===== PAGE 1 ===== [ January 1998 Vol. 48, No. 1 1] THEFREEMAN IDEAS ON LIBERTY RA FEATURES 4 High Plains Drifters: Politicians’ Lucrative Protection Racket by Fred S. McChesney The fine art of political extortion. 10 White Magic by Leonard E. Read The good “magic” wrought by free people and free markets. 13 Economics, Law, and Personal Relationships by David N. Laband and John P. Sophocleus Economics and contract law have remedies for a woman scorned. 16 The Tobacco Deal: Myths and Misconceptions by Robert A. Levy Constitutional implications of the proposed federal settlement. 24 Roads Without the State by Peter Samuel Relying on the market is the best route. 31 Who Pays the Price for Motherhood? by Ross Levatter and Rebecca Geshelin Insuring for predictable events—including pregnancy—makes bad economic sense. 37 Henry Ford and the Triumph of the Auto Industry by Burton Folsom How Ford improved quality, cut prices, and put millions of average Americans on wheels. 43 Democracy Would Doom Hong Kong by John T. Wenders The difference between freedom and democracy. 46 Elections, Extortion, and Unions by Charles W. Baird Countering a new assault by the American union movement. 48 One Freedom by Russell Madden Teaching students about the virtues—and indivisibility—of freedom. 51 Individualism and Freedom: Vital Pillars of True Communities by Edward W. Younkins Why individual liberty is indispensable for strong voluntary communities. COLUMNS Center NOTES from FEE—BIll Gates, Philanthropist by Donald J. Boudreaux 22 IDEAS and CONSEQUENCES—Food for Thought by Lawrence W. Reed 34 POTOMAC PRINCIPLES—GIobal Politics, Political Warming by Doug Bandow 54 ECONOMICS on TRIAL—Why Are Austrians Unusually Bearish? by Mark Skousen DEPARTMENTS 2 Perspective—Sheldon Richman 57 Book Reviews «Is Politics Insoluble? by Henry Hazlitt, edited by Felix Livingston, reviewed by George C. Leef; New York by the Numbers: State & City in Perpetual Crisis by Raymond J. Keating, reviewed by William H. Peterson; Unintended Consequences by John Ross, reviewed by John Hospers; The Big Lie: What Every Baby Boomer Should Know About Social Security and Medicare by A. Haeworth Robertson, reviewed by John Attarian; The Menace of Multiculturalism by Alvin J. Schmidt, reviewed by Steven Yates; A Matter of Interpretation: Federal Courts and The Law by Antonin Scalia, reviewed by Jiirgen Skoppek. ===== PAGE 2 ===== THEFREEMAN IE — Li PERSPECTIVE Ring in the New! Published by The new year reminds us that the turn of the The Foundation for Economic Education : : : Irvington-on-Hudson, NY 10533 millennium approaches. (That is true whether Phone (914) 591-7230 FAX (914) 591-8910 you celebrate the occasion in 2000 or 2001.) E-mail: freeman@westnet.com Let’s not forget that it is also the end of the FEE Home Page: htp://www.fee.org century that Paul Johnson dubbed the century President: Donald J. Boudreaux of politics. Will it be succeeded by the century Editor: Sheldon Richman of liberty? Developments are mixed. There Managing Editor: Beth A. Hoffman seems to be a new appreciation of the wonders Editor Emeritus of the free market and a wider understanding of Paul L. Poirot the flaws of government control of peaceful Book Review Editor fo George C. Leef activity, . Editorial Assistant Still, with all that, I don’t yet sense that the Mary Ann Murphy freedom philosophy is about to be embraced in Columnists substantial measure. People don’t yet seem will- Doug Bandow ing to give up subsidies and other benefits from government. They don’t even show curiosity over whether the amount they pay for everyone Lawrence W. Reed Mark Skousen Contributing Editors . ) Charles W. Baird else’s benefits outweighs whatever they receive. Peter J. Boettke : I wonder if most people realize how pervasive Clarence B. Carson government is. Thomas J. DiLorenzo What this means is that we who cherish liber- Burton W. Folsom, Jr. ty have our work cut out for us. It may seem Joseph S. Fulda daunting. But the consequences for us and for Bettina Bien Greaves our children make the effort worth the candle. John Hospers Daniel B. Klein * oxox Dwight R. Lee Campaign-finance abuse has been much in Tibor R. Machan the news of late. Typically, when we think of big Wendy McEI I" . . . ° on o No oo donors to political campaigns, we conjure up an ona as . . . . . Edand 2. Opitz image of someone delivering a contribution to a James L. Payne candidate or political party in the hope that a William H. Peterson favored subsidy, regulation, or trade restriction Jane S. Shaw will be approved. In these pages, Fred McChes- Richard H. Timberlake ney of Cornell University takes a fresh look at Walter Williams the matter and comes up with a fascinating twist. The Freeman is the monthly publication of The Foundation for Eco- You might not look at the activities of Congress nomic Education, Inc., Irvington-on-Hudson, NY 10533. FEE, in the same way again. established in 1946 by Leonard E. Read, is a non-political, educational champion of private property, the free market, and limited government. The year 1998 marks the centenary of the FEE is classified as a 26 USC 501(c)(3) tax-exempt organization. . . Copyright © 1998 by The Foundation for Economic Education, Per- birth of FEE founder Leonard E. Read (making mission is granted to reprint any article in this issue, provided credit is H : given and two copies of the reprinted material are sent to FEE. it appropriate, p erhaps, to start the century of The costs of Foundation projects and services are met through dona- liberty two years early). Our yearlong Read ret- tions, which are invited in any amount. Donors of $30.00 or more . . . . receive a subscription to The Freeman. For foreign delivery, a donation rospective begins with a 1956 selection that cel- of $45.00 a year is suggested to cover mailing costs. Student subscrip- : : sos ck tions are $10.00 for the nine-month academic year; $5.00 per semester. ebrates social cooperation and the division of Additional copies of this issue of The Freeman are $3.00 each. labor Bound volumes of The Freeman are available from The Foundation } . for calendar years 1972 to date. The Freeman is available in microform What can economics tell us about the law as from University Microfilms, 300 N. Zeeb Rd., Ann Arbor, MI 48106. , . . . . it applies to personal relationships? David Laband and John Sophocleus of Auburn Univer- sity think it can tell us plenty. They look at two ===== PAGE 3 ===== EE PERSPECTIVE recent law cases involving engagement and of the great liberators in history. The details of marriage, and come up with some interesting, his life and business philosophy are fascinating maybe controversial, results. and inspiring. And they are well told in these Advocates of the freedom philosophy no pages by Burton Folsom, who has distinguished doubt are uneasy with the federal government’s himself as an engaging biographer of American attempts to maneuver the tobacco industry into entrepreneurs. an “agreement” that would, among other things, Hong Kong is now part of China, of course, provide lots of money for the treasury. Robert and China is not exactly the world’s most Levy provides the details that support that prominent exponent of democracy. The public- uneasiness. As he shows, the process is an opinion molders have been wringing their hands assault on the rule of law and the Constitution. over the dim prospects for democracy in the Everyone should be worried by the eventual prosperous former British colony. John Wen- outcome and the precedent it establishes. ders of the University of Idaho puts the matter in Peter Samuel, editor of the newsletter Toll perspective by pointing out that Hong Kong got Roads, is an indefatigable researcher and writer rich without democracy. on the subject of the privatization of roads. His Charles Baird of California State University article in this issue ranges widely—from history at Hayward is an economist who keeps a sharp to politics to economics—in his exploration of eye on labor unions. He reports that it may soon the question: can we have roads if the govern- be possible for unions to establish themselves in ment doesn’t build or run them? a company without even a secret-ballot vote by Nothing is more twisted out of shape in the the workers. Is this a last-ditch attempt by the United States than medical insurance. Because fading union movement to forestall the of the perverse incentives created by govern- inevitable? ment intervention, people use medical insur- If you ask college students what freedom is, ance in ways they would never use it in a free you are likely to get an assortment of curious market. Imagine buying an auto-insurance pol- answers. Russell Madden of Mt. Mercy College icy that covers replacement headlights and oil reports the results he got with his students. filters. It might sound nice—until you saw the Does individualism conflict with communi- premium. At that point, you would undoubted- ties? The communitarians say yes. But Edward ly decide that the policy is not worthwhile. As Younkins of Wheeling Jesuit University says Ross Levatter and Rebecca Geshelin explain no. On the contrary, he thinks individual liberty herein, medical insurance makes no sense for makes for the best kind of community. People predictable events. But government has manip- unfamiliar with the freedom philosophy may ulated the law to make it appear as though it is find that paradoxical, but this article will sort it sensible. The authors apply this insight to preg- out. nancy benefits. Also in this issue: a full complement of book Henry Ford was one of America’s great pio- reviews and provocative contributions from our neering entrepreneurs. Last month, philosopher regular columnists: Larry Reed on privatization, Loren Lomasky explained how the automobile Doug Bandow on the politics of “global warm- has liberated the individual by making mobility ing,” and Mark Skousen on bull markets. more feasible than it was in the pre-automobile days. It follows, then, that Henry Ford was one —SHELDON RICHMAN ===== PAGE 4 ===== THEE [DEAS ON UBERTY EE— High Plains Drifters: Politicians’ Lucrative Protection Racket by Fred S. McChesney “Politicians are interested in people. Not that this is always a virtue. Fleas are interested in dogs.” —P. J. O'ROURKE he idea that politicians sell special favors to story, the politician agrees to preferential trade special interests is no longer new, although treatment for some group, it is all part of a polit- it still makes news. Throughout 1997, newspa- ical process laid out by the Constitution. And of pers and television reported daily on John course, the Founding Fathers understood that Huang, various Asian connections, and a suspi- this was an inevitable cost of democracy: not cion (at the least) that the large sums greasing laudable, but nonetheless tolerated. So goes the politicians’ hands were purchasing favors. orthodox journalistic account. Thus, allegedly, was American foreign-trade Social scientists studying politics also tend to policy distorted and, according to Senator Fred work with models in which private interests Thompson, the 1996 election influenced. Dis- purchase special treatment from politicians. In pensing the goodies is a bipartisan effort, of the now-orthodox version of the “economic the- course. The support for ethanol subsidies by ory of regulation,” popularized (if not pio- Bob Dole and Newt Gingrich indicated to many neered) by George Stigler, would-be private that the 1994 Republican conquest of Congress beneficiaries demand government favors and was unlikely to change much over time. politicians supply them. Thus, the market for In the popular rendition of politicians’ taking political favors is like a private market, with “special-interest” money, it is the private party consumer sovereignty in full operation. The who initiates the game and the politician who standard phrase “campaign contributions” accedes. Besides, it’s all part of a process pro- bespeaks the perceived process: special interests tected by the First Amendment. The money may enter the market with money to exchange and be spent for “access” to politicians, but it is pro- politicians respond. tected speech. The Supreme Court has said so. One can understand why both journalists and If, after hearing the special interests’ side of the economists nearly always view political trans- actions in this way. For the media, the story fits Fred McChesney teaches at Cornell Law School and their preferred view of the world, in which gov- is the author of Money for Nothing: Politicians, Rent ernment would operate for the public Interest Extraction and Political Extortion (Harvard Univer- but for the corrupting influence of private inter- sity Press, 1997). lopers. Thus, but for that pesky First Amend- ===== PAGE 5 ===== HIGH PLAINS DRIFTERS 5 ees In the extortion racket, citizens are made to pay, not for special favors from Uncle Sugar, but to protect private wealth that they have earned the old-fashioned way, outside the political process. ment, the solution would be just to drum out pri- Exploitative behavior need not involve vate access to government whenever money is stealth, as typifies theft. Take blackmail, involved. (So-called public-interest groups that where Person A agrees to forbear from some can deliver services rather than money—unions, perfectly legal action in exchange for pay- the American Association of Retired Persons, ment from Person B. For example, A may and so forth—would have untrammeled access, know of B’s extramarital affair and threaten however.) to reveal it to B’s spouse and the rest of the For economists, government-influenced mar- world (as A is perfectly free to do), but agrees kets are treated as just a subset of markets more not to tattle in exchange for money. Superfi- generally. The essence of private market behav- cially, the transaction resembles a contract, ior is exchange, a process that leaves both par- but there is a crucial difference. Commercial ties better off, increasing societal wealth over- contracts between A and B would leave both all. For lawyers, the process is similar: the per- better off than they were before A came on ceived special-interest deal is just another the scene. But B agrees to a blackmail deal to species of contract. Both sides provide some- avoid being made worse off by A’s intrusion. thing of use to the other (money for services), When Bill Cosby contracts with a production again leaving both sides better off from the company or television network, he gains; had transaction. he acceded to the demands of his alleged But is this perception the only explanation of daughter, he would have been paying protec- what goes on when private parties pay politi- tion money to avoid her attempts to make him cians? When Vice President Gore sits in the worse off. Had model Elle Macpherson White House with his Democratic National agreed to the alleged demands for money in Committee credit card, making dozens of calls exchange for a promise not to post nude pho- to prospective “contributors,” is he dangling the tos of her on the Internet, she likewise would prospect of special favors in return? Or might have been paying to avoid being made worse there be something else going on? off, not to gain. So, too, with politicians. They may well take payments to make private parties better Cooperation or Exploitation? off, such as providing tariffs or subsidies. Occasionally, these payments cross the legal Consider that contract is not the only basison line and are actionable as bribery. Prosecu- which parties interact in society. While con- tions are few and far between. They largely tracts are mutually beneficial, things like target not the true substance of the transac- theft and murder—also involving interaction tion—payment for special favors—but some between individuals—leave one side better off failure to follow the prescribed legal methods but the other worse off. Behavior, in other of payment for the favors. Campaign-spending words, may be either cooperative or exploita- laws provide the blueprint for perfectly legal tive. Individuals seek voluntary bilateral trans- bribery. fers (contracts); they also guard against the pos- But a politician has an alternative for raising sibility of involuntary unilateral transfers money: selling protection. He can agree not to (theft). do something that otherwise he says he would ===== PAGE 6 ===== 6 THE FREEMAN ee JANUARY 1998 do, something that would reduce the wealth of nents. Sure enough, one of the first to defend the potential donor. The most obvious burden the traders was Democratic Rep. Cardiss that can be threatened is a tax, but there are any Collins of Illinois, recipient of $24,500 from number of others that a politician can propose futures industry political committees. She and then withdraw for a price. A private citizen called on colleagues in the Illinois delegation will be just as willing to pay for a special favor to beat back the Leach bill and watch out worth $1 million as he will to avoid a $1 million for similar legislation. (“Chicago Futures tax. (This assumes constant marginal utility of Industry to Fend Off Attack, Rallies Law- wealth; with declining marginal utility of makers Who Received PAC Funds,” Wall wealth, a citizen will pay more to avoid the $1 Street Journal, Nov. 12, 1987, p. 64) million loss than for the $1 million gain.) This, then, is the essence of the political pro- ~~ While sale of special favors and sale of pro- tection racket. Superficially, selling special tection may look the same to outsiders, those favors and selling protection do look the same: milked or squeezed, of course, know the differ- payment is made to the politician in both cases. ence. Political scientist Larry Sabato reports that But in the extortion racket, citizens are made to to political action committee directors, invita- pay, not for special favors from Uncle Sugar, tions to purchase tickets to congressional recep- but to protect private wealth that they have tions “are nothing but blackmail.” Some time earned the old-fashioned way, outside the polit- ago, the Wall Street Journal reported that ical process. “House Republican leaders are sending a vague- ly threatening message to business political Milking, Juicing, and action committees: Give us more, or we may do . something rash.” Fetching One observes this sort of protection being Mud Farming and Political sold routinely, at all levels of government. Leg- Extortion islative extortion is commonly practiced through so-called “milker bills,” to use a term In responding to politicians’ minatory mes- popular in California. A bill is drafted and sub- sages, private parties are actually paying mitted, not because there is any legitimate need “money for nothing,” in the words of the song. for it, but because it threatens some private per- The money is “contributed” in exchange for son or group that predictably will pay to have politicians’ doing nothing, when legally they the bill withdrawn. “Juice bills” is another term could do something. The practice resembles the for those legislative proposals intended to “mud farming” described in William Faulkner’s squeeze private interests for cash. The Reivers. Mud farming was a simple but In Illinois, the name “fetcher bill” is apparent- lucrative rural extortion scam. By night, farmers ly the more common designation for legislative plowed up and then hosed down stretches of the proposals intended purely as shakedowns of dirt roads out in the country. By day, after cars monied interests. Even in Washington, D.C., Illi- sank into the nocturnally produced mud, the vic- nois politicians play the fetching game adeptly: timized drivers had a choice: abandon the cars or hire a mud farmer and his animals to pull the Rep. Jim Leach quietly introduced a bill a vehicles out. few days ago aimed at reducing speculation The mud farming analogy brings out one in financial futures. Barely 24 hours later, the important feature of political extortion. The Iowa Republican learned that Chicago com- - money paid to politicians to avoid their taking modity traders were gunning to kill his pro- an even bigger bite is not simply a monetary posal. Rep. Leach said one Illinois lawmaker transfer. There are real costs associated with the told him the bill was shaping up as a classic protection racket akin to the time lost and the “fetcher bill,” a term used in that state’s Leg- labor expended in extracting cars from the mud. islature to describe a measure likely to The time and money spent on executives’ visit- “fetch” campaign contributions for its oppo- ing politicians, on lobbyists’ work on behalf of ===== PAGE 7 ===== HIGH PLAINS DRIFTERS 7 Clint Eastwood, the high plains drifter, selling protection to Lago is no different from Joe Politician selling protection, except that Eastwood wants to annihilate the town and utterly impoverish its denizens. clients, and so forth are all time and money not first place, meaning there would be nothing to devoted to the production of widgets. Perhaps protect in the future and so no future protection more important, the possibility of wealth being racket. legislatively expropriated creates a disincentive The politician’s maximizing strategy, then, is to invest in the first place (or an incentive to to take just enough to benefit himself at the invest in less valuable activities that are easierto moment while leaving sufficient incentive for shield from political threats). Each extortion private parties to generate new wealth—which episode thus leaves society poorer for the time then will need political protection. The extortion lost and resources diverted from more produc- game is analytically identical to a dictator’s tive endeavors. nationalization of assets invested by foreign firms. Citizens of the more developed countries . . regard the expropriations of foreign despots as Selling Protection exotic, omotimes even laughable, Pntics That the protection racket is costly is a point indigenous to the “Third World.” But what dif- made, very apocalyptically, in the Clint East- ference is there really between an American wood western High Plains Drifter. Eastwood company paying hundreds of thousands of dol- rides into Lago, a mining town that is about to lars in soft money to the Democratic or Repub- be attacked by three killers just released from lican National Committee in return for tax prison. Lago’s corrupt city fathers had hired the exemptions and that same company acceding to men to kill the town’s honest marshal, then having a factory or other assets nationalized trumped up other charges to put the killers in abroad in return for being allowed to continue jail. They return for revenge. Eastwood himself doing business there? has come to wreak vengeance on Lago for the It is true that shakedowns practiced by Amer- marshal’s death. Unaware of Eastwood’s agen- ican politicians may differ in the complexity, da, the townspeople implore him to protect them camouflage, and rhetoric surrounding their from the killers; Eastwood agrees, on condition threats and ultimate exactions. Compare the that they do everything he says and give him extortion game as played in state legislatures or everything he demands. Making himself mayor in Washington with the schemes of Brazil’s and sheriff, Eastwood gradually reveals his President Fernando Collor de Mello, who, as plan: fending off the killers, but only by reported in the New York Times Magazine, ran destroying practically everything in Lago in the “an extortion and influence-peddling system” so process. He rides out in the end, leaving the successful that it amounted to “an assault upon town “saved” but a smoking ruin. the state.” Eastwood, the high plains drifter, selling Previously, as a local mayor, Collor sold tax protection to Lago is no different from Joe relief worth $100 million to sugar-cane firms in Politician selling protection, except that East- exchange for $20 million paid to him personal- wood wants to annihilate the town and utterly ly. As president, however, it is estimated that he impoverish its denizens. For the politician, raked in several times that amount, much of it total devastation would not be possible politi- again in selling protection. For example, Collor cally nor desirable pecuniarily. If politicians froze all bank deposits over $1,200 for 18 could take everything, individuals would have months as a supposedly anti-inflation measure. no incentive to invest in creating assets in the Again to quote the Times Magazine, “The pro- ===== PAGE 8 ===== 8 THE FREEMAN e JANUARY 1998 gram was a colossal failure, producing suicides, why does each round of change only increase heart attacks, a 4 percent plunge in economic the number of special breaks and add new forms activity—and barely a dent in inflation.” To to the April 15 ordeal? Answer: it’s all part of Brazilians, the measure might have seemed just this year’s round of extortion. The names of an unfortunate but well-intended mistake—until those purchasing protection from the taxman they learned that President Collor was selling change—the 1986 tax “reform” legislation fea- companies the right to unfreeze their accounts tured a “Gallo amendment” and a “Marriott for a 10 percent commission. amendment,” while the 1997 legislation includ- Crass as extortion in Brazil was, readers may ed an “Amway amendment” in return for that not find it all that much different from American firm’s reported so-called contributions of over politicians broadcasting their message, “Give us $1 million. But the rules of tax “reform” remain more, or we may do something rash.” Take the the same. current spectacle of politicians milking the Of course, the political threats must be credi- tobacco companies. Common Cause recently ble. If private individuals think a threat is just a labeled the millions of dollars that tobacco firms bluff, they have no incentive to pay. Thus, have passed to politicians in 1997 (primarily to Politicians may sometimes be forced actually to Republicans) “astounding.” But exactly why is legislate; as Gordon Tullock puts it, “politicians it so surprising? Newspaper accounts ascribe May sometimes have to enact legislation the “donations” to the industry’s desire to extracting private rents from owners who do not improve its image—as if the public viewed giv- Pay up, just as the Cosa Nostra occasionally ing money to politicians as something praise- urns down the buildings of those who fail to worthy. The real reason is much simpler and P2Y Hs protection levies.” If payment ultimately (one would think) more obvious. As the pols 1S forthcoming, politicians can always repeal the legislation. have demonstrated, they now have the power to .. crush cigarette firms if they choose to exercise Threats can be credible (end politically it. But for a price, Washington’s high plains attractive) only if they are constitutionally pro- . ’ tected. Private extortion is illegal. However, drifters have agreed to forbear from total i : >. . destruction of tobacco. Not surprisingly, state there is no law against the political extortion oe. . oo discussed here: legislators themselves get to politicians are racing to strap on their six-shoot- . . > define what constitutes extortion, and obviously ers and threaten tobacco firms, too. When tob . Iv will. b .. have chosen not to outlaw what they do. (True, 0acco antes up as 1t surely will, because ity pen political shakedowns come to light, they must—it won’t be to improve its image. ) occasionally prove embarrassing enough to The tobacco wars illustrate a point noted ear- force a legislator to resign.) lier: politicians will threaten and take what they Constitutions exist precisely to establish rules can, but it is not in their interest—whatever they protect the citizenry against such political might threaten—to kill the goose laying the : © depredations. Were there constitutional obsta- gold. That’s the good news. The bad news is (les to profiting from the sorts of threats that that the politicians will certainly be back as new gjicit private payments, those threats would be eggs are laid. made less often, since victims would always have the counter-option of seeking refunds Opening the Tax Window through constitutional litigation. But the state and federal constitutions have For those who find such a view too cynical, provided little shield against the political pro- consider the sorry muddle that our tax system tection racket. The Founding Fathers them- has become. Scarcely a year passes without at selves seem not to have worried as much about least discussion in Congress and the White politicians extorting from the voters as they did House of tax “reform” or “simplification.” Yet, about factions of private citizens using govern- as politicians open the tax window annually, no ment to take from other factions. The level of true reform and certainly no simplification constitutional protection against legislative result—au contraire. The public seems bemused: expropriation of basic contract and property ===== PAGE 9 ===== HIGH PLAINS DRIFTERS 9 rights has steadily diminished since the late has already been allowed to grow large, tolera- nineteenth century. As noted earlier, the very tion of the political extortion racket is actually right to “contribute” to politicians has been held desirable. If the politicians cannot be paid off to constitutionally protected. As government regu- abstain from imposing costs on private parties, lation pushes into more and more areas, the those costs will be imposed. Where government scope for selling political protection expands has too much power, then, the political protec- apace. In effect, as courts have retreated from tion racket can actually lighten the burden. affording constitutional protection against “All right,” one might say, “we should threats of legislative takings, potential private reduce or eliminate government’s ability credi- victims have found it necessary to use their own bly to threaten private individuals with pecu- self-help remedies, paying off politicians rather niary or other loss.” True enough, perhaps, but than endure even more dire regulation (includ- this position effectively boils down to reducing ing taxation). the size of the state, of reducing its power to do Consider, for example, environmental regula- almost everything it currently does. In particu- tion, an area of state and federal activity virtual- lar, it would mean an end to most taxation and ly unknown even a generation ago. The search programs to transfer wealth, the essence of for sites to dump toxic wastes, the wish to modern politics. However desirable, any such exclude certain land (woods, wetlands) from reduction amounts to arresting a trend in gov- private development, and other environmental ernment growth that has been gaining momen- issues have created opportunities for politicians tum for over a century. If that engine cannot be who can influence such decisions to harvest big stopped and thrown into reverse, those of us contributions. along for the ride must sometimes resign our- This leads to a perhaps unexpected conclu- selves to protecting our well-being with our sion. In a second-best world where government own wallets. [] rere —— — —o——— —— ——————————————————— Bettina Bien Greaves Co-Winner of Thomas S. Szasz Award ith great pleasure, we acknowledge that Bettina Bien Greaves, long-time resident scholar at the Foundation for Economic Education and contributing editor of The Freeman, has been awarded | the seventh annual Thomas S. Szasz Award for Outstanding Contri- butions to Civil Liberties. The award, given annually by the Center for Independent Thought, which, among other things, operates Lais- sez Faire Books, selected Bettina for her “lifetime achievement” in the cause of liberty. The award was established to honor the work of Thomas Szasz, the leading critic of the abuse of civil liberties in the | name of medicine. David Kopel and Paul Blackman, authors of No More Wacos: What's Wrong With Federal Law Enforcement and How to | Fix It, were also recipients of the award. Past winners include Richard Epstein, Karl Hess, and James Bovard. Congratulations, Bettina! | ===== PAGE 10 ===== Anything That's Peaceful White Magic by Leonard E. Read Editor’s Note: To mark the 100th anniversary make one, yet we possess them by the millions. of the birth of FEE founding president Leonard If this isn’t magic, what then can magic be? E. Read (1898-1983), The Freeman will publish To fully appreciate the efficacy of white a classic Read essay each month under the magic in the economic area, one needs but turn series heading “Anything That's Peaceful.” the clock back to the beginning of the century, This month's selection, excerpted from the cast oneself in that period, and pose several sim- January 1956 issue of The Freeman, extols the ple questions: good “magic” peacefully wrought by free peo- ple and free markets. 