 Book Reviews: 251 "The Good News is the Bad News is Wrong" by Ben Wattenberg "Inside the Criminal Mind" by Stanton Samenow "Ideas Have Consequences" by Richard N. Weaver Anyone wishing to communicate with authors may send first-class mail in care of THE FREEMAN for forwarding.

the Freeman AMONTHLYJOURNAL OF IDEAS ON LIBERTY FOUNDATION FOR ECONOMIC EDUCATION Irvington-an-Hudson,N.Y. 10533 Tel: (914) 591-7230 President: John C. Sparks Managing Editor: Paul L. Poirot Production Editors: Beth A. Hoffman Amy S. Vanlaar Contributing Editors: Robert G. Anderson Howard Baetjer Jr. Bettina Bien Greaves Charles H. Hamilton Edmund A. Opitz (Book Reviews) Brian Summers THE FREEMAN is published monthly by the Foundation for Economic Education, Inc., a nonpolitical, nonprofit, educational champion of private property, the free market, the profit and loss system, 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. Donations are invited in any amount. THE FREEMAN 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 $10.00 a year.

Copyright, 1985. The Foundation for Economic Education, Inc. Printed in U.S.A. Additional copies, postpaid: single copy $1.00; 10 or more, 50 cents each. THE FREEMAN is available on microfilm from University Microfilms International, 300 North Zeeb Road, Ann Arbor, Mich. 48106. Reprints are available of "A Page on Freedom," small quantities, no charge; 100 or more, 5 cents each. Permission is granted to reprint any article in this issue, with appropriate credit, except "Laws Against Plant Closings" and "Do Machines Destroy Jobs?"

A Page on Freedom Number 18 Winnersand Losers IT all seems so obvious. For every winner there must be a loser. This is true in sports, gambling, love and war. Shouldn't it also be true for economics? But in economics, as we shall see, what at first glance appears to be obvious often turns out to be false. Suppose you buy a toaster for twenty dollars. You buy it because you feel that the toaster, for you, is worth more than twenty dollars. You gain from the transaction, otherwise you wouldn't make the purchase. You are a winner. But the seller is also a winner. He sells the toaster because, for him, the twenty dollars is worth more than the toaster. If he didn't feel that way, he wouldn't make the sale. In this simple example, both parties, by their own standards, are winners. And this is true for every transaction freely entered into, in which fraud and coercion are absent. But sometimes examples seem to be more complicated. Suppose, for instance, the toaster was made in a foreign country. Wouldn't that change things?

To be sure, this would change some of the details. But the basic principle remains the same: The customer will buy only if he feels he will be better off. The same holds for the seller. In free trade, both parties are winners. This principle helps us to understand every economic transaction. Whenever we see someone buy a product, take a job, or enter into a contract in the absence of force and fraud, we know that he expects to be a winner. @ -Brian Summers THE FOUNDATION FOR ECONOMIC EDUCATION, INC. IRVINGTON-ON-HUDSON, NEW YORK 10533 195 Howard Baetjer Jr. Profit·Maker Friendor Foe? Is one who makes profits an ex ploiter, as is so often claimed? Or is that person a social benefactor? Do profits arise from harming others or making them better off? Do profit makers deserve resentment or grat itude? To examine this question, we will need to look at opposing eco nomic theories of value and profits.

But before that, we had better be clear about the nature of wealth, what it is and how it comes to be. What is wealth, precisely? Is money wealth? Suppose you could wave a magic wand, and become owner of millions of dollars, billions of marks, trillions of yen, and gold and silver coins by the truckload. Would that be sufficient to make you wealthy? Suppose that as you waved that Howard Baetjer Jr. is a member of the staff of The Foundation for Economic Education, primarily re sponsible for taking FEE's message to schools and colleges. 196 magic wand, you found yourself, with all that money, on the very spot you now occupy, in 1585. If you are in North America, there would be nothing in sight but the rocks and trees and grasses and streams, and maybe a stray India:t:l. You would be a trillionaire, but would you be as wealthy as you are at this moment, no matter how mea ger your bank account might be? No.

Real wealth is not money. Wealth in the strictest sense is valuable things-things we can use to support and enrich our lives. It is goods and services: food, clothing, shelter, elec tric light, symphony orchestras, die sel engines, milkshakes and so on. That is the first point: wealth is val uable goods and services. For the second point, how does wealth come to be? Does it shower down like manna from heaven, or grow out of the ground all ready for our use? Do houses spring up from PROFIT-MAKER-FRIEND OR FOE? 197 the earth and furnish themselves for us; do big jetliners lay eggs from which hatch little jets? No. These things have to be created; they have to be built; they have to be brought into existence by the ingenuity and labor of people. That's the second point. Wealth is created by people. But, out of what do people create this wealth-with what do they build it? Do they snap their fingers or wave a magic wand, and produce it from nothing? No. They build it out of what is already here. To take a phrase from my colleague Bettina Greaves, we have progressed from caves to computers simply by mov ing things around-most thought fully and exactly, to be sure-but just by moving things around. The clay, iron and other substances that com pose buildings have existed as long as the earth has, but they are more usefully arranged now into cinder blocks and steel beams. The elec trons going through f1uorescent lamps were here, too, but not ar ranged in that clever combination with glass tubes and vapor so as to make light. What makes wealth of raw substances is the value of their arrangement. The third point, then, is that people create wealth by clev erly rearranging and recombining the natural things that make up the earth.

To sum up, wealth is valuable goods and services, which ingenious people create, by rearranging and recombining the physical stuff of the earth. The last part of this is most significant: wealth comes to be when somebody discovers and produces a better, more valuable arrangement of things. What DeterminesValue? We can accept the above proposi tion that wealth is essentially a val uable arrangement of things, but that invites the question: What makes something valuable? Why are some things wealth and other things worthless? Why do Cadillacs cost more than matchbox toys, sir loin steak more than hamburger, tickets to see Michael Jackson more than tickets to see the Chicago Sym phony? What determines value? This is a fundamental question, on the right and wrong answers to which are built right and wrong the ories of profits, and entirely differ ent answers to our main question about whether the profit-maker is an exploiter or a benefactor. We begin with the generally accepted theory, which also happens to be wrong.

Labor? One of the greatest economists ever, Adam Smith, misunderstood val ue, and thereby started a long chain of confusion. Smith was a pro ponent of the labor theory of value, which holds in essence that the value of a thing is determined by the 198 THE FREEMAN April amount of labor that went into mak ing it. To quote from The Wealth of Nations, "Labour, therefore, is the real measure of the exchangeable value of all commodities." Notwith standing the brilliance of most of Smith's other ideas, this is an error. Karl Marx picked up S.mith's error and added more mistakes on top of it to produce his theory of profit. He argued that since the value of a thing is determined by the labor that went into it, laborers-and laborers only are responsible for the thing's value. If you are a worker on a ranch, for example, and you fertilize a field, plant alfalfa seed, irrigate it, cut the ripe alfalfa, bale it and stack it up for delivery; you, the laborer, are re sponsible for transforming the al falfa seed and other raw materials into, say, $1000 worth of feed for cat tle. Suppose the raw materials-the fertilizer and seed, the gasoline for the cutters and balers, the baling wire and the like-cost the owner of the ranch, your employer, $400. The "labor value" Marx says you added, then, is $600.

But all you get for your work is your wages, say, $500. This leaves your employer a hefty profit of $100. But he didn't labor at all; how is it that he has extra money? According to Marx's theory, this profit for your employer is "surplus value," the la bor value you put into the hay, that he didn't pay you for. You did $600 worth of work, but only got paid $500. You deserve all $600. Your em ployer has appropriated from you stolen from you-$100 worth of the product of your labor. To move on to the third part of this foolish but widely believed theory, in this way employers "exploit" their workers. Your employer takes his profit, the "surplus value" of your labor, at your expense. It was cre ated by you; therefore it rightly be longs to you, according to this the ory. The very fact of profit, then, shows there has been exploitation. The "Zero-Sum" Idea This whole ideological package the labor theory of value, profits as surplus labor value, and the exploi tation of working for wages-de pends on and illustrates another fair sounding but wrong idea, the zero sum view of the world. This is the idea that if somebody profits, some body else must be harmed, because after all there is only a certain amount to go around. If we add up, or sum the changes in economic con dition of everybody, we must always come out to zero, because one person can gain only what another loses.

Business activity simply shifts around existing wealth. That's the zero-sum view. Those who believe in the labor the ory of value-who hold the zero-sum view of life-necessarily see the profit-maker as an exploiter. This in cludes not just Marxists, but also 1985 PROFIT-MAKER-FRIEND OR FOE? 199 milder leftists. A congressman, for example, once criticized the oil com panies for making "obscene profits." And, sad to say, many men and women in business somehow think all this is true. They want to make profits, of course, and they strive very hard to make them. But they feel guilty about it. They worry that they are profiting at the expense of others, that in truth, they are ex ploiters-vicious capitalists who prey on their fellows. This worry shows how very pow erful error can be, because it just isn't so. The Subjective Theory of Value Though the labor theory has a cer tain plausibility, we can see that it is false by a simple example. Sup pose the amount of work that went into making a commodity did deter mine its value. Then supJ?osethat on neighboring ranches, two different crops are produced, each requiring and getting the same amount of la bor. Suppose one ranch raises al falfa, and the other raises poison ivy.

If the labor theory of value were true, the two crops would have to be worth the same! But obviously they are not worth the same. People will pay much more for hay, which nourishes cattle, than for poison ivy, which makes people itch. And therein lies the key to the true theory of value. People's per sonal preferences determine value and price. They will pay more for what they want more. The true the ory of value is a subjective theory of value. Value exists not in the thing val ued, but in the minds of the valuers. This subjective theory of value is a critically important economic con cept, one of the crucial insights on which the so-called "Austrian" school of economics is based. It was discovered by three economists, Carl Menger, Stanley Jevons, and Leon Walras, all working independently, at just about the same time-the early 1870s. With it they cleared away Adam Smith's labor theory er ror, and opened up the way to a proper understanding of profits.

Once the labor theory of value goes, of course, the Marxian theory of profits immediately goes with it. Since there is no such thing as "la bor value," then clearly the Marxian notion of profits as "surplus labor value" is false. An accurate view of profits is built on two implications of the "Aus trian" subjective value theory. The first is this: a certain thing does not have one value for all people in all different times and situations. Val ues are different for different people, and they change all the time. (I might add that in speaking of values as subjective I do not mean moral val ues such as courage and honesty, which are always fundamentally val uable in their way, but only per200 THE FREEMAN April sonal valuations of marketable goods.) Val ues change and vary. This is crucial. The same thing can have different values for the same person in different times and situations, and it can have different values for dif ferent people at the same time and in the same situation. For example, right after you have eaten a full meal, you probably would not pay much for a large milkshake. But as time goes by you start to get hungry again, and gradually the price you would pay for a milkshake in creases. If you have to go without food for a long time, especially in hot weather, you might eventually be willing to pay five or six dollars for a milkshake. Its value for you changes with your situation.

When Trade Is Voluntary Both Parties Benefit This obvious truism, that values vary and change, leads in turn to a second important insight: When an exchange is made in a free setting, both parties to the exchange benefit. The things exchanged are not of equal value, as has so often been thought, but of different value-to the people exchanging. Indeed, that is why they make the exchange. Consider yourself, for example, when you do business with a milkshake vendor. The value you put on the milkshake in your situation is greater than that of the people selling it. You value the milkshake more than the money; they value the money more than the milkshake. Otherwise there would be no ex change at all. You give up your money; they give up the milkshake. Both parties say thank you; both parties are happy; both have benefited. The situation is similar where the exchange is not of ice cream for money, but of labor for money. Con sider those of us who worked as sum mer laborers on a Nevada ranch har vesting alfalfa. We drove the machines, built fences, painted stor age tanks and so on, earning slightly over minimum wage. When we took those jobs, offering the ranch owner our work in exchange for his money, we valued the money he gave us more than the time and labor we gave him, and he valued our work more than the money he gave us.

There was benefit on both sides. Marx's exploitation theory thus reverses the truth. Workers are not exploited by their employers. On the contrary, in a free exchange they are benefited by their employers-and vice versa. That's the nature of free exchange. True, we might have wished that our efforts were worth more-that we could have com manded a higher wage-but in our particular situation in that time and place, that job at thatwage was bet ter than any other available use of our time and effort.

1985 PROFIT-MAKER-FRIEND OR FOE? 201 Free Exchange Is Positive Sum In a free exchange, both parties benefit. Note that this fact disproves the zero-sum assumption of eco nomic life. In a free-market ex change, neither party loses for the benefit of the other; both parties benefit, or they would not exchange at all. Free exchange in a market setting is not a zero-sum game, but a positive sum game. While we're on it, let's make an other point about this zero-sum idea. Those who believe it often remind us that resources are finite: they imply by this that therefore wealth is fi nite. True, resources are finite, if by resources they mean only raw ma terials. But the ultimate resource, as Julian Simon has pointed out in a book by that name, is people-hu man ingenuity and creativity. Of that resource there seems to be no limit at all. Human beings are as tonishingly ingenious, creative crea tures. They have a seemingly un bounded capacity to figure out better arrangements for these finite raw materials.

And for this reason, the finiteness of physical resources does not put any bounds on wealth. Wealth, as we saw at the outset, is not in sub stances, but in their arrangement. With the same physical substances, creative people can increase the amount of wealth until the crack of doom, through ever-better arrange ments of those substances. Profits To understand fully what profits are and how they are made, we need to add one more concept to those we have already observed. We have seen that people create wealth by favor ably rearranging and recombining physical things, and that different people place different values on things. To these concepts we add one more thought: our knowledge is im perfect. Most importantly, we have very imperfect knowledge about the most valuable ways to arrange and combine things. Often we do not know of mutually beneficial ex changes we might make with others.

Or, knowing of exchanges we would like to make, often we don't know how to manage them inexpensively enough. And nobody knows of val uable products and methods that have not yet been discovered. With these three concepts we can define profits. Profits are what result from somebody's overcoming imper fections of knowledge, discovering and producing a more valuable ar rangement of things. Put another way, profits are a person's reward for increasing value, for increasing wealth. Remember that wealth is in the arrangement, not in the sub stances: he or she increases wealth who comes up with a more valuable arrangement. Let's illustrate this with an example. Suppose Mr. Phelps, the owner of 202 THE FREEMAN April the ranch where I worked, has a number of big stacks of hay that he would like to sell. In that situation, Mr. Phelps puts a relatively low value on hay. Let's suppose he would take as little as five dollars a bale for it. His knowledge is imperfect. He knows that there are lots of dairy farmers in California and New Mex ico and Nevada who would like to buy his hay, but he does not know exactly who they are, how much they need, or what they would pay for it.

Furthermore, he does not know where to get trucks and drivers to ship his hay. At the same time there are lots of dairy farmers who put a relatively high value on hay. They would be glad to pay up to six dollars a bale for it. They know there are ranchers with hay to sell, but they aren't sure where those ranchers are, or how much they can deliver. And they don't know where to get trucks and drivers either. This is a problem for both Mr. Phelps, who has the hay, and the dairy farmers, who need it. These folks are in a situation where they might make a mutually beneficial exchange, but they can't manage it. What they need now is for somebody to discover this unfa vorable arrangement, figure out how to fix it, and do so. They will be glad to reward someone who does. At the same time there are people leasing eighteen-wheeled flatbed trucks that might be used to ship hay, but they don't know about Phelps and the dairy farmers. And there are oil distributors, selling die sel fuel that could run those trucks from Nevada to California, but they don't even know what alfalfa is. And there are truck drivers who would like to make the run, if somebody told them where to go, and offered them a better deal doing that than something else.

All the potential is there for half a dozen mutually desirable ex changes. But so far, nothing hap pens. The hay sits in the lot, the dairy farmers fret, and the trucks, the gas, and the drivers are being used to deliver things less important than that wonderful, high-protein hay. All these resources need some body to coordinate them properly, to rearrange and recombine them into greater wealth than they make up in their present arrangement. What is needed is an entrepreneur. The Role of the Entrepreneur Along comes the hay broker. He leases the eighteen-wheeled trucks, buys the diesel fuel, and hires the drivers, giving each one directions to Mr. Phelps' Ranch and from there to the dairies. He negotiates with Mr. Phelps to buy hay at, say, $5.25 a bale, and with the dairy farmers to sell it at, say, $5.75 a bale. Now, is Mr. Phelps better off? Yes, he has made 25 cents a bale more than he would have accepted. Are the farmers better off? Yes, they had 1985 PROFIT-MAKER-FRIEND OR FOE? 203 to pay 25 cents less than they would have paid. Is the leasing company better off? Yes, they expect to be, or they never would have rented out their trucks. Likewise the fuel dis tributor and the drivers would not have dealt with our entrepreneur unless they thought they would ben efit by it. So everything our entre preneur has done so far has meant benefits for those around him.

Now let us suppose the entrepre neur's expenses add up to 25 cents a bale. This includes all the costs of doing business: wages for the driv ers, fuel costs, maintenance on an of fice, payments for the trucks, insur ance premiums, clerical costs, phone bills, the wage value of his own time and so on. Added to the $5.25 he paid for the hay, that brings the total market value of the starting ar rangement of things (call it the cost of inputs) to $5.50 a bale. But since the market value of the final ar rangement (call it the yield) is $5.75 a bale, he has 25 cents a bale left over. That is his profit. It is the yieldmi nus the costs. It is his reward for in creasing wealth, for taking what is val ued less, and transforming it into what is valued more. It is his pay ment for discovering and producing a more valuable arrangement of things. He does not profit at the ex pense of those around him; he profits precisely because the result ofhis ac tivity, when all is said and done, is more valuable than the state of af fairs that existed when he started by 25 cents a bale.

Note that the size of the profit de pends on the amount of improve ment overall, the size of the differ ence between the less valuable starting arrangement (the costs) and the more valuable finishing ar rangement (the yield). It depends on the overall increase in value. The hay broker does not just have to discover who has hay and who needs it, and sell it for more than he buys it. He also has to discover good trucks to use, quick and efficient means of loading and unloading, cheap fuel, good mechanics, dependable drivers, short routes and so on, so that all these costs together are less than what he makes on the hay itself. His profit, if any, depends on his effi ciency, on his producing more value than he consumes. This efficiency is itself a social ser vice, because it saves valuable goods for other purposes. The quicker his loads are delivered, the less hay is spoiled and wasted. The less fuel he burns and driver time he uses, the more of these are left over to deliver other valuable goods.

Losses The opportunity for profit always involves the possibility of loss. Prof its are never guaranteed in this un certain world. The entrepreneur loses when his costs, the total value 204 THE FREEMAN April of the resources he uses up, are greater than the yield, the value of the new arrangement. He loses, and society loses, because the total stock of wealth is decreased. Suppose our hay broker is inefficient. Suppose he wastes fuel, that his drivers waste time loading and unloading, and get lost making deliveries. Suppose he leases smaller trucks than he should, so that he needs more trips to deliver the same amount. These inefficien cies might push up his total cost of delivering each bale to 50 cents, in stead of 25. And his slow delivery will allow more spoilage of the hay, so that perhaps he will be able to sell it for only $5.65 a bale, instead of $5.75. Now his costs are greater than his yield, so instead of profits, he makes losses, of 10 cents a bale. This means-indeed, it is the same thing as saying-that he has used up more val uable resources than he has pro duced, at a rate of 10 cents a bale.

He loses, because society overall loses. Mr. Phelps still gains, of course, as do the dairy farmers and the truck leasers and the fuel sellers and the drivers. They would not deal with him if they did not see an advantage in doing so. But the society overall is worse off; it would have been bet ter on the whole if this hay broker had never made the deliveries, if the trucks, the fuel and the drivers had been left at their· previous uses (as suming they were profitable). The greater the entrepreneur's profit, the better off his society must be. Bigger profits mean bigger im provements, bigger differences be tween the resources consumed and the value produced. (They also en courage competition, of course, which tends to increase supply, lower prices, and thus reduce profits; but that's another subject.) Profits can not be obscene; the bigger the better! They are all to the good for society.

Far from being exploiters, entrepre neurs who make profits are social benefactors of the first order, for they are the ones who create wealth, who increase the total amount of valua ble goods in the world. Who Deserves the Profits? I first appreciated the importance of entrepreneurial brainwork, and the difficulty of the entrepreneur's job, after work the first day I drove a baler. At the same time I realized how silly is the popular notion of "unfairness" in the laborer's doing "aU the work" for nothing more than wages, while the entrepreneur does no labor but earns all the profits. I had been on the baler all day, the usual ten hours, from seven to six with an hour for lunch. The Nevada sun was hot, and the work was dusty. As usual, Mr. Phelps had been cruis ing around, checking on us from his air-conditioned, white Lincoln Con tinental. We were sweating for just over minimum wage. He wasn't 1985 PROFIT-MAKER-FRIEND OR FOE? 205 working, but he was making the profits. It doesn't look fair, does it?

It didn't to me-until I looked closely. I had had fun, and when I saw him in the machine shop talking to his foremen I called out proudly, "Hey, Mr. Phelps, I learned how to run a baler today!" He gave me a smile with a friendly sneer and said, "Baetjer, you didn't learn to run a baler, you learned to point a baler." In a moment of insight I understood how dependent the laborer's contri bution is on that of the entrepreneur, and why the entrepreneur deserves every penny of his profits. What he said was true. I had baled a whole lot of hay that day, but I didn't know a thing about it. I couldn't even fix the small problems I had with my machine, let alone ser vice it properly or make a major re pair. Any worker could do what I had done, steering the tractor up and down the fields, but it took skilled mechanics to keep the balers run ning, and adjust them so that the bales would be the right size and weight. It had taken careful plan ning and inventory control to see that there was always baling wire and fuel on hand, and to keep spare parts in stock (they say they have them for every part of every ma chineD. The effectiveness of my sim ple, thoughtless work pulling that baler was utterly dependent on Mr.

Phelps, who had arranged to get it there, had it prepared for use, and put me aboard it in a field of new-cut hay. Sure, I had baled the hay, but who got it there to be baled? Think of the extraordinary sequence of precise, interdependent rearrangements of physical resources, labor and tech nical know-how that Mr. Phelps had arranged in order to produce that crop. The soil chemistry of the land had to be analyzed; on the basis of that analysis fertilizer had to be cho sen, ordered and spread. The fields are not naturally even, so they had to be smoothed as well as possible, and sloped at the ideal rate for irri gation. (Most recently this smoothing of the fields is done by a laser-plane, in itself an extraordinary entrepre neurial achievement of hydraulics and laser technology.) The alfalfa seed had to be chosen from among different strains, bought and sown, at the right time and in the right amounts. Since the valley gets very little rainfall, a complex ir rigation system had to be built and maintained, and the irrigation car ried out on time, in the right amounts, and at the right rate. When the alfalfa started to bloom, it had to be cut, weather permitting, as close as possible to that brief time when the protein content in the plants is highest. The drying hay had to be monitored for moisture, so that the bales would be neither damp nor dried out.

At each step of the harvest process, 206 THE FREEMAN the necessary machines, costing tens of thousands of dollars each, had to be ready. There are the "swathers," which cut, crimp and pile the hay into windrows; the balers; and the harobeds, computerized marvels of levers and platforms, which pick up, load and stack the bales. All must be in use on time, because once the hay is cut, it must be dried, baled and stacked without delay to maintain its value. During the harvest, the hay broker must be contacted and negotiated with, the fields and irri gation ditches repaired, and the next round of irrigation planned. Every step of this extraordinary process must be directed by Mr. Phelps, the entrepreneur. Each cru cial decision, on which depends suc cess or failure, profit or loss, must be made by him, either directly or through the men he has hired to make them. In any case, the responReprints. ..

sibility for the result, be it credit or blame, is his. One good decision made in that white Lincoln Conti nental was worth a whole day's worth of pointing a baler, and a whole summer's worth of baling could not make up for one bad de cision. All I did was steer. He did the thinking. That is why the entrepre neur deserves the profits: he makes them possible! The successful entrepreneur, one who makes business profits in a market economy, is a social benefac tor. (In a mixed economy, with gov ernment intervention and privilege, things are often different, but that, too, is another subject.) Indeed, the profiter is the most important, most significant kind ofbenefactor any so ciety has, because such a person pro vides, in ever greater measure, the wealth all the rest of us depend on to support and enrich our lives. ® A Page on Freedom Each of these brief messages is a handy way to share with friends, teachers, editors, clergymen, employees and others a thought-starter on liberty. It also serves to introduce the reader to our work at FEE.

See page 195 for this month's Page on Freedom. (Copies of previous messages are also available; specify title when ordering.) Small quan tities, no charge; 100 or more, 5 cents each. Or, feel free to reprint the message in your own format if you'd prefer. We hope you'll enjoy this feature! Orderfrom: FOUNDATION FOR ECONOMIC EDUCATION, INC. IRVINGTON-ON-HUDSON, NEW YORK 10533 William H. Peterson Inflation: Soviet Style,1945 IF inflation is a matter of sharp run ups in the money supply ("too much money chasing too few goods"), I wit nessed that phenomenon firsthand, and it was a lesson I'll never forget. The time was the summer of 1945. The place was Berlin, site of four military powers-the U.S., France, Britain and the Soviet Union-oc cupying an utterly ruined, once beautiful metropolis. As a member of the American armed forces, I saw right away what Stars and Stripes, the Army news paper, was reporting: that a sizeable flea market had sprung up behind the burnt-out Reich chancellery on a corner of the Tiergarten (not far from 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 Ten nessee at Chattanooga.

the bunker in which Hitler had com mitted suicide), that the market functioned daily at all hours, slow ing down only for darkness or drenching rain, that the number of traders was usually in the dozens but swelling to the hundreds on Sunday afternoons, that the trading-and higgling-was never in booths but always· on foot with traders circling around to get the best bid-and-ask prices, with most merchandise sold generally passing from pocket to pocket. The traders were not Germans nearly so much as uniformed Rus sians and Americans with fewer Bri tish and French soldiers participating. With German money worthless, the currency was occupation marks lots of it. Soviet plates were supplied 207 208 THE FREEMAN by the U.S. Treasury Department, according to Stars and Stripes, the Soviet occupying forces were sud denly given months and months of back pay-in occupation currency. Russian officers frequently carried satchels full of it. Russian enlisted men often had bagfuls.

Prices zoomed. German men and women, for the most part ragged, hollow-eyed, thin, forlorn-looking, peddled what wealth had escaped the bombing and burning-silver, jew elry, Zeiss binoculars, Leica cam eras, Meissen china (frequently chipped) and bric-a-brac including ashtrays, lamps, clocks and cheap paintings-all at fancy prices. I saw a used commonplace alarm clock go for the equivalent of $85-in 1945 dollars. The main stock in trade, however, consisted of wrist watches and cig arettes (which became a kind of sec ondary currency). The watches and cigarettes were overwhelmingly supplied by the Americans, much of these items flown in unofficially by U.S. airmen, and overwhelmingly bought by the Russians. Prices became crazier. A carton of cigarettes went for $200. I saw Mickey Mouse wrist watches (which sold at home for about $5.95) com mand $150 and Waltham watches, retailing in the States for around $16.95, sell for $300.

Understandably, the U.S. Army Post Office in Berlin did a land-office business in money orders, with the 82nd Airborne Division, the main U.S. contingent stationed in the Ger man capital, sending home far more money than it had been paid. In the end, some $250 million worth of So viet occupation currency, according to estimates, had been converted into dollars-with the bill of course picked up by the American taxpayer. Who else? ® IDEAS ON LIBERTY Obliteration of Thrift As VALUES became more and more uncertain, there was no longer any motive for care or economy, but every motive for immediate expenditure and present enjoyment. So came upon the nation the obliteration ofthrift· In this mania for yielding to present enjoyment rather than providing for future comfort were the seeds of new growths of wretchedness: lux ury, senseless and extravagant, set in. This, too, spread as a fashion. To feed it, there came cheatery in the nation at large and corruption among officials and persons holding trusts.

ANDREW DICKSON WHITE, Fiat Money Inflation in France Hal Watkins Some Thingsto ThinkAbout LUDWIG VON MISES is remembered and respected as a great economist, but it is significant that his most memorable work is a book called Hu man Action. Classic libertarians use this volume as their textbook on eco nomics. Mises recognized that ma terialism is not the basic motivation for human action, but that there are more subtle stimulae involved. Materialism is not synonymous with self-interest, but many intelli gent, sincere people think it is. By taking advantage of this confusion socialists/communists are able to sell their delusion to the unsuspecting. These interventionists take advan tage of a primitive motive that man ifests itself prominently in early childhood: covetousness. When you The Reverend Mr. Watkins edits and pUblishes The Printed Preacher, a monthly gospel message, 303 North Third, Dayton, Washington 99328.

put two one-year-old children in a playpen with a few toys, this motive becomes obvious. If one picks up a toy, the other will want it and reach for it. About that time, the parents begin their lessons in sharing, and the children are completely baffled by such a concept. Communists also teach sharing, sharing with the State. The State then "shares" with the less fortu nate-if the less fortunate meet all the ideological criteria laid down by the oligarchy in charge of the State. This is raw materialism, based on the idea that it is impossible for a human being to rise above covetous ness. Actually, communists prefer it that way. They find it difficult to keep their serfs in subjection when they develop motives on a higher plane. This is the fundamental rea son for communist opposition to re ligion. Christianity denigrates cov209 210 THE FREEMAN April etousness and replaces it with loftier motives.

"Finally, brothers, whatever is true, whatever is noble, whatever is right, whatever is pure, whatever is lovely, whatever is admirable-if anything is excellent or praisewor thy-think about such things" (Phi lippians 4:8). The Christian scrip tures encourage us to think about what is true, noble, right, pure, lovely, admirable, excellent, praise worthy. I am convinced there is no conflict here with the free market system. Contrariwise, this quality list can be said to be almost 100 per cent opposed to socialism. (I am us ing the qualifying word "almost" in the event there may be something I have overlooked, but I seriously doubt the word is useful here.) The Truth About Freedom Does freedom in the marketplace have the ring of truth about it? Is competition an advantage to the con sumer, or would he be better served if the State (politboro, council of eco nomic advisors, or whatever) deter mined what he should buy, how many and what quality? Back in the 1930s the college professors told me the capitalistic system wasted enor mous quantities of goods and energy because of its competitive nature. It would be better if the Technocrats (socialists, communists, fascists) should assemble in their board rooms and determine just what was needed and how much. This would eliminate waste and everyone would be amply supplied. That was a lie, but at that time I did not know it. I was being fed such books as The Challenge of Russia, by Kirby Page.

That wonderful experiment in the U.S.S.R. was pointing up the falla cies in the free market system. Nearly 50 years have gone by since those days, and history has proved their propaganda to be utopian lies. The Soviet Union cannot feed itself. It has to steal industrial secrets. It must fence its people in. It exports its doctrines by force. Its educational system is a continuous process of brainwashing. Where is·the truth in communism? If there is any, even its own disciples have been unable to find it! How about the nobility of the Rus sian experiment? I submit there is none to be found in the leadership, the rulers. They have starved, tor tured and killed millions oftheir own people. Wherever they have tried to export their philosophy they have achieved the same result. Much of the Third World is suffering the mis eries of starvation and war because Marxists have infiltrated under developed countries in order to make havoc ofthem. Then, when the depth of tragedy has been reached, they step in and take control. Where is there anything noble about such a system? Nobility is found in the Gu lags, the prisons and the exiles.

1985 SOME THINGS TO THINK ABOUT 211 Is there anything right about Marxism (socialism, communism, fascism, Nazism)? A current expres sion in America to describe some thing that works is, "They must be doing something right." What are they doing right in Russia, Cuba, China? If they are doing anything right, why do they have to be bailed out all the time? I agree totally with the Guatemalan leader, Dr. Manuel F. Ayau, when he says, "I, for one, believe that socialism would have disappeared from the face of the earth long ago if it were not kept alive by the United States." Their regimes continue in power by means of repression, violence and terror. They cannot afford to allow an op posing party to exist within their borders. It probably has never occurred to anyone, either in or out of commu nism, to describe the system as pure or lovely. But the apostle. Paul says we should think on such things. So cialism/communism is so full of de ceit, coercion, intrigue, shortages, hunger, privation, and class warfare (planners vs. plannees), that one is hard pressed to discover purity and loveliness therein.

Is there anything that could be de scribed as excellent in the practical applications of Marxism? We search in vain in the testimony of those who have managed to escape Russia, China, Cuba, et al., to find anything that can be given unqualified praise. The best to be said for their industry, research and development, housing, education, quality of life and morals, is that they might, in some in stances, be called mediocre. More frequently the descriptions run from fair to poor to terrible. Excellence is seldom achieved via coercion; it de pends on inner motivation, some thing that is singularly absent in a slave state. The last item in our list is "praise worthy," something worthy of praise. Occasionally, we hear communists referred to as dedicated, and surely dedication is praiseworthy. But are they really dedicated? I know that someone will cite the Russian and East German athletes and their nu merous accomplishments as evi dence. Admittedly they get high marks and set records in their var ious specialties. But why? Party bu reaucrats scour the nation looking for promising young athletes, give them special training, housing, and perks, all of which give them the il lusion of being emancipated from run-of-the-mill slavery so common in socialist countries.

Sometimes we think of the KGB agents as being dedicated, but are they? Let's face it. The pay is good, and if they can be trusted they get to live outside of Russia (or Cuba). I doubt if we should even use the word efficient to describe the KGB. If this vast spy network were -really effi cient, it could survive and even do a 212 THE FREEMAN April better job with 25 per cent of its pres-it; one would have to die to escape ent personnel requirements. our subject. Perhaps there are historians who The United States of America has are saying, "Yes, but see how com-Christian roots, and the predomi munism has spread since its incep-nant religion of our country is still tion," as though they expected praise Christianity. The guidebook· for for such an accomplishment. On the Christianity is the Bible, so let us same basis, we could commend the ask the question again: Is there an bubonic plague of the Middle Ages. economic system that is compatible I saw a bumper sticker recently with what we as Christians believe?

which read "God loves you, and I'm Happily, there is. It is the free mar trying." Well, I've tried to find some-ket, free enterprise, unfettered cap thing praiseworthy in intervention-italism. Let's examine it together, ist governments, but so far such - just as we did socialism. Can we give items have escaped me. our minds and hearts to that which is true and still promote a free marThe Science of Scarce Goods ket? Ideally, how could a free market Let's turn our attention away from succeed except in an atmosphere of statism and ask ourselves if there truth? A free market assumes lim really is an economic system that is ited government which guarantees compatible with the admonition of (to the extent of its ability) life, lib Paul, the apostle, in the Scripture erty and property, the enforcement verse we quoted. Economics, the sci-of contracts, and the punishment of ence (if it may be called that) of fraud. Truth is the cornerstone in the scarce goods, touches the life ofevery foundation of such an economy.

human being on earth, even though Christians, regardless of whether most of them may never have heard they are in positions of ownership, the term. We cannot escape econom-management or employees, would ics, any more than we can avoid eat-feel compelled to seek the truth and ing and breathing. Even astronauts, embrace it in all their economic af although they may be away from the fairs. The competitive free market earth for days, weeks or months at place would even tend to make a time, cannot remain aloof from "Christians" of the unbelievers, or economics. In fact, a sortie away they would eventually be out of from earth will involve them even business. more deeply. Air, water, and food-Can we apply the term noble to the things they may have accepted quite free market? Webster's definitions lightly on the ground-become very we wish to apply here are: "having precious to them in space. Let'sface or showing high moral qualities or 1985 SOME THINGS TO THINK ABOUT 213 ideals, or greatness of character, lofty." The truly free market is al ways controlled by the buyers, the consumers. They have the privilege of examining what is being offered for sale to determine the quality and competitive price range. If, for any reason, the potential buyers decide they had rather not buy a particular product, they can withhold their business or take it elsewhere. If the seller alleges his product to be some thing which it is not, the buyer has recourse within the framework of the law. Such an arrangement tends to ward nobility on the part of all con cerned. The producer is free to sell to whomever he pleases, and the con sumer is free to buy from whomever he pleases. The net result of this ar rangement is that the producer does all within his power to provide the best possible product at a cost to the consumer which is attractive to him.

We are told in our text to think about what is right, so join me for a moment in considering the rightness of free enterprise. Let Webster re fresh our memories: "Right: what is right, or just, lawful, morally good, proper, correct .... " The free market system measures up well to each facet of the definition, with the pos sible exception of one: lawful. It should not be, but here is the big problem area. The Constitution of the United States was designed and written to protect the rights of the citizens and promote the general welfare of all of them, but over the ensuing years many politicians lost sight of this worthy intent. They be gan to abuse their position and au thority and enacted laws that ben efited a few, to the detriment of the many. Because of this, the statute books are filled with labor legisla tion, interstate commerce laws, min imum wage laws, tariffs, and so on.

Legal Restraints The free market system is right, just, good, and proper, but the legal frustrations imposed upon it by its witting or unwitting enemies have placed so many boundaries around it that they who would practice it find themselves bumping their heads and stubbing their toes. Then, to com pound the frustration, whenever there is a problem in the economic community, free enterprise is blamed for it! So, we find ourselves contemplating a concept which is right, but in many respects, not law ful. Shall we eliminate that which is right, or shall we erase the legal re straints against it? Let's see how the free market sys tem fits within the context of pure, lovely, and admirable. The term "un adulterated" certainly comes to mind at this point. We have all stood on the banks of streams and rivers at flood stage and felt dismay at the amount of silt and debris being car ried downstream. At other times we have enjoyed watching mountain 214 THE FREEMAN streams tumbling over rocks and sand and noted that the water was so clean we could drink it. Socialism is a system clogged with the silt of trash produced by the State and dumped into the stream, leaving the buyers no choice but to consume it.

The managed economy is a river whose flow is slowed by all kinds of legal restrictions resulting in rising prices and a limited selection for the consumer. In Summation Is the free economy excellent and praiseworthy? It is hard to answer this question without being redun dant. A current expression goes something like this, "If it isn't bro ken, don't fix it." I think it would be well to apply this philosophy to our subject. History tells us that when ever and wherever the free market has been tried, it worked. Then why try to "fix" it? Those who wanted to fix it, and have too often succeeded, may be called liars, thieves, or ignorant. Communism (socialism) has never been a grassroots movement, but it must always be imposed on the un suspecting by gangsters who lust for power. Instead of granting freedom to the people, they impose more and more restrictions over life and prop erty. They even regiment whatever charity happens to survive in the hearts ofthe people. Freedom (within the laws to prevent fraud), on the other hand, allows for the fullest re alization of the desires and ambi tions of those who drink of its pure waters. All who are willing and able can do what they want and work where they will. Those who cannot participate will be cared for out of the hearts of those who can.

I believe a root of our dilemma in the twentieth century is the fact that we have not listened to the Apostle who told us to "think about such things." I (DEASON LIBERTY Thomas Jefferson Resolved . .. that it would be a dangerous delusion were a confidence in the men of our choice to silence our fears for the safety of our rights: that confidence is everywhere the parent of despotism: free government is founded in jealousy and not in confidence; it is jealousy and not con fidence which prescribes limited Constitutions to bind down those whom we are obliged to trust with power. . . . In questions of power then let no more be heard of confidence in man, but bind him down from mischief by the chains of the Constitution.

Steven E. Daskal LimitedGovernment -and the Stability of Nations THE importance of limited govern ment to the cause of individual lib erty has often been discussed in these pages. In short, limited government allows for maximum individual freedom and self actualization, free from coercion. To paraphrase Thomas Jefferson, gov ernment is a necessary evil; usually, the less of it, the better. Limited government is intimately connected with a free market econ omy, which allows for the ever changing, infinitely variable nature of human economic activity far bet ter than a series of mathematical predictions, popular "laws," or bu reaucratic regulations. A govern ment that can meddle with market mechanisms has great power, and can always manage to gain even more power through its manipula tions. Similarly, a government that Mr. Daskal of Annandale, Virginia, is a defense sys tems analyst and writer.

is restrained from upsetting the market system is, by definition, lim ited, since a significant portion of all human endeavor can be classified as economic activity, governed by the market rather than by majority rule or government order. To illustrate the power govern ment gains over individual freedom through economic controls, consider the possibility in licensing busi nesses. Most nations, even in "free" nations, require businesses to be li censed, usually as an "innocent" aid in the collection of taxes. However, in many nations, such as Allende's Chile and Sandinista Nicaragua, these licenses have been revoked in the case of certain nonviolent, tax paying businesses. The businesses thus made illegal (and violently forced out of business) were opposi tion newspapers. A seemingly harm less government regulation can be twisted to malevolent ends, without 215 216 THE FREEMAN April a single change in the law. It is safer not to give such power to govern ment than to trust to "traditions" or the "sanctity of human rights." The freedom to own and use property, without specific government permis sion, is the ultimate safeguard of po litical and economic freedom.

Traditions of Freedom The importance of limited govern ments and the free market in other parts of the world is perhaps even more critical than it is in the United States and Canada. We have strong traditio~s of respect for human rights; the American Declaration of Independence holds them to be "self evident" truths, a basic premise that cannot be challenged by thinking people. Our nations have also been blessed by relative peace and stabil ity. Massive upheavals in govern ment are rare; civil wars and rebel lions even rarer. Ethnic and religious chauvinism, though intense at times, has never resulted in major sectarian conflicts. In other parts of the world, the blessings of internal peace and sta bility are much less common. Innu merable countries in Europe, Africa, and Asia have been ripped apart by ethnic, religious, or tribal animosi ties. I suspect that there is some thing common to all of the nations experiencing this terrible, self destructive turmoil and the vicious cycle of violence and repression it has created. The common thread un derlying much of this chaos and war fare is the failure of these peoples to limit government and allow free minds and the free market to en courage development through vol untary cooperation and the process of supply and demand.

Looking at most developing na tions, and even some "developed" in dustrial nations in the rest of the world, one sees a significant lack of limited government and a coincident lack offree market economies. These states are on the same endless tread mill, outlined below, which can be termed the "revolutionary spoils system" of government. (1) The poor, the intelligentsia, the workers, the army, or whomever, revolt; they see no hope of the current system addressing their grievances, and are willing to risk destruction and death to put a "more just" system in place. (2) The revolt becomes a revolution; a new government is created, theoretically or actually representing the group or groups who began the revolt. (3) To get and keep power, these new leaders plan a new system of laws, re organize the economy, and often strip the group previously "on top" of their eco nomic and political liberty. Their prop erty is expropriated, they lose their pri vacy, and their freedom to speak, write, or assemble is limited or eliminated.

(4) This newly disenfrapchised, op pressed class, in a matter of years, or at most generations, begins its own re volt ... returning to step 1.

1985 LIMITED GOVERNMENT 217 Most political historians tend to emphasize steps one and two as the most important. We often stress the "newness" of the revolutionary gov ernment, often missing the fact that whether they are "left" or "right," "Islamic," "Peronist," or "Commu nist," the results are sadly similar. A new privileged elite is created, and is given wealth and power through the forcible theft of the freedom and wealth of other groups ofpeople. The net result is an economic debit, be cause most revolutions cause mas sive destruction of economic assets (farms and crops, homes and facto ries, transportation capital, human workers and inventors) which nei ther winner nor loser can use again. A corollary result is the growing, continual fear of further turmoil, which leads to faulty economic de cisions by both individuals and gov ernments such as investing wealth outside one's own country, investing in portable wealth (gold, gems, for eign currencies), or investing in weapons and security forces needed to keep the elite in power and protect their ill-gotten gains.

This cycle is repeated with infinite variations in dozens ofcountries. The refusal of governments to provide every person equal and honest jus tice and the opportunity of each to make his own course through life inevitably leads to suspicion, ani mosity, and ultimately violence. Repeatedly, when the demands of rebels in these countries are heard, they complain that they have been denied equal opportunity, equal jus tice before the law, equal access to the media, and equal security in their homes and businesses. Whether they be Muslims in Leba non, Turkish Cypriots in Cyprus, Basques in Spain, Palestinians in Is rael, non-Slavs in the Soviet Union, or ethnic Chinese in Vietnam or Uganda, they share common com plaints. They are not allowed to speak their languages, build their businesses, educate their children, and be·.assured of physical security to the same extent that the group in power is. This isn't surprising, since the group in power is busily taking advantage of the oppressed group to improve their own wealth and posi tion rather than giving equal oppor tunity and protection to all.

The solution to these problems is so straightforward, it is amazing that it has not been grasped by the United Nations, or the United States government, and shown to the various "leaders" who wish to restore stability to their countries. The basic concepts are nothing new or alien. They are the concepts de veloped through good sense, intui tion, and experience by our own Founding Fathers. (1) A federal form of national govern ment, allowing for different ethnic, reli gious, or tribal groups to practice their own cultures without oppression or os218 THE FREEMAN tracism within their own autonomous lo cality, while allowing for easy economic and social commerce between these localities. (2) A limited government, that cannot and does not attempt to redistribute wealth or direct activities within the lo calities, except to ensure the basic lib erties essential to legal equality, physical security, and honest business practices in a free economy.

(3) A representative government, with appropriate checks and balances, that al lows individuals to have their views on national issues heard in the highest lev els of the nation, and that allows each group or locality to have equal representation. It is increasingly urgent in our tense, heavily armed world, that the coercive "revolutionary spoils sys tem" be replaced by peaceful, lim ited, federal nations with free mar ket economies and free trade. Only through these essentially peaceful, stable governmental structures will the terrible economic and social bur dens of the developing nations be able to be corrected through balanced economic development. Strong constitutions, with rigid checks and balances, must be instituted to keep out the "spoils seekers," and attract people of good sense and good will into the government and into business. The right of all peoples to main tain their religion, their culture, their heritage, and their language amongst themselves, must be ac knowledged by all governments. The right of each individual to seek his or her own destiny, and be allowed to keep the wealth and property ac crued through honest industry, must also be made sacrosanct. If the na tions of the world fail to recognize these basic realities, they are doomed to endless repetition of the cycle of revolution, destruction, and oppression they have already en dured too long. As the destructive capability of Man becomes greater, this cycle puts the people of all na tions, even those relatively "free" of , the cycle, at ever-increasing risk. ® IDEAS ON LIBERTY Alexander Addison How LITILE do men see, who promote insurrection or revolution, and hope to lead it, that they must soon sink under its force, and be among the first victims of the fury which they excite! However honest may be the views of its promoters, in the progress of insurrection or revolution, ignorant, violent, and wicked men will soon take the lead, and conduct an enraged people to any extremity.

Hans F. Sennholz LawsAgainst PlantClosings "Never again in Massachusetts," Governor Michael S. Dukakis re cently promised factory workers, will they "lose their livelihoods with no warning, no health insurance for their families and no chance to plan what comes next." The governor had just signed a law for the protection of workers against plant closings, imposing severance-pay require ments on employers and exacting other benefits for displaced workers. Three other states-Connecticut, Maine and Wisconsin-have similar laws. The legislatures of twenty-four states repeatedly considered plant closing bills; two cities-Philadel phia and Pittsburgh-passed ordi nances. Moreover, the courts and National Labor Relations Board are doing their part in making plantDr. Hans Sennholz heads the Department of Econom ics at Grove City College in Pennsylvania. He is a noted writer and lecturer on economic, political and monetary affairs.

closing restrictions the law of the land. Plant closings always impose pain ful costs on the participants-owners and managers, workers, local gov ernments and local businesses. The media describe the burdens in vivid colors-the loss of jobs and liveli hood, the poverty and despair, the revenue loss and fiscal distress, the business decline and community de cay. But it is most significant that, in all their intense coverage, not a word is uttered about the tremen dous adjustment costs to the owners. In fact, all discussions and proposals for relief merely pertain to the type and magnitude of benefits to be ex acted from the owners. Typical pro visions of plant-closing laws exact owner-paid severance benefits, owner reimbursement for employee retraining, continuation of health insurance coverage for specified pe riods after termination, payments to 219 220 THE FREEMAN April government of specific proportions of the annual wage bill, reimburse ment for employee relocation ex penses, paid leave time, etc., etc.1 Need versus Greed The argument made in defense of such employer levies usually is threefold. First, the basic need of workers for work, wage and suste nance morally takes precedence over the owner quest for profits. In the language of displaced workers, worker livelihood takes precedence over employer greed. Second, em ployers are morally obliged to rein vest their profits in the plant in which they were earned so that the workers who earned the profits may benefit from them. Iflabor is a source of profit it is rightful and just that labor should be a beneficiary of profit. Third, labor legislation and National Labor Relations Board reg ulations have created unchallenge able job rights that shelter orga nized labor from the competition of independent labor. If organized la bor has job priority over competing labor, it may also have proprietary rights. If organized workers have a legal right to their jobs it must not be denied by the owners. After all, human rights are said to take pre cedence over property rights.

When presented in such contra position, which is borrowed from the stratagems of debate, the answer is as plain as the nose on one's face. Basic needs proceed from life, which is God's creation. Who would want to argue against the priority of such needs? However, most needs are not from nature, but from custom and education. The American steel worker who faces disemployment waxes about his needs that exceed greatly those of other American workers and surpass by far the sim ple wants of his foreign peers. Case studies of plant closing clearly reveal that it affects primar ily high-seniority workers. Young workers are laid off long before the closing, during periods of stagnation and decline when losses are suffered and output is reduced. They are the primary victims of unemployment. The workers who are left when the gates shut permanently usually are 40 to 55 years old, have high job sen iori ty, enjoy occupational status, have little education, and earn ex ceptionally high wages. 2 In 1982 the steel worker whose plant closed down was earning some 189 percent of wages and benefits paid in all manufactures. The automobile worker whose plant shut down was earning 165 percent of wages and benefits paid in all manufactures. 3 Both the steel worker and automo bile worker were senior members of powerful labor unions.

It is doubtful that most owners can match the incomes of steel and auto workers. There are millions of stock holders who directly and indirectly 1985 LAWS AGAINST PLANT CLOSINGS 221 invest their savings in corporate ownership. Most stockholders are middle-class Americans with aver age incomes who, for a greater and safer future, save a percentage of their incomes. They may own stock directly or through intermediaries such as pension funds, life insurance companies, investment companies and credit unions. When seen in this light, there are few Americans who do not invest in corporate produc tion; 998,000 men and women di rectly own General Motors Corpo ration, 216,000 own U.S. Steel. 4 The median earnings of American males, in 1982, were estimated at $19,292, and those of women at $12,532.5 But steel and auto workers were earning between $23 and $25 an hour, or $46,000 to $50,000 per year. It is doubtful that they earned less than most stockholders. Some 75,080 U.S.

Steel stockholders were women; it is unlikely that many earned more than steelworkers. Plant closi~g makes the loss of the job definite and final. Disemployed workers may encounter great diffi culties finding comparable posi tions. But stockholders may be able to salvage all or most of their in vestments; they may gather their profits and desert the ship-at least, this is how many workers are view ing the situation. If it were actually true that plant closings are so prof itable to owners, thousands of fac tories and workshops would be closing every day of the week. Why should there be any production if shutdowns are more profitable? In fact, a shutdown is a desperate mea sure designed to minimize losses and taken in frustration and despair about a hopeless situation. It usu ally inflicts severe losses on owners. When production stops, both wages and capital income grind to a halt.

The owner may lose not only his in come but also his savings, that is, his capital substance, which may have taken many years to accumulate. Two particular situations short of bankruptcy may induce an owner to call a halt to production. When his plant or workshop is expected to suf fer losses that in time are bound to consume his capital, he can be ex pected to order the shutdown. If he fails to give the order a bankruptcy judge will give it in the end. Or cred itors may call a halt by refusing to grant any more credits and demand ing repayment. To avoid losses is to protect not only one's material sub stance but also the jobs of fellow workers. It safeguards the appara tus of production that generates both capital yield and labor income and preserves labor productivity and lev els of living. If these are moral ob jectives it follows that avoidance of loss is a moral task. The owner may rightfully and morally consider a shutdown when his plant or workshop is expected to earn net returns that are consis222 THE FREEMAN April tently lower than the market rate. It is a basic principle of the private property order that the rate of re turn indicates the urgency of human wants and the efficiency with which they are served. A twenty percent return, for instance, may indicate service of a relatively urgent want, a two percent return a low-priQrity want. A twenty percent return may be a reward for a job well done and an inducement for reinvestment; a two percent return may signal con sumer reluctance or withdrawal. To serve the latter is to ignore the for mer and allocate scarce resources to the satisfaction of less important wants. It impairs the economic well being of consumers, prevents the for mation of capital, and renders expansion and modernization most difficult. Where would we be today if our forebears had consistently pur sued least urgent wants and ne glected to create productive capital?

Many factors enter into the own er's decision to halt production. He must weigh the anticipated losses from continuing production against the particular losses resulting from shutdown. Valuable fixed assets may be reduced to uselessness, specific tools and equipment to scrap iron, materials and supplies to surplus merchandise to be' sold at bargain prices. Labor costs of a shutdown may be staggering as a result of the w·aste and unproductiveness of labor during the shutdown process, the contractual obligations for pension and severance pay, moving expenses in case some activities and employ ees are transferred to other company facilities. Undoubtedly there will be legal defense costs from claims and charges lodged by labor, regulators and tax collectors. If all these costs constitute the lesser evil, the owner may choose to close his plant. The Obligation to Reinvest Where economic life is free, plants open and close in an unending pro cess of adjustment and readjust ment. Ever catering to the wishes and choices of consumers, business men make capital investments, change them, withdraw them, or re place them by more productive in vestments. They respond contin ually to changes in consumer choices, to changing techniques of production, changing labor costs, en vironmental costs, government lev ies, and many other factors that af fect productivity. Uninhibited flow of scarce capital from firm to firm, industry to industry, and location to location, leads to highest productiv ity not only for the owners of capital but also for other people as workers and consumers. Working and living conditions improved when the black smith shop gave way to the auto re pair shop, and the buggy factory to the auto assembly line.

There is no obligation, economic or moral, to reinvest profits in the plant 1985 LAWS AGAINST PLANT CLOSINGS 223 in which they were earned "so that the workers who earned the profits may benefit from them." For the blacksmith, to reinvest his dwin dling returns in better tools of pro duction would not have altered the outcome. But he could have earned a handsome profit and simultane ously benefited society by investing his funds in automobile production and service. He would not have served the true interests of his work ers by keeping them on the payroll. Labor, like capital, is under constant pressure to adjust. It, too, receives its market value and price from the services it renders to consumers who, through buying or abstention from buying, issue the production orders. The worker who quickly learns a new technology, seeks employment in a new industry, or moves to a new location where jobs abound, is re warded for his effort. The worker who for any reason refuses to adjust to new situations, may cease to serve ·other people.

Consumers Allocate Returns It is erroneous to conclude that capitalists owe their profits to the ef forts and labors of workingmen, who thereby earn a residual right to prof its. Workers have no better claim to the interest earned by capitalists or the profits collected by entrepre neurs than these have valid claims to workers' wages. Production is co operation in which each production factor receives income according to the value ascribed to its services by the supreme directors-consumers. Labor receives its full wages ac cording to inexorable value princi ples, the providers of capital receive the market rate of interest, and en trepreneurs may earn profits or suf fer losses. They -all are paid in full. For labor to claim a right to invest ment capital is to claim the right to command someone's savings, for the bricklayer who pours the foundation and lays the bricks to claim owner ship rights to the house, and the steelworker earning 189 percent of average industrial wages to press his claim to the steel mill. If govern ment were to enforce such claims, there would be few houses and even fewer steel mills.

The notion of workers' rights to the plant is rooted in popular doctrines of Marx and other socialistic writers. They are making the point that the efforts and labors of workingmen generate a "surplus" over and above the wages they are getting, and that this surplus goes first into profits and other property incomes, then in large part into new investments, in creasing the quantity of capital and reducing the demand for labor. To them, unemployment primarily is an investment phenomenon that brings forth a substitution of capital goods for labor. It permits capitalists to ex ploit labor and invest their felonious gains in ever more capital and power.

224 THE FREEMAN April There is no need for a detailed re futation of Marxism and other ver sions of socialism. Other writers have elaborated and articulated the errors in great detai1.6 But it should be pointed out again that workers do not generate surpluses over and above the wages they are getting. They engender no profits. If it were so profitable to be an employer of men, there would be no business fail ures, no bankruptcies, and above all, no unemployment. Employers would be bidding feverishly for more labor and reaping profits in direct propor tion to their payrolls. All such no tions contradict both themselves and economic reality. Job Rights versus Property Rights Under the influence of exploita tion thought, legislators and regu lators have created unchallengeable job rights for organized labor. Roscoe Pound, the eminent legal philoso pher and Dean of Harvard School of Law, called them legal immunities and privileges for labor unions, their members and their officials. Orga nized labor is free to commit wrongs to person and property, and deprive nonmembers of the means of earn ing a livelihood-things which no one else can do with impunity. It en joys special privileges as a result of certain features of American labor law, such as the elimination of proven methods of law enforcement, fail ure to distinguish unlawful action by labor organizations, their leaders and their members, done outside of the employer-employee re lation, from practice in that relation, and the practice of committing all matters affecting labor organization to administrative agencies instead of courts oflaw. 7 The legal privileges and immunities of organized labor clearly reveal great political power that is brought to bear on legisla tors. This power now is put to use for new favors in the form of plant-clos ing laws.

Socialist doctrine clothes labor in come with the sacrosanctity of "hu man rights" and vilifies other in comes as the evil effects of "unearned property rights." The for mer is said to be anchored in the in alienable right to life and liberty; the latter is said to be a product of con vention and tradition, a creature of capitalism. This is why the rights of steelworkers who earn nearly twice the average American industrial in come are to take precedence over the rights of stockholders no matter what their earnings should be. This is why a teacher's claim to income from a few shares of common stock, owned directly or by her pension fund, is to yield to a steelworker's claim for plant closing benefits. "Human rights" income is denied not only to owners but also to un organized labor. After all, the basic method of unionism is restriction of labor competition; the basic effect is 1985 LAWS AGAINST PLANT CLOSINGS 225 unemployment. Union bargaining is collective bargaining by a select group, which means the denial of the right to bargaining by outsiders.

Unions claim. the right to strike, which is the right to force other peo ple to join the strike. Unions claim "human rights," which include the privilege to deny "human rights" to others. The fate of excluded people is of no concern to the union. When, de spite the legal protection from com petition, it finally prices most of its members out of the market, and turns a profitable company into a hopeless undertaking, it calls for plant-closing laws and government bailouts. Restrictions on Closings Are Restrictions on Openings There is a striking resemblance between plant-closing laws in the U.S. and "economic development laws" in many undeveloped coun tries. Foreign governments often welcome the immediate investment of American funds for purposes of productivity and employment, and simultaneously give many reasons for blocking and seizing the funds when the owner seeks to repatriate his property. They construct com plex traps for capital and then won der why, despite all the noisy entice ments, little capital is venturing in.

Similarly, the sponsors of plant-clos ing laws are demanding plant in vestments and reinvestments, but when owners seek to withdraw their funds, or merely liquidate the left overs, plant-closing laws are to seize their assets and distribute them among the workers. It takes great courage and irrepressible optimism to launch an enterprise in a state with a plant-closing law. Many entrepreneurs are optimis tic by nature, which may lead them to ignore plant-closing laws, refus ing to contemplate business failure. In old, established concerns facing minimal danger of closure and liq uidation, closure benefits and exac tions may indeed be discounted. However, for new enterprises the risk of failure is considerably greater, which makes plant-closing laws especially onerous to them. Where business mortality is high the laws may help to reduce it by dis couraging businessmen from even trying. In industries that are subject to great variations in demand or changes in technology, the laws may erect serious obstacles to new in vestment. In unionized industries that are stagnating or contracting, they may render new investment ut terly prohibitive. In every case the closure laws reduce the demand for labor and depress wage rates. When organized labor resists the down ward pressure it causes mass un employment. In the end, the law that means to prevent unemployment by order of politicians, judges and po licemen, actually creates it.

226 THE FREEMAN April Plant-closing benefits must be viewed as just another brand of fringe benefits that may raise the cost of labor and reduce the demand for labor. To employers, they are just another levy similar to those exact ing unemployment compensation, workers' compensation, Social Se curity contribution, and all the other mandated exactions. In the long run, they tend to reduce take-home pay by forcing employers to allocate more of a worker's earnings to his fringe benefits. Take-home pay must fall when fringe benefits rise. But this adjustment process, which takes time, is strenuously resisted by or ganized labor. It refuses to learn that inability to cover labor costs by labor productivity brings forth more un employment. It is so difficult to ad mit that unemployment is a cost phenomenon that purges loss-inflict ing labor. Plant-closing laws give employers a powerful incentive to build plants and facilities in states that do not have closing restrictions. And if companies are located in such states they have an incentive to substitute capital for labor wherever possible, which reduces the demand for par ticular labor and depresses its wage rates. In situations of wage rigidity and labor resistance it causes un employment. In the end, economic principle always prevails over the power of legislators, tax collectors and policemen.

Keeping Business in Town Numerous plant-closing bills are proposing requirements for lengthy prenotification, generous severance pay to workers and confiscatory tax ation, called community restitu tion. 8 They are seeking to keep busi ness in town by rendering closures and departures financially prohibi tive. But all the threats of confisca tion and restriction imposed on own ers cannot make business any more durable. A business that fails to compete ef fectively in the production of goods and services is bound to fail in the end. It will fail if it is found wanting in product price or quality and if, for any reason, the costs of production leave no competitive margin of re turn to the owners of capital. A pro ducer who can pay only $1 per hour for skilled labor is not competitive in the American labor market; a pro ducer who can earn only three per cent on equity capital is not compet itive in the American capital market. Both are destined to fail in the end. Threats of dire conse quences may make them contract or even discontinue all the sooner. Nor can Federal subsidies, grants and loans to workers and communities avert the ultimate consequences of business inability to compete.

Contrary to labor dogma, business profitability provides job protection. The best employer is a profitable em ployer who plans to expand his op1985 LAWS AGAINST PLANT CLOSINGS 227 erations and needs more labor. To at tract qualified labor he must effectively compete not only in wage rates and fringe benefits, but also in working conditions and steadiness of work. He must be more attractive than his competitors. Employers who for any reason suf fer losses cannot offer job protection because their bosses, the consumers, do not grant protection to them. In time, losses tend to consume busi ness capital, give rise to debt, and force business to contract and dis charge labor. Alert workers observ ing the decline and foreseeing the end seek employment elsewhere. They abandon the ship before it runs aground. Other workers with less foresight and mobility may decide to stay to the bitter end. After all, un employment compensation, sever ance pay, and other transfer benefits encourage them to wait and see.

Plant-closing laws may encourage them to cling to failing employers as long as some assets are left. In many cases workers are not just innocent bystanders and victims of business failure; they may be active parties and contributors to the di lemma. Acting in unison through a militant union, they may exact max imum pay for minimum work. Or ganized steel workers receive 189 percent of wages and benefits paid in all manufactures, automobile work ers earn 165 percent. They earn these amounts for work performed according to union work rules that reduce effort and output and signif icantly raise labor cost. And last but not least, union labor usually is an gry labor with long lists of griev 'ances. It is hostile labor that is un able and unwilling to compete. 9 AdjustingLabor Costs There are countless reasons for business decline and plant closing. But no matter what they should be, workers can nearly always ward off the decline and avert the closing. In many processes of production labor is the most important factor of pro duction inasmuch as its costs exceed all other costs. A small reduction in labor cost may make a plant profit able and competitive again. A steel mill, no matter how old-fashioned its equipment, can be made to be prof itable and competitive through a re duction in labor costs. Any automo bile plant can be made to function again through savings in labor costs.

It is utterly senseless for any plant to shut down when labor costs are far above the average and union rules remain in effect. And yet, all over the country countless mills, fac tories and workshops are abandoned with labor costs at their peak. A few concessions and "givebacks" granted in exchange for future claims and fa vors rarely make a difference. It is sad when great steel cities turn into rust cities with union pay rates and union work rules in full force. It is 228 THE·FREEMAN April tragic when jobs are lost forever and plant and mills are razed with labor costs at record levels. Nearly every plant, mill and work shop could be saved and the disaster of economic loss and unemployment be avoided through improvements in labor productivity and reductions in labor costs. How the American steel industry would prosper again if la bor costs were lowered to market productivity levels! How the auto mobile industry would thrive again if the cost of labor were determined by the free choices of car buyers!

Many a plant would become com petitive again if only the union work rules would be rescinded and man agement be permitted to direct labor again. And many a mill could be saved if workers would labor in ear nest instead of "spreading the work" or pressing grievances against hap less employers. Rusty mills and abandoned factories would come to life again if organized labor were to acquiesce in the market wage, which is the productivity wage. Labor unions never relax their pressures for maximum labor cost regardless of the pain inflicted on many workers and investors. They persevere in defense of basic union ideology and their very existence. If they would listen to the warnings of one employer they would have to lis ten to all. If they would relax their grip on one they would have to relax on all. They would be returning to market wages and conditions that are determined by labor productiv ity rather than union power. By im plication they would also be admit ting that their own policy of maximum pay for minimum work is an important cause of stagnation and unemployment. But they would rather linger in depression and call for plant-closing laws than to draw this conclusion.

The Cost of Government Next to the cost of labor is the cost of government as the greatest bur den of business. Most corporations pay much more in taxes than they yield in dividends to their owners. In the U.S. they face painful exactions by three levels of taxing authorities: the federal, state and local govern ments. State and local levies differ greatly depending on the voters' con ception of entitlement and social jus tice. In some locations they often reach confiscatory levels at which businesses by the score are forced to close their doors; in other states and places where the levies are lower, business may prosper a:p.d expand. In international trade and com merce the combined load of federal, state and local levies and regula tions may determine the competi tiveness of enterprises. In situations of depression and un employment, government is akin to organized labor: It refuses to relax its hold on the victims. In fact, state 1985 LAWS AGAINST PLANT CLOSINGS 229 and local authorities usually in crease their tax rates when revenue declines for any reason. They re main deaf to the cries of business be cause they would have to listen to all if they were to listen to one. They keep on taxing, regulating and con trolling regardless of the deepening depression around them. Political entitlement and transfer take pre cedence over any aspect of busi ness. 10 It is sad to observe the decline of commerce and industry with tax rates at record levels. It is tragic to witness the closing of factory gates with tax collectors and union agents arguing over the possession of the gates.

Plant closings always inflict great pain on the participants. Discussion and proposals for relief usually deal with benefits to be exacted from owners, that is, more pain to be in flicted on owners. The noisiest pro ponents are politicians, tax collec tors, and labor leaders. And yet, the more pain they manage to inflict on entrepreneurs and investors, the deeper workers sink into depression and unemployment. I -FOOTNOTESIDaniel A. Littman and Myung-Hoon Lee, "Plant Closings and Worker Dislocation," Richard B. McKenzie, ed., Plant Closings: Pub lic or Private Choices?(Washington, D.C.: Cato Institute, 1984), p. 127. 2Ibid., p. 132. 3Keinin, Mordechai E., "Wage Competitive ness in the U.S. Auto and Steel Industries," Contemporary Policy Issues 4 (January 1984), pp.39-50. 4GeneralMotors Annual Report 1983 (Detroit 1984); U.S. Steel Corporation 1983 Annual Re port (Pittsburgh 1984). 5U.S. Department of Labor, Bureau of Labor Statistics, Handbook of Labor Statistics Bul letin 2175 (December 1983), p. 98.

6Two Austrian economists, Eugen von Bohm Bawerk and Ludwig von Mises, have exploded every aspect ofthe exploitation doctrine. Bohm demonstrated that it contradicts both itself and the realities of the world. Cf. Capital and In terest, 3 vQls. (South Holland, Ill.: Libertarian Press, 1960); Mises penned a comprehensive theoretical and philosophical refutation. Cf. Socialism (New Haven, Conn.: Yale University Press, 1951), also Human Action (New Haven: Yale University Press, 1949). 7Roscoe Pound, Legal Immunities of Labor Unions (Washington, D.C.: American Enter prise Association, Inc., 1957). aU.S. Representative William D. Ford, "Statements in Support of the National Em ployment Priorities Act," in Plant Closings: Public or Private Choices? ed. Richard B. McKenzie (Washington, D.C.: Cato Institute, 1984), Appendix. 9In the steel cities of Western Pennsylvania, Eastern Ohio and West Virginia, where un employment among steel workers exceeds fifty percent, labor is especially hostile and angry.

In Youngstown, Ohio, 989 angry school teach ers and other support personnel such as li brarians, counselors, and psychologists re cently voted for union representation, ninety abstained from voting, and seven voted to re main free. (Youngstown, Ohio: The Vindicator, October 19, 1984), p. 1. What can be expected of working people if their teachers long for and depend on union representation? lORobert M. Bleiberg, "Oh Albany!" Bar ron's, December 10, 1984, p. 9.

Ridgway K. Foley, Jr. ~:==========~Jr Essayon Caring ~\. ~,=============~ POLITICAL ASPIRANTS are notably "concerned and caring" for the com mon man. But is theirs a genuine compassion, or does it lead to plans and actions opposed to their pro fessed aims? I suspect that the political/eco nomic notion of "caring" generally amounts to ideological and practical extortion. A significant number of the self chosen saviors of mankind employ the caring concept as a tool for self satisfaction and aggrandizement. Just as some men and women erect concert halls and athletic field houses as modern pyramids to pro claim the importance of their being, so too do other individuals seek rec ognition and remembrance by the Mr. Foley, a partner in Schwabe, Williamson, Wyatt, Moore & Roberts, practices law in Portland, Oregon. 230 concoction of organized programs de signed to alleviate real or feigned in justices besetting the world about them.

In some cases, the benefactor achieves substantial and tangible pleasure by participating in such a plan-he becomes involved in some activity which provides meaning to an otherwise desultory life. In other instances, his reward takes on a much more material flavor-propo nents of many pseudo-charitable de vices make a very good living from their parade of good works, deriving power or prestige from these en deavors. Yet another gaggle of com passionate souls creates the intan gible pleasures incident to con verting the resistant and erring heathen to a particular philosophi calor theological point of view.

ESSAY ON CARING 231 There is, of course, a fourth divi sion-men and women who devote their efforts to assisting others in need without hope of tangible or in tangible earthly rewards. Unfortu nately, the numbers of this latter group appear to be declining. The Dividing Line A remarkable duality pervades the concept of caring and its current im plementation. Force represents the dividing line. Application or refrain from coercion separates the wrong ful intrusion into the sanctity of the life of another from the permissible compassionate endeavor. The law ought not impede attempts to aid others or to solve problems where those enterprises occur without com pulsion. This should be true where the majority decries the problem as ridiculous or the solution as ill advised; after all, the crowd often proves ineluctably wrong and, in any event, no human being possesses either the ability or the moral priv ilege to substitute his judgment for that of another choosing sentient being.

Conversely, no one should employ the legal monopoly of force to compel adherence to, participation in, or compliance with an artifice designed to better another, no matter how well intentioned or meritorious the plan. No individual should be permitted to thrust a decision or shunt responsi bili ty for the consequences of his choice upon another, unwilling hu man being. Disregard of this salient principle necessarily denies the dignity of that other individual, since moral choice and accountabil ity constitute an essential element in the human condition. Those who -purport to care, then, must submit to a. test of means and motive. The law (rules and orders created and enforced by mankind) should not address the means employed by those who promote compassion as a political or economic discipline ex cept to assure that no individual or entity compels a dissenter to assent to, support or participate in a pro posal disagreeable to the latter for any reason.

All too often, those who preach car ing, compassion and concern rest their case upon the root of envy: Loathe the rich and trust the poor; take from the evil producer and give to the high-principled but helpless victim of circumstance and oppres sion. Such caring persons really do not care at all about others: The cre ators must be plundered, the users must be pandered, by force and viol ence, by false premises and prom ises, in order to salve the promoter's inordinate ego and to effect his flawed view of mankind and the world. In these, the vast majority of instances, one can always count upon the concerned to care-for themselves!

232 THE FREEMAN April Do Caring Programs Improve Our Lot? Ignore for the moment the moral issue of might-makes-right in a good cause. Assume high-minded benev olence on the part of those who ex press concern. An essential question remains: Do the programs proposed by the "caring people" achieve mer itorious results-do the solutions al leviate hunger, suffering and hurt? Few individuals-and none of the vocal proponents of structured com passion-even pose this fundamen tal question, and for good reason: The undeniably negative response casts overwhelming doubt not only upon the efficacy of the particular solution but also upon the very sub stance upon which the adoring ad vocates of governmental charity base their lives! Make no mistake: All compulsive charities employ the state as the ultimate solution to any preconceived ill. One must search long and hard today to learn of or ganized attacks on human despair which resolutely avoid partaking of governmental subsidy or other coer cive aid. Yet the presence or absence offorce represents the imperative se lector, the pIumbline segregating ac ceptable and unacceptable charita ble response.

Analysis of the effect of coercive programs must focus upon two dis crete truths: First, the forceful re sponse always produces unintended and unwanted consequences which render the program counterproduc tive. Second, the institutional re sponse to a problem is always less helpful than the individual response. Initially, the unseen consequence so unerringly and eloquently de scribed by Bastiat and Hazlitt inev itably rises up to smite those who will do good with other people's lives and property. Consider the current plight of the starving legions in Af rica. Only the truly cruel eschew compassion for the suffering of an other human being. Nonetheless, most of Africa en counters famine, plague and pestil ence with great regularity. Rhodesia (until its recent transmutation into Zimbabwe) and the Republic of South Africa serve as the most re markable exceptions to this rule. The perceptive should inquire as to the reason for this recurring condition.

After all, Africa contains a store house of natural resources, a ple thora of exceptional ports, varieties of climate and rainfall, and other in dicia of an ability to provide its den izens with an adequate living. Nevertheless, other nations on other continents lacking equivalent nat ural resources and gifts must pro vide both continuing subsistence and emergency foodstuffs to the people of the African Continent. Delve beneath the superficial and one discerns the reason for this ex traordinary seeming dichotomy. Slavery impoverishes; freedom feeds.

1985 ESSAY ON CARING 233 Africa contains myriad venal, op pressive and murderous political re gimes dedicated to the unyielding repression of liberty and the en trenchment of socialism. A free so ciety-necessarily including a free economy-would and always will produce an abundant outpouring of goods, services and ideas in Africa as elsewhere. Instead, the caring peo ple importune (sometimes with force, sometimes with manipulation) their fellows to aid the starving Africans, apparently oblivious to the fact that bad values and bloody dictators have caused the current and ever-present despair. The gift of largess does little to alleviate longterm hunger in Af rica. And donations strangely turn up in the pockets of dictators, dic tocrats and gunrunners. Unfortu nately, ~ concomitant effect impedes the productive from future produc tion. Human beings robbed of the fruits of their labors tend to reduce their future production, boding ill for the next generation of starving Africans.

Other examples abound, but the point is clear. Those politicians who accuse their critics of cruel and in human conduct if they resist trans portation of great gobs of money to the poor, the helpless, and the dis advantaged, necessarily posit the axiom that it is not cruel and inhu man to steal and distribute as a mod ern Robin Hood. Not only are such politicians wrong but also their very actions will increase, not diminish, the problem perceived! As a dear and wise mentor early taught me, "No problem exists which the meddling of politicians will not make worse." Sadly, the liberal faith in democ racy resolutely clings to a belief in government as the essential vehicle to help the less fortunate. Even the "old right" concurs that the state must aid those incapable of self-as sistance, and the debate between the "old right" and the "old left" nor mally devolves into a controversy of definitions and a discussion of the level of the state most desirable to render the assistance.

Proper Role of the State Unfortunately, acceptance of the cliche avoids the seminal question concerning the proper role of the state. The inquiry cannot be phrased in terms of "states rights," for states possess no "rights," only powers of coercion. The proper issue is: Given the existence of human misfortune, who shall attempt to alleviate that condition? Surely not the state, the eternal compulsory bungler. Alle viation of distress calls for creative action. The state possesses only de structive powers. In face of calamity, we all believe that others should come to our assistance, yet charity and compulsion are mutually exclu sive terms. Man ought to perform properly, and natural law (not the victim, not the positive law) ought to 234 THE FREEMAN exact the penalty for failure to do so. Again, the moral and the efficient coincide. The individual response to a problem is always better than the institutional response. It is more personal, more meaningful, more ef ficient, more direct. It tends to reach the heart of the issue with a mini mum of overhead and delay, to resist excesses, and to avoid much weeping.

I am so very tired of caring people and sharing people who search for material or emotional monuments for their good works. They care about themselves; they do not share their own, but that belonging to another. I glory in the occasional iconoclast who disdains symbols and slogans and probes straight to the essence of a neighbor's concern, with love and without fanfare. The overworked phrase "unsung heroes" truly de scribes the men and women who visit the sick, comfort the elderly, soothe the confused children and perform all manner of good works. It is much easier to lobby legislators to send "aid" (tax dollars) to Africa than it is to spend an afternoon in a nursing home, or Thanksgiving serving the homeless a turkey in a volunteer mission. I think that such a rare breed truly cares many times more than all those who blather openly about their commitment. @ IDEAS ON LIBERTY Socialism in Ethiopia SOME YEARS ago I was arrested and underwent interrogation by officers in the Ethiopian army, the police, and finally by the Criminal Investi gation. One of the charges against me (the only true one) was that I had given charity to some widows and orphans who were not approved by the State for private charity. I was repeatedly told that charity is the work of the State and if I wanted to help people, I must give my con tributions to the governing body to distribute. (In the U.S. one is not yet arrested for helping poor widows and orphans, but charity is popularly deemed to be the work of the State and not of individuals, families, and voluntary institutions.) Peace, economic progress, and freedom is the goal of most people, even of multitudes who profess adherence to socialist ideology. It is inevitable, however, that socialism in Africa or elsewhere is incapable of attaining these goals.

FRANCIS E. MAHAFFY, 1976 Dean Russell Do Machines Destroy Jobs? YES, machines do destroy jobs. In fact, that's the purpose of machines, Le., to do the work formerly done by labor. And if a machine doesn't re place human labor, the making of that machine has been a waste of scarce resources, including the skilled labor that invented and con structed the machine in the first place. Usually, however, this relation ship between machines and jobs is expressed more softly, e.g., machines decrease the costs of production, thus permitting lower prices to consum ers; or machines are helpful to manDr. Russell, recently retired from a full schedule of academic work, continues freelance consulting, lec turing and writing from his home In Westchester County, New York. This Is one of a series of articles examining current interventions of the welfare state In the light of warn ings from the French economist and statesman, Frederic Bastlat (1801-1850).

kind because they can do the boring and repetitive tasks, thus freeing human laborers for the more inter esting aspects of production. Both statements are true, of course. But in every case, the purpose of a ma chine is to replace human beings and wipe out existing jobs. That's good, however, not bad; for that process is the basis of all human progress. In various of his essays and speeches, Frederic Bastiat clearly saw this relationship between ma chines and jobs. And as usual, after pointing out "what is seen," he also looked behind popular opinion for "what is not seen." "I see some machine replacing 20 or 100 workers," wrote Bastiat. ("H uman versus Mechanical La bor") But if it's true, he contin ued,"that the domain of invention [machines] and that of labor [jobs] 235 236 THE FREEMAN April cannot expand except at each other's expense, then it must be in places where there are the most ma chines-in the [textile districts of England], for example-that one should expect to find the fewest workers." But there's where you find many thousands of workers at their new jobs of operating those ma chines! Bastiat continued: The mistake made by the opponents of ... machines is in evaluating them ac cording to their immediate and tempo rary effects instead of following them out to their general and ultimate consequences.

The immediate effect of an ingenious machine is to make a certain quantity of manual labor superfluous for the attain ment of a given result. But its action does not stop there. Precisely because this re sult is obtained with less effort, its prod uct is made available to the public at a lower price; and the total savings thus re alized by all purchasers enables them to satisfy other wants, that is, to encourage manual labor in general to exactly the same extent that it was saved in the par ticular branch of industry that was re cently mechanized. The result is that the level of employment does not fall, even though the quantity of consumers' goods has increased. Let us give a concrete example of this whole chain of effects. Suppose that the French people buy ten million hats at fifteen francs each; this gives the hatmaking industry an income of 150 million francs. Someone invents a machine that permits the sale of hats at ten francs. The income of this industry is reduced to 100 million francs, provided that the demand for hats does not in crease. But the other fifty million francs are certainly not for that reason with drawn from the support of human labor.

Since this sum has been saved by the pur chasers ofhats, it will enable them to sat isfy other wants and consequently to spend an equivalent amount for goods and services of every kind. With these five francs saved, John will buy a pair of shoes; James, a book; Jerome, a piece of furniture, etc. Human labor, taken as a whole, will thus continue to be supported to the extent of 150 million francs; but this sum will provide the same number of hats as before, and, in addition, satisfy other needs and wants to the extent of the fifty million francs that the machine will have saved. These additional goods are the net gain that France will have derived from the invention. It is a gra tuitous gift, a tribute that man's genius will have exacted from Nature. We do not deny that in the course of the transfor mation a certain amount of labor will have been displaced; but we cannot agree that it will have been destroyed or even lessened.

Machines Mean Progress The beneficial effects of machines are far greater than Bastiat stated or even imagined in the 1840s in France. One of his examples of how machines increase production with out decreasing the number of jobs was the textile industry in England. So I'll start there too, and dwell briefly on the fantastic outpouring of machines during the Industrial Rev1985 DO MACHINES DESTROY JOBS? 237 olution, and the effect that devel opment had on jobs and the "quality and length of life." I'll begin by citing a few statistics I believe to be correct. And since fig ures neverspeakfor themselves,but Yn.U-g-t a.l"<N'9-'Ygh~ g~ok~n fo-r, I'll offe-r my interpretation of their meaning. Population of England and Wales Year PopUlation 1600 5 million (rough estimate) 1700 5112 million (rough estimate) 1750 6112 million (rough estimate) 1801 9 million (census) 1820 12 million (census) 1831 16 million (census) In London in 1750, about 70 per cent of all children died before age five.

In London in 1830 (80 years later), about 30 per cent of all children died before age five. The so-called Industrial Revolu tion in England had no particular beginning date; it was a long and slow development. But the hundred years between 1750 and 1850 are the dates most often used when refer ring to the advent of power-driven machinery, the development of the factory system, rapid industrializa tion, and the laissez-faire or "free market" economy. And that's the pe riod Bastiat usually had in mind when he referred to the effects ofma chinery and mass production. At the time Karl Marx was de-' scribing the degrading living con ditions of the people who worked in those early factory towns of indus trial England, these statistics were readily available to him. For it was in "the world's greatest library" (the British. Museum) that he did most of his research and writing on the "ex ploitation theory" that he developed into a book that shook the world.

There's just no way he could have overlooked those statistics on the population-explosion that occurred in England with the advent of power driven machinery and mass produc tion. Since there's no reason to sug gest he didn't believe what he was saying, perhaps he just didn't be lieve the statistics. Since I can't know, I'll leave it with this: Karl Marx was a far better re porter than he was an economist and philosopher. The terrible and de praved living conditions of the "working classes in England" were as he described them, perhaps even worse. But he was so busy looking at the rotten trees that he never did see the flourishing forest in which they were located. ChildrenLived Longer With the advent of machinery and child labor in factories, children were living longer; a drop in the death rate from 70 per cent to 30 per cent in 80 years is a mark of tremendous prog ress by any measurement. An explo sion of the population from a some238 THE FREEMAN April what static level of six or so million in 1750 to more than 16 million in 80 years is almost unbelievable.

(Perhaps that's why Karl Marx ig nored the statistics; they strained credulity.) At any rate, he predicted categor ically that widespread poverty, mass starvation, and death among the working classes would be the inevi table results of capital formation and industrialization in a market (non socialist) economy of private own ership. His prediction was totally wrong. The population exploded because people began to live longer. After 1830, the rise was even faster, as hundreds of thousands of Britons poured out of those islands and set tled all over the world. But I stopped my statistics with 1831 in order to forestall any possible use of invalid reasons for those impressive figures. For example, public health mea sures were almost nonexistent in England in 1830; in fact, the crowded conditions in those industrial towns caused them to become far more un sanitary and disease-ridden than they had been a hundred years be fore. So that possibility for the in creasing life span can be ruled out.

Nor were there any breakthroughs in medicine. The vaccines that were to save the lives of so many children didn't even begin to come along for another 30 years or so. Nor was there a "green revolution" to increase the supply of food. True, the potato was coming into populari ty around 1800, with its four-fold increase in food production even on marginal agricultural lands. But that was occurring mostly in Ireland and Poland. The potato didn't become a staple in England and Wales until the middle of th ~ cent~ry. Increasing Freedom Even if government welfare schemes and controls over the econ omy could cause a rise in the mate rial level of living, that was not a factor in this particular increase in longevity. For government interven tions in the economy were actually decreasing during this period. Per centagewise, there was less govern ment welfare instead of more. The economy became increasingly free.

I can find only one reason for the increase in longevity and popula tion. With machines, people pro duced more than they did without machines, and they were paid wages for their work. True enough, they were paid only a pittance for their long hours of exhausting and dan gerous labor. But at least they were paid more than they had been paid before entering those primitive fac tories and mines. And with the little money they were paid, they could buy food, something they couldn't do before they had any jobs at all. As a result of their spending of the 1985 DO MACHINES DESTROY JOBS? 239 pennies (wages) they earned, food be gan to come into England from all over the world. And even though those workers had only a little food in their bellies, they and their chil dren lived longer than they did with out any food at all. As the machines improved, the operators of the ma chines produced still more, and they were paid more; not much more, it's true, but a little more. Thus they could buy even more food and live even longer-especially the children.

Finally there was enough capital (machines) available to enable a man to produce enough to put his chil dren into schools, if he wished to do so. It was machines under private ownership, not child labor laws, that finally took children out of the fac tories and put them into schools. If this surprises you, think of what would necessarily happen to chil dren today if there were no ma chines; we would all be grubbing from dawn to dusk-most likely for grubs themselves. And millions of us would soon die of starvation. In addition to a dramatic increase in the life span of human beings in general, machines also rendered an other signal service; specifically, ma chines were mostly responsible for the abolition of human slavery, a mass wiping-out of the jobs of mil lions of human beings. But, again, that's the purpose of machines, i.e., to abolish jobs by replacing human labor with mechanical labor.

The Columbia Encyclopedia tells us that "The British, in abolishing slavery, were primarily motivated by economic, not humanitarian, inter ests. While the institution produced great wealth under the mercantilist system, it became. unprofitable with the rise of industrial capitalism." MachinesDisplacedSlaves H. G. Wells, in The Outline ofHis tory, discusses the same idea: "A vast proportion of mankind in the early civilizations was employed in purely mechanical drudgery. At its onset, power-driven machinery did not seem to promise any release from such unintelligent toil. ... [But as the mechanical revolution] went on, the plain logic of the new situation asserted itself more clearly. Human beings were no longer wanted as a source of mere indiscriminated power. What could be done mechan ically by a human being could be done faster and better by a machine." Whatever else slaves might be used for, it's certain they couldn't be trusted with the responsibility of op erating the power-driven ships, trains, and factory machines that were becoming increasingly com mon in the western world of the late 18th and early 19th centuries. Thus the ever-present moral arguments against slavery were soon but tressed by the overriding economic arguments against it.

240 THE FREEMAN April Beginning in 1833, the British Parliament rapidly outlawed the practice of slavery throughout their vast empire. Of course, it could have been merely a remarkable coinci dence that slavery diminished as mechanical sources of power in creased. For example, what about slavery in the United States? Since this nation had many machines, why wasn't slavery voluntarily abolished here? Slavery in America The history of human bondage in the United States also lends support (with a reverse twist) to the theory that machines, rather than morality or education, may have been of pri mary importance in determining the issue of slavery. Roger Burlingame, in his Backgrounds of Power, ex plains that reverse twist while dis cussing Eli Whitney's 1793 inven tion of the gin for cleaning cotton. "The gin led directly to a social, economic, and political crisis. By in creasing a hundred fold the produc tivity per worker in separating short staple cotton from its tenacious seeds, it produced an unbalance be tween cleaning and picking, plant ing and cultivation. The faster the cotton was cleaned, the more labor was required in the field. Thus slav ery, moribund in 1790, became a dominant institution .... "

Before the cotton gin, not much cotton was grown in the South because it was too expensive to clean by hand, even when the hands be longed to a slave. But Whitney's first crude machine enabled a man to clean 50 pounds of cotton a day, and rapid improvements to the machine soon doubled that amount. The re sulting demand for cotton caused its cultivation to become highly profit able. But picking cotton was such a backbreaking and monotonous task that it was the last job a free man would take. Since, at that time, there was no machine to relieve the drudg ery of the job-and since no educa tion or skill was required-it auto matically fell to slaves. Those are two tremendous ad vances in the well-being of mankind that can be attributed directly to machines that were designed to put men out of work, and did. (1) With machines, we produce more, and have more, and live longer-even though we actually work less. (2) Since human slaves can't compete with inhuman machines, millions of slaves lost their jobs.

When you stop to think about it, that's a remarkable achievement for something (mechanization) that's traditionally considered the deadly enemy ofthe working man. The mass education that's made possible only by machines, seems 'merely to have intensified our hatred and fear ofour benefactor. As Bastiat said, machines do in deed eliminate specific jobs. But the 1985 DO MACHINES DESTROY JOBS? 241 net result of the machines (capital formation) is to actually increase the number of jobs available in the econ omy. You can satisfy yourself on this point by using a five-year period to measure it. For example, in 1980, there were a given number of jobs in the United States, along with a given amount of capital (machines). During the five year period from 1980 to 1985, those machines eliminated hundreds of thousands of jobs. But if you com pare the number of jobs at the be ginning and end of that five-year pe riod, there will be more jobs now than in 1980.

Further, the new jobs will tend to be less physically demanding,· be cause of the machines, than the jobs they replaced. The total pay for the added jobs will be higher (on the av erage) than for the jobs of five years ago. In addition, there is likely to be a decrease in the number of hours wor ked for the higher pay. That's what machines are all about. This relationship holds true, how ever, only as long as our laws are de signed to encourage capital forma tion, Le., more machines. If the advent of more efficient machines is forbidden or impeded, the result will indeed be more jobs-but hours of work will lengthen, the work will be come more physically demanding, and pay will plummet dowt:Lw~rd. Frederic Bastiat's satirical para graph written 135 years ago could just as easily have been written to day: "A curse on machines! Every year, their increasing power con demns to pauperism millions of workers, taking their jobs away from them, and with their jobs their wages, and with their wages their bread! .A curse on machines!"

An Increasing Reliance on GovernmentWelfare Why do we continue to think of machines as "the enemy"? I don't really know. I can easily understand why "an automated welding pro cess" would be thought of as an en emy by the man who just lost his job to one. And even though I don't ad vocate any government interven tions against peaceful people in a free market economy, I don't protest unduly the "retraining programs," or "unemployment compensation" to offer temporary support to a willing worker seriously searching for an other job, or any other "politically realistic" measures designed to ease the transition from a lost job to an other job. I tend to look on those measures like taxes, Le., a cost for living in reasonable harmony with hundreds of millions of people with different viewpoints. But that's not the problem; after all, those "job transitions" involve thousands (not millions) of people.

Thus the problem goes much deeper. I suspect it's a general fear of the free market that's based on personal re242 THE FREEMAN sponsibility for our own free choices. We enjoy freedom to choose, of course. And as long as our choices turn out reasonably well, we'll de fend it as a "human and inalienable right." But when the choices turn out to be unfavorable, we turn to a "greater power" for help. That's cer tainly understandable; it proves only that we're human beings. That "power" used to be God and, perhaps, voluntary help from our neigh bors. Increasingly, however, we're turning to government for help-all over the world. With Bastiat, I can only recom mend that we think beyond what is immediately seen, to what is not seen; think beyond the short-term ef fects, to the longterm effects. I know only that "more government" is not the answer. @ID THE LAW by Frederic Bastiat The law, it has been said, is nothing more than the will of tyrants. So it has been many times in history. But just laws depend upon a law which under lies the law passed by legislatures or declared by rulers.

It is a law which provides the framework of liberty. Emancipation from the doleful theories of the compulsive state awaits discerning readers of this brief treatise. This remarkable volume, translated in 1950 by Dean Russell, has been a best seller since then-one of the most clear and concise ar guments of the case for limiting government in the cause of freedom. 76 pages Cloth Paperback $3.50 $2.00 Special offer: 60 cents each for 100 or more copies (paperback) to a single address. Order from: The Foundation for Economic Education, Inc. Irvington-on-Hudson, NY 10533 (Postage paid on prepaid orders; otherwise $2.00 per order for billing.) Dennis L. Peterson Set the Standard High ONE of my former colleagues devel oped a reputation for strictness as a teacher. He was a stern disciplinar ian, a stickler for detail, and a fa natic for punctuality. Although negative comments were frequently heard from his students, after their graduation they invari ably looked back on his classes and expressed appreciation for his toughness. They recognized that it was because of his high expectations that they had learned English gram mar and literature.

It is a time-proven fact that one tends to get out of organizations and individuals what he expects of them. Mr. Peterson Is a freelance writer in East Greenville, Pennsylvania, anxious to share some of the lessons he's learned concerning the freedom philosophy. We even see this principle at work in ourselves with what has been called self-fulfilling prophecy. We have a need, both as a nation and as individuals, to set our stan dards high. This includes our expec tations for our governments and their officials, our educational insti tutions and their teachers, and our religious organizations and their leaders. But it is even more impor tant that we set high standards for ourselves as individuals. Too often we are guilty of expect ing more from others than we dare demand of ourselves. The individual is the foundation of society, and "If the foundations be destroyed, what can the righteous do?" (Psalm 11:3) On the other hand, if each individual 243 244 THE FREEMAN April keeps his own standards high, the other elements of society will take care of themselves.

How can this be accomplished? First, we can demand honesty and integrity of ourselves in business and personal life. We can pledge our selves to maintain personal morals and professional ethics that are above reproach. We can temper all of our actions by the consistent ap plication of the Golden Rule: "There fore all things whatsoever ye would that men should do to you, do ye even so to them." (Matthew 7:12) Second, we can discipline our selves to continue our own self improvement and self-education. Will Rogers, that august philoso pher and conveyor of common sense, put it so clearly when he said, "Everybody is ignorant, only on dif ferent subjects." Successful men, in all callings, never stop acquiring special ized knowledge related to their major purpose, business, or profession. -Napoleon Hill In his book Think and Grow Rich, Napoleon Hill wrote, "Successful men, in all callings, never stop ac quiring specialized know ledge re lated to their major purpose, busi ness, or profession." One who is not continually learning is doomed to failure. On the other hand, there is no limit to the successes that can be achieved by the one who will con tinue learning.

Third, those of us who have fami lies of our own can pass our high standards on to our children. Con tinual education by itself is insuffi cient. "The improvement of the un derstanding is for two ends," wrote John Locke, "first, our own increase of knowledge; secondly, to enable us to deliver that knowledge to others." Why shouldn't we start with those closest to us, our families? The improvement of the under standing is for two ends: first, our own increase of knowledge; secondly, to enable us to de liver that knowledge to others. -John Locke We can teach our children to re spect the Iives, rights, and proper ties of others; to appreciate and de fend their own freedoms; to faithfully fulfill their personal duties and re sponsibilities; and to work hard, giv ing a day's work for a day's pay. We can teach them, by word and ex ample, a positive attitude toward the life of freedom. We can encourage them to produce to their maximum potential, which may require some seemingly impossible expectations, but, as John Stuart Mill wrote, "A pupil from whom nothing is ever de1985 SET THE STANDARD HIGH 245 manded which he cannot do never does all he can."

Finally, we can look to the future with the view of perpetuating and improving upon the "American dream." As individuals are success ful in setting and achieving their own increasingly idealistic goals, the nation as a whole will benefit and will become more successful in ful filling and perpetuating that dream. By raising our standards as individ uals, high standards can be effected in government, education, religion, and the rest of society around us. As Samuel Smiles wrote, "Every man's first duty is to improve, to educate, and to elevate himself, helping for ward his brethren at the same time by all reasonable methods. The man who improves himself improves the world." Every man's first duty is to im prove, to educate and to ele vate himself, helping forward his brethren at the same time by all reasonable methods. The man who improves himself im proves the world. -Samuel Smiles High personal standards will pro duce high political standards. A free political system tends to produce leaders who are representative of the people who elect them. If those who vote have low expectations of those they elect, the elected tend to exhibit low ethical standards with impun ity. And as Geoffrey Chaucer wrote in The Canterbury Tales, "If gold doth rust, what shall iron do?"

On the other hand, if we, as a na tion of individuals, set high stan dards for government in the areas of leadership, justice, and freedom, unethical and disreputable office holders find it more difficult to "do their own thing." They tend to rec ognize their responsibilities to the electorate. They promote the inter ests of freedom and steer govern ment toward the fulfillment of its only legitimate function, Le., the protection of life, liberty, and property. A pupil from whom nothing is ever demanded which he can not do never does all he can. -John Stuart Mill At the same time, however, we must be alert to the presence of evil forces at work that would lead our society into ever-degenerating so cialism and serfdom. John Philpot Curran sounded this warning in a speech in 1790: "The condition upon which God hath given liberty to man is eternal vigilance; which condition if he break, servitude is at once the consequence of his crime and the punishment of his guilt."

246 THE FREEMAN We as individuals can also set high standards for our educational sys tems, both public and private. We can insist on freedom of choice, non interference from government in the marketplace of education, and high quality in curricula and achieve ment. We can work to insure that all private educational institutions whether operated for financial, re ligious, or philosophical motives remain free to offer their services to the consumers and to provide a broad spectrum of viewpoints. The condition upon which God hath given liberty to man is eternal vigilance; which condi tion if he break, servitude is· at once the consequence of his crime and the punishment of his guilt. -John Philpot Curran When people are free politically and economically, freedom of reli gion will also be evident. In the free market one religion need not fear any other religion. There is complete openness and liberty. Government acts only as a peacekeeper, protect ing the free exercise of each religion while refraining from establishing any single one as the sole, approved religion. This is guaranteed in the First Amendment of our Constitu tion: "Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof .... "

The opposite of religious freedom is a state religion forced upon all re gardless of conviction or personal preference. History clearly records the results of such a condition, whether it be a Roman Catholic In quisition in Europe, an atheistic hu manism in Communist nations, a Puritan witch-hunt in New Eng land, or an Islamicjihad in the Mid dle East. Religious dictatorship is never compatible with personal or economic freedom. Living as we do in a nation which purports to defend freedom of reli gion, we can expect our religious leaders to guide us into the spiritual truths which best bring about indi vidual and societal stability, free dom, and prosperity. We can medi tate upon and practice our beliefs without fear of persecution. And if at any time we believe another religion or sect provides for our needs better than the one to which we currently subscribe, we can reject the old and embrace the new.

Yes, we need to set the standard high in our nation. But, as in all as pects of a free society, the burden of responsibility lies on the shoulders ofthe individual. That's you and me. Let's not expect the government to do it for us. Let's not wait for some one else to take the lead. Let's seize the initiative and do our part. @ Information in the Market Joe Cobb DURING the "energy crisis" of the 197Os there were many false rumors about major oil companies hoarding petroleum to keep prices high. When the U.S. Department of Energy was created in 1977, one of its main branches was the Energy Informa tion Administration. This agency has an annual budget of about $60 million to compile statistics on the energy resources and energy pro duction in the United States. Few people oppose collecting this kind of information. Even oil and gas producers thought it might be a good thing to dispel hostile rumors. Yet, there is a theory behind this pro gram that is basically flawed. The Energy Information Administration was created to provide a reliable cen tral data base for the National EnJoe Cobb is an economist with the Congressional Joint Economic Committee.

ergy Plan. The kind of information . that a government agency like the Energy Information Administration collects, however, is completely use less in a free market. There are two different theories of information. When we understand the differences between these theo ries, and the concepts of economics that rely upon one theory or the other, we are much better equipped to explain to friends, associates, and even politicians why the free market is the only way to solve things like an energy crisis. Information is absolutely critical for any kind of planning, both the so cialist idea of centralized national planning and the free-market method of decentralized entrepre neurial planning. Ludwig von Mises identified planning for the future as the main human quality that sets us 247 248 THE FREEMAN April apart from lower forms of life. Some animals prepare for the coming of winter, like squirrels by storing nuts, but only mankind plans for the fu ture by forgoing consumption today to create tools, capital goods, to enjoy greater wealth through higher pro ductivity later on.

Two Models There are two basic models of the economic process in most people's minds. One is the decentralized, incentive-led market where consum ers are the final judges of business performance, where bad decisions are punished by economic loss. The other is a centralized model, in which the economy is like one big company, headed by the President with the Congress serving as a Board of Directors. In a corporation, the managers need reliable information to choose what to produce and where to offer it for sale. A staff of statistical mar keting specialists and cost account ants, as well as computer models that can simulate different "what if" situations, are valuable tools for business planning. In this case, busi nessmen are trying to make the best decisions they can, but they know that most forecasting is just guess work. They can't control the con sumers' buying habits. If the buyers reject their products or services, heads may roll.

Although the corporate model of economic planning is helpful for businessmen, it is a logical fallacy to think about the larger economic sys tem as one big company. The task of everyone in the "extended order of human cooperation," to rise the term favored by Nobel-laureate F. A. Hayek, is to discover information and act upon it to meet the needs and economic demands of other people, most of whom cannot be identified in advance. This kind of information cannot be reduced to statistics and stored in a computer. It is often not known in advance. Only after the consumers have judged the businessmen's at tempts can anyone see who made a profit and who made a loss. Profits are informative and help the suc cessful business planners obtain more capital to expand their activ ity. Losses are also informative, and they diminish the supply of capital in the hands of poor business plan ners. Information about success and failure is the real, hard data in a free market economy. Investors monitor winners and losers very closely.

Even for the business planners, who can benefit by using computer models and statistics, the most im portant facts are the relative prices of the raw materials and labor they must buy before bringing a new product to market. Is it less costly to produce a product like shoes with computerized equipment and a few educated workers in the United 1985 INFORMATION IN THE MARKET 249 States, or by hiring hundreds of skilled handcraftsmen in Asia? The relative prices of capital and labor will determine the answer, and the prices can only be seen accurately in a free market. Market Price Information Essential to Business Planners If the business planners don't have free-market price information, their cost accountants can't tell them what to do. If they don't have accurate price information about the consum ers' other alternatives, their statis tical marketing specialists can't forecast sales and other "what if"

questions. Before computers can help anyone, they have to be fed facts and figures that can only come from a free, competitive market-from the choices and buying decisions of consumers. The reason why business planning is useful but "national planning" is worse than useless-it is destructive to progressis that when the gov ernment tries to take over planning, it wipes out the most important source of planning information, the relative prices of all the different products and services that permit computers and statistics to be of value to businessmen. This is the reason why govern ment statistics programs are such a waste of money. The Energy Infor mation Administration is useless to the producers of oil, gas, and elec tricity. It doesn't do anything for the consumer. It just creates jobs for a small number of well paid statisti cians and computer operators. If this were all, however, it would be as harmless as an old warehouse full of obsolete, military surplus tents.

Unfortunately, programs like the Energy Inforniation Administration are regarded by Congressmen and others who worry about the possi bility of another energy crisis as "es sential" for emergency planning and coping with any problem that may arise. The socialist theory of abolish ing the free market and replacing it with the corporate model whenever it seems expedient is alive and well in Washington. Like a time bomb, this false theory of information will someday destroy us unless those who see what is wrong with it speak out and dismantle it. ® (DEASON UBERTY The Function of Price PRICE has an important function to perform. It equates the wanting of things with the supplying of things. The two are in balance only at the free market price. Any other price, either higher or lower, causes a sur plus or a shortage. F. A. HARPER 1985 Summer Seminarsat FEE June 23-29 July 14-20 August 4-10 For twenty-two years our annual summer seminars have offered a thor ough introduction to the principles of limited government and the mar ket economy. Our sessionsattract lively and diverse groups of people including students, teachers, business proprietors and employees.

The week includes thirty-five hours of lecture and discussion, with ample time for participants to meet informally with both staff and dis tinguished guest lecturers. The Foundation, situated on a five-acre es tate in a quiet suburb near New York City, provides an ideal setting for a week of study and reflection. The charge for a seminar-tuition, supplies, room and boardis $400. Fellowships (including partial travel grants) are available. A de tailed seminar brochure will be sent on request. Pleaseaddress all requests for applications and further information to: Summer Seminars Foundation for Economic Education Irvington, New York 10533 (914) 591-7230 A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN Good News and Bad BEN WATTENBERG,as a political par tisan of the late Senator "Scoop" Jackson of the State of Washington, has been at odds with his political party for a good many years. A Free Trade Democrat, he thinks the spe cial interests and the collectivists of various stripes have laid their cuckoo eggs in a nest that is not rightfully their own. He blames the media, both print and electronic, for much of the sad state of affairs.

Hence the title of his new book, The Good News is the Bad News is Wrong (New York: Simon and Schuster, 431 pp., $17.95). Wattenberg rips the conventional wisdom to shreds by constant re currence to his own profession as a demographer. He will be called a Pollyanna or a Dr. Pangloss by many, but actually he doesn't believe it is the best of all possible worlds. He merely thinks we are holding our own ground in a number of impor tant ways, and he has the demo graphic evidence to prove it. He begins with life expectancy, which, in the western nations, keeps lengthening from decade to decade. Then he shifts to the birth rate, which, in the non-Malthusian parts of the world, has been going down. (He calls it the birth dearth.) The ru mors of a Population Bomb he deems to be utter nonsense for the United States at least. The birth dearth, he says, could hurt our country, which depends on a reasonable increase in its popula tion to keep the economic system going. Fortunately, immigration to this country shows no signs of slack ening. The worries about illegal im migration do not bother Wattenberg in the slightest. Anyone with the 251 252 THE FREEMAN April gumption to get up and go can make a welcome addition to the working population so far as Ben Wattenberg is concerned.

The Baby Boom that occurred af ter World War II may have been re sponsible for many of the youthful excesses of the Sixties, but Watten berg is satisfied that the "do your own thing" idiocy of the Baby Boom ers is a phenomenon of the past. What we now have is an Adult Boom. The Young Urban Professionals, or Yuppies, are now getting married and starting households of their own. They may settle for 1.7 children per family, but the children of immi grants will make up a needed differ ence. At any rate, the Yuppies will be buying new dwelling space, both of the split level variety and condo miniums. The high mortgage rates won't stop them. The construction boom will spill over into other booms. Wattenberg doesn't necessarily ap prove of the Federal deficit, but he doesn't see it as killing prosperity in the near future if sincere efforts are made to get it under control. Employment Wattenberg thinks the bad news about unemployment is more than compensated for by the good news about employment. His own reading of the statistics here collides with anything you might learn by listen ing to the TV anchormen. The smokestack industries may not be John Chamberlain's book re views have been a regular fea ture of The Freeman since 1950.

We are doubly grateful to John and to Henry Regnery for now making available John's auto biography, A Life with the Printed Word. Copies of this re markable account of a man and his times-our times-are available at $6.00 from The Foundation for Economic Edu cation, Irvington-on-Hudson, New York 10533. what they were, but the unemploy ment in steel and automobile towns has been mitigated by what has been happening in other towns that are often just over the horizon. Indus trial jobs stood at close to 20 million in 1970. The figure is practically the same today, but the jobs have shifted from steel factories to plants turning out computers, high-tech office equipment and robots. Meanwhile there has been a vast explosion in the service industries. There were some 600,000 new busi nesses started last year. They are what has been bringing the unem ployment figures down to some where around 7 per cent, which is close to the "frictional" margin.

Wattenberg thinks it significant that the median period of unemployment even at the depth of the recent reces sion was only 10.1 weeks. And un1985 GOOD NEWS AND BAD 253 employment compensation took care of most of that. Wattenberg thinks the teenage unemployment figures are ex tremely misleading. Kids who are still in school get listed as job-hunt ers, but it is no great tragedy if they remain unemployed in any regular sense until their school days are over. This goes for black kids as well as white. The most important thing about adolescence, says Wattenberg, is that it is soon over. Even tually the teenager will become an adult employee. Education Wattenberg does not deny that much of the hard data about our ed ucation system is bad. The averages for our SAT, or Scholastic Aptitude Tests, have been declining over a long period oftime. But this could be attributable to the fact that we now keep many more children in school for longer periods. The unintelligent take the tests along with the aca demically gifted. This brings down the average scores. But even with this concession to the egalitarians the SAT marks have recently started to go up. Wattenberg thinks we could be doing something right.

When it comes to revamping cur ricula, however, Wattenberg is all for listening to the critics who think our new standards for Excellence in Ed ucation demand a greater attention to so-called core revisions. He wants to see fewer Mickey Mouse courses. He sees no reason, however, to get rid of driver training and a few other "practical" courses. "After all," he says, "who wants to live in a country where pregnant teenagers-over drawn at the bank, unable to cook even a simple souffle-crack up the car." Wattenberg considers that our Bad News Bias keeps our politicians from making reasonable compromises with those whose prime concern is with the size of the budget. He is no libertarian, and he believes in the concept ofthe Safety Net. But his ar dor for the Welfare State has cooled rapidly over the past few years. As a neo-conservative Wattenberg finds himself at home with such figures as Irving Kristol. This means he is part of the new Fabian drift to the Right.

® INSIDE THE CRIMINAL MIND by Stanton Samenow (Times Books, 130 Fifth Avenue, New York, NY 10011), 1984 285 pages. $15.50 cloth Reviewed by Haven Bradford Gow PRESIDENT RONALD REAGAN, in his address to the International Asso ciation of Chiefs of Police, pointed out that every 30 minutes in the United States at least one person is murdered, nine women are raped, 67 people are robbed, 97 are assaulted 254 THE FREEMAN April and 389 homes are burglarized. And just as tragic is that many of these criminals are "repeat offenders." Crime casts a shadow over the lives of virtually everyone of us. We in stall burglar alarms in our homes, put anti-theft devices on our cars, avoid the New York subways, stay indoors after dark because the streets are taken over by criminals. The criminal justice system is widely distrusted and millions of Ameri cans buy hand guns for self-defense. Why this epidemic of crime?

At the core of the problem is a false view of human nature. Too many cri minologists, penologists, and even judges accept the pernicious notion that the individual person is a crea ture of his environment, shaped by social forces into whatever he hap pens to be. The criminal is corrupted by the institutions of his society and therefore is not responsible for him self and his actions. Blame attaches to the society whose product he is. It follows that the criminal is not personally answerable for his crimes; blame his slum background, his broken home, his shady compan ions, or whatever. The criminal, in short, is a "victim," who should be treated and not punished. Dr. Same now, who has spent years dealing with criminals takes a rad ically different tack: "Criminals cause crime," he writes, "not bad neighborhoods, inadequate parents, television, schools, drugs, or unemployment. Crime resides within the minds of human beings and is not caused by social conditions. Once we as a society recognize this simple fact, we shall take measures radi cally different from current ones. To be sure, we shall continue to remedy intolerable social conditions for this is worthwhile in and of itself. But we shall not expect criminals to change because of such efforts."

Dr. Same now adds that "Behavior is largely a product of thinking. Everything we do is preceded, ac companied, and followed by think ing. A train cannot fly for it is not so equipped. Similarly, as he is, a criminal is not equipped to be re sponsible. A drastic alteration must occur, and to accomplish this, a crim inal requires help. The criminal must learn to identify and then abandon thinking patterns that have guided his benavior for years. He must be taught new thinking pat terns that are self-evident and au tomatic for responsible people but are totally foreign to him. Short of this occurring, he will continue to commit crimes." To alleviate the pervasive and per sistent problem of crime, we need to have a realistic and tough-minded view of human nature, criminals and crime. Then we can develop and im plement some equally realistic and tough-minded approaches to deal with the problem. @ 1985 OTHER BOOKS 255 IDEAS HAVE CONSEQUENCES by Richard N. Weaver (University of Chicago Press, 5801 S. Ellis Ave., Chicago, III. 60637) 190 pages. $6.95 paperqack Reviewed by Tommy W Rogers THIS renowned volume stirred up a vigorous controversy when it first appeared in 1948; its title contrib uted a pregnant phrase to contem porary discourse and since the au thor's death his name heads a program to encourage young schol ars. Ideas Have Consequences is one of a handful of books to appear in the middle and late forties which breached the ranks of liberal ortho doxy and opened a way for the re surgence of the freedom philosophy which is so marked a phenomenon of the past several decades.

The "consequences" Weaver con demns are many, but they come into focus in our time in the armed camps, otherwise known as modern nations. The State now depersonal izes man, mechanizes life, collectiv izes property, and defers only to power. In his quest of the ideas which laid the groundwork for the present situation Weaver goes back as far as William of Occam who, declaring that only particular things are real, discredited general truths. With sustained argument and lofty eloquence Weaver traces the history of a ma lign set of ideas from the break-up of the Middle Ages down to the modern period. Weaver taught English at the Uni versity of Chicago, but came out of a Southern agrarian background which remained so much a part of him that he could never be comfort able with those aspects of modernity which grate harshly against what Burke referred to as "the basic inns and nesting places of human nature."

Weaver believed that liberty is most secure in a society character ized by the distributive ownership of small properties in the form of in dependent farms, local businesses, homes owned by their occupants. Widespread private ownership linked ineluctably to responsibility, provides the context in which one could become a complete person. Pri vate property makes a person inde pendent; it makes existence physi cally possible for the protester; livelihood independent of the State provides a metaphysical base, so to speak, for opponents of Leviathan. "To combat swirling forces of social collapse," he writes, "we must have some form of retrenchment, and es pecially do we need sanctuary from pagan statism ... The attack on pri vate property is but a further expres sion of the distrust of reason ... For liberty and right reason go hand in 256 THE FREEMAN hand, and it is impossible to impugn one without casting reflection on the other."

Because ideas do have conse quences, people who live according to a distorted or incomplete or fal sified picture of reality (The Great Stereopticon, Weaver called it), sooner or later meet up with such disasters as have been visited upon the twentieth century. People who walk the road to serfdom are even tually victims of omnipotent govern ment. Because of the validity of its premise and the substantive in sights of its argument, Weaver's book has an enduring message. @ Freeman binders • handsomeblue leatherlex • each binder holds twelve issues • a handyway to organize currentand past issuesof The Freeman $5.00 each Order from: THE FOUNDATION FOR ECONOMIC EDUCATION, INC. IRVINGTON-ON-HUDSON, NEW YORK 10533 the Freeman VOL. 35, NO. 5 • MAY 1985 Security and FreedomA Page on Freedom, No. 19 Leonard E. Read 259 Security, not an alternative to, but an outgrowth of freedom. The Pied Piper and Our Children John K. Williams 260 Ours the task to help choose which tune to follow.

Eminent Domain and The Rule of Law Dennis Bechara 273 A record of the taking of private property by government. Some Evils of Inflation Hans F. Sennholz 283 How fiat money inflation hurts domestically and internationally. Industrial Policy Bill Anderson 293 Political and economic reasons why central planning must fail. Capitalism and Socialism John L. Chapman 304 A brief appraisal of the voluntary versus the coercive way. Book Review: 318 "A Pattern for Failure: Socialist Economies in Crisis" by Sven Rydenfelt Anyone wishing to communicate with authors may send first-class mail in care of THE FREEMAN for forwarding.

IFreeman AMONTHLYJOURNAL OF IDEAS ON LIBERTY FOUNDATION FOR ECONOMIC EDUCATION Irvington-an-Hudson, N.Y. 10533 Tel: (914) 591-7230 President: John C. Sparks Managing Editor: Paul L. Poirot Production Editors: Beth A. Hoffman Amy S. Vanlaar Contributing Editors: Robert G. Anderson Howard Baetjer Jr. Bettina Bien Greaves Charles H. Hamilton Edmund A. Opitz (Book Reviews) Brian Summers THE FREEMAN is published monthly by the Foundation for Economic Education, Inc., a nonpolitical, nonprofit, educational champion of private property, the free market, the profit and loss system, 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. Donations are invited in any amount. THE FREEMAN 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 $10.00 a year.

Copyright, 1985. The Foundation for Economic Education, Inc. Printed in U.S.A. Additional copies, postpaid: single copy $1.00; 10 or more, 50 cents each. THE FREEMAN is available on microfilm from University Microfilms International, 300 North Zeeb Road, Ann Arbor, Mich. 48106. Reprints are available of "A Page on Freedom," small quantities, no charge; 100 or more, 5 cents each. Permission is granted to reprint any article in this issue, with appropriate credit.

A Page on Freedom Number 19 Securityand Freedom MANY VICTIMS wander unwittingly into socialism, gulled by assumptions they have not tested. One popular but misleading assumption is that security and freedom are mutually exclusive alternatives-that to choose one is to forgo the other. In the United States during the past century more people achieved greater material security than their ancestors had ever known in any previous society. Large numbers of people in this country ac cumulated a comfortable nest egg, so that "come hell or high water" depressions, old age, sickness, or whatever-they could rely on the saved fruits of their own labor to carry them through any storm or temporary setback. By reason of unprecedented freedom of choice, unparalleled opportunities, provident living, and the right to the fruits of their own labor-private property-they were able to meet the many exigencies which arise in the course of a lifetime.

We think of these enviable, personal achievements as security. But this type of security is not an alternative to freedom; rather, it is an outgrowth of freedom. This traditional security stems from freedom as the oak from an acorn. It is not a case of either/or; one without the other is impossible. Freedom sets the stage for all the security available in this uncertain world. @ -Leonard E. Read THE FOUNDATIONFOR ECONOMICEDUCATION,INC. IRVINGTON-ON-HUDSON,NEW YORK 10533 259 John K. Williams The Pied Piper and Our Children ONE of the most delightful poems ever penned is Robert Browning's "The Pied Piper of Hamelin." Chil dren delight in hearing it. The poem tells an exciting story and tells it well, Browning's choice of words and use of meter reflecting and reinforc ing the events described. Indeed, the poem has served me well. As a doting uncle not infre quently charged with the welcome task of minding my nephew and nieces, the poem has enabled me to lure Kristine, Elizabeth and Patrick away from the television set for what I fondly imagine is culturally a more edifying experience. More: while heaven forbid that I ever would abuse my role as trusted childThe Reverend Doctor John K. Williams has been a teacher and currently does freelance writing and lecturing from his base In North Melbourne, Victoria, Australia.

minder and become a propagandist for sound economics, I did on one oc casion introduce the term and the concept of "opportunity cost" to the vocabulary and thinking of my charges by explaining that the "cost" of viewing "Difrrent Strokes" was not hearing Uncle John reading "The Pied Piper of Hamelin." The success of this exercise was testified to by an agitated telephone call from my sister, who informed me that ten year-old Patrick had reduced his class-teacher to despair by challeng ing the justice of a half-hour deten tion to which he and a fellow mis creant had been sentenced. He had informed his teacher that the oppor tunity cost of the detention for his partner-in-crime was not having to sweep the leaves off the front lawn of his home, whereas the opportu nity cost for Patrick was not playing 260 THE PIED PIPER AND OUR CHILDREN 261 football with two cousins visiting that afternoon.

"The Pied Piper of Hamelin" is, however, more than a children's poem. It tells a story adults do well to consider. It describes a people who lost their children. Because of the ir responsibility of the adults of Ha melin, they lost their children. Their fail ure to keep a promise solemnly made resulted in a strange Piper leading their children away into a mountain the adults could not enter and from which the children could not leave. Other Examples If we think this mass loss of chil dren is only the stuff of which fairy tales are made, we might be wise to think again. Think for a moment of the many pipers playing tunes to which young people, in this century, have responded. The children ofHa melin went laughing and skipping after their piper. The childrenofN azi Germany, and of Marxist-Leninist regimes, marched stiffly in rigid ranks after very different pipers, en tering a mountain not of delight but of despotism, decadence, and destruction.

We delude ourselves if we assert that pipers playing tunes composed by harbingers of hate either are not found, or are without influence, in nations founded on liberty, and born in the struggle of men and women . who dreamed of freedom for themselves and their children's children. Documenting this claim is tragically easy. I think, for example, of an ugly lit tle volume which, in Australia, is set for study in many of our schools: So cial Sketches of Australia: 1888 1975. This book has it that the his tory of my country is one of inhu manity and brutality, led by mean, cruel, small-minded people. Accord ing to the author, there is nothing in my nation's heritage worthy of ad miration or deserving of praise. It would be an impertinence for a vis itor to your country and the recipi ent of your hospitality to say too much about what he observes in your school system, but I am convinced that the text so distorting my na tion's heritage might be matched by parallel texts similarly distorting your· nation's heritage and studied by your children.

A Death-Wish Joseph Schumpeter, I submit, is all too right. He argues that market capitalism in a classically liberal so cial order generates a set of men and women consumed by a pathological hatred of the socio-economic system of which they are the beneficiaries. Paranoid and careless, this set of people have as their power-base the so-called "knowledge industry." Their paranoia finds expression in the belief that they, uniquely rep resenting the forces of goodness, are 262 THE FREEMAN May the persecuted victims of existing so cial structures which are the em bodiment of evil and which conspire to destroy them. Their carelessness pe'rvades their impassioned rejec tion of those values which, over long centuries, have proved vital for the emergence and sustaining of civili zation and of liberty. They are in capable of understanding what Mi chael Oakeshott was asserting when, in his inaugural lecture at the Lon don School of Economics, he sug gested that "the greater part of what we have is not a burden to be carried or an. incubus to be cast off, but an inheritance to be enjoyed."

It is not difficult to see this twisted mentality at work. It is seen in jour nalists and academics who deter minedly keep the minds of their readers and their students fixed upon what is contemptible, thereby nurturing a sour sardonic attitude of rejection which, in the course oftime, is extended to the most valuable realities the human heritage has to offer. Their task is not difficult, for in the mixed constitution of things it is easy to pick out what is bad, to ignore what is good, and to draw the black veil of hatred over a complex of light and shade, when it still of fers considerable scope for kindness, sympathy, and improvement. More over, their task is facilitated by ideas and ideals which, at least superfi cially, conceal the dynamism of hate under a cloak of compassion. Some of these ideas and ideals I shall ex plore here. The Rhetoric of Rights On July 4, 1776, the then thirteen colonies on your eastern seaboard solemnly in· Congress declared that all men "are endowed by their Cre ator with certain unalienable rights." In so declaring, a nation made its own an idea and an ideal for which men and women, over many long years, had fought, suf fered, and died. The liberty of all people to dream their own dreams and to strive to make such dreams reality was, at long last, proclaimed to be a right possessed by all rather than a privilege conferred upon some by a caste or a class born to rule.

It may seem strange to' observe that such a positive and enriching concept of unalienable rights equally possessed by all people enshrines an essentially negative term. Yet it does. A "right" all people enjoy by virtue of their humanity signifies the ab sence of an obligation to refrain from certain activities or to surrender cer tain goods. A right to free speech sig nifies the absence of an obligation not to voice certain opinions. A right to possess certain goods signifies the absence of an obligation to surren der those goods. The only obligation to the possessor of such a right gen erated in other people by that right is also negative: namely, the general obligation not to disregard or defy 1985 THE PIED PIPER AND OUR CHILDREN 263 that right. The right of one person, X, to engage in some activity gen erates the correlative obligation in other people not coercively to pre vent X engaging in that activity; the right of X to own something gener ates the correlative obligation in other people not coercively to make X surrender that something.

Let us suppose an individual claims the right to climb a moun tain. He is claiming that he is not obliged to refrain from attempting to climb that mountain. He is further claiming that other people are obli gated not to prevent him from mak ing such an attempt. What is not being claimed, however, is that other people are obligated to provide him with the equipment or train him in the skills necessary successfully to climb the mountain. Rights equally enjoyed by all do not generate posi tive obligations in other people. Why not? Simply because rights equally enjoyed by all are grounded in what human beings all share: a comm~n humanity. If I were to claim that I have a right to own a wrist watch, and that men and women wealthier than I am are obligated to provide me with that wrist watch, I am grounding my alleged right in what I and those allegedly obligated to provide me with a wrist watch do not have in common, namely, wealth in excess of some arbitrary measure.

Claimed rights for some generating positive obligations for other people presuppose two distinct classes of people: people enjoying a purported right to certain goods and services, and people burdened with an obli gation to produce and provide those goods and services. Such a state of affairs is incompatible with the in sistence that all people equally enjoy the same rights. A Shared Determination Again, it would be possible by a shared act of human will to ensure that the equal rights of all people are recognized and respected. Men and women could, by an act of will, re frain from actions involving vio lence, theft, and deception which, by their nature, ignore and defy the rights of their fellows. Such a shared determination to refrain from aggression against other people could not, however, produce food suf ficient for all to eat or paid employ ment sufficient for all to enjoy. In deed, the imagination fails when one attempts to describe what would be needed to produce the goods and ser vices sufficient for all people every where to enjoy the right affirmed in the twenty-second article of the Uni versal Declaration ofHuman Rights promulgated by the United Nations, namely, the full development oftheir personalities in "economic, social, and cultural" spheres.

rt is not denied that men and women exercising their shared rights can contract with one another 264 THE FREEMAN May and thereby incur contracted posi tive rights and correlative positive obligations. Nor is it denied that men and women may morally be obli gated in positive ways to those peo ple with whom their lives are en twined, even though those people enjoy no right to such compassionate and caring behavior. The Good Samaritan In the wellknown Biblical parable of the Good Samaritan, it is asserted that the priest, the Levite, and the Samaritan traveler are obligated to assist the wounded victim of rob bers; it is neither asserted nor im plied that the victim has any right to these people's solicitude. The de mands of charity have nothing what soever to do with any claimed rights. The demands of clarity, however, dic tate that we use the term "right" to signify what Wesley Hohfeld, in his celebrated classification of rights, calls "liberties." The right of a per son to do A or to own B signifies sim ply the absence of any obligation to refrain from doing A or to surrender B, and the correlative obligation in other people not to force that person to refrain from doing A or to surren derB.

In 1881, however, an influential English philosopher, Thomas Hill Green, gave eloquent expression to a seemingly plausible view. All civ ilized people agree, he suggested, that freedom "is the greatest of blessings." Yet freedom, "rightly understood," means not simply "freedom from restraint or compul sion." Rather, it signifies "a positive power or capacity of doing or enjoy ing" particular things. A person is thus not really free to climb a moun tain unless he possesses the equip ment and skills necessary so to do. Or so asserted Green, surrepti tiously transforming the concept of freedom. Accompanying this meta morphosis was a corresponding transformation of the notion of a right. Some men and women alleg edly do enjoy rights creating correl ative positive obligations in other people. Arbitrary Claims The vision of rights equally en joyed by all and grounded in the hu manity of each and every person faded. In its place emerged a ple thora of arbitrary claims and selfish desires pretentiously called "rights."

President Roosevelt spoke of the rights of all to "freedom from want [and] freedom from enforced idleness or unemployment," albeit granting to privileged unionists the "right" coercively to prevent non-unionists laboring at wage rates below those arbitrarily decreed by unions, a "right" guaranteeing unemploy ment for the weak and the margin alized of a community. Inexorably, a society of free men and women pursuing their diverse 1985 THE PIED PIPER AND OUR CHILDREN 265 visions of the good life, yet bound to gether by the ties of interdepen dence and trust forged in the market place, gave way to a society of com peting special interest groups, vying for favors and thrusting their snouts ever deeper into the government trough. Inexorably, the weakest and poorest went to the wall, the privi leged assuaging their consciences by demanding that those they had forced out of work be paid unem ployment benefits, and that those they had condemned to perpetual poverty be granted welfare pay ments. The politics of principle ca pitulated before the politics of ex pedience, parties competing with one another in the task of formulating policies which benefit groups of peo ple who know what they are receiv ing, and disadvantaging those who do not know what they are paying.

How harmless the tu-ne sounded when first played by the piper. How captivating the melody of positive rights proved to be when first heard. Yet how dark is the mountain into which that piper and that melody would lead us. Equality As the noble cry for rights enjoyed by all was transformed into the shrill demand for special privileges en joyed by some, the dream of equality too became a nightmare. The docu ment speaking of the unalienable rights of all insists that all men "are created equal," and the two asser tions go together. All are equal in that all possess the same rights; the demand for equality is the demand for the recognition, in all people, of those rights human beings as hu man beings share. What is morally outrageous is the notion that the rights of different groups of people differ, and that this difference is grounded in one or more of the cri teria defining these varied groups.

Springing from this revolutionary insight is the principle of equality before the law. Rule must be by known general principles ofjust con duct equally applicable to all in an unknown number of future in stances. Any precept, even if it en joys the approval of the majority, which places the interests of some before the interests of others, or prescribes one vision of the "good life" but proscribes alternative non coercive visions, is thus anathema. Justice does wear a blindfold, treat ing all alike. Dividing the Wealth There are those, however, simi larly speaking of "equality," who dream a different dream. Professor J.R. Lucas puts it thus: "The equal ity vouchsafed us by the equality be fore the law, although valuable and not vacuous, is still much less than the equality the egalitarian seeks." In truth Professor Lucas is too kind: the equality the egalitarian seeks is 266 THE FREEMAN May incompatible with equality before the law, and the equality of rights upon which the rule of law rests.

This other vision of equality today is the. vision of many. Confining our attention merely to economists, one thinks of the late Arthur M. Okun, who asserts that "equality in the distribution of incomes ... would be my ethical preference. Abstracting from the costs and the consequences, I would prefer more equality of in come to less and would like complete equality best of all." Joining him is Charles E. Lindblom, who asserts that the closer societies move toward absolute equality of income and of wealth, the more they "approximate [to] the humanitarian vision." Cer tainly, no economic reasons for this ideal are proffered. Perhaps the absence of any eco nomic defense of egalitarianism is no accident. The late Henry C. Simons, in his celebrated study of progres sive taxation, utterly demolished in his capacity as an economist all pseudo-economic defenses of such a policy and its egalitarian underpin nings, but concluded that "drastic progression in taxation" is an im perative because the distribution of wealth and income effected by mar ket capitalism in a free society "re veals a degree (and/or kind) of in equality that is distinctly evil or un lovely [sic]." Such a strange appeal to an aesthetic consideration is echoed by Professor A.B. Atkinson who, in a volume detailing real and imag ined inequalities obtaining in con temporary Britain, finds it unnec essary to devote more than a page to explaining what is wrong with these inequalities, and apparently regards as decisive an observation by an other writer to the effect that "equality has a particularly power ful aesthetic appeal." Precisely how an aesthetic judgment can lead to a moral imperative and justify the de gree of political coercion that imper ative allegedly legitimates, is, sad to say, not explained.

Equality of Results Let us get back to basics. The word "equality," and its cognate expres sions "equal" and "equally," signify a relation. Two or more objects are "equal" in respect of a given quality or characteristic if they possess that quality or characteristic to the same degree. Two or more lengths of wood may be "equal" in length. Two or more material objects may be "equal" in mass. Absolute equality in all characteristics or qualities is impossible, for if two entities, A and B, are distinct, then each possesses at least one characteristic or quality the other lacks-minimally, spatio temporal location. Used of human beings, the adjective "equal" is quite inappropriate, for it is utterly im possible to specify any characteristic or quality all people possess to the same degree. That is fortunate: it 1985 THE PIED PIPER AND OUR CHILDREN 267 means that people are not inter changeable, for if A and B are equal in some respect they are, in that re spect, interchangeable.

This truism leads to a familiar di lemma. If "equal" opportunities are extended to people of unequal abil ities, unequal outcomes result. Yet if opportunities are so allocated that equal outcomes· result, that alloca tion of opportunities must have been characterized by inequality. A policy defended on the grounds of equality can thus no less plausibly be at tacked on the ground of inequality. Such was painfully evident in the controversies surrounding the much publicized and debated Bakke case. Prima facie, it seems impossible to formulate any public policy which generates equality along all of the important dimensions in which hu man beings have an interest. Em pirically, it is far from obvious that the rectification of various social in equalities of outcome by manipulat ing the distribution of opportunities (by, for example, policies of positive discrimination) has proved particu larly beneficial from the viewpoint of the "victims" of the alleged injus tice being rectified.

Nor is it obvious that the "correc tion" of all inequalities affecting the well-being of human beings results in a morally "more desirable" state of affairs. The grotesque worlds of L.P. Hartley's Facial Justice, in which handsome men and beautiful women are "cured" by surgery rem edying their envy-provoking ex cesses of sexual appeal, and of Kurt Vonnegut's Harrison Bergeran, in which people with abilities above the norm are "equalized" by the im plantation of anti-pacesetters, are hardly morally desirable worlds. The examples, admittedly, are bizarre, but they usefully underscore the di rectionless nature of the imperative to eliminate inequalit,ies. Equal Abuse Similarly, the prescriptive inter pretation of "equality" is, consid ered in isolation, of little or no rel evance to social ethics. People are treated equally if they are treated equally badly; they are treated with equal consideration or equal respect if they are treated with equally little consideration or equally little re spect. The moral imperative to treat human beings with consideration or respect is more demanding than the imperative to treat them with equal consideration or equal respect. The demand for "equality" is not, in other words, a· demand for quality.

Nor does a commitment to equality somehow "add" to the value of mor ally contemptible behavior: the sa dist who occasionally softens and spares an intended victim is not "morally worse" than the consistent sadist who tortures all of his victims with egalitarian efficiency. Human history testifies to the ter268 THE FREEMAN May rible consequences of the attempt somehow to make human beings "equal." Even the seemingly benign attempt to establish equality of wealth or of income demands, as Robert Nozick has argued, a dicta torial State ruthlessly suppressing individual liberty. Nozick's point was eloquently stated some two cen turies ago by David Hume, who noted that even if possessions are "rendered ever so equal," the ex changing of goods or the giving of gifts rapidly would "break" that equality. "The most rigorous inqui sition is requisite" to check such be havior on its "first appearance," as is "the most severe jurisdiction to punish and redress it."

Once again, however, pipers play ing a tune based on the theme of an "equality" quite other than equality of rights and equality before the law, are, today, familiar figures. The young follow them. The identity of these pipers is not difficult to deter mine. One thinks of such household names as Ralph Nader, Jane Fonda and Tom Hayden. One thinks of prominent journalists contributing to once respected newspapers. And if one is wise, one recalls the adults of Hamelin, who remembering their principles too late, lost their children. EconomicGrowth Finally, I draw your attention to the understanding of wealth and of conquest ofpoverty that captured the minds and the imaginations of those who, long ago, first dared a dream of a world in which destitution was no more. How foolish their dream seemed to their contemporaries. Everyone knew that poverty, historically, was the norm. Everyone knew that life expectancy was, in the France of 1800, twenty-four years for males and twenty-seven years for females, and France was then the wealthiest nation in the world. Everyone knew that in 1780, over eighty per cent of French families spent ninety per cent of their income upon bread.

Everyone in eighteenth-century Eu rope and European colonies knew that life, for the masses, was basi cally nasty, brutish, and invariably short. Everyone knew that the wealth of nations was something given and unchanging, and that one nation could improve its situation only by worsening the situation of other nations. But a dream was born. Maybe wealth could be created. Maybe trade and exchange could benefit all. Maybe the material well-being of all could be increased. Maybe if the hu man spirit was unfettered and was released to experiment and to cre ate, food sufficient for all to eat and clothing sufficient for all to wear and shelter sufficient for all to enjoy might become a reality. And it happened. In one short cen1985 THE PIED PIPER AND OUR CHILDREN 269 tury the working populace of Britain quadrupled. Real per capita income doubled between 1800 and 1850, and doubled again between 1850 and 1900. This sixteen-fold increase in wealth-this sixteen-fold increase in the goods and services available-did more in one hundred years to ame liorate poverty and exorcise the specter of destitution than had mil lennia of human history and eigh teen centuries ofpreaching about the virtue of charity.

DiscoveringUses for PreviouslyIdle Resources Men and women began to see that resources were not simply "there" to be enjoyed but were created when human creativity and hitherto use less products of nature came to gether. Human creativity took a black, viscous substance, known from Biblical days and once margin ally useful for the making of ink and perfume, and gave it a new use. A new source of energy-oil-thus came into being. Human creativity took dead rocks-anthracite coal and discovered how to ignite these rocks, and the steamship and the lo comotive became realities. People actually began to think of progress; began to realize that the new and the unexpected could burst into being, displace what was the case. and al ways had been the case, and better satisfy human needs and desires. Yet, during the 1960s many men and women, like mediums conduct ing a seance, conjured up the dead.

