===== PAGE 1 ===== " [REEMAN Ideas On Cldeas On Liberty] November 1998 Vol. 48, No. 11 FEATURES 646 Nature’s Entrepreneurs by Terry L. Anderson and Donald R. Leal The private sector can protect the environment for us. 651 Regardless of Choice, Vote! by Leonard E. Read Making responsible decisions at election time. 657 A New Monetary Universe by James A. Dorn The impact of electronic money. 660 Does the Internet Prove the Need for Government Investment? by Andrew P. Morriss A review of history provides some answers. 665 Opening Pandora’s Box by Dan Fylstra An open letter from a PC pioneer. hero The Mother of All Food Fights by Sam Kazman The battle over organic-food labeling. 672 The IRS, Now and Forever? by James Bovard The futility of moderate reform. 676 Another Minimum-Wage Clash by Richard B. McKenzie Measuring what workers may lose. 680 Do Corporations Have Social Responsibilities? by John Hood Examining the nature of profit-seeking business. 685 “49 and Holding” by Raymond J. Keating Burdensome regulation keeps businesses small. 689 “Wrecking”: The Ominous Rationale for Attacks on the Tobacco Industry by Daniel Hager Lack of due process opens the door to collectivist assaults. COLUMNS Center NOTES from FEE—The Danger of Deifying the State by Donald J. Boudreaux 655 IDEAS and CONSEQUENCES—Asset Forfeiture Run Amok by Lawrence W. Reed 668 POTOMAC PRINCIPLES—Murderous Nostalgia by Doug Bandow pers PERIPATETICS—Service Without a Smile by Sheldon Richman pes7 ECONOMIC NOTIONS—Price Ceilings Cause Shortages and Higher Costs by Dwight R. Lee 692 ECONOMICS on TRIAL—A Golden Comeback, Part III by Mark Skousen 703 THE PURSUIT of HAPPINESS—Paycheck Protection in California: What Went Wrong? by Charles W. Baird DEPARTMENTS 642 Perspective—The Great Pretenders by Sheldon Richman 644 It Just Ain’t So! by Sheldon Richman 694 Book Reviews *Achieving Our Country by Richard Rorty, reviewed by George C. Leef; The Future Once Happened Here: New York, D.C, L.A., and the Fate of America’s Big Cities by Fred Siegel, reviewed by Sanford Ikeda; Major League Losers: The Real Cost of Sports and Who’s Paying For It by Mark S. Rosentraub, and Home Team: Professional Sports and the American Metropolis by Michael N. Danielson, reviewed by Raymond J. Keating; Unrugged Individualism: The Selfish Basis of Benevolence by David Kelley, and Generosity: Virtue in Civil Society by Tibor R. Machan, reviewed by Andrew I. Cohen; Driving America: Your Car, Your Government, Your Choice by James D. Johnston, reviewed by John Semmens; Taxing Choice, edited by William F. Shughart II, reviewed by Roy E. Cordato; Hamilton’s Republic, edited by Michael Lind, reviewed by David Upham. ===== PAGE 2 ===== FREEMAN AN ERSTE || con Liar J The Great Pretenders Published by The Foundation for Economic Education William McChesney Martin, Jr., who was Irvington-on-Hudson, NY 10533 : - Phone (914) 591-7230 FAX (914) 591-8910 Snairman of the Federal Reserve from the Tru E-mail: freeman@fee.org man through the Nixon years, died last sum- FEE Home Page: http://www.fee.org mer. According to the New York Times obitu- President: Donald J. Boudreaux ary, Martin hated inflation and deficits. Fur- Editor: Sheldon Richman ther, he had a reputation for jealously Managing Editor: Beth A. Hoffman guarding the Fed’s independence and resisting Editor Emeritus - presidential and congressional pressure to Paul L. Poirot lower interest rates. Before taking the Fed’s Book Review Editor helm, he was the first paid president of the rr Leef New York Stock Exchange, and after World ‘Mary Arm Murphy War II, he ran the Export-Import Bank. His Columnists father, a St. Louis banker, helped draft the Charles W. Baird Federal Reserve Act for President Woodrow Doug Bandow Wilson and served as president of the St. Dwight R. Lee Louis Fed. Lawrence W. Reed Ordinarily, we wouldn’t take note of the Mark Skousen passing of a retired central banker, but Martin Walter Williams . . cls Contributing Editors said something that deserves recognition here. ee In a 1985 interview with the Times he recalled Clarence B. Carson his early days running the Fed, at which time Thomas J. DiLorenzo he said to himself: Burton W. Folsom, Jr. Joseph S. Fulda My gracious, here I am the new chairman Bettina Bien Greaves of the Fed and I’m doing my best—I’m not Robert Higgs the brightest fellow in the world, but I'm John Hospers working hard on this—and / haven't the faintest idea of how you figure the money supply. Yet everybody thinks I have it at my Raymond J. Keating Daniel B. Klein Wendy McElroy : A Tibor R. Machan fingertips. [Emphasis added.] Ronald Nash Edmund A. Opitz Then Martin told the Times: “They don’t James L. Payne really know what the money supply is now, William H. Peterson even today. They print some figures—I’m not Jane S. Shaw trying to make fun of it—but a lot of it is just Richard H. Timberlake almost superstition.” Lawrence H. White It is interesting to have someone like Mar- The Freeman is the monthly publication of The Foundation for Eco- tin confirm what many advocates of free bank- nomic Education, Inc., Irvington-on-Hudson, NY 10533. FEE, . . established in 1946 by Leonard E. Read, is a non-political, educational ing have long claimed, namely, that central champion of private property, the free market, and limited government. : : FEE is classified as a 26 USC 501(c)(3) tax-exempt organization. bankers arc much like the Wizard of Oz. Copyright © 1998 by The Foundation for Economic Education. Per- 3 1 mission is granted to reprint any article in this issue, except “Nature’s Behind the . awesome display of apparent Enterpreneurs,” provided credit is given and two copies of the reprinted power and wisdom are a few well-intentioned, material are sent to FEE. . . . . The costs of Foundation projects and services arc met through dona- fallible human beings pulling levers, turning tions, which are invited in any amount. Donors of $30.00 or more : . receive a subscription to The Freeman. For foreign delivery, a donation wheels, and pretending to know things they of $45.00 a year is suggested to cover mailing costs. Student subscrip- can’t possibly know. tions are $10.00 for the nine-month academic year; $5.00 per semester. Additional copies of this issue of The Freeman are $3.00 each. Bound volumes of The Freeman are available from The Foundation * * * for calendar years 1972 to date. The Freeman is available in microform from University Microfilms, 300 N. Zeeb Rd., Ann Arbor, MI 48106. Cover: Courtesy Intemational Paper 642 ===== PAGE 3 ===== Advocates of the command-and-control raise the minimum wage, Democrats claimed approach to environmental issues implicitly it would help low-income workers. Republi- assume that there is no commercial reason for cans said it would throw people out of work. entrepreneurs to preserve wilderness areas It’s not that simple, says Richard McKenzie. and other potential recreational amenities. In A growing movement believes that corpo- an excerpt from their recent book, Enviro- rations should do more than merely make Capitalists, Terry Anderson and Donald Leal money for their shareholders. Even some show that, in fact, reasons abound. businessmen take that position. John Hood In our reprint honoring the 100th anniver- untangles the issues that make up the sary of his birth, FEE founder Leonard Read corporate-responsibility crusade. speculates about what would happen if we Government regulation burdens business, voted “by turning our backs” on irresponsible particularly small business. And as Ray Keat- candidates. ing demonstrates, it often creates an irresistible The days of government fiat money may be incentive for small businesses to stay small. numbered. What could hasten the end of this Many states of the Union are going after most mischievous form of intervention? Tech- the tobacco industry to recover money they’ve nology, explains James Dorn. spent on citizens’ smoking-related ailments. The Internet has its roots in a computer Daniel Hager asks why state governments are network funded by the federal government to entitled to recovery, considering that it’s not link defense researchers around the country. their money and that one person’s medical bill That origin has been cited in support of a is several persons’ windfall. variety of government-financed projects. Columnist Lawrence Reed discusses the Andrew Morriss says there’s a lot more to the horror of civil-asset forfeiture. Doug Bandow story. considers the spectacle of a group of old peo- The antitrust suits against Microsoft have ple who miss the Bolsheviks. Dwight Lee come in for much criticism. But PC-industry argues that government price ceilings really pioneer Dan Fylstra asks a novel question: can’t lower the cost of products. Mark wouldn’t there be more to fear from a wealthy Skousen continues his series on gold. And Microsoft in a regulated computer industry Charles Baird explains why workers in Cali- driven by political influence? fornia lost a chance to stop unions from The U.S. Department of Agriculture wants spending their money on politics. Immigra- to define the term “organic food.” As Sam tion harms the environment? Turn the page to Kazman shows, that’s almost as if the govern- see why “it just ain’t so.” ment had decided to define the one true reli- Books by Richard Rorty and Michael Lind gion. There’s trouble ahead. come under the watchful eyes of our book Senate hearings on Internal Revenue Ser- reviewers, along with works tackling the sub- vice abuses have yielded yet another taxpay- jects of sports subsidies, American cities, er-protection law. But if the past is any guide, individualism, the war against the automobile, James Bovard writes, skepticism is in order. ~~ and predatory tax policies. During the recent unsuccessful attempt to —SHELDON RICHMAN 643 ===== PAGE 4 ===== FREEMAN Ideas On Liberty LIS | breathe free” to stay where they are. Yet the It Just Ain t So . environmental lobby is clearly uneasy at the prospect of their coming here. We have too many people already. McKibben shares this ambivalence. In his Since ancient times people have been fret- misleadingly titled article, “Immigrants ting about overcrowding the earth. In Aren’t the Problem. We Are” (in fairness, the 1798, Thomas Robert Malthus was already a title was probably written by a Times editor), latecomer to the alarmist message that McKibben says, “Immigration is about as dif- mankind would breed itself into extinction. ficult a moral subject as one can imagine. . . . He was far from the first Malthusian. (It’s In a world of desperate poverty, it is hard for widely unappreciated that Malthus revised citizens of the richest nation to argue that the later editions of his Essay on the Principle of door should be closed, especially since nearly Population because he had forgotten some- all of us can recall our immigrant roots.” But thing that changed his whole analysis: “moral how can we accommodate them? Even living restraint,” or the power to control reproductive “more simply” won’t help. Our “sheer num- activity. And that was before the invention of bers,” the result of longer life spans and the contraception.) baby boom, are the problem. Americans may That people worried about overpopulation be reproducing below the replacement rate of when the human race numbered under a bil- 2.1 children, but that’s not good enough. lion should cast a certain light on the periodic (Europeans are having even fewer children warnings in our own time that we face a dire than Americans are, alarm over which recent- threat. The late Julian Simon single-handedly ly made page one of the Times. Are the opin- created a body of work that blasts the founda- ion-molders signaling a new agenda, subsi- tion of these warnings to smithereens, but for dies for having children?) some people, feeling bad feels so good. They McKibben could support a halving of the are reluctant to consult the evidence when annual immigration rate, to 400,000. But he’s there is a risk that they will have to abandon suffering a case of conscience. How can we their visions of the apocalypse. do that, he asks, if we are not willing to Environmentalist Bill McKibben furnishes impose a little discipline on ourselves? “If, the latest jeremiad about overpopulation. Sev- however, we are willing to take some painful eral months ago McKibben, author of Maybe steps ourselves, then we earn the right to tell One, a case for one-child families, presented some tough truths to others—chief among his argument for controlling population to them that even this rich land can’t grow readers of the New York Times op-ed page. The forever.” context was the immigration issue. Environ- “Painful steps.” The population-alarmist lit- mentalists have a tough time with that one. erature always seems to contain that phrase. Some, like the members of the Sierra Club, McKibben sees two problems. First, the don’t want to talk about it. While they believe country is too crowded: “The Northeast corri- immigration is bad ecologically, they don’t dor of suburbs and cities is already more like the company they'd be in if they opposed densely populated than Haiti or El Salvador; it outright. They can’t bring themselves to tell California’s 30 million may become 50 mil- the “tired . . . poor . . . masses yearning to lion by 2050.” 644 ===== PAGE 5 ===== 645 Meaning what? Are Haiti and El Salvador find ways to get more from less, which is poor because they are crowded? Hong Kong, exactly what we have done for generations. Taiwan, Singapore, and Monaco are far more And as we get richer, we have more time “crowded,” but they are not poor. Some of the for recreation; that often means increased most destitute areas, such as Chad and Soma- demand for parks, wilderness, and beaches. lia, are also the most sparsely populated McKibben needs to resolve this paradox: places on earth. The underdeveloped world how can we be consuming more while not may have lots of reasons for its poverty, but running out of anything? There’s an answer, population isn’t one of them. but to get at it, one must give up the environ- “That endless growth places real stress on mentalist assumption of fixed resources. Ulti- our supplies of everything from water to mately, resources are the products of intelli- silence, from farmland to solitude,” gence, the supply of which is not fixed. McKibben writes. This is just wrong. As Without their theory of the malignancy of Julian Simon so often pointed out—and won consumption, however, the environmentalists a bet doing so—we aren’t running out of would have no case to reduce immigration. things, at least not the things subject to mar- Immigration does not increase total world ket pricing. Raw materials are cheaper and population. In fact, it could reduce future more plentiful than ever. A gallon of gasoline, growth because people in rich countries tend that quintessential nonrenewable resource we to have fewer kids than people in poor coun- were running out of a few years ago, is cheap- tries. But McKibben says that “If those who er than a gallon of milk! As for a shortage of wanted to immigrate here stayed instead in solitude, the communitarians lament that we Juarez or Shanghai or, for that matter, are all ignoring our neighbors and bowling Dublin, they would do far less damage to the alone (or sitting at the PC). In the most planet precisely because they would not be as “crowded” parts of the United States, individ- rich.” uals have more private living space than ever. There it is. The poor must remain poor You can find silence if you want it. (I'm writ- because to be rich is to destroy the planet. But ing this in a suburb of Washington, D.C., and if that is so, why is it that in the richest, and all I hear are birds and insects.) Let’s not for- freest, countries, people live the longest, get that people pay a premium to live in the healthiest lives and have the cleanest living most “crowded” parts of the United States. conditions? In the poorest places, people are McKibben’s second point is that “Ameri- at risk of dying from airborne and waterborne cans, as the world’s most voracious con- diseases and unsanitary conditions. If you sumers, contribute far more per capita to the want to see environmental damage, look at the world’s environmental problems than anyone places where governments control production else.” And the cars and homes are getting big- and consumption in the name of the common ger still, he says. This sort of analysis usually good. winds up with an attack on consumption. It’s the desire and the freedom to produce But the economics is off base. Consumption and consume that have made the West need not damage the earth—quite the con- wealthy. And as the late Aaron Wildavsky so trary. Our desire for more things, combined often said: wealthier is healthier. Od with natural market incentives, impels us to —SHELDON RICHMAN ===== PAGE 6 ===== FREEMAN Ideas On Libert Nature’s Entrepreneurs by Terry L. Anderson and Donald R. Leal “We have our idealists, inventors, innovators and organizers all around us, and in a vast mechanism of economic and social change there is work for all kinds to do. . . .” —JONATHAN HUGHES, The Vital Few n his book The Vital Few, Jonathan Hughes It is worth asking what it takes to be a suc- describes the entrepreneurs of the late nine- cessful entrepreneur in the environmental teenth and twentieth centuries who unleashed arena. If we were to compile a list of the vital America’s industrial power. Names like Rocke- few from the environmental history books, it feller, Vanderbilt, Carnegie, Ford, and Morgan might be headed with names like Audubon, lead the cast of characters. In some cases Leopold, and Muir. As entrepreneurs, these these “vital few” invented new products or men recognized the value of the natural world production techniques, but mostly they at a time when most people saw nature’s fron- amassed capital, contracted with other input tier as a wilderness to be tamed. Of these owners, and developed marketing strategies early entrepreneurs, however, only Aldo that lowered the cost of products and Leopold saw the importance of linking the increased profits. In recent times, industrial- conservation movement to entrepreneurship, ists may have fallen from the list of the vital with all the trappings of finance, contracting, few, replaced by electronic-information gurus marketing, and even profits. like Bill Gates or media moguls like Ted Turn- Unfortunately, many of today’s environ- er, but the required entrepreneurial skills mentalists have not picked up where Leopold remain basically the same. left off. His entrepreneurial spirit has given It is impossible to predict the frontiers way to political opportunism. Instead of busi- on which the next wave of entrepreneurs ness acumen, the vital few in the environmen- will leave their mark. One possibility is the tal movement understand politics, lobbying, environment. and fund-raising as the tools to achieve their political objectives. The headquarters for Terry Anderson is a professor of economics at Mon- most major groups are located in Washington, tana State University and executive director of the D.C. and the personnel spend their time in the Political Economy Research Center in Bozeman, halls of Congress rather than in the wilds of Montana. Donald Leal is a senior associate of nature PERC. This article was adapted from chapter one of . « . ) their book Enviro-Capitalists: Doing Good While The campaign to “save” the African ele- Doing Well. Copyright 1998 Rowman & Littlefield. phant illustrates how political and financial 646 ===== PAGE 7 ===== 647 agendas can overtake environmental realism. These entrepreneurs are meeting the growing Though more than one million elephants demand for recreational and environmental roam southern Africa, environmental leaders amenities. To do this, enviro-capitalists must of groups such as the Humane Society of the invent new products, attract venture capital, United States and the World Wildlife Fund contract with resource owners, and market declared elephants an endangered species and their products. The enviro-capitalist encour- instituted fund-raising campaigns, publicized ages fee hunting to reward landowners for with vivid pictures of slaughtered elephants, bearing the cost of providing habitat for wild tusks removed by chain saws. They raised animals, buys endangered-species habitat millions of dollars to promote a ban on trade instead of lobbying for regulations that in ivory, although many African conservation- restrict the use of private lands; and leases ists believed this would only further drive up water to increase instream flows, rather than the price of ivory and increase poaching. seeking legislation to limit water use by irri- Rather than channeling their efforts into the gators. In meeting each of these human direct protection of elephant habitat, these demands, enviro-capitalists also benefit the leaders politicized the elephant issue and environment. motivated politicians and bureaucrats to ban People are beginning to realize that markets trade in elephant products through CITES can be a powerful force in the environmental (Convention on International Trade in Endan- movement. Market-based incentives have gered Species). They gave little consideration become a common approach in both the pri- to the incentives faced by African natives who vate and public sectors. Corporations are directly bear the costs of living with the ele- searching for ways to increase profits in envi- phants. These people, many of whom live at ronmentally friendly ways. Policymakers are subsistence levels, are being asked to preserve facing the reality that a cleaner environment habitat, let their crops be destroyed, and per- comes at an increasingly higher cost. By har- haps even be killed to save elephants because nessing market forces as enviro-capitalists do, Westerners living in comfort thousands of we can achieve environmental ends at a lower miles across the ocean think it is a good idea. cost. These political entrepreneurs demand the pro- With rising incomes, the demand for envi- tection of elephants but place the burden of ronmental amenities grows. The question is their protection on the backs of those who can who will meet those demands, politicians or least afford it. In the end, the campaign to enviro-capitalists. “save” African elephants by banning trade in ivory filled the coffers of Western environ- mental groups. Unfortunately, it reduced the More Than Paper Profits potential for Africans to live in harmony with Tom Bourland, wildlife biologist and entre- elephants because it prevented the indigenous preneur, preaches that the market can be population from profiting from good steward- wildlife’s best ally. He believes that the grow- ship. ing demand for wildlife and recreation pro- vides landowners with powerful incentives to produce more wildlife habitat and more recre- ational opportunities. And he should know, There is an alternative approach—enviro- having turned wildlife into a money-maker capitalism—that begins when environmental for International Paper (IP), one of the largest entrepreneurs discover new opportunities for timber producers in the United States. improving environmental quality and then fig- In the early 1980s, Bourland became a ure out how to produce it in the private sector. wildlife manger of 1.2 million acres of IP’s Enviro-capitalists are entrepreneurs using timber-producing land in its mid-south business tools to preserve open space, devel- region, including parts of Texas, Louisiana, op wildlife habitat, save endangered species, and Arkansas. When he joined the company, and generally improve environmental quality. its wildlife and recreation program was not Enviro-Capitalism ===== PAGE 8 ===== 648 THE FREEMAN e NOVEMBER 1998 designed to generate income but rather to conditions for wildlife. They believed that keep neighbors happy, appease environmen- fees for land use provided an effective strate- talists, and stem the rising tide of government gy that would create