1. Given a description of the performance and style of a 1955 car, how would I go about mak- ach person tends to satisfy his desires along ing it a reality? the lines of least resistance. Those who really believe outright thievery or spoliation 2. What if someone were to give me the com- (political plunder) to be immoral are thereby mission of developing a gadget that would carry bound to reject such so-called easy means to the human voice in a fraction of a second over their ends. Why? They recognize that any injus- the face of the earth? Could I deliver? tice done others will backfire. To condone injus- tice is to endorse an evil principle—as applica- 3. Suppose travelers of the future were to say, ble to oneself as to others—and such a system “Build a winged thing that will transport more adds to the difficulty of all. than 100 passengers from Seattle to Washing- These persons with their moral scruples have ton, D.C., in less than four hours.” Could I meet not, however, cut themselves off from their the challenge? daily bread but, on the contrary, have found that strict adherence to justice and good morals is the 4. A voice from the 1950s speaks: “We are easiest way to satisfy basic needs. They have the airlines of the world. Figure out how a man come upon one of the most remarkable material on the ground can identify our planes in the phenomena in all history, a veritable white air—through darkness, fog, rain, sleet, snow— magic: Simply leave everybody free to act cre- speak to their pilots ten or twenty miles away, atively and in no way inhibit their exchanges! tell them precisely where they are, and guide They have found this to be the line of least resis- them to a runway with a tolerance of ten feet.” tance, the manner of satisfying their desires with What would I answer? the most economical use of their own energies. They have discovered an intelligence. 5. Families in millions of homes ask, “Can Example: A 1955 dishwasher! Not one per- you perfect an instrument that will permit us in son on earth possesses enough knowledge to our living rooms to witness a presidential inau- 10 ===== PAGE 11 ===== 11 Leonard Read was born on a farm in Michigan. At 19, his formal education was interrupted by his entry into World War I as an airplane mechanic with the American Expeditionary Forces. After the war, he sold insurance, worked as a cashier, then opened his own produce business. In 1927, he began a career in Chamber of Commerce work as a secretary of one of the country's smallest Chambers. He was later man- ager of the Western Division of the Chamber of Commerce of the United States for ten years. In 1939, he became general manager of the world's largest Chamber in Los Angeles. His work there won him the executive vice-presidency of the National Industrial Conference Board. He left the NICB in 1946 to organize FEE. As a tribute to Mr. Read in the September 1988 issue of The Freeman stated, “It is difficult to mea- sure the full influence of Leonard Read. He wrote more than two dozen books and hundreds of articles, delivered over a thousand lectures, and changed more lives than any of us ever will realize. In trying to assess his personal impact, perhaps it is best to say that Leonard Read taught us what is important. Principles are important. Moral philosophy is important. And, as he showed by the example of his own life, courage and an abiding faith in one's con- victions are important.” guration or a football game or a stage perfor- receiver and instantly there flow to one’s ser- mance while it is going on?” vices the creative energies of Alexander Gra- ham Bell, of tens of thousands of scientists, 6. Can the human voice be amplified by engineers, metallurgists, technicians, linemen, power from the sun? How are we to minimize operators, miners, woodsmen, and countless the ravages of pneumonia? Can clothing be others—creative energies flowing and exchang- made from sand? ing through space and time to the waving of one’s own wand—that one may communicate The questions could be endless. And the with whomever one pleases across the nation in answers by any one person, in 1900, or at any a matter of seconds! later time, would have been substantially the Why does this qualify as white magic? same, “I do not know. I cannot deliver. This that Because of the unimaginable results that flow you ask is beyond my power.” from leaving all others free to act creatively as they please and to exchange their insights or their The Magi ¢ of Freedom thoughts or their products with whomever they choose. This market process of reciprocity and No one of the above accomplishments, all mutuality affords each person a vested interest in commonplace today, resulted from the ingenu- seeing that others are unmolested and unhandi- ity of any single person. All of these and num- capped, that no one minds anyone else’s busi- berless similar advances came about in a better ness, and that society’s legal apparatus is con- climate of freedom than existed elsewhere—and fined to the inhibition of destructive energies. they came as if by magic. The telephone is a White magic? I, for instance, devote myself good example of this miracle. Pick up the to writing and talking. Yet, I am able to ===== PAGE 12 ===== 12 THE FREEMAN e JANUARY 1998 exchange my services for food, shelter, heat, gold? It is as nothing. So far has this white magic clothing, transportation, literature—a daily and advanced that the production of diamonds syn- miraculous abundance that could not be pro- thetically scarcely received a press notice. duced by me in thousands of years. Imagine one It has long been known that any general person, doing so little, yet being able to obtain upgrading of ideas and insights—things of the in willing exchange the services of millions of intellect and spirit—requires freedom of people! White magic literally serves as a means thought and expression, freedom to create and to higher ends by freeing me from the arduous to exchange. Apply the same principle to goods confinement of wholly waiting on myself. and services: Presto! As much abundance as is The alchemist’s dream of turning lead to possible for any given society. [] Back in Print! Two Classics by Leonard E. Read GOVERNMENT—AN IDEAL CONCEPT To Leonard Read, government was neither a manager of economic activity nor an almoner of gifts to the people, but a necessary instrument of social order. Its only basis is justice, not pity. Government is represented by agents who are expected to enforce and defend man’s natural rights and protect him against wrongs of his fellowmen. But these agents should not do what the individual must not do. The agents of government should be men and women of integrity. Unfortunately, Read observed, political office tends to rob a person of modesty, humility, and integrity, which make it advisable never to accept a political office. Leonard Read's eloquent discussion of the nature of government and a new beginning in freedom will endure as a principled work of great value. It is a guidepost for readers seriously interested in the limits of public regimen and the cause of liberty. 149 pages, indexed, paperback $5.95 ANYTHING THAT'S PEACEFUL The Case for the Free Market Anything That's Peaceful, written in 1964 and often hailed as Leonard Read's best book, is the fruit of years of experience in lecturing and writing on the free market and related institutions. “By my title, ‘Anything That's Peaceful,” Mr. Read explains, “I mean let anyone do anything he pleases that’s peaceful or creative; let there be no organized restraint against anything but fraud, violence, misrepresentation, predation; let anyone deliver mail or educate or preach his religion or whatever, so long as it’s peaceful.” Intriguing chapter titles, such as “Only God Can Make a Tree—or a Pencil,” “The Most Important Discovery in Economics,” and “The Greatest Computer on Earth,” invite the reader to accompany Leonard Read on his exploration of the wonders of freedom. 253 pages, indexed, paperback $5.95 ===== PAGE 13 ===== THEE IDEAS ON UBERTY EE——— Economics, Law, and Personal Relationships by David N. Laband and John P. Sophocleus wo recent, headline-making judicial deci- unless specific provisions of the agreed-upon sions in civil cases offer striking reminders contract permit the seller to continue to market about why judges, juries, and legislators would the property, it is understood by both parties that benefit from instruction in basic economic prin- the seller will suspend such efforts and also work ciples. The decisions rendered in these cases actively to conclude the sale. involving personal relationship law tum eco- In the absence of this legally binding pledge, nomic (that is, common) sense on its head and moral hazard problems would make it much are inconsistent with legal treatment of virtually more difficult to buy and sell real estate. The identical circumstances under contract law. person who had contracted to purchase a house In the first case, a young Texas man broke off would have no financial incentive to honor the his engagement to his fiancée, demanding that contract, other than the fact that he hadn’t she return the engagement ring he had given found another property more to his liking. her. When she refused, he sued. The judge Indeed, the hope of finding such a property ordered that she return the ring. It’s possible that might induce the prospective buyer to continue the judge’s ruling in this case was colored by a searching. If he found a property he liked more, personal engagement experience that went he could walk away from the contract without awry. Nonetheless, we cannot help wondering penalty at any time prior to formal execution of whether the judge who issued this ruling has the contract. ever sold a house. By the same token, the behavior of sellers The deposit, or earnest money, that the also would be different. Knowing that the puta- prospective home buyer offers to the seller when tive buyer might not honor the contract, the a contract is written serves as the buyer’s pledge seller would have every incentive to continue of good faith. Earnest money is the would-be to show the property to other prospective buy- buyer’s pledge (in this case a formal contractual ers. In the (normally unlikely) event that he obligation) that he will work actively to fulfill could find another buyer willing to pay more the terms of the contract and bring the proposed than the first one, he would break the contract sale to a successful conclusion. If the putative with the first and write one with the second. To buyer backs out of the contract for reasons that forestall this possibility, which might indeed are not within the control of the seller, the seller be damaging to the first buyer (who may have can legally claim the earnest money. We all valued the property more than the contracted- know and appreciate the reason why this is so: for price), he induces the seller to stop looking for other buyers, by compensating him (via David Laband is a professor of economics at Auburn earnest money) for the implied costs that result University, Auburn, Alabama. John Sophocleus is an from removing the house from the market. The instructor in Auburn’s economics department. seller, in turn, is protected from buyer oppor- 13 ===== PAGE 14 ===== 14 THE FREEMAN e JANUARY 1998 tunism by demanding sufficient earnest money Wheo’s Responsible for to satisfy him, at the margin, in the event the Seduction? buyer finds something better. Earnest money does not insure that real estate contracts are The second case, which was covered in major never broken. But it does imply that such con- newspapers and several network television talk tracts are only broken on good cause—that is, shows, centered on a married couple and the when the value to the prospective buyer of “other woman.” The husband’s affair led him to breaking the contract exceeds the lost earnest divorce his wife of 17 years and marry that other money. This market mechanism provides a woman, who now, of course, is “the” woman. remedy for contracts broken through bad faith, The other woman did not fall in love with the without the parties seeking resolution through husband with specific intent to injure his wife. the courts. Nonetheless, the wife sued the interloper under a North Carolina law that can hold outsiders responsible for breaking up marriages. (The The Marriage Market statute in question, which deals with alienation of affection, was abolished by the North Caroli- na Court of Appeals in 1985, but the state Supreme Court overturned that ruling.) A jury found that the other woman had seduced the husband away from his wife, and it awarded the jilted spouse $500,000 in compensatory dam- ages and $500,000 in punitive damages. This situation also has a marketplace analogy with well-developed contract law that makes economic sense. By way of illustration, consid- er what happens when Wal-Mart opens a new store. Via the heady allure of lower prices and a wide array of merchandise, Wal-Mart “seduces” customers away from the local Sears, which has been in operation for 30 years. The competition Earnest money contributes to efficient trans- acting in real estate markets. Engagement rings contribute to efficient relationship formation in what Nobel laureate Gary Becker refers to as the marriage market. The giver of such a ring pledges, explicitly or implicitly, to work toward achievement of a marriage between himself and his fiancée. By taking herself out of the general marriage market, the recipient of the ring puts herself at risk. Specifically, she risks that while she is off the market, so to speak, she will miss meeting someone else with whom she might have enjoyed a happy and fulfilling relationship. By accepting her fiancé’s ring, she gives up valuable opportunity, secure in the knowledge ,vided by Wal-Mart is welcomed by all of the that if her fiancé dumps her, the value of the ring [5.41 shoppers because they know that their will compensate her for the costs implied by [ives will improve through lower prices, those lost opportunities. enhanced operating hours by both stores, a Analytically, the fiancé’s pledge of good faith yider selection of merchandise, and so on. The - (purpose, incentives, and impact on behavior) is gwners of Sears likely will be unhappy at the identical to that of a prospective house buyer. prospect of losing customers, but they do not The judge’s recent decision with regard to the have legal recourse to collect damages from the former is not only inconsistent with well-estab- «ghar company.” lished contract law governing the latter, but also In the language of legal and economics schol- raises the costs of contracting between young ars Wal-Mart has imposed a “negative external- people interested in developing long-term rela- ty” on Sears. That is, actions undertaken by Wal- tionships with one another. We can only assume Mart have made Sears worse off, even though that if the prospective buyer of the judge’s there may have been no specific intent on the part house had backed out at the last minute, he of Wal-Mart management to do so. Their aim would have been happy to return all of the was to provide products that the public at large earnest money pledged when the contract of finds desirable, at prices that induce prospective sale first was written. It is precisely because customers to become paying customers. Legally, individuals are not happy about returning the fact that Sears is injured in this process is inci- earnest money that such money typically is held dental, not deliberate. Negligence law does not by a neutral third party. apply either. Firms are not required to consider ===== PAGE 15 ===== ECONOMICS, LAW, AND PERSONAL RELATIONSHIPS 15 the possible adverse consequences of their Sears’s legal remedy is tied to the contractual actions for their competitors when setting prices breach—it can collect from the customers, not or determining operating hours, the friendliness from Wal-Mart. If the courts did not enforce and appearance of their sales staff, the types and such a contract, it is uncertain whether Sears quality of merchandise carried, and so on. would have agreed even to locate in the town, as There are hundreds of thousands of “other its financial well-being may hinge on fulfill- companies” in the business world. They ment of long-term sales agreements with cus- “seduce” customers away from their competi- tomers. tors. It is this continuous process of widespread, Similarly, the jilted wife in North Carolina intense seduction of consumers that forces firms should have been able to sue her ex-husband for that want to survive (either by forming long- breach of their marital contract. If the courts did term relationships with specific customers or by not recognize and enforce the husband’s obliga- continuously attracting new customers) to con- tions to his wife, she arguably would be much stantly improve the quality of the goods and ser- less likely to have agreed to marry him in the vices they offer. The well-being of hundreds of first place. Fortunately, the adultery laws on the millions of individuals, both in the United States books in most states have this one right too. If and elsewhere in the world, is enhanced by the courts are not willing to support market these competitive seductions. Whether they mechanisms that facilitate development of long- actually induce individuals to walk away froma term personal relationships, individuals will longstanding relationship or not is immaterial in change their behavior, entering such relation- this regard because consumers will benefit from ships with greater trepidation and, accordingly, improved quality and service from all firms, with increased use of formal legal provisions to including ones they have patronized for years. hedge against entering a bad relationship. Such Thankfully, these ubiquitous tempters and contracts would, for a variety of reasons, be temptresses cannot be sued for building better very costly to write and enforce (not to mention mousetraps. If they could be, the capitalistic unromantic), thereby increasing business for system that has made America the economic North Carolina lawyers and judges. This incen- juggernaut of the twentieth century would col- tive notwithstanding, the people of North Car- lapse. The law in this regard has got it right in olina would be better served by terms of making economic sense. having their state legislators However, if a customer is obligated under the and Supreme Court jutices terms of a contract to purchase items from take a refresher course Sears and breaks that contract when Wal- (or two) in econom- Mart comes to town, Sears can collect dam- ics, if not common ages for breach of contract. Note that sense. O ===== PAGE 16 ===== THEFREEMAN IDEAS ON LIBERTY EE The Tobacco Deal: Myths and Misconceptions by Robert A. Levy he deal being forced on tobacco companies, wants tougher restrictions on advertising, whether it is the original negotiated agree- greater disclosure of secret industry documents, ment or one amended according to President and a stiffer price tag than the industry had bar- Clinton’s liking, is manifestly unconstitutional gained for. Instead of $370 billion in tax- and nothing less than an attack on the rule of deductible payments—estimated to cause the law. price of a pack of cigarettes to rise by about 62 In the original “Proposed Resolution,” nego- cents—Clinton proposed a $1.50 per-pack tiated by a coterie of state attorneys general, increase over ten years. Part of the increase plaintiffs’ lawyers, and public health advocates, would arise from unspecified nondeductible the industry agreed to disgorge $370 billion in payments by the industry; the rest would depend monetary damages to various parties, pay addi- on penalties for not meeting targeted reductions tional penalties if specified reductions in youth in youth smoking. As to big tobacco’s partial smoking do not occur, submit to Food and Drug immunity from litigation, the president was Administration regulation of nicotine, cease all uncharacteristically silent, apparently content to vending-machine sales of tobacco products, and leave such legally and politically sensitive rein in certain marketing practices allegedly tar- details to Congress. geted at children. In return, tobacco companies Obviously overlooked in the president’s eval- would be immune from punitive damages for uation is this troublesome complication: The their past conduct and from new class action deal in the making—either the “Proposed Reso- lawsuits. Individuals could still sue, subject toa lution” or Clinton’s adaptation—is unconstitu- cap on compensatory damages. The settlement, tional. Indeed, no legislation in recent memory if approved, would wipe out claims by more transgresses so many fundamental constitution- than three dozen state and local governments for al principles. Most important, the settlement Medicaid reimbursement. expunges the industry’s right to due process, In September, President Clinton weighed in about which more in a moment. Further, it pun- with his version of the sweeping tobacco settle- ishes tobacco companies by legislative fiat ment. Clinton embraced parts of the deal but despite the constitutional prohibition on bills of repudiated others. Specifically, the president attainder. It abridges the industry’s First wants the FDA to have more or less plenary reg- Amendment rights of free speech, impermissi- ulatory authority over tobacco products. He also bly obstructs litigants seeking redress through the courts, takes the property of cigarette vend- . : Lo ing-machine companies without just compensa- Robert Levy is senior fellow in constitutional studies & p ) P at the Cato Institute and author of the Cato Policy Hon, and delegates unprecedented legislative Analysis, “Tobacco Medicaid Litigation: Snuffing authority to the FDA. Moreover, the settlement Out the Rule of Law.” intercedes in product liability cases that have 16 ===== PAGE 17 ===== 17 long been the prerogative of state government, gress is simply not authorized to compel private thus exercising power beyond that enumerated companies to escrow funds for satisfaction of in the Constitution and flouting our system of potential judgments arising out of state tort law. dual sovereignty. Any such statutory requirement makes a mock- Those are just a few of the problems. Mean- ery of the principles of federalism and limited while, the public seems blissfully unaware of national government. the pernicious effects should the proposed set- With respect to those tobacco companies that tlement be approved. So here is a wake-up call. did participate in the settlement, their involve- Perhaps it will dispel some of the myths and ment and signatures by no means equate to con- misconceptions surrounding the insidious deal sent. Either such companies could join the set- with which the administration and Congress tlement or they could mount an expensive, time- will be tinkering. consuming, and ultimately futile challenge to nearly 40 Medicaid recovery suits, litigated under a perverted system of law that effectively Myth #1: We can ignore the foreclosed every line of defense. Here’s how constitutional infirmities if the that choice came about. . Over four decades, after thousands of claims, industry consents to them. smokers had not collected one dollar of dam- The argument goes like this: If tobacco com- ages for a smoking-related illness. Juries under- panies voluntarily enter into an agreement after stood—even if state attorneys general today do extensive negotiations, why shouldn’t we not—that we are free to use whatever legal respect their decision? We shouldn’t for two products we wish, but if we assume the risk we reasons: First, the settlement purports to bind must bear the consequences. As juries were parties who did not participate in the negotia- reaffirming that basic rule of law—known as tions. Second, there can be no real consent at the the “assumption-of-risk” doctrine—state Med- point of a gun. icaid programs were coming under intense For starters, the proposed settlement affects financial pressure. Of course, states were enti- future litigants, who had no representatives at tled to sue the tobacco companies for recovery the bargaining table. When parties are injured, of Medicaid outlays supposedly traceable to the tort system permits them to seek recovery smoking; but the states bore the same burden of from those who caused the injury. While legis- proof as the injured smoker and they were sub- latures can alter the rules at the margin (for ject to the same defenses including assumption example, they can eliminate punitive damages), of risk. Unwilling to raise taxes and unable to they cannot cut into the irreducible core that is prevail in court, the states came up with a cre- our due-process right. The cumulative effect of ative solution: they simply eliminated assump- immunities conferred by this settlement—no tion-of-risk as a defense in Medicaid recovery class actions, no punitive damages for past acts, suits and, for good measure, applied the new a limit on compensatory damages—goes too far. rule retroactively so that it would affect ciga- By foreclosing adequate legal remedies, those rette sales made decades earlier. restrictions have the practical effect of denying While they were at it, to head off any possi- access to the courts. bility of an adverse jury verdict, the states abol- Also without representation at the negotia- ished the requirement for proof of individual tions were vending machine operators, whose causation. Instead of demonstrating that a par- sales of tobacco products are precluded by the ticular claimant’s illness was caused by his settlement; some nonparticipating tobacco com- smoking, all the states had to produce were panies; and, of course, yet-to-be-formed compa- aggregate statistics showing that certain injuries nies, which must either agree to the settlement were more prevalent among smokers than non- or place substantial sums in escrow for 35 years smokers. Tobacco companies, under the new to ensure that they will be able to pay damages regimen, would thus have to pay for treating if awarded against them. That “choice” raises burn victims who fell asleep with a lit cigarette, obvious due-process concerns. Moreover, Con- cancer victims who never smoked, and even ===== PAGE 18 ===== 18 THE FREEMAN e JANUARY 1998 Medicaid recipients who defrauded the system Myth #2: Tobacco is a special and weren’t injured at all. Astonishingly, the case. No other industries are at states didn’t have to furnish any corroborating ’ evidence, just statistics. risk. What could possibly justify this abuse of If the tobacco industry were the only victim, power? Incredibly, the states contend that they that would be bad enough; but the unhappy are entitled to abrogate the assumption-of-risk prospect is for yet more incursions by a pater- defense and disregard proof of causation palistic state with a boundless appetite for social because, after all, the state as plaintiff never engineering. Lamentably, American govern- smoked. Imagine, analogously, that you are ments at all levels seem to have abandoned the exceeding the speed limit by five miles per principles of free choice and personal responsi- hour and hit another car driven by a Medicaid bility in favor of regulatory mandates and abso- recipient; he is driving 80 miles per hour, intox- Jution for the consequences of our acts. And icated, and hurtles through a red light. When because we have socialized so many activities, the state Medicaid program sues you for negli- like the provision of medical services, we gence, you properly respond that the other dri- should not be surprised when the government ver was 99 percent at fault. The state counters monitors our diet, exercise, recreation, and other that the Medicaid recipient’s behavior is irrele- lifestyle choices. Having created a system in vant; the state doesn’t drink, nor does it drive. which each of us has an incentive toward irre- Such arrant nonsense—the exact equivalent of sponsible behavior—paid for by the rest—the “the state never smoked” —is unworthy of seri- state then steps in to prohibit the behavior it has ous consideration. encouraged. Naturally, the states laughed off the charge Mired in regulations, laws, taxes, and litigation, that the new law wiped out the industry’s defens- we look to Congress to extricate us from the mess es. One of Florida's lawyers said, for example, that it helped create. Yet if Congress approves the “It doesn’t mean that the tobacco industry is ill-advised tobacco settlement, it will exacerbate defenseless. They [sic] can show that the state the problem. Politicians from both the left and has unclean hands, that the state has participated right will attack products deemed by them, our in the activity somehow.”