The old picture of wealth as some thing fixed and unchanging was res urrected. The old vision that de picted the gains of some as demanding corresponding losses by others rose from the ashes. To take but one case, Paul Ehrlich in 1968 published a volume, The Population Bomb, proclaiming a dis mal future for this fragile planet. I cite this volume because it asserted that 1984 would witness the fulfill ment of the dire prophecies Paul Ehrlich made. I, as a visitor to this nation-if Ehrlich's most hopeful scenario for the future had become a reality-would be observing a coun try within which steak was but a memory. Between 1973 and 1983 the world would have witnessed one bil lion men, women, and children starving to death. The United States would have imposed strict food ra tioning. Riots would have torn this country apart when Congress during the mid-1970s passed the Family-size Regulation Act. Smog would be ubiquitous. The telephone system would be no more. Unemployment would be the lot of twenty-seven per cent of the potential workforce.

Globally, disaster would reign. Since India's food production had reached its maximum potential in 1967 1968, that nation, and similar Third World nations, would be haunted by the dread horsemen of famine 270 THE FREEMAN May and of death. Or so Paul Ehrlich prophesied. He was wrong. In the 1970s I~dia, after three disastrous decades of so cialist agricultural policies, largely deregulated agriculture. Price con trols on food were lifted. Tax reforms were effected enabling farmers to re tain more of the earnings from the produce they sold. Decisions as to what to plant were taken from cen tral planners and restored to farm ers themselves. In September 1977 U.S. grain exports to India began to wane, for India was almost self sufficient in food. In 1983 India be gan to agonize over the new but wel come problem of how best to store surplus crops. Instead of rising, the birth rate in less developed coun tries has fallen from 2.2 per cent yearly in 1964-1965 to 1.75 per cent yearly in 1982-1983. Global food production, whether measured by grain prices, production per con sumer, or the famine death rate, is vastly better today than ever before.

The cost of such minerals as copper is falling, not rising, human inge nuity having made from sand a sub stance performing one of the uses to which copper once was put, and hav ing launched space satellites substi tuting for the millions of tons of cop per cable global communications once demanded. A higher percent age of the U.S. populace today en gages in paid employment than ever before. Paul Ehrlich and his fellow doom sayers are demonstrably wrong. Yet the pipers of cataclysmic disaster continue to play their dirge. Herbert I. London recently penned a volume entitled, Why Are They Lying To Our Children?, documenting the pro longed after-life of discredited dog mas about the limits of growth. Sur veying sixty-eight school textbooks, London notes that the future therein depicted, based on demonstrably false statistical evidence, flawed methodological assumptions, and ut ter economic ignorance, is a future of depleted resources.

So in my own country. A set text book for all students in my State de sirous of sitting university entrance examinations is penned by a biolo gist, Professor Charles Birch, and it too depicts a desert-like future, with ering any hope of a world in which destitution is no more. The very best strategy that Charles Birch, and his U.S. counterparts, can recommend is a world government coercively re distributing present wealth. What has failed in the U.S.S.R., failed in mainland China, failed in Tanzania, failed in Cuba, and failed wherever it has been tried is, apparently, to be implemented on a global basis. Observed disaster is not, it would seem, sufficient to silence the dread piper playing the terrible tune that is "socialism." Play he still does, and the young-and sometimes the not so-young-mindlessly follow.

1985 THE PIED PIPER AND OUR CHILDREN 271 Conclusion Yet, I cling, and shall continue to cling, to the hem of hope. For there is another piper playing a very dif ferent tune. He was heard during the fifth cen tury B.C. in the city-state of Athens, and human beings began to dream of rule not by a tyrant's whim or a mob's caprice, but by law. He was heard by those men and women in medieval England, who made Magna Carta-the great Constitutio Liber tatis-a reality, and forged a weapon before which all despots trembled, knowing their days were numbered. He was heard again in the eigh teenth century by thinkers who challenged the world of guild and of caste and of privilege and of legally fixed relations that was mercantil ism. He was heard again by those who fled tyranny for a new and bet ter world, and who penned the Vir ginia Bill of Rights, the Declaration of Independence, the Constitution of the United States, and the First Ten Amendments to that Constitution.

And he still is heard by ordinary peo ple who, suffering under today's ty rants, listen to their short-wave radios and, with tired and hurting fingers, transcribe the works of Sol zhenitsyn and risk the concentration camp and the so-called psychiatric hospital in obedience to this other piper playing this other tune. And what about us? We too have heard the piper who lures us by the song of liberty. We know we shall lose our children. After all, we know we never owned them in the first place. Yet to what pipers shall we lose them? I spoke earlier of those sad and sorry men and women who betray the heritage of which they are the beneficiaries. I spoke earlier of their attempts to cheat our young people of that heritage. I thus remind you of the task the philosopher Alfred North Whitehead laid upon the shoulders of men and women such as we. What is that task? Simply to bring before the growing minds of our children "the habitual vision of greatness." When Matthew Arnold was installed as Professor of Poetry at Oxford, the great Benjamin Jow ett pleaded with him to do one thing: "Teach us not to criticize, but to ad mire." Taken at face value, that plea was somewhat wholesale. There is that in my nation's history, and in your nation's history, which ought not to be admired. That is where crit icism comes in. Yet the irony is that our shared heritage enshrines the very principles by which that merit ing criticism is identified and that meriting condemnation stands condemned.

To insinuate a note of admiration in a generation reared in skepticism and cynicism is no easy task. Yet to no less a task are we called. You and I have caught a glimpse of the stars, and it is for us to say "No!" to those 272 THE FREEMAN who would shield the eyes of our children from ever seeing those stars. In the final analysis, we can not fail. For at the very heart of life yes, at the very heart of God-lies freedom. Humankind, bearing the imago Dei-the Image of God-can never be content until freedom is a reality known to all and enjoyed by all. The tune the piper of liberty plays is the tune that pulsates and throbs through all that is, and which finds voice in that tiny part of the cosmos which has become aware of itself, the human spirit. God grant that you, that I, that our children, keep our ears open to the piper who testifies to the reality of liberty built into the very fabric of our being. For it is only as we and our children follow that piper that we shall discover what Whitman sang of: "life immense in passion, pulse, and power"; and what the Reprints . ..

Jewish Rabbi of Nazareth meant when He spoke of "life, and life abundant." @ -BIBLIOGRAPHY Green, T. H. "Liberal Legislation and Freedom of Contract," in The Works of Thomas Hill Green, ed. R. L. Nettleship. London: Mac millan, 1889. Hohfeld, W. Fundamental Legal Conceptionsas Applied in Judicial Reasoning. New Haven: Yale University Press, 1964. Lindblom, C. E. Politics and Markets: The World's Political-Economic Systems. New York: Basic Books, 1977. London, H. I. Why Are They Lying to Our Chil dren? New York: Stein and Day, 1983. Nozick, R. Anarchy, State and Utopia. New York: Basic Books, 1974. Okun, A. N. Equality and Efficiency: The Big Tradeoff. Washington, D.C.: The Brookings Institution, 1975. Schumpeter J. Capitalism, Socialism, and De mocracy. New York: Harper and Row, 1942. Simons, H. C. Personal Income Taxation. Chi cago: University of Chicago Press, 1938. Simon, J. L. The Ultimate Resource. Princeton: Princeton University Press, 1981.

A Page on Freedom Each of these brief messages is a handy way to share with friends, teachers, editors, clergymen, employees and others a thought-starter on liberty. It also serves to introduce the reader to our work at FEE. See page 259 for this month's Page on Freedom. (Copies of previous messages are also available; specify title when ordering.) Small quan tities, no charge; 100 or more, 5 cents each. Or, feel free to reprint the message in your own format if you'd prefer. We hope you'll enjoy this feature! Order from: FOUNDATIONFOR ECONOMICEDUCATION,INC. IRVINGTON-ON-HUDSON,NEW YORK 10533 Dennis Bechara Eminent Domain and The Rule of Law ONE ofthe distinguishing features of a free society is its defense of the right of private property. As every individual has the right to his life, . so has he the right to those things necessary to sustain life-among them, the private ownership of prop erty and the ability to keep the fruits of his labor. Those rights not only as sure that the individual enjoy the life and liberty promised him by a free society, but also assure continued freedom, independence, and security for all.

The institution ofprivate property, however, is not without its critics. Socialists of all types decry private property as plunder and many parts of the world have instituted public ownership of the means of produc tion. In this country, however, criti cism about the validity of the insti tution of private property itself is very limited. Yet, in spite of the con sensus regarding the legitimacy of Mr. Bechara Is an attomey In Washington, D.C. private property, the concept itself has suffered a progressive erosion which is reaching potentially alarm ing proportions. As massive govern ment intervention and forcible in come redistribution has become the order ofthe day, real estate has come into playas an adequate means for the involuntary transfer of wealth. In a sense, this development be came inevitable once the proposition was accepted that some segments of the population had the right to be forcibly supported by the remainder of society. The redistributionist men tality has legitimatized the taking of one person's income and its transfer in favor of another. Yet, this process remained somewhat anonymous and detached, because the individual taxpayer has been at a loss to iden tify the particular beneficiaries who received his share of the taxes.

Since the costs of government pro grams are dispersed among all tax payers, coupled with the general an273 274 THE FREEMAN May onymity of the specific beneficiaries, taxpayers have had little incentive to arrest the growth of the welfare state. Rather, the opposite has been the case. Groups have formed with the specific goal of receiving subsi dies from the government, and the results of these organized special in terest groups have been substantial. Beneficiaries Identified Recent judicial developments re lated to the power of eminent do main, however, have somewhat al tered this reality. As owners of land become dispossessed as a result of the emergence of the exercise of em inent domain by local and state gov ernments, the anonymity of the re distributive process has been shattered. The identity of the bene ficiaries is known and in a sense this fact may pierce the cloak of altruism that has covered all the redistribu tion of wealth in which the govern ment has been engaged.

The one case which highlights this expansion of government power, and which eloquently introduces its dan ger is Hawaiian Housing Authority v. Midkiff/ which was decided on May 30, 1984 by the United States Supreme Court. The facts of the case are relatively simple. Hawaii, because of its Poly nesian background, did not have a tradition of encouraging the private ownership of land. Land was held by certain island chiefs and subchiefs, and all who occupied it were tenants of the then governmental authori ties. Over the years some settlers were able to purchase land but by the decade of the 1960s the government, both Federal and State, owned 49% of the land. In addition, 47% of the State's land was then owned by 72 landowners. One of the landowners, the Bishop Estate, owned 341,000 acres which belonged to Princess Bernice Pauahi Bishop, the last sur vivor of Kamehameha the Great, who unified the Hawaiian Islands in the eighteenth century.

Some of the landowners were dis couraged from selling their land and leased it instead because of the ad verse effect of the income tax laws. In addition, others, like the Bishop Estate, were charitable organiza tions which were exempt from taxes. Strict land use laws in, effect in Ha waii have also interfered with the workings of the land market. Barriers to Market Transactions Although the fact that the govern ment owned such a substantial amount of land, coupled with the structural barriers to the land mar ket, inevitably affected the real es tate market in Hawaii, the State's legislators concentrated their atten tion on the 72 landowners and pro ceeded to enact the Land Reform Act of 1967. Under the provisions of this stat1985 EMINENT DOMAIN AND THE RULE OF LAW 275 ute, tenants who live in any devel oped residential tract of land of at least five acres in size may, if they so desire, petition the Hawaii Hous ing Authority and request the Au thority to initiate condemnation pro ceedings so that the land may be forcibly transferred to them. In the event that the tenants do not have the financial resources to acquire the real estate, the State of Hawaii would lend them up to 90% of the purchase price. The statute provides for a hearing in which the land owner may introduce evidence as to the fair market price of the land, but otherwise the landowner may not object to the validity of the condeIn nation process.

The case arose because the Bishop Estate challenged the constitution ality of the statute, alleging that the Land Reform Act of 1967 violated the Fifth and Fourteenth Amendments of the Constitution. The thrust of their argument was that the takin.g of the land, as provided by the stat ute, was invalid because it was clearly not for public use, since the tenants were to acquire title to the land. The United States Supreme Court decided the case and it heJld that the statute was valid and not repugnant to the Constitution. FollowingPrecedent The Court's approach in determin ing whether or not the intended use of the condemned land fulfilled the constitutional requirements that the land be publicly used was that since the state legislators had the power of eminent domain, it would be pre sumed that the use ofthe land by the tenants was constitutionally valid unless this was shown to be an im possibility. The Court cited a pre vious case, Berman v. Parker,2 as the authority for reaching its' decision.

That case contained the following language: Subject to specific constitutionallimita tions, when the legislature has spoken, the public interest has been declared in terms well-nigh conclusive. In such cases the legislature, not the judiciary, is the main guardian of the public needs to be served by social legislation, whether it be Congress legislating concerning the Dis trict of Columbia ... or the States leg islating local affairs . . . . This principle admits of no exception merely because the power of eminent domain is involved. Essentially, the Court's reasoning is that once it is determined that Congress or a state Legislature has the power to condemn land as a re sult of its power of eminent domain, then the Court will not invali<;late the statute, in effect abdicating its responsibility of constitutionally evaluating the legislative scheme. The Supreme Court's position is that it will not substitute its judgment for that ofthe legislative branch, so long as the statute has a rational connec tion with the constitutional power enjoyed by the legislature. The im276 THE FREEMAN May plications of this case are very im portant, because state legislatures now have an additional power which they previously were not aware they had.

The power of eminent domain has existed for many centuries, but per haps the clearest explanation of its purpose was proffered in 1625 by Grotius, when he said that: The property of subjects is under the em inent domain of the State, so that the State, or he who acts for it, may use or even alienate and destroy such property, not only in cases of extreme necessity, in which even private persons have a right over the property of others, but for ends of public utility, to which ends those who founded our society must be supposed to have intended that private ends should give way.3 This definition clearly sets forth the very limited function and role that eminent domain must play in society. One can envisage the pro totypical example of extreme neces sity-a fire in a city-which neces sitates the destruction of houses which have not yet caught fire, pre cisely to avoid the spreading of the fire to the rest of the city. Similarly, whenever national defense is in volved, it is reasonable that the gov ernment have the power of eminent domain in order to assure all of its citizens of the benefits of peace. The power of eminent domain, however, has expanded from the very limited role assigned to it by such legal scholars as Grotius, to the contem porary role of serving any broadly defined public purpose. In order to understand why the Supreme Court ruled the way it did in the Hawaiian Housing Authority case, it is instruc tive that we analyze the origins and developments of eminent domain in the United States.

British Policies The right of eminent domain came to America via England, where it had been established for quite some time. In England, there were two va rieties of eminent domain, one ap plicable to the Crown and the other to Parliament. The Crown was en titled to use privately used land in those areas where it was indisputa ble that the Crown had jurisdiction. For example, for such aspects as for eign defense or law enforcement, the Crown or its represen~atives were entitled to use any privately owned land so that the exercise of the Crown's powers would be more effi cient. Parliament, on the other hand, could only take private property af ter payment of a fair compensation. The requirement that compensation be given to the owner was added af ter 1514. In the colonies~ the Crown faced the seemingly insurmountable prob lem that a vast unexplored conti nent needed public roads if it was to be developed. Therefore, the right of eminent domain was imported to 1985 EMINENT DOMAIN AND THE RULE OF LAW 277 America as a road building tool.

Prior compensation, however, was granted to the owner of improved land, but it was denied to the owner of unimproved land. The reason for this was that the owner of unim proved land actually benefited from the construction of a road through his property, so there was no need to compensate him for the land ac tually taken. In Colonial Days The understanding throughout co lonial days was that a taking ofpri vate land would only be justified if it was for the public use. In fact, the Constitutions of Virginia and Penn sylvania, both of 1776, used the phrase "public use" when they both sanctioned the taking of private property. This requirement appears in the Fifth Amendment to the United States Constitution, which states in part that" ... nor shall pri vate property be taken for public use, without just compensation." The power of eminent domain was also utilized, during this time, for the building ofmilldams. The reason the Mill Acts were enacted was that it was deemed a public necessity to fa cilitate the availability of mills to farmers. These statutes, which twenty-nine states had already en acted into law by 1884, provided a.

mechanism whereby mills were es·, tablished without unnecessary re·, straints, the damages caused by the consequent flooding were compen sated and the farmers had various mills from which to choose. It is en tirely possible that had the Mill Acts not been enacted in the first place, many mills would have nevertheless been established on a voluntary ba sis as millers would have discovered that it was to their economic self-in terest to reach agreement with the owner of the land they were to flood. The right of eminent domain be came an unimportant and uncon troversial footnote in the history and the development ofthe United States during the eighteenth and early part of the nineteenth century because of the vast territorial expanses of the country. However, with the devel opment of the country there arose a need to improve transportation. Therefore, state legislatures began expanding the role of eminent do main to allow private companies to build private turnpikes, highways and canals. The public was served in the sense that more transportation alternatives were made available to them and they were guaranteed the use of these facilities. Thereafter, with the development of railroads, eminent domain was further utilized to grant some railroad companies the right to build their tracks in spite of the objections of the owners of the land taken by t'h;e railroads.

Recent research has demonstrated that although railroad companies were empowered to seize land that 278 THE FREEMAN May stood in the way of certain routes, the landlords who were about to be dispossessed were not without legal recourse. In his article, "Reassess ing The Impact Of Eminent Domain In Early American Economic Devel opment," Dr. Tony Freyer concluded the following: . . . local interests could get what they wanted from, or even obstruct the con struction of, transportation facilities. Whatever benefit railroads and canals received from eminent domain law could be offset by localism; and working against such realities, the corporations either struck a bargain or looked elsewhere for a route. Either way, the operational im pact of the assessment process was in creased costs. Thus, while the right of eminent domain could potentially facili tate development, ironically, it also pro vided the means to impede development. 4 Court Rulings As the use of eminent domain be came more prevalent, the landown ers who were adversely affected by this development resorted to the courts in an effort to prevent the con fiscation of their land. Since the pur poses of eminent domain had so vastly expanded, the courts had to analyze whether or not the taking of the land was constitutional.

Essentially, courts were faced with the issue of whether or not these tak ings satisfied the public use require ment. Over time, courts began de veloping a distinction in the interpretation of the "public use" re quirement of. eminent domain stat utes. Some courts felt that all that was required was that the general public receive some tangible benefit as a result of the taking. The danger with this interpretation was that it opened the doors to all types of tak ings' since it is logically conceivable that any type of enterprise will ben efit society after it has taken some property. On the other hand, a nar row interpretation also began to take shape, as courts envisioned the pos sibility of abuse by powerful private interests as they associated them selves with the power of the state to plunder private citizens. The law of eminent domain re mained more or less settled during the latter part of the nineteenth cen tury. In fact, the Federal Govern ment did not exercise the power un til 1875. Prior to that date, a state would condemn land and afterward transfer its title to the Federal Gov ernment. 5 However, it was rather settled that eminent domain could be exercised only in the limited cases where the public had a right to use the condemned property. That a tak ing may arguably benefit the public at large was deemed insufficient to justify the exercise of eminent do main. Yet, the United States Su preme Court was not altogether con sistent in this point, and in the 1916 case of Mt. Vernon-Woodberry Cotton Duck Co. v. Alabama Interstate 1985 EMINENT DOMAIN AND THE RULE OF LAW 279 Power CO.,6 the Court embraced the public benefit analysis.

In that case an electric company attempted to condemn certain land and water rights in order to generate hydroelectric power. The company claimed that the taking was for pub lic use because provision of electric ity benefits society at large. Justice Holmes, writing for the Court, agreed, saying that if "... that pur pose is not public we should be at a loss to say what is."7 New Deal As the New Deal took hold of America, its effects were felt in the evolution of the law of eminent do main. The United States Housing Act of 1937 was the watershed. This statute created the United States Housing Authority, which in turn was enabled to grant loans to local housing agencies in order to eradi cate slums and build public housing projects. Naturally, most states seized upon this opportunity for Fed eral funding and proceeded to con demn many areas that were de·, scribed as blighted in order to build.

public housing projects. If the courts: had maintained the narrow inter·, pretation of the public use require·, ment, these condemnations could not have been effected. Instead, the pre·· vailing interpretation became th€~ broader view that the public benefit or receive some advantage, which permitted the taking of property for limited purposes. The Housing Act of 1949 further enlarged the states' right of eminent domain, as housing authorities were permitted not only to condemn slum areas but in fact were permitted to resell the land to private developers who in turn would follow a previously approved plan of land development. A Radical Departure Finally, the Supreme Court in 1954, in the previously mentioned case of Berman v. Parker, was faced with the issue of a landlord, whose department store was not "blighted" nor did it constitute a public nuis ance. Tlt,is person nevertheless had his property condemned because the area in which his store was located was classified as undesirable and the Federal Government had declared that it would serve the public inter est if that area were sold to private entities who in turn would redevelop the land. Plaintiff lost his case, and the Supreme Court in effect granted Congress a blank check upon which to write its own brand of urban re development. Therefore, the next logical step came in the Hawaiian Housing Authority case which up held the right to condemn private_ property in order to transfer the land to smaller and fragmented private owners so as to take care of the "market failure" in land in Hawaii.

The power of eminent domain is so prevalent and so powerful, that it is 280 THE FREEMAN May literally limited by our imagination. Some of the governmentally sub sidized projects that have been the object of eminent domain range from such projects as the Tennessee Val ley Authority to the World Trade Center in New York City. But per haps the case which demonstrates the most callous disregard for the rights of a community is a 1981 Michigan case, in which 3,468 peo ple were displaced in order to allow General Motors to set up an assem bly plant. The Poletown Situation The case arose when the cities of Detroit and Hamtramck decided that it was a desirable goal to acquire 465 acres which were located between them, at a cost of over $200 million. The cost included such other func tions as relocating the residents, de molishing the existing structures and preparing the land so that in turn the corporation would be enti tled to purchase it at the price of $8 million. GM would also be entitled to certain tax advantages which made it quite profitable to set up an assembly plant there. In return, GM would provide over 6,000 jobs with all the consequent benefits entailed by such job creation.

When the affected neighbors were apprised of what was in store for them, they filed suit, challenging the validity of this taking, because the use for which the property was ultimately intended was to be private and not public. The affected area, known as "Poletown" because of its predominantly Polish composition, was not a slum, nor was it consid ered an eyesore or a blighted spot in the city landscape. It just happened to be in the way of industrial devel opment. The Michigan Court re jected plaintiffs' arguments, and considered that since the creation of jobs was in and of itself an action which benefited· the general public, that the exercise of eminent domain was therefore valid in this instance even though a private entity would own the land and operate it for its own profit. In addition, the Court pointed out that the determination of what constitutes a public purpose belongs properly to the legislative branch, and that it would not ques tion this finding without clear objec tions on constitutional grounds.

No More Dissent The fact of the matter is that the court in the Poletown caseS is not atypical of the rest of the courts in the country. The United States Su preme Court, in the Hawaiian Hous ing Authority case simply restated what are now well-settled principles of law. The fact that the Court de cided this case with eight Justices in favor of the decision and none dis senting, should give us a clue as to how uncontroversial this interpre tation of the law has become. Courts 1985 EMINENT DOMAIN AND THE RULE OF LAW 281 have in effect abdicated their re sponsibility of determining whether or not a taking is for public use. It is now sufficient that the legislature declare that a taking will be in the public interest if that taking has some rational connection with the evil that the legislature wants to eradicate. Market Failures One of the most popular evils tha.t politicians are desirous of eradicat ing concerns "market failures." Yet if we were to analyze the root ofthese failures, whether they are unenl ployment, inflation, surpluses or shortages, a substantial cause of these failures is directly attribut able to prior government interven tion in the market. Therefore, in view of the fact that interventionism has taken such a firm hold of the economy, it is not difficult to visu alize all the potential market "fail ures" that exist and that will appear to be ample justification· for the ex ercise of eminent domain. Eminent domain has become yet another tool where special interest groups seek what they would otherwise not be able to obtain voluntarily in the market. The right of private prop erty has in fact been eroded over the years as a result of this judicial de velopment to the extreme that we hold our property at the pleasure of the government. If the government decides that someone else ought to have our land, whether it is for aes thetic reasons, or for job creation or for any other reason that conceiva bly benefits society, then we will al most inevitably have to succumb to the state's desire for our land.

A Hopeful Sign Courts should limit the widening powers of eminent domain enjoyed by the government. They should un dertake an analysis ofwhether or not a taking is truly for public use, and the conclusion ofthe legislature that a taking is in the public interest should not be blindly accepted. The victims of eminent domain have mo bilized by filing appropriate law suits aimed at the prevention of the taking of their land. Although un successful, the fact that people are actually opposing the arbitrary ex ercise of eminent domain is a hope ful sign. It is time that we should heed the comments of Justice Van Voorhis in his dissenting opinion in the case that paved the way for the construction of the World Trade Cen ter in New York City: Disregard of the constitutional protec tion of private property and stigmatiza tion of the small or not so small entre preneur as standing in the way of progress has everywhere characterized the advance of collectivism. To hold a purpose to be public merely for the rea son that it is invoked by a public body to serve its ideas ofthe public good, it seems to me, can be done only on the assump282 THE FREEMAN tion that we have passed the point of no return, that the trade, commerce and manufacture of our principal cities can be conducted by private enterprise only on a diminishing scale and that private capital should progressively be displaced by public capital which should increas ingly take over. The economic and geo graphical advantages of the City of New York have withstood a great deal of at trition and can probably withstand more, but there is a limit beyond which social ization cannot be carried without de struction of the constitutional basis of private ownership and enterprise.' .~ Property Condemned -FOOTNOTES181 L. Ed. 2d 186 (1984).

2 348 U.S. 26 (1954). 3 Grotius, 1 De Jure Belli et Pacis, Ch. 1. 4 1981 Wisconsin Law Review 1263, 1284. 5 Kohl u U.S. 91 U.S. 367 (1875). This case established the Federal Government's eminent domain power. 8 240 U.S. 30 (1916). 7 Ibid., at 32. 8 Poletown Neighborhood Council u Detroit 410 Mich. 616, 304 NW 2d 455 (1981). 9 Courtesy Sandwich Shop u Port ofNew York Authority 12 NY 2d 379, 399, 190 N.E. 2d 402, 411 (1963). IDEAS ON LIBERTY THE VICTIMS, who in former years might have called upon the court or a policeman for protection, now find the court and the policeman on the side of the aggressor. We may not be able to measure the damaging effect on respect for law and order; but the damage is done, nevertheless. Barbarism has its earmarks, and the acquisition of property through conquest or superior force is notably one of them. Civilization, too, has its earmarks, and the orderly disposition of property through the me dium of deeds, leases, wills, and other contractual arrangements is not only an earmark of civilization but an absolute prerequisite. Leases, deeds, wills, and other contracts will all fall under the stroke of the proposed condemnation. With them will fall the personal security, the hopes, the plans, and-yes-the dreams of the many human beings who have placed their faith in their worth. Here, as always, the failure upon the part of large segments of any given society to understand and respect the rights of ownership can only result in the rise of innumerable pres sure groups, all trying to suggest what should be done with other peo ple's property.

EDWARD P. SCHARFENBERGER Hans F. Sennholz Some Evilsof Inflation To BE IGNORANT of inflation is to suf fer its evil effects. Most people define inflation as a period of generally ris ing prices and wages. They echo of ficial pronouncements and news re ports by the public media that interpret all price rises as inflation ary. Quick to indict anyone who raises prices, they accusingly point to the lust and greed of other men, especially businessmen, as the root cause of inflation. This popular interpretation of in flation contains all the futile means and remedies commonly used to fight inflation: the price constraints and controls designed to keep pricc~s lower than they otherwise would be, the public condemnation of busi nessmen who raise prices and their prosecution for violating price con trol edicts, the imposition of income tax surcharges, and so forth. It obDr. Hans Sennholz is Chairman of the Economics I)e partment at Grove City College. He.has written end spoken extensively on all aspects of the American financial and economic dilemma.

scures economic reality, pointing at the visible effects of inflation and its victims; it does not call attention to the essence of inflation, the inflating of the money quantity. The popular confusion about the meaning of inflation is more than just unfamiliarity with definition. It is a root cause of inflation itself with out which it could not persist. It com pletely reverses cause-and-effect re lationships and thereby indicts the victims for perpetrating the crime while it exculpates the monetary au thorities who willfully and openly are creating ever more money. Thought makes the word, and the word makes thought. Inflation breeds great evil, whether you de fine it as rising goods prices, as an increase in available currency and credit, or as an abnormal increase beyond available goods, resulting in a visible rise in prices. Of all injus tice, inflation is one of the greatest as it devours the possessions of mil lions of hardworking people. And no 283 284 THE FREEMAN May matter who is perpetrating it, the courts of law actively collaborate with the perpetrators by upholding the evil and declaring it constitu tional, equitable and fair. A dollar is a dollar, they proclaim, you shall ac cept a lO-cent dollar in payment of a lOO-cent debt.

Political Injustice It is easier to endure the losses that are suffered as a result of error and misjudgment than the damage sustained by injustice. Inflation ministers unbearable injustice, de frauding some people and enriching others. It impoverishes some social classes while it bestows comfort and wealth on others. There cannot· be any doubt that inflation derives aid and comfort from its many beneficiaries. Political injustice is committed from a great many motives and rea sons and often makes use of legis lation that goes under the name of legal tender, a perfectly innocent la bel for hideous wrongs. It appears to be harmless, indeed, when defined as "a currency which may be law fully tendered and offered in pay ment of money debts and which may not be refused by creditors." In real ity, legal tender is no offer at all, but a forced acceptance, no tender that may be freely refused, but a legal ob ligation to accept a currency no mat ter how much its purchasing power has fallen or is expected to fall. Legal tender actually denies the free dom of contract and the right to re fuse acceptance of deteriorated means of payment.

Legal tender legislation grants government unlimited power over the monetary affairs of the people just as the coinage monopoly of the state did in antiquity and the feu dalization of the coinage right dur ing the Middle Ages. It creates this power in democratic societies as it does in the command societies under socialism and communism. Govern ment, by way of legal tender legis lation, forces people to accept its own currency, grants it monopolistic po sition, and prohibits its discount no matter how it may depreciate. In short, legal tender legislation out laws monetary freedom and paves the way for great injustice. It is difficult to fathom anything more unjust than legal tender leg islation. It permits monetary au thorities to inflate and depreciate their money and then force the peo ple to accept it at face value and in full payment. It gives special privi lege not only to the government but also to all debtors. They need not pay their debts in full but can discharge them by giving inferior money in ex change. Legal tender destroys the property rights of creditors. Under the pretense of creating order and stability, it turns every credit trans action into speculation on the future purchasing power of the medium of 1985 SOME EVILS OF INFLATION 285 payment. It is immoral to the high est degree.

Legal tender legislation permits government to tax its people without having to seek their consent first. It enables government to issue any quantity of fiat money, declare it le gal tender, and spend it for political ends. It is a tool of expropriation of property owners and creditors, in cluding all sellers of goods, services and labor. It forces them to accept le gal tender currency at face value no matter how much it has deteriorated and how low its purchasing power has fallen. The legal tender evil has come to the U.S. through both legislation and jurisdiction. Under the plea of ab solute necessity, the Continental Dollar was made legal tender in 1776 until its demise in March of 178l. During the Civil War, Union green backs were given legal tender force. In 1933 all Federal Reserve notes and U.S. Treasury currency were given coercive powers. In every case the courts sanctioned the action and ignored the evils. The U.S. Supreme Court confirmed the monetary pow ers of government in a number of conspicuous decisions. From John Marshall, Chief Justice for 35 years (1801-1835), to Charles Evans Hughes, Chief Justice during Pres ident Roosevelt's monetary mach inations, most justices made the best of government control over the peo ple's money. On June 5, 1933, a Joint Congressional Resolution voided the "gold clause" in all contracts and ob ligations. In 1935 the Supreme Court concurred. In the words of Chief Jus tice Hughes, "parties cannot remove their transactions from the reach of dominant constitutional power."

(Henry Mark Holzer, Government's Money Monopoly, New York: Books in Focus, 1981, p. 185.) Unearned Income and Loss Inflation causes displacements in the distribution of income and prop erty. As lenders and borrowers, most people do not take into account var iations in the objective exchange value of money. If the monetary value should decline, the lenders are bound to suffer losses in purchasing power while the borrowers gain a corresponding amount. There are longterm contracts that do not have to be fulfilled until a later point in time. There are longterm employ ment contracts or contracts for the supply of materials, all of which in volve money payments over time. They all face inflationary risks. It is a popular, although erro neous, belief that inflation affects only wealthy individuals because they are said to be the money lend ers. This may have been true during the Middle Ages when economic wealth was concentrated with a few wealthy noblemen and merchants, while the masses of people were struggling for mere survival. But 286 THE FREEMAN May ever since the nations of the West emerged from feudalism and mer cantilism, and tried individual free dom and enterprise, an ever-growing number of people were able to save some part of their rising incomes, permitting most people to become lenders on net balance. There are millions of creditors of life insurance companies, pension funds, savings banks, and similar institutions. Mil lions of people own government sav ings bonds and other money assets.

It is true, they may have charge ac counts and other consumer debt. But in most cases savings probably ex ceed obligations, which suggests the conclusion that the American people are vitally interested in sound money. The disastrous nature of inflation becomes apparent when we contem plate the magnitude of the losses which inflation is inflicting on mil lions of American creditors every year. Even at the modest rate of five per cent annual depreciation, the an nuallosses to creditors and gains to debtors amount to more than $100 billion a year. The economic and psy chological impact of this silent transfer of wealth on millions of in dividuals surpasses all imagination. Considering such staggering losses on the part of the thrifty and prov ident, the rising clamor for entitle ment and transfer is not surprising. The losses strengthen the demand for social security, aged health care, and governmental controls over prices and rents. They foster Federal aid and subsidies and otherwise pro vide a chief argument for an exten sion of government power.

LongTerm Contracts Longterm employment contracts permit inflation to inflict painful losses on millions of working people. Within a few years of employment they may lose a part of their pur chasing-power income through mon etary depreciation. Their relative economic and social position in so ciety may decline when inflation ravishes them more than others. There cannot be any ~ doubt that teachers, ministers, priests, and rab bis are primary victims of inflation. But they also are thought leaders who significantly affect the moral, political and economic trends of the future. Their losses in income and social position during the age of in flation may have contributed to the fact that many are more frustrated in political and economic outlook than other groups of society. Monetary depreciation inflicts spe ciallosses also on industries that are controlled politically, in particular, public utilities. Being subject to commission control, their rates are fixed by decree in accordance with authoritative judgments of fairness and adequacy; but their costs keep on rising in reaction to inflationary pressures. American railroads and 1985 SOME EVILS OF INFLATION 287 public utilities are eminent exam ples. In competition with other in dustries for capital, labor and sup plies, their costs are rising; but their own rates are determined by govern ment committees and commissions that are known to grant relief only after lengthy public hearings and long after inflation has raised pro duction costs. Moreover, public au thorities are tempted to "fight" in flation and "hold the line" by denying price adjustments. Squeezed by the vise of rising costs and rigid rates, the financial position of public utilities deteriorates considerably. In the end they stagnate and cease to function efficiently.

Booms and Busts It is the course of every evil that it brings forth more evil. Unbeknown to most people, including most econ omists, inflation breeds business cycles with destructive booms and depressions. Indeed, what has been more damaging to individual free dom and the enterprise system than the recurrence of recessions and depressions! During the Great Depression government interven tionism made its greatest strides. Each new recession gives new im petus to political power. Inflation at first produces condi tions that appear favorable to every one. Businessmen earn extraordi nary profits; there are few, if any, business failures. Employment conditions improve and wage rates rise, for which labor unions and allied politicians loudly claim credit. The general atmosphere is one of confi dence and prosperity until the infla tion-induced activity tends to raise business costs. In time costs soar un til profits turn into losses and a recession takes the place ofthe boom.

Recession is a time for readjust ment to the demands of the market. Loss-inflicting operations are aban doned, and business costs are re duced. Businessmen correct their mistakes made during the boom; the worst offenders are forced to sell out or face liquidation and bankruptcy. Even labor may need to readjust to market demands or face unemploy ment. In short, a recession or depres sion is a time of recovery from the excesses and blunders of the boom. Business cycles have plagued this country from its beginning. In every cycle the U.S. government tried its hand in money and banking. Whether the debauchery of the Con tinental Dollar by the Continental Congress, the issue of U.S. Treasury obligations during the British American War and the Civil War, the financial adventures of the First and Second Banks of the United States, the silver legislation, the World War I inflation-they all con stituted preludes for the depressions that followed. Similarly, the Great Depression had its beginnings in the bursts of credit expansion by the 288 THE FREEMAN May Federal Reserve System in 1924-25 and again in 1927-28. Without them there could have been no stock mar ket boom and no crash of October 24, 1929. Since World War II, Federal Reserve credit expansion kindled seven booms and seven recessions.

Full employment through deficit spending and currency expansion is the official doctrine that guides the economic policies of Federal Admin istrations. Whether it is deficit fi nancing or easy bank credit, the ul timate consequences are always the same. But each depression is bound to be deeper and more painful than the preceding one, and each boom more feverish than the preceding boom, because maladjustment, if not corrected, is cumulative. Recessions turn into depressions and booms into "crack-up booms" with panicky flights into gold and other real val ues. In the end, booms and depres sions become "stagflations" that combine both evils: the destruction of currency and the depression with mass unemployment. Rising Tax Exactions The federal government is the greatest beneficiary of inflation; pol iticians, government officials and their proteges its greatest profiteers. When inflation raises money in comes it lifts taxpayers into pro gressively higher income tax brack ets and thus allocates an increasing share of their incomes to governmente It pushes them all toward the top rate. Similarly, it boosts govern ment exactions through state and lo cal income taxes, corporate income taxes, estate taxes, and other levies with progression features.

Business income and taxation are especially affected by monetary de preciation. When prices rise, a dis tortion in profits takes place. They are made to appear larger than they actually are. Inflation drives the cost of replacing plant and equipment above the original cost, but for tax purposes government recognizes only the original costs and thus forces business to overstate its ac tual earnings. It levies income taxes on imaginary profits which, in real ity, are inflationary costs of maintenance. The great popularity of inflation rests on its benefits to government. The federal government as a giant debtor reaps vast fortunes from mon etary depreciation. On its nearly two-trillion-dollar debt it reaps gains of tens of billions of dollars every year. It may add new debt through budgetary deficits, and yet, the mountain of debt, in terms of pur chasing power, may not rise at all be cause inflation may melt it away even faster.

In a modern transfer system gov ernment exists for the purpose of promoting the prosperity of those who run it-politicians and officials. Inflation permits them to spend vast 1985 SOME EVILS OF INFLATION 289 amounts that directly and indirectly benefit them. Their remuneration usually exceeds the amount they can earn in productive employment., Their perks and fringes are much to be desired, their power over others to be feared. In order to secure their benefits and sustain their power, they need the votes of their constit uents. Multibillion-dollar expendi tures for group entitlements may buy the votes. And the power to buy votes with entitlement legislation depends on their power to inflate. Without it, a Federal deficit of $200 billion annually would be inconceiv able, as would be the myriad of transfer programs and the huge bu rea ucracy administering the pro grams. The transfer state builds on the power to tax and to inflate, the effects of which in turn give rise to ever more transfer demands.

The Dollar Standard Inflation creates problems not only at home but also abroad. Until 1971, when gold was the international money and the U.S. dollar was pay able in gold, inflation generally caused an outflow of gold from the country with the highest rate of in flation. Threatening inability to pay in gold tended to restrain the coun try from inflating any further, or force it to devalue its currency to ward gold. But in 1971, the United States refused to honor its growing foreign obligations to redeem its currency in gold. Fearing more losses, President Nixon declared gold to be "unsuited for use as money," and vowed to remove gold from the mon etary system of the world. When other major countries followed suit the transition from the traditional gold standard to irredeemable paper issues was completed. -. The U.S. dollar emerged as the pri mary international currency serv ing trade and commerce the world over. It already had acquired a lead ing position under the Bretton Woods system that had made the U.S. dollar the international reserve money payable in gold at a price of $35 per ounce. When, in August 1971, President Nixon repudiated the agreement the world continued to use the U.S. dollar without its re deemability. After all, the world's merchants and bankers had grown accustomed to it. It afforded access to the markets of the most produc tive country in the world, and its record of relative stability was one of the best in recent monetary his tory despite its devaluations in 1934 and 1971. But above all, the official repudiation of gold created a void which no other fiat currency could possibly fill. It left the U.S. dollar in the most prominent position for be coming the world medium of ex change and reserve asset.

The world desperately needs a common money that facilitates for eign trade and international trans290 THE FREEMAN May actions. For hundreds of years gold served as the universal money unit ing the world in peaceful coopera tion and trade. Today the U.S. dollar is called upon to assume the very functions of gold. But in contrast to the gold standard, which was rather independent of anyone government, the dollar standard depends com pletely upon the wisdom and discre tion of the U.S. government. That is, the world monetary standard now rests solely on the political forces that shape the monetary policies of a single country-the United States. We can think of no greater respon sibility for any country than that of the United States to the world. Every day assumes a fearful responsibility when we view the fate of the free world that rests on the U.S. But un fortunately, the dollar standard is a political standard in which the pur est motives are mixed with the most sordid interests and fiercest passions of the electorate. The dollar stan dard itself is the outgrowth of an ide ology that placed government in charge of the national monetary or der. It is the handiwork of govern ments and their apparatus of poli tics. To expect much of such a creation is to invite bitter disappointment.

The world fiat standard leads to temptations which no contemporary government can be expected to re sist. The world demand for a reserve currency constitutes an extraordinary demand that tends to support and strengthen its purchasing power. It affords the country of issue a rare opportunity to inflate its cur rency and export its inflation with out immediately suffering the dire consequences of currency debase ment. In particular, it presents an opportunity to the administration in power to indulge in massive deficit spending, which hopefully bolsters its popularity with the electorate, while its inflation is exported to all corners of the world. The country that provides the world reserve asset can, for a while, live comfortably be yond its means, enjoy massive im ports from abroad while it is export ing its newly created money in payment of such imports. In short, it can raise its level of living at the ex pense of the rest of the world.

Government as Beneficiary For more than a decade the U.S. government has been the benefi ciary of this ominous situation. It en gages in massive deficit spending and currency expansion with mini mal inflationary effects as the dollar inflation is exported to foreign coun tries. For several years the foreign dollar holders even financed most of the budgetary deficits which the U.S. government was incurring. Inevita bly they suffered staggering losses on their dollar holdings which they had earned in exchange for real wealth. And yet, they are coming 1985 SOME EVILS OF INFLATION 291 back again and again because their own currencies are worse than the U.S. dollar. The greatest factor of dollar strength is the chronic weakness of other currencies. Leading European. currencies do poorly in foreign ex change markets because their banks of issue are pursuing policies of easy money and credit. European central banks are undermining confidence in European currencies and thereby generating an extraordinary de mand for U.S. dollars.

The exchange rate between var ious currencies is determined by their purchasing power .. It is ex plained by the purchasing-power parity theory, according to which the rate of exchange between currencies tends to adjust to their purchasing powers. If the exchange rate were to deviate from parity and a discrep ancy were to appear, it would be come profitable to buy one and sell the other until the discrepancy would disappear. If the exchange rate of the U.S. dollar versus the _Swiss franc were to favor the U.S. dollar it would be profitable to sell the dollar and buy the franc until the disparity would disappear. Foreign-exchange rate changes anticipate relative changes in goods prices. But it is safe to assume that a rise in foreign exchange rates is unlikely to signal an anticipated rise in purchasing power. After all, in this age of inflation every currency is losing purchasing power most of the time. "Strength" in foreign ex change rates merely means relative strength in terms of other currencies that are losing purchasing power even faster. The U.S. dollar may be the strongest currency around al though it, too, is losing purchasing power. It may rise to spectacular heights versus other currencies al though it is sinking to new lows in purchasing power.

Exporting Inflation Foreign inflation is giving the dol lar a boost; every foreign attempt at prosperity through credit expansion is giving it new strength. On the other hand, every U.S. government effort at expansion is sapping the dollar strength, every new attempt at financial stimulation through Federal Reserve credit expansion is weakening the dollar vis-a-vis all other currencies. U.S. monetary authorities now are orchestrating the international flow of funds. During the 1970s they gen erated the greatest credit boom the world has ever seen. There had been some credit expansion before August 15, 1971, when President Nixon uni laterally abolished the last vestiges of the gold standard. But it acceler ated dramatically thereafter when the U.S. government showered the world with U.S. dollars. Central bank reserves consisting primarily of paper dollars expanded from $92 292 THE FREEMAN billion in 1970 to more than $800 bil lion in 1983. The Eurodollar market, which recycles the flood of petrodol lar deposits to debtors all over the globe, grew from some $100 billion in 1970 to nearly $2 trillion today.

All these credits fueled an inflation the likes of which the world has never seen before. The 1979 Crisis In October 1979 an international flight from the dollar visibly shook the world dollar standard and cast serious doubt on its future. It forced President Carter to raise $30 billion in harder currencies in order to stem the panic. When the discount rate was raised to 13 per cent the crisis subsided. Federal Reserve authori ties subsequently reduced the ex pansion rate and in some months even abstained from any further credit expansion, which soon trig gered the beginning of painful read justment. The 1981-1982 recession was the inevitable effect of this new self-restraint. It precipitated a world wide scramble for liquidity and gave rise to a "crisis-demand" for U.S. dollars. The demand gave new strength to dollar exchange rates and new support to its purchasing power. The recession put a heavy strain on the world's banking system. A number of large debtor countries were unable to meet their obliga tions. Poland, which owed large debts to financial institutions in the West, fell victim to its own socialistic policies. Argentina, mismanaged by a military junta, sought a resched uling of its considerable debt. Mex ico, in a similar situation, gave rise to the fear that her failure could lead to a chain reaction bringing about a collapse of several large financial in stitutions and eventually the world banking system. Throughout the fears, strains, and volatile changes in foreign exchange markets, the U.S. dollar was gaining in strength.

The crisis demand for dollars was bolstered further by the fears of po litical and financial instability abroad, making the U.S. dollar a "refuge currency." In many coun tries suffering from sustained cur rency depreciations the U.S. dollar is the key currency. It can be found in the cashholdings of people every where who use it as their unit of cal culation and medium' of exchange. They are bidding for U.S. dollars by offering their goods and services in exchange for more dollars. As long as individuals the world over are willing to hold dollars and keep on adding dollars, the dollar is bound to remain strong. But if they should lose faith in U.S. policies and reduce their holdings, the dollar would turn weak again, perhaps weaker than ever before. It could tumble in an abrupt and disorderly fashion, and the dollar standard dis integrate in confusion and disarray.

DURING the 1984 election season, In dustrial Policy became a catch phrase as candidates outlined their economic positions. Since the elec tions have now passed (at least for two quiet years), the phrase is not bounced around in the news columns as before, but advocates ofIndustrial Policy are as anxious as ever to see their ideas come to fruition. Thus, their ideas bear watching and those who see this particular policy initi ative as potentially disastrous to our economy should try to obtain what ever intellectual and political am munition is available to see that In dustrial Policy remains only an idea. Throughout this paper I shall be critiquing the so-called Industrial Policy ideas, but before I criticize I shall give the readers a general de scription of what these ideas are and how they would be implemented. First, it should be noted that InMr. Anderson is an economist in Chattanooga, Tennessee.

Bill Anderson Industrial Policy dustrial Policy advocates such as Harvard University's Robert Reich, Barry Bluestone of Boston College, Senator Gary Hart and business ex ecutive Lee lacocca see American in dustry in decline: our basic indus tries such as automobiles, steel, rubber and textiles are falling prey to subsidized or outright govern ment-owned foreign competition. The loss of such jobs, they contend, means the end of the American mid dle class as we have known it, and further erosion of the job base will relegate us to low-paying service jobs such as keyboard punching and hamburger flipping. America the once-powerful and wealthy will be come America the exploited colony. Second, advocates see Industrial Policy as fitting into a broader pic ture of "quality of life," which em phasizes things like health care, support services, paid vacations, en vironmental purity, welfare compen sation and other such amenities that 293 294 THE FREEMAN May "protect" us from the often harsh realities of life. Government plan ning and intervention, they argue, can help raise the standard of living for most, if not all, of us by providing more quality of life services.

Specific Industrial Policy imple mentations would include the following: (1) Increased government spend ing in health care, unemployment compensation, worker retraining, housing and relocation for displaced workers. (2) "Domestic Content" legisla tion for automobiles as well as in creased "protection" for other do mestic producers that must compete with foreign firms both in the U.S. market and abroad (included in this package would be a broad range of subsidies both for exporters and firms that sell mostly in this country). (3) Increased (or targeted) regula tion of U.S. firms, especially those in the transportation industry to in sure "stability" in the marketplace. (4) Reinstitution of the Hoover-era Reconstruction Finance Corporation that would make low-interest loans available to "threatened" U.S. firms. (5) Restrictions on plant closings to keep firms from shutting down unprofitable plans or enterprises in one area of the country and moving them to a more suitable business cli mate either in this country or in a foreign land.

(6) Expanding labor union power, giving "participatory rights" to wor kers in the decision-making of the firms where they are employed as well as providing workers' groups with low-cost liquid capital to enable them to buy plants that are closed or are being closed. (7) Targeting of potentially prof itable new firms (such as high-tech companies) by giving them "protec tion" as well as low-cost capital. Interventionism Of course, any observer of govern ment intervention into our economy can readily see that government has, at one time or another, followed the above scenario. Government expen ditures for health care and un employment benefits have steadily increased since the 1960s. Pro tectionism has been a part of Federal policy since the founding of our re public. The regulatory monster has expanded its reach for nearly a cen tury, and government support of unions has guaranteed organized la bor a far larger share of the work force than it would have if unions were forced to compete in the mar ketplace the way firms compete for workers.

But the advocates of Industrial Policy recognize this fact as well. They, too, admit that government al ready intervenes in the ways speci fied previously and further admit that intervention can even be harm1985 INDUSTRIAL POLICY 295 ful at times. The choice, they say, is not between intervention or non intervention; rather, we must choose between "smart" policy and "stu pid" policy.l Stupid industrial poli cies, the advocates say, disintegrate into a chaotic mixture of zero-sum clashes between competing sectors of the economy.2 Smart policy, they say, brings the different sectors to gether in a coordinated effort. The key, of course, is to know the differ ence between that which is "stupid" and that which is "smart," then have the political conviction and courage to see that Congress implements these policies. As Reich has noted: America has a choice: it can adapt itself to the new economic realities by altering its organization, or it can fail to adapt and continue its present decline. Adaptation will be difficult. . .. A new consensus is difficult to achieve when each person seeks to preserve his standard of living but finds that he can only do so at the expense of someone else. But failure to adapt will rend the social fabric irrepar ably. Adaptation is America's challenge.

It is America's next frontier. 3 Examples given by industrial pol icy advocates include the so-called success of the Japanese Trade Min istry, or MITI, and (if one can believe it) American farm policy. Both cases, the advocates write, show that by co ordinating private businessmen and government officials, an entire econ omy can benefit from new success and productivity. Most important, they say, is that the new efforts at Industrial Policy are not a case of the private sector versus the public sec tor, as is the case of socialism. Rather, they note, the key word is "coordination," or, perhaps, a "pub lic and private partnership." Partnership? To those who have become weary of the false battles of "public inter est" against the "private interest," such a proposed partnership might bring some relief. The truth is, how ever, this so-called "partnership" is every bit the assault on the private economy that has come with decades of socialist planning. At best, Indus trial Policy is a naive idea that will be rendered harmless by public in difference and its greatest sin will be that of wasting a valuable commod ity called paper. But at worst, In dustrial Policy will bring about large distortions and misallocation of cap ital in the economy while, at the same time, increasing the already intolerable mass grab for funds from the Federal treasury and push ing productive entrepreneurship underground.

Distorting the American economy is the last thing on the minds of the Industrial Policy promoters. After all, they say, the idea is to help, not hurt our economic prospects. One might ask, "How can anything so de structive come out of something meant to do so much good?"

296 THE FREEMAN May To refute the promoters' claims, then, we must show the ways in which such policy implementation will cause damage to the economy, as well as demonstrate the difficulty of putting such legislation in force. Before dealing with those subjects, however, we will first examine the two examples of success cited by pol icy proponents. Learningfrom Japan When viewed with a critical eye, the so-called magic ofMITI fades into political and economic reality. This is not to say that MITI has not had some success, but most likely those Japanese success stories would have occurred even if the bureaucrats in the trade ministry had not "tar geted" the semiconductor industry, among others. 4 What is more impor tant, however, is what MITI failed to accomplish-to the relief of the Jap anese. In the early to mid-1970s, MITI attempted to persuade Japa nese investors to target the steel and petrochemical industries rather than the automobile industry, which MITI declared could never be competitive with U.S. auto manufacturers on an international basis. As we know to day, Japanese steel stays alive mainly because of government sup port while the Japanese automobile industry has become the envy of the industrialized world. 5 No wonder, then, that Economist Katsuro Sakoh said that the recent economic success of Japan is "based not on how much it [the Japanese government] did for the economy, but on how much it restrained itselffrom doing."6 As seen by the recent wave of farm foreclosures-coming at a time when record supports are being paid to farmers-one is hard-pressed to com prehend the excitement Industrial Policy proponents have for farm programs. Yet, Economist Lester Thurow, an ardent supporter of in terventionism, has written, "In agriculture what started as a des perate effort to prop up a very large, sick industry in the 1930s ended as an industry that is the world's most efficient. There is no reason that feat cannot be duplicated elsewhere."7 In answering Thurow's glowing endorsement of farm policy, Richard McKenzie, an economist from Clem son University, comes directly to the point: What such advocates fail to report is that we have an agricultural policy that props up the price of food for the rich and poor alike, that adds to the impoverish ment of the lower-income groups in this and other countries, that contributes to the destruction of the soil base, and wastes a monumental amount of food all in the interests of appeasing a very powerful political interest group. 8 McKenzie touches on the point of interest groups made by Reich, but unlike Reich, he understands the na1985 INDUSTRIAL POLICY 297 ture of interest groups and is fully aware that appeasing such groups is not costless. For even if one ignores (and we will not do so in this paper) the economic illiteracy shown by In dustrial Policy advocates, it is im possible to bypass their political na ivete. Their fallacy is simply the fallacy of composition; that is, they forgot that what may be good for one special interest group is not neces sarily good for the public at large.

Farmers who receive supports from the federal government no doubt personally benefit, but the benefit is not shared by the public. Rather, thE~ public must pay for this transfer of wealth through higher taxes and higher food prices. To give such sup port to every sector of the American economy simultaneously is virtually impossible, since there would be no sector left to pIunder. Instead, such universal support would be an act of self-plunder, of everyone attempting to prosper at the expense of everyone else. Industrial Policy proponents to,· tally misread the true nature of gov,· ernment. In the view of those who believe government is the best tool to correct so-called "market fail· ures," according to economists Rob-· ert E. McCormick and Robert D. Tol· lison, "the state is a productive entity that produces public goods, in·· ternalizes social costs and benefits,. regulates decreasing cost industries (monopolies) effectively, redistrib·· utes income Pareto optimally (giv ing to some without hurting others), and so forth."9 A Flawed Theory But McCormick and Tollison, through their studies of govern ment, find that such an approach "is not a very believable theory of gov ernment action and, moreover, that it is flawed by the unwarranted as sumption that government can be called upon to correct imperfect mar kets in a perfect and costless man ner. That the state is not a perfect instrument for correcting market failures hardly needs demonstra tion. . .. Indeed, although imperfec tions in the economy may be la mentable, lamenting is the best that can be done if the consequence of government action is to decrease rather than improve economic welfare." 10 As stated earlier, Reich acknowl edges the impact of interest group behavior (called "rent seeking" in economic jargon), but then declares that Americans must "adapt" to "new economic realities," as though a few exhortations to unselfishness by (self-interested) politicians can change things. But the truth is, peo ple who have their hand firmly placed in the Federal cookie jar, along with those trying to jam their own hands into the chaos, will not suddenly turn altruistic because a few intellectuals write books. It must 298 THE FREEMAN May be remembered that the fallacy of composition works both ways. Most handouts to special interest groups constitute a small part of the Fed eral budget-that is, by themselves.

Particular groups asking for more Federal money, protection, or the like usually preface their requests with an acknowledgement that whatever portion comes to them will be only a minute part of the budget and that cutting out that giveaway will have almost no effect on efforts to balance the Federal budget. And, most importantly, such groups are firmly aware of the old adage that governments grow "because the benefits are concentrated and the costs are diffused." They argue, "See the good this program will do for us, yet the cost to the taxpayer is very minimal." Behavior at the Margin If the case is seen as being isolated from the rest of the budget, then the argument makes sense. But econom ics and the study of political and eco nomic behavior does not simply con centrate on total spending or total outlays. Rather, studies emphasize behavior at the margin. That is, when we look at the total budget pic ture, we view it as the sum of every little program (plus the gargantuan ones as well) that Congress slips into law. Anyone of those programs by itself constitutes only a small frac tion of total spending; added together, however, the programs be come part of a budget out of control.

Can such rent-seeking behavior be changed through exhortations by politicians and intellectuals? Hardly. If one views the present budget pic ture as the political norm, the pros pects for ending the interest-group giveaways are not bright. For one, neither intellectuals nor politicians are free of rent-seeking qualities. In the case of the politician, he or she is part of a barter system that trades favors for votes. Politicians are fond of asking for budget restraint-in someone else's district; they like to seek tax increases-far away from their constituents. Intellectuals, on the other hand, are not free of gov ernment largess themselves. Uni versities are perennial grant recip ients, as are particular professors who receive Federal monies for their own pet studies. And, finally, there is the issue of power. One can readily surmise that if the federal govern ment were ever to implement the version of Industrial Policy advo cated by the proponents, those in charge of overseeing the resulting programs would be the very intel lectuals who are interested in seeing the programs come to fruition.

Thus, one can be sure that the Ini tiation of a so-called comprehensive plan of Industrial Policy would not end the destructive rent seeking that presently characterizes our budget ary process. Instead, it would give 1985 INDUSTRIAL POLICY 299 government intervention a new re·· spectability at a time when the real· ities of intervention are proving just how harmful intervention and reg·· ulation has become. And as the po·· litical process would steadily worm. its way into the decision-making of the Industrial Policy czars, the fa cade of economic impartiality would crumble until nothing remained but rent seeking and interventionism. Economic Fallacies Plans of Industrial Policy can be criticized as in conflict with political reality. But those plans contain a multitude of economic sins as well" a mountain of errors which will be discussed next. The first challenge to the so-called need for Industrial Policy deals with the very claims that America is in.

the throes of deindustrialization. This challenge is vital because it at·, tacks what proponents see as the basic reason for implementing In·, dustrial Policy in the first place. While it is true that many of America's factories have shut down. in recent years, many on permanent shutdown since the 1981-82 reces sion, one must keep those facts in perspective. For one, much of the un employment in this country is con centrated in heavily unionized in dustries, including manufacturing and mining. (The construction in dustry-much of which is union ized-also suffers from high rates of unemployment, but high unemploy ment rates in that industry are com mon, due to a large number of eco nomic factors.) Because of the nature of unionism, such high unemploy ment rates are predictable, espe cially given the militancy of union leadership in this country. The higher-than-average wage of the union worker helps bring about un employment in two ways. First, as economic theory predicts, the high price of unionized workers forces the company to hire fewer employees than it ordinarily would have hired had market rates, rather than coerced wage rates, prevailed. Sec ond, the high wages make it attrac tive for other workers to seek union work, as well as making it attractive for laid-off union workers to remain unemployed until being recalled.

Thus, the high rates of unemploy ment in unionized sectors. But unionization has other nega tive effects on industry as well. Most of the recently closed plants were shut down because they lacked the needed capital to operate profitably. Unions have long been known to re sist recapitalization in plants be cause such retooling often leads to a smaller workforce in those particu lar factories, which equates to less membership in unions. Therefore, plant owners and managers have often had to limp along in a high technology age with yesterday's cap ital. While the economy was boom300 THE FREEMAN May ing, such problems could be masked; when the latest recession hit, how ever, the party was over and old, ob solete plants closed by the hundreds. No Mass Migration This is a grim picture, but does it translate into the claim by Indus trial Policy advocates that there is at present a mass transfer of jobs from the Northeast (snowbelt) to the South (sunbelt)? No doubt, some firms are relocating facilities from the Midwest and Northeast into the South. But the so-called massive transfer claimed by the Industrial Policy proponents just is not hap pening. Richard McKenzie points out that New England's manufacturing employment rate in the latter 1970s grew at a compound annual rate of 3.46 per cent, which was 50 per cent more than that of the South Atlantic region. This was no simple wealth transfer; rather, it reflected the growing high-tech boom and the ability of the New England states to provide such firms with a labor force that could match the job requirements.

In fact, according to U.S. Depart ment of Labor Statistics, projections show the distribution of manufac turing jobs in this country to remain relatively static through the rest of this decade. 11 While it is true that certain changes, some pleasant and some not, are occurring on the micro level of our economy, the broad picture is that the U .8. economy is strong. True, there is a small but sig nificant growth rate in the service economy, but this growth is a sign that we are becoming wealthier, not poorer as Industrial Policy propo nents tell us. This is because the growth of ser vices tells us that we need not em ploy huge numbers and proportions of our population in basic manufac turing jobs as was required in years past. The growth of fast food restau rants, for example, is not a threat to our well-being, but rather reflects the fact that Americans are eating out more, a sign of greater disposa ble income. The same can be said of numerous other service industries as well. Because our manufacturing base is efficient, and because low-cost foreign firms see this country as a strong market for selling their prod ucts, we are able to buy basic items at far less cost (in percentages of per sonal income) than could our fore bears. This means that we have money left over to eat out or pur chase services becoming more and more available to us. And as the po tential for service industries contin ues to grow, the opportunities for new kinds of employment grow as well.

Those who declare that the in crease in imports and the growth of service employment threaten our well-being forget that foreign firms will sell here as long as they believe 1985 INDUSTRIAL POLICY 301 they can receive something in re turn. Japanese auto manufacturers, for example, are not philanthropists; they do not sell us high-quality, in expensive automobiles out of altru ism. Rather, they seek goods and ser vices in return and if the day comes that we have no manufactures or if all of us are turning over hamburg ers at the local fast-food place, the Japanese or any other foreign pro ducer will look elsewhere for new markets (or the Japanese will undergo massive changes in their di etary habits-highly unlikely). The actual implementation of In dustrial Policy, judging from what has been described about the rent seeking aspects of the political pro cess, would be nearly impossible.

But, for the sake of argument, if it were actually put into law, could it succeed? That is, are opponents ac tually afraid that such an initiative could be more effective than free markets, thus discrediting a whole body of economic literature and its authors? If the writings of Nobel Laureate Friedrich A. Hayek are to be be lieved-and economic history has yet to discredit Hayek's work-the an swer is a flat no. First, and most im portant, Hayek has shown time and again that centralized planning can not replace the efficiency of the mar ketplace, and his writings have been proven by the unqualified market failures of socialist economies. The Role of Knowledge A recurring theme in Hayek's work is the role of know ledge in eco nomic processes, a theme recently emphasized by economists Israel Kirzner and Thomas Sowell.12 Hayek points out that while economic knowledge can be centralized in a few areas, it cannot be centralized when dealing with the entire work ings of an economy. As McKenzie notes: The mental capacity of our leaders is limited. They are capable of digesting only so much information intelligently.

Central control of the economy will ul timately be restricted by the mental lim itations of our elected and appointed leaders, even though they may be the "best and the brightest" among us. Growing complexity in products and pro ductive processes, which is forecast by in dustrial policy proponents, will necessar ily make us more, not less, dependent upon decentralized decision-making. This is because the growing complexity of pro duction means that our -leaders will be less capable of knowing and handling the entirety of the complex information that is known by others. IS No doubt the Industrial Policy ex perts are bright, intelligent persons. Few persons would deny that fact. However, the U.S. economy will not function better just because intelli gent, highly-educated men and women are trying to centralize eco nomic decisions. Rather, these deci sions are better left to those who, 302 THE FREEMAN May while lacking high-powered college degrees, are far more capable at un derstanding their own economic sur roundings than someone in Wash ington, D.C. As Sowell has noted, we need the skills of all persons in the economy, not just the skills of a cho sen few.14 Centralized knowledge simply cannot replace decentralized knowledge.

, Another serious flaw in the eco nomic reasoning of Industrial Policy advocates is their failure to under stand the problems of economic mal investment, a problem that has been analyzed by Austrian economists since the beginning of this century . . The outline of Industrial Policy calls for "targeting" growing or promis ing sectors of the economy with pro tection from foreign (and some do mestic) competition as well as making cheap capital available. It is this portion of the plan that makes malinvestment a virtual certainty. First, there is an inherent contra diction in the advocates' analysis. For a new industry to have promise, it must perform well in the market place, for the market is the only true bellwether for any product. If people do not see a use for a new product or service, if they believe that the new item cannot meet their present or fu ture needs, then that item has no fu ture in the marketplace. Because the market reflects the needs and wishes of large numbers of people, it is by far the best way to measure the promise of a product or service. No other method is comparable. Even if a government official declares an unpopular item to be a new member of the marketplace, there is no guar antee that the item will ever be used in large quantities if at all.

Therefore, the best that economic planners can do in determining the potential for a new product or ser vice is to make their determination after the fact. Their decision cannot precede the market's verdict; it can only follow. With that in mind, it is important to realize that the mar ket, and only the market, can truly pick winners and losers. For govern ment to do so can have disastrous re sults. Farm price supports, for ex ample, have made farming an attractive business for some inves tors because they were already guar anteed a price for their product-pro vided they could produce it. The lure of guaranteed prices has brought so many producers into the market that even government policies have not been able to keep prices at profitable levels. The result has been a 1930s sty Ie liquidation of the Farm Belt (made vividly clear by recent news reports). The same scenario would repeat it self anywhere the government tried to "target" what it p~rceives to be promising producers. The lure of easy capital and protection would entice new entrants into the market, and the resulting glut of production 1985 INDUSTRIAL POLICY 303 would bid input prices up and drag profits down. To put it hIuntly, if the U.S. government were to give the same kind of support to the semicon ductor industry as it presently gives to farmers, that industry would be flat on its back within a short time.

The policies of easy money and pro tection would bring about massive malinvestment of capital, a malin vestment that would sooner or later have to be liquidated when the mar ket would correct itself. Of course, malinvestment and liq uidation are impersonal terms. A human translation ofthem would in clude words like unemployment, job lessness, depression, and the like. For the price of malinvested capital must ultimately he paid by hu man beings, and it is the poor who suffer most. On a large scale, as both Hayek and Ludwig von Mises have pointed out, malinvestment ofcapital has led to every one of our recessions in this century, and the central culprit in each period of capital malinvest ment has been government policy, lJoth fiscal and monetary. The new Industrial Policy promises to be a re peat of former mistakes and a guar antee of more recessions. Thus, Industrial Policy is not a new promise of prosperity and a new age of American industry. Instead, it is simply, as McKenzie puts it, a hoax.

Granted, the deception is not delib erate, but it is deadly all the same. Government planning cannot sub stitute for the market at any time, even when one perceives problems of "market failure." The market will ultimately speak; it is up to us to be sure that the words it uses include prosperity and wealth instead of depression and unemployment. @) -FOOTNOTESlLester Thurow in Industrial Policy debate with Dr. William H. Peterson in Chattanooga, Tennessee, March 19, 1984. 2These ideas are put forth by Lester C. Thu row in his book The Zero-Sum Society, in which he sees government being pulled apart by com peting special interest groups. 3Robert Reich, The Next American Frontier (New York: Times Books, 1983), p. 21. 4Richard McKenzie, "The Great National In dustrial Policy Hoax," lecture given at Notre Dame University November 17, 1983, pp. 11-12. slbid., p. 12. 8Katsuro Sakoh, "Industrial Policy; The Super Myth of Japan's Super Success," Asian Studies Center Backgrounder, No.3 (July 13, 1982).

7Thurow, "Farms: A Policy Success," News week" May 16, 1983. 8McKenzie, p. 15. 9Robert E. McCormick and Robert D. Tolli son, Politicians, Legislation, and the Economy (Boston: Martinus Nijhoff Publishing, 1981), p.3. l°lbid., pp. 3-4. llMcKenzie, pp. 9-13. 12Both authors have made extensive use of Hayek's analysis on knowledge, Kirzner in Perception, Opportunity and Profit, and Sowell in Knowledge and Decisions. 13McKenzie,p. 15. 14ThomasSowell, Pink and Brown Peopleand other Controversial Essays, (Stanford: Hoover Institute, 1980).

John L. Chapman CAPITALISM •SOCIALISM My PURPOSE here is to extol the vir tues of a social system based on the precepts of private enterprise, lim ited government, and maximum in dividualliberty. This system, known as "capitalism," will first be defined, and its major features will then be highlighted. Additionally, the pri mary competing social system, known as "socialism" or "interven tionism," will be defined, and com pared or contrasted where appropri ate. Finally, key features of current public policy debates will be ad dressed where they relate to points under general discussion. Mr. Chapman, an economics major in college, is a marketing representative for IBM in Louisville, Kentucky. 304 One of the most intriguing of all intellectual debates concerns the most optimal method of organization of human society. More specifically, from the time of Aristotle onward a great debate has raged concerning the proper form, scope, and role of government in society, in order to ef fectuate the "good life."

Most people would agree that two polar-opposite kinds of society have evolved through the ages, and the aforementioned debate centers around which society is superior. Us ing the analogy of a continuum or spectrum, at one pole we have what is commonly referred to as "capital ism," and at the opposite pole is the system known as "socialism." All nations reside along this continuum, CAPITALISM AND SOCIALISM 305 and none is at either absolute ex·· treme. Closest to the theoretical pure capitalism is the United States; clos·· est to pure socialism is the U.S.S.R. All other nation-states lie in be·· tween. A definition of each social system and a look at some of the major fundamentals ofeach will help us determine why capitalism is clear ly the superior form of social organization. Market Allocation Capitalism is a system of social or·· ganization whereby capital is allo·· cated and distributed via market-· based channels. More simply capi.

talism is a system where private in· dividuals or organizations deter·· mine the production, distribution, and ownership of all goods and ser·· vices in an economy. "Capital" may be defined as any entity used in the production of goods and services. Ex·· amples of capital would include raw materials, equipment, buildings, money, and machines. In a capital istic society, all the above-mentioned examples are owned and utilized by private individuals or organizations for the attainment of the owner's ends. Socialism is a system whereby cap ital is owned, allocated, distributed, and utilized by the collective society as a whole, rather than by private people or groups. The concept of pri vate property and use of capital for private ends is replaced instead by public ownership and collective em ployment of capital. Government bureaus, acting in the name of "the public" as a whole, replace private organizations as the main actors in an economy. For example, in social ist Great Britain, the steel industry has been nationalized, and there is one government-run computer com pany as well. Both enterprises thus avoid the rigors of marketplace com petition facing such United States firms as U.S. Steel and IBM in these respective industries.

A final level-setting point of im portance concerning capital is the undisputed fact that the only way a country is able to increase its wealth is to experience an increase in cap ital per worker. The only method of increasing "output per worker" meaning either (a) more work in the same amount of time, or (b) the same amount of work accomplished in less time-which is commonly referred to as productivity, is to increase the amount of capital invested in that worker. For example, factories with automated machinery today produce thousands more articles of every thing, from widgets to automobiles, than in previous times. Another example of capital in vested in a worker to increase his productivity-and thus his wealth is the pocket calculator. A student utilizing a calculator to do his math homework will finish earlier than the student computing the same 306 THE FREEMAN May problems in his head or with pencil on paper; the resultant time savings may either be used as leisure time an economic good-or to increase in come, with either choice represent ing a net increase in wealth. There fore, any economy, socialistic, capitalistic, or mixed, has to invest in capital in order to increase output and thus wealth, and thereby im prove living standards.

Government or Market? The key question all concerned hu man beings must answer is this: which institution, the "govern ment" or the "market" (an intan gible consisting of freely acting in dividuals or groups), is better equipped to solve the problems con fronting society today? All rational men and women, whatever their po litical and philosophical leanings, would like to see a world at peace, fully employed, with equality of op portunity for all, and the eradication of poverty. Which kind of society, the command economy or the market economy, will generate the capital wealth necessary to eliminate social ills? The answer, it would seem, is self evident. Yet the debate rages on, be cause the illiteracy and lack of knowledge of the general populace with regard to economics is rampant in our world. Lacking the intellec tual tools to correctly analyze prob lems or interpret relevant data, most people, whether they be commoners of the street or members of the United States Senate, misinterpret the causes of a problem, and subse quently then advocate solutions which usually will tend to make the problem worse! Let us then analyze briefly the workings of capitalism, and expose the shortcomings of gov ernment interventionism, whether total (as in socialism) or partial (as in a mixed economy,such as the United States today).

Capitalistic institutions had their latent beginnings in the periods of Greece and Rome, disappeared dur ing the Dark Ages, and reappeared during the Reformation. During most of this time, from primitive tribal cavemen through to the rise of civilizations in the Middle East, the Far East, and then Greater Europe, societies were authoritarian in na ture. A ruler-king or ruling class de vised several rationales for their subjection of others ("divine right," position ofbirth, wealth, or ancestry, for example), but the end result was the same. It is obvious but important to note that throughout the thousands of years of human history, up to the present day, the fundamental eco nomic problem of "scarcity" has per sisted; that is to say, man's wants (for scarce goods and resources) have not been, and never will be, satiated. It is of further fundamental impor tance to note that through the ages, 1985 CAPITALISM AND SOCIALISM 307 up until just a few hundred years ago, man's material condition, or standard of living, was relatively constant. It rose briefly with the ad·· vent of Greek and Roman civiliza·· tion, but receded as those societies died. Authoritarian structures may have resulted in pyramids or great cathedrals, but life continued mostly to be "nasty, brutish, and short."!

Only with the advent of free en·· terprise capitalism was the standard of living for all to suddenly realize a dramatic improvement. This is im·· portant only because of the wide u spread but fallacious notion that ma·· terial progress is merely a function of the progression of time (Le., the quality of life in the 1980s is an im·· provement from the 1880s, but not as good as it will be in the 2080s). In fact, the standard of living is a func·· tion of the prevailing social and eco·· nomic institutions of any given so·· ciety. 2 Indeed, only when such capitalistic institutions as private property, limited government, and liberal trade were developed, did the quality of human life show marked improvement from the relative stag nation of the preceding centuries. Social Contract As Locke, Hobbes, and others have observed, individuals form a "social contract" (or government) to protect individual life, liberty, and property.

Capitalism developed as individuals began to withdraw from the yoke of authoritarijlnism, and instead de sired individual liberty to order their lives. The "social contract," or gov ernment, entailed a delegation of fundamental rights of individuals to protect themselves. Thus, early gov ernment was an "umpire" rather than an active participant in day-to day affairs, and as such treated each individual neutrally (or equally). This was an important development because the private property order and individual liberty allowed for the first time a "long-run view" of life, rather than a preoccupation with immediate concerns. In eco nomic terms, the individual could now save and accumulate goods for future use (Le., "investment"), be cause of societal guarantees of life and property. The resultant saving and capital accumulation led directly toward in creased specialization and a produc tive division of labor, and the "In dustrial Revolution" quickly ensued.

Most Marxian analysis of this period focuses on the horrors and exploi tation, but the facts were otherwise. People flocked to the urban centers of Europe and then America as cap ital investment steadily increased worker productivity and thus raised the living standards of the masses. 3 More recently, South Africa has ex perienced a tremendous influx of im migrants seeking improved opportunities. The functioning of this emerging 308 THE FREEMAN May market society was brilliant to be hold. As Adam Smith first so elo quently described, a market-based economy was driven by an "Invisible Hand" which promoted order out of seeming chaos. Each individual la borer in a capitalist society seeks to acquire a marketable skill in order to trade with others. Thus, increased specialization (with all its attendant productive efficiencies) is promoted. As literally thousands of specialties are developed, relative prices (which are nothing more than the collective monetary votes of the masses of con sumers) point the use of scarce eco nomic resources toward their most highly-valued ends.

Consumers in Charge The Invisible Hand of the market directs capital to wherever consum ers desire. For example, in recent years the demand for improved de cision support and analysis tools (leading to improved professional productivity in business) has led to an explosive growth in low-cost per sonal computers and software that is easy to use. Market signals prompted data processing compa nies in this direction, and market competition has resulted in steadily lower prices and improved quality. Conversely, the market signaled to Ford Motor Company several years ago that its production of the Edsel was a waste of scarce resources (be cause Ford was not realizing a profit on this auto), and consequently Ford ceased Edsel production. A few significant points should be noted here. First, the Invisible Hand, when allowed to operate unham pered by government, serves indi vidual consumers by catering to the satisfaction of their wants. This is a monumental development; through out most of human history, the masses toiled for the king, the phar aoh, or the oligarchical elite. Under capitalism the reverse is true; the captains of industry seek to serve the consuming masses.

Secondly, resources are most effi ciently allocated, and production most effectively coordinated under capitalism. The free movement of prices signals capital and labor (the two main ingredients of production) to migrate to their highest-valued marginal uses. The production of the most desired goods and services en sues, and this obviously promotes so cial welfare in the best possible way, by satisfying the most urgent wants. Thirdly, the private property order engenders a spirit of peaceful, har monious coexistence and coopera tion among individuals and groups. Permitting and protecting the nat ural right to property encourages saving and capital accumulation (and of course as capital invested per worker increases, standard of living and quality of life increase), fosters a climate of production by encour aging labor, and encourages individ1985 CAPITALISM AND SOCIALISM 309 ual self-reliance and responsibility (through the growth of personal assets).

Of course, what is true for individ uals can scarce be folly for nations as a whole.4 International speciali zation and division of labor lead to increased production of goods and. services worldwide. Increased pro·, duction, enhanced by full and effi cient employment of labor, capital, and land, leads to generally lower goods prices, and market competi tion improves quality. Where active trade across borders occurs, the liv ing standard is improved and war will never occur; Canada and the United States have no need for arm ies and border guards. In fact, there has never been an armed conflict be·, tween two capitalistic societies, be cause the bonds of free trade and. peaceful noncoercive coexistence are too strong. EconomicProgress Under capitalism, then, the en gines of production turn at full speed. Individuals are free to pursue their own interests, and the consumer is king. Any individual who seeks em ployment finds it, because wages are not distorted by any intervention and compensation is based on mar ginal contribution to needed produc tion (labor is always in demand, as wants are insatiable). It is talent and merit, and not birth or wealth, that propel the individual up the economic ladder. And of course, it is ab surd to deride those individuals who amass great wealth; no one is any poorer because of them, and they at tained such rewards by serving the rest of us!

Peace and prosperity prevail among individuals and nations, and poverty is eradicated through full employment. Additionally, and most importantly, the individual leads a free, uncoerced life and has complete sovereignty over his own existence, as long as his actions are peaceful and create no negative externalities for others. As long as the spirit and responsible attitudes engendered by capitalistic institutions are promul gated, the happy state of affairs such liberty fosters will never break down. In the short span of a few hundred years, capitalism has delivered an improvement in the general quality of life unparalleled in the previous thousands of years of human history under the ancien regime of authori tarianism. It would thus seem self evident that capitalism is the most superior form of social organization (even more so if one travels to and observes the two Berlins, or the two Koreas, or the two Chinas). A brief look at the underpinnings of social ism shows, however, why it is still so prevalent, just as its functional workings expose its false glamour.

Most socialists (and I use the term here to apply to any individual fa310 THE FREEMAN May voring an active, interventionist government) claim to be altruistic, compassionate people professing concern for and a desire to help oth ers. They view the market economy as an impersonal, cold institution promoting crass material gain, and chastise its instability and always changing chaos, brought about by the "animal spirits of investors."5 They seek to bring order and secu rity to society by instituting a cer tain amount of control over eco nomic activity, through fiscal, monetary, and even social policy. Through legalized intervention ("le galized" in the sense of a law heing passed) government seeks to amelio rate social conditions. Alleged Examples of the Failure of Competitive Enterprise Adherents of interventionism see various failings of the market econ omy. Among those heard most often are the charges that capitalism causes a rather widespread distri bution of income, and that unequal income distribution consigns some to a permanent "underclass." Fur ther, most members of this under class are from minority groups, and since such groups historically have been the victims of racial discrimi nation, collective government action is required to right earlier wrongs and raise these groups' living stan dards, argue the socialists. This ar gument, incidentally, is merely a variant of the old Marxian critique of the bourgeois exploitation of pro letarian labor.

Another failure ofthe marketplace pointed to by collectivists is the "misallocation" of resources. How can funds be properly sourced, say these social well-wishers, when professional athletes, for example, command astronomical salaries when compared with public school teachers? After all, education is a far more noble and socially useful profession than basketball or foot ball. Additionally, defense contracts, say, are a terrible waste, when such money should really be spent to feed the poor. More examples could be cited, but the key point to understand is that policies of social welfare seek to re dress inequities and social ills alleg edly caused by an unhampered mar ket economy. Conscious collective efforts are made to redistribute re sources toward women, minorities, and other institutions and special in terests. Again, to paraphrase Marx ian analysis, the "problem of pro duction" has been solved distribution is now the focal point for interventionists.

The policies of socialism are so al luring (especially to the idealists often found in graduate schools, uni versities, the arts, and the media) precisely because of the appeal to al truism, and the exhortation to ex hibit concern and compassion for 1985 CAPITALISM AND SOCIALISM 311 others. Government intervention ism (all of society supposedly work ing together for the common good) may be used to achieve a better so ciety for all, and to root out the in cessant competition, change, and chaotic insecurity of the market so ciety, replacing these with the tran quil, orderly security of the collec tive command society.6 Sadly, the appealing rhetoric that always lies behind the well-meaning policies of active government inter ventionism does not shield· the false premises on which such actions are based, or the unfortunate conse quences that ensue. A brief look at the background and general struc ture of a few of these programs and their consequences will suffice to point to socialism's broader failings.

The Transfer Society Policy-makers in government pos sessing a socialistic orientation seek to redress market failings, as pre viously stated. In the United States, this process began in earnest with the advent of Roosevelt's New Deal. Social Security was set up to aid the aged. Agriculture and various small businesses then received subsidies. Later, benefits were drawn up for veterans (and then other groups) for housing, education, and vocational training. By the administration of Lyndon Johnson, vast health care, public works, and anti-poverty schemes had come into being. The result of all this is the existence to day of a plethora of public laws showing favor to select groups, in dustries, or institutions, and of course organized lobbies represent ing hundreds of special-interest pressure groups. This sytem of interwoven welfare programs constitutes what Hans Sennholz and others have aptly named "the transfer society." In the transfer society that the United States is fast becoming, there are classes of beneficiaries receiving government largess in the form of entitlements, subsidies, grants, or generous pensions flowing from the just-mentioned social programs and hundreds of others as well. Less vis ible to the public, however, are the classes of victims that are paying the bills for such largess. The very pro gressive and high marginal taxes (not to mention chronic inflation) levied on the victims to pay for the subsidies and benefits flowing to the targeted beneficiaries has had a highly negative effect on the level of production and output (and a con comitant rise in taxpayer cynicism and disgust, as their work efforts grow increasingly futile).

Since approximately 1960, defense spending as a proportion of the Fed eral budget has dramatically de creased, from 53 per cent of total spending to less than one-fourth. At the same time, "social spending" has exploded. One would hope, at the 312 THE FREEMAN May very least, that this would have re sulted in less poverty, better job op portunities and lower unemploy ment for the poor, rebuilt cities and highways, and improved interna tional conditions. Unfortunately, the general living standard for minori ties and underclasses has in relative terms not seen improvement. 7 The inner cities are as decayed as ever, and foreign aid and agricultural and technological subsidies have not aide~ the Third World-Africa, a net exporter of food in the 1950s, is today the site of massive famine. Benevo lent socialism has failed. Rational Behavior The transfer society, as are all forms of socialism, was destined for failure for a few key reasons (which, I would argue, one could have deter mined a priori, without ever both ering to gather comparative statis tics).8 First and foremost, man is a praxeological being. That is to say, man behaves purposively, utilizing various means to arrive at chosen ends. As such, he responds in a gen erally predictable manner to chang ing incentives; as the incentive structure in the economy has changed, so has the behavior of eco nomic agents. This again is a seem ingly self-evident tautology, but it is mentioned because the proponents of Big Government constantly ig nore the inexorable laws of human action through policies which carry perverse incentives. Incentives to produce are replaced by incentives to receive statist handouts.

Government is not capable, by nature, of being productive or constructive. In its capacity as government, it acts to restrain and restrict. When it uses these powers against those who would disturb the peace in one way or another it enables peaceful men to produce and construct. When it uses them to restrain peace ful men, it inhibits the con structive. Thus it is that limited government is the requirement for releasing the energies of men. CLARENCE B. CARSON The economic distortions these handout programs cause is truly massive. What kind of sense, for ex ample, does it make to pay farmers not to produce food? Agricultural price supports are a related absurd ity. By setting maximum prices (os tensibly to help the poor) govern ment artificially pumps up demand for a product at the same time it cur tails the incentive of the producer to supply the commodity. Increased shortages result.

Minimum wage laws and union wage floors, again designed to aid certain targeted groups, have the same effect. The employer's demand for labor is reduced (labor, like 1985 CAPITALISM AND SOCIALISM 313 everything else, is a cost phenome non) at the very time the higher wages guarantee an increase of job applicants; the end result is a cer tain amount of unemployment. Those lucky enough to obtain the artifi cially high-wage jobs benefit at the expense of the unemployed; this is the collectivist's idea of "compas sion" (ofcourse, in a free market, all - who wished work and the opportu nity .to acquire skills and advance would have a job at market wage rates). It is unnatural to he unem ployed, and anywhere and every where this condition occurs, it is a sign of market interference of some sort. 9 Benefits of Deregulation All government interventions in the domestic economy, and interna tional protectionism as well, have a common denominator: restricted supply and higher end-prices to the consuming public. Where govern ment backs off, immediate positive effects are realized. Airline and trucking deregulation has led to a flourishing of new carriers offering better services at lower prices to the consuming public. Of course, the Teamsters Union and executives at Eastern Airlines may be less than happy, but the masses benefit.

Confiscatory tax rates and infla tion are perhaps the most insidious interventions of all, however, for they lead literally to the destruction of civilized society (as Lenin once ob served). Taxes are a direct disincen tive to produce, and the phenomenon of "capital flight" is a direct result of high progressive rates. Is there any doubt as to why Bjorn Borg left his native Sweden for Monaco? Trying to grab ever more income, the Swedish government lost it all. This is but one example of a widespread phenomenon-tax avoidance and outright evasion are dramatically increasing, as luxury goods boom and the "underground economy" grows perhaps beyond 15 per cent of Gross National Product. Inflation is a surreptitious tax caused directly by government mis management of the money supply. By continually inflating the money stock, the FED adds high uncer tainty into longterm contracts, sti fling business investment. Why would any creditor loan to a debtor when the payback will result in cheapened dollars? As money loses its unit of account and store of value functions, this relationship is ru ined, and further impedes vital trade. Fixed-income pensioners are devastated by real wealth transfers away from them, yet "compassion ate" government officials scoff at at tempts at monetary reform.

The worst aspect of inflation, how ever, is undoubtedly that it is a key ingredient of boom"and-bust busi ness cycles. By falsifying interest rates, flows of investments into cap314 THE FREEMAN May ital goods industries are stopped as inevitably project costs rise, and re sources flow into consumer and ser vice sectors only later. Malinvest ment and misallocation of scarce resources, with attendant hardship and disruption for human beings, is always the end result. 10 This is best exemplified by the current situation in the United States, where certain sectors and geographic areas have enjoyed a sparkling recovery, while other sectors, such as agriculture and certain import-export busi nesses, are lagging. Inflation and in tervention always combine harm fully, with grave human costs. The Unseen Effects In addition to the foregoing distor tions, socialism's toll must be viewed in terms of opportunity cost. What would have been built, produced, and delivered in lieu of the inefficient profligacy of government? What would each individual and group have done with their extra income?

We of course will never know. Cer tain individuals or groups benefit from subsidies or direct transfers in the short run, and these positive ef fects are seen by all (a public hous ing project is of course highly visible, for example). The aggregate costs which burden the rest of society will in the longer term far outweigh the short run visible benefits, however. These costs are currently wide spread and diffuse, but they are growing rapidly, and will come due. In addition to economic distortion and curtailed production, interven tionism leads to expanding powerful bureaucracies. Groups no longer mo tivated to produce and serve the con suming public instead lobby for a larger portion of government hand outs (colloquially, grab a larger por tion of a redistributed pie rather than grow the whole pie). Senators and Congressmen, looking only to ward winning the next election, set up large bureaus to visibly transfer resources to privileged groups. Such an environment, geared toward re distribution rather than production of wealth, is highly conducive to the waste, fraud, and corruption so often found.

This is another predictable conse quence of interventionism, because government bureaus are not subject to the rigor and discipline of the free market; where there are no pricing signals or competition, there will be tremendous inefficiency and waste. Does anyone really know the pur pose of the Department of Energy? Has it produced any oil? Has the De partment of Transportation pro duced any autos, or run transit sys tems effectively? What do the Labor, Commerce, and Education Depart ments really do? Would the free mar ket have granted thousands of dol lars to study insect sex lives, or the effect of pornographic literature on children?

1985 CAPITALISM AND SOCIALISM 315 Obviously there is tremendous waste in a system where groups are encouraged to spend productive time trying to obtain grants from govern ment bureaus. The masses who are not beneficiaries are big losers. In novation will always be stifled un der such a system. Can anyone see a self-serving Federal Department of Railroads, under heavy pressure from railroad industry lobbyists, granting a government permit to the Wright Brothers to test their air plane? How fortunate socialism was not well developed in the United States in 1903. Legal Plunder Perhaps the worst effect of social ism, however, is that the transfer so ciety is tantamount to legal plun der. ll Leaving aside the obvious disincentives, what is "fair" about taking differing percentages of in come from different laborers? The United States once had the highest taxpayer compliance in the world, but the increasing perversity of the transfer society has caused millions to enter the underground economy.

People fight the government's un fairness by becoming corrupted thieves and tax -cheats. Additionally, the transfer society promotes true Marxian "class war fare," as several special interests compete for government handouts. Beneficiaries and victims, agricul ture and small business, black and white, and young and old are but a few ofthe many groups fighting each other for privilege. In fact, the con flict has many levels; within the ag ricultural lobby, for example, to bacco interests are surely in contention with dairy farmers for agricultural price supports. Social ism breeds violence and warfare, as competing entities vie for what is "fairly" theirs. In summary, then, the command economy has proved to be a failure because it is based on a false theory of human nature. To understand this one need only observe masses of peo ple seeking freedom and opportu nity, "voting with their feet" world wide (Southeast Asia and Cuba are recent examples of a popular flight from socialism), or talk briefly with the likes of Lech Walesa to know why: government programs take away the incentive to work and produce.

Seeds of Conflict Capital formation, the necessary prerequisite to an increased stan dard of living and improved quality of life, is stifled as government bu reaucrats and politicians wield power which rightfully should fall to consumers. Strife and conflict re place the peaceful coordination and exchange of goods and services that capitalism provides. Once this is dis cerned, it is easy to see why the bil lions spent on "social programs" in 316 THE FREEMAN the last 20 years have done nothing to end poverty in the aggregate. It is no coincidence that social ism's most ardent supporters are rel atively wealthy, and are often found in academia or the media. Coming from a controlled and comfortable environment, these people seek only to lift the Iiving standards of the poor. Their aims and concerns are commendable, but their intellectual arrogance is unseemly. They wish to order society after their own fashion, and impose their own designs and standards on the rest of us, thinking they know best. Having no knowl edge of economics, they pursue pol icies which in the end cause misery to the unemployed, condemn mil lions to poverty, stifle innovation and production, and in the long run lower us all. In their ignorance, they dis parage the very system that has brought them several amenities of life and the time to deride capital ism, and they vote for politicians and policies which will come to hurt them, ironically. The road to hell is, after all, paved with goodintentions.

However, ideas rule the world, and the human spirit burns to be free of all man-made fetters. Those who un derstand the free market must un dertake to explain the adverse con sequences of interventionist policies to the well-meaning but misguided proponents of collectivism, and return again to freedom, prosperity, opportunity, and peace for all indi viduals. The alternative is too sad to contemplate. @f) -FOOTNOTESlSee Thomas Hobbes. 2See Ludwig von Mises, The AntiCapitalistic Mentality. 3Mises makes reference to the blatant falla cies of Marxist interpretation on this point sev eral times in his various works. 4See Adam Smith, The Wealth of Nations. SKeynes, of course, felt government could in geniously temper these animal spirits, and his General Theory prescribes the formula. 8Clarence B. Carson gives an excellent ren dition of socialism's soothing rhetoric and ap peal in The World in the Grip of an Idea (New Rochelle, NY, Arlington House Publishers, 1978).

7A growing body of literature, exemplified by George Gilder in Wealth & Poverty and more recently by Charles Murray in Losing Ground, points to the harmful social-effects of bad eco nomics. For example, the number of single-par ent black families and illegitimacies has risen steadily over the last twenty years. &This is the traditional analysis of the Aus trian school of thought, which makes use of the tenets of praxeology and methodological indi vidualism to arrive at valid conclusions. 9Hans Sennholz, "The 'Natural' Rate of Un employment" (The Freeman, November 1984, pp. 644-650). lOOnly Austrian business-cycle theory ade quately explains concurrent inflation and recession. The reader should look to authors such as Mises, Hayek, Rothbard, Sennholz, and others. llDean Russell, "The Source of Rights" (The Freeman, November 1984, pp. 661-668).

1985 Summer Seminarsat FEE June 23-29 July 14-20 August 4-10 Fortwenty-two yearsour annual summer seminars have offered a thor ough introduction to the principles of limited government and the mar ket economy. Our sessionsattract lively and diverse groups of people including students, teachers, business proprietors and employees. The week includes thirty-five hours of lecture and discussion, with ample time for participants to meet informally with both staff and dis tinguished guest lecturers. The Foundation, situated on a five-acre es tate in a quiet suburb near New York City, provides an ideal setting for a week of study and reflection. The charge for a seminar-tuition, supplies, room and boardis $400. Fellowships (including partial travel grants) are available. A de tailed seminar brochure will be sent on request. Pleaseaddress all requests for applications and further information to: Summer Seminars Foundation for Economic Education Irvington, New York 10533 (914) 591-7230 A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN Pattern for Failure In A Pattern for Failure: Socialist Economies in Crisis (New York: Har court Brace Jovanovich, 175 pp., $22.95), Sven Rydenfelt, a Swedish economist, offers a general proposi tion endorsed by Milton Friedman in a thoughtful introduction. The gen eral proposition is that wherever there is detailed central economic planning the ordinary man suffers.

The reason, says Rydenfelt, is eco logical: people are dependent on their economic and social envi ronments, and when individual entrepreneurs are discouraged by oppressive government-imposed con straints the creativity that feeds everybody languishes. There is some elaboration of Ry denfelt's general thesis in an open ing section devoted to the im portance of the entrepreneurial en vironment. Like George Gilder in 318 America, Rydenfelt thinks the sup ply of entrepreneurial incentive is more important than the supply of capital. If a man has a good idea, and there are no regulations to prevent him from pushing it, he will get the capital he needs somehow. Once having established the out lines of his theory of the general im portance of the entrepreneurial cli mate, however, Sven Rydenfelt rapidly shifts the emphasis of his book. What he is really interested in doing is to show how socialist gov ernments mess up their agricultural policies, bringing starvation by their treatment of the peasants.

Formulafor Famine· Communist and socialist govern ments, no matter how they come to power, are impelled by Marxist the ory to favor the industrial proletarPATrERN FOR FAILURE 319 iat. Partly this is due to Marx's own contempt for what he considered the stupidity of country life. Depending on the city workers to keep them in power, socialist governments fix the price they are willing to pay the peasants at a point that is low enough to guarantee cheap food to the urban masses. It doesn't matter whether the peasant keeps nominal title to his acres or not-the failure to let farmers sell their crops as they please reduces the incentive to pro duce. Peasants will normally work hard enough to keep their own fam ilies fed, but without market free dom there will be nothing extra to forestall possible famines. Sven Rydenfelt's evidence, which is elaborately displayed, is that the famines always come. The pattern was set in Soviet Russia, when there was drought in the Ukraine in the years after the Bolshevik takeover.

There wouldn't have been serious trouble if there had been a stored re serve. But the civil war had emptied the grain bins. Lenin used the weather as an excuse. But he was re alistic enough to postpone agricul tural collectivism. Telling the peasants to enrich themselves-i.e., to become kulaks he proclaimed the so-called NEP, or New Economic Policy. The theory was too successful to please Stalin, who, in the early Thirties, decided to break the power of the kulaks and establish big state farms. The result John Chamberlain's book re views have been a regular fea ture of The Freemansince 1950. We are doubly grateful to John and to Henry Regnery for now making available John's auto biography,A LifeWiththePrinted Word. Copies of this remarkable account of a man and histimes our times-are availableat $6.00 from The Foundation for Eco nomic Education, Irvington-on Hudson, New York 10533.

was a forced famine that killed some three million skilled agricultur alists. Stalin in Charge Stalin claimed successes for the new collectives, but when Khrush chev decided to expose the excesses of Stalinism, one of the first figures he revealed was that in 1953 Russia had fewer livestock than it had in 1913, when there were 60 million fewer people to feed. In the long run Khrushchev proved to be no improvement on Stalin as a farm manager. His attempt to bring new acres under cultivation in semi arid areas worked out badly. Ryden felt says there were crop failures in Russia in nine out of twenty years between 1963 and 1983. The excuse was always that the weather had been bad. The Communist high com320 THE FREEMAN mand solved the problem of the re cur·rent shortages by importing grain from the capitalist West. Sven Rydenfelt follows his section on the failures of Soviet agricultural planning with chapters on what has happened to farming in Poland, Ro mania, Czechoslovakia, Yugoslavia, Hungary, Portugal, China, India, Vietnam, Sri Lanka, Ghana, Tan zania, Cuba and Argentina.

In all cases save that of Hungary the courses followed by communist or "planning" governments have re sulted in general impoverishment. Freeman binders The Hungarians have saved them selves by letting their· peasants sell their produce in the open market. There is a repetitive quality to Sven Rydenfelt's story, but this is bone and marrow of the central point that he is determined to drive home. Rydenfelt's examples do not in clude Ethiopia, Angola, Mozam bique, Chad and the general sub-Sa haran region in Africa. But we know from the news stories that there are no exceptions to Rydenfelt's rule that, where socialism prevails, star vation is just around the corner. .® • handsome blue leatherlex • each binder holds twelve issues • a handy way to organize current and past issues of The Freeman $5.00 each Order from: THE FOUNDATIONFOR ECONOMICEDUCATION,INC. IRVINGTON-ON-HUDSON,NEW YORK 10533 the Freeman VOL. 35, NO. 6 • JUNE 1985 The Positive ApproachA Page on Freedom, No. 20 Why freedom outperforms socialism.

Dean Russell 323 Economic Reality and U.S. Government Farm Programs E. C. Pasour, Jr. 325 The consequences of intervention will not be cured by more meddling. Comparable Worth versus Civil Liberty: Are Feminists Pro-Choice? Jane M. Orient 332 Potential gains not worth the tremendous costs. The Spirit of Freedom Robert Bearce 341 A timely reminder of the wisdom ol the Founders. The Morality of Profit How to gain through better service. Craig Russell 350 Language Traps Bettina Bien Greaves 353 How words can change their meaning-and our lives. The Ecology of Entrepreneurship Try the new theory of entrepreneurship. Sven Rydenfelt 363 Redigging Old Wells John K. Williams 367 Time to open again the ancient wells of human rights, private property, and individualism. Book Reviews: 380 "The American Idea: Ending Limits to Growth" by Jack Kemp "Beyond Liberal and Conservative" by William S. Maddox and Stuart A. Lilie Anyone wishing to communicate with authors may send first-class mail in care of THE FREEMAN for forwarding.

IFreeman A MONTHLYJOURNAL OF IDEAS ON LIBERTY FOUNDATION FOR ECONOMIC EDUCATION Irvington-on-Hudson, N.Y. 10533 Tel: (914) 591-7230 Managing Editor: Paul L. Poirot Production Editors: Beth A. Hoffman Amy S. VanLaar Contributing Editors: Robert G. Anderson Howard Baetjer Jr. Bettina Bien Greaves Charles H. Hamilton Edmund A. Opitz (Book Reviews) Brian Summers THE FREEMAN is published monthly by the Foundation for Economic Education, Inc., a nonpolitical, nonprofit, educational champion of private property, the free market, the profit and loss system, and limited government. The costs ofFoundation projects and services are met through donations. Total expenses average $18.00 a year per person on the mailing list. Donations are invited in any amount. THE FREEMAN 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 $10.00 a year.

Copyright, 1985. The Foundation for Economic Education, Inc. Printed in U.S.A. Additional copies, postpaid: single copy $1.00; 10 or more, 50 cents each. THE FREEMAN is available on microfilm from University Microfilms International, 300 North Zeeb Road, Ann Arbor, Mich. 48106. Reprints are available of "A Page on Freedom," small quantities, no charge; 100 or more, 5 cents each. Permission is granted to reprint any article in this issue, with appropriate credit.

A Page on Freedom Number 20 The PositiveApproach THE LIBERAL-SOCIALISTis always positively for something. But the conservative-libertarian is all too frequently merely against some thing. That's why the socialists are winning. Now personally I'm positively for every good thing there is. For example, I'm aggressively in favor of higher standards for educa tion-and more and better education-than any socialist I ever met. I want the best possible medical care for everyone. With all my heart, I desire that every family in the U'nited States and elsewhere shall be well fed, well clothed, and well housed. While the socialists campaign for minimum wages and minimum standards of living, I shall continue positively to explain to people how the free market will bring maximum wages, high standards, and more goods and services for everyone. I'm for the maximum and against the minimum. If people only realized it, the advocates of these minimums and averages are their deadliest enemies. The socialists want to depress the people to a common level; the libertarian wants to elevate each individual person to his highest capabilities.

The socialists want to standardize people; the libertarian wants to encourage and assist each person to develop his own personality and potentiality to the fullest. The socialists want to restrict and forbid and control; the liber tarian wants to remove the artificial and man-made obstacles to peace, progress, and plenty. Since that is what you and I favor, why don't we say so? If we explain our viewpoints consistently and effectively, we will soon put the socialists on the defensive where they belong. For when it comes to an interest in the true welfare of people, the socialists are small men of little vision. -Dean Russell ® THE FOUNDATION FOR ECONOMIC EDUCATION, INC. IRVINGTO~ON-HUDSON, NEW YORK 10.533 323 1985 Summer Seminarsat FEE June 23-29 July 14-20 August 4-10 For twenty-two years our annual summer seminars have offered a thor ough introduction to the principles of limited government and the mar keteconomy. Our sessionsattract lively and diverse groups of people including students, teachers, business proprietors and employees.

The week includes thirty-five hours of lecture and discussion, with ample time for participants to meet informally with both staff and dis tinguished guest lecturers. The Foundation, situated on a five-acre es tate in a quiet suburb near New York City, provides an ideal setting for a week of study and reflection. The charge for a seminar-tuition, supplies, room and boardis $400. Fellowships (including partial travel grants) are available. A de tailed seminar brochure will be sent on request. Pleaseaddress all requests for applications and further information to: Summer Seminars Foundation for Econom ic Education Irvington, New York 10533 (914) 591-7230 E. C. Pasour, Jr. Economic Reality and u.s.Government Farm Programs FARM BANKRUPTCIES are front-page news. Although the magnitude ofthe problem has undoubtedly been ov erstated by the media, there are no hard data on the precise number of farm businesses experiencing finan cial stress. According to a 1984 sur vey, less than 20 percent of all farm operators had debt/asset ratios of 40 percent or higher.! While the USDA on the basis of a recent Amer ican Bankers Association survey of agricultural banks found the inci dence of farm bankruptcies "rela tively low," pleas for government to "do something" are widespread throughout the land. 2 The paradoxical nature of the call for government action to alleviate the economic distress in U.S. agriculDr. Pasour is a Professor of Economics at North Car olina State University at Raleigh.

ture is too Iittle recognized. As shown in the following analysis, cur rent farm problems are rooted in past government programs. 3 As so often happens when government inter venes, government farm programs not only have failed to achieve their objectives but have created pres sures for further intervention to deal with the unforeseen and unintended consequences of these policies. Despite the fact that U.S. agricul ture is often considered to be a bas tion of free enterprise, farm pro grams today are remarkably similar to the protectionist Roosevelt New Deal policies instituted during the Great Depression of the 1930s. Moreover, it is ironic that govern ment outlays for farm programs have increased greatly during the Reagan Administration. The tax payer cost of farm price support pro325 326 THE FREEMAN June grams alone increased from $4 bi!· lion in 1980 to more than $20 billion in 1983-making these programs the most rapidly growing item in the def1.cit·plaguedfederal budget.

Although agriculture escaped the deregulation movement of the late 1970s and early 1980s that affected transportation, banking, and so on, it appears that major changes are likely to occur in U.S. farm policies within the next decade. The pres sures for change are due to changing economic conditions and to an in creasing public awareness of the ef· fects of past government farm policies. As the U.S. Congress debates a 1985 farm bill, agricultural policy is at a crossroads with only two choices. The choice is either to continue the existing network of costly programs involving government subsidies and government· sanctioned restrictions on competition that now affect about half the output of U.S. farms or, al· t~rnatively, to rely on the competi tive market process to bring about appropriate adjustments in produc tion and resource use. In making this choice, it is important to consider the objectives and results of current and past farm programs.

GovernmentInterventionto Assist Low-IncomeFarmers Price supports, marketing orders, 'and other restrictions on competi tion were instituted to increase farm prices and incomes during the Great Depression when economic condi· tions in agriculture were greatly dif ferent than they are today. While farm incomes, on average, histori cally have been lower than nonfarm incomes, this is no longer the 'case. If the half of the farms that are non commercial rural residences are eliminated from the income statis tics, the farm sector has higher fam ily incomes, on average, than the nonfarm sector.4 Of course, there is no presumption that wages should be equal. And, if public policies are instituted to equalize wages in dif ferent sectors regardless of under lying economic trends, there is little incentive for labor to adjust in response to changing economic conditions. Furthermore, government farm programs make the income distri bution less equal within agriculture since most farm program benefits are related to farm size. Conse quently, when farm product prices are increased by price supports, in comes of small farmers are affected relatively little. Economist William Lesher estimates that just 13 per cent of the farms obtain 45 percent of direct government payments, while 71 percent ofthe farms receive only 22 percent of the payments. 5 The result is that although farm pro grams are justified on the basis of helping low-income farmers, it is owners of large farms with incomes 1985 ECONOMIC REALITY AND FARM PROGRAMS 327 quite high relative to nonfarmers who receive most of the benefits.

Government Intervention to "Stabilize Agriculture" Another goal of farm policy is to "stabilize" farm product prices and income. Despite this often stated goal, there is little doubt that past government policies have contrib uted to the current financial distress being experienced by substantial numbers of farmers. The record sug gests that government attempts to stabilize agricultural markets have been no more successful than simi 1ar attempts by government to "fine tune" the overall level of economic activity during the past 15-20 years. Indeed, much of the current eco nomic distress in U.S. agriculture can be traced directly to inflationary monetary and fiscal policies and to subsidized credit, which induced farmers to overinvest in land and capital facilities during the late 1970s. Economic instability is often in creased by government intervention as Washington political decision makers manipulate agricultural (and other) programs to affect up coming elections. Prior to the 1976 election, for example, the Ford Administration raised the loan rate on wheat from $1.50 to $2.25 per bushel and tripled the tariff on im ported sugar. 6 Similarly, President Carter increased dairy price supports on the eve of the 1980 election.

Again, in September 1984 President Reagan changed the rules of the Farmers HQrne Administration (FmHA) to postpone and reduce farm debt-thereby merely postponing the day of reckoning for many farmers. The subsidized credit programs op erated by the FmHA create an in centive to expand the size of farm op erations through borrowing. The high ratio of capital to labor in U.S. agriculture makes farming particu larly sensitive to changes in interest rates. When the cost ofcapital is sub sidized, farmers are induced to sub stitute capital for labor and land. Thus, easy government credit poli cies undoubtedly have contributed to the recent increase in farm bankruptcies. The importance of the export mar ket for U.S. farm products increased markedly during the early 1970s. Although the United States is the world's largest exporter of agricul tural products, government policies increase uncertainty and insb~bility in export markets. The suspension of grain sales to the Soviet Union in 1980 by President Carter is a prime example. Uncertainty and instabil ity inevitably increase when the de mand and price of farm products hinge on unpredictable political factors.

However, it is not only trade re strictions directly affecting agricul tural exports that are of importance 328 THE FREEMAN June to U.S. farmers. During the recent recession, the Reagan Administra tion tightened import restrictions on a range of products including autos, steel, textile products, and motor cycles. Since buyers of U.S. farm products must obtain dollars to make these purchases, such restrictions on imports, whether "voluntary" or in voluntary, are especially damaging to U.S. agriculture. The conclusion is that much of the market instabil ity for U.S. farm products during the past decade can be traced to govern ment policies. Indirect Effects of Farm Programs Restrictions on competition inev itably reduce the efficiency of re source use. In current wheat, feed grain, and cotton programs, the gov ernment pays U.S. farmers not to till some of the world's most productive farmland. The higher prices for bread, milk, sugar and other prod ucts resulting from price support programs are especially harmful to those with low incomes and create increased pressures for food stamps and other income transfer programs.

There is a cost ofproduction "trap" associated with the operation of all agricultural price support programs. Any effective price support will in crease cost of production as in creases in product prices are capi talized into prices ofland, production rights, and other specialized re sources. Thus, if the price of wheat were doubled or tripled to (say) $10 per bushel, prices of land and other specialized resources in wheat pro duction would be bid up so that the expected cost of production, includ ing the return to entrepreneurship, would tend to equal product price. Since the benefits of farm pro grams are largely capitalized into higher prices of inputs (especially land), it is the owners of these inputs at that time who benefit. Producers who enter production later receive little benefit from such programs un less price support levels are further increased. Later entrants into pro duction receive higher product prices, but they also have higher costs. Moreover, the increased prices of land and other inputs creates a trap that makes it difficult to abolish farm programs. If price support lev els are reduced or abolished, prices of land and other specialized assets decrease-imposing huge losses on current farmers, particularly land owners. The windfall losses would not necessarily be incurred by those who received the gains since many farmers bought land and other farm assets after prices ofthese assets had already increased and, therefore, did not receive the original windfall.

There is a great deal of public con cern about the viability of the small farm. Thus, it is ironic that interest rate subsidies of the FmHA and the CCC (Commodity Credit Corpora tion) promote the trend toward fewer 1985 ECONOMIC REALITY AND FARM PROGRAMS 329 and larger farms by encouraging the substitution of machinery and other capital inputs for labor. When credit is allocated on the basis of oppor tunity cost, credit is used by those producers who best accommodate consumer demands. IT credit is sub sidized, some less productive pro ducers are kept in business, thereby increasing output with lower prod uct prices. Thus, another indirect effect of subsidized credit is to harm those producers not receiving pref erential treatment in capital markets. Schizophrenic Nature of Programs Farm programs are incredibly complex and there is no way to de termine the net impact of the net work of price supports, marketing orders, credit subsidies, conserva tion subsidies, food stamps, and other programs financed through the U.S. Department of Agriculture.

However, the programs are often in consistent, having opposite effects on farm product prices. For example, price support programs for milk, sugar, feed grains, wheat, cotton, and tobacco along with food stamp and other subsidized food assistance pro grams increase product prices. On the other hand, government-fi nanced research activities and credit, land, and water subsidies tend to increase output and decrease farm product prices. Expenditures to "stabilize farm prices and income" by reducing out put totalled about $20 billion in fis cal 1983. During the same period, expenditures that increase output totalled about $15 billion. If the dol lars spent on these programs were equally efficient in achieving their conflicting objectives, some $30 bil lion may have been spent in 1983 on activities having little (or no) net ef fect on food costs, farm prices, or farm incomes. That is, because of their opposite effects on product prices, a substantial part of farm program expenditures merely cancel out each other. However, there are important gainers and losers asso ciated with the operation of farm programs as indicated below even if the expenditures, on average, are self-defeating.

The fundamental problem in ag riculture, as in other areas, is to achieve the most productive pattern of resource use. There are only two ways of securing economic coopera tion-the market system and central direction. There is, in general, a strong case for decentralized com petitive markets as the most effec tive means of coping with constantly changing economic conditions. The competitive entrepreneurial market process is fully as applicable in ag riculture as in other economic sec tors. The market in agricultural pro duction and marketing activities can do what central planning cannot do: it can utilize the detailed informa330 THE FREEMAN June tion in millions of minds that cannot be conveyed to any planning au thority. In view of the record of past government farm programs, the bur den of proof should be on those ad vocating continuation or expansion of progams that prohibit or inhibit the operation of the entrepreneurial market process.

The value of U.S. farm exports jumped from $8 billion in 1972 to about $44 billion in 1981-a dra matic increase in real terms. The in creased dependence of U.S. agricul ture on international trade has important implications for domestic agricultural policies since there is a fundamental incompatibility be tween domestic agricultural price support programs and free interna tional trade. When domestic prices of dairy, tobacco, peanut, sugar, and other products are raised above the world price, imports must be re stricted to prevent domestic consum ers from purchasing lower priced im ports. As the dependence of U.S. agriculture on exports increases, the liberalization of trade becomes in creasingly important. However, the United States cannot be a credible proponent of free trade as long as U.S. farmers operate under an um brella of protectionist domestic ag ricultural policies.

Implications and Conclusions The effect of government-enfor~ed restrictions on competition in agriculture is to increase income to wheat growers, sugar producers, dairy farmers, and other small groups at the expense of the public at large. Consumers and taxpayers bear the major costs of government farm programs. Price support pro grams mean that consumers face higher prices of milk, sugar, pea nuts, tobacco, oranges, and other products. Consumers are hit espe cially hard in the case of sugar and dairy products. In late 1984, the do~ mestic price of sugar was four times the world price. Similarly, U.S. dairy product prices were two to three times the world price. The dairy pro gram is also expensive to the tax payer. In fiscal 1983, the treasury costs were $2.6 billion-or about $13,000 per commercial dairy farmer. 7 The cost of price supports, subsidized credit, and other USDA outlays is now roughly $50 billion per year and increasing rapidly.

Farm programs are not an unmixed blessing to farmers. Farmers who rent or buy land, production rights, or other specialized resources, also face increased production costs. The notion of individual rights, in cluding the ability of people to en gage in voluntary exchange is cen tral to questions concerning the appropriate role of government in agriculture (and in other sectors). In the decentralized market process, maximum scope is provided for in dividual choice. Only through this 1985 ECONOMIC REALITY AND FARM PROGRAMS 331 approach can the nation's agricul tural resources be used most eco nomically serving the interests of farmers, consumers, and taxpayers alike. In agriculture, as in many other areas of economic activity, gov ernment might make its greatest contribution by attempting to do less. In the long run, noninflation ary monetary and fiscal policies plus a more open economy would benefit agriculture far more than the net work of costly action programs now in place. @ -FOOTNOTES1Agricultural Finance: Outlook and Situa tion Report, ERS, AFO-25, U.S. Department of Agriculture, December 1984, p. 7.

2Ibid., p. 3. Reprints . .. 3Many of the points discussed below are elab orated upon in more detail in E. C. Pasour, Jr., "The High Cost of Farm Subsidies," Back grounder No. 388 (Wash., D.C.: Heritage Foun dation, Oct. 22, 1984) and E. C. Pasour, Jr., "The Free Market Answer to U.S. Farm Problems," Backgrounder No. 389 (Wash., D.C.: Heritage Foundation, October 30, 1984). 4David H. Harrington, "Income and Wealth Issues in Commercial Farm and Agricultural Policy," pp. 145-153 in Increasing Understandr ing ofPublic Problems and Policies-1984 (Oak Brook, TIL: Farm Foundation, 1984), p. 147. 5William G. Lesher, at the Conference on Al ternative Agricultural and Food Policies and the 1985 Farm Bill, sponsored by the Giannini Foundation and Resources for the Future, Berkeley, California, June 11, 1984. 6Bruce L. Gardner, The Governing of Agri culture (Lawrence, Kansas: Regents Press of Kansas, 1981), p. 118.

7Dairy: Background for 1985 Farm Legislar tion, Economic Research Service, U.S. Depart ment of Agriculture, Agricultural Information Bulletin No. 474, September 1984, p. 28. A Page on Freedom Each of these brief messages is a handy way to share with friends, teachers, editors, clergymen, employees and others a thought-starter on liberty. It also serves to introduce the reader to our work at FEE. See page 323 for this month's Page on Freedom. (Copies of previous messages are also available; specify title when ordering.) Small quan tities, no charge; 100 or more, 5 cents each. Or, feel free to reprint the message in your own format if you'd prefer. We hope you'll enjoy this feature! Order from: FOUNDATION FOR ECONOMIC EDUCATION, INC. IRVINGTON-ON-HUDSON, NEW YORK 10533 Jane M. Orient ComparableWorth versusCivil Liberty: Are Feminists Pro-Choice? THOUGH enshrined in the 1984 plat form of the Party of New Ideas, the comparable worth concept was both proposed and demolished in 1928 by George Bernard Shaw. "To Each What She Deserves" was the title of its chapter in his book The Intelli gent Woman's Guide to Socialism, Capitalism, Sovietism, and Fascism.

Shaw's discussion might be espe cially helpful to those who confuse the idea with the fundamentally dif ferent issue of equal pay for equal work. "Well think it out," he says. "The clergyman ... is able to read the New Testament in Greek; so that he can do something the blacksmith cannot do. On the other hand, the Jane M. Orient, M.D., Is In the private practice of medicine In Tucson, Arizona. She Is also adjunct as sistant professor of Internal medicine at the Univer sity of Arizona ColI~ge of Medicine. 332 blacksmith can make a horseshoe, which the parson cannot. How many verses of the Greek Testament are worth one horseshoe? You have only to ask the silly question to see that nobody .can answer it." Shaw also discussed an alternate but similar notion: "Since measur ing their merits is no use, why not try to measure their faults? Suppose the blacksmith swears a good deal ... ! Every body in the village knows this; but the parson has to keep his faults to himself." And ifthe parson were discovered to have the fault of distorted values (say that he preferred fashionable society to re ligion), would that make him "as bad as the blacksmith, or twice as bad, ... or only half as bad?"

A system that paid prizefighters so much money had to be absurd, Shaw concluded. "But to suppose that it COMPARABLE WORTH VS. CIVIL LIBERTY 333 could be changed by any possible cal culation that an ounce of archbishop or three ounces of judge is worth a pound of prizefighter would be sillier still." Proponents of comparable worth make exactly that supposition. A scale devised by the Hay Study in San Jose assigned points on the same scale to 231 different jobs, taking into account skill, effort, responsi bility, and working conditions. For example, the position of puppeteer was given 124 points, equivalent to offset press operator, engineering technician I, or street sweeper op erator. A maintenance worker I was considered to be worth 140 points, a senior recreation leader 158 points, and a stage hand 178 points. At first glance, such a scale looks perfectly objective. After all, what could be more objective than a num ber? In reality, the numbers· simply codify the subjective values of the consultant. Rather consistently, such job evaluations tend to place a higher value on college education than em ployers do. Similarly, they seem to award points for social worthiness.

The raters then presume to impose their values on everyone, through the legislature and the courts. Not only do they determine conversion factors-how many horseshoes equal a Greek verse-but they pretend that these are as precise as the factors that convert centimeters into inches, at least to three significant digits. Of course, individuals do place val ues on horseshoes and Biblical translations. The values differ with the individual, and with his needs (and resources) at the moment. The person who has seen horses only in B-grade Western movies would prize them less than would a farmer in an underdeveloped nation, who de pends on them to transport his pro duce to market. A person studying for the ministry would probably ap preciate Greek scholars more than a manufacturer of semiconductors would. Subjective Values Economic values are subjective and variable. Comparable worth challenges both the legitimacy of voluntary exchange in the market place, and the values represented in the wages and prices thus deter mined. Paradoxically, this attack on economic pluralism is led by defend ers of the right to choose alternative life sty les, even those considered morally reprehensible in the recent past. ' Comparable worth is promoted as a moral or civil rights issue. The moral imperative arises from the perceived injustice in the present system. The "59 cent gap" (the av erage woman earns 59 cents-now 61 cents-for each dollar earned by the average man) may be grounds for suspecting unfairness, though it does not constitute a prima-facie case.

334 THE FREEMAN June About half the gap is due to unde termined factors, and is attributed to discrimination. Half is accounted for by "human capital" factors: ed ucation, experience, and commit ment to the labor force. Part of this difference between women and men may result from past discrimination, mandated by laws restricting wom en's conditions of work and, more powerfully, by unwritten custom. Interestingly, past discriminatory practices were motivated by a con cern for social justice. Labor unions, the Catholic Church, the social wel fare movement, and even American socialist parties all belonged to a co alition supporting the "family wage." The "one-paycheck-per-fam ily" idea was meant to protect those most vulnerable to competition, the men at the low end of the wage scale. Fair competition would have meant unemployment for some breadwin ners (men), while their jobs were done by women, who were bringing in a supplementary income. 1 In ad dition, increasing the size of the la bor force drives wages down, by the law of supply and demand. Keeping women at home helped men to com mand a "living wage."

Although past discrimination re sulted from good intentions, yester day's social justice has become to day's unfairness. The values that our lWilliam Tucker, "Condemned to Liberation: the Woman as Breadwinner," The American Spectator, November 1984, p. 22. forefathers imposed on the economy were wrong, according to current thought. However, comparable worth advocates would follow the precedent of rejecting the free mar ket and enforcing, by legislation or litigation, their own vision of what is right. They fear that too much freedom might lead to oppression. On the one hand, it is argued that the market is too free-at least for employers. A representative of the American Federation of State, County, and Municipal Employees stated that freedom from bias was the only legitimate freedom of the marketplace. A Question of Choice On the other hand, it is claimed that women are not really free, but have been "herded" into the "pink collar ghetto," that is, segregated disproportionately into low paying jobs, more or less deliberately. But why do women settle for "unaccept ably" low wages? Why do they not clamor to enter relatively well-paid, if humble, occupations, such as the skilled trades? When pressed, com parable worth proponents acknowl edge that women don't want to do thosejobs. They do not strive for up ward mobility, except into positions of high status, as in medicine, administration, or government.

They want to stay where they are, albeit with a raise in pay. Clearly, this is an admission that 1985 COMPARABLE WORTH VB. CIVIL LIBERTY 335 "women's work" does have certain advantages. Compensation cannot be measured solely in terms of dol lars and cents. Although the low sa laries of librarians, secretaries, nurses, and teachers are no secret and certainly not a recent develop ment-women, and increasing num bers of men, still prefer these fields. The working conditions are pleas ant, at least in comparison with bricklaying and plumbing; the hours are convenient; and entry to and exit from the work force are relatively easy. Thus, the seeming ambivalence about freedom is explained: it is re lated to the definition. Comparable worth advocates are not concerned about freedom to make choices, but about freedom from the conse quences of those choices. Their real grievance is that they do not control the market forces that determine what will be offered for each job.

They resent the law of supply and demand, and are unhappy about the val ues that employers assign to var ious jobs. Payment for Caring Though conceding that people should be compensated for enduring the hot sun and other difficult con ditions, comparable worth advocates indict our society for placing a low value on intellectual abilities and attributes such as "caring," which are required in traditionally feminine roles. How can a civilized na tion show such slight appreciation (in monetary terms) for those who nurture and teach the young? What sort of society values a strong back more than compassion and a liberal education? The United States is no more advanced in that regard than the England of George Bernard Shaw. Of course, increases in pay of professionals such as nurses and teachers have occurred, but in re sponse to shortages rather than be cause of enlightenment. Likewise, comparable worth would not rely on enlightenment either, but would substitute legal compulsion for amoral market forces. Furthermore, it is in reality just as materialistic as the marketplace, since all admis sible rewards are monetary.

It is easy to deplore the taste and judgment of the common man, as re flected in market values. The ques tion is whether we can assume that an ad hoc, elite commission would distribute rewards any more fairly. Arguably, such a commission could be disinterested and able to consider factors beyond brute economics, whereas employers have a vested in terest in the cost of production. Nevertheless, no group could claim to be immune to all bias, especially if it owed its very existence to a spe cial interest group whose values dif fered from the prevailing ones. Acknowledging that the compa336 THE FREEMAN June rable worth commission must pos sess some bias, is it not morally pref erable to be biased in favor of the "disadvantaged"? This appealing idea has profound implications. To say, a priori, that in the scales ofjus tice the rights of employees ·out weigh those of employers (and of the customers who ultimately pay the cost of production) is incompatible with the principle of equality before the law, the very foundation of civil rights. At first, the "disadvantaged"

may appear to gain. But sooner or later, those who are most skilled in manipulating the political process will define "social justice." In other words, in the absence of equality be fore the law, might makes right. It is crucial to understand the con flict between civil rights and com parable worth. Civil rights demand a society ruled by law and based on contract. Under the law, each indi vidual must have the right to make voluntary agreements with others. The courts uphold contracts, and prevent coercion, which might be understood to include arbitrary bar riers to employment, that is, bar riers unrelated to ability to perform the job. Comparable worth, on the other hand, necessarily resorts to rule by men rather than by law, and would make status rather than con tract the basis of society. Rule by men is inevitable because there can be no objective criteria to determine what each should be paid. No library would even be large enough to con tain the statute books that enu merated all the possible combina tions of knowledge, experience, and personal attributes, along with the pay due to each individual possess ing that combination for performing jobs with particular requirements.

Turn Back the Clock? However advantageous rule by men may appear to be in certain cir cumstances, the idea should alarm the student of history. Do we wish to turn the clock back to the time be fore the Magna Carta established the supremacy of the law over the ruler? Do we desire to emulate the current example of the People's Re public of China, which has not pub lished a legal code, but relies on a "democratic political process" for all decisions? Useful as it might be to study models remote in time or place, it might be adequate simply to look at the other side of the comparable worth equation. If some groups of people are to be paid relatively more, who is to be paid relatively less? Since compa rable worth advocates tend to com pare the pay of teachers and secre taries with that of blue collar workers, one suspects they would like to economize on janitors, truck dri vers, garbage collectors, and plumbers-hardly a group with out standing privileges. Naturally, a group seeking political influence 1985 COMPARABLE WOR'rH VS. CIVIL LIBERTY 337 would be reluctant to name those who would be hurt by its proposals.

In all likelihood, there would be no explicit pay cuts-just no raises for the previously "favored" until jus tice has been achieved. Especially if government employees, who are in the front ranks of the advocates, are upgraded in salary in large num bers, the mechanism of financing is likely to be inflation, a tried-and-true method of cutting people's pay with out facing the storm of protest. This is the second way in which compa·· rable worth is deceptive, the first being the pretense that the numbers on the scale are objective measures rather than statements of opinion. Moral Objections So far, we have considered the moral objections to the comparable worth proposal. It is deceptive, coer cive, elitist, and arrogant. More se riously, it would suspend the rule of law. In place of an alleged gender discrimination (which is assumed to be the reason for the wage gap), it would substitute legalized class dis crimination (where class is defined by points "On a scale of worthiness).

Today, many seem to believe that noble ends justify the means. Dis regarding the due process of law, they focus on results. Therefore, let us next discuss the likely outcome of comparable worth, in the light of some desirable goals: 1. higher val uation of femininity, 2. broader opportunities for women, 3. higher pay for women, and 4. greater indepen dence for women. Although feminists tend to see the relatively low wages in female dom inated fields as evidence of lowes teem for women, there is another side to the "family wage." Although women of the elite view a career as a means of self-fulfillment, those of lesser skills might regard a job as further drudgery that they must per form in addition to household duties and child care. The "59 cent gap" provides some women (about 40 per cent of married women) the option of staying at home. Indeed, the differ entiation of family responsibilities by gender probably accounts for much of the gap. The average pay of women who have never married, and who have continuously participated in the labor market, is virtually the same as that of married men.2 Closing the gap might mean that all but the most well-to-do would re quire two paychecks to make ends meet. In fact, more and more fami lies are finding themselves in that situatio~. The implication is that a woman's work in the home is not suf ficient to merit a living: clearly, a de valuation of her contribution to so ciety. That women hire substitutes for child care and homemaking, at wages less than they themselves 2Michael Levin, "Comparable Worth: the Feminist Road to Socialism," Commentary, September 1984, p. 13.

338 THE FREEMAN June earn, is further evidence that their val ue in the home is less than in the outside world. Are mothers really less important than secretaries? Only if we think in terms of dollars. Probably, no one could afford to pay women what they are really worth. Of course, it does not seem fair that some women are blessed with prov ident husbands, whereas many oth ers are not so fortunate. However, comparable worth could not alle viate that problem, and might worsen it, just as aid to dependent children has been accompanied by an increase in the number of women on the welfare rolls. Comparable worth is tinged with envy. Why should some women have just one job (at home), while others must commute to a stressful, unglamorous second one? Within the Market Naturally, comparable worth ad vocates are more concerned about the welfare of women who are in the labor market than those who are not.

At least, the working woman should benefit from the proposal. However, "entitlement" to a certain wage is not very helpful if a worker cannot find employment at that rate. The market price, or market wage, is one at which supply and demand reach an equilibrium. Interference with this mechanism, as by comparable worth, results in an excess of either supply or demand. Increasing wages by judicial fiat would increase the demand for the affected jobs at the same time that it decreased their supply, causing stiffer competition among those seeking the positions. Those with fewer skills (or fewer "connections") will find no opportunity. They might demand that the number of slots be increased, or frozen, but this would at best be a short-term solution. Businesses forced to pay workers more than they are worth eventu ally face several options: bank ruptcy, replacement of workers with word processors or machines, or ex porting jobs to Taiwan or other more competitive areas.

Looking again at the other side of the equation, lower wages in other fields would cause a shortage ofpeo pIe willing to accept some jobs. Why bother to study calculus, in which the attrition rate is as high as 70 percent, when similar compensation is mandated for those who elect li brary science instead? Why lift heavy boxes if a desk job pays more? Shortages of workers decrease pro ductivity, affecting the entire economy. "Social worth," defined by an elite commission, may sound more fair than "demand," defined by the mar ketplace. But in reality it simply re places a voluntary decision by a forced one. Its fairness is debatable, but the disruption of the economy is obvious.

1985 COMPARABLE WOR1rH V8. CIVIL LIBERTY 339 Resort to the continuing use of force in order to "liberate" women would seem paradoxical if we did not understand the definition of freedom that ·is inherent in utopian propos als. To schemes aimed at liberating us from the human condition, polit ical liberty is an obstacle, because people might make decisions that thwart the aims of the self-styled lib erators. These utopians do not want women to be independent as individ uals, free to become engineers and to make contracts. Rather, they wish to replace the perceived subjugation of women to men with the subjugation of everyone to a "political· process" dominated by philosopher-kings with the "right" values, who prom ise to free people from their prob lems. Many ofthe proposed solutions are familiar: more state-supported day-care centers, more maternity benefits, and of course more plan·· ning and less economic freedom.

Could there be any other solu·· tions? What if the emphasis changed from escaping the burdens of women to coping with them in creative ways? What if we allowed more freedom? The main problem. of women is, in a word, children. Women have a dis proportionate share of that burden.. As a survey of executive women by the Wall Street Journal showed, their husbands rarely assume pri mary responsibility for meal plan ning, caring for sick children, or shopping for them. We can't do away with children, and transferring their care to someone else also creates problems. Infectious diseases are more common in day care centers, and child abuse has been reported. Most importantly, parents relin quish much of their critical early in fluence on the child's upbringing. Is there any way in which women could care for their own children, and yet make full use oftheir other abilities? The InformationRevolution and Freedom in the Market The information revolution is one means by which freedom in the mar ketplace could increase freedom for women. The "telecommuting" sec tor could potentially involve 15 to 20 percent of the work force by the end ofthe decade. Writers, travel agents, programmers, financial advisors, and coders of insurance forms even now frequently work from their ter minals at home. Of course, men who prefer to work at home and handi capped persons benefit along with women who have small children. Net income is greater, if there are no child care expenses, and time. oth erwise spent commuting can be used more productively. As a bonus, chil dren who see their mothers at work need not rely on pictures in school books to learn that women make important contributions to the economy.

Though it would seem to be in 340 THE FREEMAN women's best interests to be in the forefront of the telecommuting rev olution, feminists are forming alli ances with those who oppose eco nomic freedom in general, and home work in particular. Resolutions against computer home work have been passed at union conventions, with rhetorical threats of "electronic sweatshops." In at least one in stance, local authorities have shut down a computer home worker be cause of alleged violation of a zoning law. A 1943 Labor Department ruling bans all home work in seven indus tries. Only recently, Secretary of La bor Donovan attempted to rescind the most notorious restrictions for bidding workers to knit outerwear at home, but he faces court chal lenges from the International La dies' Garment Workers Union. 3 Thus, the most conspicuous propo nents of comparable worth, unions and government, are fighting against the real civil rights issue of the 1980s: the right to work without rigid restrictions and meddlesome intrusions.

Not all women would wish to tel ecommute. But women benefit from having as many options as possible, including a division of labor in which a man is the chief breadwinner. They 3David Rubins, "Telecommuting: Will the Plug Be Pulled?" Reason, October 1984, p. 25. should encourage their daughters to learn their mathematics, since in adequate quantitative skills exclude women from a wide variety of occu pations. They might advocate ex pansion of vocational education, in view ofthe glut of college graduates. They should favor policies that pro mote economic growth, which cre ates jobs. Above all, they should sup port a system that is open to the unforese'en opportunities resulting from innovation and technological advance, which has already relieved them of much of their great-grand mothers' drudgery. In short, women belong in the front lines of the battle to preserve economic liberty.

George. Bernard Shaw,· Fabian so cialist, after rejecting comparable worth, eventually concluded that everyone should be paid exactly the same amount. He recognized only one difficulty: what about the poor bloke who just wasn't worth what so ciety was obligated to pay him? Shaw suggested that we simply execute such a fellow, in a kindly manner of course. Comparable worth advocates don't propose to execute people, at least not yet. But for a small increase in the paychecks of some, the demise of the rule of law, the death of economic freedom, distorted growth, aborted potential, and stillborn opportuni ties are too high a price. @ Robert Bearce The Spirit of Freedom ON July 3, 1776, the events of thE~ previous day were fresh on John Ad ams' mind when he wrote to his wife Abigail: "The second day of July, 1776, will be the most memorable epocha in the history of America. I am apt to believe that it will be cel ebrated by succeeding generations as the great anniversary festival. It ought to be commemorated as the day of deliverance, by solemn acts of devotion to God Almighty. It ought to be solemnized with pomp and pa rade, with shows, games, sports, guns, bells, bonfires, and illumina tions, from one end of this continen.t to the other, from this time forward forevermore."

John Adams was enthusiastic about the historic action taken by the Continental Congress on July 2. Mr. Bearce Is a freelance writer In Houston, Texas. A resolution favoring independence from Great Britain had been carried by the affirmative vote of twelve Colonies. Not until the 4th of.July, though, was the actual Declaration of Independence formally adopted. Although Adams missed foretelling the exact day of future celebrations, he accurately described the manner in which America's Independence Day would be remembered by later generations. Each Fourth of July, Americans commemorate the adoption of the Declaration of Independence. "Old Glory" comes out of the closet and appears on front porches across the nation. Bands play "The Stars and Stripes Forever." Thoughtful citi zens give thanks for the blessings of liberty. Such patriotic enthusiasm appears as a yearly ritual across the United 341 342 THE FREEMAN June States. The outward display of loy alty is there, but does this allegiance reflect an in-depth understanding of the Declaration of Independence a real commitment to personal freedom?

Although John Adams wrote triumphantly to Abigail about the vote for independence, he added a critical observation: "You will think me transported with enthusiasm, but I am not. I am well aware of the toil and blood and treasure that it will cost us to maintain this Decla ration and support and defend these states." The Critical Challenge We are now facing that same crit ical challenge. The Declaration of Independence may be extolled, but just praising it as a relevant, thoughtful document of freedom will not preserve it. Enshrining it will not strengthen freedom. Instead, we must re-examine and reassert the principles outlined in the Declara tion of Independence. Consider the second inspiring sen tence of the document: "We hold these truths to be self-evident: That all men are created equal; that they are endowed by their Creator with certain unalienable rights; that among these are life, liberty, and the pursuit of happiness ..."