stronger incentives for regulations placed on private timber owners. users to care for the land. A major part of the Bourland was hired as a token wildlife biolo- fee program included selling multiyear land gist to operate within this agenda, but he was leases to hunting clubs. Under the lease quickly frustrated—the bottom line on the arrangement, clubs have a personal stake in financial statement was driven by timber stewardship of “their” areas. Bourland production. believed that clubs would monitor land use, Recognizing the importance of the profit limit hunting pressure, and cooperate with motive, Bourland locked his entrepreneurial wildlife managers, all of which would add to radar onto the relationship between wildlife the members’ enjoyment of the recreation on and IP’ financial statements. He noted the IP property and lower the company’s costs. growing demand for hunting, fishing, and IP had already made substantial invest- recreation, as well as the consumers’ willing- ments in experimental wildlife management ness to pay for quality experiences. But he programs and knew the potential for integrat- also saw that the company was receiving ing wildlife management with timber pro- nothing for the use of these amenities. Bour- grams. In 1957 the company established its land’s environmental agenda had to give way 16,000-acre Southlands Experimental Forest to new realities. To respond to these realities, near Bainbridge, Georgia. This forest served the company’s wildlife and recreation pro- as a proving ground for management tech- gram had to earn its way by charging user fees niques that harmonize timber production and of those enjoying the amenities on IP’s lands. the needs of wildlife while earning profits Charging fees for recreation represented a from recreation. Exemplifying the innovative bold move for a timber company because it techniques pioneered at Southlands were was bucking tradition. In the rural townships experiments with prescribed burning. of Louisiana, Bourland’s home state, local Fire is an important tool in the management people were accustomed to hunting, fishing, of southern pine forests. Because the pines and camping for free on IP’ lands. Some did are fire-resistant, periodic burning reduces not take kindly to having to pay. Indeed, some competitive undergrowth and thereby regional managers at IP worried that they enhances timber production. Prescribed burn- would be the ones facing the wrath of a ing also benefits wildlife by promoting the disgruntled public. According to IP’s then- growth of browse essential to white-tailed chairman and chief executive, John Georges, deer and bobwhite quail. Prior to the South- “There were times when some executives lands burning projects, deer, turkey, quail, and were asking, ‘Is it worth it—should we be rabbit populations in the experimental forest doing this?” were low. By the early 1980s, however, pre- Despite local objections, IP proceeded with scribed burning had dramatically increased the change, spurred by several factors. populations of these species. After visiting Besides evidence of growing recreational Southlands, outdoor writer Richard Starnes demand, increasing abuse on IP’s open lands concluded, “Experiments with whitetails, was costing the company dearly. Litter, arson, turkey, quail, dove, rabbits, and a host of other and off-road traffic were major problems. game and nongame species are proving that it Also, wildlife populations were declining is practical—and profitable—to manage con- from years of poaching and excessive legal tinuous-yield tree plantations in a way that hunting. Hunters were complaining about too ensures the healthy proliferation of wildlife.” little game and too many people. Bourland and other supporters of fees at IP Huntin g Club Leases argued that revenues from wildlife and recre- ation would more than offset the additional Under Bourland’s direction, IP launched its costs of monitoring IP’s lands and improving fee-based wildlife and recreation program in ===== PAGE 9 ===== NATURE’S ENTREPRENEURS 649 1983, emphasizing three sources for rev- Most importantly, as revenues from IP’s enues: hunting club leases, daily-use permits, recreational program grew, regional forest and seasonal family permits. By 1986, the managers began managing their forests differ- program had made dramatic strides. Revenues ently. In 1988, speaking to congressional staff from recreational sales in Arkansas, members in Big Sky, Montana, Bourland Louisiana, and Texas had tripled to $2 mil- described the new behavior of the timber lion, and corresponding profits were an owners: “Because the status of wildlife affect- impressive 25 percent of total profits in IP’s ed the bottom line, the landowner bent over mid-south region. Fourteen hundred hunt- backwards to provide habitat for white-tailed ing clubs had leased one million acres of IP deer, wild turkey, fox, squirrel, and bobwhite lands, more than double the amount leased by quail, as well as endangered bald eagles and the end of 1983. The results convinced the red-cockaded woodpeckers.” They left corri- skeptics. dors of trees 100 yards wide between harvest- “Managed fee hunting programs are gain- ed areas through which wildlife could travel ing acceptance among hunters seeking exclu- safely. They left clumps of trees uncut while sivity, safer conditions, and abundant game,” younger stands next to them grew, thus creat- Bourland said. He pointed out that the hunt- ing greater age diversity. They reduced the ing clubs are an integral part of wildlife man- size of cut areas and made their perimeters agement because they “can provide wildlife more irregular and therefore more attractive protection, control harvest pressure, and to a greater variety of wildlife. They did not accomplish habitat improvements to a degree harvest large strips of trees and shrubs along not generally possible through other arrange- either side of streams, and they planted food ments.” In addition, a new partnership, or plots. “contract,” between recreational users and the These and other efforts have paid big divi- company was being formed among a growing dends to wildlife as well as stockholders. Ten number of clubs that gave new meaning to years after the inception of the program, game wildlife management. At a clubs request, surveys showed that populations of deer, company biologists provided members with turkey, fox, quail, and ducks had increased wildlife-management guidance, survey assis- substantially. Eastern wild turkey and white- tance, harvest analysis, and food-plot materi- tailed deer had exhibited the largest gains, al. In return, club members restricted their increasing tenfold and fivefold, respectively. hunting techniques, recorded harvests, and According to company biologists, the main followed company-imposed restrictions on reasons are better habitat and less hunting harvests. By 1986, new contracts had been pressure. Nongame populations have also adopted by nearly one-third of the clubs that benefited. Company biologists carry out an leased IP land. assortment of projects to improve habitat for The company also began experimenting these species, from putting up bluebird boxes with other recreational packages. At the upper to protecting heron rookeries. Even though end of the scale, IP opened the 3,000-acre Big nongame species have no explicit market, Oak Club in East Texas. In 1986, hunters at hunters, campers, anglers, and hikers are will- the club paid $200 per day for lodging and ing to pay more for a diversified recreational guides and for the opportunity to take one experience. IP’s biologists continue to explore buck and two doe white-tailed deer. Farther other options that would provide additional down the price scale was the 1985 opening of revenue for nongame species. the 4,000-acre San Patricio Bowhunting Area. The 1990s have been a time of change and Bowhunters using the area paid $200 per sea- continued success for the program. Bourland son or $100 for a three-day hunt and enjoyed has left IP to form a flourishing business, pro- a success rate of 61 percent. Services provid- viding wildlife and forest management con- ed by the company included a walk-in cooler sulting for private, nonindustrial (that is, and campsites furnished with electricity, small) timber owners in the South. In this new water, tables, grills, and bathroom facilities. venture, Bourland is helping hundreds of pri- ===== PAGE 10 ===== 650 THE FREEMAN « NOVEMBER 1998 International Paper forestlands provide a scenic backdrop for canoeists. Ninety-six percent of the company's 6.2 million acres, stretching from Texas to Maine, are available to the public for recreational use. vate forest owners benefit from the years of owned, fee-based wildlife recreation is wildlife research carried out at IP. Meanwhile, becoming firmly established. In addition, IP’s wildlife and recreation program contin- environmental entrepreneurs are coming up ues to grow. Nearly two-thirds of the compa- with new products and services to meet new ny’s more than 6 million acres in the United markets. Texas ranches such as the King States are now managed profitably for Ranch near Corpus Christi, the Fennessey wildlife and recreation. Revenues from the Ranch near Baytown, and the Selah Ranch program reached $10 million in 1990 and are near San Antonio are providing nature hikes expected to double rapidly. Thirty-five thou- and bird-watching tours. In the West, where sand hunting and recreational customers now there is so much free access to public lands, it use IP lands in Arkansas, Louisiana, and is tougher for the private landowners to com- Texas, and another 25,000 pay to use IP lands pete, but the fee-recreation market is begin- elsewhere in the country. On the company’s ning to develop even there. Enviro-capitalists timber lands in northern Maine, for example, such as Tom Bourland are leading the way for the public pays daily fees of $3 to $6 and sea- new land management techniques. sonal fees of $15 to $90 for camping, hiking, This example illustrates how entrepreneur- fishing, and canoeing. In the Adirondack ial skills can be successfully used to improve region of New York, people lease cabin sites, the environment. Entrepreneurial approaches paying $700 to $1,000 per year. that capitalize on profits in the marketplace The International Paper Company’s offer an important alternative for producing wildlife and recreation program indicates a environmental quality in a world where acri- growing trend. In the South and the East, mony and tight budgets dominate most policy where most of the land base is privately debates. [] ===== PAGE 11 ===== Anything That's Peaceful Regardless of Choice, Vote! by Leonard E. Read have vowed never to support any organiza- on constitutional questions and the aims of tion which would take positions represent- government and (2) aims at, if it does not pre- ing me, which positions I would not willingly suppose, honest candidates contending for (peacefully) stand personally responsible for. office within the framework of that constitu- In short, I object to organizations that claim a tion. In this kind of political order, each office consensus that does not exist—a false report- seeker is supposed to present fairly his own ing of agreement growing out of committee capabilities as related to the agreed-upon action. framework, voting being for the purpose of It is logical for anyone to inquire, “Well, deciding which candidate is more competent what about support of and membership in one for that limited role. of the two major political parties? Would you Clearly, the theory as originally conceived go so far as to take part in neither of these? did not intend that the positions of candidates You would vote for the candidate of one or the should be a response to voter opinion polls other party, regardless of positions, wouldn't concerning the content or meaning of the con- you?” These are good questions and deserve a stitution and the aims of government. If voters careful answer, though I am not suggesting could thus reshape or reform the boundaries that anyone else adopt my view. of government at will, there would be no need According to The Columbia Encyclopedia, of candidates. Far less costly and more effi- “the existence of only two major parties, as in cient would be the purchase of an electronic most English-speaking countries, presuppos- computer into which voter opinions and es general public agreement on constitutional ~ caprices would be continually fed; it could questions and on the aims of government” spew out altered constitutions and govern- This idea is fundamental to my thesis. Under mental purposes every second! such agreeable circumstances, each party If there were “a general public agreement keeps a check on the other, thus giving assur- on constitutional questions and on the aims of ance that neither party will step out of the government,” and if candidates were vying bounds that have been agreed upon. with each other for office solely on their com- Let it be re-emphasized that the two-party petency to perform within this framework, I system (1) presupposes a general agreement would have no comment. But there is little -_ contemporary agreement as to constitutional Leonard E. Read established FEE in 1946 and served questions and the aims of government! Name as its president until his death in 1983. This article is, point that can now be presupposed. Both the excerpted from Chapter 9 of Mr. Read's book Any- . d the ai h d thing That’s Peaceful. It is the eleventh in a monthly questions and the aims are at sixes and sevens. series commemorating the 100th anniversary of Mr. And as to candidates—with a few notable Read's birth. exceptions—they no longer contend with 651 ===== PAGE 12 ===== 652 THE FREEMAN « NOVEMBER 1998 each other as to their competence to serve meant: A candidate for Congress sat across within a generally accepted framework but, the desk listening to my views about limited instead: government. At the conclusion of an hour’s discussion he remarked, “I am in thorough accord with your views; you are absolutely right. But I couldn’t get elected on any such platform, so I shall represent myself as hold- ing views other than these.” He might as well have added, “I propose to bear false witness.” No doubt the candidate thought, on bal- ance, that he was justified, that The Larger Good would be better served were he elect- The upshot of this political chaos is that ed—regardless, of how untruthfully he repre- voters are seldom given the chance to decide sented his position—than were he to stand for on the basis of competency but have only the his version of the truth and go down to defeat. choice of deciding between opportunists or, a This candidate is “a mixed-up kid.” His val- better term, trimmers. This changed situation ues are topsy-turvy, as the saying goes. In an does, indeed, call for comments about politi- egotism that has no parallel, he puts his elec- cal party membership and voting. tion to office above honesty. Why, asks the Despite the respectability of the two-party responsible voter, should I endorse dishonesty theory, its practice has “come a cropper.” by voting for such a candidate? He has, on his Today, tnmming is so much in vogue that own say-so, forsworn virtue by insisting on often a voter cannot cast a ballot except for bearing false witness. Does he think his ambi- one of two trimmers. Heard over and over tion for office is right because he needs a job? again is the apology, “Well, the only choice I Then let him seek employment where want of had was to vote for the lesser of two evils. I principle is less harmful to others. Or, is his had to vote for one of them, didn’t I?” A notion of rightness based on how much the moral tragedy is implicit in this confession, as rest of us would benefit by having him as our well as a political fallacy; in combination they representative? What? A person without (1) they compete to see which one can come up with the most popular alteration of the framework, and (2) they compete to see which one can get himself in front of the most popular voter grab bag in order to stand four-square for some people’s supposed right to other peo- ple’s income. must eventually lead to economic disaster. moral scruple representing us in Congress! The role of the legislator is to secure our I. The Moral Tragedy rights to life, liberty, and property—that is, to protect us against fraud, violence, predation, It is morally tragic whenever a citizens and misrepresentation (false witness). Would only choice is between two wrongdoers—that our candidate have us believe that “it takes a is, between two trimmers. crook to catch a crook”? A trimmer, according to the dictionary, is Such righteousness or virtue as exists in the one who changes his opinions and policies to mind of man does not and cannot manifest suit the occasion. In contemporary political itself in the absence of integrity—the honest, life, he is any candidate whose position on accurate reflection in deeds of one’s beliefs. issues depends solely on what he thinks will Without this virtue the other virtues must lie have most voter appeal. He ignores the dic- dormant and unused. What else remains? It is tates of his higher conscience, trims his per- doubtful if anything contributes more to the sonal idea of what is morally right, tailors his diseased condition of society than the dimin- stand to the popular fancy. Integrity, the accu- ishing practice of integrity. rate reflection in word and deed of that which Those of us who attach this much impor- is thought to be morally right, is sacrificed to tance to integrity must perforce construe trim- expediency. ming as evil. Therefore, when both candidates These are severe charges, and I do not wish for public office are judged to be trimmers, to be misunderstood. One of countless per- the one who trims less than the other is often sonal experiences will help clarify what is regarded as “the lesser of two evils.” But, is he ===== PAGE 13 ===== REGARDLESS OF CHOICE, VOTE! 653 really? It must be conceded that there are gra- what we deserve. The trimmers who succeed dations of wrongdoing: killing is worse than in offering themselves as candidates are, by stealing, and perhaps stealing is worse than and large, mere reflections of irresponsible covetousness. At any rate, if wrongdoing is citizenship—that is, of neglected thinking, not comparative, then it is self-evident that the study, education, vigilance. Candidates who best of us are just as evil as the worst of us; for trim and voters who trim are each cause and man is fallible, all men! each effect; they feed on each other. When the worst get on top it is because there are enough of the worst among us to put them there. While categories of wrongdoing are com- To repeat, when one must choose between parative, it does not follow that wrong deeds men who forsake integrity, the situation is within any given category of evil are compar- tragic, and there is little relief at the polling ative. For instance, it is murder whether one level except as candidates of integrity may be man is slain, or two. It is stealing whether the encouraged by voters of integrity. Impractical amount is ten cents or a thousand dollars. idealism? Of course not! Read Edmund And, a lie is a lie whether told to one person Burke, one of the great statesmen of all time, or to a million. “Thou shalt not kill”; “Thou addressing his constituency: shalt not steal”; “Thou shalt not bear false Degrees of Evil witness” are derived from principles. Princi- But his {the candidate’s] unbiased opinion, ples do not permit of compromise; they are his mature judgment, his enlightened con- either adhered to or surrendered. science, he ought not to sacrifice to you, to any Is trimming comparative? Can one trimmer man, or to any set of men living. These he does be less at fault than another trimmer? Does not derive from your pleasure—no, nor from the quantity of trimming have anything what- the law and the Constitution. They are a trust soever to do with the matter? Or, rather, is this from Providence, for the abuse of which he is not a question of quality or character? To trim deeply answerable. Your representative owes is to ignore the dictates of higher conscience; you, not his industry only, but his judgment; it is to take flight from integrity. Is not the and he betrays instead of serving you, if he sac- candidate who will trim once for one vote rifices it to your opinion. likely to trim twice for more votes? Does he not demonstrate by any single act of trim- II. The Political Fallacy ming, regardless of how minor, that he stands ready to abandon the dictates of conscience Is it fallacious to believe that responsible for the place he seeks in the political sun? citizenship requires casting a ballot for one or Does not the extent or quantity of trimming the other of two candidates, regardless of how merely reflect a judgment as to how much far the candidates have departed from moral trimming is expedient? rectitude? If the only question at issue is whether a Before trying to arrive at an answer, let us candidate will trim at all, then trimming is not reflect on the reason why the so-called duty of comparative; thus, it would be incorrect to casting a ballot, regardless of circumstance, is report, “I cast my ballot for the lesser of two so rarely questioned. Quite obviously, the evils.” Accuracy would require, “I felt there duty to vote is one of those sanctified institu- was no choice except to cast a ballot for one tions, such as motherhood, which is beyond of two men, both of whom have sacrificed criticism. The obligation to vote at any and all integrity for the hope of votes.” elections, whatever the issues or personalities, We must not, however, heap all our con- is equated with responsible citizenship. Vot- demnation on candidates who trim. There ing is deeply embedded in the democratic would be no such candidates were it not for mores as a duty, and one does not affront the voters who trim. Actually, when we find only mores without the risk of scorn. To do so is to trimmers to vote for, most of us are getting “raise the dead”: it is to resurrect questions ===== PAGE 14 ===== 654 THE FREEMAN ee NOVEMBER 1998 that have been settled once and for all; itis to no man of integrity is offering himself, does throw doubt on custom, tradition, orthodoxy, as much as one can with a ballot to encourage the folkways! other trimmers to run for office. Can anyone Yet any person who is conscious of our conceive of any element of protest in such rapid drift toward the omnipotent state can balloting? To vote for a trimmer goes further: hardly escape the suspicion that there may be it would seem to urge, as strongly as one can a fault in our habitual way of looking at at the polls, that men of integrity not offer things. If the suspicion be correct, then it themselves as candidates. would be fatal never to examine custom. So, What would happen if we adopted as a cri- let us bring the sanctity of voting into the terion: Never vote for a trimmer! Conceding a open and take a hard look at it, in a spirit of generous liberality in defining trimmers, mil- inquiry rather than advocacy. lions of us would not cast ballots. Would the Now for the hard look: Where is the Amer- end result of this substantial, nonviolent ican who will argue that responsible citizen- protest, this large-scale demonstration of ship would require casting a ballot if a Hitler “voting by turning our backs,” compound our and a Stalin were the opposing candidates? problem? It is difficult to imagine how it “Ah,” some will complain, “you carry the could. For a while we would continue to get example to an absurdity.” Very well, let us what we now have: a high percentage of trim- move closer to home and our own experience. mers and plunderers in public office, men who Government in the U.S.A. has been pushed promise privileges in exchange for ballots— far beyond its proper sphere. The Marxian and freedom. In time, however, this