! Yes, “unclean hands” moral overseers, to be bad for us. There will be no is a legitimate defense; but when the industry shortage of candidates as the do-gooders take aim pointed to Florida’s continued support for feder- at the food industry, for example—from choco- al tobacco programs, its $825 million pension late to sugar, dairy products, red meat, and French investment in tobacco stocks, and its manufac- fries. Obesity, which causes 300,000 deaths each ture of cigarettes for sale to local jurisdictions year from heart attacks and strokes, will be the and distribution to state prisoners, Florida attor- new shibboleth; but it won’t be the last. There’s neys filed a motion to suppress the evidence, and still coffee, motorcycles, sporting equipment; the the state judge granted the motion.2 So much for list is endless. the unclean hands defense. Is that merely paranoia? You be the judge. Faced with insurmountable legal hurdles in Vice President Gore at a press conference this dozens of Medicaid suits patterned after Flori- past July ventured that there is a “link between da’s, the industry decided to negotiate. Was the exposing children to massive levels of violence settlement consensual? Ask yourself why an on television and violent behavior.” He asserted industry would agree to fork over $370 billion, that the link is “just as well established” as the subject itself to FDA regulation, overhaul its “link between tobacco smoking and lung can- advertising, eliminate vending-machine sales, cer.” Then he prompted, “So how do we act on and pay large penalties if targeted reductions in that?” And William J. Bennett, in a New York youth smoking were not realized—all in return ~~ Times op-ed dated July 29, 1997, predicted: “If for partial immunity from litigation that had not the liquor industry does not start acting in a cost a single dollar of damages in 40 years. To more socially responsible way, it may soon find call this settlement consensual is consummate itself held in the same kind of esteem in which doublespeak. the tobacco companies are now held. The alco- ===== PAGE 19 ===== THE TOBACCO DEAL 19 hol industry can act now. Or it can deny reality excise tax, smuggled cigarettes accounted for an and pay later.” estimated 30 to 50 percent of consumption; so Those threats must not be taken lightly. The Canada was forced to lower the tax to keep hallmark of a free nation is whether it safe- smuggled cigarettes away from children It guards the rights of its least popular citizens. doesn’t take a rocket scientist, an FDA commis- When it comes to tobacco, we have failed that sioner, or a surgeon general to know that the test. We have tapped the industry’s deep pock- proposed tobacco settlement will inevitably ets in order to reward states that retroactively foment illegal dealings dominated by criminal imposed new and unimagined laws on a feck- gangs hooking underage smokers on an adulter- less and friendless defendant. Today it may be ated product freed of all constraints on quality tobacco; tomorrow none of us will be secure. and price that competitive markets usually afford. If the health imperative is to reduce smoking Myth #3: The administration among teenagers, we have the requisite tools at and Congress should impose our disposal. The sale of cigarettes to young- sters is illegal in every state. Those laws must be vigorously enforced. Retailers who violate the The provisions of the tobacco settlement as law must be prosecuted. Proof-of-age require- originally drafted are misconceived, unwork- ments are appropriate if administered objective- able, and counterproductive. But if Congress ly and reasonably. Vending-machine sales adopts the Clinton version or, still worse, the should be prohibited in areas like arcades and draconian recommendations of antismoking schools where children are the principal clien- zealots like former FDA commissioner David tele. And minors—who are often held responsi- A. Kessler and former Surgeon General C. ble as adults when charged with a serious Everett Koop, the outcome will be even more crime—should at least be subject to parental destructive. Koop and Kessler want tougher notification and moderate punitive measures FDA regulation, stiffer penalties imposed onthe when caught smoking or attempting to acquire industry if the nation doesn’t meet targeted cigarettes. declines in youth smoking, huge increases in cigarette taxes, tighter rules on smoking in pub- lic and work places, and export controls on Myth #4: The industry and its industry access to foreign markets. That’s all— customers owe the public for just prohibition, without the label, and without . the precursor to prohibition, which, as you will health costs due to smoking. recall in the case of alcohol, was an amendment At the outset, one must ask why tobacco com- to the Constitution. Kessler and Koop object panies should be responsible for antismoking especially to a provision requiring the FDA to campaigns and programs to help smokers break show that its regulations will not spawn black- their habit. After all, cigarettes are legal; and the market transactions. No wonder they regard that choice to smoke is freely made. Claims that provision as a material limitation on the some consumers are hopelessly addicted, hav- agency’s powers. FDA restrictions on nicotine ing relied on fraudulent information and decep- content, coupled with inflated retail prices to tive advertising, not only strain credulity but pay for the settlement, will lead ineluctably to a require proof. Equally objectionable, the indus- pervasive black market. try will be required to finance health care for We never seem to learn. California, Mary- uninsured children. By what possible logic can land, Michigan, and New York hike their ciga- that problem be laid at the doorstep of the tobac- rette taxes and the result is rampant smug- co companies? Selling tobacco to children is gling—not just from low-tax neighboring states, illegal; but no one has shown that the tobacco but from military bases, Indian reservations, companies have broken that law. To hold a sin- even exports to Mexico that are smuggled back gle industry financially liable because some into the United States. After Canada raised its families are unable or unwilling to insure their tougher sanctions. ===== PAGE 20 ===== 20 THE FREEMAN e JANUARY 1998 offspring is no more than a bald transfer of pack, according to Viscusi, was 25.3 cents— wealth from a disfavored to a favored group. less than half of the prevailing 53-cent tax. Even if tobacco companies were held Thus, when it comes to reimbursing the pub- accountable for all smoking-related public lic treasury for health costs associated with health costs—including publicly funded med- tobacco, the essential premise of the settlement ical care, group life insurance, sick leave, nurs- is wrongheaded. Any fair-minded assessment of ing home care, and lost payroll taxes—the the public burden must take into account, first, excise tax on cigarettes generates revenue to the the excise tax receipts that already compensate government in excess of those costs. Thus, if for smoking-related health costs and, second, any wealth transfer is justified, it would be from the costs that the public would otherwise have those smokers who are covered by Medicare incurred if the smoker had not smoked. Quite and Medicaid to those smokers who are not. The simply, tobacco companies and their customers typical smoker, who is not on public assistance, have more than paid their way. Indeed, federal has paid his share of public health costs, and and state governments have benefited hand- then some. By contrast, the nonsmoking taxpay- somely from excise tax collections, and therein er, presumably the financial beneficiary of the lies one reason they have been unwilling to tobacco settlement, has not been burdened and make cigarettes illegal. should not, therefore, be rewarded. The first comprehensive analysis of the social cost of smoking was published in the Journal of Myth #5: A legislated ‘the American Medical Association in 1989 by a gettlement is the only way to team of researchers from the RAND Corpora- . . tion. The RAND study established the frame- resolve this serious problem. work for subsequent research, setting forth two Disputes between private parties must not be key principles. First, if a smoker does not die resolved by legislative fiat. The settlement from a smoking-related illness, he will die from emerged after secret negotiations involving something else. Accordingly, the relevant social defendants with the boot of government resting cost is not the entire amount spent on his illness, on their necks, state attorneys general who seek but the difference between the amount spent and to replenish their Medicaid coffers without the amount that would otherwise have been imposing unpopular tax increases, and advoca- spent if he had not smoked. Second, premature cy groups that have subordinated the rule of law death from smoking can produce long-term to their professed health concerns. Our courts, financial benefits in the form of lower retire- not our legislatures, are constituted for the reso- ment costs and reduced nursing home care. lution of such disputes. They are the proper Those benefits are an offset to outlays for med- forum to adjudicate the one legitimate argument ical care, sick leave, and group life insurance. for holding a tobacco company liable notwith- Researchers at RAND concluded that the standing a consumer’s decision to smoke: a public health cost of a pack of cigarettes in 1986 smoker is not free to choose if he relies on dollars was 15 cents. The Congressional fraudulent advertising or if he is addicted as a Research Service updated that estimate to 33 minor and unable to quit once he is capable of cents, in 1993 dollars. Smokers were then pay- appreciating the risks. ing an average of 53 cents per pack in excise Weighing against that argument, however, is taxes—o60 percent more than the costs they were evidence that 46 million people have quit smok- imposing. In a separate study, Duke University ing. Moreover, as tobacco critic Richard Kluger economist W. Kip Viscusi reworked the RAND concedes: “Whether one categorizes smoking as data and found that medical care, sick leave,and a... vice, a dependency, or an addiction, it was group life insurance cost approximately 51 commonly known—and had been for decades— cents per pack’—still lower than the excise tax, to be hard to stop once begun. Nor could anyone even without offseting for retirement and nurs- say for certain how much of a daily dose served ing home savings. With all expenditures and to induce addiction; tolerance differed from per- savings factored in, the total external cost per son to person.” Kluger concludes that there is no ===== PAGE 21 ===== THE TOBACCO DEAL 21 basis to “claim that the cigarette makers had months after the parties signed the “Proposed massively imposed an intentionally addicting Resolution” —that “{o]ur support for the tobac- product on an innocent public that had little co program is as strong as ever.” knowledge or choice in the matter.”8 Regarding tobacco and its dangers, the pri- The hazards of tobacco were well-document- vate sector is capable of gathering and dissemi- ed as long as 400 years ago. Indeed, throughout nating the requisite information. Then, based on this century incessant warnings have emanated that information, we can each decide whether to from thousands of health publications, medical purchase a particular product. The controlling professionals, and government entities. By the principle is the one laid down by former Senator 1920s, 14 states had actually prohibited ciga- George McGovern, who lost his daughter to rettes. Printed health warnings appeared on alcoholism and thus knows firsthand what can every pack of cigarettes lawfully sold in the transpire when a risky product is abused. Sena- United States for the past 30 years. To be tor McGovern points to “those who would deny unaware of the danger of tobacco is to have others the choice to eat meat, wear fur, drink been hopelessly oblivious. coffee or simply eat extra-large portions of In any event, those are the claims and coun- food.” He cautions that “the choices we make terclaims that should be resolved in court. Our may be foolish or self-destructive [but] there is adversarial system—including evidence, trial, still the overriding principle that we cannot and jury verdict—must be permitted to function. allow the micromanaging of each other’s lives. Smokers, insurance companies, and the industry . .. [W]hen we no longer allow those choices, should fight it out, applying traditional princi- both civility and common sense will have been ples of tort law. State Medicaid systems may sue ~~ diminished.”!0 O like any other insurer; but they are subject to the assumption-of-risk defense and they must prove 1. Richard Scruggs, remarks to the Federalist Society, National hyo ; : Conference on Civil Justice and the Litigation Process, September case-by-case causation and damages. If a plain 12. 1996, transcript, p. 188, tiff can show that he was defrauded, unaware of 2. Stephen Rothman, “Tobacco Industry Defense Move Curbed : : . s _ by Fla. Judge,” Reuters, February 3, 1997. the risks, and addicted by the industry s decep 3. Dwight R. Lee, Will Government's Crusade Against Tobacco tion, then he should prevail. But the rules must #ork? (St. Louis: Center for the Study of American Business, Wash- ’ . . - be objective and evenhanded—the same rules id ot 1997), pp. 2-4. that are applied against any other defendant. 5. William G. Manning, et al., “The Taxes of Sin: Do Smokers eo : _ and Drinkers Pay Their Way?” Journal of the American Medical As for Congress, if it truly wants to discour Association, March 17, 1989. p. 1604. age tobacco consumption, it can start by elimi- 6. Jane G. Gravelle and Dennis Zimmerman, Cigarette Taxes to : : ’ F3: Fund Health Care Reform: An Economic Analysis (Washington, nating the industry s subsidies. There canbe no ['%" Congressional Research Service, 1994) rational explanation why the Department of 7. W. Kip Viscusi, “Cigarette Taxation and the Social Conse- Agriculture exp ends tax dollars in promoting an Quences of Smoking,” in James Poterba, ed., Tax Policy and the oo . . er Economy (Cambridge, Mass.: MIT Press, vol. 9, 1995), Table 5. activity that the FDA is attempting to inhibit. 8. Richard Kluger, Ashes to Ashes: America’s Hundred-Year : : er Cigarette War, the Public Health, and the Unabashed Triumph of Despite that unassailable proposition, We are pu Morris (New York: Alfred A. Knopf, 1996). p. 760. treated to the spectacle of Dan Glickman, secre- 9. “Washington Assures N.C. Tobacco Farmers,” Reuters, tary . . August 27, 1997. of agn culture, announcing to the applause 10. George McGovern, “Whose Life Is It?” New York Times, of North Carolina tobacco farmers—two August 14, 1997, p. A3S. ===== PAGE 22 ===== Ideas and Consequences by Lawrence W. Reed Food for Thought I may seem strange at first, but one of the lum south was 50 percent at a time when it was great virtues of anything “private” is also an a criminal offense to educate blacks, one has to obstacle to making its case to a skeptical pub- wonder if we’d actually be better off in our lic. That virtue is this: if it’s private, it will be inner cities today if we closed down the public held to a higher standard than its “public” schools and made education illegal. counterpart. This mentality translates into an untenable Indeed, a favorite ploy of statists is to judge a situation when it dominates public debate: it private activity, institution, or proposal against means we end up tolerating the awful to avoid some imagined ideal, which makes it automati- the better-but-less-than-perfect. To seize the cally defective by comparison every time. It high ground, we must be equipped to explain often doesn’t matter how superior the private vividly the shortcomings of government action. sector is over the public sector; if what’s private No better example comes to mind than one in comes with any warts at all, the statist usually which I was recently and personally involved. 1 says, “Obviously we can’t do that, so let’s stick was arguing before a large audience that if one with government” —even if it is a wart hog. is not yet sold on privatizing the schools, then at Should first-class letter mail delivery be pri- least privatizing certain aspects, like food ser- vatized? The statist objects by suggesting that if vice, could save the taxpayers some money and private carriers handled the mail, the cost would improve the quality. But to the approval of rise and some people wouldn’t get their mail at many nodding heads, the first questioner all. So we keep the government post office, revealed the bias I’ve described above: “If pri- which delivers ever-higher costs more reliably vate firms take charge of the food, the children than it delivers the mail itself. will be at risk. Private companies are interested Should education be handled in the market- only in profit and they really don’t care about place, rather than by government? The statist the kids. To make money, they’ll cut corners warns that if education were privatized, some and who knows what they would end up serving people might get rich while some children fell for lunch. Keep our cafeterias public, not pri- through the cracks. So we keep the education vate, because government has only the kids’ status quo, wherein teacher union leaders rake best interests in mind.” in six-figure salaries as millions of children, at That objection sounds plausible only until you great expense, go uneducated. Given the fact look at the real world. The fact is that while that literacy among black slaves in the antebel- problems have arisen in both public and private cafeterias, private ones usually have stronger —_— _ incentives to prevent them from occurring in the Lawrence W. Reed, economist and author, is presi- dent of the Mackinac Center for Public Policy, a free- first place and to fix them quickly when they i market research and educational organization head- happen. I drove home the point with a poignant quartered in Midland, Michigan. story. 22 ===== PAGE 23 ===== 23 If you think public cafeterias are safer, I said, requires workers to take a food-handling class. you didn’t see a revealing story in the Detroit Cafeterias run by the Detroit public schools are News on October 17, 1996. Headlined “Many inspected only once a year and typically require School Cafeterias Unclean: Health Inspectors only the managers (not food service workers) to Find Mice, Bad Food At Area Sites,” the article be trained in safe handling of food. revealed that inspectors “found mice and water Nationwide, an industry estimate puts the bugs scurrying in kitchens, rotten food, half- number of privatized public school cafeterias at cooked hamburgers and cafeteria employees approximately 10 percent of all districts, who couldn’t wash their hands because sinks excluding small rural districts. That means that were inaccessible. . . .” the great majority of public-school cafeterias Eight out of ten public school cafeterias in are not privatized—epresenting a huge poten- Metro Detroit were found to be in violation of tial market for firms able to offer lower costs one or more critical health regulations, putting and improved service, and a potentially safer many children at risk for food-borne illnesses. environment for children. What on earth makes Two hundred public schools—all in the Detroit anyone think that government restaurants are area—were cited for at least six critical viola- better than private ones? tions when inspectors made a sweep of the Private food-service companies are usually schools. Cockroaches, flies, spoiled food, and very successful at what they do because they staphylococcus bacteria were common. know they can lose the business quickly if they Incredibly, a survey by the Detroit News over turn in a poor performance. And, in many a three-year period found that “Hundreds of places, they feel the competition from nearby children have fallen ill from bad school food” fast-food restaurants that attract students in the while many others “are believed to get sick in higher grades. Says Paul Kelly, business man- ways that go unreported.” ager for the Pocono Mountain School Board in The problem is not peculiar to Detroit’s pub- Sweetwater, Pennsylvania, “Companies can lic schools. The same article points out that offer more resources. You get the clout and schools in New York City (and by inference, economies of scale in purchasing. You get those in other big cities as well) are plagued research and insights into products such as milk with similar problems. Edward Stancik, a New and biodegradable materials.” Those are the York Special Commissioner who investigated facts I shared, in so many words, with my audi- the schools, had this to say: “School officials ence. If my reading of the consensus at the end don’t seem to get it. Kids are getting sick, work- of the meeting is accurate, I think it worked. ers are untrained, food is uneatable.” That was one small battle in a great big war By contrast, nearby schools with privatized of ideas that the advocates for free markets are - cafeterias look pretty good. The city of Ham- waging every day of the week. It made me tramck, which is completely surrounded by the appreciate an important fact: winning the war city of Detroit, has “one of the cleanest cafete- requires that we not let the other side get away rias” in the area. It’s managed by the Marriott with judging free markets against perfection Corporation, which inspects the food service while they judge their own deficient prescrip- facilities it manages on a monthly basis and tions against mere good intentions. O ===== PAGE 24 ===== (DEAS ON LIBERTY Roads Without the State by Peter Samuel an there be roads if the government doesn’t quickly that this was designed “to suit the con- build them? The first roads were probably venience of everyman’s fields.” People built not even made by humans but by animals. Herds local roads to suit their own purposes, making of buffalo, deer, and other grass foragers pushed things difficult for distant travelers. Washing- aside the shrubs and trampled down the grass to ton, a great traveler in his first profession as a make tracks for their mass migrations—tracks surveyor and then as an officer in the war that humans exploited. against the French, wrote acerbically that the Many of the first manmade improvements to circuitousness of local roads made finding one’s those tracks were made by the military because way difficult because “the directions you the deployment of armies depended heavily on receive from people are blind and ignorant.”! reliable supplies. There’s a saying among mili- In Washington’s time it was regarded as an tary logisticians that soldiers fight on their act of enlightenment to have the military engi- stomachs, so in order to keep those stomachs neers lay out a new town according to a rectan- filled, armies needed wheeled carts to bring in gular grid—thus the layout of central Philadel- the supplies of grain, meat, and other provisions phia, old town Alexandria, Washington, D.C. to sustain the bodily energy and the morale of (with diagonals added), and Manhattan north of the soldiers. Military engineers were among the the Dutch Wall Street area. Among the quite first road and bridge builders. Because the state mindless applications of the grid, consider hilly depended on the military for its survival, it has San Francisco! always been interested in roads. Such “grid” road networks were laid down by At the same time, roads have always been a rulers going back to ancient Egypt and Assyria, vital part of peaceful trade and commerce, and though the design is normally attributed to Hip- have served the movement of people in search podamus, the Greek follower of mathematician of new opportunities. So a tension has always Pythagoras, for its application in the building of existed over the role of the state in assuring the town of Miletus following its sacking by the good roads. They have always served state and Persians in 440 BC. The grid Hippodamus laid private purposes. down in Miletus was extolled as a triumph of Roads have varied from the apparently hap- “reason” over the “wanton riot of nature,”? and hazard and irrational in organization to the “Milesian” road plans became widely applied in almost mindlessly regular. George Washington the classical world, especially by the Romans in complained in his diary that New England’s their new towns, but also as far away as China. roads were “amazingly crooked,” but noted Washington was not the only early American founder to take an enormous personal interest in Peter Samuel is editor and publisher of Toll Roads, a Toads. At Thomas Jefferson’s initiative, the monthly newsletter. 