The colonists had enjoyed these God-given rights and others since the first settling of America. With varying degrees of freedom, they could own property, bear firearms, and worship as they pleased. They had the right of trial by jury, and they practiced representative govern ment. Most important, they had been free to live their own lives as they-not the government-best saw fit. When these freedoms were threat ened by Parliament and King George III, the colonists became indignant. Receiving no just response to their grievances, they chose to separate themselves from the mother coun try. The Declaration of Indepen dence was the formal statement of their decision to be totally indepen dent and self-governing. The real importance of the Decla ration, however, is its fundamental assertion of individual freedom. Even if the demand for political in dependence had not been made, the document would still be a profound statement in defense of human dig nity. When the Thirteen Colonies proclaimed their independence as the United States, they were reaf firming personal freedom and re jecting authoritarian rule by gov ernment over the individual.

Several years after the United States had won independence from Great Britain, a veteran of the Lex ington-Concord fight in 1775 was asked why he had fought against the British. "We had always governed ourselves," replied the rugged old 1985 THE SPIRIT OF FREEDOM 343 minuteman, "and we always meant to. They didn't mean we should." His forthright answer reveals the main issue of the American War of Independence-FREEDOM. The min uteman understood that if he was to have freedom, he would have to en joy the right of self-government. He reasoned that he could govern him self only to the extent that he exer cised personal judgment and choice over his own affairs. For almost one hundred fifty years, the colonists had done just that-accepted individual freedom, responsibility, and ac countability for their own lives. Gov ernment regulations and controls threatened that freedom. Oppressive Government The Declaration of Independence clearly states the objection to op pressive governmental authority.

The central portion of the document shows that the colonists were pro testing abuse ofpower, usurpation of their rights, obstruction of justice, and governmental interference. Speaking of the King of England, they pointed to this abuse of govern ment authority: "He has erected a multitude of new offices, and sent hither swarms of officers to harass our people and eat out their substance." Although he was eventually char acterized as such, King George III was not a tyrant. He and Parliament had shown a rather benevolent, paternalistic attitude toward the Thir teen Colonies-an attitude similar to the "compassion" and "concern for the disadvantaged" supposedly shown by our modern-day politi cians. Like young, immature chil dren, the Colonies were to benefit from the fatherly hand ofthe British Crown. But they were not very im pressed by this paternal hand of reg ulation, decrees, taxes, and other bu reaucratic interventions.

"Tyranny!" shouted the colonists. They saw unlimited government power for what it was-the seed of repression and subjugation. Patriots like Thomas Jefferson fought for the principles of limited government and individual freedom. They knew that the main role of government was twofold: (1) apprehending and pun ishing domestic evildoers-those people who would violate other peo pie's right to "life, liberty, and the pursuit of happiness," (2) organizing the defense of law-abiding citizens against foreign aggression. Govern ment was not to be the source of a people's material welfare. The Declaration of Independence speaks eloquently of "life, liberty, and the pursuit of happiness" for the individual. These rights could be se cured only when government itself was held within strict boundaries of power and authority. The colonists realized they could improve their own personal lives if they were free of government interference. They did 344 THE FREEMAN June not want the government trying to do for them what they could and should do for themselves. They asked only for the freedom to enjoy the just fruits of their daily labors.

Even as the Crown continued to infringe upon their "unalienable rights," the colonists followed legal channels of protest, expressing loy alty to the King. There was the firm intention of retaining the tradi tional political relationship with England .. The preservation of free dom-not revolution-was on the col onists' minds. Eventually, patience ran out, prompting Patrick Henry to declare: "We have done everything that could be done to avert the storm which is now coming on. We have petitioned, we have remonstrated, we have sup plicated, we have prostrated our selves before the throne, and have implored its interposition to arrest the tyrannical hands of the ministry and Parliament. Our petitions have been slighted; our remonstrances have produced additional violence and insult; our supplications have been disregarded; and we have been spurned with contempt from the foot of the throne."

Individual Dignity The American War of Indepen dence was fought to preserve a truly "revolutionary" truth-each of us is a unique individual, able to accept self-responsibility and thus to enjoy personal dignity. For the most part, the governments, systems, revolu tions, societies, and ideologies of the world have tried to suppress that truth. People have been enslaved, tortured, and killed by those who reject man's God-given right to "life, liberty, and the pursuit of happiness." The American colonists had seen the approach of slavery. In the Dec laration of Independence, they ac cused King George III of seeking the "establishment of an absolute tyr anny over these States." Similar language was used by the revolu tionary Jacobins during the French Revolution when they assailed the monarchy under Louis XVI. The French radicals shouted lofty slo gans about liberty, but their bloody revolution against the monarchy hardly parallels the spirit of the American Revolution-the true spirit of freedom.

"Liberty! Equality! Fraternity!" clamored the revolutionaries of France. Louis XVI lost his head on the guillotine. So did thousands of other Frenchmen. The leaders of the French Revo lution of 1789 had read the Decla ration of Independence. They ad mired America's document of freedom. Unfortunately, they lauded it but rejected its principles. They failed to comprehend what Jefferson and Adams meant when they said "all men are created equal." Equal1985 THE SpmIT OF FREEDOM 345 ity as it is outlined in the Declara tion says that individuals are equal in their right to be free and inde dent-to be free and independent as long as they respect the rights of oth ers to be free and independent, with .everyone respecting property and other individual rights. Each person should have the right to rise to the height of self-realiza tion consistent with that person's individual talents, ambition, and willingness to accept personal ac countability. In seeking this self-ful fillment, each person must respect the equal rights of other individuals.

When a government respects true equality-the equal right to enjoy personal freedom-the result will be that many differences will exist among the citizenry. This natural condition of inequality is consistent with freedom, justice, and human nature. Individuals are unique. Each person has varying talents, aspira tions, and weaknesses. If individuals are free to arrange their own lives, they create a diverse society where men and women attain different so cial, intellectual, and economic status. Equal Treatment Results in Many Differences Individuals are equal in their right to "life, liberty, and the pursuit of happiness" -so long as they accept responsibility for their own lives and recognize their personal accountability for their failures, shortcom ings, and misdeeds. Regrettably for mankind, modern-day politicians and "social architects" like the French revolutionaries reject this truth .

Robespierre, Danton, and other leaders of the French Revolution be lieved they could bring about the re generation of humanity through the power of the State (government power and authority). Although they spoke much about freedom, they ac tually denied self-determination and the free will of the individual. They insisted that man was the product of his environment. Crime, poverty, greed-these were supposedly in flicted upon humanity by corrupt po litical, social, and economic condi tions/institutions. By the use of government authority and power, the revolutionaries believed they could erect a near-perfect if not per fect society. The visionaries of Revolutionary France had a distorted view of hu man nature-a distorted view still held by many people today in the media, in politics, in our universi ties, and even in our religious insti tutions. The theory-minded leaders of the French Revolution believed that the individual was inherently virtuous. If a person committed mur der, he should not be harshly con demned for a criminal act. Rather, he should be regarded as the victim of adverse social or economic condi346 THE FREEMAN June tions which drove him to the act of taking another individual's life.

Thus, the French revolutionaries focused their efforts to build the vir tuous society by removing what they mistakenly thought caused people to act in "antisocial" ways. By recon structing society through the power of the State, they were convinced that people would return to their basic goodness, virtue, and right eousness. The government leaders of the French Revolution said that they loved humanity. They said that they were for the "poor and homeless," "the helpless and abused," and "the needy," but in reality, they rejected the true meaning of human dignity contained in the Declaration of In dependence. They placed Society and the State above the individual and individual freedom, whereas the fifty-six signers of the Declaration of Independence in America placed the individual above the State. The patriots of the American Rev olution had faith in individual free dom. Freedom-not government power-was the foundation for true progress, self-improvement, and happiness. Absolute equality and perfection brought about by govern ment authority were illusions. Only free individuals in a truly free na tion could achieve material welfare, human dignity, and personal fulfill ment. Only when the individual has both the freedom to make choices and the corresponding obligation to abide by the just consequences of those choices, can he achieve self respect.

By adhering to the principles ofthe Declaration of Independence, Amer icans have attained material abun dance and personal dignity. The blessings of liberty have been en joyed because free individuals have been allowed in the past to labor freely in a free society. Yet, we have also been abandoning the basic truths upon which America was founded. "Omnipotent" Government From the halls of Congress to the academic forum, we hear that gov ernment has the answer to all of our society's ills. We are assured that government can and should solve every problem from hunger to faulty automobile bumpers. Commissions ... regulations ... controls ... rules ... coercion ... Congressional committees subcommittees ... regimentation and more regimentation-all should remind us of the grievances listed in the Declaration of Independence. Coercion, paternalism, restrictive legislation, and unconstitutional government intervention will gain ground to the extent that we are in different to the cause of true free dom. When we remain silent, we will be responsible for our own destruc tion-moral degeneracy, material!

1985 THE SPIRIT OF FREEDOM 347 economic stagnation, and eventual physical slavery. The principles of freedom will con tinue to be eroded as long as free in dividuals relax in their compla cency. "Is this the part of wise men," asked Patrick Henry in March, 1775, "engaged in a great and arduous struggle for liberty? Are we disposed to be of the number of those who, having eyes, see not, and having ears, hear not, the things which so nearly concern their temporal salvation?" Freedom is threatened today just as it was threatened at the time of the Declaration of Independence. The colonists wanted less govern ment-not more of it in their daily lives. They wanted to be free to re lease their own creativity and ener gies. The "pursuit of happiness" was their own responsibility. They stated in the Declaration "that, to secure these rights, governments are insti tuted among men, deriving their just powers from the consent of the gov erned." The early patriots of Amer ica believed that government should protect their "unalienable rights."

It had no right to interfere with "life, liberty, and the pursuit of happi ness" other than that of prosecuting lawbreakers and maintaining self defense from foreign aggression. The colonists were free people struggling to remain free. Living in freedom had strength ened the character of the colonists. They recognized the existence of moral absolutes. Right was right. Wrong was wrong. They were indi viduals who valued honesty, hard work, thrift, and an equal respect for the rights of others. They knew what they believed and why they believed it. They said what they meant and meant what they said. Humble Before God Although the colonists were self reliant and independent, they were humble before God. True liberty was found in a genuine reverence for Al mighty God and obedience to His commandments-not worship of gov ernment authority. Their spiritual faith gave them a clear understand ing of their personal roles in life.

They accepted the rugged challenges of life, knowing that in worldly af fairs, the Lord, indeed, helped those who helped themselves. The farmers and shopkeepers who took up arms against the Redcoats heeded Ben Franklin's admonition: "They that can give up essential lib erty to obtain a little temporary safety deserve neither liberty nor safety." The patriots of 1776 chose both lib erty and the responsibility of de fending that freedom. The Continen tal soldier fought at Trenton and Germantown ... suffered at Valley Forge ... and finally won indepen dence. The "spirit of '76" is the faith and spirit of freedom. If Patrick 348 THE FREEMAN June Henry and other patriots were will ing to die for freedom, certainly we should live for freedom. We face the continued struggle for liberty. Bat tles lie ahead. We are in continual warfare. These are facts that we must accept honestly as we consider Patrick Henry's words back in 1775: "The battle, sir, is not to the strong alone; it is to the vigilant, the active, the brave. Besides, sir, we have no election. If we were base enough to desire it, it is not too late to retire from the contest. There is no retreat but in submission and slavery!"

A State of War Today, free people are in a state of warfare-a continued battle prompted by those who oppose free dom. We need to acknowledge our current challenge to keep alive the spirit of freedom and to strengthen freedom. First, we need an honest, sincere, and broad understanding of the basics of freedom. We cannot very well defend that which we cannot adequately explain and present to other people. We should ask our selves how well we truly understand such principles of freedom as the free-market exchange of goods and services ... personal freedom/ac countability ... no coercion against law-abiding citizens ... voluntary cooperation ... limited, strictly de fined government power. Do we understand these principIes? Are we doing what we can to understand them better? Second, in order to rejuvenate the spirit of freedom, we must practice the freedom faith continually, con sistently, and earnestly in our own personal lives. Some warriors for the cause of freedom know the ABCs on the subject, and they are on the bat tlefronts, such as actively campaign ing for pro-freedom candidates for Congress.

Such "activism" is_ to be cheered and encouraged, but woe! Some of those hard-charging freedom war riors will (1) on Monday, demand the total elimination of the federally funded Legal Services Corporation, but (2) on Tuesday lobby the federal government for an increase in fed eral subsidies and low interest loans for farmers. The wayward, backslid den freedom troopers in this case are an association of farmers who are more interested in their "special in terest" than in individual freedom and responsibility. No, we cannot have that type of in consistency if the spirit of freedom is to be enhanced and strengthened. Third, we must diligently protect freedom. Patrick Henry advised that those who would defend liberty must be strong, active, brave, and vigi lant. "Vigilance is the price of lib erty," and today we should be vigi lant-seeing where and how freedom is being undermined. For example, we ought to see that 1985 THE SPIRIT OF FREEDOM 349 many reporters, commentators, edi tors, publishers, and anchor persons are not the fair, objective, accurate, and honest news people they would like us to believe. Instead, they are prejudiced against freedom. They show a clear bias in favor of more governmenta support for more government intervention that daily translates into a corruption of the truth.

A good portion of the major news media people have a personal belief that the government should be spending more-not less-for educa tion, the arts, welfare, health, and the like. They personally believe that government regulations and programs-not free people working freely in a free society-are the best way to make sure individuals are sufficiently housed, clothed, fed, and given proper medical care. Even though we may have a very sound grasp of the basics of freedom, we must be vigilant to the distor tions, half-truths, and slanted re porting we receive from media sources around us. Fourth, we should be earnest spokesmen for freedom, actively tak ing a part in the current battles af fecting our daily lives. It isn't enough to appreciate the writings of Bastiat, Jefferson, Burke, Tocque ville, and Ludwig von Mises. Nor do we accomplish much by railing at the supper table about Congress's latest repudiation ofthe oath of officeto de fend the Constitution of the United States. Rather, we should practice what we preach by becoming intel ligently, firmly, and consistently in volved defending freedom, explain ing it, and strengthening it.

Words of Wisdom Two men who signed the Decla ration of Independence back in 1776 still speak to us as we seek to learn more about freedom. "A wise and frugal government," advises Thomas Jefferson, "which shall restrain men from injuring one another, shall leave them otherwise free to regu late their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government ..." Dr. John Witherspoon, the only ac tive clergyman to sign the Declara tion, gives us a final insight into the spirit of freedom: "A good form of government may hold the rotten materials together for some time, but beyond a certain pitch even the best constitution will be ineffectual, and slavery will en sue. On the other hand, when the manners of a nation are pure, when true religion and internal principles maintain their vigor, the attempts of the most powerful enemies to op press them are commonly baffled and disappointed." ® Craig Russell The Moralityof Profit ONE of the banks on Main Street lends a display window to local com munity groups. Recently featured there was a food co-op. Prominent in the display was a sign that read, in large black letters, FOOD FOR PEOPLE, NOT FOR PROFIT. This implied that there was something wrong, something immoral about profit; that if something was for profit, it couldn't be for people.

I don't sell food, but I do sell re maindered books and operate a pa perback exchange. I own the build ing my bookstore is in; I live behind the store and rent the apartments upstairs. Both my books and my apartments are for people, and both Mr. Russell owns a bookstore in upstate New York. 350 bring me a profit. My income is com pletely dependent on customers who buy my books and tenants who rent my apartments. I do not get a reg ular paycheck. Each week, indeed, each day, is different and brings a greater or lesser reward for my ef forts. How much money I have to pay the mortgage, the taxes, the utili ties, and the other bills owning a house and a business entail-even the amount I have for food-is en tirely up to the public. I cannot force them to support me. I can't even force them into the store or the apartments. They have to come of their own free will. They have to come because they want to.

How do I get them into the store? I attract them by offering the best THE MORALITY OF PROFIT 351 books I can find at the best possiblE~ prices. First, of course, I have to buy the books. There are several com panies out there bidding for my busi ness. One of them, my main supplier, sells me books in quantity. Though I don't know what titles I'm getting, I do know the price is better than any other company's I deal with, and the more books I buy at once, the lower the per-copy price. I then supple ment what I have with specific titles from other companies. They charge more but I choose exactly what I want. Supply and Demand What then do I charge for these books? Certainly I can't sell them for cost. If I did, I'd quickly be out of business. Instead, I charge as much as I can for them. Just as the cus·· tomer wants the most for his money, I want the most for my product. I want to pay my bills, I want to eat, I want my store to grow and im·· prove, and I want to save for those days when I don't make very much.

It's not only in my interest to get the best price I can but in my customer's as well because the more profit I make, the more secure the business will be and the more books I'll be able to stock, giving my customer a wider and wider selection to choose from. Naturally, I can't sell the books for as much as I'd like, only as much as I can get. For one thing, I have direct competition. In the paperback ex change on Main Street, a customer trades in two books to get one free. In mine, he turns in one book to get another of equal value for 25¢. The other bookstore on Main Street sells a few remainders as does the one in the mall, though neither has as many as I do and their prices are higher. I also have indirect compe tition in the form of bowling alleys, movie theaters, libraries, and every other place people patronize in their leisure time. My usual price for remainders is $1.98, though I do have a few at $2.98. Most things marked higher won't sell; to my customers, $3.98 is just too much money. Therefore I can't make more profit by raising my prices, only by lowering my costs. I make more profit on books from my major supplier, because my costs are lower, than on those from my minor suppliers. I also lowered my overall costs by building my shelves myself rather than buying them and by running my business out of the same building I live in rather than renting a separate place.

My apartments have to be profit able, too. Indeed, why should a ten ant pay my cost for the apartment? He did not have to put a down pay ment on the building. He does not have a mortgage and is free to leave on thirty days notice, or less if he wants to forfeit his security deposit, whereas I'm tied down here. He is 352 THE FREEMAN not responsible for the taxes, the utility bills, the maintenance, or the repairs; I am. Competition Defines How Much the Market Will Bear How much do I charge, then? As with my books, I charge as much as I can. And again as with my books, it's in the tenant's interest to do this as well as my own. If I charge too little, I won't have enough for im provements or repairs. If the ten ant's refrigerator breaks down, or the roof springs a leak, I won't have enough money to fix it. Two years ago, the city government here started enforcing its housing code. Without profit from rents, I would not have been able to afford the $1000 it took to bring the house up to code, and my tenants may well have been evicted by the city! It's in the tenant's interest as well as mine to charge as much as I can because that's our only insurance that the house won't deteriorate.

Still, I can't charge as much as I'd like because there is competition in rentals just as there is in books. If I want too mqch, the tenant can al ways find another place at a more attractive price. The way to increase my profits here, as with my books, is to lower my costs. For' example, several years ago I had the building insulated. While it was a high intitial cost, it has since more than paid for itself by cutting my monthly fuel bill in half. To say "food for people, not for profit" is to misunderstand the ne cessity of profit. Without it, there may well be rio food. You only have to think of the starving millions in Africa, or the chronic food shortages in socialist countries around the world, to realize that. Without profit, there is no production. With profit, production is abundant because pro duction is what benefits others, and if you don't benefit others with goods and services, they won't benefit you with money.

The slogan also makes a false dis tinction and fails to understand the morality of profit. There is no either/ or here; profit is not to the exclusion of people. The two go together. Pro ducers, after all, are people too. I do not steal from my customers and tenants when I sell and rent. We ex change. We satisfy and benefit each other by trading what we have for what we don't have. Both sides gain in free market transactions. Once I've lowered my costs and raised my prices as much as possible, the only way I can profit further is to benefit more people, who in turn benefit me. This, then, is the essential, inescap able morality of profit: people help ing people and i~proving each oth er's lives. @) Bettina Bien Greaves ................................-........... ,..' ...•,......., -..'. ... .., -._.' .~ : . ;" Language J ...........\ li·aps :; .~ ....... ! :i : ! : ~ i ~ ~ .......................................

THE ORIGIN of language is shrouded in antiquity. No matter how we may speculate, we can never really know how language actually started long, long ago before the dawn ofhis tory. Words may have begun as grunts and cries of fear, joy, expres sions or interjections. Or perhaps as attempts to imitate the sounds of na ture, the cries of wild creatures. Modern linguists are inclined to be lieve, however, that words developed as people tried to express themselves vocally and to describe reality through symbols. The origin of lan guage is not as important for us to day, however, as what language is Mrs. Greaves is a member of FEE's Senior Staff. in February she gave a series of six lectures, in Span ish, to students at the Universidad Francisco Mar roquin in Guatemala. This is a slightly shortened En glish version of one of her talks. and how it enables us to express ourselves. Language is a major tool for com municating. It has helped to unify societies and to develop cultures. It has encouraged individual expres sion and intellectual development.

Language permits us to transmit knowledge from person to person throughout society and down through the ages. Thus, language makes it possible for us to learn, not just from our own personal experi ences, but from other persons, even from many who lived far away and long ago. Properly used, language can facilitate teamwork and coop eration, making increased produc tion possible. If misused, however, it can mislead, distort and misrepre sent, its words becoming veritable "language traps." To communicate 353 354 THE FREEMAN June successfully, therefore, it is impor tant to choose one's words carefully so as to convey the ideas we want to express and avoid misunder standings. An Ongoing Process The development of language is an ongoing process. It is evolving con tinually as people conceive of new ideas and want to pass them along to others. Many persons, specialists, scientists and scholars, often find ex isting words inappropriate for their purposes. As they seek to express themselves ever more precisely they enrich our language. Thus, new words are being created every day, some by specialists, some borrowed from other languages and other cul tures. To accommodate new ideas, fads and fashions, as well as ex panding scientific knowledge, the usage and meanings ofold words also change from time to time. Witness the many new words and terms that have entered our language with the Beatnik generation, for instance, and the development of electronics and computers. Some new words and new meanings for old words prove helpful and in time are accepted into language; others tend to confuse rather than to clarify and are even tually dropped and forgotten.

After World War II, the German people found they had not only to clear away the rubble left from the bombings. They had also "to revive the German language" to undo the damage done by Nazi propaganda. German novelist Hans-Werner Ri chter noted in a recent interview (Pan American Clipper, July 1983): After 12 years during which German had been distorted to a mumbo jumbo of Nazi propaganda ... even ordinary words had lost their true meanings. You couldn't use such words as heart, spirit, blood, soil, folk, country, because during the Third Reich they had acquired a sense and implication that those of us who re turned from the war rejected ... Then, slowly, we began using traditional words and expressions again, though very cau tiously, in order to give them once more their lost meaning and content. Leonard Read, FEE's President from 1946 until his death in 1983, used to tell a story to illustrate how the words we hear and use can in fluence not only language but also thought. In 1947, Read attended the founding meeting of the Mont Pe lerin Society in Switzerland. Also at tending the meeting were Ludwig von Mises, "dean" of Austrian econ omists, and Walter Eucken, noted German professor and free market economist. Eucken had lived in Ger many throughout World War II.

Though a critic of the Nazi regime, he had been so well respected that the authorities had left him pretty much alone. Eucken addressed the Mont Pelerin meeting. Mter hear ing him speak, Mises commented to Read, "It is amazing how the Nazi 1985 LANGUAGE TRAPS 355 jargon has unwittingly been admit ted into his speech. He always spoke such perfect German and he used to be a good economist." Through its jargon, the Nazi propaganda had even affected the economic ideas of Eucken, one ofNazism's most severe critics. In the Mises seminars at New York University, which I attended for many years, Mises frequently spoke of the importance of carefully choos ing one's terminology. He often warned against using mechanical terms or similes and metaphors from the physical sciences to explain hu man action. As shorthand expres sions, they may be helpful at times to illustrate an abstract point. How ever, the danger exists that such similes or metaphors may be taken literally. Moreover, they are never really suitable for describing human action, which is always purposive, intentional, never mechanical.

Some words are appropriate, oth ers inappropriate, for expressing the ideas we want to convey. Some may actually conceal and distort the meaning we have in mind. And, as we have seen, some may even change the opinions of those who use and hear them. Among the worst offend ers nowadays are words that have been borrowed by economists from the languages of violence, mechan ics, the physical sciences and math ematics. Such words may even be come "language traps." Terms of Violence Consider the word "revolution," with its two basic meanings. The first comes from the verb "to re volve," meaning to rotate around a single point, the second refers to the violent overthrow of a regime. "Rev olution" was first applied to the in dustrial world by writers who no ticed the important technological developments of the late 18th and early 19th centuries. They obviously did not consider these developments to be rotating around an axis; rather they used "revolution" to describe the overturn, within a fairly short period, of earlier production meth ods. " 'A revolution is making,' said Arthur Young in 1788 when he saw the textile machines spread from the cotton to the woolen industry." The Marxians later drew a parallel be tween the technological "revolu tion" that was taking place and the changes in political and intellectual life which they hoped that "revolu tion" would bring about.

Careful historians know that the old order was not "suddenly broken in pieces by the mighty blows of the steam engine and the power loom," as sociologist and economist Arnold Toynbee (1852-1883) put it. From 1760 to 1830, industrial production was going through "the slow grad ual process of economic evolu tion .... [there was] no sudden shift of scene" but rather "a constant tide of progress and change, in which the 356 THE FREEMAN June old is blended almost imperceptively with the new." (E. Lipson, An Intro duction to the Economic History of England). Economic historian T. S. Ashton also deplored the use of the word "revolution" in this context for, as he writes: The word "revolution" implies a sud denness of change that is not, in fact, characteristic of economic processes. The system of human relationships that is sometimes called capitalism had its origins long before 1760, and attained its full development long after 1830. (The In dustrial Revolution, 1944/1964. p. 4) The factory system with its assem bly lines did not spring full blown from the system of medieval hand tooled production to destroy the small scale industry with a single - blow. Yet that is the implication in Toynbee's use of the term. And since his day, the phrase, "industrial rev olution," has gained broad accep tance in our language, carrying with it the connotation ofviolence and the implication that the changes wrought by the "industrial revolu tion" were antagonistic to the inter ests and wants of the people.

Terms of violence-"strike" and "pickets" -are also used to describe the activities ofmodern labor unions. To "strike" implies the use of force. The word "picket" originally re ferred, in military terminology, to the pointed posts or stakes used to build a defensive stockade or to the soldiers ordered to stand guard around a military position. Literally speaking, "peaceful pickets" and "educational picketing,'" dignified by references in U.S. Supreme COl:1rt decisions, are contradictions in terms. Members of modern, specially privileged, labor unions are often not prohibited from using force or threat of force. And when they "strike" or "picket" their previous places of em ployment, they sometimes actually engage in acts of violence. So terms of violence may not be inappropriate to describe their activities. However, such terms are not suitable for de scribing the peaceful employer-em ployee relations of a free market society.

Nor are terms of violence suitable for describing the other processes of free and open competition on the market. Nevertheless, frequent ref erences to "cutthroat competition," "the law ofthe jungle," and the like, appear in the popular economic lit erature. Persons who understand the principles of human action and the market process look on the opera tions of the market from a very dif ferent perspective. Competition Competition in the marketplace is part of a cooperative process rather than a physical struggle among en trepreneurs, investors, workers and selling personnel. All these various categories of producers cooperate in 1985 LANGUAGE TRAPS 357 the effort to attain their common goal, to try to serve consumers bet ter. Producers of the same or similar products may sometimes feel as if they are in a race with one another. Yet a producer's prime goal is not to destroy or defeat others. Rather each is looking for ways to provide con sumers with something they want more than the other goods and ser vices then being offered.

The fact that many consumers are demanding the same or similar items does not make them turn on one another tooth and claw. Rather it works to their advantage. It stim ulates increased production and makes economies ofmass production possible. Everyone who wants a hammer, a television set or any other item, benefits from the fact that other people also want hammers and TVs, for instance, for it leads pro ducers to manufacture more ham mers and TV sets, better hammers and TVs, cheaper hammers and TVs or better and cheaper hammers and TVs. And the demands of many pro ducers for specific raw materials, or specialized workers, for instance, help other producers of the same or similar products in an unanticipated. way-by inducing savers and inves·, tors to enter and/or to expand those particular fields of production. Thus, market competition results in a complex process of cooperation. among producers of all the goods and.

services needed at every stage ofproduction to transform and transport raw materials from their natural state into finished goods in the hands of final consumers. This process bears no similarity at all to anything like brutal "cutthroat competition" or "the law of the jungle." Terms from the PhysicalSciences The tremendous advances made in the physical sciences, especially dur ing the last hundred years, has led to remarkable technological dev~l opments. We now enjoy the fruits of countless inventions undreamed of only a few decades ago. Many of these improvements were made pos sible because the physical scientists could conduct controlled experi ments, analyzing physical phenom ena quantitatively as well as qualitatively. As the prestige of the physical sci ences has advanced, many persons have come to expect that the science of human action, economics, should also be transformed from a qualita tive to a quantitative science. Yet both the subject matter and the methodology ofthe science of human action are very different from those of the physical sciences. The terms that describe and explain the one are not suitable for describing and ex plaining the other. They may even become veritable "language traps,"

distorting meaning, leading to mis understandings and preventing the clear expression of economic ideas.

358 THE FREEMAN June Economics deals with the con scious, purposive actions of individ uals, based on their ideas, ideas which are always changing. Neither ideas nor actions can be quantified or measured as physical phenomena can be. Moreover, there are no con stant relations in the field of ideas and actions, so that controlled ex periments are impossible. Yet it is the actions of individuals on the ba sis of their ideas that make the econ omy, the market, which economists study. Without individuals, ideas and actions, there would be no econ omy, no market. Thus, market phe nomena are always the outcomes of the conscious and purposive actions of living, thinking, acting individu als, not of machines, automatons, or robots. Social Cooperation Social cooperation and the market began countless centuries ago as people discovered that it was to their advantage to cooperate, divide the labor, specialize and trade the re sults of their efforts. They learned they could increase the total amount of goods and services produced and thus improve the situation of all par ticipants. As people became aware of the benefits of social cooperation, so ciety developed. Thus, society itself, as Mises points out, "is a product of social cooperation." And the market evolved gradually over centuries, out of countless conscious and purposive actions of individuals, as people reached out to touch more and more persons throughout the world.

As individuals noticed more and more opportunities to gain through cooperation and trade, the complex ity and extent of their cooperation increased. The division of labor be came more and more specialized and trading transactions expanded. Step by step there evolved the extremely complicated and interrelated pro duction processes and far-reaching market transactions we see today, which make it possible for all of us to have and consume goods and ser vices that come from many lands. The longterm, large scale, effects of this widespread social cooperation, dovetail so perfectly that it is tempt ing to look on the market as some thing that functions "mechanically" or "automatically." While it is true that today's social cooperation and market arrangements were not con sciously planned, it is not true that they are in some way "mechanical" or "automatic." Each of the many separate steps that led to them was purposively undertaken by some in dividual or individuals.

It is to the credit of Friedrich Hayek, winner of the .1974 Nobel prize in economics, that he has ex plained explicitly that "the sponta neously grown institutions" such as private property, the market, lan guage, media of exchange (Le., mon eys), moral codes, and so forth, al1985 LANGUAGE TRAPS 359 though not intentionally designed by men are in effect man-made, in the /sense that they are the outcomes of countless purposive individual ac tions. Hayek cites the early English economist, Adam Smith (1723-1790) who noted that man in society is led "to promote an end which was no part of his intention." He also refers to his Austrian predecessor, Carl Menger (1840-1921), who consid ered "the major problem of theoret ical interpretation" to be "the origin of social structures arising unintentionally." Orderly Activities The actions of the unnumbered millions who have participated in the market may each have been planned by an individual, i.e., they were all "micro." Certainly, they were all conscious, purposive, inten tional, and not "automatic" or "me chanical." However, no one inten tionally planned the totality of the results, Le., the "macro" effects. The overall results, though unforeseen, appear "orderly" and are generally beneficial to society. Hayek explains in The Counter-revolution of Science that "the independent actions of in dividuals will produce an order which is no part of their intention."

As he puts it there is nothing mys terious in the fact that: "... money or the price system enable man to achieve things which he desires, al though they were not designed for that purpose, and hardly could have been consciously designed before that growth of civilization which they made possible ..." Hayek is well aware of "language traps." In The Counter-revolution of Science, he specifically calls atten tion to the fact that "the term insti tution itself is rather misleading in this respect as it suggests something deliberately instituted." (p. 83). Hayek certainly must appreciate also the difference between the way things" grow" in nature and the way human institutions develop out of the conscious actions and choices of individuals. Yet, enchantment with the phrase "spontaneously grown institutions" can easily lead one into a "language trap." It is most impor tant not to forget that Hayek's "spontaneously grown institutions,"

though not specifically conceived or intended by man, are actually out comes of many separate, conscious, purposive actions of individuals. Adam Smith's "invisible hand" metaphor is somewhat analagous to Hayek's "spontaneously grown in stitutions." Smith's "invisible hand" metaphor dramatized the fact that, thanks to market forces, the struc ture of prices and free and open com petition, no Production Czar was needed to control production and equate supply and demand. Yet, some of Smith's admirers have fallen into a "language trap" Smith cer tainly didn't intend to set. They have 360 THE FREEMAN June interpreted his phrase to imply that an all-knowing, all-powerful God ac tively intervenes in human affairs to assure that supply on the market will tend to equal demand, and vice yersa. This misinterpretation rein forces Mises' words of caution that similes and metaphors may lead to misunderstandings if interpreted literally.

Individuals Choose Persons who introduce into eco nomic discussions and analyses terms from the fields of the physical sciences and mechanics fail to un derstand clearly the nature of eco nomics. They do not realize that eco nomics deals with personal ideas and conscious actions of individuals which are neither quantifiable nor measurable. Nor do they realize that there are no constant relations in the field of human action. There is noth ing "automatic" or mechanical about the market. Using terms that imply that there is denies, in effect, the essence of market transactions based on individual ideas and sub jective values and purposive actions. It ignores the inevitability of change and may very well mislead unwary users into unfortunate "language traps." Thus such terms as "market mechanism," "automatic forces of the market," "business cycles" or "equilibrium prices" are never ap propriate for describing market phenomena.

Terms from Mathematics The current infatuation with ag gregate economics and computers has enhanced the popularity of mathematical terms for describing market phenomena. However, they are not appropriate for dealing with the principles of human action. To understand why not, consider the origins and' definitions of mathe matical terms. When physical scientists analyze the world and the universe, they seek to describe distance, area, weight, volume, time, sound, heat, light, and s'o on, in units of mea surement that do not change, or at least do not change perceptibly enough to distort the particular measurements being taken. Each unit of measurement is related in some way to the physical world it self. Units of distance and area are defined in terms of the earth's sur face. The unit of time by which we reckon years, months, days, hours, min utes and seconds, is based on the rotation of the earth and the move ment of the stars. The weight of an object is a measurement of its resis tance to the earth's gravitational pull, i.e., according to Webster's New Collegiate Dictionary (1951), weight is "the force with which a body is at tracted toward the earth. It is equal to the mass of a body multiplied by the acceleration due to gravity." Vol ume is a measure of solid content, or a dry or liquid measure.

1985 LANGUAGE TRAPS 361 Various scales have been devised to record temperatures-Centigrade, Fahrenheit, Kelvin, Reaumur, etc. all easily convertible for "on each of these [scales] are two fixed points, the melting point of ice and the freezing point of water under stan dard pressure" (The Columbia En cyclopedia). The most frequently used units of measurement for heat are the Calorie and the British Ther mal Unit, both defined as "the amount of heat required to raise the temperature [of a certain amount] of water at its maximum density one degree" Centigrade or Fahrenheit, respectively. Scientists can also measure sound, heat and light now by the waves they emit. Units of Measurement These units of physical measure ments are all precisely defined. They do not deal with ideas, opinions or values. Scientists may mismeasure or misread measurements. Their in struments may be wrongly cali brated. Their very attempts to mea sure an element may raise or lower its temperature, influence its chem istry or physiology in some way and so affect the measurements taken the Werner Heisenberg principle.

Their experiments may go awry and their interpretations of their results may vary. However, the existence of such difficulties does not affect the basic fact that physical scientists can deal with physical objects as if they are constant, or variable only within certain inconsequential limits. And they can expect that physical exper iments and measurements carefully carried out, under controlled condi tions' will be precise and accurate. Mises used to say, "economics is not potatoes." Rather economics is a study of the ideas, actions and val ues of men. The study of economics provides the theories and under standing that help men determine how best to supply consumers with precisely enough potatoes, neither too few nor too many, so as to satisfy their demands for potatoes without wasting time, labor and other re sources, resources that might better be used to satisfy other market de mands, more urgent than the de mand for more potatoes. This, in es sence, is the "economic problem."

Now it is true that some of the con sequences of conscious, purposive human action may be measured in mathematical terms. The raw ma terials and agricultural products brought forth from the earth, pota toes for example, may be counted, measured and weighed. The physi cal goods produced with the cooper ation ofentrepreneurs, investors and workers may also be totaled and measured in various ways. However, these physical goods and services are distinct from the values men place on them and it is their values to men that interest economists. Economics is the science of human 362 THE FREEMAN action, ofindividuals, their ideas and val ues. It deals, not with physical phenomena, goods and services themselves, 'whose size, weight, vol ume, heat, cold, light, sound, and the like can be measured-but with hu m'an responses to them-emotions, sensations, feelings, values and the ideas they evoke. Such responses are personal and subjective. They can only be compared by the individual experiencing them. It is not even possible for an individual to mea sure his/her emotions, sensations, feelings, values and ideas, nor to compare them with other persons' emotions, sensations, feelings, val ues and ideas. And there is certainly no universal, constant, scale of mea surement, that can be precisely de fined and calibrated, against which the emotions, sensations, feelings, values and ideas of one, several, many or all persons may be measured.

A Study of Human Action If we forget that economics is a study of human action and begin to look on it as being concerned simply with the production of potatoes-or of the many and sundry other goods and services on the market-it be comes tempting to describe economic phenomena in terms of mathemati cal "language traps." However, the popular mathematical terms fre quently applied to economic con cepts-the "balance of payments," "price levels," "stable prices," the "rate of profit," "market equilib rium," business or trade "cycles," "index numbers" -imply something that is not true. They imply that market phenomena-the outcomes of ideas, values and actions of individ uals-are in some way quantifiable, measurable and predictable. Thus, such terms are more apt to mislead than enlighten. The goal of economics is to try to alleviate insofar as possible the "economic problem," the fact that there is a scarcity of goods and ser vices relative to the demand for them. Economics seeks to determine how best the world's resources should be arranged so as to provide people with the goods and services they want, not too many or too few, without wasting scarce resources.

However, this is not a question of technology, mathematical measure ment or of business and commerce. Only on the basis of an understand ing of the principles of human action and the role of ideas and values can economists determine how individ uals should cooperate, divide the la bor, exchange the goods.and services and calculate so as to plan produc tion to yield the best possible results as valued by consum~rs. Terms that misrepresent or conceal the contri bution economics can make toward alleviating the "economic problem" are "language traps" to be avoided. @ Sven Rydenfelt The Ecologyof Entrepreneurship J.M. KEYNES'theories with prescrip tions promising to cure unemploy ment and depression were greeted as gospel by economists and politicians of the 1930s. Just as peace-lovers all over the world launched the slogan "no more war," so the newly-fledged Keynesians felt strong enough in their faith to promise "no more de pression and mass unemployment."

The Keynesian miracle drug was, in fact, never tested in the thirties. The Second World War came in stead. Following the war was the "golden quarter of a century" from 1945 to 1970-ahappy period with full employment for which the poli ticians gladly proclaimed credit. Then came the 1970s and the birth of a severe economic crisis, a social Dr. Rydenfelt is professor of economics at the Uni versity of Lund in Sweden. plague developing into a virtual depression with mass unemploy ment. At long last the Keynesian drug could be tested to prove its healing powers. Despite governmental borrowing in volumes Keynes never dreamed of, with doses rapidly increased into wild overdoses, the economic crisis spread. The awkward truth finally became clear: the miracle drug was a failure, producing no visible heal ing effects. Still, the politicians stub bornly refused to open their eyes and desperately continued to increase the Keynesian doses.

New theories and new remedies were sorely needed, and out of the tra vails of the crisis new theories were born. One of them will be pre sented here. The theory of entrepre neurship, explains the roots of the 363 364 THE FREEMAN June crisis and indicates ways out of it. And the time evidently is ripe for the new theory, dry soil is waiting for rain and seed. The idea is spreading even into the camps of the enemies, even into Socialist governments of the West where officials today speak of the necessity of creating a better economic climate for business and declare themselves prepared to ac cept higher profits. Austrian Economics and the Entrepreneurial Role The ideas of the new theory can be traced back to the 18th century where one of the pioneers, the French economist J.B. Say, added to the three classic factors of produc tionland, labor and capital-a fourth factor, the entrepreneurs.

These ideas were further spread by the Austrians Mises, Schumpeter and Hayek as well as by modern American economic historians like Douglass North and Robert Thomas. Mallyeconomists have contrib uted to the work, but so far only Pro fessor Israel Kirzner at New York University has presented a coherent theory of entrepreneurship. The the ory, however, is far from finished and complete, and different versions have been presented by different au thors. The interpretation here is my own. I especially want to emphasize the close relation to modern ecology, the science of the dependence of allliving beings on the environment. While Keynesianism is a mecha nistic theory, treating society like a machine you are able to control by means of "social engineering," the theory of entrepreneurship is fun damentally humanistic. Everything in society is produced by human beings, whose performances are de pendent not only on the physical en vironment but as much on the polit ical and economic one.

In an unfavorable environment we, as a rule, develop only a fraction of our possibilities, while in a favor able one we are able to develop our full potential. If economic growth with full employment and rapidly increasing living standards is to de velop in a society, among other pro duction factors the following three must be present: 1. Capital 2. Entrepreneurs 3. A favorable entrepreneurial environment The third factor is by far the most decisive. In every society there are key groups-in medicine the doctors, in education the teachers-and if so ciety is to function well these groups must be offered adequate incentives to do their best and develop their full potential. In all societies a minority of people are equipped with entrepreneurial talents enabling them to start, man age and develop enterprises. This minority holds the key to business 1985 THE ECOLOGY OF ENTREPRENEURSHIP 365 productivity, growth and employ ment. But they will use their special talents fully only in an environment with adequate incentives. In such an environment they will attract or cre ate the necessary capital.

Modern growth theory has, as a rule, concluded that the shortage of capital is the deciding cause of pov erty in underdeveloped countries. Moreover, the theory holds that the provision of capital via aid from the industrial countries should be suf ficient to start economic growth in the poor countries. Vast discourag ing experiences indicate that this theory is not realistic. Capital, according to the theory of entrepreneurship, is a necessary but not a sufficient condition. According to this theory the cause ofthe dismal experiences is the fact that the regimes of these countries, mostly socialistic, have systematically oppressed and exploited their en trepreneurs. Policies destroying the entrepreneurial environment must have counterproductive effects. Similarly, the theory of entrepri neurship is able to explain the eco nomic crisis of the 1970s and 1980s in the West. During the golden quarter from 1945 to 1970, the en trepreneurs were allowed to work and produce in a largely favorable environment. Stimulated by ade quate incentives, they developed such productive energies that many governments had to apply brakes on their wild investment plans, brakes in the form of special taxes and fees.

Not unemployment, but a shortage of labor, was the problem during this period. Economic "doctors" of the present crisis often try to explain hardships as a product of "technological un employment," resulting from labor saving machines and devices such as computers and robots. But such ex planations are mere nonsense. All machines since the industrial revo lution in the 18th century have been "labor saving." In spite of this, shortage of labor was still the prob lem in the 1960s. Since the 18th cen tury the bogey of "technological un employment" has been picked up from dark closets during all slumps and depressions and sent back to its hideout whenever better times arrived. Just like garments and other cul tural manifestations, governmental policies are strongly affected by changes of fashion. In the entire Western industrial world the 1970s meant a rapid expansion of state regulations, restricting the freedom of entrepreneurs. Simultaneously, the increasing taxing of firms and entrepreneurs was transformed into confiscation policies. In total, this meant a systematic destruction of the entrepreneurial environment.

An obvious conclusion arises from the entrepreneurial interpretation of the present Western crisis. A sit366 THE FREEMAN uation with full employment and ra pid growth-a situation similar to that prevailing before the 1970s can be created only by restoring eco nomic environments with adequate incentives for the entrepreneurs. Critics often object that such pol icies would imply the establishment of a new privileged class-the entre preneurs. However, policies produc ing adequate incentives for entre preneurs should be pursued not for the sake of the entrepreneurs but for the sake of the unemployed and other victims of the crisis. In countries like the U.S.A. and Sweden we have the best educated and most healthy manpower of the world. But what is the use of these unique resources as long as our pol iticians systematically kill the in centivesand .possibilities-of our entrepreneurs to invest and to cre ate jobs? @ Factors of Production -REFERENCESCasson, Mark. The Entrepreneur: An Economic Theory. Oxford: Martin Robertson, 1982.

Gilder, George. The Spirit of Enterprise. New York: Simon & Schuster, 1984. Hayek, F. A. Full Employment at Any Price. London: The Institute of Economic Affairs, 1975. Kirzner, Israel. Perception, Opportunity, and Profit. Chicago: University of Chicago Press, 1979. Kirzner and others. The Prime Mover of Prog ress: The Entrepreneur in Capitalism and S~ cialism. London: The Institute of Economic Affairs, 1980. Mises, Ludwig von. Human Action: A Treatise on Economics. 2nd printing. New Haven: Yale University Press, 1949. North, Douglass & Thomas, Robert. The Rise of the Western World: A New Economic His tory. Cambridge: Cambridge University Press, 1973. Rydenfelt, Sven. A Pattern for Failure: Social istEconomies in Crisis:San Diego, New York, London: Harcourt Brace Jovanovich, 1984. Schumpeter, Joseph A. The Theory of Eco nomic Development. Cambridge, Mass.: Har vard University Press, 1951.

IDEAS ON LIBERTY PHYSICAL EXERTION turns into a factor of human production when it is directed by reason toward a definite end and employs tools and previ ously produced intermediary products. Mind-reason-is the most im portant equipment of man. In the human sphere, labor counts only as one item in a combination of natural resources, capital goods, and labor; all these three factors are employed, according to a definite plan devised by reason, for the attainment of an end chosen. Labor, in the sense in which this term is used in dealing with human affairs, is only one of several factors of production . . . . Entrepreneurial judgment directs the toil of the workers and the employment of the capital goods toward the ultimate end of production, the best possible removal of what causes people to feel discontented and unhappy. LUDWIG VON MISES John K. Williams Redigging Old Wells TUCKED away in the book of Genesis is the simple report of an incident re ferring to the Jewish patriarchs Abraham and his son Isaac. When residing in the arid wasteland that was Gerar, Abraham labored long to dig wells. Years after his father's death, Isaac returned to Gerar. The Philistines, he discovered, had filled Abraham's wells with earth and sealed them off. So Isaac, as the Bib lical writer puts it, "dug again the wells ... of Abraham his father ... and gave them the names his fa ther had given them."

The story tells of a gain achieved, a loss suffered, and the recovery of what had been lost. This sequence of The Reverend Doctor John K. Williams has been a teacher and currently does freelance writing and lecturing from his base In North Melbourne, Victoria, Australia. This article Is from a seminar lecture at the Foun dation for Economic Education. events is a commonplace of human history. Men and women again and yet again have faced two distinct tasks: on the one hand, new gains to be made; but on the other hand, old gains to be re-won. New wells to be dug, yes; but also old wells, filled over the passing of time with rubble, to be dug again. The former task may be more dramatic than the latter, but the importance of redigging wells first dug by our forefathers cannot be minimized. In a sense, Samuel Johnson made the point when, some two centuries ago, he said, "The number of new things we need to know is small compared with the number of old things we need to be reminded of."

Reminding ourselves and others of old truths easily forgotten-redig ging old wells dug long ago by our forefathers but filled up and sealed 367 368 THE FREEMAN June off by the Philistines of our age-is a task those of us committed to the cause of liberty cannot shirk. For the task, I submit, is urgent. Human Rights The first such well is the well of human rights. The distinction between a "human right" and a "positive" or "contrac tual right," should be clear. Unfor tunately, however, it has not proved clear to some. In particular, I think of an influential British philosopher, Thomas Hill Green,! who last cen tury argued that the mere absence of an obligation to surrender some good or desist from some activity was vacuous. What mattered was the ac tual ownership of the good or suc cessful execution of the activity. My "right" to climb a mountain is use less, according to Green, if I lack the equipment and skills necessary to execute a successful climb. Green's claim is echoed by those who mock the notion of human rights byask ing what use to an impoverished per son is the "right" to enter an expen sive restaurant and dine?

In this way, the notion of a human right was transformed. My right to own a wristwatch signifies for many today not simply the obligation of other people not to force me to sur render a wristwatch I have legally acquired, but to provide me with the wristwatch. Immediately any no tion of "equal rights" vanishes, for two sets of people have been speci fied: those entitled to receive certain goods and services, and those obli gated to provide those goods and ser vices. The assertion, for example, that the wealthy are obligated to provide goods and services specified by the alleged "rights" of the poor, cannot be referring to a "human right." The alleged "right" rests not upon what all people have in com mon-their humanity-but upon what they do not have in common. Privileges for Some Obligations for Others I submit that claimed "rights" generating positive privileges for some and positive obligations for others are but arbitrary claims given muscle and a measure of respecta bility by the State. Such "rights"

have nothing whatsoever to do with what your forefathers meant by "un alienable rights." Your forefathers were moved by the vision of a society without castes or classes or legally privileged elites of any kind. Those who today advocate and agitate for an exponentially increasing number of "positive rights" are necessarily demanding a society of caste and of class. The alleged "rights" of some to particular goods and services ob ligate others to provide those goods and services. The alleged right of a set of people described as the "poor" to, say, a minimum income obligates the wealthy to surrender what is 1985 REDIGGING OLD WELLS 369 theirs, namely some of their alleg·· edly "excess" wealth, and in prin·· ciple could well be appealed to as ob·· ligating the wealthy to create that "excess wealth." The result is disaster. Society col-· lapses into a hostile contest between special interest groups jockeying for government-conferred privileges ..

The politics of principle reverts to the politics of patronage. De facto, benefits typically go to well-orga·· nized and concentrated groups who know what they have been given:, and the costs are carried by dis·· persed and disorganized people who do not know what they are paying. A government performing the vital task of protecting the equal rights of all degenerates into a "hit man" en· forcing the special privileges ofsome. Yet the vision remains-the vision of men and women endowed by their Creator with a common humanity and thus enjoying equal human rights. With that vision goes a task: the task of redigging a well our fore fathers dug and named the well of human rights. Property The second well needing such re digging is explicitly named in the Virginia Bill of Rights. Among the "inherent rights" enjoyed by all are, "the representatives of the good peo ple of Virginia" declared, "the en joyment of life and liberty, with the means of acquiring and possessing property, and pursuing and obtain ing happiness and safety."

It has today become fashionable to downplay the importance of private property rights. I refer not to Marx ists and collectivist anarchists who attack the institution of private property as such, but to the mental ity which displays itself in such slo gans and bumper stickers as "Hu man Rights Before Property Rights" and "People Before P~operty." The first point I would make should not have to be made. Prop erty rights are rights ascribed to peo ple; they are not "rights" ascribed to inanimate objects. Doubtlessly, sooner or later groups of people will start agitating for the "rights" of porridge, plums, and protons-in deed I was enchanted to receive in my mail recently an appeal from some people mightily concerned about the "rights" of the Eucalyptus Gum Tree-but we can, I think, defer discussion of this particular mani festation of sheer lunacy. Property rights are human rights.

Property rights as such are ines capable. In any conceivable society, decisions have to be made as to how material goods are to be utilized-in one way rather than in another; for this purpose rather than for that purpose. Rules specifying who, le gitimately, may make such decisions are describing "property rights." Maybe a solitary dictator is the leg itimized decision maker. Or maybe 370 THE FREEMAN June members of an aristocracy or a par ticular political party. The "who" does not affect the nature of the rules. The rules are specifying prop erty rights, and such rules are inescapable. My second point is less obvious. It draws upon an argument skillfully elaborated by Murray Rothbard. 2 If "human rights" are to mean any thing, they must be earthed and grounded in property rights. States Rothbard: "Not only are there no hu man rights which are not also prop erty rights, but the former lose their absoluteness and clarity ... when property rights are not used as the standard."3 The point is that human beings are material creatures living in a ma terial, spatio-temporal world. They are not pure, unextended spirits. In the language of the author of Gene sis chapter three, man-adam-is "of the earth" -adamah. Abstract "rights" unrelated to matter, space and time are utterly vacuous when ascribed to a being who, if he or she is to act at all, must act in a mate rial, spatio-temporal world.

You visit, let us say, the country of Willania. You are informed that you enjoy, in Willania, a right to free speech-that is, you are not obli gated to refrain from speaking freely. You are further informed, however, that you are obligated to desist from seeking to own, rent, borrow, or beg any space you may fill with sound waves. You are told, in other words, that while enjoying a right to free speech, you do not enjoy a right to own, rent, borrow or beg a hall or any other physical place where you may engage in such speech. You realize your alleged right to free speech is a joke. It means nothing whatsoever. You learn, likewise, that in Wil lania there is a right to a free press. Individuals or sets of individuals do not, however, have the right to own, borrow, or beg paper, ink, printing devices of any kind, or any space where they may sell or give away tracts, pamphlets, newspapers, or whatever. Again you laugh, for the alleged "right" signifies nothing at all.

Material Rights In my language, the word "right" must become "flesh." The "rights" of material creatures must themselves relate to material realities. Ifthey do not, they signify nothing at all. Let me underscore that, just as my "right" to climb a mountain indi cates merely that I am not obligated to desist from attempting to climb the mountain, rather than some guarantee that I shall succeed in that endeavor, so my "right" to prop erty does not signify that I will suc ceed in acquiring property. My "right" to free speech does not ob ligate anyone to provide me with a place where I can speak or an audi ence to whom I can speak. The in1985 REDIGGING OLD WELLS 371 stitution of private property cer·, tainly makes it more likely that an. individual will succeed in acquiring, directly or indirectly, the material goods necessary to exercise a "right" than does a set of rules establishing, say, that members of a particular po·, litical party "own" and thus deter·· mine the use of scarce material resources.

It is unlikely that the politically determined ,;controllers of resources would grant me access to the ink, pa·· per, and printing equipment neces sary to publish materials attacking a politically based system of prop erty rights. If, however, the owners of printing presses in a society co ordinated by a system of privatEl property rights believe my tract or pamphlet will sell, or I can otherwise pay them for the use of their equip·· ment, they will, in all probability:, happily print a little tract or booklet attacking the institution of private property. Be that as it may, private property rights do not guarantee the realized ownership or temporary control of a material resource. They simply rule out an obligation to des·· ist from attempting to acquire or temporarily enjoy the use of a ma~ terial resource. Property as a Standard Consider Rothbard's second claim: not only are "human rights" vac uous when unrelated to "property rights," but the former "lose their absoluteness and clarity" when "property rights are not used as the standard."

To take an obvious case, consider my claimed "right" to smoke ciga rettes. If unrelated to property, this "right" is notoriously vague, and I am forever engaging in attempts to resolve clashes between my "right" to smoke, and non-smokers' "rights" to smoke-free air. If, however, I re mind myself that smoking is a phys ical activity, and that I must, if I am .to smoke, smoke in some place, al leged clashes of "rights" are re solved. I own an apartment, let us say. It is for me to determine how that space is used. I smoke in that apartment. My mother, owning her own home, determines how that space is used, and finding cigarette smoke unpleasant, she has decided that no one may smoke in her home. There is no problem-save, perhaps, my decision as to whether I shall visit my mother and, if I do, my prob lem of sitting in the living room and attempting to be civil while craving for a cigarette.

There are problems with commun ally owned property, but the prob lems are unrelated to the allegedly conflicting "rights" of smokers and non-smokers. The problems are sim ply related to the difficulty in spec ifying decision-making procedures, acceptable to all parties, applicable to communally owned and controlled spaces.

372 THE FREEMAN June So with a "right" to free speech. Tie that "right" to where the phys ical activity of speaking is exercised, and alleged conflicts of "rights" are resolved. To reiterate: property rights are human rights, hence to speak of hu man rights taking priority over property rights is folly. Property rights are inescapable, some rules determining who legitimately may decide how material resources are to be utilized being inevitable in any society. A society embracing human rights, as earlier defined, must, if these human rights are to mean any thing, ground them in property rights. In the absence of private property rights, individual human rights are utterly vacuous. The Well of Private Property Simply, having dug the well of hu man rights, our forefathers inexor ably were led to dig the well of pri vate property. One can also, I submit, defend the institution of private property on pragmatic grounds. Historically speaking, the lot of the vast majority of human beings has been destitu tion. Life for the masses has, at nearly all times and in nearly all places, been nasty, brutish, and short. The historical oddity crying out for explanation is plenty, not paucity; wealth, not poverty.

Now an improved material stan dard of living for all members of a society rests upon sustained eco nomic growth. That means, simply, that a society's output of goods and services must increase more rapidly than does its population. Sustained economic growth first became a reality in stxteenth-cen tury England and the Netherlands. Why? The population of these na tions did not decrease; it increased. These nations did not live by plun dering other nations. No remarkable technological innovation can be cited as the cause of this sustained eco nomic growth. Nor can one point to the practice of voluntary exchange as the key, for this practice as such is ubiquitous, being, it would seem, "natural" to human beings of all times and at all places. What was common to, and uniquely characteristic of, six teenth-century England and the Netherlands was a peculiar system of property rights. And that system constitutes the key to sustained eco nomic growth.

Imagine that you are a farmer. Your farming methods are precisely the same as those of your fellow farmers and your farming ancestors. One year, however, you make a change in your methods, perhaps by accident. That change results in an increased crop. Given collective ownership of the land and its fruits, that increased crop is shared among many. The im provement in the situation of each 1985 REDIGGING OLD WELLS 373 recipient is small, so small that it may not even be noticed. The Incentive to Change Suppose, however, that you own the land and its fruits. You discover that you have more food for yourself and your family, and an increased surplus you can directly or indi rectly exchange for other goods and services. Your situation has im proved dramatically. You thus both discover that your changed methods of farming lead to increased crops, and are encouraged to do what hu man beings are loathe to do-namely, permanently change the entrenched habits of years. Your neighbors, in cidentally, are also slightly better off, more food being available for them to buy. Let us call the addi tional food your neighbors can pur chase the "social rate of return" on your innovation, and your own im proved standard of living the "pri vate rate of return" on your inno vation. As your private rate of return is close to the social rate of return you have every chance ofdiscovering a desirable innovation in farming methods, and every incentive to adopt that change. The key to this discov ery-facilitating, incentive-providing process is the system of precisely de fined and efficiently enforced prop erty rights we call private property.

Admittedly, one might attempt to devise alternative systems of prop erty rights which display some of the features of private property rights. A recent volume of essays by main land Chinese economists addresses the elaboration and implementation of some such system. The authors at tempt to tie the income of workers to their productive output, and casti gate egalitarianism as an evil which "protects the backward, obstructs the advanced, frustrates the enthu siastic, lowers working efficiency, and is, in general, a hindrance to the realization of socialist moderniza tion."4 The catch is, however, that an army of bureaucrats and other state officials come between the acting in dividual and the "information-plus incentives" automatically provided by a system of private property rights. The discovery and rapid adoption of changes in behavior which im prove the material situation of hu man beings are facilitated by the system of private property rights we call "private property." The system is not "perfect," whatever that may mean in this context, but it is the least inadequate discovery-facilitat ing, incentive-providing system the human species has yet evolved. A concern for the material well-being of flesh and blood men, women, and children, inexorably leads to advo cacy of the institution of private property.

I have called this defense of pri vate property pragmatic. Yet it is not, as I have just hinted, without a 374 THE FREEMAN June moral dimension. To embrace a col lectivist system of property rights and thereby jeopardize sustained economic growth, inevitably misal locate scarce resources, and almost necessarily perpetuate destitution, hardly merits moral acclaim. In deed, intellectuals in general and church leaders in particular who be wail the continued existence of pov erty absolutely defined, and who state that they yearn for a world in which the hungry are fed, the naked clothed, and the destitute housed, yet who ceaselessly undermine the very system which, to date, has best done what they claim to value most, are, surely, moral imbeciles. Conservation of Resources One could develop the case further. We are told, for example, that pri vate ownership jeopardizes the con servation of scarce resources. Yet consider. Here is a farmer who owns his land. He is anxious that his land should provide a living for himself and his chosen successors tomorrow as well as today. Is he likely to adopt methods of farming which produce large profits today, but reduce his land to a desert-like waste? Or is the political controller, anxious to please the short-term wants of a fickle elec torate or a demanding Party, the person more likely to exchange to morrow's productivity for today's killing?

Notice, incidentally, that our private owner's motivation to use his resources with an eye to the future is tied to his ability to dispose ofwhat is his as he chooses. Knowing his children and his children's children will inherit his farm, he is even loathe to cut down the beautiful oak tree his own great-grandfather planted, and motivated to seek out some way to retain that tree without substantially reducing his produc tive output. Those who cry out for the conservation of scarce resources and the preservation of what is of sen timental value, should, I suggest, be in the front ranks of those attacking the iniquitous tax we call "death duties." But enough. Our forefathers per ceived the crucial importance of pri vate property. The well they dug cries out for redigging. Individualism I refer finally to an old well usu ally named Individualism. Other names have been given it, and what already has been said about our fore fathers' understanding of human rights and property rights indicates much of what I, at any rate, mean by the word. Frankly, I choose to use the term "Individualism" simply be cause the term, at least in church circles, is so frequently used derog atively. I read, for example, in a par ish church bulletin that "capitalism is utterly incompatible with Chris tian values. In fact it is incompatible 1985 REDIGGINGOLD WELLS 375 with any civilized system of values.

At its heart lies individualism, and individualism is the opposite of community." Let me indicate what individual ism is not. First, it is not a denial of the claim that human beings are so cial animals. Clearly, the life of the human mind and the joy of the hu man heart are largely the gifts offel lowship, friendship, and intimacy. In the absence of language, thought, so necessary for a fully human exis tence would be but rudimentary, and language is an essentially social phenomenon. Indeed, it is necessar ily a social phenomenon, as the phi 10sopher Ludwig Wittgenstein so powerfully argued. 5 Evidence exists for asserting that an infant deprived of "tender, loving care" is deprived of something utterly vital. The hun ger of the human spirit for commun ion with selves beyond it is a real and almost insatiable hunger. The Indi vidualist in no way denies that the achievement of an authentically hu man existence, in both the cognitive and affective domains, is a coopera tive enterprise, not a solitary endeavor.

Second, the Individualist does not deny his material dependence upon other people. He does not, unless he is an extremely foolish Individual ist, pretend that he is a "self-made man" or "self-sufficient." He both can, and is wise to, make his own the assertion of Michael Oakeshott that "the greater part of what we have is not a burden to be carried or an in cubus to be thrown off, but an in heritance to be enjoyed." Exercise in Interdependence Indeed, the free market so lauded by the Individualist is an exercise in interdependence. Before typing this lecture, I purchased a new ribbon for my typewriter. I ambled into my friendly local stationery store, and exchanged what I would earn for ap proximately half-an-hour's tutoring in Greek Philosophy for a new rib bon. The generosity of the exchange is stunning. Just consider that rib bon. Consider the skills involved in locating, mining, and refining the metals making up the spool, the skills involved in weaving the rib bon wound around the spool and syn thesizing the "ink" impregnating the ribbon, the skills in manufac turing the completed object, the skills in making the plastic box and printing the paper label informing intending buyers of the box's con tents, the skills in ensuring that my local stationer had on his shelves the appropriate ribbon for a very aged "Royal Typewriter." Literally hundreds of thousands of skills are coordinated through the sheer mir acle that is the free market. Inter dependence is the \rery name of the game.

Amusingly, if Individualism sig nifies a desire for complete self-suf376 THE FREEMAN June ficiency, Marx and Lenin are advo cates of Individualism! Both lament the so-called "alienation" deriving from the division of labor. Their Uto pia is an imprecisely described state of affairs where individuals able to do everything for themselves magi cally emerge. Marx sings of the day when I will be able "to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticize after dinner, just as I have a mind, with out ever becoming hunter, fisher man, shepherd, or critic."6 Lenin agrees, claiming that with the abo lition "of the division of labor among people" a new humanity "of people able to do everything" will be created. 7 As an unrepentant Individualist, I regard this postulated self-suffi ciency as neither a possible nor a particularly enchanting prospect. Frankly, I enjoy being part of the complex web of human interrelat edness that is the free market.

Collectivism in Contrast If we would understand Individu alism, it is useful to look at its con trast, namely, collectivism. An ap propriate, albeit not the only possible, starting point is the thought of Jean Jacques Rousseau. According to Rousseau, a society is coordinated and unified by what he calls the "general will." This will is distinct from the will of any individ ual or set of individuals. It is neither the "majority will" nor what one might call a "consensus will." Some how, over and above the individual wills of the members of a commu nity, there actually exists this addi tional will, a will the wisdom and be neficence of which exceeds the wisdom and beneficence of any in dividual or set of individuals. Since there is but one general will, there is but one supreme" good" and one overriding "goal" towards which a community must strive. In dividuals and voluntary associa tions positing other "goods" and other "goals" are thus anathema.

Indeed, the Jacobins and Girondins rightly appealed to Rousseau when, during the reign of terror, they out lawed all voluntary associations. Rulers, by a process Rousseau does not care to elaborate, are somehow sensitive to the dictates of the gen eral will, encoding these in partic ular laws. Since the ultimate source of these laws is the wise and benef icent general will, it is unthinkable that anyone might challenge these laws. The good citizen is the citizen who actually identifies his own will and the general will. There can be no tension between an individual's real "will" and the general will; if such a tension is allegedly experi enced' an individual is in error as to what he or she truly "wills." Rousseau displays his full colors when writing on schooling. The State, he insists, must control all 1985 REDIGGING OLD WELLS 377 schooling, .and thereby ensure "that children are imbued with ... the maxims of the general will and [learn] to respect them above all else." The entire objective of school ing is to create citizens who, as Rous seau puts it, "wish only what the community wishes."8 Rousseauon Education Rousseau's best-known volume on education is frequently misinter preted on this matter-indeed, Rous seau is sometimes cited as a de fender of a permissive, child centered approach to schooling. Af ter all, in Emile, the titular hero-a child named Emile-is supposedly freed from the constraints of an adult's will. Emile will learn all he needs to know by freely exploring nature and her necessities. In this way one who is "born free" will re main free, unfettered by the artifi cial constraints of society. His only constraints will be those imposed by nature.

Such a reading of Emile overlooks, however, the fact that the pupil has a tutor. The tutor's task it is to en sure that Emile's encounter with na ture is systematically fraudulent, for he must so arrange matters that na ture will "teach" his charge pre cisely what he, the tutor, wishes it to teach. "[TJhere is," writes Rousseau with a complacency bordering upon cynicism, "no subjection more per fect than that which retains the appearance of liberty." "No doubt," he adds, "[the pupil] must not do any thing 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."9 Why, one might ask, the pretense? Why the elaborate charade? Why is the tutor never openly to show his hand? The answer is simple: what must at all costs be avoided is a clash between the will ofthe tutor, and the will of little Emile. Compliance with the tutor's will must be perceived by Emile as the exercise of his own will.

Thus he is conditioned to perceive compliance with his community's general will as the exercise of his own, "true" will. Hegel and Marx Rousseau's influence was consid erable. When debates about compul sory, state-controlled schooling re surfaced in your country during the 1830s, the philosopher most cited by advocates ofsuch schooling was Jean Jacques Rousseau.l° More signifi cantly, the transition from Rous sea u's belief in this mysterious "general will" to Hegel's belief that the state was the earthly manifes tation of .the Absolute or God, was an easy transition. ll The indebted ness of Marx to Hegel is well known, but the advocates of Fascist and Nazi totalitarianism were no less indebted. 12 378 THE FREEMAN June What has been outlined is the es sence of collectivism. The individual will, the individual person and his or her own ideas, values, hopes, and dreams, mean nothing. What mat ters is the whole of which the indi vidual is a part and which tran scends any individual or any set of individuals. The collective-the com munity-the people-society-the State: that is reality. The individual is ultimately a fiction.

To this Individualism says "No." If ten people are on an island, there are ten individual wills and the rela tionships between them. There is no eleventh will, a "general will" distinct from and other than the in dividual wills, and the way those ten wills interact. There is not some "thing" called society distinct from ten individuals, their skills, and their relationships. Should one in dividual seize power and start ex acting tribute from his nine neigh bors, what exists is nine bullied victims, one bullying ruler, and a set of relationships marked by coercion. No mysterious new entity called "the State" has come into being. To de lude oneself into believing that terms such as "society," "commu nity," and "state" signify real enti ties distinct from human beings, their skills, and their relationships is to fall for what the philosopher A. N. Whitehead calls, "the fallacy of misplaced concreteness."13 It is the individual who thinks.

Certainly, individual minds can in teract and stimulate one another, but thought itself demands a particular thinker. It is the individual who in itiates purposive action from within. Again, individuals can decide to join forces and, as we say, "act collec tively," but that "collectively acting unit" is not other than or distinct from individual human beings, en joying particular relationships, in dividually initiating purposive be havior. It is the individual who perceives, each from his or her own unique spatio-temporal location. It is the individual who dreams, hopes, cares, values, chooses, and loves. Lose sight of the individual in some collective or aggregate or class, and one is in danger of losing contact with reality. So affirms Individ ualism. Social scientists are particularly prone to start reifying-that is, turn ing into existing things-collective terms. I know no better works elab orating this claim than Ludwig von Mises' Theory and Hist ory14 and Friedrich A. Hayek's Individualism and Economic Order.15 Thought through, Individualism inexorably leads to advocacy of the free market in the free society. It leads us to affirm, as did our fore fathers, that no human being is a chattel to be enslaved, debased, or dictated to by another. It leads us to challenge all dominations and all tyrannies, all bigotries and all priv1985 REDIGGING OLD WELLS 379 ileged classes, all institutions and all social practices, that deny the sa credness of the human spirit.

And it leads us to call deep thanks for those who, many centuries ago, dug a well in the desert of collectiv ism and privilege, and dug it deep, and called it a name signifying what the word "Individualism" denotes. That well the Philistines have sought to fill and to close. It is for us to start redigging it. Three wells. Human rights. Pri vate property. Individualism. The damage done by the Philistines is not difficult to see. Nor, however, is our task. How best to go about it each one of us must determine for himself or for herself. In the meantime, we can find strength in the knowledge that there are those whose devotion to liberty we can rely on. I refer, of course to ourselves. @ID -FOOTNOTESIT. H. Green, The Works of Thomas Hill Green, ed. R. L. Nettleship (London: Oxford University Press, 1889). Martin Ten Hoor 2M. Rothbard, The Ethics ofLiberty (New Jer sey: Humanities Press, 1982), pp. 113-119.

3Ibid., p. 113. 4Xu Dixin et al., China's Search for Economic Growth (Beijing: New World Press, 1982), p. 122. 5L. Wittgenstein, Philosophical Investiga tions, trans. G. E. M. Anscombe (Oxford: Basil Blackwell, 1958). 6K. Marx, The German Ideologyin Karl Marx: Selected Writings, ed. D. McLellan (Oxford: Ox ford University Press, 1977), p. 169. 7V. 1. Lenin, Left-Wing Communism: An In fantile Disorder (New York: International Pub lishers, 1940), p. 34. 8Cited, The Minor Writings of Jean Jacques Rousseau, ed. W. Boyd (New York: Hutchins, 1962), p. 13I. 9J. J. Rousseau, Emile (Paris: Garnier Edi tion, 1935), p. 114. IOCr. J. K. Williams, "The End of Schooling," The Freeman (September 1982), pp. 565-73. llG. W. F. Hegel, Hegel's Philosophy ofRights, trans. T. M. Knox (Oxford: Oxford University Press, 1942). 12Cr. Ludwig von Mises, Omnipotent Govern ment (New Rochelle: Arlington, 1969).

13A. N. Whitehead, Process and Reality (New York: Macmillan, 1929), p. 11; idem., Science and the Modern World (New York: Macmillan, 1929), p. 75. 14Mises, Theory and History (Westport: Ar lington, 1969). 15F. A. Hayek, Individualism and Economic Order (Chicago: University of Chicago Press, 1948). IDEAS ON LIBERTY RESOURCES OF THE SPffilT are like savings: They must be accumulated before they are needed. When they are needed, there is no substitute for them. Sooner or later, the individual faces the world alone, and that moment may overwhelm him if he has no resources within himself .... We can escape our physical environment and our neighbors, but we can not escape ourselves.

A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN TheAmerican Idea CONGRESSMANJACK KEMP'S reputa tion rests mainly on his supply -side tax legislation, both the Kemp-Roth law that has already been passed and the "fair and simple," or FAST, flat tax which he and Senator Kasten have just introduced. But the more technical aspects of fiscal and mon etary reform take up something less than half the space in the book that Kemp has made out of his collected speeches. Called The American Idea: Ending Limits to Growth (The Amer ican Studies Center, Washington, D.C., 355 pp.), with a foreword by President Ronald Reagan and a pref ace by Irving Kristol, the book ap plies the doctrines of the freedom philosophy to practically every as pect of government, from foreign and military policy to the protection of human rights, and from the compo380 sition of political parties to the chances for an international confer ence to restore the gold standard.

Kemp speaks of a coming "Amer ican renaissance," and he is himself a modern renaissance man. His col lege degree was in physical educa tion, and he began his working life as a third string quarterback for the Pittsburgh Steelers. Later, as a first string quarterback for the Buffalo Bills, he doubled as a labor leader, helping to organize the football play ers union. When still a football player he chanced upon two books, Friedrich A. Hayek's The Constitu tion of Liberty and Ludwig von Mises' Planning for Freedom. These saved him from the journey to the Left that a belief in unionism en tailed for many pro-labor partisans in the Walter Reuther period.

THE AMERICAN IDEA 381 From the Playing Field to the Political Route A Californian who might normally have preferred to return to the Sun Belt after completing a football ca reer in snow country, Kemp was such a favorite with Buffalo fans that he was prevailed upon to remain in the Northeast and run for Congress. He knew that the decline in the steel in dustry might become his Number One political concern. But he also saw that protectionism would be no permanent cure for Rust Belt or "smokestack industry" troubles. In one of the foreign policy speeches in The American Idea Kemp says: "Shortly after I became a congressman 12 years ago, I be came increasingly aware that the problems which afflicted the de pressed Buffalo-area district could not be solved by local projects. Buf falo was suffering from problems· of national scope, which required so lutions on a national level." This perception caused Kemp to behave more like a Senator than a mere Representative. His Buffalo constituency has forgiven him for his refusal to concentrate on "local proj ects." As an ex-quarterback Kemp knew the importance of having a comprehensive game plan. He also knew that politics, like football, is a game of margins. Paradoxes had to be accepted, and some philosophical inconsistencies had to be excused at least for the time being.

So Kemp has always upheld the concept of the Safety Net. He does not talk about getting rid of the Wel fare State. His political sense tells him that the best way of reducing welfare payments is to make them unnecessary. Hence his emphasis on the supply-side ideas of Jude Wan niski and Art Laffer. The supply-side proposition, as elaborated by Kemp in several of his speeches, is this: let potential savings and investment money flow back into the productive mainstream by reducing marginal tax rates. With new industries start ing up and prosperity spreading, the amount of taxation needed to sus tain the Safety Net would shrink. And, with more people taking care of themselves in private industry, the national budget deficit would disappear. The anti-supply-side people, in cludingmany Republicans, have scoffed at so-called Laffer Curve thinking. So one of Kemp's major tasks has been to wean Republicans away from their old austerity con cepts. "Austerity," says Kemp, "is not the solution. It is the problem."

Money and the Market Some of Kemp's speeches that crit icize the Volcker monetarists are highly technical. But, broadly speaking, Kemp doesn't think it pos sible for the monetarists to control the supply of money. "Money," he says, "is not chosen by economists or 382 THE FREEMAN June government officials. It is chosen by the market, by the common agree ment of millions of individuals." Both the Keynesians and the mo netarists, in Kemp's opinion, "have underestimated the degree to which people can and do find ingenious substitutes for whatever definition of money the central bankers are targeting. Witness the explosion of money market funds, overnight re pos, and overnight Eurodollars, none of which are included in MI." And there is always the question of the velocity of money, which cannot be predicted on the basis ofpast history. Kemp, in several speeches, has called for a return to the gold stan dard. This would substitute auto matic controls that would enable en terprisers to do some longterm planning. To quote Art Laffer, gold convertibility would be "a sort of in surance policy for the quality of money." But Kemp, thinking in global terms, considers that the re turn to gold would have to be a de cision made at some future Bretton Woods conference of the world's ma jor economies.

While waiting for his flat tax pro posals to revive enterprise every where, Kemp is pushing his concept of enterprise zones. The decaying in ner cities, he says, would revive if businesses were to get tax breaks for starting new factories within their confines. The idea has already had a limited success in England. It is no John Chamberlain's book re views have been a regular fea ture of The Freeman since 1950. We are doubly grateful to John and to Henry Regnery for now making available John's auto biography, A Life with the Printed Word. Copies of this re markable account of a man and his times-our times-are available at $6.00 from The Foundation for Economic Edu cation, Irvington-on-Hudson, New York 10533. substitute for making the whole North American continent-or, in deed, the world-a huge enterprise zone, but it would bring a certain im provement at the margin. Kemp can't figure out why the House of Representatives majority dominated by Speaker Tip O'Neill can't see it.

Kemp goes to Japan for corrobora tion of his ideas. Japan, he says, has the lowest tax burden of any indus trialized country, "29 percent of the economy in 1981, compared with 34 percent in the U.S., 46 percent in France, and 45 percent in West Ger many." Most capital gains in Japan are tax free, and so is the first $12,000 of interest income per per son. The personal savings rate inJa pan is almost 20 percent. "Everything depends on incen tives," says Kemp. That is the lesson of his book. @J 1985 OTHER BOOKS 383 BEYOND LIBERALAND CONSERVATIVE by William S. Maddox and Stuart A. Lilie (Cato Institute, 224 Second St., S.E., Washington, D.C. 20003), 1984 197 pages _ $18.00 cloth Reviewed by Charles H. Hamilton YEARS AGO, Albert Jay Nock decried "the managed glossary of politics." It is still with us as terms like "con servative" and "liberal" are used al most exclusively to describe all manner of political attitude and philosophy. Adding a multitude of prefixes-thus inventing new liber als, old conservatives, neo-conser vatives, and so forth-has merely added to the confusion. The usual two-term continuum of the political spectrum does not work. They have become what Jeremy Bentham called "impostor-terms."

Now two political scientists have presented a more complete perspec tive. Maddox and Lilie use four terms based on a person's attitude on two issues: government interven tion in economic affairs and on the expansion of personal freedom. (The latter dimension is the most unsat isfactory, since the authors don't make clear whether government in volvement expands personal free dom or eliminates it.) In such a ma trix, the authors posit, conservatives opposeeconomic interventionism but support restrictions on personal freedom; liberals support economic interventionism but oppose restric tions on personal freedom; libertar ians oppose both economic interven tionism and restrictions on personal freedom; and finally, populists sup port both governmental interven tion in the economy and restrictions on personal freedom. Using this framework, the authors found that the public was made up of 24% liberals; 26% populists; 18% libertarians; and 17% conservatives.

The authors are able to explain the apparent contradictions that plague election results and opinion polls: John Anderson's impressive support from "liberals" and "conservatives" in 1980, and Gary Hart's perplexing degree of success in 1984. Indeed, the implications of Reagan's victory are best understood when one views it as an uneasy alliance of libertarians and populists with a minority of conservatives. The authors analyze a massive amount ofpublic opinion survey data using their four categories. The re sults are a fascinating reinterpre tation of recent political history and of the opinions that Americans hold. The authors show that over the past couple of decades there has been an increasing appreciation for the im portance of economic and personal freedom issues. And their comments on the so-called baby-boom genera tion suggest that these concerns 384 THE FREEMAN have the potential for becoming much more important in the years ahead. This is heartening news.

More interesting, and much more important, are some of the implica tions one can derive from the four categories for discussions of political philosophy and values. The "impos tor-terms" of the past perpetuate a confusion about the nature and in terrelatedness of freedom. Maddox and Lilie go a long way in the direc tion of clarifying the philosophical and value content of political labels. Because they are limited by the con straints of the survey data they use, they cannot go far enough. Hope fully, surveys in the future will be more philosophically consistent. If the authors are right that eco nomic issues may become subordi nated to issues of personal freedom in the coming years, then it is esFreeman binders pecially important that the case for the intimate interdependence of eco nomic and personal freedom be clearly articulated. We cannot have one without the other. There is great need to explain further the key dis tinction between government inter vention in economi~ and personal freedom issues, and a free market so cial system dedicated to genuine per sonal freedom and initiative.

Maddox and Lilie have developed a first-rate framework for using po litical labels and have analyzed as best they could how they apply to American political attitudes. Given the massive changes in attitudes over the last decade, and the pros pect that these will continue, the book is an invaluable aid in plan ning how to present the freedom phi losophy to a new and eager generation. • handsomeblue leatherlex • each binderholds twelve issues • a handyway to organize currentand past issues of The Freeman Order from: THE FOUNDATION FOR ECONOMIC EDUCATION, INC. IRVINGTON-ON-HUDSON, NEW YORK 10533 $5.00 each the Freeman VOL. 35, NO. 7 • JULY 1985 Legalized PlunderA Page on Freedom, No. 21 Leonard E. Read 387 Beware those who advocate the Welfare State. Pandora and Hope John K. Williams 388 Reports of the death of the universe have been exaggerated. Compulsory Bargaining Reviewed Bargaining, yes; compulsion, no.

C. W. Anderson 403 The Economics of Medical Care George Vossif 406 A doctor calls for competition and freedom in medicine. For Work of Comparable Worth Who says different work is comparable? Kenneth McDonald 415 Comparable Worth: Social Justice or Social Transfer? Bill Anderson 417 Some seen and unseen consequences of a "good idea." Agricultural Technology, Economic Incentives and World Food Problems E. C. Pasour, Jr. 427 Let governments abstain from policies that restrict competition and trade. The Challenge of Liberalism David M. Brown 434 Statist privilege under fire from those who love liberty. Public Lands and Private Incentives Clint Bolick 438 Suggestions for market determination of land use. Book Review: 445 "Government and Legal Plunder: Bastiat Brought Up to Date" by Dean Russell Anyone wishing to communicate with authors may send first-class mail in care of THE FREEMAN for forwarding.

IFreeman AMONTHLYJOURNAL OF IDEAS ON LIBERTY FOUNDATION FOR ECONOMIC EDUCATION Irvington-an-Hudson, N.Y. 10533 Tel: (914) 591-7230 President: Robert D. love Managing Editor: Paul L. Poirot Production Editors: Beth A. Hoffman Amy S. Vanlaar Contributing Editors: Robert G. Anderson Howard Baetjer Jr. Bettina Bien Greaves Charles H. Hamilton Edmund A. Opitz (Book Reviews) Brian Summers THE FREEMAN is published monthly by the Foundation for Economic Education, Inc., a nonpolitical, nonprofit, educational champion of private property, the free market, the profit and loss system, 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. Donations are invited in any amount. THE FREEMAN 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 $10.00 a year.

Copyright, 1985. The Foundation for Economic Education, Inc. Printed in U.S.A. Additional copies, postpaid: single copy $1.00; 10 or more, 50 cents each. THE FREEMAN is available on microfilm from University Microfilms International, 300 North Zeeb Road, Ann Arbor, Mich. 48106. Reprints are available of "A Page on Freedom," small quantities, no charge; 100 or more, 5 cents each. Permission is granted to reprint any article in this issue, with appropriate credit, except "The Economics of Medical Care" and "Public Lands and Private Incentives."

A Page on Freedom Number 21 LegalizedPlunder WHAT are we to think of those who have a libertarian bent, of those who pay lip service to the free society, and then go on to assert, "We're paying for it, so we might as well get our share." What sin cerity or depth can be ascribed to their lip service? Do not actions speak louder than words? By their actions, are they not, most ef fectively, giving support to the socialistic design? Endorsing the Wel fare State? Frederic Bastiat writing in France in 1850, referred quite accu rately to the above behavior as legal plunder, and explained in sim ple terms how to identify it: "See if the law takes from some persons what belongs to them, and gives it to other persons to whom it does not belong. See ifthe law benefits one citizen at the expense ofanother by doing what the citizen himself cannot do without committing a crime. " No individual with libertarian pretensions can, in good conscience, advocate legal plunder. What, then, should be his position? He has only one way to turn. Bastiat, the libertarian teacher, was again helpful: "Then abolish this law without delay, for it is not only an evil itself, but also it is a fertile source for further evils because it invites reprisals. [fsuch a law-which may be an isolated case-is not abolished immediately, it will spread, multiply, and develop into a system." ~ -Leonard E. Read THE FOUNDATION FOR ECONOMIC EDUCATION, INC.

IRVINGTON-ON-HUDSON, NEW YORK 10533 387 John K. Williams Pandora and Hope MOST OF US as children listened to and delighted in the Greek myth of Pandora's box. The story really be gins with the god Prometheus, who defied Zeus by giving humanity the gift of fire, a gift which enabled hu man beings to become creators, re fining metals and transforming the face of earth. To punish Prometheus and to restore human beings to their appropriate place in the scheme of things, Zeus instructed his son He phaestus, god of fire and thus a par ticularly skilled craftsman, to make a woman whose name, Pandora, sig nified her nature. The name means "all gifts," and to ensure that she did possess all possible beauties and charms, Hephaestus called upon all the gods to assist him in her creation. The Reverend Doctor John K. Williams has been a teacher and currently does freelance writing and lecturing from his base In North Melbourne, Victoria, Australia.

388 Her creation completed, Pandora took her place upon earth with other human beings. She possessed, how ever, a box which the gods had given her. In no circumstances was she to open that box. Needless to say, Pan dora's curiosity got the better of her, and she opened it. Out from the box leapt all the evils that, ever since, have tormented and frustrated hu manity. Pandora slammed down the lid, but it was too late, the box's in habitants having been unleashed and being beyond recall. All, that is, save one. A small, plaintive voice pleaded with Pandora to open the box once more and to free this solitary, remaining occupant. Pandora re lented. She opened the box and out stepped the final occupant. And the name of this occupant was Hope. As a child, I thoroughly enjoyed the story. It was exciting, magical, and from the viewpoint of a little boy PANDORA AND HOPE 389 with three sisters-desirably sexist.

I particularly enjoyed the happy ending: evils abounded, but Hope also walked the world. Strengthened by Hope, human beings could do bat tle with ignorance and folly and cre ate a better world. And that goes to show that what we get from a story depends in no small part upon what we bring to a story. I brought to the story a pre supposition deriving from the reli gion of Israel and of Jesus. The pre supposition, shared by many people who claim to have severed all their links to the Judaeo-Christian heri tage' is that hope is a virtue to be admired and an attitude to be cul tivated. Given that presupposition, the intended meaning of the ancient myth is almost certainly missed. Pandor~ is, if you like, the original dizzy blond. She may possess all charms and beauties, but she's not very bright. She opens the box. Dis aster results. Disease, earthquake, and suffering of all forms become part of human existence. But does Pandora learn? Not at all! All it takes to make her open the box again is a wistful little voice asking her to do so. The silly girl thus releases the last occupant ofthe box, the final evil named Hope.

The ancient Greeks were essen tially a life-affirming, life-loving people. One cannot miss this in the comedies of Aristophanes: bawdy, down-to-earth plays displaying sheer delight in the world. One cannot miss the enthusiasm and joy in crea tivity that expressed itself in Greek architecture and sculpture. Yet ac companying this love of life and en joyment of the fair earth, went a sad and somber melody. The Golden Age lies in the past. Human history is the story of a slow but inexorable decline from the heights. The end of the story, fixed and unalterable, is the destruction of civilization and the victory of barbarism. This terrible future must be accepted with resig nation. The danger that human beings might escape their fate by ex ercising the creativity Prometheus gave them, has been averted by Zeus through Pandora's releasing all manner of evil on earth. The Final Evil And the last evil, the final evil, is hope. This is the evil people cling to, the most difficult evil to conquer.

Hope is the desperate attempt to deny the inevitable. It is a delusion veiling the grim truth, an opiate dulling a mind that cannot face the worst, a fantasy hiding reality. Peo ple affiicted by hope exercise their creativity not for the right reason, which is to express in the present a waning capacity that in the future will cease to be, but as a futile at tempt to improve the world and fash ion a better future. I underscore that it would be un just to depict the ancient Greeks as 390 THE FREEMAN July morose pessimists. They enjoyed the present, and created works of liter ature and philosophy and art that the world has ever since admired. Yet a sad song accompanied their deeds. Perhaps that song finds its most obvious expression in the final words of Sophocles' immortal trag edy, Oedipus Rex: Sons and daughters of Thebes, behold: this was Oedipus, Greatest of men; he held the key to the deepest mysteries; Was envied by all his fellowmen for his great prosperity; Behold, what a full tide of misfortune swept over his head.

Then learn that mortal man must always look to his ending, And none can be called happy until that day when he carries His happiness down to the grave in peace. 1 That is one view of hope: The final evil which only the wisest of human beings avoid. Another Point of View There is, however, another view of hope, a view affirming that it is en tirely appropriate that men and women should look ahead not with resignation but with joyous antici pation. The future is not inexorably fixed-indeed, there is no such thing as the future. Rather, there is, in the words of Eric Trost, a range of pos sible futures. "Which of the possi bilities will be realized depends not a little on the choices we make which, in turn, depend on our val ues-and also on our taking an ac tive rather than a passive role. The paradox is that, becallse the future is not determined, one has to make choices."2 This viewpoint, affirming that hu manity's earthly existence is not tied to a fixed and fated future, is essen tially derived from the Judaeo Christian religious heritage. It finds expression in these words from the book of Deuteronomy: "I have set be fore you life and death, blessing and curse; therefore, choose life, that you and your children may live."3 Which of many possible earthly futures shall be depends upon the decisions men and women make. Pessimism is precluded: people can "choose life."

Optimism, however, is also pre cluded: people can choose death. Later writers elaborated the theme. Should human beings "choose life" a great and glorious possible earthly future could become a reality. Seers dreamed of a day when "every man shall sit ... under his own fig tree, and none shall make them afraid,"4 a day when "the wil derness and the solitary place shall be made glad, and the desert shall rejoice; it shall blossom abundantly and rejoice even with joy and sing ing."5 Human existence is pregnant with possibilities either for good or for evil. People can choose the way of life and of blessing. An earthly fu1985 PANDORA AND HOPE 391 ture that is better than the present can be realized. Hope is therefore justified. I have long enjoyed a love affair with the glory that was Greece. Yet to the question, "Is hope an evil to be fought or a good to be embraced?" I side with Jerusalem, not with Ath ens. To be sure, there are illusory hopes that will and must die, but hope itself is to be embraced and af firmed. A better world-a world more prosperous and more deeply com mitted to liberty than is the present world-is possible. Not inevitable, but possible. And whether that pos sibility becomes reality depends, in part, upon the "choices we make ...

and our taking an active rather than a passive role."6 A Hopeful Beginning The history of your nation began with people who hoped. Your fore fathers set out, like Abraham of old, not really knowing "whither [they] went,"7 but the possibility of a better world was there, and in the hope of it brave souls ventured. So they went on, sometimes faltering, sometimes obstructed, often disappointed, often frustrated, but they went on. Their hope was in a possibility, and in their own deeds and their power to do them. Thanks to them, and the hope that burned in them, a new nation was born, a nation "conceived in lib erty." In very truth, the desert began to "blossom abundantly," and hitherto unimagined prosperity graced the earth. A story is told of a mischievous boy who sought to make a fool out of an old man highly regarded for his wis dom. The boy devised a plan. He would capture a small bird, cup it in his hands, and ask the old man whether the bird was alive or dead.

If the old man said that the bird was dead, the boy would open his hands and let the bird flutter to its free dom. Ifthe old man said that the bird was alive, the boy would squeeze all life from the tiny creature and open his hands to reveal the poor dead thing he held. So he caught a small bird and held it in his cupped hands and asked his question of the old man. "Old man, they say'you are wise. So tell me: in my hands is a bird-is it alive or is it dead?" The old man looked at the boy in silence for what seemed an eternity. Finally, he spoke. "My child," he said, "the life of that bird is in your hands." Our Civilization Can Be Conserved and Enriched So, I believe, with the many pos sible futures for this planet. They are not totally in our hands and subject to our choices, no, but they are very largely so. Which one of them be comes reality depends in no small part upon us. The liberties we cher ish can be preserved and extended.

The prosperity we enjoy can be con solidated and increased. The civili392 THE FREEMAN July zation we know can be conserved and enriched, and passed on to our chil dren and our children's children. Or so I believe. That belief is modest. It is not op timism, for I believe not in the inev itability of progress but merely in the possibility of progress. Yet nei ther is it pessimism, asserting that hope for a better world is folly. Lib erty, prosperity, and civilization can be victoriously defended against their enemies and, indeed, strength ened and increased. Can be. That is all, but it is enough. Hope is justified. Incidentally, do you know the def inition of optimism and pessimism? James Branch Cabell informs us that "the optimist proclaims that we live in the best of all possible worlds; the pessimist fears this is true." I suppose that if I had to choose be tween the philosophy of the optimist and that of the pessimist, I'd choose optimism-after all, as has been pointed out, many an optimist has become rich simply by buying out a pessimist! Fortunately, however, I do not have to choose. A third option is available: the modest option of hope.

It is that option that I advocate. The Attack on Hope The option of hope is today under fire. The sad melody that haunted ancient Greece has become, in our world, a cacophony of sound. Shrill voices noisily proclaim the death of hope. Our planet is on the verge of running out of resources and room. The vision of a world of plenty must be supplanted by a blueprint for a world of enforced austerity. Human liberty is a luxury humanity can ill afford. The free market in a free so ciety has had its day. The only choice people have is a choice between this gloomy future or no future whatso ever. Or so the contemporary proph ets of pessimism assert. Adding insult to injury, those who would rob us of hope for a better fu ture are joined by men and women who would take away any pride we may have in our past. There is, they assert, nothing in our Western her itage meriting admiration or worthy of praise. Developed nations enjoy the prosperity that is theirs simply because they have ruthlessly ex ploited and still exploit developing nations. Hopelessness and guilt are thus the appropriate attitudes for the children of Western nations to adopt.

A Gloomy Future There can be no doubt that many young people are profoundly affected by this philosophy of hopelessness and guilt. A recent study of Austra lian school-children's attitude to the future revealed that the majority of these children envisage their future in terms of "devastation and doom," or of a return to "primi tive life styles." The author of the report, Noel Wilson, turns at the end of his study from figures and charts, and 1985 PANDORA AND HOPE 393 becomes almost a poet. "My little girl," he writes, "is six years old. She builds a castle of wooden blocks, and smiles. She knocks them down. And laughs."8 In a foreword to Herbert London's Why Are They Lying to Our Children? 9 Herman Kahn asks, in all seriousness, whether the dra matic rise in the teenage suicide rate in developed nations during recent years, might be in no small part a function of the hopelessness and guil t the purveyors of pessimism advocate.

It is, I submit, difficult to overstate the seriousness of the situation. If it be true, in the words of Eric Trost previously cited, that which of the many possible futures for humanity is realized depends upon present choices made and the decision to take "an active rather than a passive role," present attitudes and beliefs play a crucial role in the creation of future history. It may well be that a vision of inevitable doom and gloom will itself lead to the very apocalypse it depicts. Ifliberty is destined to die, why cherish and seek to further it? If prosperity can be no more, why at tempt to act in ways which create prosperity? Why resist what is fated to be? Two crucial tasks thus face the lover of liberty. Two questions must be asked and answered. First, do those who assert that the only pos sible future for this planet is one of enforced austerity make out their case? Is their evidence adequate and their argumentation valid? Second, if their evidence and their argu ments do not justify the conclusions they reach, then how is their influ ence to be curbed and their vision to be challenged? I can think of few more important questions those of us who hold to hope and are committed to liberty can consider.

The Limits to Growth In 1968 a best-selling book penned by Paul R. Ehrlich numbed a sadly uncritical world. In 1971 this vol ume, The Population Bomb,IO was joined by Jay W. Forrester's influ ential World Dynamics. 11 Then came a plethora of books elaborating the theme played by Ehrlich and Forres ter, the most significant of these being the Club of Rome's report, The Limits to Growth 12 and the three vol ume Global 2000 Report to the Pres ident. 13 The message proclaimed was clear. Economic growth, once hailed as humanity's benefactor, has be come a monster threatening human survival. Resources are on the brink of utter depletion. An already over crowded planet is moving, like the fated hero of a Greek tragedy, to ward utter disaster, too many people desperately attempting to occupy and wrest a living from too little space. The authors of books and reports enshrining this point of view enjoy at least three advantages over their critics. First, human beings not in394 THE FREEMAN July frequently display a perverse liking for bad news. A story is told of an elderly lady who attended one Sun day an unfamiliar church. The preacher spoke of the goodness and the mercy of God, and of the hope God proffers the human spirit. After the service, the lady tearfully be rated the preacher. "You," she said, "have taken away my total deprav ity and taken away my eternal dam nation, so what have I left to bring me joy?" Precisely what this pro pensity to welcome bad news indi cates I leave for psychologists to de termine. Maybe more people are characterized by a masochistic streak that says "No" to joy and to delight than most of us realize.

Second, the purveyors of pessi mism enjoy the advantage that, un like their critics, they cannot be ac cused of wishful thinking. Inasmuch as no rational person would want to believe what the advocates of limits to growth do believe, these people must have utterly compelling grounds for their convictions. Their critics, clearly, are faint-hearted souls unable to face grim reality. Now certainly wishful thinking is a danger against which rational peo ple must be on their guard. Yet the suggestion that the bearers of bad tidings must have carefully checked the grounds upon which they base their beliefs, is false. Human history is littered with the graves of men and women who confidently, albeit sometimes sadly, predicted impending disaster, but who proved to be madly in error, the bases of their gloomy be liefs being without any substance whatsoever. Third, the authors of the books being considered in some cases com muned with a computer when sort ing and analyzing their data. That simple fact mightily impresses not a few gullible readers. It would seem that, for many people today, the only ~ore convincing phrase than "sur veys have shown" or "studies have indicated" is "a computer has said."

Such people would do well to med itate upon an acronym widely cited by computer-buffs: GIGO. The acro nym signifies simply, "Garbage in garbage out." Any person dubious as to whether GIGO explains the com puter-based Club of Rome report, would do well to read an admirable essay by Christopher Freeman, "Malthus With a Computer."14 Should this essay fail completely to exorcise the demon of misplaced ven eration, I recommend. the following words of the socialist economist Gunnar Myrdal, who can hardly be accused of wishful thinking gener ated by enthusiasm for economic lib erty. "[The] use of mathematical equations and a huge computer which· registers the alternatives of abstractly conceived policies by 'a world simulation model,' may im press the innocent general public but has little, if any, scientific validity.

1985 PANDORA AND HOPE 395 That this 'sort of model is actually a new tool for mankind' is unfortu nately not true. It represents quasi learnedness of a type that we have, for a long time, had too much of, not least in economics .... "15 In this context it is appropriate to note that the Club of Rome, after some 4 million copies of The Limits to Growth had been sold, announced that the report was deliberately in accurate, and that the Club had known all the time what every com petent reviewer of the book had said-namely, that the program ming of and data fed into their com puter grossly distorted reality. Time magazine carried the following re port of what, surely, is a quite stag gering admission: "The Club's foun der ... says that Limits was intended to jolt people from the comfortable idea that present growth trends could continue indefinitely. That done, he says, the Club could then seek ways to close the widening gap between rich and poor nations-ine quities which, ifthey continue, could all too easily lead to famine, pollu tion, and war. The Club's startling shift, Peccei says, is thus not so much a turnabout as part of an evolving strategy."16 Julian L. Simon is surely justified in thus paraphrasing this extraor dinary statement: "In other words, the Club of Rome sponsored and dis seminated untruths in an attempt to scare us. Having scared many people with these lies, the club can now tell the real truth."17 Lies, albeit pro cessed by a computer, remain lies.

Science and Pseudo-Science The sad phenomenon of men and women enjoying scientific expertise, yet prostituting that expertise for political or social causes, is not with out precedent. The sad story of men and women, trained in the sciences, who by order of Stalin manufactured "evidence" for the utterly erroneous beliefs of the pseudo-geneticist Tro fim D. Lysenko 18 is a case in point. Indeed the Soviet dissident Mark Po povsky documents the ongoing ten sion confronting scientists in the USSR between their disciplines' de mand for truthfulness and their gov ernment's desire for particular con clusions. 19 One hesitates to call men and women enjoying scientific ex pertise "scientists" when they fal sify their data to fit preconceived theories rather than seek out evi dence to determine whether or not certain theories hold. They are more appropriately called "ex-scientists" or "pseudo-scientists."

Now the primary advantage critics of the limits-to-growth movement enjoy over advocates of this position is that the overwhelming consensus of informed, scientific opinion is on the side of the critics. Men and women enjoying scientific expertise who advocate limits to growth are an eccentric, in the literal meaning of 396 THE FREEMAN July that word, minority. Their numbers are few and their conclusions at var iance with those reached by the vast majority of trained scientists. Unfortunately, serious scientists tend to avoid the public arena, their writings almost invariably appear ing in professional journals read al most exclusively by their fellow-sci entists. As a consequence, the popular writings and public state ments of eccentric scientists and "pseudo-scientists" tend to go un challenged. Lay people assume, trustingly but erroneously, that these conclusions either represent the consensus of informed, scientific opinion or constitute a reputable, al beit controversial, viewpoint keenly debated within informed, scientific circles. Certainly, young people in our schools so believe. It would be surprising if they did not. For their textbooks typically present as incon trovertible fact the highly dubious conclusions of the limits-to-growth movement.

The Resourceful Earth At long last, however, serious sci entists have acted to correct a scan dalous misrepresentation of the truth. Twenty-eight men and women of standing within the scientific community took it upon themselves to prepare essays representative of the present scientific consensus on the issues discussed by advocates of the limits~to-growth position. Edited by Julian L. Simon and Herman Kahn, the collection of essays, enti tled The Resourceful Earth: A Re sponse to "Global 2000",20 is "must" reading for all lovers of truth and lovers of liberty. ' Consider simply the following statements, taken from the execu tive summary of the essays con tained in the volume: 21 • "Life expectancy has been rising rapidly throughout the world, a sign of demographic, scientific, and eco nomic success." An examination of the essays documenting this asser tion reveals that no misleading global aggregates have been used.

Life expectancy is increasing in de veloping, as well as in developed, nations. • "The birth rate in less developed countries has been falling substan tially during the past two decades, from 2.2 percent yearly in 1964-5 to 1.75 percent in 1982-3." • "Many people are still hungry, but the food supply has been improving since at least World War II, as mea sured by grain prices, production per consumer, and the famine death rate." • "Land availability will not in creasingly constrain world agricul ture in coming decades." • "Mineral resources are becoming less scarce rather than more scarce, affront to common sense though that may be."

1985 PANDORA AND HOPE 397 These are but five of seventeen conclusions listed as the executive summary of The Resourceful Earth. Each statement is totally at vari ance with claims made by men and women advocating the limits-to growth movement. It is underscored that the conclusions reached by the contributors to The Resourceful Earth cannot, in any significant sense, be described as "controver sial": they represent the overwhelm ing consensus on the issues in ques tion obtaining in informed, scientific circles. Returning to the limits-to growth literature after studying the essays in this volume is a distressing experience, even over looking the sleazy confidence-trick perpetrated by fqe Club of Rome. One moves from a world of measured conclu sions, precise data, and logical anal ysis to a world of shrieked asser·· tions, impressionistic data, and tortuous logic. Trends Are ImprOVing "We do not say," assert the vol ume's authors, "that all is well everywhere, and we do not predict that all will be rosy in the future.

Children are hungry and sick; peo· pIe live out lives of physical or in tellectual poverty, and lack of oppor tunity; war or some new pollution may do us in. The Resourceful Earth does show that for most relevant matters we have examined ... trends are improving rather than deteriorating .... [W]e do not say that a better future happens automati cally or without effort. It will happen because men and women ... will ad dress problems with muscle and mind, and will probably overcome, as has been usual throughout his tory."22Simply, hope is both possible and rational. The editors further suggest that readers examine for themselves the professional stature of the contrib utors to the volume, and do the same with the staff of persons listed in Global 2000. To the best of my abil ity I have done so, and while com muning with Who's Who in Ameri can Science simultaneously checked out the credentials of other contrib utors to the limits-to-growth litera ture. Suffice to say that so doing made me resent the fact that, some years ago, I took the limits-to growth movement as a serious, sci entifically grounded movement. I now perceive it as an eccentric move ment largely drawing its scientific support from pseudo-scientists. I only take it seriously in the sense that advocates of a limits-to-growth mentality are extremely able pub licists who have managed to breed despair in young people yearning for hope and entitled to joy.

Conceptual Confusion The purveyors of pessimism man gle language, the most elementary of conceptual distinctions eluding 398 THE FREEMAN July them. Typically, they do not care to note that all economic goods are, by definition, scarce, or distinguish be tween a good's scarcity and a short age of that good. It is not even clear what support ers of the limits-to-growth move ment mean by a resource. Oil once was not a resource at all, being merely a useless black substance. When in biblical days some people discovered it could be used in the manufacture of perfume and ink, it became a marginally useful re source. Only in the nineteenth cen tury did it become an extremely use ful resource, human ingenuity having discovered a new use to which oil could be put. Anthracite coal only became a resource when, in 1809, an American discovered how to ignite it. Now, if a resource involves a hid den reference to human desires and human technology, attempts to mea sure a resource face problems. Con sider oil. Available reserves of oil were minimal until an American dug the first oil well in 1859. Inas much as it is technologically possi ble to transform tar sand and shale rock to oil, should the actually or possibly obtainable reserves of tar sand and shale rock be inc!uded in an attempt to calculate actually or possibly obtainable reserves of oil?

Soybeans similarly can be turned into oil. Do they count? Millennia ago the Iberians declared that the Rio Tinto mines in Spain were exhausted. They could extract no more copper, silver or gold from them. The superior technolog ical skills of the Romans witnessed the reopening of these mines and a great deal of successful mining. When their technological skills had gone as far as they could, the mines yet again were perceived as ex hausted. The process was repeated again and again. The discoveries of the "leaching" process, the "roast ing" process, and the "flotation" process at different times trans formed the exhausted Rio Tinto mines into anything but exhausted mines. Since in this obvious sense at tempts to specify "available re sources" must refer to available technologies, should not technolo gies transforming one substance into another similarly be referred to? More subtly, a resource becomes "less scarce" when a new way to per form a given task is discovered. Vast quantities of copper were once re quired if the inhabitants of one coun try were to speak to inhabitants of another country, thousands of miles of cable being needed if such were to be done. Space satellites now serve for this purpose. Economically speaking, copper today is less scarce than it was two decades ago.

Simply, in any humanly signifi cant sense, resources are no more limited than is what Julian L. Simon calls humanity's "ultimate re1985 PANDOR.A AND HOPE 399 source" ~the human imagination. Perhaps one should add that re sources are similarly no more lim ited than is people's liberty to ex ercise their imaginations. The Price System of the Free Market Not surprisingly, the vital role of changing relative money prices in a free market economy in conserving resources and creating resources finds no mention in the limits-to growth literature. As, for whatever reason, a given resource becomes relatively scarcer, the price of that resource relative to the price of other resources in creases. This in itself conserves the resource. A consumer notes that the price of a particular sort of fish has soared. He purchases and consumes another sort of fish. It is almost as simple as that. But only "almost." Fishermen, noting that the price of, say, tuna has increased busily seek out more tuna fish, hoping to improve their situa tion-Le., increase their income.

They know what to do if they are to improve their situation and have a strong incentive to do just that .. Maybe an imaginative entrepreneur devises a way to farm tuna, or ere·· ates a powder which makes other forms of fish taste like tuna. In this way, changing relative money prices in a free market, in addition to con·· serving a resource as its scarcity in·· creases relative to other resources, indicate how people can best employ their efforts so as to increase the availability of the resource. Again, the free market in a free so ciety, which rests firmly upon pre cisely defined and efficiently en forced private property rights, encourages the owners of some re source to consider longterm bene fits, not simply short-term gains. Suppose I own a farm. I want the land I control to provide. me and my chosen successors with a living to morrow as well as today. I thus have every incentive to avoid practices which improve my situation in the immediate present but jeopardize my future well-being and that of my children. Compare, however, the pressures upon people whose own ership, and hence control, of a farm is politically determined. Short sighted practices which please the electorate become extremely tempt ing. Simply, it is the political con troller, anxious to satisfy the desires of voters or the Party, who is likely to ravage and run, not the private owner. Indeed, the private owner is loathe even to cut down the beauti ful oak tree his great, great grand father planted, and diligently seeks out a way to conserve the tree with out substantially reducing his income.

In sum, the consensus of informed scientific opinion, a little thought about the nature of resources, and a 400 THE FREEMAN July consideration of the truly wondrous role of the free market in a free so ciety in conserving and creating re sources, make nonsense ofthe claims of the limits-to-growth advocates. What Are We to Do? I return, however, to my opening remarks. In the absence of hope-in the absence of a rational belief that the world tomorrow can be more joy ous, more prosperous, more commit ted to liberty than is the world to day-people are unlikely to make the choices or play the active role which transform a real possibility into an exciting reality. Hopelessness, alas, is endemic, the purveyors of pessi mism having carried out their mi serable work all too well. Yet, most certainly all is not lost. First, at least a person without hope does not entertain illusory hope. Within living memory, the col lectivists and statists were overdos ing on hope. Read, for example, Paul Hollander's volume, Political Pil grims. 23 It tells the amazing story of Western intellectuals who returned from visits to totalitarian, collectiv ist states with glowing eyes. When Stalin was ruthlessly starving mul titudes to death, these gullible "po litical pilgrims" spoke of radiant faces, joyous harvest songs, and the birth of "real" freedom. Socialism was feeding the hungry, clothing the naked, sheltering the destitute. Il lusory hope once ran high.

But no more. The tired old routine of exciting reports, mounting evi dence, desperate denials, improba ble alibis, admissions of error, and discoveries of a new socialist utopia, fails to convince anymore. Many young minds may be devoid of hope. At least, however, barren soil is not choked with weeds that must be cleared before the seeds of liberty can be sown. Second, the case for the free mar ket in the free society has, so to speak, "novelty value." It is not that this case has been heard, assessed, and rejected. It hasn't been heard. Caricatures of economic and politi cal liberty certainly abound, but the true picture does not, shall we say, suffer from overexposure in the me dia or in our schools. We at least are spared the tired yawns of those who have "heard it all before." In parentheses, I note that a major problem in communicating the case for economic and political liberty to the young is, ironically, the very ma terial prosperity these realities have enabled them to enjoy. How does one convince the children of plenty that the vast majority of human beings who have walked this earth have known only destitution, and that the abnormal situation crying out for ex planation is not destitution, but prosperity? Certainly, until anyone is convinced that a phenomenon is sufficiently puzzling to warrant in vestigation, explanations of the phe1985 PANDORA AND HOPE 401 nomenon are unlikely to elicit much interest.

A more serious problem is, of course, the warped syllabuses and texts so endemic in our schools. While I hold firmly to the view that this problem is generated ultimately by state control of schooling, and that the only "solution" to the prob lem is a separation of school and state that is as sacrosanct as the sep aration of church and state, advice proffered by Herbert London in the final paragraph of Why Are They Lying To Our Children? merits thoughtful consideration: "We let facile statements substitute for hard analysis, and we let undocumented, inflammatory rhetoric find its way into our [schools'] texts. For these bad judgments we will pay a price in uneducated youths. Because schools are .local institutions subject to pa rental influence, much can be ac·· complished when there is the will to do so. ... The application of com mon sense standards of 'fair play' and 'balanced argument' will go a long way toward correcting the lies our students are routinely taught."

The Vision of Greatness I would go one step further. The philosopher A. N. Whitehead once observed that a primary task of ed ucators is to bring before the grow ing mind "the habitual vision of greatness." It is not enough that our young people are not subjected to the pseudo-science, the economic illit eracy, and the pathological self hatred cursing the purveyors of pes simism. It is not enough that they learn of the solid ground that exists for asserting that humanity's world tomorrow can be more prosperous, more peaceful, and more committed to liberty than is humanity's world today. It is not enough that they hear the compelling case that exists for the free market in the free society. They need also to be inspired by a vision and excited by a dream. They need to sense and feel the greatness of the human species' long and slow struggle to achieve liberty. They need to sense and feel what liberty is: the power of it, the joy of it, the song of it, the sacredness of it.

And that brings me to my third and final ground for holding that our case is anything but lost. A disoriented minority may, in recent years, have been allowed to call the tune. But the decencies are alive and well in this world and in this nation. Ordinary men and women are growing tired of seeing the light in their children's eyes fade and witnessing joy and hope and vitality and enthusiasm crushed out of their children. These men and women are ready to hear what the freedom philosophy has to say and, I believe, are anxious to hear it. And there are those-not least the men and women connected with The Foundation for Economic Education-more than able to artic402 THE FREEMAN ulate that philosophy and inspire their hearers by it. Admittedly, there is no certainty of victory. Yet there is every reason to believe that victory can be ours. Our confidence need never be less than our own willingness to labor and to toil for what we know is right and true.

A willingness to labor on. This we can reach if we care enough, and therein is our victory. The life ofhu manity is precarious and frail: a handful of dust and a breath of hope. Yet though that dust is of the earth, the hope that burns in the human spirit is of God. And nothing can for ever extinguish that spirit and the hope that is within it. , -FOOTNOTESISophocles, Oedipus Rex trans. E. V. Rieu (Harmondsworth: Penguin Books, 1949), p. 68. 2Cited by R. Blandy, 200 I-the Economic Out look, Working Paper 67 (Flinders: National In stitute of Labour Studies, 1984). 3Deuteronomy 30:19. 4Micah 4:4. 5Isaiah 35:1-2. aSee note 2. 7Hebrews 11:8. 8H.I. London, Why Are They Lying To Our Children? (New York: Stein and Day, 1983). 9N. Wilson, Visions of the Future; Paper pre sented at 1984 SPATE Conference, South Aus tralia, 1984. I°P.R. Ehrlich, The Population Bomb (Lon don: BallantinelFriends of the Earth, 1971).

First published 1968. llJ. W. Forrester, World Dynamics (Cam bridge, Mass.: Wright-Allen, 1971). 12D.H. Meadows et al., The Limits to Growth (New York: Universe Books, 1972). 13 Global 2000 Report to the President, vols. I, II, III (Washington, D.C.: U.S. Government Printing Office, 1980). 14C. Peerman, "Malthus With a Computer," Models of Doom, ed. H.S.D. Cole et aL (New York: Universe Books, 1973), pp. 5-13. 15G. Myrdal, Against the Stream-Critical Es says on Economics (New York: Vintage Books, 1975), p. 204. 16Time, April 26, 1976, p. 56. 17J.L. Simon, The Ultimate Resource (Prince ton: Princeton University Press, 1981), p. 287. 18See, for example, Fads and Fallacies in the Name ofScience, M. Gardner (New York: Dover, 1957), pp. 140-151. 19M. Popovsky, Science in Chains (London: Collins and Harvill, 1980). 2°J.L. Simon and H. Kahn, The Resourceful Earth: A Response to "Global 2000" (Oxford: Basil Blackwell, 1984).

21Jbid.,pp. 2-3. 22Ibid., p. 3. 23P. Hollander, Political Pilgrims (New York: Harper, 1983). IDEAS ON LIBERTY Ludwig von Mises PRODUCTION is a spiritual, intellectual, and ideological phenomenon. It is the method that man, directed by reason, employs for the best possible removal of uneasiness. What distinguishes our conditions from those of our ancestors who lived one thousand or twenty thousand years ago is not something material, but something spiritual. The material changes are the outcome of the spiritual changes.

c. W. Anderson ~~t~ Compulsive Bargaining Reviewed CONGRESSpassed the Wagner Act in. 1935 with great hope that it would give employees job security and bring industrial peace on the labor·· management front. Even though the results have been vastly different from the intentions, there has been no serious public examination of the premises which give justification to this law or the 1947 Taft-Hartley amendments. The idea that compulsory collec tive bargaining is beneficial to em ployees and the public is still ac cepted without question by most people and is still being taught in our schools-now by unionized teachers. However, falling productivity and skyrocketing labor costs have been C. W. Anderson of Sun City, Arizona, is retired Pres ident of Management Resources Association of Mil waukee and past Chairman of the Institute for Hu mane Studies. shaking the credibility of the claims of public benefits; higher levels of unemployment cast doubts as well on the so-called benefits for employees.

What are some of the unforeseen results of this well-meaning effort to equalize the bargaining power of the employee and the corporation? The thousands of strikes, billions of dollars of lost pay, vicious picket line violence and destruction of prop erty, make a mockery of the "indus trial peace" objective. Current unemployment and the relocation of thousands of employees in heavy industries to other kinds of jobs is directly related to the high la bor costs (not only payroll costs but the rigidities of negotiated work rules) and the refusal of union lead ership to allow local units to make concessions which might break cer403 404 THE FREEMAN July tain "patterns." The fact that some concessions have occurred is evi dence of the severity of the economic predicament of the employees and industry. But it is important to un derstand that in a truly free labor market these wrenching, violent re locations would not occur; transi tions would be gradual, nondis ruptive.

Given the low level of public trust in unions as revealed in many opin ion polls, and the declining union membership through layoffs, decer tifications and losses of representa tion elections, it would seem that a reevaluation is in order. Voluntary Action Approved To guard against misunderstand ing, there is no suggestion here to eliminate voluntary collective bargaining. Free, voluntary association is surely harmonious with economic freedom-free enterprise, if you will. When not mandated or interfered with by law, peaceful, collective ac tion will serve as a restraint against any employer practices or policies that are excessively punitive or out of step with the realities of the sur rounding labor market. It is in every employer's self-interest to hold his most productive employees. Does compulsory union bargain ing for employees breed conflict? There is now strong evidence that in many cases it tends to. To understand why, just put yourself in the position of a union agent. Your job and your prestige depend on what you can get for the members that they believe they can't get for them selves. So, when an employer is trying to be fair, paying as much or more than competitors, what can you as an agent do? Guess how long you'd last if you tried to be fair by telling the members they had a good em ployer who was doing his best to make their jobs secure.

The hard fact is that to justify your job and your union, you must attack the employer. The more wedges you can drive between the employer and the employees the more secure is your job. It is mainly because this built-in conflict is becoming more evident that growing numbers of employees are resorting to the decertification process to rid themselves of this dis ruption. When business is booming and inflation permits regular in creases in compensation and easy movement to other jobs, inner con flicts are much less evident. It is in slack times that it becomes apparent that the self-interest of the union hi erarchy has taken precedence over the interests of employees. This self-evident source of conflict alone is good cause for a re-exami nation of long accepted bargaining dogma. But, beyond the practical negatives there are other worrisome questions of principle. Space permits 1985 COMPULSORY BARGAINING REVIEWED 405 touching on only one-the right to own and control property in a free society. Because of the many prior le galized infringements on this right, it is now rarely defended. But those expedient compromises have taken us far down the road to the socialism (common ownership) envisioned by Karl Marx and also the British Fa bian Society which, incidentally, ad vocated strong unions as a key factor in the breakdown of property rights.

If we accept the idea that we have a right to life, and understand that sustaining life depends on a right to own property, how can we, in prin ciple, favor a law that violates that right? Compulsory collective bar·· gaining demands that the owner of a business "bargain in good faith" with a union which can be elected by Reprints . .. a small portion of the employees (only 51 percent of those voting). Practically, "good faith" is inter preted by the National Labor Rela tions Board and the courts to mean making concessions and, in fact, such concessions, which may not be fa vored by most employees, can de stroy a business. Furthermore, the employees who want to work under conditions agreed to voluntarily are legally deprived of their property right which is to contract individ ually for their work. Should we be concerned about what has been happening to prop erty rights in this effort to force col lective bargaining? I think so, and I believe that millions of people in shops and offices are more than ready for a reappraisal. il A Page on Freedom Each of these brief messages is a handy way to share with friends, teachers, editors, clergymen, employees and others a thought-starter on liberty. It also serves to introduce the reader to our work at FEE.

See page 387 for this month's Page on Freedom. (Copies of previous messages are also available; specify title when ordering.) Small quan tities, no charge; 100 or more, 5 cents each. Or, feel free to reprint the message in your own format if you'd prefer. We hope you'll enjoy this feature! Order from: FOUNDATION FOR ECONOMIC EDUCATION, INC. IRVINGTON-ON-HUDSON, NEW YORK 10533 George Voss if The Economics of Medical Care IN voluntary markets, private med icine included, the key knowledge necessary for trade is conveyed by freely fluctuating prices. The price system conveys knowledge of the personal and subjective utilities of the actors, that is, of the supply and demand of various commodities and services, which cannot be compared otherwise. Demand for ordinary medical care in voluntary markets is highly elastic and medical care by physicians is largely optional, ex cept for some categories of life threatening conditions, few in num ber and low in incidence, sometimes known as "catastrophic illness." As history shows, medical care in esGeorge Vosslf, M.D., Ph.D., Is In the practice of psy chiatry, Birmingham, Alabama. His Interest In eco nomics evolved from his study of the effects of fees and reimbursement systems on the psychotherapeu tic process.

406 senti ally voluntary markets tends to be accessible and affordable. Sus tained price inflation in medical care is always a result of direct or indi rect political intervention. The lately much-touted competition between providers is not the genuine com petitive bidding for the satisfaction of the actual consumer of care, the patient, as a free market would have it. On the contrary, this politically created competition will further en hance and centralize the bureau cratic controls on medical care, thus compounding, instead of reducing, the inflationary effects of the mul tiple and pervasive political inter ventions already in operation. The Voluntary Market This pattern of trade refers to the exchanges that take place between consenting parties, free from coerTHE ECONOMICS OF MEDICAL CARE 407 cion, whence the more familiar term of free trade. Mutual advantage for the trading parties follows necessar ily, since neither would consent to the exchange if some form of gain were not expected. For free trade to exist, the obvious preliminary con dition is that the participants in the exchange be the legitimate owners of the goods and services exchanged, since only the owners can legiti mately dispose of property. This is why regulation of trade by other parties than the owners amounts to var ious degrees of expropriation and in·, voluntary servitude.

Medical care is a type of individual service consisting of skilled assis·· tance to a person's recovery from ill-· ness. The essence of this recovery is an inherent process of self-healing which cannot be supplanted, but only assisted (or induced, or pro moted) by human interventions. The provider of such skilled assistance is usually called a physician, and the receiver a patient. Medical care also incl udes some types of assistance to manage chronic conditions, some types of disease prevention, and some incidental activities (such as relief of pain). It does not include as sistance to terminate life or induce disease, or the conversion of humans into industrial products and major invalids. Medical care is far from being a high priority in voluntary markets, except on rare occasions. For the most part and in most individuals it ranks way below nourishment, san itation, education, entertainment, and so on. Most medical treatments can be deferred for various periods of time, and spontaneous healing often takes place. Lifestyles mark edly affect the susceptibility to ill ness and the ability to heal. Effec tive help in case of illness can be, and often is, provided by family and friends. One's general practitioner can provide most of the professional medical care for affordable fees, or he can refer the patient to specialists he deems competent and affordable.

Further, friends, acquaintances, books and advertisements provide a wealth of both general and specific information about diseases, emer gencies, medicines and specialists. Even tentative choices made under pressure or away from home can later be converted into preferred choices. Let the Customer Choose Thus, the paternalistic idea that the patient or his family cannot make a proper choice of medical care because they are too ignorant or too worried to explore the market is ut ter ly false and has been promoted by bureaucrats and some physicians for the egregious purpose of portraying themselves as indispensable. It also follows that ordinary medical ex penses are not an insurable risk. They are too optional and too afford408 THE FREEMAN July able, while the respective illnesses are too preventable and too subjec tive to provide an actuarial basis. In surance for catastrophic medical ex penses would be the only viable medical insurance on the free market.

In voluntary markets, the pa tient's freedom of choice is necessar ily complemented by the providers' freedom to compete. Thus, the pa tient obtains the best medical care that he is able and willing to pay for and medical fees, as well as the med ical technology prices,. tend to drop overall. Yet, lower prices are not necessar ily the winners in the free market. For one thing, medical services are seldom comparable between practi tioners' because of differences of training, experience, manner, skill, judgment, reliability, discretion, and the like. For another, idiosyncratic intangibles, such as a familiar wait ing room and set of fellow patients, a distant office picked for its close ness to a shopping mall or to the chil dren's home, an attraction for the specific psychopathology of the phy sician or the staff, often can and do make the patient choose the appar ently more expensive alternative, which is, however, a very different product from the impersonal manip ulations which bear the same name in the "Emergency Room" next door.

There is little doubt that banning competition or success in the marketplace makes for a hampered, non free market condition. But the re verse is not true; that is, competition (especially if imposed) does not nec essarily lead to a free market. Glad iators, who were slaves for the most part, used to compete fiercely for vic tory in combat sports. And many of us compete just as fiercely for gov ernment handouts. Neither of these types of competition has led to free markets, but the difference is, of course, in the fact that victorious gladiators were freed every now and then, while those of us who win the handouts wind up with even more government controls. In a monetary economy, advanced specialization of labor and rapid ac cumulation of capital become possi ble if prices fluctuate freely, to re flect the otherwise immeasurable utilities of the myriads of actors in the market. Contrived price stabil ity, such as wage and price control, is the deadly enemy of the essential tool of the free market, the economic calculation. Capitalism is the nick name offreedom in the marketplace, because it leads to capital formation and growth, which means less labor and more leisure, capital goods of in creasingly higher order, consumer goods of increasing newness, variety and abundance.

Capitalism is thus the market ar rangement which provides for the honest channeling of the profit mo tive, the motive of acquiring better 1985 THE ECONOMICS OF MEDICAL CARE 409 value than the value given up in ex change. While still in good health, private medicine was a superb illus tration of the success of capitalism. In medicine, even more than in any other areas of human action, any third party is profoundly unable to guess the utility of any service to the actual recipient, or the costs in curred (in terms of forgone oppor tunities) by those who pay the bill. The bureaucrat learns nothing from, the diagnostic and procedure codes, because they cannot communicate the very thing they are supposed to: the value of the medical service rendered. Involuntary Markets Markets are hampered if the mar·· ket actors are prevented, through the use or threat of physical force, from acting according to their own trade decisions, or if the information on which they have to base such deci sions is deliberately scrambled, through various forms of fraud, by some other people who, thereby, ac quire property or use of at least a part of what the first group involun tarily gives up. Those in the first group are the victims of the invaders from the second group. In involun· tary markets many people switch back and forth between these two roles.

From the standpoint of the natural law, invasion is unjust and injustice is criminal. Either the property of the victim or its use, including the possible irreversible use, is seized by the criminal, for his own or his friends' benefit. The harmony, co herence and efficiency of the volun tary exchange are disrupted and re placed by conflict, fragmentation and waste. Private criminals hamper the markets illegally. But governments can pass laws to protect themselves and their friends from criminal and civil liabilities, whenever they re sort to force or fraud to interfere with the free market. As they exceed their only legitimate function, that of de fending the natural rights of the in dividual, governments have to re sort to force, fraud, and an expanding body of statutes to make such ac tions legal. Socialist and communist govern ments expropriate their subjects outright. The more insidious Welfare State, a pseudo-democratic version of older forms of paternalistic despot ism, obtains the same end result through regulation, subsidies, infla tion and taxation. And individual freedom is also lost in the process.

All areas of economic activity are af fected this way, sooner or later, but in this century medicine has been the archstone of the edifice of power of the Almighty State, behind curtains of iron and behind curtains of decep tion alike. In what follows here, only those government interventions will be 410 THE FREEMAN July examined in some detail which have more importantly contributed to the spiraling medical expenditures, while others will be mentioned only briefly. Monopolies Monopolies are grants of exclusive privilege to engage in certain eco nomic activities, given to individu als or groups by the political power. This means that entry into the re spective field of activity is prevented or made difficult by using force. The simplest procedure is to eliminate the violators and confiscate their property outright, but modern insti tutions are more refined. In the case of medical licensure, there is a first component, ideologi cal, designed to deceive the public into believing that licensure is op erated to protect the consumer, the patient. The second component is an exclusive, expensive and time-con suming training, wherein painstak ing efforts are made to inculcate in the trainee a sense of obedience, and even devotion, toward the "profes sion." The third component is the bureaucratic ritual of getting li censed, quite expensive when the te dious tests which precede it and the unnecessary repeat registrations which follow it are considered. De licensure is used occasionally against the more bothersome polit ical opponents in the profession, but only exceptionally against incompetent physicians. The fourth com ponent is the actual use of force against those who practice without a license: criminal penalties, includ ing prison terms, are provided for the violators, but are seldom necessary, given the ideological processing of the minds- "brainwashing" -both within and without the profession.

Indeed, as shown in the previous sec tion, the free market can provide all the information the patient requires to purchase medical care, through directories, advertisements, refer rals, word of mouth and the price system. The sole purpose of licensure is to prevent the emergence of uncon trolled competition. The privileged elite can thus charge premium fees, the so-called monopoly prices. While these fees do not necessarily maxi mize the receipts of the individual physician, they do maximize the re ceipts of the profession as a whole over the long run, which is why price-cutting doctors are often ostra cized or otherwise punished by their colleagues. A second major impediment to a free market in medicine is the enor mous edifice of government subsi dies. The best known, though not usually thought of as a means of sub sidizing the medical profession, is the National Institutes of Health.

This name is brilliantly deceptive, because health is not at all what this huge bureaucracy usually pro1985 THE ECONOMICS OF MEDICAL CARE 411 duces. Its main products are a hor rendously expensive technology which serves the interests of the medical and political establish ments-and a coherent body of the oretical and methodological dogma which makes competition by rival schools of thought extremely diffi cult and even very unlikely. This major mechanism is closely coordi nated with the system of govern ment grants to the academic estab lishment represented by the faculties of "approved" medical schools, further complemented by grants to various medical care facil·, ities (hospitals, clinics, HMO's) and to the patients themselves (through Medicare, Medicaid, Veterans' Ben-· efits), which create the "market" re quired by the expensive technology and methods of practice. Incentives for Patients The third major impediment to a free medical market has been the po·· litical creation of incentives for the patients to buy large amounts of medical care and for the physicians to push the expensive kind. Both of these mechanisms are brought into play through one of the most fien dish tricks yet invented by the in surance industry in collusion with the government: the employee bene fits. This, of course, is a. system of harnessing the healthier employees and the employers to subsidize the not-so-healthy employees, as well as those who have a proclivity to abuse handouts of any kind, whether they are called "health care" or not. En ticed by apparent tax advantages, the employees are simply herded into huge populations of captive cus tomers for the insurance industry.

Moreover, they are virtually never offered the option of taking cash in stead of these benefits, that is, the possibility to opt out of the system and shop for sickness insurance in the open market. In a free market, lower prices, catastrophic insurance and private charity would insure ad equate access to medical care even for the improvident, although the current system of expectations and incentives might make the return to free market behaviors very difficult for a while. The mechanism by which even the least abusive patient's incentives are perverted is widely known as "first dollar coverage" and consists of in surance coverage for all sorts of mi nor expenses for even the most op tional kinds of medical care, with only token amounts of deductible ex penses. Thus, it is not surprising that in some metropolitan areas sex therapy with surrogates has been advertised as covered by "health insurance."

The mechanism by which the phy sician's incentives are perverted, again through the "health insur ance" schemes, consists of the more favorable coverage and preferential 412 THE FREEMAN July compensation ofhighly technical and expensive methods of diagnosis and treatment, complementing the sys tem of institutional grants and cou pled with the virtual exclusion of the patient from the transaction through the so-called assignment of benefits to the physician. In the process, the insurance carrier (or some agent it hires) undertakes to establish allow able fees for standardized and codi fied diagnoses and procedures. This is the inception of rationing and of the bureaucratic control ofquality in medical care. Naturally, detailed in formation about the patient, both medical and non-medical, has to be made available to the payer of ben efits. The confidentiality of the con sultation and treatment, the hall mark of Hippocratic ethic, is thereby compromised. Thus, private medical care has been replaced by imper sonal procedures and a system of surveillance even before the govern ment takes over nominally.

Other Ideological and Legislative Interventions The escalating operation of the types of government intervention described has been facilitated by a plethora of other ideological and leg islative interventions, such as: • promotion of the concept that "health care" is a human right; • tax policies, mostly within the frame provided by the income tax system; • creation and expansion of various public medical facilities; • massive regulation of medical care, especially in institutional set tings, which, like taxation, is a form of expropriation of the private sector; • protection of the inefficient and punishment of the successful enter prises through the arbitrary appli cation of the body of vague statutes and incoherent court decisions known as the "antitrust law"; • the exemption of the "business of insurance" from the antitrust law; • massive inflation of the money supply, often through deficit-spend ing, gargantuan bond issues and loan guarantees.

This is an enormously complex system of fraud and waste, which serves various special interests by using the police powers of the gov ernment, especially its regulatory and fiscal powers. Some of the par ticipants in the scheme use it delib erately for their predatory purposes. Others contribute to the operation without grasping its meaning, ded icating themselves to the avowed humanitarian goals. In a somewhat different context, V. I. Lenin re ferred to such unfortunates as "use ful idiots." A third category of con tributors consists of those who have some vague notion of the wrong they commit and who engage in con temptible attempts to demonstrate that it is not their fault, or that it 1985 THE ECONOMICS OF MEDICAL CARE 413 could not be avoided, or that it is right, or that they are not actually doing what they are doing. There are many semi-literate artisans in this category, among them quite a few dedicated and competent physicians.

The isolated rebel is barely worth a mention here, as he is either de stroyed or converted to one of the three categories in good standing. As to the dupe, we all take turns at playing that role, full-time or part time. The humanitarian guise of medi cal care and, even more so, "health care," is an excellent opportunity for the politician to obtain votes and for the bureaucrat to increase his power by deficit-spending in high gear, while bestowing favors to sundry friends along the way. The role played by Medicare and other Fed eral medical programs in the growth of the Federal budget, even though only partially known or acknow 1 edged, is staggering. Furthermore, numerous areas of government in tervention-such as occupational safety, clean air, food and drug safety-are health-related. At TaxpayerExpense These multiple interventions in the marketplace are ultimately sup ported by the taxpayers, by the peo ple on fixed incomes and, more dan gerously and increasingly so, by eroding the capital base of the econ·· omy, that is, the savings-investment portion of the national income.. The economic decline is further acceler ated by the commitment our govern ment has demonstrated to various international giveaways. When hy per-stagflation will, eventually, take a definitive and deadly hold of the economy, the federal government will-messianically and presumably at our request, as expressed, for ex ample, in the declaration of a state ofemergency by the President-have to assume total control of the dwin dling rubble and mandate the gen eral and immediate pursuit of hap piness ... or else!

But individual liberty can be lost much earlier by regulations alleg edly aimed at protecting people's life and health. On the one hand, the economic intricacies of medical care extend deeply into the most varied industries, with insurance and phar maceuticals as the most obvious ex amples. On the other hand, once the individual health becomes a matter of "public interest," nothing that could even remotely affect it could escape the jurisdiction of the sover eign. Clean air requirements and mandatory safety belts have been only timid inroads. "You ain't seen nothin' yet!" But rejoice! All re quirements will most certainly have to serve the dignity of human life, as defined by the best government ex perts, naturally. If, say, the Depart ment of Health and Human Services will continually monitor your bio414 THE FREEMAN logical functions-quite remotely and privately, of course-you can rest assured that not only the public in terest will be served, but your best interests also, even if you may hap pen not to fully grasp this now.

The Freaks Since the price exacted by the in terventions of the government in the market is huge, both in monetary terms and in terms of costs which in clude personal freedoms still very dear to many of us, it would stand to reason to ask the government to back out of our pockets, businesses and private lives. They would if we asked. Some of our Representatives and Senators still respond to the opinions expressed by their consti tuencies' even though decreasingly so. The others can be formally or dered to obey, or they can be re called. But instead, we continue to delude ourselves that we can pull it through by making the next guy bear the brunt of the "sacrifice," al though it should be clear by now that we are all to be sheared, unless we manage to shake off the yoke of big government and our predatory hab its together. A rather strange instance of let ting ourselves be mesmerized into delusional thinking is the recent fad for "competitive new forms of med ical care" (such as PPO's, PPI's, HMO's, etc.). Their competitiveness consists of their ability to secure, or take advantage of, favorable leg islative treatment, government grants, tax exemptions and reserved markets-that is, captive patient populations-in exchange for their higher compliance with the rules of the sovereign or his surrogates, in particular with the procedures-sur veillance approach to medical care.