silent but tenet, “from each according to ability, to each eloquent refusal to participate might conceiv- according to need,” backed by the armed ably improve the situation. Men of integrity force of the state, has become established pol- and high moral quality—statesmen—might icy. This is partly rationalized by something show forth and, if so, we could add their called “the new economics.” Within this kind numbers to the few now in evidence. of political framework, it is to be expected Would a return to integrity by itself solve that one candidate will stand for the coercive our problem? No, for many men of integrity expropriation of the earned income of all citi- do not understand freedom; or, if they do, are zens, giving the funds thus gathered to those not devoted to it. But it is only among men of in groups A, B, and C. Nor need we be sur- integrity that any solution can begin to take prised that his opponent differs from him only shape. Such men, at least, will do the right as in advocating that the loot be given to those in they see the right; they tend to be teachable. groups X,Y, and Z. Does responsible citizen- Trimmers and plunderers, on the other hand, ship require casting a ballot for either of these are the enemies of morality and freedom by political plunderers? The citizen has no sig- definition; their motivations are below the nificant moral choice but only an immoral level of principles; they cannot see beyond the choice in the event he has joined the unholy emoluments of office. alliance himself and thinks that one of the Here is a thought to weigh: If respect for a candidates will deliver some of the largess to candidate’s integrity were widely adopted as a him or to a group he favors. In the latter case, criterion for casting a ballot, millions of us, as the problem is not one of responsible citizen- matters now stand, would not cast ballots. Yet, ship but of irresponsible looting. in a very practical sense, would not those of us who protest in this manner be voting? Cer- The Duty to Vote tainly, we would be counted among that grow- ing number who, by our conscious and delib- Does responsible citizenship require voting erate inaction, proclaim that we have no party. for irresponsible candidates? To ballot in What other choice have we at the polling favor of irresponsible candidates as though it level? Would not this encourage men of were one’s duty is to misconstrue the meaning statesmanlike qualities to offer themselves in of duty. To cast a ballot for a trimmer, because candidacy? OJ ===== PAGE 15 ===== Ideas and Consequences by Lawrence W. Reed Asset Forfeiture Run Amok eventy-year-old Joseph Puertas and his event, most of the property seized does not family will never forget one cold night in even belong to Joseph Puertas, but to other December 1997 when police and drug-sniff- family members. ing dogs came calling at the doors of both his “They arrest my father and take from us home and his business and, at the same time, what we have spent years working for, based those of his three sons as well. on what some crackhead tells them,” Steve Based on the word of an “informant,” who Puertas told the Detroit Free Press. “You tell was a self-confessed addict with two prior me that’s justice?” felony convictions, the Oakland County, The newspaper’s account of how the Michigan, police searched all the buildings authorities defended their action, and the for evidence of drug dealing. They found no response of the Puertas family’s attorney, drugs, no drug paraphernalia, no records of James Burdick, is instructive: drug transactions, and no other evidence of “Why would they forgo thousands of dol- drug dealing. They did find one small plastic lars of interest they could have made if they bag of powder, which on examination, turned had put their money in the bank?” asked pros- out to be Slim Fast. ecutor James Halushka, director of warrants But the search wasn’t exactly fruitless, at and investigations for the Oakland County least for the searchers. The Oakland County Prosecutor’s Office. “If this isn’t dirty money, prosecutor’s office may wind up more than $5 why didn’t they put it in the bank?” million richer: $3.2 million from selling the Burdick’s response: “Show me the law that Puertas family’s bowling alley, which the says you have to put your money in a bank.” police seized, plus $1.9 million in cash, jew- Seizing property from the innocent—or at elry, and coins. A pretty good haul for a few least from people who haven’t been convicted hours’ hard work by the boys in blue. of a crime—is not always drug-related. Con- The property seizures that December night, sider the case of John and Tina Bennis of incidentally, did not lead to any charges or Royal Oak, Michigan. convictions. One charge was filed against On October 3, 1988, police found John Joseph Puertas based only on the dubious Bennis engaging a prostitute in the front seat word of the informant—who, incidentally, of his car. Bennis was convicted of indecency may have framed the family to secure lenien- and fined $250. The police then obtained a cy on the felony charges he now faces. In any civil court order to seize Bennis’s car as a “public nuisance.” Lawrence Reed is president of the Mackinac Center Tina Bennis, who as John's innocent wife Jor Public Policy (www.mackinac.org), a free-market endured the troubles and embarrassment that research and educational organization in Midland, attended her husband’s indiscretion, was half- Michigan, and chairman of FEE ’s Board of Trustees. owner of the vehicle. She had helped pay for 655 ===== PAGE 16 ===== 656 THE FREEMAN e NOVEMBER 1998 the car with her babysitting income and used life, liberty, or property without due process it to take the couple’s five children to and from of law”—so says the Fifth Amendment to the school. But the authorities refused to recog- U.S. Constitution. James Madison noted that nize that she had any interest in the vehicle. In “Government is instituted to protect property a 1996 decision with far-reaching implica- of every sort. . . . This being the end of gov- tions, the U.S. Supreme Court upheld the ernment, that alone is a just government authority of the government to punish Tina which impartially secures to every man, what- Bennis for the actions of her husband by ever is his own.” Without a doubt, Madison keeping the car. and his colleagues, were they to witness prop- These cases involve an alarming practice erty seizures under today’s civil asset forfei- known as “civil-asset forfeiture.” Not unique ture laws, would decry the practice as remi- to Michigan, they are occurring in every state niscent of the very tyrannies they and others all across America with disturbing frequency. once pledged their “lives, fortunes and sacred In civil-asset forfeiture cases, the government honor” to prevent. may do little more than meet the most mini- Ending the government’s senseless and mal threshold for alleging that criminal activ- counterproductive war on drugs would go a ity has taken place. No criminal charges need long way to stop the majority of today’s most to be filed, and no convictions need to be offensive forfeitures, but one does not have to gained for law enforcement authorities to be in favor of drug legalization to see the need seize and keep the property of citizens. for an array of legal reforms. In a recent study Indeed, even an acquittal on any criminal done for the Mackinac Center for Public Pol- charges to which seized property relates will icy, Donald Kochan suggests: not necessarily immunize an individual from a forfeiture proceeding. If the owner wishes to * Enacting protections for the innocent. Lan- recover his property, he has the burden of guage in forfeiture statutes should be showing that it was not used in the commis- strengthened to ensure that property owners sion of a crime. who have not participated or acquiesced in a Enacted to help the government nail “drug crime committed with their property are not kingpins” and other big-time lawbreakers, punished with forfeiture. forfeiture laws often scoop up the homes, cars, and cash of ordinary law-abiding citi- « Shifting the burden of proof from proper- zens. The police usually oppose any curbs on ty owners to the government. Governments the practice because they normally get the at all levels should be required to prove cash or the profits from the sale of seized that disputed property is in fact connected property. to illegal activity before it can be seized. Civil-asset forfeiture operates on the princi- ple that the property, not the individual, com- * Removing financial incentives for law- mits the crime. This legal fiction allows the enforcement agencies to employ asset for- government to “punish” property, leaving the feiture. The cops shouldn’t keep what they owners themselves without the rights normal- swipe. ly available to accused persons. But the very notion does violence to these pillars of law in John Adams advised that “Property is sure- a free and civilized society: people commit ly a right of mankind as real as liberty.” The crimes, inanimate property does not, and peo- innocent victims of forfeiture-laws-run-amok ple are innocent until they are proven guilty. can certainly attest to the fact that the seizure America’s Founders understood the critical of property is equivalent to the loss of liberty. importance of property rights in preserving The rest of us ignore their plight at our own liberty. “No person shall . . . be deprived of peril. [] ===== PAGE 17 ===== FREEMAN Ideas On Liberty A New Monetary Universe by James A. Dorn lectronic money (e-money) offers the rather than revolution.3 Because of habit and possibility of privatizing the currency and the network effects of paper currency, it will making government fiat money disappear. take time for people to adjust to new ideas and Competition and falling processing costs will new technology and to accept digital cash (in prompt e-money issuers to pay interest to the form of portable “smart cards” as well as users, and as people choose to hold that Internet accounts) as a new medium of money rather than non-interest-bearing paper exchange. Thus, the current monetary system money issued by central banks, there willbe a will not disappear overnight. radical change in economic affairs. Even central bankers are forecasting the Transition to a demise of paper currency. Jerry L. Jordan, . president of the Federal Reserve Bank of New Monetary Universe Cleveland, predicts that “Just as fiat money The convenience of e-money, its anonymi- replaced specie-backed paper currencies, ty, and its positive yield will make it increas- electronically initiated debits and credits will ingly attractive as a medium of exchange in become the dominant payment modes, creat- the information age. So, as banks find ways to ing the potential for private money to compete further reduce their reserves and clearing bal- with government-issued currencies.”! And ances at the Federal Reserve, the net effect University of Georgia economist Lawrence H. will be to reduce the demand for central bank White forecasts, “When commercial on-line money (the monetary base). The Fed will then networks and Internet sites begin offering off- have to reduce the supply of base money to shore banking services, with zero or very prevent inflation. In the process, the Fed will small fees for transferring funds, an exodus of suffer losses. (Seigniorage, by which the Fed retail banking business will begin from the currently profits through issuing currency for regulated onshore sector to the untaxed and interest-bearing government bonds, would unregulated offshore sector.” become negative.) If the public and banks The transition from the old monetary uni- continue to move out of non-interest-bearing verse, with government at its center, to a new government fiat money (in the form of cur- monetary universe, with the private market at rency in circulation and deposits at the Fed) its center, will be a slow process of evolution and into e-money, the central bank will even- tually go out of business.’ James Dorn is vice president for academic affairs at The market will fill the void and provide 2 the Cato Institute and professor of economics at Tow- new monetary standard as people demand son University. He is the editor of The Future of sound money. Private entrepreneurs will have Money in the Information Age (Cato Institute). an incentive to maintain the value of their cur- 657 ===== PAGE 18 ===== 658 THE FREEMAN ¢ NOVEMBER 1998 rencies or be forced out of business; con- Treasury, in particular, view the transition sumers will unload bad monies and switch to to electronic cash and commerce will shape monies with reliable purchasing power6 A the future of the electronic payments sys- market-driven monetary regime will then tem. A laissez-faire attitude will foster inno- emerge in which the monetary unit would be vation; a protectionist attitude will mean that fixed in value by making it convertible into a special interests will determine the pace of basket of commodities or, more likely, into innovation. The challenge for government mutual fund shares.” Market forces will will be to provide a legal framework that ensure that the supply of money will respond safeguards property rights and expands mar- to changes in demand without experiencing kets so that wealth is created rather than the disrupting effects of monetary disequilib- destroyed. As Federal Reserve Board chair- rium that occur under the current fiat money man Alan Greenspan has noted, “If we wish regime, in which money has no guaranteed to foster financial innovation, we must be value.8 careful not to impose rules that inhibit it. . . . [T]he private sector will need the flexibility to The Fl exibility to Exp eriment experiment, without broad interference by the government.” 10 In the choice of monetary institutions, F. A. Private entrepreneurs, such as David Hayek wrote, “selection by evolution is pre- Chaum of DigiCash, are already developing vented by government monopolies that make the technology needed to ensure privacy and competitive experimentation impossible.” security in the electronic payments system. Thus, the key to whether a new monetary Chaum, a pioneer in developing blind- regime evolves is competition—that is, the signature technology (the use of encryption to freedom to experiment. Will private, profit- generate secure digital signatures), is confi- seeking entrepreneurs, operating within the dent that the new technology will allow elec- spontaneous market process, be allowed to tronic cash to come very close to having the discover a new monetary universe or will gov- attributes of paper currency without the costs. ernment planners and regulators attempt to Moreover, that technology will allow users of block that process by protecting the status e-cash to “retroactively and irrefutably reveal quo? Ultimately, the answer to that question the recipient of the funds.” Thus, crimes asso- may be that the forces of technology and com- ciated with the use of paper currency—such petition will make it impossible to prevent as extortion and bribery—*are no more likely private-sector suppliers of e-money from than they are with checks today.” His goal is breaking the government’s monopoly on cur- to create “a payments system that can be rency. widely adopted and that will stimulate eco- Financial innovation depends on the free- nomic growth... and act as a springboard for dom to fail, as well as the right to profit from increasing individual freedom.” Chaum success. Markets are driven by individuals believes that goal is achievable once “con- who are willing to take risks in search of new sumers realize that the use of electronic pay- opportunities and profit. In the process, pri- ments media does not have to compromise vately sanctioned informal rules often emerge their privacy, but in fact can empower them to that later become codified and enforced by protect their own interests.”!! government; the market typically leads the process of innovation, and government fol- Monetary Freedom and lows. Misguided government intervention . o . would cause more problems than it cures. If Individual Sover eignty overzealous regulators restrict experimenta- In the new monetary universe, the individ- tion and make the emerging electronic mar- ual—not the state—will stand at the center. ketplace too costly, they will severely hamper Market-driven money, not politicized govern- the development of e-money. ment fiat money, will be the standard of value. How the Congress, Federal Reserve, and Bill Frezza, president of Wireless Computing ===== PAGE 19 ===== A NEW MONETARY UNIVERSE 659 Associates, envisions an enlarged private 3. Ibid., pp. 15-16. 4. Lawrence H. White, “Thoughts on the Economics of ‘Digital space in which “sovereign individuals Will cumency’,” Extropy, 20d-3rd Quarter 1995, p. 18. have the tools to construct a practical realiza- 5S. A more detailed scenario of this transition process is found in . . . cl qe ss Kevin Dowd, “Monetary Policy in the 21st Century: An Impossible tion of laissez-faire capitalism.” At the center Task?” Caro Journal, Winter 1998, pp. 327-31. of that space, “will be new monetary institu- 6. For a fuller discussion of why private enterprise will produce money of superior purchasing power, see F. A. Hayek, “Toward a tions that must inherently rest on the consent Free-Market Monetary System,” in James A. Dom and Anna J. of the participants.”12 In the new monetary Schwartz, eds., The Search for Stable Money (Chicago: University of . . Chicago Press, 1987), p. 383. Also, more generally, see Hayek, universe, people will benefit from greater Denationalisation of Money—The Argument Refined, 2d (extended) competition, more information, and more ed., Hobart Paper 70 (London: Institute of Economic Affairs, 1978). 7. In this “defined-value” monetary regime, the monetary unit freedom. would be defined by a basket of goods and services. Banknotes and The danger, of course, is that government bank accounts denominated in the unit would be maintained at their . J . defined values by redeemability in equivalent amounts of some con- may try to stifle competition, control informa- venient redemption medium, perhaps mutual fund shares. Kevin tion, and constrain freedom. Special-interest Dowd has proposed a convertibility rule that is designed “to achieve price stability by pegging the prices of index-based financial deriva- groups that benefit from a paper-based mone- ives” See Dowd, “Monetary Policy,” p. 330, especially footnote 6. tary system should not be allowed to maintain 8. For an excellent discussion of how to avoid monetary disequi- librium, see part four of Leland B. Yeager, The Fluttering Veil: what Milton Friedman has called the “tyranny Essays on Monetary Disequilibrium (Indianapolis: Liberty Fund, of the status quo.” The challenge is to develop 1997) edited and with an introduction by George Selgin. Also see F. X. Browne and David Cronin, “Payment Technologies, Financial an institutional framework that provides trans- Innovation, and Laissez-Faire Banking: A Further Discussion of the parent rules for the electronic payments Sys- Issues,” in The Future of Money, chap. 19. They explain how a laissez-faire banking system based on electronic payments and tem, safeguards the value of money, and pro- deposits held in the form of highly liquid and divisible mutual fund tects individual freedom. Then we will have shares that are “marked to market” and used as exchange media . could eliminate the problem of monetary disequilibrium. better money, greater wealth, and more liber- 9 F. A Hayek, The Fatal Conceit: The Errors of Socialism, vol. ty as a result of the information revolution. [] | of The Collected Works of F. A. Hayek, edited by W. W. Bartley HII (Chicago: University of Chicago Press, 1989), p. 103. 10. Alan Greenspan, “Fostering Financial Innovation: The Role 1. Jerry L. Jordan, “Governments and Money,” Cato Journal, of Government,” in The Future of Money, p. 48. Fall/Winter 1995/96, p. 176. 11. David Chaum, “Privacy and Social Protection in Electronic 2. Lawrence H. White, “The Technology Revolution and Mone- ~~ Payment Systems,” in The Future of Money, p. 94. tary Evolution,” in James A. Dom, ed., The Future of Money in the 12. Bill Frezza, “The Internet and the End of Monetary Sover- Information Age (Washington, D.C.: Cato Institute, 1997), p. 20. eignty,” in The Future of Money, p. 33. We are helping sum I t hosted by ——— sell books over the Internet May We Help You? 3D RESEARCH http://fee.3dresearch.com web @ 3dresearch.com (724)-776-7384 ===== PAGE 20 ===== Does the Internet Prove the Need for Government Investment? by Andrew P. Morriss ans of tax-funded investment often cite net requires thinking carefully about exactly the Internet as an example of the good what the Internet is. In a 1968 paper titled that government can do. Sure, they say, the “The Computer as a Communication Device,” Net now has uncountable millions of compo- two pioneering computer scientists, J.S.R. nents, from Web sites to computer networks Licklider and Robert Taylor, set out the prin- large and small. But if it hadn’t been for those ciples that continue to define the Internet first critical investments by the government, today. According to Michael and Ronda we wouldn’t have the Internet today. Politi- Hauben, the principles consist of these ideas: cians from Vice President Al Gore to Speaker “1. Communication is defined as an interac- Newt Gingrich now call for more such invest- tive creative process. 2. Response times need ments by the government—and the taxes to to be short to make the ‘conversation’ free and fund them. We must find and identify promis- easy. 3. Larger networks form out of smaller ing new technologies and invest. in them to regional networks. 4. Communities form out build tomorrow’s information infrastructure, of affinity and common interests”! Perhaps they tell us, a task too important to be left to most striking about this definition is its simi- private enterprise. larity to the description of an open society The actual history of the Internet suggests built around free markets. that this is far from accurate. The Internet Implementing this vision requires connec- today bears little resemblance either to what tions between computers. The hardware part the government wanted to build or to what it of the Internet consists of millions of inter- actually built. The innovations in networking connections between computer systems that produced today’s Net occurred as much across the world. My office computer, for despite government funding as because of it. example, is connected by a fiber optic cable to If anything, therefore, the Internet represents a server on my university campus. The server the success of spontaneous ordering over cen- in turn is connected to the telecommunica- tral planning, not the successful design of a tions lines owned by many companies. Those new technology by the state. lines eventually lead, by an unknowable num- ber of paths, to Freeman editor Sheldon Rich- What Is the Internet? man’s computer. The software part of the Internet distin- guishes its networking capabilities from that of the telephone system. Those capabilities Andrew Morriss (apm5@po.cwru.edu) is a professor enabled me to make use of these physical of law and associate professor of economics at Case connections to submit this article by e-mail. Western Reserve University, Cleveland, Ohio 44106. My computer’s mail program chopped the 660 Examining the strength of the statist claim that government investment created the Inter- ===== PAGE 21 ===== 661 article into many small pieces, or packets, The Birth of ARPANET addressed them to Richman care of his Inter- net service provider (ISP), and sent them out along many different paths using a technique called “packet-switching.” When the pieces reached the ISP, they were reassembled for downloading, making the document legible on his computer screen. The transmission of information in these small packets is a key work that could survive a nuclear attack and ature of the interme It 1s what enables the permit the United States to launch missiles in et to transmit much more information than 1... 