1785 Land Ordinance Act specified that on land 24 ===== PAGE 25 ===== 25 in the territories beyond the original 13 states, factured at a small number of major refineries or farmers were required to deed 33-foot strips on distributed from major points. The taxman can either side of all the boundaries to provide 66- track the fuel under those circumstances. But foot rights of way for roads, this being the esti- before petroleum, road vehicles depended on mated width needed for a horse and wagon team horse and ox power, and their “fuel” consisted to execute what we now call a U-turn. The road of hay, oats, and other feed that was so highly geometry mandated by the act, which was re- dispersed, no tax system could possibly track inforced in the Homestead Act of 1862, was an them. instrument of social and economic engineering in that it set a pattern for farm size and land sub- division over vast tracts of the west. It is easily Involuntary Servitude visible today to passengers looking down on The most common early method of getting states like Iowa and Kansas from an airplane roads built was the corvée—a decree of the local window. court ordering all able-bodied men in an area to report with pick and shovel for a couple of days Roads for Safety and of local roadwork. The well-heeled were able to Sanitation pay for substitutes to fill in for them. As trade developed further west, the attitude toward Besides serving the ruler’s military needs, corvée changed because local people didn’t see roads were also seen as lines of demarcation for why they should engage in forced road labor on property and as safety and sanitation devices. behalf of distant interests. It was one thing to They provided safety, it was hoped, by being band together with immediate friends and wide enough to confine fire to a single city neighbors for mutual benefit. But it was quite block. Sanitation was advanced by the roads’ another matter to labor for the benefit of through functioning as gutters for the drainage of waste traffic—commercial carriers or travelers from water. That was perhaps the first “utility” asso- far away. Whenever the corvée was stretched to ciated with streets, followed by water, gas, elec- road improvements that benefited outsiders, it tricity, and now telecommunications. The state broke down. was involved to adjudicate rights and responsi- Three alternatives were available to corvée- bilities with respect to vehicular safety, trash maintained roads, alternatives that remain disposal, and common rights of passage. Many today: state-funded roads, nationally planned roads were indeed commons in the sense that and funded roads, and private turnpikes. With they were wide enough for livestock to graze this last alternative, investor-financed corpora- and feed a bit while resting on a journey. tions would build and maintain a road based on It was another kind of utility, the postal ser- user tolls. (The turnpike was literally the light- vice, that enshrined in the Constitution the pike, or spear-like barrier, that was turned by the interest of the U.S. government in roads. Arti- toll collector to let traffic pass.) cle 1, Section 8, Clause 7, gives the Congress At the center of American transportation pol- the power “To establish Post Offices and post itics has been debate over how far each of these Roads.” Post roads were not defined, but in three models should be used. There have always support of the postal service the Founding been those favoring national planning and Fathers apparently gave the federal government finance of roads. In 1808, at the request of the broad powers over almost any roads in theory. U.S. Senate, Treasury Secretary Albert Gallatin It is one thing to be granted a power, another produced a national plan for highways and to raise the funds to exercise it. From the earli- canals. He proposed federal construction of est days of the republic there have been argu- roads from the Atlantic-coast cities to Detroit, ments about the fairest and best method to St. Louis, and New Orleans. In one passage of finance roads. Before the introduction of the the report he asserted that public subsidies of spark-ignition engine early in this century, there this kind would increase national income by the was no feasible way of collecting a fuel tax. A full amount of any expenditure. A road, like any fuel tax is feasible when the fuel used is manu- other investment, can only be assessed on its ===== PAGE 26 ===== 26 THE FREEMAN e JANUARY 1998 likely revenues and costs, not on its general transportation. This was a major business. By nature. But then public officials and bureau- some estimates, half the corporations formed crats, risking the money of others, have always in the first half of the last century were tollway been cavalier in such pronouncements. Gal- companies. At least 10,000 miles of private latin’s economic nonsense is repeated by enthu- toll roads were built in the first 60 years of the siasts for transportation subsidies to this day. republic.3 But if his rationale was faulty, there was a The toll road was often the subject of contro- case for improved roads, and Gallatin’s plans versy, political pressure, and changing rules. caught the imagination of congressmen. The But it was a central economic institution and a Congress passed a bill to charter a special bank major public utility in late eighteenth- and early to raise $13 million over 20 years for Gallatin’s nineteenth-century America. Local merchants, national roads. The bill was vetoed in 1817 by landowners, and farmers financed several thou- President James Madison, who argued it sand turnpikes in the northeast, and smaller infringed states rights. In so doing he averted numbers elsewhere—evidence of which national planning of highways for a while. A remains in the name “pike” found on many now federally subsidized National Road between “free” roads. Investors knew that political inter- Cumberland, Maryland, and Wheeling, West ventions to cap toll rates, exempt classes of Virginia (now US-40), had been built in the people from tolls by law, or improve competi- 1810s but the federal government did not have tive free roads could ruin a turnpike. So sub- the money for its maintenance. Again there was scription to the stock was often made on other contention. The Congress in 1822 passed a bill than strictly investment grounds. Some invest- to impose tolls for maintenance of this Cumber- ed because they saw it as a civic duty or were land-Wheeling road. Again a president, this time subject to peer pressure. Some stock buyers James Monroe, intervened, vetoing the bill as wanted to influence the route of the turnpike to unconstitutional. The issue of responsibility for their own benefit. For example, the records of roads was so big that it became an early test of the Brandonville Turnpike Company in Vir- the whole structure of the U.S. Constitution and ginja show that on June 6, 1847, one E. Brooke produced some of the first presidential vetoes. pledged $75 for stock “if it [the proposed turn- In a pattern that survives to this day, the pike] goes within ten yards in front of my Cumberland-Wheeling National Road was poyse.” maintained by the states, with the amount of A small minority of the turnpikes gave their federal support varying from year to year, jpvestors a good return on their capital. Other depending on the vagaries of political machina- pikes were badly managed or simply ill-con- tions in Washington, D.C. In general, govern- ceived, and failed. And competing technolo- ment funding for roads was so poor in the age of gy—the steam railroad—came along to sup- horse power that turnpike corporations were the plant the gravel-and-dirt pikes at least for long- major mechanism for improving and maintain- hay] transportation from about 1850 onward. ing roads. Some of them were what would now jth respect to animal-drawn vehicles, the be called “public-private partnerships.” The ympikes’ grand era was 1780 to 1840. Some government provided charters and some subsi- 55teq to late in the new century; others went dies or capital contributions. There was plenty jn(o decline or were taken over by local author- of innovative financing; for instance, landown- jyioc In most cases, the localities inherited ers subscribed to stock on condition that the toll : : from the turnpikes much improved roadways road serviced their property. and bridges that would never have been built otherwise. Turnpikes as Investment Opportunities The Automobile Era Straight investor money was garnered too. In the early years of the automobile, the gaso- In the early days of the republic, such turn- line tax was seen as a sensible user fee for roads. pikes provided the main basis of intercity The federal Department of Agriculture gained ===== PAGE 27 ===== ROADS WITHOUT THE STATE 27 support for “lifting farmers out of the mud” with the right of way and works of “Vanderbilt’s a program of tax-financed rural roads. In the Folly”—an uncompleted set of tunnels and 1920s a Federal Bureau of Public Roads was embankments from the abandoned New York established. It successfully pushed the notion Central’s south Pennsylvania railroad. The that a nationally planned network of roads was idea for the Pennsylvania Turnpike, the first of needed and that only government funding the big cross-state turnpikes, was credited to a would ensure that this could be developed.’ The lobbyist, William Sutherland of the Pennsylva- modern motorway, or freeway, especially suited nia Motor Truck Association and Victor to tolling because of its limited access and Lequoc, an employee of the State Planning egress points, was not implemented until the Agency, whose role was to garner the maxi- 1930s. That coincided with the Great Depress mum anti-depression money by coming up sion’s (erroneous) discrediting of capitalism and with projects that would impress the federal its celebration of the state, as seen in the New government.6 These government-owned corpo- Deal’s government activism. rations pioneered the earliest sections of the Government dominated highway building. In interstate highway system and financed some New York City, Robert Moses, the great city- 2,100 miles of tolled freeways between 1940 government activist, pressed tax money into a and 1956, when the Federal-Aid Highway Act system of expressways to supplement the early introduced a gasoline tax to finance a highway parkways (essentially low-speed freeways in a trust fund out of which the U.S. government park-like setting). The parkways drew on the would fund 90 percent of the cost of new inter- inspired park designs of Frederick Law Olm- state freeways. That act grandfathered the sted. Lake Shore Drive in downtown Chicago, existing toll roads into the interstate system, which opened to traffic in 1933, is described as meaning that they got convenient connections the first “superhighway” that discarded the pas- with the new untolled freeways plus nice fed- toral setting of the parkway for the unapologetic eral interstate shield signs. utilitarianism of a mass automobile movement The act, however, banned any new tolls on system. The year 1937 brought the first propos- interstates. In one of the most spectacular mis- al for a metropolitan-wide network of freeways uses of economic modeling, the U.S. Bureau of (though described then with the British term Public Roads purported to analyze the feasibili- “motorway”) in Los Angeles, an idea promoted ty of toll financing and estimated that only 172 by a city engineer and the Automobile Club of miles out of an initial 14,336-mile interstate sys- Southern California. The first freeways in Los tem could be supported by tolls! Defense and Angeles were built from 1938 to 1940—the economic arguments were advanced for the gas- Arroyo Seco (later renamed the Pasadena Free- tax—financed system, which built about 36,000 way) and a one-mile piece of the Hollywood miles of freeway in the next 20 years. Some freeway. Their funding was a patchwork of gov- 2,500 miles of new toll roads were built by state ernment money, including cash from the federal turnpike authorities during this period, either Works Progress Administration, city funds, and extensions of pre-existing toll roads or, as in the first gas taxes, which were imposed by local Florida, Oklahoma, and Kentucky, freeways governments. The next L.A. freeways were that local politicians could not get put on the funded by the feds under the National Strategic interstate map and funded by the feds. The System of Roads umbrella, ensuring priority in tolled mileage peaked in 1975 at 4,400 miles. allocations of administered supplies of steel and From the late 1960s de-tolling became common. cement. Toll plazas were nuisances, the site of stops and The first auto-era roads to be tolled—by the queuing that seemed an anomaly on an other- state highway department—were Connecti- wise high-speed highway. So it was generally cut’s Merritt and Wilbur Cross Parkways in popular for politicians to promise to get rid of 1937. Various state turnpike authorities were the tolls. Moreover, the states could get federal being formed in the war years, following the grants for reconstruction and improvement of example of the Pennsylvania Turnpike, which the grandfathered toll roads only by de-tolling opened its first toll motorway in 1940, using them. ===== PAGE 28 ===== 28 THE FREEMAN JANUARY 1998 By 1990 there were 42,000 miles of non-toll farms. Because those products sell for a price, interstate freeways, 9,500 miles of state- their producers are able to raise money by going financed non-toll freeways, and 4,100 miles of out into the capital markets with estimates of the turnpike.” This decade has seen few new inter- profits they may be able to generate through state freeways and about 300 miles more of their proposed investment. So if highways were state and local government-built turnpike, priced with tolls, the highway service providers including the first major toll roads in Califor- could raise capital for good toll highway pro- nia. And since 1995 two investor-financed jects based on the prospective stream of future highway projects have been built, totaling 24 revenues. miles—the Dulles Greenway in Loudoun Such bottom-line-oriented managers are County, Virginia, and 91-Express in Orange likely to run their highways much better than County, California. civil servants working in state agencies. The civil servant, whose funding comes from the legislature, will be helped by the poor condition The Market Alternative of the roads. Roads in disrepair will draw atten- tion to the supposedly dire need of the state agency for more money in the next budget. The worse the condition, and the more aggravating the traffic jams, the more likely state managers are to gain political support for generous fund- ing. No reason to schedule repaving at night, or to quickly move the overturned tractor trail- er, or do life-cycle cost analysis of more robust Given our history of state dominance of highways this century, we have huge vested interests in its continuance: state highway bureaucracies, an industry of contractors and consultants with connections to those bureau- cracies, and legislators for whom highway pork projects are part of the political medium of exchange. Two arguments are deployed that jnitia] construction versus maintenance or buttress the statist status quo for tax-financed rebuild. No one ever calculates returns on cap- highways—that taxes are the most practical and ji, at a state highway administration or sees the 108 fair way to pay for roads. Both are widely adverse results on their income of causing traf- believed, but dubious. On faimess, it is said to fc jams. be more burdensome for the worker eaming The second argument against tolls is that $30,000 or the welfare mom on $15,000 to pay they are costly and cumbersome to collect. But a $2 toll than it is for a rich person making over compared to what? Taxes are also costly to col- $100,000. That is true, of course. Any expense Ject. The tax agencies employ vast staffs and is less burdensome to the rich than to the poor, impose large costs on taxpayers. The various which is a major reason that people work. The “highway user” taxes imposed on fuels are a inexorable logic of the tolls-are-unfair argu- huge object of evasion. Gasoline used on farms ment is that prices for goods and services gen- or boats, for example, is tax-exempt. So is erally are unfair, which leads to a case for diesel fuel used in construction or shipping or socializing everything and distributing goods as heating fuel. Thus, from organized crime through the state according to some godly judg- down to small struggling gas stations and ment of “need.” But in the real world, where tanker drivers, people heavily exploit the profit capitalism and markets have been found a to be gained from classifying fuels as tax- rather practical way of getting people to work exempt, then quietly selling them for trans- on behalf of one another via exchanges of portation use as tax-paid. goods and services, prices are central. Moreover, the politicians for so long have Indeed, the lack of pricing and markets for diverted money from the so-called highway highway services is at the root of many of our trust fund to nontransport purposes that most highway problems. There is a constant moan citizens understandably resist proposals for from people about the lack of money for roads, higher gas taxes. They doubt that they get high- a complaint you never hear in respect of build- way value for the gas tax. Tolls are often the ing new electric generating plants, telephone politically practical only way to get needed new lines, computer factories, car plants, or pig highways financed and built. ===== PAGE 29 ===== ROADS WITHOUT THE STATE 29 Toll collection via the traditional toll plaza used to prevent backups and all the resultant is, of course, usually cumbersome and costly. frustration, pollution, energy use, wasted time, But advances in radio and imaging allow new and accidents that accompany unpriced or roads to levy tolls on the fly. Most existing toll fixed-price roads. roads are being retrofitted so that motorists Asked recently to devise a method to manage with transponders (a battery-powered radio smooth efficient traffic flows on high occupan- device the size of a cigarette pack) can drive cy vehicle lanes under construction on State through toll plazas and pay by mail or credit Route 91 in the western portion of Orange card without stopping. The first toll roads are County, California, consultants said, “variable now operating without any plaza at all—the tolls.” It is the way commodity markets work, investor-built 91 Express in California and 407 the way we get our food, our housing, and most Express Toll Route in Toronto. Motorists using other things. The idea is old and tried and 407-ETR acquire a toll transponder, allowing proven. New technology allows it to be imple- the system to identify their accounts on entry mented on highways, lifting the heavy hand of and again on exit, compute their mileage, statism from motorists at last. If a case ever apply the appropriate time-of-day toll, and existed for state provision of roads, it exists no debit their accounts. If a motorist doesn’t have longer. a transponder, the license plate is pho- A variety of methods are available to reduce tographed, and a toll bill arrives each month itn the role of the state in the provision of roads: the mail. With these technologies, the cost of toll col- * The various state and local government- lection can be cheaper than tax collection, and owned turnpikes, toll bridges, and tunnels can the hassle of paying on the road is ended. simply be sold off to the highest bidders. There Some raise “Big Brother” concerns, but they are about 100 of these, and they collect about $5 apply equally to requirements for Social Secu- billion annually in tolls and are probably worth rity numbers, vehicle license plates, and dri- $20 billion to $30 billion. vers licenses. Concerns can be mitigated by » The maintenance of highways is increas- anonymous transponder accounts, indepen- ingly being privatized, just as construction of dently verified and routine purging of toll highways has always been based on competi- data, and the argument, “If you really are con- tive contract. But government can get out of the cerned that information about your move- road business by reducing gas taxes and calling ments are in a toll computer, then don’t use the for proposals from business for funding roads. toll road.” Eight states already have mechanisms in place for investor-financed companies to build new roads as toll projects, and a number of projects are under way. The advantages of this are that The new automated toll roads are bringing investors rather than taxpayers take the risks. market practices into highway service, for Existing nontoll highways can be either example by charging higher tolls at peak than sold off by the states or franchised to business in at off-peak times. They do that because they return for the rights to levy tolls, sell off utility make more revenue that way. The time sav- rights-of-way, and run service and refreshment ings from using a free-flowing toll road are. concessions. Users of the toll roads should be much greater in rush hours than nonrush exempted from gas taxes and other state charges hours, so motorists are prepared to pay more that would otherwise have gone to the upkeep of then. Variable pricing makes business sense, the roads. With commercial ownership and too. Highways can operate much more effi- management, highway service will be more ciently if they can persuade some motorists to responsive to motorist needs than state “pork” defer their trips to times when there is spare roads. capacity, or to use mass transit or car pools. Variable tolls are thus a powerful tool for It is possible to bring some of the benefits of increasing transport productivity. They can be the marketplace by introducing tolls while Market Practices ===== PAGE 30 ===== 30 THE FREEMAN e JANUARY 1998 maintaining state ownership. That is what the Qther Sources Germans plan for their autobahn system, and it seems to be the major British approach. But full privatization would transfer ownership to investors and allow the assets to be traded, introducing the additional market discipline of competition in both consumer and capital mar- kets. By allowing takeovers, consolidations, and spin-offs of highway assets, the markets would ensure that highways are managed for the best return on capital-—the dynamic that gives us our food, our fuels, our housing, our electric power, and all the rest of what goes into our standard of living. [] This article draws heavily on the work of the bicentennial celebration book America’s High- ways 1776 to 1976: A History of the Federal-Aid Program (no author named), U.S. Department of Transportation, U.S. Government Printing Office, Washington, D.C., 1976. It also relies on the work of Daniel B. Klein, Santa Clara University, California, the premier economic historian of nineteenth-century turnpikes. See “The Volun- tary Provision of Public Goods? The Tumpike Companies of Early America,” Economic Inquiry, Western Economic Association International, October 1990, pp. 788-812, and Daniel B. Klein and John Majewski, “Economy, Community and 1. M. G. Lay, Ways of the World: A History of the World's Roads aw: The Turnpike Movement in New York, d of the Vehicles that Used Th Brunswick, N.J.: Rut . . Crs Press, 1992) 0 i em (New Brunswick, eer 1797-1845,” Law and Society Review, Vol. 26 2. Ibid., p. 13. No. 3, 1992, pp. 469-512. Also useful is Robert 3. José Gomez-lbaiiez and John R. Meyer, “Private Toll Roads in . “Th . . the United States,” Report for the U.S. Department of Transporta- Flemming Hunter, ¢ Turnpike Movement in tion, Harvard University, 1991, p. 2. Virginia, 1816-1860,” Ph.D. thesis in political 4. Robert Flemming Hunter, “The Turnpike Movement in Vir- : Columbia Uni . N York. 1957 ginia, 1816-1860,” Ph.D. thesis, Columbia University, New York, Science, Columbia University, New York, . 1957, p. 33. ’ And on the first turnpike in the automobile era 5. Bruce E. Seely, Building the American Highway System: Engi- gr . neers as Policymakers (Philadelphia: Temple University Press, the authoritative work is Dan Cupper, The Penn- 1987). sylvania Turnpike: A History, (available at Turn- 6. Dan Cupper, The Pennsylvania Turnpike: A History (Lebanon, pike rest areas, an d from Appli ed Arts Publish- Pa.: Applied Arts Publishers, 1990), p. 7. 7. Gomez-lbafiez and Meyer, p. 7. Crs, P.O. Box 479, Lebanon, PA 17042). “You can either save time by subscribing to Commentary or you can waste time keeping up with it.” — George F. Will Commentary Commentary Sepecwgber 160 Subscribe Today! Tm Commentary ] Call 1 (800) 829-6270 or write to us at 165 East 56th Street, New York, NY 10022 ===== PAGE 31 ===== THEFREEMAN IDEAS ON UBERTY EE—— Who Pays the Price for Motherhood? by Ross Levatter and Rebecca Geshelin (Corer with President Clinton’s approval, ring to mandates for pregnancy coverage in recently mandated that health maintenance employer-purchased health insurance, an essen- organizations (HMOs) permit women giving tially middle-class phenomenon. (Government- birth to stay at least two days in the hospital. provided health care for the poor, including pre- Many physicians applaud the mandate. But natal care, is not discussed in this article.) The mandates, even for praiseworthy actions, have fact is that routine pregnancy should not be an pernicious effects. insurable event at all. No HMO opposes patients staying an extra day-—even an extra month—as long as they pay for the service. So what is really at issue is the provision of extra services at no additional cost, Insurance aims to keep certain unforeseen a condition with which physicians have become disasters—from fires to auto accidents to devas- intimately familiar in the last decade. Such ser- tating disease—from financially ruining the vices won’t be uncompensated for long. HMOs, insured. The goal is not to prepay for planned forced to provide additional services, will sim- events; that’s what savings accounts are for. ply raise rates. Since all HMOs face the same Paying for services like pregnancy and birthing mandate, competition won’t keep the prices through insurance leads to the twin problems of down. Everybody will end up paying more so adverse selection (those who purchase the insur- pregnant women can obtain a benefit they can ance are those most likely to be planning a preg- pay for themselves if they really want it. nancy) and moral hazard (purchasing insurance But don’t women need two days in the hospi- increases, at the margin, the likelihood a preg- tal after delivering a child? The answer, of nancy will occur). The fact that pregnancy is a course, is: not all of them. Some women still desired and elective state guarantees adverse bear children at home. Mandating a minimum selection. Mandates, which limit adverse selec- The Role of Insurance not required by all women makes no sense. tion by extending the coverage to more people, That mandate pales, however, beside the magnify moral hazard. more pervasive subsidy granted to pregnant University of Chicago law professor Richard women in general, a subsidy that grossly dis- Epstein made these points in Forbidden Grounds torts the health-insurance market. We are refer- (Harvard University Press, 1992), “Normally — pregnancy is regarded as a voluntary and wel- Ross Levatter, M.D., is a physician who writes often come event, easily distinguished from any dis- on economic and political issues, Rebecca Geshelin ability for which insurance is usually sought and is a financial director with an applied economics . . background. The authors thank David Dorn for pro- extended. Because pregnancy is desired, and viding details of the appropriate federal laws and because women largely control whether and regulations. when to become pregnant, the evident moral haz- 31 ===== PAGE 32 ===== 32 THE FREEMAN e JANUARY 1998 ard makes pregnancy a poor candidate for any Harm to Low-Income People form of insurance.” Epstein also makes the indel- icate though economically correct point that “women are more likely to choose to become pregnant if they can receive disability payments for an outcome they regard as beneficial.” As health-insurance costs rise, those at the bottom of the employment ladder are frozen out. An employer can ask an employee to choose between a $60,000 salary or a $50,000 salary Despite these perverse outcomes, Congress Pus $10,000 of health insurance. An employer passed the Pregnancy Discrimination Act in cannot ask an employee to choose between a October 1978 (amended under the Civil Rights $13,000 salary and a $5,000 salary plus $10,000 Act of 1991), requiring employers with 15 or Of health insurance. more employees to include pregnancy coverage Although mandated pregnancy coverage is in any offered health insurance benefits. Con- probably the government's most expensive sider the perverse incentives this creates. health mandate, it is by no means the only one. Employers, of course, don’t have to provide Scores of mandated coverage items permeate health insurance. Insurance versus higher cash the federal and state regulations, grossly distort- income is a routine tradeoff employers and iNg negotiations between employee and employees bargain over. Given the uneven tax employer, and between doctor and patient. treatment of the two types of compensation Over the last decade, employers have tried (employer-purchased health insurance is paid several approaches to circumvent insurance with pre-tax dollars while employee-purchased Mandates. Some dropped coverage altogether, health insurance is paid with post-tax dollars), Paid their employees more, and urged them to employees tend to prefer health insurance over Purchase insurance on their own. (Many additional salary at the margin, while the employees didn’t, of course.) Some large com- employer is relatively indifferent. panies have self-insured, which often eliminates That tax treatment distorts the market. The the legal mandates. Self-insurance, however, is market is then further distorted by the Pregnan- typically more costly and less efficient than pur- cy Discrimination Act (PDA). If provided at all, chasing Insurance from companies that special- group health insurance must be purchased for 12¢ in providing it. So government mandates everyone in the group; all employees are eligi- push people to forgo the benefits of the division ble by law. The PDA, by mandating that preg- ©flabor. nancy must be covered if health insurance is The final irony is that the politically imposed offered, raises costs dramatically, shifting mandates for pregnancy coverage (and other employers away from offering coverage if they mandates) are a primary reason that many are unable to lower cash wages. Americans lack health insurance. They’ve sim- All mandates, obviously, increase costs. But ply been priced out of the market. You’ll recall why does pregnancy coverage increase them so that First Lady Hillary Clinton deplored that dramatically? Because pregnancy is notarandom State of affairs and used it to justify her attempt- event (as disease is). Since pregnancy is common ed socialization of the health-care market, even and doctors know their payments are covered by though the government mandates were a major insurance, costs skyrocket. Epstein’s adverse factor making insurance so expensive. This is a selection and moral hazard principles apply. medical microcosm of Ludwig von Mises’s From a business point of view, there may be Point about the instability of a mixed economy. something even worse than a dramatic increase 1he logical consequences of one intervention in costs: an unpredictable increase. Since preg- [62d either to repeal or a new and more perva- nancy is not a random event, statistical predic- SIV€ intervention. We are still suffering from not tions don’t apply. Calculating business costs having learned his lesson. associated with health insurance becomes more a matter of reading entrails than actuarial tables. Again st Motherhood? In such circumstances, employers do not remain : indifferent to the choice between wage increas- But how can you be against health insurance es and additional health benefits. for pregnancy? Isn’t that like being against ===== PAGE 33 ===== The Foundation for Economic Education Irvington-on-Hudson, New York 10533 Tel. (914) 591-7230 Fax (914) 591-8910 E-mail: freeman@westnet.com January 1998 Ld 1 4 ® Bill Gates, Philanthropist et’s review the familiar refrains on giving, the more admirable is that entre- charitable giving. Social democrats preneur. The pro-market Economist, for criticize tycoons for not giving more example, recently hinted none-too-subtly of their wealth to charities. Business peo- that Bill Gates is less admirable than is ple are repeatedly admonished to “give George Soros. The reason is that Soros something back.” The implication is that gives away a much larger share of his commercial profits are taken from others, wealth to charities than does Gates. and decency demands that the lucky tak- The Economist is wrong to deride Gates. ers return at least part of their booty to In fact, if Bill Gates gave away a larger those from whom it was extracted. Bill portion of his wealth to charities he would Gates, in particular, has come under likely reduce the welfare of others rather increasing fire for not shoveling a substan- than increase it. (Gates is just one example. tially greater share of his $40 billion for- Everything said about him here applies to tune into nonprofit causes. all successful entrepreneurs.) In this light, Ted Turner’s recently When discussing Gates’s $40 billion for- announced gift of $1 billion to the United tune, people imagine something like the Nations is widely commended. Among following: If Gates would spread, say, Turner’s admitted aims is to shame other three-quarters of his wealth around to the moguls into donating more of their wealth poor, to colleges, and to nonprofit founda- to charities. tions, each of these groups would be much Free-marketeers, in contrast, point out better off, while Gates himself would still that profits are the reward for good and have a tidy $10 billion in his bank