These freak entities-bureaucratic medicine cloaked in free market pre tenses-have absolutely nothing to do with voluntary markets, or with any genuine competitive bidding for better patient care. Presenting them as free market phenomena is an out and-out fraud; or the expression of a delusion, at best. They are a death trap, for physicians and patients alike, the death of individuality, freedom and medical professional ism. To rejoice in joining them is like rejoicing in entering the gas cham ber because they are playing your fa vorite tune. @) (DEASON LIBERTY Nationalized Health Service IT TAKES SOME TIME to undermine a good medical system and particularly to destroy the long-established traditions of trust between doctor and patient which the older British doctors remember. Nevertheless, the British National Health Service is doing both. GEORGE WINDER, 1962 Kenneth McDonald For Workof Comparable Worth IN the State of Washington, the American Federation of State, County and Municipal Employees got a court ruling that requires the state to pay the same wage to men and women for work of "comparable worth."

In an interview, (US News & World Report, December 24, 1984) the pres ident of the union said that "the state used want ads that said 'male only apply' or 'female only apply'. Women could apply for jobs such as food service worker and laundry aide, which paid less than jobs for men such as plumber and truck driver .... We're talking about jobs that are not exactly the same but are of equal worth to the employer." Comparable worth rulings have followed in Minnesota, Iowa and a Kenneth McDonald is a freelance writer and editor living in Toronto. number of American cities. In Can ada the Ontario Federation of Labor is pressing the provincial govern ment to legislate equal pay for work of equal value. At issue is the principle of equality before the law. When it treats people equally, the law takes no account of the differences that distinguish them, only of the way they conduct themselves. All who obey the law are at liberty. All who break it have the right to equal treatment. All are dif ferent, but all are treated alike.

People recognize the principle in their business dealings. It is com monly accepted that people who do the same job should be paid the same wage. The wage is determined by what the completed work is worth to the entity that contracted for it to be done. To insist that jobs be done by men would be as injurious to the principle as to restrict jobs to women. At a time when the nature of work in in dustrialized countries is changing rapidly, any move that hinders the freedom of men and women to com pete for jobs can only weaken the common effort. Men and women are more likely to put their talents to good use in work of their choice than if they are coerced into taking particular work. The community gains accordingly. When they are coerced into taking other work, in which their talents are wasted, the community loses. It 415 416 THE FREEMAN loses more than the value ofthe work they might have performed. It loses freedom.

The fact that everyone is different denies that anyone can be equal to any other. It is equality before the law that constitutes their freedom to use the qualities that distinguish them. Those qualities are displayed through the differences in material success or failure that result from their possessors' freedom to exercise the qualities. But material success or failure is not the sole measure of a person's worth, only of particular talents or skills. Measuring anoth er's worth as a human being (as distinct from value in the perform ance of a job) is beyond human competence. Nevertheless attempts are made, through the coercive power of the state, to change the material out come of people's differences. The state and its agencies attempt to re distribute income in accordance with political theorists' notions of equity. At once we have left equality before the law, in which different people are treated alike, and admitted that their differences entitle them to be treated differently.

Thus the State ofWashington must now concern itself not with what a particular job is worth but with who does it. If it is done by a woman, she must be paid the same as a man who does a different job. The principle is not equal pay for equal work, but equal pay for different work. Assessing the comparable worth of the two jobs is as much a matter of opinion as assessing the comparable worth of the man and woman who do them. It interferes with the freedom of both people to tackle either job. Equal pay for equal work needs no defense except against the misuse of words. Equity is fairness. Equal pay for equal work is fair because every one sees it to be fair. Equal pay for work of equal value is fair only in the minds of the people who make the assessment. Yet it has come to be called "pay equity." If it were called "worth equity" the fallacy would be apparent. It is no accident that the first ap plications of comparable worth were in government jobs. Because it is ac countable to the public, the civil ser vice naturally looks to paper quali fications and standardized tests to determine eligibility for jobs and benefits. Admitting a consultant's opinion of comparable worth may be seen simply as adding one more measurement to an already struc tured system. But that does not make it right.

Nor would it be right to extend the idea to the private sector. Imposing arbitrary controls would go directly against the engagement of human ingenuity and enterprise that the private sector depends upon for vitality. i) Bill Anderson ComparableWorth: SocialJusticeor SocialTransferl ONE of the best ways to cause dis·, sension in the workplace is to let everyone know what everyone else is being paid. One employee who car·· ries a heavier-than-average load sees another worker, whose job entails seemingly less responsibility, re·· ceive higher pay. The wage structure in that particular workplace, the first employee reasons, is patently unfair and unjust. On a larger scale, people who work in one sector of the economy may be,· lieve they are unfairly being paid less than workers in another eco nomic sector. For example, school teachers make less than autowork ers; librarians are paid less than crane operators; nurses make less than doctors, and almost everyone makes less than the best-paid profes sional (and quasi -amateur) athletes.

On this issue, there is no question that resentment exists. When I Mr. Anderson is an economist in Chattanooga, Tennessee. taught school a few years ago, one teacher who was a militant member of the teachers' union told me that only socialism could guarantee jus tice in the workplace; the present system, he noted, paid him far less than he deserved. "Autoworkers only build cars," he complained, "But we (teachers) build people. Yet, we get only half of what an autoworker receives." One can dispute his logic, but there is no denying the resentment and the envy is there and is alive and just waiting to be placed into a broad scheme of public policy. That policy, of course, is called Comparable Worth, and it promises to be the pay issue of the next few years. It is the purpose of this paper to examine the claims of both comparable worth proponents and opponents and to see if this concept can survive rigorous economic analysis.

For an economic concept that would prove to be as complex as com parable worth, the driving idea be417 418 THE FREEMAN July hind it is naively simple: what the ancients called the "justum pre tium," or, in today's words, the "just price." That is, "economic justice," not the market should be the focus of determination of what a wage should be. Those who "deserve" high wages will receive them and those who do not will find their pay com mensurate with their social worth. A librarian, for example, may have both an undergraduate and gradu ate degree in his or her field but make far less than a truck driver who dropped out of high school when he was sixteen. A college professor, who, most likely, had to suffer through the pain of rigorous Ph.D. studies may find himself on a lower pay scale than one of his former stu dents who failed to finish college but turned out to be a top-notch salesperson.

These inequities, declare compa rable worth proponents, will be a relic of the past when their ideal leg islation passes a vote of Congress. The new pay law will insure, so they say, true justice in the workplace with each worker receiving eco nomic benefits that are due him or her. Target Areas For the most part, jobs that are tar geted by comparabie worth advo cates are presently dominated by women. Thus, proponents claim, such legislation would really be an antisex discrimination, for the dif ferential in pay among different oc cupations is due more to sex bias than to anything else. Appeals to the market are simply met with the re sponse that ifthe market is "unfair," then criteria other than market cri teria must be used when worker pay is at stake. The proposed set of laws, then, would mandate that pay be deter mined for every occupation by gov ernment edict put out by bureau crats who would determine what each job's social worth may be and what compensation should be given it. Therefore, the librarian may be judged more important to society than, say, a truck driver with pay scales set accordingly. Likewise, a schoolteacher might finally find himself or herself with a salary that exceeds that of the autoworker. The comparisons are endless as are the possibilities for "remaking" the economy.

In examining the feasibility, prac ticality and, yes, justice of such a scheme, we must ask the question: "Is this practical?" While feminists and other ideological purists may de cry the use of the term "practical," one must remember that a govern ment which attempts to force upon its citizens changes that cannot pos sibly be made or administered is practicing the worst kind of tyranny and injustice. Therefore, the real possibilities of actually implement1985 SOCIAL JUSTICE OR SOCIAL TRANSFER? 419 ing a successful comparable worth wage plan must be taken into ac count as seriously as one might con sider any ideological questions. The two of them cannot be separated, for reality is the ultimate test of ideology. At the present time, a Federal judge has ruled that the State of Washington must come up with a comparable worth plan to "redress past discrimination" by raising pay scales in state occupations in which women hold a majority of positions.

Other states and municipalities are also looking into comparable worth pay plans. However, the most perti nent question in this matter deals with whether or not such a pay plan could be imposed upon all U.S. em ployers, public or private, as a whole. Addressing this issue requires first that we look into what constitutes a wage and how wages are set in the marketplace. After examining the basics of pay, this paper will then ex amine the feasibility of establishing a grand comparable worth plan in this country as well as look at the implications of the plan. And, fi nally, this paper will look at who would really benefit from the com. parable worth proposal. How Wages Are Determined Contrary to popular belief, an em ployer does not set a wage; rather, the pay a person receives for his or her work is set by the consumer of that product or service rendered by that person. Pay is not a function of what it costs a person to prepare for the position he or she holds; instead, it is a function of the value consum ers place upon the marginal produc tivity of that job. Writes economist Hans Sennholz: Consumers, who are the ultimate di rectors of the production process, attach value to labor services. They judge labor like any other factor of production, by the improvement it adds to their well-being . ... a worker's productivity is deter mined by the value consumers attach to his services and achievements. Employ ees, employers and capitalists all are sub ject to the whims and wishes of consum ers who wish to be served at the lowest possible price. 1 Some of the evaluation of labor made by consumers is explicit and some implicit. For example, we may value a certain doctor's services be cause he has successfully treated many of our illnesses. We meet the doctor face-to-face and we see direct results. On the other hand, we can not directly judge the performance of one particular worker on an assem bly line (unless his work is excep tionally shoddy or exceptionally good). We can, however, judge the finished product which that worker had a hand in creating, and the value we place on that product will deter mine, indirectly, the value we place on his job.

This point is a vital one in labor 420 THE FREEMAN July economics, yet it is often lost in the economists' maze of graphs, charts and mathematical equations. The market, which is directed by the spending habits of consumers, ulti· mately directs the labor process from hiring to wage paying. Employers are not autonomous beings in this matter,. as some market critics have said. Rather, they are ultimately di rected by consumers. Of course, this does not mean that employers always listen to consum ers. Indeed, the economic grave yards are full of the corpses of busi· nesses past whose owners either failed to listen to the market or could not make the necessary adjustments to stay profitable. The point here is that ultimately the consumers' voices will be heard and business owners must either listen or cease doing business. While consumers will ultimately decide whether or not a business will exist and who will be paid what, other factors play an important role as well. For example, one must ask whether the enterprise is capital or labor intensive. For obvious reasons, a capital intensive enterprise will pay higher wages than a labor in tensive one.· A large machine will simply turn out more products than someone working by hand. A steel· worker, unionized or non-unionized, works with large, productive, multi million-dollar tools; a. garment worker, on the other hand, works with a single sewing machine. The sheer output of the two different workers spells out why the steel worker is better-paid than the gar ment worker.

And, finally, there is the question of how the right job is matched with the right worker. In order. for em· ployment to occur, both employer and employee must agree on all con ditions, including working hours, pay and job environment. Compa rable worth proponents, of course, disagree with that statement, as do others who feel that .government must intervene into the labor mar· keto And, they point out, many work ers are understandably unhappy with their jobs and wages. But being unhappy does not .undercut the fact that each worker chooses his or her occupation and in so choosing also accepts the pay and environment that comes with it. (We are assuming a labor market determined in a mar_ket-oriented society as opposed to a socialist one in which government chooses occupations for its citizens.) The Worker for the Job Choosing a particular job at a par· ticular place does not necessarily mean that one always likes what he or she has chosen. All of us want to be paid more; likewise, each person seeks the maximum fulfillment and benefits from his job. What is at is sue, however, is the present occu· pation versus the current alterna1985 SOCIAL JUSTICE OR SOCIAL TRANSFER? 421 tives. One may be unhappy in his job, but he would be even unhappier elsewhere. Thus, a teacher may com plain about the higher pay received by an automobile worker, but he chooses not to be an autoworker and receive that paycheck. For him, the opportunity cost of being an auto worker as opposed to being a teacher is too high.

Despi te the language of labor union officials and the Clayton Anti Trust Act, labor services are com modities with price determined by supply and demand. 2 And just as government intervention into com modities markets has caused distor tions and misallocations, so, too, does intervention cause problems in the labor market. 3 Unemployment caused by excessive minimum wages has been well-documented, espe cially among youth and minority workers. 4 Yet, the problems caused by the current minimum wage law would be miniscule compared to the dislocations that would invariably be caused by comparable worth legis lation. In this next section we will examine the reasons for this claim. Sex and Wage Differences As has been already shown, wage rates are a function of consumer de mand, labor supply and opportunity cost. These factors play the major role in determining pay for both men and women in all occupations. One then asks: Why, on the whole, do women receive less pay than men, often for the same jobs? Which leads to the second, and more pertinent (for this paper) question: Why do some occupations, especially those domi nated by women, pay less than other occupations, especially those domi nated by males?

For many years feminists have sported buttons with 59¢ painted on them, the figure representing the pay women receive to each dollar earned by their male counterparts. (That number is obsolete. A recent Rand Corporation study shows that the percentage has risen to more than 64 percent and that 20-24 year old women earn about 90 percent of what men in that age bracket earn. 5) The button, they say, is proof that women are the subject of extreme discrimination in the workplace. Yet the feminists' argument fails to account for the opportunity cost of hiring male labor. Write Alchian and Allen: " ... if it (pay differential) were prejudice, whose prejudice is it? Why would male employers forsake the profits that could be achieved by hiring equally productive women at lower wages?"6 In other words, if the feminists' argument were true, then employers would be foolishly sad dling themselves with excess costs by hiring the more expensive male workers. And to further complicate the situation, it has also been sta tistically shown that "women in their thirties during the 1970s who 422 THE FREEMAN July have worked continuously since high school or college earned slightly more than single men."7 In sum, according to Alchian and Allen: . . . the basic factors explaining female male differentials appear to be the effects of the female's childbearing productivity and work in the household on her work experience-not employer prejudice and discrimination. 8 Economist Thomas Sowell, using the same information, concludes: Married women don't do nearly as well in most occupations for reasons that are obvious to anyone familiar with the re sponsibilities of wives and mothers. Mar ried men do better in their careers than single men or single women for reasons that are equally obvious to anyone fa miliar with how much of their personal and social needs and responsibilities are taken care of by their wives.

For -the same reason that a married woman can put less time into her career than a single woman, a married man can put more time into his career than a sin gle man, relying on his wife to take care of everything from sex to socks. What ever the merits or demerits ofthe present division of domestic responsibilities, it is not employer discrimination on the job.9 Full Time vs. Part Time Sowell goes on to point out that much of the wage differential be tween men and women comes be tween married men who work full time and part-time female workers or women newly divorced or widowed who are entering the job mar ket following a long absence from working. 10 He writes: Obviously, a woman in her thirties or forties who has been a housewife for a decade or two cannot re-enter the labor market, after her husband is gone, at the same level as a man who has been work ing full time all the years she was taking care of a home and children. ll While this information is valuable in helping determine why the "av erage" woman makes less than the "average" man, it only explains in part why many female-dominated occupations seem to be at a lower wage scale that the male-dominated ones. To further explain this differ ential, we must go back in history.

Before the advent of the modern economy, women labored in the fields alongside the men (this can still be seen in Third World countries as well as communist-dominated agrarian societies such as China). The early factory system brought men, women and children from the farms to the mills, and, in the first days of the In dustrial Revolution, it was not un usual to see entire families on the factory floors. 12 As capital became more sophisti cated and more abundant, the need for factory labor began to subside (which helped lead into the service oriented economy), at least as a per centage of the entire work force. As real wages rose, many women were 1985 SOCIAL JUSTICE OR SOCIAL TRANSFER? 423 able to stay at home while their hus·· bands worked, thus easing much of the burden placed upon them by having to take care of household chores, raising children and work u ing at a full-time job.

Following the Second World War-· which served as an employment ca·· talyst because it opened large seg·· ments of the labor force to women-· the number of married women work·· ing as a percentage of the female la·· bor force began to rise. At the same time, women's pay relative to that of men began to fall, reversing a pre·· war trend. I3 But by the late 1960s and early 1970s, both ratios began to reverse themselves and It is as·· sumed that female pay will continue to rise. The point here is that female pay has fluctuated as a result of social changes, not discrimination. It is safe to assume that whatever em ployer discrimination against fe males has existed was stronger be fore World War II than after (the same can be said for racial prejudice as well), yet female pay as a per centage of male pay fell for nearly 20 years following the war. And before the feminist movement and accom panying "affirmative action" legis lation gained real influence in this country, women's pay began to rise again.

Nor is women's pay the only dy namic aspect of female employment. While some job categories remain dominated by women, other employ ment areas that were once a male bastion are presently seeing an in flux of women. The following table demonstrates this statement: Percent of Women in Various Occupations 14 Occupation 1960 1972 1982 Accountant 16.8 21.7 38.6 AuthorslWriters 34.8 31.7 42.9 College Professors/Administrative 21.8 28.0 35.4 Cooks 63.8 69.8 65.7 Computer Specialists N.A. 16.8 28.5 Engineers N.A. 0.8 5.7 Bookkeepers 83.6 87.9 91.8 Insurance and Real Estate Agents 14.6 22.7 37.1 Lawyers and Judges 3.7 3.8 15.4 Medical/Dental Technicians 62.4 69.5 72.9 Registered Nurses N.A. 97.6 95.6 Physicians/Surgeons 6.9 12.7 23.8 Salaried Managers 13.2 17.6 28.0 Social Scientists 24.6 21.3 38.0 424 THE FREEMAN July As one can clearly see from this ta ble, the work world is rapidly and de cisively changing, at least in the re lationship of women and their careers. But the problem with com parable worth legislation is that it ignores this rapid change. Instead, proponents want to somehow freeze the employment world in its present state, an action that would not only be unjust to those who have not yet begun their careers, but would also be impossible to implement save changing our entire social order, an event not likely to occur. Indeed, the implementation of comparable worth legislation would serve to rel egate women to traditional roles and deny them the opportunities to move into employment fields that were once almost totally dominated by males.

The reason for this strong charge is that an attempt to base worker pay according to both sex and occupation would require far more occupational stability than the present system al lows. At the same time, new job cat egories would simply have to either be forbidden or face the same kind of Federal scrutiny that now is ap plied to new drugs and health aids. In other words, our economy's dy namic growth would disappear, being replaced by the stagnation that now characterizes the socialist bloc nations. Anyone who has Iived for more than a decade can easily see that job categories do not last forever. Re frigerators made the iceman obso lete in the 1930s and 1940s, and the new high-tech era now upon us has overhauled job categories with a vengeance never seen before. Posi tions that until a few years ago didn't even exist are now heavily sought after by capable and bright persons. Andjobs that were a mainstay in our economy a decade ago are only memories.

Comparable worth legislation would also be the most anticonsu mer set of laws ever passed because it would delegate to government the choices that now rest with consum ers. As we have pointed out earlier, jobs and their pay are ultimately de cided by the millions of votes cast in the marketplace. At its very best, government can only move after the fact, and by the time the leg islative process had solidified its hold upon the economy, consumer pref erences would have already directed massive changes which the new gov ernment directives could not control. As Ludwig von Mises and Fried rich A. Hayek have pointed out in their numerous volumes, govern ment simply does not have the re sources to keep up with the vast amounts of change generated by the private sector. The only way for gov ernment to handle such change, then, is to make it illegal and banish the private sector to an underground existence. But such action, as the 1985 SOCIAL JUSTICE OR SOCIAL TRANSFER? 425 people forced to live in communist!

socialist dominated nations have learned, extracts a dreadful cost, es pecially from the middle class and those in lower-income brackets working their way upward. An un changed economy is a stagnant one, and a stagnant economy offers nei ther the wealth nor the freedom that people can find in a vibrant, dy namic, unshackled one. Thus, comparable worth propo nents might find, if their pet legis lation were to be implemented and enforced, that they might win the battle but lose the war. True, the law would mandate that their financial positions be improved relative to others, but, in the end, they would ultimately be worse off than before as the economy deteriorates. Why, one might ask, would people continue to press for a national com parable worth law in the face of such a grim scenario? First, proponents do not believe such a succession of events as described above would happen if such legislation were to be passed. And, short of totalitarian revolution in the United States, they are right. But the point is that a to talitarian revolution is what would be required for comparable worth legislation to truly be effective. Any thing less coercive would give the market enough leeway to effectively repeal such an antimarket law, at least in part.

Second, and more important, the urge to use government as a way to gain at the expense of someone else runs deep among us. And, as Robert McCormick and Robert Tollison have written, the effective role of govern ment in our society is to transfer wealth, and to do it by force.15 To fur ther understand what comparable worth proponents want, then, we must examine possible wealth trans fers that are inherent in their proposals. Winnersand Losers Who, then, would benefit and who would be hurt? According to com parable pay advocates, the job cate gories in which workers might ben efit would include service-oriented occupations such as teaching, sec retarial skills, nursing, bookkeeping and the like as well as others such as librarians. If, by law, pay scales in those occupations were signifi cantly raised, the raises could be fi nanced in a number of ways. First, in the case of positions in govern ment services (and many of the oc cupational areas under the compa rable worth umbrella fall into the government category), taxes could be raised. If tax increases were not a vi able option, then government offi cials could slash the pay rates for other workers, such as public works crews, administrative assistants and/or cut their own pay. One does not have to be particularly politi cally astute to see the potential prob426 THE FREEMAN lems that would arise from this op tion; simply put, people want wealth transferred to, not away from them.

The final option would be to raise the pay of some workers in a partic ular category-at the expense of other workers in that same field, a practice that is common in unionized industries. Therefore, experienced or entrenched workers would benefit at the expense of employees with less seniority or experience. At the same time, entry-level positions in those areas would become more scarce, thereby depriving persons inter ested in that field a chance for employment. This option hardly seems "fair" to those who are not in a position of seniority, but it is the most viable and surely would be the avenue that would be taken by both government and the private sector should such legislation pass. Thus, in the end, comparable worth legislation, which has been designed to help raise the pay and work status of women, would serve to lessen employment opportunities for women, especially those on the lower economic scale.

Unskilled or semi-skilled workers would be hurt, and well-educated, politically-connected workers would benefit. We can see, then, that comparable worth is not really a mechanism that would create social justice but rather is yet another transfer scheme that would serve to help a privileged few at the expense of the less-privileged many. Its impact would be negative, as has been demonstrated. The market has been shown to give women far more choice than would be allowed under a system based on coercion. And, as the shift in jobs has shown us in the last 10 years, op portunities for women to work in higher-paying and fulfilling occu pations have grown and will con tinue to grow. Government can best foster that growth by keeping its hands as far from the labor market as possible. , -FOOTNOTES1Hans F. Sennholz, "The Demand for Labor," The Freeman (February, 1985), p. 84. 2Armen A. Alchian and William R. Allen, Ex change and Production (Belmont, California, 1983), p. 307.

3Sennholz, p. 90. 4Ibid. 5Robert W. Poole, Jr., "Working on the Wage Gap," Reason (March, 1985), pp. 18-19. 6Alchian and Allen, p. 316. 7Ibid. 8Ibid. 9Thomas Sowell, Pink and Brown People (Stanford, California, 1981), p. 33. loIbid. llIbid., p. 34. 12For more on the Industrial Revolution and working conditions, read Capitalism and the Historians, edited by E A. Hayek. 13Source : Statistical Abstract of the United States. 14Ibid. 15Robert E. McCormick and Robert D. Tolli son, Politicians, Legislation, and the Economy (Boston, 1981).

E. C. Pasour, Jr. AgriculturalTechnology. EconomicIncentivesand world Food problems BRITISH Parson Sir Thomas Malthus predicted in 1798 that population in creases over time would outstrip in creases in food production causing chronic food shortages. In recent years, a neo-Malthusian doctrine has again gained popularity as wide spread hunger problems, especially in Ethiopia and other African coun tries, command front-page head lines. It is ironic that visions of a starving Africa are obscuring a ma jor surge in agricultural productiv ity throughout much of the world to day. Moreover, there is a great deal of evidence that the most serious constraints on food production are not weather or natural resources but Dr. Pasour is Professor of Economics at North Car olina State University at Raleigh. rather government policies that sti fle entrepreneurial incentives. This paper presents evidence on rising farm productivity, the importance of economic incentives in agriculture, and implications for world food pro duction and economic development.

Rising Farm Productivity1 Increases in agricultural technol ogy are resulting in dramatic increases in farm productivity throughout much ofthe world. In the United States, farmers planted the world's first hybrid wheat in 1984, which increased yields from 25 to 30 percent. Rice growers in the Gulf states planted a new rice variety, which also had yields 25 to 30 per cent higher than earlier varieties. At the same time, Taiwanese farmers 427 428 THE FREEMAN July are feeding surplus rice to livestock. Agricultural output is also increas ing rapidly in the European Eco nomic Community (E.E.C.). Wheat yields rose 23 percent in the E.E.C. in 1984 and French harvest of field peas has jumped 50 percent in two years. Contrary to popular impression, world agricultural production is also increasing rapidly in the developing countries. Thailand, Malaysia, In donesia, and the Philippines have all increased their farm productivity by more than 35 percent in the last dec ade. The International Rice Research Institute has introduced its Third World rice variety, which requires much less nitrogen and pesticide protection to achieve yields compa rable to those of its previous "mir acle" rice varieties. Researchers in Peru are making breakthroughs in production in the huge Amazon Basin replacing trace minerals that leach rapidly because of the high rainfall. Argentine wheat has be come so cheap that grain companies recently considered importing it into the United States.

Agricultural productivity in Asia has been most influenced by the Green Revolution and by a recent dramatic shift in Chinese farm pol icy. Green Revolution rice varieties have been the biggest single factor in lifting Asian agricultural output by more than 25 percent during the past decade. Yet, potential gains from increases in available technology can be choked by policies that stifle entrepreneurial incentives. Technology Is Not Enough China provides a classic example both of the effect of collectivist ag ricultural policies and of what can happen when these policies are changed. In 1958, Chairman Mao de creed "The Year of the Great Leap Forward." Under the "Great Leap Program," large numbers of farm workers were to be diverted to in dustrial employment and the re maining farm population forced into agricultural communes. The loss in agricultural output caused by these policies was catastrophic. Food sup plies fell to famine levels and had not recovered by 1965. Thus, contrary to conventional wisdom, per capita food consumption actually decreased dur ing the Mao years.

China's agricultural output has increased dramatically since the late 1970s when a decision was made to increase farm product prices, scrap the big communal farms, and lease the land back to families and small groups. The privatization moves and the retreat from communism have been accompanied by an increase in foodgrain output of 12 percent a year for the past seven years despite bad weather in 1980, so that China has overtaken Russia as the world's largest wheat producer. 2 A recent article in The Economist reveals a general relationship be1985 WORLD FOOD PROBLEMS 429 tween market incentives and agri cultural production. 3 In a cross-coun try comparison of food production, Africa dominates the list of individ ual countries whose agriculture has increased the least since 1970. How ever, the difference between the most and least productive African states is dramatic. Significantly, the study concludes that: "Those which have done best-e.g., Ivory Coast and Ma lawi-have encouraged private own ership of land, or given peasant farmers security of tenure. The least productive have been those which have encouraged state and collective farms."2 The evidence suggests that prop erty rights and economic incentives are fully as important in less devel oped as in highly developed econ omies. This conclusion, however, should not be taken to mean that providing economic incentives will quickly transform a poor country.

There is no short-cut to economic development, with or without outside financial aid. (As shown below, financial aid often is counterproductive.) The solution to economic develop ment in low-income countries lies primarily within the countries themselves. The only long-run so lution to food and income problems in any country is to increase through capital formation the productivity of the people involved. When govern ment policies severely distort economic incentives and discourage capital formation, it is not surpris ing that productivity, including ag ricultural output, is low. What Can Be Done? There is evidence that more can be done to increase food production in poor countries. Large increases in output by peasants in India, China, and other countries show that in creases in agricultural output do not require big farms, big dams, big ir rigation systems or an "agricultural plan." Instead, the most important step is to provide entrepreneurial in centives. This means that poor coun tries need to scrap those policies that are biased against farmers such as high taxes, price controls on farm products, overvalued exchange rates that depress agricultural exports, and protectionist trade policies that increase the cost of fertilizer and farm machinery. 5 Developing countries, for example, often have regulations banning the importation of tractors, harvesters, and other mechanically powered farm machinery. Such restrictions are based on the old but persistent myth that machines destroy jobs.

This argument carried to its logical conclusion would prevent all substi tution of capital for labor and per manently keep workers at a subsis tence level. Another important step, as sug gested by the productivity figures 430 THE FREEMAN July presented above, is to increase the application of science in agricultural production. Per capita food produc tion rose 16 percent in South Amer ica and 10 percent in Asia between 1972 and 1982.6 This improved per formance is due both to improved farming technology and to stronger economic incentives to use it. Many small farmers in developing coun tries, given an incentive, can now benefit from higher yielding vari eties and better pest control. Africa-No Exception But what about Mrica? In recent months, the world's attention has been riveted on Africa's hunger problems. The food problem in Af rica is not due to the lack of natural resources. The problem is that most of Africa has continued to practice its traditional method of cultivation as rising population pressures allow fallow land less and less time to re cover its natural fertility. Overgraz ing is also encouraged by communal landholding. Public policies rooted in a development model stressing the necessity of central planning and ra pid industrialization stifle agricul tural production (and economic de velopment in general). Dennis Avery, senior agricultural analyst, U.S. Department of State, presents a vivid example: The importance of policy is amply dem onstrated in the neighboring countries of Kenya and Tanzania. The two nations have similar agricultural resources and histories-but in the 20 years since in dependence, they have followed diamet rically opposite farm policies. Kenya divided big landholdings among small holders, then backed the smallholders with price incentives, research and ex tension programs. Overall farm produc tivity increased 37 percent from 1971 to 1982. Tanzania forced its scattered fam ily farmers to consolidate into large vil lages ... Tanzania's farm output rose only 12 percent in the 11 years from 1971 to 1982-even by the Tanzanian govern ment's highly optimistic numbers. Only massive food aid forestalled widespread hunger in Tanzania even before the re cent drought. 7 Avery contends that even in Af rica, technology is now available to double yields and drought-proof its food supplies. 8 He cites as evidence a new, more drought-resistant sorghum hybrid developed in the Su dan that appears to have the poten tial to triple yields in much of East Africa. Also available is a new sorghum for the dryer region of the Sahel that apparently can double yields there. In West Africa, there is the potential to become self-suffi cient in rice by shifting from upland to swamp rice production. Nigeria has a new corn variety that yielded nine tons per hectare in the midst of last year's drought (the current av erage yield is one ton). New peanut varieties with yields several times those of current varieties are being tested in Senegal, Mozambique, 1985 WORLD FOOD PROBLEMS 431 Zambia, and Zimbabwe. Improved pest control and new varieties helped bring about a seven-fold increase in yields of cowpeas in West Africa. The fact that available technology has not been more widely applied in Af rica is not only a highly visible hu man tragedy but also an indictment of the government policies of African nations.

Farm Programs in Developed Countries Agricultural success in the less de veloped countries is also adversely affected by farm programs in the United States and other highly de veloped countries that subsidize do mestic agricultural output. When domestic prices of farm products are raised above the world price, im ports must be restricted to prevent domestic users from buying lower priced imports. As a result of the U.S. sugar price support program, for ex ample, domestic sugar price was four times the world price in late 1984. This import quota system, imposed by the world's biggest sugar market, is highly detrimental to Caribbean sugar producers. In addition, subsidies, easy credit terms, and reduced interest rates are often used in the United States, the European Economic Community, and other developed countries to in crease agricultural exports. Regard less of the type subsidy, producers in the exporting country receive an artificial advantage at the expense of producers in the countries where the products are "dumped." This dump ing of agricultural products in de veloping countries permits govern ments to keep the price of food cheap to the detriment of local farmers. De pendence on cheap imports discour ages agricultural development and food production. The conclusion is that in assisting developing coun tries, the United States, the E.E.C., and other highly developed coun tries should stop subsidizing their own farmers. While government farm programs in the United States are often sold to the public on the ba sis of helping "feed the world," these programs actually impede economic development and food production in less-developed countries.

Economic Aid The conventional wisdom for the past generation has been that poor countries cannot develop without fi nancial aid from the highly devel oped countries. Foreign aid, how ever, is not indispensable to economic progress. Indeed, P.T. Bauer shows that aid is more likely to obstruct development than to pro mote it. 9 Foreign aid reduces in comes in the donor countries and en ables the recipient country to follow counterproducti ve interventionist policies. Aid, for example, enabled Tanzania to pursue economic and so cial policies that are antithetical to 432 THE FREEMAN July both economic progress and individ ual freedom. The effects on farm out put of the Tanzanian experiment (which involved forcibly herding millions of people into collectivized villages) were described above. The Population Problem Neo-Malthusians frequently cite the population "explosion" as an in surmountable barrier in alleviating world hunger. The prophets of doom typically reach their conclusions on the basis of projecting past trends.

However, there is no reason to expect population to continue to increase at the same rate in developing countries as economic development occurs. When income levels rise in developing countries, the birth rate can be expected to decrease. lo Thus, the relationshp between population and food must be considered in the context of economic development. There is no evidence that Draconian population controls (such as compul sory sterilization or abortion) are re quired for economic development. Implicationsand Conclusions The world is currently undergoing a major increase in agricultural pro ductivity. World agricultural pro duction is at a record high and is in creasing rapidly. Agricultural output is increasing rapidly in the developing countries-rising from 2.7 percent per year in the early 1970s to 3.3 percent annually from 1977 to 1982. 11 This growth rate would have been even higher if not for the dismal record of agricultural production in Africa.

The famine in Afria emphasizes the urgency of modernizing African agriculture. Fortunately, much of the required technology is presently available. The coupling of technol ogy with economic incentives can in crease agricultural output in Africa just as it has in many countries throughout the world. There is no easy or quick solution to world hunger or economic devel opment. Production offood and other products is limited by available re sources, and the only realistic goal in any country is to make the most efficient use of these resources. The only effective way of increasing in comes is to increase capital forma tion and productivity. Foreign aid is no substitute for voluntary savings by the millions of people living in low-income countries. Programs and policies affecting physical inputs will have little effect on output in the absence of the proper social and economic climate.

Political controls of agriculture and other sectors of the economy inevit ably stifle individual initiative, cap ital accumulation, and productivity. It is no accident that, every country that has launched experiments in collectivized agriculture has wit nessed a decrease in agricultural productivity. Hong Kong, Singapore, 1985 WORLD FOOD PROBLEMS 433 South Korea and Taiwan are ex amples of countries that have pros pered by shunning collectivist eco nomic policies. The effect of recent limited privatization measures on agricultural output in China pro vides another dramatic example of the effect of economic incentives. Increases in agricultural technol ogy present a challenge to highly de veloped as well as to less developed countries. The temptation by gov ernment officials in both cases is to "manage agriculture." In the devel oped countries, domestic farm prod uct prices are increased above com petitive levels by expensive farm programs. Surpluses acquired in the operation of price support programs are often "dumped" in less devel oped countries. These policies are in imical to food production in less de veloped countries and to economic progress.

Rising farm productivity through out the world now holds the promise of undermining these protectionist farm policies. There seems little doubt that farm producers in all countries will face more competition in domestic and foreign markets as currently available technology is adopted more widely. There is no way to determine now what the ultimate effects of these developments on world agriculture will be. We can be confident, however, that a more pro ductive agriculture holds the poten tial to improve the lot of the world's hungry people. The challenge to gov ernments in developed and less de veloped countries then is to abstain from policies that restrict competi tion and trade. Such restrictions pre vent farmers and other workers in all countries from engaging in those activities in which they are most productive. Only through wide spread use of decentralized compet itive markets can agricultural re sources throughout the world be used most productively, yielding maximum benefits to people in all countries. i) -FOOTNOTESIThe productivity figures cited in this section are from two papers by Dennis T. Avery, Senior Agricultural Analyst, Bureau of Intelligence and Research, U.S. Department of State. "The Dilemma of Rising Farm Productivity" was presented before The Agribusiness Round table, September 10, 1984. "The Bad News for Farmers Is That the Global Bad News Is Wrong" was presented before the N.C. So ciety of Farm Managers and Rural Appraisers, February 28, 1985.

2"Business Brief: In Praise of Peasants," The Economist, February 2, 1985, pp. 86-87. 3Ibid., p. 87. 4Ibid. 5"Peasants Rising," The Economist, February 2, 1985, pp. 11-12. 6Dennis Avery, 1985, op. cit., p. 3. 'Dennis Avery, 1984, op. cit., pp. 6-7. 6Dennis Avery, 1985, op cit., p. 4. 9P.T. Bauer, Dissent on Development, Revised ed. (Cambridge, Mass.: Harvard Univ. Press, 1976), pp. 95-132. lOLudwigvon Mises, Human Action (Chicago: Henry Regnery and Co., 1966), p. 669. llDennis Avery, 1985, op. cit., p.3.

David M. Brown The Challenge of Liberalism IN OUR ERA the age-old assault of the state upon the individual has reached its zenith. Through such horrifying manifestations as Nazi Germany and Soviet Russia, the twentieth century has seen the rise of despotic utopias whose power to destroy seems all-encompassing. Meanwhile, the growth of welfare statism in those polities not yet ex plicitly totalitarian increasingly re stricts the scope of human action even as its advocates proclaim the futility of individual effort. The lone individual unwilling to participate in the game of power and depen dency finds his resources and integ rity strained to the crumbling point as he seeks the path to independent living. Mr. Brown of Syracuse, New York, Is a freelance writer and student of Individualism. 434 In this context, the emerging in fluence of an individualist move ment dedicated to the preservation of individual rights deserves both applause and scrutiny. Among its guiding lights are Ayn Rand and Ludwig von Mises, Friedrich Hayek and Robert Nozick. Whatever their differences, they and their followers agree that the state must shrink, that its intervention in the economic and· social realm is disastrous and il legitimate, that the individual must be allowed room to breathe and live.

But is their argument against the collectivist philosophy sufficient? And have they made their case for the individual? The modern libertarian movement has received scant serious attention from writers outside its mainstream, but its swelling ranks-and its in tellectual challenge to statist privi lege-are hard to ignore. A recent survey, Liberalism at Wits' End by Stephen Newman, grapples with the libertarian phenomenon. He con cludes that although the libertarian position is timely (if anachronistic), and its critique of state power often valuable, libertarianism at best of fers only a partial solution to "the crisis of public authority," at worst actually betrays liberty. Given Newman's professed alle giance to concepts like liberty and rights, it's not surprising that his answer to libertarianism rests in part on misconceptions regarding THE CHALLENGE OF LIBERALISM 435 what those terms imply politically.

In traditional collectivist fashion, he contrasts human rights with prop erty rights as if these two were op posite and inimical. The limiting of government to the "night watch man" role of retaliation against the use of force and fraud, in Newman's view, leaves uncountered the auton omy-threatening "tyranny of eco nomic power." In striving to refur bish the Lockean undergirding of the original American republic, the lib ertarian neglects this economic tyr anny in the name of property rights. In brief, libertarianism "calls for the renewal of liberal theory, but it dem onstrates liberalism at wits' end." Liberalism-not today's "liberal ism," synonymous with economic in terventionism, but the classical lib eralism that respects the sovereignty of the individual and the inviolabil ity of his rights-of course upholds the right of private property. But far from implying an abrupt lack of sen sitivity to the abuse of power "at the entrance to the market place," the consistent preservation of property rights is the only means of protect ing men's lives and achievements both from criminals in general and the government in particular. Such stark limiting of the government's purview does not mean that the in dividualist is indifferent to nonvi olent iniquities which he would for bid the state from acting against.

But he disagrees that legal coercion is an omnipotent and benevolent cor rective of social ills, and he compre hends the role of ideas in shaping human events. Error cannot be re futed with a club. The only lastingly influential weapon man has against ignorance and prejudice is his reason. Since the concept of rights is val idated by reference to what man re quires in a social context to pursue values successfully, any use of coer cion extending beyond that needed to defend the individual from hood lums and defrauders inevitably un dercuts the freedom that best pro motes every honest man's struggle. To ignore this must lead to disas trous consequences, such as are ev ident throughout history. Respect for the Individual The liberal philosophy is grounded on a profound respect and sympathy for the individual and an optimistic view of his potential. The liberal sees man as fundamentally efficacious, worthy of the fruits of his achieve ment, and able to accept responsi bility for his own life. This is the vi sion that must be articulated if liberalism is to be persuasive. Ifman were the helpless entity some depict him to be, freedom would seem of lit tle practical value, certainly few would be inspired to defend it.

Mr. Newman himself does take summary cognizance of a time and place-the United States before the 436 THE FREEMAN July turn of the century-when capital ism enabled the general widening of prospects that its admirers laud. "Free-market capitalism ... served the interests of rich and poor alike by opening the avenue of success to ambition and talent," he admits. Unfortunately, with the rise of eco nomic concentration, large-scale wage labor, and the End of the Fron tier as the nineteenth century drew to a close, it became obvious that "political and economic liberty could no longer guarantee personal auton omy or equal opportunity ... The changed conditions brought about a new politics and the expansion of state power."2 No Urge to Compete This scenario inverts the historical reality. In the free market, no inef ficient economic monolith could out last superior competition and the unchecked exercise of consumer choices. Monopoly power as such, in the sense of prohibiting or burden ing participation in the market place, was always conferred and en forced by governmental edict. The burgeoning of economic controls in fact led to diminished options, not vice versa. The controls were ration alized by collectivist dogma urging the sacrifice of the individual to the group, and supported by people who did not want to stand on their own.

The first "antitrust" legislation, the Sherman Antitrust Act, was backed by cotton farmers whose product was losing competitive ground to jute, while those unwilling to compete against the sugar and petroleum in dustries also unfurled the antitrust banner. At the time, the productive output of these trusts was generally rising as prices fell, a trend opposite to what the trustbusters were alleging. The trusts were organized as a means of making large-scale enter prises more economical, but had they attempted to raise prices above the dictates of supply and demand, such a move would have signaled other producers to enter the field.3 The op ponents ofefficiency and freedom, far from seeking to reclaim their inde pendence and autonomy as Newman argues, were forfeiting them in a quest for unearned gain. Newman's critique of the unham pered market obviously rests on something more fundamental than historical fallacy. In reality, the free market system, by releasing human energy to reach its full potential, en riches man's life and multiplies his opportunities. But Newman doesn't see it that way. Ignoring the role of personal effort and initiative, he maintains that "in the modern corporate economy ... the great ma jority of persons will find their au tonomy gravely circumscribed," in asmuch as they may be obliged to accept unpalatable employment for the sake of physical surviva1.4 1985 THE CHALLENGE OF LIBERALISM 437 -FOOTNOTESHow Jobs Develop The fact that the very existence of a job in the first place depends on some employer's successful produc tive effort, or that marginal employ ers (often the very ones ready to challenge corporate complacency) will be progressively forced out of business as controls and taxes grow, has apparently eluded Newman's at tention. A free economy is not a static economy. Any worker discon tented with his current station in life can save money, learn new skills, and so on in order to rise as high as his talent and energy will take him.

An independent man who knows the value of freedom and who re spects the rights of others will not demand handouts and market-out come" amendments" at the first sign of difficulty. As Ludwig von Mises writes, "If the longed-for success is not forthcoming, if the vicissitudes of fate destroy in the twinkling of an eye what had to be painstakingly built up by years of hard work, then he simply multiplies his exertions. He can look disaster in the eye with out despairing."5 Liberalism at Wits' End does have merit. Despite some condescension and occasionally creaky scholar ship, Newman manages to fairly summarize many common libertar ian ideas, while tracing their origins to such radical forefathers as Locke and the American revolutionaries. And he makes relevant criticisms of such aberrations in the movement as anarchism, subjectivist self-in dulgence and Pollyanna expecta tions. But the heroic ideal that· in spires so many individualists is grossly misconceived, and there is no awareness of a psychological litera ture defending the liberal attitude.

In the end, Stephen Newman's struggle against .liberalism is a los ing one. Too often, he doesn't antic ipate how his numerous, altogether unoriginal objections would be and have been answered by libertarian thinkers. This is especially disturb ing since, given the weighty values at stake, not even the sketchiest al ternative to an admittedly untena ble status quo is provided in the book. Even so, perhaps Newman's arguments against the individualist philosophy are the best that can be presented from a collectivist, "pub lic-interest" perspective. In which case, we might rightly conclude that they represent statism at wits' end. i 1 Newman, Stephen L. Liberalism at Wits' End: The Libertarian Revolt Against the Mod ern State (Cornell University Press: Ithaca and London, 1984), p. 11. 2Ibid., p. 16. 3For example, see "Competition (Except Where Prohibited by Law)" by Thomas J. DiLorenzo in the February '85 issue of Reason magazine.

4Newman, op. cit., p. 46. 5Mises, Ludwig Von. Liberalism: A Socio Economic Exposition (Sheed Andrews and McMeel, Inc.), 1978, p. 15.

Clint Bolick OURS is a nation rich in natural splendor. The very same geological forces that created the awesome beauty of America also provided us with a vast reservoir of resources. The environmental movement has attempted to convince us that gov ernment is the only line of defense preventing rapacious developers from attaining the wholesale de struction of our land. Every acre added to the public store, continues this line of reasoning, is an acre saved from bulldozers and oil drills. So it is that one-third of all of the land area of the United States is owned by the federal government. But the reality is that every parcel Mr. Bolick, attorney with the Mountain States Legal Foundation, presented this paper at a conference sponsored by the Political Economy Research center In Denver. It Is published here with their permission. 438 which is fully withdrawn from pro ductivity is enormously costly. The inevitable trade·off that occurs whenever resources are unavailable to commerce is that goods or services that could otherwise be produced are not, thus driving up their prices.

While certainly there are real ben efits in preserving land, the decision to withdraw lands from production rarely includes a sound evaluation of the opportunity costs. Moreover, where government opts to permit de velopment, it often does so in a man ner that is woefully inefficient. Gov ernment's very nature as a political entity, immune from private incen tives, dictates such inefficiency. The environmental movement's disdain for private control of land as well as productivity on public lands is based on flawed premises. Private PUBLIC LANDS AND PRIVATE INCENTIVES 439 ownership is not irreconcilable with environmental objectives, and is in fact harmonious with efficient, ra tional use of natural resources. The market provides strong incentives to facilitate multiple uses of property and to avoid waste. And since pri vate profits are derived from satis fying the wants of others, the mar ket encourages responsiveness to public demand.

As the owners of the public lands, it is time we reevaluate these prem ises. If our goal is conservation-the sound, optimal development of nat ural resources with due concern for our environment-we must consider whether the public sector is indeed suited to the task. The evidence demonstrates that it is not, and that a rational policy can only be achieved by turning to private al ternatives and incentives whenever possible. Public Lands: The Wealth of a Nation At latest count, the federal gov ernment controls 734 million acres of land. In the Rocky Mountain re gion, federal lands encompass 86% of the land mass of Nevada, 66% of Utah, 64% of Idaho, and large por tions of other states. Much of the land is rich in natural resources, although it is impossible to determine the full extent of these resources since much of the land is off limits to exploration. It is estimated that the Department of the Interior alone controls 85% of the nation's crude oil reserves, 40% of its natural gas, 80% of its oil shale, and a vast portion of its coal. The agency also controls prime grazing land, which sustains two million head of cattle and 2.3 million sheep and goats.

The established national policy fa vors multiple use and an accommo dation of the various interests which compete .for public lands. The Min ing and Minerals Policy Act of 1970,1 for instance, states that it is the "continuing policy of the Federal Government in the national interest to foster and encourage private enterprise in ... the orderly and economic development of domestic mineral resources, reserves, and re clamation of metals and minerals to help assure satisfaction of indus trial, security and environmental needs." Despite such policies, nearly 70% of the federal lands are unavailable for development or are heavily re stricted, designated as wilderness, endangered species habitats, recre ation areas, or in other ways that re strain productivity. 2 Legislation re cently passed by Congress will increase by 20-30 million acres the total of designated or actual wilder ness land, which already is equal to the area of California, Nevada, and Arizona combined. These enact ments remove from reach likely 440 THE FREEMAN July deposits of oil, gas, gold, silver, zinc, molybdenum, chromium, and platinum.

Given our dependency on foreign supplies of important resources, it is difficult to comprehend any sound reasons underlying the frenzy to lock up domestic resources. Only in a sys tem of government control, removed as it is from practical considerations, could the enormous oppportunity costs of completely removing re source-rich land from development be countenanced. Unfortunately, the burden of such an inefficient allo cation of benefits and costs is borne by the citizenry itself-the intended beneficiaries of public control. Public Control: Disincentives to Efficiency It is not particular policy-makers who are responsible for inefficient decision-making, but rather the public nature of the system itself. The public lands system, along with all government bureaucracies, is burdened by intrinsically ineffi cient characteristics, such as the following: 3 1. The federal lands are "owned"

by 220 million Americans. However, few citizens have the time or re sources to inform themselves about general policy issues relating to pub lic lands, let alone day-to-day man agement concerns. Neither can the public reasonably be expected to at tempt to influence every such decision. As a consequence, manage ment decisions are necessarily in the hands of a comparatively few indi viduals, far removed from the inter ests of the owners. 2. This results in a critical distinc tion between the public and private sectors: the separation of authority from responsibility. Whereas the market system allocates costs di rectly to those maktng the choices, government decision-makers are largely immunized from the conse quences of their decisions. Similarly, government officials are motivated not by the quest for profit-which can be obtained only by satisfying the desires of others-but by political concerns. Efficiency may not be the principal political goal at any par ticular time.

3. While the wishes of the vast ma jority of citizens are diluted in the political process, some people do have sufficient direct interest in the outcome of policy and management decisions to invest heavily in influ encing those outcomes. Unlike the market system, in which buyers and sellers are responsible for the con sequences of their own decisions, the political system can be exploited to allocate costs to one group and ben efits to another. For instance, when land is removed from development for recreational or aesthetic pur poses, those directly receiving the benefits rarely shoulder the full costs. Instead, their wishes are sub1985 PUBLIC LANDS AND PRIVATE INCENTIVES 441 sidized by taxpayers in general, thus effectuating a "transfer payment" of sorts. 4. Another result of the lack of a profit motive is the absence of a tan gible, objective measure of effi ciency. Output is frequently substi tuted for efficiency, as in the five year-plans of the Soviet Union. This is manifested perhaps most clearly in timber harvesting on public lands.

As Baden and Stroup have observed, the Forest Service "systematically supports inefficient timber produc tion. Instead of investing in the na tion's resources where the marginal returns are highest, the Forest Ser vice is influenced by political consid erations only haphazardly related to site productivitY.,,4 5. Bureaucratic inertia is often so entrenched that decision-makers cannot respond to changed condi tions. For instance, although the Na tional Forest Management Act of 1976 5 mandated the creation of a centralized planning process for the national forest system, not a single land management plan was devised after six years, despite $500 million in annual expenditures for that pur pose. In a time of national crisis, the bureaucracy's innate inefficiencies could paralyze its ability to react appropriately. 6. Many policies affect the inter ests of future generations, but there is no direct political pressure to ac count for these interests because the beneficiaries are not born yet, and thus can neither vote nor engage in lobbying efforts.

7. Bureaucrats, like all people, are self-interested. The incentives that promote private investment and de velopment do not exist in public land management. More importantly, the measures of success in government have nothing to do with land pro ductivity. Government officials who get ahead often do so by expanding their land bases. This gives them more power, which is the medium of exchange in government. This type of incentive will always foster bu reaucratic growth and the accretion ofpublic lands, regardless ofwhether such expansions are in the public in terest. Any gains in productivity which may result are therefore purely coincidental. Efficiency Advantages These are the costs inherent in placing property rights in the hands of government. These problems are exacerbated when public lands are insulated completely from market forces. Again, there are occasions in which the public may prefer such an outcome, but it is indeed misleading to assume that such an option is without enormous costs. And it is also far from certain that such choices always represent the wisest allocation of our precious resources.

The movement to increase public ownership and control of land is 442 THE FREEMAN July premised upon a misconceived view ofthe market system as wasteful and self-destructive. This viewpoint er roneously assumes that the private sector has no interest in conserva tion, whereas the converse is ac tually true. As earlier noted, a private owner can derive a profit from land only by satisfying the desires of others. The owner can create a short-term profit by removing all value from the prop erty and selling it as a service or product, but in so doing the owner will have diminished the value of the land itself. The most rational, long term strategy for a private owner is to preserve or renew the resource to the maximum possible extent, to as sign multiple uses wherever feasi ble, and to develop and carefully maintain the property itself so as to enhance its market value. The Pot latch forests are prime examples of well-preserved, multiple use prop erty in the private sector.

The most significant difference be tween public and private ownership of land is the commonality of au thority and responsibility. Benefits and costs are not severable. Thus, the owner is impelled to seek the op timal use of the property. If a private owner wastes resources or chooses to utilize them in a manner which is not their highest value, the costs cannot be passed along to taxpayers. There are degrees of ownership in terests, and the incentive to waste the property decreases as the degree of ownership increases. Consider the case of a homesite within a national park. A person renting the property for a week has little direct interest in preserving the property. In fact, a renter achieves a maximum return on the investment by extracting as much value as possible during the finite rental period. A leaseholder, particularly with an expectation of renewal, or a holder of a life estate, has an incentive to preserve the as set for a much longer period-but also an incentive to remove as much value as possible before the period expires. A person who owns full title to land, however, will realize maxi mum profit only by preserving and developing the land. Public land management can thus be enhanced by increasing, rather than eliminat ing, market incentives and by re moving decision-making from the political sphere.

Alternatives to the Status Quo A. Privatization. Presumably the most radical proposal for reform is the privatization of public lands. Such an alternative would simply add to the 2/3 of all real property that is presently owned-and gen erally well-managed-by private individuals. Advocates of privatization argue that rational land management can be advanced by assigning the rights to anyone in the public sector. Such 1985 PUBLIC LANDS AND PRIVATE INCENTIVES 443 an assignment would ultimately at tract high-valuing users, with whom the private owners would be free to transact. Baden and Stroup, for ex ample, have suggested that public lands be given to environmental or ganizations such as the Sierra Club. 6 In order for such groups to preserve the lands for aesthetic purposes, the property must be self-supporting. For instance, the Rainey Wildlife Sanc tuary, a 27,000 acre Louisiana wild life preserve owned by the Audubon Society, also sustains natural gas wells and private cattle herds. The Nature Conservancy is renowned for its ownership and preservation of lands in multiple use contexts. Sim ilarly, there is no reason why gov ernment lands cannot be sold with deed restrictions mandating preser vation and public access.

Professor Steve Hanke lists the fol lowing benefits of privatization: 7 • productivity would increase and costs per unit on the land would decrease; • consumers would be served more efficiently, since property owners would be free to serve them; • federal revenues would be generated; • negative and low-yielding govern ment assets would be eliminated; • state and local tax bases would be enlarged; and • land use decisions would be de politicized, and individual freedom and responsibility enhanced. President Reagan, recognizing the prospects for reducing the national debt through sale of surplus public lands, embarked upon a limited pri vatization program by issuing Ex ecutive Order No. 12348 in 1982. The Order instructed agencies to review real property holdings, improve management, and sell unneeded property. B. Increased Private Incen tives. Private uses of public lands, consistent with the government's stewardship responsibilities, should be expanded. Indeed, the Federal Land Policy and Management Act of 1976 calls for such an approach, but bureaucratic mismanagement has frustrated progress to date. In any event, when such uses are permit ted, property rights should be as signed to private users to increase efficiency incentives.

Grazing permits provide a prime example. Under the existing system that allocates permit preferences for public grazing lands to adjacent ranchers, there is little de facto dis tinction between the public and pri vate interests. The permits are transferable along with the base ranches, and are reflected in the val ue of the ranches for borrowing and sale purposes. As a result, ranchers frequently make sizable private investments on public lands for fencing, pipelines, wells, and so on.S But despite these incidents of pri444 THE FREEMAN vate ownership, the permits are nonetheless legally treated as mere "privileges," subject to casual revo cation or reduction, 9 often at the whim of local bureaucrats. Indeed, grazing permits are essentially the only significant government benefit to which the rights of due process of law do not attach. The Supreme Court abolished the distinction be tween rights and privileges in 1970,10 but procedural protections such as the right to a hearing, to present evi dence, and to cross-examine wit nesses have not yet been extended to permit holders.

C. Administrative Reform. Re forms that induce public land man agers to behave like their private counterparts could marginally im prove efficiency. Perhaps the most meaningful reform would be to tie agency budgets to returns from the lands supervised. Requiring bureau crats to pay their own way to some degree could induce market sensitive management and the sale of non-revenue-generating properties. Federal stewardship responsibili ties mandate responsiveness to the public interest. Specifically, a bal ance of important interests, such as resource development, grazing, rec reation, and preservation, is re quired. Unfortunately, it is the na ture of bureaucracy that it is more responsive to special rather than general interests. Conversely, it is market rather than political incentives that lend themselves to fulfilling the long term interests of the public. Yet the present trend is to remove rather than encourage private incentives.

Efficiency will be enhanced in pro portion to the degree of market forces allowed to operate. Government it self is an impediment to sound land management. Meaningful reform can be achieved only by limiting government's role and enhancing private property rights. Far from adding to the already vast supply of wilderness lands, we should place in private control those lands best suited to efficient development. -FOOTNOTES130 U.S.C. § 21a. 2R. Terrill, "Minerals Policy and the Public Lands," in R. Holwill, ed., Agenda '83 (The Heritage Foundation, 1983), p. 191, 193. aSee R. Stroup and J. Baden, Natural Re sources: Bureaucratic Myths and Environmen tal Management (Ballinger Publishing Co., 1983), p. 23-26. 4Ibid. at 11I. 516 U.S.C. § 1600, et seq. 6J. Baden and R. Stroup, "Saving the Wil derness: A Radical Proposal," Reason, July 1981, p. 28-36. 'lS. Hanke, "Land Policy," in Agenda '83 (note 2), p. 181, 181-82.

sG. Libecap, "Economic Interests of Grazing Permittees," in J. Smits, ed., Privatizing the Public Lands (Public Lands Council, 1983), p. 53,55-57. 9See 43 U.S.C. § 315a and 16 U.S.C. § 1508, stipulating that permittees acquire no interest or title in federal law. I°Goldberg v. Kelly, 397 U.S. 254 (1970).

A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN GOVERNMENTAND LEGAL PLUNDER EARLYON in his book about Bastiat, Government and Legal Plunder: Bas tiat Brought Up to Date (Foundation for Economic Education, 120 pp., $4.95, paperback), Dean Russell quotes what he calls "the most damning definition of government ever penned." It is the statement made by Frederic Bastiat to his fel low legislators in France of the 1840s. "The State," said Bastiat, "is the great fiction by which everybody tries to live at the expense of every body else." The French of Bastiat's day, of course, failed to comprehend what he was talking about. But in the En gland of the free traders, Cobden and Bright, he did have a hearing. Bas tiat, after all, was blood brother to the Britishers' own John Locke, who laid it down in 1688, the year of the Glorious Revolution, that the State's only legitimate function was to defend the individual's rights to life, liberty and property. Where Locke's compatriots were satisfied to call these the "rights of Englishmen," a phrase that found favor with the American colonists, the universal ists, of whom Bastiat was one, deemed them the natural rights of all men.

With great clarity Dean Russell explores Bastiat's sharp distinc tions. Life, liberty and property pre ceded government. The reason for government was to establish laws that would prevent one individual from plundering his neighbors. In a world of nationalisms there were col lective aspects to this-armies were necessary to defend borders. But this did not mean that government had the right to push collective action be yond the rules necessary to protect individuals in their natural rights. Bastiat's colleagues in the 1840s, 445 446 THE FREEMAN July who believed in majority rule, made the mistake of confusing legality with morality. It did not follow, said Bastiat, that something became moral just because 51 per cent of the people supported it. We need consti tutions to set certain things beyond the pale of the legislative process. Slavery, for example, would not be justified by a majority vote calling for its establishment.

There is an endearing quality in Dean Russell's rueful account of how he has attempted to apply Bastiat's principles to his own life. When he was a student at the Columbia Uni versity Graduate School of Journal ism, Russell had no answer to those who twitted him about his doubts about majority rule. He had to admit that he believed in democracy. It was not until years later that he found a satisfactory comeback by asking his own question, "Majority rule for what?" The Broken Window As a teacher of economics Russell has recited Bastiat's story of the "broken window" to thousands of students. Yes, as Bastiat explained, a broken window in a baker's shop made work for glaziers. But it prob ably kept the proprietor of the bak er's shop from buying a new suit of clothes. The tailor, in turn, lost the chance to buy something. Henry Hazlitt used the broken window fal lacy to great effect in his Economics in One Lesson. Dean Russell brought the fallacy home to his students at the University of Wisconsin in La Crosse by taking the State's decision to build a new graduate school ofvet erinary medicine as an unnecessary expense comparable to the replace ment of a window.

Wisconsin had been paying its neighboring state of Minnesota to al low 35 students a year to attend the Minnesota College of Veterinary Medicine. The expense created an "unfavorable balance of trade" be tween the two states. "Why," so a Wisconsin businessman asked, "not keep the currency in Wisconsin?" Money invested in a local veterinary college would create new jobs. A new school would need a full staff, which would incidentally provide a market for Wisconsin cheese and beer. Dean Russell gave an "A" to any student who could detect the fallacy in the businessman's idea that money spent across state lines is inevitably a loss. The Minnesotans obviously could use Wisconsin money to buy Wisconsin cheese. But when it came to giving himself an "A" Dean Russell went to the trou ble of arguing the whole matter of job-creation with a fellow professor. This professor had counted more than 100,000 new jobs coming from the construction of the veterinary college. Bulldozers and wreckers had to be brought in to knock down old buildings. Trucks had to haul away 1985 GOVERNMENT AND LEGAL PLUNDER 447 the debris. International Harvester and General Motors both profited.

When the new construction was completed, the electricians and the plumbers moved in at more than $50 per hour. Russell had to admit that his fellow professor had made a good case. But then he went home to contem plate, on his unscreened and mos quito-plagued patio, about his own tax contribution to the building of the veterinary college. As he drank his cheap Brand-X beer he wished he could afford the good beer that some of his vanished tax money might have supplied. His wife came out to mention their shabby furniture and stained drapes. The roof, she said, needed repair. As for Dean Russell himself, he needed a new suit and a decent pair of shoes. After reviewing the situation Dean Russell decided that the $6,000 he had paid in taxes to Wisconsin would have gone to create just as many jobs as any $6,000 allocated to the vet erinary college. Trade Barriers Russell enjoys bringing Bastiat home in spates of rueful analysis.

But there is nothing rueful about the "story examples" used by Bastiat to expose the fallacy of trying to im prove the domestic economy by re stricting foreign imports. Tariffs al ways cause higher prices and a decrease in products and services. To illustrate the inanity of trade restrictions Dean Russell takes his students to Japan for a look at the "orange situation." The Japanese insist on paying four times as much for their inferior domestic oranges as they would have to pay for Cali fornia's superior fruit. This infor mation caused students to become angry at Japanese "inscrutability." But Russell turned the anger into somewhat different channels by pointing out that Americans insist on forcing themselves to pay at least 50 per cent more for an American car than the Japanese are willing to charge for a better model. Russell might have mentioned that our re fusal to sell the Japanese oil from Alaska, which we could replace with oil from Mexico or elsewhere at sav ings all around, is just as stupid as the Japanese "inscrutability" about oranges.

Bastiat never heard the word "en titlements." One trembles to think about what he would have to say if he .could only be present in Wash ington in 1985. We have only begun to struggle with the consequences of disregarding his warnings about making legal plunder a way of life for the millions. Dean Russell has done a masterful job in indicating the enormity of the task that faces us in trying to go back to Bastiat. ® New! GOVERNMENT AND LEGALPLUNDER BastiatBroughtUp to Date Dean Russell Frederic Bastiat saw a century and a half ago that the law becomes legal plunder when it goes beyond simple defense of individual rights. Bastiat often presented his lessons in a series of clever and telling stories which explored and exploded the logic and true effects of the planned economy. Today his parables on free trade, the broken win dow fallacy, government schools, natural rights, and the law are just as true as they were in the 1840s.

In Government and Legal Plunder, Dean Russell uses Bastiat prin ciples as a starting point for his book, and provides contemporary ex amples of issues that we personally face every day. He shows that we must limit government's role in society and in the economy, to en courage individual initiative and human freedom. 120 pages $4.95 paperback Order from: The Foundation for Economic Education, Inc. Irvington-on-Hudson, NY 10533 the Freeman VOL. 35, NO. 8 • AUGUST 1985 Is It Fair? A Page on Freedom, No. 22 If free and peaceful, the outcome is fair. Howard Baetjer Jr. 451 The Anti-Apartheid Threat John Davenport 452 Another country's problem need not be aggravated by us. American Economic Progress The story of economic growth in the U.S. E. Barry Asmus Donald B. Billings 455 Either We Import Capital or We Export People Gustavo R. Velasco 465 An early warning of the harm done by barriers to trade.

Competition in the Prison Business Charles H. Logan 469 Exploring prospects for business competition in prison management. The Ultimate Source of Wealth Charles Dykes 479 Concerning the importance of human capital-and freedom. A Piece of Street Wisdom John K. Williams 484 The warning, and the promise, that causes have consequences. The Myth of National Industrial Policy Dennis Bechara 498 Why it would be wrong to resurrect the RFC. Book Reviews: 507 "From Adam Smith to the Wealth of America" by Alvin Rabushka "An American in Leningrad" by Logan Robinson "Making the Future Work" by John Diebold Anyone wishing to communicate with authors may send first-class mail in care of THE FREEMAN for forwarding.

IFreeman AMONTHLYJOURNAL OF IDEAS ON LIBERTY FOUNDATION FOR ECONOMIC EDUCATION Irvington-an-Hudson, N.Y. 10533 Tel: (914) 591·7230 President: Robert D. love Managing Editor: Paul L. Poirot Production Editors: Beth A. Hoffman Amy S. Vanlaar Contributing Editors: Robert G. Anderson Howard Baetjer Jr. Bettina Bien Greaves Charles H. Hamilton Edmund A. Opitz (Book Reviews) Brian Summers THE FREEMAN is published monthly by the Foundation for Economic Education, Inc., a nonpolitical, nonprofit, educational champion of private property, the free market, the profit and loss system, 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. Donations are invited in any amount. THE FREEMAN 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 $10.00 a year.

Copyright, 1985. The Foundation for Economic Education, Inc. Printed in U.S.A. Additional copies, postpaid: single copy $1.00; 10 or more, 50 cents each. THE FREEMAN is available on microfilm from University Microfilms International, 300 North Zeeb Road, Ann Arbor, Mich. 48106. Reprints are available of "A Page on Freedom," small quantities, no charge; 100 or more, 5 cents each. Permission is granted to reprint any article in this issue, with appropriate credit, except "American Economic Progress."

A Page on Freedom Is It Fair? Number 22 MANY think we can decide fairness by looking at how things are. We can't. Fairness depends on how they got that way. Advocates of a faulty doctrine called "comparable worth" say it is unfair that women in certain jobs are paid less than men in other jobs these advocates deem equally valuable. Some American auto makers say it is unfair that the Japanese can sell their cars for less than American counterparts. Advocates of income redistribution say it is unfair for wealthy people to accumulate more wealth than others. But these inequalities are not necessarily unfair. They might be, of course. Suppose the women are paid less because the men have a union which forces employers (through violent strikes) to pay them above-market wages. That would be unfair. Or suppose the Japanese can sell their cars for less because the U.S. government imposes quo tas on the number of American cars sold. That would be unfair.Sup pose wealthy people receive more income than others because the government gives them other people's money. That, too, would be unfair. Each of these situations would be unfair-not because of their inequality, but because they occur through force.

On the other hand, if the wages are freely negotiated and agreed upon, if Japanese cars sell cheaper because Japanese auto workers produce more for less pay, if the rich make their money by providing a desired product at an affordable price, all is fair no matter how unequal. We might not choose those outcomes, but they are fair. Process determines fairness-fair process, fair outcome. If a process involves force and legal privilege, its outcome is unfair, though equality itself. But as long as a process is free and peaceful, its out come is fair. This is why the market process-free, peaceful exchange-embodies economic justice. -Howard Baetjer Jr. (I) THE FOUNDATION FOR ECONOMIC EDUCATION, INC. IRVINGTON-ON-HUDSON, NEW YORK 10533 451 John Davenport The Anti-Apartheid Threat ACCORDINGTO LENIN the road to the communization of Europe lay through the heart of Mrica. Today this dictum could be amended and sharpened. The road to destabilizing Africa's major economy, namely South Africa itself, and cutting it off from the West lies straight through the financial markets of Wall Street, the American universities, and the halls of Congress.

The spearhead of this attack on South Africa is the anti -apartheid lobby which aims to strike down all customs and laws making for the separation of the races. To this end liberals and communists demon strate outside the South African Em bassy in Washington and its consuJohn A. Davenport is a former editor of Barron's and former member of the board of editors of Fortune. 452 lates throughout America. Excited students parade across our cam puses to force trustees to sell off South African securities. Mean while, Congress strongly favors leg islation which strikes at the heart of South African sovereignty not to mention constitutional rights of American citizens. The thrust of this Draconian leg islation is to bludgeon South Africa into changing her racial ways by limiting U.S. bank loans to her gov ernment, prohibiting purchase of gold Krugerrands, and, worst of all, snuffing out new direct corporate in vestment in the country. Paradoxi cally, it has been black South Mri can leaders who have seen the dangers of this approach. When Sen ator Kennedy visited South Africa he found to his astonishment that it was blacks who hooted him down. In a powerful article in The Wall Street Journal, Chief of the Zulus, Man gosuthu Gatsha Buthelezi, warned against this disinvestment policy.

The cutting edge for social change, he argued, has been the presence of American corporations. Anything which decreases U.S. investment in South Africa, now running to two and a half billion dollars, must drag down the living standards of blacks no less than whites. But as matters have turned out the anti-apartheid lobby is not much in terested in raising black living stan dards. The attack on South Africa THE ANTI-APARTHEID THREAT 453 has been programmed by such out fits as TransMrica and by radicals who have again and again favored Soviet interests in Cuba, Central America, and the Middle East. But this claque never could have achieved overwhelming influence in the House and strong support in the Senate had not Liberals suc cumbed to a perverse delusion. This delusion is that the United States has a right to impose its social ideals on South Mrica by intimidation and ostracism. Yet American experience; starting from the priceless inheritance of a common language and law but en tailing long years of slavery and bloody civil war, offers a poor guide as to the road South Mrica can or should travel. South Africa is not America. It is a sovereign state but one that embraces 4.5 million whites, nearly one million Indians from In dia who would not return if paid to do so; some three million Coloureds, product of early mixed marriages, who most closely resemble our American blacks, and finally sev enteen million Bantu speaking a va riety of tongues who retain strong tribal affiliations. Perhaps half of these live in the increasingly auton omous homelands; the other half in close association with whites in the country's urban areas.

In this strange mixture of cultures and subcultures the weeds of apart heid, an ugly word for separateness, took early root though its outward manifestations have changed over the years. Americans visiting South Mrica no longer encounter those de grading signs of petty apartheid that used to disfigure Jan Smuts Airport. Job reservation for whites in the mines and factories has been under mined by that very investment which our American legislators are seeking to snuff out. What remains is a complex system of laws deter mining where each race can live. These surely do conflict with per sonalliberty. In the good society leg islation ought to be color blind. Yet even the most sanctimonious Congressman should have exhibited a measure of prudence before trying to tear up the country's social fabric. The people of Soweto, the sprawling black township in the shadow of Jo hannesburg's skyscrapers, may rightly resent the fact that while by day they can mix freely with the whites, they must return to Soweto by nightfall. Yet these same resi dents would be even more resentful if tribes from the hinterland invaded their township in search of better housing.

It is fatuous to believe that if all past laws were torn up tomorrow, peace and harmony would prevail. The result might well be wars be tween black and black such as have swept other areas of Mrica. Time, education, and the kneading forces of a market economy may make 454 THE FREEMAN forced apartheid obsolete. Bellows from Washington will not contribute to this desired end. Similar reflections concern the broadening of the franchise where the world owes South Africa a debt for refusing to go along with the mania of majority rule and "one man one vote once." Admittedly the color bar is an offensive and clumsy way to limit the follies of doctrinaire de mocracy. Far better to knit minimal educational or property require ments into the franchise as obtained in the infancy of the United States. This approach was embodied in the Rhodesian Constitution of the six ties. Perversely the West turned its back on this hopeful experiment and today Rhodesia, renamed Zim babwe, languishes under the one party tribal rule of Mugabe.

South Africa has watched this de nouement with increasing cynicism. It has given Indians and Coloureds a place in its Parliamentary struc ture and is now reaching out toward some kind of power-sharing with the Bantu, while avoiding majority rule. Bishop·Tutu regards these moves as mere "crumbs from the white man's table." Others may see them as win dows of opportunity. The critical question however for Americans is a simpler one. It is whether at 9,000 miles remove the U.S. has the wisdom or indeed the will to manage and dictate South Af rican affairs. This the more so because in the case of most other na tions we have learned to curb our innate idealism. Americans have not forgiven China for slaughtering millions in its "cultural revolution," but we nonetheless are doing big business with China. We do not seek to tear down India's caste system, though it may be a palpable cause of much misery. The very banks which under proposed legislation would be pre vented from lending money to South Africa are today pouring money into East Germany which is fomenting discord in Southwest Africa (Nam bia). Why single out South Africa for special treatment when she has re mained loyal to the West and re sisted Communist subversion and Soviet dictation?

The truth is that in the name of morality America is waging an im moral war of aggression on South Africa. The President has a Consti tutional duty to veto sanctions or threat of sanctions against that country and should powerfully reas sert America's enduring strategic interest. That interest lies in seeing to it that South Africa's vast store of mineral wealth remains in friendly hands. It is also to see to it that the sea routes around the Cape of Good Hope are properly defended. In the furor over apartheid it is easy to for get these imperatives. We may be sure the Soviets are making no such miscalculation. @) E. Barry Asmus Donald B. Billings American Economic Progress THE English Industrial Revolution of the late eighteenth and early nineteenth centuries created new technologies, production processes, and machines of both marvel and miracle. Many became available to the rest of the world following the War of 1812. But it was the Ameri can entrepreneur who successfully borrowed, adapted, and applied these new ideas in the United States.

Complemented on the American continent by the rich endowment of land and resources and a limited but literate population, but unencum bered by vestiges of feudal restric tions, the technologies begun in Great Britain were utilized by the industrious people of this new nation. In addition, the presence of a poDr. BarryAsmus is an economist and national speaker living in Phoenix, Arizona. Dr. Don Billings Is Pro fessor of Economics at Boise State University. This article is taken from their book, Crossroads: The Great American Experiment, pUblished In 1984 by University Press of America. Reprinted by per mission of the pUblisher. litical and social environment which rewarded work, encouraged savings and investment, and in large part left individuals alone in the pursuit of their own interests, also contrib uted importantly to the transfor mation of the American economy. A crucial ingredient in that ad vance was a set of economic insti tutions which provided the impetus for individuals to better their own condition: private ownership of the means of production, voluntary ex change in open and free markets, and a price system which assigned resources to their highest and most valued uses.

The benefits attributed to the "open qualities of American society" produced a willingness to consider and adapt new and better ways to get things done. In this environment, the propensity to "truck, barter, and ex change" was encouraged, and "the uniform, constant, and uninter rupted effort of every man to better his condition," in combination with the richness of the American conti455 456 THE FREEMAN August nent's natural environment, gener ated the most remarkable increase in wealth and progress mankind had ever experienced. Viewed as a long term process of raising living stan dards, competitive capitalism in the nineteenth century was eminently successful. From a Feudal System to One of Private Property In contrast to the success of private property arrangements in the nine teenth century, it is interesting that in the earlier phases of the British colonization of the eastern seaboard, attempts were made to transfer com munal arrangements of land own ership to America. The Virginia Company, for example, tried to es tablish a structure of property rights reflecting the late feudal system of Europe. Such efforts at common ownership discouraged individual motivation, however, and gave set tlers little incentive to better their own condition. The Virginia Com pany was eventually dissolved, and a system of private property rights in the land, a system of "freeholds,"

came to dominate American agri culture. Following the successful revolu tionary break with England, the new nation sought to establish the insti tutional arrangements necessary for economic growth. This would in volve, as Adam Smith had said, se curing the property rights of individuals, extending the market so that specialization might be encour aged, and insuring that gains in pro ductivity might become part of a self sustaining process of economic ex pansion. Fundamental decisions were made which increased and en couraged the role of the private sec tor of the economy and left relatively few functions for government. As an example, a significant con sequence of the constitutional con vention in Philadelphia in 1787 in volved the prohibition on tariffs between'the several states. Drawing on the ideas of Adam Smith and his Wealth ofNations, free'trade was en couraged among the United States.

The relevant market was thus ex tended and future economic expan sion was assured. The provision in the new Constitution for a patent system further strengthened private property rights, thereby encourag ing inventions and entrepreneur ship. The increased security of in dividual rights to property in combination with provision for the enforcement of private contracts laid the basis for a large and continuous increase in production and wealth. Since rights were protected and en forced, business risk was limited to that arising from the vagaries of the market, exclusive of government changing the legal, environment. Thousands upon thousands were willing to take a chance at reaching the golden ring.

1985 AMERICAN ECONOMIC PROGRESS 457 This constitutional period set the stage for the economic revolution which would follow in the nine teenth century. As stated in the highly acclaimed American Eco nomic Growth: "In short, the whole structure of the institutions and the legal enactments of this period, was designed to encourage the growth of the private sector by reducing trans~ action costs, with the supplemental result of shifting the private-public mix in favor of the former." Govern ment was largely restrained to pro tecting property rights and private individuals were allowed to work and produce. The rise of competitive capitalism in the United States had its impor tant beginnings in those early years of the Republic. The emphasis on private property and, therefore, pri vate initiative was also stimulated by a massive shift of resources from public lands to the private sector, culminating in the Homestead Act of 1862. The slow transition to an in dustrialized America and the pace of economic growth was quickening in the early decades of the nineteenth century.

Civil War Interrupts EconomicProgress The coming of the Civil War rep resented a dramatic interruption in this economic progress. It was an es pecially important watershed pe riod. Some industries, mostly in the North, such as woolen textiles, shoes and boot manufacturing, sewing ma chines, and farm machinery were stimulated by the hostilities. Other industries were contracting. Accord ing to Dudley Dillard and other eco nomic historians "... the Civil War was a major disrupting influence to American life and retarded, per haps, as many economic activities as it stimulated." Based on available statistics on employment and the value of output by economic sector, it is apparent that the Civil War separated an agricultural America from the industrial economy that followed. After the CivlI -War, progress be gan again. One author has called that period until the eve of World War I "the most rapid and striking transformation of a major social or der in the history of mankind."

Other writers and historians have characterized this time as the "Gilded Age" or the "Age of Ex cess." In any case, the United States was propelled to the rank of being the wealthiest country and having the highest standard of living in the world. While progress was uneven due to cyclical changes in the level of economic activity, the real mate rial standard of living, as measured by the real earnings of nonfarm em ployees, showed an accelerating ad vance. Not only did real wages rise significantly, but at the same time the work day was becoming shorter.

458 THE FREEMAN August The average work day in manufac turing and mechanical establish ments was 11.5 hours in 1850, 9.8 hours in 1900, and down to 8.5 hours in 1920. Dorothy Brady, in American Economic Growth, observed that " ... the refinements that house holds with modest means were in troducing into their homes in the 1830's and earlier, became available to the poor. By the 1870's such ar ticles as beds, bedding, chairs, ta bles, dishes, knives, and forks were considered indispensable even to the poor." And these material gains, it must be remembered, occurred be fore labor unions were at all signif icant as a portion of the American labor force. UnprecedentedGrowth Historically, we must remind our selves, economic progress has been very slow throughout the world. Generations and even centuries would pass without noticeable dif ferences in the standard of living. This so-called "Age of Excess" in the United States, and the earlier In., dustrial Revolution in Great Brit ain, represented an unprecedented break with the past. Per capita in come was doubling every 30 years, and Americans came to expect a con stantly improving economic life. The die was cast, there was no turning back. The agricultural revolution in America was giving way to an in dustrial revolution. By the late 1870's, employment in non-agricul tural occupations exceeded employ ment in agriculture. Between 1860 and 1910, the percentage of the labor force engaged in agriculture fell from about 60 percent to approximately 30 percent. Today it is less than 3 percent. The value of output in the manufacturing sector surpassed that of agriculture during the decade of the 1880's.

The massive and rapid transition to a fully industrialized economy was assisted by the building of the trans continental railroads. While rail road building involved a curious "mixture of government paternal ism," it was essentially a laissez faire philosophy that marked public policy. Government was careful not to offend the strident individualism of the post-Civil War period. In order to stimulate and accelerate the pace in the construction of a transconti nental rail connection with the West, more than 130 million acres of land adjacent to railway right-of-ways were granted to railroad companies between 1850 and 1871. For exam ple, the Union Pacific received 20 million acres, while the Northern Pacific acquired 42 million. Never theless, and in spite of these land grant subsidies, the actual construc tion of the railroads was with pri vate money and was carried out through the entrepreneurial skills of the Vanderbilts, Goulds, Hills, and Morgans. Capital was more gener1985 AMERICAN ECONOMIC PROGRESS 459 ously available in part because of the decline in the federal debt during this period. On the eve of the Civil War there were roughly 30,000 miles of track, by 1890 there were 170,000 miles, and by 1916 there were 250,000 miles. The railroad con struction boom created a truly in tegrated national market for the products of American farms, mines, and factories. Indicative of this growth in markets was the growth in ton-miles of freight hauled. In 1859 railroads carried 2.6 billion ton miles, by 1890 the figure had ex ploded to 80 billion ton-miles.

Specialization Since more geography meant ex panded markets, economies of scale could be attained by specialization in production and distribution. Mass production techniques were encour aged by the new national market, and assembly line principles of pro duction were employed by a number of industries. Automobile companies adopted the "process experiments" conducted by the slaughterhouses and grain mills. The "disassembly" ofpigs in slaughterhouses during the first decade of the 20th century pro vided the guidelines followed by Henry Ford's assembly line in the second decade. The "rationalization of the work process" permitted larger volumes of production and lower costs than would have other wise been possible. In 1916, the Ford Motor Company sold more than one half million Model T's at a retail price of less than $400 and shipped them all across the country on the radically improved and integrated national transportation network.

Ford's experiment, which relied on an industrial system that used "the principles of power, accuracy, econ omy, system, continuity, speed, and repetition," made available to the growing middle class the automo bile: America's great "freedom ma chine." Henry Ford literally placed a steering wheel in the hands of every working person in America. This is a feat which most industrial ized countries of the world have still not totally accomplished. The Great Entrepreneurs In the process of rationalizing techniques of production, the great entrepreneurs of the Gilded Age brought to the American people ever greater quantities of consumer goods at continuously lower prices. Since an essential input to most, if not all, of the new industries was steel, it was Andrew Carnegie who, through his entrepreneurial leadership and production techniques, filled the void and brought remarkable results.

Writes William Greenleaf: Carnegie's unrelenting insistence of cost-cutting through progressive technol ogy reduced the price of a ton of steel from $65 a ton in 1872 to $20 a ton in 1897.

460 THE FREEMAN August Between 1889 and 1900, Carnegie boosted his annual steel output from 322,000 tons to 3 million tons. During that time his profits increased eight times over, reach ing $40 million in 1900. Rising productivity also meant higher real wages for steel workers. In the process of searching for en trepreneurial profits, Carnegie's ef forts generated large increases in the output of steel at drastically lower prices, but higher wages for those in the industry. Unfortunately, the clearly beneficial results of Carne gie's cost cutting efforts are still viewed by many as selfish profiteer ing. This is a most unfortunate twisting of the facts. John D. Rockefeller was another "Robber Baron" who, with the as sistance of entrepreneurial partners Samuel Andrews, Henry Flagler, and his brother William Rockefeller, led the race in petroleum refining and distribution. This competitive race, in which Rockefeller set the pace for a while, revolutionized the average American's life and stan dard of living. The Rockefeller or ganization began refining petro leum products in 1865. By 1870, Rockefeller's share of total refined output was 4 percent, and at that time there were approximately 250 independent refiners. By 1880 the Rockefeller share was more than 80 percent, and the number of indepen dent refiners had fallen to less than 100. The decrease in numbers was encouraged by the generally defla tionary movement in prices during the 1870's, and by the economies of large scale production associated with the introduction of destructive distillation (petroleum "cracking").

The myth ofpredatory pricing, as the source of Rockefeller gains, has been soundly refuted by John S. McGee in a 1958 article in The Journal ofLaw and Economics. In actual fact, rival refineries were frequently pur chased by the Standard Oil Com pany at "outrageously" high prices. One George Rice in 1882 literally tried to "bribe and blackmail" Stan dard Oil into paying a price for his refinery which was inflated by a fac tor often. Standard Oil For economic growth and Ameri can living standards, however, we are interested in the implications of the competitive forces for costs of production and consumer prices. During the period in which the Rockefeller interests were supposed to have monopolized the petroleum industry, Dominick Armentano has captured the flavor of what was in fact going on: Between 1870 and 1885 the price of re fined kerosene dropped from 26 cents to '8 cents per gallon. In the same period, the Standard Oil Company reduced the av erage costs per gallon from almost 3 cents in 1870 to 0.452 cents in 1885. Clearly, the firm was relatively efficient, and a 1985 AMERICAN ECONOMIC PROGRESS 461 good share of that efficiency was trans mitted profitably to the consumer in the form of lower prices for a much improved product.

As costs and prices continued to fall into the twentieth century, Stan dard Oil experienced a progressively less important and less secure posi tion. Fuel oil, lubricating oils, and gasoline began to replace the kero sene age; new crude supplies were discovered in the Southwest and California; and additional inte grated petroleum companies entered the competitive oil business. Stan dard's share of crude supply fell from 34 percent of total market supplies in 1898 to just 11 percent in 1906. On the eve of the government antitrust suit against the Standard Oil Com pany in 1911, its share of the petro leum products market was 64 per cent, down from a high of 88 percent in 1890. The per gallon barrel price of refined oil, which had been 9.33 cents in 1880, declined to 5.91 cents in 1897, and continued to decline into the twentieth century. Yet in the face of these facts, on May 15, 1911, the United States Su preme Court ruled that the Stan dard Oil Company had "unreason ably" conspired to restrain trade, and, therefore, was in violation ofthe Sherman Antitrust Act of 1890. The socially beneficial effects of lower prices, and very large increases in the production and consumption of petroleum, was apparently not conCrossroadsis an important and comprehensive presentation of the rise, decline, and restora tion of freedom and the market economy. The authors do an outstanding job of introducing readers to the history and na ture of the American free mar ket experiment. Copies can be ordered from the American Studies Institute, 3420 East Shea, Suite 266A, Phoenix, Ar izona 85028: Paper $14.25, Cloth $26.75. Pleaseadd $1.50 for shipping and handling.

sidered at all. The accepted meaning of monopoly-the restriction of out put and higher prices-was to be turned on its head. Standard Oil was to be dissolved for increasing output and lowering prices. This case is just one example of where government chooses to interfere with economic activities regardless of the actual situation. In our own time, govern ment agencies find fault with IBM for increasing production and low ering the price of processing infor mation through innovation. If the price is too high, then government charges monopoly. If the price is too low, government charges unfair competition. What about the same price? Then, of course, the govern ment charges price fixing. The gov ernment rule seems to be: no matter the price, it is suspect.

462 THE FREEMAN August Competition and Government in the Gilded Age In· fact, the conventional wisdom that the American economy in gen eral was controlled by giant monop oly trusts around the turn of the century is itself incorrect. As the railroad tycoon James J. Hill said in 1901: "... the trust ... came into being as the result of an effort to ob tain ruinous competition." Accord ing to the economic historian Ga briel Kolko, monopoly during this period "... was the exceptional and not routine characteristic of most in dustries, and the use ofthe term 'mo nopoly' or 'trust' by defenders of the status quo, was based more on wish fulfillment than on economic real ity." Kolko quotes from an issue of The Iron Age in 1900 which sadly summarized the difficulty encoun tered in short-circuiting the compet itive process: Experience has shown that very few of the promises of the promoters of consol idation have materialized. That some of them are satisfactorily profitable is un doubtedly true . . . Others are less so some are conspicuously unprofitable: some have dissolved, and more will have to dissolve within the next two or three years.

The pressures of the inherently competitive open market system re quired that those wishing to protect themselves from new and potential competition had to turn to government for aid and protection. But imagine the kind of world we would have if business was generally suc cessful in hiding behind govern ment. Instead of solving problems through individual initiative, people would be encouraged to lobby, dem onstrate, coerce, threaten, and use government power to their own ends. In most cases, government action is synonymous with monopoly and the naked use of power. Seldom can a company maintain a monopoly po sition for long without the mantle of government protection. Profits at tract entry. The life ofthe incumbent is quite uneasy, and they must con stantly be looking over their shoul der for potential competitors. How ever, through licensing, controls, import restrictions, tax credits, de pletion allowances, and other de vices, government can successfully impede rivalry, and, hence, reduce or eliminate competition. In reality, government is controlled by power ful special-interest groups, and it is these minority interests that, with out exception, work at cross-pur poses to the private interests of the average citizen. It is this movement to state enforced monopoly which Gabriel Kolko has termed "The Triumph of Conservatism."

In general, then, most historians have this thing backwards. Seldom have antitrust laws ever been used against a firm that was restricting production and raising prices, but al1985 AMERICAN ECONOMIC PROGRESS 463 most always the firms that get pros ecuted are the ones that expand pro duction and lower prices. The result is that they get a larger market share. The question is: Should that be construed as bad? Suits are brought against these firms be~ause they attract and hold customers day after-day, and conduct transaction after-transaction in markets where new entrants are always a realistic possibility. In the final analysis, these firms are merely being respon sive to the consumer because they recognize that the consumer is king. As an example, and contrary to pop ular assumptions, the Interstate Commerce Commission was not cre ated to regulate a natural monopoly. It was lobbied in the Congress by in fluential eastern railroad interests as a means of enforcing their price fixing agreements and other cartel type behavior; enforcement which had proven to be impossible in the free and open market place. Kolko summarizes this more realistic perspective: Despite the large number of mergers, and the growth in the absolute size of many corporations, the dominant ten dency in the American economy at the beginning of this century was toward growing competition ... As new compet itors sprang up, and as economic power was diffused throughout an expanding nation, it became apparent to many im portant businessmen that only the na tional government could rationalize the economy . . . ironically, contrary to the consensus of historians, it was not the ex istence of monopoly that caused the fed eral government to intervene in the econ omy, but the lack of it.

The Great Transformation On the eve of World War I, after a century of remarkable progress in the United States, economic growth and its benefits for raising the stan dard of living were evident for all to see. It was a time during which cap italism (cynics call it "Social Dar winism"), was given a chance, the role of government in economic af fairs, while substantial in some in stances, was quite limited in scope. Living standards, longevity, and eco nomic opportunity grew to levels un imaginable merely a hundred years earlier. Though progress was un even, and some people grew fabu lously rich, it was in part the poor who experienced the greatest im provements. By the end of the nine teenth century, America's poor en joyed material living standards significantly higher than most of the world's population. Something indeed must have been right in America. If not in the view of many historians and their social theories, then in the actions of the "teeming millions" who immigrated to the United States by voting for competitive capitalism with their feet. The truth was out that America offered economic opportunity and 464 THE FREEMAN political freedom. Between 1860 and 1890, more than ten million immi grants came to America to seek their fortunes. During the period between 1895 and 1915, on the average, more than one million immigrants a year came to the United States. Thomas Sowell, a contemporary economist, documents in his Race and Econom ics, the important degree to which these immigrants, mostly carrying just the clothes on their backs, were largely assimilated, within a gen eration or two, into the mainstream of American economic life.

The great increase in wealth and economic progress in the nineteenth century, which was shared by most if not all Americans, can largely be attributed to the revolutionary ideas of John Locke, Thomas Jefferson, and Adam Smith. They redefined the relationship of sovereign individu als to their government, and clearly demonstrated the socially beneficial results of a system of natural liberty. Political and economic freedom, af ter all, go hand-in-hand, and they produced living standards which even Karl Marx recognized would occur. But "capitalism" in many quar ters is, nevertheless, perceived to be morally unacceptable. While agree ing to its material advantages, aca demicians, pastors, parlor groups, people in the media, and other word merchants, believe capitalism is un worthy of compliment or retention. Even in the face of Stalin and Mao, the gulag and bure~ucracy, and re peated socialistic failures world wide, the dream lives on that there exists a better system than capital ism. Perhaps there is. But history, and especially the United States and its economic system during the nine teenth century, shows clear and overwhelming evidence that private ownership and limited government produce a system of natural liberty that allows man more freedom, eco nomic opportunity, and a better chance to improve himself than any other system known to man. Though falling far short of utopian dreams, it would seem far ahead of whatever is in second place. (I BIBLIOGRAPHY Armentano, Dominick. Antitrust and Monop oly: Anatomy of a Policy Failure. New York: John Wiley & Sons, 1982.

Davis, Lance; North, Douglas C., et. al. Amer ican Economic Growth: An Economist's His tory of the United States. New York: Harper & Row Publishers, 1972. Dillard, Dudley. Economic Development of the North Atlantic Community. Englewood Cliffs, N. J.: Prentice-Hall, 1967. Greenleaf, William, ed. American Economic Development Since 1860. New York: Harper & Row Publishers, 1968. Kolko, Gabriel. The Triumph ofConservatism: A Reinterpretation of America's History, 1900-1916. New York: Free Press, 1977.

Gustavo R. Velasco Either We Import Capital or We Export People Gustavo R. Velasco (1903-1982) was a prominent lawyer, banker, economist and professor in Mexico. Speaking there before the Fourth Industrial Con gress in 1957, he warned against a local Chamber of Commerce proposal to inhibit foreign investments in Mexico. He said this could halt the entrance of new capital, lead to less domestic production and force many Mexicans to leave their country in search of a livelihood. Persisting restrictions against capital movements into Mexico and the steady and continuing stream ofpeople across our southern border reinforce the logic and urgency of Velasco's warning. THE true victim of the protectionist measure being considered will not be foreign capital. Capital will go to more sensible and less hostile coun. tries than Mexico, to countries where it will be able to employ labor prof itably and productively. The true victim ofthe measure will be the eco nomic progress ofMexico. In the very Translated from the Spanish and slightly condensed by Bettina Bien Greaves.

real and true sense of the word the victims will be the millions of our fellow countrymen whom we shall be forcing, by this antiforeign senti ment, either to emigrate or to live in misery, without the hope that they or their children will be able to at tain human dignity. What distinguishes a poor country such as Mexico or China from a country like the United States or 465 466 THE FREEMAN August Canada is not racial superiority, nat ural resources, good intentions or luck. What makes the labor of the American worker or the Canadian farmer more productive is that they work not just with their hands or with antiquated tools: they work with equipment and machinery. In other words, they work with the aid of capital. The best and most effi cient way to improve the power ofthe Mexican workers, to increase pro duction and to raise our standard of living, is through capitalization. The Need for Saving If domestic capital, savings, could bring about the miracle of com pounding our efforts and multiply ing our output, we would have no reason for being concerned about for eign investments. Unfortunately, however; precisely because of our poverty, the portion of the popula tion that saves is extremely small.

In view of the lack of savings and of Mexico's great need for capital, pub lic and private domestic investment are quite inadequate. Yet, the pop ulation of Mexico is increasing at such a rate every year, every day, that a much higher rate of invest ment is necessary just to keep us from going backward-let alone to achieve progress. The only way to speed up economic development, the only hope for the millions of the less fortunate of our fellow countrymen is to take advantage of all available resources. In other words, precisely because the problem is so great, we should not only increase domestic capital as much as possible, but we should also protect foreign capital. The dilemma is clear: Either we im port capital or we export people. Either we permit foreign investors to cooperate in the enormous task which confronts us, or we deny our laborers the opportunity to perform useful and beneficial work in their own country.

In Mexico today, we still have not attained the income per capita that France or England had at the begin ning of the 19th century. In other words, the truth is that we are more than 150 years behind the times eco nomically. If we depend on our own resources, our people will not, not even in a hundred years, approach the standard of living now enjoyed in the United States and Canada. The real problem of foreign in vestments does not consist of the harm they may cause to an estab lished producer. All new competi tion, domestic or foreign, may do in jury to those producers who believe they may relax their efforts. A free economy is essentially dynamic. Nothing in it is sure except that pro ducers must constantly earn the fa vor of consumers. The daily plebi scite of the market determines who satisfies the needs of the consumers best or cheapest. Their interests must prevail, for the ultimate pur1985 EITHER WE IMPORT CAPITAL OR WE EXPORT PEOPLE 467 pose of the economy is to serve the general welfare. Consequently, when producers try to protect themselves from competition by means of a law, they thwart the plebiscite of the con sumers, a plebiscite which is much more democratic and truthful than a political election. Moreover, they presume thereby to set their own in dividual interests above those of the majority.

In addition to being improper and. immoral, this protectionist proposal itself would lead to general impov·· erishment. No one denies that the industrialist who obtains a special privilege, such as the exclusion of competitive foreign products, will benefit. But this will be at the ex·· .pense of consumers. They will have to go without some article they would have preferred which will not then be produced. Or they will have to purchase some domestic product at a price that is higher than it would have been if the producer had faced greater competition. For the community in general, not only is there no advantage at all from such legislation, but there is a net loss equal to the amount of pro duction which is prevented. Like all restrictionist measures, the elimi nation of domestic or foreign com petition imposes an economic cost. The result is not progress but re trogression, not abundance but scarcity.

Foreign capital has not been primarily responsible for political in stability in the many countries that could be mentioned. To cast blame is a convenient way to avoid confessing the truth to ourselves. During the first 70 years of our political life, we had hardly any foreign investments here in Mexico. And yet we had con tinuous riots, insurrections and rev olutions. We do not suggest that there is a cause and effect relation, but it was precisely when the coun try opened its doors and when it de veloped economically that it finally tired of its convulsions, attained peace and some measure of economic progress. Erect a Wall With respect to the preservation of our culture, the grounds on which many argue for restriction, we should note that the real threats come, not from the establishment of new factories, but rather from con tacts outside the country. To be con sistent, the advocates of the restric tionist measure under consideration should propose that Qooks, maga zines and travellers be' kept out of Mexico. They should also recom mend that radio waves be blocked, as in Russia and her satellite coun tries, because they bring us the mu sic and the language ofother peoples.

Whoever believes that the way to preserve our culture and traditions is to erect a Chinese Wall around the country shows very little faith in 468 THE FREEMAN their vitality. It is only our poverty which .prevents us from building more schools in which that half of our people who now have no schools might learn to read and write. It is only our poverty which·prevents us from establishing libraries and mu seums, conserving the monuments and artistic treasures left us by our indigenous and Spanish ancestors. If the United States can radiate its culture beyond its borders, this is due above all to its vast economic wealth. He who lacks vitality be cause he does not have the proper food or because he is weakened by disease can hardly think about the purity of his language or the conser vation of his country's temples. We proudly and energetically defend our Mexican heritage. We should even increase and enrich it. But we should Reprints . ..

not confuse these two problems. We should recognize that the foundation on which the defense of Mexican cul ture must rest is the economic pros perity of the country. Patriotism, and the nation's best interest, do not call for the policy of discrimination and repudiation now being proposed. If the problem is cor rectly stated and analyzed from the poi!1tof view of the general economic and cultural interest of Mexico, the conclusion is precisely the opposite of that recommended in this pro posal. Either we permit foreign investors to cooperate in the enor mous economic task which confronts us, or we deny our laborers the op portunity to perform useful and ben eficial work in their own country. Once again, either we import capital or we export people. i) A Page on Freedom Each of these brief messages is a handy way to share with friends, teachers, editors, Clergymen, employees and others a thought-starter on liberty. It also serves to introduce the reader to our work at FEE.

See page 451 for this month's Page on Freedom. (Copies of previous messages are also available; specify title when ordering.) Small quan tities, no charge; 100 or more, 5 cents each. Or, feel free to reprint the message in your own format if you'd prefer. We hope you'll enjoy this feature! Order from: FOUNDATION FOR ECONOMIC EDUCATION, INC. IRVINGTON-ON-HUDSON, NEW YORK 10533 Charles H. Logan Competitionin the PrisonBusiness A specter is haunting American cor rections-the specter of free enter prise. To be clear at the beginning: no entrepreneurs are challenging the state's monopoly of penal au-· thority. However, there are those who believe that the actual day-to-day business of imprisonment should not be .left entirely in the hands of gov·· ernment employees. It is one thing to believe that only the state has BL right to imprison someone. It is an other matter entirely to believe that only the state can run a prison in a fair, humane, effective, and econom·· ical fashion. The first belief is a mat ter of political philosophy; the sec·· ond is an empirical proposition.

Mr. Logan is Associate Professor of Sociology, Uni versity of Connecticut at Storrs. Given the dismal performance of the state in running its prisons, many people now are willing to entertain, and to test, the proposition that pri vate enterprise can do it better. The Fruits of Monopoly What do we normally expect in a business that is protected from com petition? More often than not, we find unmet demand, low quality, and high cost. Precisely these conditions now characterize the prison busi ness. Rising crime rates and more punitive public conceptions ofjustice have increased the demand for im prisonment. Supply, however, has not kept up with demand, so prisons and jails have become seriously ov ercrowded. The Bureau of Justice 469 470 THE FREEMAN August Statistics reports that in 1983, state and federal prisons operated, on the average, at about 110 per cent of ca pacity. In 15 states, 21,420 prisoners were released early because of ov ercrowding. Over 8,000 other pris oners, in 18 states, were held in local jails because of prison crowding. In a recent survey of corrections offi cials, police, prosecutors, public de fenders, court personnel, and pro bation and parole officials, a majority of all but the public de fenders identified overcrowding as the number one problem of the en tire criminal justice system. This was in response to an open-ended question (no prompting or choices of fered) and for most groups this prob lem was far ahead of the nearest contender.

The strain on quantity also affects the quality of imprisonment. Cor rections departments have been forced to double-cell and to house the overflow of inmates in tents, gym nasiums, corridors, recreational rooms, and basements. San Quentin, built to hold 2700 but currently housing 3900, must, to insure secu rity, confine most of its prisoners to their cells continuously, allowing them to emerge only for meals and showers. Courts have begun to de clare these conditions intolerable. As of 1983,41 states and the District of Columbia either were under court order to remedy prison conditions or were the subjects of litigation. However, it is much easier to order reforms than to pay for them. Cal culations of the cost of constructing a new prison range as high as $125,000 per bed, but are highly var iable. The U.S. Department of Jus tice, using 1982 dollars, cites aver age construction costs per bed of $26,000, $46,000, and $58,000 for minimum, medium, and maximum security prisons, respectively. Since they are based on a systematic sur vey of all states and are specified by prison type, these may be the best figures to use for average costs nationally. .

Cost Overrun Most estimates ofconstruction cost are probably too low, because they ignore such considerations as land purchase, site preparation, over runs, hidden costs, and financing cost (for example, if construction is paid for by a 20-year bond at 10 per cent interest, the real cost will be tri ple the original figure). Moreover, construction cost is only the begin ning; operating cost adds yearly to the burden. As with construction, figures on operating cost vary widely, running from $4,000 to $30,000 per inmate per year. Th~ most common figures are in the mid teen thousands, as represented by the American Correctional Associa tion's figure of $15,000 and the fed eral prison system's estimate of $13,000.

1985 COMPETITION IN THE PRISON BUSINESS 471 The cost of constructing and op erating prisons has been rising faster than the general level of inflation. This is not surprising; cost is pre dictably less restrained where the government has a monopoly over im perative services. If current condi tions of demand and supply persist, we can expect the cost of imprison ment to continue its upward course. However, two recent developments may deflect this course somewhat. First, taxpayers are beginning to re sist. Perhaps the public is aware that it does not get from the penal system full value for its tax dollar. This should put pressure on the govern ment to be more efficient. Second, private entrepreneurs are beginning to offer an alternative. Where de mand for a service outstrips supply and where current prices seem un reasonably high, conditions are ripe for competition and the emergence of new sources of supply. We should.

therefore not be surprised to see this occur. Despite long-standing and wide·, spread dissatisfaction with the qual·· ity, quantity, and cost of imprison·· ment, it still comes as a shock to most people to learn of the rise, at the be·· ginning of the 1980s, of a new source of supply in response to this unmet, or poorly met, demand. Nonetheless, a number of entrepreneurs, many with prior governmental experience in corrections and other areas of criminal justice, recently have come to believe that they can build and run prisons at least as effectively, safely, and humanely as the state, but with greater efficiency. This would lower the cost to taxpay ers while allowing a profit for themselves. The Private Prison Pioneers Actually, virtually all aspects of corrections (food services, medical services and counseling, educational and vocational training, recreation, maintenance, security, industrial programs, and so on) are already subject to private contracting on a piecemeal basis. What is new is the idea of running entire, secure insti tutions completely under private contract. These facilities are usu ally, but not necessarily, built and owned by the companies that man age them.!

The first such facility dates to 1975, when RCA Services Company, a subsidiary of Radio Corporation of America, established the Intensive Treatment Unit, a 20-bed, high se curity, dormitory style training school for delinquents at Weavers ville, Pennsylvania. The second did not appear until 1982, when the State of Florida turned over the op eration of the Okeechobee School for Boys to the Eckerd Foundation (cre ated by the founders of a drugstore chain). In 1983, a prison for youthful offenders near San Francisco was contracted by the U.S. Bureau of 472 THE FREEMAN August Prisons to Eclectic Communications, Incorporated. Most recent of all have been con tracts "forthe private operation of se cure institutions for adults. By the end of 1984, the U.S. Immigration and Naturalization Service (INS) had contracts with two private com panies for the detention of illegal al iens (including facilities for fami lies). One of these, Behavioral Systems Southwest, has been set ting up and running detention cen ters for the INS since 1983. They run facilities totaling 350 beds in Ari zona, California, and Colorado and have proposed additional centers in New Mexico. The other INS contrac tor, Corrections Corporation of America, constructed and opened a $5 million, 350-bed detention center in Houston in 1984 and has been awarded a contract for another fa cility in Laredo, Texas, to open in 1985 with an expected daily popu lation of 175.

At the local government level, adults are also being held in several privately owned and operated facil ities. Corrections Corporation of America owns and runs a 250-bed, medium security correctional facil ity for Hamilton County, Tennessee. Southwest Detention Facilities owns and runs jails for counties in Texas and Wyoming and is negotiating for similar facilities in Colorado and New Mexico. So far, however, I have learned of only one currently operating commerical prison for con victed adult felons: in 1984, Palo Duro Private Detention Services opened a 575-bed medium security prison for convicted immigration of fenders, under contract to the U.S. Bureau of Prisons. These inmates are in the custody of the U.S. Bureau of Prisons because they have been convicted and sentenced to prison terms. The illegal aliens held for the INS are in temporary detention, mostly pending deportation.

States have been slow to follow the federal lead, perhaps partly because of statutory impediments, but pri vate companies are prepared to sign contracts with one state or many. Buckingham Security Limited, a Pennsylvania-based company incor porated in Connecticut, has plans to site and build a 720-bed maximum security prison near Pittsburgh. They have letters of intent from sev eral states to contract for the care of protective custody inmates. These inmates consume extra resources and cause many problems within their original prisons, but are not so troublesome when removed to sep arate facilities. Cost Advantages of Private Prisons What does it cost to build and run prisons in the private sector? It is difficult to give a definite answer to this question even in the public sec tor, where experience is long and 1985 COMPETITION IN ~rHE PRISON BUSINESS 473 data are plentiful. Early figures on private costs must, therefore, be re·· garded with caution, but they ap·· pear to support an expectation of savings.

At an annual cost per inmate of $40,000, RCA's Weaversville Inten sive Treatment Unit is much more expensive than the other institu tions. From independent descrip tions of the programs and facilities, it seems likely that much of the cost reflects high quality and small size, combined with the special needs of hard-core juvenile offenders. One ex pert (James Finkenauer, a criminol ogist at Rutgers) has described Weaversville as "better staffed, or ganized, and equipped than any pro gram of its size that I know."2 The Florida School for Boys at Okeecho bee, at $14,588 annually per inmate, is comparable in operating cost to the American Correctional Associa tion's estimate of $15,000 for state run institutions. Other available cost figures vary considerably. The lowest is $14 a day, per inmate, which Behavioral Sys tems Southwest charges the INS to detain illegal aliens in a series of converted and lightly secured mo tels. This is low by any standards, but the $24/day charged to the INS by Corrections Corporation of Amer ica for the same service may be an even better deal, since it covers con struction of a new facility. The Hanl ilton County contract with CCA does not include basic construction, but the $21/day fee includes a commit ment to spend up to $1 million in renovation during the first year of the four-year contract.

Behavioral Systems Southwest compares their $14/day charge to a current INS cost of $40-$50/day, while Corrections Corporation of America claims their $24/day charge is one-third less than it would oth erwise cost the agency (which would compare it to $36/day). Palo Duro Private Detention Services charges the U.S. Bureau of Prisons $45/day for medium security imprisonment, which they say is 25 per cent less than the projected cost ifthat agency provided the service itself. South west Detention Facilities has offered to build and run a regional prison at a fee of$54/day for three counties in New Mexico that currently spend $78/day to house each of their prisoners. Even the high security prison pro posed by Buckingham Security Lim ited would be competitive at $24,000 per year (about $66/day) per inmate, since that figure includes construc tion. Buckingham Security's esti mate of $15 million to construct a maximum security prison with 720 beds works out to $20,833 per bed, a steal compared to the U.S. Depart ment of Justice average figure (cited above) of $58,000 per bed for a max imum security prison. Corrections Corporation of America built their 474 THE FREEMAN August 350-bed detention center in Houston for $5 million, or $14,286 per bed.

What these figures suggest is that claims from the private sector of ability to build and run prisons at lower cost are at least plausible and worth putting to the test. The data are too limited and too crude to sup port any firm or categorical conclu sions yet, but they are enough to show that a prima facie case for com mercial prisons must be taken seri ously. Pending further da.ta, the case for (or against) private prisons rests mainly on a priori arguments, only a few of which can be considered here. 3 A Priori Arguments for Privatization Perhaps the strongest presump tion in favor of private contracting of imprisonment is to assume that it would be similar in success or failure to the private contracting of other public services. We know that these other contracts are not always suc cessful. However, E. S. Savas, in Pri vatizing the Public Sector,4points out that the most rigorous and compre hensive research (of which there is little so far) supports the general su periority of private over public pro vision of such diverse services as solid-waste collection, electric power, fire protection, transportation, health care, education, social ser vices, protective services, and a number of others.

Obviously, imprisonment differs from these other activities in impor tant respects, but not necessarily in ways that relate to efficiency and cost. Besides, if a prison system is broken down into its various sepa rate activities, there are only a few aspects that do not have counter parts in both the public and the pri vate sector. Therefore, evidence of successful private delivery of other public services warrants the pre sumption that it would be feasible for imprisonment also Personnel is probably the major area where savings could be ex pected with private contracting. Businesses, for economic reasons, tend to hire and retain approxi mately the number of employees that they truly need. Governments, for political reasons, frequently em ploy too many or too few. Retirement programs, sick pay, fringe benefits, and (for blue collar workers) salaries are generally more generous in the public sector, as the Grace Commis sion has documented. This is be cause wages and benefits are not subject to the direct discipline of market forces in the public sector, at least not as much as they are in the private.

Profit-and-Loss versus Bureaucratic Incentives Costs other than personnel are also more likely to be held down by com mercial prisons, as a result of the in1985 COMPETITION IN THE PRISON BUSINESS 475 trinsic economic incentives found in profit-making companies but absent from government agencies. Public service institutions tend to be both inefficient and ineffective, not so much because they are public rather than private, but because of the way they are financed. Profit-and-loss in centives differ fundamentally from bureaucratic incentives. Entrepreneurs are motivated, un der conditions of competition, to pro vide maximum satisfaction at min imum cost. Bureaucrats, in contrast, are rewarded not so much for em. ciency, but in direct proportion to the sizes and budgets of their agencies. Budget-based organizations are thus motivated to grow and to spend. Their money is based on promises, intentions, and efforts, and not strictly on results.

There is another reason why it tends to be inefficient for a govern mental unit to attempt to supply all its own services. Economies of scale vary greatly by the type of service and by the size and nature of the area being served, but as Robert W. Poole, Jr. notes: "The one arrangement least likely to be most efficient is for all the services to be provided at the scale defined by the size of the city" (or county, or state).5 For example, nearly all cities need some jail ser vices, but it may require a multi-city contract to meet efficiently the needs of small cities, while a large city can' operate more efficiently by using multiple contractors to meet its var ied needs (e.g., high and low secu rity, male and female inmates, ju veniles and adults, detoxification units, etc). Moreover, economies of scale can change, sometimes rapidly, due to technology or market forces; private vendors can respond to these changes more readily than can po litical entities.

Other Benefits So far, I have addressed only the fiscal advantages of commercial prisons, but certain other potential benefits are no less important. One goal of contracting is to inject into the public sector some of the greater flexibility that is often found in the private sector. Flexibility is espe cially important in the administra tion of public policy, where concen tration of decision-making magnifies the consequences of ignorance, un certainty, and error. Policies regard ing imprisonment, for example, con tain implicit or explicit projections about trends, distributions, and pat terns of crime and punishment. Even where broad trends are discernible, however, it is beyond the powers of social science to make highly accu rate and reliable forecasts. Because of the scale on which it op erates and the ponderous way in which it moves, government is much more dependent than is private en terprise on the longterm accuracy of projections. Of course, the private 476 THE FREEMAN August sector must also be able to predict, if it wishes to make a profit, but it can make better use of short-term (and therefore more accurate) predictions because it can generally respond more quickly to changes in information.

A market in corrections would share in the general advantages of markets over all forms of central planning. The advantage most rel evant here is that competition iso lates and minimizes the conse quences of erroneous predictions, while central planning magnifies them. If a state launches a major prison construction plan and hires an army of civil servants on the ba sis of a longterm projected trend that does not materialize, or that un expectedly reverses itself after a few years, the cost will be monumental. If several competing contractors are responding continually to projected needs, it is unlikely that they will all make the same mistakes at once. Some contractors will predict bet ter than others, or be able to respond more quickly to altered predictions. These companies will survive and prosper by being able to meet the changing needs of the state more ef fectively. The less successful com panies will have to absorb and thereby contain the cost of their in accurate predictions. In contrast, when the state has a monopoly on the prison business, it can simply pass on to taxpayers the full cost of its errors. Thus, the state has less in centive to avoid errors in the first place.

Speedy Response This presumption offlexibility and speed of response on the part of pri vate prison contractors is not just a matter of faith; concrete examples can be cited. In 1975, the Attorney General of Pennsylvania ruled that even hard-core delinquents could not be incarcerated in facilities with adult offenders. Faced with the need to immediately relocate all affected juveniles, and having no suitable fa cilities available, the state turned to RCA, with whom they already had a contract for educational programs for delinquents. In ten days, RCA set up the Weaversville Intensive Treat ment Unit, a heavy security facility with 20 beds and 30 staff members. In this case, RCA was able to conyert buildings already owned by the state; other contractors have built their own or remodeled existing pri vate structures, such as motels, to make them secure. While a spokesman for the Federal Bureau of Prisons reports that it takes two or three years to site and build 6 and other sources report that it takes five years or more to build secure facilities, private contractors claim to be able to design, finance, and build a prison in as little as six months. Corrections Corporation of America financed, built, and opened 1985 COMPETITION IN r£HE PRISON BUSINESS 477 its 350-bed detention facility for the INS in just seven months.

Contracts allow government agen·· cies to experiment with new pro·· grams without longterm commit·· ment of funds or of tenured civil service staff. Thus, vested interests in these programs do not accumulate inside the agencies. This avoids the tendency toward bureaucratic self· perpetuation that ordinarily makes public programs difficult even to al· ter, let alone to eliminate. Of course, advantages of flexibility for the pub lic agency translate into insecurity for the private contractor. If the vulnerability of a contract is an advantage to one side, it is a dis advantage to the other. However, this problem is intrinsic to all pri vate contracting. To survive and suc ceed, a contractor must be able to solve this problem in a variety of ways: by providing service that is too good to give up; by accurately antic ipating and being ready to meet the shifting needs of different clients; by holding down the administrative cost of hustling from one contract to another; by cultivating multiple clients; or by other techniques that must be the stockin-trade of any competitive contractor.

Flexibility Promotes Justice The flexibility of private prison contracts can also enhance justice. Public concerns over justice and punishment have led to reforms in many components of the justice sys tem. Abolishing parole, limiting ju dicial discretion, banning or restrict ing plea bargaining, and other such reforms, are supposed to curb abuses and' to make punishment more uni form and just. One objection to these reforms is the fear that they will pro duce further and more dangerous overcrowding of prisons. Therefore, attempts have been made to reintro duce discretion through mecha nisms for diversion, sentence reduc tion, emergency release, and "early community reintegration." The search for these new discre tionary mechanisms, which are de signed to forestall or to relieve the pressures of overcrowding, rests on a faulty assumption: that prison flow can and should be fine-tuned by the state, while prison capacity remains virtually fixed. A penal system pri marily concerned with doing justice, however, makes just the opposite as sumption: prison flow should re spond to crime rates, which are largely beyond the control of the state; therefore, prison capacity must be flexible.

At least at the margins, then, the prison system should be able to ex pand and contract as the shifting de mands of justice require. Flexibility at the margins will tend to maximize the supply and minimize the cost of imprisonment. Commercial prisons, with efficient management, multi ple vendors, and renewable, adjust478 THE FREEMAN able contracts, offer an increased prospect of achieving this marginal flexibility. Government Should Foster Competition Public employee unions will no doubt offer many reasons why gov ernment services, including impris onment of criminal offenders, are best handled by civil servants under direct employment and administra tive management by the state. They may be correct, much of the time, in this assertion, but they should be made to uphold their claim in open competition. No longer should they be permitted to foreclose the ques tion through monopolization by fiat.

Competition is as important to the processes of government as it is to those of private enterprise. As a mechanism of evaluation, account ability, and control, it is unmatched. How do we know-and how can we be sure-that the government is run ning our prisons in the most just, hu mane, effective, and efficient man ner possible? A very good test is to see whether private enterprise can do it better. Competitive private contracting introduces a market test of price that is absent under governmental mo nopoly, and it provides a new basis for comparison of all programs, both public and private, on dimensions other than cost. Many of the com ponent activities of the penal system are already subject to competition among private vendors.-Why not do the same for the administration of entire prisons? The ultimate legal authority for imprisonment must, by definition, remain in the hands of government, which means that a high degree of regulation will al ways be necessary. With that prov iso, however, rigid legal obstacles to the private administration of pris ons should be removed. i) -FOOTNOTESlInformation on the programs described be low comes from the following sources: Kevin Krajick, "Punishment for Profit" Across the Board, 21, March 1984, pp. 20-27; Kevin Kra jick, "Prisons for Profit: the Private Alterna tive" State Legislatures, 10, April 1984, pp. 9 14; Philip E. Fixler, Jr., "Behind Bars We Find an Enterprise Zone" The Wall Street Journa~ November 29, 1984, p. 34; The Hartford Cour ant, April 1, 1984; The Philadelphia Inquirer April 16, 1984; and telephone inquiries.

2Cited in Krajick, "Punishment for Profit." 3For an extended list of a priori arguments both for and against privatization of public ser vices generally, see E. S. Savas, Privatizing the Public Sector: How to Shrink Government (Chatham, N.J.: Chatham House Publishers, 1982), pp. 89-91. 4Ibid., pp. 93-111. 5Robert W. Poole, Jr., "Objections to Priva tization" PolicyReview, 24, Spring 1984, p. 107. 6Cited in Krajick, "Punishment for Profit."

Charles Dykes The Ultimate Source of Wealth "Is Saudi Arabia rich? Is Mecca Muslim? one might respond."1 With this seemingly trivial question, George Gilder introduces a subject of profound importance: the nature of wealth. And when Gilder points to history as showing that "the most prosperous countries-from Phoeni cia to Venice, from England to Ja pan, from Hong Kong to Singapore have been domains rich not in 'nat ural resources' but in human free dom and rights to propertY,"2 he opens up an even more profound matter: the source of wealth. What, then is "wealth"? For the economist, wealth is anything hav ing economic value measurable in price. For most people, wealth means great amounts of worldly possesMr. Dykes is a businessman, freelance writer and en thusiastic advocate of the free market. sions. For nearly everyone, wealth is synonymous with money. From the perspective of history, however, it is instructive to note that money has not always been the chief symbol of wealth as it is today. The concept of wealth has varied in dif ferent periods of history. For exam ple, wealth in the medieval era was not thought of primarily as the pos session of large amounts of money or material possessions, but in having power over other people. Still later, wealth came to mean the ownership of large tracts of land and great houses.

The Industrial Revolution again transformed the idea of wealth. Wealth no longer was viewed pri marily as the possession of landed property, but the ownership of the means of production-e.g., factories, 479 480 THE FREEMAN August looms, mines, railroads. Then insid iously, over the last 150 years, the idea of wealth has changed from the ownership of the means of produc tion to the possession of money. Is Saudi Arabia rich? She is, if "rich" means money. But is Saudi Arabia wealthy? Warren Brookes re marks "that most, if not all, of the economic mistakes we have made (and continue to make) over the last generation have resulted from a fun damental misconception about the nature of substance or wealth," and insists that if our economy is to be re-established on a sound basis we must have "a more correct under standing ofwhat wealth really is and (perhaps more important) what it is not."3 Adam Smith YS. Karl Marx Among economic thinkers over the past 200 years, there have been two dominant schools of thought on the nature of wealth. According to men like Adam Smith and J.B. Say, wealth is primarily a matter of the human spirit, "the result of ideas, imagination, innovation, and indi vidual creativity, and is therefore, relatively speaking, unlimited, sus ceptible to great growth and devel opment." The other dominant school, represented by such men as Thomas Malthus and Karl Marx, believes "wealth is essentially and primarily physical and therefore ultimately finite."4 George Gilder makes clear his con viction that wealth is basically a product of the human spirit and not of natural resources. He ar gues, moreover, that "riches" -i.e., money-is not the same thing as wealth. "Wealth consists," he writes with reference to Saudi Arabia, "in assets that promise a future stream of income. The flows of oil money do not become an enduring asset of the nation until they can be converted into a stock of remunerative capi tal-industries, ports, roads, schools, and working skills-that offer a fu ture flow of support when the 9il runs out." In the 16th century Spain became "rich" much like Saudi Ara bia, flooded by money in the form of silver from the mines of its colonies in Latin America. "But Spain failed to achieve wealth, and soon fell back into its previous doldrums, while in dustry triumphed in apparently poorer parts of Europe" [My empha sisl. Gilder is certain the oil-rich na tions of today will achieve wealth when they "transform the transitory streams of income from oil into cap ital goods at home with a yield for the future."5 Is wealth, then, "the consequence, possessed by the oil rich lands ... , or the cause, mani fested for centuries, for example, by relatively barren islands like Japan and Great Britain, and now by Hong Kong and Taiwan?"8 One cannot undertake a serious examination of the subject of wealth 1985 THE ULTIMATE SOURCE OF WEALTH 481 without at the same time clearly un derstanding what economists call capital. While wealth and capital can be distinguished, they cannot be sep arated. Capital is a form of wealth.

It is a unique form of wealth, how ever, in that its function is the pro duction of additional wealth. Capital is wealth in the form of tools or re sources which are employed to gen erate a greater quantity or quality of various kinds of wealth. Productive, Static, Transcendental and Human Capital It is possible, in the context of the United States in the waning years of the 20th century, to distinguish at least four kinds of capital. The first, productive capital, is the conven tional form-Le., any tool or resource used to create additional goods or services for sale in the marketplace, for example, seed corn used to pro duce corn, a carpenter's tool chest, a writer's typewriter. Productive cap·' ital is usually capable of being mea·, sured in terms of monetary value. Second, there are those who speak of static capital. It differs from pro·· ductive capital in that, while it has tangible value, it is not employed in the production of additional wealth; for example, a diamond, or a rare stamp.

Third, it is possible to speak of a new kind of wealth which is not cap·· ital at all in the usual sense, some thing called transcendental capital.7 This new form of capital is a product ofpolitical or legal coercion by which an individual or a group "enjoys re turns on the capital owned by some one else."8 There is the taxation of the productive and provident for the purpose of subsidizing through gov ernment transfers the lazy and im provident. Politics in our time has become as powerful a means of achieving personal wealth as inno vation and productivity; and that means is the possession of transcen dental capital claims. Fourth, in the free world "the ma jor productive resource is personal productive capacity-what econo mists call 'human capital."'9 Human capital includes things like charac ter, knowledge, skills, creativity, health, imagination and liberty. Mi chael Novak rightly protests that when the classical economists dis cussed "the components of economic wealth-land, rents, capital, and la bor-they nearly always overlook the most important ingredient: practical intelligence and the organization of personal life." "The cause of wealth," Novak believes, "lies more in the human spirit than in mat ter."10 While productive or physical capital increases the productive ca pacity of a people by putting the tools or resources with which to work in their hands, human capital makes possible more efficient tools, or su perior resources, and organizes more effective means of utilizing both 482 THE FREEMAN August physical and human capital to achieve desired ends.

Thomas Sowell argues that human capital is ultimately decisive for the economic performance of a nation or people. Throughout history men have seen the destruction of their physical wealth by war, persecution or natural catastrophe, but armed with substantial human capital they not only have survived but regained their former prosperity. It was hu man capital, not natural resources or luck, which enabled Germany and Japan to emerge from the rubble of World War II to become the eco nomic powers they are today. The same is true of Chinese immigrants who left their homeland and arrived in new lands impoverished and un educated. In these new lands they have frequently been victims of per secution and have often been ex cluded from occupations deemed de sirable by the host country's majority. Yet almost everywhere, they have ended up achieving aston ishing economic success. Capital Deteriorates "Visible physical capital-facto ries, power dams, oil refineries-is always in a process of deteriora tion," writes Sowell, "whether at a slower or a faster rate. Financial as sets likewise are constantly being consumed in order to live. Wealth in both forms will have to be replaced, even in the normal course of events.

What war or expropriation does is to speed up this process of wealth's ex haustion and its need for replenish ing. But the real source of wealth in both normal and abnormal times is the ability to produce-human capi tal-not the inventory of goods, equipment, or paper assets in exis tence at a given time."ll The person or people possessed of substantial human capital is char acterized by a strong future-orien tation. That is, they are willing to delay present satisfaction in order to enable either themselves, their chil dren, or someone else to enjoy greater satisfactions at some later time. The future-oriented father is concerned to develop his children's potentialities to the full, and toward this end he stresses the values of hard work, self-discipline, initiative, honesty and unselfishness. Living in the Present By contrast, the present-oriented person "lives from moment to mo ment ... things happen to him, he does not make them happen. Im pulse governs his behavior, either because he cannot discipline himself to sacrifice a present for a future sat isfaction or because he has no sense of the future. He is therefore radi cally improvident: whatever he can not consume immediately he consid ers valueless."12 Family life and the rearing of chil dren are crucial arenas for human 1985 THE ULTIMATE SOURCE OF WEALTH 483 capitalization. "Human capital/,' writes Victor Fuchs in this context, "refers to the development in the child of a healthy body and mind, general and specific skills, and other qualities that will help determine how well the child will fare later in life. The development of these traits typically requires investment by par ents and society-that is, an expen diture of resources when the child is young in the expectation of a return to the child, parents, and society when the child matures."13 EconomicProgress Economic achievement and prog ress, thus, depends largely on hu man aptitudes and attitudes, and upon the political, social and eco nomic institutions and arrange ments which derive therefrom.

Alexis de Tocqueville, in his book Journeys to England and Ireland (1833) sums up in a powerful state ment the transcendent importance of human capital for the life of na tions and individuals. He writes, "Looking at the turn given to the hu man spirit in England by political life; seeing the Englishman, certain of the support of his laws, relying on himself and unaware of any obstacle except the limit of his own powers, acting without constraint; seeing him, inspired by the sense that he can do anything, look restlessly at what now is, always in search of the best; seeing him like that, I am in no hurry to inquire whether nature has scooped out ports for him, and given him coal and iron. The reason for his commercial prosperity is not there at all: it is in himself." f) -FOOTNOTESlGeorge Gilder, Wealth and Poverty (New York: Basic Books, 1981), p. 47. 2George Gilder, National Review, "The Dis ease of Government," December 31, 1980, p.

1569. 3Warren T. Brookes, The Economy in Mind (New York: Universe Books, 1982), p. 12. 4Ibid. 5George Gilder, Wealth and Poverty, p. 48. 6Ibid., p. 49. 7James Dale Davidson, The Squeeze (New York: Summit Books, 1980), p. 4l. 6Ibid., p. 43. 9Milton and Rose Friedman, Free to Choose (New York and London: Harcourt Brace Jova novich, 1980), p. 2l. lOMichael Novak, The Spirit of Democratic Capitalism (New York: Simon and Schuster, 1982), pp. 102-103. llThomas Sowell, The Economics and Politics of Race (New York: William Morrow and Com pany, Inc., 1983), p. 249. 12Edward C. Banfield, The Unheavenly City (Boston: Little, Brown and Company, 1968, 1970), p. 53. 13VictorR. Fuchs, How We Live (Cambridge: Harvard University Press, 1983), p. 52.

John K. Williams A Piece of Street Wisdom One of the illusions of our age is that wisdom is most likely to be found in the writings of the learned and the deliberations of academia. That this belief is an illusion is demonstrated if, in imagination, we take a tour of Athens as it was in the fifth century B.C. Scholars we can find aplenty. The historian Thucydides is penning a volume which, he claims, "is not ... designed to meet the taste of an im mediate. public, but [to] last for ever."! The philosopher Socrates is raising questions destined to haunt the human mind for millennia. The dramatist Sophocles is writing plays which audiences, in the year 1985 A.D., will still find awesome. Yet in the streets of Athens ordiThe Reverend Doctor John K. Williams has been a teacher and currently does freelance writing and lecturing from his base In North Melbourne, Victoria, Australia. 484 nary people are doing what ordinary people ever have done and ever will do. They haggle in the market, dis cuss the weather, and make wagers on sporting events. They boast of their triumphs, lament their trage dies, and devise their schemes. They tell one another jokes and pass on the latest gossip. Occasionally they spice their conversations with snippets of street wisdom, quoting proverbs they drank in with their mothers' milk.

One such proverb might puzzle us. "Ah, well," one Athenian sighs, "the avenging gods are shod with wool." "True, true," nods his neighbor, and the conversation proceeds. And we wonder. "What," we ask, "does this saying mean?" "The avenging gods are shod with wool." Actually, the saying enshrines a dramatic change in Greek thought, a change explored by Gilbert Mur ray in his magnificent little volume, A PIECE OF STREET WISDOM 485 Five Stages of Greek Religion.2 The Greeks once believed that the aveng ing gods were swift and furious, rid ing in fiery chariots and announcing their entry into human affairs by ear-shattering thunder. They ex acted vengeance with a blazing sword the visibility of which brought fear to the hearts of erring mortals. The proverb questions this picture. The avenging gods, it affirms, are slow, deliberate, silent. No thunder ing sound or blazing sword signifies their presence. Their footfall is as soft as a whisper or a sigh. There is no noise, no spectacle, no chase, no headlong pursuit. For the feet of the avenging gods are shod with wool.

It would be superficial to dismiss the saying because we no longer be lieve in the avenging gods of Greek mythology, be these gods drawn by galloping steeds or shod with wool. Indeed, the Greeks themselves did not take the inhabitants of Mount Olympus too literally. What they be lieved and what the folk-saying we are considering affirmed, is that life is consequential. Actions have con sequences which, while not always obvious, are inescapable. They saw it in nature. A sapling, struggling toward the sky, is in jured. It continues to grow, but the injury it incurred has consequences. The grown tree is crooked. The un intended injury has undesired consequences. So, affirmed the ancient Greeks, with human life. The actions we sow determine the harvest we reap. That this is so is not, they held, entirely to be regretted. If a growing sapling could not bend its trunk to an injury, it could not bend its roots around rocks and seek out nourishment. If error did not carry the consequences of error, truth could not carry the consequences of truth. Unless folly brought the consequences of folly, wisdom could not bring the conse quences of wisdom. If actions defy ing the laws of nature did not lead to disaster, actions in accordance with these laws could not lead to blessing. Indeed, were the world ca pricious rather than consequential, knowledge and partial control of the world would be impossible. Or so the ancient Greeks believed.

Actions Have Consequences No sphere of human activity more displays the reluctance of human beings to acknowledge the conse quential nature of their world than does the economic sphere. Again and again men and women have learned to their dismay that actions defying economic laws lead to disaster, but it would seem that our species suffers what educationalists pretentiously call a "subject-specific learning dif ficulty." National leaders, laugh ingly called statesmen, launch a war against economic reality, then des perately seek for scapegoats when the nation they have so ill-served 486 THE FREEMAN August suffers the consequences. Social re formers, all too many of whom wear clerical collars, proffer for the re mediation of real and imagined so cial ills the snake-oil nostrums of yesteryear. The mistakes of the past are repeated in the present. It is tempting to ask with Bob Dylan, "When will they ever learn?" Dy lan's assurance that "the answer, my friends, is blowin' in the wind" I do not presume to understand,· but I do know that, in the words of Scripture, those who "have sown the wind"

sooner or later "shall'reap the whirlwind."3 Many today have "sown the wind." Many today act as though the laws of economics could be defied. Yet if we listen we can hear a soft footfall. If we look we can see the pale shad ows of ghostly figures just behind us. For the avenging gods, shod with wool, are in pursuit. The Creation of Wealth First, we have ignored the process whereby wealth is created. We have acted as though wealth could be cre ated by political edicts. For most of humanity's history men and women have so acted, hence examples of such behavior are legion. Let us con sider, however, the cluster of writ ings, edicts and policies, usually known as mercantilism, which di rected the economic life of most Eu ropean nations during the seven teenth and eighteenth centuries. Rigorous laws, designed to achieve the goal of an export surplus, con trolled imports. Maximum wage laws allegedly kept the cost of pro duction low. Governments dictated the cost of material goods. The chil dren of the poor were trained so that they could labor in industries judged important by bureaucrats. In the France of Louis XIV state officials decided what industries were to be created and where in France or her colonies they were to be located. Self styled experts dictated, to take but one example, what patterns were to be woven in the state-owned tapes try works at Aubusson, it taking some four years of intense negotia tion between weavers and state of ficials before backwarp could be in troduced into fabrics. Rules laid down between 1666 and 1830 for the textile industry filled in excess oftwo thousand pages.

The situation in the United States of America was only slightly less bi zarre. The distant ruler who, in the words of the Declaration of Indepen dence, had sent "hither swarms of Officers to harass [your] people" in cluded among those officers not a few whose task it was to ensure that such commodities as tobacco, beaver pelts, pig and bar iron, and whale fins were traded only with Great Britain. Hats and woolen goods were not to be ex ported from one of your provinces to another. The story is well told by John Chamberlain in his volume, 1985 A PIECE OF STREET WISDOM 487 The Roots of Capitalism. 4 As an un repentant Anglophile I draw my only comfort from the knowledge that at tacks on George III and his policies penned in your nation were ex ceeded in thoroughness only by an attack penned in Great Britain by Adam Smith. Fruits of Mercantilism But what were the fruits of the eco nomic system coordinated by politi cal edicts we call mercantilism? They were the same as the fruits of any economic system so coordinated.

Life, for the masses, was poor, nasty, brutish and short. The United King dom, France and your country were cursed by recurrent famines. Life ex pectancy at birth was, in the France of 1800, twenty-four for males and twenty-seven for females. In 1780, over 80% of French families spent at least 90% of their income solely .on bread. A few people, admittedly, prospered, but the many did not, and this unhappy situation was perpet uated by a plethora of brutally en forced laws establishing and main taining a rigid system of caste, class and privilege. The disastrous consequences of mercantilism were no accident-in deed, the disastrous consequences of any economic system coordinated by political edicts are no accident. For such economies ignore a simple but unalterable truth. Human beings are not omniscient. The knowledge of any person is fragmentary, impre cise, and imperfect. The point is perhaps best made by considering first the situation of a small, primitive tribe. Its way of life has remained unchanged for gener ations. Members of the tribe know, by and large, what skills the tribe· possesses, what needs the tribe has, and what material resources the tribe enjoys. Given this knowledge, tribal elders or all members of the tribe meeting together can lay down rules specifying how the tribe is to use what it has to acquire what it wants.