1iai0n. The RAND work included a the conventional telephone network, which ope dedication ofa oe between the packet-switching network. Packet-switching elephones on each end for the duratio © would permit messages to be routed around call. Transmitting information over the Inter- damaged parts of the network. RAND was not net allows multiple uses of the same connec- jp ierested in implementing the reports, how- tion, mixing packets of information from my oye; and nothing was done with them for sev- e-mail with yours, for example, and then eral years. DOD continued to fund research; sorting them out at the appropriate points. 4g 5 result, much of the pioneering work on The “pipeline” between two points can there- networking was either classified or in unpub- fore be kept continuously full, with no wast- jished DOD reports and so unavailable out- ed time for pauses in conversations or while de the government. one caller answers the doorbell in the middle Also during the 1960s, new operating sys- of a call. tems allowed mainframe computers to handle The Internet is thus a complex system—a more than one user at once through “time- mixture of hardware and software and mil- sharing” methods. As computers increased in lions of computers of every conceivable make speed and flexibility, these operating systems and design running different operating sys- allowed the huge costs of hardware to be tems. And thanks to voluntary and mutual spread over more users. Differences in capa- coordination by millions of people, as in a pjlities among the various types of computers free market, they all talk to each other to pro- at different facilities produced interest in vide us with an unimaginable variety of infor- communicating between machines as well, in mation and services, commercial and free. It order to allow researchers to avoid duplicating is a network of networks. hardware. Networking thus naturally followed Today’s Internet is the embodiment of a from time-sharing. The Defense Department spontaneous order in many ways. No agency was particularly interested in these develop- or board controls it. No central planner ments because of its extensive investment in decides how it will operate. It ignores nation- computers at universities across the United al borders. It has changed the world. States, and it continued to fund networking Yet a few years ago, little of what we research, largely through the Information Pro- know today as the Internet existed: no cessing Techniques Office (IPTO). bookstores, no Web pages, little public Far from setting out to design the Internet at access beyond academic institutions. Before the command of bureaucrats, researchers did the Internet, there was ARPANET-—the much of the early work as “extras” on existing Advanced Research Projects Agency Net- contracts, diverting resources to unofficial work—a U.S. Department of Defense projects. Indeed, the first director of IPTO (DOD) network that is often described as has been described as a “‘Johnny Appleseed’ the forerunner of today’s Internet. The with a mission” to promote networking, rather ARPANET connection is thus the source of than as someone merely responding to his the “we wouldn’t have it without the govern- superiors’ goals. More than funding was ment” story. diverted to these projects. IPTO also managed Concern over secure military communica- tions in the early 1960s, sparked in part by an act of sabotage against three Defense Depart- ment microwave towers in Utah in 1961, led the U.S. military to commission a series of studies by the RAND Corporation. DOD wanted a decentralized communications net- description of the theoretical basis for a ===== PAGE 22 ===== 662 THE FREEMAN « NOVEMBER 1998 to hire whatever private researchers the direc- Why Was There No 6 . tor wanted a “Private ARPANET”? Even when the official decision was made to set up a network connecting research sites, Government activity generally “crowds no one knew what uses the network would be out” private activity by absorbing resources put to. For example, Henry Edward Hardy that could be used elsewhere. Computer net- writes that “The popularity of electronic mail working is no exception. Not only did the on the early ARPANET was unanticipated by government directly seize resources through its designers.”” The informal “Network Work- taxation and lock up knowledge in classified ing Group” shaped the network. But decisions documents, it also lured many of the best were made not by the Defense Department or computer scientists to work on its projects, by university bureaucracies; rather they were slowing private-sector activity. made by free-wheeling technical working Private networks were attempted, but they groups that formed spontaneously. “What failed. Setting up a network required permis- began [at the early meeting] was the creation sion from the Federal Communications Com- of a community which cooperated more-or- mission, and existing communications com- less harmoniously for over 15 years,” Peter panies like Western Union fought the creation Salus writes.8 of new networks. Even when a private packet- While groundwork for the ARPANET was switching network, Telenet, began operation, being laid, few outside the technical groups “many millions in legal expenses” were had much enthusiasm for the project. Many required to fight the regulatory battle prompt- were skeptical about packet-switching. The ed by RCA, ITT, AT&T, and Western Union. project also struggled with “a feeling that This kept Telenet from making profits for with the government involved it would be five years.!! Regulatory barriers to entry, not a years late and nothing would work.” Only lack of entrepreneurial activity, slowed the after a successful demonstration at a 1972 com- efforts to build private networks. puter conference did much enthusiasm appear. Despite these obstacles, a private network (ARPANET was not the only government- among universities, USENET, sprang up. It funded networking experiment during the resembled today’s Internet much more than 1960s and 1970s. The French, German, ARPANET did. USENET developed because British, and Japanese governments also fund- the Defense Department limited ARPANET to ed network development. None was particu- a relatively small number of sites. People at larly successful and none produced anything other sites wanted a network too, and USENET like the Internet. American technical superior- quickly surpassed ARPANET in usefulness ity doesn’t explain the success of ARPANET; because it lacked the restrictions DOD money other Defense Department networking efforts imposed on ARPANET. (USENET still exists; failed miserably.!0) it is a collection of newsgroups devoted to Thus the story of ARPANET is fascinating every subject imaginable.) but it is not the commonly accepted myth that government investment produced the Internet. Far from being centrally planned, ARPANET ARPANET Was Not the Internet grew up as the result of the successful capture The Internet had its genesis within of agency (and private) resources by individu- ARPANET. The protocols, or common lan- als pursuing their own academic interests. The guage that all computers can use to communi- availability of no-strings-attached federal cate with each other, were developed by defense dollars undoubtedly made it easier for ARPANET people. In 1979 the government’s the early networking pioneers to concentrate Advanced Research Projects Agency estab- on the technical details of their work. Given lished the Internet Configuration Control the intensity of their interest in the subject, Board. Both ARPANET and the Internet are however, subsidies were hardly required. packet-switched networks. But there are many Other money would surely have been found. profound differences. Indeed, the Internet ===== PAGE 23 ===== DOES INTERNET PROVE NEED FOR GOVERNMENT INVESTMENT? 663 today is so vast and complex as to be virtual- government-sponsored networks attempted to ly impossible to describe accurately. It is a impose it.!3 highly decentralized open-ended process that » Its obliviousness to geography and borders. 1s not governed in any literal sense. (The Wired magazine recently sent Internet pioneer Internet Society, a nongovernment, nonprofit (and Grateful Dead lyricist) John Perry Barlow organization, was formed in 1992 to “main- across Africa to test network accessibility in tain and extend the development and avail- remote corners of the continent; he found ability of the Internet and its associated tech- an astounding degree of connectivity already nologies and applications.”) There are several in existence. Connecting to the world defining characteristics that make the Internet outside DOD-funded sites was a problem for what it is and sharply differentiate it from ARPANET users. Even sending e-mail across ARPANET. a university campus from a non-ARPANET * Its constant and rapid growth: There are site to an ARPANET computer often required hundreds of thousands, if not millions, of con- routing messages across continents. nections on the Internet depending on how The international connections that are such one defines “connection.” ARPANET, in con- an important part of the Internet today were trast, grew slowly. In 1969 there were just four also a struggle for the early ARPANET pio- host computers connected. By January 1976 neers. Once the network expanded beyond a there were just 63. ARPANETs limited scope few experimental connections to universities was due to its restriction to sites with DOD abroad, international standards bodies domi- funding.!2 nated by representatives of government postal » Its freedom with respect to content: It is and telephone monopolies began to interfere nearly impossible to control how individuals with the protocol standards. use the Internet. Because it was built with government funds, ARPANET users faced a The Internet after ARPA number of restrictions on their use of the net- : work. Commercial use, for example, was ARPANET and its successors were eventu- banned. Even one of the most popular uses, ally shut down beginning in 1990 and network newsgroups, quickly ran into censorship traffic shifted to a mix of private and public problems. Although the first newsgroups con- transmission lines by 1995, a period of unpar- cerned primarily technical issues about the alleled growth in both network usage and network, users quickly began to establish technology. The ARPANET experience did groups concerning other subjects of interest. contribute significantly to the development of When several users proposed a newsgroup the Internet in a number of important ways. dealing with recreational drugs, those in con- The experience with networking gained from trol of the network rejected it as too contro- running ARPANET, for example, helped versial. (Drugs weren’t the only subject that thousands of computer scientists make was rejected; a proposal for a newsgroup advances that benefit us all today. Even more called “gourmand” was also turned down important, the drawbacks to a government because the creator refused to change the network prompted ARPANET users to devel- name to “recipes.”) op techniques for outwitting government con- * Its quick and spontaneous evolution of trollers. That experience helped create the standards: For example, the HTML language Internet. As Jim Gilmore, an important figure for producing web pages is quite recent but is in evading the early attempts at censorship now used throughout the world. The early net- told Peter Salus, “when faced with obnox- work protocols developed by the hackers and iously centralized control over something that graduate students who built the initial ought to be free and/or distributed, I look for ARPANET software evolved into a system a low overhead way around that increases whose popularity prevented an international freedom in general.”14 standards body from centrally planning a There have been other sources of technical new system (OSI), although a number of innovation as well, however, and they deserve ===== PAGE 24 ===== 664 THE FREEMAN e NOVEMBER 1998 as much credit as the Defense Department, if one consciously created the Internet. While an not more, for the Internet’s capabilities today. international network of networks undoubted- A recent article in Wired magazine attributed ly would look different today had ARPANET advances in credit-card processing and video- never existed, there is also little doubt that streaming technology to a company selling packet-switching and e-mail would have pornography on line. Those techniques are evolved anyway. Dedicated, motivated people now used by mainstream vendors as well. with a need to communicate—for commercial Unlike the mythical Internet that sprang and noncommercial purposes—would have forth from the ARPANET, the real Internet surely seen to it. ] grew out of a spontaneous ordering process of the interactions of millions of individual 1. Michael Hauben and Ronda Hauben, Netizens: On the History users. The uses we make of the Internet were and Impact of Usenet and the Internet (Los Alamitos, Calif.: [EEE unimaginable to the researchers and scientists nado original paper is available at who created the networking protocols and 2. Ibid, p. 117. hardware advances we rely on today. Far from A peter Eo Casting the Net: From ARPANET to INTERNET being the result of the government’s “strate- and beyond. .. (Reading, Mass.: Addison Wesley Publishing Com- gic” investment in the original Defense Fy @)p 22% = 86. Department networks, today’s Internet devel- 6. Salus, p. 20. oped at most accidentally from and often in 7. Henry Edward Hardy, “The History of the Net,” master’s the- . sis, Grand Valley State University, September 28, 1993; at spite of those investments. The explosive hup:/info.isoc.org/guest/zakon/Intermet/History/History_of_the_Net. growth in commerce, for example, became ™™ 0.53 possible only when the government’s ban on 9. Ibid., p. 67. commercial use of the networks it financed 19 id. P io was lifted. 12. Hauben and Hauben, p. 42. Moreover, the “strategic” nature of the " hi early investment in networking is a myth. No 15. Frank Rose, “Sex Sells,” Wired, December 1997. 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! Enter or extend your own subscription, or send a sample copy to a friend, neighbor, or business associate. Call Janette Brown at (800) 452-3518 for details. ===== PAGE 25 ===== FREEMAN Ideas On (ideas On Liberty) Opening Pandora’s Box by Dan Fylstra ast year, Netscape and several other PC siphoned off from product development and industry companies appealed to our gov- marketing. We’ll have to worry about whether ernment to help them in their fight against we have enough influence in Washington, and Microsoft, which they felt was using its mar- in our state capitals. Have we hired the right ket power with Windows to gain an unfair lobbyists, donated to the right PACs, hob- advantage in the browser wars. Our federal nobbed with the right politicians? Will we get and state governments have responded, and our share of any government largess, and can the results are everywhere in the daily news. we sneak in our special exemption from the I'd like to comment, not about Netscape or latest tax or regulation? Microsoft, but about the politicization of our There will be a new pecking order, defined industry, what it means for our future, and by the amount of political influence enjoyed what fundamental choices we can make going by various companies, trade associations, and forward. other groups. And who is likely to come out Somehow, things are not working out quite on top of this new pecking order? The start- the way we expected. Now, in countless trade- ups with the hottest new technology, or the press articles, columns, and editorials, people established companies who’ve had the time to are asking: Should the government be develop their political connections? Let’s be involved? Will it do the right thing—whatev- blunt: it’s pretty obvious that in today’s White er that is? And how will it impact us? Have we House and Congress, influence can be opened Pandora’s box? bought, and the price tag isn’t all that high by My answer to that last question is yes. our industry’s standards. If a night in the Lin- We’ve opened Pandora’s box—and it will coln bedroom goes for $50,000 and a seat on prove impossible to close it. Our industry is a Commerce Department trade mission is just being politicized. Henceforth, it won’t be $100,000, then established leaders in the PC enough to design and build great products, industry ought to be able to afford plenty of and sell them at attractive prices. We'll also influence. As for the small and medium-sized have to compete in the political sphere. And companies—well, if you can’t afford to pay, that will take time and money, which will be you can’t afford to play. Dan Fylstra has been involved in the PC industry since its inception. He was founding associate editor "Who Among Us Will Have the of BYTE Magazine in 1975, and founder of VisiCor, 4 1979. He re currently president of the PC software Most Influence? vendor Frontline Systems, Inc., and can be reached at . danfylstra@hotmail.com. This is excerpted from a And who can afford the most influence? longer “open letter” distributed on the Internet. Which company is responding to the pressure 665 ===== PAGE 26 ===== 666 THE FREEMAN e NOVEMBER 1998 brought upon it by drastically stepping up its What Are Qur Choices? lobbying efforts and political contributions? Microsoft, of course. Bill Gates is no dummy, Pandora’s box is open. The impact of poli- and he’s said it quite explicitly: he used to tics on our livelihoods is growing every day, think that all he had to do was design and and we don’t know what to do about it. Most build great products. Now he realizes that atti- of us would rather avoid thinking about or tude was “naive.” The folks who hate spending time on politics; we'd rather be cre- Microsoft, the 800-pound gorilla in a relative- ating new technology, and satisfying more ly free market, should be worrying about the customer wants and needs. Many of us, if future Microsoft, the gorilla with so much asked, would echo the classic cry: laissez political influence—so many senators and faire—leave us alone! But the politicians congressmen in its back pocket—that it’s won’t leave us alone. Because of our relative practically untouchable. No, this won’t hap- lack of sophistication and lack of involvement pen next month or next quarter, but what in politics, we are on the defensive. We're about four years from now, given our politics likely to end up on the short end of any com- today? promise—whether it’s about strong encryp- We’ve worried about the market power of a tion, Internet access and freedom of speech, few companies like Microsoft, but we haven’t electronic commerce and sales tax, you name anticipated how the true coercive power of it. So, if Pandora’s box is open, what are our government might be used for or against us. choices? Continuing to ignore politics is not After all, you don’t have to buy Windows 98, really an option, because politics has arrived and many people won’t. But you do have to at our door. We can, of course, accept the pay your taxes, or go to jail, to finance things politicization of our industry—as some have like the federal Market Promotion Program, already done—and become supplicants. We which pays for McDonalds hamburger ads can become active in “mainstream” politics, overseas today, and—who knows?—might in either the Democratic or the Republican pay for Microsoft’s browser ads overseas Party (is there any difference?), trying to tomorrow. move the politicians in a sensible direction, Most of us cling to the notion, or at least the and hope for the best. hope, that the Justice Department or the state Or, we can apply some lessons from our attorneys general will somehow act intelli- own experience and try to gain leverage by gently in the public interest, and things will investing in a start-up. Not another high-tech turn out okay. We've never examined public company, but a political start-up that is capa- choice theory, which predicts that in the pub- ble of challenging the status quo. I’m thinking lic sector, as in the private sector, key players broadly of the libertarian movement. . . . will pursue their own self-interest, not the It’s no secret that libertarian ideas are pop- broad public interest. We need to recognize ular on the Internet, or that they are showing the state attorneys general for what they are: up across our politics and culture with political entrepreneurs who are simply riding increasing frequency. But what practical dif- the anti-Microsoft wave for all it’s worth, ference would it make if the high-tech com- seeking to advance their own careers. The munity were to embrace the libertarian move- results for consumers or for our industry are ment in a big way? I believe that if enough of beside the point, as long as we are not that us made this decision, it would fundamental- politically influential. Indeed, public choice ly alter the future, both for our industry and theory predicts that a political system like for American politics. For the high-tech com- ours will transfer wealth from the politically munity, an investment of time, energy, and unorganized to the politically influential. The money stands to earn a far bigger share of the ideal outcome, from the politicians’ view- “libertarian start-up” than we will ever gain point, is that we all become supplicants, on an from the established political parties. Instead ongoing basis, fighting among ourselves for of being absorbed into the enormous pool of the favors that only they can hand out. current political interest groups, we could ===== PAGE 27 ===== OPENING PANDORA’S BOX 667 play a major role from the beginning. It is ing political leaders. It is time for us to get already true that the libertarians, on average, involved. . .. have a much deeper understanding of technol- What would this mean in the long run? It ogy than the often-clueless Republicans and would mean that we could worry less about Democrats, and we could ensure that this politics. It would mean we could focus on cre- remains true in the future. ating new technology, designing and building But most important, the libertarians have great products, and meeting customers’ needs the right ideas—about the wisdom of relying and wants once again. on the market, about the futility of central I admit that as a political start-up, the liber- planning, about the practical importance of tarian movement may seem like a long shot liberty for innovation and growth, in our compared to just coping as best we can with industry as well as others—that I believe we’ll the Democrat-Republican duopoly. Just think have to embrace, sooner or later, if we wantto of it like Apple versus Texas Instruments in realize the opportunities ahead of us in the 1978, or Microsoft versus IBM in 1982. In my 21st century. These ideas are important to view, the libertarians may be the only real everyone in our economy and culture, but alternative we have to becoming just another they are critical to the computer industry. We industry that is caught up in the stasis of have been held back, co-opted, and bamboo- American politics—the only way to get hope zled for too long by today’s very disappoint- out of the bottom of Pandora’s box. Handsome New Paperback Edition! THE CLASSIC BLUEPRINT FOR A JUST SOCIETY HE LAW BY FREDERIC BASTIAT New Introduction by WALTER E. WILLIAMS Foreword by SHELDON RICHMAN “Phenomenal! An amazing and timeless treatment of the cost of using government to solve problems.” — Russell Roberts, author of The Choice Single copy: $2.95 4 copies for $10.00 96 pages with index, paperback (quantity discounts available) Hardcover edition: $12.95 Please