account! creative efforts. Because profits represent Because $10 billion quite adequately pro- only a small portion of entrepreneurs’ net vides a lifetime of luxurious living, Gates additions to society's wealth—and because | is inexcusably greedy for not giving away no business can profit in the market with- a hefty chunk of his wealth. out contributing at least as much to society The trouble with all of those who imag- as it earns in profits—market advocates ine this scenario is that they mistakenly note that there is nothing to give back. assume that Gates consumes his entire for- Profits obtained in the market are earned, tune. It’s true that if Gates liquidated all of never taken. his portfolio he could gorge himself on The free-marketeers are correct. But tens of billions of dollars worth of con- even many market supporters assert that sumption goodies. Like most wealthy peo- the greater an entrepreneur’s charitable ple, however, he doesn’t do that. Contrary ===== PAGE 34 ===== to media insinuations, Gates doesn’t have It is possible for nonprofit foundations to $40 billion in cash or in his checking use these funds as productively as when account. While he may spend several mil- they are used for neurosurgery. But this lion dollars annually for his own con- happy outcome is unlikely. Most nonprofit sumption, the vast bulk of his assets is foundations are unable to measure the invested in Microsoft stock. effectiveness of what they produce. Some And it’s because the vast bulk of his nonprofits, no doubt (such as FEE!), pro- fortune is in Microsoft stock that Gates duce great bang for the buck. But too would likely harm society if he were many nonprofits—especially those actively stricken with an acute spasm of generosity seeking greater government intervention— and gave away a large bundle of his for- produce either no or negative returns. The tune. Here's why. reason is that their managers, unlike Bill Gates is phenomenally good at pleasing | Gates, face no genuine market test of their consumers—that is, at creating wealth for effectiveness. others. His proficiency at this vital chore is Moreover, too much charitable giving is proven by all the recent caterwauling by done for show—to impress the chattering Microsoft's rivals who are irritated that classes with one’s devotion to the arts or they must compete against this mighty with one’s compassion for the latest cause consumer pleaser. If Gates and Co. were célebre. The ostensible beneficiaries of such sufficiently inefficient, Netscape, Novell, giving (“the poor,” “the red-cockaded and other rivals of Microsoft wouldn't woodpecker,” etc.) are seldom the direct howl endlessly to the government and to objects of the alms-giver’s intentions. the press for pity. In contrast, all business decisions are What Bill Gates and Microsoft do made to impress consumers—the people uniquely well is to produce and market who actually stand to benefit from such computer software. If Gates were to liqui- decisions. When a successful entrepreneur date, say, $30 billion of his stake in takes monies from his business and gives it Microsoft and give this sum to nonprofit to charities, that person removes monies causes, he would take an immense amount | from a proven source of increased well- of capital out of a firm with a long record being and puts it into ventures that typi- of creating wealth. Gates would withdraw cally face no market test. $30 billion of assets from what he is None of this denies that there are plenty proven to do best. of worthy causes deserving generous Because Gates could live just as well on financial support. But each giver should $10 billion as on $40 billion, his personal choose wisely, avoiding giving to a cause standard of living wouldn't change. But just because it’s the movement-of-the- the standard of living of the rest of us moment. And entrepreneurs certainly would fall. Society would be poorer with ought never feel obligated to “give some- $30 billion of assets taken from Microsoft. thing back.” Successful entrepreneurs have To see why, ask what would happen to the | already created great wealth and opportu- wealth of the nation if, say, a gifted neuro- nity for others. surgeon liquidated his physical assets—his If Bill Gates and other capitalists want scalpels, his diagnostic machines, his to aid charities by reducing their own pre- examining rooms—and gave the resulting sent consumption, that’s grand. But I for monies to the Sierra Club or to United one hope that entrepreneurs take to heart Nations agencies. Gates’s sage observation on charitable Administrators at these agencies would donations: “giving away money effectively be better off, but society would be poorer is almost as hard as earning it the first because this gifted neurosurgeon stripped place.” himself of the tools he needs to do for oth- ers what he is proven to do best. But isn't it possible that agencies receiv- © 75) ing the neurosurgeon’s charity will MA 2» 7 employ this money to produce at least enough wealth to offset the reduction in Donald J. Boudreaux the supply of neurosurgery? President ===== PAGE 35 ===== JANUARY BOOK SALE Start the New Year with great savings on selected titles from the FEE catalogue. Hurry! Offer ends January 31, 1998. FREEMAN CLASSICS Private Property and Political Control 173 pages (P) $14.95 sale $7.00 Public Education and Indoctrination 207 pages (P) $14.95 sale $7.00 Up from Poverty 207 pages (P) $14.95 sale $7.00 BOUND VOLUME OF THE FREEMAN, 1995 808 pages (H) $24.95 sale $15.95 BOUND VOLUME OF THE FREEMAN, 1996 855 pages (H) $24.95 sale $19.95 LORD JOHN E.E.D. ACTON The History of Freedom 100 pages (P) $7.95 sale $3.95 PETER J. BOETTKE, editor The Collapse of Development Planning 342 pages (P) $21.95 sale $12.95 CLARENCE B. CARSON Throttling the Railroads 143 pages (H) $12.95 sale $7.95 RICHARD M. EBELING, editor Global Free Trade: Rhetoric or Reality? 173 pages (P) $10.95 sale $4.95 ERIC W. HAGEN and JAMES J. WORMAN An Endless Series of Hobgoblins 161 pages (P) $9.95 sale $6.95 RUSSELL KIRK The Roots of American Order 559 pages (P) $14.95 sale $7.95 ROBERT LOVE How to Start Your Own School 178 pages (H) $12.95 sale $9.95 J. WILSON MIXON, JR., editor Private Means, Public Ends 230 pages (P) $1495 sale $9.95 GARY NORTH Puritan Economic Experiments 74 pages (P) $5.95 sale $3.95 HANS F. SENNHOLZ Three Economic Commandments 47 pages (P) $4.95 sale $2.95 MARK SKOUSEN The Structure of Production 430 pages (H) $29.95 sale $15.95 MILLER UPTON The Great Society: A Second Opinion 36 pages (P) $2.95 sale $1.00 Postage & handling: Please add $3 per order of $25 or less; $4 per order of $26-$50; $5 per order of more than $50. Send your order, with accompanying check or money order, to FEE, 30 South Broadway, Irvington-on-Hudson, NY 10533. Visa and MasterCard telephone and fax orders ($10 minimum) are welcomed: (800) 452-3518; fax (914) 591-8910. Booksellers and others who wish to order in quantity should call Renée Oechsner, at (914) 591-7230. ===== PAGE 36 ===== Now complete—a rich narrative account of our country’s history . . . A Basic History of the United States by Clarence B. Carson Vol. 1—The Colonial Experience, 1607-1774. 184 pages, $9.00 Vol. 2—The Beginning of the Republic, 1775-1825. 262 pages, $10.00 Vol. 3—The Sections and the Civil War, 1826-1877. 224 pages, $10.00 Vol. 4—The Growth of America, 1878-1928. 300 pages, $11.00 Vol. 5—The Welfare State, 1929-1985. 354 pages, $12.00 Vol. 6—America in Gridlock, 1985-1995. 214 pages, $16.00 The first general history of the United States to come out Over 1500 pages in all, illustrated. of the Conservative Movement If volumes are purchased separately, ¢ Broad in perspective, yet rich in detail total price is $68.00. ¢ Recaptures the spirit and values that made America great Order the set now and save $21.00. * A history you will want for your children and grandchildren paperback $47.00/set Published by the American Textbook Committee. Available from FEE. Visa and MasterCard Orders: (800) 452-3518 FEE 1998 Undergraduate Seminar in Economics & Liberty Thursday, March 19 through Saturday, March 21 A wonderful opportunity for college undergraduates to participate in lectures and discussions on free-market economics and classical liberalism. The seminar will be held at the Hudson River residence of the Foundation for Economic Education in Irvington-on-Hudson, just north of New York City. SCHEDULED SPEAKERS: Candace Allen (University of Southern Colorado), Israel Kirzner (New York University), Dwight Lee (University of Georgia), Tom Palmer (Cato Institute), and Lawrence White (University of Georgia). TUITION, MEALS, and LODGING: Hosted by FEE. Space is limited and the selection process is highly competitive. Participants are responsible for their own travel costs. APPLICATIONS: If you are interested in attending, please contact Karol Boudreaux, FEE, 30 South Broadway, Irvington-on-Hudson, NY 10533. (914) 591-7230 (office); (914) 591-8910 (fax); E-mail: kboudreaux@fee.org. Apply today! OPPORTUNITIES FOR SPONSORSHIP: FEE invites financial sponsorship from individuals interested in supporting the seminar. Nominations of highly qualified students are also welcomed. ===== PAGE 37 ===== WHO PAYS THE PRICE FOR MOTHERHOOD? 33 apple pie? Or motherhood, for that matter? Should We Subsidize Actually, it’s only about being against subsi- . 9 dized motherhood. You can like apple pie but Children? oppose the government’s mandating a slice with Are the subsidies justified by the importance every restaurant meal. of children to society? People chose to have Mandated health insurance for routine, children for all of recorded history without uncomplicated childbirth (medical complica- requiring subsidies of this sort. They would con- tions of pregnancy and childbirth are insurable tinue to do so even if the subsidies ended events) makes no more sense than mandated because most people want children. It is unnec- health insurance for baldness, myopia, or infer- essary to subsidize choices people already are tility. Like pregnancy, those are not diseases. prepared to exercise. Moreover, you can have Like pregnancy, they were until recently viewed too much of a good thing. as natural situations to which one adapted. Now, Ironically, much of the subsidy that pregnant like pregnancy, they are conditions that can be women receive represents a transfer from one improved by medical science. The question is: if group of women to another. Infertile women, medical science is used in that way, who should |eghians, and women who simply choose not to pay? bear children suffer lower salaries and dimin- Health-insurance mandates increase costs for jched job opportunities (both the result of everyone, making coverage less affordable. increasing the business costs of hiring women) That higher cost forces some people out of the ¢; her women can have “free” birthing care. health-insurance market. Those remaining ae That is unjust. compelled to subsidize other people’s cosmetic What about women who cannot afford the improvements, visual acuity, fecundity, and costs of pregnancy? While no one should be pregnancy coverage. _ prohibited from having children, neither should Analogies, of course, are always limited. anyone be forced to pay so that others can have There are differences between pregnancy and x : oq baldness. infertilitv. and mvopia. For example children. Clearly, the cost of having a child is ’ w, yopia. PI® dwarfed by the cost of raising a child, yet almost 4 ne hile bs usally 2 consciously atmed hy no one suggests that those costs should fall on J anyone but the parents. Do we really want to thi baldn infertili d 1a— his regard, baldness, infertility, and myopia support subsidies that encourage prospective unlike pregnancy—resemble diseases. That . makes them more like insurable events than Parents to have children they cannot afford to raise? regnancy is. But to some extent and in perhaps pregnancy periap Do these positions sound radical? They subtle ways, the adverse selection and moral _ actually harken back to the traditional method hazard problems still obtain. ) ) Obstetricians, focusing on the many benefits of medical payment, standard practice as recently as four decades ago. It may also be of complete prenatal care, might oppose remov- ; : ing the mandate for insurance coverage. No one the practice people will prefer if they move disputes the benefits. But again, the question js; 2Way from employer-provided health insur- benefits to whom? Are the beneficiaries clearly ance and opt for a more economical package identified, and if so why don’t they pay for the consisting of catastrophic insurance and med- benefits themselves? ical savings accounts (MSAs). They will use Some claim if people must pay for obstetrical MSA money to pay for routine prenatal and care directly, they will forgo it. This is non- delivery costs. sense. Insurance doesn’t routinely pay for cos- Imagine that: actually paying for the costs of metic surgery or corrective-lens surgery or in delivering our own children rather than using vitro fertilization; nonetheless, plastic surgeons, government mandates to thrust an uncompen- ophthalmologists, and fertility. specialists make sated burden on others. What a wonderful good money offering those services. Like preg- demonstration of responsibility and indepen- nancy, such procedures are largely elective and dence for our children to witness as they enter voluntarily paid for. the world. [1] ===== PAGE 38 ===== Potomac Principles by Doug Bandow Global Politics, Political Warming ive years ago the Clinton administration spiracy: The Coming of the New Ice Age and announced a 50-point plan to curb the emis- Ice: The Ultimate Human Catastrophe. sion of so-called greenhouse gases, principally The latter, written by Fred Hoyle and pub- carbon dioxide. Countries spent much of last lished in 1981, proclaimed: “It is 12,500 years fall debating a global agreement to cut future since the last ice age ended, which means the emissions below 1990 levels. “The only thing next one is long overdue. When the ice comes, we know for absolute certain is that voluntary most of northern America, Britain, and north- programs won’t work,” contends Jessica Tuch- ern Europe will disappear under the glaciers.” man Mathews, president of the Carnegie Since “The right conditions can arise within a Endowment for International Peace. single decade,” Hoyle advocated warming the Actually there’s one other thing that we oceans. know for certain: activists like Mathews are But, happily, that crisis seems to have passed. misusing science in demanding draconian And we are back to global warming. The basic energy restrictions to avert global warming. In theory is that pollutants—so-called greenhouse fact, there is no consensus among climatolo- gases—are accumulating in the atmosphere, gists that uncontrolled, human-induced warm- holding in the heat and causing the world’s tem- ing threatens the planet. Or that the kinds of perature to rise. It remains just a theory, howev- measures being proposed would avert such a er, since climate change is a complex business. danger. For instance, increased emissions may help The climate has long been a favorite of apoc- shield the earth from the effects of the sun’s alyptics. In the 1890s and then again in the rays; other factors, such as variations in the 1950s people warned that the planet was warm- sun’s intensity, also play a role. ing. But in the 1960s and 1970s arose a differ- Nor is there one right temperature. After all, ent fear: a new ice age. there was once an Ice Age. And there was Publications like National Geographic even a little ice age running from the 1400s reported shorter growing seasons, summer through the 1800s, when temperatures were frosts, and advancing glaciers. Time magazine notably lower. There’s no reason to believe observed that “the atmosphere has been grow- that the temperature in 1997, or 1897, or any ing gradually cooler for the past three decades. other particular year is the right one. Indeed, if The trend shows no indication of reversing.” we could choose, we should choose a warmer There were books too, like The Weather Con- climate. Fewer people die because of the cold; less money is spent on energy; growing sea- — sons are longer. Some people would lose, but Doug Bandow, a nationally syndicated columnist, is a & peop senior fellow at the Cato Institute and the author and on net mankind would be better off if tem- editor of several books, including Tripwire: Korea P€ratures rose moderately. The only real and U.S. Foreign Policy in a Changed World. issue, then, is whether the earth faces an 34 ===== PAGE 39 ===== 35 uncontrolled, catastrophic increase in average up. John Shanahan of the American Legislative temperatures. Exchange Council points out that “the govern- The question is worth asking, but the discus- ment’s own satellite data and balloon measure- sion has become highly political. Six years ago ments over the last 18 years show a very slight Stephen Schneider, who once warned of a new cooling,” the opposite of “what the climate ice age, told the Boston Globe that “it is jour- models predict should have occurred.” nalistically irresponsible to present both sides Indeed, to some degree the scaremongering as though it were a question of balance.” reflects sheer hubris. After all, mankind’s Despite being a scientist, he admitted: “I don’t impact on the environment remains marginal— set very much store by looking at the direct evi- just seven billion of the 200 billion tons of car- dence.” After all, he stated, “To avert the risk bon dioxide in the atmosphere is the result of we need to get some broad-based support, to human activity. It may be an important seven capture public imagination. That, of course, billion, but it remains a secondary cause. means getting loads of media coverage. So we Thus, there are good reasons to avoid any have to offer up some scary scenarios, make treaty commitments to regulate the economy some simplified dramatic statements and little into oblivion. The President rejected the envi- mention of any doubts one might have.” So ronmentalists’ most extreme proposals, but much for genuine scientific discourse. activists oppose any compromise. Interior Sec- Explained Schneider: “Each of us has to decide retary Bruce Babbitt even denounced American what the right balance is between being effec- companies as “un-American” for criticizing tive and being honest.” global warming pseudoscience, and suggested He’s not interested in direct evidence because that they be “called to account.” there is no consensus among climatologists Such firms are defending more than their about global warming. Past polls have found profits, however. Since the United States is that most of them do not believe human-induced already one of the globe’s most efficient energy warming had occurred. Even half of the mem- consumers, massive cutbacks in emissions bers of the U.N.-sponsored Intergovernmental would mean fewer jobs, less production, and a Panel on Climate Change (IPCC) doubt that we lower standard of living. A Heritage Foundation face a runaway greenhouse effect. study estimates the cost of proposed controls The IPCC’s latest report has nevertheless from just 2001 through 2020 to be $3.3 trillion, been cited as making the case for global warm- or about $30,000 per household. It obviously ing. But lead author and climate modeler Ben- matters whether environmental activists are jamin Sanger complains that “it’s unfortunate choosing effectiveness or honesty when making that many people read the media hype before their claims. they read the chapter.” He cites the report’s The answer is not just to delay the effective many caveats: “We say quite clearly that few date or moderate the controls. There should be scientists would say the attribution issue was a no treaty without real consensus both that disas- done deal.” ter threatens and that new regulations would Caveats are necessary because even Bruce avert disaster. Hamilton, conservation director of the Sierra To reach such a consensus, policymakers Club, acknowledges that “If you look at the sci- should treat global warming as a scientific issue. ence, it’s all over the map.” Disputes begin over If persuasive evidence indicates the potential for data collection and temperature trends. The best uncontrolled, human-induced warming, then evidence suggests far less warming so far this countries should explore less costly control century than predicted by the models; most measures—such as reforestation and spreading warming has happened at night, when it is ben- trace quantities of iron in the oceans. eficial. Moreover, about half of the warming But Americans must demand facts, not occurred before 1945, when emissions of sup- rhetoric. Chicken Littles have long manipulated posed greenhouse gases began to climb dramat- fears about the climate: the President brought ically. Finally, temperatures have been falling weather forecasters to the White House for while the climate controversy has been heating indoctrination. Some scientists have also sacri- ===== PAGE 40 ===== 36 THE FREEMAN e JANUARY 1998 ficed their integrity for politics. In Science mag- on those demanding the power to levy new taxes azine Richard Kerr warns that “Climate model- and impose new regulations. Unless and until ers have been ‘cheating’ for so long it’s almost such evidence appears, the American people become respectable.” should remain skeptical of the global warming Is the sky falling? The burden of proof falls chorus. ] The Mainspring of Human Progress BY HENRY GRADY WEAVER New Introduction by John Hood* FOR SIX THOUSAND YEARS PEOPLE DIED OF HUNGER. WHY DON'T WE? This is the basic question dealt with in MAINSPRING. But the attempt to find the answer leads into a wide range of subjects, such as: * What is the greatest of all our modern inventions? * Who invented zero (0) and why? e Just what is the difference between a republic and a democracy? e What simple invention contributed most to our national wealth? * What was the “bestseller” in 1776? e Is there one sure-fire formula for personal security? In MAINSPRING, Henry Grady Weaver answers these and countless other questions with a truly bold narrative, while taking you on a fascinating journey through history to trace and thus identify— THE MAINSPRING OF HUMAN PROGRESS *President, The John Locke Foundation, and author of The Heroic Enterprise: Business and the Common Good (Free Press, 1996) Published by The Foundation for Economic Education, Inc. 30 South Broadway, Irvington-on-Hudson, NY 10533 ISBN 1-57246-064-4 * 272 pages * paperback $12.95: F'E Printed in larger type for easy reading. E Visa and MasterCard orders: 1-800-452-3518 ===== PAGE 41 ===== THE IDEAS ON UBERTY — Henry Ford and the Triumph of the Auto Industry by Burton Folsom nyone strolling by 58 Bagley Street in later wrote. This meant problems raising Detroit early in the morning of June 4, money. His business manager, James Couzens, 1896, would have seen a strange sight: Henry once said that Ford was thrown out of so many Ford, ax in hand, was smashing open the brick offices in Detroit that one time he just sat on the wall of his rented garage. He had just started his curb and wept. Even those who were making first gas-powered car, and it was too big to fit cars seemed only to want them for racing, and through the door. Ford would tell the story over they always tried to get the highest price possi- and over in the years following—the rain that ble for each one. Thomas Edison and others pro- night, the brief drive down Grand River Avenue moted the idea of electric cars, but Ford to Washington Boulevard, and the seven years it believed in the gas-powered internal combus- took him to build his “quadricycle.” tion engine. And he failed twice before he final- What was most remarkable, though, was not ly started Ford Motor Company in 1903. the event itself—others had already figured out Right from the start Ford insisted on quality. how to build cars and make them run. What was “When one of my cars breaks down,” Ford remarkable was that Ford grasped the implica- Wrote, “T am to blame.” He searched throughout tions of a horseless carriage and had the vision, the world for the best materials he could find at perseverance, and ability to make cars for the the lowest cost. Once he discovered the French multitude of Americans. Many experts scoffed Were using vanadium steel—an exceptionally at the car. Woodrow Wilson called it the “new strong metal—in their racing cars. No American symbol of wealth’s arrogance.” But Ford seemed to know how to make it, so Ford dreamed of improving its quality, cutting its brought an immigrant to Michigan to build a price, and selling millions of them to average steel mill and make some for him. “[T]hat is the Americans all over the country. Here are five kind of steel I want for the universal car I am key points to consider about Ford’s remarkable £0ing to build,” Ford said. Shortly thereafter, he venture into making and selling cars. was using 20 different kinds of steel in his cars—one for strength, one for elasticity, anoth- er for durability, and so on. 1. Success for any entrepreneur From 1903 to 1908, Ford made several dif- . . . ferent cars, including the Model N and Model in the emerging auto industry K, but none satisfied him completely. Cus- was not inevitable. tomers began to buy his product, however, and Ford’s path to building his car for the multi- ————— } i tudes had many curves and hills. not to mention Burton Folsom is senior fellow in economic educa- y ’ tion with the Mackinac Center for Public Policy in detours and dead ends. “No man of MONEY EVEN Midland, Michigan. This essay is adapted from his thought of it as a commercial possibility,” Ford book Empire Builders (Rhodes and Easton, 1998). 37 ===== PAGE 42 ===== 38 THE FREEMAN e JANUARY 1998 —— —— Ford didn’t invent the assembly line, but he adapted it perfectly to car production. sales jumped from about 1,700 cars in 1904-05 decided to freeze the design of the Model T. to almost 8,500 in 1906-07. That gave Ford the Then they broke down the making of a car into cash to start buying out many of his partners. By dozens of small tasks. Each worker specialized 1906, he had a majority of the stock in Ford in one of these tasks, such as attaching the Motor Company, and that winter he locked him- engine to the frame or putting on the steering self in a back room to build his universal car: the wheel. Workers stood next to each other beside Model T. a long conveyor belt and performed their spe- After more than a year of tinkering, the cialized tasks until, one by one, the Model Ts Model T was ready to sell. It turned out to be the were complete. big breakthrough Ford was looking for. It was They came off the belt every 30 seconds. The not luxurious, but it took people from one place assembly line slashed the time needed to com- to another and did so cheaply and safely. Most plete each car from about 12 1/2 hours to 1 1/2. early cars cost at least $2,000. Ford priced his That enabled Ford to meet the crushing demand first Model Ts at $850. for Model Ts—sales were about 78,000 in 1911-12, before the assembly line and over 2. Ford was imaginative and 248,000 in 1913-14, after the assembly line was A . fully in operation. Naturally, Ford cut the price willing to take risks. during this time from $690 to $550, which made With sales on the rise, Ford did something it affordable to another layer of middle-class daring: he further slashed the price of a Model Americans. T—sometimes so steeply that he risked taking One argument against the assembly line was losses. “Our policy is to reduce the price, that the work was monotonous. Ford almost extend the operations, and improve the article,” conceded this point when he said, “There is not Ford wrote. “You will notice the reduction of much personal contact—the men do their work price comes first.” He explained, “We have and go home.” Ford did keep his factories well never considered any costs as fixed. Therefore, lighted and ventilated, and he worked hard to we first reduced the price to a point where we prevent accidents on the job. But the work was believe more sales will result.” From 1908 to not challenging. Partly as a result, he (and many 1913, Ford knocked down the price from $850 other industrial employers) had high rates of to $600, and sales leaped from about 18,000 to turnover and absenteeism. Ford found himself 168,000. “Every time I reduce the charge for spending $100 to train each new worker, though our car by one dollar, I get a thousand new buy- many stayed only for a month or two and then ers,” Ford rejoiced. Meanwhile, he kept quit. improving his product. “We will rip out any- Ford’s reaction to this problem was dramatic: thing once we discover a better way,” he in 1914 he doubled his minimum wage to five promised. dollars a day and cut daily working hours from One better way was his development of nine to eight. The experiment caught the indus- assembly-line production. He didn’t invent the trial world by surprise. His competitors were assembly line, but he adapted it perfectly to car startled; his workers were energized. Ford him- production. When Ford was selling only ten cars ~~ self was ecstatic. Some of the most talented a day he would have a skilled mechanic com- workers in Detroit lined up by the thousands to plete most of each car from start to finish. As apply for jobs with Ford. He couldn’t hire as sales surged to almost 1,000 per day, that sys- many as he would have liked because turnover tem became impossible. Ford and his staff and absenteeism almost disappeared overnight. ===== PAGE 43 ===== HENRY FORD AND THE TRIUMPH OF THE AUTO INDUSTRY 39 No one wanted to lose his job. As a result, pro- duction surged and profits skyrocketed. Ford happily paid the higher wages and also cut the price of the Model T by over 10 percent in 1914, 1915, and again in 1916. With each cut, more and more of his workers could afford to buy the cars they were making. Ford was delighted to violate “the custom of paying a man the smallest amount he would take.” And yet “[t]here was . . . no charity in any way involved. . . . The payment of five dollars a day for an eight-hour day was one of the finest cost-cutting moves we ever made.” Ford was so pleased that in 1922, when Model T sales began to top a million a year, he raised his minimum wage to six dollars a day. Meanwhile, he cut the price to about $300. With all of their manufac- tured steel, vulcanized rubber, and processed plate glass, Model Ts were selling at about 25 cents a pound—perhaps the best bargain in the industrialized world. Sales passed one million in 1920, and peaked : at almost 1.8 million in 1923. At that time, well Henry Ford over half the cars on the roads were Model Ts, and Ford had become a billionaire. Not only did ments can promise something for nothing but he put America on wheels, he changed the way they cannot deliver.” Ford himself, by contrast, businessmen priced their products and paid their was providing tens of thousands of jobs, all with workers. He had helped centralize the auto good wages and only eight-hour days. industry in Michigan and secured that state’s Those people often shunned as second-class place in the nation’s industrial future. He was an citizens did well with Ford. Blacks found the American folk hero and a national celebrity. color barrier easier to cross at the company, and The mere presence of Henry Ford in a barber- they were hired by the thousands. Ford also shop for a shave was an excuse for scores of hired handicapped people whenever he could— locals to press their noses to the glass to get a including bedridden patients who happily good look at this man who had changed their screwed nuts and bolts together in mini-assem- world so profoundly. bly lines in their rooms. Ex-convicts often found themselves with clean slates at the Ford Motor Company. Once, when driving to work, he saw 3. The early auto industry, a vagrant on the road. Ford eagerly picked him unlike the railroad business, up and gave him a job in the factory. In this was usually governed by the case, the man quit after six weeks, but Ford was free market. 