But consider the problem facing a large and complex society. Skills are dispersed through literally millions of people, and constantly change as new technologies evolve. People want many different things. The ma terial resources available are dis tributed globally and are charac terized by ever-altering relative scarcities. No individual or set of in dividuals, however wise or however benign, conceivably could collate and synthesize the totality of informa tion so widely dispersed and so sub ject to change. Yet this information, wondrously, is available, and economic deci sions-decisions as to how a people can best use what they have to ac quire what they want-can be made by reference to· this information. Friedrich A. Hayek puts it suc cinctly and puts it well. "Each in488 THE FREEMAN August dividual can rarely know the con ditions which make it desirable, for him as well as for others, to do one thing rather than another, or to do it in one way rather than another. It is only through the prices he finds in the market that he can learn what to do and how. Only they, constantly and unmistakably, can inform him what goods or services he ought to produce in his own interest as well as the general interest of his com munity or country as a whole. The 'signal' which warns him that he must alter the direction or nature of his effort is frequently the discovery that he can no longer sell the fruits of his efforts at prices which leave a surplus over costS."5 Simply, chang ing relative money prices encode in formation about people's changing wants, changing technologies, and changing relative scarcities of raw materials, otherwise unavailable.

Why Socialism Fails This is why economics coordinated by political edicts do fail and must fail, misallocating resources and thereby spawning destitution and the human suffering destitution en tails. This is why, as Ludwig von Mises compellingly argues, socialist economies cannot succeed. 6 This is why, to make the general specific, Tanzania, which once enjoyed thriv ing agricultural bases but socialized these bases in the name of agrarian reform, is today utterly dependent upon foreign aid for the most basic of foodstuffs. This is why, in socialist nations, men and women are not able to use what they have to acquire what they want, including food for their bellies and she Iter for their bodies. The point is not that their rulers are heartless or evil, deliberately is suing edicts which misallocate re sources. Rather, the point is that eco nomic reality has been defied. The most obvious of truths has been for gotten. People are finite, fallible creatures. The only means whereby finite, fallible beings can, in a large and complex society, obtain the in formation necessary if they are to use what they have to acquire what they want, has been ignored. And the avenging gods, shod with wool, inex orably overtake those who presume to defy reality.

Yet let us not pretend that these gods, slowly and silently, are not pursuing us. We may not totally have abolished a market economy, but we have· severely fettered it, thereby distorting the information changing relative money prices encode. Tar iffs. Quotas. Subsidies. Minimum wage laws. A plethora of regulations controlling industry. We have not ut terly ignored economic reality, but we have infringed its laws. And the consequences are inescapable, their cost to human well-being incalcula ble. For the avenging gods cannot be deterred from their task.

1985 A PIECE OF STREET WISDOM 489 At the heart of economic reality is the thinking, valuing, choosing and acting being we call "man" or "woman." If we are to discover the law-abiding processes defining eco nomic reality, our focus must there fore be upon this being. Should we pretend otherwise, thinking and writing and acting as though ab stract fictions are concretely real, whereas flesh and blood people are irrelevant to our concerns, we invite error and the pursuit of the aveng ing gods. The general fallacy informing such a pretense was called by the philos opher A. N. Whitehead "the fallacy of misplaced concreteness."7 Con temporary philosophers prefer to see the fallacy as an instance of what they call a "category mistake."S In a paper entitled, "Redigging Old Wells,"9 I suggest that social scien tists are peculiarly prone to this er ror. A summary statement of the ar gument I develop in that paper may, however, here be appropriate, al though I urge any person wishing to follow up the point carefully to read Friedrich A. Hayek's volume, The Counter-Revolution of Science. to The Priority of the Particular Imagine that ten people are cast aways on an island. Innumerable re lationships between these people are formed. For some purposes it may be useful to refer to the "community"

or the "society" existing on the island, but these expressions do not signify some single existing entity distinct from the ten individuals and the relationships between them. Rather, the expressions are a useful shorthand whereby we refer to the individuals and their relationships. If one of the ten individuals acquires a monopoly of coercive power, and starts ordering his nine companions around and exacting tribute from them, no mysterious eleventh "thing" called the "state" has mag ically come into existence. All that exists is one bullying ruler, nine bul lied victims, and the relation ships between these sets of individ uals, relationships characterized by coercion. Admittedly, the term "society" is frequently used to include institu tions and customs no living individ ual created. This indicates, however, that the term "society" can desig nate the predecessors of an existing generation and the heritage these people passed on to their successors.

As G. K. Chesterton somewhere ob serves, a particular generation is but "the small and arrogant oligarchy of those who merely happen to be walk ing about." The ten castaways on our imaginary island doubtlessly bring into their present skills and prac tices inherited from the past. The crucial point, however, still holds. Terms such as "community" and "society" and "state" do not refer to concrete, existing "things" some490 THE FREEMAN August how distinct from individual human beings and their relationships. When economists forget this, mis chief is afoot. For the economist who deals in the abstractions called "ag gregates" is ever in danger of losing from his sight the thinking, valuing, choosing and acting individual. He is thus in danger of departing from reality. As a case in point, consider the seemingly self-evident proposition that an increase in the marginal tax rate will be followed by an increase in tax revenues. The assertion seems perfectly obvious-but only if indi vidual people and their possible re sponses to an increased marginal tax rate are ignored.

Tax Models To make this point, I shall refer to two "tax rate-tax revenue" models elaborated by Professors A. Laffer ll and P. Gutmann. 12 I do so with some hesitation, for the models-the so called Laffer Curve and Gutmann Curve-themselves can lure us into committing the fallacy of misplaced concreteness. The models are not photographs of reality or even por traits of reality; at best they are like cartoons featuring characters such as Unc1e Sam and John Bull. Unlike a diagrammatic representation of, say, Boyle's Law, which enables us to make specific predictions about the behavior of gases, the diagrams we shall consider cannot be used as a basis for precise prediction. Yet, given that we exercise due. caution, the Laffer and Gutmann Curves can assist us in understanding a vital truth. The Laffer Curve purportedly shows that increases in the tax rate cannot generate a rise in govern ment receipts indefinitely. A zero tax rate means no government revenue.

A 1% tax rate results in some gov ernment revenue. A 2% tax rate al most certainly leads to greater gov ernment revenue than does a 1% tax rate. Yet a 100% tax rate produces tax revenue approaching that re sulting from a zero tax rate-namely, zero revenue. At some point, an in crease in the marginal tax rate re sults in an individual choosing lei sure rather than paid employment, and if sufficient individuals do this, tax revenue drops. Put it this way. A person earns $100 a day. On Monday he is taxed at the rate of 20%, retaining $80 from his original $100. The cost of leisure-the cost of not engaging in paid employment and instead walk ing in the park, visiting friends, lis tening to the music of Mozart, and so on-is a forgone $80. On Tuesday a 40% tax rate applies, the individ ual retaining only $60 from his earn ings. The cost of leisure has thus dropped, the individual forgoing only $60 if he chooses not to go to work.

On Wednesday and Thursday the tax he pays rises to 60% and 80% re1985 Tax Revenue A PIECE OF STREET WISDOM FIGURE I 491 0% 100% Tax Rate spectively of his earnings. By Thurs day the cost of leisure is temptingly low, being merely $20 forgone. On Friday a 100% tax rate applies. The cost of leisure is now zero-save, per haps, for whatever pleasure an in dividual derives from his work and the company of his working compan ions. Simply, at some point an in crease in the marginal tax rate will so decrease the cost of leisure, that many people will choose leisure rather than paid employment. Tax revenues thus drop. Hence the Laf fer Curve (Figure I). I repeat that this tidy diagram ri diculously oversimplifies complex reality. It might suggest that if gov ernments were smart enough, they could discover a tax rate which, at all times and places, maximizes gov ernment revenue. Clearly, this is nonsense. The point at which the cost of engaging in paid employment that is, forgone leisure-becomes so high that what is forgone by not working is less valuable to an indi vidual than the joys of his leisure ac tivities, varies from person to person and, in the case of a specific individ ual, from time to time. What the Laf fer Curve dramatically displays is that an increase in the marginal tax rate can so reduce the cost of leisure that an individual may rationally change his pattern of behavior in a way that reduces tax revenue. A con sideration of the relationship be tween the marginal tax rate and tax revenue that ignores the thinking, valuing, choosing and acting indi vidual is absurdly simplistic and misleading.

The Gutmann Curve depicts an other possible human response to in creasing marginal tax rates. Instead of choosing leisure rather than paid employment, individuals may choose to transfer their productive activi ties from the "legal" economy to the 492 THE FREEMAN August so-called "subterranean" economy. Gutmann suggests that three dis tinct phases in the relationship be tween the "legal" economy, the "subterranean" economy, tax rates and tax revenues, can be specified. Given a low marginal tax rate, the totality of goods and services people cooperatively produce-a totality, in cidentally, which is itself a fiction we must handle with care-will involve both a legal output and an illegal output, but a relatively small illegal output. As the marginal tax rate climbs, the ratio of legal output to illegal output changes, more indi viduals deciding to switch their pro ductive activities to the "subterra nean" economy. Since typically an illegal activity is less efficient than an open market exchange, the total productive output of a community drops. Finally, a limit is reached: given the institutional structures obtaining, no further economic activities can be transferred from the "legal" economy to the "subterra nean" economy. Hence the Gutmann Curve (Figure II).

Again, my warning message: Dia grams depicting a relationship be tween abstractions are an economic health hazard! Yet the diagram does depict a very real choice individuals can make when confronted with an increase in the marginal tax rate. The Gutmann Curve, like the Laffer Curve, suggests that a government may threaten its own well-being and, indeed, the well-being of an en tire community-by increasing mar ginal tax rates., A decrease in gov ernment revenues does not in itself disturb me; indeed, I deplore at tempts to "sell" the Laffer and Gut mann Curves to governments by the Iure of increased government reve nue. I am disturbed by a decrease in the number of goods and services a community produces and provides, Output ----------.- Total Output --------.-lIIegal Output t Legal Output J Tax'-- ......... ....a...- ----l"'- ...... Rate FIGURE II 1985 A PIECE OF STREET WISDOM 493 for this affects the material well being of all people-save, perhaps, government officials. Certainly, a decrease in the number of goods and services available to a community is disastrous from the point of view of the poorest.

Marginal Tax Rates Affect the Marginal Dollar I have but touched on the conse quences of tax. policies dictated by theories which, focusing upon aggre gates, ignore the real world of flesh and blood people. I make one further point. Marginal tax rates affect, by definition, the marginal dollar. Now the marginal dollar is important, for it is that dollar which an individual is most likely to save and to invest. Put it this way. An individual wins the lottery and, after tax, has $100,000 at his disposal. He is tempted either to invest that sum and add, let us say, $10,000 per an num to his income stream; or to blow the lot on a luxury cruise. The cost of the cruise is considerable: a for gone $10,000 per annum. A mar ginal tax rate of 50% reduces the cost of the cruise to a forgone $5,000, for the income derived from investing $100,000 at 10% per annum is taxed at 50%. The marginal tax rate of97% which obtained in pre-Thatcher Britain reduces the cost of the cruise to a mere $300 forgone per annum.

Extravagant consumption is thus encouraged, and capital formation is discouraged. And this is disastrous, for capital formation is the sine qua non of economic growth. Jeopardize economic growth, and human beings suffer-again, particularly the poorest. My primary claim, however, is simple. The rules defining a fasci nating game with abstractions and aggregates, and the laws defining economic reality, are not identical. If the rules defining a game are ap plied to the real world, an invitation has been extended to retribution. And the invitation is accepted. The avenging gods, shod with wool, set about their slow and silent task. The People's Money Money matters. By "money" I mean merely an economic good sought by all or nearly all members of a community and used primarily for present or future exchanges, Wlits of the economic good "money" being exchanged for services and other goods. The discovery of money was a momentous discovery, for without it the cooperative activities of the division of labor and free ex change could not have gone beyond rudimentary forms. Indeed, if any person doubts that money matters, that person should ponder the recent obscenity that was Pol Pot's regime in Cambodia. By abolishing money and its uses, Pol Pot and his hench men devastated an economy and forced men and women humbly to beg 494 THE FREEMAN August from state officials what they needed to survive.

As the title of a recent volume af firms, money today, in most devel oped and seemingly secure nations, is in crisis. 13 Indeed. ~ .urge you to read the volume in question: Money in Crisis, edited by Barry N. Siegel. Within its pages "economists from such diverse perspectives as mone tarism, Keynesianism, rational ex pectations, supply-side economics, and the Austrian school" proffer a variety of proposals with a single ob jective, namely, "to make monetary institutions strictly accountable and devoid of political and bureaucratic influences." This cover description of the book accurately indicates the book's contents. In a very real sense, however, money has always been in crisis. The long history of money can be read as an ongoing war between rulers and the ruled. It is no accident that money controlled by the masses through the market was once called "the people's money" as against money controlled by political rulers and their associates.

It is not my purpose to narrate the fascinating albeit depressing story of the battles between a "people's" money-and a "ruler's" money. All I wish to affirm is that the laws of eco nomics, the precepts of high moral ity, and the blessings of individual liberty, lead to the injunction, "Put not thy monetary trust in princes." A people who so place their trust shall be pursued and overtaken by the avenging gods. A Choice from the Market How best to secure money not sub ject to "political and bureaucratic in fluences" can be debated and today is hotly debated. My own conviction is that we should, with Friedrich A. Hayek, agitate for the de-monopoli zation of money and choose a gold currency from whatever rival cur rencies result. By a 'gold currency,' I mean simply coins made from gold and carrying information as to the maker and weight of the coins and notes the issuers of which must, by law, on request convert into what ever weight of gold the notes specify.

While personally choosing such a currency from whatever currencies the free market makes available, I would keep an interested eye upon alternative forms of currency avail able. Who knows in advance what new discoveries individuals might make? I stress this openness to alterna tives simply because some advocates of the case for gold attempt to utilize for their own purposes the strategy so brilliantly deployed by Lord Keynes, namely, ridiculing the views of opponents. There is nothing ob jectionable in this: reductio ad ab surdum is a legitimate form of ar gument, even when spiced with humor. What is objectionable is the 1985 A PIECE OF STREET WISDOM 495 suggestion that people could not value rare pieces of paper carrying certain words, or that walking gold is~ "scientific" whereas valuing printed pieces of paper is "magical." People can value anything. Of course paper money has no intrinsic value, but neither does gold. The "value"

of any good is not some "thing" in hering in the good, but a relation ship between an appraising mind and a good appraised. A Reasonable Doubt At this point, permit me a second personal aside. I am second to none in my admiration for Ludwig von Mises. I do not believe, however, that Mises is honored if his admirers fail to do what he invariably did, namely, be prepared to question any claim. Frankly, I have some worries with Mises' "regression theorem," at least as sometimes stated. 14 Crudely, the theorem can be understood as as serting that units of money can be exchanged for services and other economic goods if and only if what first functioned as money had a non monetary use. It must be possible to trace back the monetary use to a non monetary use. I see no absurdity in asserting that an extraordinarily in telligent human being could have realized that some substance all peo ple in a community would accept in an economic exchange would serve a very. useful function. I see no ab surdity in asserting that this individual might specify some rare sub stance, hitherto regarded as utterly useless, as an ideal candidate for a currency. I see no absurdity in as serting that the case for using this substance as money might be ac cepted by a community. The happy coexistence of such intellectual per spicuity and such persuasive prow ess in a single individual is absurdly unlikely, but it is not logically im possible or empirically impossible.

The point is possibly pedantic. Maybe it is sufficient to say that we are ill-advised to overstate the case for a gold currency or to assert that individuals in a money-creating and-providing free market could not create and provide a paper money somehow protected from the cupid ity of those providing it and from po litical and bureaucratic influences. How such could be done I know not and that such will be done I believe not. But the free market again and again has done what many said was impossible. Hence my option: the de monopolizing of money, my own choice from whatever currencies the market provides of a gold currency, and my ongoing observation of the success or failure of non-gold currencies. Milton Friedman's advocacy of a constitutional amendment proscrib ing the arbitrary inflation of the cur rency by government fails to con vince me. First, unless people thoroughly understand why money 496 THE FREEMAN August matters, an amendment passed to day could be revoked tomorrow. Sec ond, an acceptance of "non-arbi trary" inflation, whether under a 2% rule or a 5% rule 15 or any other rule, overlooks the effect of any inflation upon the relative prices of goods and services. Friedman's arguments against a gold currency have, I sub mit, been anticipated and answered in Ludwig von Mises' volume, On the Manipulation ofMoney and Credit.16 Money Matters Similarly, Friedrich A. Hayek's advocacy of the de-monopolization of money,17 divorced from the pruden tial advice that one should choose from any alternatives proffered a gold currency, does not satisfy me.

While not saying that competition between rival paper currencies could not discover means for securing a non-inflatable currency, I would not, and the pun is intended, bank upon such a possible discovery. During your nation's history different states issued their own paper currencies, and these currencies, in a very real sense, competed. 18 This precedent, so to speak, does not provide grounds· for optimism. My main point, however, is simply that money matters. If men and women entrust their nation's mon etary system to rulers who can in flate the currency, the avenging gods make ready to strike. And there is no protection from their vengeance. Advertisements promising men and women that an investment in gold will protect them "from inflation" and that should read "from the ef fects of inflation" -are utterly mis leading. The effects of inflation are not identifiable with the decreasing purchasing power of a nation's mon etary unit. The entire communica tion system that is the free market in a free society is distorted by in flation, and that distortion can be come so grotesque that a market economy ceases to function. There is no protection from the wool-shod, avenging gods.

Conclusion It would be pleasant if economic reality were not as I have depicted it. But our desires must be adjusted to reality, for reality will not adjust itself to our desires. Yet I remind you of what I said ear lier. If error did not contain the con sequences of error, truth could not contain the consequences of truth. Unless folly brought the conse quences of folly, wisdom could not bring the consequences of wisdom. If actions defying the inexorable laws of economic reality did not end in disaster, actions complying with those laws could not result in blessing. I remind you also of what that blessing involves. Men and women freed from the horrors of destitution. Men and women, their material 1985 A PIECE OF STREET WISDOM 497 needs satisfied, freed to create beauty bringing delight to their souls and to seek truth bringing joy to their minds. Men and women freed to foster and to nourish the warm and intimate relationships that make human life holy. Men and women freed to dream dreams of an even greater future and to struggle to make their dreams come true. All that, and so much more, is involved in the blessing we seek.

So maybe the avenging gods are but angels in disguise. Maybe, by visiting upon us the consequences of error and folly, they lure us back to the pathway of truth and wisdom. Maybe they wish us well, not ill. For the pathway from which we stray and to which they so insistently re direct us, is the pathway leading from a city doomed to crumble and which nothing can save to a city our forefathers in the fight for liberty founded, and which we, under God, are called upon to complete. , -FOOTNOTESIThucydides, The Peloponnesian War, trans. Rex Warner (Harmondsworth: Penguin Books, 1972), p. 48. 2G. Murray, Five Stages of Greek Religion (London: Watts and Co., Thinkers' Library Edi tion, 1935), pp. 72-8. 3Hosea 8:7. 4J. Chamberlain, The Roots of Capitalism andianapolis: Liberty Press, 1976), pp. 39-41. 5F.A. Hayek, 1980s Unemployment and the Unions (London: Institute of Economic Affairs, 1980), p. 28.

6L. von Mises, "Economic Calculation in the Socialist Commonwealth," in Collective Eco nomic Planning ed. F.A. Hayek (London: Ru tledge & Kegan Paul Ltd., 1935), pp. 87-130; idem., Socialism andianapolis: Liberty Press, Liberty Press Edition, 1981), pp. 95-130. 7A.N. Whitehead, Process and Reality (New York: Macmillan, 1929), p. 11; idem., Science and the Modern World (New York: Macmillan, 1929), p. 75. 8G. Ryle, The Concept of Mind (London: Hutchinson, 1949), pp. 16-18. 9J.K. Williams, "Redigging Old Wells," The Freeman, June, 1985. l0F.A. Hayek, The Counter-Revolution ofSci ence andianapolis: Liberty Press, second edi tion, 1979). 11A.B. Laffer, "Government Exactions and Revenue Deficiencies," Cato Journal, 1 (Num ber 1, Spring 1981), pp. 1-22. 12p. Gutmann, "The Subterranean Econ omy," Financial Analysts Journal (November December, 1977), pp. 26-34. l3B.N. Siegal, ed.,Money in Crisis (San Fran cisco: Pacific Institute for Public Policy Re search, 1984).

l4Mises, Human Action (Chicago: Regnery, 1966), pp. 408-11, 610£.; idem., The Theory of Money and Credit (New York: The Foundation for Economic Education, 1971), pp. 97-123. 15Friedman, The Optimum Quantity ofMoney (Chicago: Aldine, 1969), pp. 46-8. 16Mises, On the Manipulation of Money and Credit (Dobbs Ferry, N.Y.: Free Market Books, 1978). 17F.A. Hayek, Choice in Currency (London: Institute of Economic Affairs, 1976); idem., Denationalization ofMoney: The Argument Re fined (London: Institute of Economic Affairs, second edition, 1978); idem., "The Future Mon etary Unit of Value," in Siegel, op cit., pp. 323 35. 18E. Groseclose, Money and Man (Norman: University of Oklahoma Press, 1976), pp. 180 93.

Dennis Bechara CALLShave come in recent years for a new industrial policy as a certain cure for economic stagnation. Be tween 1969 and 1976, the Northeast and Midwest sections of the country lost about a million manufacturing jobs. It was common to refer to some of the more blighted areas as the "rustbelt" of America, foreshadow ing· ominous things to come. Al though the recent economic rebound has in some ways muted the ur gency, the call for government plan ning is still very much with us. Demands for a new industrial pol icy no longer originate solely from academic circles. Prominent busi ness leaders are espousing such a so lution to our economic evils. Lee la cocca, for instance, asks for the implementation of a "rational" inMr. Bechara is an attorney in Washington, D.C. 498 The Myth of National IndustrialPolicy dustrial policy. In fact, he has stated that, "Any debate over whether the [United States] should have an in dustrial policy is outdated and way off course. We already have one but it's all messed up. The real issue is, should we have a rational industrial policy." In a sense, he is right. We have a hodgepodge of Federal poli cies that affect investment decisions in a significant fashion. Whether these policies could ever be "ra tional" is, of course, a debatable point.

Two Variations of a Theme Two names are commonly associ ated with the proposal for a national industrial policy-Felix Rohatyn and Robert Reich. Rohatyn acquired na tional prominence when he became the chairman of the ,Municipal As sistance Corporation (MAC), an offTHE MYTH OF NATIONAL INDUSTRIAL POLICY 499 budget enterprise created by the State of New York, which issued $10 billion in bonds. MAC was credited with saving New York City from bankruptcy, and Rohatyn, as its chairman, basked in the so-called success of the rescue operation. He became affectio~ately known as "Mr. Fixit." New York City by 1975 had bor rowed $724 million to cover current expenses. Its short-term debt amounted to $4.5 billion. MAC was devised as a way of financing the short-term debt and averting out right default. MAC was able to func tion only with the backing of the fed eral government. This was achieved by measures that guaranteed to the capital markets that even if the City of New York defaulted, the taxpay ers would cover the bonds. New York City was saved from bankruptcy by the spreading of its risks to the na tional level.

Rohatyn's proposed national in dustrial policy is to revive a scrapped agency called the Reconstruction Fi nance Corporation (RFC) which would target decaying industries and regions and inject them with much-needed capital. Rohatyn also calls for easy credit by the Federal Reserve System to encourage the ex pansion of the housing and construc tion industry. The new RFC would not be vulnerable to public pressure, according to Rohatyn, because it would make its investment decisions behind closed doors, after consulta tion with appropriate business, la bor and government representa tives. As part of the conditions for granting financial assistance, the RFC would require certain policy and management changes, and it would obtain a share of equity in the enterprise. Thus, dying industries, such as steel, textiles, rubber and automobiles would be favored and strengthened by the RFC. Robert Reich, a Harvard Professor, proposes to favor industries with po tential future technology. In con trast to Rohatyn, Reich's version of the RFC would conduct its deliber ations in public and would welcome the participation of all segments of society.

Interestingly enough, Reich and Rohatyn criticize each other's pro posals. Reich feels that Rohatyn's closed-door RFC represents a dan gerous concentration of power and a threat to our democratic institu tions. Rohatyn's criticism is that an open-door RFC would only lead to politicized decisions. Both criticisms are valid arguments against the cre ation of an RFC. Credit Is Earned The unfettered market extends credit according to the profitability of an enterprise. If a business ven ture seems headed for failure, the credit markets either charge higher borrowing costs or simply do not 500 THE FREEMAN August grant any further financial assis tance. On the other hand, if an en terprise has a probability of success, credit is allocated to it. This is a healthy phenomenon, because prof itable enterprises are rewarded by the credit markets and unprofitable industries are penalized. A profita ble enterprise is one that has cor rectly judged desires of consumers and thus is allocating resources in the most efficient way. An unprof itable enterprise, on the other hand, is one that has failed to adjust to con sumer demand and misallocates resources.

By granting financial assistance to dying industries, the proposed RFC would, in effect, lower the rate of eco nomic growth because resources would be allocated to inefficient uses. In addition, the RFC would be the lender of last resort. Industries whose prospects are so bleak that they cannot obtain further financ ing from the private markets, would flock to the RFC seeking assistance. The funds granted to these poorer risks would crowd out more deserv ing users of funds. This may happen either because interest rates go up as a result of government opera tions, or, because one borrower ob tains actual physical capital goods let's say tractors on farms-at the expense of others. So we would be al locating resources to those poorer risks, who would either fail, or pro duce inefficiently. Therefore, it is not just a mere re-allocation of capital that is involved in an industrial pol icy. Also involved is the reduction in the country's wealth.

There is no guarantee that govern ment is any better equipped than the credit markets to judge what will be the technology of the future. A few years back, France and England joined in a common government en terprise to develop a new airplane that would be the fastest in the world. The result was the Concorde, a massive white elephant that is no longer in production. The test of profit and loss is the crucial one to determine what industries have po tential for growth, and the credit markets are better equipped to judge this. Under Socialism The incentive to be careful in al locating credit would be removed if credit were socialized, because gov ernment is not under the constraint of having to turn a profit. Other con siderations, such as "the public in terest," are prone to political manip ulation. On July 25, 1983, Senator Proxmire, when discussing the de sirability of instituting a national industrial policy, wondered how re sources would be allocated, and he answered the question in this fashion: Money will go where th,e political power is . .. It will go where the union power is mobilized. It will go where the cam1985 THE MYTH OF NATIONAL INDUSTRIAL POLICY 501 paign contributors want it to go. It will go where the mayors and governors as well as Congressmen and Senators have the power to push it. Anyone who thinks government funds will be allocated to firms according to merit has not lived or served in Washington very long.

In addition, it is easy to envisage dying industries, with their lobby ists, Congressmen and labor unions influencing an RFC and persuading it to grant further economic assis tance. The so-called "new" or "prom ising" industries that Reich would like to aid would simply not have the political clout that the established industries already have. An RFC would provide a further incentive for groups to engage in rent-seeking be havior. Political considerations w:ill enter into play in the allocation of capital, and those firms that are eco nomically efficient but politically unpopular, will suffer the conse quences. Government Allocation Distorts the Economic Message To the extent that the proposed RFC channels resources to indus tries less favored by consumers, we distort the economic information which is essential to entrepreneurs. Where the relative profitability of industries is forcibly altered by the government, the wrong signals are sent to entrepreneurs, and further malinvestments take place. An RFC could only perpetuate inefficient firms at the expense of the efficient ones.

In fact, this is happening right now. Ifwe look at the activities of the federal government, we observe that there are over $30 billion in direct loans and over 150 agencies that guarantee loans to different groups in the country. All of this activity amounts to approximately $100 bil lion a year. Economist Herbert M. Kaufman of the University of Ari zona studied the effect of Federal loan guarantees and his conclusion should not surprise us. For every $1 billion in Federal loan guaran tees, between $736 million and $1.2 billion in private investments that otherwise would have taken place is crowded out. In addition, the current tax code provides a series of incentives and deductions that skew production and the allocation of resources away from where the market would have put them. For example, by fiscal 1986, the combined tax breaks provided to people and businesses will be in the neighborhood of $400 billion. It has been estimated that in 1983 alone, the wealthy legally avoided paying taxes on more than $35 billion of in come by placing investments in such qualifying ventures as oil drilling, avocados, dairy farms, real estate and other tax-sheltered enterprises.

This is one of the reasons Lee Iacocca is correct when he states that we al ready have an industrial policy.

502 THE FREEMAN August There is no question that a substan tial segment of our economy is di rectly influenced by considerations that are outside the free market. History of the RFC Perhaps a better way of under standing the proposals for a na tional industrial policy is to study the actual record of the much trumpeted Reconstruction Finance Corporation. The RFC was established on Jan uary 22, 1932, as part of Herbert Hoover's programs to combat the Depression. Its purpose was to pro vide financial assistance to a num ber of institutions, public and pri vate, in order to promote economic recovery. During the first few months of its existence, the RFC re fused to divulge to the public the names of the institutions that were being considered for or which were granted financial relief. It was feared that the public would lose confidence in any corporation that received funds from the RFC, perceived as the lender of last resort. Congress, how ever, revised this policy and man dated that the RFC's activities be come publicly known. It soon became evident that loans were granted on the basis of political considerations, as shown by'the following: (a) $90 million to the Central Re public Bank of Chicago, whose "hon orary chairman," Charles G. Dawes, was the past president of the RFC.

(b) $14 million to Union Trust Company of Cleveland. Its chairman was the treasurer of the Republican National Committee. (c) $12.3 millioll to the Guardian Trust Company also of Cleveland. Atlee Pomerone, president of the RFC, was a director of this company. (d) $7.4 million to the Baltimore Trust Company, whose vice chair man was a Republican Senator. (e) $13 million to the Union Guardian Trust Company of Detroit, a director of which was Roy D. Chapin, Secretary of Commerce. Aside from banks and trust com panies, over the years the RFC provided financial assistance to insurance companies, mortgage companies, credit unions, agricul tural credit corporations,railroads, and eventually even to topless bars and massage parlors! Over 13 years, the RFC distributed more than $35 billion. Although some apologists of the'RFC claim that when it ceased operations it left a surplus 'of $500,000,000, a closer analysis re veals an $11.5 billion loss due to loans that defaulted and were oth erwise written off.

Did the RFC achieve its goals? If we consider unemployment as a re liable indicator, we have to conclude that the RFC failed. In 1931 unem ployment stood at 8 million. By 1939 there were 9 million people unem ployed. Unemployment declined only after Pearl Harbor. All the RFC 1985 THE MYTH OF NATIONAL INDUSTRIAL POLICY 503 achieved was to misallocate re sources. Capital was diverted from more efficient uses to less efficient, but politically more savvy uses. No one will ever know how much in vestment was crowded out by the RFC, but if the study by economist Kaufman is an indication, the ef fects were substantial. Japan One of the shining examples uti lized by many proponents of a na tional industrial policy is Japan. According to this version, ~Japan's economic miracle is due to the guid ance provided by the Ministry of International Trade and Industry (MIT!). Therefore, all we have to do is set up our own MITI and perma nent economic recovery will be with us. Before we do that, it would be in structive to analyze just what MITI has done in Japan. Is the Japanese miracle due to MITI's omniscience?

Or is it due to a policy of limited gov ernment and laissez-faire? At the end of World War II, Japan was devastated militarily and eco nomically. Two of its cities, Hiro shima and Nagasaki, were obliter ated by atomic bombs. Food was scarce, and only 16per cent ofJapan's land is arable. In 1947 more than half the Japanese population was engaged in farming. Although lack ing capital and technology, Japan had a vast amount of cheap labor. So labor-intensive industries began to prosper and produced such items as foodstuffs, textiles, ceramics, and beverages. These export industries in turn brought foreign currency into the country, enabling Japan to ac quire foreign technology, manage rial expertise and raw materials. As the evolution continued in the 1960s, capital intensive industries began to emerge, producing such items as automobiles, motorcycles, television sets, radios and cameras.

Japan's success in exporting its goods was the result of thousands of private companies which imported cheap raw materials, acquired for eign technology and exported goods. What was the role of the Japanese government and of MIT! in partic ular during this time? During the 1950s, MITI was con vinced that there were no commer cial possibilities for the transistor. After all, a change to transistors was simply too revolutionary an idea. So for two years, MITI attempted to prevent Sony from acquiring man ufacturing rights from Western Electric. Similarly, MITI felt that Japan's automobile manufacturers could not compete in the world mar kets. So they attempted to dissuade the manufacturers from getting into the export market. In addition,MITI felt that there were just too many automobile plants in Japan, so it at tempted to force all ten firms into merging into two-Nissan and Toyota.

504 THE FREEMAN August Needless to say, MITI failed to per suade the Japanese business com munity of the wisdom of its advice. Robert Reich points at the Japanese semiconductor industry as the one example where the government suc cessfully targeted an industry. But, if we take a closer look at the sta tistics, the U.S. government has been spending 10 times as much money as the Japanese government spends on the semiconductor industry. There fore, government spending is not the answer to the success of the semi conductor industry. In fact, the Jap anese government's share of all re search and development (including defense) is amazingly low.In the U.S. it is 48 per cent, whereas in Japan it is 28 per cent. Not surprisingly, during the 1950s and 1960s, the Japanese govern ment was concerned with rebuilding the nation's infrastructure. Roads, harbors and airports were built. The government balanced its budget during this time, and taxes were kept low. The tax system did not pe nalize savings, and the share of na tional income taken by taxes was and still is the lowest among the de veloped nations. In addition, the devastation of the Second World War took away the power enjoyed by the old bureaucratic elite, the Zaibatsu, and this in turn has spurred competition.

Perhaps the most astonishing fact is that contrary to what the proponents of a national industrial policy contend, most loans recently issued to business in Japan have come from the private sector. There has been, in other words, no massive financial targeting of industries by the gov ernment. In fact, the industries that have received government financial assistance have been politically powerful, but economically weak. Farmers receive a substantial amount of protection in the form of outright subsidies and import re strictions. Coal mining has bene fited from low interest loans. Yet output has decreased from 54 mil lion metric tons in 1962 to 19 million tons in 1978. The shipbuilding in dustry also received low interest loans. Yet it is operating at 35 p~ cent capacity and, after 1977, 46,000 workers had to be laid off. Petroleum refining, petrochemicals and al u minum have also received govern ment aid. None of these industries, however, is responsible for the out standing rate of growth experienced in Japan. Rather, the "secret" of Ja pan's success may be reasonably at tributed to the government's policy of keeping spending under control, and of providing a favorable busi ness climate.

Is it true that in spite of having a general policy of favoring free en terprise, we are nevertheless expe riencing a deindustrialization of our economy? A brief review of some of the statistics will be revealing.

1985 THE MYTH OF NATIONAL INDUSTRIAL POLICY 505 The Changing Pattern of The American Economy A common observation among the proponents of a national industrial policy is that the economy has shifted away from manufacturing. Non-agricultural employment has increased from 60.6 million in 1965 to 90.8 million in 1980. The manu facturing sector has, during this same period of time, fluctuated be tween 18.5 and 21 million jobs. Be tween 1969 and 1975, about a mil lion manufacturing jobs were lost. Yet, 3 million manufacturing jobs were created between 1975 and 1979. Some of the manufacturing in dustries contracted as a result of the recent recession, but manufacturing employment has subsequently sta bilized. Fears that our manufactur ing sector was on the verge of ex tinction were unfounded. The importance of the manufac turing sector, however, has declined during this same period of time. In 1965, 30 percent of all non-agricul tural employment was in manufac turing, whereas in 1980, it was 22 per cent. The growth in jobs has oc curred in the service and the gov ernmental sectors. But this does not mean that we are fast becoming a nation ofjanitors. The share of man ufacturing jobs in Japan, Germany and England has fallen even more sharply than in this country.

Although the reasons for the con traction of the relative share of manufacturing jobs are varied, they do not defy logical analysis. One reason is that some industries, like the steel industry, paid exorbitantly high wages to its unionized labor force at a time when their productivity was declining. The average wage rate for a Japanese automobile' worker is half what his American counterpart earns. Paradoxically, many employees have voluntarily left the manufac turing sector and joined better-pay ing jobs in the service sector. The service sector created 9 million jobs in the decade of the 1970s. Of these, about 8 million were in the profes sional and business service area. In addition, the growth of the service sector has been made possible by the entry in the market of many part timers, such as teenagers and the el derly, who seek temporary assign ments that demand few skills. Clearly, there is a need for these jobs.

However, there is no danger that the manufacturing sector is about to dis appear. Even if the manufacturing sector were in the decline, that in and of itself is insufficient to justify an industrial policy. Conclusion As we have seen, the proposals for a national industrial policy are founded upon a misunderstanding of basic economic issues. The role of the price system; the allocation of re sources; supply and demand-these 506 THE FREEMAN are all crucially important issues that we must understand if we are to prevent one economic folly from being implemented on top ofanother. As Friedrich Hayek once said, the fundamental problem in economics is that knowledge of all the relevant circumstances "never exists in con centrated or integrated form but solely as the dispersed-bits of incom plete and frequently contradictory knowledge which all the separate in dividuals possess." This is the fundamental reason all central planners, from the 5-year plan in the Soviet Union to national industrial' policy, are bound to fail.

Understanding why this is so is an important step. This is why it is so crucial that groups, such as the Foundation for Economic Education, exist. As each one of us strives to im prove his understanding of the mar ket order and its moral underpin nings, we shall approach a more just and freer society. , IDEAS ON LIBERTY Voluntary Cooperation To suggest that America's greatness lies not in trying to frame national goals and purposes, but in making it possible for mil lions of individual Americans to realize their goals and purposes is not to intimate that America is devoid of ideals or lacking in the capacity for voluntary cooperation. Quite the contrary. The American pioneer, by his very way of life, was more self-reliant than the European peasant who was dependent for his livelihood on the local country squire in England, or nobleman in France. But,· in the case of an Indian raid, the lives of the pioneer and his family might depend on the willingness of his neighbors to come to his help. There was also cooperation in building cabins, in clearing woods, in husking corn. And this tradition of vol untary mutual aid finds expression in the very different con ditions of modern life, in the service club that looks after hand icapped children, in the alumni group of a small or medium-sized college that raises funds for scholarships for the students who have followed them and whom they wish to help.

WILLIAM HENRY CHAMBERLIN, "America is Many Million Purposes"

A REVIEWER'SNOTEBOOK JOHN CHAMBERLAIN The Wealth ofAmerica In his From Adam Smith to the Wealth ofAmerica (New Brunswick, N.J., Transaction Books, 237 pp., $29.95), Alvin Rabushka has writ ten one of the really searching books of our time. But its title, though apt as an indication of the validity of principle, is somewhat misleading. Taken literally, it implies a straight line process in history. But the sad truth is that Adam Smith lost caste in England at the very peak of his success. His principles took hold in America in the nineteenth and early twentieth centuries, but they went out of vogue in the depression of the Thirties. If that were all there was to it, Ra bushka might as well have called his book The Decline of the West. Both Britain and America have been throwing their wealth away. But it so happened that several geograph ically small countries on the rim of eastern Asia (Hong Kong, Taiwan, Singapore, South Korea) decided to follow the path of economic freedom, a ·phenomenon which is now teaching us to have a new look at things.

Rabushka devotes part two of his book to the Oriental experience. With rebirth in mind he might bet ter have called his book The Phoe nix. Or even, There'll Always be an England-Somewhere. Certainly we in the West have been honoring Adam Smith's laissez faire philosophy in the breach. But there is a lesson in Rabushka's story. The lesson is that it can take fifty years for a common sense proposition to take over. When Adam Smith wrote The Wealth of Nations England was in the grip of the mercantilist phi losophy. The younger William Pitt was fascinated by Smith's work, but the war with Napoleon kept him from doing much about it. "In the aftermath of the Napo leonic Wars," so Rabushka writes, "Britain paralleled the contempo rary United States." The list of reg ulations in the British statute book covered all sorts and conditions of work. There was a stiff tariff wall around manufactures, and the corn 507 508 THE FREEMAN August laws were regarded as an absolutely necessary crutch for agriculture. The export of machinery was banned and skilled artisans were denied the right to emigrate. The Navigation Acts stipulated that all seaborne trade going in and out of British ports should be carried in British ships. The ships themselves had to be built in British yards. There were restrictions on joint stock compa nies, and foreign trade was in the hands of royally-chartered monopo lies. A huge public debt, the legacy of the eighteenth-century wars, con sumed half of all public spending.

Says Rabushka, "the govern ment's heavy-handed approach to the economy reflected mercantilist thinking and practice embellished by wartime controls ... The British economy was a mixture of deliberate economic decisions of her rulers to achieve specific national goals and a collection of ad-hoc taxes and mea sures solely reflecting urgent war time needs for more revenue or eco nomic protectionism." Sounds very much like Washington, D.C., today. The Cotton Industry It so happened that the British controllers in 1815 had overlooked the cotton industry, which was just coming into existence. There were hundreds of regulations to prevent growth in silk and woolen manufac ture. But the cotton industry had, for a moment, the unchecked advantage of the nascent industrial revolution. It began to show its heels to silks and woolens. Adam Smith had been a long time dead when the British: really began to heed his words. And it took a full half century, from 1815 to 1865, be fore the economic reform had been completed. Some great men were in volved in it. Rabushka doesn't give enough credit to the evangelists of free trade, John Bright and Richard Cobden. His heroe.s are William Huskisson, Sir Robert Peel and Wil liam Gladstone. Huskisson started the ball rolling by the tariff reform of 1825, with reduction in the duties on rum, fabrics, minerals and man ufactured goods. In 1832 the first im portant electoral reform brought manufacturing representatives into the House of Commons.

Sir Robert Peel continued the tar iff reduction crusade, but he had to compromise by accepting a not too onerous income tax in order to keep the budget balanced. The Corn Laws persisted, and Peel, as a Tory, didn't dare go too strongly against the landed aristocrats who insisted that agriculture should not be left to the mercies of the international market. But the potato famine in Ireland changed the intellectual climate a bit. Despite the opposition of the Duke of Wellington, who said "damned rotten potatoes put Peel in his fright," the Corn Laws were fi nally repealed.

1985 THE WEALTH OF AMERICA 509 A Stimulusto Trade Then came the Gladstone budget of 1860, with a total abolition of du ties on dairy products and cuts on timber. The favor to imports had a magical effect on exports. "The ex port ~rade of 1860," says Rabushka "was the largest on record, having risen in value to 136 million pounds from the 1859 figure of 130 million." Modern supply side theorists would be fully justified in claiming that the· history of England between 1815 and 1865 proves the case for the Laffer Curve. Money continued to pour into the exchequer in steadily increasing amounts with each round oftariff reductions. The lower the tax rate, the bigger the tax volume. But Britain's increase in wealth, coupled with the new electoral laws that ex tended the franchise to all males re gardless of property qualifications, was its own undoing. The Fabians, with their philosophy of redistribu tion, set the new intellectual climate in the Eighties and Nineties, and the Welfare State was the end result.

Rabushka more or less drops the British story at this point. He con tinues to accentuate the positive by switching to what happened after 1946 in Hong Kong, Taiwan, Sin gapore and South Korea, where the British experience of the 1815-1865 half century has repeated itself. Ra bushka's penultimate chapter, enti tled "What happened to the Ameri can Dream?," is pure melancholy. The final chapter, "Recipe for Pros perity," calls for a return to Adam Smith's principles. With the fifty-year struggle in Britain in mind, Rabushka ob viously doesn't think anything is going to happen overnight. But "Ronald Reagan," he says, "has taken a modest first step, perhaps no more than that of William Huskis son ..." Some modest reforms, he says, have been achieved. And the "determination and success of three giants in nineteenth-century Brit ain gives cause for optimism in our country. As the intellectual currents increasingly demonstrate the flaws in big government and the benefits of the market economy, politicians ... will find the attractions of more economic freedom irresistible. On this view, the future is not so black."

I) AN AMERICAN IN LENINGRAD by Logan Robinson CH.W. Norton & Co., New York, New York 10010), 1982 320 pages _ $17.50 hardback Reviewedby Bill Anderson LOGAN ROBINSON, a New York City lawyer and Harvard Law School graduate, has written an enjoyable 510 THE FREEMAN August and informative book on his expe riences in the Soviet Union, first as an exchange student at the Civil Law Faculty of Leningrad State Uni versity (Lenin's alma mater) from 1976 to 1977 and later as a tourist returning to the U.S.S.R. in the fall of 1980. A well-written and fast-paced book, An American in Leningrad gives much insight into daily life in the Soviet Union through a collection of anecdotes detailing the author's ad ventures (and misadventures) in dealing with the omnipresent bu reaucracy, standing in long lines to purchase shoddy merchandise (when it was available), and making friends with local.citizens despite the KGB and the built-in paranoia of the Rus sian culture. Robinson's accounts are laced with humor as he describes his many brushes with Soviet bureau crats whose main duty, it seems, is to make life as difficult as possible for anyone needing their official approval.

For example, the author cites the difficulties of obtaining the neces sary faculty signatures to allow him to travel in other parts of the U.S.S.R., although he admits that his being an· American gave him a distinct advantage over his counter parts from the Soviet Union as well as those from Eastern European and Third World nations who were also studying in Leningrad. And part of the reason for his relative success in winning "victories" over the bu reaucratic system, Robinson writes, was his determination not to leave his American values and forceful ness at home. Although he is not an economist, Robinson picks apart the inefficien cies of the Soviet economy with the logical scalpel worthy of a Milton Friedman, pointing out just why the communist system fails. The author gives an excellent example in his ac count of a small, private industrial goggles factory in Leningrad. Be cause of the eye injuries occurring in Leningrad factories due to a goggles shortage, some workers fashioned industrial goggles of their own. They recognized the· growing demand for their products and were soon filling orders from state factories, an illegal activity in the U.S.S.R. punishable by death. For a while, the state's des perate need for goggles outweighed the gravity of the workers' "crimes,"

but when the factory became "too" successful, the authorities closed in on the operation, shutting down the enterprise and jailing its owners. The end result, Robinson writes, is that once again goggles came into short supply and eye injuries rose in Leningrad. The fascinating part of that story, he narrates, is that it was told to him by a Soviet lawyer who herself be· lieved that state crackdowns on pri· vate enterprises were wrong-headed at best and harmful at worst. The 1985 OTHER BOOKS 511 lawyer's attitudes, it seems, mir rored the attitudes of others Robin son met in the U.S.S.R. In fact, he writes that he found only one (that's correct) believing Marxist-Leninist in all his travels in the ideology's birthplace. Unfortunately, the lone adherent to the Russian civil reli gion happened to be his faculty advisor. An American in Leningrad con tains many other anecdotes as well, including Robinson's brief tour with the Nitty Gritty Dirt Band as he served as the band's translator dur ing part of its Soviet tour, a tour made humorous by the bumbling an tics of the KGB as it tried, in grade B movie style to harass the band and its Russian fans.

For those who wish to gain more insight into the U.S.S.R., its econ omy and its people, this book is must reading. i) MAKING THE FUTURE WORK by John· Diebold (Simon & Schuster, Inc., 1230 Avenue of the Americas, New York, N.Y. 1002.0), 1984 466 pages _ $18.95 Reviewedby William H. Peterson THOSE who well anticipate and de fine the issues, according to legal lore, usually win the arguments. John Diebold is one who not only foresaw the postwar sweep of automa tion-indeed he coined the word-but who has long been adept at spotting and honing issues and hence win ning arguments. Diebold sharpens national if not global questions and probes the fit (or misfit) of many of America's institutions with the dy namics of the 1980s. Generally he finds these institu tions out of tune with the times-Le., a drag on progress. Accordingly he comes up with ways of "closing the gap between what our society can achieve-and what we do achieve."

Examining that gap, Mr. Diebold analyzes on the basis of structure, function, process and management such institutions as the federal reg ulatory bureaucracy, Congress, or ganized labor, commercial banking, corporate America, the "lawyering" industry, the media, and public education. Well, what about education? He notes that the school industry spends about 85 per cent of its budget for salaries, 10 per cent for buildings, less than 5 per cent for books and pa pers, and under 1 per cent in re search on how children learn and its own efficacy in educating them. He worries about educational monop oly-about requiring a child to at tend a particular school regardless of its goals, methods, and curricu lum. He therefore asks for more choices in education and comes out for the voucher plan, for possibly 512 THE FREEMAN even for-profit corporate-run schools. He writes: "An IBM school or a Gen eral Electric school is not outside the realm of possibility."

What about the media, which Mr. Diebold thinks is indeed the Fourth Estate? He decries its generally short-term outlook, its penchant for creating crises by focusing attention on isolated generally pictorial events to the exclusion of stories that can not be told in pictures or a few par agraphs. Television news gets espe cially rapped for sensationalism. Example: Three-Mile Island, which Walter Cronkite hyped up at the time as "a nuclear nightmare ... the worst nuclear power plant acci dent of the atomic age." Even now the incident is still described as a "disaster," comments Mr. Diebold, even though the only human harm known for sure as attributable to the accident was caused by anxiety, not radiation. What of the "lawyering" industry? Mr. Diebold criticizes the U.S. legal system for becoming in many ways a roadblock to making the future work and even "a roadblock to jus tice." He criticizes, for example, the government antitrust attorneys who tried to subpoena IBM documents that would have taken 62,000 man years to produce at a cost of $1 bil lion. He complains about the more than 600,000 lawyers in America af against 15,000 in Japan. He thinkf humorist Russell Baker has a pos· sible cure-we export one lawyer t< Japan for each Japanese car im ported here.

So this incisive book goes, witl hardly any institution spared. MorE and more corporate leaders are cas tigated for their short-term vision which in turn is blamed on the "per formance" orientation of Wall Stree1 analysts, the SEC requirement 0: quarter ly reporting, the here-and there behind-the-times teaching 0: business schools, and the Congres sional prohibition manifested in thE Glass-Steagall Act preventing bank~ from taking equity positions ir corporations. To be sure, the anachronizing, thE emerging cross-purposes of Ameri ca's institutions, are complex mat ters. The status quo is frequently ty rannical, as another critic of ou] times, Milton Friedman, has re minded us. But the promise of free dom and free enterprise is too grea1 to be short-changed. Better to define issues, raise questions, exerciSE leadership, engage in dialogue, and perhaps above all, have vision-the long view. These are the marchini orders that John Diebold, a modern day Socrates, hands us in this book @ the Freeman VOL. 35, NO.9· SEPTEMBER 1985 Three Steps to FreedomA Page on Freedom, No. 23 Robert D. Love 515 The way is not easy, but the reward is liberty.

A Conservative Declaration Michael Bordelon 516 The founding fathers stressed liberty more than equality. The Two-Wheeler Lesson The more competition, the better. Hal Watkins 523 The Disease From Which Civilizations Die John K. Williams 525 The breakdown of manners, morals, laws and conscience. The Limitations of Profit-Sharing Henry Hazlitt 538 Instead of straight wages, should workers prefer a share of profits? The Morality of Capitalism E. Barry Asmus Donald B. Billings 541 Choice presumes freedom to exercise our responsibilities. Economic Prediction and Entrepreneurial Success Dennis L. Peterson 550 Despite the gloom of the "experts," free individuals find a way. Terrorism Bill Anderson 554 A study of terrorism from an economic point of view. The Three Faces of Unionism Hans F. Sennholz 564 Myths underlie the politically powerful movement. Book Review: 574 "Disabling America: the 'Rights' Industry in Our Time" by Richard E.

Morgan Anyone wishing to communicate with authors may send first-class mail in care of THE FREEMAN for forwarding.

IFreeman AMONTHLYJOURNAL OF IDEAS ON LIBERTY FOUNDATION FOR ECONOMIC EDUCATION Irvington-an-Hudson, N.Y. 10533 Tel: (914) 591-7230 President: Robert D. love Managing Editor: Paul L. Poirot Production Editors: Beth A. Hoffman Amy S. Vanlaar Contributing Editors: Robert G. Anderson Howard Baetjer Jr. Bettina Bien Greaves Charles H. Hamilton Edmund A. Opitz (Book Reviews) Brian Summers Joan Kennedy Taylor THE FREEMAN is published monthly by the Foundation for Economic Education, Inc., a nonpolitical, nonprofit, educational champion of private property, the free market, the profit and loss system, 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. Donations are invited in any amount. THE FREEMAN 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 $10.00 a year.· Copyright, 1985. The Foundation for Economic Education, Inc. Printed in U.S.A.

Additional copies, postpaid: single copy $1.00; 10 or more, 50 cents each. THE FREEMAN is available on microfilm from University Microfilms International, 300 North Zeeb Road, Ann Arbor, Mich. 48106. Reprints are available of "A Page on Freedom," small quantities, no charge; 100 or more, 5 cents each. Permission is granted to reprint any article in this issue with appropriate credit, except "The Morality of Capitalism" and "The Three Faces of Unionism."

A Page on Freedom Number 23 ThreeStepsto Freedom THE direction of the country will be changed only as ideas are changed and as those ideas begin to affect the way people live. While most people believe that elections can alter the course of the country, that is not true. We must look elsewhere for meaningful change. Leonard Read repeatedly stressed three ways in which we could make ideas on freedom come alive. They bear our renewed attention: • First of all, you must know what you're talking about. That means self-improvement, the acquisition of knowledge and serious research to find truth. • Second, you must live what you believe. All of us know that you cannot tell people to "do as I say, but don't do as I do." The Bible is clear when it says "as a man acts so it is in his heart." • Third, when you know what you're talking about and you live what you say you believe, it is inevitable that someone will ask you why. It is a great flattery to be sincerely asked, "Why do you believe and act as you do?" At that point, you have attained the greatest responsibility. You have been asked to be a tutor.

FEE has taught these three steps through these many years-the simple facts of knowing what you're talking about, living what you say you believe, and teaching when asked, "Why?" Mastery of the first step can lead to the second, and the second to the third, and the third will have a real impact on our world. If no one is asking "why" in your life, then you should be reading The Freeman and participating in the activities at FEE. As Leonard Read would remind us: "The way is not easy, but the reward for these achievements is individual liberty and, we submit, there is no other way." , -Robert D. Love THE FOUNDATION FOR ECONOMIC EDUCATION, INC. IRVINGTON-ON-HUDSON, NEW YORK 10533 515 Michael Bordelon "~~~~:~~~) ~-- -~~§t,\ A ~ "Equality of opportunity, far from being a matter of settled doctrine amongst us, is a basic issue between the Liberals among us and the Con servatives among us."! As arresting as this insight by Willmoore Ken dall may be, it is nonetheless an un derstatement: the extent to which America is dedicated to "equality of opportunity" is not merely a basic difference between liberals and con servatives, it is the basic difference.

Considering that the debate over egalitarianism has been at the heart of American political dialogue for at least half a century now, it would seem that both the meaning of equality and its place in the Amer ican political tradition would be firmly established. But it is not so. Dr. Bordelon is Chairman. Department of Social Stud ies. St. Thomas Episcopal School, Houston, Texas. 516 Conservative Declaration Although many observers, sophisti cated and unsophisticated alike, have attempted to link "the equality principle" with our Founding Fa thers, the connection is still dubious, mainly because the Fathers were far more fond of talking about liberty than about equality. The priority of liberty to our na tion's Founders is clear. If the var ious documents of the last quarter of eighteenth-century American his tory are examined carefully, the reader will find them filled with ref erences to the effect that liberty is the "greatest good,"2 or that the preservation of liberty is "the most valuable end of government,"3 or that government exists "to secure the blessings of liberty." This last reference is, of course, taken from the preamble to the Constitution, the A CONSERVATIVE DECLARATION 517 most solemn statement of promises that we Americans have ever made to each other. In fact, references in late eighteenth-century American political literature proclaiming a great love for liberty are so numer ous that painstaking research is not needed to find many of them. We may wonder what the Fathers meant by liberty, or whether liberty may be properly regarded as an end in itself, or should instead be regarded as a means of achieving some greater good. But whatever our uncertainty, the fact remains that in the late 17 ODs many Americans did pro nounce liberty to be one of life's greatest goods, especially in that all important listing of ends in the Con stitution's preamble.

The Importance of Liberty By contrast, formal and explicit statements maintaining that equal ity is a goal of American life are few and far between. Indeed, the level ing spirit which has often been as sociated with democracy was one of the most oft-mentioned fears· of our Founding Fathers. It would be dif ficult to find any explicit passage stating that it was their object to make America a land of greater equality; it is not difficult to find passages in which the Fathers boldly stated their aim to secure liberty for themsel ves and their descendants. This is not to deny the observa tions of Franklin and Tocqueville that the early United States was a land characterized by a high degree of equality in comparison to the nations of contemporary Europe. Investigations by more recent observers 4 have likewise revealed that certain developments of the Revolutionary period tended to re duce some of the political, social, and economic inequalities ofthe day. The dispossession of the Tories, the abo lition of primogeniture and entail, and the relaxation of property and religious requirements for voting and holding office are all cases in point. On a few occasions some Americans (notably Antifederalists) even speculated that America would be a healthier place if it were not di vided into wealthy families and im poverished masses such as existed in Rome in the century preceding Cae sar Augustus.

Nevertheless, even granting these concessions to the importance of an implied equality at the time of the Founding, it is still clear that the Founding Fathers never dedicated themselves to a conscious and active pursuit of the equality principle to a degree comparable to the strength of their devotion to liberty. Liberty was eulogized far more frequently, openly, and forcefully than equality, which was only rarely mentioned by the Fathers with any enthusiasm. The result has been that those who seek an American commitment to the equality "principle" have found 518 THE FREEMAN September themselves almost of necessity de pending upon analysis of the most famous statement on equality in our political heritage, the "all men are created equal" clause in the Decla ration of Independence. The great problem with the equal ity principle as stated in the Decla ration of Independence is its brevity.

The simple truth is that the equal ity clause lacks any explicit mean ing. The statement is simply too short. Whatever meaning is to be gained from the famous clause must therefore be derived by implication. Consequently, the clause has been subjected to numerous different interpretations by many different advocates of "the doctrine of Equal ity," all of them seeking to remake America into a hind of equality as they understand it, including the view so often urged upon us that it is our duty, where equality does not exist, to make men equal. There are, of course, other less radical inter pretations suggesting that "all men are created equal in the sight of God," or that "the Americans are equal to the British," or that "all races are equal to each other," or any number of other, often ingenious, understandings. The Ambiguity of Equality Such interpretations all suffer from the same basic weakness: they are not self-evidently true or "ob vious." It has often been pointed out that the term "self-evident" can have a more philosophical meaning: that is, a self-evident truth may be one in which the truthfulness of the proposition is contained within the meaning of the terms. Nevertheless, even granting the merits of this ar gument, it does not explain the tre mendous power that the equality clause has exercised' over the minds of men.

To explain the power of the asser tion we must understand it as self evident not in philosophical terms but in terms of the obvious. That is, we must somehow find some mean ing of the equality clause which can explain why all who ponder it are in stinctively inclined to accept it as ob vious, or as "self-evident." The force fulness ofthe statement is lost unless it contains a meaning which is clearly true, and even more than that, pertains equally to every mem ber of the human race, in all places and at all times in human history. Even more, the meaning must be un affected by the manifold differences among men including their varying talents, intelligence levels, nation alities, races, and genders as well as a host of other distinctions too nu merous to mention. Without in any way denying this tremendous variety of distinguish ing features, we may note at least two simple ways in which the basic equality of men is generally con ceded. First, there is little dispute 1985 A CONSERVATIVE DECLARATION 519 that all men are equal in that every man has one and only one body.

Every man, always and everywhere, is equal to every other man in bodily number; every man has exactly one body to nourish and use and, even tually, lose, in this world. Yet despite the manifest clarity of this rather simple observation, it is rarely ut tered as a political statement. When men come to interpret the "all men are created equal" clause, they gen erally prefer to devise novel inter pretations (often formulated to serve ulterior purposes). These intellec tual exercises are not necessary. The assertion of the bodily equality of all men, simple as it is, is not barren of practical political implications, and in fact can be taken to be the start ing point of social contract theory. The bodily equality of men may well be regarded as the basis of the Lock ean natural rights to life and prop erty, i.e., sustenance. The second basic equality of all men is spiritual rather than physi cal. Although men disagree about the exact character of man's spiri tual powers, few are willing to con test that man is endowed with a non physical faculty of some kind, whether it be understood as soul or intellect. And as in the physical sense, this conception of equality has a mathematical simplicity: every man has one soul or intellect, and one is clearly. equal to one. Although this argument may be regarded with justice as commonplace, it nonethe less deserves mention because it is asserted far less often in connection with the equality clause than is the more vague contention that "all men are equal in the sight of God." From the clearly defined belief that every man is endowed with a soul come very definite implications which precl ude the propriety of treating men as if they were animals. 5 That is, if man is dignified by a spirit which informs his very being, then the concentration camps and other cruelties of twentieth-century total itarianism are clearly indefensible.

Viewed in the light of such impli cations, the Declaration's assertion of a right to "the pursuit of happi ness" may then be construed as meaning that each man should have the freedom to attempt to fulfill both his bodily and his spiritual needs. What Equality Isn't The simplicity of such fundamen tal interpretations of the equality principle may seem to leave open the possibility of an inexhaustible num ber of political implications, but it is important to consider certain mean ings which do not seem to be implied, particularly when such meanings have been given wide circulation in recent decades. First, the clause it self does not specify any concrete way in which all men may be re garded as equal. For that matter, it does not even go so far as to suggest 520 THE FREEMAN September The AmericanTraditionof Equality 1. It is a very limited kind of equality that is avowed. Equality before the law and an equality of rights subsume the various expressions of it.

2. It assumes a negative role for government. This theme occurs re peatedly: Congress shall make no law ... ; No bill of attainder ... ; No title of nobility ... shall be granted. The impact of this is positive, though the statements are negative. It means that men are freed from the restraints of fixed classes and orders, that they can use their energies to achieve their ends, so long as they do not violate the equal rights of others in doing so. 3. It in no way prescribes that men shall cease to make distinctions nor that differences will cease to exist. On the contrary, in the absence of legally prescribed positions, there may be as many differences of de gree as there are individuals. 4. Such a conception of equality is consonant with liberty; indeed, it is a concomitant of the greatest liberty. CLARENCE CARSON, The American Tradition any ways in which men ought to be equal. Second, the clause does not contain any implication that men should be made equal in ways in which they are not already equal.

And third, there is no hint that gov ernment should take up the job of the Creator and make men equal; there is no evidence that the welfare state is hidden in the expression "all men are created equal." In short, there is no implication whatsoever that equality is itself a goal or end of gov ernment or of life in society.6 In fact, even the Declaration argues that government exists to secure liberty and not equality, clearly implying liberty as an end of government action. It can be argued that the Decla ration was and should be revered at least as much for its role in securing our liberty or independence from En gland as for its famous statement on equality. This argument is all the more plausible since the Declaration connects government far more di rectly with liberty than with equal ity: liberty is one of the three basic rights listed in the Declaration as 1985 A CONSERVATIVE DECLARATION 521 being the objects of protection by le gitimate action. Thus also the Bill of Rights was cherished by its advo cates as a bulwark of liberty, a point made often by its most zealous pro ponents. And even Lincoln sought for the slave not equality so much as liberty. Perhaps Lincoln's most sig nificant political act was the Eman cipation Proclamation, a gesture which sought to free the slaves, not to make them equal to the whites.

The opposite of slavery is liberty, not equality. The March Toward Uniformity For some decades now people have concluded that mere emancipation has not been sufficient-for our var ious "underprivileged" groups to be truly free, it is argued, they must be on an equal footing with "main stream" Americans politically, so cially, and economically. Thus in the twentieth century we have seen an enormous effort made to secure these equalities for our various "disadvan taged" citizens so that they will eventually enjoy full "equality of op portunity" with the nation's more established citizens. But there is tremendous confusion over the use of the phrase "equality of opportunity," which is often used in terms of an athletic footrace. 7 Al though at first glance this metaphor may seem simple enough, a little thought makes the comparison con fusing. Everyone is agreed as to what is "fair" in an athletic contest: all the participants should begin the race at the same starting point and begin to run at the same time. How ever, the concept "equality of oppor tunity" is not so clear when it is ap plied to the operations of individuals involved in the manifold activities of modern society.

Taken literally the phrase "equal ity of opportunity" may be (and of course is) interpreted to mean that all individuals should have the same advantages (or suffer no particular disadvantages) in the "race" for the goods of this world. The corollary, as we all know, is that it is govern ment'sjob to see to it that individual advantages and disadvantages be cancelled out as far as possible so that the race is "fair." This is per haps the main reason that we have "big government" today: with every attempt to eradicate all the little dif ferences in life which make for in equality of opportunity, the govern ment has grown larger. Despite the attempt to lend re spectability to the expression "equality of opportunity," it is the simplistic meaning of equality which has prevailed; we are being steam rolled by it. From the New Deal to Brown vs. Board of Education to Baker vs. Carr to the Great Society to Women's Lib and Gay Liberation, the march toward uniformity goes on. And lately, for the first time in our history, we have been asked to 522 THE FREEMAN give the equality principle formal and explicit Constitutional status in the form of the Equal Rights Amendment.

Recent events have suggested that the egalitarian Zeitgeist in America is currently on the wane. If so, we have no reason to be embarrassed at such a development. One does not have to deny a basic equality among men in order to resist the various forces which would reduce us to a bland uniformity. Nor does it take a refined intellect to perceive that vul gar egalitarianism represents a dis tinct threat to the liberties Ameri cans have long cherished as fundamental to their heritage. An instinctive preference for liberty is quite in keeping with our national character. The American ethos has been informed far more by the prin ciple of liberty than of equality, and not even the Declaration of Indepen dence tells us otherwise. , -FOOTNOTESlWillmoore Kendall, "Basic Issues Between Conservatives and Liberals," Contra Mundum, edited by Nellie D. Kendall (New Rochelle, N.Y.: Arlington House), p. 579.

2JonathanElliot, ed., The Debates in the Sev eral State Conventions on the Adoption of the Federal Constitution as Recommended by the General Convention, in 1787.5 vols. (New York: Burt Franklin, 1966), II, 133. The speaker cited is Samuel Nason of Massachusetts. 3Cecelia Kenyon, The Antifederalists. (New York: Bobbs-Merrill, 1966), p. 262. The speaker cited is Patrick Henry of Virginia. 4J. Franklin Jameson, The American Revo lution Considered as a Social Movement (Bos ton: Beacon Press, 1959). Originally printed in 1926, this work exerted a powerful influence on later historical research. SIt should be noted that for the purposes of this essay the distinction between soul and mind is of secondary importance in its implications. 6By no means, however, have all the inter pretations of the Declaration's famous clause been simplistic equalitarian efforts. Some ofthe more perceptive students of the equality prin ciple (such as Harry Jaffa and Charles Kesler) have concluded that it does not imply any sort of leveling at all. Rather, they contend, it sug gests a basic equality of natural rights, viz., life, liberty, and the pursuit of happiness. Thus, the argument goes, "the doctrine of Equality"

is the central principle of the American Ex perience, rooted as it is in the basic equality of man. (Charles Kesler, "A Special Meaning of the Declaration of Independence," National Review XXXI, No. 27 (July 6,1979), pp. 850 859) As attractive as this argument may be, it suffers from several weaknesses. First, the Declaration of Independence itself does not ex plicitly give any content to its famous equality clause. Second, the priority of equality to lib erty as an end is not established. That is, we may concede for argument's sake that equality may have had to some of the Fathers a certain priority to liberty as a means to an end (as sur gery may be prior to health, for example), but certainly not in the sense of being of greater importance to them, a point clearly manifest in the Constitution's preamble. 7The phrase has been used on countless oc casions, not only by various liberals but by many respected non-equalitarians as well. To give just one instance, no less an authority than Harry Jaffa has been cited (by his devotee, Charles Kesler) as arguing in the name of op portunity that "The purpose of the (athletic) race is to find out who is the fastest, and this can be done only if the start of the race is fair."

(Kesler, p. 858) Hal Watkins The Two-Wheeler Lesson THEfirst major Japanese motorcycle company, Yamaha, came to the United States in 1958. At that time Harley-Davidson was the only American manufacturer left on the scene, and that year they made 12,676 motorcycles. Today Harley Davidson has only a small fraction of the market in this country, but they sold about 35,000 last year. That's 22,000 more than they sold in 1958. In twenty-seven years H-D has nearly tripled their production. Most of the people riding motor cycles today certainly would not be doing so-and probably would not even give the idea second· thoughtThe Reverend Mr. Watkins edits and publishes The Printed Preacher, a monthly gospel message, 303 North Third, Dayton, Washington 99328. if it were not for the Japanese bikes. The image of the bike rider has changed. Middle-class, Yuppies (young urban professionals), and senior citizens are cruising the free ways and vacationlands on two wheeled "Winnebagos." The Hell's Angels types are a definite minority and continuing to fade from the scene.

The quality of all the motorcycles has been vastly improved. Twenty seven years ago the best available to Americans was a noisy, vibrating, two-cylinder, oil-Ieaker that would rarely start on the first kick of the crank. Thanks to the "Oriental Ex press" we can now enjoy a cycle sym phony that starts with one press of the button. Even the Harley-David son riders should give thanks for the Big Four Japanese bikes: Honda, Su zuki, Kawasaki, and Yamaha. Why? Even H-D advertising admits they have changed. Speaking of the 35,000 riders that bought H-Ds last year, their own advertising says these new riders discovered, "Har ley had not only changed for the bet ter, it had changed for the best." (Rider magazine, May 1985) In April 1983, Harley-Davidson was able to sell U.S. lawmakers the idea that Japanese bikes were un fair competition for American bikes. As a result of this pressure a tariff of 45% was levied against all im ported Japanese motorcycles with a displacement of over 700cc. Some of 523 524 THE FREEMAN the Japanese manufacturers got around this by assembling their larger models in this country, and they scaled their 750s down to just below 700cc. They want to sell to us, so they stay competitive.

Some readers might ask, "Who cares about motorcycles?" Most of you probably don't. But that's not the point of this essay. One lesson we learn from the two-wheelers is that producers can be very innovative in their efforts to supply the market, and the Japanese are currently the examples of this fact. The more important lesson for all the world to see, if they only will, is that competition is good for every body. Twenty-seven years ago Har ley-Davidson sold a few motorcycles to a limited clientele. There was vir tually no effort to increase the size of the market. (And who wanted to buy stock in H-D? It has changed hands several times in the interim.) Enter the Japanese Big Four bike makers with sophisticated research, development, innovations, constant improvement and promotion. More Americans became interested in these fancy, trouble-free two-wheel ers, and they started riding in ever increasing numbers. Harley-David son saw the handwriting on the wall: "Weighed in the balances and found wanting." Rather than quit, they de cided to learn from the competition, retool, and "get with it."

How about the car industry? It's somewhat the same story. American carmakers became fat and lazy. En ter the Japanese carmakers (and some from Europe). Wh~t has been the result? We have all been able to get more for our money, regardless of whether it is American or foreign made. No one can deny this! Who will gain if a tariff is imposed on foreign cars? Wen, the American manufacturer directly affected will be able to raise his prices. The ben efits stop here. There will be fewer cars on the market, so every poten tial car-buyer is impacted by the tar iff in a negative way. Furthermore, without open competition, quality, research, development, and innova tion begin to suffer. Who wants a basketball game where any player over six feet is out lawed? Would you pay money to see a baseball game in which it is against the rules to hit the ball more than 300 feet? Competition looks for the best-the thing we all want. Har ley-Davidson, according to my re search, made three bikes in 1903.

After fifty-five years of anemic com petition on the home front they made fewer than 13,000 in one year. Jap anese competition in the past twenty-seven years has stimulated H-D to the extent that last year in order to get just a small piece of the market they turned out over 35,000. No, maybe you don't like two wheelers, but the four-wheelers can learn something here,' too. ~ John K. Williams ~e The DiseaseFromWhich ~ CivilizationsDie SAINT AUGUSTINE once lamented that he knew precisely what he meant by the word "time" until asked to state what he meant. I sym pathize with the saint. I know full well what I mean by the noun "civ ilization," but pinning down the word is a singularly frustrating exercise. Webster's New World Dictionary of the American Language-a work somewhat inordinately given to us ing the term et cetera-tells me that "civilization" is related to "social or ganization of a high order, marked by the development and use of a written language and by advances in the arts and sciences, govern ment, etc." and thus indicates "the total culture of a particular people, nation, period, etc." and "countries and peoples considered to have reached a high stage of social and cultural development." This helpsThe Reverend Doctor John K. Williams has been a teacher and is a freelance writer and lecturer based in North Melbourne, Victoria, Australia. He has been resident scholar at FEE for the past few months.

particularly the reference to the "de velopment and use of a written lan guage" and "advances in the arts and sciences, government, etc." -but I am still dissatisfied: I know not a few men and women deeply involved in government, and not completely ignorant of the arts and sciences, whom I hesitate to describe as "civ ilized." It is, as the King of Siam re marked to Anna, "a puzzlement." Non-dictionary definitions of and comments about "civilization" and the "civilizing process" compound confusion. Martin Crombie asserts that "the alchemy of civilization transforms vicious animals ruled by instinct into human beings governed by reason," but Eric Berne tells us that "we are born princes and the civilizing process turns us into frogs." Jose Ortega y Gasset insists that "civilization is nothing else but the attempt to reduce force to being the last resort," but Will Rogers wryly observes that no one can "say that civilization doesn't advance, for 525 526 THE FREEMAN September in every war they kill you in a new way." On the one hand, Winston Churchill affirms that "to fight for the preservation of civilization is to fight for the survival of the human race," but on the other hand Ralph Waldo Emerson insists that "the end of the human race will be that it will eventually die of civilization." When these conflicting utterances are blended, and are spiced by the sug gestion of Calvin Coolidge that "civ ilization and profits go hand in hand" and the observation of Alan Coult that "the flush toilet is the ba sis of Western civilization," the search for a definition of civilization begins to look like an exercise in futility.

Civilizations Die But A Continuity Remains For all this, while no one of us may be able precisely to say what he or she means by "civilization," all of us understand, even if we do not agree with, the assertion that civilizations seem to die. Civilization itself may continue, and much that past civi lizations have achieved may be ab sorbed by new civilizations and thus conserved, but particular civiliza tions, like individual men and women, are seemingly destined to be born, to grow, to flourish, to fade, and to die. While it is easy to concede that such a process has characterized civ ilizations of yesteryear, it is not so easy to believe that this is also true of our own civilization. And yet, the cosmos of which we are a part, and thus human history itself, are vital and dynamic, not lifeless and static. Change is thus inevitable. Since change is of the very essence of real ity, no particular state of affairs, and hence no particular form of civili zation, are forever. And that is not terrible: rather, it is ground for hope.

Tomorrow is not predestined to be a rerun of today. A world more pros perous, more peaceful, more com mitted to liberty than is our world, is a real and exciting possibility. I have been unable, alas, to iden tify the reference, but an observa tion I noted in a desk calendar and wrote down says it all. "Civilization is a stream with banks. The stream is sometimes filled with blood from people killing, stealing, shouting and doing things historians usually record, while on the banks, unno ticed, people build homes, make love, raise children, sing songs, write po etry and even whittle statues. The story of civilization is the story of what happened on the banks. His torians are pessimists because they ignore the banks for the river." The words are those of Will and Ariel Durant, but where in their writings they are found I do not know. What happens on the banks is marked by continuity. One genera tion inherits and builds upon what previous generations have achieved.

1985 THE DISEASE FROM WHICH CIVILIZATIONS DIE 527 In this sense, the insights and dis coveries of particular civilizations last. And in this sense, what is great and glorious about our civilization can last. Hence my willingness to af firm that "the American Way" can last and will last. In so speaking I am not, incidentally, seeking to flat ter you. The "American Way" has a long history. Insights and ideals for which innumerable people over mil lennia fought and died came, per haps by an accident of history, the defining characteristics of "the American Way." Your nation, after all, is unique in that it was "con ceived in liberty." What can last and what, I believe, will last, are the principles so many for so long sought to establish, and which in this new nation "became flesh." What can and will last is, so to speak, the ringing affirmation that "all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are Life, Liberty, and the pursuit of Happiness."

While we cannot pretend that our civilization as it is shall endure until the end of human history, the way to preserve and pass on to those who follow us what is magnificent and awesome about the American Way is to defend all that is excellent in our civilization as it is. Being human being material creatures living in a spatio-temporal, physical world-we cannot defend an abstraction called "civilization itself." Just as the only way to serve an abstraction called "humanity" is to serve particular flesh-and-blood human beings, so the only way to further the cause of civ ilization as such is to cherish and conserve a particular civilization. We serve civilization as such, and can only serve civilization as such, by serving the best in our own civi lization. And one way·to do this is to ask what it is that we can do to com bat the forces that weaken, that un dermine, that erode a particular civ ilization. Hence the title 9f my address and the question I wish to explore: What is the disease from which civilizations die?

Thucydides In using the word "disease" I am borrowing a metaphor, an image, used some two-and-a-half millennia ago by a Greek historian named Thucydides. Thucydides loved the city-state of Athens. His devotion was not to the buildings and environment one could point to, but to a way of life which Athens in the fifth century B.C. em bodied. In words Thucydides as cribes to a great Athenian leader named Pericles, that way of life is thus described: Our constitution is called a democracy because power is in the hands not of a minority but of the entire people. When it is a question of settling private dis putes, everyone is equal before the law.

528 THE FREEMAN September . . . And, just as our political life is free and open, so is our day-to-day life in re lation to each other. We do not get into a state with our next-door neighbor if he enjoys himself in his own way, nor do we give him the kind of black looks which, though they do no real harm, still do hurt people's feelings. We are free and toler ant in our private lives; but in public af fairs we keep to the law. This is because [the law] commands our deep respect ... especially ... those unwritten laws which it is an acknowledged shame to break. It seems just as natural to us to enjoy for eign goods as our own local products ... and our city is open to the world .... We regard wealth as something to be prop erly used, rather than something to boast about, and as for poverty, no one need be ashamed to admit it. The real shame is not in being poor, but in not taking prac tical measures to escape from poverty.

Here each individual is interested not only in his own affairs, but in the affairs of [Athens] as well. l Now it must be confessed that this description of the Athenian way is not a little idealized. The institution of slavery was a reality in Athens, just as it was in all Greek city-states of the fifth-century B.C. Again, power in Athens could be said to be "in the hands ... of the entire peo ple" if and only if women did not count as people. Yet for all this, Thu cydides' description accurately cap tures something of what was so mag nificent about his beloved Athens, a civilization that gave birth to think ers, writers, and artists whose in sights and works still live, having become part of "civilization itself." Yet the civilization that was Athens did not live. It died. Early in the work from which I have quoted, Thucydides describes a mysterious plague which swept through Athens, elaborating in de tail the symptoms those suffering from the disease displayed. At one level this section of his history is simply history, a painstaking record of a significant event which most certainly did occur. Yet more than a simple description of what happened is intended. Thucydides uses this de scription as a controlling symbol for his entire work. Athenian civiliza tion itself suffered, he asserts, from a "disease," a disease characterized by particular symptoms. This dis ease, which in the case of Athens proved fatal, is the disease all men and women of good will must fear.

For it is the disease from which civ ilizations die. Human Beings and Human Nature Th ucydides frequently uses the phrase, "human nature being what it is" and similar phrases. By so speaking, he is indicating at least two realities, two constants about men and women. First, human beings are rational. Men and women are capable of thought~ They can for mulate goals and rationally seek out ways to realize these goals. They can recall, consider, and learn from the past and thereby plan for the future.

1985 THE DISEASE FROM WHICH CIVILIZATIONS DIE 529 They can envisage not simply an im mediate and given present, but a dis tant and possible future. Human na ture is rational. Now rationality dictates, insists Thucydides, the rule of law. Long term objectives can be realized by an individual if and only ifhe or she can count upon other people behaving in an essentially predictable way. By this is meant not that the individual cannot or should not be spontaneous and creative, and thus unpredicta ble, but that some rules and conven tions governing the way people relate to each other must exist and must be respected. Rule by a tyrant's whim or a mob's caprice is undesirable:, apart from anything else, precisely because such rule is erratic and un predictable, precluding cooperative, longterm endeavors. What is per mitted today might be forbidden to morrow; undertakings made in the present might not be fulfilled in the future. Social coordination and co operation demands, insists Thucy dides, the rule of law. And as ra tional beings, men and women can perceive that this is so.

The Rules of Law Like many of his contemporaries, Thucydides divides "laws" broadly defined into four groups or sets. First, and perhaps weakest, are the rules signified by the word manners. People breaking these rules tend to be regarded as somewhat uncivilized and uncouth, but that is all. Ill-man nered people may not be invited to dinner parties, but they are not per ceived as "bad" people. Then come the rules signified by the word morals. These rules are sig nificantly stronger than the rules we call "manners." People breaking these rule~ are perceived not simply as irksome, antisocial irritants but as evil people. Third come the rules making up the written laws of a community. These rules, stronger than both manners and morals, are the rules which, if broken, incur a penalty im posed by a court. While some "im moral" actions may also be "illegal" actions, not all are. Thus the sexual license so uproariously depicted in the plays of the Athenian comedian, Aristophanes, while certainly not il legal, was no less certainly regarded as immoral. The sphere of morality, and the sphere of legality, were not perceived by the Greeks as identical.

Manners. Morals. The written laws. And a fourth set of rules: the "unwritten laws which it is an ac knowledged shame to break." These laws were perceived as so basic, so fundamental, so important, that they did not need to be written down. For the Greeks, these laws were two: honor the dead, and honor the gods, including the gods of others. In a sense, these two laws reduce to a sin gle imperative: respect other people as people, possessing a worth in and 530 THE FREEMAN September of themselves, and respect the val ues other people hold, even if those values are other than one's own. In more contemporary language, we might define the "unwritten laws" as what some philosophers call re ciprocal respect for autonomy, a re spect for the personhood of other peo ple and their capacity to formulate and strive to realize their own peace ful, noncoercive visions of the "good life." The "unwritten laws."

Rationality, then, dictates obedi ence to these laws. It is in one's own interest that one is part of a com munity where certain expectations can be held and longterm goals can be pursued. To be sure, one cannot, given these rules, do exactly what one might wish at a given moment, but neither can anyone else. There is thus an incalculably valuable pay off, a pay-off more than compensat ing for the irksome restraint of not always being able to behave with impunity. So affirms reason. So as serts the rationality that is part of human nature. Alongside rationality is found a second characteristic of "human na ture": a drive to seek immediate, here-and-now pleasure. Men and women resent whatever curbs their freedom to seek such pleasure. Re gardless of the dictates of sweet rea son, they chafe at the bit. Thus if a person can acquire the power to defy the rules social cooperation and co ordination demand, that person will defy them. If a person can acquire the power to defy the rules and get away with it, that person will, as serts Thucydides, tend to do pre cisely that.

The first rules to go are usually manners. Then morals bite the dust. Then the written laws are defied. Fi nally, the "unwritten laws" are for gotten. Resentment and envy are fostered, the powerless detesting the powerful. Factions proliferate. Bar barism reigns. A Tyrant is Born And then, asserts Thucydides, comes the end, in one of two forms. A social order without coordination is powerless to defend itself against the disciplined onslaughts of an ex ternal power. Or-and more fre quently-a people sinking into the chaos of barbarism panic. They cry out for someone-anyone-who will restore some semblance of cohesion and order. And invariably that someone emerges. He promises to give the people what, in desperation, they are grasping for. ~e promises to restore social order and the rule of law. But at a price. In exchange, men and women must surrender their lib erty. In this way, the tyrant is born.

Thucydides describes in great de tail the symptoms observable as this disease-the disease from which civ ilizations die-inexorably works its way toward its terrible end, pro gressively eroding the structures 1985 THE DISEASE FROM WHICH CIVILIZATIONS DIE 531 and practices that are, so to speak, the central nervous system of a civ ilized community. I quote him at some length. "Revolutions broke out in city after city, and in places where the revolutions occurred late, the knowledge of what had happened previously in other places caused still new extravagances ... in the methods of seizing power and ... un heard-of atrocities in revenge. To fit in with the change of events, words, too, had to change their usual mean ings. What used to be described as a thoughtless act of aggression was now regarded as the courage one would expect to find in a party mem·· ber; to think of the future and wait was merely another way of saying that one was a coward .... Fanatical enthusiasm was the mark of a real man ... ; [anyone] who held violent opinions could always be trusted; anyone who objected to [such opin ions] became a suspect. . .. Family relations were a weaker tie than party membership, since party members were ... ready to go to any extreme for any reason whatever.

These parties were not formed to enjoy the benefits of the established laws, but simply to acquire power.... " Continues Thucydides: "Love of power ... was the cause of all these evils. . . . Leaders of parties in the cities had programs which appeared admirable-on the one side equality for the masses, on the other side safe and sound government by an aris tocracy. Yet by professing to serve the public interest, party leaders and members in truth sought to win ... prizes for themselves .... [With] the conventions of civilized life thrown into confusion, human nature, al ways ready to offend even where laws exist, showed itself in its true colors ... , repealing general laws of humanity which ... give a hope of salvation to all."2 Thus the symptoms. Then the end. Whether externally imposed or in ternally generated, tyranny and des potism triumph. Liberty dies, and with it a civilization. The joyous songs of a free and civilized people are silenced. The disease from which civilizations die has worked its way to its end.

Here endeth a brief and sketchy lesson from a volume penned by a ge nius whose name is never heard by many students. They prefer, you see, "relevant" books and contemporary names. And those of us who should know better capitulate, fearful of in curring our children's wrath. We proffer amusing mini-courses about ephemeral interests instead-then wonder why it is our young know lit tle about the heritage that is rightly theirs. Moral Decline As a preacher, I might be expected to point to the breakdown in West532 THE FREEMAN September ern societies of moral rules. Clearly, all is not well. In his monumental volume, Modern Times: The World From The Twenties To The Eighties, 3 Paul Johnson documents the rise in the West of moral relativism and moral subjectivism. More and more, moral rules are perceived either as arbitrary prescriptions and proscrip tions relative to a particular society, having no rootage or grounding in the nature of things, or as expres sions of personal taste, a difference over the merits of cruelty for its own sake being akin to a difference over the merits of a particular flavor of ice cream.

Yet in spite of this, I suggest that anyone tempted to assert that our civilization has sunk to hitherto depths of moral depravity, read some history. The eighteenth-century writer, Tobias Smollett-author of that ever-delightful work, The Ex pedition of Humphry Clinker-de scribes the highways of his day as being "infested with violence and as sassination" and the cities of his age as "teem(ing) with the brutal vota ries of intemperance and lewdness." London in 1839 boasted 933 brothels and 844 houses of ill-fame to serve a population of some two million peo ple. Hooliganism is no more ram pant in New York City today than it was in nineteenth-century London, where gangs such as the "Bucks" and "Corinthians" perfected tradi tions of sheer terrorism elaborat~d by their eighteenth-century prede cessors, the notorious "Mohocks." Consider this description of the Mo hocks: "Nobody who was alone was safe from their cowardly assaults.

They attacked at random any un armed person who was out after dark. They assaulted unprotected women; they drove their swords through sedan-chairs; they pulled people from coaches, slit their noses with razors, stabbed them with knives, ripped the coach to pieces, and then ... killed."4 The barbaric behavior of English soccer fans which recently shocked a disbelieving world has its parallels in the eighteenth century, the major difference being not the mindless ness of the behavior but the fact that, today, we at least are shocked. The situation is complex. There is something depraved about an age witnessing self-styled world leaders applauding a speech delivered by Idi Amin on October 1,1975, at that ca bal of tyrannies laughingly de scribed as the United Nations. There is something profoundly disturbing about a generation of adults that seemingly has lost its moral nerve, leaving the young to improvise their manners and morals as best they can. Yet to assert that we are expe riencing an unprecedented moral de cline is to go beyond the evidence.

Suffice to suggest that, if we take se riously Thucydides' claim that a dis regard of the rules we call manners 1985 THE DISEASE FROM WHICH CIVILIZATIONS DIE 533 and morals is indeed symptomatic of the disease from which civilizations die, we cannot be complacent with impunity. The Rule of Law What is beyond dispute is that we today have largely departed from the rule of law. "When it is a question of settling private disputes, everyone is equal before the law," asserts Thu·· cydides. Citizens of Western nations not so long ago could echo this as sertion. Today they cannot. The founding fathers of this nation meant by "equality" precisely what Greeks such as Thucydides meant by the term isonomia-namely, equality before the law. There are to be no spe ciallaws for special classes or castes or elites, laws privileging some but disadvantaging others. Indeed rules which do single out particular indi viduals or particular sets of individ uals were not, for the Greeks, prop erly called laws at all, but "edicts"

or "decrees." Even when such rules are backed by the majority, they re main other than laws proper, "the decrees of the demos-the people-correspond(ing)," as Aristotle puts it, "to the edicts of the tyrant." This truth was clearly and unam biguously perceived by those who in the seventeenth and eighteenth cen turies defended the political philos ophy of classical-classical-liberal ism, and was no less clearly perceived by your founding fathers. They established a republic, not an unrestricted democracy; they advo cated not the absolute rule of any majority but the constitutionally de fended liberties of minorities, even minorities of one; they defended not rule by any principles securing ma jority approval, but by principles of conduct equally applicable to all. Justice was portrayed as a blind folded figure. She did not see who stood before her. That did not mat ter, for whoever you were-rich or poor; Catholic, Protestant, Jew or "Infidel"; educated or unlettered your "rights" were the same.

This understanding of the "rule of law" is utterly vital for a free and civilized community. Rules which single out special classes, castes, or elites breed the factionalism and scheming Thucydides laments, fos ter the envy Thucydides deplores, and precipitate the civil strife and dissension Thucydides fears. No matter what impressively high minded terms are appealed to as jus tification for any departure from the rule of law properly understood "social justice" or whatever-the outcome remains the same. And that outcome is disaster for a free and civ ilized society. And let us not delude ourselves. In recent decades Western civilization has witnessed a departure from the rule of law, classically defined. Jus tice is no longer blindfolded, su premely indifferent as to who it is 534 THE FREEMAN September standing accused before her. She peeks! "Tell me who you are," she as serts, "and then I shall tell you your rights." The notion that all enjoy ab solutely equal "rights" -essentially the "right" to formulate and strive to realize any vision of the "good life," given only that such striving and such visions are peaceful, and that all are to be protected by gov~ ernment from violence, theft, and fraud-has been unspeakably atten~ uated. "Equality of rights" and "equality before the law" have suc~ cumbed to a different vision of "equality" -an egalitarian same~ ness secured by edicts and decrees which advantage some but disad vantage others.

The very nature of government thus changes. No longer is govern ment given the vital but limited task of enforcing a single set of rules, pro tecting all from actual or threatened violence, theft, and fraud, and thereby ensuring that all are equally free to formulate and strive to real ize their own visions-their diverse but noncoercive visions-of the "good life." Rather, government becomes the means whereby one group ofpeo pIe seeks favors and advantages at the expense of rival groupings of people. A massive redistributive ap paratus proliferates zero-sum games whereby some gain and others lose. Factionalism is encouraged, envy is increased, and government becomes not the protector of all but what Frederic Bastiat, the great French classical liberal thinker, called "the fictitious entity by which everyone seeks to live at the expense of every one else."5 And according to Thucy dides, this eroding of the rule of law signifies the presence of the disease from which civilizations die.

The Family I make no apologies for drawing your attention to Thucydides' spe cific reference to the weakening of family ties as a further symptom of the disease from which civilizations die. Indeed I would urge you to read a singular ly scholar ly vol ume penned by the courageous Russian dissident, Igor Shafarevich, entitled The Socialist Phenomenon. 6 While a mathematician by training-indeed until recently Shafarevich was a professor of mathematics at Moscow University-he displays in this vol ume an utterly awesome historical knowledge, and he uses that knowl edge to document with compelling thoroughness the hatred statists and collectivists invariably have had for the family unit. It would seem to be the case that opposition to individ ual liberty inevitably leads to op position to the family. Because I am committed to the rule of law, I cannot and do not advocate laws specifying the family unit and deliberately seeking to foster and fa vor the family unit. I must, in the name of the rule of law, oppose all 1985 THE DISEASE FROM WHICH CIVILIZATIONS DIE 535 rules the objective of which is the re·· alization of some particular vision of the "good life" -save, of course, vi sions involving the actual or threat·· ened coercion of people not sharing those visions.

What I oppose in the name of the rule of law is the perhaps uninten·· tional weakening of the traditional family by welfare schemes which in practice encourage a breakdown of the family unit. It would be imper·· tinent for me to refer to the situation in your nation. But I can refer you to Charles Murray's devastating cri tique of American social welfare pol icy, Losing Ground. 7 All I ask is that governments mind their own business and get out of the way as individuals organize their so cial relationships. The traditional family is, in my judgment, so grounded in biological and emo tional reality that it can look after itself. The only further suggestion I make is that individuals caring about strengthening the traditional family, involve themselves in vol untary organizations assisting fam ilies in trouble-financial assis tance, counseling, and so on. Be that as it may, the undermining of the family is, as Thucydides per ceived so long ago, a symptom of the disease from which civilizations die.

Individual Integrity Finally, according to Thucydides, the disease from which civilizations die afflicts the "best" members of a society, not simply the "worst." Given immoral social institutions, the "best" are tempted to compro mise their principles. By so yielding, however, those who should know better become infected cells carrying the disease, rather than healthy an tibodies fighting the invader. Some lines of George Meredith say it all: In tragic life, God wot, No villain need be. Passions spin the plot: We are betrayed by what is false within. I know the alibis, being extremely gifted in the less than noble art of rationalization. I am robbed, say, by a pickpocket. At some future date, I acquire some clout over the pick pocket. Is it not proper that I re trieve all or some of what rightly is mine? Similarly, is it not right that I join in the scramble to the govern ment trough, retrieving what has been taken from me, at least in part?

But the analogy is flawed. We are not retrieving from the pickpocket what is ours; we are rather sending him out to pick other pockets-including those of our children and our chil dren's children-and sharing in the loot. We are partners in crime, not victims enjoying a measure of restitution. I am not referring to forms of in volvement in a less than ideal sys tem that cannot be avoided. In my nation, the only way I can opt out of 536 THE FREEMAN September a socialized medical system is to seek out some ex-doctor, struck off the lists, and negotiate an undisclosed cash payment; and frankly I'm not prepared to entrust my physical well being to some probably incompetent rogue. I go to the ballet, even though I know that money coercively ex tracted from football fans and movie buffs for the most part less affluent than am I is subsidizing my extrav agant tastes. Total disengagement with a less than ideal system is ac quired only by opting out, and, with like-minded souls, seeking a de serted island on which to set up a utopia-but such islands are few and the pioneering spirit is not, alas, mine.

I am, however, referring to an in volvement we could avoid if we were willing to pay the price. Many of those who state that they value lib erty, and a politico-economic system informed by liberty, tolerate in themselves a measure of involve ment with Statist structures that is not necessary, and which makes their professed values ring hollow. In this sense we are, in Meredith's words, betrayed by "what is false within," becoming carriers of the disease from which civilizations die. Conclusion No person with eyes to see, and certainly no person with eyes alert to the symptoms detailed by Thu cydides of the disease from which civilizations die, can entertain the fantasy that all is well with our civ ilization. Yet I am utterly convinced that our situation is far from hope less, and that the "disease" can be curbed and conquered. I believe the American inheritance is the greatest inheritance ever given to any nation: "A new nation, conceived in liberty, and dedicated to the proposition that all men are cre ated equal." In this land the dream of the ages was earthed, and became the very foundation upon which a people began to build. The revol u tion that gave you birth was unique.

Other revolutions ended in terror or Napoleonic empire. Your revolution challenged at its beginning, and has challenged ever since, all domina tions and tyrannies, all prejudices and bigotries, all predatory institu tions enslaving and debasing the free spirit of humanity. Your revolution enshrined and still enshrines the cry that people are not chattels, not pawns on a planner's chessboard, not divided by "nature" into lords and serfs. It is therefore sacrilege to en slave them, infamous to engineer them, criminal to degrade them and seek to smother the liberty that burns in their being. And that is your strength. For the liberty upon which this nation was and is built is not merely a value cre ated by or equal to a taste some of us happen to have acquired. It is grounded in the very nature of hu1985 THE DISEASE FROM WHICH CIVILIZATIONS DIE 537 man reality. In the absence of pri·· vate property rights, the absence of changing relative money prices in a.

market economy-in the absence, to put it bluntly, of economic and in·· dividual liberty-a community lit·· erally cannot use what it has to ac quire what it wants, and the hungry will not be fed, the naked will not be clothed, the destitute will not be sheltered. More, there is in the human spirit a yearning that can never utterly be silenced, a yearning for freedom to formulate one's own vision of the "good life" and seek to realize that vision. I know that there is another voice and another yearning-a voice that whispers fearfully of the risks and responsibilities freedom in volves, and a yearning to be carried through life. Yet the voice that says, "Stand on thy feet, take up thy bed and walk," has the last word, for it is stronger than the voice which, in the name of an illusory security, lures us toward the collective grave of statism. You and I are on the side of life. Yes, we must act as though every·· thing depended upon the labors of our hands, the intensity of our thinking, the devotion of our hearts.

Yet if liberty is written into the very structure of our individual and so cial being, victory in the end is sure. If only we stop compromising; if only we as educationalists and adults do what A. N. Whitehead said we must do, and expose our children to the "habitual vision of greatness" by telling them the story of humanity's struggle toward freedom; if only we stop apologizing or indulging in neu rotic guilt, and stand tall at mention of the" American Way" as I have de fined and as your forefathers defined it and not as foolish rabble-rousers define it. If only we do this the vic tory shall be ours. Of course there will be setbacks. Ofcourse there will be disappointments. Since when has the long, slow journey from the slav ery of Egypt to the promised land of freedom been other than through a wilderness? Yet that "wilderness and the solitary place shall be made glad, and the desert shall rejoice; it shall blossom abundantly and re joice even with joy and singing." , -FOOTNOTESIThucydides, The Peloponnesian War, trans.

Rex Warner (Harmondsworth: Penguin Books, 1954), pp. 145-46. 2Ibid., pp. 242-45. 3Paul Johnson, Modern Times: The World from the Twenties to the Eighties (New York: Harper and Row, 1983). 4Cited by J. Hemming, Individual Morality (London: Nelson, 1969), p. 6. 5Frederic Bastiat, "The State," trans. S. Cain, in Selected Essays on Political Economy, ed. George B. de Huszar (Irvington: Foundation for Economic Education, 1968), p. 144. 6Igor R. Shafarevich, The Socialist Phenom enon (New York: Harper and Row, 1980). 7Charles Murray, Losing Ground: American Social Policy, 1950-1980 (New York: Basic Books, 1984).

Henry Hazlitt The Limitationsof Profit-Sharing A funny thing happened on March 28 of this year. The New York Times ran as its leading editorial a piece entitled "Best Idea Since Keynes." This must have puzzled many read ers. The main idea of Maynard Keynes was that the sovereign rem edy for almost any economic depres sion was more credit creation, Le., inflation. Bitter experience has al ready taught an increasing number of economists that this is the most dangerous "remedy" of all. Passing over this difficulty, what is this "best idea since Keynes"? Ac cording to the Times editorial writer -profit-sharing! He treats this as if it were a brand new idea, and gives all the credit for it to "Martin Weitzman, an M.LT. economist, ... in a readable little book, called The Share Economy Henry Hazlltt has had a long and distingUished career as economist, journalist, author, editor, and literary critic.

538 which was published last Octo ber.... The core of his idea is some thing like profit-sharing; to change our system of fixed-rates to one in which workers' incomes are deter mined by company performance." The Times thought so much of this that it ran another article on the same subject about a month later, on April 25. The first thing that needs to be pointed out to the Times is that profit-sharing, as an applied idea in individual firms, is at least nearly two centuries old. It has usually taken the form of a supplementary payment to fixed wages. The first venture of any size seems to have been that of the French National Fire Insurance in 1820. During the nineteenth century it -got a further extensive trial in Britain, Germany, Holland, Italy and Switzerland. There were a number of such "'schemes in the U.S. between 1910 THE LIMITATIONS OF PROFIT-SHARING 539 and 1930, but most of them were abandoned in the depression of the 1930s.

Why weren't there more? Why are profit-sharing arrangements for workers still so rare? Market Determined Salaries Let us begin with the reasons froIll the standpoint of the employer. If he hopes to attract competent workers, he will know that he must offer (even apart from union demands) at least the going market rate of wages or salaries. If he offers his workers a profit-sharing plan, it must be in ad dition to this basic market-rate. Employees for the most part feel that they cannot afford to gamble that they cannot be left in doubt re garding their future income, unless it is almost certain to be larger than the going market rate of wages or salaries. Workers would feel that un der straight profit-sharing their fu ture would be much more dependent on the decisions of management than on their own individual perfor mance. And as we shall shortly see, they would be right. Moreover, the employer in a pros perous firm, instead of offering a profit-sharing plan, has another choice. He can simply offer a specially competent worker a higher salary than the average for that type of work. Most good workers would probably prefer that to a profit-shar·· ing gamble. The employer, in turn, would be free to adjust his payment to each particular case.

Now let us look at profit-sharing further from the standpoint of the employee. The advocates of profit sharing contend that it is or would be a great stimulus to increase the workers' output and effort. This is very doubtful. Let us consider a firm with 100 workers. An individual worker, even if he doubles his effort or output, would stand to increase his individ ual share of profits by only 1 per cent or less. If he worked for a firm with 10,000 employees or more, his in creased share of profits would be in fini tesimal. Of course, if all the workers increased their effort and output they would stand to achieve a more substantial share of profits; but it would be very hard to get them to think collectively, or for each to trust all the others. The Times editorial, perhaps tak ing its cue from the Weitzman book, offers a hypothetical example of how profit-sharing might work in prac tice: "Imagine that General Motors ... had agreed in such negotiations to pay its workers 70 per cent of rev enues. Since it would keep 30 per cent, G.M. would want to keep hir ing as long as the additional workers made any contribution to revenues."

This example reveals that the Times writer did not know what the average division of corporation earn ings has actually been under the 540 THE FREEMAN present wage system. Over a long period of years, as shown by figures compiled annually by the Depart ment of Commerce, nonfinancial corporations have paid about 90 per cent of their total net earnings to their employees and retained an av erage of only about 10 per cent in profits. This division, of course, has not reflected any intention on the part of the corporation stockholders. It has merely been what has hap pened in fact. The Times writer believes that the introduction of profit-sharing would reduce our recent persistent Amer ican unemployment rate of about 7 per cent. It is doubtful that it would have any effect at all in this direc tion. Our unemployment rate has been mainly brought about by two governmental policies. One of these is our legal minimum wage. This has decreed in effect that if a man can not be employed at a certain mini mum legal rate per hour he must not be employed at all. The result was dramatically shown when the min imum wage was first enacted, and threw thousands of teenagers, and particularly black teenagers, out of jobs. The other government policy that assures continued joblessness is high and prolonged unemployment insurance or relief. The Times news columns frequently refer to jobless men and women who have become "too discouraged to look for work."

As long as they have an assured in come whether they work or not, their "encouragement" to look for work will remain low. One final thought. I am assuming that neither Mr. Weitzman nor the Times is proposing to introduce profit-sharing by force. This would be an appalling proposal. But if coer cion is not used, all employers are still free, as they have always been, to offer workers profit-sharing plans instead of straight wages, and unions or individual workers are free to ex press their preference for them. I suspect that risk-taking will con tinue to be left to the entrepreneurs, where it belongs, and that employ ees will continue to prefer the rela tive assurance of a fixed and more dependable income. ® (DEASON LIBERTY To Get a Higher Real Wage THEREIS ONE WAY and only one way for workers to get a higher real wage, and that is by higher production. As workers and management jointly turn out more goods for every hour of work, the real earnings of the worker increase, as they always have, and the standard of living im proves. There is no other answer to the problem. Labor unions cannot raise the standard of living of all the workers, and the fiat of the gov ernment never can do it. The productivity of industry is the only answer.

LAWRENCE FERTIG E. Barry Asmus Donald B. Billings The Moralityof Capitalism A powerful and factual case has been made for the remarkable and un precedented economic progress which inevitably follows the adop tion of competitive capitalism and its central institutions of private prop erty and voluntary social arrange ments. Even Karl Marx, in the Com munistManifesto, pronounced cap italism a great "engine of growth." Undeniably, however, the market system of capitalism continues to be viewed as materialistic, ethically unjust, and consequently immoral by great numbers of people all over the world. This view is especially strong among the majority of so-called intellectuals. Dr. Barry Asmus is an economist and national speaker living in PhoeniX, Arizona. Dr. Don Billings is Pro fessor of Economics at Boise State University. This article is taken from their book, Crossroads: The Great American Experiment, published in 1984 by University Press of America. Reprinted by per mission of the publisher.

Never mind the historical fact that systems other than capitalism tram ple freedoms, spawn totalitarian po litical regimes, reduce opportunity, and make a mockery of economic ef ficiency. Despite the evidence that central planning and economic equality lead to government inter vention in private actions, and often ruthless dictatorship, the committed socialist of the left or right never theless believes that a small dose of socialism will one day glorify the hu man situation. Interestingly, an increasing num ber of America's intellectual elite, known for their belief in "the mixed economy," "the middle way" or "eco nomic democracy," are emerging from the socialist closet. They either admit to being socialists or, at the very least, are expressing prefer ences for an institutional mix other than free markets. Motives aside, 541 542 THE FREEMAN September their contention is that capitalism is inherently unfair. Without a moral basis, say the critics, the private property, free-market system could never be compassionate.

In the past, defenders of competi tive capitalism have been just as guilty as anyone for perpetuating this wrong-headed view. They have literally spent thousands of hours extolling the virtues of the efficiency of capitalism, free markets, and of the socially useful information gen erated by prices, wages, interest rates, profits, and losses. Pontificat ing on the efficiency aspects of cap italism, its supporters have failed to devote enough time and attention to the.morality ofthe system. If the case for the morality of capitalism is not made, either through comparisons to its real world alternatives or on the basis of principle, then the probabil ity of the great American experi ment surviving is slim indeed. The Moral Case for Capitalism In fact, it should be clear that the most important part of the case for economic freedom is not its vaunted economic efficiency nor its dramatic success in promoting economic wealth and well-being, but rather that capitalism is consistent with certain fundamental moral princi ples of life itself. These are princi ples that respect the dignity and in dividuality of each person and that don't try to manipulate people as objects but recognize a person's rights and values. They seek to use per suasion and voluntary exchange rather than coercion andforce. Com petitive capitalism thrives on the non-aggression principle of human freedom.

The requirement that transactions in the private property market order must be voluntary guarantees that the moral and physical autonomy of persons is protected from violent at tack by others. Force is inadmissa ble in human relationships under a regime of capitalism. Personal free dom, and therefore economic and po litical freedom, is not "ethically in different," but a necessary condition of morality. Violence or the use of force against other individuals, which necessarily denies the most fundamental character of human freedom, the safety of persons and their property, is inconsistent with a moral order. The moral life requires that individuals act and make choices free of external intimidation and coercion. Friedrich Hayek re minds us of certain fundamental conditions of the moral life: "It is only where the individual has choice, and its inherent responsibility, that he has occasion to affirm existing values, to contribute to their further growth, and to earn moral merit."

Moral choice presumes the neces sary freedom to exercise our responsibilities. The free market system, in which 1985 THE MORALITY OF CAPITALISM 543 only voluntary and mutually bene ficial exchange is permitted, is con sistent with freedom-of-choice, and, therefore, offers the greatest poten tiality for a moral order in which the integrity of the individual consci ence is respected. Hayek, in a warn ing to us about the undesirable con sequences of a planned, socialist order, wrote in his book The Road to Serfdom that only: ... where we ourselves are responsible for our own interest ... has our decision moral value. Freedom to order our own conduct in the sphere where material cir cumstances force a choice upon us, and responsibility for the arrangement of our own life according to our own conscience, is the air in which alone moral sense grows and in which moral values are daily recreated in the free decision of the individual. Responsibility to bear the consequences of one's own decisions are the very essence of any morals which de serve the name.

It is frequently asserted that the ma terialistic character of capitalism is at the very least amoral. However, it is surely an error to blame a social system for being too concerned with material things simply because the individuals in that system remain free to decide for themselves those goals which are to be pursued. The practice of blaming capitalism for being materialistic is to miss. the point. Most would agree that capi talism does have a record of organ izing resources efficiently. It is also Crossroadsis an important and comprehensive presentation of the rise, decline, and restora tion of freedom and the market economy. The authors do an outstanding job of introducing readers to the history and na ture of the American free mar ket experiment. Copies can be ordered from the American Studies Institute, 3420 East Shea, Suite 266A, Phoenix, Ar izona 85028: Paper $14.25, Cloth $26.75. Please add $1.50 for shipping and handling.

important to note that very few peo ple go hungry under this system. In comparison, socialism fails on both counts. Yet, material abundance is admittedly but one of the positive at tributes of living. In most societies of which we are familiar, it is only a minority who are not concerned with economic growth and material gain. As much or even more than market economies, socialist nations of both the left and right place most of their emphasis on economic growth, in dustrial production, and personal sacrifice in the pursuit of material ends. Unfortunately, the people in planned societies who are not ma terially oriented, those, for example, who might want to pursue the life of a recluse, take a vow of poverty, or seek some spiritual end, are perse544 THE FREEMAN September cuted. Freedom, it seems, is more important to the minority of those who do not have material objectives than it is to those who do. Only in a decentralized, pluralistic, private property order can inalienable rights of these persons who are different be secure. But whatever the goals of in dividuals, whether virtuous, mater ialistic, or whatever, the market still seems to be the most humane way mankind has found for dealing with the economic problems of scarcity and the efficient allocation of resources.

The Humane Effects of Freedom One of the great advantages of a social system characterized by social cooperation through mutually ben eficial exchange is the opportunity and scope for sympathy, beneficence, and human friendships. Indeed, the libertarian scholar Murray Roth bard reminds us that " ... it is far more likely that feelings of friend ship and communion are the effects of a regime of contractual social co operation rather than the cause." Each individual has a uniqueness. In that sense, it is difficult for any one else to say what will or will not lead to another's fulfillment. Naturally, when we disagree with a person's actions, there exists the tendency to save that person from himself. Fortunately, capitalism tends to favor those who respect the sanctity of the other person's autonomy because of the respect for and enforcement of private property rights. The deterioration in many so cially useful conventions, and the decay of morality which people have felt in recent years, are partially the result of our shift in thinking from personal to social responsibility. As persons are told their behavior and circumstances are not their fault, be havior is modified, society is in dicted, and government is viewed as the only institution capable of solv ing the problem.

The work ethic, encouraged by the institution of private property, rep resents an important source of moral responsibility as well as a continu ous reminder that our actions al ways entail costs. The essential in gredients of a free market order define a set of social institutions which encourage mutual respect for each and every individual. In con trast with all other economic sys tems, competitive capitalism oper ates on a set of rules which encour ages mutual respect for persons with whom we interact. The processes by which we satisfy material wants through social co operation do not exhaust the goals which individuals might hope to achieve. The search for personal happiness and inner peace, for ex ample, must be found within the in dividual alone. Nevertheless, man kind's social relationships are generally far more peaceful under a 1985 THE MORALITY OF CAPITALISM 545 system of private property and free trade. The .period between the Na poleonic Wars and World War I, the heyday of competitive capitalism, represented a century relatively free of the brutality of war. Furthermore, competitive capitalism was the first social system in human history to di rect an individual's desire to become rich by peacefully supplying greater quantities of goods and services for other human beings.

The market process has been es pecially productive in providing greater abundance for the working class and the poor. Unfortunately, the alternative to serving other peo ple's wants through voluntary ex change is to try to control their lives through the use of force. Wherever socialism has prevailed, it has in. variably meant lower living stan dards for most people, and the sub jugation of the many by the privileged few. A socialist country of the left or right, with few if any ex ceptions, means a totalitarian polit ical regime in which other civil and human freedoms disappear and a form of slavery ensues. Capitalismand Religion The case for morality and justice of the system of capitalism rests on the intimate and complementary connection between private property and voluntary arrangements, and the sovereignty of the individual over his own life. We tend to take the concept of individuality for granted, but in reality, this concern and in terest for the individual came into its own only with the rise of capi talism. In fact, the market system, far from dehumanizing man, finally allowed him to assume his full indi viduality. The individual conscience and its potential for discerning right and wrong, which was recognized during the early Christian period, came to full fruition under the sys tem of competitive capitalism.

The "dawn of conscience," that point in history in which individuals were first argued to be morally free and, therefore, responsible for their actions, first appeared in Egypt and was later borrowed and developed by the Jews. Later Jesus and the Apos tle Paul outlined a view which rec ognized the unique personality of each human being. Essentially, this account represented an individual istic view of mankind which main tained that the individual's soul is the most important thing about him. Christianity provided an environ ment in which individuals, in order to gain salvation, made choices from a position of free will. Not only did the church discover that individual souls were worth saving, but Christianity also im planted the concept of the "rule of law." This attention to the notion of legality also proved to be important in the development of the idea of freehold property and the land deed 546 THE FREEMAN September in the Western world. Admittedly, these contributions were largely to protect the church and its institu tions and property from the power of the secular State. But over time, the principles of the "rule of law," and the private ownership of property were progressively expanded to the relationships between individuals.

There is a distinct and important connection between the Judeo Christian morality and a free-mar ket economy. This relationship rests on the established view of the cen tral importance of the individual in the analysis of social relationships. The system of free and open mar kets is most conducive to the perfec tion, or at least improvement, of man's free will, which tends to gen erate and make moral behavior pos sible. One can learn correct behavior only if one is allowed to make mis takes and, hopefully, to learn from them. After all, one possible conse quence of making a mistake is wis dom. Unfortunately, the larger the influence of government in peoples' lives, the less opportunity there ex ists for an unhindered and free ex ercise of a person's moral faculties. Society itself cannot be moral or immoral; only individuals are moral agents. Following the argument de veloped by Arthur Shenfield, it would appear that in an economic system, ". . . if its essential charac teristics on balance positively nur ture or reinforce moral or immoral individual behavior, [then] ... it is a moral or immoral system in its ef fects." Competitive capitalism, un der the rule of law, positively nur tures moral behavior and, therefore, can be moral in its effects. Where justly acquired property rights are defended, and where contracts are enforced, and where the rule of law applies, then "the voluntary nature of capitalist transactions propels us into respect for others."

Morality and Personal Taste It is, of course, impossible to argue that a system of competitive capi talism will always produce values and behavior of which we would in dividually approve. However, it is important that we tolerate the "un defendable," undesirable or annoy ing behavior of others as long as it is peaceful. An individual should not violate what the nineteenth-century sociologist Herbert Spencer called his "law of equal freedom," which states that " ... every man has free dom to do all that he wills, provided he infringes not the equal freedom of any other man." Consequently, peaceful, nonviolent human action is not a crime. Those who really be lieve in freedom must oppose coer cive acts which would deny the pos sibility of a moral life by preventing that freedom of choice which moral ity requires. Given the uniqueness of individuals and the varied goals they pursue, we must allow actions 1985 THE MORALITY OF CAPITALISM 547 which, while permissable in a free society, are offensive to personal tastes.

Lysander Spooner, a great and pas sionate defender of individual lib erty during the nineteenth century, recognized an important distinction: the criminal and/or violent invasion of one's person or property is differ ent in kind from behavior, " ... whilst perhaps immoral in some broader sense, must be allowed to flourish, and even be given the full protection of the law." Morality is impossible unless one has the free·· dom to choose between alternative courses of action without external coercion. It was the great humani tarian, Albert Schweitzer, who said that civilization can only revive when there shall come into being a number of individuals who would develop a new tone of mind, inde pendent of and in opposition to, the prevalent one among the crowd-a point of view which gradually wins influence over the collective mind and in that manner determines its character. Only a movement grounded in a revised ethical perspective can res cue us from this relentless slide into collectivism. Necessarily, the re vised moral point of view will come into existence only by individual choice. Once again, we encounter the proposition that it is the free market economic system of private property and voluntary exchange which maximizes the potential for leading a moral life.

The effects and results of the com petitive process under capitalism are generally consistent with a moral or der, but even when they are not it is still terribly important to oppose coercive restrictions of human be havior unless they violate the law of equal freedom. Diverse lifestyles and unique opinions represent one of the main arguments for human liberty. It is under a system of private prop erty and free markets where some times annoying or even obnoxious activities are protected by the laws of a free society. Morality and Its Alternatives In summary, the system of insti tutional arrangements called "cap italism," a disparaging reference for many people, is unquestionably more consistent with morality and justice in our social arrangements than any alternative set of social in stitutions presently conceivable to us. The obviously immoral character of the socialist dictatorships in Po land, Cuba, East Germany, the Peo ple's Republic of China, the Soviet Union, the Ayatollah's Iran, anq. the right-wing fascist dictatorships in countries like Argentina and Chile, where the most elementary human freedoms are suppressed, and where millions of human beings have been murdered in the name of a new so cial order, documents the case for the 548 THE FREEMAN September free, open, and decentralized market system.

Poverty 'and brutality are repul sive. From any point of view, starv irlg children must be viewed with anguish. We ask then, under what economic systems are the greatest number of people leading lives with sufficient food, self-chosen occupa tions, and the greatest degree of in ward and outward independence? In which countries do individuals have the opportunity to be free, really free? Have the socialist countries de livered this choice, mobility, and in dependence? Or, in fact, is it best nurtured in an open market, private property, and limited government social order? Within the Limits of Right These questions have already been answered. The Soviet Union talks about "freedom" and "democracy," but they don't seem to have much of an immigration problem. Commu nist East Germany, on the other hand, must build massive steel and concrete walls and guard them con tinuously to prevent an exodus of their people. Even in the so-called "social democracies," the construc tion of peaceful and egalitarian sys tems is failing. In recent years the declining French economy, under a more intense Mitterrand brand of so cialism, ~as been on international display. The myth of the Swedish utopia has been fully revealed for what it really is in The New Totali tarians by Roland Huntford.

The great French economist and social critic, Frederic Bastiat, writ ing in the nineteenth century, cap tured what would be the desirable characteristics of a truly just and moral order. He asked an important question: ... which countries contain the most peaceful, the most moral, and the hap piest people? Those people are found in the countries where the law least inter feres with private affairs; where the gov ernment is least felt; where the individ ual has the greatest scope, and free opinion the greatest influence; where the administrative powers are fewest and simplest; where taxes are lightest and most nearly equal; ... where individuals and groups most actively assume their responsibilities, and, consequently, where morals of ... human beings are con stantly improving; where trade, assem blies, and associations are the least re stricted; ... where mankind most nearly follows its own natural inclinations; ...

in short, the happiest, most moral, and most peaceful people are those who most nearly follow this principle: Although mankind is not perfect, still, all hope rests upon the free and voluntary actions of persons within the limits of right; law or force is to be used for nothing except the administration of universal justice. Understanding that the case we have made for the moral basis of cap italism requires further refinement, we defer to the wisdom of St. Au gustine. He argued that material well-being does not necessarily bring 1985 THE MORALITY OF CAPITALISM 549 better choices, a finer morality, or even more happiness. Referring to earth and the human predicament, he writes: "The things which the earthly city desires cannot justly be said to be evil, for it is itself, in its own kind, better than all other hu man goods. For it desires earthly peace for the sake of enjoying earthly goods. It is all right for men to seek these things, for they are good things, and without doubt, the gifts of God. But there is something better and that is the heavenly city which is secured by eternal victory and peace never ending." That kind of morality is between each person and his God. Salvation is quite another matter.

The Exciting Study of Freedom Despite the arguments of Bastiat, Hayek, Shenfield, and others, a very interesting and important question remains to be asked. Why has a sys tem of social organization which has produced historically unprecedented increases in living standards in those countries where the principles were practiced, and which simultane ously did so much to reduce man's inhumanity to man during its ascen dancy, come to have such a low standing in the minds of so many millions of people? Hayek is surely right when he insists that we must once again make the study of free dom an exciting intellectual issue. Not just for economic, philosophical, or historical reasons, but for the bil lions of people who, whether they know it or not, must faintly perceive that ideas do have consequences, and that their lives are bound to be af fected dramatically by the scrib blings of philosophers. "Liberty,"

said Alexis de Tocqueville, "cannot be established without morality, nor morality without faith." If America is to survive, its indis putably modern elements must be conjoined with what Russell Kirk calls the "permanent things,"- and George Nash calls " ... the spiritual things and the institutions that sus tain them." ~ BIBLIOGRAPHY Augustine, Saint. The City of God. New York: Random House, Inc. 1950. Bastiat, Frederic. The Law. Irvington: The Foundation for Economic Education, Inc., 1950. Hayek, Friedrich. The Road to Serfdom. Chi cago: University of Chicago Press, 1944. Kirk, Russell. The Conservative Mind. Chi cago: Henry Regnery, Co., 1953. Nash, George. The Conservative Intellectual Movement in America. New York: Basic Books, Inc., 1976. Rothbard, Murray. Man, Economy and State. Los Angeles: Nash Publishing, 1962. Shenfield, Arthur. "Capitalism Under the Tests of Ethics," Imprimus. December, 1981.

Spencer, Herbert. Social Statics. New York: Robert Schalkenbach Foundation, 1970. Spooner, Lysander. Natural Law, Weston, Mass.: M & S Press, 1971. Tocqueville, Alexis de. Democracy in America. New York: Alfred A. Knopf, 1946.

Dennis L. Peterson Economic Prediction and EntrepreneurialSuccess WHILE traveling in my car recently, I was intrigued by an illustration given on an audio cassette presen tation to which I was listening. It set me to reflecting on the power of the human spirit in a free environment and the futility of government at tempts to regulate and predict that spirit. The speaker was Thomas J. Peters, author of the best-selling In Search of Excellence. In the. process of dis cussing his thesis, Peters described a man who defied all the negative predictions and forecasts of the "ex perts" and created an $800 million company. According to the "ex perts," what he did was impossible, and he did it in an area that would qualify for the "Least Likely to Suc ceed" award. Mr. Peterson is a freelance writer in East Greenville, Pennsylvania. 550 In every single year since 1930, the "experts" predicted that American consumers had had it with chicken.

There was just no more demand for it on the market. Despite the same gloomy prediction for 54 years, Frank Perdue "made it" with chicken! And he did it in the eco nomically "depressed" Delmarva Peninsula. From that unlikely spot, he has successfully expanded into the largest urban areas of the east ern United States, including New York and Philadelphia. His lowest share of any of these market areas is 58 per cent. On the reverse side of the same tape I had just heard author and lec turer Earl Nightingale recount an other story of the economic success that comes from a free human spirit. He told how a milkman named Stew Leonard was seemingly forced out of ECONOMIC PREDICTION AND ENTREPRENEURIAL SUCCESS 551 business when a major highway con struction project ran through his small dairy. Rather than surrender to this in trusion by government "progress," Leonard borrowed some money and built another store. Since then, he has expanded it 25 times. Today it is the largest dairy specialty store in the world. It covers 8.5 acres, is pa tronized by more than 100,000 cus tomers each week, and sells in ex cess of 10 million quarts of milk a year. This is to say nothing of the "1 million pints of cream, 1 million car tons of yogurt, 100 tons of cottage cheese, 3 million quarts of orange juice, more than 500,000 pounds of butter, 520 tons of salad ... 1,040 tons of hamburger meat and 1,820 tons of poultry products-oh, and 1.56 million ice-cream cones!"

The accomplishments of Frank Perdue and Stew Leonard could not be predicted by government econo mists. Their successes are due to the imagination, creativity, and pur poseful actions of free individuals in the free enterprise marketplace. They were spurred to these entre preneurial heights by the desire to make a profit and thereby improve their lot in life. In the process, they met the needs of millions of similar individuals. None of this could have been accomplished by the mere man ufacture of charts, graphs, and "guesstimates" by government's economic "experts." Charts and Statistics One of the fallacies promulgated and perpetuated in many high school and college economics courses today is the idea that economics is charts, graphs, statistics, and predictions. Economics, when taught in such a manner, is perceived as a very com plex and mysterious realm into which only the "experts" dare ven ture. All the rest of us, then, are ex pected to act and react according to the predictions, presuppositions, and economic philosophies of these "experts. "

"The only function of economic forecasting," Ezra Solomon stated, "is to make astrology look respect able." Another wag declared that if all the economic experts who ever lived were stretched out head-to-toe around the earth, they would never reach an accurate conclusion. While charts, graphs, and statis tics are appropriate for the study of past economic events, activities, or trends, they have little to do with predicting the quantitative actions of individuals in a free market. The impression that "figures give you all the answers is wrong," Earl Night ingale concluded. "Figures don't give you the answers. Figures merely give you the questions." No less an authority than Ludwig von Mises showed the futility of gov ernment planning and prediction in the economy. "The most that can be attained with regard to reality is 552 THE FREEMAN September probability," he stated. "The fun damental economic problem," he continued, "consists in the neglect of the fact that there are no constant relations between what are called economic dimensions."

Statistics can also be distorted to fit the views and purposes of whoever is using them. As one of my college economics professors once said, "Figures don't lie, but sometimes liars do the figures!" There are those who will argue, however, that whereas it may be true that government forecasting and planning were not necessary in the early stages of our nation's economic development, today's rapidly-chang ing and highly technical industrial society make it essential. Joseph P. Kennedy firmly believed this. "An organized functioning society," he contended, "requires a planned economy. The more complex the so ciety, the greater the demand for planning." Once government officials adopt this fallacy as public policy, there is no end to the extremes of regulation and experimentation that govern ment will undertake. It is this in terference in the free market, more than any other single factor, which brings about inflation, unemploy ment, scarcity, and depression. And, ironically, these problems then lead to increased demands for govern ment intervention.

John Chamberlain addressed so succinctly the problem created by such government interference in the market: "Where government tries to substitute itself for the economic mo tor, there is the inevitable confusion between the starter, the accelerator, and the brake." "Fellows with Schemes" Reduced to its simplest, govern ment interference through planning is the attempt by a few to tell the rest what is best for them, as though the individual is too ignorant to de termine his own self-interests. Hu morist Will Rogers might have had this in mind when he commented, "World ain't going to be saved by no body's scheme. It's fellows with schemes that got us into this mess." Socialistic planners think in terms of a nebulous nonentity called "so ciety." They think "society" pro duces goods and services. They think "society" consumes the goods and services "society" produces. In reality, only individuals pro duce and consume. There is no eco nomic action of the masses but only of individuals. Government actions in a free economy, therefore, must be based on this foundation principle.

This precludes all government plan ning and interference in the econ omy beyond the requirements of de fense and general safety. After thinking about the phenom enal successes of Frank Perdue and Stew Leonard, I wondered where we 1985 ECONOMIC PREDICTION AND ENTREPRENEURIAL SUCCESS 553 would be today had these entrepre neurs and others like them permit ted government predictions to cloud their visions. Literally millions of consumers would have had needs unmet. Billions of dollars in eco nomic activity would have been re directed into other channels. Many profitable jobs would never have come into existence. The experts' predictions would have been "proven" by self-fulfilling prophecy. The myth of economics as the realm of the experts would have been fur ther perpetuated. But these and other believers in the free market refused to be kept down by the gloom and doom foreUpcoming Articles OCTOBER casts of the planners. They knew that if they worked hard to meet the needs of consumers, produced qual ity products, and served their cus tomers courteously, they would have a fantastically profitable market at their fingertips. They put their knowledge and imaginations to work and, with faith in the free market system, made their dreams realities.

The attempts of such individuals both their successes and their fail ures-are what the free market is all about. And it will continue to sur vive and thrive in spite of govern ment interference. It operates best, however, when it is permitted total freedom. @ • Liberty and the Entrepreneur-Perry Gresham • Free Enterprise: The Key to Prosperity-Clarence B. Carson • African Famine: The Harvest of Socialist Agriculture-David Osterfeld NOVEMBER • Should American Business Give Up Smoking?-Gary North • Living in Two Chinas-Dean Russell • Letters to the Editor Beginninga new sectionin The Freeman. We welcomeyourcomments. Send your letters (short ones please) to Letters Editor, Foundation for Economic Education, Irvington-on-Hudson,New York 10533.

Bill Anderson POLITICAL TERRORISM has become a sickening yet commonplace fixture of our modern world. In the past 15 years nearly 5,000 persons have died with scores more injured from delib erate terrorist attacks aimed mostly at persons from either western or pro-western nations. We can expect to hear on almost any news broad cast or read in a daily newspaper that a western diplomat has been gunned down, an American military officer kidnaped or a foreign busi ness executive "executed" by a po litical extremist group that "claims responsibility" for its bloody actions. Short of abandoning all laws and precepts that guarantee civil liber ties, there is little that can be done Mr. Anderson is an economist in Chattanooga, Tennessee. 554 to totally rid our world, and espe cially the free world, of political ter rorism. The cost of eliminating ter rorism would be, in the eyes of most persons, greater than the cost of liv ing with the terrorist specter. How ever, it is important to understand the reality behind the actions of ter rorist groups, what they want and how they can be slowed, if not stopped, from doing irreparable harm to our social fabric.

This article seeks to examine ter rorism from an economic point of view. Because of this viewpoint, it will reach far different conclusions on both the nature of terrorism and how to deal with it than most con ventional literature on the subject. This is not because economists are weird (though many are, self-admitTERRORISM 555 tedly, a bit strange), but rather be cause the fundamental principle of economic theory-namely self-inter est-is missing from most literature on terrorism. By assuming that ter rorists are self-interested (like the rest of us), we can examine their mo tives and plans of action in a ra tional manner that enables us to un derstand their goals (though not agree with them) and, more impor tant, predict their reactions to cer tain government policies. For the most part, terrorist groups work under the guidance of Marxist Leninist theory, although there are others who are fighting against com munist regimes. What all the groups have in common, however, is that they seek or have sought either to seize power themselves or drasti cally affect the workings of the gov ernment in power. The source of their motivation, as well as the re sponse government should make to terrorist attacks is the topic of dis pute, not the actual makeup or ide ology of the particular groups.

Traditional literature on terror ism, especially the literature deal ing with terrorism from Marxist-led groups, makes a number of impor tant errors. Economist Richard M. Kirk writes that to most analysts of this subject "political purposes are typically defined as ideological in nature. As a result, political terror ists are assumed to be ideological zealots, willing to kill and be killed in order to further 'the cause'."l This is not to say that ideology or the will ingness to die for a cause is not a part of terrorism. Certainly the suicide bombers who killed 252 American soldiers in Beirut, Lebanon, in 1983 (and died in the process) knew they would not survive their attack. The problem here is that such attacks are depicted as a form of altruistic be havior, an action in which the at tackers expected nothing in return. AnalyzingTerroristActions Because the prevailing literature simply depicts terrorists as "ideolog ical zealots," it becomes difficult, as Kirk notes, to analyze rationally their actions. He writes, "As a re sult, traditional studies are forced to search for typically unobservable psychological and socio-economic characteristics as explanations for violent behavior."2 Terrorists, he says, are seen as being low in self esteem, 3 economically or politically alienated,4 irrational,5 or insane. 6 Such analyses provide interesting work for psychologists and sociolo gists, but afford little help in eco nomic analysis of the problem.

As a result of traditional analysis of terrorism, we find that predict able views of government and its role in stopping terrorism prevail in most literature today. Terrorists, it is be lieved, work simply out of ideology; in that same vein of reasoning, it is also assumed that governments 556 THE FREEMAN September work ideologically. That is, what on the surface is a violent confrontation between terrorist groups and gov ernments is, in reality, an outgrowth of a deeper ideological struggle. So lutions to terrorist problems, then, 'are placed in ideological frame works; depending upon one's ideo logical biases, the solutions run from expanding the welfare state to in creasing powers of the particular na tion's security police. Noting this situation, Kirk writes, "The dominant theme in the exist ing literature is a call for expansion of the role of government, particu 1arly the redistributive role, in order to alleviate the causes and thereby reduce the occurrence of political terrorism."7 In other words, he says, it is assumed that many terrorists, especially those on the left, have deep concerns for the poor and, in their desire to make an unwilling government (and the public it rep resents) bend to the just needs of the poor and oppressed, turn to terror ism as a last resort. Thus, terrorists may have their actions condemned by elements of society who at the same time might have sympathy for their ideology. For example, the in famous Patty Hearst kidnaping in 1974 by the Symbionese Liberation Army brought both condemnation for their tactics and praise for the SLA's "goals" of "helping the poor."8 The public forgot that the act of kid naping a young woman nearly destroyed her life; the public also for got that the SLA had gunned down (with poisoned bullets) a popular black school superintendent in the San Francisco area. The perception that became popular was that of a misguided group of men and women whose hearts were in the right place.

FaUlty Solutions To change the breeding grounds of terrorism, it is then .supposed, gov ernments must change their ideol ogy (provided they are not already leftist in scope) in order to facilitate the kind ofjustice that it is assumed will mollify the righteous anger of terrorists. As pointed out earlier, Kirk has written that the dominant theme of literature on terrorism calls for expanding the redistributionist powers of the state. By so doing, the literature assumes, redistribution of wealth from rich to poor through taxation and regulation will actually succeed in reducing the wealth gap between rich and poor. Thus, it is be lieved, redistribution will bring sta bility to a society, ending poverty and eliminating the reasons that terror ists operate in the first place. As one can see, the reality of ter rorists and government does not match with the traditional expla nations, which also means that tra ditional literature, far from helping solve the terrorist problem, actually helps contribute to its increase. By presenting false views of both the 1985 TERRORISM 557 motives of the terrorists and of the nature of government, traditional writers on the subject simply do not offer the public realistic information.

The remainder of this paper, then, will concentrate on the following areas: first, we will discuss the na ture of government; second, why ter rorists are motivated to attack gov ernments; third, suggestions on how to stop or at least curtail terrorist ac tivities to more tolerable levels; and, fourth, an explanation of the "new" or government-sponsored terrorism. The Nature of Government As discussed earlier, a strong as sumption exists in the journalistic and academic worlds that govern ment operates along ideological lines. 9 That is, what individuals do in governmental processes is done because of ideologicaJ motivation. Ideology does, of course, playa part in government; the Marxist-Lenin ist-Stalinist philosophy that per meates communist governments cer tainly contributes to their restrictive laws on property and enterprise. But one must look one step beyond the obvious to understand what govern ment actually does in practice, not just what people say it should be doing.

In reality, as the Public Choice rev olution has demonstrated, govern ment serves to transfer wealth from one group of people to another. 10 This does not necessarily imply that such a role is evil. After all, ,protection of personal and property rights is a necessary and good function of gov ernment, but protection is neither costless nor applied evenly as some persons receive more protection and some less than the norm. The judi cial process involves transfers of wealth (for example, lawsuits and fines) as well. However, many wealth transfers are harmful to the general public. Price controls, regulations and im port "protection" are among the many examples of how government reduces public welfare for the ad vantage of a privileged and well placed few. The vast number of lob bying groups that make permanent homes in Washington, D.C., are not spending their time and money to improve the state of government in this country. They are, rather, seek ing benefits for themselves at the ex pense of other individuals.

Politicians and bureaucrats serve as the brokers in this process and, like all good brokers, receive their "perks" from the system, politicians being rewarded with votes and bu reaucrats with salaries and secu rity.11 In a democratic system, more available wealth means more wealth to transfer. That is, as the general wealth of a society increases, so will the attempts for some to gain wealth at the expense of others through the political system. 12 The question here is this: What is 558 THE FREEMAN September the most expedient way to obtain wealth through this system? At the same time, we also ask: What are the limits to the amount of wealth that can be transferred? And, finally, what is the connection of wealth transfers to terrorism? Like all other markets, the politi cal market is rife with uncertainty. A certain, predictable market would have no need of lobbyists, since po litical outcomes would be predeter mined. As it is now, lobbyists have no guarantee of success in their at tempts to seek wealth transfers, hence their willingness to spend large amounts of money. At the same time, politicians have just as little guarantee of being successful in their attempts at being initially elected or reelected. The political scene is rife with violent change. For example, Richard Nixon was over whelmingly reelected in 1972 to the U.S. Presidency; less than two years later, in the wake of Watergate, those same voters demanded his ouster. The rapidly changing face of the economy creates new interest groups and with new interest groups come new demands for politicians.