send check or money order to: FEE, 30 South Broadway, Irvington-on-Hudson, NY 10533 (Add $3.00 for postage) Visa and MasterCard orders ($10.00 minimum, please): 1-800-452-3518 ===== PAGE 28 ===== Potomac Principles by Doug Bandow Murderous Nostalgia mong America’s more significant actors trial of Julius and Ethel Rosenberg, Soviet and singers was Paul Robeson, born a atomic spies in the United States who were century ago. His centennial is being celebrat- executed early in the Cold War. ed with film retrospectives, museum show- Sunset’s residents demonstrate on behalf of ings, and book reissues. janitors’ pay, lobby for Social Security, Robeson, an impressive talent who struggled endorse national health insurance, circulate against pervasive racism, had a less presentable petitions over Sunset Hall’s dismissal of an side: he was an avowed communist. He pro- employee, object to the purchase of table- moted leftist causes in the United States, cloths as wasteful, and collectively decide frequently visited the Soviet Union, and was what food is to be served. But they don’t just awarded the Stalin Peace Prize in 1952. want more government in a liberal democra- Anyone can make a mistake, but Robeson cy. They pine for the good ol’ days of com- knew what he was doing. In 1949 he met in munism—the real thing. Moscow with his friend Itzik Feffer, a Yiddish At age eight Glady Foreman, now 90, was author who warned of the start of Stalin’s proclaimed a “little socialist” by her father. anti-Semitic purges. When Robeson returned She has written a book—as yet mercifully home, he told reporters that “I heard no word unpublished—titled “How Adam and Eve Lost about” anti-Semitism. He later accepted the Their Social Security.” Says Foreman: “Social- Stalin Peace Prize despite Feffer’s murder at ism, crushed to the earth, will rise again.” the hands of the regime. Jacob Darnov, a messenger in the Bolshe- It is impossible to know how Robeson, who vik army decades ago, expresses his continu- died in 1976, would have reacted to the col- ing admiration for Lenin. “He’s the greatest lapse of communism. But true believers politician we ever had in this world.” remain. Sunset Hall in Los Angeles, a small Wayne Friedlander, a former member of apartment home for the aged begun 75 years Students for a Democratic Society who once ago by Unitarians, could provide the plot fora ran Sunset Hall, says he owes the residents a terrible sitcom. Filled with unrepentant com- debt. They “are the giants,” he explains. munists and socialists, Sunset Hall sports a In one sense, he’s right. These people are picture of Robeson, bust of Vladimir Lenin, “giants.” Giant fools. Lest that seem harsh, and books on Marxism, Mao Zedong, and what else can one say about people who pro- Leon Trotsky. There is also literature on the moted—and continue to defend—the most murderous philosophy ever to disgrace human Doug Bandow, a nationally syndicated columnist, is history? To back the communist Sin 1917 was a senior fellow at the Cato Institute and the author an understandable, if tragic, mistake. But the and editor of several books, including Tripwire: twentieth century has demonstrated that the Korea and U.S. Foreign Policy in a Changed World. philosophy is inherently totalitarian and its 668 ===== PAGE 29 ===== 669 implementation is inherently destructive and kept a bust of Hitler in the living room and violent. Everywhere and every time, the expe- who declared that fascism would rise again, rience has resulted in a charnel house. To sup- and wrote this up cute—well, this simply port communism still, despite decades of could never happen.” He's right, even though mass murder, is inexplicable. there is no difference in the moral culpability In his book, Death by Government, Univer- of the true believers of left and right. sity of Hawaii professor R.J. Rummel cata- Indeed, the ongoing effort to rehabilitate logues the catastrophic record of the regimes former communists suffers the same myopia. so beloved by Sunset Hall residents. The Sovi- There are, for instance, the Rosenbergs. A et Union, figures Rummel, killed somewhere number of leftists long proclaimed the Rosen- between 28 million and 127 million people. bergs’ innocence. Unfortunately for the true His best estimate is 62 million. Even those believers, Soviet archives indicate that the who believe that Rummel’s figures are exag- husband-and-wife team were, yes, spies. The gerated still offer mind-numbing figures—20 long campaign conducted on behalf of Alger million, according to French scholar Stephane Hiss, a Soviet spy convicted of perjury after Courtois’s Black Book of Communism. serving in the State Department, also ground Rummel figures that the second most mur- to an ignominious close with overwhelming derous regime, also surpassing the Nazis, was evidence of his guilt. that of Mao Zedong. Rummel estimates that Then there are those who were blacklisted the communist Chinese killed somewhere by Hollywood during the Cold War. Many between six million and 102 million people— did suffer, and suffer unfairly. But private most likely about 35 million. Courtois actual- sanction is very different from public prose- ly puts Mao Zedong in first place, with cution. The national security state commit- between 45 million and 72 million dead. ted excesses; the refusal of some studios to Rummel and Courtois also offer estimates for hire apparent communists was something other great communist killers. Cambodia’s quite different. Indeed, those who laud the Khmer Rouge, led by Pol Pot, wiped out an blacklisted writers often act as if being estimated two million to 2.3 million people; denied public credit for one’s script, a com- the Vietnamese murdered 1 million to 1.7 mil- mon result of blacklisting, was akin to being lion, while the North Korean regime killed 1.7 sent to the Gulag—as were tens of millions million to two million. by the rulers so beloved by those who were There’s more. Communist Poland slaugh- blacklisted. tered 1.6 million (through extensive ethnic This is the central issue. As the Washington cleansing after World War II). At about the Post’s Stephen Rosenfeld points out, “What is same time, Yugoslavia killed around 1.1 mil- missing from the discussion is an evaluation lion. African governments have accounted for of the substance of the political views many 1.7 million. of the movie people had.” Those blacklisted Then there were the many lesser commu- were supporting a monstrous tyranny, one that nist tyrannies that dotted Asia and Eastern oppressed, slaughtered, and destroyed at will. Europe. In some of those states the dead num- That someone would refuse to hire them is as bered “only” in the hundreds of thousands. In unsurprising as, say, refusing to hire a pro- a few, “merely” tens of thousands—truly rep- fessing Nazi. The real victims were the tens of resenting the velvet glove of communism. But millions gunned down by tyrants. Glady Foreman still hopes that socialism The twentieth century, filled with so much “will rise again.” horror, is mercifully coming to an end. While It is astounding enough that true believers we may choose to forgive those who support- remain. What could prompt the New York ed the murderous totalitarians who wreaked Times to put a story about Sunset Hall on its human devastation, we should never forget. front page, however? Observes syndicated However charming, talented, or even cute columnist Michael Kelly, “If a Times reporter they now may seem to be, their hands remain found a brave little band of aging Nazis, who covered with blood. OJ ===== PAGE 30 ===== ¥ Government FREEMAN Ideas On Libert The Mother of All Food Fights by Sam Kazman Qomeone once commented that if the feder- USDA, however, had not plucked this issue al government regulated restaurant fare, out of thin air. Rather, the task had been hand- there'd be blood in the streets. Vegetarians ed to it by Congress in the 1990 Organic Foods would be fighting with meat-eaters, Jews and Production Act. The agency might have told Moslems would battle pork fanciers, tee- Congress, “forget it,” but agencies are loath to totalers would have at it with imbibers, and be that candid about nonsensical missions. On burrito purists would persecute wrap-sand- the contrary, a little extra turf and budget never wich snackers. Food peace is, in fact, one of hurt anyone in government service. the greatly unappreciated benefits of our rela- tively free restaurant market. Violent food The Elusive Meaning fights are few and far between, and they tend of Organic to be limited to such government monopoly situations as prisons. So what is organic anyway? The simplest The U.S. Department of Agriculture, how- definition is the one we learned in high ever, recently came close to igniting the moth- school—compounds that contain carbon. That er of all food fights with its organic-food definition is also the most useless, since it labeling proceeding. The rulemaking drew encompasses just about everything we con- over 115,000 comments—a record for the sume other than water and salt. (Is sea salt agency. At issue were such questions as ever marketed as organic?) whether the term organic could be applied to The popular notion is that organic food such items as genetically modified foods, contains no synthetic chemical additives. irradiated meat, or crops fertilized with Defining just what this means in practice is municipal sludge. Even the eligibility of live- hard enough. Are there any permissible mea- stock raised under confined conditions was surable residues? How far down the produc- questioned. tion chain do the rules apply? If a field had One might wonder why USDA was synthetic pesticides applied to it in the past, involved in this issue in the first place. A gov- how much time must pass before the produce ernment attempt to define organic food nowa- grown on it can be called organic? What days is little different from a government about the trace amounts of preservatives pres- attempt to regulate religious doctrine; it might ent in plastic packaging? bring uniformity, but it might also ignite the Moreover, even this basic public under- supermarket equivalent of a religious war. standing—that organic means no synthetic additives—is subject to exceptions by organic Sam Kazman (skazman@cei.org) is general counsel purists. USDA’s main organic-advisory board, at the Competitive Enterprise Institute. for example, issued a lengthy series of recom- 670 ===== PAGE 31 ===== 671 mendations regarding permissible synthetic organic becomes too difficult, or meaningless, substances and impermissible nonsynthetic they will just use another word to market their substances. produce.” But what the controversy over USDA's pro- The issue has been complicated by the posal demonstrates is not that organic food entry of several state agencies into the certifi- may be technically difficult to define, but that cation business. The basic political urge of it isn’t a technical concept at all; instead, it such agencies is to pre-empt the field and cre- has become a theological one. For many peo- ate regional monopolies over the term organ- ple, organic has come to mean a way of life— ic. To the extent this urge is resisted, con- in the words of one group, a “holistic sumers are better off. approach” involving “key concepts such as Consumers who care about such issues health of the agro-system and biodiversity.” don’t need the force of law in order to obtain The fact that these concepts may be hard to the information they want about food prod- define does not mean that the people who ucts. USDA has already announced that its espouse them are insincere; it simply high- eventual definition will not allow genetically lights the folly of federal involvement. modified foods, but suppose it had ruled oth- erwise. Producers of organic foods that were not genetically modified could still communi- cate that fact to interested consumers— As demand for organic food has grown, pri- through labeling, through advertising, and vate organic-certifying agencies have arisen. even through private organic-certification Some have stricter standards than others, and systems that make a point of prohibiting bio- some may have standards and enforcement engineered products. Information that groups practices so lenient that they are practically of consumers want will make its way to them meaningless. But to the extent that differences without legal compulsion. between them really mean something to con- In a sense, this is exactly what has hap- sumers, those consumers are fully capable of pened for kosher certification. When it comes distinguishing between them (or of choosing to kosher food, some people couldn’t care retailers who do the job for them). Regardless less, some people care only that a product be of whether we view the popularity of organic labeled kosher, and some are concerned about food as a crazy fad, a long-term market devel- the strictness of the standard met by the prod- opment, or an evolving esthetic, two things uct. For this last group there are competing are clear: producers and consumers are enti- rabbinical inspection boards, each with a dif- tled to pursue it, and government should keep ferent logo. With the possible exception of out. guarding against outright fraud, there is little The lack of any pressing necessity for such need for government involvement. Interest- involvement is clear. The large organic- ingly enough, despite the lack of that involve- foodstore chains already have established ment, consumer demand for kosher certifica- connections with suppliers and certifying tion is so high that it has “gone mainstream.” agencies; the same is true of conventional Kosher-product sales have been growing supermarket chains that carry organic prod- steadily (in dollar volume they are only slight- ucts. In the words of one marketing director, ly behind organic food), and such mass mar- “consumers won’t see any drastic changes in keters as Nabisco and Mars have recently our stores” under a federal rule. “We’ve been joined the trend. Consumers seem capable of taking a very strong stance on organic from sorting things out peacefully. the beginning, requiring certification from Which brings me back to my opening point growers.” about restaurant regulation and public peace. Organic growers themselves are also capa- 1 read it somewhere, but I don’t recall where. ble of doing without a cumbersome federal For the first reader to identify the source, I definition. According to one organic-farming will buy a sandwich: veggie, organic, kosher, newsletter, “many growers say that if certified cheese and onions, you name it. Ol Private Certifiers ===== PAGE 32 ===== FREEMAN Ideas On Liberty The IRS, Now and Forever? by James Bovard Qinee late last year, politicians in Washing- presume that the tax-audit process is an even- ton, D.C., have been promising to save handed pursuit of a fair tax assessment, many Americans from the Internal Revenue Ser- IRS agents see it as a chance to get a pound of vice—to fundamentally reform the agency, flesh from an innocent taxpayer. IRS auditors once and for all. The surge of anti-IRS out- are rewarded on the basis of how much addi- rage fits a dismal pattern in recent American tional tax they impose on people, not on history. On July 30, 1996, when signing a bill whether they follow federal tax law. The IRS’s to provide meager additional protections to “Program Letter for Fiscal Year 1997” stated taxpayers, President Bill Clinton proclaimed: that tax examiners will be evaluated accord- “We say to America’s taxpayers, when you ing to the total “proposed additional tax and deal with the IRS, you also have privileges penalties” they recommend for imposition on and we respect them. You have protection and taxpayers, as well as “total revenue protected: we will help provide it. You have rights and Total dollars protected as a result of disallow- we will shield them.” ing claims for refund.” The American Institute We’ve heard this before. Since the 1960s, of Certified Public Accountants (AICPA) national outrage has repeatedly erupted when complained in 1997 to the IRS that “The Ser- news of IRS abuses hit newspaper front vice’s methods of evaluating its personnel pages. Each time, politicians and bureaucrats focus on . . . maximizing revenue and protect- swore that they would fix the problems and ing the Treasury.” AICPA added that “the that such abuses would never happen again. Examination Division’s performance is evalu- Each time, the IRS has continued to tyrannize ated solely based upon factors other than and terrorize innocent American citizens— determinations as to the proper amount of with no effective redress from either federal tax.” judges or from the U.S. Congress. When individuals appeal audit findings to We will examine some of the more brazen the IRS Appeals Office, it sustains barely 30 IRS abuses to gain insights into the futility of cents on the dollar of additional taxes moderate reform. assessed during audits. In other words, almost 70 cents of each dollar of additional Institutional Arbitrariness taxes that auditors demand is found to be unjustified. In percentage terms, the IRS apparently cheats far more often during tax audits than average Americans cheat on their James Bovard is the author of Lost Rights: The tax returns. The National Commission on Destruction of American Liberty (St. Martin's, 1994) Restructuring the IRS found that the quality and Shakedown (Viking, 1995). of IRS audit work has deteriorated in recent 672 Roughly two million Americans are audit- ed each year. While many Americans might ===== PAGE 33 ===== The Foundation for Economic Education Irvington-on-Hudson, New York 10533 Tel. (914) 591-7230 Fax (914) 591-8910 E-mail: freeman @fee.org November 1998 The Danger of Deifying the State ntil this afternoon, I had planned to The scene shows Nazi trucks stuffed with write this month about the folly of frightened children being forcibly taken Social Security, or about the perils from their parents—parents left standing of central banking, or about the internal in a detention yard, screaming and wail- contradictions of government regulation; I ing, as they helplessly watch as their little forget which, exactly. I forget because a far | ones are driven off to no-one-knows- more interesting topic sprang to mind a where. few hours ago: my son, 15-month-old Recollecting that single movie scene and Thomas Macaulay Boudreaux. knowing that it depicts a reality less than This afternoon I watched Thomas toddle | 60 years past caused me to shake physical- joyfully about the playground in our ly. The pain even of imagining such a hor- hometown of Irvington-on-Hudson. He ror was acute. pointed quizzically at the geese squawking I ran to Thomas and held him tightly. near the water’s edge; he was entranced by | He slobbered on my cheek as I laughed an acorn; he laughed and laughed as we and cried simultaneously. “My boy is here, slid down a sliding board; and he studied safe, with me,” I repeated to myself. with the seriousness of a surgeon the sand “But what if they come?” asked the that he held for the first time in his tiny darker part of my mind. “What if one day hands. was overcome with the joy that such beasts show up in America to take parents feel when they see their children Thomas from me as if he were trash on the learning how wonderful life can be. And curb?” intense affection washed over me as I saw The calmer part of my mind assured me him make his way across the grass while that no such beasts are darkening the prattling his sweet non-words. horizon. Just as Thomas paused and looked back As I strolled Thomas back home, how- to ensure that I was still there—just as his ever, | wondered. I wondered about the eyes met mine—my mood completely source of such brutal totalitarianism. If changed. For reasons I do not know, at such vileness arose during this century in that moment my mind recalled what is Germany (and in Russia, and in China, for me the most vivid and horrible scene and in Cuba, and in other countries too in Steven Spielberg's film Schindler's List. numerous to list), are we Americans really ===== PAGE 34 ===== secure against the scourge of unlimited others as more-than-mortal suffers a corre- totalitarianism? spondingly deflated sense of self-respect It’s unthinkable that in 1998 the U.S. and loses his independence of mind. The government will engage in Nazi-style initial sentiment of those who are elevated beastliness. But it’s not at all unthinkable might be a warm paternalism toward that such brutal displays will become com- | those who do the elevation. But if not monplace in America sometime in the removed from their perch, the elevated future. Totalitarianism is inevitable if inevitably come to regard all others as enough people come to believe that gov- clay to be beaten, molded, and baked into ernment’s proper role is to solve all prob- whatever shapes the elevated happen to lems. A people who demand that their fancy. government engineer them into a state of Modern totalitarianism grows from the collective holiness will in fact end up in an dangerously wrongheaded belief that earthly hell. those who wield government power are Consider the powers that are today somehow greater than, wiser than, and exercised in America by the national gov- more trustworthy than ordinary men and ernment. In the name of water conserva- women. And it is fertilized by the childish tion, Washington specifies the amount of wish that every inconvenience no matter water that our toilet tanks can hold. In the how minor, every affront no matter how name of ecology, Washington microman- innocent, and every possible danger ages private use of privately owned lands. (except that of the state itself!) no matter In the name of fairness to the handi- how remote be prevented by government. capped, Washington intrudes itself into People who are ceded the power neces- the building-design business. In the name sary to engineer society eventually become of child safety, Washington vetoes parents’ | monsters. choices of which toys to buy for their chil- This eventuality is what I fear as I look dren. In the name of adult safety, at my little son. He is safe today. But if I Washington dictates which pharmaceuti- reflect upon all the power that government cals we may and may not use. In the name wields now that it did not wield when I of energy conservation, Washington speci- was born 40 years ago, and then consider fies the fuel efficiency of our automobiles. the real possibility that government's And as I write these words, Congress is power will grow at the same pace over the considering federal legislation to override next 40 years, I tremble with fright. A gov- state statutes that permit people to carry ernment with such power would assuredly concealed handguns. Fewer and fewer treat Thomas and his children, not as aspects of our lives are off-limits to humans, but as cattle or clay. And if Washington. Thomas should resist by asserting his indi- Why do we tolerate such intrusiveness viduality, the government would summar- from strangers—intrusiveness that none of | ily slaughter him along with all the rest of us tolerate even from members of our own those truly heroic people who refuse to be family? The reason is that Americans gen- babied or bullied by the state. erally believe not only that government No calling for me is higher than warn- means well, but also that it possesses ing against the awful dangers of statism. unique powers to right all wrongs. In Nothing less than my son’s life depends short, too many Americans believe govern- | upon reversing the modern trend of deify- ment to be godlike. ing government. Thus the danger: that which we deify we trust without question. But govern- ment is an institution of mortals, not of VD) 75) gods or quasi-gods. When anyone treats mies another person as being more-than-mortal, he who is ludicrously elevated in this way Donald J. Boudreaux suffers an inflated ego. And he who treats President ===== PAGE 35 ===== FEE Holiday Sale: Readers’ Favorites O nce again the holiday season is upon us. This month we're offering for sale titles that you, our readers, love (next month look for staff favorites). We hope that you'll consider purchasing one, two, or twelve of these great works and give them as gifts to a) other freedom lovers; b) statists who need to hear the other side; c) family members or friends; or, d) your local library. Over the years these books have proved themselves : to be highly readable, enjoyable expositions of economic wisdom and individual liberty. Go ahead, stuff some stockings with a different kind of sweet! Human Action, 4th ed. — What better place to begin than with Ludwig von Mises! While Human Action definitely WILL NOT fit into your — or anyone else’s — stocking, we nonetheless feel that this great work is worthy of your consideration as a holiday gift. The beautiful navy blue leather- bound edition will make an ideal present for a child, grandchild, or beloved other who is interested in the hows and whys of market processes. As we noted last month, Rose Wilder Lane praised this book as “unquestionably the most powerful product of the human mind in our time” and believed it would “change human life for the better during the coming centuries as profoundly as Marxism has changed our lives for the worse in this century.” Why not give this exceptional work to someone exceptional in your life? Deluxe leather $99.05 Sale: $49.95 — save 50%! Economics in One Lesson - 50th Anniversary Edition — Henry Hazlitt’s work is undeniably a classic. Building on Frederic Bastiat’s distinction between “the seen and the unseen,” Hazlitt teaches readers the key “lesson” of economics — that you must look beyond the immediate, obvious results of actions to understand their full impact. (If only economics reporters on TV would learn this lesson we would no longer be insulted by reports of the “silver lining” around the cloud of natural disasters — that carpenters, at least, will have more work!) This great book explains, among other things, how the price system works, the effects of minimum wages, who is protected by “protectionist” tariffs, and how taxes discourage production. Follow the lead of some George Mason University professors who use this book to teach undergraduates economics! 