2 least content that he had given the man a chance. In political and economic philosophy, Ford Ford relished the opportunity to compete for did not consistently favor laissez faire, but his buyers in an open market. All he wanted was the strong individualism usually put him on the side freedom to operate as he thought best—to of the free market. He argued that private enter- decide whom to hire, what to pay, what kinds of prise was the way to solve problems in Ameri- cars to make, and how much to charge. He ca. “The welfare of the country is squarely up to expected to rise or fall on the basis of his deci- us as individuals,” he said. “That is where it sions. He rose to the top because he made wise should be and that is where it is safest. Govern- choices. The railroad industry, by contrast, frus- ===== PAGE 44 ===== 40 THE FREEMAN e JANUARY 1998 All Ford wanted was the freedom to operate as he thought best—to decide whom to hire, what to pay, what kinds of cars to make, and how much to charge. trated Ford because it was strongly regulated by from good roads: car manufacturers, tire mak- the Interstate Commerce Commission. When he ers, and cement producers among others. The bought the Detroit, Toledo, and Ironton Rail- Dixie Highway, from Detroit to Florida, and the road to bring supplies to his factories at High- Lincoln Highway, from Indianapolis to San land Park and River Rouge, he tried to “reduce Francisco, are examples of highways largely our rates and get more business. We made some built and operated by private groups. cuts, but the Interstate Commerce Commission refused to allow them! Under such conditions . . why discuss the railroads as a business?” Ford 4. Success in the auto industry would just make cars instead. meant satisfying consumer The early car industry had no such federal wants. regulations, but it did have monopolists who wanted to use government to stifle competition. George Selden, for example, received a U.S. “It is strange,” Ford wrote in 1922, “how just as soon as an article becomes successful, some- patent in 1879 for a gas-powered internal com- 00dy starts to think that it would be more suc- bustion engine. Although Selden never made or cessful if only it were different. There is a ten- sold any cars, he argued that those who later did dency to keep monkeying with styles and to so were violating his patent rights. He sued for SPOil a good thing by changing it.” royalties and the lower courts upheld his patent. What Ford was ignoring here were the American car makers formed the Association changes in auto technology that had been made of Licensed Automobile Manufacturers, paid after he froze the design of the Model T. By the Selden royalties of 1.5 percent per car, and early 1920s, for example, General Motors cars determined who would be allowed to make had automatic starters, hydraulic brakes, and cars. All American automakers except one balloon tires. William Knudsen left Ford for joined the association. Always the individual- General Motors, and under his leadership the ist, Ford refused to join, refused to pay license Chevrolet began to challenge the Model T. fees, and refused to let other automakers tell Even with sales slipping, Ford refused to him how to make his cars. He went to court and change. His Model T still appealed to the purse, argued that Selden’s patent did not cover the but not so much to the eye, ear, or back. The modern internal combustion engines he was new Chevrolets were more stylish, less noisy, using. After long litigation, the courts eventual- and more comfortable to ride in. As a Chicago ly agreed with Ford. The monopoly was broken Woman wrote Ford, “My bones will not talk in 1910. agreeably to one another” after a long drive in After the Selden patent decision, Ford and the a Model T. What’s more, by 1924 the new other automakers just naturally looked to mar- Chevrolet had a water-pump cooling system, an ket forces to solve their business problems. The oil gauge on the dash, a reliable ignition sys- building of roads and highways, for example, tem, a foot accelerator, and a gas tank in the was urgent with the growing number of cars. rear for safety and convenience. And the new Car taxes were only a small source of revenue Chevys came in all colors. The era of Ford for road building, so Ford made gifts of land and dominance was over. money for that purpose in Michigan. Other pri- In 1927, shortly after the 15 millionth Model vate groups built highways, raising millions of T rolled off the assembly line, Henry Ford dollars from those who had the most to gain could no longer ignore the complaints from his ===== PAGE 45 ===== HENRY FORD AND THE TRIUMPH OF THE AUTO INDUSTRY 41 dealers and the slump in sales. His response, Eagle codes that, under penalty of fine and however, startled everyone: he abruptly shut imprisonment, regulated all aspects of their down his factories, laid off his workers, and businesses. Ford was astounded: his colleagues went to work on a new car. For the next 18 preferred stability and government regulation months, Ford and his staff crafted his next cre- to competition and free trade. He was especial- ation—the Model A. The new car was exquis- ly irritated when Pierre S. du Pont, the former itely made and sold 1.7 million in 1929—which head of General Motors, urged him at a party to partly vindicated Ford’s entrepreneurship. One sign the code. of his problems, however, was that General As journalist Garet Garrett has written, “But Motors was changing models each year to for the Ford Motor Company, it would have to incorporate new technology and cater to fash- be written that the surrender of American busi- ions in style. Ford’s strategy of manufacturing ness to government was unanimous, complete, a good car, putting it on the assembly line, and and unconditional.” Ford stood almost alone, selling it almost unchanged for 15 years no defying the law, and pronouncing it un-Ameri- longer appealed to American consumers. Ford, can and unconstitutional. He needed a legal however, was stubborn and slow to change his loophole to keep out of jail, and his lawyers ways. The sales of the Model A dropped found him one: he didn’t have to sign the auto steadily during the early 1930s, and Ford fell industry code, he now argued, as long as he permanently behind General Motors in car complied with its provisions. This he did with sales. Even his development of the powerful 00d humor. “The code minimum wage is hard- V-8 engine in 1932 did not win him back most ly a good dole,” Ford jibed. Later he said of the of his old customers. code, “If we tried to live up to it we would have to live down to it.” No government bureaucrats would leaf through his books and tell him how S. The New Deal was the real to run his business. undoing of Henry Ford. NRA chief Hugh Johnson and President Roosevelt, however, wanted government con- A major push for a planned economy came tro] as well as compliance. They tried to pres- from President Franklin Roosevelt after his gyre Ford into signing the code, and when he election in 1932. He believed that more govern- refused they tried force. Ford would receive no ment was the solution to the Great Depression. government contracts until he signed—and with One of his proposals was the National Recovery the large increase in government agencies dur- Act (NRA), which required American business ing the 1930s, that meant a huge loss of busi- to regulate itself through signed codes of behav- ness. When a Ford dealer’s bid on 500 trucks for ior that would legally bind all companies within the Civilian Conservation Corps was $169,000 an industry. Competition would be almost com- below the next best offer, the government pletely eliminated. Under most codes, the indus- announced it would reject the bid and pay more tries would set production quotas, prices, wages, because Ford refused to sign the auto code. and work hours. The law also gave labor the Finally, in May 1935, the Supreme Court struck right to organize and collectively bargain. As down the National Industrial Recovery Act, Ford said when the NRA was being prepared, killing the NRA, and Ford again was allowed to the government “has not any too rosy arecordin compete for any car business he wanted to. running itself this far.” Ford had little time to celebrate—he spent As American industrialists rushed to Wash- much of the rest of the 1930s and early 1940s ington to comply with the NRA, Ford resisted trying to escape union organizers. Roosevelt and refused to sign any code. “I do not think signed the Wagner Act, which allowed unions that this country is ready to be treated like Rus- to organize on terms that put employers at a sia for a while,” Ford wrote in his notebook. disadvantage. Eventually, Ford Motor Compa- “There is a lot of the pioneer spirit here yet.” ny would be organized and Ford would lose However, General Motors, Chrysler, and the much of his authority to set wages or working smaller independents eagerly signed the Blue hours. ===== PAGE 46 ===== 42 THE FREEMAN e JANUARY 1998 Roosevelt’s New Deal had almost doubled Foundation. Gifts to foundations were tax- the national budget. Somebody had to pay for deductible, so Ford could dump his fortune in the new government programs for farmers, busi- the foundation, put Edsel in charge of it, and nessmen, veterans, silver miners, youth, the thereby save $321 million in inheritance taxes unemployed, and many others. First, Roosevelt and keep his business in the family. hiked the income tax on the rich with a margin- Ford’s maneuver preserved family control of al rate of 79 percent (later 91 percent). Next he Ford Motors, but it took his capital out of supported the first federal taxes on cars, tires, investment, froze it in the foundation, and put it, and gasoline. Then he promoted the Wealth Tax after his death, in the hands of the bureaucratic of 1935, which instituted an inheritance tax of types he had fought all his life. Raymond 70 percent on large estates. The first of these Moley, a New Dealer who turned conservative, taxes was hard on Ford; the second was hard on scoffed at the “projectitis” of the Ford Founda- all car owners; the third made it impossible for tion and its “big and expensive staff of busy Ford to give his company to his only child, people who think up and sort out innumerable Edsel, or to Edsel’s children. projects, to be bestowed with plenty of money The wealth tax captured Ford’s attention, if upon specially created agencies or upon profes- not his wealth. He was 72 years old and refused sors hard pressed to live on their academic to turn over two-thirds of his estate to the gov- salaries.” As historian Allan Nevins observed, ernment. His lawyers advised him that one way “In a real sense, Henry Ford’s factory, his for- out of his tax problems was to set up the Ford tune, his life-work, had been socialized.” [J ===== PAGE 47 ===== THEFREEMAN [DEAS ON UBERTY — Democracy Would Doom Hong Kong by John T. Wenders here is an important lesson to be learned All this was pointed out last April when the from the Hong Kong economic miracle, the Harvard Business School invited a prominent destiny of which is now in the hands of China. Hong Kong businessman, Philip Tose, to speak. Too bad most commentators have missed it After his speech, Mr. Tose was asked why he completely. thought Hong Kong has prospered and India has The lesson is simple. This small patch of languished. Mr. Tose replied, “One word: rocky land, devastated by war and Japanese Democracy.” occupation, in a mere 50 years rose to the top of The faculty, of course, was aghast, and the world’s economic heap. Common sense Scrambled to disassociate itself from Mr. Tose’s would say that the path it followed should be questioning of the democracy icon. The dean of carefully studied and imitated. Instead what we the faculty, Kim B. Clark, issued a statement have is an endless parade of politicians blasting declaring the businessman’s remarks as “totally China for not choosing to institute a democratic 2t 0dds with my own views and those of the government after its long-awaited takeover. Harvard Business School faculty.” What these people have missed is that Hong That response is typical, not only of Har- Kong prospered precisely because there was no Yard's faculty, where such a view is to be democracy there. expected, but with both the public at large and Hong Kong was ruled from London as a politicians in general. Few are willing to even colony. Fortunately, and in contrast to other consider the logic of democracy. It has become British colonies like Kenya and India, where 2 slogan that forecloses analysis. Don’t freedom socialist policies were followed, Hong Kong and democracy go hand in hand? had an enlightened administration. It installed a strong legal framework that kept the govem- Democr acy vs. Freedom ment out of the economy. That constitution-like The unpopular answer, of course, is no. Free- framework emphasized private-property rights dom and democracy are different. In words and freedom of contract much as did the origi- attributed to Scottish historian Alexander nal U.S. Constitution. In short, it drew a clear Tytler: “A democracy cannot exist as a perma- line between economy and state. And with no pent form of government. It can only exist until democratic political force bent on favoritism a majority of voters discover that they can vote and redistribution, the economy was free to themselves largess out of the public treasury.” prosper, which is exactly what it did. Democracy evolves into kleptocracy. A majori- ty bullying a minority is just as bad as a dicta- tor, communist or otherwise, doing so. Democ- John Wenders teaches economics at the University of racy is two coyotes and a lamb voting on what Idaho. to have for lunch. 43 ===== PAGE 48 ===== 44 THE FREEMAN e JANUARY 1998 That was one of Mr. Tose’s points. He noted Invasions of free speech, such as the recent that India’s democratic socialism was largely attempt by Congress and President Clinton to driven by a big majority that paid no taxes and regulate the Internet, are constantly being struck used the election process to punish those who down by the courts, and many more are pre- did. In India, with a population of 900 million, vented by these precedents. The Constitution only 12 million pay any taxes, and only 12,000 protects free speech from democracy. of those pay above the base rate. There you have In the economic sphere, freedom means that representation without taxation. individuals have a right to own, buy, and sell But in a larger sense, the blind worshiping of property on their own terms in free markets. democracy misses the real issue. Democracy That is known as the freedom to make contracts. addresses how. affairs in the public sector will be In the past century, there has been everywhere a conducted. On the other hand, freedom is con- steady invasion of market activity by the politi- cerned with the relationship among people in cal process. Even in capitalist countries, such as the private sector. Freedom means that individ- the United States, the public sector has continu- uals may choose how to interact on a voluntary ally expanded. Once economic activity becomes basis outside the purview of the state. In short, part of the public sector and is addressed by the democracy means you have a right to vote in the political process, it immediately becomes sub- public sector; freedom means you, alone, have ject to capture by those—often a tiny minori- the right to determine the terms of your interac- ty—who can effectively manipulate the process tions with others in the private sector. to their own ends. The proposals for the governance of Hong In many ways, that political invasion of the Kong, as well as reform in eastern Europe, have marketplace throttles free speech as well, as wit- focused on democracy in the public sector to nessed by the successful efforts of the newspa- the neglect of the more important question: per trade groups, normally staunch defenders of how should human activities be divided free speech, to prevent competition from tele- between the public and private sectors? One phone companies. The former publisher of my can envision a country with an authoritarian, local newspaper once made a pilgrimage to but very small, public sector in which freedom Washington to lobby against allowing telephone is much greater than in a country with a demo- companies to sell electronic yellow pages. He cratic, but very large, public sector. This is the also railed against proposed first-class postage essence of the difference between Hong Kong increases, arguing that the additional revenues and India. The former was governed in an should be instead raised from junk-mail adver- enlightened, even if authoritarian, way; the lat- tisers—one of his competitors for advertising ter by democratic socialism. Which turned out revenues. better is obvious to all but the collectivists who worship democracy. Democracy Is Not Economic Reform The Constitutional Solution Democracy is not touted only for Hong Kong. The key is a constitution, like the United States The popular notion is that the economic collapse once had, that draws a firm line between the pub- of communism in eastern Europe and the old lic and private sectors, and between democracy Soviet Union signals the need for democratic and freedom. More importantly, the role of a reform of the political process. On the contrary, proper constitution is to protect freedom from proper reform can only be achieved by removing democracy and the individual from the majority. economic matters from the political process. Some freedoms are civil, such as speech, reli- Unless the size of the public sectors in those gion, and association. The First Amendment to countries are shrunk considerably, little will the U.S. Constitution takes the regulation of have changed. The only difference will be that speech and press out of the public sector. If left people have the right to vote on how the public to a democratic political process, free speech sector restricts their freedoms. Similarly, if the would be severely restricted by lawmakers. new governors of Hong Kong expand the public ===== PAGE 49 ===== DEMOCRACY WOULD DOOM HONG KONG 45 sector, even by democratic means, freedom and tives will be neither known nor weighed. Mar- prosperity will be eroded. kets are certainly not perfect. They are just bet- The lessons of the past are clear, if Hong ter than the alternatives, as events in eastern Kong and the former communist countries Europe and elsewhere have shown. choose to look. Wherever economies are heavi- In our own economy the dangers of public ly regulated—eastern Europe, the former Soviet encroachments on the private sector are usually republics, China, North Korea, India, most of encountered more subtly. Here, we have pro- Africa and South America—socialist or not, duced a massive public sector by tolerating they have been outstripped by their market-ori- small encroachments without addressing the ented counterparts—western Europe, Japan, larger issue. If nothing else, the history of Hong South Korea, Taiwan, Singapore, Chile, the Kong and eastern Europe (and other countries) United States, the Commonwealth nations, and, should stimulate us to rethink the drift of piece- yes, Hong Kong. meal democratic encroachments on our own The constitutional bases for a market econo- freedoms. my are very simple: property rights must be vest- There is a difference between democracy and ed in individuals or voluntary associations of freedom. Freedom is not measured by the abili- individuals. Those rights, like our freedom of ty to vote. It is measured by the breadth of those speech and religion, must be well defined and things on which we do not vote. Freedom must tenaciously defended against encroachment be protected from democracy. A good constitu- from the public sector. Titles to property and ser- tion will do that. vices must be freely transferable and protected Hong Kong has had no constitution. The con- by laws based on the freedom to make contracts. straints on the government depended on enlight- The objection to separating the public and ened administrators appointed from London. private sectors is that markets do not always But to depend on enlightened men is risky; men work ideally. Yet the same people who thus can just as easily be collectivist meddlers. What condemn the marketplace want to scrap it for a Hong Kong needs is a rule of enlightened law— politically directed system that is demonstrably a constitution—not men, enlightened or other- worse. Rational choices can only be made by wise. If China is serious about continuing the weighing the benefits and costs of alternatives. economic prosperity of Hong Kong, and possi- Only people can know their alternatives, and bly even extending it to the mainland, its first only people who directly bear the consequences order of business should be to draw up a consti- of their choices will weigh them properly. Fil- tution that guarantees private property and the tering choices through complex political and freedom to make contracts, and to turn a deaf bureaucratic processes assures that the alterna- ear to those who clamor for democracy. [] Attention, Teachers: Recent issues of THEFREEMAN for classroom use liberty—at no cost to you or your school. We are offering cartons of past Freeman issues free of charge, postpaid. Each carton contains over 100 copies of a single issue. Simply send your request, with shipping instruc- tions, to: FEE, 30 South Broadway, Irvington-on-Hudson, New York 10533. I Ii a wonderful opportunity to introduce your students to ideas on ===== PAGE 50 ===== THEFREEMAN IDEAS ON LIBERTY —— Elections, Extortion, and Unions by Charles W. Baird Qippose Congress passed a law that abol- to recognize a union for collective bargaining ished secret-ballot elections for membership on the basis of signatures that union organizers in Congress. Instead, each candidate, and his or have solicited from workers, but no employer her campaign workers, collected signatures of can be forced to do so. When a union tries to support from voters. The signatures would be organize the workers in a non-union workplace, solicited face to face from each voter, who it must collect the signatures of at least 30 per- could give his or her signature to only one can- cent of the workers in order to force the employ- didate in each election. The winning candidate er into a secret-ballot election. However, no in any congressional district would be the one amount of signatures, not even 100 percent, can who collected signatures from a majority of the force an employer to recognize a union without district’s voters. Would you support such a a secret-ballot election. change in the law? I certainly would not. The American union movement is not the After all, in the privacy of a voting booth a American labor movement. In the private sector citizen can cast an honest vote. No one is watch- only 10 percent of the work force is unionized, ing or applying pressure to sway the vote one and that percentage is getting smaller and small- way or the other. All the campaigning is over, er. By 2000 private-sector unionization will be and the voter is left alone to make a private deci- down to no more than 7 percent—just where it sion. Unless the voter tells, no one knows what was in 1900. Leo Troy, a labor economist at the decision was. In contrast, a person who gath- Rutgers University, calls this the symmetry of ers signatures does so in favor of a specific can- history. didate. The solicitor’s job is to persuade the John Sweeney, the overwrought president of voter to sign, and he knows who does and who the AFL-CIO, is aware of his increasing irrele- does not. An unscrupulous solicitor could retal- vance in the private sector and is desperate to do iate or threaten to do so against a nonsigner. The something about it. He is striving, for example, selection of the winning candidate would not be to organize the workers in the nursing-home free. It would be implicitly coercive. industry by enlisting the aid of well-intentioned, The National Labor Relations Act (NLRA) but ill-informed, clergy and journalists to pres- provides that employers may insist on a secret- sure owners of nursing homes to recognize ballot election when their employees vote on unions on the basis of gathered signatures rather whether they will be represented by a union in than secret-ballot elections. Some employers collective bargaining. An employer may agree have capitulated to the pressure. Thus their employees are forced to accept the representa- - be [19 . 1” : Charles Baird is director of the Smith Center for Pri- tion “services” of unions and even to become vate Enterprise Studies at California State Universi- forced payers of union dues without ever having ty at Hayward. the chance to vote on it. 46 ===== PAGE 51 ===== 47 Worse yet, the AFL-CIO is proposing that ers collecting signatures, they will pay a heavy Congress change the NLRA to force employ- price. In any other setting, we would call such ers to recognize unions whenever organizers an arrangement extortion. collect the signatures of a majority of workers Shame on those employers who turn their at any workplace. It claims that elections take workers over to labor unions without a secret- too long and that employers have an opportu- ballot election. And shame on Congress if it nity to campaign against unionization before ever capitulates to the unions’ demands for sig- the votes are cast. Union leaders assert that nature-based recognition in place of the secret employers should have nothing to say about ballot. In 1996 labor unions spent a total of unionization. It should be a matter left $300 million in financial and in-kind donations, between workers and those who solicit their most of which they didn’t have to report, sup- signatures. porting politicians they think are sympathetic to Without putting too fine a point on it, unions their agenda. Will Congress ever sell the right and their organizers have a reputation for to secret-ballot elections in exchange for cam- aggression and violence. And that reputation is paign donations? I hope not, but Congress has well deserved, as documented in a huge study of done little to justify anyone’s confidence in its union violence undertaken by researchers at the common sense. As Will Rogers said, “This Wharton School of the University of Pennsylva- country has come to feel the same when Con- nia. It is reasonable for workers to fear that if gress is in session as we do when the baby gets they refuse the blandishments of union organiz- hold of a hammer.” Od Alps The Officia Jornal oF Oo Amscinting of A MEDICAL - “A fabulous journal... a beacon of hope and intellectual pursuit in medical journalism...” The Medical Sentinel is the official, bimonthly, peer-reviewed journal of the Association of American Physicians and Surgeons. The AAPS is the national physician organization that success- " i A 4 td Prats » Ton Comttativn Pin ma fully sued the Clinton Administration over the secret | * Sms, ~ a dealings of Hillary Clintons Health Care Task | - peel l owes Seto teecten Force. Jane M. Orient, M.D., Executive Director, AAPS; Miguel A. Faria, Jr, M.D., Editor-in-Chief, Medical Sentinel. Comrarateries Le] —— a ty Sn © Obras ro “The Medical Sentinel is committed to...defense of the practice of private medicine, the tenets and principles set forth in the Oath of Hippocrates, individually based medical ethics, and the sanctity of the patient-doctor relationship...dedicated to the pursuit of liberty, free markets, and integrity in medical research...” nn, Call 1-800-757-9873 . . 