The Costs of the Political Transfer Market Thus, the process of seeking trans fers is perilous for both lobbyist and politician. There is no guarantee that either will receive what he or she desires. Yet, this is the accepted way of transferring wealth in our so ciety. And like any other market, the political transfer market has its lim its. Lobbying groups have limited re sources and there is a marginal point at which the cost of lobbying is more expensive than the benefits gained by it. Politicians may transfer too much wealth and, thus, be voted out of office by angry taxpayers. 13 There are those, however, who do not wish to take the risks of partic ipation in the lobbying or political system directly, but still seek indi rect influence over the political pro cesses. For example, college profes sors and journalists may often have a powerful influence in the system through their writings or studies, yet not be running for public office or be directly lobbying for political favors.

Whatever the mode or level of in fluence the above groups may have on our political/economic processes, they all have one thing in common: they adhere to a certain social con tract which recognizes a "proper" channel of activities to influence the workings of government. Those of us who may decry the irresponsible spending habits of our Congress since the days of the New Deal still follow a nonviolent philosophy. Aus trian economists, who may oppose the gargantuan welfare state or the Federal Reserve's money monopoly, do not take their case to the streets. For example, Murray Rothbard, though an ardent opponent of the 1985 TERRORISM 559 Federal Reserve System, has no plans to bomb the Fed offices in Washington, D.C. This does not mean that free market advocates seek no influence on our political economy; rather, such advocates are willing to "play by the rules" in seeking public support of their pol icy initiatives.

What MotivatesTerrorists? Terrorists break that social con tract by their actions of indiscrimi nate violence against individuals. After peeling away the ideological skins and fig leaves that terrorists use to justify their violence, we come to the core reason for their actions: the terrorists' own desire for power and influence. Economist Thomas Sowell, following the murder in 1978 of Italian Premier Aldo Moro by the Red Brigades, was one of the few so cial commentators to recognize the terrorists' real motives. He writes: For several weeks a group of obscure young men became important. They car ried out a deed that made headlines around the world. They had a famous man in their power, to abuse or taunt as they pleased and to kill when they felt like it. They saw the life of the country around them disrupted as police, work ers, and others changed their daily rou tines in response to the event. The pope, the American president, and the United Nations recognized them with appeals and declarations. In normal times, they might never have gotten past the secre taries to see any of these people, much less expect to influence them. With one daring crime, they leapfrogged bureau cracy and protocol and elbowed their way into the headlines and even into history. 14 Why the violence? Is it, as some "experts" have declared, simply an act of insanity by members of ter rorist groups?

To the second question, we answer "no." And because we believe that terrorists are making rational deci sions, we can only assume that they carry out acts of violence because they have deemed such violence both more effective and less costly than standard participation in accepted political processes.· Kirk notes: " ... when the cost of gaining conven tional political influence is high enough, or some other explicit or im plicit barrier to entry into the polit ical sphere exists, the use of violence in the form of political terrorism can become a profitable method of rent seeking. "15 In other words, the terrorists are seeking wealth transfers and/or power (all of which can be defined as economic or political rents) through violent means because they are not willing to pay the cost of participat ing in the political system. True, the political system gives no guarantees of success. Radical politicians, though they may be influential in their own small districts, usually do not sway enough voters to gain na tional offices or, should they be elected, are often forced to moderate 560 THE FREEMAN September their policies in order to achieve the needed political compromises that permit them to govern effectively.

Potential terrorists (or actual ones) are faced with the following di lemma: They can either pay their dues in the political system, thus perhaps reaping the rewards but also shouldering the greater risks of fail ure, or they can seek power by other means, that being violence. True, vi olent activity has the inherent risks of death or imprisonment, but in the terrorist's mind, the rewards gained from terrorist activity outweigh both those risks and the rewards that could have been gained had he or she simply participated in the political system like everyone else. The act of terrorism gives the individuals in volved a chance to gain the kind of significance that most likely could not be gained by legitimate chan nels. Sowell writes: The media and intellectuals tend to judge terrorists in terms of the effects of their acts on what the terrorists them selves define as their cause-the "aveng ing" of this or the "liberation" of that.

Usually the terrorists' acts don't have a ghost of a chance of achieving their pro claimed goals, but they can give a lot of importance to a lot of otherwise insignif icant people in the meantime. And these are not merely insignificant individuals: they are often insignificant individuals who grew up surrounded by people with wealth, power, or recognition which they would be unable to duplicate through normal channels for many long years. 16 In this passage, however, even Sowell underestimates the accom plishments of the terrorists. Yes, many of them are insignificant in dividuals who crave attention and power; but, no, they are not simply acting to gain attention the way a two-year-old child throws a tantrum to get Mommy's attention. Terrorism can alterthe way a gov ernment does business, and it can also alter the plans of those who originally wished to be involved in government but change their minds because the inherent risks of kid naping and/or assassination become high. Democratic nations have seen some erosions of their civil liberties because of terrorist violence. And some European airports have sec tions that resemble armed camps in stead of,passenger terminals.

Control Measures In response to terrorism, as much of the literature suggests, should government expand social services via wealth transfers in order to sa tiate the terrorists' "hunger" for so cial justice? This is a most crucial point in understanding terrorism and the proper response political au thorities must give to such violent activity. If government officials mis read the reality of terrorist demands and seek to expand the scope and powers of government in the area of wealth transfers, they are actually encouraging more t~rrorism. The 1985 TERRORISM 561 reason for this is quite simple. Ex pansion of the redistributive powers of government encourages more seeking out of wealth and power transfers. This is the essence of sup ply-side theory, that is, supply cre ates its own demand (from J.B. Say). The increased supply of government induced wealth transfers (rents) will lead to an increase in demand for them.

Far from being appeased by the in crease of government powers of wealth distribution, terrorists are likely to become more in number and more and more violent in their ac tivities, the violence coming because of the increase in competition brought about by the proliferation of terrorist organizations. A second point also needs to be made in regard to expansion of gov ernment's distributive powers. The assumption that is often made is that government can permanently alle viate poverty by fiat. When govern ment assumes the will to eliminate poverty, supporters of intervention believe, then government can ac tually accomplish that act. All that is missing, they say, is the will. Therefore, they further assume, the idealistic terrorists will be appeased when government acts to eliminate poverty and terrorist activity will then cease. The problem here is that the state simply does not have the capability to eliminate poverty by command any more than the state can order nature to insure that all Fourth of July holidays are warm and sunny. 17 Since the beginning of the Great So ciety heydays in the mid-1960s, enough money has been spent by the government to fight poverty to make each poor family in this nation in dependently wealthy, yet we are no closer to eliminating poverty than we were in 1965 and some forcefully argue that we have lost ground. 18 Less Government May Lead to Less Terrorism If increasing the scope and distrib utive powers of government leads to more terrorism, it stands to reason, then, that scaling back government activity of transferring wealth might lead to a decrease in terrorism, though it will not eliminate terrorist violence altogether. Simply stated, less government may actually result in less terrorism. Increasing distrib utive powers of government, on the other hand, will lead to a more cha otic social order (an inevitable con sequence of government interven tion) and more terrorism.

Terrorist activity can also be cur tailed by increased police activity, which is a state function, provided the members of a particular society are willing to give up some of their civil freedoms (search and seizure laws, etc.) or have them modified in order to make it easier for terrorists to be either apprehended or hit in 562 THE FREEMAN September pre-emptive strikes. Modification is more likely than simple elimination of freedoms; so a society is left with choosing between more police pro tection and activity and, perhaps, fewer civil liberties. Striking the Balance: Freedom and Protection Such a choice is not easy, as we have learned from sad experience that police or security officers can very well abuse their powers. Giving them increased powers can lead to new abuses, yet people also wish to be spared the constant state of fear that terrorists can strike into peo ple's hearts.

As one can see, the choice is not between a high level of terrorism or no terrorism at all, but rather a choice between the amount a society is willing to tolerate versus some suspension of their civil liberties as well as a chance to share in state transferred wealth. Increasing the welfare state only invites more ter rorism, as the experience of the past decade has vividly demonstrated to us. At the same time, we cannot ig nore the terrorist threat to lives and property by continually throttling law enforcement efforts (as was done in this country in the 1970s-which corresponded to a rising number of terrorist incidents). But neither do we wish our society to become a po lice state; a balance must be struck at some point. State-Sponsored Terrorism In the past few years we have seen increasing evidence of terrorism backed by national governments, the bombing of the U.S. Marine bar racks in Lebanon in the fall of 1983 being a vivid example. Author Claire Sterling in her best-selling book The Terror Network 19 documented the in volvement of the Soviet Union, its Eastern-Bloc allies, Cuba, North Ko rea and other communist states in terrorist activities aimed at the West. Iran, it has been recently learned, is also playing a major role in helping terrorist groups such as the PW and Islamic Jihad attack both Israel and other representa tives of western nations, especially the United States.

The bottom line of state-sponsored terrorism is that such activity is a cheap and highly productive way to wage a form of warfare. The risks to the Soviet Union are minimal (wit ness the number of disbelievers in the western news media after strong evidence was presented that the U.S.S.R. played a role in the shoot ingofPope John Paul II in 1981) and the opportunities for disruption of western societies excellent. Again, western politicians and opinion makers must not fall prey to the idea that state-sponsored terror ists are simply acting out an ideo logical cause in controversial fash ion. Rather, it is imperative for the West to realize that both the terror1985 TERRORISM 563 ists and their parent governments are using terrorism as a means to snatch political and economic gains that might not be obtained through normal diplomatic channels and are not worth the risk of all-out warfare.

And in response to the terrorist threat, western governments should steer clear of "solutions" which in clude liberalized wealth transfers to ward the guilty hostile nations (e.g. liberalized government-to-govern ment loan agreements, subsidies, etc.) or agreements that "give away the store" militarily. As in the case of domestic terrorism, the expansion of wealth transfers will only serve to bring about increased levels of violence. In the 1960s many liberals were advocating vast increases in welfare and other transfer payments as well as increasing poverty programs in order to appease what they saw as growing unrest in poor-and espe cially black-communities. 20 What the nation received in payment for its increased Federal largess was the most violent social upheaval in nearly a century. What was not ac complished was what liberals hoped would be accomplished: the elimi nation of poverty.

The same analogy can be applied to terrorism. Should our leaders con tinue to try to appease terrorists by using welfare state expansion, what they-and the rest of us-will reap is more violence. @ -FOOTNOTESlRichard M. Kirk, "Political Terrorism and the Size of Government: A Positive Institu tional Analysis of Violent Political Activity," Public Choice (Spring, 1983), p. 41. 2Ibid. 3 A. Kaplan, "The Psychodynamics of Terror ism, Terrorism (1978), p. 245. 4P. Wilkinson, Terrorismand the LiberalState (London, 1977). 5Ibid., p. 49. 6National Advisory Committee on Criminal Justice Standards and Goals, Disorders and Terrorism (1976), p. 49. 7Kirk, pp. 41-42. 8At the time, the SLA received praise in the media for being concerned for "the poor" but also received condemnation for the kidnaping, which is no surprise, since Patricia Hearst came from a family of media magnates. 9Kirk, p. 43. l°Robert E. McCormick and Robert D. Tolli son, Politicians, Legislation, and the Economy (Boston, 1981), p. ix.

llIbid., p. 6. 12See William L. Anderson, Federal Spending and Taxes: A Study in Causality, unpublished master's thesis, 1984. 13McCormick and Tollison. 14Thomas Sowell, "Terrorist Celebrities," Pink and Brown People and Other Controver sial Essays (Stanford, California, 1981), p. 63. 15Kirk, p. 44. 16Sowell, pp. 63-64. 170ne of the main welfare state fallacies is that belief that whatever government wills, government can do. This fallacy assumes that government action is costless when in reality the opportunity cost of government action usu ally brings a net loss to society. 18See Bill Anderson, "Casualties of the War on Poverty," The Freeman (January, 1984). 19C1aire Sterling, The Terror Network (New York, 1981). 20James B. Reston, "Focus on the Nation," The World Book Yearbook, 1966, pp. 25-26.

Hans F. Sennholz The Three Faces of Unionism MYTHSsurround one of the most im portant yet least understood insti tutions of contemporary society-la bor unions. These myths persist, not only because the critics are weary of facing and exploding them again and again, but also because labor orga nizations have a vested interest in reinforcing them. The very existence of unions depends on the perpetua tion of the myths that comprise the labor union ideology. The core of the ideology is the no tion that the market order does not function fairly and equitably and that it victimizes working people. Adam Smith remarked that workers Dr. Hans Sennholz heads the Department of Econom ics at Grove City College in Pennsylvania. He is a noted writer and lecturer on economic, political and monetary affairs. 564 labor under a disadvantage in their dealings with wealthy employers. Jean-Baptiste Say, J. R. McCulloch, and John Stuart Mill echoed the no tion. Alfred Marshall confirmed it, as did A. C. Pigou and nearly all con temporary economists. They all com miserated with laboring people and, therefore, extolled the benefits of la bor organizations for the purpose of removing the disadvantage. They often stood shoulder to shoulder with socialistic writers who hailed labor organizations as ramparts against the evils of competition and as main springs of social justice.

The union ideology is as animate and alive today as it was at its be ginning. Most contemporary econo mists still cling to the age-old no tions of employer holding power and THE THREE FACES OF UNIONISM 565 labor inability to wait, or to some aged exploitation doctrine. But in contrast to yesteryear, unionism now is deeply entrenched in tradition, legislation and jurisdiction. Labor unions are well-organized and well-financed institutions that do everything in their power to pre serve their existence. To ensure their survival, yea, their growth and ex pansion, they pursue every feasible option along ideological, economic and political lines. Struggling val iantly for self-protection and self preservation, they have assumed ambidextrous features and faces, which may predominate differently over time, according to the strength and kind of resistance confronting union efforts. But regardless of the predominant face, the activities of labor unions are always directed to ward self-preservation by remaking the union environment, removing disabilities and extending the scope of union opportunity.

Inculcation and Indoctrination Labor organizations are among the most effective educational institu tions in all matters of economic and social thought. Well-financed, al ways activist, they engage in sys tematic propagation of economic doctrines reflecting union views and interests. They energetically work through all media of communication and impart their doctrines on all lev els of education. From coast to coast countless union organs make exten sive use of historical narratives that tell the union story, of foes and friends, of sacrifices and triumphs. They speak of the worker's noble struggle for recognition and status in the late nineteenth and early twentieth centuries, and of violent resistance by greedy managers and owners. When in desperation work ers resorted to strikes and boycotts, management fought back with lock outs, blacklists and strikebreakers. But in the end, so the unions report, justice prevailed and organized la bor became strong enough to bar gain on an equal basis with its evil adversaries and call a halt to labor exploitation.

The remarkable success of this union rendition of labor history is built precariously on several subtle and specious pieces of popular rea soning. Every union organization routinely builds on the fallacious no tion that labor conditions were de plorably poor in the past, but im proved materially when unions appeared on the scene. Union spokesmen routinely echo the prim itive syllogism that events coincid ing in time must also be related causally. They repeat ad nauseam that at the beginning of the labor movement more than a century ago, when few workers were organized, hours were long and wages were low. But the knights and heroes of labor confronted the exploiters and 566 THE FREEMAN September fought them to a halt. Union effort and sacrifice brought remarkable improvements. The advocates of government reg ulation of hours and wages usually draw a similar conclusion. Labor conditions were poor before govern ment intervention; they measurably improved since government passed minimum wage laws and forcibly limited the hours of labor. Conse quently, they confidently conclude, the intervention by wise legislators and civil servants materially raised the workers' level of living. Unfor tunately, neither the advocates of la bor legislation nor the proponents of union organization tell us how the improvement credit is to be divided and attributed.

If it were true that events coincid ing in time are, ipso facto, connected causally, we could also conclude that acid rain and water pollution in re cent years have visibly improved our levels of living, that the roar of jet engines has enhanced our environ ment, and the increase of heart dis ease and cancer has added to our quality of life. Of course, no rational observer would draw such a conclu sion. But we are urged to believe, and millions of people actually do be lieve, that labor unions and labor legislators did improve working and living conditions through strikes, threats of strikes, or legislative restrictions. It is self-evident to economists that labor's phenomenal progress re sulted from increased productivity, that is, from more output per man hour. Labor reaped great benefits as labor productivity rose due to in creased capital investment per worker. Better tools and equipment provided by investors caused output to double every twenty to thirty years. Moreover, inventors created new products and devised new tech niques while entrepreneurs made better use of existing capital as well as manpower. With the rise in the marginal productivity of labor, em ployer competition in the labor mar ket caused wage rates to rise and la bor conditions to improve.

Union Harm Workers themselves did not con tribute to the steady improvement in their working conditions unless they managed to save and invest in facilities of production. In fact, wher ever labor unions caused output to decline through strikes, inefficient work rules, labor agitation, or any other reason, they actually kept wage rates lower and working con ditions poorer than they otherwise would have been. The visible dete rioration of economic conditions in countries with powerful unions, e.g., Great Britain, illustrates the point. The remarkable sway of union ide ology rests on a logical error that confuses coincidence in time with causal relation. Throughout most of 1985 THE THREE FACES OF UNIONISM 567 union history the spokesmen of la bor' voicing crude versions of the exploitation doctrine, made their demands for more, more and ever more in exchange for ever less labor exertion. In most parts of the world laboring under stagnant eco nomic conditions, such demands would have been simply dismissed as sheer lunacy-the machination of madmen.

Entrepreneurs Raise Productivity In the capitalistic countries, how ever, entrepreneurs and capitalists in time succeeded in significantly raising labor productivity, thereby boosting wage rates and improving labor conditions. They actually de livered what unions were demand ing. But who was acclaimed as the great benefactor of labor? The agi tators proclaiming exploitation and profiteering, or the capitalists-en trepreneurs who were quietly build ing tools rather than consuming their incomes so that there should be more in the future? Unfortunately, public opinion was led to applaud the loud agitators and feature the union leaders. Labor leaders forever reinterpret labor history. They extol virtues and motives of the agitators of labor un rest such as in the case of the Great Railroad Strikes of 1877 when twenty people were killed in Pitts burgh. Rioting, looting and burning destroyed millions of dollars worth of railroad property. In the end, Fed eral troops had· to be used to sup press the disorder. Unions commem orate the Chicago Haymarket Riot of 1886 when a bomb was thrown killing one policeman and wounding many others. Seven perpetrators were arrested, four of whom were hanged. Unions treasure the mem ories of the Homestead Strike of 1892, the Pullman Strike of 1894, the Coal Strike of 1902, and the most bloody Colorado anthracite coal mine conflict leading to the "Ludlow Massacre" of April 20, 1914, when women and children burned to death. Unions cannot forget how slow state and local governments were in coming to the aid and sup port of labor, and how, in many cases, they actually thwarted the efforts of workers to gain their objectives.

Union thought deeply influences the tone and emphasis of economic writings. There are few textbooks in economics that do not laud the val iant efforts of labor organizations to ward improving labor conditions. There are few economic commentar ies that do not extol the virtues of labor unions. They pave the way for socialism; in fact, most labor unions actively proclaim, promote and dis seminate the doctrines of socialism. After all, it is difficult to censure the competitive system for its labor in equities without drawing the conclu sion that it should be abolished. But even where union leaders cast their 568 THE FREEMAN September lot with the market order, their tacit assumption of labor exploitation tends to pave the way for the com mand system. Economic Functions and Policies Labor leaders fervently dissemi nate crude notions of the labor the ory of value and the exploitation doc trine, which provide the raison d'etre of unionism. Witho:Jt union protec tion, we are told, most Americans would be lab~cing from dawn to dusk for pennip~~ an hour. Unions are said to hav~ ".'aised,and continue to raise, the wages of all workers through as sociation and collective bargaining, to have improved working condi tions and reduced daily chores and working hours. Because of their great faith in labor unions and labor objectives, the American people con tinue to endure destructive strikes and threats of strikes, tolerate union coercion and violence, suffer many inconveniences, and credit economic improvements to labor leaders. To many millions of Americans, mem bership in a labor union is an im portant social duty and the strike a noble task.

Unfortunately, the exploitation doctrine, wherever it serves as guidepost for human action, engen ders disaster. The labor legislation it breeds not only reduces labor pro ductivity and wage rates, but also sows discontent and social conflict. The minimum-wage legislation and other attempts at raising wage rates and fringe benefits above those de termined by the market, create un employment and depression, which in turn calls for ever more govern ment intervention. The labor unions it sponsors not only reduce labor ef ficiency through a multiplicity of work rules, cause maladjustment and unemployment, especially of ju nior members, but also reduce eco nomic service generally, which keeps levels of living lower than they oth erwise would be. The basic method of all unionism is restriction oflabor competition; the basic effect is unemployment. In an unhampered labor market without labor unions, wage rates and work ing conditions are determined by the productivity of labor, which, in final analysis, is the value ascribed to ser vices by consumers, clients and pa tients. Competition among employ ers, together with opportunities for self-employment, tend to lift the wage rate of every worker to this very level of productivity. If, for any reason, someone should earn less than his productivity rate, his em ployment would be highly profit able. He would become the object of employer bidding for labor, which would lift the price of his labor back to his productivity level. If, for any reason, he should demand more than his productivity rate and claim a share of capital or entrepreneurial income, he is a candidate for un1985 THE THREE FACES OF UNIONISM 569 employment. That business would be more productive without him.

Professional people, too, are sub ject to these principles of the market. Their incomes are determined by the val ue judgments of their customers, clients and patients who are the su preme directors of the production process. Surely, there is deplorable government intervention that makes matters worse. In the health care industry, government may sub sidize and regulate the industry through Medicare, Medicaid and other schemes, which make it vul nerable to politics. The industry must expand or contract, prosper or suffer, always readjusting to chang ing political fortunes. A labor union representing doctors would not im prove the situation; it, too, would reduce the quality and quantity of the service and provoke ugly confrontations. Restricting Entry Unions restrict competition in their part of the labor market in or der to raise the wage rates of their members. They are not concerned with outsiders whom they bar from access to union industries. Nor do they give much thought to their ju nior members who may lose their jobs as a result of union activity. But they are rather effective in their ef forts to raise the employment costs of senior members while inflicting grievous losses on junior members, outsiders, employers, and consum ers. Unions restrict the competition of outsiders whom they fight with every available method, even vio lence on the picket line. The ex eluded workers must seek other em ployment or remain unemployed.

Their fate is of no concern to the unions. When, many decades ago, unions were limited to a few industries only, the labor they cast out could find em ployment in other parts of the labor market that were still free. In them the supply of labor would rise, which would lower the wage rates of un organized workers. But with the spread of unionism throughout basic industries and the proliferation of labor legislation, e.g., minimum wage legislation, there is no escape for the victims. Unemployment has become a chronic mass phenomenon that is holding more than eight mil lion Americans in its grip. Unions favor collective bargaining which, in union terminology, means the substitution of a union's bar gaining for the bargaining of indi vidual workers. In reality, it is the bargaining of a select group that as serts the power of the picket line to keep all outsiders from bargaining. Collective bargaining, in this sense, means the denial of the right to bar gain by outsiders. When some union agents sit down to deal with an em ployer, other agents and members are guarding his gates and forcibly 570 THE FREEMAN September preventing outsiders from compet ing. The employer, fearing violence at his site and willful destruction of his property, may have no choice but to deal with the agents.

Bargaining By Coercion If union bargaining were truly col lective it would give a voice to all workers at the gate, including eager job seekers. In reality, it is confron tation at the point of a gun. The "right to strike," which is sacred to all unionists, is said to be a natural right to abstain from work. In real ity, it is the right to force other people to join the strike. It is the right to prevent willing and eager workers from taking the place of striking workers. During a recent strike by some 52,000 hospital workers against 30 New York City hospitals and 15 nursing homes, 1,199 workers were arrested or charged with serious strike-related offenses. (The New York Times, August 26, 1984, pp. 1, 47). If 1,199 workers were caught in the act and apprehended, it is likely that many more committed criminal offenses and escaped undetected and unmolested. Surely, the New York police, like any other police, are not likely to apprehend every scofflaw in the very act. Moreover, they cannot possibly prevent the violence or threats of violence against reluctant union members who would work rather than strike and against unemployed workers who would love to fill the open jobs. The potential vio lence committed against fellow workers and their property usually exceeds by far the destruction wrought on employer property. But in the case of hospital workers the greatest harm undoubtedly comes to the patients whose suffering is ag gravated by the wanton denial of care.

Labor unions are the product of the ever-changing labor ideology. From their modest beginning nearly two hundred years ago until this very day their words and actions are clearly discernible in the writings of the critics of the private property or der. At the beginning and well into the nineteenth century, however, the legal system remained free from la bor ideology, which permitted the courts to examine critically union organization and activity. Courts found that trade societies formed either to benefit their members at someone else's expense, or to work harm on workers who did not join the movement, were disturbing the peace and disrupting social cooperation. In an 1815 decision involving the shoemakers of Pittsburgh, the court ruled that union activity was harm ful not only to employers but also to the community at large. Under the influence of English common law, some judges even held that labor or ganizations, in denying basic rights 1985 THE THREE FACES OF UNIONISM 571 to outsiders and forcing other work ers to join every strike, were con spiracies prejudicial to the public in terest. But while the courts may have limited the effectiveness of early labor organizations, they did not prevent the continuation and ex pansion of the union movement. Af ter all, ideas control the world; they are mightier than the laws of poli ticians and the prohibitions of judges.

Political Reform Movement From the very beginning the union movement was also a political re form movement that sought to achieve by political force what it could not attain by economic force. Where trade unions proved power less in changing the laws and prin ciples of the market, their represen tatives were more successful in the halls of politics. As political reform ers they labored to introduce gov ernment intervention in the eco nomic and social order. Unionism is an offshoot of modern political and economic ideology; the country that pioneered modern po litical and economic thought, Great Britain, was also the first to give rise to unionism. It was primarily polit ical at its inception, a constituent of a popular reform movement that later took its name from a national charter, the Chartist movement. Concentrating on political demands, it advocated universal manhood suffrage, the ballot, equal districts for Parliamentary representation, an nual parliaments, the payment of members of the House, and the ab olition of property qualifications for membership in Parliament.

Some two million Chartists ex pected successful political action to lead also to economic changes, since political representation of the work ing classes would lead to measures favoring them. Chartist leaders usu ally urged peaceful methods, but their agitation aroused resentment and often encouraged violent action. Chartism did not bring the revolu tion its opponents had feared, but it did lead to political reforms and, above all, leave a foundation for fu ture labor movements. With the decline of the Chartist movement during the middle of the nineteenth century, British unions for a while concentrated on economic issues. Toward the end of the cen tury, however, they turned to politics once again as socialist ideas-al though non-Marxian-were swaying the movement. Their renewed inter est in politics brought forth the La bour Party, their primary political instrument. In Great Britain as in other countries following th~ British example, labor unions now are firmly affiliated with the Labour Party or the Social Democratic Party.

Union members may be required to pay "political levies" along with their union dues.

572 THE FREEMAN September On the European continent, union ism typically developed as part of a wider labor movement, with a Marx ian political party usually taking the lead. The party organization gener ally is the intellectual elite of the movement, affording guidance to and often assuming control of the unions. But political control tends to divide the movement, with different political parties establishing com petitive unions. The predominant current is socialistic although some unions are affiliated with Christian parties (mostly Roman Catholic), na tionalistic or democratic parties. A few communistic unions are associ ated with the party of Marx and Lenin. From Unionism Pure and Simple to Political Action The American labor movement, throughout most of its history, kept its distance from socialism and par tisan politics. It was "trade union ism pure and simple," with the sin gle purpose to engage in collective bargaining in order to raise wages and improve working conditions of union members. It tacitly assumed that, under capitalism, workers may prosper provided they are organized.

But the logic of its own ideological base, the labor theory of value and exploitation doctrine, gradually led it to the socialist philosophy that promises lasting relief to labor only by a radical reform of the system. Collective bargaining must take sec ond place to political action. Since the 1970s the American Fed eration of Labor and Congress of In dustrial Organizations (AFL-CIO) has become a prime supporter of sta tist remedies for economic problems, real and imagined. With many un ionized industries sinking into deep depression and membership unem ployment rising to fifty per cent or higher, the traditional instruments of union power, collective bargain ing and work stoppage, have lost most of their potency. In fact, they demonstrably make matters worse, causing industry to sink ever deeper and unemployment to rise ever fur ther. Of course, labor leaders would never admit any union responsibil ity; instead, they are quick to point at the administration in power as the maker of depression and unemploy ment. They become supporters of po litical action.

The AFL-CIO now supports the en actment of legislation that would protect unionized industries from foreign competition. It advocates such protectionist measures as do mestic-content laws and import quo tas, and opposes all efforts at low ering trade barriers on imports from developing countries. It calls for a tripartite National Industrial Policy Board, made up of representatives of organized labor, government and business, that would oversee the re construction of the nation's sick in1985 THE THREE FACES OF UNIONISM 573 dustries and decaying communities. Labor is backing legislation that would prohibit plant closings or at least make them prohibitively ex pensive, and would inject grants and subsidies into struggling, heavily unionized industries. Unlike the AFL-CIO of old, which had no intention of running the country, the new AFL-CIO acts as if its very survival depends on political action. This new perspective is mak ing labor unions a part of a larger, liberal-socialist movement for eco nomic, social and political reform. In the footsteps of the European move ment, the fiercely independent unions of old are turning into vocal institutions of ideological indoctri nation and party politics. But no matter what their strategy may be, the only way of obtaining higher wages, shorter hours, and better working conditions for all is, and al ways has been, to raise labor productivity. @ New!

GOVERNMENT AND LEGAL PLUNDER SastiatStoughtUp to Date Dean Russell Frederic Bastiat saw a century and a half ago that the law becomes legal plunder when it goes beyond simple defense of individual rights. In Governmentand LegalPlunder,Dean Russell uses Bastiat prin ciples as a starting point for his book, and provides contemporary ex amples of issues that we personally face every day. He shows that we must limit government's role in society and in the economy, to en courage individual initiative and human freedom. 120 pages $4.95 paperback (Postage paid on prepaid orders; otherwise $2.00 per order for billing.) Order from: The Foundation for Economic Education, Inc. Irvington-on-Hudson, NY 10533 A REVIEWER'SNOTEBOOK JOHN CHAMBERLAIN Disabling America IF you ask him, Richard E. Morgan, the author of Disabling America: The "Rights Industry" in Our Time (New York: Basic Books, 245 pp., $16.95), would surely deny that he is a hardline authoritarian. A profes sor of constitutional law at Bowdoin, he believes in what our forefathers called the "Rights of Englishmen."

This presupposes a traditionally lib eral, if not a libertarian, spirit, and in all candor Mr. Morgan, on the last page of his book, warns his readers that a "society without a rights in dustry is just as uncomfortable to contemplate as a society without policemen." It's all a question of balance, how ever, and Richard Morgan, no ideo logue, has felt constrained to come down on the side of common sense. He takes it seriously that we live un574 der a Constitution whose words, if accepted in an ordinary dictionary sense, guarantee both the rights of individuals and of the society as a whole. In short, Richard Morgan is no extremist. But there are thou sands in his own legal profession who are making a good thing of what he calls the "rights industry." The "new class" of interest group publicists and advocates, activist lawyers and New Day liberal law teachers has, as he puts it, "run amok."

Going amok happens to be good for the incomes of activist lawyers, but Richard Morgan does not questioll the sincerity of the rights industry. In his kindly opinion the activists DC longer see the forest for the trees They can't read the First Amend ment correctly. And they twist thE civil rights legislation, and such Su DISABLING AMERICA 575 pre me Court rulings as Brown vs. Board of Education, into some very strange shapes. Morgan sums up the disruptive aims of the rights activists under five headings. Number one, they are doing their best to isolate the churches. Two, they are disabling the public schools. Three, they are en feebling law enforcement all across the board. Four, they make it im possible to maintain old-fashioned order in areas that were formerly protected by such traditional groups as the family and the private asso ciation. And five, they insist on pre empting private choice.

Common Sense Rights What all this means is that people who consider themselves good lib ertarians are actually bent on de priving a big majority of citizens of their common sense rights. People who are religious find themselves at a disadvantage against those with no religion at all. The so-called sec ular humanists get free transporta tion to school and free laboratory equipment (for payment of taxes, of course). But if the Catholics or Meth odists ask for their share of educa tional tax money for bus service or such laboratory equipment as Bun sen burners, which have nothing to do with the possible establishment of religion, they get a rude turn down. Richard Morgan considers such discrimination to be an actual in fringement of the First Amendment, which says nothing about depriving any group of state aid to education. The only thing prohibitive in the re ligious section of the First Amend ment is the statement that the gov ernment shall not establish a na tional church. Paying for Bunsen burners mayor may not be a good use of tax money for anybody (true libertarians would be against it as part of their animus against public schools), but it surely can't be equated with the establishment of a national religion.

The Supreme Court majority, in Brown us. Board of Education, sim ply decreed that de jure segregation in the public schools was an in fringement of equal rights. The only thing required by the Supreme Court decision was that anybody, no mat ter what his or her color, could prop erly demand sitting room in what ever public schools the neighborhood provided. But the rights industry ac tivists twisted the Supreme Court's words around to support the "affir mative action" of busing to achieve quota representations of blacks in all schools, regardless of the neighbor hood distribution of population. Activist judges all across the land prescribed forced busing. The dis traction of long-distance rides re sulted in worse, not better, educa tion for both blacks and whites. Meanwhile, the rights industry ac576 THE FREEMAN tivists were busy taking disciplinary authority away from teachers gen erally. The busing troubles were piled on top of "blackboard jungle"

conditions that made teaching a haz ardous profession anyway. In the matter of law enforcement, the Miranda case did for the cops what the no-summary-punishment rule had done for the teachers. Vol untary confessions of criminal activ ity were ruled inadmissible as evi dence in court if they were made without due warning by the police that the Fifth Amendment guaran teed a right to silence. Richard Mor gan is no supporter of third-degree torture to extract confessions, but he considers it a stupid departure from ancient wisdom if believable confes sions made in a voluntary manner without the Fifth Amendment warn ings or presence of a lawyer can't be read to juries. Morgan finds that traditional or der in society can't be maintained when judges make their personal predilections the foundation of their decisions. He quotes Judge Robert Bork, formerly of the Yale Law School, approvingly. With law school teachers advocating what amounts to avoidance of the Constitution as traditionally interpreted, there will * * occur, so Bork says, "the gentrifica tion of the Constitution .... Non interpretation leads a judge to find constitutional values within himself ... the values which might loosely be described as characteristic of the university-educated upper middle class will be those that are imposed."

The rights industry intellectuals frequently quote James Madison and Thomas Jefferson to sustain their at titudes. But Richard Morgan cau tions the overzealous "new class" radicals to study the behavior of both Madison and Jefferson when they were in the White House. Jefferson, as President, signed into law acts of Congress "providing federal land grants to a religious body for 'prop agating the Gospel among the heathen' (native Americans)." He also approved the use of federal money to support a Catholic priest in his priestly duties among the In dians. Madison, as President, issued four Thanksgiving proclamations. As a member of Congress he had sat in a committee that recommended the chaplain system. Regardless oj their personal prejudices, neitheI Madison nor Jefferson demanded to· tal separation of government and religion. (I * the Freeman VOL. 35, NO. 10 • OCTOBER 1985 Something BetterA Page on Freedom, No. 24 Brian Summers 579 Individual free choice is the essence of the market.

Liberty and the Entrepreneur Each is vital to the other. Perry Gresham 580 Free Enterprise: The Key to Prosperity Clarence B. Carson 584 Enterprise in behalf of freedom and free men. Human Nature and Human Action E. Barry Asmus Donald B. Billings 600 Alternatives to government management of our lives. Routing the Fabians Signs of a return toward laissez-faire. Kenneth McDonald 603 African Famine: The Harvest of Socialist Agriculture David Osterfeld 607 Socialist policies have led to the tragedy of famine. Railroad Deregulation Henry W. Vanderleest Karoline Bota 610 A case study of marketing in a deregulated environment. Catch the Little Foxes! John K. Williams 618 Beware the minor flaws within us that curb our freedom. Philanthropy and Freedom Dennis L. Peterson 627 The market process encourages cooperation and service. Book Reviews: 634 "The Essence of Hayek" edited by Chiaki Nishiyama and Kurt R.

Leube II Marxism" by Thomas Sowell "The Essential Royster: A Vermont Royster Reader" selected by Ed mund Fuller Anyone wishing to communicate with authors may send first-class mail in care of THE FREEMAN for forwarding.

tffi\ the ®Freeman AMONTHLYJOURNAL OF IDEAS ON LIBERTY FOUNDATION FOR ECONOMIC EDUCATION Irvington-on-Hudson, N.Y. 10533 Tel: (914) 591-7230 President: Managing Editor: Production Editors: Contributing Editors: Robert D. love Paul L. Poirot Beth A. Hoffman Amy S. Vanlaar Robert G. Anderson Howard Baetjer Jr. Bettina Bien Greaves Charles H. Hamilton Edmund A. Opitz (Book Reviews) Brian Summers Joan Kennedy Taylor THE FREEMAN is published monthly by the Foundation for Economic Education, Inc., a nonpolitical, nonprofit, educational champion of private property, the free market, the profit and loss system, 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. Donations are invited in any amount. THE FREEMAN 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 $10.00 a year.

Copyright, 1985. The Foundation for Economic Education, Inc. Printed in U.S.A. Additional copies, postpaid: single copy $1.00; 10 or more, 50 cents each. THE FREEMAN is available on microfilm from University Microfilms International, 300 North Zeeb Road, Ann Arbor, Mich. 48106. Reprints are available of "A Page on Freedom," small quantities, no charge; 100 or more, 5 cents each. Permission is granted to reprint any article in this issue, with appropriate credit, except "Free Enterprise: The Key to Prosperity" and "Human Nature and Human Action."

A Page on Freedom Number 24 SomethingBetter "Do you want to go downtown tonight to see a movie?" "No thanks. There's a better movie I want to watch on TV." My friend made a choice. After weighing the pluses and minuses, he chose movie A over movie B. He went to see the movie he preferred. This is the essence of the market economy. In a free market, entrepreneurs offer goods, services and jobs. We, in turn, choose what we consider to be the best offer. In the eyes of others, of course, we may be wrong. But it is our decision, and we bear the consequences. When given a choice, people always select what they prefer. This is a truism. They go with the best anyone has to offer. That is, until something better comes along. Something better came along for many immigrants when they entered the United States. Here were jobs, land, goods and services. Here was freedom. In America, workers were free to compete for jobs, and employers were free to compete for workers' services. Merchants were free to offer their wares, and consumers were free to take their pick. People were free to seek some thing better.

Entrepreneurs the world over continue to offer consumers more and better products. Consumers, when they are free to choose, select those products which best suit their needs. Workers continue to move to freer economies, in search of better jobs and a better life. In the last two years alone, the U. S. economy has created 7 million new jobs, while absorbing a steady stream of immigrants. This, then, is the choice we face. Do we continue to let entrepreneurs here and abroad offer us goods and services, so that we may freely decide which products best suit our needs? Do we continue to serve as a haven for people seeking a better life? Or do we close our society, shackle our economy, and use the force of government to prevent people around the world from seeking something better? (fl -Brian Summers THE FOUNDATION FOR ECONOMIC EDUCATION, INC. IRVINGTON-ON-HUDSON, NEW YORK 10533 579 Perry Gresham Libertyand the Entrepreneur WHEN FIRMS are failing and people are out of work, there is clamor for government action to reduce foreign competition and to subsidize falter ing industries. An unfortunate in clination to run to government ob scures the real hope for solution to these problems. What is really needed is enough liberty for entre preneurs to do their work.

Francis Amasa Walker, Economics Professor at Yale and later President of M.I. T., met the "iron law" theo ries of Malthus, Ricardo and Mill head on. He demonstrated with stunning clarity that new opportu nities do not derive from dipping into some imagined "wage fund" or from exploiting the workers. Walker iden tified the entrepreneur as the sig nificant factor in economic develop ment-especially in times such as his or ours. Dr. Gresham is President Emeritus and Distinguished Professor, Bethany College, Bethany, West Virginia. 580 David Birch and his M.1.T. col leagues startled America by their study of nearly six million firms re ported in Dun and Bradstreet. They concluded that small companies, each with fewer than one hundred employees, created eighty-two per cent of the new jobs in the United States economy during the period 1969-76. These small companies are the realized insights, dreams and formulated plans of action on the part of entrepreneurs.

The Complex Motives of the Entrepreneur The entrepreneur in America can be truly classified a rare bird. He dif fers from the conventionally defined businessman in many ways. The en trepreneur's motives are not merely to avoid loss, turn a modest profit if possible, defend the organization, maintain a position, and win ap proval for exemplary conduct. The LIBERTY AND THE ENTREPRENEUR 581 entrepreneur is possessed above all with drive, insight and ingenuity. Adam Smith assumed the eco nomic motive to be "a drive to better one's own condition." Ludwig von Mises refined this viewpoint as "an attempt to substitute a more satis factory state of affairs for a less sat isfactory one." The entrepreneur, however, has more complex motives. The will to power is a basic factor in human psychology, and many eco nomic motives derive from this will the entrepreneurial drive included. Possessions often bring power and position. George Gilder, however, re minds us that individual economic motives need not be altogether self ish. Henry Ford not only sought profit, but hoped to provide trans portation at low cost for the people of America. John and George Hart ford, who created the Great A&P Tea Company, sought to better their con dition, but also to supply the Amer ican people with better food for less money. The old service club slogan, "He profits most who serves the best," is true.

Emulation, nevertheless, is a prime factor for each entrepreneu rial venture. When other people are making substantial profits, the en trepreneur wishes to do the same thing. Risk Factors The speculative aspect of entrepre neurship has been emphasized by Ludwig von Mises in his great book, Human Action. Israel Kirzner, in his timely book Competition and Entre preneurship, acknowledges the spec ulative character of business inno vation, but points out that the wise entrepreneur is alert to the fact that "opportunity for profit does exist." He goes on to say, "All human action is speculative; my emphasis on the element of alertness and action has been intended to point out that, far from being numbed by the inescap able uncertainty of our world, men act upon their judgments of what op portunities have been left unex ploited by others." One of the neglected philosophical aspects of economics has been the ac knowledgment and understanding of the principle which the philosopher, Charles Sanders Peirce, called Tych ism. The very smallest particles of the universe exhibit a random per formance which can be actuarily de scribed for purposes of rough predic tion, but cannot be assumed to exhibit the kind of absolute causa tion that made many of the laws of science and, to a lesser extent, the social sciences seem capable of flaw less prediction. The economic deter minism of Karl Marx must go the way of all absolute determinism. The word "Tychism" derives from Tyche, the goddess of chance. The Latin name for this fair mythological maiden is "Fortuna." She is, indeed, the goddess of the entrepreneur.

582 THE FREEMAN October Some people have native capacity to take risks. As Gilder points out in his The Spirit of Enterprise, "whether sorting potatoes or writing software, they are movers and shak ers, doers and givers, brimming with visions of creation and opportunity. They are optimists who see in every patch of sand a potential garden, in every man a potential worker, in ev~ry problem a possible profit." These are people who take the pIunge to create new enterprises, build new businesses, revitalize old ones. They struggle, flounder, work day and night, sometimes succeed and often fail; but they are resilient and they keep coming on. The Compleat Entrepreneur I shall not attempt to describe the compleat entrepreneur as Izaak Walton made glamorous "the com pleat angler." I shall, however, out line a few characteristics of the nu merous entrepreneurs who are building America out of the ruin of some of our traditional beleaguered and subsidized industries.

Kirzner correctly identifies alert ness to new opportunity as the prin cipal factor in entrepreneurship. The person who fails to see an opportu nity is disqualified. A wise old Af rican observed, "Anybody can see a seed in an apple; the wise person can see an apple in a seed." Only optimists transform the econ 0my. The optimism must be disciplined, and cannot give way to gloom. The turn of mind which set tles for Murphy's Law is doomed. To build upon my earlier figure of speech, the pessimist is a person who can see a bellyache in an apple blossom! Boundless energy is a great aid to an entepreneur. Very few people suc ceed in life without sizable reser voirs of energy. The pioneer who starts a new business may very well wind up working at it all hours of the night. Entrepreneurs make money the old-fashioned way: "they earn it!" Lack of fiscal discipline encour aged by government and somewhat by huge corporations is the enemy of business innovation and successful development. The young Turks who have learned their habits from bu reaucracies, whether public or pri vate, may argue the maxim, "You've got to spend money to make money."

My experience is that most who urge this action are more adept at the spending than the making. The en trepreneur who starts in his base ment then mortgages his house and works on a shoestring is much more likely to succeed than is the person who takes out a huge loan and at tempts to live up to his presumed status as a businessman. The entrepreneur, moreover, must be able to face failure and be re sourceful enough to learn from it. Some of the most successful compa nies in America are the result of 1985 LIBERTY AND THE ENTREPRENEUR 583 early entrepreneurial failures. The imaginative and creative business person learns by failure, as well as by success. A talented entrepreneur must have a better-than-average sense of timing. When Shakespeare wrote "There is a tide in the affairs of men, which taken at its crest, leads on to fortune," he provided the maxim for the modern American entrepreneur.

My friend Richard Cramer exempli fies the possible accomplishment of a genius entrepreneur who acts at the right time and in the right place. I quote a paragraph from his letter: I left IVAC Corporation in May 1972 and founded IMED Corporation in September of 1972. I brought with me from IVAC, etc. engineers and marketing people who had been with me all the way back to my start in 1962. IMED proceeded to con tinue to develop products in the IV con trol area and developed the first truly volumetric IV pump, which allowed, in turn, the development and use of a wide range of IV solutions, and the expanded use of IV therapy in patient care. IMED grew very rapidly and very profitably by concentrating on these nurse related in struments, that positively affected the stabilization and recovery of patients. In 1982, I sold IMED to Warner Lambert company for $465 million cash. This, in cidentally, was the largest sale of a pri vate industrial corporation in United States history.

The cybernetic revolution is of con siderable benefit to the aspiring en trepreneur. The ease with which relatively inexpensive computers can aid in the prediction of outcomes is of great importance to the daring in novator. Ford and Carnegie had to do it the hard way. The Social Economic Climate Our present business climate has negative aspects for entrepreneur ing. The inevitable competition may be fierce; business and union monop olies have erected formidable bar riers to progress, but the brave and the daring succeed! The greatest enemy of the entre preneur is government intervention. The do-good motives which prompt politicians to pass laws and erect bureaucracies not only restrain the pioneer, but mobilize formidable ob stacles in the form of unnecessary regulation and discriminatory tax ation. The daring, innovating entre preneur is well-equipped for the struggle, but the government holds a frightening advantage: it has a monopoly on violent force!

Noone, however, can thwart the insight, initiative, imagination, drive and determination of a true en trepreneur. While economists are de scribing the impossibility of the project, and the government is reg ulating against the success of the en terprise, and the unions and associ ations are mobilized to thwart progress, the truly intrepid are win ning fortunes and providing employ ment for unnumbered multitudes. @J Clarence B. Carson FREE ENTERPRISE: The Key to Prosperity FREE ENTERPRISE is widely ac claimed in the United States. Poli ticians, generally, declare in favor of it; editorialists frequently laud it; Chambers of Commerce have writ ing contests about it; even automo bile stickers praise its virtues. Yet much of our enterprise is restrained, restricted, hampered, regulated, controlled, or prohibited. As an old saw has it, "What you do speaks so loud I can't hear what you are say ing." By our practice, we say that we believe in free enterprise-except . ..

Except for public utilities. Except for the railroads. Except for mail deliv ery. Except for medical services. ExDr. Carson is an experienced observer and analyst of political and economic affairs. He is a specialist in American history with his Ph.D. degree from Van derbilt University. He is the author of several books, and is currently at work on a five-volume text, A Basic History of the United States. 584 cept for housing, financing, and real estate transactions. Except for large corporations. Except for education. Except for interest rates. Except for farmers. Except for small business. Except for industrial workers. In short, a case could be made that Americans believe in free enterprise except in whatever activities they happen to be considering. It may be helpful, then, to consider free enterprise in terms of itself, mi nus all the partisan exceptions. The approach here will be to pose five questions: What is free enterprise?

What are the objections to free en terprise? How may the objections be answered? What are the practical advantages offree enterprise? Is free enterprise necessary to freedom? The answers to these should provide some perspective on free enterprise.

FREE ENTERPRISE: THE KEY TO PROSPERITY 585 What is Free Enterprise? Free enterprise is a way of going about meeting our needs and wants by providing for ourselves or by freely entering into transactions with others. The opposite of free enter prise is hampered, restricted, con trolled, or prohibited enterprise. The enterprise itself must be conducted in an orderly fashion within the framework of rules, but if the rules inhibit entry or hamper activity they become restrictions on enterprise. It is clear enough, for example, that traffic at an intersection must be regulated in its flow hut that rea sonable rules promote rather than inhibit the effective use of the street. On the other hand, if a city made a rule that taxicabs were to be limited to those presently in operation it would be equally clear that enter prise was being hampered. In a sim ilar fashion, if a city adopted a rule forbidding any taxi to use the streets within its boundaries, that type of enterprise would be prohibited.

Thus, government may be an ad junct or an obstacle to enterprise. Free enterprise does not exist in a vacuum; it must be institutionally supported and protected. One of these institutions is government. Government is necessary to prohibit and punish the private violation of the rights of those who peacefully use their energies and resources in a productive way. Government is necessary also to punish fraud and deception, to settle disputes which may arise, and to regulate the use of public facilities such as highways. Another basic institution for free en terprise is private property. For en terprise to be free, those who engage in it must be free; that entails hav ing property in themselves and what they produce. Enterprisers must have title to their goods in order either to consume them or trade with others. Real property in land and buildings is essential to have a place to produce and to market goods and services. Private property not only supplies opportunities for the indi vidual to provide for himself but it also places inherent limits on his ac tivity. He can only rightfully sell and convey to another what is his in the first place. Private property also sets bounds to enterprise by restricting the owner to the use of what is his own or to that which the rightful owner authorizes others to use.

A third ingredient of free enter prise is free access to the market. A market is any arena within which buyers and sellers meet to effect their transactions. Under free enter prise neither buyer nor seller is pre vented from making transactions by government decree or private threats or use of force. The motor of free enterprise, in deed, of all enterprise, is individual initiative. Individuals provide the energy for the making of goods and providing of services. They conceive, 586 THE FREEMAN October invent, design, engineer, produce, and market goods through their en deavor. The great spur to produce is the increase of one's goods or the profit he may make by selling them. Here again, the importance of pri vate property and free access to the market may be seen. If men cannot keep as property what they produce, if they cannot market it, their in centive to produce is lessened or removed.

The great regulator of free enter prise is competition. Competition among sellers keeps prices down and tends to assure that the customer will be served. Competition among buyers provides a market in which those goods that are wanted can be sold at a profit. Prices are the result of this competition. Although any owner may offer his wares at a price acceptable to him, he can only sell when he has found a buyer willing to pay his price. What Are the Objections to Free Enterprise? There is no doing without human enterprise, for without it we would all be impoverished and our survival in doubt. The main question we have in regard to it is whether it shall be free or hampered. Reformist and revol utionary intellectuals have launched a massive assault over the past century against the market, private property, the profit motive, and other facets of free enterprise. The thrust of their efforts has been to discover fatal flaws in the system, which they usually describe as cap italist, and to propose that govern ment either supervise or take over the operation of the economy. They can be classified in one of two broad categories: meliorism or socialism.

Meliorism is the view that what is wrong with free enterprise can be corrected by government interven tion. It holds that government can control, restrict, limit, regulate, tax, and redistribute so as to better the lot of the people and avoid the worst difficulties which they believe are inherent in free enterprise. Melior ists are hardly enthusiastic about private property and individual en terprise, but they do not usually at tack them head on. Socialists do directly attack prop erty, private enterprise, the profit system, and what they call capital ism. They propose to abolish them with governmental (or collective or public) ownership of the means of production of goods. Socialism di vides roughly into two camps: dem ocratic socialism and communism. Democratic socialists are distin guished by a gradual approach to so cialism because they are tied to pop ular elections and must move as the electorate will. Communists are rev olutionaries who move toward so cialism swiftly and by drastic mea sures once they come to power. They are characterized by one-party rule, 1985 FREE ENTERPRISE: THE KEY TO PROSPERITY 587 and by totalitarian control over the lives of the people.

While socialists and meliorists have a barrage of objections to free enterprise, the following points are central to their argument. One of their arguments which has broad appeal is that free enterprise produces cutthroat competition, often described as dog eat dog, or rugged individualism. The charge is that some people compete so vigorously that they drive competitors out of business or buy them out. While this is made to sound as if it were a spe cial variety of competition, it is really a plea for government inter vention to limit and restrain competition. Competition as War A related objection to free enter prise is that competition amounts to industrial warfare, that it pits men against one another in the quest for material possessions. Those who ad vance this notion say that free en terprise depends upon and calls forth the baser human motives, that it is materialistic, that it makes selfish ness into a virtue, and that it fosters competition rather than leading men to cooperate with one another. This conception of competition war has served over the years as the major propellant of government interven tion by way of antitrust legislation, fair trade laws, and other regulatory measures.

An -objection heard frequently is that the consumer is taken advan tage of and deceived by advertising and a great variety of marginally different products and services. Ac cording to John Kenneth Galbraith in The Affluent Society, all kinds of frills are produced which people do not really need but are induced to buy by advertising. Ralph Nader has made a career out of protecting cus tomers from themselves. The thrust of the consumer protection move ment has been to try to replace the ancient rule of letting the buyer be ware with government prescriptions about how goods may be sold. Although those who raise objec tions to free enterprise are often am biguous about the merits of free en terprise, one of their objections is that under this system there is im perfect competition. This is the charge that businesses do not com pete with one another with suffi cient vigor. Instead, they say, com panies engaged in the same business conspire with one another to raise prices. Or, as a result of competition, one company drives all others out and proceeds to charge what the traffic will bear.

In the middle of the nineteenth century Karl Marx claimed that in industrial capitalist countries there was a trend toward monopoly where a single company would dominate a whole industry. Indeed, he held that large companies would grow larger 588 THE FREEMAN October until they had a whole industry un der their sway. This argument crops up again and again in many differ ent guises. The term "oligopoly" was devised to describe the situation when several giants control an in dustry. The thrust of these argu ments in the United States has been to press for breaking up large con centrations of industry. Some objectors to free enterprise hold that one of its least desirable traits is that it results in unequal distribution of goods and services. The most commonly repeated phrase is that the rich get richer and the poor get poorer. Many lack the ..bare necessities, while others have more than anyone could consume or use.

Those who make these charges against free enterprise may not be lieve that goods should be exactly equally distributed, but they do ar gue that everyone should have enough, at the least, to meet their basic needs. Probably, the most devastating charge against the free enterprise system is that it is responsible for the business cycle. Business activity does apparently go in cycles, with periods of prosperity alternating with reces sions and depressions. The most common claim of reformists is that businessmen claim too large a share of the proceeds from their products, that there is a resulting decline in consumer demand, leading to reces sion or depression. The way to prevent this, they say, is for govern ment to soak up the excess in taxes and distribute the wealth more or less directly to those who will spend it for consumer goods. How May Objections to Free Enterprise be Answered?

Many of the objections to free en terprise arise either from misinfor mation about economics or the hope that somehow the requirements of economy can be evaded-itself a mis conception regarding economics. One of the best ways to answer them, then, is to call up some of the basic principles of economics. Economics has to do with scarcity. The character of economics is indi cated by the conventional uses of words related to it. For example, one dictionary defines "economical" as "avoiding waste or extrava gance; thrifty." It "implies prudent planning in the disposition of re sources so as to avoid unnecessary waste .... " "Economy" refers to "thrifty management; frugality in the expenditure or consumption of money, materials, etc." Economics can be defined as the study of the most effective means for persons to maintain and increase the supply of goods and services at their disposal.

Goods and services are understood to be scarce, and economics has to do with the frugal management of time, energy, resources, and materials so as to bring about the greatest in1985 FREE ENTERPRISE: THE KEY TO PROSPERITY 589 crease in the supply of goods and ser vices most desired. There is every reason to believe that man is naturally inclined to use as little energy and materials to pro duce as many goods as he can from them. In short, he is predisposed to be economical. If this were not the case, it is easy to believe that he would long since have perished from the face of the earth. But this eco nomic penchant gives rise to a prob lem rather than resolving all prob lems. There are two ways for an individual to augment the supply of goods and services at his disposal. (1) He can provide them for himself. (2) He can acquire them from others. Again, there are two ways for an in dividual to acquire them from oth ers. (1) He can acquire them by ex change (in which we may well include free gifts). Or (2) he can take them from someone who possesses them.

It is this latter option that raises hob in determining what is eco nomic. Strictly speaking, robbery could be quite economical for an in dividual. By stealing, an individual can greatly increase the supply of goods and services available to him with only a very little expenditure of energy and materials. A bank rob ber may, for example, spend half an hour using a twenty-dollar gun and enrich himself, say, to the extent of $20,000. That might indeed be economical for an individual, but it is not so for society at large. Economics has to do with the increase of the supply of goods in general, not just the indi vidual's gain. The bank robber aug ments his personal supply at the ex pense of those from whom he has stolen. Moreover, he may reduce the general supply further by the threat he poses to trade and the loss of in centive men have to produce when they are uncertain that they will be able to keep the rewards of their ef forts. For these reasons, theft should not be considered economical.

Even so, the example of the bank robber is not frivolous. All redistri bution schemes are proposals to use force to take from those who have and give to those who have not. If governments do such things, it is still theft, albeit legal theft. And its effect on the general supply would reasonably be the same as any other kind of theft. The Problem of Scarcity The economic question, then, is under what system is the supply of goods most apt to be replenished and increased? Is it one in which there is free access to the market, in which men receive the fruits of their labor for their own use or disposal, in which individual initiative is fully brought into play, and in which sell ers and buyers are in competition? Or is it one in which access is con trolled, in which property is con590 THE FREEMAN October trolled by government or held in common, in which individual initi ative is discouraged, and in which competition is restrained? If we un derstand that the basic problem is scarcity, these are the questions about enterprise that need to be an swered. The problem is really one of production, and with that in mind the objections to free enterprise dis cussed earlier can now be answered.

The attack on competition, be cause of the rigors involved in it and because there are losers, is really an attack on effective production. Such attacks gain widespread support quite often because of the desire to avoid the requirements of competi tion. Anyone can see the advantage of competition when it is among oth ers. After all, competition brings down prices, increases the variety and quality of goods, and increases demand as well as supply. But com petition is not nearly so attractive when we have to engage in it, es pecially once we have made our mark in production. It is not only necessary to get there by competi tion but also to stay there by chang ing and improving products, offering superior service, and the like. The argument against cutthroat compe tition is really not an argument against free enterprise but an ar gument against having to compete by those who have jobs, have arrived at a position, and want to retain it without further competition. When government restricts entry to any field, it is the "have-nots" who are most apt to be kept out. The main opportunity for men to improve their condition is by way of free access to the market. Free enterprise offers ready entry to all comers and pro vides what assurance there can be for continued replenishing of goods.

Cooperation and Competition Competition is not a kind of war fare. To the extent that it pits men against one another it does so by stimulating them to excel. When each man is doing his best all may benefit: those who participate by producing and excelling, the rest of society by what is produced. There are no necessary victims in compe tition. Of course, not everyone can excel or even compete at the same level. But any man is a winner who discovers that way and level at which he can effectively produce and serve. Most people cannot run the four-minute mile. That does not mean that we put weights on the faster racers in order to enable the slower runners to keep up. People do well to compete at their own levels of ability. Competition does not prevent or even downgrade cooperation, either. Under free enterprise people must and do cooperate in many ways to provide us with the amenities of life.

Industrial production today requires cooperation of a very high degree.

1985 FREE ENTERPRISE: THE KEY TO PROSPERITY 591 The assembly line is the epitome of organized cooperation. The making and selling of automobiles, for ex ample, requires the cooperation of all sorts of entrepreneurs, financiers, service providers, manufacturers, assembly line workers, transporta tion workers, designers, engineers, and mechanics. On a less grandiose scale, we usu ally take for granted that anyone of a hundred items will be available when we want it. I may decide, for example, that I need a new box of pencils. I go to the nearest store which carries sundries and discover that the store not only has pencils but a considerable variety of them as well. How did this happen? Did the store know that I was about out of pencils and that they should stock some in case I should come by? Not at all, yet a lot of foresight had gone into providing them for my conven ience. Not only had companies brought together in factories those who could make pencils but also the need had been predicted, the capital set aside for producing them, sup plies ordered, raw material pre pared, and the pencils produced and placed by wholesalers with my local store. True, businesses in direct com petition with one another may not do a great deal of cooperating with one another, but that may be largely be cause of the antitrust laws.

The extensive nature of competi tion is not generally well understood, and certainly not by most who write about imperfect competition. Most critics talk of competition as if it involved only direct competition among the suppliers of a particular kind of product. That kind of com petition is only the tip of the iceberg of competition. For example, if Gen eral Motors were the only maker of automobiles in the United States, there would still be competition. The Chevrolet division would still be competing with Pontiac, Pontiac with Buick, Buick with Oldsmobile, these with Cadillac, and all of them with foreign imports. Varieties of Competition But competition is much broader and more varied than the above ex ample would suggest. New cars are in competition with used ones. Au tomobiles, as a means of transpor tation, are in competition with busses, airlines, trains, motorcycles, trucks, bicycles, horses, and walk ing. Further, human wants are ex tensive, and the means for satisfying them are numerous and diverse. In stead of buying a car, or a second one, a given consumer may choose to add a room on his house, buy a boat, equip his family room with an amusement center, put his money in savings, or what not-all because he judged the car he might have bought too expensive. That kind of choice crops up in whatever direction we look.

592 THE FREEMAN October The number of foods which will sustain life, either singly or in com bination with others, could hardly be counted. There are many fibers, nat ural and artificial, from which to make clothes, all sorts of building materials, a considerable number of fuels, to give a few examples. If the price of anyone of these is raised sig nificantly, or the quality declines, al ternative means are likely to be found to gratify the want. If oranges become more expensive, apples may be substituted. Competition may not be as broad as the range of commod ities on the market, but we come nearer to the truth when we view it that way than when we attempt to confine it to the makers of a single commodity. Access to the Market Imperfect competition, rightly understood, is a condition which ex ists when access to the market is hampered by legal restrictions or the use or threat of force. Otherwise, the extent of competition may be pre sumed to be adequate in the market, else new companies could be ex pected to enter the field. Whether competition is adequate or not can not be determined by counting the number of companies engaged in making a commodity, by comparing the shares of the market which com panies have, by calculating their costs and comparing them with re tail prices, or any other such empirical device. The effectiveness of com petition can only be measured to the extent that consumer satisfaction with the goods offered him in the market can be measured. When there is free access to the market, anyone who believes that there is some unmet want is free to enter the market and supply it. It happens all the time.

The critics are right when they say that under free enterprise goods are not equally distributed among the populace. Where there is private property, not everyone has the same amount of property. If such equality could exist, it would depend upon distributing everything equally and then stopping all transactions or change at that point. It would have to mean, also, the stopping of all births and deaths, for as soon as an imbalance between births and deaths occurred, a new inequality would either exist or an entire re distribution have to take place. But before such a new distribution could be completed the situation would no doubt have changed again and the effort to establish equality have failed. This is by way of saying that equality in the distribution of goods cannot be. In no extensive society has there ever been equality of pos sessions; everywhere and always there has been disparity. The pres ent writer does not know of a single family, which is surely the smallest 1985 FREE ENTERPRISE: THE KEY TO PROSPERITY 593 social unit, in which each has ex actly the same amount of posses sions as every other, nor can he read ily visualize how it could happen.

Give two small children each a toy. One will have his torn up within the hour, while the other may keep his in good repair for months or years. It is so for adults as well; some man age well, work hard, take care of what they have received, others hardly at all. The basic question for an economy and society is not one of the disparity of wealth but of the jus tice of the arrangement under which it is acquired and maintained. Market Success What is a just distribution of goods and services? Given the differences in talent, tenacity, prudence, and willingness to work, it is surely not justice to distribute goods on the ba·· sis of equality, or even need. Under the free enterprise system men are understood to have got what they de served when they get as property what they have produced and get in exchange for it what the highest bid der in the market is willing to pay. Does that mean that the case of the have-nots is hopeless under free en terprise ? Not at all, for free enter prise offers them the best opportu nity there is for improving their condition. When there are no obsta cles in the way of entering any en deavor, men can and do change from have-nots to haves. There are many historical examples of men who have started with nothing and even at tained great wealth. There are many more examples of those who have started with little and attained a competence.

There is much evidence to show that it is government activity, not free enterprise, which is responsible for the so-called business cycle. The cyclical change from prosperity to depression-recession to prosperity can be precisely corollated with in creases and decreases in the supply of money. Dramatic increases in the money supply result in expansive business activity and tend to create a boom atmosphere. When the sup ply of money is decreased or stabi lized, activity slows, and recessions follow. If there is a severe deflation, such as the one that followed the stock market crash in 1929, a deep depression can be the result. In pre cise terms, the cycles result from credit expansions and contractions. The villain of the piece is govern ment manipulation of the money supply by way of the Federal Re serve system. The cure lies not in government intervention to hamper enterprise, but in a sound money that cannot be manipulated.

What Are the Practical Advantages of Free Enterprise? It is not necessary to rely on theory alone to determine the superiority of free enterprise over other methods 594 THE FREEMAN October in providing for people's needs. There is historical evidence that when enterprise is freed from the re strictive hand of government and when property is rigorously pro tected, production increases along with general economic well-being. It needs to be understood, however, that much of economic history is a record of government interventions and restraints and that there are al ways some. Consequently, restric tion is usually a matter of degree, not of absolutes. Nonetheless, there have been periods in the life of nations when enterprise has been freed from many of the restraints, and these provide favorable evidence for free enterprise. England in the 19th century is a striking example of what can hap pen when enterprise is freed. In the early 1700s there were still numer ous restrictions and special pri vi leges hampering enterprise in that land. Beginning in 1689, however, the British made almost continuous progress in the direction of freer en terprise. By the 1820s, enterprise was substantially free in Great Brit ain, though the movement for free trade is usually thought of as cul minating with the repeal of the Corn Laws in 1846. It is worth noting, too, that this freeing of enterprise was accompanied by the general estab lishment of widespread liberty, the limiting of the monarch, the tolera tion in religion, and protections of speech and of the press. These things go hand in hand.

The economic results were not long in coming. It has been estimated that England's industrial output in creased tenfold between 1820 and 1913. Coal production was approxi mately 10 million tons in 1800, 44 million tons in 1850, and 154 million tons in 1880. Iron production was about 17,000 tons in 1740. By 1840 it had reached 1,390,000 tons, and a few years later had nearly tripled from that. Population increase did not quite keep up with industrial production, but there was unprece dented population growth as well. By the end of the 19th century, English men were generally better off ma terially than ever before in history. When Enterprise is Freed To show Britain's place of leader ship in the world, however, it is nec essary to compare British economic achievement with that of other lead ing countries. Great Britain's per centage of manufacturing produc tion in the world was 31.8 in 1870.

By comparison, that of the United States was 23.3, that of Germany 13.2, and that of France 10.3 among the leading countries. In 1860, Brit ain had 23 per cent of the world trade, compared with 11 per cent for France and 9 per cent for the United States. In 1880, Britain had more than 6% million tons of shipping, compared to less than 1% million for 1985 FREE ENTERPRISE: THE KEY TO PROSPERITY 595 the United States, the nearest competitor. The 19th century was in many ways a kind of Golden Age. There was a quickening of activity in many nations, and England was surely the center from which so many improve ments radiated outward to the rest of the world. The symbol of En gland's greatness was the Royal Navy, but the wonders were much more the achievements of the mer chant marine. The ships that plied the seas from their home base in the tight little isle carried not only the abounding goods of a productive na tion but also statesmen, ideas, and men confident in the superiority of their institutions eager to teach oth·· ers in the arts of peace. The differ ence between England and many other lands was the stability of her institutions and the freedom of her enterprise.

In many ways, the emergence of the United States in the early 20th century as the leading manufactur ing and agricultural producer was even more reasonable than the 19th century achievement of Britain. Af ter all, Britain had had several cen turies offairly steady advance on the world stage before the 19th century. What became the United States, by contrast, had been a colony until the late 18th century and had only emerged as a nation to be respected by European nations in the course of the 19th century. Yet in less than a century of independence, the United States was thrusting toward lead ership among the producing peoples in the world. The country had been criss-crossed with railroads; the wil derness had been tamed, and the great Mississippi basin had become one of the most productive areas in the world. The political institutions of the United States had been de signed from the outset to restrain and limit government. The energies of men were largely released in peaceful pursuits, and the people achieved wonders of building, inven tion, and development of manufac turing, transportation, and farming.

The Destruction of Enterprise Examples of the repressive effect of government on enterprise are even more plentiful, but it will be possible here to give only one ex ample. Appropriately, the example chosen will be Britain, since the fo cus has been upon that land in the freeing of enterprise. In the early years of the 20th century, the British government began to clamp down on enterprise, in what one historian has called The Strange Death of Liberal England. The impact of this on the British was being felt as a general decline by the 1930s, but the assault on enterprise did not reach its peak until after World War II. In 1945, a Labour Party came to power in England committed to en acting the socialist programs it had 596 THE FREEMAN October long been advancing. The party did so with great haste, and in short or der the Labourites completed the wreck of what remained of a once vigorous and healthy economy. The economy had suffered greatly from the interventions of the interwar years. It was hampered even more drastically by wartime restrictions.

But the measures of the Labour gov ernment came close to banishing pri vate economy from the land. The wreckage was wrought by na tionalization, controls, regulations, high taxes, and compulsory provi sion of services. There was a con certed effort to plan for and control virtually all economic activity in the land. The initiative for action was taken from the people and vested in a bureaucracy. Where industries were taken over, they were placed under the authority of boards which were in no position to act responsibly. Equal Distinction and Having Less English socialists had long been committed to as near equal distri bution of goods and services as they could. Therefore, the Labour govern ment undertook redistribution with a right good will. They levied steeply graduated income taxes, taxed "lux ury" goods at high rates, controlled prices of food, clothing, and shelter, and rationed many items that were in particularly short supply. They provided free medical services, gave pensions, and otherwise aided those with little or no earned in comes. They distributed and they distributed.

The more they distributed, the less they had to distribute. Not only did such shortages as they had known during war continue, but others cropped up as well. One writer says, "By 1948, rations had fallen well be low the wartime average. In one week, the average man's allowance was thirteen ounces of meat, one and a half ounces of cheese, six ounces of butter and margarine, one ounce of cooking fat, eight ounces of sugar, two pints of milk, and one egg." Even bread, which had not been rationed during the war, was rationed begin ning in 1946. The government had first attempted to fool the English people into buying less bread by re ducing the amount in a loaf. When that did not work, they turned to ra tioning. Housing, clothing, food, fuel-everything, it seemed-was in short supply. By the summer of 1947, the British government was making no secret of its problem. The country was inun dated with government posters, pro claiming "We Work or Want," pos ters whose threat was all bark and no bite. The fact is that when pro duction is separated from distribu tion to any considerable extent the incentives to produce are reduced.

When this is accompanied by nu merous restrictions and loss of pri1985 FREE ENTERPRISE: THE KEY TO PROSPERITY 597 vate control over property, as it was in England-restrictions which hamper people in their productive efforts-goods and services will be in ever shorter supply. Since that time, Britain has off and on, but slowly, reduced the extent to which it restricts so as to hamper in dustry. Democratic socialists in many lands have lost some of their enthusiasm for nationalizing prop erty and have favored government control with largely private owner ship, as has been the case in Sweden. The United States in recent years has removed or reduced some of its regulations, though the central fea tures of the Welfare State remain. Communists remain unmoved by all evidence, continue to thrust for gov ernment ownership of all productive property, and cause untold suffering with their drastic measures against private enterprise wherever they come to power. The most recent dra matic instance occurred in Ethiopia, with its hunger and starvation.

But whatever rulers have or have not learned from their determined efforts to establish roadblocks to en terprise, one thing appears univer sally to have alluded them. It is this: They still have not grasped that men must be in control of their own af fairs if their enterprising spirit is to be unleashed in constructive efforts. For this, they must have the full measure of freedom, not that portion which politicians prate about as "human rights," thus ignoring or shunting aside the rights to property. Is Free Enterprise Essential to Freedom? Freedom is a seamless cloth, its parts inseparable from one another. Free enterprise is a part of and nec essary to freedom within a society. It not only provides bread better than any other system but it also but tresses and rounds out the structure of political, social, intellectual, and religious freedom of a people. Freedom is indivisible. Some of those who profess to value freedom but not free enterprise have tried to maintain that this is not the case.

They distinguish between property rights and human rights, .and hold that human rights are superior to property rights. Property rights are, however, human rights, rights of hu mans to the fruits of their labor. Ar guments about which rights are su perior are on the same order of those as to whether the heart is superior to the liver or whether the lungs are superior to the kidneys, for the fact is that human life and activity de pend on all of these. Just so, freedom depends on the right to property just as it does to rights of free speech. The reason for this needs to be ex plored. There is no human activity that does not involve the use of prop erty. We cannot sleep, wake, eat, walk, drive, fly, swim, boat, work, go to church, print a paper, view a 598 THE FREEMAN October movie, make a speech, procreate, or engage in conversation without us ing property in some one or more of its dimensions. If a church cannot be owned by its communicants, their freedom to worship is under the con trol of someone else. If a press cannot be privately owned, freedom of the press is an illusion. If government controls all property, freedom of speech is something belonging to government, not to individuals.

The Breadth of Freedom Free enterprise-which embraces private property-does not mean simply the right to engage in ma terial production and distribution. It means the right to engage in every kind of productive activity: not only the manufacture of widgets but also forming a fraternal organization, starting a charitable organization, publishing a newspaper, organizing a church, and founding a college. Not all undertakings involve profit making, but all do involve the use of property and the making of transactions. The thrust of government inter vention in the economy is toward government control of all life and the destruction of the independence of the citizenry. Not every government intervention will in fact result in the totalizing of intervention, of course. Government may intervene here and not there, may extend its power for a time and withdraw, may even reverse its direction. But the tendency of men in power is to grasp for more.

The tendency of those who gain some control over enterprise is to extend it into more and more areas. Many Western socialists do not ac cept the totalitarian tendency of their doctrines. They cling to the be lief that freedom can be retained in areas that they consider valuable while it is yielded up in the economic realm. They have nowhere, to my knowledge, submitted their theory to the test. Their experiments with socialism have been limited. They have nationalized some industries, expropriated some property, taken over the providing of some services, created bureaucracies to control some undertakings, empowered la bor unions, and drawn up various sorts of restrictions. They have usu ally allowed considerable enterprise within the interstices of their sys tems. Such systems are oppressive, do hamper enterprise, do not func tion very well, but they are not to talitarian-not yet, anyway. They are not fullfledged socialism, either.

The same cannot be said for those countries in which there have been all-out efforts to abolish private property, to control every aspect of the economy, to bring all employ ment under state control, in a word to institute socialism in its most vir ulent form, Communism. In these countries, freedom is crushed. Such a country is ruled by terror, the ter1985 FREE ENTERPRISE: THE KEY TO PROSPERITY 599 ror administered by secret police, by the shot in the back of the neck, by slave labor camps, by the arbitrari ness of all government action, which is the ultimate terror. Terror is as es sential to thoroughgoing socialism as sunlight is to photosynthesis. It is essential because man naturally has to look after himself and seeks means to do so, turns whatever he has into private property, and exerts his imagination and enterprise to provide for himself and his own. Man Student Special forever labors to carve out areas of freedom for himself. By so doing, he subverts socialist control. The only means for holding him back is terror and arbitrary government control.

Those who favor free enterprise are working to maintain or establish hu man freedom. They are on the side of the human spirit wherever efforts are being made to crush it. Those who stand for free enterprise have a noble cause, for it is the cause of free dom and of free men. @ Any student, on any campus, who is seriously interested in ideas of liberty, may receive The Freeman each month of the school year, without charge, provided the student makes the request. You are invited to help us spread this word. * Or, if you wish to have The Freeman sent to one or more students or libraries or fraternity or sorority houses as a gift from you, merely send FEE the names and addresses and $5.00 each for the school year, October through May. We shall faithfully follow your instructions. * NOTE TO TEACHERS:We want to encourage your use of our materials, but please do not ask an entire class of students to submit individualrequests for The Freeman. In such cases, we'd much prefer to send a bulk shipment each month.

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E. Barry Asmus Donald B. Billings Human Nature and Human Action "Why should it be," asked Walter Lippmann, a famous observer of the American scene, "that in a time when men are making the prodi gious claim that they can plan and direct society, they are so profoundly impressed with the unmanageabil ity of human affairs?" Especially in the twentieth century, we have seen more elaborate attempts through government to manage and control the private actions of individuals, yet, as Lippmann observed, " ... this more elaborate organization can be operated only if there is more intel ligence, more insight, more disci pline, more disinterestedness, than exists in any ordinary company of Dr. Barry Asmus is an economist and national speaker living in Phoenix, Arizona. Dr. Don Billings is Pro fessor of Economics at Boise State University. This article is taken from their book, Crossroads: The Great American Experiment, published in 1984 by University Press of America. Reprinted by per mission of the pUblisher.

600 men. Unfortunately this is the sick ness of an overgoverned society, and at this point the people must seek re lief through greater freedom if they are not to suffer greater disasters." Even the casual observer senses that government actions to solve prob lems are not working, and that as government attempts to do more, the less successful it becomes. Human Action Much of the reason for this can be understood by looking at how, we as individuals, organize ourselves in society. The rise, decline, and resto ration of the market economy is in large part about the relative advan tages and disadvantages of two overarching principles of social or ganization. Following the work of the German sociologist Franz Op penheimer, Albert Jay Nock distin guishes between the "political HUMAN NATURE AND HUMAN ACTION 601 means" and the "economic means" as social organizers or delivery sys tems. Which of these institutions works better when organizing social and economic behavior and which most closely conforms to the basic nature of man?

The political means necessarily re quires the use of the coercive appa ratus of government. It forces indi viduals to take actions which are contrary and in opposition to their own desires and goals. After all, the essential characteristic of govern ment is its claim to a monopoly right on the use of force in society. As in dividuals, you and I would be ar rested if. we attempted to do those things which governments do as a matter of course. The Economic Means versus The Political Means The "economic" or market means refers to social arrangements in which only voluntary transactions between persons are permitted. In a market economy involuntary or forced exchanges would be criminal acts legitimately subject to appro priate penalties and government ac tion. The fundamental distinction is between mine and thine. Individu als would pursue their own goals through the voluntary exchange of justly acquired rights in property.

The market means is consistent with both human nature and the purposeful action of individuals. In contrast, the political means oper ates at cross-purposes to human na ture and individual choice. Mini mum wage laws, rent controls, usury laws, price controls, tariffs, subsi dized rents, interest rate ceilings, agricultural price supports, Federal loan guarantees, passenger rail ser vice subsidies, and fixed public util ity rates are just a few of the ways that government tries to alter hu man behavior. In every case it limits the number of exchanges that would have normally taken place and nec essarily involves government force to ensure compliance. Constraining the purposeful behavior of individ uals reflected in the laws of supply and demand, government tries to supersede the market in the name of the "public good." But, the use of government force to restrict private actions presents im portant difficulties. Before govern ment can create a miracle for one group, for example farm price sub sidies for agriculture or rent subsi dies for current renters, the money must first be taken away from some one else. Taxes are the anti-miracle imposed on people who would rather spend their money in a different way.

This raises a fundamental question regarding the morality of allowing person A to meet with person B to determine how the money of person C will be used to help person D. The issue is a matter of justice in the ac quisition of things (i.e., property) and 602 THE FREEMAN therefore an important topic of discussion. There is also the question of eco nomic efficiency. Does government intervention in fact produce the in tended consequences? Do minimum wage laws really help the poor? Have price supports in agriculture helped the farmer in the long run? Did price controls on energy solve the "energy crisis" or create it? Although many of government's actions are sincere and well intended, they have for the most part been disastrous in their unintended consequences. Govern ment inherently demands that in dividuals act contrary to their per sonal objectives. This creates a situation analogous to the problem of forcing water to run uphill; al though it can be done, it is very costly in terms of economic effi ciency. But more importantly, the process involves a continual and growing abridgment of liberty.

In contrast, the market means en courages the spontaneous and mu tually beneficial exchange of prop erty which is in perfect harmony with the purposeful actions of free and sovereign human beings. As Adam Smith pointed out more than two hundred years ago in his Wealth of Nations, if the organizing princi ples of society agree with and are complementary to human nature, then "... the game of human society will go on easily and harmoniously, and is very likely to be happy and Crossroads is an important and comprehensive presentation of the rise, decline, and restora tion of freedom and the market economy. The authors do an outstanding job of introducing readers to the history and na ture of the American free mar ket experiment. Copies can be ordered from the American Studies Institute, 3420 East Shea, Suite 266A, Phoenix, Ar izona 85028: Paper $14.25, Cloth $26.75. Please add $1.50 for shipping and handling.

successful. If they are opposite or dif ferent, the game will go on misera bly and the society must be at all times in the highest degree of dis order." The mystery, posed by Walter Lippmann in The Good Society, re garding the simultaneous increase in the growth and power of govern ment and our receding confidence in government's ability to deal with so ciety's ills, disorder, decay, and ma laise should be no surprise. Chaoti cally, we have come to rely on coer cive institutions of social organiza tion that operate at cross purposes to the essential nature of purposeful human beings. Every individual has his or her very own principle of mo tion. There is no mystery at all; pushing square pegs into round holes simply does not produce socially ben eficial results. ~ Kenneth McDonald Routing the Fabians I can still hear Sidney Webb explain ing to me that the future belonged to the great administrative nations, where the officials govern and the po lice keep order.

-Elie Halevy FOUNDED in England in 1884, the Fabian Society's aim was. to spread the ideas of socialism gradually by democratic means. For almost a cen tury it succeeded. In Great Britain and North America, under liberal and conservative governments alike, the state's influence spread. As re cently as the late 1970s, every mem ber of (British) Prime Minister James Callaghan's cabinet was a Fabian. Kenneth McDonald is a freelance writer and editor living in Toronto. Nevertheless it was increasingly plain to majorities of British and North American voters that at tempts in the Fabian mode "to achieve through state action the co ordinated control of the economic forces of society" had built up a gov ernmental apparatus that was chok ing their economies. The election of Margaret Thatcher, Ronald Reagan and, later, Brian Mulroney signaled a rejection of Fabianism. What has not been signaled is the nature of the "ism" that will replace it. It is not enough to hail the bless ings ofindividual enterprise, or freer trade, or even individual freedom.

All three stand to be enhanced as the state assumes a less active role in the economy. Desirable though that en hancement may be, it lacks the ap peal that wins elections. Nor can we 603 604 THE FREEMAN October afford the luxury of the Fabians' gradualism in reverse. The acceler ating burden of debt-servicing charges alone demands action in years, not generations. The political task is to establish a principle, to form policies that ad here to it, and to explain the com bination to the people. Suppose that in North America the principle were to be that the best government is that which governs least, i.e., the antithesis of Fabian socialism. Policy would then be di rected toward dismantling the gov ernmental apparatus. Government corporations would be offered for sale. Any unsold after a stated in terval would be dissolved. Services provided solely by federal govern ments would be contracted out to private suppliers whose terms of contract would stipulate criteria of service and performance. Federal governments would withdraw from revenue-sharing programs of a ser vice nature (education, health and hospital care), leaving to states and provinces the options of making up the difference by direct taxation or contracting the services out.

Individual Choice The effect would be to transfer sig nificant amounts of spending power, and decisions about spending, from governments back to the individuals who contribute to their revenue. Two consequences would follow. First, as federal spending fell, bud gets would move into balance while providing for steady retirement of the public debt. Second, as states and provinces assumed full responsibil ity for matters now subject to reve nue sharing, the cost of discharging that responsibility would be met by direct taxation supplemented by borrowing on their sole credit. In short, the governmental appa ratus, which now absorbs about half of national incomes and is adding more to debt every day, would return to. solvency. State and provincial governments, whose seduction into shared cost programs has also forced them to share the debt that the pro grams have incurred, would regain control of their affairs.

Fabians and other critics would de nounce the foregoing as a return to laissez faire and the law of the jun gle. In fact, however, except for a pe riod in 19th century England, Fran ~ois Quesnay's laisser passer et laisser faire (free passage and free dom of action) has not been tried. One of many myths about laisser faire is that it caused the Great Depression. As Murray ·Rothbard wrote: "Hoover's role as founder of a revolutionary program of govern ment planning to combat depression has been unjustly neglected by his torians. Franklin D. Roosevelt, in large part, merely elaborated the policies laid down by his predeces sor. To scoff at Hoover's tragic fail1985 ROUTING THE FABIANS 605 ure to cure the depression as a typ ical example of laissez faire is drastically to misread the historical record. The Hoover rout must be set down as failure of government plan ning and not of the free market."!

By contrast, the period from the end of the Napoleonic War to 1890 saw England's governmental expen diture fall from 29 per cent of the na tional product to nine per cent. As H.S. Ferns described it: "This period of government expenditure declin ing in proportion to the total product of the community was one of eco nomic success measured by almost any indicator one cares to choose: population growth, production per capita, intake of food per capita, house building, technological inno vation, saving and investment, im provements in literacy, average length of life, etc."2 The irony is that laissez faire cap italism, which would engage every one's self-interest to everyone's ben efit, is hobbled by self-interest in league with the state. Powerful groups use elected governments as their agents to restrain trade in their favor. Industry associations, com mercial and financial interests, la bor unions, even the associations of consumers who have most to gain IMurray N. Rothbard, America's Great Depression (Princeton, N.J.: Van Nostrand, 1963), p. 168.

2H.S. Ferns, The Disease ofGovernment (Lon don: Maurice Temple Smith Ltd., 1978), p. 15. from laissez faire-all demand spe cial treatment. The results are seen in oligopolies, cartels, import quo tas, tariffs, restrictive labor laws and affirmative action programs. In Canada, goods often pass more read ily to and from the United States than they do between provinces. The truth is that all of us are de manding more from governments than they can provide at the cost we are prepared to pay. We won't pay more taxes-the growth of the un derground economy bears witness to that-yet we expect governments to supply the services below cost. It is the rising cost of subsidizing the ser vices, and politicians' reluctance to reduce the subsidies, that has put governments into debt. Invest in the Private Sector Nevertheless, appeals to self-inter est may constitute the best hope for change. It is a fact that the growing pro portion of federal budgets consumed by debt charges reduces the propor tion that is available to fund gov ernment services. As the debt rises, the taxpayers get smaller and smaller returns on their investment in the government that taxes sup port. If the government raises taxes to meet its rising costs, the taxpay ers will keep less of their income.

Everything points to the taxpayers getting less value for their money. It is also a fact, borne out by tax606 THE FREEMAN payers' daily experience, that pri vate suppliers give better service than governments. Take those two facts together and it is plainly in the taxpayers' inter est to invest less in the government and more in the private sector . .Getting politicians to subscribe openly to the proposition would call for a self-denying ordinance whereby they would resist the temptation to spend other people's money and start helping them to save some of it instead. This might be accomplished by looking upon taxes as an investment in government services rather than a levy to meet government's ex penses. Switching from the slow, cumbersome and costly supplier to the efficient and competitive one would be simply an act of good business. It remains to consider how powerful groups might be resisted in their claims for special treatment.

The remedy is to be found in appeals to the principle of equality before the law. "We're sorry, we sympa thize with your proposal, but we must treat everyone alike. Govern ment as it has been allowed to ex pand is a drag on the economy. You and everyone else will benefit through its withdrawal from active participation. " Thus two principles are involved: the best government governs least; and all are equal before the law. Having established them, the polit ical leadership would need a rally ing cry that would convey the mes sage to the people. Quesnay's free passage and free dom of action is ready made. There is an exuberant ring to it, a slogan to blow fresh air across the barriers to freedom. I Upcoming Articles NOVEMBER • Should American Business Give Up Smoking? - Gary North • Livingin Two Chinas - Dean Russell • Letters to the Editor Beginning a new section in The Freeman.We welcome your comments.

Send your letters (short ones, please) to Letters Editor, Foundation for Economic Education, Irvington-on-Hudson, New York 10533 DECEMBER • On the Bishops and the Market - Charles A. Baird • Getting There - John K. Williams • John Witherspoon: "Animated Son of Liberty" - Robert A. Peterson David Osterfeld African Famine: The Harvestof SocialistAgriculture David Osterfeld is Associate Professor of Political Science at St. Joseph's College in Rensselaer, In diana, and an associate of The Institute for Humane Studies. THE popular explanation of the cur-The United Nations (UN) has rent famine in Mrica is the drought. listed 24 African countries as threat But is this convincing? The North ened by famine. These countries American Great Plains has major - have one crucially important thing droughts about every twenty years, in common. They have all pursued the most severe being the 1934-36 policies which amount to nothing Dust Bowl. A major drought was re-short of an assault on agriculture.

corded in California in 1977 and the The policies include the following. 1975-76 drought in England was labeled "unprecedented" in its sever-Marketing Boards ity. Yet none of these resulted in fa-The stated purpose of these Boards, mine. In fact, the 1977 California which are found in most of the 24 harvest was a record high. And food countries including Ethiopia, is to production in England increased by insulate the farmer from price fiuc 15 percent between 1975 and 1980. tuations. In fact, the Boards are typWhy is it that droughts occur in all ically used to raise government rev parts of the world but, with a few ex-enue. The farmer is forced to sell his ceptions, famines are confined to produce to the Board which, because Mrica? it is a government monopoly, need pay him only a fraction of its actual market value. The typical farmer in Tanzania receives about 10 percent of the value of his produce. In Kenya 607 608 THE FREEMAN October it is 15 percent and in Ghana 20 per cent. Adding insult to injury, the farmer must then pay taxes on the income he does receive.

Outlawing Middlemen The Boards could not operate as revenue agents if farmers were free to sell their produce elsewhere. Thus, the private sale of food has been out lawed or severely restricted in many countries. In Ethiopia and Tanzania, for example, those caught violating the prohibition are beaten or killed. Protectionism In order to stimulate local indus try and to appease a small but po litically powerful urban elite, pri vate foreign investment has been discouraged and foreign-owned com panies have been nationalized. Tar iffs, subsidies and licensing restric tions have been enacted. These policies have allowed local manufac turers to sell their goods at well above free-market levels. This means that the African farmer must confront artificially inflated prices with an artificially deflated income. State Farms State farms are notoriously inef ficient. While other socialist coun tries such as China have been dis mantling them, African countries have been busy creating them.

Ghana established large state farms in the 1960s. Its per capita food output fell 19 percent during the 1970s. Tanzania began its Ujama Program in 1970, resettling some 13 of its 18 million people onto collective vil lages. Its per capita food output fell 15 percent in ten years. A food ex porter in 1970, it imported over $16 million worth of food in 1980. Moz ambique became independent in 1975 and promptly created state col lectives. Within 5 years per capita food output fell 12 percent. In Ethio pia state farms comprise 4 percent of the land, receive 90 percent of the state's agricultural investment, but 80 percent of them operate at a loss. Yet the ten-year plan calls for a dou bling of the state farm sector. Land Reform Several countries, including Mo zambique, Zaire and Tanzania, have implemented land reform, but Ethiopia's is the best known. Con trary to the way it is depicted by the media, much of Ethiopia is ex tremely fertile. It would be the breadbasket of Africa, agronomists said, were its development not re tarded by feudalism. In 1975 the new Marxist government nationalized all land. Feudalism ended; "Ethiopian Socialism" began. Instead of devel opment, farm output, low to begin with, declined. Why? The principle of land distribution was to allocate to each family enough land to feed itself but no more. The use of hired 1985 AFRICAN FAMINE 609 labor was prohibited, as was the pri vate sale of farm produce and ma chinery. The primary purpose of the reform said the UN, which ap plauded it as "progressive" and "forward-looking," was to prevent the emergence of "commercial ag riculture" by making farm plots too small for machinery to be economi cally viable. Thus, the reform changed little. Under feudalism the farmer had little incentive to pro duce. Under socialism he has even less. Over 60 percent of Ethiopia is arable. But only 10 percent is culti vated. As one authority commented: "The low rate of land use may be at tributed to lack of motivation to pro duce anything beyond subsistence levels."

It is hardly surprising that these policies produced shortages. Indeed, it would have been surprising if they had not. The Market Solution History shows two things quite clearly: 1) the application of Social ist measures to agriculture results in declining production, food short ages and sometimes even famine; and 2) the application of Capitalist measures to agriculture tends to pro duce agricultural abundance. For example, prior to the 1917 Rev olution, Russia was a major exporter of food. By 1920, however, the area under cultivation in the Soviet Union had declined by 50 percent and yields per acre fell by 40 to 50 percent. An estimated six million Russians died of starvation. Millions more died in the 1930s as a result of Stalin's collectivization program. Eventually single-acre private plots were grudgingly permitted. Small as they are, these plots are about 40 times as efficient as the collective farms. There is certainly a degree of irony in the fact that despite its tre mendous agricultural potential the Soviet Union is now the single larg est purchaser of US grain exports.

India provides a very instructive contrast to the Soviet Union. After highly interventionist if not socialist policies resulted in famine in the early 1970s, India abandoned price controls on agriculture. By 1977 In dia not only was self-sufficient, it was exporting large quantities of grain. In addition, it had built up a grain reserve of 22 million tons, which enabled it to manage the se vere drought of 1979 without the need for food imports. The famine in Africa is certainly a tragedy. It is all the more tragic be cause it need not have happened. There is no need for it to happen again. Anyone with a serious desire to end recurrent famines would do well to take a look at what results from an ideological commitment to socialism. Let the free market op erate, for wherever farmers have been exposed to market incentives, farm output has increased. ~ Henry W. Vanderleest Karoline Bola • RailroadDeregulation ON February 4, 1887, Congress passed the Act to Regulate Com merce. This legislation also created the Interstate Commerce Commis sion (ICC) whose job it was to ad minister and enforce provisions of the Act. The Act to Regulate Com merce, along with several subse quent amendments which sought to strengthen it, placed the railroad in dustry securely under the control of the federal government. While the original intent of the Act was to abolish the numerous abuses of pub lic trust by the railroads, the long term effect was the stagnation of the industry. For nearly 100 years, rail roads had little or no flexibility in marketing their services to shippers.

Dr. Vanderleest is a Professor of Marketing at Ball State University, Muncie, Indiana. He is a noted writer and lecturer on marketing transportation services. Ms. Bota is a freelance writer and resides in Knox ville, Tennessee. 610 Because of government-imposed price, service, and revenue con straints, there generally was little incentive for railroads to increase productivity, to lower costs, or to be innovative in providing services to their customers. Regulation in the railroad industry generally stifled creativity in the marketing area and, for the most part, caused the major ity of railroads to turn inward and become operations-oriented rather than marketing-oriented in their ap proach to doing business with the public. The operations-oriented rail road's approach to selling its ser vices to shippers typically took the form of, "This is what I can do for you and this is how much it will cost.

Take it or leave it." On October 14, 1980, Congress en acted the Staggers Rail Act. This Act thrust railroads into a significantly less-regulated environment, one for RAILROAD DEREGULATION 611 which mos~ were unprepared. The tables were turned and shippers could now tell railroads, "These are my needs, what's your best offer?" If the offer was not good enough, ship pers were usually able to go to an other railroad or switch to compet ing modes such as trucks or barges. After being shielded for many years from the "real" marketplace with its demand, supply and competitive considerations, railroads quickly recognized that they had to begin successfully marketing their ser vices in order to survive. This article examines the impact of deregulation in the railroad in dustry and how it has allowed rail roads to develop and implement sound marketing programs in at tempting to meet their organiza tional goals. Although the article is limited to the railroad industry, de regulation in many industries, in cluding aviation, banking and com munications appears to be the wave of the future. It is expected that mar keting will become a key element in the business plans of many firms in each of these industries as they also strive to compete successfully in a deregulated environment.

Competitive Conditions Prior to 1980 Despite the constraining effects of regulation, railroads remained the dominant form of freight transpor tation in the U .8. until the emergence of the motor carrier industry in the 1930s. In the 1940s and '50s the number of trucks and their ac ceptance increased rapidly, provid ing shippers with a viable alterna tive for moving their merchandise. Railroads, however, made little at tempt to meet the challenge motor carriers were providing. As the dom inance of railroads continued to dwindle, the causes became increas ingly evident. First, the Act to Regulate Com merce gave railroads virtually no flexibility in rate-making. While the intent of early legislation was to abolish railroad rate discrimination, it made it difficult, if not impossible, for railroads to make rate adjust ments which reflected economic as well as competitive conditions. As a result, railroads lost much of the high-value, high-rate traffic-such as manufactured goods, gasoline and produce-to the motor carrier indus try. Most remaining rail traffic con sisted of low-value, bulk commodi ties such as coal, grain and timber.

In general, the loss of high-value traffic to the trucking industry was due to service considerations. While it may have been cheaper to ship some goods by rail, the time saved by using motor carriage could be translated into dollars and cents, thus offsetting the higher cost. The speed and reliability of some rail roads had also been lessened by de ferred maintenance policies which 612 THE FREEMAN October were practiced by most railroads at the time. Another factor hindering the com petitiveness of railroads during nearly ninety years of regulation was the railroads' inability to aban don unprofitable lines when neces sary. Because of the ICC's restric tions, railroads were often forced to provide unneeded and unprofitable service to some areas for extended periods of time. Railroads were also reluctant to become involved in the costly and time-consuming battles with shippers and local groups when abandonments were proposed.

The extensive amount of redun dant track mileage, coupled with the costs of maintaining it, resulted in serious financial difficulties for many railroads. The railroads ar gued that the elimination of some mainline track would allow them a greater volume of traffic to travel over the remaining lines, thus re ducing their operating costs. Per mission to abandon was granted very infrequently, however. When aban donments were approved, it was gen erally only after drawn-out deliber ations had been completed, some lasting as long as four or five years. Because of the problems and inef ficiencies resulting from restrictive government regulation, the railroad industry consistently earned a re turn on investment considered to be far below that necessary to attract new capital for plant and equipment improvements. As a result of infe rior railroad service, shippers read ily switched their business to motor carriers who, although usually charging higher rates, generally of fered higher quality and more de pendable service.

Key Elements of the Staggers Act The Staggers Act of 1980 marked the end of nearly 100 years of re strictive government regulation of the railroad industry.l In short, it al lows the marketplace to determine price, quality and type of transpor tation service offered by individual railroads, which gives them greater opportunity to compete successfully against each other as well as against competing modes. A brief overview of the major provisions of the Stag gers Act which directly influence the ability of railroads to develop mar keting programs, particularly in the areas of pricing and service, is dis cussed here. General rate flexibility. Rate free dom is the most important result of railroad deregulation. Railroads can now make rate adjustments, subject to certain guidelines, without ICC approval. Currently, for example, nearly two-thirds of all rail rates are entirely free from regulation. 2 The balance are still under some ICC ju risdiction because they apply to spe cific commodities such as coal being moved between two points where 1985 RAILROAD DEREGULATION 613 railroads have virtual market dom inance, thus leaving the shipper with no alternative carrier choices. In general, however, pricing is now a controllable variable in a railroad's business plan as price changes can be made in a timely manner in re sponse to changing economic and competitive conditions.

With deregulation, the traditional practice of all railroads collectively seeking approval from the ICC for the same percentage rate adjust ment has also been eliminated in fa vor of individual railroads setting their own rates. As a result, the role of the ICC has been lessened to rou tinely publishing and filing rates de veloped by carriers. Because of the large number of rates now available to shippers, some real bargains ex ist. Regardless of whether rates are increased or decreased, the Act stip ulates that individual railroads may determine specific rates for each shipment, depending upon demand and competitive forces. That com petitive rates are now very popular is evidenced by the fact that nearly 70 per cent of the freight revenue earned by railroads in 1984 is due to negotiated rates. 3 Service contracts. The legalization of service contracts in which indi vidual railroads tailor a specific rate and service package to the needs of a particular shipper also resulted from the Staggers Act. The new law encourages railroads to innovate and experiment in developing rate and service packages for individual ship pers. Before the Staggers Act, rail roads and shippers were hesitant to enter into contracts because they feared antitrust litigation. Although the ICC has no role in the develop ment of contracts, it must approve the final agreement between the railroad and shipper. This rarely poses a problem, however, as most contracts are routinely approved.

The duration of contracts can run from several months to as long as ten years or more. Contracts can take virtually any form as shippers are able to negotiate for specific services needed as well as eliminate any un wanted services. Railroads usually benefit in this situation because they can set rates that more closely re flect their actual costs in handling the shipper's freight. Some long term arrangements even specify that railroads make major investments in equipment and facilities. In gen eral, contracts allow railroads to in crease efficiency, particularly in the area of better car utilization and longterm revenue projection. Un certainties in these two areas have contributed largely to the railroad industry's weak financial condition in the past. Eased regulatory restraints have also encouraged railroads to offer in termodal transportation services to their customers. Prior to 1980, rail614 THE FREEMAN October roads were generally prohibited from offering service via other modes.

This has changed so that railroads may provide shippers "total" trans portation service using all modes. This situation is well illustrated by the CSX Corporation which has built a true intermodal transportation company around the traditional rail operation by offering a wide range of transportation services by all modes. 4 It is expected that the pop ularity of intermodal transportation services will continue to increase as this concept allows railroads to react to competition from other modes and increase revenues by moving traffic from origin to destination over longer distances. Mergers and abandonments. The Staggers Act has sparked an in creased interest in mergers. This is because one of the objectives of de regulation is to encourage railroads to become more self-contained. Be cause of their high fixed costs, rail roads have always been most effi cient on long hauls where stopping, starting and the number of inter change points are minimal. With ad ditional mergers, railroads will be able to compete more effectively with other modes and increase revenues by handling the shipment from ori gin to destination on one system. In creased revenues combined with re duced costs incurred when moving traffic over longer distances should contribute to improved earnings for individual railroads as well as to the general health of the industry.

Abandonment of unprofitable lines was also facilitated with deregula tion. Prior to 1980, it was extremely difficult for railroads to withdraw service from areas which do not pro vide profitable volumes of traffic. This resulted in cross subsidies where shippers on a railroad's more profitable lines were charged higher rates to cover losses elsewhere. The goal of deregulation is that railroads need only provide service where enough volume of business exists to provide a reasonable return for that service. Although it is easier to discon tinue nonprofitable lines, it is ex pected that most railroads will at tempt to avoid abandonments as long as possible by stepping up their marketing efforts to promote use of the line in question. If and when a line is abandoned for lack of traffic, however, it remains to be seen if the marketplace will offer enough incen tive for another carrier to move into the area and provide service. In a sit uation where an abandoned line re mains unattractive to all railroads, the Act makes it easier for the line to be taken over by other parties such as state and local governments.

Some states, for example, have en acted legislation that subsidizes a carrier for keeping a marginal route operating.

1985 RAILROAD DEREGULATION 615 Railroads' 'Discover" Marketing Effective marketing is based upon determining the needs of a market and attempting to meet those needs more efficiently than competitors, with the ultimate goal of making a profit. Before 1980, most railroads were in a position where it was either not possible or not necessary to aggressively seek out business by offering competitive price and ser vice packages. Railroads are now aggressively at tempting to find new freight. In creasing profit potential has encour aged numerous successful efforts such as "Sprint" and "Slingshot" express trains, "Fuel Foilers," "Tank Trains" and other rail service pack ages designed to meet the specific needs of rail customers. 5 Marketing oriented railroads no longer depend exclusively on moving additional bulk cargo to increase business. In stead, they are putting much em phasis on seeking general merchan dise freight, with the goal of re capturing some of the high-value traffic that they had previously lost to the motor carrier industry.

Railroads are also intensifying their sales and promotional efforts. In communicating with their cus tomers about available services, for example, many railroads have adopted traditional consumer goods promotional techniques such as prime-time radio and television spots, billboard advertising and direct mail flyers. These methods com plement promotional techniques generally used in industrial mar keting such as trade shows and per sonal sales calls. Having satisfied customers should enable railroads to make extensive use of testimonials in future print and television advertising. Much railroad promotion now in cludes direct, head-on comparative advertising of rail service compared to that offered by competing modes such as motor and water carriers. A recent Southern Pacific ad in a pop ular trade publication proclaims that: Truckers are grinding their teeth these days ... for a good reason. We're suc cessfully competing against the trucks now because we have the freedom to ex ercise our imagination ... for example, we tailor train schedules to accommodate customers, we add trains, we expedite them, we write on-time delivery guar antees and we offer price incentives ...

our overall package gives us a competi tive edge over truckers. 6 Pricing and service freedoms al lowed by the Staggers Act have given railroads the opportunity to learn what marketing is all about. Progressive railroads now recognize that marketing can aid them in re acting to changing market condi tions and to competing transporta tion modes. Marketing-oriented rail roads believe that marketing be longs at the top of the organizational 616 THE FREEMAN October chart and are reorganizing to reflect this belief. Many, such as the Illinois Central Gulf and Norfolk Southern are bringing in marketers from the "outside," meaning nonrailroaders, to head up newly organized market ing divisions. 7 In short, the Staggers Act has created a renewed sense of urgency to accept marketing prin ciples' understand them and put them to use. On Track to Profitability Recent data show that railroads now account for nearly 40 per cent of total U.S. freight tonnage hauled in 1984, up from just over 37 per cent in 1980.8 Although representing only a small increase during the four-year period, it is l).onetheless significant because it reversed a downward trend in ton miles hauled that began in the 1940s when railroads, in ad dition to being saddled with regu latory restraints, were also being faced with new competition from the growing trucking industry. New business freedoms as a result of de regulation are also primarily respon sible for the improvement in the rate of return on investment in the rail industry from about 2 per cent to about 5.5 per cent during this four year period. 9 In general, earnings and stock prices are up for individual railroads and there have been substantial in creases in capital spending through out the industry. Massive innovation and new construction programs undertaken by many railroads have eliminated considerable deferred maintenance from mainline track. It is also likely that new equipment purchases will provide railroads with a 20 per cent increase in equip ment capacity in 1985. 10 It is ex pected that increased capital spend ing for improving track and roadbed conditions, modernizing switching yards, upgrading terminal facilities and purchasing additional rolling stock will allow many railroads to provide a higher level of service to their customers in the future. While railroads have traditionally been in different to service considerations, their new profitability is encour aging them to look at service as an important aspect of profitable operations.

Conclusions After years of deferred mainte nance, decreasing traffic and inad equate profitability, railroads are making a comeback. Easing of reg ulatory restraints through deregu lation has given railroads the ability to meet changing market and com petitive situations as well as the freedom to make business decisions independent of government sanc tion. In short, railroads have been given the opportunity to succeed or fail based on the strengths and weaknesses of their management decisions in a free marketplace.

1985 RAILROAD DEREGULATION 617 Railroads no longer have the luxury of operating in a protected environ ment where they had minimal in terest in or incentive to optimize their operations. Progressive railroads have re sponded to deregulation by gearing their organizational goals toward making rail service fit shipper needs rather than making shipper usage somehow fit rail service. As a result, each railroad provides its customers with different combinations of price and service, depending upon com petitive conditions. Overall, the fu ture of the rail industry is bright. A new spirit is evident which is re flected in new innovation, productiv ity and improved profitability. After four years of deregulation, evidence shows that the industry's health has improved and survival seems assured. It is expected that the same results will be seen in other industries that have been recently deregulated.

Deregulation requires that a firm become marketing-oriented as it is no longer shielded from the harsh realities of the free marketplace by government regulation. Marketing and deregulation go hand-in-hand. As evidenced in the railroad indus try, without deregulation there is lit tle need for marketing. In a dereg ulated environment, however, it is crucial that marketing become the key activity in a firm's business plan. Well-managed firms will thrive in a market-directed, deregulated environment, while those with a managerial focus who continue to bemoan the loss of the regulatory crutch will ultimately fail. @ -FOOTNOTESIFor a good. summary of the Staggers Act see Ernest W. Williams, "A Critique of the Stag gers Rail Act," Transportation Journal (Spring, 1982), pp. 5-15. 2Yearbook of Railroad Facts, 1984 edition (Washington, D.C.: Association of American Railroads, 1984), p. 15. aYearbook of Railroad Facts, 1984 edition, p.31.

4"CSX: Railroading For Fun and Profit," Business Week (November 30, 1983), p. l00ff. 5"Staggers Rail Act and Its Impact on Ship pers," Dun's Business Month (January, 1984), p.l000. 6See Dun's Business Month (October, 1984), pp.84-85. ""The Railroads Rise Again," Fortune (No vember 26, 1984), p. 29. SYearbook of Railroad Facts, 1984 edition, p.6-7. 9Frank Malone, "Rate of Return Reaches 5.5% as Earnings Soar," Railroad Age (Novem ber 1984), p. 21. lO"Industry Groups Speak Out for Deregu lation," Dun's Business Month (January, 1984), p.97. -REFERENCESAltrogge, Phyliss D. "Railroad Controls and Competitive Conditions," Transportation Journal (Winter, 1981). "Deregulating America," Business Week (No vember 28, 1983). Rakowski, James P., "Regulating Change in Surface Transportation," Appalachian Busi ness Review (January, 1982).

John K. Williams Catchthe LittleFoxes! A FRIEND of W. C. Fields once dis covered the comedian diligently reading the Bible. Surprised by this uncharacteristic display of piety, the friend asked Fields what he was doing. "What do you think?" re torted Fields. "I'm looking for loopholes!" That, I suppose, is one way of read ing the Bible. There are countless other ways. One of these ways sim ply involves seeking out and delight ing in the images used by the Bib lical writers. One such image, quaint but charming, I would bring to your attention. "Catch us," requests the author of The Song ofSolomon, "the The Reverend Doctor John K. Williams has been a teacher and is a freelance writer and lecturer based in North Melbourne, Victoria, Australia. He was res ident scholar at FEE this past summer. 618 foxes, the little foxes, that spoil the vineyards."! Most defenders of freedom are aware of, and have thought about, the great and powerful forces which today conspire to spoil the vineyards of economic and political liberty. We do well, however, also to be alert to the "little foxes" -the sneaking, sly realities that nip away at and in time devastate the liberties our forefathers planted and we are called to tend. When we look, we discover that the number of these "little foxes" is alarmingly large.

The Little Fox of Snobbery A strange phenomenon has re cently become widespread in my country. It is fashionable to deplore and sneer at fast-food chains and soCATCH THE LITI'LE FOXES! 619 called family restaurants. Liberals given to haunting those tribal ritu als called "cocktail" or "sherry" par ties become quite animated at these gatherings when the conversation turns to the actual or threatened ar rival of a MacDonald's outlet or Den ny's Restaurant in their fashionable suburb. Noisily, they lament the al legedly plastic smiles, plastic food, and plastic architecture of these establishments. Some liberals have gone further, writing articles and penning little books bewailing the evils of fast food and family restaurants. It would seem that these twentieth century phenomena have become, for many liberals, the apotheosis of cap italism, the very epitome of the socio-economic system they deplore.

Hence, while unable to take the lib eral mentality as seriously as it takes itself, I invite you briefly to ponder this loathing of institutions which seem, at least on the surface, innocuous. Strangely, the liberals have at one point got something right. Fast-food chains and family restaurants do capture something of the essence of the free market. In and through these enterprises the market is doing what it always has done: transform ing luxuries once reserved for a priv ileged few into commonplace activ ities taken for granted by the many. Writes Joseph Schumpeter: "It is the cheap cloth, the cheap rayon and cotton fabric, boots, motorcars and so on that are the typical achieve ment of capitalist production, and not as a rule improvements that would mean much to a rich man. Queen Elizabeth [the First] owned silk stockings. The capitalist achieve ment does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort."2 Not so long ago, dining out was considered-at least in my country a luxury. The wealthiest frequently patronized restaurants. Moderately comfortable families dined out only on special occasions. Those yet to en joy even "moderate comfort" dined out rarely if at all.

The Achievement of Capitalism But the market worked its magic. Consider what capitalism has done. The pleasurable practice once en joyed by a few became available to the many. Tastes once perceived as evidence of refinement-namely, choosing one's meal from a menu and being waited upon-were revealed as universal and thus "ordinary." Or dinary folk gained. Yet some people lost-lost the plea sure derived from "feel[ing] and act [ing] smugly superior" by displaying "tastes and interests" distinguish ing them from the masses. So deriv ing pleasure is, according to the dic620 THE FREEMAN October tionary, the defining characteristic of snobbery. That a snob, so the dic tionary affirms, is "a vulgar or os tentatious person," perhaps merits mention! Still, people desperate to seem "different" can entertain their whims. Accompanying the advent of fast-food chains and family restau rants has been the emergence of ex traordinarily expensive dining places boasting a "homey atmos phere" and "home-cooked food."

People of self-sty led "refinement" can thus pretend to be dining at home and, during their meal, con template the rare and special tastes distinguishing them from the masses. Indeed, affluent liberals to day tend to regard taking their friends to restaurants as somewhat gauche. They thus flock to courses in gourmet cooking and, after a tiring day slaving over a hot stove, invite one another to home-cooked meals served by themselves. They thus re main "special." Remain "different." Remain "snobs." And nip away at the free market for robbing them of their snobbish privileges. The Little Fox of Obsessive Democracy First cousin to the little fox of snobbery is the little fox of obsessive democracy. The obsessively demo cratic little fox actually enjoys what the snobbish little fox would like to enjoy: tastes and attitudes quite distinct from those held by ordinary mortals. Yet in the case of the ob sessively democratic little fox, "en joy" is a misleading verb. He or she dislikes being different, and yearns to be simply "one ofthe boys" or "one of the girls."

Usually, the little fox of obsessive democracy is an academic. By virtue of their training, academics fre quently are elitist in their tastes, in the literal meaning of that sadly abused word, "elitist." The aca demic savors the novels of Dostoev sky; the masses devour the works of Jackie Collins. The academic listens with delight to the music of Mozart; the masses spend vast sums upon re cordings of the noises made by "Boy George." And the obsessively dem ocratic academic is profoundly disturbed. Grounds for being disturbed cer tainly do exist. While holding that economic value is purely subjective, signifying not some property of an object but a relationship between an appraising mind and an object ap praised, I see no more reason to as sume that aesthetic value is subjec tive than to assume a subjective theory of truth. If informed that a Jackie Collins novel or a "Boy George" song is really on a par with The Brothers Karamazov or The Magic Flute, I shall treat my infor mant with courtesy, but nothing more. The informant is sadly mis guided and, while praying that a soul 1985 CATCH THE LI'ITLE FOXES! 621 might be delivered from barbarism, I shall not meditate at length upon a grotesquely perverse point of view.

Typically, however, the obses sively democratic academic is not content merely to lament error. Nor does it suffice to instruct the ill informed and thereby foster the cause of civilization. A glaring dif ference must be explained away. The obsessive democrats like to believe that their tastes and interests are really "natural" and would be shared by all were it not for some distorting process debasing the val ues of so-called "ordinary" people. And the free market provides the sought-for scapegoat! It even caters to a demonstrably democratic desire for villains to hiss! The masses, so obsessively democratic academics muse, would agree with them were it not for the demonic manipulation and destruction of "authentic feel ings" engineered by profit-seeking entrepreneurs and advertisers work ing in and through the market. George J. Stigler puts the matter well. "It is ... a basic function of the intellectual to define the standards of good taste more clearly, and to persuade people to approach them more closely. It is proper to denounce vulgarity of taste, and to denounce it more strongly the more popular it is.... [YJet I say that complaints of deficiencies in tastes are misplaced when they are directed to the mar ket place. . . . The market place responds to the tastes of consumers with the goods and services that are saleable, whether the tastes are ele vated or depraved. It is unfair to cri ticize the market place for fulfilling these desires, when clearly the de fects lie in the popular tastes them selves. I consider it a cowardly concession to a false extension of de mocracy to make sub rosa attacks on public tastes by denouncing the peo ple who serve them. It is like blam ing the waiters in restaurants for obesity.' '3 Consumer Tastes and Values The market place reveals, with un canny and not undisturbing accu racy, popular tastes and values. Cas tigating the market for what it re veals is lUre denouncing wet roads for inclement weather. Yet the ob sessive democrat, temperamentally, must sustain the illusion that he or she is really "one of the people." It is not merely egalitarianism; it is profound insecurity combined with egalitarianism. Perhaps an element of guilt is also present, an academic wondering whether a salary deter mined by the market place for a per son specializing and delighting in early Elizabethan literature would be quite as generous as that granted by an essentially government-funded school or college. Be that as it may, the villain has been uncovered. The' obsessive democrat's tastes are those of "the people," but of "the people"

622 THE FREEMAN October as they would be were it not for the destructive, alienation-producing market. So what, as Lenin once asked, is to be done? The answer is clear. Tinker with the market. A tax on popular novels here; a subsidy for "worth while literature" there. Extract money from football fans and movie buffs to underwrite performances of opera and ballet. Challenge the rule of radio stations playing recordings by "Boy George" by "publicly funded" radio stations featuring Mozart. And, of course, launch vig orous attacks on the evils of advertising. The little fox of obsessive democ racy is, I suggested, first-cousin to the little fox of snobbery. The differ ences are obvious, but so is the fam ily resemblance. Each sets about spoiling the vineyards of liberty to protect personal convictions chal lenged by the choices of countless in dividuals through the workings of the market. One wishes to feel "dif ferent," possessed of rare and re fined tastes. The market, transform ing luxuries "into commonplace opportunities, reveals that the tastes in question are universal. The other wishes to be "one of the people," but the market, dutifully providing the people with what they value, reveals that the tastes of the masses and those of the obsessive democrat are radically different. In each case, the market shatters a cherished illusion. Not surprisingly, the market is thoroughly disliked!

The Little Fox of Moralism The third little fox spoiling the vineyards belongs to a different fam ily. The little fox of moralism is not the victim of illusion. Rather, he is merely confused. His values, while essentially sound, are impressionis tic. His knowledge of the workings of the free market is almost zero. Yet, at least in theory, reason and argu ment might lead to his becoming a guardian rather than a destroyer of the vineyards. The moralist values the coopera tive and compassionate spirit. He is anxious to see justice· realized and destitution abolished. He measures the market against these less than precise values, and declares the mar ket wanting. The market is immo ral. Or so the little fox of moralism believes. Sincerely believes. And with admirable intentions, he sets about spoiling the vineyards. The sincerity and good intentions of moralists, religious and secular, who attack the free market in a free society, need not be questioned.

However, a brief perusal of history suffices to establish the havoc and devastation wrought by the sincer est of people from the best of motives. G. K. Chesterton somewhere ob serves that were a lunatic wielding an axe to be pursuing one in the sin cere belief that the world would be 1985 CATCH THE LITTLE FOXES! 623 unspeakably enriched by one's de mise, the lunatic's sincerity-and, indeed, good intentions-do not ob ligate one to assist him in his hom icidal endeavors. The moralist yearns to see desti tution abolished. Astonishingly, that yearning leads him to oppose the free market. All the evidence available suggests that an allocation of scarce resources by political rather than by market forces perpetuates poverty. The Swedish economist, Sven Ry denfelt, recently published a volume in which he examines the perfor mance of fifteen diverse nations em bracing socialism. A single story emerges. "From disillusioned farm ers to poor harvests, from food sub sidies to foreign loans from massive debts to bankruptcy, the socialist state is doomed."4 The hungry are not fed; the naked are not clothed; the homeless are not housed. The survival of the unhappy inhabitants of these nations rests upon the pro ductivity and generosity of the very capitalist nations so many moralists deplore.

That this is so should not surprise. A small tribal society may well be able to cope with a centrally planned economy. Wants are few and are known. Skills also are few. Raw ma terials available to the tribe are bas ically known. Tribal elders, or the tribe as a whole, can collate infor mation about these wants, skills, and available resources, and direct the tribe's productive activities by ref erence to this information. This cannot be done in a large and complex society. People want innu merably different things. Countless skills are diffused through millions of people, and constantly change as new technologies are devised. Raw materials are distributed globally, and are characterized by constantly changing relative scarcities. No ex perts could conceivably collate, syn thesize, and make economic deci sions by reference to this totality of information. Yet in the absence of this information, resources inevita bly will be misallocated, people fail ing to use what they have to acquire what they want.

The Market Process But in a free market the requisite information is available. As Fried rich A. Hayek 5 , building on the work of Ludwig von Mises, has so cogently argued, changing relative money prices in the market "encode" the relative data. Suppose, for instance, that the price of one sort of fish in creases relative to the price of other sort of fish. Fish consumers use the more expensive fish sparingly, and start seeking for alternatives. Fish providers, anxious to secure a pleas ing return for their labors, seek to increase the supply of the expensive fish or discover a pleasing alterna tive. Maybe an alert entrepreneur devises a means of farming the fa624 THE FREEMAN October vored fish. Both consumers and pro ducers know what they must do to adapt to the new social situation and to improve their personal lot, and have every incentive to behave in the appropriate wa:y. Planning is still a reality, but it is planning by individuals who know precisely what their abilities and wants are rather than by alleged "experts" who cannot even begin to calculate what wants and abilities are there to be considered, coordi nated' and satisfied. Cooperation is the essence of the exercise, but it is the uncoerced cooperation of individ uals who, to improve their own sit uation, must take account of their fellow citizen's wants, and whose productive activities rest upon and presuppose the different productive activities of their fellows.

Indeed, it is a society coordinated by political commands that involves a morally suspect form of "compe tition" as against "market coopera tion." Such a society inexorably de clines into factions competing for the attention and favors of those ex ercising political power. Each fac tion seeks a larger share of available goods in the full knowledge that suc cess in securing such a share means less for others. In a market economy, an economy coordinated by individ uals seeking to improve their own situations, the only "competition" obtaining is the competition to dis cover new and better ways of satisfying the desires of others. Doubt lessly some individuals seek to curry favors from the politically powerful, but the extent to which success fol lows these attempts measures the distance towards socialism the com munity in question has traveled. Simply, a desire to alleviate pov erty, to foster cooperation, and to fur ther consideration of the needs of others, favors not a socialist com mand economy, but the free market that moralists so angrily denounce.

The moralist perceives something "unjust" about disparities of income and wealth distribution effected by market forces. Yet what in this con text can the words "just" and "un just" signify? Absolute equality of income and wealth is usually con ceded to be "unjust," in that it takes no account of different needs, differ ent wants, and different efforts, and demands constant coerced redistri butions to "correct" inequalities generated as people freely exchange what is theirs. What then is re quired? The Rule of Law The answer usually is disarmingly simple: a distribution taking ac count of all relevant personal fac tors. Yet what are these factors? And how is such a distribution to be achieved? Maybe in a family or even schoolroom, burdens and benefits can be distributed related to individ ual wants and moral deserts, but in 1985 CATCH THE LITTLE FOXES! 625 both the family and schoolroom a parent or teacher knows each indi vidual involved and can, with mod erately successful accuracy, deter mine such wants and deserts. Yet the smallness of the group involved is the sine qua non of this state of af fairs. In a complex society of literally millions, such knowledge is inacces sible and such a distribution there fore impossible.

Yet both the words "justice" and "injustice" can still operate. Think again ofthe family or classroom. The parent or teacher ignoring individ ual needs and deserts may well be regarded as "unfair" or "unjust," but so is the parent or teacher who has a "favorite" or "pet." In some circum stances "fairness" or "justice" may demand a consideration of the per sonal situation of individuals, but in other circumstances what is de manded is the impartial enforce ment of rules applicable to all. The first use of the words "fairness" or "justice" cannot, as argued, be ex tended beyond the small and inti mate group to "society as a whole," but the second use can. Indeed, only the second use can. In a large and complex society, '~ustice" demands rule by purely general principles of conduct, equally applicable to all. The "justice" of a particular distri bution of income or wealth is deter mined not by some characteristic of the distribution itself, but by the be havior or procedures generating the distribution. The question to be asked is whether that behavior de fied or complied with general rules of conduct equally applicable to all.

If, for example, the behavior gener ating a particular distribution of in come or wealth defied rules pro scribing force, theft and fraud, the behavior is "unjust" and thus the distribution is unjust. Conversely, if the behavior was voluntary and in accordance with the rules-if the be havior, let us say, did not involve force, theft or fraud-the behavior and thus the distribution is "just." Justice and Impartiality Such a model of "justice," appli cable to a large and complex society, should appeal to many moralists, particularly members of the Chris tian clergy. It reflects the impartial ity of the One Who "maketh his sun to rise on the evil and on the good, and sendeth rain on the just and on the unjust" (Matthew 5:45). Admit tedly, it falls short of the "justice" which will be meted out on the Last Day, when He who knows all things, incl uding the innermost secrets of every human being's heart, judges each, but such justice cannot be em ulated by finite creatures who do not and cannot know all things, yet who nonetheless must create social order.

In one sense, "justice" understood as the rule of purely general principles of conduct equally applicable to all may be a "second best," but given a 626 THE FREEMAN social group larger than the small and intimate unit of the family or family-like body, it is the only form of ~)ustice" available to finite, falli ble beings. Politicians may speak of a large modern nation as a "family"; some clergymen may cling to a social ideal based upon the small feudal village. The reality of a large and complex society is, however, ill served by a model of "justice" ap propriate only to such rhetoric and nostalgic yearnings. In sum, the moralist objects to a market economy, but typically dis plays a morally culpable ignorance of the workings of such an economy and of the problem any attempt to devise a socio-economic system must solve: how, in the absence of the per fect knowledge an omniscient being alone enjoys, to allocate scarce re sources and move beyond the arbi trary rule of the powerful.

Truly, the little fox of moralism is a mightily confused little fox. He re mains confused even when decked out in a clerical collar or a bishop's gaiters. He may well be sincere, but the measure of that sincerity is his willingness to listen to a few home truths and modify his attitudes in the light of what he hears and con cedes to be true. Conclusion Our list of "the little foxes that spoil the vineyards" could be ex tended. Sufficient, however, has been said to make our task clear. Our first task, as ever, is to toil in the vine yards our forefathers planted, that we may pass on to our children the inheritance that rightly is theirs. Yet a second task also is ours. De pending upon our capacities and sit uation, let us become either amiable but alert guard dogs sniffing out the little foxes spoiling the vineyards, or scarlet-clad hunters riding after these foxes in dedicated pursuit.

Either way, let us "catch the foxes, the little foxes, that spoil the vineyards." @) -FOOTNOTESlThe Song of Solomon, 2:15. 2J. Schumpeter, Capitalism, Socialism and Democracy (New York: Harper and Row, 1942), p.67. 3G. J. Stigler, The Intellectual and the Market Place and Other Essays (Glencoe, Ill.: Free Press, 1963), p. 7. 4S. Rydenfelt, A Pattern For Failure: Socialist Economies In Crisis (New York: Harcourt Brace Jovanovich, 1984), dust-jacket summary. SF. A. Hayek, "The Telecommunications Sys tem of the Market," 1980s Unemployment and the Unions (London: Institute of Economic Af fairs, 1980), pp. 25-37.

Dennis L. Peterson Philanthropyand Freedom EVERY TIME the opportunity arises, I enjoy traveling to nearby Lancas ter, Pennsylvania, where I can ob serve the Amish and their farms. I enjoy seeing their neatly ploughed fields, immaculate homes, horse drawn carriages, and handmade crafts. More importantly, however, I admire their deep commitment to a mixture of self-reliance and com munity charity. It reminds me of what our nation once was and could again become. It is not their primitive, agrarian society I advocate. I long for in creased self-reliance and an indi vidual concern for our fellow man as opposed to the now predominant de pendence on government handouts. Early in our nation's history, Americans-farmers, laborers, mer chants, and manufacturers alike understood that charity was the re sponsibility and privilege of individ uals and religious organizations. Mr. Peterson is a freelance writer in East Greenville, Pennsylvania, anxious to share some of the lessons he's learned concerning the freedom philosophy.

They never dreamed of relegating this duty to any other institution, es pecially not to government. Mter the Civil War, however, an almost imperceptible change began to occur in the attitude of indi viduals. As the power of the federal government overshadowed that of individual state and local govern ments, the central government be gan to assume duties once fulfilled solely by individuals and churches, including those duties involving charity. Perhaps the greatest changes in attitude came during the New Deal. In an attempt to provide "quick fix" cures for the problems of the Depres sion, government usurped the role of individuals in charity and philan thropy. Government became the pri mary provider of jobs, homes, and other humanitarian aid. It did not take long for the American people to begin looking to Unele Sam for the sustenance of life and industry in America. Then came the "Great Society"

627 628 THE FREEMAN October under President Lyndon Johnson with its myriad welfare and public assistance programs. By this time, government assistance had come to be viewed as practically an inalien able right of every needy American. This attitude has since become en trenched in American life. When ever workers lose their jobs, families lose their homes, or farmers lose their mortgages, there is an imme diate cry for Federal assistance. Any hint of freezing the budgets of such programs at existing levels brings an outcry of anguish from social do gooders across the nation. Despite such vociferous defense of government assistance, there are several logical reasons for returning charity and welfare to the private sector. Government, some people are beginning to admit, simply cannot afford to continue financing the ever increasing demands for its assis tance. Private charity is more effi cient and more effective than the government dole because it can ap ply the help where it is needed most-on a local, individual level and keep administrative costs down.

It is easier through private charity to encourage individual pride and to stimulate efforts toward self-help and self-improvement, whereas gov ernment assistance encourages la ziness and idleness. Private charity is also more personal than bureau cratic welfarism. The most compelling reason to return charity to private hands, how ever, is because that is exactly where it belongs. Charity is not the respon sibility of government. Govern ment's only legitimate role is de fender and peacekeeper, not feeder, clothier, and general provider for the people. The General Welfare When confronted by this proposi tion' proponents of government as sistance and welfarism generally as sert two reasons for legitimizing government usurpation of this duty: the mandate of the general welfare clause in the U.S. Constitution and the argument that private enter prise capitalists exploit rather than care for the needy.

The preamble of the Constitution states that the federal form of gov ernment was instituted to, among other things, "promote the general welfare." This phrase, statists con tend, gives government a carte blanche to care for the people of the nation. Carried to the extreme, the logic of this argument encompasses the provision by government of cra dle-to-grave social welfare for every individual in the country. Contrary to this erroneous inter pretation, however, the "general welfare clause" means only that government is empowered to pro mote, through its peacekeeping au thority and power, an atmosphere in which all citizens are free both to ef1985 PHILANTHROPY AND FREEDOM 629 fect their own well-being and to help provide voluntarily for the well being of other less fortunate individ uals around them. The Founding Fa thers would be appalled to know that any other interpretation was made of this clause.

The idea that capitalists inhu manely exploit the needy, thereby necessitating government interfer ence and assistance, has long been espoused by socialists and Marxists. They enjoy portraying free-market entrepreneurs as obese, callous mag nates who violently oppress and ex ploit the unfortunate laboring masses. They claim capitalism helps only the rich at the expense of the poor. Lenin argued, "Capitalists are no more capable of self-sacrifice than a man is capable of lifting himself by his own bootstraps." Jawaharlal Nehru complained, "The forces of a capitalist society, if left unchecked, tend to make the rich richer and the poor poorer." Even Roman Catholic bishops re cently condemned the American free enterprise system. They apparently prefer a government-enforced redis tribution of wealth, perceiving capi talists as unfeeling and greedy but a socialistic, paternalistic government as the savior of the downtrodden poor.

While many supporters of the free enterprise way of life would auto matically reject Marxist premises as false, one important point does war rant our attention: There is always and in every instance the potential for such a premise becoming a reality. Thomas Jefferson recognized the danger when he warned, "Material abundance without character is the surest way to destruction." Grover Cleveland, aware of the threat of communist ideas to capi talism, was not blind to the dangers within the free enterprise system it self. "Communism is a hateful thing and a menace to peace and organized government," he declared, "but the communism of combined wealth and capital, the outgrowth of overween ing cupidity and selfishness, which insidiously undermines the justice and integrity of free institutions, is not less dangerous than the com munism of oppressed poverty and toil, which, exasperated by injustice and discontent, attacks with wild disorder the citadel of rule."

Obsessed by Materialism There is within every individual a natural tendency to develop an at titude of selfish materialism which leads to the complete disregard for those who, perhaps through no fault of their own, happen to be less for tunate than the average citizen. In the past, genuine concern and com passion has prompted those with the financial means to develop a variety of programs that help meet the needs 630 THE FREEMAN October of such people. Private and religious philanthropy and benevolence saw to it that those in need were cared for. In many instances, however, there has developed among the citizens of the free world such an obsession with personal and material advancement as to seemingly obscure the efforts of private philanthropy. Some indi viduals have become so wrapped up in obtaining more and more for themselves that they have thought less and less of the needs of others.

Their conscience has been seared by the attitudes of "looking out for number one" and "get to the top of the ladder as quickly as you can re gardless of those on whom you must step in the process." In direct proportion to the unwill ingness of private individuals to con tribute philanthropically, the gov ernment has eagerly stepped in to fill the void. With these government funds, however, has come the inevi table hand of government control. And, contrary to what some would have us believe, government welfare has not been the gleaming success Lyndon Johnson's "Great Society" predicted. If anything, it has only encouraged and compounded the problems. While self-interest has always been at the heart of capitalism, it has also been accompanied by a feeling of human charity and a sense of so cial responsibility toward one's fellow man. This is shown by countless instances of private philanthropy.

Andrew Carnegie gave an estimated $350 million to charities. Marshall Field provided $8 million for a mu seum and donated land for the cam pus of the University of Chicago. "There is no happiness in mere dol lars," he warned. "It is only in the wider public affairs, where money is a moving force toward the general welfare, that the possessor of it can possibly find pleasure, and that only in constantly doing more." Private Charity But most charitable funds come from the average citizen, the ones who share in the wealth produced by the wealthy minority. The magni tude of this giving was brought to light recently in Philadelphia. In an attempt to evict members of MOVE, a radical antisocial commune, police accidentally destroyed the homes of 61 families. Individuals, corpora tions, and community organizations immediately began raising funds for the innocent victims of the tragedy. A radio station solicited $30,000 from its listeners in less than a week.

A large corporation donated $56,000 for emergency relief and challenged other businesses to match it. All of this took place-even before govern ment officials had pieced together what had happened-because people were genuinely concerned about the welfare of their fellow men. As a re1985 PHILANTHROPY AND FREEDOM 631 sult, some people are beginning to remember that Philadelphia is the "city of brotherly love." Yet there is still a clear danger that capitalism, if left unchecked-not by government interference but by the superior moral standards of individ uals-will degenerate into a state similar to that predicted by the Marxists. This danger, however, is not-as Marxists would have us believe-in evitable. With the rebuilding of sound national moral foundations and the strengthening of individual character, capitalism can continue to disprove socialist propaganda by meeting the needs and fulfilling the dreams of every citizen willing to put forth efforts at self-improvement and responsible social consciousness.

History has repeatedly proven that not only the greatest material pros perity but also the greatest philan thropy has resulted from commit ment to the freedom philosophy. Such high character and morality cannot be dictated by an omnipotent government; it must arise voluntar ily from within the individual heart and conscience. It must develop as the result of an awareness of the truth and practicality of the Golden Rule: "Therefore all things whatso ever ye would that men should do to you, do ye even so to them" (Mat thew 7:12). It must be the outgrowth of realizing the need for an individ ual to love his neighbor as himself. Samuel Smiles, who wrote widely on the practical aspects of personal and entrepreneurial success, con cluded, "... society mainly consists of two classes-the savers and the wasters, the provident and the im provident, the thrifty and the thrift less, the haves and the have-nots."

And so it will ever be, even in the best of free markets. But in a state planned economy the number of wasters, improvident, thriftless, and have-nots is far greater than in a free economy. The capitalist so quickly con demned by so many is, in Smiles' words, "merely a man who does not spend all that is earned by work." He then employs the money or time or resources saved in the acquisition of even more wealth in order to rise above a mere existence. He uses it to raise his family's standard of living. And what he believes he can afford to give to others for the fulfillment of their needs or desires, he contrib utes as he sees fit. Philanthropy Begins at Home To some, this may on the surface seem very selfish and self-centered, but it has proven to be without ques tion the most effective system of en couraging philanthropy known to human history. Leonard Read wrote that "if material wealth has any moral purpose at all, it is to free men from the restrictions which are im posed by a subsistence level of liv632 THE FREEMAN ing.... " Not only does the success ful capitalist improve his own lot but also that of his fellow men through the goods or services he provides. In addition, his success permits him to contribute through charity to the improvement of others without hindering his own standard of living.