205 pages, cloth $495 Sale $9.00 paper $9-95 Sale $5.00 Clichés of Politics — Edited by Mark Spangler, Clichés is now in its fourth printing, and for good reason. This excellent book refutes classic “clichés” we've all heard statists use to explain why we need more government and, therefore, more coercion. Here's a very brief sampling: “The size of the national debt doesn’t matter because we owe it to ourselves”; “There is too much inequality of wealth and income”; “If free enterprise really works, why the Great Depression?” and most persistent and pernicious “To solve the problem we need government regulation.” George Roche, president of Hillsdale College, calls Clichés “the best brief anthology of economic principles available today.” Get several copies, pass them around, and watch the intellectual sparks fly. 314 pages, paper EHD Sale $9.00 The Mainspring of Human Progress (50th Anniversary Edition) — Another of our consistent best sellers, Henry Grady Weaver's little gem of a book (this one could fit in the stockings) goes beyond economics in explaining the human progress made possible by the commericial and industrial revolutions. Weaver explores the truly important question of why countless human beings starved to death for thousands of years, but now, at least in the developed world, we no longer do. Identifying individual liberty and private-property rights as keys to economic growth and human well-being, Weaver provides an eloquent defense of the free-market system. 253 pages, paper ake ke Sale $6.00 Sale ends: December 31st, 1998 Postage and Handling: Please add $3.00 per order of $25.00 or less; $4.00 per order of $25.00 to $50.00; $5.00 per order of more than $50.00. Send your order, with a check or money order to FEE, 30 South Broadway, Irvington-on-Hudson, NY 10533. Credit card orders — $10.00 minimum please: Visa, MC, Discover, American Express, or fax orders are welcomed. Please call 800-452-3518, or fax us at 914-591-8910. ===== PAGE 36 ===== The Market Economy: A Reader edited by James L. Doti & Dwight R. Lee THE MARKET Looking for a great way to teach economics, fr CONOMY: or learn it yourself? James L. Doti and Dwight R. Lee This outstanding anthology is an invaluable source book for students of free-market economics as well as for proponents of limited government. Professors Doti and Lee have assembled a stellar list of authors—Adam Smith, Frederic Bastiat, David Ricardo (among the classical economists); Ronald Coase, Milton Friedman, James Buchanan, EA. Hayek, Ludwig von Mises, and George Stigler (among the modern greats); in addition to Ayn Rand, Henry David Thoreau, and Charles Murray, among others—to explain eight key issues: the invisible hand; markets and individual freedom; government regulation; the proper role of government; international trade; scarcity and social cooperation; income distribution; and imperfect markets. What a joy to find—in a single book—Hayek'’s classic essay “The Use of Knowledge in Society,” Friedman and Stigler’s wonderful work on rent control “Roofs or Ceilings?”, Ayn Rand's essay on “The Nature of Government,” and Adam Smith's pivotal analysis of the division of labor. For anyone homeschooling children, or for anyone interested in deepening his or her knowledge of the relationship between economics and personal freedom, this book is not only essential, it’s a real treasure. 362 pages, paperback $3795 Special! $14.95 An Evening at FEE with Doug Bandow THE POLITICS OF ENVY Saturday, November 14, 1998 What's really going on in Washington today? What does the current mess tell us about politics in general? |. Freeman columnist Doug Bandow diagnoses the mala- | » "= dy—and prescribes a cure: limited government. Don’t miss this lively roundtable at The Foundation for Economic Education, 30 South Broadway, Irvington-on-Hudson, New York. This informal get-together starts at 5 p.m. with a reception and dinner, followed by Doug's presentation and a question- and-answer session. Price is $35 per person. For reservations, call Janette Brown at (800) 452-3518. ===== PAGE 37 ===== 673 years in part because of poor training of audi- achieve that goal could lose cash bonuses or tors and the increasing complexity of the tax promotions. Joseph Lane of the National law. Association of Enrolled Agents (licensed tax- The incentive system is truly bizarre: IRS payer representatives) declared: “Whenever auditors receive bonuses for assessing addi- an enforcement agency resorts to using pro- tional taxes regardless of whether appeals duction statistics for evaluative purposes, be officers determine that citizens actually owe they audit yields or traffic tickets, the first such taxes. Dan Pilla, author of several books casualty is citizen rights.” on the IRS, estimates that Americans pay bil- There are practically no limits to the scams lions of dollars in taxes that they do not owe that the IRS can use to jack up the amount of because few taxpayers take their audit case to tax citizens supposedly owe. If a taxpayer the appeals level. Expense and fear deter falsely reports his income, he can be sent to many appeals. prison for several years for tax fraud. But if an IRS employee lies about federal tax law in IRS Culture order to commandeer more of a citizen’s bank account, he can get a bonus award and maybe Why are abuses of taxpayers so common? even a promotion. IRS auditors disallow legit- In recent years, IRS agents have been indoc- imate expenses—such as in the case of a Cal- trinated to see taxpayers as a class enemy. ifornia restaurant owner who was prohibited This new attitude is epitomized by “Culture from counting food purchased for his restau- Bingo”—a game used to train agents and rant as a business expense. In auditing the auditors to recognize “an IRS organizational returns of self-employed salespeople, IRS culture regarding the audit process.” The agents have refused to permit as business game encourages the use of summonses to costs the expenses for trips in which a sale did obtain third-party records, to think of fraud not occur. referrals as a path to promotion, and to Increasingly, IRS auditors are simply mak- believe that most taxpayers deposit unreport- ing up income—and then demanding that ed receipts in their bank accounts. One of the people pay the additional taxes. IRS agents most damning lessons of the training is the use Bureau of Labor Statistics data to deter- doctrine: “Taxpayers seem to live better than] mine the average income in a certain geo- do.” The IRS appears to be officially seeking graphical area. If they are not satisfied with to maximize the resentment or hostility that the additional taxes they have been able to gin agents feel toward the taxpayers they audit. up for someone they are auditing, they The American Institute of Certified Public announce that the person is hiding income— Accountants said of the course materials: that the person actually has the average “Every ethical issue presented finds the ethi- income in his area—and thus owes thousands cal result to be pro-IRS and anti-taxpayer. of dollars of additional taxes, penalties, and There is not one scenario where an IRS agent interest. As Bruce Strauss, a private tax pre- might act unethically against a taxpayer's parer who worked for IRS collections for over interest.” 30 years, recently observed: the fact that “the In 1988, Congress prohibited the IRS from IRS now has the authority to assign addition- evaluating its employees on the basis of the al income to a taxpayer at its discretion, with- additional taxes they collected. However, the out any basis in fact, is frightening and IRS has—as usual—flouted this law and used absolutely unacceptable.” statistical evaluations that help turn IRS agents into public enemies. One confidential . IRS document uncovered last fall revealed Property Seizures that auditors in the San Francisco region were IRS officials insisted at Senate Finance expected to assess at least $1,012 in addition- hearings last year that employees were not al taxes for each hour they spent auditing a encouraged to seize private property merely taxpayer’s return. Any auditor who failed to to accumulate bonus points on the job—a ===== PAGE 38 ===== 674 THE FREEMAN e NOVEMBER 1998 practice strictly prohibited by federal law. The Mirage of Taxpayer Rights However, subsequent audits of the IRS have shredded that defense. An audit released in Time and again, the American people have December of the IRS’s Oklahoma-Arkansas been deceived by political promises to fix the district found that a third of the property IRS. In 1988, and again in 1996, Congress seizures violated federal law or IRS regula- enacted so-called Taxpayer Bill of Rights leg- tions. The report concluded: “District man- islation that was supposed to stop the IRS agement’s goals and performance expecta- from tyrannizing innocent citizens. However, tions are focused heavily on specific statistical according to training materials the IRS uses targets, including dollar targets” per employ- for new agents, the main effect of the bills of ee. IRS revenue officers ignored regulations rights is to increase the agency’s power over and guidelines before seizing property; in one taxpayers. The American Institute for Certi- case, the only effort an IRS agent made to fied Public Accountants recently complained, contact a citizen before confiscating two cars “In turning the Taxpayer Bill of Rights on its “consisted of driving to the taxpayer’s house, head, [IRS] examiners come away believing honking his car horn, and noting that no one that, with no legal opposition, they will be came out of the house in response.” free to . . . interrogate taxpayers and invade In recent years, the IRS has greatly taxpayers’ rights of privacy by interviewing increased its audit rate for low-income fami- ‘spouses, relatives, employees, friends, com- lies, at the same time that the audit rate for petitors’ and a host of others.” wealthy Americans has fallen. One IRS crim- An IRS collections officer with a quarter- inal investigator told the Senate last Septem- century experience testified anonymously at ber that the Criminal Investigation Division the Senate hearing that the Taxpayer Bill of management “encourages and emphasizes... Rights has “had very little effect on the con- what they referred to as mom and pop cases, duct of the IRS. The Taxpayer Bill of Rights is which are easy hits and can be opened and very positive . . . but who is going to enforce closed quickly . . . rather than investing time this for the taxpayer? If you're going to sue in the large cases which require more time the IRS it’ll take thirty, forty, fifty thousand and resources to prove.” dollars.” Phoenix tax lawyer Bob Kamman The IRS has had a special preference for observed: “The taxpayer rights provisions of pursuing divorced people. After a divorce, the the Internal Revenue Code are like the civil agency has hounded both former spouses to rights provisions of the former Soviet Union’s force each of them to pay the full amount they constitution. On paper, they tell a wonderful allegedly owed as a couple. The General story. In practice, for many taxpayers there is Accounting Office estimated that the IRS no effective protection against government wrongfully pursues tens of thousands ex- abuse.” spouses each year, demanding additional tax For instance, the 1988 Taxpayer Bill of payments that are not legitimately owed. Sen- Rights created a Taxpayer Ombudsman with ator Bill Roth observed that “the agency is all the power to issue a “taxpayer assistance too often electing to go after those who would order” to provide immediate relief in cases be considered innocent spouses because they where taxpayers were being wronged by the are easier to locate, as well as less inclined IRS. However, as usual in Washington, this and able to fight.” appointee has become a lapdog of the agency Sometimes, the first time a person knows he is supposed to oversee. In 1996, over the IRS is on his case is when he gets a call 32,000 taxpayers requested “taxpayer assis- from the bank saying that his savings have tance orders”; the Ombudsman granted them been commandeered by the agency. The IRS in only five cases—slightly more than one in is not required to tell people when it confis- every 10,000 requests. cates their bank accounts; it claims that the The only Americans who have legal rights, only “official notice” people are entitled to is in the IRS’s eyes, are those who can afford to a notice from the bank. hire lawyers and topnotch accountants to fight ===== PAGE 39 ===== THE IRS, NOW AND FOREVER? 675 the agency. Congress enacted provisions to Senator Daniel Patrick Moynihan said that allow citizens who fight the IRS in court to the purpose of the law was to give IRS agents have their attorneys’ fees paid in cases where “the respect to which they are entitled.” Yet, the IRS’s position lacked merit. However, the the IRS’s own audit reports and congressional IRS and the Justice Department have fought hearings preceding the bill's passage raised tooth and nail to prevent almost anyone from one horror story after another of IRS agents receiving reimbursement for their legal fees in on rampages. After the Senate passed the bill, any case—regardless of how egregious the IRS Commissioner Charles O. Rossotti and government’s behavior may have been, and Treasury Secretary Robert Rubin praised the regardless of how often the IRS may have pre- bill. Yet Rubin had vigorously attempted to viously lost in court on exactly the same derail the first Senate hearings on IRS abuses issue. The fact that the cost of hiring a lawyer in September 1997, and Rossotti had down- and fighting the IRS in court is prohibitively played the extent of IRS abuses in his own high for the vast majority of Americans testimony at later hearings. With powerful means that the IRS has carte blanche to ride IRS friends like Rubin and Rossotti, taxpay- roughshod over most Americans’ legal rights. ers have no reason to presume their problems have been solved. . . Congressional and administrative “fixes” The Latest Bill of Rights of IRS abuses are a pipe dream because the Last summer, Congress passed and Presi- agency will continue to have vast arbitrary dent Clinton signed an IRS overhaul bill that power over ordinary Americans. Nancy supposedly gives taxpayers all the protection Jacobs, who along with her husband was they need from federal revenue collectors. hounded by the IRS for 16 years because the The fact that this third “bill of rights” in ten IRS provided an incorrect identification num- years passed Congress by overwhelming mar- ber to her husband’s optometry business, gins (402-8 in the House, 96-2 in the Senate) declared: “When you have someone come to indicates that it is unlikely to reduce the fed- you from the IRS telling you they’re going to eral government’s fundamental power over take your home, take your vehicles—every- private citizens. The new law does shift the thing you own, close your business—you do burden of proof for some tax-court cases— what they say.” The IRS has indisputably and but only a tiny percentage of taxpayers who grossly abused every bit of power that Con- are wrongfully assessed for additional taxes gress has given it. A grant of power from Con- fight all the way through IRS administrative gress to the IRS is just the starting point; it procedures to a courtroom. The law provides then stretches the power to the limit. When it some relief to divorced people whose dead- is accused of savaging the lives of taxpayers, beat ex-spouses have left them tax troubles, it proclaims “good faith” error. and extends attorney-client privileges to certi- It is an illusion that better laws will solve fied public accountants. The law also creates a the problems of an agency that is long noto- new oversight board—but the National Trea- rious for breaking any and all laws. The only sury Employees Union, which represents IRS truly effective reform is to shut down the workers, is guaranteed a seat on the board. IRS and get rid of the byzantine tax code Moreover, the board will only be concerned designed to allow politicians and bureau- with long-term planning and budgets, not crats to micro-manage the lives of American today’s abuses. citizens. 0 ===== PAGE 40 ===== FREEMAN deas On Libert Another Minimum-Wage Clash by Richard B. McKenzie t happened again. Republicans and Demo- support for increasing the minimum wage by crats recently locked political horns over those interested in helping the working poor.” President Clinton’s proposed one-dollar Despite EPI’s claims, the Republicans increase in the minimum wage. The political argued, as they have in the past, that if Con- partisans repeated past claims with self-right- gress raised the cost of menial labor, several eous fervor, but once again were off base on hundred thousand jobs would be lost. Some the consequences of the increase. (The mea- employers would not be able to afford as sure was defeated—this time.) many workers, and other employers could be President Clinton and his Democratic allies expected to automate low-skill jobs out of argued that the proposal would be an unmiti- existence. Opponents backed up their claims gated blessing for the country’s low-wage with equally sophisticated statistical studies workers who deserve an increase in their take- that showed that some low-skilled workers home income. Bob Herbert, a columnist for should be made better off (those who kept the New York Times and an avid minimum- their jobs) but only because other low-skilled wage supporter, quoted approvingly a study workers would be made worse off (those who from the Economic Policy Institute (EPI) are unemployed). For example, the EPI com- which found that the last hike raised the missioned a study of a $1.35 increase in the incomes of 10 million Americans: “The bene- minimum wage in the state of Washington fits of the increase disproportionately help and found that by 2000, the increase can be those working households at the bottom of the expected to destroy 7,431 jobs, causing the income scale. Although households in the affected workers to lose $64 million in annu- bottom 20 percent (whose average income gj] income. was $15,728 in 1996) received only 5 percent of total national income, 35 percent of the . benefits from the minimum wage increase Both Sides Are Wrong went to these workers.” Both sides to the debate were once again Herbert is convinced that such findings wrong in their assessments of the minimum- should give minimum-wage critics reason to wage increase because they both failed to rec- eat their words. He reminds his readers of ognize that employers are a lot smarter than what Cato Institute chairman William Niskan- the political combatants seem to think. Nei- en said during the last debate over the mini- ther side seems to realize that Washington mum wage: “It is hard to explain the continued simply doesn’t have the requisite power over Richard McKenzie teaches economics in the Gradu- markets to significantly improve worker wel- ate School of Management at the University of Cali- fare by wage decrees, no matter how well- fornia, Irvine. intentioned the legislation may be. 676 ===== PAGE 41 ===== 677 Why is this so? The simple answer is that This line of argument can also help us the labor markets for low-skilled workers are understand why workers who retain their jobs highly competitive, which explains the low are unlikely to be any better off. They get wages paid menial workers in the first place. more money, but they get fewer fringes and Many employers of low-skilled workers have to work harder for their pay. The only would love to be able to pay their workers reason a sane employer would offer the more, but they have to face a market reality: if fringes and reduced work in the first place is they paid more, then their competitors would that the workers valued them more highly have a cost advantage. than they valued the money wages that they When Congress forces employers to pay gave up to get them. And sane employers more in money wages, it also forces them to aren’t about to offer workers anything unless pay less in other forms, most notably in they get something in return, like greater pro- fringe benefits. If there are few fringes to take duction or a lower wage bill. When the mini- away, employers can always increase work mum wage is hiked, therefore, the value of the demands. resulting lost fringes and reduced work Why would employers curb benefits and demands to the workers will be greater than increase demands? First, they can do it, given the value of the additional money income. that the minimum-wage hike initially will Put another way, the workers who retain attract more workers and cause some employ- their jobs are made worse off (albeit margin- ers to question whether they can hire as many ally so) in spite of the money-wage increase. workers unless adjustments are made. The Employment in menial jobs may go down forced wage hike also strengthens the bar- (albeit ever so slightly) in the face of mini- gaining position of employers, given that they mum-wage increases not so much because the can tell prospective workers, “If you don’t like employers don’t want to offer the jobs (as tra- it, I can hire someone else.” Second, the ditionally argued), but because fewer workers employers must cut fringes and/or increase want the menial jobs that are offered. Under- work demands, or face the threat of losing standably, the voluntary quit rate among low- their market positions to competitors who do wage workers goes up, not down, when the so. Third, if employers don’t cut fringes minimum wage is hiked. and/or increase work demands, the value of Seen from this perspective, the