1s ISSN Numbe $35.00 @R Hacienda Publishing 1086-4784 Fax: 1- 912-757-9725 » PO.Box 13648 Macon, GAe 31208-3648 ===== PAGE 52 ===== THEFREEMAN DEAS ON UBERTY —— One Freedom by Russell Madden “A man was either free or not free. . . . Freedom was indivisible. . . . To talk of ‘several freedoms’ is to use the language of Europe, not of America; it is an abandonment of the basic principle on which the United States was founded.” —ISABEL PATERSON, The God of the Machine Ex semester I have my communications zens. Only when all negative conditions are students define three abstract concepts: purged from our culture will people finally be love, justice, and freedom. Inevitably, it is the “free.” discussion of freedom that generates the great- This approach is, of course, an example of est amount of controversy and disagreement. what is called “positive freedom.” Such “free- Many of the definitions the students offer dom” requires that individuals be provided the contain some suggestion that freedom means means to achieve whatever goals and values acting without limits. You can be free, they they choose to seek. Those who champion this imply, only if you are able to do whatever you idea usually interpret the words “to promote the want or desire. Even if “whatever” includes general welfare” in the Constitution as justify- doing violence to other individuals, even killing ing the redistribution of wealth from one seg- them? Yes, they say. ment of society to other, less fortunate groups. These same students then contend that soci- Here, “need”—however defined—creates a ety could not survive without imposing limits claim on the property of others. One obvious on people in the form of laws, rules, and regula- problem with this approach is deciding who will tions. Since this is the case, they conclude that define the degree of “need” that is dire enough we cannot truly be free. The whole notion is a to warrant the seizing of one person’s property pleasant fiction but wholly impractical. in order to give it to another. Ultimately, this translates into the strongest and most ruthless coalitions—the winners—imposing their will on the losers. As history readily reveals, essen- Many other students believe that people can tial human “needs”—such as health care, food, only be free when they are free “from” some- or shelter—may begin at the subsistence level thing: hunger, fear, disease, want, or worry. but gradually rise until nearly every aspect of Echoing many of our politicians, this group sug- life becomes a “need” that must be satisfied— gests that since these are undesirable conditions, not through one’s own effort and earned proper- society should do everything it can to eliminate ty but through the effort and wealth of someone such unpleasant factors from the lives of citi- else. If a student objects that this notion of free- Russell Madden is a communication instructor at Mt. dom infringes on the desire of one class of peo- Mercy College in Cedar Rapids, Iowa. ple—the “haves” —to keep and use their prop- 48 “Freedom From” ===== PAGE 53 ===== 49 erty, and favors the desire of the “have-nots,” a freedom,” this concerns not the ability to do classmate may reply that the right of one per- something but rather the situation in which son to be “free” (in the sense of being entitled one’s actions are not interfered with by the ini- to his “well-being™) is more important than the tiation of force by other people, especially the “freedom” of certain others (in the sense of government. doing what they choose). In this view, one As for traffic lights, the above definition of may, indeed, violate the second type of free- freedom explains why such signals and the dom and impose obligations, but only to a police power behind them do not imply a limit- point, that is, as long as the “giver’s” well- ing of one’s freedom. If a driver believed “free- being is not, in turn, reduced below a certain dom” meant the right to pass through any inter- level. Using force to make people act in pre- section whenever he desired, he would pose an ferred ways is permissible in the name of free- immediate physical danger to other unsuspect- dom as long as that vague and fluid line of ing drivers using those same roadways. But no “need” is not crossed. one has the right—the freedom—to expose Other students attempt to avoid this problem other individuals to the risk of physical harm by talking about different types of freedom: without their permission. Such an action would economic freedom, political freedom, moral constitute an “initiation of force” and thus be freedom. These freedoms are hierarchical in incompatible with freedom. nature, they say: moral freedom trumps political To state this from another perspective, a dri- freedom, and political freedom then takes prece- ver has the freedom—the right—to travel the dence over economic freedom. Thus, acts of highways without interference from someone moral choice—such as declaring oneself a “con- deliberately engaging in behavior that poses a scientious objector” during a war—are most real physical threat. The same reasoning also important and deserving of respect. Political demonstrates why no one has the freedom to freedoms—such as freedom of speech and reli- “drink and drive.” This behavior creates an gion—are broad freedoms that must be protect- objective danger and is outside the boundary— ed as much as possible. Economic freedom, the relevant social context—defined by the con- however, is viewed as less worthy of recogni- cept of “freedom.” Such “anti-freedom” actions tion, as when a distinction is made between per- are—and correctly should be—prohibited by sonal or political speech and commercial the government, just as it prohibits more obvi- speech, which can be subject to extensive regu- ous examples of coercion such as murder, lation for the good of others. assault, and rape. Freedom, however, is not a smorgasbord As long as people are not subject to the initi- from which one picks and chooses. Freedom is ation of physical force, they are free. One does not whatever society agrees that it is. And most not trade one freedom for another. My freedom particularly, freedom is not some idealistic illu- does not conflict with yours. Freedom is not sion, unobtainable and irrelevant to one’s daily “nice in theory but impossible in practice.” It life. forms the essence of proper social relationships, the foundation of a benevolent society, the only way to establish the foundations of morality. Voluntary action leads to personal confidence, Freedom is of one piece. It is absolute within individual well-being, and tolerance of differ- its proper context. For those who raise such spe- ences. Forced action leads to personal doubt, cious examples as traffic lights “limiting” free- individual degradation, and exacerbation of dom, it is not the concept of freedom that is resentment, envy, and hatred. lacking but the critic’s understanding of when One cannot be “partially free.” Freedom in a and where such an idea is, in fact, relevant. Ina social context is all or nothing. One is either free social and political context, freedom “has only or one is not. What is possible to discuss in one meaning: the absence of physical coercion” terms of degrees is slavery. Once coercion (Ayn Rand, Capitalism: The Unknown Ideal, enters the picture, principles vanish. Our “free- emphasis in original). Often labeled “negative dom” today is ours by permission, revocable Freedom Indivisible ===== PAGE 54 ===== 50 THE FREEMAN e JANUARY 1998 whenever one group or another grows strong One can describe “political,” “economic,” enough to impose its will on the rest. and “moral” freedoms just as one can describe a person’s head or arms or legs. But attempting to An Impossible Mixture separate one segment from another, to pretend one aspect can exist unharmed and in isolation In a very real sense, calling our economic from another, is to do violence to the very con- system a “mixed economy,” that is, an economy cept in question. Politicians may encourage the of freedom and controls, is a misnomer. A fiction that they can regulate economic freedom mixed economy promotes the mirage of an while leaving political freedom intact, but both orderly and lawful society but ultimately leads logic and history prove them wrong. to chaos and conflict. In an essay titled “Does- Freedom is a necessary condition for those n’t Life Require Compromise?,” Ayn Rand who would live a truly human existence, and noted, “There can be no compromise between property rights are how we implement that free- freedom and government controls; to accept dom. One can no more detach the two and still ‘just a few controls’ is to surrender the principle say freedom exists than one could detach a head of inalienable individual rights and to substitute from its body and say the person still lives. for it the principle of the government’s unlimit- Americans need to remember that each and ed, arbitrary power, thus delivering oneself into every one of us has a right to be free. There is gradual enslavement.” (The essay appears in and can never be a right to enslave, not even a The Virtue of Selfishness.) little bit. Od A Moral Basis for Liberty BY ROBERT A. SIRICO Introduction by Edmund A. Opitz he political edifice of liberty requires a firm moral foundation, but the moral terminology of contemporary political debate is often secretly at war with liberty. This represents more than linguistic confusion; it is a danger to the proper exercise of virtue in the context of freedom. While liber- ty’s historical roots are found in Jewish and Christian religions, the moral prin- ciples of both are overlooked in modern discussion of such basic institutions as entrepreneurship and the welfare state. Modern discussion and evaluation of the two institutions are in need of radical correction. Advocates of capital- ism and economic liberty can and should assume the moral high ground. ISBN 1-57246-059-8 * 72pages ¢ paperback $3.95 Published by The Foundation for Economic Education, Inc. FE Irvington-on-Hudson, NY 10533 To order, call (800) 452-3518 or fax (914) 591-8910 ===== PAGE 55 ===== THEFREEMAN (DEAS ON UBERTY EE— Individualism and Freedom: Vital Pillars of True Communities by Edward W. Younkins ndividualism is the view that each person has freedom is a necessary, but not a sufficient, moral significance and certain rights that are condition for happiness. either of divine origin or inherent in human Individual happiness can be defined as the nature. Each individual exists, perceives, expe- positive conscious emotional experience that riences, thinks, and acts in and through his own accompanies or derives from the use of one’s body and therefore from unique points in time human potentialities, including one’s talents, and space. It is the individual who has the capabilities, and virtues. The sense of belonging capacity for original and creative rationality. to freely chosen communities is an important Individuals can interrelate, but thinking requires constituent of happiness. a specific, unique thinker. The individualist Individualism denies that a community or a assumes responsibility for thinking for himself, society has an existence apart from the individ- for acting on his own thought, and for achieving uals that constitute it. A community or society is his own happiness. a collection of individuals—it is not a concrete Freedom is the natural condition of the indi- thing or living organism distinct from its mem- vidual. From birth, each person has the poten- bers. To use an abstract term such as communi- tial to think his own thoughts and control his zy or society is to refer to certain persons sharing own energies in his efforts to act according to particular characteristics and related in specifi- those thoughts. People can initiate their own able ways. There is no such thing as the general purposive action when they are free from man- will, collective reason, or group welfare; there made restraints—when there is an absence of are only the will, reason, and welfare of each coercion by other individuals, groups of people, individual in a group. A community or a society or the government. Freedom is not the ability to is simply the association of persons for cooper- get what we desire. Non-manmade obstacles ative action. Coordinated group action is a func- such as lack of ability, intelligence, or tion of the self-directed and self-initiated efforts resources may result in the failure to attain of each person within the group. one’s desires. Freedom means the absence of Although the individual is metaphysically coercive constraints; however, it does not mean primary (and communities are secondary and the absence of all constraints. It follows that derivative), communities are important because people need them to reach their potential for Edward Younkins is professor of accountancy and happiness. Social bonds are instrumentally valu- business administration at Wheeling Jesuit Universi- able for the satisfaction of individuals’ non- ty, Wheeling, West Virginia. social desires; affiliation is necessary for flour- 51 ===== PAGE 56 ===== 52 THE FREEMAN e JANUARY 1998 ishing. A free political order, which respects True Communities Respect the natural rights and allows for individual free- Primacy of Free Persons dom, best nourishes the formation of voluntary communities through which people choose to Freedom, justice, virtue, dignity, and happi- live according to their freely chosen common ness all must be defined in terms of the individ- values. ual; however, the pursuit of individual happi- ness will naturally and almost always occur in Genuine Communities Are communities. People have needs as individuals that cannot be met except through cooperation with others—it is impossible to achieve human Assigning primary emphasis to the individual fulfillment in isolation. A true community does not devalue social cooperation. Humans respects free persons. Genuine communities are not only distinct individuals but also social arise when people are free to form voluntary beings. Cooperative action affords possibilities associations to pursue their individual and for growth and brings benefits that otherwise mutual interests. Inherent in respect for persons would be unattainable by isolated individuals. is respect for the forms of association they Man’s rationality allows him to cooperate and choose for that purpose. communicate with others. In a free society, all Individuals do not begin in a condition of iso- cooperative social ventures are entered volun- lation—to exist is to coexist. Birth, by nature, tarily. In fact, individualism provides the best takes place within families including parents, theoretical basis for a genuine community that siblings, grandparents, aunts, uncles, and is worthy of human life. Voluntary, mutually cousins. Those family members, in turn, have beneficial relations among autonomous individ- numerous memberships in a variety of commu- uals are essential for the attainment of authentic nities and voluntary associations. In a free soci- human communities. The uniqueness and worth ety, individuals tend to belong simultaneously of the person is affirmed when membershipina to many different communities. To varying community is freely chosen by the individuals degrees, each person identifies with particular that comprise it. familial, religious, geographic, occupational, Individualism and independence liberate professional, employment, ethnic, racial, cultur- interdependence. In the recent bestseller Seven al, social, political, or other communities. These Habits of Highly Effective People, Stephen communities are usually, but not necessarily, Covey observes that interdependence is a choice local and severely limited in size by the number that only independent people can make. A posi- of people with whom an individual can have a tive, principle-centered, value-driven person personal acquaintance and relationship and who organizes and executes his life priorities share a recognizable common interest. Continu- with integrity is capable of building rich, endur- ing technological advances in communications ing, and productive relationships with others. and transportation enhance people’s ability to ~ True independence of character enables a person select the communities that best meet their to act rather than be acted upon. Independence of needs and aspirations. character requires him to integrate certain princi- ples (virtues), such as integrity, courage, justice, Minimal Government Allows honesty, and faimess, into his nature. Interde- True Communities to Flourish pendent people combine their own efforts with the efforts of others to achieve even greater suc- The bonding together of citizens into volun- cess and happiness. They are self-reliant and tary communities and associations enables them capable people who realize that more can be to remain independent of the state. Life in freely accomplished by working together than by chosen communities is better for the person than working alone. Interdependent persons choose to life as a dissociated individual in a large nation- share themselves with, learn from, understand, state. Skeptics of state power favor the place- and love others, and therefore have access to the ment of as many intermediate voluntary groups resources and potential of other people. as possible between the state and the individ- Freely Chosen Communities ===== PAGE 57 ===== INDIVIDUALISM AND FREEDOM 53 ual—these mediating institutions help individu- uals, communities, and other voluntary associa- als realize their objectives more freely and more tions. The proper function of the state is no completely. The principle of subsidiarity holds more than to protect people in the pursuit of that the state should restrict its activities to those their own happiness. This simply means pre- that individuals and private associations cannot venting interference from others. effectively perform. Decisions are most wisely Since active governments are inimical to the made by individuals and local organizations formation and operation of voluntary communi- closest to the pertinent everyday realities, and ties, the generation of such communities is facil- by the next highest level only when the capabil- itated by the minimal state—one that operates ities of actors at lower levels are exceeded. Sub- within the constraints of liberal individualism. sidiarity allows free individuals to thrive in Rich and rewarding personal relationships authentic communities without the intervention based on voluntary cooperation and mutual of the state. assistance abound within minimalist, rights- The purpose of the state is not to help people based systems. The freedom of individuals is a either materially or spiritually to pursue their necessary condition for the formation and vital- visions of happiness—that is the role of individ- ity of true communities. OJ The power of one. “There is really nothing that can be done except by an individual. Only individuals can learn. Only individuals can think creatively. Only individuals can cooperate. Only individuals can combat statism.” —LEONARD E. READ founder of FEE And only your individual help can make The Freeman grow! Renew your donation to FEE, or send a trial subscription to a friend, neighbor, or business associate. Please see reply envelope. Call (800) 452-3518 for details. ===== PAGE 58 ===== Economics on Trial by Mark Skousen Why Are Austrians Unusually Bearish? “Can capitalism survive. No. I do not think it can. . . . Can socialism work? Of course it can.” —JOSEPH A. SCHUMPETER! hen the financial markets went into a tail- You Can Profit from a Monetary Crisis (1974), spin in late October 1997, my doomsday Why the Best-Laid Investment Plans Usually colleagues appeared gleeful. “The bear [market] Go Wrong (1987), and The Economic Time has begun,” predicted Gary North. “It isn’t Bomb (1989). going to end for about 10 years. If things go Of course, few of the doomsdayers’ dire well.” Adrian Day told me that the market was omens have come true so far, yet their resolve in 70 percent overvalued and was delighted to see forecasting new crises is only strengthened. some air come out of the “bubble.” Doug Casey had been forecasting the “Greater Depression” for over a decade. “It could be worse than even I imagine.” What is at the root of this deep-seated pes- Over the years, I’ve been collecting books simism about the global economy? Part of it written by the perma-bears and the number isso may be Christian theology, an apocalyptic high that I may need another shelf. Samples of vision of the future (Matthew 24). But since bestsellers: Howard Ruff, How to Prosper Dur- many of the doomsdayers are not Christians, ing the Coming Bad Years (1979); Doug Casey, an alternative source may be the “Austrian” Crisis Investing: Your Profits and Opportuni- school of economics, some of whose leading ties in the Coming Great Depression (1979); figures feared for the future and whose theories Jerome Smith, The Coming Currency Collapse suggest financial and monetary trouble down (1980); Dr. Ravi Batra, The Depression of 1990 the road. (1987); James Dale Davidson and Lord Joseph Schumpeter, the enfant terrible of the William Rees-Mogg, The Great Reckoning: Austrian school, was deeply depressed about the How the World Will Change in the Depression prospects for capitalism and entrepreneurship. of the 1990s (1991); Harry Figgie, Jr., Bank- He thought big business would destroy individ- ruptcy 1995: The Coming Collapse of America uality and initiative, and socialist central plan- and How to Stop It (1992); and Robert Prechter, ning would engulf the world. Jr., At the Crest of the Tidal Wave: A Forecast Many Austrian economists experienced the for the Great Bear Market (1995). Harry ravages of war and inflation in the first half of Browne has written a series of negative titles: the twentieth century and were pessimistic about the future. Felix Somary, an economist — who became a Swiss banker, forecast the 1929 Dr. Skousen is an economist at Rollins College, crash, the Great Depression, and World War II, Department of Economics, Rollins College, Winter C4. . Park, Florida 32789, a Forbes columnist, and editor turned decidedly bearish in the mid-1950s, pre- of Forecasts & Strategies. He is currently working on ~~ dicting another great depression right before his his own textbook, Economic Logic. death.2 54 The Root of Pessimism ===== PAGE 59 ===== 55 Ludwig von Mises was incurably gloomy Times that “all bull markets are eventually self- about the future. Peter Drucker, the manage- limiting” due to inevitable overinvestment. He ment guru who grew up in Vienna and had con- noted that global bull markets eventually have tact with Mises at New York University, to crash because of “superabundant” capital expressed dismay about Mises. “He was the investment in the United States and Asia. most depressing person I ever met,” he told me. Mises’s despair is clearly noticeable in his sear- . . ing intellectual memoir, Notes and Recollec- The Missing Link tions.3 Mises was downhearted about many things—the world wars, the rise of socialism and Keynesianism, and his failure to receive a full-time teaching position at a major university. Sometimes I feel like a lone bull among Aus- trian economists and financial analysts. Why am I optimistic about the global economy and stock prices? While the Austrian bears make a valid point about the inevitable dangers of Lack of Faith in Fiat Money monetary inflation and a fiat money system, they overlook another key element: free mar- kets lead to long-term economic growth, rising standards of living, and hence bull markets. I raised this issue in the August 1997 issue of The Freeman, comparing two graphs of GDP growth over the past century. We can either focus on the short-term fluctuations in GDP, or the long-term trend. Short term, the economy looks volatile and dangerous. Long term, it looks dynamic and progressive. The stock market can be viewed in the same light. We can constantly focus on the short term and play on the fears of a bear market, or we can take a long-term view. During the twentieth century, bull markets have lasted a lot longer than bear markets, and almost 70 percent of the time stocks were in a bullish mode. Why? Because in spite of wars, recessions, taxes, regulations, and inflation, the U.S. economy has remained largely favorable toward free enterprise. Yes, crashes and bear markets are inevitable in today’s inflationary world, but so are bull markets in today’s free-market economy. [J But pessimism about the future goes beyond world events and personal tragedy. It is also inherent in the theory of Austrian economics— especially with regard to the world monetary system and the theory of business cycles. Austrians are deeply suspicious of the current fiat money system, which they regard as unsta- ble and prone to crisis. Today’s monetary sys- tem of unbacked, inflated currencies is at sea without a rudder. Floating (or sinking) exchange rates may postpone, but cannot escape, the day of reckoning. Someday, a monetary, economic, or financial crisis will arise that will cause a run on the dollar, a collapse of the fractional-reserve banking system, and the re-establishment of gold and silver as real money.* Not surprisingly, sound-money advocates recommend the accu- mulation of precious metals as a hedge against such an impending crisis. The Austrian theory of the business cycle, as developed by Mises and Friedrich A. Hayek, also suggests inherent instability in the financial and economic worlds. An increase in the fiat money supply will not simply raise prices, but will create an imbalance in the structure of the economy, a boom-bust cycle. The economic and 1. Joseph A. Schumpeter, Capitalism, Socialism and Democracy financial boom cannot last, but will cause prices (Harper & Row, 1942, 1947), pp. 61, 67. and interest rates to rise, which eventually will 2. Felix Somary, The Raven of Zurich (St. Martin’s Press, 1986), i pp. 293-302. cause a recession and a collapse in stocks, real 3. Ludwig von Mises, Notes and Recollections (Libertarian Press, 1978). estate, and other assets. As Murray Rothbard 4. The best summary of this “Austrian” position is Murray N. puts it, “The boom requires a bust.”’ Rothbard, What Has Government Done to Our Money? (Mises Insti- ; : : tute, 1990). Recently this Austrian perspective was taken 5. Murray N. Rothbard, America’s Great Depression, 4th ed. by a well-known bear on Wall Street. James (Richardson & Snyder, 1983), p. 20. An excellent related booklet is : ’ The Austrian Theory of the Trade Cycle and Other Essays, ed. by Grant, editor of Grant's Interest Rate Observer, oi 0 with an introduction by Roger Gaison (The Lud. editorialized in the October 29, 1997, New York wig von Mises Institute, 1996 [1983]). ===== PAGE 60 ===== HAD ENOUGH? Had enough of the liberal bias in the popular news media? Had enough of “donating” an increasingly large amount of what you eam to sup- port inefficient, bloated social programs? Had enough of watching our culture degenerate before your eyes? Do you feel like a stranger in an increasingly strange land? If you answered “yes” to any of the above questions, then you will be interested in a bold, intelligent new quarterly journal of conservative scholarship and opinion, The Social Crific. No, you won't find “inside- the-Beltway” gossip in this journal. What you wi/ find is vital social and political commentary by great social critics such as William Watkins, Jr., John Attarian, Louis Filler, and Dr. Charles Baird, Director of The Smith Center for Private Enterprise Studies. The Social Crific—a vital conser- vative resource now in bookstores across North America. Conservative academics: Had enough of being systematically discriminated against by the lib- eral “peer-reviewed” journals? Had enough of feeling the intellectual shame that results from adapting what you write to conform fo the politically correct academic whimsy of the day? The Social Crficis an honest intellectual journal. If you believe as we do that scholars ought to be judged by the quality of their thoughts and not by academic fashion, then we would like to see your work. (Fast turn around time; immediate acceptance possible.) http://www.socialcritic.com Introductory Offer. 