Those who decry this system offree philanthropy fail to offer in its place any more adequate or more effective alternative system. While capital ism admittedly has its problems, in stark comparison to any form of totalitarianism-whether benevo lent or malevolent-these difficul ties are negligible. "The inherent vice of capitalism is the unequal sharing of blessings," Winston Churchill stated, "but the inherent vice of socialism is the equal sharing of misery." Individual Moral Improvement The solutions to the needs of our fellow men lie not in regulation, in tervention, or government-coerced programs, but in the moral improve ment of the individual. Along with this will come to the individual re alization that one must be not only honest but also generous. This will sometimes require self-sacrifice on our part. Such sacrifice will, how ever, be strictly voluntary. The most important form of gen erosity is the giving of one's self.

Success experts Napoleon Hill and W. Clement Stone advised, "Share yourself without expecting a reward, payment, or commendation. And above all else-keep your good turn a secret." Do so consistently and that secret will not remain one for long. Consumers notice and reward such generosity and good will. Modern-day capitalists can help dispel the socialistic accusations of selfishness by realizing and acting upon the truth that if one wants to get more he has to give more. As someone once wrote: If you want to be rich, give; If you want to be poor, grasp; If you want abundance, scatter; If you want to be needy, hoard! The story has been told of a man who opened a butcher shop in a small town which already had several such businesses. Despite the fact that his prices were higher than any of his competitors', his shop became the most frequented shop in town. When questioned about how he did it, the wise man replied, "I give them a smile and twenty ounces to the pound."

The key to success, not only in business but also in life itself, is to give something to others. Some of us can give money, others offer goods, and still others provide services. But we can all give something. We should count that day lost in which we have not tried to give a little of ourself to or for someone else. This is the es sence of true charity. It is an integral part of true free enterprise. ~ New! GOVERNMENT AND LEGAL PLUNDER BastiatBroughtUp to Date Dean Russell Frederic Bastiat saw a century and a half ago that the law becomes legal plunder when it goes beyond simple defense of individual rights. Bastiat often presented his lessons in a series of clever and telling stories which explored and exploded the logic and true effects of the planned economy. Today his parables on free trade, the broken win dow fallacy, government schools, natural rights, and the law are just as true as they were in the 1840s.

In Government and Legal Plunder, Dean Russell uses Bastiat prin ciples as a starting point for his book, and provides contemporary ex amples of issues that we personally face every day. He shows that we must limit government's role in society and in the economy, to en courage individual initiative and human freedom. 120 pages $4.95 paperback (Postage paid on prepaid orders; otherwise $2.00 per order for billing.) Order from: The Foundation for Economic Education, Inc. Irvington-on-Hudson, NY 10533 A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN The Essence ofHayek To represent the full scope of Fried rich Hayek in a single book, even with an allotted 550 pages at the ed itors' disposal, was surely a formi dable undertaking. The object, as nurtured by W. Glenn Campbell, the director of the Hoover Institution of Stanford University, was to greet Hayek on the occasion of his 85th birthday with a present to be called The Essence of Hayek (Hoover Insti tution Press, $27.50). The editors, Chiaki Nishiyama and Kurt R.

Leube, both of whom are former stu dents of Hayek, had to winnow through essays, occasional papers, books, speeches and polemical ex ercises that are numbered literally in the hundreds. Hayek has spent a long working lifetime in pushing his investiga tions into many fields outside of for mal economics. He has been an epistemologist, a student of law, a 634 theorist of government, a student of science, an historian and, finally, a psychologist. In giving us relevant samples of all the many Hayeks, Nishiyama and Leube have exercised excellent judg ment. The book jacket copy, ob viously written by someone who knows what Hayek is all about, speaks of the "two fundamental ideas-the limitation of knowledge and the spontaneous formation of systems"-that unify Hayek's work. Individuals, as Hayek says, can't know everything, but the market can be trusted to coordinate a thou sand subjective valuations in a price.

Thus "spontaneity" is regulated without the coercion that people, as individuals, can never stomach for very long. As Campbell points out, one of Hayek's earliest interests was psy chology. Indeed, Hayek once debated THE ESSENCE OF HAYEK 635 the idea of becoming a professional in that field. Since Austrian eco nomics, as developed by Carl Men ger, Eugen Bohm-Bawerk and Lud wig von Mises, eschews "macro economic" preoccupation with sta tistical aggregates and concentrates on the subjective nature of individ ual choice, Hayek managed to find plenty of room for the contemplation of human vagaries even within the so-called dismal science. The Human Nature It was knowledge of human nature that made Hayek's The Road to Serf dom, written in wartime England, the great book that it was and is. John Maynard Keynes, Hayek's friendly enemy in the cloisters of Cambridge, had assumed that indi viduals could be handled in the mass by a dedicated bureaucracy once a group consensus could be estab lished. In wartime, with an enemy at the gates, this can be done. But what is possible in a war crisis is not possible in times of peace. Human nature will out. Individuals have thousands of varying desires of their own, and they make their separate plans accordingly. If a master plan ner presumes to thwart them, re sentments will multiply to the breaking point. The central plan ners, to carry out their assumed mis sion will feel constrained to bring in the strong-arm boys to knock recal citrants into line. So the "worst"

must eventually get on top. A planned society is not possible with out a bureaucracy of thugs. Orwell had not yet written 1984 when Hayek presented his analysis of sta tist controls to Keynes, who, in praising The Road to Serfdom as a "grand" book, uttered a feeble pro test that people ought to respect the judgment of a disinterested elite. To Hayek, words have conse quences. Most idea people-the "scribblers" who, in Keynes's the ory, have usually to wait a genera tion to see their doctrines picked up are not normally action-oriented. But Hayek, in addition to being a scribbler, has also been a great "doer." Where would England's Margaret Thatcher be today if An tony Fisher, a British RAF pilot who made some money as a chicken farmer by outguessing the control lers, hadn't gone to Hayek to seek advice about a possible career in pol itics? John B. Wood, in a book called The Emerging Consensus put out by the Institute of Economic Affairs in London, gives us an anecdotal re cital of how Fisher's visit to Hayek in 1945 resulted in the "spontaneous formation of systems."

Hayek told Fisher to play politics at one remove, urging him to use his money and influence to change the climate of opinion in an England that needed a whole new line of thought. Taking Hayek with high seriousness, Fisher decided to set up 636 THE FREEMAN October a research organization in London. He found his director in the ener getic Ralph Harris, who doubled as secretary and, later, as president of the Mont Pelerin Society, which had also come into being to advance the freedom philosophy because of the word spread by Hayek. The pam phlets, books and research material put out by Ralph Harris's Institute of Economic Affairs played a great part in the education of Margaret Thatcher, who acknowledged it by making Harris a member of the House of Lords. Changing Opinion John Wood says the Fisher-Harris lEA is a "good illustration of the so cial philosophy with which it is now identified, namely, that most crea tive developments in society result from harnessing the spontaneous forces generated by individuals."

The words could be adapted to de scribe Leonard Read's FEE in Amer ica. Tony Fisher has more recently been exercising his spontaneity by starting new research institutions in cities around the world. One ofthem, the Fraser Institute of Vancouver, has been credited with killing rent controls in Canada and helping to send a conservative majority to the capital in Ottawa. As a "doer," Hayek was responsi ble for a notable Mont Pelerin meet ing that was devoted to exploding the myth that the industrial revolution in Britain has impoverished two or three generations of British work ers. Hayek's contributory essay, "History and Politics," reprinted in The Essence of Hayek, is a most ef fective refutation of the notion, spread by Marx and Engels, that a steady proliferation of the tools available to workers can only result in their degradation as the capital ists seize the product. The industrial revolution enabled many more peo ple to come to birth in England, and to achieve steadily improving stan dards of living.

Hayek, in another notable essay reprinted here, insists that he is an "Old Whig," not a conservative. One of the traits of the conservative at titude, he says, "is a fear of change, a timid distrust of the new as such." If Hayek is speaking of some of the Tories who make things difficult for Margaret Thatcher, he is, of course, correct. But the term "Whig" would never be understood in America, where the Whigs in nineteenth cen tury history were the supporters of government largesse. Hayek is fearful of the political fu ture as long as "the ordinary rep resentative cannot say 'no' to any large number of his constituents, however unjust their demands, and still hope to retain his seat." Hayek wrote these words in 1976. They still hold in 1985. But Reagan has read Hayek, and that, conceivably, could make a difference. We shall see. ® 1985 OTHER BOOKS 637 MARXISM: PHILOSOPHY AND ECONOMICS by Thomas Sowell (William Morrow and Company, Inc., 105 Madison Ave., New York, NY 10016), 1985 281 pages _ $15.95 cloth Reviewed by Kenneth L. Marcus THOSE who would defend freedom against its opposites must avoid the pat generalizations and hackneyed misconceptions that have colored both apologies for and attacks upon the work of Karl Marx and Friedrich Engels. In his slim, tightly woven but thorough exposition, Thomas Sowell cuts through the labyrin thine rhetoric of Marx and Engels to provide a scholarly but concise and accessible interpretation of Marxian theory.

Reserving criticism for his final chapter, Dr. Sowell simply and sys tematically presents the philosophy, economics, historical theory and po litical strategy of Marxism. He em phasizes that Marx must be under stood in terms of his dialectics, thus avoiding the pitfalls of earlier analysts. Dialectics refers to the process by which things change and develop. "What Marxian theory derived from Hegel," Sowell tells us, "was that the way to understand the world was not to see it as a collection of things but as an evolving process. An acorn or a caterpillar could not be understood as a fixed and isolated thing, with out seeing that it was a transitory stage of an ongoing process that would eventually turn one into an oak tree and the other into a butterfly." Marx was essentially interested in human development and wanted to establish the social environment where human beings might best re alize their potential. Under the "ex ploitative" conditions of capitalism and the division of labor, Marx claimed, people can develop them selves only partially. Standing all day in a factory and working in front of a machine does not encourage a person to develop and express his or her personal creativity.

Marx's theory of history tries to explain the transformations of whole societies. Changing technologies bring changes in economic relation ships and ultimately in political structures and ideologies. Society is not completely determined by its modes of production, but economic development provides the tenden cies which society will follow. Capitalism is viewed as a neces sary stage in socio-economic devel opment, but one which will eventu ally be "negated" or replaced. It offered wider potentialities for man kind than earlier systems and pro vided a rapid increase in production, but it leads to continual, periodic 638 THE FREEMAN October crises which will ultimately hasten its development into a higher form of society. The form the revolutionary move ment would take was seen by Marx and Engels as crucial to the devel opment of the post-revolutionary so ciety. A democratic regime would be possible only if the bourgeois rule were overthrown by a mass move ment of workers, but a small con spiracy of professional revolution aries would imply dictatorial rule after the revolution.

Dr. Sowell sees the modern prac tice of communism as being, in a sense, a betrayal of Marx's thought, but not one which should have been wholly unpredictable. For one thing, Marxism is, in Sowell's words, "a mighty instrument for the acquisi tion and maintenance of political power." And it is not entirely clear whether Marx himself would not have committed the atrocities of a Joseph Stalin or a Pol Pot. Nevertheless, Dr. Sowell, who himself now holds a distinctly free market outlook, remembers the at traction which Marxist doctrine once held for him and continues to hold for countless students and intellec tuals. He tells us, "What Marx ac complished was to produce such a comprehensive, dramatic, and fas cinating vision that it could with stand innumerable empirical con tradictions, logical refutations and moral revulsions at its effects." Dr. Sowell, too, is dramatic and comprehensive, and his book is clearly written and devoid of jar gon. It is ideally suited as an intro duction to Marxism, but it delves deeply enough to recommend itself to more learned scholars. The last chapter spells out the tragic flaws in Marx's reasoning and is especially worth reading. Dr. Sowell has pro vided a valuable work which will en able us to base our acceptance of free enterprise and our rejection of com munism on careful study and deliberation. ® THE ESSENTIAL ROYSTER: A VERMONT ROYSTER READER selected by Edmund Fuller (Algonquin Books of Chapel Hill, P.O.

Box 2225, Chapel Hill, NC 27515), 1985 345 pages • $18.95 Reviewed by Robert M. Thornton REVIEWING this collection of essays and lectures is difficult because Royster-former editor of The Wall Street Journal-writes wisely and el oquently on so many subjects George Washington and Martin Lu ther, our duty to posterity and re spect for the Constitution, foreign policy and the military, inflation and the State, politics and politicians (from FDR to RR), public morality and education, modern technology and the Promethean Gift, criminal 1985 OTHER BOOKS 639 trials and the use of words. His "purely personal" columns on mar riage, grandchildren and the cele bration of anniversaries are a de light-touching but not cloying, filled with sentiment but not sentimental. Let me dwell briefly on what Roy ster says about journalism, his own field of endeavor for fifty years and an increasingly controversial sub ject during the past decade or two.

Our Founding Fathers believed in the revolutionary idea of freedom of the press. They would be surprised, however, and perhaps disturbed by "what has evolved in the succeeding two centuries from their views of what constitutes freedom of the press." Certainly "they did not en vision a press of very nearly unre strained license." Royster quotes Blackstone: "The liberty of the press is indeed essen tial to the nature of a free state; but this consists in laying no previous re straint upon publications, and not in freedom from censure for criminal matter when published. Every free man has an undoubted right to lay what sentiments he pleases before the public: to forbid this is to destroy the freedom of the press; but if he publishes what is improper, mischie vous or illegal, he must take the con sequences of his own temerity." There, declares Royster, "is the whole of the law and the philosophy of the press as it appeared to Englishmen of the eighteenth century, including our own revolutionists."

Royster believes the American press occupies a unique position to day and by the word press he refers not just to "the newspapers of mass circulation but to the whole of the press in all its multiplicity and di versity." This "American press," he writes, "can publish what it will. It can seize upon secrets stolen from government archives and broadcast them to the world. It can strip the privacy of councils and grand juries, it can pillory those accused of crimes before they are tried. It can heap cal umnies not only upon elected gov ernors but upon all whom chance has made an object of public attention. It can publish the lascivious and the sadistic. It can advance any opinion on any subject, including the opinion that all our government is corrupt and that the whole ofthe social order proclaimed in 1776 should be swept away and another put in its place." Royster believes that "freedom of the press is not some immutable right handed down to Moses on Mt.

Sinai. It is a political right granted by the people, in a political docu ment, and what the people grant they can, if they choose, take away." Beca use he cherishes the precious right of free speech, Royster warns his fellow journalists not to abuse it because "there is no liberty that can not be abused and none that cannot be lost." (t College division: 1985-1986FREEDOMESSAY CONTEST for high school and college students Write now for guidelines and information! Ideas determine the course of human freedom. Here is an opportunity for students to express their own ideas on liberty in FEE's essay contest, Foundations of a Free Society. Essays should present the positive case for individual responsibility and choice ina free economy. First prize essays will be published in The Freeman. Award winners and runners-up will receive fellowships for a FEE seminar. Cash awards will be made as follows: First Prize-$2000 Second Prize-$1000 High school division: First Prize-$1000 Second Prize-$500 Teachers and professors instrumental in the submission of recognized essays will receive a $100 award.

The deadline is January 15, 1986. Please write: Freedom Essay Contest The Foundation for Economic Education Irvington-on-Hudson, New York 10533 the Freeman VOL. 35, NO. 11 • NOVEMBER 1985 For a Moral RevolutionA Page on Freedom, No. 25 To relieve the crisis confronting us. Spruille Braden 643 America's Two Elites Kenneth McDonald 644 The elite that produces versus the elite that controls. Living in Two Chinas Dean Russell 648 The prospect for peace between Taiwan and the mainland. Interventionist Liberalism and the Fast Lane The new liberalism lacks staying power. Charles R. La Dow 655 Should American Business Give Up Smoking? Gary North 658 Involving consumer preference and freedom to trade. Classical Liberalism Reconsidered A Symposium 667 Comments upon the republication of Ludwig von Mises' Liberalism. Declarative Law Joseph S. Fulda 684 Let the law describe responsibilities rather than command action.

Entrepreneurship, the Possible Dream William H. Peterson 688 The spirit of enterprise graces the free society. To the Editor 696 Book Reviews: 699 "Liberalism Proper and Proper Liberalism" by Gottfried Dietze "Hayek: His Contribution to the Political and Economic Thought of Our Time" by Eamonn Butler "Murder at the Margin" by Marshall Jevons "Death on Demand" by K. Hill and O. Dale Anyone wishing to communicate with authors may send first-class mail in care of THE FREEMAN for forwarding.

~Fieeman AMONTHLYJOURNALOF IDEAS ON LIBERTY FOUNDATION FOR ECONOMIC EDUCATION Irvington-on-Hudson, N.Y. 10533 Tel: (914) 591-7230 Robert D. Love, President Editor: Charles H. Hamilton Publisher: Paul L. Poirot Managing Editor: Beth A. Hoffman Production Editor: Amy S. Vanlaar Contributing Editors: Robert G. Anderson Howard Baetjer Jr. Bettina Bien Greaves Edmund A. Opitz (Book Reviews) Brian Summers Joan Kennedy Taylor THE FREEMAN is published monthly by the Foundation for Economic Education, Inc., a nonpolitical, nonprofit, educational champion of private property, the free market, the profit and loss system, 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. Donations are invited in any amount. THE FREEMAN 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 $10.00 a year.

Copyright, 1985. The Foundation for Economic Education, Inc. Printed in U.S.A. Additional copies, postpaid: single copy $1.00; 10 or more, 50 cents each. THE FREEMAN is available on microfilm from University Microfilms International, 300 North Zeeb Road, Ann Arbor, Mich. 48106. Reprints are available of "A Page on Freedom," small quantities, no charge; 100 or more, 5 cents each. Permission is granted to reprint any article in this issue, with appropriate credit, except "Should American Business Give Up Smoking?"

A Page on Freedom Number 25 Fora MoralRevolution ALMOST everywhere politicians and "do-gooders," by camouflaging ill-con sidered or bad enactments as welfare or defense measures, are enticing their peoples down the path of dalliance into systems of state interventionism. They are leading them to eventual destruction. They are concentrating power in Washington under a bureaucracy already expanded beyond manageable dimensions and which increasingly resorts to uncontrolled extravagance and extravagant controls. They are murdering the nation. Can there be greater treason? Too many laws create confusion, unwise laws corruption. Together they nurture absolutism and criminality. There are, for example, many enterprises which could not operate prof itably were they to obey, to the letter, a complexity of laws and regulations, which sometimes almost seem to have been enacted with malice afore thought. As a result, these businessmen are easy prey for gangsters and crooked officials, both high and low, who exact tribute for what they call "protection." In these cases the quickest prophylactic would be to do away with the unwise laws and regulations.

Jefferson once remarked that a revolution every so often is a good thing. This country desperately needs a moral revolution right now. I pray that it comes soon, before it is too late. I pray that it will be brought on by an outraged public opinion, resulting from each individual reassuming his per sonal responsibilities and then joining with others to make their voices heard. Such a revolution will return the United States to morality and straight thinking, and thereby resolve the crisis which now confronts us. @ -Spruille Braden THE FOUNDATION FOR ECONOMIC EDUCATION, INC. IRVINGTON-ON-HUDSON, NEW YORK 10533 643 Kenneth McDonald IN a recent survey, Freeman readers were asked whether they were op timistic or pessimistic about the fu ture of freedom in America. The fact that the question should have been asked is disturbing. Yet the seeds of doubt are being sown. A casual reader of Canadian news papers, in which the United States is often portrayed as bellicose and predatory, might conclude that free dom there was selective: plentiful for the rich; scarce for the poor. A reg ular listener to and watcher of the Canadian Broadcasting Corpora tion's radio and television programs would be left with a stronger impresKenneth McDonald is a freelance writer and editor, living in Toronto.

644 sion: that the U.S. was the chief threat to world peace and, by impli cation, to free people everywhere. These persuasions of the media are not peculiar to Canada. In the March issue of Chronicles of Culture, Paul Hollander noted, after traveling in Western Europe, that "Highly edu cated people appeared to entertain a view of the American political sys tem more appropriate to the per sonal dictatorship of Qaddafi of Li bya or Kim II-Sung of North Korea than to a system in which 'the chief executive' is subject to a vast net work of controls, restraints, and countervailing forces." The fact that America gets a bad press abroad may be due to the fact that it often gets a bad press at home. Negative reporting by U.S. news papers, magazines, wire services, radio and television networks finds its way into their equivalents throughout the world. The nation in which freedom of speech is as fiercely treasured as breathing tells the world everything it does. The good and the bad, the successes and failures, all are re corded. Nothing is hidden, or at least not for long. Sooner or later, corrup tion is exposed, even the corruption of power.

The freedom that makes all the re cording possible makes the U.S. an inviting target. Her domestic de tractors supply the ammunition to reinforce the attacks by her foes.

AMERICA'S TWO ELITES 645 Freedom in America How does this affect freedom in America? It deflects attention from Ameri ca's basic strength: the freedom of her citizens to exchange the product of their mental and physical skills. Indeed that freedom is contested by domestic critics who claim that the product, and the capitalist system that enables it to be produced, con flict with their ideas of "social justice." No account is taken of the process through which the product comes into being. Instead, the state, whose role in a representative democracy is to uphold the law before which all citizens are equal, has put its thumb on one side of the scales of justice. The many, who constitute potential majorities in elections, are preferred to the few, who don't. This inherent flaw in representa tive democracy is paradoxical. De mocracies were formed by people who saw that the good of the many was advanced by individuals of which the many consists. Not every one succeeds. But they who do, bring benefits to the rest. Whether as em ployers or inventors, engineers or philosophers, they add something that was not there before.

They owe their success, in large part, to the freedom with which de mocracy surrounds them. They are an elite, but a fluctuating one, an elite whose composition changes as individuals make their separate ways up or down the ladder. The paradox is that democracy de velops two elites: the elite that pro duces, in freedom, the sources of bet terment; and the elite that gathers to itself, also in freedom, the power to control other people's affairs. The second of those two is not con fined to democracies. In the extreme form that characterizes arbitrary rule, it has controlled most of the world's peoples throughout history. Today, and even after classing some marginal countries on the side of de mocracy, more than 60 per cent ofthe world's people are subject to arbi trary rule by elites. (Whether the rule is exercised by a personal dictatorship, as in Libya, or by a self-perpetuating oligarchy, as in the USSR, it needs an elite to prop it up. The elite is rewarded with favors beyond the reach of the ruled.

The desire to preserve elite status, and to make it hereditary, traps elites and rulers alike in the conspiracy.) The fact that, despite the Western media, and despite the propaganda of their own rulers, people from the 60 per cent try desperately to escape to America is a mark for optimism. Even if these refugees know about the second of America's two elites, those who control other people's af fairs, they know also that its mem bers will not knock on their doors in the night.

646 THE FREEMAN November Nevertheless for Americans, and for all who wish America well, it is that second elite which calls for examination. It consists for the most part of well meaning people who would defend freedom as stoutly as any. Indeed it may be their desire to defend the freedom of the less fortunate that impels them to control people's af fairs. Former Canadian Prime Min ister Pierre Elliott Trudeau ex pressed the sentiment when he wrote (in 1958) "I believe in the necessity of state control to maximize the lib erty and welfare of all, and to permit everyone to realize himself fully." The Basic Contradictory Tenets of Socialism The difficulty that confronts all self-styled democratic socialists, or social democrats, is that their tenets are contradictory. Their philosophy requires the state to control the economy, Le., to deny citizens the economic freedom which is insepar able from political freedom, while claiming to keep the latter intact.

They are condemned to a condition of what George Orwell called "Dou ble think [which] means the power of holding two contradictory beliefs in one's mind simultaneously, and accepting both of them." (1984) That does not make them any the less dangerous. Their adherents are prey to a trap of a different kind. Be mused by visions of a welfare state in which the sun shines every day upon smiling and contented people, they fail to see that taking without giving in return is a one-way street. At the end of it, there is little left to take. Like drug addicts, who seek tem porary relief at the risk of lasting damage, they take what the state of fers, yet see no relation between the scale of its offerings and the depre ciation of the currency in which the offerings are expressed. The resulting impoverishment leads the elite to call for more inter ventions by the state whose inter ventions caused it. But their philos ophy prevents them from admitting the connection between the two.

This, then, is the paradox of free dom: that an elite which freedom spawned poses the gravest threat to it. For there is no doubt that, un checked, the work of that elite will lead to more and more of the state's encroachments until the individu al's liberty, far from being maxi mized, will fast diminish. Warnings that these growing en croachments have only one end-in state control of Soviet-sty Ie dimen sions-are laughed out of court. America, after all, is a democracy. It is true that democracy is strong. It has the strength of people who partake of it willingly and would as willingly defend it, if necessary by arms.

1985 AMERICA'S TWO ELITES 647 But the defense it needs most is against ideas that would bring it down. The elite that would control affairs at home, and the elites that do control affairs in the dictator ships, differ only in degree, not in kind. The foreign observers' view of the United States of America, referred to earlier, persuades them that the two superpowers are much of a muchness, both too big and power ful, both dangerous. Superficially, the sinecures of public office in Washington, and the perquisites that accompany them, are not dis similar from those that attend the functionaries in Moscow. What seems to escape the observ ers is this palpable difference: that the Soviet government goes to bar barous lengths to stop its people from getting out; the U.S. government tries vainly to stem the flow of peo ple who are trying to get in. The promise of freedom that brought the millions to America in the past brings them still.

. Neverlheless the foreign observers have a point. America is not threat ened so much by the Soviet Union as by the pressures that confroriting the Soviet Union imposes upon Ameri ca's institutions. Confronting a state whose purpose is to expand its influence by military means is no light matter. Nor is it limited in time. Mounting a corre sponding military defense, perhaps for generations, imposes a heavy burden on the economy. Moreover, the allocation of American resources to military purposes, and the accom panying growth of government to gather and monitor those resources, will accentuate similarities between two political systems that are in fact distinct. Democracies and dictatorships are not ordinary foes. Between one and the other no compromise is possible. The first thrives on freedom, the sec ond dare not allow it. The Importance of Optimism Freedom is the issue. The freedom to exchange ideas, and the products of ideas, is the basis of America's strength; denial of that freedom is her enemies' weakness.

America, too, is weakened by the elite that encroaches on freedom at home. Just as defense against the foreign enemy is rooted in freedom, so is the domestic enemy vulnerable to the ideas that freedom generates. The challenge is to tailor those ideas, and disseminate them, in ways that will counter, and dis credit, the forces that threaten freedom. To return to The Freeman's ques tion, optimism is a component of freedom. It was optimism that brought the millions to America, and it is the freedom they found and prospered from that will secure America's future. @) Dean Russell • Livingin Two Chinas • THE economy of the Republic of China on Taiwan is largely based on private ownership and production for-profit. The officials are elected and are responsible to the wishes of the people in general. The economy of the communist government on the mainland, the People's Republic of China, is based on total government ownership of all resources and all means of produc tion. That system of social owner ship, Le., planned production by everyone for the benefit of all, nec essarily requires a dictatorship to run it.

While the communist armies clearly won the long war in China between the two sides in the 1940s, their current leaders are now beginDr. Russell, whose latest book is Government and Le gal Plunder, recently spent six months teaching at the National Taiwan University. 648 ning to abandon the· economic sys tem they fought for and have fol lowed since 1949. The communist leaders on the mainland are now increasingly en dorsing the basic economic idea that free-market production guided by the desire for profit is (in most areas of daily living) superior to govern ment-directed production for the general welfare. That 'development deserves the serious attention of all of us who value human freedom. Here's why: Along with a trend toward the market economy, a different form of government necessarily begins to emerge in practice. For when a peo ple are free to choose as consumers, a large shift in authority must nec essarily begin to flow from the cen tral government to local groups and individuals who determine what to LIVING IN TWO CHINAS 649 produce 'and how best to do it in or der to meet consumer demand. The checks and balances of market-di rected production and of voluntary selling and buying begin to displace the arbitrary decrees of government officials. That's a first necessary step toward some form of democratic government.

I first became personally involved in studying and comparing the two Chinas when I entered communist China as a tourist a few years ago. It was a short visit, totally under the supervision of government guides during the entire trip. While I en joyed it (first-class hotels, excellent food, fascinating archeological sites, and such), I had almost no direct con tact with the Chinese people. Even so, I saw enough drabness, regimen tation, and sullenness to convince me I wouldn't want to live and work there. I am, however, now living and working in the Republic of China on Taiwan as a Visiting Professor at the National University. My observa tions and experiences here have been markedly different from those on the mainland. And I'm convinced that the difference stems basically from the economic systems of the two countries. I've never seen nor heard of more individual economic activity than I've encountered here on Taiwan. It seems at least as frantic as that gen erated by their Chinese cousins in Hong Kong. Across the street from the faculty housing compound where I live, new businesses are suddenly born every day when entrepreneurs drive up (truck or bicycle-cart), roll out a tarpaulin on the sidewalk, and begin selling any number of items.

I've bought "designer jeans" there for $9, and "brand name" $16 sweat suits for $4. I can get leather jackets at perhaps 20 per cent of the price I'd pay at home. Caps, bananas, gloves, oranges, cigarettes, face pow der, books, watermelons-you name it and it'll eventually show up on a street corner in my neighborhood. And that's only a hint of what goes on all over this city (Taipei) of some two-and-one-half million people. The Two Chinas Compared That's what free enterprise and the profit motive do. It works every time it's tried. Given half a chance, it'll work in communist China as well as here. In fact, it is working there. Un der even a rudimentary sort of free market in food production, appar ently the communist Chinese are now finally getting enough to eat. And many are now earning enough money as private business people to buy TV sets, an occasional mo torcycle (no cars yet, however), and building materials to repair their government-owned and government assigned housing units.

When I compare what's available in the Republic of China (most es pecially housing) with the pathetic 650 THE FREEMAN November situation in the People's Republic on the mainland (or in Russia or Cuba), I wonder how any person can defend communism as the friend of the workers. In 1984, the Republic of China en joyed a high 10.92 per cent economic growth. And the per capita income exceeded $3,000. Meanwhile in com munist China, per capita income is somewhere between $300 and $500. Communist officials are reluctant to supply this type of information, and the few statistics they make avail able are often contradictory. In any case-with their great economic leaps forward, their cultural revo lutions to purify the spirit of the peo ple, and the inevitable communist leadership intrigues-the per capita income in mainland China doesn't seem to have improved much over the past 30 years. The Miracle on Taiwan The Republic of China is rapidly turning from an underdeveloped country into a highly industrialized nation with a large surplus in its balance of payments account. Pri vate enterprise and the market econ omy have worked their magic again on Taiwan-as they always do every where when permitted to operate.

And while the United States ren dered valuable assistance in supply ing both armaments and economic aid, the "miracle" of Taiwan was mostly accomplished by the people of Taiwan and their government. Here's an absurdly brief summary of how they went about it. In harmony with the "Principles of the People" advocated by Dr. Sun Yat-sen (the first pres.ident of China in 1912 and the leader of the revo lution against the imperial Ching or Manchu dynasty), the government started with food production. To in crease it, they instituted a "land to the tillers" program to encourage peasant ownership on easy terms. The government compensated the former landowners by giving them equity-shares in the new industries that immediately began to appear on Taiwan. And as had been promised, the United States government "matched" every dollar of this new capital that had been invested in in dustrial development of all cate gories, both public and private. The Taiwanese people themselves were encouraged to invest their earnings in the new companies that were springing up all over the island. For eign investors were also invited in to "take advantage of the cheap and hardworking labor to be found there."

Again in harmony with the teach ings of Dr. Sun Yat-sen, the govern ment itself maintained complete ownership of twelve key industries steel, railroads, utilities, and such. But light industry and agriculture were left to private ownership and the dictates of the customers in a 1985 LIVING IN TWO CHINAS 651 market economy. The "market test" of the value of products and services was also supposed to apply to the government-owned industries-a theoretical idea that's difficult to ap ply in practice. But for the most part, anyone could start his own company and make whatever he thought he could sell for a profit. (In communist China under total government own ership, there was strict rationing of almost everything; and it still exists there today for the items most wanted by the consumers.) Economic and Political Liberty True, the economy of Taiwan is not a free market economy as we know it in the United States; it's more like that of Great Britain, with govern ment ownership of major industries.

(In fact, Dr. Sun most likely got his economic ideas from the Fabian so cialists in England where he lived and studied for several years.) But when the Taiwanese economy is compared with the communist eco nomic system on the mainland, it is free indeed. And while the dominant political party on Taiwan (the Kuomintang) doesn't exactly en courage competing political parties (there are two more), the people gen erally have a choice among candi dates when they vote for their rep resentatives to the National Assembly and to the other national and local offices. The economy and government of the Republic of China on Taiwan today are unquestionably the freest and most democratic the Chinese people have ever known in their long history. The results of this Taiwan-style market economy and representative government have generally been a distinct improvement. Education: attendance is required through ninth grade, and it is thereafter available (and essentially tuition free through the university level) for all those showing sufficient aptitude according to competitive examina tions open to everyone. Religion: choose your own, or even start a new one. Travel: live where you please, and travel anywhere except to com munist China. Jobs and material possessions: in essence, there is full employment, and as I view the con stant traffic jams, it seems to me that "everybody" owns a car or motor cycle-and also a color TV set, con siderable electrical equipment in homes that are mostly owned by the people who live in them, and well sty led clothing for every season.

Medical: I have found the hospitals and doctors here to be reasonably close to the standards I've been ac customed to in New York-and med ical care is generally available to everyone in one form or another. This "living example" of the re sults of freedom for almost 20 mil lion nationalist Chinese on Taiwan has faced the communist Chinese on the mainland for the past 35 years.

652 THE FREEMAN November As the standard of living here has constantly gone up, it has remained essentially stationary there. And that fact is known to millions of the mainland Chinese, and most espe cially to the communist leaders. Per haps that explains why those lead ershaveannouncedthattheyintend to apply market-oriented principles to their own economy in an effort to satisfy the pressing material needs ofthe one billion Chinese under their authority. A Step Toward Freedom But can they go from total control of all resources and all production to a considerable degree of freedom of choice? Might this "new economic policy" get out of control and result in a demand by the Chinese people for political freedom? After all, that result happened several times in Eastern Europe, and at least once in Russia itself. We can't know, of course, if it will happen in commu nist China. But the leaders of the Re public of China on Taiwan would be short-sighted indeed to take any ac tion to impede this trend toward eco nomic freedom for the mainland Chinese. They might even support it by taking no action'to discourage the "illegal" trade now rapidly devel oping between the two Chinas, For example, dUring the past 12 months, there has been as much as one billion dollars in trade from Tai wan with mainland China-all technically illegal. Most of it has been indirect via Hong Kong and other countries along the Chinese border, but some of it has been direct by pri vately owned "fishing boats" from Taiwan to various Chinese ports.

And this trade is growing steadily. It could soon be two billion, then three, and so on. This practical "as sistance to the development of a free market on mainlanti China" needs no encouragement but merely the absence of official discouragement. And the same policy might also be applied to the "illegal" visits by Tai wanese Chinese to see relatives on the mainland, No one on Taiwan really knows how· many Chinese from here have "vacationed in Hong Kong" and then gone on into mainland China, where they are most welcome. The communist border officials don't even record their entry in the pass ports issued by the Republic of China, since the visits are "illegal." Instead they merely give them a slip of paper that can be discarded before they return to Taiwan! The number of these visits is substantial, and is growing. As a result of these visits and trade, the Chinese on the mainland hear firsthand about the freedom and prosperity of their relatives on Taiwan. And, no doubt, these visits also remind them that the only way they can get out of China is to slip past guards,· dogs, and barbed wire1985 LIVING IN TWO CHINAS 653 and then perhaps swim for three hours through shark-infested waters to Hong Kong. These comparisons can only encourage the ever-present desire for similar freedom to trade and travel in the People's Republic of China.

Exchange Is the Key It is clear to me that the Republic of China on Taiwan has nothing to fear when its system is compared with that of the People's Republic of China on the mainland. Further, the material level of living in both Chi nas is automatically raised by this exchange of products. Obviously, each party to the trade gains some thing he would rather have than what he gives up in exchange. That's the purpose of all trade, both do mestic and foreign. Unfortunately, many government leaders on Taiwan seem unaware of the power of ideas, and some of them are now campaigning for strict en forcement of the long-existing laws against travel and trade with red China. I'm convinced, however, that if the Legislative Assembly decides to enforce those laws, they will thereby destroy the only possible de velopment that could permit some sort of mutually acceptable contact (not necessarily formal re-unifica tion) between the two Chinas.

Human freedom starts with the free market and stops with the con trolled market. That's necessarily the case since it is people who are controlled, not markets. That's all that any government is ever de signed to do, i.e., to control people. And that's the purpose of all laws. (Can you name a law that isn't de signed to compel or prevent someone from doing something?) And the law itself eventually follows the market. If people are free to voluntarily ex change their goods and services, the law is (or soon will be) in harmony with that economic situation. And it is well to remember that freedom feeds on itself. People with a little economic freedom want more freedom, and they will automati cally move in that direction until stopped by the police powers of gov ernment. A powerful example of this tendency is evident in communist China today. The communists there have always posted guards along the Hong Kong border in an effort to pre vent their people from escaping into a free market economy. And now' that the government has created an experimental "free zone" within China along the same border with Hong Kong, additional guards are now posted between the communist China "free zone" border and the rest of China. The purpose, of course, is to prevent the Chinese people from escaping from the more-controlled areas of China into the less-con trolled areas of China.

When the communist leaders fi nally and fully understand that eco654 THE FREEMAN nomic freedom brings a correspond ing degree of political freedom, they may try to return to complete eco nomic controls. The result could be a revolution, as occurred in East Germany, Czechoslovakia, Hun gary, and even in Russia itself. That result would present all sorts of in triguing possibilities to the leaders of the Republic of China who still claim to be the only legitimate gov ernment of all China. But suppose the mainland com munists continue this trend toward a market-type economy based on Dr. Sun's principles? (After all, the com munists claim Dr. Sun as their foun der, too.) And suppose that this in creasing economic freedom on the Upcoming Articles mainland is followed in due course by a representative type of govern ment in the People's Republic of China? In short, suppose the two di vided Chinas end with somewhat the same economic and governmental systems? Then who would be presi dent or prime minister or first sec retary of all China? Would he come from Taiwan or the mainland?

My answer is simple: It's not in the least important to the Chinese peo ple who is president of an economi cally and politically free China. What is important is that the Chinese people be able to produce, trade, and travel freely in a market economy based on the ideas of pri vate ownership. ® DECEMBER • On the Bishops and the Market-Charles A. Baird • Getting There-John K. Williams • John Witherspoon: "Animated Son of Liberty"-Robert A. Peterson JANUARY • What Is a Just International Order?-William H. Peterson • Toward a Market Monetary System-Alberto Benegas' Lynch, Jr.

FREDALLEN once quipped that "The world is moving too fast for the Moses-model man," Since then, we have speeded up considerably. A sil icon chip may come to hold it all. And we have spun off into space, with destinations as yet unknown. Those who have grasped these comets' tails are euphorious, when not assailed by fear of future shock. The rest of us are bewildered by it all. Few of us would wish these mira cles to vanish. Division of labor now promises an end of toil by robotry man's longest dream in sight. So why are we distraught? The prime an swer is that philosophy is dead. Much of the madness around us is just that: reminding us that we are in the age of psychiatry, where even the normal may be gauged as abMr. La Dow of San Diego, is a retired teacher of his tory and government with an ongoing concern for maximizing the freedom of the individual. normal. For the sake of personal san ity, we cannot too often remind our sel ves that matters cannot be as horrendous as depicted. Mter all, the world has never been utopian and a good case can be made that we have "never had it so good." When one looks around, it appears that most persons are behaving themselves reasonably well and quite a few are doing outstandingly. Indeed, it is only by contrast with this moderate order liness that we can get an impression of how dreadful the ex ceptions are.

Nevertheless, however unreason able they may be, it is best that we take the signs of our times seriously. In an era devoid of philosophical wis dom, we have, arguably, stretched the engine of capitalism to the breaking point. Perhaps we are ask ing wealth to do what it is unfitted to do: solve all "social problems," 655 656 THE FREEMAN November while all but abandoning individual responsibility. If this is capitalism, then capitalism must be at fault. What, then, are the grounds for hope? First, those who enumerate such matters tell us that today's youth, despite continuing socialistic bias in education, are turning up most often as conservative-libertar ian-to use the current vernacular for whiggishness. An even more sub stantive occurrence has been the sinking, almost dead, esteem into which Keynesian economic theory has fallen. It is difficult to find an economist of that school today. Even Congress belabors its mind with "the deficit." And such a callow youth as Arthur Laffer often has the last laugh.

Without Keynesian theory in prac tice, the "new liberalism" must be a sinking star. Only deficit financing can sustain it. Roosevelt's New Deal was chicken feed compared to the cur rent welfare state and that is all that we would have, had it not been for LordKeynes' magic and theconsump tion function. The interventionist liberal revolution would have run out of cash flow. What goes on now is a rear guard action, trying to save some boondoggles from the debacle. While, as long as the goodies flow, we the people wili grab them; yet too many of us, in all classes, are getting wise to the political Ponzi game knowing that a bill· comes with the lunch. It is not equally recognized how much of the pressure which so many of us have referred to as the "rat race," has been the result of the fore named false economics. Stimulation of consumption by means of transfer payments must play hob with an otherwise free market. It offers the carrot to the consumer while beating the producer to make him keep up with resultant inflation. Wasted en ergy and wasted resources have been the result. Buyers overbuy to hoard goods instead of cheapening money.

Producers and sellers are squeezed by ever-rising costs, in resources and labor. Skimping in quality and plan ning for quick wear-out in fashion and substance was an inevitable re sult. We became the throwaway so ciety, whose trash-disposal became a world wonder equal to the pyramids. Eventually, sound companies were chivvied into making unwise merg ers in attempting to survive the rat race. Collectivism Is the Scoundrel If this were capitalism, it would make socialism look attractive: any thing to bring orderliness and de pendability out of chaos. But this was not capitalism; nor was it so cialism, for public ownership was minimal. One hates to admit it; but those who attacked it as fascism were closest to a common definition: private ownership with public right to use, which spells out state control.

1985 LIBERALISM AND THE FAST LANE 657 legacy has been chronic unemploy ment, single-parent families, teen age pregnancy, racial and sexual conflict, and a host of other social ills which accompany establishment of a welfare class. For, make no mistake, it takes organized political power with police force to create such havoc. So capitalism is not the scoundrel. It is the government which has wrought this time of travail: for there is no animosity in the truly capitalistic free market. By far most buyers and sellers will make their contracts in reasonable amity. The legitimate purpose of the state is to suppress and punish the minority of frauds and criminals who are always with us. To do otherwise, with gov-Individual Liberty and ernment trying to run the market, Social Harmony has always and everywhere in-So life in the fast lane, in the man creased the numbers of such ras-ner to which the new liberalism has cals-and, most disastrously, in gov-made us uneasily accustomed, is not ernment itself. For Lord Acton was inexorable. Indeed, it is close to indubitably right in his aphorism re-bankruptcy. But we are well advised garding the corruption of power. to maintain a degree of calm until The closest we have come to insti-the funeral. The cure is wisdom tuting capitalism and the free mar-which is not born ofvituperation and ket in the United States was estab-mass action. As Leonard Read was lishment of our Federal Constitution fond of saying, the answer to error and its Bill of Rights; but we have is to make of oneself "one better been eroding its principles gradually unit." He understood that only such ever since by ever looser interpre-efforts would add up to any desirable tation. The document still stands. All change in affairs.

that is necessary is to honor its clear There is little wrong with life in intent-if we wish to know capital- . the fast lane which cannot be ism. None of us can plead ignorance amended by movement to the con of the free market; for each of us, dition of individual liberty, for per even among the criminal element, sons, of whatever status, are the must make some unpoliticized, un-most viable masters of their own forced transaction every day. That is welfare. Taken in the aggregate, why they say that there is honor their individual efforts to that end even among thieves. and based on complementary interNo one could possibly know less ests, create what Frederic Bastiat concerning what is good for the in-called "economic harmonies," or so dividual citizen than the so-called cial peace and order such as possible liberal politician. His intellectual in this world. @ Gary North ShouldAmerican BusinessGive Up Smoking OVER the past two years, the United States' trade deficit has skyrock eted. This has led to a renewed in terest in the question of free trade.

More than this\ it has led to a re thinking ofjust 'what it is that Amer ica's economy is supposed to do in or der to compete in world markets. We have been told that America's "smokestack i~dustries" are threat ened, and that this nation is losing its competitive abilities in the field of heavy manufacturing. I am sure this analysis is correct. Now, why am I supposed to worry about this? Let me ask you a question. Are you worried about America's loss of com petitive ability in basic manufactur ing? Let us lay aside the military © Gary North, 1985. 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. 658 strategy questions for the moment. (I will return to this topic later.) Are you worried about the economic ef fects of the loss of manufacturing ca pacity in the smokestack industries?

Are you worried about the loss ofjobs in these industries? Are you worried about "our" competitive edge being dulled? Why? I would hazard a guess that you are not really very worried about these possibilities. In fact, if you heard that a factory was going to be built across the street from your home, you might start worrying about that threat even more than you are wor rying about the loss of America's smokestack industries. There are some of you who might even be tempted, however momentarily, to file a complaint with your local zon ing board to keep that factory out of your neighborhood.

SHOULD AMERICAN BUSINESS GIVE UP SMOKING? 659 Let us say, just for argument's sake, that you live on Peaceful Street in the town of Upward Mobility, U.S.A. What I am trying to point out is that your fears concerning smoke stack industries as a resident of "Peaceful Street" are different from your fears as a resident of the hy pothetical "Nowhere in Particular, U.S.A." In fact, they are almost op posite fears. As a "Peaceful Stree ter," you want to keep smokestack industries out, but as an American, you want to keep smokestack indus tries in. This seems a bit peculiar. Of course, you may just enjoy worrying. All right, let me broaden the geo graphical perspective. You live in the "Suburban Acres" tract. (All right, we won't call it a tract. We'll call it a development.) Now, what about smokestacks somewhere within the development, but on a different street? Still a bit nervous? Not what you had in mind? Fair enough. I am just trying to find out what you have in mind.

Let us continue. What about build ing new smokestacks in your town? Still not impressed? But you say that you're not opposed to business. You appreciate business. It creates op portunities. So if a computer man ufacturing firm wants to come to town, you would not have any objec tions. Also, if a college wants to open up just across the city line, that would be all right, just so long as it is a small, private college for engineering majors. (Mter all, who ever heard of a campus riot by engineer ing majors?) Smokestacks? No smokestacks! Nevertheless, you are worried about America's future. America is losing its smokestack edge. We may be beyond the point of no return. (But in "Upward Mobility," that's good!) The Question of Geography I have no quarrel with smoke stacks, since the nearest one to my house is five miles out of town-on the west side, where I seldom visit. In fact, I would not be brokenhearted if the nearest smokestack were six miles out of town. Or sixteen. Or, for that matter, 16,000. I just don't like smoke that much. So when I read that we are "losing our smokestack industries in America," I have a ten dency to read a different editorial.

There is another argument which seems to be implied in the debate over smokestacks. We are warned from time to time that "they" will get "our" manufacturing jobs. You know who "they" are. Them. Those ... people! Over there! You know the kind of people I mean. They talk funny. They talk too fast. Quite frankly, they jabber. You just can't understand them. And they wear funny-looking clothes. (Anyway, those over 50 years old do. The younger ones wear Levi's .and polo shirts-all over the world.) I suppose this fear is correct. Those 660 THE FREEMAN November sorts of people probably will get "our" manufacturing jobs. They seem to appreciate manufacturing jobs. For them, such jobs seem to be the best deal in town. Ofcourse, their town may be 16,000 miles away. But I don't care. That's their business. They don't bother me. I suppose we could all get together and lobby Congress to pass laws that would use tax money to keep "our"

smokestack industries smoking. But I think there is a real possibility that if we do, there will be a lot of people trying to come to the U.S.A. to work here. I guess "those people" just like to work in factories. I don't, so it's no sweat off my nose. Let them work where they want to. The odd thing is that so many of those who are opposed to sending "our" jobs abroad also are opposed to opening our borders to allow for eigners to come here to work. But if we try to keep "our" manufacturing jobs here (for instance, by passing quotas or tariffs against imports), and we also try to keep foreign work ers from coming here to work, then we are saying that only Americans have a legal right to such jobs. Not a legal right to bid for these jobs, but a legal right to keep them at the high bid. Trade Union Restrictions I have seen a similar argument in a slightly different context. Defend ers ofcompulsory trade unionism use such arguments to justify the ac tions of the unions. What if a worker who is not a union member asks for the legal right to bid for a job? He doesn't demand a right to the job, only the right to bid for it. The union leader argues that this opportunity to bid for a job "hurts labor," and he then seeks government legislation to prohibit employers from hiring people who bid on jobs at wage rates under those that are preferred by union leaders and union members.

When governments go along with this sort of political pressure, the high bid wins. I will go farther. I think the main arguments in favor of "keeping America's smokestack industries smoking" were originated by people who on the whole are also defenders of the arguments favoring coercive trade union activity. They want to keep the above-market wage levels that are demanded by the unions and enforced by Federal law (such as the Wagner Act of 1935), and they do not want foreigners-them-to be al lowed to make market wage bids against the trade unions. First, they do not want American laborers to be allowed to make such bids, which is why they also promote minimum wage laws, so that "foreigners" in places like Texas and Alabama can not make wage bids at market lev els. Second, they also do not want foreigners in other nations to be al lowed to make such bids.

1985 SHOULD AMERICAN BUSINESS GIVE UP SMOKING? 661 What amazes me is that American citizens who clearly understand that coercive (government-protected) trade unionism is a threat to their interests as consumers and as free men, do not recognize the danger of very similar legislation to keep America's smokestack industries "competitive." Legislation to achieve this will, in fact, keep Amer ica's uncompetitive smokestacks smoking, not the competitive ones. The competitive ones are competi tive, after all. Should We Give Up Smoking or Freedom? Even more amazing is the fact that millions of the same middle-class voters who are worried about the loss of the smokestack industries are also fans of the ecology movement, which is an anti-smokestack movement generally. People are subjected to fears that are frequently conflicting. We should give ourselves a break. We should try to worry about the same problem only one way at a time, either not enough smoke or too much smoke-but not both alterna tives at the same time!

Let us examine the logic that most suburban Americans are not being shown. We are being asked to sup port political decisions that do not make sense. The promoters of these ideas apparently have not thought through the logic of their position. We should. For example: 1. We Americans need to save our factories. We need to keep them here in the U.S.A. Not in Upward Mobil ity, of course. Not even very close to Upward Mobility. Somewhere else. But right here in the U. S.A. 2. We do not want to have all Hthose people" come here to work in "our" factories. We need immigration quo tas to keep them out. (This raises the cost of labor, and therefore the cost of operating the factories.) 3. (implied, but not stated:) We know that we are unwilling as con sumers to "buy American" simply in order to keep "our" factories smok ing. We know that we keep buying foreign products if "the price is right."

4. We therefore need government legislation to reduce our freedom as consumers to buy what we want at market prices. In other words, "let's not make a deal!" In short, we are being told that we need subsidies for business, or tariffs (an invisible subsidy) or import quo tas (another invisible subsidy). We need to give up our freedom in order that we can breathe more smoke. If people really faced the implica tions of what the "save the smoke stacks" propaganda is all about, they would not be very likely to get on board this particular bandwagon. The problem is, people have a ten dency to get excited about dangers that they do not really understand, 662 THE FREEMAN November and at the same time ignore dangers that are a very serious threat to them. If "save the smokestacks" were being promoted as "give up your freedom of choice as a consumer in order to save the smokestacks," or "raise our taxes in order to save the' smokestacks," I think fewer people would get involved in promoting the political schemes that are being touted to save them.

Which Form of Exclusion? It gets even more silly. Americans argue as if foreigners were in some inscrutable way stealing our facto ries, simply by offering to work so cheaply. What is the response that some editorial writers want us to make as voters? They want us to pressure Congress to vote for con trols on the export ofjobs. They want to make it illegal for certain people outside the borders of the United States to have the right to hire American agents (salesmen) in America who will come to American consumers and offer to make a deal. These editorial writers see many kinds of voluntary agreements as a form of theft, if the deal is done across a border. Not every deal, of course. They want some trade al lowed. But not trade that might "hurt" a factory located in the U.S. The problem is that any transac tion with one person makes impos sible that same transaction with someone else. You cannot buy two items with the same money. All vol untary exchanges are inherently ex clusionary. Anyone who says "let's make a deal" is inescapably saying, "let's you and I make the deal by ex cluding our respective competitors. I will exclude my competitors by of fering you the best terms you think you can get, while you exclude your competitors by making me the best offer that I think I can get."

This form of exclusion is the very essence of freedom. It is exclusion by service. But it tends to make the ex cluded parties angry, if they are un willing or unable to make a compa rable competitive offer. So they get the government to step in and sub stitute a different form of exclusion: exclusion by coercion. Instead of pit ting buyer against buyer and seller against seller, they reduce every one's opportunity to make ex changes. It becomes illegal for oth ers to come in and offer a potentially better deal. Governments make ex clusion by service illegal. The Trade Deficit People are worried about the trade deficit. The odd thing is that so few people understand what a trade def icit is. Consider this: Do you think foreign manufacturers are giving us their goods? Are they doing it for free? Of course not. Then we must be exporting something to pay for it. What are we exporting? Money.

What is money? The definition is: 1985 SHOULD AMERICAN BUSINESS GIVE UP SMOKING? 663 "the most marketable of all goods." We send them money, and they can do whatever they want with it. Specifically, we send them dollars. They can buy oil with it (the oil mar ket is denominated in dollars). They can buy U.S. manufactured goods and services with it (farm goods, wood products, American educa tion), or invest in America with it (farms, corporate shares, Treasury bills). We keep running those sav ings bond ads: "Invest in America." So that's what foreigners are doing. The next thing you know, someone writes a scary editorial about "for eigners are buying up America." Then why are we worried about a trade deficit? If we traded, then we must have traded something. Then why do we call it a trade deficit? It is defined as a deficit in the value of the manufactured goods that have been exchanged within the time pe riod of one calendar year. It is not a trade deficit of value. Value is given for value received. (In other words, trade is trade.) What foreigners have valued is investment opportunities in the U. S. But the government stat isticians do not count the value of these investments in the figure called "the trade deficit."

Are we worrying too much? Exports We keep hearing this answer to the trade deficit problem: "What we need is exports. We have to increase U.s. exports. We need to send more American goods and services out of the country." In short, we need to in crease productivity. I'm all for that! I have an idea. Why don't we ex port smokestacks? Well, why not? We can tear them down, and then ship them overseas. Let someone over there buy them and put them back up and start pumping smoke through them. Of course, our smokestacks may be too old. Maybe nobody overseas wants them. Maybe we could just tear them down (they're ugly, after all), and put something in their place. How about a computer fac tory? Or even better, maybe a soft ware development company to pro duce programs to run the computers. Or what about this? Let's build smokestacks over there. We will own them-those who invest in the com panies that build them-but we will get the smoke out of Upward Mobil ity, U.S.A. Then we trade with "them." They send us the goods, and they keep the smoke. We send these smokestack industry job opportuni ties to "them," and they send us the finished goods.

But why do they want to do this? Why would they build a bunch of smokestacks, or allow us to build them for them? Why would they want to live in "Blue Collarsville" instead of the kind of town we live in, "Upward Mobility"? Incredible as it seems to us, our discarded "Blue 664 THE FREEMAN November Collarsville" is their "Upward Mo bility." Our discarded "smokestack jobs" are their yellow brick road to the Emerald City. In short, they can't afford to move to our version of "Up ward Mobility," so they move to the best approximation they· can pres ently afforda smokestack version. (I wonder if there may be someone in Monte Carlo-or even Balboa Island, California-who cannot understand why you and I live in a place like ~'Upward Mobility, U.S.A."). No Sweat What I'm trying to say is that not many of us really are that fond of smokestacks. If we don't like them in our neighborhoods, why do we worry so much about them? As far as I can figure it out, what the U.S.

is exporting is opportunities to work in places where most Americans pre fer not to work. Americans who live near smokestacks send their kids to college so that the children can move away from the smokestacks, to places like Upward Mobility. We associate Upward Mobility, U.S.A. with service industry jobs: education, telecommunications, medicine, law, theoretical physics, break dancing-that sort of thing. If that isn't Upward Mobility, what is? So then, after decades of savings, af ter two or three generations of pay ing college tuitions, most of us fi nally got into Upward Mobility, U.S.A. We have now started exporting the job opportunities that we have worked so hard to get away from. Why not? We really don't want these opportunities for ourselves, or for our sons, our daughters, and our grandkids. I think the reason why we are los ing our smokestack industries to for eigners is that we don't want to work in smokestack industries, except maybe as accountants. To get us to go work in such places, factory own ers would have to offer us high wages that are just too high, compared to the wages that foreign workers are willing to accept. Quite frankly, those accountants who work in var ious smokestack industries in the United States have looked at our wage demands and have decided to shop elsewhere. When it comes to wage demands, we "have been weighed in the balance and found wanting."

This brings me back to our original topic: your worry about the loss of our smokestack industries. Why? Why not worry about something else? Try something new. World War III Are you worried about World War III? That seems like a reasonable fear. What if the Soviet Union uses its fleet to· cut off our shipping with South Africa, or the Middle East, or Venezuela, or a lot of other places? What if we can no longer import the things we need from "over there"?

1985 SHOULD AMERICAN BUSINESS GIVE UP SMOKING? 665 Then what will happen to America? There is no question about it, it is a bad thing to lose a war to the So viet Union. There is no question about it, the Soviets do appear to be planning to cut off the West's trade routes. There is no question about it, the massive coercion which is in volved in military conflict is painful, expensive, and fearful. But is this an argument to keep alive all of our smokestack indus tries? The free market says no. We, as buyers and sellers, keep telling the market that we want to buy our manufactured products from abroad. Well, not all of our manufactured products. Well, not even a sizable majority. About 16 per cent of our gross national product is involved in trade. Not all of this trade is man ufactured goods, either; a lot of it is the import of raw materials, such as oil. And of course our largest trading partner is (and always has been) Canada. I feel confident that the So viet navy will not soon cut off our shipping routes to Canada. Never theless, we do buy a lot of videotape machines from Japan. And 35 mil limeter cameras. And about 22 per cent of our cars.

In fact, when you think about it, the major threat to the U.S. by the Soviet Navy is the threat to im ported raw materials that we cannot produce in the U.S. I am thinking about things such as strategic in dustrial metals that only South Africa and the U.S.S.R. appear to have in abundance. That really has noth ing to do with our smokestack in dustries, except insofar as their own ers will be forced to close a lot ofthem ifthey can no longer buy certain crit ical industrial metals from the U.S.S.R. or South Africa. Now, if there really is some abso lutely crucial manufactured product that our military forces need to fight a war, then I have a suggestion. Let the military service which has de termined that this manufacturing process is vital to national defense set aside funds from its annual ap propriations in order to subsidize this critical industry. If that is the best judgment of the national de fense strategists, it can be put into effect at the time of the debate over the military budget. Let the gener als and admirals pay for the decision.

The Trek to Washington But I am suspicious-and remem ber, I specialize in suspicions about requests for Federal legislation. There are some increasingly uncom petitive manufacturing industries in this country that pay lobbyists to go toWashington and argue national defense, when they really mean "in efficient production methods" de fense. They are trying to get taxpay ers and consumers to finance a military strategy that the military establishment would not be willing to pay for out of their own budgets.

666 THE FREEMAN November Maybe the military experts really do need to keep the whole U.S. steel in dustry operating at full capacity. I have a suggestion: they can pay for this industrial strategy by reducing expenditures on military retirement benefits. You say that they don't really think the steel industry is that crit ical to national defense? Well then, please don't ask Americans who pur chase consumer goods to pay higher prices, so that American manufac turers can buy domestically pro duced steel which is produced by in efficient American firms, in order to finance a military strategy which the experts who are supposed to plan the nation's defense do not think is really that crucial to their strategic plans. There is no doubt in my mind that the world would be better off if there were no military aggression. Smoke stacks could then be distributed freely across the face of the earth in terms of economic criteria (including For Free Trade ecological criteria). If trade routes were open to all shippers without fear of aggressive navies, we would see a far more efficient distribution of smokestacks. The point is, mili tary considerations are important, but it is not the responsibility of free market institutional arrangements to support a hypothetical and un announced U.S. military strategy concerning industrial mobilization in time of war.

Conclusion I have no great attachment to smokestacks. I can take them or leave them. If they are competitive, and consumers by their unhampered vol untary purchases indicate that "our" smokestacks are better than "their" smokestacks, that is good enough for me. But at the same time, if consumers "vote" for "their" smokestacks in preference to "ours," then that is also good enough for me. It should be the decision of consum ers, not political planners. @J (DEASON LIBERTY IN every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest. The proposition is so very manifest, that it seems ridiculous to take any pains to prove it; nor could it ever have been called in question, had not the interested sophistry ofmerchants and manufacturers confounded the common sense of mankind. ADAM SMITH, The Wealth of Nations Classical Liberalism Reconsidered: A Symposium.

to mark the publication of a new edition of Liberalism by Ludwig von Mises FEE is pleased to announce a new publication of Liberalism: In the Classical Tradition by Ludwig von Mises. It is an important book, worthy of serious consideration in various aspects. We asked several authors to comment on different facets of classical liberalism. The result is the symposium which follows. The new edition of Mises' Liberalism is now available from FEE, in attractive paperback, at $9.95. For order details see page 683. 667 668 THE FREEMAN November The Meaning of Liberalism from the new preface by Bettina Bien Greaves THE TERM "liberalism," from the Latin "liber" meaning "free," re ferred originally to the philosophy of freedom. It still retained this mean ing in Europe when this book was written (1927) so that readers who opened its covers expected an analy sis of the freedom philosophy of clas sicalliberalism. Unfortunately, how ever, in recent decades, "liberalism"

has come to mean something very dif ferent. The word has been taken over, especially in the United States, by philosophical socialists and used by them to refer to their government in tervention and "welfare state" pro grams .... This view of liberalism was so prev alent in 1962, when the English translation ofthis book appeared, that Mises believed then that to translate literally the original title, Liberalis mus, would be too confusing. So he called the English version The Free and Prosperous Commonwealth. By the following year, however, Mises had decided that the advocates offreedom and free markets should not re linquish "liberalism" to the philo sophical socialists. In the Prefaces of both the second (1963)and third (1966) editions of his magnum opus, Human Action, Mises wrote that the advo cates ofthe freedom philosophy should reclaim "the term 'liberal' . . . be cause there is simply no other term available to signify the great political and intellectuai movement" that ush ered in modem civilization by foster ing the free market economy, limited government and individual freedom.

It is in this sense that "liberalism" is used throughout this book.... In Liberalism Mises not only offers brief explanations ofmany important economic phenomena, but he also pre sents, more explicitly than in any of his other books, his views on govern ment and its very limited but essen tial role in preserving social coopera tion under which the free market can function. Mises' views still appear fresh and modern and readers will find his analysis pertinent .... In fact, the only hope of keeping the world from plunging still further into international chaos and conflict is to convince the people to abandon gov ernment intervention and adopt lib eral policies. ~ Mrs. Greaves, a member of FEE's Senior Staff, attended Mises' NYU Seminar for many years. She is also the translator ofthe Mises works included in On the Manip ulation ofMoney and Credit.

1985 CLASSICAL LIBERALISM RECONSIDERED 669 The Place of Mises' Liberalism Ralph Raico THE great intellectual and political movement known as liberalism has been one of the prime shapers of the modern world. As Ludwig von Mises wrote, it "changed the face of the earth," creating for the peoples who shared in it a life of freedom and abundance unexampled in previous history. Given this, the paucity of general works on the history and philosophical bases of liberalism and the mediocrity of most of the readily accessible ones is curious indeed. (This does not hold, however, for works of more limited scope. The Decline of American Liberalism, (1955) by Arthur A. Ekirch, Jr., for example, combines fine scholarship with a seasoned understanding of the true meaning of liberalism.) The best known book in the field is doubtless the History ofEuropean Liberalis~ by Guido de Ruggiero, originally published in 1925. Still useful in some respects, it suffers from a conceptual haziness and a lack of cutting edge perhaps attributable to the neo-idealist philosophy popular in Italy at the time, of which the author was a follower. Moreover, although himself a liberal in a very broad sense, Ruggiero had little knowledge of economics or appreciation of the functioning of the free market. His vulnerability to anticapitalist arguments may be gathered, for instance, from his treatment of the Industrial Revolution in Britain.

Here he repeats the common socialist interpretation of that great process as a catastrophe for the working class, in terms scarcely differing from those of Friedrich Engels. The basic flaw in Ruggiero's work, as in most of the others we will consider, is that it accepts and even enshrines a change that was occurring at the time in the usage of the word "liberal" itself. Instead of implying, as it had previously, a rigorous belief in private property and the free market, "liberal" came, first, to be compatible with adher ence to a wide range of interven tionist and welfare-state measures and then even, in the United States and elsewhere, to designate pre cisely such adherence. As Joseph Schumpeter shrewdly observed in his monumental History ofEconomic Analysis, "As a supreme, if unin tended, compliment, the enemies of the system of private enterprise have thought it wise to appropriate its label." If the underlying conception of Ruggiero's book manifests this distortion, an earlier work, L.T.

Hobhouse's Liberalism (1911) played 670 THE FREEMAN November a significant role in bringing it about. This short book, despite its promising title, is of little value today except as a landmark in the accommodation of what John Gray has perceptively called ·turn-of-the century revisionist liberalism to socialism and social democracy. The amalgamation of genuine liberalism with the strand of inter ventionism that today is often called by that name is also the disabling error of two books by the American scholar J. Selwyn Schapiro, Con dorcet and the Rise of Liberalism (1934) and Liberalism and The ofFascism (1949). It is characteristic of the confusion of these once well known volumes that the authentic, classical version is demeaned by the label "bourgeois liberalism," there by consecrating that bit of Marxist propaganda as accepted scholarly terminology. Even less sympathetic to the spirit of true liberalism are the writings on the subject oftwo British socialists, Harold Laski's The Rise of European Liberalism (1931) and Kingsley Martin's The Rise of French Liberal Thought (1926). As with·Schapiro's works, some useful information is provided, especially by Martin, but their overall value is vitiated by a warped perspective. It must be considered a cause of deep regret that the history of liberal ideas was never undertaken by one of the great historians of the liberal age, for example, by Lord Acton, Lecky, or John Morley, the superb biographer of Cobden and Gladstone.

In a class by itself is a brilliantly edited anthology, Western Liberal ism: A History in Documents from Locke to Croce, by E. K. Bramsted and K. J. Melnuish (1978). There have, of course, been numerous col lections on the subject. What distin guishes this one is not only the com prehensiveness and richness of the selections, but the intelligence and perceptiveness of the commentary. Again, however, the enterprise suf fers from the futile attempt to en compass Herbert Spencer and Fred eric Bastiat in the same general movement as John Maynard Keynes and even Lord Beveridge, the ide ologist of the cradle-to-the-grave British welfare state. A similar flaw· undermines a recent general treat ment, David Manning's Liberalism (1976), which adds a diffuseness and numerous confusions of its own. Mises' Liberalism stands in bold contrast to the mass of other works in the field. In clean, clear lines it sets out what it meant to be a liberal when liberalism was the spectre haunting Europe and, indeed, much of the rest of the world. Liberalism is shown, in Mises' exposition, to be a coherent theory of man and society and of the institutional arrange ments that are required to promote social harmony and the general wel fare. In particular, the social philos phy is placed squarely on the secure 1985 CLASSICAL LIBERALISM RECONSIDERED 671 foundation of private property in the means of production. No attempt is made to accommodate the concept of liberalism to standpoints intrinsi cally incompatible with it, such as socialism or any variety of interven tionism. On the contrary, starting from the principle of private prop erty, Mises demonstrates how the other elements of the liberal world view-personal freedom, peace, dem ocratic government, tolerance, and equality before the law-are linked to it in a dissoluble whole.

Especially noteworthy is Mises' emphasis on peace as one facet of the classical liberal philosophy, an as pect too often neglected in treat ments of the topic. Mises is solidly in the tradition ofthe makers of the lib eral ideology when he states that Heraclitus was wrong, "not war, but peace, is the father of all things." His condemnation of war, imperialism, and jingoistic hysteria reiterates and develops that of Condorcet and Ben jamin Constant, Cobden and Bright, Spencer and William Graham Sum ner, and virtually all the others. In Mises' Liberalism we have a timeless statement of classical lib eralism by the thinker who is ac knowledged as its greatest twen tieth century champion. Lucidly and unflinchingly he shows it"to be the only system consonant with individ ual freedom and personal autonomy, as well as with modern industrial ized society. It is the work we must consult and ponder if we wish to un derstand what liberalism means and where it stands in the struggle of ideologies that will continue to shape the future. @ Dr. Raico originally translated Liberal ism from the German. He is associate pro fessor of history at the SUNY College at Buffalo.

Liberalism and Capitalism Hans F. Sennholz To SEEK freedom as an organizing principle of society and a way of life for the individual is to strive for the freedom to speak his mind, to ex press and discuss his views, to or ganize in groups and parties, to choose and change his government, to elect his agents and representa tives, and arrange his social and eco nomic life in any way he pleases as long as it is peaceful. For man to en joy freedom is to work as he pleases, to give and find employment as he sees fit, to buy and sell his products freely and keep the rewards. To be free is to be unhampered and un impeded in his peaceful economic pursuits. The ideology and political program for individual freedom is liberalism. At least that's what it was called 672 THE FREEMAN November throughout most of its history, and what Ludwig von Mises called it in his prodigious writings. It was the dominant ideology in England be tween the Glorious Revolution (1688) and the Reform Act of 1867, and a broad social and political trend throughout the Western world. Its primary demands were religious lib erties and toleration, constitution alism and individual rights, which in turn gave great impetus to the the ory and practice of economic liberty.

The French physiocrats and the English liberal economists erected the economic postulate of laissez faire, that is, unhampered private property in the means of production and self-regulating markets, unre strained by political intervention. For Ludwig von Mises, the private property order, commonly called cap italism, was the only practical social and economic order. It gave rise to modern civilization and economic conveniences unknown in the past. "There is only the choice between communal ownership and private ownership of the means of produc tion," he assured us. "All interme diate forms of social organization are unavailing and, in practice, must prove self-defeating. If one further realizes that socialism too is un workable, then one cannot avoid ac knowledging that capitalism is the only feasible system of social orga nization based on the division of la bor. This result of theoretical investigation will not come as a surprise to the historIan or the philosopher of history. If capitalism has succeeded in maintaining itself in spite of the enmity it has always encountered from both governments and the masses, if it has not been obliged to make way for other forms of social cooperation that have enjoyed to a much greater extent the sympathies of theoreticians and of practical men of affairs, this is to be attributed only to the fact that no other system of social organization is feasible." (Lib eralism, p. 85) No matter how much or how little we may know about the workings of capitalism, we cannot help admiring it for its enduring and resilient qual ities. Professors denounce it for caus ing exploitation and inequality, for breeding monopolies and oligopo lies, for contributing to unemploy ment and waste as a result of its lack of mechanism assuring full employ ment. And yet, capitalism lives on unperturbed by such charges.

Preachers and priests disapprove of it on moral and cultural grounds; and yet, it endures despite their damnation. Politicians talk about the urgent needs of the public sector; and yet, capitalism persists despite all the exactions on behalf of the de pendent sector. The basic features of capitalism endure, even in the dark est corners of the world, despite all the laws legislators may pass against it and all the brute force govern1985 CLASSICALLffiERALISMRECONSIDERED 673 ments may use against the people. Could it be that private property and the social order based on it are deeply rooted in the very nature of man? It is difficult to find an unham pered capitalistic order anywhere in the world. Governments, which are the political apparatus of coercion and compulsion, interfere with near ly every manifestation of eco nomic life. They levy confiscatory taxes on production and distribu tion; and yet, entrepreneurs and cap italists manage to produce goods and render services with the leftovers.

Governments regulate and restrict output; and yet, the property order, although shackled and mutilated, perseveres in producing goods and services. Governments set wage rates and interfere with the struc ture of prices; and yet, the market order lives on in black markets and underground activity. Governments indulge in inflation and credit ex pansion and resort to legal tender legislation; and yet, capitalistic pro duction goes on in the darkness of monetary destruction. Governments bestow economic privileges and le gal immunities on labor unions and permit them to disrupt production; and yet, in the end, economic pro duction resumes although labor ceases to function efficiently. Gov ernments engage in war and de struction; and when the killing ceases, and nothing is left for gov ernment to plan, ration anddistribute by force, there is capitalism. It produces miracles of reconstruction and marvels of recovery.

In most parts of the world, capi talism is the system of last resort. When the communal order has brought poverty and hunger, when every measure of political coercion has failed repeatedly and the polit ical mind is incapable of concocting another economic folly, when the po lice are exhausted from regulating economic production and the courts are paralyzed by immense case loads of economic crimes, the time has come for the private property order. It needs no political plan, no eco nomic legislation, no economic po lice, only freedom. @J Dr. Sennholz is Chairman ofthe Econom ics Department at Grove City College. He is well known to Freeman readers. Liberalism and Individualism Anne Wortham INDIVIDUALISMhas many meanings and represents a complex of ideas, val ues, and doctrines that are asso ciated with classical liberalism. These ideas are addressed in Mises' Liberalism. They are the corner stones of his conception and defense 674 THE FREEMAN November of liberalism. Moreover, the method of his defense is itself an exercise in the application of methodological in dividualism's theory of society.

Mises' brand of individualism is known as utilitarian individualism. Although he makes no explicit ref erence to utilitarianism or individ ualism in Liberalism, this doctrine is implicit in every aspect of Mises' argument. Elsewhere he has defined the essence of utilitarianism to be "the cognition that action pursues definite chosen ends and that con sequently there can be no other stan dard for appraising conduct but the desirability or undesirability of its effects ... By its recognition that so cial cooperation is for the immense majority a means for attaining all their ends, it dispels the notion that society, the state, the nation, or any other social entity is an ultimate end and that individual men are the slaves of the entity. It rejects the phi losophies of universalism, collectiv ism, and totalitarianism. In this sense it is meaningful to call utili tarianism a philosophy of individu alism." (Theory and History, pp. 57 58) One finds Mises' utilitarian indi vidualism at work throughout his discussion of the connection between liberalism's advocacy of private ownership of the means of produc tion and its demand for limited func tions of government, and in his anal ysis of the relation of the state to the individual. But his perspective is most evident in his refutation of the charge by anti liberals that capital ism is a threat to social cooperation.

Mises was aware of the claim that individualism pits the individual against society; he was also aware of the antiliberal progression from an attack on autonomy and privacy to an attack on private property. Thus, he begins the section on "Property" with an assertion that is the under lying theme of his entire enterprise: "Human society is an association of persons for cooperative action. As against the isolated action of indi viduals' cooperative action on the basis of the principle of division of labor has the advantage of greater productivity. If a number of men work in cooperation in accordance with the principle of the division of labor, they will produce (other things being equal) not only as much as the sum of what they would have pro duced by working as self-sufficient individuals, but considerably more. All human civilization is founded on this fact." (p. 18) He boldly argues that "private property creates for the individual a sphere in which he is free of the state. It sets limits to the operation of the authoritarian wilL" As an in termediary between the individual and the state, "it allows other forces to arise side by side with and in op position to political power. It thus be comes the basis for all those activi1985 CLASSICAL LIBERALISM RECONSIDERED 675 ties that are free from violent interference on the part of the state.

It is the soil in which the seeds of freedom are nurtured and in which the autonomy of the individual and ultimately all intellectual and ma terial progress are rooted." (pp. 67 68) Certain doctrinaire individualists take the view that any social coop eration entails the compromise of in dividual autonomy and the sacrifice of self-interest to the interests of so cial groups and institutions, and is therefore altruistic, hence immoral. Actually, what Mises describes is not a sacrifice at all. Sacrifice in volves the renunciation of a greater value for a lesser one. While indi vidualism does not pit self-interest against social cooperation, as anti liberals claim, it does assign a greater value to self-interest than to social cooperation. But it recognizes that in certain social contexts coop eration may be in the individual's interest, while in others it would not be. If it is in the interest of the in dividual's well-being and prosperity, then no sacrifice is involved. The an tiliberal interventionist state cer tainly does require sacrifices of the individual which it justifies in the name of social cooperation. But as Mises demonstrates in his discus sion of price controls and minimum wage legislation, this kind of gov ernment interference in the market not only requires the sacrifice of the interests of merchants, manufactur ers, employers and employees; it also creates social disorganization and is therefore self-defeating.

Many defenders of liberalism try to make their case either by obscur ing individualism's value of auton omy or by bypassing it altogether. When they do address it, they too often concede to antiliberals their typical contrast of individualism with the ideal of cooperative social order. The significance of Liberalism for advocates of individualism is that it is an exemplification of how one can make the case for individualism without making this concession. As Mises' argument demonstrates, an tiliberal ideologies have no monop oly on the goals of association, social cooperation and harmony. In fact, in Mises' view, antiliberal ideologies often mask profoundly an tisocial assumptions. There is no need at all to defend liberalism's value of autonomy by placing the .self-sufficient individual in opposi tion to man as a social being. Thus, in Mises' approach to autonomy and privacy, he makes a valuable contri bution to the conceptualization of in dividualism by presenting an expo sition of the proposition that individualism is the best basis for a cooperative social order. @ Dr. Wortham is Assistant Professor of Public Policy at the Kennedy School of Government, Harvard University.

676 THE FREEMAN November Liberalism and Religion Edmund A. Opitz CLASSICALliberalism created a rev olutionary new view of the political State, its nature and proper func tions. We may better understand this sea change in political thought if we contrast the secular state of liber alism with it polar opposite found in the ancient world. The great au thority on the ancient city, Fustel De Coulange, tells us that "the state was a religious community, the king a pontiff, the magistrate a priest, and the law a sacred formula." The Greek polis was Church and State in one, Julius Caesar was Pontifex Maximus; the citizen was bound to the State body and soul. When civic and religious obligations are com bined and owed to the same insti tution we have that absolute power dreaded by Lord Acton. It was the great achievement of classical liberalism, with its roots in the post-Reformation era and mood, to desacralize the political order, thus stripping the State of its reli gious and moral pretensions. Holy empires and sacred monarchies claiming transcendent sanction have prevailed throughout history, and the State was venerated as an order of salvation. From now on, however, the sanctions of the State were to be much more modest, its objectives limited to constabulary functions; "the night watchman State," as a critic dubbed it.

No longer would the State assume responsibilities beyond its compe tence for the mo:!"aland spiritual re generation of men and women. "It is not for a disdain of spiritual goods that liberalism concerns itself exclu sively with man's material well being," writes Mises in Liberalism, "but from a conviction that what is highest and deepest in man cannot be touched by any outward regula tion." (p. 4) The tutoring and re newal of the human mind and spirit would, from now on, be the task of Church and Schoolin the broadest sense-so these institutions were pried out from under the State's um brella and assumed the autonomy they must have ifthey are to achieve their purposes. "Separation of Church and State" is repeated endlessly and mindlessly among us, so that the idea of a sec ular State is now commonplace. But it was a novel idea in the 17th cen tury, and it has not taken root any where in the world except in regions responsive to the influence of clas sical liberalism. What was the seed idea which eventually germinated as the concept of a secular State? And what was the milieu in which the seed took root? It was a milieu in which an aura of sanctity might be 1985 CLASSICAL LIBERALISM RECONSIDERED 677 attached to virtually anything; trees, rivers, stones, animals, as well as to the social order itself. And of course there were priest-kings, divine mon archs and holy emperors.

The Old Testament records a sharp break with this mentality, a new de parture which removes the idea of the holy from nature and society and rests it exclusively with the tran scendent deity: "I am the Lord, your Holy One, the Creator of Israel, your King." H. Frankfort, in his Kingship and the Gods, elaborates: "In the light of Egyptian, and even Meso potamian, kingship, that of the He brews lacks sanctity. The relation between the Hebrew monarch and his people was as nearly secular as is possible in a society wherein re ligion is a living force." The distinc tion between civic and sacred is sharpened in the New Testament, es pecially in Jesus' rejoinder to a trap question: "Render unto Caesar that which is Caesar's, and unto God that which is God's." The realm of Cae sar, the State, is now shorn of its lofty conceits. The State is a necessary and useful institution, but there's nothing divine or sacred about it.

Only God is holy, and there is some thing of the divine in persons; but not in the social order-the State is secular. There is a private domain in man, touched by the sacred, to which only the individual has rightful access. Invasion of this Self by any other constitutes a violation, and the State's apparatus of compulsion is set up precisely to punish trespasses of this sort. Wanton killing is the most flagrant of violations and it is the law's business to punish murder. Stealing is a violation of the bonds of ownership and is the ground for laws against theft. And because no person can be held accountable for his actions, nor realize his potential, unless he is free, the law seeks to se cure equal freedom for all persons. In short, each person has inherent rights, derived from a source beyond nature and society, to his life, his lib erty and his property; and it is the function of the Law to secure these rights.

The State's ability to punish evil should not create any expectation that the State can enforce good. Goodness must be voluntary, and the most the State can do on behalf of goodness is to curb evildoers and thus create "a free field and no fa vor" where right thinking and well doing of every variety can take root. The State began to get out of the religion business ~arly in the mod ern era; the press got free, and speech was unfettered. Adam Smith dem onstrated that the economy did not need political controls, but only the Rule of Law, which preserved social cooperation under the division of la bor. The best things in life began to flourish in regions outside the do main of politics: family, friendship, 678 THE FREEMAN November fellowship, conversation, work, hob bies, art, music, worship. . .. It was a noble vision, but it did not promise utopia and thus disap pointed those who demanded a heaven on earth. A little more re alism on this point and the vision may yet take hold again. @ The Reverend Mr. Opitz is a member of FEE's Senior Staff.

Liberalism and Limited Government Israel M. Kirzner AT FIRST glance the role of limited government in Mises' system of clas sical liberalism appears as a some what uneasy compromise between two conflicting goals: on the one hand to achieve the advantages of a free market; on the other hand to benefit, in certain respects, by co ordinated central direction. Indeed this compromise might appear to dif fer only in degree from the kind of compromise enshrined in those "mixed economic systems" that have become so dear to the hearts of the economists and politicians of our time. But such a view of the role of limited government in Misesian lib eralism would be utterly incorrect. For Mises, limited government is in no sense a compromise; and the possibility of any viable, stable kind of "mixed" system was categorically rejected by Mises: "There is simply no other choice than this: either to abstain from interference in the free play of the market, or to delegate the entire management of production and distribution to the government ... there exists no middle way." (p.

79) The truth is that for Mises' liber alism the appropriate and important functions of government, as well as the severely circumscribed limits to government are both directly and consistently implied by the very es sence of liberalism itself. "The pro gram of liberalism . . . if condensed into a single word, would have to read: property, that is, private own ership of the means of produc tion .... " (p. 19)It is the preservation of the institution of private property that most emphatically renders gov ernment a necessity for the liberal society; it is the preservation of pre cisely that same institution that makes it essential to prescribe strict and definite limits to government. That government is necessary for liberalism was forthrightly empha sized by Mises. Government is de fined as "the organs charged with the responsibility of administering the apparatus of compulsion." (p. 35) And "the liberal understands quite clearly that without resort to com pulsion, the existence of society would be endangered ... One must 1985 CLASSICAL LIBERALISM RECONSIDERED 679 be in a position to compel the person who will not respect the lives, health, personal freedom, or private prop erty of others to acquiesce in the rules of life in society." (p. 37) And, again, "For the liberal, the state is an absolute necessity, since the most important tasks are incumbent upon it: the protection not only of private property, but also of peace, for in the absence of the latter the full benefits of private property cannot be reaped." (p. 39) Recognition of the necessity of the state apparatus of compulsion does not, however, lead the liberal to as cribe special nobility, virtue, or es teem to the exercise of state func tions. On the contrary, the liberal is thoroughly sensitive to the enor mous potential for evil and corrup tion that inheres in the exercise of government. "Nothing corrupts a man so much as being an arm of the law and making men suffer. The lot of the subject is anxiety, a spirit of servility and fawning adulation; but the pharisaical self-righteousness, conceit, and arrogance of the master are no better." (p. 58) It is because for Mises the exercise of state functions carries with it no inherent nobility or dignity, that he sees the merits of democracy in a manner entirely free of the mystique with which it is invested in current political ideology. There is, for the liberal, no special glory attached to the task of governing, and no indignity attached to being subject to (limited) governmental rule. The rule of government is a practical ne cessity; that is all. Division of labor then exercises its claims. "One can not be an engineer and a policeman at the same time. It in no way de tracts from my dignity, my well being, or my freedom that I am not myself a policeman."

It then follows that there is noth ing particularly glorious about a sys tem that seeks to replace govern ment by the few by self-government by the whole people-even were such a goal in fact a possible one. The only reason for endorsing democracy for the liberal society is a pragmatic one. "Democracy is that form of political constitution which makes possible the adaptation of the government to the wishes of the governed without violent struggles ... By means of elections and parliamentary ar rangements, the change of govern ment is executed smoothly and with out friction, violence, or bloodshed." (p.42) But if the preservation of private property was the basis for liberal ac knowledgment of a vitally impor tant role to government, that same essential element in liberalism im plies a severely circumscribed set of functions for government. Liberal ism reflects the teachings of econom ics concerning the enormous bene fits that society reaps from the institution of private property in the 680 THE FREEMAN November means of production. But the very concept of private ownership in volves "for the individual a sphere in which he is free of the state. It sets limits to the operation of the au thoritarian will." Every attempt by the state to go beyond its function of "guaranteeing life, health, liberty and private property against violent attacks" is then seen by the liberal as "evil." (p. 52) No matter how well meaning paternalistic acts of gov ernment may be, such acts neces sarily invade the domain of private property. Consistent paternalism cannot but lead to complete author itarianism, stifling all progress and innovation. "The wielding of powers of this kind even by men imbued with the best of intentions must needs reduce the world to a grave yard of the spirit." (p. 54) Here then we have the single goal and raison d'etre of limited govern ment in the Misesian system: The pragmatic lessons of economic sci ence' joined with a passionate re gard for individual freedom, point unequivocally to the liberal system of private ownership of the means of production. Preservation of this fun damental framework of individual rights calls for government that pro tects these rights against potential enemies; the concern that such pro tection emphatically refrain from it self invading those very rights is not the expression of any kind of com promise-it is merely the other side of the very same coin, the essential ity to liberalism of a protected, in violate sphere of individu~l rights.

@ Dr. Kirzner is Professor of Economics at New York University as well as a Trustee of The Foundation for Economic Education. Liberalism and Change David Boaz THE UNITEDSTATESis a society based on change. We have no cultural memory of generations or centuries when life remained much the same. The one constant to which Ameri cans have become accustomed is change. Many explanations can be adduced for this phenomenon-our society's relative youth, constant new fron tiers, continual immigration. But the fundamental explanation is that the United States is the world's most liberal society in the classical sense of the term. It was founded by lib erals, on explicit liberal principles, and it has remained largely true despite many deviations-to those principles. The benefits of change are obvious. We can point to new developments from the cotton gin to the automo bile to the computer chip that have made our lives better. The clearest 1985 CLASSICAL LmERALISM RECONSIDERED 681 way to understand the benefits of change is to recognize that our so ciety supports more than 200 million people at the highest standard of liv ing in the history of the world, in a land area that once provided mere subsistence to only a few million.

But change has costs. As consumer preferences shift or new competitors arise, some people lose their busi nesses or their jobs. Their skills be come outmoded. When an industry or even a firm shuts down, a whole way of life may disappear. Millions of Americans have had to give up farm life. Millions more are faced with the loss of their lifetime jobs as smokestack industries decline. Some people find this change too much to bear. Many of us today may think of the 1920s-when Mises wrote Liberal ism-as the good old days, even a golden age, and certainly a time well before the harrowing pace of modern life. Yet even then people were com plaining about the need to adjust to change. They argued, said Mises, that "the material advances of re cent generations ... have, of course, been really very agreeable and ben eficial. Now, however, it is time to call a halt. The frantic hustle and bustle of modern capitalism must make way for tranquil contempla tion." (p. 189) Few people today are so explicit in their hostility to change. They don't want to stop all change, just the particular changes that infringe on their patterns of life. Modern "liberals"

and leftists find a receptive audience among displaced workers and others beset by economic change for their programs of stagnation: Rent con trol, farm parity, plant closing re strictions, limits on automation. Similarly, New Right conservatives appeal to middle Americans fearful about today's lifestyle changes with their programs to "restore tradi tional moral values." There are, it would appear, few things that Ludwig von Mises and George Will would agree on, but one of them is this point, as phrased by Will: "The essential aim of liberal ism, and the central liberal value, is the maximization of individual choice." Mises wrote about the max imization of choice primarily as a means to achieve greater wealth for everyone in society. But he did not limit his liberal principles to what George Will would call the "merely economic" sphere of life. Here is Mises on liberal policy toward what we might today call lifestyle issues: "If the majority of citizens is, in prin ciple, conceded the right to impose its way of life upon a minority, it is impossible to stop at prohibitions against indulgence in alcohol, mor phine, cocaine, and similar poisons.

Why should not what is valid for these poisons be valid also for nico tine, caffein, and the like? Why should not the state generally pros682 THE FREEMAN November cribe which foods may be indulged in and which must be avoided because they are injurious? ... We see that as soon as we surrender the principle that the state should not interfere in any questions touching on the indi vidual's mode of life, we end by reg ulating and restricting the latter down to the smallest detail." (pp. 53 54) The problem for conservatives like Will is that capitalism means indi vidual choice. And, as Mises noted, when people are allowed to be free, some of them will choose courses of action that others disapprove. When that happens, some want the gov ernment to step in. Whether it is to control rents, prevent disinvestment in farming, or keep women in the home, they are willing to use the state to keep society from changing.

This is a fundamentally reaction ary view of the world, a lingering im pulse from pre-capitalist times. Be fore capitalism, and in a few parts of the world still largely untouched by capitalist society, life did stay much the same for generations. Men and women knew that they would grow up, live, and die just as their fathers and mothers did. This was not a pas toral ideal; it was a life that was nasty, brutish, and short, and the subsistence society could support only a few people compared to to day's population. Into this stagnant world came lib eralism. By freeing people from an cient bonds, it showed them that progress was possible. They could change their lives, they could have more material comforts, their pow ers of creation and achievement were liberated. And with the coming of liberalism came an end to settled so ciety. Change became the only constant. Liberalism gave people the free dom to make choices. Economic free dom created prosperity, which gave more people the wherewithal to take advantage of the new choices avail able to them. This process of choice and change is the distinguishing characteristic of capitalism.

Liberals must recapture the pro gressive spirit that characterized liberalism in its early days. We must make it clear that liberalism, and only liberalism, is the political phi losophy of progress, and that those who seek to resist change stand in the way of what Mises called "an ever progressing improvement in the satisfaction of human wants." (p. 192) @ Mr. Boaz is vice president for public policy affairs at the Cato Institute.

Ludwig von Mises LIBERALISM: IN THE CLASSICAL TRADITION FEE is pleased to announce the reprinting of Liberalism. This new edition, prefaced by Bettina Bien Greaves, offers the philosophy of classical, nineteenth-century liberalism: the great political and in tellectual movement that promotes free men, free markets and lim ited government. /IAn indispensable book." - Henry Hazlitt /lMises' views still appear fresh and modern and readers will find his analysis pertinent." - Bettina Bien Greaves 230 pages • $9.95 paperback Order from: The Foundation for Economic Education, Inc. Irvington-on-Hudson, New York 10533 (Postage paid on prepaid orders; othenvise add $2.00 per order for billing.) Joseph S. Fulda DeclarativeLaw THELAW is imperative, it commands. Criminal law is a series of "Thou shalt nots." Regulatory law, a rela tively new area of statutory en deavor though it has ancient roots, is a series of "Thou shalt nots" and "Thou shalts." Regulatory law of this sort often infringes the natural rights of the parties, often presumes guilt in those regulated and requires them to prove themselves innocent, and often has perverse results, even results opposite from those intended.

In short, and as people of all political persuasions are coming to realize, regulation is not the answer. In this essay I wish to develop an alternative to the imperative law which proscribes and prescribes. The alternative would be declarative law, Joseph Fulda is Assistant Professor of Computer Science at Hofstra University. 684 law which describes. Such a law would not conflict with libertarian values. It would not mandate prior restraint nor would it presume guilt. Most likely, the practical results would be better than those of imper ative law. Basic civil law, both the common law and the statutory law, has the primary function of describing the responsibilities that one man bears another. This function of the law comes from the basic Western tra dition that the two senses of the word "responsible" are indissolubly linked; that is, if a man is respon sible for an act in that he performed it, he is responsible for that act in that he is liable for its consequences.

This relation between the two senses of the word "responsible" can also be seen in Western religion which DECLARATIVE LAW 685 maintains a clear connection be tween virtue and reward, vice and punishment. And it can be· seen in the market system where success is related to consumer satisfaction and failure is related to consumer dissatisfaction. The Issue of Negligence One of the ways, perhaps the prin cipal way, in which civil law de scribes our respective responsibili ties to family members, friends, and business associates is through the law of negligence. Negligence is "the failure to exercise that degree of care which, under the circumstances, the law requires for the protection of those interests of other persons which may be injuriously affected by the want of such care" (American College Dictionary). In other words, negligence is the "failure to exercise the care that a prudent person usu ally exercises (Merriam-Webster)."

Indeed in the law we are most often compelled to consider what "the or dinary, prudent man of average in telligence" would do and to use this fictional man as the basis for decid ing whether particular persons party to a dispute have met their respec tive responsibilities. New Jersey, which finds hosts who serve alcohol liable for the conse quences of their guests' driving while intoxicated, has, in essence, ex perimented with the idea of declar ative law. Unfortunately, however, the two senses of "responsibility" are not linked, since it is not the driver who is held responsible for the ac tions for which he is certainly, in the other sense of the word, responsible. I should like to give two examples where existing imperative law might well be replaced by declarative law. The first is the New York State law requiring seat-belt use for all front seat passengers under penalty of a fifty dollar fine. Instead of a direc tive ordering drivers to take this precaution,a simple statement that they are liable to a civil suit in negligence and criminal charges for manslaughter would suffice. In making such a declaration the leg islature would be doing no more than defining "prudence" and "ordinary care" in the light of the many stud ies showing the life-saving benefits of seat-belt use. As knowledge ad vances, what is prudent, ordinary, and reasonable will change. It is within the scope of the legislative mandate to describe interpersonal responsibilities to redefine these terms as needed. Naturally, to a lib ertarian, there is no room for legis lation-imperative or declarative requiring seat-belt use for the driver himself. The law exists to protect man from the folly of his fellow man, not from his own folly.

The second example is the New York City ordinance requiring land lords to install smoke detectors in all apartments at a maximum charge to 686 THE FREEMAN November tenants of ten dollars. Instead of this directive, we would prefer a decla ration that given this new, inexpen sive technology, its absence in the case of fire is negligent and opens the landlord up not only to civil suit but again to charges of manslaughter. There may be some apartment build ings in the poorer sections of town where tenants must choose between food now or protection from fire in the future. In that case nothing pre vents the tenants and landlord from negotiating a waiver of responsibil ity-much like the waivers that are often signed prior to a medical op eration consenting to limit liability. The advocate of regulation, hear ing what we have proposed, will no doubt object that there is no prior re straint, that the remedies discussed, civil or criminal, exist only after the fact, when it is too late. Regulation, in contrast, is intended to be pre ventive. The answer, of course, to this objection is that while the state imposes no prior restraint, the mar ket certainly does.

Importance of the Insurance Protection In a society based on declarative law, the need for liability insurance would be high and the insurance in dustry would surely develop schemes to protect their interests. Inspec tions by private insurance compa nies with millions of dollars at stake and whose inspectors may well have their jobs on the line will surely be more thorough than those done by disinterested bureaucrats working for indifferent agencies. Likewise, the expensive and cumbersome legal process of proving negligence when an insured company causes injury through imprudence is now gladly undertaken by the insurance com pany. Furthermore, .premiums for such insurance will be determined on the basis of both. the company's record and inspections. A company with substantially higher premiums than its competitors, and that in cludes companies insured on the ba sis of statistics without inspections, will soon find its prices noncompe titive and its customers switching loyalties. Likewise, a company with out insurance at all is likely to be boycotted by most consumers: the existence of insured firms and con sumers seeking security insures this.

Mter all, companies who are insured have every incentive to advertise this fact. It must be admitted, however, that on the free market consumers who wish to bear the risk of dealing with uninsured companies-and in New York City consumers do this every time they choose a "gypsy" cab over a regulated, heavily insured "yel low" cab-either to save money or for convenience are free to do so. The claim we make is that the market adequately prevents and retaliates for harm done us by others, not that 1985 DECLARATIVE LAW 687 it prevents us from harming ourselves. The Imperative for Freedom Besides liability insurance, insur ance against extraordinary losses in business due to imprudence and any number of other insurance schemes might be contracted into. Neither I nor anyone can know just how the insurance market would deal with product safety, economic security, employee safety, and the like. But one can rest assured that under a re gime of declarative law, the ex post penalties of the market and the law would be transmuted into preven tive measures by all manner of in dividual and group schemes. If one could know just how, the imperative for freedom would be a merely moral concern. Since one cannot mimic the actions and decisions and interplay of millions of freely acting individ uals, the imperative for freedom is a practical concern as well. @ Christmas 1985 Gift Subscriptions Checking your holiday gift list? For only $10.00 per name, you may make a gift of The Freeman and Notes From FEE for one year to friends, business associates, teachers, students, em ployees, clergymen, libraries-whomever you choose. The gift will begin with an attractive card, mailed in time for Christmas!

The Foundation for Economic Education Irvington-on-Hudson, New York 10533 William H. Peterson \Entrepreneurship, The Possible ~ Dream ~~ ENTREPRENEURSHIP,the possible dream. The dream may not always be big but it is possible, even probable given the right conditioning, given the right commitment. For in a free society the spirit of enterprise, the spirit of dynamic boldness, of busi ness ingenuity, appears to be rather universal, across the board-part and parcel of human nature. Thus in one way or another the spirit of enterprise crops up in every occupation, every craft, every profes sion, every walk of life, from a plumber figuring out a new way to fit a pipe bend, to a factory manager recasting a production layout flow, to a university student enhancing Dr. Peterson is director of the Center for Economic Education and holds the Scott L. Probasco Jr. Chair of Free Enterprise at the University of Tennessee at Chattanooga. This article is derived from a research program in entrepreneurship.

688 his human capital by hitting on a new and better study technique, to a Washington hostess coming up with an innovative dinner table seating arrangement, to a novelist working out a fresh plot construction and-to cite perhaps a bigger dream-to a Vi etnamese "boat person" establish ing a restaurant in Los Angeles. All these individuals must shape and reshape their plans to fit chang ing conditions and invest in a de manding if not capricious situation in an uncertain future. All of them reflect entrepreneurial behavior the entrepreneurial spirit in action. Perhaps without knowing it, they are enterprisers all, at least in de gree. Shakespeare sensed this entre preneurial spirit when he had Ham let observe: "Every man hath business and desire, such as it is." So did Adam Smith sense the spirit of ENTREPRENEURSHIP, THE POSSffiLE DREAM 689 enterprise when he declared in The Wealth of Nations (1776): "In all countries where there is tolerable se curity, every man of common under standing will endeavor to employ whatever stock he can command, in procuring either present enjoyment or future profit." Colonel Harland Sanders, founder of Kentucky Fried Chicken, expressed his own streak of entrepreneurship this way: "I was 66 years old. I still had to make a living. I looked at my Social Security check of $105 and decided to fran chise my chicken recipe. Folks had always liked my chicken."

Thus the aspiring enterpriser or entrepreneurial manager might ask himself: Are you ready to be an entrepre neur, to be an entrepreneurial man ager (sometimes called an "intrapre neur"), to be a success? If so, what have you done to merit it? Have you developed a marketable specializa tion? Have you developed something fresh and unique that would be of in terest at your workplace or to your customer, real or potential? Are you fully applying and capitalizing on it? And, just what have you done to pro mote your ideas? The message here, then, is: The spirit of enterprise seems latent if frequently dormant in human na ture. It is a national as well as an individual resource. It can be nur tured and developed. Above all, it can be self-applied. The Entrepreneurial Choice Yet enterprise is not a free good. It has a price. It is implied in the econ omist's concept of opportunity cost, the idea that whatever man seeks he must sacrifice something to obtain it, that he must give in order to get, deny himself the yield from the in vestment of time, effort or capital in options denied, that he must engage in the calculus of costs and benefits arising from different choices, that, indeed, he may miscalculate-incur losses, lose his capital and become a business mortality statistic. Yet, cor rect choices can be creative, inno vative, beneficial to community and entrepreneur alike.

Yes, enterprise, success, the pos sible dream. So I ask: Inside and out side the world of business, just what is it that ignites the spark of inge nuity, of creativity, that causes the enterprisers, whoever and wherever they are, to try something dramatic, dynamic and bold, that enables them, frequently, to till new ground, see new horizons, break through once-impenetrable barriers? Now, what of entrepreneurship, the child of enterprise? What impels entrepreneurs to scout for new market or production possibilities, to come up with some thing novel, daring, risky, even per ilous in terms of losing precious time and accumulated capital? What makes them try to spot and meet the shifting needs and demands of the 690 THE FREEMAN November ever-fickle, at times cruelly dictato rial and always most sovereign consumer? Whatever the answer, the break throughs start in the mind. Just how did Thomas Alva Edison come up with the idea of an electric light (apart from literally hundreds of other patented ideas), Willis Car rier with the concept of an air con ditioner, Clarence Birdseye with the thought of frozen food, Gail Borden with the invention of condensed milk, Rowland Hussey Macy with the notion of a department store, Wallace Abbott, M.D., with the idea of "dosimetric granules" or mea sured-medicine pills, Gustavus Swift with a vision of "an ice-box on wheels" to get fresh-dressed beef and pork by refrigerated fast rail to pop ulation centers in the East, Ray Kroc with the thought of franchised fast food restaurants, Stephen Jobs with the concept of a personal computer, Mary Kay Ash with the idea of "beauty consultants" merchandis ing Mary Kay Cosmetics, Rocky Aoki with the scheme of a chain of Benihana Japanese steak houses and more recently with a line of fro zen Oriental packaged food for the home?

Just what is behind the some 600,000 new firms appearing on the American scene every year, in good times and bad (with bad times of course raising the business mortal ity rate)? Encouraging New Ideas In short, how does the entrepre neurial mind work? What makes it tick? What encourages it, discour ages it? How can we nurture enter prise, productivity, creativity, fore sight-entrepreneurial ideas? What attitudes, values, customs, mores, habits, laws, institutions, traditions, conditions, and the like give rise to this vital social asset? Just what prods the entrepreneur to hazard markets with' innovative and fre quently untried ideas, to risk failure and the loss of capital~ to overcome conscience which, as Shakespeare's Hamlet again observed, "does make cowards of us all"? These questions are basic to the care and cultivation of entrepre neurship. The questions are also basic to the character of the econ omy, for the entrepreneur, according to a host of economists including Richard Cantillon, Jean-Baptiste Say, F. Y. Edgeworth, Francis Walker, Joseph Schumpeter, Frank Knight, Ludwig von Mises and Is rael Kirzner, is the central figure of economic activity.

Whatever the answers, clearly en trepreneurship is a function of the mind-the conditioned mind, the imaginative mind, the disciplined mind, the entrepreneurial mind. Consider the entrepreneur as an individual possessed of perception and nerve, of vision and gumption. His is, as a rule, a dual personality: 1985 ENTREPRENEURSHIP, THE POSSIBLE DREAM 691 He is a perceiver and a doer. He sees and he acts. He beholds and he grasps, even when the brass ring eludes him, i.e., when he is wrong. Still, he remains the personification of mind over matter, of a dream come true-even if the dream fades away, or even if the dreamer and the doer are occasionally two different indi viduals' with the doer (perhaps in the personage of a partner or a venture capitalist) the activator of the enter prise, the realizer of the dream. Nonetheless, as we will see, the entrepreneur, sparked by an entre preneurial spirit, dominated by the consumer, conditioned by his in stitutional environment, makes things happen; he spurs supply; he enriches mankind; he is an unsung hero.

Thoreau caught the spirit of en terprise when he wrote in Walden: "If you have built castles in the air, your work need not be lost; that is where they should be. Now put the foundations under them. All men want, not something to do with, but something to do, or rather some thing to be." Item: Not long ago Seiko, the Jap anese watchmaker, developed a wristwatch that calls Moslems to prayer at the right hour five times daily. Thus Seiko gently reminds Moslems to face Mecca, their holy city in Saudi Arabia, and pray, no matter where the Moslems may be. The time-reminder also comes as a table clock and pocket-watch. The price of these timepieces runs around $100, and the potential market is es timated at hundreds of millions of people. This is entrepreneurship at work, bringing the Seiko people, their dealers and Moslems together in far-reaching social cooperation, in mutual and peaceful advantage, in an all-around win-win-win situation.

Item: Joseph J. Pinola, C.E.O. of his Los Angeles-based First Inter state Bancorp, long had a vision of a nationwide banking system under one management. The cloud over such a vision was the uniform state banking rule that no bank could op erate outside its state borders. But the entrepreneurial concept of Pi nola was to hurdle state borders via the holding company or affiliation route, i.e., to have a First Interstate Bank of California, a First Inter state Bank of Arizona, a First Inter state Bank of Nevada, and so on. To day First Interstate services consumers at more than 1,000 bank ing offices in 14 states with more than $45 billion in assets. As entre preneurially -minded Joseph Pinola wrote on February 19, 1985 in First Interstate's 1984 annual report: There's a saying that gives a sage ad monition: "To the blind, all things are sudden." Hence, in our view, trying to manage in today's environment without any foresight of a framework for change 692 THE FREEMAN November is pure folly. Our framework is our stra tegic plan, which has a clear objective: The development of First Interstate into a profitable, nationwide supplier of a broad range of financial services. (Italics added.) Item: Sears, the giant department store and mail order house under the leadership ofC.E.O. Edward R. Tell ing, recently moved four-square into the financial services business. Long in the auto and life insurance busi ness with Allstate, Sears recently launched Discover, a new credit card to compete with Visa and Master Card. Sears also bought out the Dean Witter Reynolds stock brokerage firm, the big California-based na tionwide real estate firm of Coldwell Banker, the Greenwood Trust Com pany of Delaware and a bank in South Dakota, thereby enabling Sears to set up its own financial em pire and giving commercial banks like Citicorp, BankAmerica and First Interstate fears of powerful competition from this so-called "nonbank bank." Sears' move into financial markets to better serve their customers is not without risk.

Comments C.E.O. Telling, according to Time (August 20, 1984): "Taking chances is a fact of economic life. Business must risk to grow. Fear of what mayor may not happen is no excuse for avoiding challenges." So we begin to see how entrepre neurship and challenge are practi cally one, how entrepreneurship serves as a bridge between produc ers and consumers, with consUmers as the bridge-tenders, determining which producers get to cross the bridge and in what strength-i.e., in what share of the market. We also see how the role of the con sumer is, as noted, sovereign-cen tral, crucial, pivotal to the success or failure of entrepreneurship. The en trepreneur has to satisfy King or Queen Consumer, the person ever looking over the entrepreneur's shoulder, ever having the final say. The consumer applauds with profits, punishes with losses, ever com manding: Do better, do better-or else. The consumer, in' other words, is the master, even a. virtual dictator over the entrepreneur. The con sumer holds the almighty power of the purse. He picks and chooses among competitors. He accepts some and rejects others. He thereby has every entrepreneur by the jugular, occasionally withholding patronage, strangling a woebegone entrepre neur to death. Here is the way that Ludwig von Mises put the entrepre neurial situation inHuman Action: The direction of all economic affairs is in the market society a task of the en trepreneurs. Theirs is the control of pro duction. 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 1985 ENTREPRENEURSHIP, THE POSSIBLE DREAM 693 the consumer. Neither the entrepreneurs nor the farmers nor the capitalists deter mine what has to be produced. The con sumers do that. If a businessman does not strictly obey the orders of the public as they are conveyed to him by the structure 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.

So you see that this Captain Consumer-King or Queen Customer is rough and tough, and that the entrepreneur knows it. Entrepre neurial ideas are fine, they may be realized, Le., brought into being, if approved over and over again by the sovereign consumer. So quality or value of product or service, given the level of pricing, is ever critical. Con sumers demand it, expect it, and when it is missing they take um brage and may well strike back-do without or switch support to another vendor-thereby imposing losses on the offending entrepreneur. Quality. Value. Worth. The most for the least. These are the simple parameters of the marketplace. Hence the recent rise of employee quality control circles in stores and offices, mills and factories in Japan, North America and Western Europe and now practically around the world. Perfection becomes the entre preneurial goal. As father-and-son Management Professors Michael and Timothy Mescon (respectively at Georgia State and the University of Miami) noted in SKY Magazine, September 1984: Perfection. When was the last time you observed, experienced, or participated in an act of perfection? When was the last time you witnessed a flawless perfor mance, purchased a flawless product, or were treated with flawless service? Can you recollect receiving excellent treat ment or accurate delivery in the past week, month, or year? Perfection, flaw lessness, excellence, and accuracy are words that don't easily come to mind. In deed, terms like these are difficult for many of us to vocalize. We have for all too long accepted the mundane, promoted the average and rewarded the mediocre.

But as the Mescons further note, in our global business market peo pled by sharp, hungry, enterprising competitors, little but perfection will do the trick. Excellence is not fan tasy. Its pursuit is mandatory, com petition demands it. Relatedly, pro ductivity improvement becomes make-or-break. Hence perfection be comes more and more the norm. It more and more is rewarded both by the consumer and, increasingly, by the quality-minded, competition-at tuned employer-entrepreneur. Item: A recent IBM ad states in a bold headline: If Your Failure Rate Is One In A Million, What Do You Tell That One Customer? The ad con tinues to explore the simple point that controls all work at IBM: zero defect performance. Still, concludes the ad, if an IBM product does some694 THE FREEMAN November how need attention, IBM stands ready, willing and able to furnish er ror-free and precise service. Perfec tion, even for that isolated customer, is the ideal that must be ever borne in mind, a litany that must be rei terated to employees over and over again. This, say the Mescons, is the way to keep the concept of perfection at work.

Item: Motorola, the global elec tronics company, has charged all of its 90,000 employees to pursue ex cellence, to strive for product and service quality perfection. Through its Participative Management Pro gram (PMP) Motorola has forged a system of employee economic edu cation, including individual worker recognition, aimed at two-way com munications and work perfection. At Motorola's Mesa, Arizona plant, for example, PMP employees have es tablished a Perfection Award-rec ognition of achieving a 100 per cent explicit unmistakable standard: per fection. To date more than 3,600 Per fection Awards have been earned by Motorola employees in Mesa. Indeed, perfection-minded Moto rola does not use the word employees or workers: They are, according to Motorola, henceforth to be known as "associates." (Perfection, like entre preneurship, after all, is partly a matter of self-image and self-image is enhanced by being an associate rather than an employee or worker.) Writes Henry W. Bried, the firm's PMP director: Participative Management at Motorola is a system of management which encom passes a two-way exchange between and among management and our associates (being our employees). It is structured to meet the individual and common produc tion objectives of industry. Since 1974, when we first implemented it, this sys tem is the most successful and effective program to improve productivity in in dustry today.

Participative mahagement and quality circles are variations of en trepreneurship. They tie in with my theme of enterprise, the possible dream. Yet perhaps more than a dream, for, again, entrepreneurship is a relatively unexploited natural resource, embedded in human na ture, a vital strand that weaves in and out of every human psyche, or as Ludwig Mises put it in Human Action: "In any real and living econ omy, every actor is always an entre preneur and a speculator." Mises reminded us that man must ever cope with Adam's curse, with the inescapable fact of scarcity, with a stomach (or stomachs) to fill, with the need to get a roof over his head and clothes on his back, with his therefore having to ever entrepre neurially garner and commit re sources in every action. In a free so ciety, man the entrepreneur and speculator has to have a purpose in mind, shoot at a goal, work with his 1985 ENTREPRENEURSHIP, THE POSSIBLE DREAM 695 fellow man in a finely-tuned net work of social cooperation.

Human Action Embodies Entrepreneurship Entrepreneurship, then, is ever a matter of choice. Faced with count less alternative courses of action, man in and out of entrepreneurship must constantly choose, ever trade off one option for another, opting as a rather strict rule for the most re warding, obeying the economic "law" of Nobel Laureate George Stigler that $2 is better than $1 or, to put it in a less tongue-in-cheek way, more happiness is better than less. In any event, man is always his own bottom line, his own profit cen ter. Profit in this sense is, again, ever psychological and motivational, value-ridden, allowing for altruism and unselfishness, the mental cal culus of a unique individual, an in dependent as well as interdependent being. Profit is the universal spur, then, behind the spirit of enterprise. It is a force for-as conditioned by The Entrepreneurial Spirit ethics, by the absence of fraud and force-the public interest, the social good.

Enterprise is perforce dynamic. It moves with the ebb and flow of life, of history, of technology, high and low. It swings with the tone of poli tics, with the shape of political in stitutions. Man, the innate enter priser, the potential entrepreneur, realizes that conditions change, that the world is in a whirl, that, as Her aclitus noticed, he can never swim in the same river twice, that he lives in an environment of change, of uncer tainty as well as scarcity, that any one action may fail its mark, that he is inescapably a speculator. So all human action embodies elements of entrepreneurship and speculation. We are all, then, entrepreneurs and speculators in one degree or an other. Nobody is immune to the op portunities and uncertainties that life unfolds before us. Entrepreneur ship is a normal human capacity. It can be cultivated and developed. It is a possible dream. @ IDEAS ON LIBERTY HOWEVER you measure it, U. S. entrepreneurial activity is growing.

Business start-ups, which averaged 1,800 a day in 1950 and 4,000 in 1960, increased to an estimated 12,000 a day in 1983.... The vigor of our entrepreneurial spirit is the United States' greatest business treasure. GIFFORD PINCHOT m, Intrapreneuring To the Editor As many of you know, we recently conducted a Freeman reader sur vey. One comment we heard repeatedly was "please include letters from readers." In response to this suggestion, we are starting a new "To the Editor" column. We will share with readers the most inter esting and provocative letters we receive regarding Freeman arti cles. Since FEE's activities encompass more than just publishing The Freeman, we will also include, from time to time, reactions to other FEE undertakings. In short, we want this to be the space in which our readers share their opinions. Letters may be edited for purposes of clarity or space. Address your letters: To the Editor The Freeman Foundation for Economic Education Irvington, New York 10533 A Complaint To the Editor: I have a complaint.

I have been sending money every year to FEE for several years so that I could continue to receive The Free man. I don't want this to change. My complaint is my loss of sleep and damage to my health caused by each issue of The Freeman. When it arrives I sit up to all hours to read it from cover to cover, frequently write letters to compliment authors, and then usually mail my copy to a friend (or enemy). This process oc curs every month and it is causing 696 me to lose sleep, damaging my health, and prevents me from devot ing full time to the three novels I'm trying to write. The problem is that the magazine is too good. The solution is simple. Every other issue print mediocre ar ticles, or even just send out a blank magazine. This won't completely solve the problem, but at least I'd know that every other month I would receive some relief. I do trust that you will attend to this request promptly.

ROBERT T. SMITH Smyrna, Georgia TO THE EDITOR 697 On Industrial Policy To the Editor: I found Dennis Bechara's discus sion of industrial policy in your Au gust issue to be a useful source of documentation of the folly of agen cies such as the Reconstruction Fi nance Corporation and Japan's MIT! attempting to direct investment. In his discussion of the changing pat tern of the U.S. economy, however, he overlooks a major change taking place within the manufacturing sec tor which lends further support to his thesis. That change is the shift of manufacturing from a corporate sec tor which is sufficiently shielded from market forces in the short run to operate by planning to a compet itive sector which responds quickly to market forces. Zoltan Acs exam ines that shift in his book, The Changing Structure of the U. S. Economy: Lessons from the Steel Industry. That shift puts the lie to an ar gument long used to justify indus trial policy: John Kenneth Gal braith's view that the corporate sector is based on planning rather than prices, so that all that indus trial policy would do is transfer the planning from self-interested firms to supposedly public-interested bu reaucrats. Acs's study. shows that firms which use planning to resist market forces in the short run do not grow, but shrink, in the long run. In dustrial policy could prevent that shrinkage only at the expense of the growth of the innovative competi tive sector. Thus, the only possible reason to have an industrial policy in that case would be to undo a con dition brought about by industrial policy in the first place. One can read this into the lacocca quote which Be chara uses on the first page of his article. As with other interventions, the solution is to eliminate the orig inal intervention rather than to try to correct the problems caused by in tervention with more intervention.

ROBERT BATEMARCO Assistant Professor of Economics Manhattan College Riverdale, New York Getting Even To the Editor: The John Williams article in the September Freeman, "The Disease From Which Civilizations Die," caused me to reverse a fondly held idea with respect to the use of gov ernmental programs. The question is whether it is morally acceptable for me to accept government benefits such as Social Security and Unemployment Insur ance, should they become available. In the past, I thought yes, on the premise that it is some sort of return of stolen property. But Williams's argument clobbers 698 THE FREEMAN my little metaphor. His story starts with his being robbed by a pick pocket. Then at some future date he acquires some clout over the thief. If he participates in future loot, Wil liams is not recovering his property. R~ther, he becomes a partner in a new crime, not a victim enjoying a measure of restitution.

Williams's story of the pickpocket is a classic. MARSHALL FRITZ Chairman, Advocates of Self-Government Fresno, California Rational Self-Interest To the Editor: My congratulations to Professors Asmus and Billings for their excel lent article on "Human Nature and Human Action" in the October Free man. However, a few nagging ques tions remain unanswered. Allow me to play devil's advocate. Of primary concern to our Found ing Fathers was the connection be tween virtue and freedom. The Founders were certain that a just so ciety could not remain free unless its citizens were sufficiently virtuous. In other words, how will a market economy promote the necessary vir tues required to sustain a free soci ety? Indeed, what are the moral vir tues commensurate with liberal capitalism? What will prevent a free society from degenerating into cor ruption and licentiousness? Asmus and Billings are absolutely correct in identifying the relation ship between market economics and human nature and action. Absent from their central thesis, however, is a moral defense of selfish action. Yes, such action may be "purposeful," but it is selfish just the same. For the history of moral theory teaches us that selfishness is bad and sacrifices to others the morally good. What the defenders of capitalism desperately need is an ethical advocacy of egoism and rational self-interestedness. We must take the higher ground.

BRAD THOMPSON Senior History Master Appleby College Oakville, Onto Canada Help·ls on the Way! To the Editor: One of your authors showed me a copy of the July 1985 issue of The Freeman, and it was a breath of fresh air in an otherwise typically stulti fying Washington day. So that I might look forward to a few more such breaths, I would appreciate your adding me to the mailing list for future issues. JEFFREyLZUCKERMAN Chief of Staff Equal Employment Opportunity Commission Washington, D.C.

A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN Liberalism Proper and Proper Liberalism GOTTFRIEDDIETZE, who teaches po litical science at Johns Hopkins Uni versity, enjoys playing semantic games. A good bit of juggling is re quired to explain the exact conno tations of the title of his latest book, Liberalism Proper and Proper Lib eralism (Baltimore: Johns Hopkins University Press, 282 pp., $27.50). In the first place, it must be under stood that Dietze is not talking about what passes for liberalism in con temporary America, where the word has become a synonym for socialism and State interventionism. But be yond that there is the quibble in volved in the placement of the qual ifying word "proper." When Dietze uses the adjective "proper" after the noun "liberalism," he does it with out any ethical or moral implication. He is talking about liberty without restriction. Libertarianism would be a better word for it. But when he shifts the placement of his adjective, putting it ahead of the noun, he brings standards of good moral be havior into the picture.

This is his roundabout way of in troducing a book about the political thought of four eighteenth-century classical liberals, Montesquieu, Adam Smith, Kant and Jefferson. These four seminal thinkers, whose Iives spanned the period from the Glorious Revolution in England in 1689 (the year of Montesquieu's birth) to 1826 (the date of Jefferson's death), talked about freedom and lib erty as grand abstractions. But not one of them would have been able to pass a test of consistency adminis tered by a modern libertarian. They all believed in the existence of a 699 700 THE FREEMAN November moral law, and saw no quarrel with liberalism if such law were to be made the basis of legislation putting restrictions on the private individ ual. In other words, they were for limited government. They were, all of them, republi cans, not democrats. Dietze confuses the issue in a later chapter when he speaks of "democracy' proper" and "proper democracy." "Democracy proper" means a majority rule, whether for good or for evil. "Proper democracy" means a democracy that acts in accordance with the kind of proper liberalism espoused by Mon tesquieu, Smith, Kant and Jeffer son. It would have been simpler if Dietze had used older definitions of limited versus unlimited govern ment, or of democracy versus republicanism.

Montesquieu Montesquieu, though an aristo crat, had had his fill of a tyrannical monarchy ("L'etat, c'est moi"). As "a man of measure" he sought a way of turning government over to the peo ple without running the risk of a tyr anny of the majority. The English Constitution, which was a conglom eration, appealed to him. English rights had been won over the cen turies and were embodied in the sep arate documents of Magna Carta, the Petition of Right and the Bill of Rights. There were also the court de cisions based on Anglo-Saxon common law. The late Willmoore Ken dall always insisted that the Lockean Glorious Revolution of 1689 had merely substituted the absolut ism of Parliament for the absolutism of the Stuart kings. But Montes quieu would not have understood Kendall. He saw England as the land of governmental checks and bal ances. Parliament could pass laws, but only after the give-and-take of argument in two legislative houses.

The lords could always veto the com moners, and the monarch had his in fluence and his executive discretion. Montesquieu doesn't speak much of the third power of the judges, but they were there as a check on the abuse of power whenever elected or appointed officials ignored the limits imposed by parliamentary mandate or the common law. Restrictions on government did not mean that Montesquieu favored a weak state. He went along with the English animus against military forts and land forces. But as a nation possessing a great commerce, En gland was justified in maintaining a navy (an armee de mer) to guarantee protection against invasions. Dietze says that Montesquieu assigned an important role to taxation for the money needed for security mea sures. Though he wanted the range of public affairs to be supervised by liberal republicans, Montesquieu "still saw a need for a vigorous gov ernment that is able to defend a 1985 LIBERALISM PROPER AND PROPER LIBERALISM 701 large nation against foreign enemies and domestic dangers and thought that management of population growth and of the economic admin istration of relief for the poor, and other such projects, are included in the task of providing security."

Adam Smith Montesquieu's interest in the pro tection of commercial freedoms ex ercised in a context of morality pointed the way for Adam Smith. Dietze pays special attention to Smith's first book, The Theory of Moral Sentiments, in presenting the Smith theories of society and gov ernment. In The Theory of Moral Sentiments the "great end" is "the order ofthe world, and the perfection and happiness of human nature." The "order of the world" is composed of smaller orders, such as the state, and smaller "orders and societies into which the state is divided." The individual's liberty is restricted not only by ethical and moral consider ations, by divine and natural law, but also by norms set by men. Lib erty had to be under enforcible law ifjustice were to prevail among men. This is far from the stereotype that makes Smith the patron saint of "anything goes." He talked a lot about the moral value of benevo lence in the Moral Sentiments. But justice came first. And the mercan tilist laws of England in 1776 seemed manifestly unjust.

Dietze takes Smith in his natural setting of the Scotland of his time. Smith owed as much to his teacher, Francis Hutcheson, as he did to Da vid Hume. He "tempered Hume's doctrine of self-interest by a Hutch esonian humanity." He was "a man of measure." Immanuel Kant, like Montesquieu and Smith, made freedom a touch stone. But he stressed, more than Montesquieu and Smith, the "moral imperative restricting our freedom." The moral law, said Kant, obligates men to put duty before the pursuit of happiness. Jefferson, the product of a different ethos, put more faith than Kant in the capacity of the com mon man to combine morality with the pursuit of happiness. They were both "men of measure" nevertheless. @) HAYEK: HIS CONTRIBUTION TO THE POLITICAL AND ECONOMIC THOUGHT OF OUR TIME by Eamonn Butler (Universe Books, 381 Park Ave. S., New York, NY 10016), 1985 168 pages _ $7.95 paper; $15.00 cloth Reviewed by Kenneth L. Marcus WHAT has given socialism so strong a grip on the minds of successive generations is that it was developed, by Karl Marx, into so systematic and inspiring a body of ideas that it could 702 THE FREEMAN NovembeJ withstand the refutation of numer ous of its tenets. The ideology offree dom, if it is to reclaim the confidence and imagination of our brightest minds, must be developed into a body of ideas equally comprehensive and exciting.

This has been the achievement of Professor Friedrich A. von Hayek, one of the most illustrious figures ac tive in the social sciences today and one of the most prestigious names associated with the freedom move ment. During many of his most pro ductive years, his work was too far ahead of its time to be given the at tention it so richly deserves. As aca demia has begun to catch up, how ever, Dr. Hayek has come into his own, as witness the outpouring of lit erature inspired by his seminal works, and the numerous honors which he has achieved (most con spicuous of which is the 1974 Nobel Prize for Economics, which he shared with Dr. Gunnar Myrdal). One of the most notable contribu tions to the constantly expanding Hayek literature, is Eamonn But ler's slim introductory volume, only recently released in the United States. Although other works, such as philosopher John Gray's latest book, delve far more deeply into Hayek's work and contain more pro found and original insights, Butler's contribution may become the defin itive first source and introduction to Hayek's system.

It is in one sense difficult to rec ommend any introduction to Ha yek's work, since the primary source material is itself beautifully written and presented with a simplicity wholly disproportionate to the depth of insight contained. The Road to Serfdom, for instance, was written for a popular audience and may be read without introduction or clari fication. And even more detailed and advanced works, such as The Con stitution of Liberty and Law, Legis lation and Liberty, are written with clarity and legibility. The value of a concise introduc tion, such as Mr. Butler's, is that it presents, in one volume, the whole range of Hayek's thought, conveying a sense of its scope and comprehen siveness, but emphasizing the inter connectedness of works produced over a long span of years and the consistency of the system by which they are united. As Hayek has re marked, "a student of complex phe nomena may long himself remain unaware of how his views of differ ent problems hang together and per haps never fully succeed in clearly stating the guiding ideas which led him in the treatment of particulars."

This fear is surely less well founded for him than for most social scientists, and one is clearly im pressed, by his work, with the sug gestion that he is profoundly aware of the "guiding ideas" which lead him. Nevertheless, room is left, 1985 OTHER BOOKS 703 Reviewed by John K. Williams which Butler fills, for a concise, non technical synopsis. Here we have, telescoped and simplified for the new reader, both the guiding ideas and the particulars of Hayek's system atic attempt to relay the intellectual foundations of the free society. @ MURDER AT THE MARGIN by Marshall Jevons 168 pages _ $6.95 paperback DEATH ON DEMAND by K. Hill and O. Dale (Thomas Horton and Daughters, 26662 South New Town Drive, Sun Lakes, Arizona 85224), 1978 and 1985 168 pages. $10.00 cloth deeds, tantalizing clues, assorted suspects, and "much-smarter-than the-police" detectives. Detectives, however, with a differ ence. Not for them the traditional tools of the detecting trade, let alone the contemporary wonders of the fo rensic scientist. Rather, Professor Henry Spearman and Professor Karl Teasdale, the respective heroes of Murder at the Margin and Death on Demand, bring the insights of economics to the solving of crime, thereby suggesting that Police Aca demies send their trainees to a sem inar at FEE!

It must be conceded that neither volume displays the ingenuity of an Agatha Christie novel. Yet learning the identity of the murderer is but part of the charm of each book. Quite painlessly, the ordinary reader can learn of opportunity cost, property rights, the law of demand ("the most ECONOMICS, we are frequently in-firmly entrenched principle in the formed, is the dismal science. Many whole fabric of economics") and even economists, however, are anything the fallacies spawned by Lord but dismal people. Professors Wil-Keynes (an avid follower of whom, Ham Breit and Kenneth Elzinga, Professor Joe Birnoff, comes off sec wri ting under the pseudonym of ond best in exchanges with the de "Marshall Jevons," and the author tecting hero of Death on Demand) or authors of Death on Demand (the while relaxing with a good, old-fash conjunction of "Hill and Dale" being •ioned "yarn." too enchanting to be believed!), have The literary purist might dismiss not let their knowledge of economics the volumes' characters as flat and dampen their delight in the classical describe much of the dialogue as con "whodunit." Both Murder at the trived. The devotee ofromal}1ic tales Margin and Death on Demand pre-might fervently hope that "Marshall sent the reader with murderous' Jevons" does not attempt to pen a 704 THE FREEMAN torrid tale exploring the lot of two or more people having Hinterdepen dent utility functions" (which, Pro fessor Henry Spearman assures his wife, is what "economists mean by love.") Economists grimly deter mined to maintain the view that eco nomics is a "dismal science" might sneer at the simple exposition of key economic concepts informing both volumes.

Well, so be it! People who take themselves too seriously blea,ch life of its color. The two volumes are fun to read, and the economic asides are amusing as well as informative. Take time off to rea,d the books-and enjoy! @ New! GOVERNMENT AND LEGAL PLUNDER BastiatSloughtUp to Date Dean Russell Frederic Bastiat saw a century and a half ago that the law becomes legal plunder when it goes beyond simple defense of individual rights. In Government and Legal Plunder, Dean Russell uses Bastiat prin~ ciples as a starting point for his book, and provides contemporary ex amples of issues that we personally face every day. He shows that we must limit government's role in society and in the economy, to en courage individual initiative and human freedom. 120 pages $4.95 paperback (Postage paid on prepaid orders; otherwise $2.00 per order for billing.) Order from: The Foundation for Economic Education, Inc.

Irvington-on-Hudson, NY 10533 the Freeman VOL. 35, NO. 12 • DECEMBER 1985 Production Is a Team EffortrA Page on Freedom, No. 26 Bettina Bien Greaves 707 Production depends on cooperation, not on class warfare. Getting There! John K. Williams 708 The need for more accessible and exciting works on liberty. On the Bishops and the Market Charles W. Baird 718 On the serious flaws of the Bishops' Pastoral and a more promising solution. Catholic Social Teaching and the U.S. Economy William S. Kern 728 A Hayekian critique that suggests an alternative moral code. The International Debt Problem: The Case of Argentina Michael Adamson 732 The problem can only be solved by recourse to the free market. John Witherspoon: "Animated Son,of Liberty" Robert A. Peterson 737 Another great debt we owe to one of the Founding Fathers. Growing Pains Hopeful signs in our struggle with adversity. Environmental Problems and Private Property Conservation needs a free-market setting.

Ben Barker E. Barry Asmus Donald B.Billings 743 749 To the Editor 754 Book Reviews: 757 • I Reality and Rhetoric" by P. 1. Bauer "Freedom With Justice: Catholic Social Thought and Liberal Institu tions" by Michael Novak Index for 1985 761 Anyone wishing to communicate with authors may send first-class mail in care of THE FREEMAN for forwarding.

~ the WFreeman AMONTHLY JOURNAL OF IDEAS ON LIBERTY FOUNDATION FOR ECONOMIC EDUCATION Irvington-an-Hudson, N.Y. 10533 Tel: (914) 591-7230 Robert D. love, President Editor: Charles H. Hamilton Publisher: Paul L. Poirot Managing Editor: Beth A. Hoffman Production Editor: Amy S. Vanlaar Contributing Editors: Robert G. Anderson Howard Baetjer Jr. Bettina Bien Greaves Edmund A. Opitz (Book Reviews) Brian Summers Joan Kennedy Taylor THE FREEMAN is published monthly by the Foundation for Economic Education, Inc., a nonpolitical, nonprofit, educational champion of private property, the free market, the profit and loss system, 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. Donations are invited in any amount. THE FREEMAN 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 $10.00 a year.

Copyright, 1985. The Foundation for Economic Education, Inc. Printed in U.S.A. Additional copies, postpaid: single copy $1.00; 10 or more, 50 cents each. THE FREEMAN is available on microfilm from University Microfilms International, 300 North Zeeb Road, Ann Arbor, Mich. 48106. Reprints are available of "A Page on Freedom," small quantities, no charge; 100 or more, 5 cents each. Permission is granted to reprint any article in this issue, with appropriate credit, except "Environmental Problems and Private Property."

A Page on Freedom Number 26 ProductionIs a Team Effort FROM the mine to the auto, the farm to the grocer, the lab to the hospital, production is a team effort, not a class struggle. Workers and managers are teammates in a common enterprise. Everyone gains if the operation func tions smoothly; everyone loses if it is disrupted. Everyone depends on every one else. The producer's goal is to develop a smoothly functioning team effort and avoid costly disruptions. The prices and wages he pays are determined by the market. To obtain raw materials and workers, producers at each stage of the production process must outbid their competitors. Yet they cannot long afford to pay more than customers will pay for the final product. Occasional disruptions such as floods, fires, earthquakes and hurricanes are inevitable. But violent man-made disruptions like strikes could be avoided if everyone realized that production is a team effort. Unfortunately, many people don't; they accept the class conflict idea and believe they must strike to receive the full value of their labor.

Strikers do not realize that management must pay market wages. If they pay less, workers will leave them; if they pay more they face bankruptcy. Resilient and innovative entrepreneurs can, and often do, overcome the dis ruptive effects of strikes. They rearrange production plans and re-establish effective team efforts. But a strike is expensive. In the long run, its costs are distributed through the market among all those who would otherwise benefit. The costs of the disruption are carried back through the market as every stage of the team effort is disrupted from the. automobile back to the mine, the grocer back to the farm and the hospital back to the lab. @ -Bettina Bien Greaves THE FOUNDATION FOR ECONOMIC EDUCATION, INC. IRVINGTON-ON-HUDSON, NEW YORK 10533 707 708 John K. Williams GETTING THERE! "Cheshire Puss," [Alice asked] ... "Would you tell me please which way I ought to go from here?"

"That depends a good deal on where you want to get to," said the Cat. "I don't much care where-" said Alice. "Then it doesn't much matter which way you go," said the Cat. "-so long as I get somewhere," Alice added as an explanation. "Oh, you're sure to do that," said the Cat, "if you only· walk long enough."1 GETTINGTHERE 709 FEWWYERSOF LIBERTYand students of the freedom philosophy share the confusion of Lewis Carroll's Alice. We know "where we want to get to." We wish to move from a fettered market economy and an intrusive government to a free market econ omy and a limited government. Yet how to reach that destination is not without its problems. Alice's ques tion, therefore, can well be ours: Which way ought we to go from here? Economic Education Economic education is a necessary, but not sufficient, condition for the transformation of the possible world of economic and political liberty into a realized world. "Getting there"

cannot be achiyved by economic ed ucation alone; without economic ed ucation, however, "getting there" is impossible. What form, however, should that economic education take? Two direc tions seem to me important. First and foremost comes self-education. As the late Leonard Read insisted again and yet again, you and I must be perpetual students of the freedom philosophy. We must read; we must think; we must meet with like minded men and women and learn from them and with them. We will never possess all the answers, but The Reverend Dr. John K. Williams has been a teacher and is a freelance writer and lecturer based in North Melbourne, Victoria, Australia. He was resident scholar at FEE this past summer. when real-world counterparts of the grinning Cheshire Cat ask us to de scribe our destination, we will be able to say more than could poor Alice. There seems to me, however, to be a second direction we students of the freedom philosophy should be tak ing. I refer not to research at the cut ting edge of human thought about economic issues and political philos ophy, important though such re search be. Fortunately, many schol ars in universities, foundations, and institutes are, in this nation and other nations, engaging in such re search, and doing so in greater num bers than has been the case for many decades. The gap I perceive, and be lieve we both could and should close, relates to accessible materials intro ducing and creating an appetite for our case. Let me explain.