Economic the company’s stock will suffer, creating prof- Policy Institute figures on the added income itable opportunities for investors to buy the received by 10 million workers are grossly firm, change the benefit/work-demand poli- misleading because they suggest that the cies, improve profitability, and then sell the affected workers are better off, which is firm at a higher price. unlikely. The net effect of the adjustments in fringes Granted, economists might speculate that and work demands is that the cost impact of the job reductions have been small because the minimum-wage hike to the employer will the demand for menial labor is fairly constant, be largely neutralized. For example, when the but that explanation makes no sense. The elas- minimum wage is raised by a dollar, the cost ticity of demand for anything, including labor, of labor, on balance, may rise by only five relates to the number of substitutes: the more cents. That explains why studies have found substitutes, the greater the elasticity. The that recent minimum-wage hikes have caused problem with the explanation is that there is few (if any) job losses even among that group no labor group that has more substitutes than of workers—teenagers working at fast-food menial (minimum-wage) workers, especially restaurants—whose jobs are most likely to be now that firms have so much flexibility to cut. Even the EPI study cited above shows a automate jobs out of existence or to replace reduction in Washington state’s total employ- domestic workers with foreign workers by ment of less than three-tenths of one percent way of imports. for a proposed 26 percent increase in the You can’t fool the market. It will outsmart state’s minimum wage. the smartest of politicians. OJ ===== PAGE 42 ===== Peripatetics by Sheldon Richman ¥ current Issues Service Without a Smile top the presses! Heres a news flash that “One 18-year-old student added that he would will send shock waves through the coun- dig ditches but did not want to do anything try: school-based compulsory community ser- involving people.” vice doesn’t engender the spirit of giving. This is not what the architects of “manda- Imagine that! When students are forced to be tory volunteerism” had in mind. They seem compassionate volunteers, they rebel and find genuinely surprised at the results. If we are to ways to get around the system. Who'd have believe them, they actually expected students, believed it? on command, to be overcome with charity and In a recent article in the Washington Post, good will. James Youniss and Miranda Yates are crest- People who feel a general benevolence fallen because “a good idea is in danger of might wish to volunteer and help out others being subverted.” For six years the Maryland who are in some kind of difficulty. But it Board of Education has required students to doesn’t follow that if people are forced by a perform 75 hours of community service bureaucracy to render service, they will before they can graduate from its schools. become benevolent. They are more likely to (Other districts around the country have simi- be resentful of the imposition and find ways to - lar programs.) But according to Youniss and discharge their obligations in the least oner- Yates, “many are evading the requirement by ous way possible. Should we really be sur- meeting the letter, but not the spirit, of the prised that some students see service as mere- law.” And some “students treat service as just ly a task they have to get through in order to another credential for their college applica- graduate? tions.” Hard to believe, but there it is. Social engineers never get the point. They How are they evading their mandatory persist in thinking they may enact schemes good deeds? The authors say students look for without taking into account that, just like ways to “get the task over with as quickly and them, others have their own preferences and painlessly as possible.” Others want credit for aspirations. People, particularly young peo- activities such as babysitting, taking out the ple, don’t like to be forced. As Adam Smith family’s trash, mowing a neighbor’s lawn, or wrote long ago, individuals are not pieces on setting up a dance at their schools. Youniss a chessboard. If compelled to carry out some- and Yates report that last year students who one else’s plan, they will resist or evade. Let’s had put off doing their service were permitted hope that is always the case. at the last minute to satisfy the requirement by Youniss and Yates offer the standard picking up litter on school grounds or reshelv- defense of mandatory service: “Effective ser- ing books at the library. The authors write that vice programs give students the chance to do meaningful work that produces tangible Sheldon Richman is editor of The Freeman. results, such as feeding the hungry or the 678 ===== PAGE 43 ===== 679 homeless, or bringing comfort to the elderly” and of indoctrinating students into the view But that’s not the issue. Those opportunities that unpaid service to others is their duty. I exist without the school requirement. They wonder, for example, if a student would get are there for the taking. The programs don’t credit for volunteering with an organization “give” students the chance to help others. that defended property rights against statist They compel students to do so. That distinc- environmentalism or that opposed the war on tion may be lost on school administrators, but drugs. it is important nonetheless. We can be sure that students aren’t allowed The purpose of the mandatory service pro- to start small businesses to fulfill their gram was summarized by Nancy S. Grasmick, requirement Why not? Because a business who was the Maryland school superintendent exists to make money, and school-based ser- of education when the program began. She vice programs forbid compensation of any said that “To make a contribution to the com- kind. (One student was told his time in the munity and learning from that contribution Boy Scouts didn’t satisfy the requirement helps one to become a lifelong learner.” because he received compensation—merit This has a phony ring to it. Whatever badges.) effects it might have, it is not clear why per- Running a small business (as a freely cho- forming community service would instill a sen activity) would teach some valuable love of learning in children. And weren’t the lessons and would therefore be a worthwhile schools theoretically doing that already? Is part of a private-school or homeschool cur- there a confession here that public school isn’t riculum. Students would learn that under cap- enough to develop an appreciation for the italism one prospers by providing one’s fellow acquisition of knowledge? human beings with things they need and want. Advocates of required service also like to Think of the corollaries that students would tout its character-forming effects. But what come to appreciate: the marketplace rests on a about the effect of state compulsion on the harmony of interests among all people; the character development of students? Let’s not division of labor is a method of cooperating forget this is a program at compulsory gov- with total strangers scattered far and wide; ernment schools. First the children are forced one man’s gain is another man’s gain; consent to attend government schools, some of which is the only proper basis for dealing with oth- are little more than custodial centers. Then ers; peace and cooperation through the market they are ordered to work without pay, in the make us all richer; benevolence flows out of name of charity, if they want to graduate. That freedom. sounds like standard government procedure: Any decent school should teach those through force all good things can be achieved. lessons. But government schools can’t teach No one seems much interested in how insti- them without undermining their very reason tutional coercion misshapes character. One for existence. How do you square compulsory would hope that the purpose of education is to attendance and school taxes with freedom and teach children to become independent, respon- free markets? Government schools were set sible, rights-respecting human beings who are up because freedom wasn’t trusted. By design fit to pursue their own happiness. But the les- they have shifted a major part of child rearing son taught in public schools (and, sorry to say, from parent to state, and have equated sub- many private schools) is that pervasive gov- servience to authority with good citizenship. ernment knows best, not only as to what and The English classical liberal Richard Cobden how any given child should learn, but even argued in the nineteenth century that the coer- how a child should relate to his community. cive hand of an overreaching government dis- It’s hard to avoid the conclusion that torts the institutions of civil society, such as mandatory service has the dual intention of trade and religion. We can surely add charity marshaling manpower for approved missions to that list. OJ ===== PAGE 44 ===== FREEMAN Ideas On Libert Do Corporations Have Social Responsibilities? by John Hood Busnes are accustomed to being criti- affiliates, including AT&T, Federal Express, cized for neglecting their responsibilities Hallmark, and Time Warner. to society. Complaints that private enterprise Social responsibility isn’t expected only of puts profit before people have long provided large corporations. If commercial activities reliable applause lines for politicians and are perceived to be unethical or destructive, it assorted activists, and material for the briefs doesn’t matter what type of business enter- of crusading public-interest attorneys. But in prise engages in them. However, publicly the past few years, the concept of corporate traded corporations are the target of most dis- social responsibility—increasingly part of the cussion about social responsibility because of curriculum in America’s schools of business how they are created and managed. and management—has established itself as a Corporate social-responsibility advocates political and social force to be reckoned with. note that since corporations are “fictitious This can be seen in recent proposals in Con- persons,” created by law and sustained by gress and elsewhere to offer tax breaks orreg- government grants of limited liability for ulate differently firms that shoulder their individual shareholders, they have obligations “social responsibilities.” to society that surpass those of sole propri- Another sign of the increasing prominence etorships or partnerships. One such scholar, of the idea was the formation of Business for business professor Thomas M. Jones of the Social Responsibility (BSR) in Washington, University of Washington in Seattle, D.C, in 1992. The 54 founding members of explained that “the corporation which acts in BSR—including Ben & Jerry’s Homemade, a responsible manner may simply be paying Inc., The Body Shop, Stride Rite Corp., and society back for the social costs of doing busi- Working Assets—were well known as advo- ness, costs for which the firms rarely receive cates of environmentalism and economic an invoice.” “fairness.” The organization said it intended, This view is hardly new. In fact, it was through lobbying and public relations, to accepted doctrine in the United States and make “social equity,” “environmental respon- other Western societies until the nineteenth sibility,” and “developing a sustainable econ- century that the right to conduct business in omy” integral to corporate decision-making. the corporate form was a matter of royal or BSR now has more than 800 members and state prerogative, not of private economic interest. Monarchs issued charters to public- John Hood is president of the John Locke Founda- stock corporations that promised public bene- tion, a public-policy think tank in North Carolina, fits, such as exploration and colonization of and the author of The Heroic Enterprise: Business the New World. Individuals could own shares and the Common Good (Free Press, 1996). of the corporation, and sell them (with some 680 ===== PAGE 45 ===== 681 limitations), but the purpose was not merely calculated to increase profits in the longer to serve the interests of stockholders. In the run. But that wasn’t his stated purpose. Ford American colonies, the earliest business cor- proclaimed broader social goals: “to employ porations established during the eighteenth still more men, to spread the benefits of this century were founded to perform such ser- industrial system to the greatest possible vices as building transportation infrastruc- number, to help them build up their lives and ture, supplying water, fighting fires, and pro- their homes.” The Dodge brothers sued, viding insurance. These early corporations claiming that Ford was using shareholder were rare and closely regulated in size, scope, equity to pursue his own personal philan- and property holdings. thropic goals. The Michigan Supreme Court, while professing to respect Fords business judgment, agreed with the Dodges. It stated that a corporation exists to benefit its stock- After the break from England, however, holders and that corporate directors have dis- American states began to pass charters that cretion only in the means to achieve that goal. allowed self-incorporation rather than incor- It may not use profits for “other purposes.” poration by special legislative act. At first, The court went on to say that corporate these corporations could be created only for behavior such as charitable giving could pass religious, charitable, or municipal functions. legal scrutiny as long as it had a legitimate The first private incorporation statute, passed relationship to corporate profits. Other state by the North Carolina state legislature in courts codified this standard by upholding 1795, applied only to canal builders, and the corporate expenditures such as gifts to local canals had to pass to state ownership. Later, training schools, community chests, recre- however, states broadened the scope of self- ational facilities, hospitals, and even church- incorporation to the point where firms began es. Expenditures designed to attract cus- to arise throughout the economy for the clear tomers and advance corporate interests by purpose of conducting private business. obtaining “good will and prestige” also At the turn of the century, the implicit passed muster. assumption underlying state corporate law As a practical matter, then, Dodge v. Ford was that the corporation existed to make and similar cases throughout the early twenti- money for its shareholders. This consensus eth century gave corporate managers great was rarely challenged. The first important discretion. Nevertheless, the case did estab- legal test of the responsibilities of corporate lish in the minds of corporate managers and directors came in the influential 1919 case of others the notion that corporations had direct Dodge v. Ford. Despite its name, the case had responsibilities only to shareholders. nothing to do with competition between automakers. Instead, it had to do with the intended largess of Henry Ford, president and controlling shareholder of the Ford Motor After the Great Depression hit and through- Company. In August 1916 Ford owned 58 per- out the war years, this notion came under fire cent of company stock. John and Horace from several fronts. First, a number of schol- Dodge owned 10 percent. Rather than pay ars and observers of business came to regular and special dividends, as the company advance the proposition that corporations, far had done in previous years, Ford announced from being owned and thus controlled by their that only regular dividends would be paid. shareholders, were really accountable to no The remaining profits would be used to one but their managers. Adolf Berle and Gar- expand production capacity, increase wages, diner Means, in their influential work, The and offset losses expected from his cutting the Modern Corporation and Private Property, price of cars. argued that shareholders were passive owners Many analysts have interpreted Henry at best; they effectively exercised only the Ford’s strategy as an astute business decision power to sell their shares if dissatisfied with Self-Incorporation Permitted Principle Under Fire ===== PAGE 46 ===== 682 THE FREEMAN e NOVEMBER 1998 corporate policies or performance. “By sur- in Smith, the court, along with other legal and rendering control and responsibility,” Berle academic commentators, suggested that the and Means wrote, shareholders had “surren- corporate interest itself had changed. Because dered the right that the corporation should be they controlled institutions of economic power operated in their sole interest.” Their book, and social influence, responsible corporate published the same month Franklin Roosevelt managers (as well as government regulators), was elected, helped justify the economic reg- according to this outlook, should consider a ulations imposed in the early New Deal. host of goals other than profit maximization. Another argument advanced was that cor- porations had grown $0 large and amassed 0 Reaction and Counteraction much power over society that previous formu- lations of their social responsibilities had sim- Many business leaders and academics ply become outdated. This view was stated by viewed the corporate social responsibility the New Jersey Supreme Court in 4.P Smith movement with alarm. To them, it went hand Manufacturing Co. v. Barlow, the 1953 case in hand with increased government control that helped redefine the purpose of corpora- over private economic decisions. The most tions in the minds of many executives, judges, famous critic is Nobel laureate Milton Fried- and scholars. In 1951, the board of directors man, author of Capitalism and Freedom. of A.P. Smith, a manufacturer of valves and Friedman, while teaching at the University of fire hydrants, adopted a resolution to con- Chicago, wrote perhaps the most widely tribute $1,500 to Princeton University. Corpo- cited—and criticized—essay on corporate rate shareholders challenged the donation as social responsibility in the past 30 years: “The being outside the proper scope of corporate Social Responsibility of Business Is to expenditure. The court disagreed and upheld Increase Its Profits.” In that modest five-page the contribution. Harking back to the royal article in the September 13, 1970, issue of the charters, the court said that the shareholders, New York Times Magazine, Friedman sought to “whose private interests rest entirely upon the clarify the legal and ethical issues involved in well-being of the corporation, ought not to be the debate by noting that businesses are simply permitted to close their eyes to present-day groups of people and that only people have realities and thwart the long-visioned corpo- responsibilities. If a corporation makes a rate action in recognizing and voluntarily dis- donation to charity without the shareholders’ charging its high obligations as a constituent authorization, wrote Friedman, the managers of our modern social structure.” are deciding how to spend other people’s Around the same time, other court decisions money. It would be better to return the money and new state statutes recognized the power of to shareholders as dividends or capital gains corporations to make donations to the public and let them decide which charities to support. welfare or for charitable, scientific, or educa- In Friedman’s view, the purpose of the cor- tional purposes. Advocates of corporate social poration is clear: “There is one and only one responsibility began to argue that if philan- social responsibility of business—to use its thropy was a legitimate corporate activity, then resources and engage in activities designed to perhaps other activities that placed social increase its profits so long as it stays within goals over shareholder returns were also legit- the rules of the game, which is to say, engages imate, such as abandoning profitable but (in in open and free competition without decep- their view) socially or environmentally tion or fraud.” destructive product lines. The actual legal sta- It is no exaggeration to say that, with very tus of corporate social responsibility probably few exceptions, every major article on or did not change a great deal between Dodge v. analysis of corporate social responsibility Ford and Smith v. Barlow, since managers had since the publication of Friedman’s article has always enjoyed a substantial amount of discre- cited, mentioned, or challenged it. Some crit- tion in how to serve what they perceived to be ics maintain that Friedman’s understanding of the economic interest of the corporation. But corporate ownership is badly dated. Since ===== PAGE 47 ===== DO CORPORATIONS HAVE SOCIAL RESPONSIBILITIES? 