10% off the newsstand price One-year (four issues) subscription: $18.00 Two-year subscription: $ 34.00 (14% off the newsstand price) Please make check or money order payable to: N ame The Social Critic Address Mail to: The Social Critic 31121 Mission Bivd., Suite 301 City State Zip Hayward, CA 94544 ===== PAGE 61 ===== 57 people read and absorb what Hazlitt has to say in these essays, we might someday be able to accu- rately say that the era of big government is over. Each of the essays in Is Politics Insoluble? is excellent, but here I can only mention a few. Is Politics Insoluble? by Henry Hazlitt In the first essay, “Is Politics Insoluble?,” edited by Felix Livingston Hazlitt asks whether it is conceivable that we The Foundation for Economic Education ® 1997 could ever come to agreement on the proper role ® 143 pages ® $14.95 paperback of government in the way that we have settled - answers on many questions in the physical sci- Reviewed by George C. Leef ences. He is doubtful. Politics is a field in which everyone thinks his own opinions are perfectly hen Henry Hazlitt died in 1993 at the age reasonable, but very few comprehend the long- of 98, advocates of liberty lost one of run consequences of adhering to various politi- their greatest spokesmen. Rare indeed is the co-economic doctrines. Most importantly, they individual who combines a deep, penetrating fail to see that interventions “tend to be indefi- mind, clear writing, and the will to keep battling nitely expanded.” As long as most people against the tide for what he knows to be true. remain ignorant of sound economic thinking Henry Hazlitt was that rare individual. A vigor- (and Hazlitt’s own Economics in One Lesson ous opponent of statism in all its many forms, he remains the best antidote for economic igno- left a wealth of brilliant books and essays to rance), we will be plagued with widespread sup- those of us who carry on the fight to preserve port for harmful and authoritarian laws. what freedom remains to us and eventually The third essay, “The Case for the Minimalist recover that which has been taken away. State,” was written in response to Robert Noz- A project that Hazlitt never completed was a ick’s 1974 book Anarchy, State, and Utopia. The book he intended to call Is Politics Insoluble? key part of this essay is Hazlitt’s criticism of He outlined the book in 1978, and when he Nozick’s reliance on natural law in making the donated his library to the Foundation for Eco- case for a minimal state. Hazlitt argues that the nomic Education in 1984, Hazlitt wrote that the philosophical case is stronger if we adopt a rule- book was half finished. Felix Livingston has utilitarian framework instead. His essay does not now collected the essays that Hazlitt intended to ~~ settle the matter, but neither can it be dismissed use as the book’s framework and provided an lightly. It seems to the reviewer that this point is excellent introduction that ties together the prin- worthy of a good deal more attention. cipal themes of the work. Even though the Another particularly strong essay is “The essays, written between 1968 and 1980, have all Task Confronting Libertarians.” Hazlitt laments appeared before (many in these pages), we are the fact that relatively few business leaders in fortunate to have them together in a book that the United States are willing to stand up for free will help to keep attention focused on the markets, either by attacking government inter- thought of a truly great man. vention themselves or at least by funding the The ten essays that comprise Is Politics Insol- various organizations that are active in doing so. uble? revolve around a single question: What is A big part of our task is to convince those who the role of the state? Issues that spin off from this ought to be our allies that our fight is their fight central question include: What is the harm of and they should provide more assistance. excessive government? How do libertarians best Is Politics Insoluble? is chock full of vintage make their case for a limited state? Can there Hazlitt wisdom, a good read for veteran liber- really be such a thing as “political science”? tarans, newcomers, and anyone else who has an How strong were John Stuart Mill’s numerous interest in political economy. OJ exceptions to the laissez-faire principle? How sound was Herbert Spencer’s case for strict George Leef is president of Patrick Henry Associ- adherence to laissez faire? The era of big gov- ates: Liberty Consultants, East Lansing, Michigan, emment is still very much upon us, but if enough and book review editor of The Freeman. ===== PAGE 62 ===== 58 THE FREEMAN e JANUARY 1998 that the crisis has led to a pervasive citizen atti- tude in the city and state of dependency on gov- ernment in lieu of old-fashioned individual New York by the Numbers: State & City in Perpetual Crisis by Raymond J. Keating responsibility. Says Forbes: “Incentives matter Madison Books ® 997 ® 640 pages ® $29.95 and freedom works. Understanding this simple lesson would give New York a fighting chance.” Reviewed by William H. Peterson The question is, however, do New York's top leaders, all presumably free marketeers, under- he power to tax involves the power to stand the lesson? Unfortunately, no. Witness the destroy.” attempt in 1997 to undo New York City’s per- So U.S. Chief Justice John Marshall pre- Verse rent control scheme, which harks all the sciently declared in McCulloch v. Maryland in Wa¥ back to World War II. Upshot: city tenants 1803. And so has much destruction followed, by the busload noisily descended on Albany, especially since passage of the Sixteenth their placards attacking “Greedy Landlords” Amendment, which permitted income taxation, and “Heartless Legislators.” Some Big Apple. in 1913. Case in point: tax-mad New York. So guess what? Republican Governor George Pataki retreated. New York City Republican In New York State: Mayor Rudolph Giuliani retreated. And New Economic growth, business formation, and yg pugnacious Republican U.S. Senator job creation lag behind the nation and have for Ajfonce D’ Amato retreated. Three retreaters out years. } of three, or politics wins again. Average U.S. per capita spending for state But Keating understands the lesson well, and and local governments is topped by 52 percent. j, pis Jast chapter lays out a road for New York Only Alaska and the District of Columbia spend g{ate’s Renaissance—for staff and budget more. downsizing of the state regulatory bureaucra- Welfare spending tops the national average joc for holding them accountable, for setting by 83 percent. Only D.C. spends more per or, Jimits for the governor and state legislators capita. oo (New York City has already made welcome Medicaid payments per recipient are Ameri- 1, qyes in this direction), for improving econom- ca’s highest. ic growth and job creation via supply-side tax Per capita state and local debt tops the nation- +c He would eliminate the state’s capital al average by 70 percent. gains and estate tax, phase out the state’s per- In New York City: sonal income tax, and chop the state corporate There are fewer private-sector jobs than there income tax in half, from 9 percent to 4.5 per- were in 1958. cent. Audacious. There is the highest combined state and city Similarly for New York City’s Renaissance corporate and personal income tax rates in the Road, Keating maps out sharp staff and budget nation. downsizing and tax cuts. He would, for exam- Per capita spending tops the large-city aver- ple, eliminate the New York City Department of age by 120 percent. Cultural Affairs and its budget of some $225 Per capita welfare spending tops the large- million. He would phase out and progressively city average by 270 percent. privatize the City University of New York to Per capita income taxes top the large-city save more than $400 million annually. He average by almost 1,000 percent. would achieve further fat savings by privatizing No wonder Ray Keating, also author of D.C. the city’s giant bus and subway system. And by the Numbers: A State of Failure, subtitles his Keating would wipe out the city’s rent control data-and-graph-filled book on New York’s fis- scheme. cal and regulatory game of Russian roulette Where there is a will there is a way. Even “State and City in Perpetual Crisis.” New York State and New York City have been And no wonder publisher and 1996 presiden- slowly hitting Renaissance Road while encoun- tial candidate Steve Forbes says in the foreword tering yawning political potholes along the way. ===== PAGE 63 ===== BOOKS 59 Memo for Messrs. Pataki, Giuliani, and novel. The reader is repelled by the account of a D’ Amato: Check out New York by the Numbers. mindless bureaucracy with power to ruin Fast. [J careers and imprison innocent victims almost William Peterson is a Heritage Foundation adjunct without limit. Like the characters in the book, he scholar and Distinguished Lundy Professor Emeritus Will find his anger rising and want to take of Business Philosophy at Campbell University in action. The author’s own words can best give a North Carolina. sense of this feeling: “The recent policies of raising your taxes, banning your guns, seizing your property, and chilling your freedoms, are the last gasp Unintended Consequences of an evil monster. That evil monster is by John Ross socialism, and it is dying. I want to see Accurate Press ® 1996 ® 861 pages ® $28.95 everyone of you at the funeral.” The applause was thunderous. As Henry Reviewed by John Hospers watched, his phone rang again. It was Fleming. “What did you think? There were lots of speakers like that. You’ll see more of them on C-span.” “Why hasn’t there been any other cover- age on local or national news? It looked like there were ten or fifteen thousand people there when they panned the crowd. Haven’t seen a word about it in any newspaper.” “Does that really surprise you?” Fleming asked. “Hey, like the guy said, cheer up. Socialism’s dying all around the globe. Wash- ington just wants to give it one more try.” “I hope it doesn’t kill em first,” Henry said as he hung up the phone. nintended Consequences by John Ross is an 850-page novel whose central theme is the unintended consequences of seemingly beneficent actions and policies. The author cites historical parallels—the murder of the Austrian heir apparent in Sarajevo in 1914, the Versailles Treaty of 1919—but this work is about the cat- astrophic consequences of massive government regulation. Whereas Ayn Rand’s novel Atlas Shrugged was concerned with what happens when a free economy is strangled by regulation, Ross’s novel has somewhat narrower focus, namely the endless petty regulations on the possession of The above passage depicts a rally at a gun guns and ammunition. Not only is the owner- club, where the estimate of ten thousand people ship of guns prohibited in many states even for present seems exaggerated. If one were to guess purposes of self-protection, but if the steel or the that this book has sold ten thousand copies, that wood on a gun is slightly longer or shorter than estimate would probably be also an exaggera- the regulations permit for just that size and type tion: unknown author, obscure publisher, very of gun, the owner is subjected to endless harass- little publicity. And this would be a pity: the ment, fines, and jail sentences. The official rea- novel is suspenseful, dramatic, and “must” read- son for the Waco raid (which figures promi- ing for anyone who wants to learn in detail how nently in the book) is the failure of the gun own- a free economy deteriorates. ers to pay a $200 gun tax. “One of the political The author himself clearly wishes his novel parties,” the main character concludes, “is going to be an influence on American life; he writes to have to wake up, smell the coffee, and start in his introduction: “Today in America, honest, restoring and reaffirming all the articles in the successful, talented, productive, motivated Bill of Rights—the Second, Fourth, Fifth, and people are once again being stripped of their Tenth Amendments.” freedom and dignity. . . . The conflict has been The effect of thousands of such regulations, building for over half a century, and once again and the ways in which they confer almost warning flags are frantically waving while the unlimited power on the regulators, is described instigators rush headlong toward the abyss, in a series of seemingly unrelated, yet (as it and their doom. It is my hope that these people turns out) closely connected, incidents in the will stop and reverse their course before they ===== PAGE 64 ===== 60 THE FREEMAN e JANUARY 1998 reach the point where such reversal is no perceive to be best for you is justified.” If they longer possible.” must “misrepresent the facts or hide future I recommend Unintended Consequences costs” to secure public consent and “keep those highly. J Social Security taxes rolling in,” so be it. John Hospers is professor emeritus of philosophy at Much of The 8 ig Lie is a long-overdue demo- the University of Southern California. lition job, exploding pernicious myths and grim- ly telling the truth. Your “contributions” do not provide your benefits; they’re redistributed to current beneficiaries. Nor are benefits guaran- The Big Lie: What Every Baby Boomer teed. Congress has already reduced benefits sev- Should Know About Social Security and eral times—for example, raising the normal retirement age from 65 to 67. Without reforms, Medicare further cuts are inevitable. by A. Haeworth Robertson And forget about the “trust funds” supposed- Retirement Policy Institute ® 1997 ® 137 pages ly accumulating to pay future benefits. Contain- ® $24.95 ing only Treasury debt, the funds, Robertson - ; says bluntly, are “stark naked; there is nothing Reviewed by John Attarian in them that can be used to pay future benefits.” Their only true asset is the government’s ability A uthor A. Haeworth Robertson has fought to collect taxes in the future. the good fight for decades. Upon becom- Robertson is especially scathing about “the ing Chief Actuary of the Social Security biggest lie of all”—the myth that the current Administration (SSA) in 1975, he began trying system is affordable and needs only modest tax to dispel misunderstandings of Social Security and benefit changes. Using both SSA’s interme- by both the SSA and the public. In 1978, he diate-cost and high-cost (which he deems more resigned to pursue his educational effort, which accurate) actuarial assumptions, he shows that yielded two books, The Coming Revolution in provision for financing promised benefits for Social Security (1981) and Social Security: the Baby Boomers is “grossly inadequate.” What Every Taxpayer Should Know (1992), Under the high-cost projections, balancing more than 100 articles and papers, and over 500 income and outgo over the 2010-2060 period speeches. will require increasing Social Security taxes 48 But after 20 years of listening to “lies and percent or cutting benefits 32 percent. hypocrisies surrounding the selling of Social Medicare’s outlook is even worse. Security to the public,” Robertson’s patience Want to retire in your early sixties? Forget it. has run out. “I am compelled to speak out as In all this, Robertson is absolutely right. forcefully as possible about one of the greatest Changing Social Security, he concludes, is imper- frauds ever perpetrated on the American pub- ative. The only question is, “Do we want a rela- lic.” Hence this concise, angry, and hard-hitting tively easy rescue now, or do we want a frantic, book for general readers. disorganized and futile rescue at the last minute?” Alarmed at Social Security’s oncoming Robertson offers the Freedom Plan, which financial crisis and the lateness of the hour, he acknowledges “some necessary compromises” warns that “if we do not take action by the year as we leave a system “with countless outstand- 2000, it will be too late.” After that, revising ing promises and trillions of dollars in liabili- Social Security will entail profound social and ties.” He would keep the current system through economic turmoil. end-1999. Beneficiaries aged 55 and up as of He attributes the gross deception of the public January 1, 2000, would stay in Social Security to media ignorance and self-preservation among without change. To recognize the unfunded politicians and bureaucrats alike. “Some people accrued liability for their benefits, estimated at have the paternalistic, arrogant attitude that they $14 trillion as of that date, the government know what is best for you and that whatever is would put $14 trillion of Treasury bonds in the necessary to achieve their goals for what they trust funds. People under 55 would no longer ===== PAGE 65 ===== BOOKS 61 participate in Social Security or Medicare, nei- free markets, Christianity, natural law, achieve- ther paying taxes nor collecting benefits. ment, and the “melting pot.” He argues passion- Instead, they would receive Freedom Bonds ately that behind the terms diversity, tolerance, equal to their past taxes, plus interest, for Old- and sensitivity is a movement now posing a big- Age Insurance and Health Insurance (but not ger threat to this country from within than Com- Survivors Insurance or Disability Insurance), munism ever was from without. deposited in individual Freedom Accounts. Schmidt distinguishes multicultural educa- They would pay taxes into the system at today’s tion from multiculturalism. The former consists Social Security rates, receiving more Freedom of education about other cultures, examining Bonds in exchange. They could also make pri- their values and practices empirically and non- vate investments in their Freedom Accounts, ideologically. To this Schmidt has no objection. e.g., real estate or securities. Besides retirement, One should learn about other cultures. But this they could use their accounts to buy disability is not what multiculturalists want. Multicultur- and health insurance. Contributions to the alism is an ideology holding that all cultures, accounts would be deductible from gross values, and practices are equal. It does not, how- income for tax purposes. ever, maintain this view consistently. The While not, alas, phasing Social Security and exception is the culture identified as white, Medicare out, the Freedom Plan has great mer- male, heterosexual, Christian, and European- its. In formally acknowledging Social Security’s derived, which multiculturalists deride as unfunded liability, it is outstandingly honest. oppressive and intolerant. Dividing the world The greater freedom of choice, and full income- into victims and oppressors marks multicultur- tax break for the taxes and contributions, are alism as essentially Marxist in its origins and attractive. So is the refreshing straightforward- basic assumptions. ness, eschewing the extravagant promises of What follows is a reductio ad absurdum leav- other “reform” plans leaning on “the magic of ing multiculturalists looking uninformed at best, compound interest.” Robertson isn’t peddling and hypocritical or even evil at worst. For any snake oil. example, if all cultures are equal, then one must When a former chief actuary says the Emper- accept as equals to our own those cultures built or is naked, it’s time to arrest Social Security around extreme xenophobia, genital mutilation, for public indecency. Every syllable of Robert- cannibalism, slavery, or human sacrifice. In son’s anger is justified. His expertise lends short, genuine multicultural education solidly his arguments unassailable credibility. A rous- refutes multiculturalism. This explains the tone ing, readable, and trustworthy humbug-buster, of anger mixed with revulsion running through The Big Lie belongs on every Baby Boomer’s this book. Multiculturalism is not what it pre- bookshelf. [J tends to be. Its call for an egalitarianism of cul- John Attarian is a freelance writer in Ann Arbor, tures and lifestyles masks an intellectually dis- Michigan. honest attack on modern American/Western culture that is divisive and destructive. Thus the necessity of exposing its incursions, particularly into the educational system. One way multiculturalists have attacked The Menace of Multiculturalism by Alvin J. Schmidt American culture has been to rewrite textbooks. Praeger Publishers ® 1997 © 199 pages + index Multiculturalist-approved texts portray non- * $39.95 Western cultures as idyllic while neglecting the achievements of our own. They insinuate that Americans stole from other cultures, e.g., that the Founding Fathers lifted some of the U.S. I his The Menace of Multiculturalism, sociol- Constitution from Iroquois law. Multicultural- ogist Alvin J. Schmidt has produced a power- ism thus plays fast and loose with history and ful critique of multiculturalism and unapolo- anthropology. Afrocentrism, a well-known getic defense of an American culture based on school of multiculturalism, systematically Reviewed by Steven Yates ===== PAGE 66 ===== 62 THE FREEMAN e JANUARY 1998 mixes up culture, race, and geography, and Critics of multiculturalism have an uphill invents an “African culture” out of whole cloth. struggle just getting attention. Those defending Supposedly the West also stole from this cul- the ideas necessary to preserve freedom are ture. The reality is that there are many cultures scattered and poorly organized, often subsisting on the African continent. well outside the academic “mainstream” in an To protect itself, multiculturalism relies on a environment in which unpopular ideas are easi- level of doublespeak that would have shocked ly ignored and lost in the flow of information. even Orwell. Diversity is promoted to advance Although the publication of books like this one multiculturalism; it does not extend to ideas. is an encouraging sign that cracks are opening in Tolerance is advanced; but multiculturalists are the multiculturalist edifice, things might have to resolutely intolerant of Western traditions. Sen- get worse before they can get better. CJ sitivity is promoted—but multiculturalists are Seven Yates, who teaches management ethics at anything but sensitive to practicing Christians. Southern Wesleyan University, is an adjunct research Political correctness is the tool multiculturalists fellow with the Acton Institute for the Study of Reli- use to control public discourse on “rights” £7 and Liberty and the author of Civil Wrongs: ts b 3 thnici d & What Went Wrong With Affirmative Action (San movements based on ethnicity, gender, or sexu- gc oo. 10S Press, 199 9. al preference. Schmidt breaks new ground by noting how Yugoslavia began as a multiculturalist experi- ment and ended in ethnic cleansing. The lesson is simple: multiculturalism does not work! Mul- A Matter of Interpretation: | ticulturalists nevertheless maintain that ethnic Federal Courts and The Law groups need not assimilate into a single Ameri- i ) can culture and promote policies that hinder by Antonin Scalia assimilation, for example, bilingual education. ~~ Princeton University Press ® 997 ¢ 159 pages Schmidt documents many other cases of mul- °® $19.95 ticulturalist attacks on American practices and values, including the war on the traditional fam- ily. Schmidt reasserts the importance of Chris- tianity in American culture as well as its enor- he fate of our liberties no longer rests in the mous contributions to Western civilization. hands of the voting public, elected legisla- Can we turn back multiculturalism? A degree tors, or executive-branch officials. Whatever of pessimism is understandable. After all, multi- liberties we are permitted to have in the age of culturalism is now the unofficial ideology of Big Government are determined mainly by a most of higher education. Its advocates are in small cadre of often-unelected judges. This power as the gatekeepers of academe. More- powerful elite decides what rights our national over, multiculturalists are well represented in and state constitutions provide, which laws are federal and state governments, the courts, the enforceable, and the manner in which govern- media, Hollywood, naive corporations which ment authority can be exercised. How these hire “diversity” consultants, and even main- judges go about their business of deciding what stream churches. Hence Schmidt’s reference to the law says is therefore of extraordinary inter- multiculturalism as a latter-day Trojan Horse, est, or at least it should be, to anyone interested being used by those who hate America to bring in preserving individual liberty. it down from within. Hence, we should all be grateful for 4 Matter Schmidt holds out hope on several fronts, of Interpretation, the remarkably readable and however. The critics of multiculturalism may be fascinating new book by Supreme Court Justice a minority without much institutional power, Antonin Scalia. Based upon his recent Tanner but so were the Founding Fathers. The Consti- Lectures at Princeton University, this book tution endures as an ideal and some multicultur- provides a lay-reader—friendly glimpse at the alist initiatives (e.g., campus speech codes) have complex and arcane world of jurisprudence and failed constitutional scrutiny. the legal art of interpreting statutes and constitu- Reviewed by Jiirgen Skoppek ===== PAGE 67 ===== BOOKS 63 tional provisions. In the span of a mere 150 islative powers in the act of legal interpretation pages, even readers unfamiliar with the twists is the grounding of American law in the common and turns of the law can gain a better law tradition. The common law is judge-made understanding of what motivates the most law, and even as American law in practice began influential legal scholars currently espousing to be reflected primarily in statutes, judges still their views in America. approached their practice from a common-law What makes the book particularly interesting orientation. Justice Scalia points out how, to this is that it is not a mere recitation of Justice day, legal education uses the common law as the Scalia’s legal philosophy, but also a dialogue foundation for turning students into lawyers. The with other academics who have insights into the result, he maintains, is that judges wield all too question of legal interpretation, including com- much influence, thereby doing great damage to mentary by Professors Mary Ann Glendon (a the idea of democracy. specialist in comparative law), Gordon S. Wood As a means to limit this activism by judges, (a historian of the American eighteenth centu- Justice Scalia proposes judicial utilization of ry), and Amy Gutmann (a professor of politics two principles, textualism and originalism. at Princeton who provides a stimulating intro- What are these approaches to legal interpreta- ductory setting for the book). Most noteworthy tion? “Textualism” respects the primacy of the are the contributions of two of the nation’s fore- text, focusing squarely on the plain meaning of most adherents to what might be called the Feel- statutory law and constitutional provisions. It Good School of Jurisprudence (wherein every requires the use of basic rules of construction, jurisprudential analysis is carefully designed to such as “expression of one is exclusion of the justify the particular result that makes the author other” (Scalia’s example, “If you see a sign that feel good about his or her liberal preferences on says children under twelve may enter free, you a given legal issue), Professors Laurence Tribe should have no need to ask whether your thir- and Ronald Dworkin. teen-year-old must pay”), or “a word is given Justice Scalia has become closely associated meaning by those around it” (for example, “I with, if not the embodiment of, the principles of took the boat out on the bay” gives “bay” a dif- “originalism” and “textualism,” two quite differ- ferent meaning than “I put the saddle on the ent methodologies for interpreting the law. What bay”). “Originalism,” on the other hand, his chief article in the book, “Common-Law requires an analysis of a legal text on the basis Courts in a Civil-Law System: The Role of Unit- of its original meaning—how the text was ed States Federal Courts in Interpreting the Con- understood at the time of its authorship. stitution and Law,” makes clear is that these In contrast to these methodologies, which the methodologies are not an end in themselves, but Justice suggests encourage limits on judicial merely a means to an end. The motivating goal authority, he presents dark images of the enemy. for employment of these methodologies is judi- His bétes noires include use of the supposed cial restraint. In Justice Scalia’s legal universe, “intent of the Legislature” and apparent “leg- the great mortal sin is judicial activism and the islative history” to interpret statutes, and the aggrandizement of authoritarian power in the viewing of the U.S. Constitution as a flexible hands of a judicial elite. According to him, the “Living Constitution” constantly changing with problem is the shift from law based upon demo- the needs and desires of society at any given cratic will and a reliable and steady constitution moment. The danger in these approaches, he to law created by all-powerful judges employing argues, is that democracy will be replaced with their own personal preferences. It is this usurpa- government by a judicial elite and that, once the tion of democracy that Justice Scalia wishes to public catches on, judges will be chosen purely limit by employing his interpretative techniques. on the basis of political preference, putting even Scalia complains that “So utterly unformed is our most cherished individual rights in danger. the American law of statutory interpretation that Justice Scalia presents his views with charm not only is its methodology unclear, but even its and clarity. His adversaries, however, also make very objective is.” He argues that one of the key some strong points. For instance, Scalia’s reasons for the penchant of judges to take on leg- approach can lead to contradiction. After all, ===== PAGE 68 ===== 64 THE FREEMAN e JANUARY 1998 textualism and originalism are often at odds. The his legal principles fairly consistently to justify former most often produces very tightly interpret- implementation of the will of legislative majori- ed statutes, but permits constitutional phrases ties or to preserve traditions against contempo- like “due process” and “equal protection” to be rary, often “political correctness’—motivated given extremely broad meaning. Originalism in assault. Frequently, Justice Scalia’s arguments many respects requires utilization of the very sup- prefer the result that preserves the way things posed evils (reference to legislative history and have been done in the past. Of course, preserva- legislator understanding) that the former approach tion of “the way things used to be” may by def- abhors. Justice Scalia’s article spends little inition constitute a certain kind of conservatism, time attempting to resolve this contradiction. but this gives little comfort to civil libertarians. Nor is it always clear exactly what the author’s The failure of Justice Scalia and the com- concern is. Is he opposed to an imperial judicia- menting scholars to effectively reconcile these ry because it subverts democracy and majority contradictions does not in any way diminish the rule? Or is he worried that an imperial judiciary value of the book. The very fact that these ques- is too ready to succumb to the will of the major- tions are raised in the mind of the reader is of ity, thereby imperiling basic minority rights? great value. 4 Matter of Interpretation sets the The Justice poses both dangers, at his conve- mind aswirl with ideas. It stimulates internal nience, even though the two problems are quite legal and philosophical debate as the reader pro- incompatible. Justice Scalia advocates judicial gresses through its pages. It excites an interest restraint, but also seems by implication to be in the law and demonstrates the critical impor- arguing for judicial activism when necessary to tance of thinking about the role of legal inter- strike down legislative efforts that contradict the pretation in the crafting of the way we govern original understanding of particular constitu- ourselves. It is a book for anyone who cares tional provisions. about the law and its place in our society. [J Such contradictions have led many champi- ons of individual rights to worry about the true Jiirgen Skoppek is a magistrate on Michigan's Work- goals of Justice Scalia’s jurisprudence. In decid- ers’ Compensation Appellate Commission and holds ing cases at the Supreme Court, he seems to use a J.D. from Harvard Law School. FEE’s new 1998 catalogue will be mailed as part of the February 1998 issue of The Freeman. Additional copies will be available from FEE on request after January 15.