On my shelves, alongside the col lected writings of Karl Marx, the significant writings of Lenin, the works of Trotsky, and numerous vol umes by contemporary Marxist-Len inist thinkers, stand some so-called "documentary comic-books."2 These books introduce readers to the ideas of Marx and of Lenin. They do so in an admittedly superficial but none theless essentially accurate way. Footnotes and comments in the text refer the reader to more sophisti cated works. The books are easily read, are not without humor, and both introduce a case and whet the 710 THE FREEMAN December reader's appetite for more. The "tar get audience" is obvious: the curious layperson in general and college stu dent in particular. Where, I wonder, are comparable volumes making our case? Many de fenders of liberty say, and I believe correctly say, that really there is lit tle to be said against Marxism-Len inism that has not already been said. 3 Yet the young undergraduate has to be "lured" into tackling the demanding works on our side. A dy namic professor can so lure his or her students, but such professors are not, alas, as plenteous as soybeans. There is, I submit, a dearth of volumes pre senting in an interesting and highly accessible form the essential case for economic and political liberty and against Marxist-Leninist teachings.

A churchman, perusing the hymnals of his day, lamented that the devil seemed to have all the good tunes. My lament is that the Marxist-Len inists and other statists are showing a more imaginative determination to communicate their ideas than are we. I think I perceive the problems. Our case cannot,· without gross dis tortion, be reduced to slogans scrawled on walls and messages adorning our cars. Simply, we do face problems in popularizing and cre ating interest in our case. But so do our opponents. Many so phisticated Marxist-Leninists de plore the "documentary comic books" to which I have referred. They dismiss them as unsophisti cated and crude. The books can be torn to shreds by anyone with even a passing knowledge of the thinkers I previously cited. Yet our opponents have taken the risk. They picked out a target audience. They hired an able illustrator. They worked and re worked the text. They carefully in cluded references to the best mate rials making out their case. They calculated that if sufficient interest were created, readers exposed to a rebuttal of the arguments presented in the comic books would turn to the more sophisticated works cited in search of answers. They showed imagination, embraced risks, and got on with the business of retailing ideas and generating enthusiasm for these ideas.

The Church and the Market Consider another fairly specific target audience: clerics and church people. I do not receive all the mail ings emanating from my denomi nation's headquarters. The Division of Social Justice has written me off as a lost cause. And I didn't endear myself to those employed at the Uniting Church's city offices when, in print, I described the impressive edifice occupied as the black hole of the Uniting Church, emitting no light and absorbing everything com ing within range. Still, I do receive a goodly number of mailings from 1985 GETTING THERE 711 that eerie place, and value the stamps, which I save for a charity. I receive mailings from my nation's equivalent to your National Council of Churches, and mailings from the World Council of Churches. Some of the material is innocuous. Much of it, however, is littered with specifically economic claims. Again and again I learn, for example, that the poverty of so-called developing nations is caused by past plundering and present exploitation by devel oped nations.

Specifically the Marxist-LeninIst theories have "trickled down," so to speak, and are being promoted, whether intentionally or uninten tionally, through pamphlets, study guides, and learning kits addressed to clerics in particular and church people in general. Men and women using these materials absorb an en tire conceptual apparatus, learning to use words such as "justice," "equality" and "rights" in a way prejudging the case for economic and political liberty. What materials are available, spe cifically addressed to churchpeople, presenting the case for the free mar ket in a free society in a highly ac cessible, interest-creating way? Ed mund A. Opitz has penned an admirable volume entitled, Religion and Capitalism: Allies, Not Enemies, and more recently both the Lu theran theologian Robert Benne and the Roman Catholic theologian Michael Novak have written and ed ited volumes primarily addressed to churchpeople and informed by the ological subtlety and economic sa gacity.4 There are also, I know, not a few works defending economic lib erty, and sometimes political liberty, in the context of what one might call a fundamentalist theological stance.

Yet there remains a gap. There is a desperate need for materials, spe cifically directed to church leaders and church members, which are not far removed from the simplicity, brevity, and accessibility of the Marxist-Leninist "documentary comic books" to which I have referred. Wakening Interest in Liberty I am not suggesting for a moment that the volumes penned by such thinkers as Edmund Opitz, Robert Benne, and Michael Novak are ir relevant to the economic education of clerics and churchpeople. They are vital for such education. I know, for example, of three clergymen who, af ter reading Edmund Opitz's book, substantially modified their eco nomic and political attitudes. Yet these people had to be cajoled into reading the three hundred pages of the work. Attractive, brief, simple materials, the purpose of which pri marily is to waken an interest and whet an appetite scholarly works can satisfy, are urgently required.

Students of the freedom philoso712 THE FREEMAN December phy would, I submit, do well to meet, think together, and list specific tar get groups for materials making out the case for economic and political liberty. The specific interests and concerns of these groups should be identified. Then comes the prepara tion of direct, uncluttered, relatively unsophisticated materials making a case for liberty related to these in terests and concerns and, even more importantly, leading readers to sub stantial works elaborating and fill ing out that case. I know some of us have done this before. We have not, however, done it well enough. Op ponents of liberty have been more creative, more imaginative, more venturesome than have we. The time is ripe for us, in our vitally impor tant work of economic education, to start "outsmarting" our opponents. In this way the journey from where we are to our desired destination is furthered.

The NonRational Allied to the ongoing work of eco nomic education, is the task of ex ploring nonrational factors affecting people's attitudes to economic and political liberty. Much has been writ ten and said about nonrational fac tors predisposing men and women against the free market in a free so ciety. In my article entitled, "Catch the Little Foxes!"5 I discuss some of these: snobbery, a fear of so-called elitism, and a confused moralism. Ludwig von Mises brilliantly ad dresses the issue in his volume, The AntiCapitalistic Mentality, and a collection of essays edited by Ernest van den Haag-Capitalism: Sources of Hostility-further explores the problem. 6 A volume from the pen of Igor Shafarevich, a Russian dissi dent dismissed in 1977 from his teaching position in mathematics at Moscow University, throws a great deal of light on the anticapitalist mentality, and I recommend the book-The Socialist Phenomenon'1 to you. Inasmuch as useful materials dissecting nonrational sources of op position to the free market in a free society are so readily available, I here merely wish to indicate two fac tors we do well to remember.

First, we delude ourselves if we be lieve that we can carry our case merely by referring to self-interest. The very self-interest of many men and women within the statist appa ratus-politicians, government offi cials, bureaucrats, privileged busi nessmen, unionists, and intellec tuals, and a plethora. of men and women on the receiving end of so called "wealth transfers" -does not, in the short term, lead them to op pose the status quo and to start working for economic and political liberty. If the "short term" can rea sonably be expected to hold for their lifetime, there is no rationally com pelling reason to consider longterm consequences.

1985 GE'ITING THERE 713 This does not mean that appeals to self-interest are inappropriate, but such an appeal is most rationally ad dressed to people outside the statist apparatus and whose enforced la bors provide the goods and services consumed by net tax beneficiaries. We can, perhaps, remind net tax beneficiaries that self-interest dic tates some limits to the numbers they admit to their privileged ranks and the burdens they place on the shoulders of those laboring to sup port them. If we are addressing peo ple whose moral stance leads them to consider the well-being of all, then clearly arguments emphasizing overall utility and longterm conse quences are fittingly used. Yet the sooner we acknowledge that individ ual self-interest can dictate opposi tion to economic and political liberty, the better. Second, we likewise delude our selves if we assume that all people unambiguously desire individual liberty for themselves. A perusal of Erich Fromm's Fear ofFreedom 8 can do much to shatter this delusion, and if Fromm fails to convince us, the case argued in Dostoevsky's The Brothers Karamazov by Ivan in the section entitled "Legend of the Grand Inquisitor" should do the trick.

Better than any reading, however, is a modest exercise in self-analysis. Is there not that within each of us that yearns for a "security" the free market in a free society cannot give? In my language, there is that within the human psyche which yearns to be carried through life and protected, much as a fetus is carried and protected in the womb. There is to be sure another voice, a voice say ing, "Son of man, stand on thy feet," a voice saying, "Take up thy stretcher and walk," a voice luring men and women to leave the secure, predictable, responsibility-free life of slavery in Egypt and journey through a wilderness toward the promised land of liberty. This voice, I believe, is both deeper and stronger than the voice whispering of a se curity we in truth can know only in the womb or in the tomb. Yet for all that, we are ill-advised to pretend that in getting from where we are to where we want to go, we can simply assume the existence of a universa~ unam biguous desire for individual liberty.

The human predicament is charac terized by an ambiguity and a com plexity hinted at both by depth psy chology and high religion, and that ambiguity and complexity must not be ignored. Making Freedom Exciting There is a third and final factor to which I would refer in considering nonrational components of people's attitude to economic and political liberty. A.N. Whitehead, in his little read volume, The Aims ofEducation and Other Essays, repeatedly and 714 THE FREEMAN December unashamedly refers to the centrality of imagination in the educative pro cess, and speaks of the able teacher as a person who "keeps romance alive in his pupils" and kindles an appreciation of "the beauty of a mathematical argument."9 The business of "getting there" -the task of moving toward our destination of an authentically free market in an authentically free society-demands not simply dedicated intelligence but also infectious enthusiasm. Bluntly, we need fire in our bellies as well as ideas in our heads and facts at our fingertips.

Read Michael Harrington. Read Marx and Engels. Read almost any socialist tract. There is a passion, a cry of moral outrage, a note of in dignation informing these works. It is clear that the authors care about the cause they are defending. In comparison, most volumes defend ing economic and political liberty are "super-cool." In their determination to be reasonable, the authors sup press the voice of rational anger and heartfelt emotion. It is of vital importance that you and I continue to refine our concep tual apparatus, clarifying for our selves and others what we mean by such terms as "liberty," "rights," "equality before the law," and so on. We must keep at the task of refining our arguments. We must argue our case, and argue it honestly and well. Yet, while avoiding theatricality and contrived emotion, we need not-we must not-fear our feelings. It is cause for outrage that socialist econ omies misallocate resources and con demn multitudes to destitution. It is cause for anger that intrusive gov ernments condemn the marginally skilled to involunt~ry unemploy ment, inflate the currency, feed and foster envy, breed factionalism, and pass off theft as an exercise in so called "social justice." Our cause the cause of liberty-is and should be a source of joy and of vitality and of enthusiasm.

We defend liberty not simply be cause we have found arguments that convince us, but because we glimpsed a vision that inspires us. If we seek to attract others to what we so yearn for and cherish, infectious enthusiasm must accompany the reasoned case we elaborate. No jug gling of concepts, no development of arguments, no recital of figures can, in itself, win fellow pilgrims on the pathway to liberty. Thought must be stimulated, yes; but so must feeling. Tennyson said it well: Let knowledge grow from more to more, But more of reverence in us dwell; That mind and soul, according well, May make one music as before-but vaster. Compromise: Yes or No? A contrast frequently is drawn be tween conviction and compromise. We preachers frequently draw it.

1985 GETTING THERE 715 The question we must consider is whether, in "getting there," some measure of compromise is accept able. Should we, for example, advo cate and agitate for specific eco nomic and political reforms which, while from our point of view partial and imperfect, nonetheless bring us nearer to the destination we desire to reach? The question is easier to ask than it is to answer, and any per son who fails to see any problem has, in all probability, not really under stood the full implications of the question. I can only, therefore, prof fer for your consideration my own tentative conclusions. "Getting there" involves selling some ideas. While a plethora of sell ing techniques are available, I have a soft spot for the manufacturer who distributes samples of his product. His confidence that consumers will find his product more to their liking than alternatives is itself appealing, and if his product is as good as he believes it to be, future sales are as sured. Can it not be argued that un less and until men and women ac tually see that the cessation of governmental acti.vity in specific areas of their nation's economic life leads not to disaster but to an im provement oftheir own situation, the total cluster of ideas and ideals we are attempting to sell will meet con siderable sales resistance?

Yet there is another side. Noble ends do not justify immoral means; indeed, the means we adopt not in frequently determine the ends we get. Again, might not measures im proving the workings of a fettered economy, or increasing the efficiency of an intrusive government, lessen people's discontent and delay rather than hasten the advent of a free mar ket in a free society? Is not an effi cient intrusive government or an ef ficient bureaucracy worse, from our point of view, than their inefficient counterparts? Nonetheless, I come down on the side of what I call cal culated and principled compromise. I can best explain what I mean by focusing upon specific measures. Compromise versus Conviction One. A "compromise" such as the funding of schooling by vouchers or tax credits is acceptable because it facilitates rather than complicates a further move totally entrusting schooling to the market. The myth that schools subject to market forces could not and would not satisfy the objectives of schooling is so deep seated that only the demonstrated consequences of deregulation can ex plode it. The decentralization and diversification of schooling which would result from deregulation make it easier rather than more dif ficult to contemplate the possibility that schools could be funded by fees rather than by federal, state, or local tax revenues. It is true that these 716 THE FREEMAN December gains might partially be offset by a lessening of parental and commu nity dissatisfaction with schooling as it now is, but that dissatisfaction is not immediately related by most people to the root cause of that dis satisfaction, namely, the involve ment of government with schooling.

Two. While defending and sup porting programs of tax reform which lead to the reduction of tax revenues and the consequent cutting of government expenditures (and only programs of tax reform which lead to these objectives merit consid eration) the advocate of economic and political liberty must oppose all forms of taxation which are hidden and which ipso facto are "painless." While the defining freedom philos ophy principle of equality before the law favors uniform rather than pro gressive taxes, a "progressive tax" where the highest marginal taxa tion level is, say, 20%, is "better" than a "uniform tax" of, say, 40%. Most importantly, if joining forces with so-called "supply-siders" ad vocating cuts in the marginal tax rate, defenders of economic and po liticalliberty must not claim that such cuts would result in increased government revenues and defend the cuts by reference to this claim. Any increase in taxation revenues re sulting from cuts in the marginal tax rates must be perceived as grounds for further cuts.

Three. The "myth-exploding" con sequences of even a partial entrust ing of schooling to the market noted above, justify support for any pro gram of "privatization." In fact a stress on the educative nature of such programs suggests a political strategy for privatization. Our pri mary objective is not the "privati zation" of any particular industry, but the restoration ofall government trading and operating activities, save those relating to defense against ex ternal and internal aggression, to the market. It is therefore utterly vital that we maximize the probability of consumers benefiting from initial programs of privatization. The "or der of privatization" will be dictated simply by the anticipated value ofnet benefits to consumers. Four. While gradualism is appro priate to some politically orches trated reforms (e.g., the restoration of schooling to the market through the interim device of deregulation by vouchers or tax credits), such a pro cess is singularly inappropriate if other objectives are to be realized.

Bluntly, measures which precipitate the inevitable unemployment re sulting from a serious misallocation of labor cannot and must not be· in troduced piecemeal. Massive but short-lived unemployment is politi cally preferable to less extensive but prolonged unemployment. Again, considerations of both logic and 1985 GETI'ING THERE 717 "fairness" dictate that some mea sures (e.g., the abolition of laws ex tending special privileges to unions) be accompanied by other measures (e.g., the abolition of subsidies, price maintenance schemes, et al advan taging privileged business interests). I do not pretend that these sug gestions in any way resolve the ten sion between compromise and con viction. Indeed, in the last analysis my prayer is simply that God keeps sharp the stab of conscience and thereby infuses all compromises with experienced bitterness until the advent of an authentically free mar ket in a free society minimizes the pressure upon anyone to compro mise his or her convictions. Our di lemma is that to move toward our destination we have to act, but the world in which we act is so much a creature of interventionism that pristine purity is not a real option.

Conclusion Yet I end where I began. Central to the business of "getting there" is the purpose for which this Founda tion was created: economic educa tion. Ideas alone will not bring us to our destination, but men and women excited by the ideas enshrined in the concept "liberty" and dedicated to the furthering of these ideas can do it. To the question, "How much can the world as it is be changed?" I answer in a single word: Enough. It can be changed enough to liberate a pro cess which, working in and through men and women like us, can bring us nearer to the realization of our dreams, our hopes, and our prayers for our children and our children's children. @ -FOOTNOTESlL. Carroll, Alice's Adventures in Wonder land in The Annotated Alice, ed. Martin Gard ner (New York: The New American Library, 1960), p. 88. 2Marx for Beginners and Lenin for Beginners (New York: Pantheon Books, Pantheon Docu mentary Comic-Book Series, 1974, 1976).

aSee M. Bakunin, Statism and Anarchy; E. von Bohm-Bawerk, Capital and Interest; H. B. Acton, The Illusion ofthe Epoch: Marxism-Len inism as a Philosophical Creed;R. Aron, In De fense ofDecadent EuroPe;L. Kolakowski, Main Currents of Marxism: Its Origins, Growth and Dissolution; L. von Mises, Omnipotent Govern ment, Socialism, and Human Action. 4See E. A. Opitz, Religion and Capitalism: AL lies, Not Enemies; R. Benne, The Ethic ofDem ocratic Capitalism; M. Novak, The Spirit of Democratic Capitalism. sJ. K. Williams, "Catch the Little Foxes!" The Freeman, October, 1985. 6L. von Mises, The AntiCapitalistic Mental ity (South Holland, Ill.: Libertarian Press, 1972); E. van den Haag, Capitalism: Sources of Hostility (New Rochelle: Epoch Books, 1979). "1. Shafarevich, The Socialist Phenomenon (New York: Harper and Row, 1980). BE. Fromm, Fear of Freedom (London: Rout ledge Kegan Paul, 1960).

9A. N. Whitehead, The Aims ofEducation and Other Essays (London: Williams and Norgate, 1929).

Charles W. Baird On the Bishops and the Market THE second draft of the controversial pastoral letter of the National Con ference of Catholic Bishops on the American economy (hereinafter, the Pastoral) was recently released. While it acknowledges some of the successes of the American free en terprise system, it is seriously flawed by fundamental confusions concern ing the nature of the voluntary ex change economic system. The bishops have adopted an out moded view of the relationship be tween the government and the mar ket. On the basis of that economic and political analysis, the bishops of fer "solutions" based on a governDr. Baird is Professor of Economics at California State University at Hayward. The author wishes to thank Professor David Hen derson, the Reverend James Sadowsky, and the Rev erend Ferdinand D. Saunders for their comments and suggestions on an earlier draft of this essay.

718 ment-directed command economy. These solutions have failed in the past, are failing now, and will fail wherever they are tried. The only feasible solution to the problems with which the bishops are con cerned is to eliminate the govern ment enactments that cause those problems. A second fault of the Pastoral is its repeated instances of the fallacy of composition. The bishops discuss at length the implications ofthe Gospel for the choices that individual Chris tians ought to make. They then, without giving any logical justifi cation for doing so, immediately leap to conclusions about what govern ment ought to do. God created man with free will. The bishops seem to want to replace free will with gov ernmental coercion.

ON THE BISHOPS AN]) THE MARKET 719 The Outmoded View In the 1950s and 60s most main stream economists taught that a free market economy works well only un der very unrealistic conditions called "perfect competition." The three most important of those conditions are that (1) each buyer and each seller must have only tiny market shares, (2) all buyers and sellers al ways know all relevant information, and (3) there are no unpaid-for spill over effects of exchanges between in dividuals. Since those conditions ob viously do not hold, economists taught, the real world is beset with "market failure." Market failure provides the rationale for govern ment to go beyond its traditional role of referee or night watchman en forcing the rules of voluntary ex change. It justifies government in tervention in the exchange process to make things come out more nearly as. they would if the conditions of perfect competition actually existed.

The Modern View In fact, the conditions of perfect competition are completely irrele vant to the assessment of the merits of the free market. Those conditions were the creation of economists who wanted to express their theories in mathematical terms. In so doing, those economists practiced what F. A. Hayek, the 1974 Nobel Prize winner, calls "scientism" -the adoption of the methodology of the nat ural sciences in a field of inquiry where it is totally inappropriate, and, in the case of economics, de structive of clear thought.! The chief advantage of a voluntary exchange economy over a command economy is that the market process provides a way systematically to dis cover and correct economic error. 2 For reasons I explain below no gov ernment can possibly duplicate or improve upon that discovery and correction mechanism. If we make the value judgment that each person is as significant as every other person, a successful economy must be defined as one in which the pattern (quantities and qualities) of production is constantly adjusted to keep up with the pattern of what the people in the economy want to be produced. Moreover, it is one in which all the people in the economy are free to participate on the basis of their own preferences, and their own knowledge, alertness, and abilities, subject only to the con dition that they do not initiate any involuntary exchange (e.g., theft, fraud, coercion).

When the pattern of production is inconsistent with what people want, resources can be profitably rede ployed by directing them away from where they are valued less toward where they are valued more. Legally enforced private property rights to profits earned through voluntary ex720 THE FREEMAN December change switches on entrepreneurial alertness to profit-making oppor tunities. 3 Interventionism Does Not Work There are two reasons why gov ernmentintervention, regulation, or control cannot improve upon, or even duplicate, the performance of an economy based upon voluntary ex change: the knowledge problem and the political problem. 4 First, the know ledge that is rele vant to the successful performance of an economy exists nowhere in its entirety. The relevant knowledge of individual tastes and preferences, individual productive capacities, re source availabilities, and potential for technological innovation-exists in small bits and pieces in the minds of the millions of individuals to whom the knowledge pertains. There is simply too much of it for any gov ernment agency to assemble and keep up to date. Moreover, much of the relevant knowledge (e.g., tastes and preferences) is inherently sub jective and therefore nonquan tifiable. 5 Second, the political facts of life are such that no government agency will be run on the basis of a dispassionate weighing of social costs and benefits.

Even if there were no know ledge problem, no government agency would use the relevant knowledge in an objective and efficient way. We are all painfully aware of the disproportionate influence of special in terest groups on political decision making. What counts is political advantage, not the generalized pub lic interest. And this must always be so, no matter who is involved in the process. The modern theory of public choice begins by noting that the typical person in government is just like the typical person in the private sector he or she acts purposefully to achieve his or her own goals. 6 We all attempt to do the best we can for ourselves as we see it within the constraints that confront us. The chief goal of the typical politician is to get reelected. The chief goal of the typical bureau crat is to secure larger and larger budgets for his agency. The chief goal of the typical special interest group is to secure more and more benefits.

So an "iron triangle" is formed. Pol iticians, recognizing the value of a highly organized, politically active, special interest group at election time, attempt to buy favor with such groups by voting for programs that confer focused benefits on the groups at the expense of the general taxpayer. A single taxpayer's share of the tax burden that comes from anyone pro gram is tiny, but a single benefi ciary's share of the benefit is large. Thus taxpayers will not oppose a specific program as intensively as its beneficiaries will support it. Taxpay ers overlook a politician's support 1985 ON THE BISHOPS AND THE MARKET 721 of programs that focus benefits on others as long as the politician also supports the program that focuses benefits on them. Government inex orably grows, even though very few programs enjoy genuine informed majority· support. People in the private sector also at tempt to do the best they can for themselves subject to the con straints they confront. But private sector constraints are different from government sector constraints. In the private sector there is constant pressure to be efficient. Employees and suppliers are constantly moni tored by management whose eyes are fixed on the bottom line. Moni tor-managers are forced to care about efficiency, even when they are not the owners of their enterprises, by the market for corporate control hostile takeovers of poorly-run firms. 7 Thus in the private sector people find, perhaps to their discom fort, that the only way successfully to pursue their own goals is con stantly to strive for efficiency in all their economic activities. They will make mistakes, but there is a strong incentive to discover and correct the mistakes, and there is a reliable market process enabling that discov ery and correction.

Humans are a fallen race. Ever since we were expelled from the Gar den we have been confronted with scarcity-i.e., there are insufficient resources to provide us all with all that we would like to have. Both as individuals and collectively we con front tradeoffs. In order to get more of one thing, we must be willing to forgo some of something else. Every decision carries a cost. There is no such thing as a free lunch. That is true for individuals, and it is also true for government. When taxes (open or disguised) are im posed, taxpayers forgo the use of some of their means which are trans ferred to others by government force. Nothing is free. Government cannot re-enact the miracle of the fishes and loaves. Since every individual and collec tive choice involves a cost, the only way that we can get the most out of the scarce resources with which God has endowed us is constantly to strive to minimize the cost of all our actions-Le., constantly to strive for efficiency. We are commanded to be good stewards of our endowments.

The private property, voluntary ex change economic system is the only system that automatically provides the means and the incentives to do so. EconomicRights In the Pastoral the bishops advo cate the enactment of what they call "economic rights." By this they mean that the government should pass laws which give each person in the country a legally enforceable en titlement to housing, food, employ722 THE FREEMAN December ment, education, and so forth. They recommend that when a person or a group cannot secure these things for themselves through voluntary ex change, government should provide them. But government cannot create out of nothing the means to pay for these things. Thus the bishops are saying that taxpayers in general ought to be bound under secular law to pay for them. The "rights" pre scribed by the bishops for some im pose legally enforceable (by secular government) duties-to-provide upon others.

Rights Must Be Universal As long as we are discussing sec ular law and the actions of secular government we ought to be more careful about what is meant by "rights." A "right," in the sense that the authors of the U. S. Constitution understood that word, is an entitle ment which all people can hold and exercise simultaneously without contradiction. 8 For example, sup pose we say that person A has a right to food in the sense that food must be made available to A no matter what A does. We must also be saying that there is at least one other per son, B, who has the obligation to make the food available to A. But then A and B do not have the same food-related right. The alleged right requires government to take from one person and give to another person. The only food-related right which all humans can hold identically and simultaneously, and therefore the only one that is a legitimate human right, is the right to make offers to engage in voluntary exchange with each other concerning food (Le., of fers to give, receive, buy, or sell). A person has a right to make any offer on any terms he or she wishes, but no person has the right to compel any other person to accept the offered terms. The legitimate role of secular government is limited to the enforce ment of the rules of voluntary ex change. That includes the punish ment of those who engage in involuntary exchange.

The same is true regarding jobs, housing, education, or anything else.9 Logically, one person's legiti mate human right cannot impose a duty upon another person to perform any positive act. To be legitimate, a right must be universal. The only duty that a legitimate human right can impose is the duty to refrain from a particular kind of positive act-viz, involuntary exchange. This is a neg ative duty. Rather than specifying what a person must do, it specifies what he or she must not do. To en gage another person in involuntary exchange is to trespass against the legitimate human rights of that person. In sum, the bishops' call for eco nomic rights is a call for a set of sec ularly enforced obligations to per1985 ON THE BISHOPS AND THE MARKET 723 form positive acts (surrender of means) on some people for the ben efit of some other people. It is not a call for legitimate rights at all. It is a call for privileges for some at the expense of others.

A Revised Parable: Good and Better Samaritans I think the bishops have taken the wrong lesson from the parable of the Good Samaritan. In that parable the Lord taught that Christians have a God-imposed duty to choose to en gage in charity. There is nothing in the parable that even suggests that there is any moral merit whatsoever in being charitable because the gov ernment forces you to be. Indeed, there is much throughout the Gospel narratives thaf suggests that such acquiescence does not qualify as charity at all. We are creatures with free will, and we are answerable to God only for the choices we make as we exercise that free will. It almost seems that the bishops would have preferred a different ver sion of the parable: the parable of the "Better Samaritan." In this version when the Samaritan discovers the victim of the robbery and assault he does not use his own means to help out. Instead, he rushes back to Je rusalem to urge the passage of a law that forces all travelers on the road between Jericho and Jerusalem to pay a traveler's tax to build a fund which can he used to ameliorate the suffering of all such victims. Having thus fulfilled his moral obligation to be his brother's keeper, he resumes his journey to Jericho confident that he now, just as the Levite and the priest, need not suffer any more interruptions.

Free to Choose As a Christian I am bound to choose to be charitable to friends, ac quaintances, strangers, and even enemies. In fact, millions of people do choose to be charitable each year. God established His Church and en dowed the Apostles and their de scendents with authority and respon sibility to instruct the faithful in the choices that they must make if they are to attain salvation. He autho rized no one to force people to make correct choices. The bishops' author ity to bind and loose does not imply the authority to take away God's gift of the freedom to choose. The choices humans have made have given rise to hunger, homeless ness, famine, disease, war, and other tragedies too numerous to mention. Moreover, the disastrous conse quences of our choices have always been greatest when those choices are enforced by secular government. Wicked choices of a private citizen who cannot wield the coercive au thority of government never affect as many people as are affected by the wicked choices of those who can im pose their choices through the ac724 THE FREEMAN December tions of the state. The most egre gious recent examples of wicked choices, enforced by government, wreaking havoc on millions of in nocents are the choices of Hitler and Stalin. The problem with them was not that they were fascist or com munist. The problem was that they had the power to impose their choices on others.

A major point in favor of the vol untary exchange economic order is that it limits the scope and conse quences of the choices that humans make. The United States is not a purely voluntary exchange economy. We have strayed far away from the political and economic philosophy of the authors of our Constitution, and it is precisely for that reason that we suffer from the economic problems the bishops so fervently lament. Many of the proposals of the bish ops would further diminish the scope of voluntarism and choice. For ex ample, in #103 of the Pastoral the bishops endorse the so-called labor law reform bill of 1978. Under that proposed legislation, which was de feated, unions would have been granted increased power to coerce unwilling workers into accepting union representation "services" and into paying for the privilege. The bishops justify their endorsement by, believe it or not, appeal to the free dom of association implied by the First Amendment. 1o Similarly, in Chapter IV the bishops go on to endorse the concept of "industrial policy" whereby a tri partite authority made up of repre sentatives of unions (not workers in general), corporations, and govern ment would replace the market sys tem with economic planning. The choices of consumers and producers in the marketplace would be over ridden by this authority. The bishops presume that planners know better than consumers and producers what is good for the country. This partic ular form of economic organization is not new. It was exactly how Mus solini organized the Italian econ omy. Mussolini called it fascism, but it is more commonly called syndi calism or the corporate state. No matter what it is called, it is fraught with peril because it replaces the freedom to choose with naked eco nomic force driven by the choices of a power elite.

Harnessing Self-Interest In several places in the Pastoral the bishops seem to endorse that old Marxist canard: production for profit ought to be replaced with production for use. But production for profit is production for use. Christ, of course, warned us against becoming captives of self-in terest. He admonishes us as individ uals to get our priorities in order, putting our development as mem bers of His Body at the top of the list. He does not say that attention to self1985 ON THE BISHOPS AND THE MARKET 725 interest is bad in and of itself, es pecially when looking after self-in terest forces us to act in the interest of others. In a voluntary exchange economy the natural desire of all people to pursue their individual ends is chan neled into actions that benefit oth ers. Apart from gifts, the only way that you can obtain income and wealth in a voluntary exchange eco nomic system is to do things that other people value highly enough to be willing to pay you to do them. To repeat, production for profit is pro duction for use. One can make profit only by producing what others find so useful that they are willing to pay a price for it that exceeds the cost of production. Each person is forced by the rules of voluntary exchange to be very "other directed." Each person must care very much about what other people want him or her to do.

By contrast, in a command econ omy a person who wants, for exam ple, to spend his or her time painting abstract pictures doesn't have to worry about pleasing enough people to make a living at it. Rather, the natural attention of the would-be artist to his or her self-interest is channeled into attempts to secure tax subsidies. Taxpayers don't have to like that for which their taxes are spent. The bishops endorse the principle of tax subsidy over consumer choice in their recommendations regarding bailouts for failing smokestack in dustries. As consumers, citizens have rejected the economic choices of producers in many smokestack in dustries. As a remedy the bishops would force those consumers, through the imposition of taxes, to act as if they approved those choices. The bishops thereby encourage pro ducers, such as Lee Iaccoca of Chrys ler, to ignore the interests of consum ers and cater to the interests of politicians.

The Mirage of Social Justice In the beginning of the Pastoral, the bishops assert that every per spective on economic life must be shaped by three questions: "What does the economy do for people? What does it do to people? And how do people participate in it?" A care ful survey of history reveals at least one important truth: Societies that give a large scope to the voluntary choices of their members are more prosperous, just, and free than soci eties that override those choices with governmental coercion. It may be true, as the bishops assert, that the richest 20 per cent of Americans re ceive more income than the bottom 70 per cent combined. It is also true that the typical American living in what the federal government defines as poverty is immeasurably better off than the vast majority of human beings on earth. The American econ omy, based on much less involuntary 726 THE FREEMAN December exchange than the bishops wish to impose, has generated more wealth, and has distributed that wealth more widely, than any other econ omy that exists today or has ever ex isted. By their own criterion-the ef fect on the poor-the bishops ought to forswear.their support of the com mand economy and promote the principles of voluntary exchange.

- But a more fundamental point needs to be made about how the word "justice" is used. ll "Justice" refers to the choices and actions of people. A tree, for example, is neither just nor unjust. Only people choose and act, and it is only those choices and actions that are just or unjust. A so ciety is merely a group of people. It has no existential significance be yond the individuals that make it up. The choices and actions of society are merely the choices and actions of its individual members. Sometimes individuals choose to act collectively through the adoption of such decision procedures as ma jority-rule voting, but it is still in dividuals who are acting. And it is still the choices and actions of indi viduals which are just or unjust. N0 where in Holy Scripture are we told that anything other than individu als will be judged according to God's rules of just conduct. Since society, apart from its individual members, does not choose or act there cannot be any such thing as social justice or social injustice.

True Justice It is what people, as individuals, do on the basis of the choices they make that is just or unjust. The justice or injustice of the end result of human actions can. be determined only by examining those actions them selves. If just steps are undertaken each step along the way, the result has to be just. In philosophy this is called a process, rather than an end state, theory of justice. 12 Applied to the question of distributive justice it implies that whether a given income distribution is just or unjust depends only on how that distribution came about, not on the pattern of the dis tribution itself. If it is the result of voluntary exchange, and only vol untary exchange, it is just. If it is the result of involuntary exchange (e.g., theft, fraud, or assault) it is not just. The end-state theory of distribu tive justi~e adopted by the bishops implies that a person is not justly en titled, under secular law, to the por tion of his voluntary exchange in come that exceeds the average income received by other individu als. One is tempted to accuse the bishops of subscribing to a view of distributive justice forbidden by the Tenth Commandment.

Within a voluntary exchange eco nomic order individuals are free to choose to live in communities orga nized on the principle of "from each according to his ability, to each ac cording to his need." But they are not 1985 ON THE BISHOPS AND THE MARKET 727 free to force others to do so. The Christian community described in Acts was such a freely-chosen com munity. The bishops may think that all people ought to choose to live in such communities, but they go be yond the authority of Scripture when they advocate forcing people to do so through the coercive power of the state. Caesar, after all, is due only that which is legitimately his. In Conclusion The bishops are disturbed by the suffering and injustice that they see in the United States, and they wish to recommend remedies. That cer tainly is their right-and their duty. They fail, however, to understand the principles of a voluntary ex change economic order. And because of that, they fail to see that their pro posed rem~dies can only make mat ters worse. They apparently believe that the problems they so abhor arise because there is too little govern ment action. They seem to consider the free market system as the source of all the problems. So they advocate less freedom and more coercion as the remedy. By proposing to move the American economy further away from the principles of voluntary ex change they guarantee that the same, or even worse, problems will still be around when it comes time for them to write another Pastoral.

A more promising solution to the economic problems that rightly concern the bishops and many other Americans would be to repeal all the legislated barriers to economic pros perity that have been enacted since the beginning of the New Deal and firmly to resolve not to make the same mistakes again. ~ -FOOTNOTESiF. A. Hayek, The Counter-Revolution of Science (Glencoe, IL: The Free Press, 1952), Part 1. 2F. A. Hayek, "The Meaning of Competition," in Individualism and Economic Order (Chi cago: University of Chicago Press, 1948), Chap ter V. 3Israel M. Kirzner, Competition and Entre preneurship (Chicago: University of Chicago Press, 1973). 4Don Lavoie, "Two Varieties of Industrial Policy: A Critique," Cato Journal, Fall 1984. 5F. A. Hayek, "The Use of Knowledge in So ciety," in Individualism and Economic Order, op. cit., Chapter IV. 6James M. Buchanan and Robert D. Tollison, eds., Theory of Public Choice: Political Appli cations ofEconomics (Ann Arbor: University of Michigan Press, 1972).

7Henry G. Manne, "Mergers and the Market for Corporate Control," Journal of Political Economy, April 1965. 8Roger Pilon, "Ordering Rights Consistently: Or What We Do and Do Not Have Rights To," Georgia Law Review, Summer 1979. 9Charles W. Baird, Opportunity or Privilege: Labor Legislation in America (Bowling Green, OH: Social Philosophy and Policy Center, 1984). l°Charles W. Baird, "Labor Law and the First Amendment," Cato Journal, Spring/Summer 1985. uF. A. Hayek, Law, Legislation, and Liberty, Vol. 2, The Mirage of Social Justice (Chicago: University of Chicago Press, 1976). i2Robert Nozick, Anarchy, State, and Utopia (New York: Basic Books, 1974).

William S. Kern Catholic Social Teaching and the 0.5. Economy: A Hayekian Critique IN October of 1985 the National Conference of Catholic Bishops re leased a new draft of their "Pastoral On Catholic Social Teaching and the U.S. Economy." The Bishops seek to demonstrate, via a review of Biblical teachings, that certain ethical norms of economic life exist to which all men should adhere. As a result of their review of scripture, .the Bish ops conc1ude that a reorganization of the American economy is justified based upon the moral values of "so cial justice" and "economic rights." The reorganization would rely much more heavily than at present upon the techniques of economic planning and state intervention. The social thought of Austrian economist and social philosopher William S. Kern is Assistant Professor of Economics at Franklin and Marshall College, Lancaster, Pennsylvania. 728 Friedrich A. Hayek provides us with a basis from which to evaluate the position taken by the Church on these matters. The recent work of Hayek has centered upon an elab oration of the ethical principles of the market economy and a free so ciety. In one of his earliest essays on the morals of a free society Hayek stressed the symbiotic relationship between morality and freedom. He wrote that "It is an old discovery that morals and moral values will only grow in an environment of freedom, and that, in general, moral stan dards of people and classes are high only where they have long enjoyed freedom." (1967, p. 23) At the same time he points out that the presence of certain moral values is a prereq uisite for a free society. "We can add to this that only societies which hold moral values similar to our own have CATHOLIC SOCIAL TEACHING AND THE U.S. ECONOMY 729 survived as fr-ee societies." (1967, p.23) Among the requisite moral values, Hayek regards two as indispensable to a free society: "the belief in in dividual responsibility and the ap proval as just of an arrangement by which material rewards are made to correspond to the values which a person's services have to his fellows; not to the esteem in which he is held as a person for his moral merit."

(1967, p. 232) It is one of the merits of the market that it accomplishes the latter of these states of affairs. Morality and Freedom Hayek also clearly recognized that while moral convictions are neces sary for a free society to exist, not all moral principles are consistent with a free society. It might even be the case, paradoxically, that freedom may lead to the growth of values which are incompatible with the preservation of a free society and a market economy. (p. 230) Further more, in his view it was in large part because of the rejection of certain moral principles that a free society became possible, often in opposition to religious teachings: Religious prophets and ethical philos ophers have of course been mostly reac tionaries, defending the old against the new principles. Indeed, in most parts of the world the development of an open market economy has long been prevented by those very morals preached by prophets and philosophers, even before govern mental measures did the same. We must admit that modem civilization has be come possible largely by the disregard of those indignant moralists. (1979, p. 165) In his most recent work, Hayek has emphasized that the concepts of "so cial justice" and "economic rights"

are among those that are incompat ible with freedom. Hayek accepts the idea that gov ernment has a legitimate role to play in protecting the destitute by secur ing some minimum standard of liv ing for those unable to support them selves in the market. Unfortunately, the concept of social justice has never been nor is it likely to be restricted to this limited definition in actual practice. Because the concept is so ill defined it imposes no limits on the claims which can be made under this banner. In practice the concept of so cial justice is likely to become "a mere pretext for claims for privi leges by special interests." (1976, p. 140) Though the idea may have been intended only to apply to the most unfortunate, the concept has since been adopted by other groups who do not get as much as they think they deserve or groups that feel threat ened in their present positions. By the measures it takes, government "will produce opinions and set stan dards which will force it to continue on the course on which it has em barked." (p. 143) The result is that "every single act of this kind will 730 THE FREEMAN December give rise to demands by others to be treated on the same principle: and these demands can be satisfied only if all incomes are thus allocated" in effect, eliminating the market as a distribution mechanism. (p. 142) If income distribution is no longer to be performed by the acts of vol untary exchange and contract through markets, what will substi tute as a method of determining wages and the allocation of labor among occupations? The answer must be that government will per form these tasks. Thus the ultimate sacrifice to be paid for the attain ment of social justice and economic rights is freedom.

The Mirage of Social Justice Hayek attributes the increasing popularity of the idea of social jus tice to a confusion in thought about the nature of morals. The concept of social justice is relevant in that which he terms the "small group." The model of the small group society is that of a family, small village, or tribal relations. Within such a group individuals may have an extensive range of specific positive obligations. It may well be a recognized duty to assist others of the group and adjust one's actions to the needs of the group. As Hayek describes it, a free so ciety became possible only by reduc ing one's specific obligations toward others of one's own small group while at the same time conceding to others outside of the small group "the same protection of rules of just conduct which apply to the relations of the members of one's small group." (1976, p. 89) But this process of the extension of rules of just con duct to others "requires an atten uation of at least some of the rules which are enforced in the relations to other members of the small group.

If the legal duties towards strangers are to be the same as those towards one's neighbors, the latter duties will have to be reduced to such as can be applied to the stranger." (1976, p. 89) Given these circumstances, Hayek argues that there is a fundamental difference between moral behavior in the Open Society and that of small group life. In the small group the individual can know the effects of his actions on his fel lows, and the rules may forbid him to harm them in any manner and even re quire him to assist them in specific ways. In the Great Society many of the effects of a person's actions on various fellows must be unknown to him. It can, there fore, not be the specific effects of the par ticular case, but only rules which define kinds of actions as prohibited, which must serve as guides to the individual. (1976, p.90) Hayek concludes from this that the moral order of the Open Society is defined by a system of impartial rules of just conduct. This implies, he asserts, that the concepts of social justice and economic rights do not 1985 CATHOLIC SOCIAL TEACHING AND THE U.S. ECONOMY 731 have meaning or definable content in such a moral c~de because "there are no principles of individual con duct which would produce a pattern of distribution which as such could be called just, and therefore no pos sibility for the individual to know what he must do to secure a just re muneration of his fellows." (1976, p.

70) Hayek has described the concept of social justice as an "atavism" and has regarded the attempt to extend the concept's influence in social re form as both misplaced and even dangerous. Such value concepts, im posed by force through economic planning and other forms of state in tervention, are incompatible with the moral code that the market sys tem and a free society require. One of Hayek's most important messages is that one of the hardest lessons we must learn is that im moral consequences may well result from morally inspired efforts. Our R A. Hayek review of Hayek's views on the is sues of social justice and the morals ofthe free society reveals two things. A free society possesses a moral code. That moral code rests upon the ideals of individual responsibility, cooper ation through voluntary efforts, and preservation of individual freedom. In contrast, the legal order that would have to be imposed to secure the results required by the standard of social justice would demand the sacrifice of these moral ideals. @J BIBLIOGRAPHY Hayek, Friedrich. Individualism and Eco nomic Order. Chicago: 1948.

______ . Studies in Philosophy, Politics and Economics. Chicago: 1967. ___' . Law Legislation and Liberty, Vol. 2. The Mirage ofSocial Justice. Chicago: 1976. ______ . Law, Legislation and Liberty, Vol. 3. The Political Order of a Free Peer pIe. Chicago: 1979. IDEAS ON LIBERTY ECONOMICACTIVITYprovides the material means for all our ends. At the same time, most of our individual efforts are directed to providing means for the ends of others in order that they, in turn, may provide us with the means for our ends. It is· only because we are free in the choice of our means that we are also free in the choice of our ends. Economic freedom is thus an indispensable condition of all other free dom, and free enterprise both a necessary condition and a consequence of personal freedom.

Michael Adamson The International DebtProblem: TheCaseofArgentina THEgovernment of Raul Alfonsin in herited a nation burdened with mas sive economic problems when it was elected in December of 1983. Seven years of military rule had all but de stroyed a once growing economy un der the machinations of the state. During the period of military rule, the government tremendously in creased its foreign borrowing, from $8.3 billion in March, 1976 to $43.6 billion in December, 1983.1 The Argentine situation is one ex ample of a larger problem: the in currence of debt worldwide by gov ernment. Since August 20, 1982, when Mexico announced that it could no longer meet its debt service payments, some 30 nations have re negotiated terms on up to $100 bil lion of external debt. Argentina it self declared a moratorium on its debt principal late in 1982. Interest Michael Adamson is a graduate business student at Arizona State University.

732 payments, which consume roughly two-thirds of Argentina's annual ex port earnings, were refinanced in March, 1984 by a package deal in volving the governments of Brazil, Colombia, Mexico, and Venezuela so that American commercial banks would not have to list their Argen tine assets as nonperforming. Today, the Alfonsin government quibbles with the International Monetary Fund (IMF) over austerity programs which enable Argentina to borrow more money from the Fund. Because the strength of the dollar makes prices of imports to America rela tively cheaper, the so-called "debt crisis" has abated temporarily. Yet the only solution to the problem-the market solution-has not been ap plied. When the relative value of the dollar falls (it is presently overval ued against most industrial-nation currencies), the debt problem will again become a major issue.

THE INTERNATIONAL DEBT PROBLEM 733 The idea behind many popular so lutions to the sovereign debt prob lem (borrowing by government) is more government intervention in the form of continued capital flow through some IMF arrangement or similar mechanism until the debtor nation is "stable" enough economi cally to be able to accumulate suf ficient dollars from the exportation of goods to meet its obligations. Such IMF-type austerity plans may avert the political repercussions to gov ernment of making the necessary adjustments to a market economy, but, through a misallocation of re sources, they exacerbate the prob lem in the long run. A solution to the debt problem re quires a market system based on the idea of private property rights. The approaches to the problem taken by the IMF are not producing, nor will they produce, an answer. IMF pro grams are matters of short-term ad justment, the goal of which is to buy time for nations to solve their eco nomic woes. They are, in fact, a sort of protectionism which, in the end, subsidizes the interventionist poli cies of the debtor nations. They also rely on a macroeconomic approach by government to adjust such items as unfavorable balances of trade by fine-tuning monetary and fiscal pol icy in hopes of finding a way out of the woods, so to say. This assumes that the state is somehow capable of planning equitably and efficiently on behalf of millions of individuals it has deemed incapable of pursuing their own self-interest. Thus, many commentators have advocated an expansion of IMF quota limits, evi dently unconcerned about the fact that it is individual taxpayers who must foot the bill for the programs of the IMF and World Bank.

Several nations, including South Korea and Taiwan, are servicing substantial debt requirements on the strength of relatively strong market economies. Yet, when a nation such as Argentina has a debt service problem as a result of intervention in the economy by the state, the IMF typically proposes a slower growth austerity program entailing export ing goods and accumulating dollars with which to service the debt. This so-called trade surplus is generally secured by restricting imports. By not regarding trade as a two-way ex change in which both parties benefit when it is done voluntarily, the in dividual is made to suffer as he be comes less well-off materially. As barriers around free trade are con structed, the problem grows. The Growth of the Problem Today's debt problem in general can be traced to the reaction of in terventionist governments to eco nomic changes in the 1970s. The ini tiation of floating exchange rates in 1971 was followed by a decline in the relative value of the dollar, which fa734 THE FREEMAN December cilitated the expansion of trade be tween the United States and many of the so-called developing nations.

Governments, such as Argentina, fi nanced this expansion largely by borrowing external funds. These in creasing debt levels were expected to be serviced through continued eco nomic growth. The oil-importing developing na tions adjusted to the OPEC oil price increases of 1973 by borrowing ad ditional funds. These loans, made from "petrodollars" accumulating in American commercial banks, were considered to be of little risk, as eco nomic growth and a weak dollar in creased export earnings from which the debt could be serviced. 2 It should not surprise anyone, then, that from 1974-80, many governments used these borrowed funds to expand pub lic expenditures and exports sub stantially at the expense of capital formation. 3 Real-interest rates turned sharply positive in 1978, as the governments of Western Europe, followed by the United States, began to adopt re strictive monetary policies to reduce inflation. In addition, terms of trade fell significantly from 1979-82, as recession was accompanied by a rise in protectionist trade measures.

With oil prices increasing again in 1979, governments were strained to meet their debt service obligations and by 1982 the banking system was on the verge of financial collapse. The Case of Argentina The case of Argentina illustrates the distortions created by state in terventionism in the market econ omy. From 1973-84, public expen ditures expanded enormously. To finance this expansion, the govern ment resorted to deficit spending. From 1973-82, these fiscal deficits averaged 5.2 per cent of gross do mestic product (gdp).4 They were largely financed through borrowing abroad. The growth of the state and the debts which it incurred eroded the base .of real saving and private in vestment. The state was becoming the sole investor. However, the ab sence of a market test for the state allowed it to waste a large amount of resources on prestige and ill-con sidered projects, which was done fla grantly by the military gove-rn ment. 5 Accounting was so poor that much of the debt was not even reg istered in the Central Bank. 6 Mr. AI fonsin and his elected Radical Party inherited the world's highest infla tion rate and its third highest sov ereign debt in 1983.

From 1976-79, the military tried certain steps to solve Argentina's economic woes. Consumption of beef and grain was restricted, while ex ports of both were increased. 7 Real wages fell as government fixed wages while the market determined prices. In response to the unpopu larity of these policies, the govern1985 THE INTERNATIONAL DEBT PROBLEM 735 ment increas~d the money supply. Thousands of Argentines then con verted their pesos into dollars or other currencies to move out of the country. Capital flight was exten sive; some $11 billion was moved into foreign bank accounts. 8 Roughly half of the proceeds from loans to Argen tina were reinvested abroad and re main there because economic chaos continues at home. 9 The gdp in 1983 was lower in real terms than it had been eight years earlier. to - Mr. Alfonsin did not apply the market solution to the economy. In stead, he promised that the govern ment would fight inflation and pull business and labor out of the reces sion with easy credit and real wage increases. ll Hundreds of state-owned companies (which composed roughly 60 per cent of industry in terms of output) were to be closed or sold and government spending was to be cut. 12 The actual program was limited to price controls on selected consumer items and a week-long ban on the sale of beef. Despite efforts to peg wages to prices, prices have risen by as much as 30 per cent per month. 13 In such an environment, investment is reduced in favor of consumption and economic development becomes impossible. Argentina's once mod ern industrial structure is in danger of becoming obsolete. 14 Most recently, in June, 1985, the government announced new mea sures to fight inflation through a dramatic reduction in the budget deficit, mostly through new taxes and new tariffs. An indefinite freeze on prices and salaries is now in ef fect. A new currency, the austral, is being introduced, which it is hoped will be more stable than the peso, and will therefore draw out some of the estimated $4 billion worth of American dollars now being saved by Argentines in mattresses and other places. 15 None of these mea sures is a move toward a free econ omy. As long as the government commands the economy, Argentin a's woes will continue, and with them the external debt problem.

In Conclusion Attempts by the Argentine gov ernment to manage the economy have resulted in a distorted alloca tion of resources and a reduced stan dard of living for the people. Inter vention in the form of wage and price controls, tariffs, public borrowing and investing, and inflation have ne glected the ultimate user, the con sumer, and have restricted his right to peaceful action. The society has become more and more stratified, with various groups in conflict with each other. The nationalistic policies of the state have retarded economic growth and will lead to ever lower per capita standards of living. The whole question of the proper role of government has been totally for gotten.

736 THE FREEMAN As to the debt problem itself, there are only three ways out: 1) an inter nal adjustment economically and po litically within Argentina entailing a return to the free market system, 2) an assumption of bad debt loss by the lending institutions if Argentina is unable to repay its loans, or 3) an assumption of risk on the part of the governments of creditor nations (and ultimately on their taxpayers).16 Only alternative one insures that the problem will not recur. Alternative three is the method being employed today by the IMF and other govern ment agencies to prevent the polit ical consequences of alternative two. If there is a return to a free econ omy, individuals, by pursuing their own self-interest, will direct re sources to the production of those goods and services demanded by con sumers. As consumer demands are satisfied, the returns to investment (profits) insure an ever expanding economy. Through this process, sav ings can be set aside which will ser vice and eventually repay the debt.

As government, reduced to its proper function of protecting life and prop erty, is removed from the economic scene, its need and ability to borrow will be eliminated. The individuals, whom the government is required to protect, will pay for this service with some form of taxation. Whether Ar gentina, or any nation, will ever have the political means to apply the economic solution, is beyond the scope of this article. There are only two alternatives: a free economy based on private property rights or a command economy in which the state exists at the expense of the in dividual. The latter leads to eco nomic chaos and social instability. Only the former results in peace and prosperity. @}) -FOOTNOTES1Andrew Thompson, "Alfonsin Walks on a Knife Edge," South 43 (1984): 88-89. 2William C. Freund, "What's Behind the Debts of Developing Countries?" Journal of Accounting, Auditing, and Finance, Fall, 1983, pp.90-95.

SInter-American Development Bank, Exter nal Debt and Economic Development (Washing ton, D.C., 1984). 4International Monetary Fund, International Financial Statistics: 1981, 1984 (Washington, D.C., 1981, 1984). 5Mary Speck, "The Argentine Dilemma," In quvy, June, 1984,pp. 22-25. 6Linda Schuster, "Politics Played a Crucial Role in Argentina Lending," Wall Street Jour nal, 17 May 1984, p. 34. '''The Breaking of a Continent," The Econ omist, 30 April 1983, pp. 17-2l. 8Schuster,op. cit. 9Larry A. Sjaastad, "International Debt Quagmire-To Whom Do We Owe It?" World Economy 3 (1983), 305-24. lorrhompson, op. cit. llSpeck, op. cit. 12Neil Ulman, "Argentina Lists Plans To Curb Deficit, Inflation." Wall Street Journal, 27 January 1984, p. 35. ls"A Gambler's Throw?" The Economist, 22 June 1985, pp. 68, 70. 14"The Breaking of ..." op. cit. 15"A Gambler's Throw?" op. cit. 16Sjaastad, op. cit.

Robert A. Peterson John Witherspoon: "Animated Son of Liberty" ON July 4, 1776, the Declaration of Independence lay on the table of In·· dependence Hall in Philadelphia .. Two days ear Her, Richard Henry Lee's resolution for independence had been adopted, and now the time was at hand when each delegate would put pen to paper, thus com mitting his life, his fortune, and his sacred honor to a future darkened by clouds of war. If their bid for liberty failed, those who signed would be the first to be hung from a British noose. Sensing the urgency of the mo ment, John Witherspoon of New Jer sey rose to speak: There is a tide in the affairs of men, a nick of time. We perceive it now before us. To hesitate is to consent to our own slavery. That noble instrument upon your Mr. Peterson is Headmaster of the Pilgrim Academy, Egg Harbor City, New Jersey. He teaches economics and Is a staunch advocate of the principles of vol untarism in education.

table, which ensures immortality to its author, should be subscribed this very morning by every pen in this house. He that will not respond to its accents and strain every nerve to carry into effect its provisions is unworthy the name of free man. For my own part, of property I have some, of reputation more. That reputa tion is staked, that property is pledged, on the issue of this contest; and although these gray hairs must soon descend into the sepulchre, I would infinitely rather that they descend thither by the hand of the executioner than desert at this crisis the sacred cause of my country.1 Witherspoon's words gave voice to the sentiments of the majority of del egates, and on July 4, America de clared her independence. In his philosophy offreedom, With erspoon was one of the most consis tent of the Founding Fathers. Leav ing no realm of thought untouched, all knowledge was his province as he discussed money, political economy, 737 738 THE FREEMAN December philosophy, and education, all in re lation to Whig principles of liberty.

His articles and teachings on the na ture of money foreshadowed the dis coveries of the Austrian school of economics in the 19th century, and contributed to making the Consti tution a "hard-money document"-a fact that has been forgotten by mod ern politicians. His Influence on Others Witherspoon never led an army into battle, nor did he run for high national office after the war. Yet his influence was such that in his role as President of the College of New Jersey (now Princeton) he helped to educate a generation of leaders for the new nation. His students in cluded James Madison, the young Aaron Burr, Henry and Charles Lee of Virginia, and the poets Philip Freneau and Hugh Brackenridge. Ten of his former students became cabinet officers, six were members of the Continental Congress, thirty nine became Congressmen, and twenty-one sat in the Senate. His graduates included twelve gover nors, and when the General Assem bly of the Presbyterian Church in America met in 1789, 52 of the 188 delegates had studied under With erspoon. The limited-government philosophy of most of these men was due in large measure to Wither spoon's influence. 2 Born in Scotland in 1723, Witherspoon was reared on stories of the Scottish Covenanters who in years past had stood for both religious and political liberty. In due time he was sent to the grammar school at Had dington, and later entered Edin burgh University at the age of fourteen.

Witherspoon received his educa tion in Scotland at a time when the air was filled with the kind of think ing that led to Adam Smith's Wealth ofNations. Indeed, Witherspoon and Smith were contemporaries, and in 1776 both would strike an important blow for liberty-Witherspoon with the signing of the Declaration on one side of the Atlantic, and Smith with his publication of the Wealth of Na tions on the other. Witherspoon spoke out for political liberty, while Smith took a stand against mercan tilism and for economic liberty. Free dom is all of a piece, and the work of these two Scotsmen complemented and supported one another. Political freedom and economic freedom go hand in hand-you cannot have one without the other. Witherspoon received his M.A. in 1743, and spent the next two decades serving as a parish minister in the Church of Scotland. During this pe riod of his life he developed a repu tation for being the champion of the "Popular Party," which stood against patronage and pluralism in the Church of Scotland. His fame continued to grow in both Scotland 1985 JOHN WITHERSPOON 739 and America, and so, when an open ing occurred for the presidency of Princeton, Witherspoon's name was brought up and approved by the trustees. After careful negotiations and some pleading by Princeton.

alumnus Benjamin Rush, who was studying medicine in Edinburgh" Witherspoon accepted the call. 3 Arriving in America in 1766 , . Witherspoon plunged into his new task with vigor. One of his first jobs was to get the college on a sound fi nancial footing. Unlike many col lege administrators today, who go begging at the public trough, With·· erspoon could not appeal for Federal aid. Princeton was totally supported by tuitions and voluntary contribu tions. Within two years, Wither·· spoon's fund-raising efforts (even George Washington contributed) brought Princeton back from the brink of bankruptcy. Educational Reform After laying a sound foundation for school finances, Witherspoon turned his attention to educational reform. He was the first to use the lecture method at Princeton. Previously, in structors had assigned readings and then quizzed their students in class. He also set up a grammar school, authored several works on child rearing, introduced modern lan guages into the college curriculum, and taught a course on moral philosophy.

Witherspoon's activities at Prince ton were brought to an abrupt halt by the outbreak of the War for In dependence. Like most Americans, Witherspoon was at first slow to em brace the cause of independence, hoping instead for a reconciliation of the two countries based on the res toration of full English rights for the colonials-in particular, the right of their own little parliaments to tax them and make their laws, under the overall jurisdiction of the king. Witherspoon grew increasingly concerned, however, with the at tempt of the British to install an An glican bishop over the American col onies. 4 He viewed this as the first step toward an ecclesiastical tyr anny over the colonies, of which the Quebec Act was also a part (the Que bec Act extended French law, which meant no trial by jury, and Roman Catholicism into the Ohio Valley). Witherspoon understood that reli gious liberty-man's freedom to own his conscience-was inextricably in terwined with political and eco nomic liberty: "There is not a single instance in history," he wrote, "in which civil liberty was lost, and re ligious liberty preserved entire. If, therefore, we yield up our temporal property, we at the same time de liver the conscience into bondage."5 When hostilities broke out, and continued for about a year with no end in sight, Witherspoon felt that it was his duty to set forth the issue 740 THE FREEMAN December from the pulpit. In what is perhaps his most celebrated sermon, "The Dominion of Providence Over the Passions of Men," Witherspoon said: ... the cause in which America is now in arms, is the cause of justice, of liberty, and of human nature. So far as we have hitherto proceeded, I am satisfied that the confederacy of the colonies has not been the effect of pride, resentment, or sedi tion, but of a deep and general conviction that our civil and religious liberties, and consequently in a great measure the tem poral and eternal happiness of us and our posterity, depended on the issue. S Witherspoon went on to say that Americans would need "pure man ners," "bravery," "economy," and "frugality" if they wanted to win their independence.

Limited Government In his concept of political economy, Witherspoon believed that good gov ernment was limited government, wherein "faction" checked "faction" so that no person or group of persons could gain unlimited power. Thus, he believed in a system of checks and balances-a system that found its way into the United States Consti tution through the influence of one of his favorite students, James Mad ison. 7 Ashbel Green, who would fol low in Witherspoon's steps as a Pres ident of Princeton, said that the aging statesman approved of the Constitution "as embracing princi ples and carrying into effect measures, which he had long advocated, as essential to the preservation of the liberties, and the promotion of the peace and prosperity of the country."8 Witherspoon put his views on civil government into practice when he served in Congress from 1776 to 1782. Always active, he served on over one hundred committees and preached to members of the Conti nental Congress on Sundays while in Philadelphia. The British showed that they realized the significance of Witherspoon's contribution when they burned him in effigy along with George Washington during the oc cupation of New York City.

The war left Nassau Hall in ruins, as the British particularly singled out Presbyterian institutions for de struction. Undaunted, Witherspoon left the Continental Congress in 1782 to rebuild his beloved Prince ton. He still found time to comment on the problems which confronted the new nation-particularly eco nomic problems. An economist, or moral philosopher, of the first rank and an advocate of hard money, Witherspoon had seen first hand the effects of the inflationary "Conti nentals." In his "Essay on Money," which in many ways. presaged the writings of the Austrian school of economics, Witherspoon wrote: I observe that to arm such bills with the authority of the state, and make them le gal tender in all payments is an absurd1985 JOHN WITHERSPOON 741 ity so great, that it is not easy to speak with propriety upon it . . . It has been found, by the experience of ages, that money must have a standard of value, and if any prince or state debase the metal below the standard, it is utterly impossible to make it succeed. Why will you make a law to oblige men to take money when it is offered them? Are there any who refuse it when it is good? If it is necessary to force them, does not this sys tem produce a most ludicrous inversion of the nature of things?9 Witherspoon was also mindful of the tremendous productive capacity of the free society, not only in the physical realm but in the other fields of human action as well. In a text book he wrote for his students, he concluded: "What then is the advan tage of civil liberty? I suppose it chiefly consists in its tendency to put in motion all the human powers.

Therefore it promotes industry, and in this respect happiness-produces every latent quality, and improves the human mind. -Liberty is the nurse of riches, literature, and heroism."IO Contracts Are Important The contract, so essential to capi talism' also loomed large in With erspoon's thought: "Contracts are absolutely necessary in social life. Every transaction almost may be considered as a contract, either more or less explicit."ll And in what con stituted an intellectual "end run" around the classical economists, Witherspoon touched upon the dis covery that value is essentially sub jective, determined not by the amount of labor that goes into a product or by government decree, but by individuals freely acting in the marketplace. "Nothing has any real value unless it be of some use in human life, or perhaps we may say, unless it is supposed to be of use, and so becomes the object of human desire. . . . "12 Besides writing, Witherspoon spent his last years building up Princeton and his church. Two ac cidents left him blind the last two years of his life. His light spent, he continued to preach and teach, re lying upon the vast store of knowl edge that he had husbanded away through years of diligent study.

At the age of seventy-one, having crammed several careers into one lifetime, Witherspoon passed away and was buried in the President's Lot at Princeton. Two hundred years 'later, Witherspoon's great contribu tions in helping to lay the founda tions of American freedom are still only darkly understood. There have been those in the past, however, who have recognized the magnitude of Witherspoon's life and thought. John Adams, for instance, noted in his di ary that Witherspoon was "as hearty a friend as any of the Natives-an animated Son of Liberty."13 One of his students, Philip Freneau, wt'ote: His words still vibrate on my ear, 742 THE FREEMAN His precepts, solemn and severe, Alarmed the vicious and the base, To virtue gave the loveliest face That humankind can wear. 14 It was through the influence of men like John Witherspoon that a new nation gained a constitution that repudiated interventionism, fiat currency, and embraced the idea of hard money. He was a pastor, edu cator, statesman, economist, and po litical theorist. He was, and still re mains, "an animated Son of Liberty." @b -FOOTNOTESIJohn Witherspoon, quoted in Charles Au gustus Briggs, American Presbyterianism (New York: Charles Scribner's Sons, 1885), p. 35l.

2Charles G. Osgood, Lights in Nassau Hall (Princeton: Princeton University Press, 1951), pp.12-13. 8Lyman H. Butterfield, John Witherspoon Freeman binders Comes to America (Princeton: Princeton Uni versity Library, 1953). 4Carl Bridenbaugh, Mitre and Sceptre: Trans atlantic Faiths, Ideas, Personalities, and Poli tics 1689-1775 (New York: Oxford University Press, 1962). 5John Witherspoon, The Works ofJohn With erspoon, 9 vols. (Edinburgh: 1804-1805) Vol. II, pp. 202-203. 8lbic!. 7James H. Smylie, "Madison and Wither spoon: Theological Roots of American Political Thought," The Princeton University Library Chronicle, Vol. XXII, No.3 (Spring, 1961), MS, Presbyterian Historical Society. 8Ashbel Green, quoted in Smylie, p. 130. 9Works, Vol. IV, p. 223. lOJohnWitherspoon, An Annotated Edition of Lectures on Moral Philosophy, ed., Jack Scott (Newark: University of Delaware Press, 1982), p.147.

11Lectures on Moral Philosophy, p. 168. 12Lectureson Moral Philosophy, p. 178. 18Marlha Lou Stohlman, John Witherspoon: Parson, Politician, Patriot (Philadelphia: The Westminster Press, 1976), p. 15. 14Philip Freneau, quoted in Mary Weather spoon Bowden, Philip Freneau (Boston: Twayne Pub., 1976), p. 17. • handsomeblue leatherlex • each binderholds twelve issues • a handyway to organize currentand past issuesof The Freeman Order from: THE FOUNDATION FOR ECONOMIC EDUCATION, INC. IRVINGTON-ON-HUDSON, NEW YORK 10533 $5.00 each Ben Barker Growing Pains THE U.S. embodies both the greatest hope and the greatest danger that the civilized world now faces be cause of our unique ideological framework. Like all social orders, we are subject to thrusts of optimism, innovation and energetic expan sion-but Americans take these thrusts farther, and often faster than any society ever before. Then we pIunge into periods of denial, re trenchment, and even regression.

These have been labeled by others as cycles, but a better analogy would be that we escalate over these episodes of alternating euphoria and depres sion in a jagged, ascending spiral of human development. Even in primitive societies phases of breakdown and revitalization take place. In the early stages of breakBen Barker is a practicing psychiatrist in Simi Valley, California. down individuals succumb in in creasing numbers to stress-provoked mental or physical diseases. They lash out against authority, family and friends and sink into a whirlpool of withdrawal, drug and/or alcohol abuse. One by one the strands of the cultural network strain, stretch and break as marriages, families and in stitutions fail. The jails neither re form nor adequately imprison, there is no spiritual solace in the churches, and the government becomes tyran nical and oppressive. The people fight, bicker and separate.

Both the individual and the soci ety at this stage lack the ability to anticipate events or to form a life or world strategy. Instead, they react in a poorly organized way to events stumbling from one crisis to the next as in a drunken stupor. No great de sign emerges and the insane reac743 744 THE FREEMAN December tive lurching decays toward non sensical chaos. It seems probable that the U.S. is now emerging hes itantly from precisely such an epi sodic breakdown into an era of growth and revitalization. In the late 1950s we saw our last powerful era of national unity, sta bility and solid prosperity. We ad mitted that Catholics, Jews and even blacks were perhaps Americans af ter all and moved toward the spiri tually cleansing civil rights strug gles at the dawn of the sixties. What -that entanglement brought about, however, was the greatest ideologi cal antagonism to erupt in this na tion since the Civil War of one hundred years before. White and black rebels in this societal confron tation forged powerful utopian links and struggled to bring us to a truer realization of the pluralism we had always preached but never really practiced. Their frequently shocking personal lives of drug and licentious sexual experimentation united the conservatives against the young reb els, and blood literally ran in the streets of our cities and universities.

Most of us failed to perceive or de lineate the nature or extent of that great rupture in our social fabric. As a consequence the Sixties Revolu tion was reported as a disjointed se ries of sporadic acts of antisocial violence or official retaliation. The youth saw the Vietnam War and its concomitant draft as but an effort to herd them into Asian swamps for systematic execution, and so took their resistance from civil rights to antiwar as well. Her oin, LSD, acid rock and long hair be came talismans of the revolution aries. The conservatives, on the other hand, stumbled through out rage, retaliation, Watergate corrup tion and straight into the camp of hard-core materialism. By the late seventies both sides of the civil war were exhausted by their nearly two decade ideological conflict and were ready for retrenchment. Interest ingly, during the period of social tur moil a massive inflationary era had enveloped us.

The Lost War on Inflation The debasement of the dollar nat urally turned out to be a far more potent instrument of social realign ment than confrontation had been. Hundreds of thousands were swept into the ranks of the wealthy by either planned or fortuitous involve ment in investments that benefited from inflation. On the other side of the equation vast numbers of Americans on fixed incomes were swept beneath the poverty rug as their paper money rushed toward worthlessness. The politicians, ever ineffectual, waged a war on infla tion, and lost. Meanwhile, the ever expanding government bureaucratic class indexed their own salaries and hence became an elite walled off 1985 GROWING PAINS 745 from the ravages of a plummeting dollar. The battle for social and economic primacy and survival heated up con siderably when industrial unions at tempted to imitate the daring feats of government bureaucrats. What they did not understand was that lo cal, state and federal government of fices and functions are geographi cally fixed-private enterprise is mobile. So, corporate managements by the hundreds stripped the teeth of unions by shutting down their op erations in one location, and opening up in another-often in another country. This accomplished what has been called the Deindustrialization of America. It also left government employees as the most stable and potent block of voters in the land.

Their numbers, their perks, and their outlandish retirement benefits continue to escalate to this day in the midst of marked economic instability. At the same time, inflation forced women out of the home and into the workplace. Previously unaware members of the female sex discov ered that they were likely to receive unequal pay, have less power and be subjected to sexual dalliance in the office and plant. This fact of life was of course not new, but our liberal middle-class had for years refused to acknowledge the true terms of eco nomic slavery. Additionally, these working women were obliged to leave their children in day-care cen ters. Recent sensational headlines have informed us of the too-frequent outcome of that tactic-sexual abuse and kiddie porn. Faced with so many onslaughts from so many directions, even the flaming social revolutionaries of the sixties lost heart. Many sought sol ace in faceless religious cults which could feed and clothe them as they continued their dance of rebellion against the powers that be. Some even saw the evil of their ways, ac cepted the blame for the social chaos about them, put on three-piece fitted suits and came in out of the cold. Few recognized that they, too, had for saken individuality for a cult iden tity, this time the cult of the corpo rate ideology.

A Reawakening of the Importance of Individual Responsibility Those of us truly aware of the ex tent of cultural fragmentation that had taken place looked to ourselves as the sole form of transport through life that could be trusted. The gov ernment' academia, the military and the media elite were perceived as failed institutions that had betrayed our faith. We invoked our own phys ical or economic survival over civil law, church dogma or manipulated public polls. We refused court ordered school busing by a variety of tactics, bought gold and guns, at tempted to dismantle taxes, and 746 THE FREEMAN December often retreated to the foothills. We were a society in disequilibrium. Between 1946 and 1961 roughly 64 million infants were born in Amer ica. Joined by increasing hordes of immigrants, they were labeled the Baby Boom generation. Having been raised in a period of prosperity, they walked into the job markets of the late sixties and early seventies and had doors slammed in their faces.

Behind them they left a bloated ed ucational bureaucracy which may prove increasingly redundant, and in front of them they faced an en trenched labor force unwilling to al low them easy entry. To make mat ters worse, many of them had not learned to read or write, and few knew the meaning of hard work. They are now our voting citizens, and they are filled with rancor. They are also now part of America's mid dle class. The Indomitable Individual Unlike the French and Russian no bility, the U.S. middle class is acutely aware of the pressures upon their privilege, and do not intend to be simply overrun by a fascist cen tral government or the lumpen pro letariat. We value our liberty highly, and recognize it as the ultimate standard of wealth in a globe of di minishing distances and collapsing values. Like all things of value, lib erty must first be earned, then defended. Gail Sheehy, the author of Pathfin ders (Bantam Books, paperback, 1981) captures the stubborn essence of Americanism in one paragraph: Much of the message of America's consensual ideology is conveyed non verbally, through a continuous spring of cultural imagery: the lone silhou ette of George Washington in a boat taking him to battle; the pioneer wife of the "big sky" movies, who draws a weary hand across her brow, straightens her apron, and tramps back through the flood-stricken fields determined to get the new seed in the ground; the lonesome cowboy after whom Kissinger patterned his shut tle diplomacy; the tight focus of two men in a space shuttle; right up to the hero's welcome given President Rea gan by Congress a month after his stunning comeback from mortal at tack. Our reverence is saved for vic tories of the indomitable individual over fate or circumstance, victories that are often beyond politics and re ligion. Mantras, prayer wheels, Ti betan death verse, martial arts, Mus lim fervor, flowing Indian or African robes, and kids cavorting about Yan kee fields draped in Siddartha loin cloths-they are all remnants ofvalue systems unconnected with the indi vidualistic spirit that is in the Amer ican blood.

What this observation pays special heed to is the powerful, unique na ture of the U.S. ideological frame work: the magical belief system that 1985 GROWING PAINS 747 the dedicated individual can over come all odds by dint of stubborn dedication and hard work and trans form his world. This dream includes inventors, singers, dancers, oil-field roughnecks, athletes and even poli ticians. It is the concept that if we can immerse ourselves with single minded determination into our own very special niche and return to the social system more than we take out then lightning will strike and we will become winners. It can happen to us at any age, so the secret is to persevere. The credentialed elite who exposed the Baby Boom generation to nihil ism and existentialism benefited from this dream themselves by vir tue of achieving status and privilege through conformity to academic rote. Awash with envy, however, they lusted for greater status and privi lege and taught the youth to doubt seriously the articles of faith in the American dream. Left with no ide ological framework, the youth went on a destructive suicidal binge until their anger was spent. That's why Johnny can't read. He was taught by a member of the Flower Child generation who had lost all faith in the system-including the belief in the human need to communicate effectively.

The present conservative backlash is a reaction phase to the era of con fusion and nihilism. If it accom plishes its task, and I'm certain that it will, then we will move into an era of growth and prosperity in which pragmatic realism is spiced with imaginative beliefs in the unique power of the individual. Such a for mula will allow America to move be yond the limits conceived by doom sayers who have lost the ability to believe in the indomitable human spirit. We will grow beyond the lim its of their imaginations into vistas of achievement that will dwarf pres ent accomplishments. We will prevail. The Entrepreneurial Spirit The fact that the American dream is still alive, and growing, is amply proven by the number of small busi nesses that open each day across our land. No educational system teaches us to open and operate small busi nesses' or to deal with failure if we flop. We just do it. And if the light ning strikes and our enterprise moves toward success we draw unto ourselves the skills needed to over come our growing pains. The dan ger of losing all and starting from scratch once again haunts our every step, but like the lonesome cowboy we buckle on our belt and spurs and tackle another day because we be lieve in ourselves.

Confronting the passionate indi vidualistic dream of the American entrepreneur is the growing rat-pack of government and pseudo-govern ment bureaucrats. Unable to even 748 THE FREEMAN dream, much less achieve the neb ulous task of winning, the bureau crats make a career of stopping oth ers. Will the Fed kill the recovery with escalating interest rates? The staid civil servant hopes so. There are already too many haughty mil lionaires, flamboyant technology ge niuses, high-riding athletes, and un stable show business personalities. In the dry, dull world of civil service there are no greater sins than wealth and flamboyance. Our present economic and social background, then, contains powerful antagonist forces pulling us on the one hand toward self-expression, transcendence and growth and on the other toward socialist repres sion. In a very fundamental sense whether we continue to grow or in volute and die depends upon which force has the upper hand. Your time, energy, talent and financial invest ments can either be involved in the growth and development sector or in the repression and dominance sec tor. As individuals or as a people we can grow a little each day toward self-realization or we can die a lit tle-depending upon how we direct our energies.

Individual or family-owned busi ness enterprises are the economic backbone of our country because they fit so smoothly into the ideolog ical framework that is in the Amer ican blood. When we lose sight of our strong point and move toward the dead -end structure and caste sys tems of older nations we are con demning ourselves to their same fates. There is genius and growth in diversity. We will decay and fall if we stifle small enterprises through repressive tax structures. If and when we become a country ruled by government and massive corpora tions our growing pains will cease, and our death throes will begin. @ Upcoming Articles JANUARY • What About Immigration? - Julian Simon • How to Gain Liberty - Leonard E. Read • What Is a Just International Economic Order? William H. Peterson FEBRUARY • The Constraints on Helping - Charles Murray • The War on Poverty Revisited - Edmund A. Opitz E. Barry Asmus Donald B. Billings Environmental Problems and Private Property SELF-INTERESTASIDE, the environ mental movement has appropriately focused our attention on environ mental degradation and the impor tance of our natural surroundings in general. The issue, however, is not whether conservation and pollution are important. The crucial problem is how to develop institutional ar rangements to protect our planet's physical and social habitability in the most efficient and equitable way.

In that discussion, environmental ists, with very few exceptions, have assumed government to be the nec essary custodian of the natural enDr. BarryAsmus is an economist and national speaker living in Phoenix, Arizona. Dr. Don Billings is Pro fessor of Economics at Boise State University. This article is taken from their book, Crossroads: The Great American ExperIment, published in 1984 by University Press of America. Reprinted by per mission of the publisher. vironment, since capitalism, in the name of profits, will exploit the min erals, forests, wildlife, and other nat ural values to the detriment of the environment. The idea that self-in terest and the market economy are at fault has been shown to be in error by the biologist Garrett Hardin in his classic description of the envi ronmentally destructive implica tions of the commons. (See "The Tragedy of The Commons," Science, December, 1968.) The promise that government will manage the natu ral environment in the "public in terest" remains to be challenged.

In contrast to the private sector of the economy, where the quality of managerial decisions is brought to light by the signals of profit and loss, managers in the _public sector are seldom totally accountable for their 749 750 THE FREEMAN December decisions. When resources are not held privately, and therefore are not transferable to others by those in control, the public bureaucrat is rarely held accountable for any wasteful and exploitive use. Effi ci~nt resource allocation in the gov ernment sector requires informed voters and legislators. Unfortu nately, existing political institutions guarantee neither. Good intentions and good people are not enough. The problem is not one of bad people run ning the Bureau of Land Manage ment, the U.S. Forest Service, or the National Parks Department. Natu ral resource economists Richard Stroup and John Baden have iden tified the fundamental dilemma: "Even with good intentions and ex pertise, public servants are likely to generate environmental problems because they lack the feedback and reality checks inherent in the price system and markets." (See Natural Resources: Bureaucratic Myths and Environmental Management, Pacific Institute, 1983.) .

Competing Special Interests Guarantee Conflicts Government stewardship of natu ral resources guarantees bitter con flict over the use of the "public do main." As the mountain valley, lake, river, forest, or desert become pop ular due to rising incomes and grow ing population, a political struggle is the inevitable consequence of public ownership. Irresolvable conflict among competing users leaves the government bureaucrat in the mid dle of the argument. Hearings are held, special interests lobby their legislators, but almost inevitably good intentions produce poor results. One group lobbies to save the wild horses in the American West; con sequently the horses multiply in great numbers and consume the for age which supports other wildlife species dear to the hearts of other special interest groups. . Bureau of Land Management grazing policies, determined in the political arena by special interests, destroy the land. Federal irrigation projects subsidize farmers at the ex pense of free flowing rivers. "Mul tiple use" policies guarantee politi cal confrontation over access to "public lands" and necessarily pro duce inefficient results. Quality in the management of natural re sources, whether in the public or pri vate domain, is largely determined by the structure of the property rights in force. When resources are treated as common property, the ten dency of fast depletion and environ mental destruction is assured. How ever, when resources are exclusively under the control of a private owner who has an absolute right to the cap ital value of the assets, the owner will have a direct interest in con serving and protecting those values.

In addition, the profit motive as1985 ENVIRONMENTAL PROBLEMS 751 sures that the resources will be moved to their highest valued use. Stroup and Baden in Natural Re sources persuasively argue that an efficient management of natural re sources involves three interrelated issues. First, the authority to control resources must be coupled with the personal responsibility for actions taken. Decision makers must have a personal stake in the consequences of their decisions. The public sector inevitably breaks this link and therefore inhibits accountability. Second, it must be recognized that we live in an imperfect world, and while the market system is not ideal, it does not follow that government solutions are preferable. The com petitive market process, even when not operating perfectly, has other wise unobtainable beneficial effects. Finally, it must be recognized that individuals respond to the incen tives they face. Unfortunately, insti tutions in the past have encouraged wasteful exploitation of publicly owned property. For emotional and philosophical reasons the assign ment and enforcement of private property rights have been falsely condemned as a surrender to "big business" and the profit motive.

The fact of the matter is that in dividuals conserve, husband, save, protect, and expand their stocks of valuable resources if they have ex clusive claims on the proceeds re sulting from their sale. Black Angus cattle on private ranches thrive, while the wolf nears extinction. Lion populations in private game re serves flourish, while their numbers are threatened in the wild. Hawk populations on public lands dwindle, but domesticated chickens, turkeys, and geese are harvested in great numbers in the private sector. The private forests in the southeastern United States are much more pro ductive than the public forests in the Pacific Northwest. The contrast has been starkly stated by Stroup and Baden: "Private ownership allows the owner to capture the full capital value of his resource, and thus eco nomic incentive directs him to main tain its longterm capital value ... In contrast when a resource is owned by everyone, the only way in which individuals can capture its economic value is to exploit the resource be fore someone else does."

Problems of Interventionism A profound illustration is provided by the National Audubon Society's management of its privately owned Rainey Wildlife Sanctuary in Loui siana where environmental values of preservation and wildlife protec tion exist in harmonious partner ship with gas wells and grazing cat tle. Nevertheless, in stark contrast to their practice at Rainey, the Au dubon Society continues to advocate public ownership of federal lands to prevent mineral exploitation and de752 THE FREEMAN December velopment. At Rainey, "reality checks" that produce management decisions in which opportunity costs must be squarely faced are available to the Society. In the political arena, bureaucratic managers produce out comes which are pleasing to no one because they are faced with ill-de fined multiple use mandates and have no personal stake in decisions. The environmental movement's preference for government owner ship of natural resources has the po tential of producing results opposite of what they desire for yet another reason. Government can both give and take away. The reliance on gov ernment for environmental protec tion is a double-edged sword which can just as easily swing in the di rection of environmental destruc tion. The election of President Rea gan in 1980 and his appointment of James Watt as Secretary of the In terior should remind us of how ra pidly political circumstances can change and how the reins of govern ment power can be shifted to those who would oppose our favorite in terest. Given the speed and degree by which governments can change their mind, depending on which in dividuals occupy power, the ultimate security for places of beauty rests with secure and enforceable private property rights.

There are many examples of how the environment can be sacrificed on short notice because of emergencies Crossroads is an important and comprehensive presentation of the rise, decline, and restora tion of freedom and the market economy. The authors do an outstanding job of introducing readers to the history and na ture of the American free mar ket experiment. Copies can be ordered from the American Studies Institute, 3420 East Shea, Suite 266A, Phoenix, Ar izona 85028: Paper $14.95, Cloth $26.75. Please add $1.50 for shipping and handling. declared by government. For exam ple, the oil embargo by the OPEC countries in November 1973 quickly produced a suspension of the Na tional Environmental Protection Act by a Congressional vote so that the Alaskan Pipeline might be built. The Wilderness Society's court action was quickly circumvented. And this was the same government which held energy prices down during the 1970s and thereby stimulated en ergy use in the U.S. While spending billions to encourage energy conser vation with their right hand, gov ernment simultaneously "encour aged" consumption, through price controls, with their left hand.

In the summer of 1979, largely as a result of the government created "energy crisis," President Carter and important members of both par1985 ENVIRONMENTAL PROBLEMS 753 ties in Congress advocated a new Federal Energy Mobilization Board which would have had broad powers to override all existing environmen tal legislation. A little emergency here, another there, and the political atmosphere shifts to a stance which argues that the environment must be sacrificed to the latest political difficulty. The Private Property Alternative The essence of politics is compro mise, which hardly assures confi dence that environmental concerns will have priority. The government limits the liability of private power companies from nuclear accidents under the Price-Anderson Act, and thereby contributes to the prolifer ation of nuclear power stations like the Diablo operation on the coast of California. This is the very same government that most environmen talists wish to assign the responsi bility of conserving, preserving, and protecting our physical environ ment. To a degree, fortunately, the Ruth Shallcross Maynard environmental movement is coming to recognize the risks associated with government's stewardship of the land and wildlife. Audubon's expe rience with the Rainey Wildlife Sanctuary is difficult to ignore. Na ture Conservancy and Ducks Unlim ited have demonstrated their rec ognition of the importance of private ownership and, therefore, control of valuable wilderness and other en vironmental treasures.

Capitalism and the profit-moti vated capitalist are not fundamen tally to blame for the various classes of environmental decay witnessed on spaceship earth. Indeed, private ownership for profit generates an in credibly powerful incentive to con serve and cultivate resources in or der to increase their value to other users. It is our conviction that the best hope for the long run conser vation of natural resources and the environment rests with privatiza tion and the enforcement of private property rights in a free-market setting. i IDEAS ON LIBERTY NATURAL resources are best utilized and conserved where they meet spe cific economic requirements in the most efficient way as determined by competition in the free market .... Conservation will take place in the best sense where individuals are allowed to seek solutions to their own personal problems as they arise.

To the Editor Last month we inaugurated our "To the Editor" feature. Each month we will share with readers the most interesting and provocative let ters we receive regarding Freeman articles. Since FEE's activities encompass more than just publishing The Freeman, we will also in clude, from time to time, comments about other FEE undertakings. In short, we want this to be the space in which our readers share their opinions. Limited space will preclude our printing all the thoughtful letters we receive. Letters may be edited for purposes of clarity or space. Send your comments to: To the Editor The Freeman Foundation for Economic Education Irvington, New York 10533 On Equal Rights To the Editor: I find it strange that Michael Bor delon in his "A Conservative Dec laration" (September, 1985) finds that the Declaration of Indepen dence gives no content to its famous equality clause, "that all men are created equal." That clause is fol lowed immediately by the equally famous one which declares: "That they are endowed by their Creator with certain inalienable rights .... "

If the language means anything, the two cIa uses are linked and the thought expressed very clearly im plies that the equality of all men lies 754 in their equal possession of natural rights. Dr. Bordelon also ignores the prin ciple of equality of all before the law. While not explicit in the Declara tion, it was certainly an operative principle in most American consti tutions, with the regrettable excep tion of women and slaves. It is noteworthy that Kenneth McDonald in "Routing the Fabians" (October, 1985) fixes on the principle of equality before the law as the rem edy for fending off the special inter est groups who demand special priv ileges of an economic character. This was precisely the approach used in the days of Jefferson and Jackson to TO THE EDITOR 755 break the privileges of groups seek· ing economic advantages through government-granted monopolies, subsidies, tariffs, licensing, and reg ulation of businesses.

The brilliant Jacksonian editor, William Leggett, used the slogan "Equal Rights" to challenge those who sought economic advantage through government privileges. He used the principles of laissez-faire, the free market, and equal rights, to rally the people against the new ar istocracy arising through their en joyment of government-granted privileges. Those searching for a new rhetoric to rally the forces offreedom in today's statist society would profit from reading Leggett's defense of equal liberty in his Democratik Ed itorials: Essays in Jacksonian Polit ical Economy, edited by Lawrence White (Indianapolis: Liberty Press 1984). JOSEPH PEDEN New York, NY The Moral Battle To the Editor: It is encouraging to see articles extolling "The Morality of Capital. ism" (September, 1985). More arti· cles illuminating the moral superi· ority ofthe free exchange of property, ideas, and services need to be writ ten and widely publicized.

The connection between the pri vate property order and individual choice, with its basis in morality, is the arena in which the battle be tween the socialist ideology and that of free men must be fought. The arena is not "which system is more efficient." The free market wins the efficiency contest hands down. This article stands in stark con trast to the pronouncements of the Bishops' pastoral letters or the Na tional Council of Churches who see little moral virtue in the free mar· keto The defense of the free market has to be made in the arena of the "permanent things" -of morality or the battle is lost. PAIGE MOORE Houston, TX And Thank You! To the Editor: When I was a young man, still wet behind the ears, spending my time playing instead of learning, I never had time to notice what was hap pening to my country. So I and many others like me stared blindly about as the dreams of Jefferson, Washington, and Pa trick Henry were being buried under a mountain of Marxist nonsense.

And never was heard an opposing word. Well, fortunately for me, al most never. For, even then, there was FEE keeping the truth alive. Through The Freeman and other publica tions, it gave us the intellectual am756 THE FREEMAN munition to do battle with the ene mies of freedom. The Freeman offered rational antidotes to the day to-day poison we were being taught. It has passed the torch to new gen erations of Americans. That is an in credible job, one still unknown to most people and yet one of the most courageous and admirable under takings of the twentieth century. So let me take this opportunity to say, thank you, to all of the people at FEE, past and present, for being there and raising a standard for all to see. Keep up the good work. HERB GROSSMAN New City, NY Sharing Profits To the Editor: I have always admired Henry Haz litt. His books-among them Eco nomics In One Lesson, his book on inflation, and The Great Idea-are all superb. Nevertheless, I was sur prised by his article on "The Limi tations of Profit-Sharing" (Septem ber, 1985).

My basic motivation for becoming a profit sharing consultant has little to do with profit sharing as such-to me profit sharing is a means to an end. By making employees partners through profit sharing, one is laying the foundation for trust and mutual interest on which to build an effective program of education on the eco nomic facts of business life. Fur thermore, if businessmen in America were successful in meeting this'chal lenge, there would be no trade imbalance. A few years ago, attending the An nual Conference of the Profit Shar ing Council of America, I heard the extraordinary story told by Mr. John McConnell, Chairman of Worthing ton Industries in Columbus, Ohio. In the 14 years since cash profit shar ing was installed, some $22.5 mil lion have been paid out. In 1978, $6.4 million were distributed to some 800 individuals. The average production worker received just under $10,000 on top of a salary of $12,000.

The results? Whereas productivity as measured by sales per employee attained a median level of about $60,000 in the metal manufacturing business, and $58,000 for all indus tries, at Worthington productivity averaged $176,000 per person in 1978. As regards profits, Worthington's total return to investors-price ap preciation plus cash dividends-for the past ten years of 34 per cent an nually ranked as second among For tune's 1000 largest companies in 1978. I enthusiastically support incen tive profit sharing. SARTELL PRENTICE, JR. Pasadena, CA A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN Reality and Rhetoric THE Labor peer in Britain, ap pointed to the House of Lords by La bor governments, is a twentieth-cen tury phenomenon. Now, as the twenty-first century approaches, we are witnessing the creation of a Free Market peerage. Ralph Harris, now Lord Harris of High Cross, takes in finite delight in promoting the be liefs of Friedrich Hayek and the Mont Pelerin Society from a back bench. And P.T. Bauer, now Lord Bauer, a 1982 life peer appointment of Margaret Thatcher, makes it a one~two succession of punches for a classical liberalism that has long been out of fashion even among Tory lordships.

Lord Bauer is anything but an ideologue. He would gladly admit to a bias for freedom, but he works strictly from the facts when he crit icizes the conventional wisdom about such things as foreign aid. His most recent book, Reality and Rhetoric (Harvard University Press, Cam bridge, Mass., 184 pp., $15.00), takes off from his personal experiences as a student of British colonial office practices in the Twenties and Thir ties in West Africa and Southeast Asia. Detailed as a young economist to make investigations of the rubber industry in Malaya and Sumatra and the cocoa industry in West Africa, Bauer was impressed with what a light hand the British colonial office ruled in the days before the Fabians took overits guidance.Boththe rub ber industry and the cocoa industry were the creation of native individ uals who were glad to borrow where they could but who did the necessary clearing and planting on their own.

The British "imperialists" gave the local entrepreneur a free hand as 757 758 THE FREEMAN December long as he did not engage in tribal warfare. Bauer observes that before 1885 there was not a single rubber tree in Malaya or a single cocoa tree in Ni geria and the Gold Coast in Africa. There was nothing that might be called an infrastructure to enable peasant.s to get their goods to distant markets. The change came about through local initiatives, not through any top-down planning in London. Chinese traders were drawn to the rubber trade in Asia. "Some started their own plantations," says Bauer, "while others brought seeds and consumer goods to the indige nous people of Malaya and Nether lands India (now Indonesia)." By the late Nineteen Thirties more than half the rubber acreage in Southeast Asia was owned by Asians. Foreign borrowing accounted for little ofthis: the acreage, says Bauer, "repre sented the results of capital forma tion through direct investment in the face of initially low incomes."

In West Africa, says Bauer, there were (and are) no European-owned plantations. Cocoa, ground nuts, cot ton and kola nuts have been pro duced on farms established, owned and operated by individual Africans. Local traders, financed by Europe ans, have provided necessary capi tal. The local trader, unhampered by government, "made available con sumer goods and production inputs, and provided the outlet for cash crops." Bauer quotes Sir Keith Han cock as rightly calling West Africa "the Traders' Frontier." A Fabian Legacy It was the triumph of Fabian ideas in Europe in the late Thirties that changed everything in West Africa and Malaysia for the worse. Govern ment marketing boards were set up with monopoly powers. The free trader was practically abolished. Little proprietors had to sell to the marketing boards at specified prices. The boards, with surpluses to use as the politicians saw fit, were, in a way, functioning as tax collectors. A younger generation of native intel lectuals journeyed to London to study economics under Fabian pro fessors such as Harold Laski. They returned home to become the advis ers to government. When, in the last years of British colonial rule, the sit uation was described to colonial sec retary Oliver Lyttleton and to An drew Cohen, the head of the African Development Department of the co lonial office, they remarked cyni cally that the African peasant had no future anyway.

So things stood in Africa when the British were busy turning over local governments to politicos such as Nkrumah. In a "one man, one vote, once" situation, Nkrumah used the Gold Coast-Ghana Cocoa Marketing Board as his financial power base for years to deadly effect. With traders 1985 REALITY AND RHETORIC 759 prohibited, the economy stagnated. Bauer writes ofWest Africa, but he is quite aware of the whole African and Third World-situation in var ious detail. Not all Third World countries are alike, but the foreign aid policies of the West have had the unfortunate effect of dragging them down to a dead level. The Third World is a political concept, ·not an economic one. Tanzania, in East Af rica, has good soil and good growing weather, but President Nyerere, a proponent of single party socialism, has used extensive aid from theWest to ruin his economy. He has driven his peasants into villages and col lectivized their farms. The result has been poor food production. In Zaire, another big aid recipient, President Mobuto has expelled independent traders. This has resulted in a re version to subsistence production.

The aid money from the West keeps Mobuto in power. Mobuto takes it as a bribe to keep him in the western political camp, but the money does not trickle down. There is plenty of lavish spending of aid money in the Third World, but Bauer asks how the poor benefit from such brand new capitals as Brasilia, Islamabad, Abuja in Nigeria and Do doma in Tanzania. New govern ment-owned airlines provide pres tige for the "in" politicos, but the vast majority of the people can't use them or even operate them. Bauer thinks it is a sophistry to say that foreign aid to the Third World keeps employment up i~ the donor countries. The provision of British ships to India, Poland and Vietnam in the Seventies did benefit labor and management in British shipyards, butthetaxpayersputoutthemone~ They will never get it back from the recipients of their largesse. Bauer thinks it would have been more sen sible to use the shipyards for other purposes.

Bauer blames the politicians for much of our trouble, but he does not exempt his fellow economists. They generalize on the basis of demo graphic change and forget such "core" things as wages and prices. It is our good fortune that Bauer has a "bully pulpit" in the House of Lords to tell us what is wrong. @l FREEDOM WITH JUSTICE: CATHOLIC SOCIAL THOUGHT AND LIBERAL INSTITUTIONS by Michael Novak (Harper & Row, San Francisco), 1984 253 pages _ $17.95 cloth) Reviewed by John K. Williams No DEFENDER of liberty can regard with equanimity the abhorrence of the free market in a free and open society displayed by many main stream church bodies and leaders. All such defenders of liberty are therefore indebted to Michael Novak for his volume, Freedom With Jus760 THE FREEMAN tice. While the work is self-con tained, it usefully supplements N0 vak's influential earlier work, The Spirit of Democratic Capitalism; in deed, men and women committed to economic and political freedom, and anxious to promote a creative inter change of viewpoints with clerical opponents of these freedoms, would do well to have both volumes on their bookshelves.

Part I of Freedom With Justice ex plores the relationship between eco nomics and religion, examines the tension between classical liberalism and Catholic social ethics, and re lates these analyses to two much dis cussed issues in contemporary West ern democracies: first, poverty and welfare, and second, the creation of employment. In Part II Novak proffers a de tailed exposition of Catholic social ethics and a no less detailed analysis of the thought of John Stuart Mill, described as "a .quintessential Lib eral." In the third and final section of his volume, Novak addresses "some of the problems with which Catholic social thought is bound to be wrestling during the rest of (the twentieth) century" -for example, the amelioration of poverty, the pro tection of human rights, and the fos tering of a sense of identity which, in a large and complex society, can not be mediated through "society as a whole."

Novak presents his readers with an abundance of precise and detailed documentation. Moral issues which no defender ofliberty can ignore, and moral insights which all such de fenders can welcome, inform almost every chapter of the book. No think ing person-religious, nonreligious, or antireligious; socialist, libertar ian, or conservative-could respon sibly shrug off the case Novak develops. It is, however, unlikely that any reader of the work would agree with Novak's stance in toto. Statist read ers will be dismayed by Novak's challenging of their dogmas. This re viewer found Novak's analysis ofhu man rights impressionistic, his de fense of a "safety-net" welfare system unconvincing, and his sur prisingly naive trust in "limited" in terventionism incomprehensible. Contemporary reformulations of classical liberalism-for example, that developed by Robert Nozick are, unfortunately, not discussed.

Novak issues a challenge to pro-so cialist clerics, and provides defend ers of liberty with ample ammuni tion to take the fight to local church communities. Agnostics might enjoy startling their neighbors by pur chasing several copies of Freedom With Justice and presenting them as Christmas gifts to their commu nity's clerics! But all readers of The Freeman-religious or nonreli gious-would do well carefully to study this volume. (j Index THE FREEMAN-Volume 35, January-December, 1985 Prepared by BE'ITINA 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 ABC of a market economy (Hazlitt) 2:68-74 ADAMSON, Michael The international debt problem: the case of Argentina. 12:732-736 AFRICA Agricultural technology, economic incentives and world food problems (Pasour) 7:427-433 Anti-apartheid threat (Davenport) 8:452-454 Essay on caring (Foley) 4:230-234 AFRICAN famine: the harvest of socialist agriculture (Osterfeld) 10:607-609 AGRICULTURAL technology, economic incentives and world food problems (Pasour) 7:427-433 AGRICULTURE Mrican famine: the harvest of socialist agriculture (Osterfeld) 10:607-609 Economic reality and U.S. government farm programs (Pasour) 6:325-331 Profit-maker-friend or foe? (Baetjer) 4:196-206 AMERICAN dream/heritage Disease from which civilizations die (Williams) 9:525-537 Growing pains (Barker) 12:743-748 Spirit of freedom (Bearce) 6:341-349 AMERICAN economic progress (Asmus & Billings) 8:455-464 AMERICA'S two elites (McDonald) 11:644-647 ANCIENT Chinese story (D. Russell) 2:111-119 ANDERSON, Bill Comparable worth: social justice or social transfer?

7:417-426 Industrial policy. 5:293-303 Terrorism. 9:554-563 See also Book reviews (Robinson) ANDERSON, C.W. Compulsory bargaining reviewed. 7:403-405 ANTI-APARTHEID threat (Davenport) 8:452-454 ARGENTINA The international debt problem: the case of Argentina (Adamson) 12:732-736 ASIA Agricultural technology, economic incentives and world food problems (Pasour) 7:427-433 Living in two Chinas (Russell) 11:648-654 See also Japan ASMUS, E. Barryand Billings,DonaldB. American economic progress. 8:455-464 Environmental problems and private property. 12:749-753 Human nature and human action. 10:600-602 The morality of capitalism. 9:541-549 AWENIUS, Robert The forgotten man. 3:153-158 B BAETJER, Howard, Jr. Is it fair? 8:451 Profit-maker-friend or foe? 4:196-206 BAIRD, Charles W. On the bishops and the market. 12:718-727 BARGER, Melvin D. See Book reviews (Geneen) BARKER, Ben Growing pains. 12:743-748 BASTIAT, Frederic-ideas of Ancient Chinese story (D. Russell) 2:111-119 Competition and capital (D. Russell) 1:25-33 Do machines destroy jobs? (D. Russell) 4:235-242 Legalized plunder (Read) 7:387 BATTLE for the mind (Opitz) 3:182-188 BEARCE, Robert The spirit of freedom. 6:341-349 BECHARA, Dennis Eminent domain and the rule of law. 5:273-282 Myth of national industrial policy. 8:498-506 BEYOND the market (Davenport) 1:4-8 BILLINGS, Donald B. (co-author) See Asmus BISHOPS' pastoral letter Catholic social teaching and the U.S. economy (Kern) 12:728-731 On the bishops and the market (Baird) 12:718-727 BLACK capitalists Negro and free enterprise (Still) 1:40-48 BOAZ, David Liberalism and change. 11:680-682 BOLICK, Clint Public lands and private incentives. 7:438-444 BORDELON, Michael A conservative declaration. 9:516-522 BOTA, Karoline (co-author) See Vanderleest BRADEN, Spruille For a moral revolution. 11:643 761 762 THE FREEMAN December BROWN, DAVID M.

The challenge of liberalism. 7:434-437 See also Book reviews (Newman; Sowell) BUREAUCRACY, bureaucratic management Growing pains (Barker) 12:743-748 Public lands and private incentives (Bolick) 7:438-444 c CAPITAL savings and investment Either we import capital or we export people (Velasco) 8:465-468 Laws against plant closings (Sennholz) 4:219-229 Ultimate source of wealth (Dykes) 8:479-483 CAPITALISM & socialism (Chapman) 5:304-316 CAPITALISM, liberalism and (Sennholz) 11:671-673 CAPITALISM, morality of (Asmus & Billings) 9:541-549 CAPITALISM: yes and no (Carson) 2:75-82 CARSON, Clarence B. Capitalism: yes and no. 2:75-82 A credit expansion economy. 3:141-152 Free enterprise: the key to prosperity. 10:584-599 CATCH the little foxes (Williams) 10:618-626 CATHOLIC social teaching and the U.S. economy (Kern) 12:728-731 CHALLENGE of liberalism (Brown) 7:434-437 CHAMBERLAIN, John. See Book reviews CHANGE, liberalism and (Boaz) 11:680-682 CHAPMAN, John L.

Capitalism & socialism. 5:304-316 CHARITY, voluntary, vs. political subsidies Essay on caring (Foley) 4:230-:234 Philanthropy and freedom (D.L. Peterson) 10:627-632 CHINA (Taiwan and Mainland) Living in two Chinas (D. Russell) 11:648-654 CIVILIZATIONS, disease from which [they] die (Williams) 9:525-537 CLASSICAL liberalism reconsidered: a symposium. 11:667-682. COBB, Joe Information in the market. 4:247-249 COMMUNICATIONS media America's two elites (McDonald) 11:644-647 COMMUNISM/socialism Some things to think about (Watkins) 4:209-214 COMPARABLE worth, for work of (McDonald) 7:415-416 COMPARABLE worth: social justice or social transfer? (B. Anderson) 7:417-426 COMPARABLE worth versus civil liberty: are feminists pro-choice? (Orient) 6:332-340 COMPETITION and capital (D. Russell) 1:25-33 COMPETITION in the prison business (Logan) 8:469-478 COMPULSORY bargaining reviewed (C.W. Anderson) 7:403-405 CONSERVATION/preservation/environment. See Private property CONSUMER sovereignty Demand for labor (Sennholz) 2:83-97 Entrepreneurship: the possible dream (W.H.

Peterson) 11:688-695 Laws against plant closings (Sennholz) 4:219-229 Morality of profit (C. Russell) 6:350-352 Something better (Summers) 10:579 COOPERATION. See Social cooperation CREDIT expansion economy (Carson) 3:141-152 o DASKAL, Steven E. Limited government-and the stability of nations. 4:215-218 DAVENPORT, John A. The anti-apartheid threat. 8:452-454 Beyond the market. 1:4-8 DECLARATIVE law (Fulda) 11:684-687 DEFICIT connection (Ross) 2:104-110 DEMAND for labor (Sennholz) 2:83-97 DEREGULATION, railroad (Vanderleest & Bota) 10:610-617 DEMOCRACY, consequences of America's two elites (McDonald) 11:644-647 DISEASE from which civilizations die (Williams) 9:525-537 DOOMSDAY syndrome, Club of Rome Pandora and hope (Williams) 7:388-402 DO machines destroy jobs (D. Russell) 4:235-242 DYKES, Charles The ultimate source of wealth. 8:479-483 E ECOWGY of entrepreneurship (Rydenfelt) 6:363-366 ECONOMIC development/progress Agricultural technology, economic incentives and world food problems (Pasour) 7:427-433 American economic progress (Asmus & Billings) 8:455-464 Capitalism & socialism (Chapman) 5:304-316 Either we import capital or we export people (Velasco) 8:465-468 Free enterprise: key to prosperity (Carson) 10:584-599 Pandora and hope (Williams) 7:388-402 Positive approach (D. Russell) 6:323 Ultimate source of wealth (Dykes) 8:479-483 ECONOMIC prediction and entrepreneurial success (D.L. Peterson) 9:550-553 ECONOMIC reality and U.S. government farm programs (Pasour) 6:325-331.

ECONOMICS, values/actions/principles Language traps (Greaves) 6:353-362 Piece of street wisdom (Williams) 8:484-497 ECONOMICS of medical care (YossiD 7:406-414 EDUCATION Pied Piper and our children (Williams) 5:260-272 EITHER we import capital or we export people (Velasco) 7:465-468 EMINENT domain and the rule of law (Bechara) 5:273-282 1985 INDEX 763 EMPLOYER of last resort (Sennholz) 1:49-55 ENERGY crisis Environmental problems and private property (Asmus & Billings) 12:749-753 ENTREPRENEURSHIP: the possible dream (W.H. Peterson) 11:688-695 ENTREPRENEURSHIP Agricultural technology, economic incentives and world food problems (Pasour) 7:427-433 American economic progress (Asmus & Billings) 8:455-464 Ecology of entrepreneurship (Rydenfelt) 6:363-366 Economic prediction and entrepreneurial success (D.L. Peterson) 9:550-553 Liberty and the entrepreneur (Gresham) 10:580-583 Negro and free enterprise (Still) 1:40-48 Profit-maker-friend or foe? (Baetjer) 4:196-206 ENVIRONMENTAL problems and private property (Asmus & Billings) 12:749-753 EQUALITY/egalitarianism Conservative declaration (Bordelon) 9:516-522 Justice versus "social justice" (Hospers) 1:9-24 Pied piper and our children (Williams) 5:260-272 ESSAY on caring (Foley) 4:230-234 F FEDERAL Reserve & FDIC Credit expansion economy (Carson) 3:141-152 FOLEY, Ridgway K., Jr.

Essay on caring. 4:230-234 FOR a moral revolution (Braden) 11:643 FOR work of comparable worth (McDonald) 7:415-416 FORGOTIEN man (Awenius) 3:153-158 FREE banking alternative (Wells & Scruggs) 2:98-103 FREE enterprise, Negro and (Still) 1:40-48 FREE enterprise, key to prosperity (Carson) 10:584-599 FREE market, morality and voluntarism ABC of a market economy (Hazlitt) 2:68-74 Beyond the market (Davenport) 1:4-8 Capitalism & socialism (Chapman) 5:304-316 Growing pains (Barker) 12:743-748 On the bishops and the market (Baird) 12:718-727 Pandora and hope (Williams) 7:388-402 Some things to think about (Watkins) 4:209-214 FREE markets and human freedom (D. Russell) 3:132-140 FREEDOM, individual America's two elites (McDonald) 11:644-647 Conservative declaration (Bordelon) 9:516-522 Free markets and human freedom (D. Russell) 3:132-140 Liberty and the entrepreneur (Gresham) 10:580 583 Limited government-and the stability of nations CDaskal) 4:215-218 Pied piper and our children (Williams) 5:260-272 Spirit of freedom (Bearce) 6:341-349 FREEDOM pages #15. Liberalism stands for freedom (Phelan) 1:3 #16. "I'm for the achiever" (Upton) 2:67 #17. Individual in society (Mises) 3:131 #18. Winners and losers (Summers) 4:195 #19. Security and freedom (Read) 5:259 #20. The positive approach (D. Russell) 6:323 #21. Legalized plunder (Read) 7:387 #22. Is it fair? (Baetjer) 8:451 #23. Three steps to freedom (Love) 9:515 #24. Something better (Summers) 10:579 #25. For a moral revolution (Braden) 11:643 #26. Production is a team effort (Greaves) 12:707 FULDA, Joseph S.

Declarative law. 11:684-687 G GERMANY, post World War II Inflation: Soviet style, 1945 (W.H. Peterson) 4:207-208 GETIING there (Williams) 12:708-717 GOVERNMENT intervention Capitalism & socialism (Chapman) 5:304-316 Declarative law (Fulda) 11:684-687 Economic reality and U.S. government farm programs (Pasour) 6:325-331 For a moral revolution (Braden) 11:643 Free enterprise: key to prosperity (Carson) 10:584-599 Interventionist liberalism and the fast lane (La Dow) 11:655-657 Limited government-and the stability of nations (Daskal) 4:215-218 Railroad deregulation (Vanderleest & Bota) 10:610-617 Terrorism (B. Anderson) 9:554-563 GOVERNMENT licensing/privileges/cartels Economics of medical care (YossiO 7:406-414 Occupational licensing (Yandell) 1:56-59 GOVERNMENT, limited-rule of law Catch the little foxes! (Williams) 10:618-626 Disease from which civilizations die (Williams) 9:525-537 Liberalism and limited government (Kirzner) 11:678-680 Limited government-and the stability of nations (Daskal) 4:215-218 GOVERNMENT spending Ancient Chinese story (D. Russell) 2:111-119 Deficit connection (Ross) 2:104-110 Employer of last resort (Sennholz) 1:49-55 Forgotten man (Awenius) 3:153-158 Industrial'policy (B. Anderson) 5:293-303 GOW, Haven Bradford. See Book reviews (Samenow) GREAVES, Bettina Bien ' Language traps. 6:353-362 The meaning of liberalism. 11:668 Production is a team effort. 12:707 GRESHAM, Perry E.

Liberty and the entrepreneur: 10:580-583 GROWING pains (Barker) 12:743-748 764 THE FREEMAN December H HAMILTON, Charles H. See Book reviews (Maddox & Lilie) HAWAII, land ownership Eminent domain and the rule of law (Bechara) 5:273-282 HAYEK, F.A.-ideas of Catholic social teaching and the U.S. economy (Kern) 12:728-731 HAZLITT, Henry The ABC of a market economy. 2:68-74 The limitations of profit-sharing. 9:538-540 HIGHWAYS: public problems, private solutions (Semmens) 3:172-181 HOSPERS, John Justice versus "social justice" (Hospers) 1:9-24 HUMAN nature and human action (Asmus & Billings) 10:600-602 IDEAS, importance of Getting there (Williams) 12:708-717 Three steps to freedom (Love) 9:515 IDEAS, innovations Economic prediction and entrepreneurial success (D.L. Peterson) 9:550-553 Entrepreneurship: the possible dream (W.H. Peterson) 11:688-695 Liberty and the entrepreneur (Gresham) 10:580-583 "I'M for the achiever" (Upton) 2:67 INDIVIDUAL action/enterprise/opportunity Battle for the mind (Opitz) 3:182-188 "I'm for the achiever" (Upton) 2:67 Liberalism and individualism (Wortham) 11:673-675 Negro and free enterprise (Still) 1:40-48 Pied piper and our children (Williams) 5:260-272 Redigging old wells (Williams) 6:367-379 INDIVIDUAL in society (Mises) 3:131 INDUSTRIAL policy (B. Anderson) 5:293-303 INDUSTRIAL policy, myth of (Bechara) 8:498-506 INDUSTRIALIZATION, "industrial revolution"

Do machines destroy jobs? (D. Russell) 4:235-242 Should American business give up smoking? (North) 11:658-666 INFLATION Inflation: Soviet style, 1945 (W.H. Peterson) 4:207 208 Some evils of inflation (Sennholz) 5:283-292 See also Money INFORMATION in the market (Cobb) 4:247-249 INTERNATIONAL debt problem: the case of Argentina (Adamson) 12:732-736 INTERNATIONAL relations Limited government-and the stability of nations (Daskal) 4:215-218 See also Trade INTERVENTIONIST liberalism and the fast lane (La Dow) 11:655-657 IS it fair? (Baetjer) 8:451 J JAPAN Industrial policy (B. Anderson) 5:293-303 Myth of national industrial policy (Bechara) 8:498-506 Two-wheeler lesson (Watkins) 9:523-524 JOHN Witherspoon: "animated son of liberty" (R.A. Peterson) 12:737-742 JUSTICE/fairness, rule of law Catch the little foxes! (Williams) 10:618-626 Is it fair? (Baetjer) 8:451 On the bishops and market (Baird) 12:718-727 JUSTICE versus "social justice" (Hospers) 1:9-24 K KERN, William S.

Catholic social teaching and the U.S. economy. 12:728-731 KEYNES, John Maynard-ideas of Demand for labor (Sennholz) 2:83-97 Ecology of entrepreneurship (Rydenfelt) 6:363-366 KIRZNER, Israel Liberalism and limited government. 11:678-680 KNOWLEDGE, importance of Industrial policy (B. Anderson) 5:293-303 Piece of street wisdom (Williams) 8:484-497 Pied piper and our children (Williams) 5:260-272 L LABOR, labor unions, wage rates Comparable worth: social justice or social transfer (B. Anderson) 7:417-426 Comparable worth versus civil liberty: are feminists pro-choice? (Orient) 6:332-340 Compulsory bargaining reviewed (C.W. Anderson) 7:403-405 Demand for labor (Sennholz) 2:83-97 Employer of last resort (Sennholz) 1:49-55 For work of comparable worth (McDonald) 7:415-416 Justice versus "social justice" (Hospers) 1:9-24 Laws against plant closings (Sennholz) 4:219-229 Limitations of profit-sharing (Hazlitt) 9:538-540 Protectionism and unemployment (Sennholz) 3:159-171 Three faces of unionism (Sennholz) 9:564-573 LA DOW, Charles R.

Interventionist liberalism and the fast lane. 11: 655-657 LAND reform/development Mrican famine: the harvest of socialist agriculture (Osterfeld) 10:607-609 Eminent domain and the rule of law (Bechara) 5:273-282 Environmental problems and private property (Asmus & Billings) 12:749-753 Public lands and private incentives (Bolick) 7:438-444 1985 INDEX 765 LANGUAGE traps (Greaves) 6:353-362 LAWS against plant closings (Sennholz) 4:219-229 LEGALIZED plunder (Read) 7:387 LET'S liberate money (Ross) 1:34-39 LEITERS to the editor. 11:696-698; 12:754-756 LIBERALISM and capitalism (Sennholz) 11:671-673 LIBERALISM and change (Boaz) 11:680-682 LIBERALISM and individualism (Wortham) 11:673-675 LIBERALISM and limited government (Kirzner) 11:678-680 LIBERALISM and religion (Opitz) 11:676-678 LffiERALISM,challengeof (Brown)7:434-437 LIBERALISM, classical Symposium On new edition of Ludwig von Mises' book. 11:667-682 LIBERALISM, meaning of (Greaves) 1:668 LIBERALISM by Ludwig von Mises, its place in literature (Raico) 11:669-671 LIBERALISM stands for freedom (Phelan) 1:3 LIBERTY and the entrepreneur (Gresham) 10:580-583 LIMITATIONS of profit-sharing (Hazlitt) 9:538-540 LIMITED government-and the stability of nations (Daskal) 4:215-218 LIVING in two Chinas (D. Russell) 11:648-654 LOGAN, Charles H.

Competition in the prison business. 8:469-478 LOVE, Robert D. Three steps to freedom. 9:515 M MARCUS, Kenneth L. See Book reviews (Butler, Sowell) MAITHEWS, Buddy. See Book reviews (Davis) McDONALD, Kenneth America's two elites. 11:644-647 For work of comparable worth. 7:415-416 Routing the Fabians. 10:603-606 MEANING of liberalism (Greaves) 11:668 MEDICAL care, economics of (Yossif) 7:406-414 MEXICO Either we import capital or we export people (Velasco) 8:465-468 MIND, battle for the (Opitz) 3:182-188 MISES, Ludwig VOn The individual in society. 3:131 Liberalism, symposium on. 11:667-682 MONEYlbanking/inflation Credit expansion economy (Carson) 3:141-152 Free banking alternative (Wells & Scruggs) 2:98-103 Inflation: Soviet style, 1945 (W.H. Peterson) 4:207-208 Let's liberate money (Ross) 1:34-49 Some evils of inflation (Sennholz) 5:283-292 MORALITY of capitalism (Asmus & Billings) 9:541-549 MORALITY of profit (C. Russell) 6:350-352 MORALITY/religionlethics Battle for the mind (Opitz) 3:182-188 Beyond the market (Davenport) 1:4-8 Catholic social teaching and the U.S. economy (Kern) 12:728-731 Disease from which civilizations die (Williams) 9:525-537 Liberalism and religion (Opitz) 11:677-678 On the bishops and the market (Baird) 12:718-727 Philanthropy and freedom (D.L. Peterson) 10:627-632 Set the standard high (D.L. Peterson)4:243-246 MOTORCYCLES Two-wheeler lesson (Watkins) 9:523-524 MYTH of national industrial policy (Bechara) 8:498-506 N NEGRO and free enterprise: a march forward singly (Still) 1:40-48 NORTH, Gary Should American business give up smoking?

11:658-666 o OCCUPATIONAL licensing (Yandell) 1:56-59 ON the bishops and the market (Baird) 12:718-727 OPITZ, Edmund A. Battle for the mind. 3:182-188 Liberalism and religion. 11:676-678 ORIENT, Jane M. Comparable worth versus civil liberty: are feminists pro-choice? 6:332-340 OSTERFELD, David Mrican famine: the harvest of socialist agriculture. 10:607-609 p PANDORA and hope (Williams) 7:388-402 PASOUR, E.C., Jr. Agricultural technology, economic incentives and world food problems. 7:427-433 Economic reality and U.S. government farm programs. 6:325-331 PETERSON, Dennis L. Economic prediction and entrepreneurial success. 9:550-553 Philanthropy and freedom. 10:627-632 Set the standard high. 4:243-246 PETERSON, Robert A. John Witherspoon: "animated SOn of liberty" 12:737-742 PETERSON, William H. Entrepreneurship, the possible dream. 11:688-695 Inflation: Soviet style, 1945. 4:207-208 See also Book reviews (Diebold) 766 THE FREEMAN December PHELAN, Towner Liberalism stands for freedom. 1:3 PHILANTHROPY and freedom (D.L. Peterson) 10:627-632 PHILOSOPHY, ideology Interventionist liberalism and the fast lane (La Dow) 11:655-657 PIECE of street wisdom (Williams) 8:484-497 PIED Piper and our children (Williams) 5:260-272 PLACE [in literature] of Mises' Liberalism (Raico) 11:669-671 PLANT closings, laws against (Sennholz) 4:219-229 POLITICAL action/pressures America's two elites (McDonald) 11:644-647 Getting there (Williams) 12:708-717 Routing the Fabians (McDonald) 10:603-606 Three faces of unionism (Sennholz) 9:564-573 POSITIVE approach (D. Russell) 5:323 POVERTY, government programs and Employer of last resort (Sennholz) 1:49-55 Forgotten man (Awenius) 3:153-158 On the bishops and the market (Baird) 12:718-727 'Thrrorism (B. Anderson) 9:554-563 PRISON business, competition in (Logan) 8:469-478 PRIVATE property Capitalism: yes and no (Carson) 2:75-82 Eminent domain and the rule of law (Bechara) 5:273-282 Free markets and human freedom (D. Russell) 3:132-140 Public lands and private incentives (Bolick) 7:438-444 Redigging old wells (Williams) 6:367-379 PRIVATIZATION of public enterprises Competition in the prison business (Logan) 8:469-478 Getting there (Williams) 12:708-717 Highways: public problems, private solutions (Semmens) 3:172-181 Railroad deregulation (Vanderleest & Bota) 10:610-617 Routing the Fabians (McDonald) 10:603-606 PRODUCTION is a team effort (Greaves) 12:707 PROFIT and loss system ABC of a market economy (Hazlitt) 2:68-74 Entrepreneurship: the possible dream (W.H. Peterson) 11:688-695 Information in the market (Cobb) 4:247-249 Morality of profit (C. Russell) 6:350-352 PROFIT-MAKER-friend or foe? (Baetjer) 4:196-206 PROFIT-SHARING, limitations of (Hazlitt) 9:538-540 PROSPERITY, free enterprise, key to (Carson) 10:584-599 PROTECTIONISM Protectionism and unemployment (Sennholz) 3:159-171 Should American business give up smoking?

(North) 11:658-666 Trade barriers (Shannon) 2:120-122 PUBLIC enterprises/transportation/highways Highways: public problems, private solutions (Semmens) 3:172-181 PUBLIC lands and natural resources Environmental problems and private proptery (Asmus & Billings) 12:749-753 PUBLIC lands and private incentives (Bolick) 7:438-444 R RAICO, Ralph The place of Mises' Liberalism. 11:669-671 RAILROAD deregulation (Vanderleest & Bota) 10:610-617 READ, Leonard E. Legalized plunder. 7:387 Security and freedom. 5:259 RECONSTRUCTION Finance Corporation (RFC) Myth of national industrial policy (Bechara) 8:498-506 REDIGGING old wells (Williams) 6:367-379 RELIGION, liberalism and (Opitz) 11:676-678 RESPONSIBILITY, free market and Declarative law (Fulda) 11:684-687 ROGERS, Tommy W. See Book reviews (Weaver) ROSS, Ernest G. The deficit connection. 2:104-110 Let's liberate money. 1:34-39 ROUTING the Fabians (McDonald) 10:603-606 RUSSELL, Craig The morality of profit. 6:350-352 RUSSELL, Dean An ancient Chinese story. 2:111-119 Competition and capital. 1:25-33 Do machines destroy jobs? 4:235-242 Free markets and human freedom. 3:132-140 Living in two Chinas. 11:648-654 The positive approach. 6:323 RYDENFELT, Sven The ecology of entrepreneurship. 6:363-366 S SCRUGGS, L.S. (co-author). See Wells SECURITY and freedom (Read) 5:259 SELF -IMPROVEMENT/education Getting there (Williams) 12:708-717 Set the standard high (D.L. Peterson) 4:243-246 SEMMENS, John Highways: public problems, private solutions.

3:172-181 SENNHOLZ, Hans The demand for labor. 2:83-97 Employer of last resort. 1:49-55 Laws against closings. 4:219-229 Liberalism and capitalism. 11:671-673 Protectionism and unemployment. 3:159-171 Some evils of inflation. 5:283-292 The three faces of unionism. 9:564-573 SET the standard high (D.L. Peterson) 4:243-246 .

1985 INDEX 767 SHANNON, Russell Trade barriers. 2:120-122 SHOULD American business give up smoking? (North) 11:658-666 SMOKESTACK industries Should American business give up smoking? (North) 11:658-666 SNOBBERY Catch the little foxes! (Williams) 10:618-626 SOCIAL cooperation ABC of a market economy (Hazlitt) 2:68-74 Morality of capitalism (Asmus & Billings) 9:541-549 Production is a team effort (Greaves) 12:707 Redigging old wells (Williams) 6:367-379 "SOCIAL justice" Catholic social teaching and the U.S. economy (Kern) 12:728-731 "SOCIAL justice" versus justice (Hospers) 1:9-24 SOCIALISM, capitalism & (Chapman) 5:304-316 SOME evils of inflation (Sennholz) 5:283-292 SOME things to think about (Watkins) 4:209-214 SOMETHING better (Summers) 10:579 SPffiIT of freedom (Bearce) 6:341-349 STATISTICS Economic prediction and entrepreneurial success (D.L. Peterson) 9:550-553 STILL, Judith Anne The Negro and free enterprise: a march forward singly. 1:40-48 SUMMERS, Brian Something better. 10:579 Winners and losers. 4:195 SUMNER, William Graham-ideas of Forgotten man (Awenius) 3:153-158 T TAXATION, taxpayer Deficit connection (Ross) 2:104-110 Forgotten man (Awenius) 3:153-158 TERRORISM (B. Anderson) 9:554-563 THORNTON, Robert M. See Book reviews (Royster) THREE faces of unionism (Sennholz) 9:564-573 THREE steps to freedom (Love) 9:515 TRADE barriers (Shannon) 2:120-122 TRADE/exchange, domestic/international Competition and capital (D. Russell) 1:25-33 Economic reality and U.S. government farm programs (Pasour) 6:325-331 Either we import capital or we export people (Velasco) 8:465-468 International debt problem: the case of Argentina (Adamson) 12:732-736 Living in two Chinas (Russell) 11:648-654 Protectionism and unemployment (Sennholz) 3:159-171 Should American business give up smoking?

(North) 11:658-666 Some evils of inflation (Sennholz) 5:283-292 Two-wheelers (Watkins) 9:523-524 Winners and losers (Summers) 4:195 TRANSFER society Capitalism & socialism (Chapman) 5:304-316 Comparable worth: social justice or social transfer? (B. Anderson) 7:417-426 Terrorism (B. Anderson) 9:554-563 'rRANSPORTATION Highways: public problems, private solutions (Semmens) 3:172-181 'TWO-WHEELER lesson (Watkins) 9:523-524 U ULTIMATE source of wealth (Dykes) 8:479-483 UNDEVELOPED countries. See Economic development UNEMPLOYMENT, causes of Demand for labor (Sennholz) 2:83-97 Protectionism and unemployment (Sennholz) 3:159-171 U.S. HISTORY American economic progress (Asmus & Billings) 8:455-464 Spirit of freedom (Bearce) 6:341-349 John Witherspoon: "animated son of liberty" (R.A. Peterson) 12:737-742 U.S. SUPREME Court Eminent domain and the rule of law (Bechara) 5:273-282 UPTON, Miller "I'm for the achiever." 2:67 v VANDERLEEST, Henry W. & Bota, Karoline Railroad deregulation. 10:610-617 VELASCO, Gustavo R.

Either we import capital or we export people. 8:465-468 VOLUNTARISM, freedom of exchange Human nature and human action (Asmus & Billings) 10:600-602 Morality of capitalism (Asmus & Billings) 9:541-549 On the bishops and the market (Baird) 12:718-727 W WATKINS, Hal Some things to think about. 4:209-214 The two-wheeler lesson. 9:523-524 WELLS, Donald R. & Scruggs, L.S. The free banking alternative. 2:98-103 WILLIAMS, John K. Catch the little foxes! 10:618-626 The disease from which civilizations die. 9:525-537 Getting there. 12:708-717 A piece of street wisdom. 8:484-497 The Pied Piper and our children. 5:260-272 Pandora and hope. 7:388-402 Redigging old wells. 6:367-379 See also Book reviews (Jevons, Hill & Dale; Novak) 768 THE FREEMAN WINNERS and losers (Summers) 4:195 WITHERSPOON, John: "Animated son of liberty" (R.A. Peterson) 12:737-742 WOMEN Comparable worth: social justice or social transfer (B. Anderson) 7:417-426 Comparable worth versus civil liberty: are feminists pro-choice? (Orient) 6:332-340 For work of comparable worth (McDonald) 7:415-416 WORTHAM, Anne Liberalism and individualism. 11:673-675 y YANDELL, Dirk Occupational licensing. 1:56-59 YOSSIF, George The economics of medical care. 7:406-414 BOOK REVIEWS (Reviewer'sname in parentheses) BAUER, P. T., Reality and Rhetoric (Chamberlain) 12:757-759 BUTLER, Eamonn. Hayek: his contribution to the political and economic thought of our time (Marcus) 11:702-703 DALE, O. (co-author) See Hill DAVIS, John Jefferson. Your wealth in God's world (Matthews) 2:128 DIEBOLD, John. Making the future work (W.H. Peterson) 8:511-512 DIETZE, Gottfried. Liberalism proper and proper liberalism (Chamberlain) 11:699-701 EFRON, Edith. The apocalyptics: cancer and the big lie (Chamberlain) 3:189-191 FULLER, Edmund, ed. The essential Royster: a Vermont Royster reader (Thornton) 10:638-639 GENEEN, Harold with Alvin Moscow. Managing (Barger) 2:126-128 GILDER, George. The spirit of enterprise (Chamberlain) 1:60-63 HART, Benjamin. Poisoned Ivy (Chamberlain) 2:125 HAYEK, Friedrich A. von. The essence of . ..

Nishiyama & Leube, eds. (Chamberlain) 10:634-636 ___. His contribution to the political and economic thought of our time by Eamonn Butler (Marcus) 11:702-703 HILL, K. & Dale, O. Death on demand (Williams) 11:703-704 JEVONS, Marshall. Murder at the margin (Williams) 11:703-704 KEMP, Jack. The American idea.' ending limits to growth (Chamberlain) 6:380-382 LEUBE, Kurt R. (co-editor) See Nishiyama LILIE, Stuart A. (co-author) See Maddox MADDOX, William S. and Lilie, Stuart A. Beyond liberal and conservative (Hamilton) 6:383-384 MISES, Ludwig von. Liberalism: in the classical tradition (symposium) 11:667"':'682 MORGAN, Richard E. Disabling America.' the "rights industry" in our time (Chamberlain) 9:574-576 MOSCOW, Alvin (co-author) See Geneen NEWMAN, Stephen. Liberalism at wit's end (Brown) 7:434-437 NISHIYAMA, Chiaki & Leube, Kurt R., eds. The essence of Hayek (Chamberlain) 10:634-636 NOVAK, Michael. Freedom with Justice (Williams) 12:759-760 PINES, Burton. Back to basics (Chamberlain) 2:125 RABUSHKA, Alvin. From Adam Smith to the wealth of America (Chamberlain) 8:507-509 ROBINSON, Logan. An American in Leningrad (B. Anderson) 8:509-511 ROYSTER, Vermont. The Essential . .. Fuller, ed.

(Thornton) 10:638-639 RUSSELL, Dean. Government and legal plunder: Bastiat brought up to date (Chamberlain) 7:445 447 RYDENFELT, Sven. A pattern for failure: socialist economies in crisis (Chamberlain) 5:318-320 SAME NOW, Stanton. Inside the criminal mind (Gow) 4:253-254 SOWELL, Thomas. Civil rights: rhetoric or reality? (Brown) 1:63-64 ___. Marxism: philosophy and economics (Marcus) 10:637-638 TYRRELL, R. Emmett. The liberal crack-up (Chamberlain) 2:123-125 WATTENBERG, Ben. The good news is the bad news is wrong (Chamberlain) 4:251-253 WEAVER, Richard N. Ideas have consequences (Rogers) 4:25~-256

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Title: The Freeman 1985

Author: Foundation for Economic Education

First published: 1950

Series: The Freeman, volume 35

Source file: The Freeman 1985.pdf

Source page: https://freecapitalists.org/books/the-freeman-1985/

Converted: 2026-08-09 by The Liberty Archive (freecapitalists.org), converter v6

Table of Contents

The Freeman 1985

- Liberalism Stands for Freedom
- Beyond the Market; J. Davenport
- Justice versus Social Justice; J. Hospers
- Competition and Capital; D. Russell
- Let's Liberate Money; E. G. Ross
- The Negro and Free Enterprise; J. A. Still
- Employer of Last Resort; H. Sennholz
- Occupational Licensing; D. Yandell
- Book Reviews

February

- I'm for the Achiever
- The ABC of a Market Economy
- Capitalism: Yes and No; C. Carson
- The Demand for Labor; H. Sennholz

- The Free Banking Alternative; D. Wells and L.S. Scruggs

- The Deficit Connection; E. G. Ross
- The Ancient Chinese Story; D. Russell
- Trade Barriers; R. Shannon
- Book Reviews

March

- The Individual in Society
- Free Markets and Human Freedom; D. Russell
- A Credit Expansion Economy; C. Carson
- The Forgotten Man; R. Awenius
- Protectionism and Unemployment; H. Sennholz
- Highways; J. Semmens
- Battle for the Mind; E. Opitz
- Book Reviews

April

- Winners and Losers
- Profit Maker; H. Beetjer, Jr.
- Inflation: Soviet Style; W. Peterson
- Some Things to Think About; H. Watkins
- Limited Government; S. Daskal
- Laws Against Plant Closings; H. Sennholz
- Essay on Caring; R. Foley, Jr.
- Do Machines Destroy Jobs? D. Russell
- Set the Standard High; D. Peterson
- Information in the Market; J. Cobb
- Book Reviews

May

- Security and Freedom

- The Pied Piper and Our Children; J. K. Williams

- Eminent Domain and the Rule of Law; D. Bechara

- Some Evils of Inflation; H. Sennholz
- Industrial Policy; B. Anderson
- Capitalism and Socialism; J. Chapman
- Book Reviews

June

- The Positive Approach

- Economic Reality; E.C. Passour, Jr.

- Comparable Worth verus Civil Liberty; J. Orient

- The Spirit of Freedom; R. Bearce
- The Morality of Profit; C. Russell
- Language Traps; B. B. Greaves

- The Ecology of Entrepreneurship; S. Rydenfelt

- Redigging Old Wells; J. Williams

- Book Reviews

July

- Legalized Plunder

- Pandora and Hope; J. Williams

- Compulsive Bargaining Reviewed; C. W. Anderson

- The Economics of Medical Care; G. Yossif
- For Work of Comparable Worth; K. McDonald
- Comparable Worth; B. Anderson
- Agricultural Technolog; E. C. Passour, Jr.
- The Challenge of Liberalism; D. Brown

- Public Laws and Provate Imcentives; C. Bolick

- Book Reviews

August

- Is it Fair?

- The Anti-Apartheid Thread; J. Davenport

- American Economic Progress; E Asmus and D. Billings

- Wither We Import Capital or We Export People; G. Velasco

- Competition in the Prison Business; C. Logan

- The Ultimate Source of Wealth; C. Dykes

- A Piece of Street Wisdom; D. Williams

- The Myth of National Industrial Policy; D. Bechara

- Book Reviews

September

- Three Steps to Freedom
- A Conservative Declaration; M. Bardelon
- The Two-Wheeler Lesoon; H. Watkins

- The Disease from which Civiliazations Die; J. Williams

- The Limitations of Profit-Sharing; H. Hazlitt

- The Morality of Capitalism; D Asmus and D. Billings

- Economic Prediction; D. Peterson
- Terrorism; B. Anderson
- The Three Faces of Unionism; H. Sennholz
- Book Reviews

October

- Something Better
- Liberty and the Entrepreneur; P. Gresham
- Free Enterprise; C. Carson

- Human Nature and Human Action; E. Asmus and D. Billins

- Routing the Fabians; K. McDonald

- African Famine; D. Osterfled

- Railroad Regulation; D. Vanderleest and K. Bota

- Catch the Little Foxes; J. Williams
- Philanthropy and Freedom; D. Peterson
- Book Reviews

November

- For a Moral Revolution
- America's Two Entities; K. McDonald
- Living in Two Chinas; D. Russell

- Interventionist Liberalisml and the Fast Lane

- Should American Business Give Up Smoking; G. North

- Classical Liberalism Reconsidered: A Symposium

- Declarative Law; J. Fulda

- Entrepreneurship, the Possible Dream; W. Peterson

- Book Reviews

December

- Production is a Team Effort
- Getting There; J. K. Williams
- On the Bishops and the Market; C. Baird
- Catholic Social Teaching; W. Kern
- The International Debt Problem; M. Adamson
- John Witherspoon; R. Peterson
- Growing Pains; B. Barker

- Environmental Problems; E. B. Asmus and D. Billings

- Book Reviews

Index
Book Reviews
About this edition