683 shareholders are passive or even unknowing the legal or fiduciary responsibilities of cor- investors in particular companies (through porate managers in business transactions such pension or mutual funds), they don’t exercise as takeovers and mergers. But there remain a the type of control that real owners of proper- couple of points from Friedman’s discussion ty do. “With the dissolution of ownership in that are unappreciated. the traditional sense,” wrote Michigan State One is the important notion that corpora- University legal scholar Jeffrey Nesteruk in tions do not exist in physical reality. This has the Cincinnati Law Review, “the dichotomy implications beyond Friedman’s contention between shareholder and societal member that corporations, as artificial persons, cannot must be reconsidered.” Another argument really have social responsibilities. Consider lodged against Friedman's view is that divid- that corporations consist of more than simply ing profit-seeking business activity from the their land, plants, machinery, inventory, and larger world of political, legal, and social products. The value of a corporation—at least decision-making is impossible. “Role special- in the minds of those who buy, hold, or sell its ization, which perhaps is desirable, does not stock—is based on both tangible and intangi- and cannot exist in our modern industrial econ- ble assets. A company with few assets today omy,” Thomas Jones stated. “Corporations play but a great idea for a new product may domi- a political role; governments play an economic nate the marketplace tomorrow, while a com- role. Profit alone no longer implies preferred pany with millions of dollars in assets and a behavior. . . . Corporations are social institu- large market share in a soon-to-be obsolete tions and as such must live up to society’s stan- industry may be destined for failure. Hard-to- dards; society has changed the standards for quantify characteristics, such as worker corporations, as it has every right to do.” morale, management style, systems for pro- Friedman has responded that social moting internal innovation, and an ability to changes have not invalidated the distinction foresee future trends, determine the expected between corporations and other institutions. value of corporate stock. Nor is the relationship between shareholder Can individual shareholders really be and corporate manager anything but an viewed as “owners” of such corporate assets owner-employee, or principal-agent, relation- as the brainpower and work ethic of employ- ship. To suggest otherwise is merely to substi- ees, or the goodwill and confidence of con- tute one’s own judgment for the judgment of sumers? A more meaningful way to think shareholders, who, after all, voluntarily about corporations may be that they are bun- decide whether or not to invest their funds. dles of ever-changing and variably valuable They (or their agents among money man- private agreements between individual per- agers) will sell the stock of companies from sons. Coca-Cola, for example, might be rea- which they no longer expect competitive sonably thought of as a set of bilateral and returns. Indeed, the proliferation of stock multilateral agreements between such groups ownership through institutional investors has as farmers, factory workers, plastic designers, merely reinforced the responsibility of corpo- bauxite miners, graphic artists, bankers, bond rate managers to focus like a laser beam on buyers, managers, retailers, soda drinkers, profit as an objective. Advocates of corporate and celebrity spokesmen. All these individu- social responsibility may not like the implica- als (and many others) enter into contracts tions of this trend, but that does not justify with Coca-Cola in which they agree to pro- their attempts to second-guess shareholders in vide something of value in exchange for their wish for an economic return. something else of value. Stockholders are no different; they agree to Shifting the Debate risk their wealth as equity owners of the corpo- ration in exchange for a shot at a profitable The debate over corporate social responsi- return on their investment. There is nothing bility has focused on such issues as the nature socially undesirable about this emphasis on of corporate ownership in America today and profit. Many American families rely on invest- ===== PAGE 48 ===== 684 THE FREEMAN ee NOVEMBER 1998 ments in stocks or mutual funds to make the Profit and the Common Good down payment on their first home, to send their kids to college, or to live decently in retirement. Another of Friedman’s points that deserve Shareholders of U.S. corporations seek profit in greater attention is his suggestion that “the the same way that other groups of Americans people who preach the doctrine of social seek higher wages as workers, higher interest responsibility are concealing something: the rates as lenders, lower interest rates as borrow- great virtue of the private enterprise system is ers, and lower prices as consumers. Corpora- precisely that by maximizing corporate prof- tions serve as the venue where these sometimes its, corporate executives contribute far more compatible, sometimes competing interests are to the social welfare than they do by spending accommodated in ever-changing, but always stockholders’ money on what they as individ- mutually satisfactory ways. uals regard as worthwhile activity.” Here is Stephen Bainbridge of the University of the crux of the matter. The assumption that Illinois College of Law has suggested that this profit is inconsistent with the common good is “nexus of contracts” view of corporations predicated on a perceived tension between establishes a firmer defense of profit as the making money and serving one’s fellow man. goal of corporations than the traditional But as Adam Smith said centuries ago, if the understanding of shareholder “ownership” pursuit of profit really does act as “an invisi- that Friedman employs. After all, sharehold- ble hand” guiding human action toward ers of publicly traded companies differ from, socially beneficial endeavors, then surely to say, homeowners in some easily recognizable abandon that pursuit is to lose the social ben- ways. Someone who buys a few shares in efits that would otherwise exist. Coca-Cola and is subsequently caught break- In other words, perhaps commercial activ- ing into a bottling plant cannot defend himself ity—as distinguished from other forms of by proclaiming that since he is an “owner” of behavior, such as personal philanthropy or Coca-Cola, he has a perfect right to enter. government action—confers unique benefits Thinking of the responsibility of managers on society. Realistically, all sorts of prob- to stockholders as stemming from a contract lems in society can be viewed as within with a specified goal—the maximization of the purview of corporate activity. But in the return on investment—might be more Friedman's view, the response of corpo- helpful than thinking about property owner- rations to these problems will and must be ship per se. By embracing the contractual def- different because of the nature of profit- inition of a corporation, Bainbridge is able to seeking business. “The crucial question for a argue that state laws allowing incorporation corporation is not whether some action is in are not special public favors to shareholders, the interest of the corporation, but whether it justifying imposition of social obligations. is enough in its interest to justify the money Instead, they are merely “default rules” for spent,” he wrote. Companies, then, bring establishing contracts between buyers and a search for efficiency and economy to the sellers of equity that would come about in the task of solving problems. This search repre- marketplace anyway, but at a high transaction sents a fundamentally different way of cost. Rather than having every corporation addressing social problems from the means and potential shareholder negotiate and sign employed by governments, charities, church- contracts, the law recognizes a baseline cor- es, or families. To erase the distinctions porate contract that everyone is presumed to between corporations and other institutions is agree to unless otherwise specified. “Refusing potentially to lose the unique problem-solving to hold shareholders personally liable for firm opportunities that free enterprise creates. In debts thus is the precise equivalent of enforc- effect, private business is fulfilling its “social ing a standard form sales contract, nothing responsibility” if, and only if, it tries to make more and nothing less,” Bainbridge contends. a profit. ] ===== PAGE 49 ===== E FREEMAN Ideas On Liberty “49 and Holding” by Raymond J. Keating he federal regulatory monster inflicts they did not include federal regulatory massive costs on the U.S. economy. No enforcement spending, which, at the very sector feels this statist wrath more sharply least, approaches $20 billion annually. Also, than small business. according to the magazine, Hopkins’s figures Perhaps burdened the most are small, enter- “include only the burden of complying with prising firms looking to expand. Like the fed- rules for which cost studies have been done. eral progressive income tax, many regulations Some costs, such as the loss of productivity punish success: a growing firm that adds caused when new regulation forces firms to employees faces an ever-increasing regulatory adjust, are left out altogether.” burden. Indeed, the incentives to stay small are considerable. CC While placing hard numbers on the burdens Lost Productivity government imposes on the economy and pre- Economist Richard Vedder estimated that dicting future burdens are dicey endeavors, federal regulatory activity from 1963 through the following sobering estimates are worth 1993 reduced productivity growth by one per- noting. In a 1996 study, economist Thomas centage point annually, meaning that GDP in Hopkins projected that the total cost of feder- 1993 would have been $7.614 trillion instead al regulations would be $700 billion for 1998, of $6.343 trillion.3 That’s a $1.27 trillion loss measured in 1995 dollars.! That represents a in economic output due to increased federal real increase of 28 percent over the recent low regulatory activity—in addition to compli- of $549 billion a decade ago in 1988. Of ance costs and federal spending. course, regulatory costs fall hardest on small- In 1992, analysts Nancy Boyd and William er enterprises. Estimated per employee, costs Laffer III estimated that total federal and state for firms with fewer than 20 employees run 86 net regulatory costs (after accounting for the percent higher than those for businesses top- so-called benefits of regulation) registered ping the 500-employee mark. Firms with 20 upwards of $1.7 trillion annually.4 Laffer fur- to 499 employers have costs 78 percent high- ther estimated that lost GDP growth due to er than larger companies.2 excessive regulation over the previous two However, as The Economist magazine decades led to an absence of 3.6 million to 9.6 noted in its July 27, 1996, issue, Hopkins’s million jobs that would have been created.’ projections were “conservative.” For example, Make no mistake, small to mid-sized busi- nesses are the primary engine of job creation Raymond Keating is chief economist at the Small in the economy, accounting for anywhere Business Survival Foundation, a columnist with from two-thirds to more than 100 percent of Newsday, and a contributing editor of The Freeman. net jobs created in any particular year. 685 ===== PAGE 50 ===== 686 THE FREEMAN ee NOVEMBER 1998 According to an analysis performed for the had no plans to hire more workers, because of Small Business Administration, firms with the new regulatory burden that would follow. fewer than 500 employees in 1992 created “If we didn’t have the regulatory overhang almost 12 million new jobs by the close of that comes with 50 employees,” she told the 1996. By contrast, firms with more than 500 senator, “I could hire an additional five, seven, employees in 1992 wound up losing 645,000 or ten people. I could do it tomorrow. But I’m jobs by 1996. Therefore, since the burdens of not going to. We are 49 and holding. I know a regulation fall heaviest on small businesses, lot of businesses in the same circumstance.’ the impact of regulatory costs on employment The Wall Street Journal reported in 1993 is bound to be severe. that a Pittsburgh company that processes flat- rolled steel coils increased its work force to 49 and then stopped to avoid the clutches of the Family and Medical Leave Act. A letter to To reduce the regulatory burden, over the the Washington Times in 1992 told of a Vir- years Congress has exempted many business- ginia instrument company that kept employ- es from certain regulations based on the num- ment below 50 to avoid having annually to ber of employees. Regulations take effect at submit paperwork related to nondiscrimina- thresholds ranging from 10 to 100 workers. tion in hiring; one company that exceeded 50 Unfortunately, this is another example of had submitted a file weighing more than eight good intentions gone awry. Quite simply, asa pounds. firm grows and adds employees, it is subject to new regulations and therefore higher costs. Is There a Solution? or the small business content to stay quite small, exemptions may work in their favor As an answer to this threshold problem, (though they will still be hurt, as we all are, by regulation enthusiasts would extend the rules regulation’s overall damage done to the econ- to small business. But spreading the econom- omy). However, for businesses seeking to ic damage makes no sense if one is concerned grow, formidable additional costs are imposed about the state of small business and the soci- as new regulations kick in. Any business con- ety’s economic well-being. sidering expansion must ask if the increased Another option is to lift the bar even high- regulatory costs of hiring more people out- er—say, to 250 or 500 employees. That would weigh the added profit made possible by the exempt more businesses, but growth-oriented new employees? In the language of econom- companies would still find themselves stifled. Bogus Relief ics, does the marginal cost of labor now The only real answer is deregulation. The exceed the marginal revenue product? If so, imposition of new regulatory burdens on all new employees will not be added. businesses should be stopped, and existing For many businesses, it makes sense to onerous regulations should be repealed. Most apply the brakes and stop growing. Indeed, for are simply unwarranted meddling in the mar- some, it actually may pay to get rid of some ketplace. The government must get out of the employees to avoid being hit by new regula- way. [J tions. A study by Congress’s Joint Economic Committee estimated that under the Family 1. Thomas D. Hopkins, “Regulatory Costs in Profile,” Center for . . the Study of American Business, Washington University, St. Louis, and Medical Leave Act, which takes effect at August 1996. : 2. Ibid. 30 employees, a firm with 60 workers could 3. Richard K. Vedder, “Federal Regulation’s Impact on the Pro- increase profits by cutting back to 49.6 ductivity Slowdown: A Trillion-Dollar Drag,” Center for the Study : of American Business, Washington University, St. Louis, July 1996. There arc many anecdotes about companies 4. William G. Laffer Ill, “How Regulation Is Destroying Ameri- cutting off expansion after reaching the can Jobs” Backgrounder #926, Heritage Foundation, Washington, threshold at which additional regulations take PC; February 16. 1993. effect. Senator Robert Bennett reported an 6. Joint Economic Committee, “Derailing the Small Business Job : : : Express,” United States Congress, November 7, 1992. encounter with a businesswoman who said 7. Quoted in “Isn't Anybody Back There Listening?,” Inc., Octo- her company was at “49 and holding.” She ber 1993. ===== PAGE 51 ===== Economic Notions by Dwight R. Lee ¥ Economics Price Ceilings Cause Shortages and Higher Costs he coordination of demand and supply, typically see prices as too high and therefore which we discussed last month, does not an impediment to their desire for more things. occur automatically. It is an example of Adam Suppliers see the same prices as too low. What Smith’s invisible hand, which leads people happens when the government responds to interested only in pursuing their own interests consumer pressures by imposing a maximum to make choices that promote the interests of legal price on a product below the price the others as well. But the invisible hand, as market would set? The unfortunate, and iron- amazing as it is, works only under certain ic, result of a price ceiling is to increase the conditions. Without property rights, a defense cost of products to consumers. against the violation of those rights from both In the accompanying figure the demand external and internal threats, a predictable curve, D, and supply curve, S, determine a judiciary, a stable monetary system, and a price P*, which the market tends toward. As I limited government, the voluntary exchange discussed in last month’s column, P* moti- on which social coordination depends quickly vates suppliers to make available exactly that breaks down. amount, Q*, that consumers want at that Government has important roles in protect- price. This ability of millions of people to ing private property, preventing capricious coordinate their decisions with one another is judicial decisions, and protecting the mone- the result of the information they communi- tary unit against debasement. But these func- cate through market prices. Now consider tions can be performed effectively only by'a what happens when the government imposes limited government. Once government goes a price ceiling below P*, say at Pc. beyond protecting voluntary exchange as an At that price suppliers are willing to make impartial referee and attempts to determine available only Qg units of the product, while particular outcomes, it disrupts the social consumers are anxious to buy Qp units. The cooperation that is the surest means to gener- result is a shortage, as consumers cannot get ally desirable outcomes. Examples of disrup- as much of the product as they want. Short- tive government incursions into market activ- age—the inability to buy a product although ity are unfortunately frequent. A particularly one has the money in hand—is different from harmful form of government meddling is the scarcity, which we can define as the inability attempt to outlaw market prices. of people to have as much as they would like When most people think of market prices at a zero price. Scarcity is an unavoidable fea- they don’t think of the communication and ture of the real world; shortages are not. Any cooperation those prices allow. Consumers shortage would be eliminated by the price generated by market communication, so Dwight Lee is Ramsey Professor of Economics and shortages are always created by government Private Enterprise at the University of Georgia. restrictions on market prices. 687 ===== PAGE 52 ===== 688 THE FREEMAN e NOVEMBER 1998 Price ference between what they are willing to pay, P,,;, and the price ceiling, P.. So the total Pu s monetary and time cost will tend toward Pm, which is more than consumers would pay without the price ceiling. The consumers pay more, but notice, the suppliers don’t receive pr more. The higher amount consumers pay does nothing to communicate to suppliers that more should be made available. Another common cost-increasing response D to price ceilings is reduced quality. While sup- pliers cannot legally benefit from the excess a, o a quantity demand (Qp - Qs) by raising the price above Pc, they can reduce the quality of the product, which reduces their costs. The reduction in Advocates of price ceilings claim that they quality can take many forms, and is often tied lower the cost of the product for consumers. in with the queuing just discussed. This claim seems plausible since the price Rent controls cause a deterioration in the consumers pay is P. after the ceiling is quality of apartments. When landlords have imposed instead of P*. But you can’t lower more demand than they can satisfy, and are the cost to consumers by restricting the price unable legally to charge higher rents, they communication that allows them to secure the reduce costs by doing less to maintain their maximum cooperation from suppliers. apartments. New York City once tried to solve Indeed, price ceilings increase the consumers’ this problem with its rent-control law by cost. Since the height of the demand curve exempting tenants from paying the rent if tells us how much consumers are willing to their apartments were damaged. Not surpris- pay for another unit of the product, we can see ingly, tenants began breaking windows and from the figure that when only Qg units of the ripping up carpets to avoid paying the rent. product are available, consumers are willing Of course, some consumers come out to pay Pm rather than do without. And just ahead under price ceilings. With lots of peo- because they can’t legally pay that amount in ple anxious to buy at the controlled price, it dollars doesn’t mean they won’t pay it in other doesn’t cost suppliers much to discriminate ways. against certain people. Those whom suppliers For example, one way consumers compete favor often get products at lower prices with- during shortages is on the basis of first-come, out long waits. For example, celebrities and first-served. According to Hedrick Smith’s the politically well-connected have no trouble book The Russians, the average housewife in obtaining rent-controlled apartments in New the former Soviet Union spent 14 hours a York City, while others end up doing without. week queuing up for products because of the But most consumers are harmed by price shortages created by pervasive price ceilings. ceilings. This is hardly surprising since price How long will people queue up for an addi- ceilings prevent consumers from communi- tional unit of a price-controlled product? cating with suppliers in ways that motivate the Until the cost of doing so is equal to the dif- best possible response to their demands. [] ===== PAGE 53 ===== FREEMAN deas On Libert “Wrecking”: The Ominous Rationale for Attacks on the Tobacco Industry by Daniel Hager he state of Minnesota’s lawsuit against judicial and legislative adversaries have to the tobacco industry has ended in a multi- apply the dubious collectivist principle that billion-dollar settlement. Litigation by other governments own the money they spend. states is expected to yield them lucrative Minnesota and other states claim that their windfalls as well, and Congress has had its Medicaid expenditures for individuals own eye on forcing the industry to capitulate allegedly injured by smoking “cost” these to its demands. governmental bodies a certain amount of In the wake of Minnesota’s triumph, the money and that they are therefore entitled to Associated Press quoted state Attorney Gener- recover it from the alleged culprits. al Hubert Humphrey III as saying, “Today the However, there is no actual cost to govern- tobacco industry has surrendered, and they ments because they have a custodial rather have surrendered on our terms.” But before he than ownership role with respect to the tax- and other members of the anti-tobacco forces payers’ money. Governments take money become over-jubilant, they should examine the from some and distribute it to others, who ramifications of their actions. become beneficiaries. The beneficiaries With the tobacco industry’s loss of consti- receive as much as the governments disburse, tutional protections, the government’s philo- so the costs are canceled out by those gains. sophical justification for its assault is clearly If the tobacco industry caused the state collectivist. As in the Soviet Union 70 years government to pay medical costs of some ago, the rationale for wanton attack is simply Minnesotans (those who smoked and received that the accused is a “wrecker,” culpable for state aid), then the industry also created ben- damaging the collective. In the absence of due efits for Minnesota’s doctors, nurses, and process, anybody is vulnerable to being found ancillary medical staff, as well as a sizable guilty of “wrecking activities.” bureaucracy to administer associated paper- work. In addition, any such illnesses enabled Whose Money Is It? Minnesota’s hospitals and nursing homes to increase their occupancy rates and thereby To extract monetary penalties from the contributed to their economic health. A tobacco industry, Humphrey and the other heightened demand for rooms may even have prompted the building of new facilities, a Daniel Hager is a senior research associate with boon to the construction industry and its Patrick Henry Associates in East Lansing, Michigan. employees. In other words, when government 689 ===== PAGE 54 ===== 690 THE FREEMAN « NOVEMBER 1998 intervenes as a third-party payer, illness would have given, but cannot now give, to the becomes a form of public works, ranking same. Then you will understand that a public alongside projects like government-funded enterprise is a coin with two sides. Upon one buildings, roads, bridges, sports facilities, and is engraved a labourer at work, with this so forth. device, that which is seen; on the other is a Thus the current tobacco controversy labourer out of work, with the device, that reduces itself fundamentally to an exercise in which is not seen.” (Italics in original.) When interventionist public-works theory. Govern- individuals spend in their own interest, mar- ment spending on public works is sometimes kets respond, and greater wealth is generated justified on the grounds that it stimulates the than when their money is siphoned off to pay economy and creates jobs. Under that theory, for something the state represents as being for the purported transgressions of the tobacco the collective good. When societies are orga- industry have had a salubrious stimulative nized for the furtherance of an ostensible col- economic effect. The irony of collectivist and lective good, dire results are not unexpected. quasi-collectivist systems is that illness 1s like Individual rights are abrogated, and a ruling public works. Curious, is it not, that the tobac- caste emerges to define what constitutes that co industry is blamed for the costs but not public good. Public expenditures must be kept credited for the benefits. to a bare minimum. What the present controversy swirling The abuse of power by government in around tobacco actually elucidates is that the attacking the tobacco industry differs from fundamental problem is not the industry but the conduct of the Soviet Union of 1930 only state intervention, which distorts issues of in degree. The Piatiletka, Stalin’s five-year culpability and redress and expands the level economic plan initiated in 1928, of public works. ‘collapsed in chaos, and expediency dictated Advocates of public-works expansion that scapegoats be identified and punished should be directed to the works of French eco- as “wreckers” of the proletariat. In the case nomic analyst Frederic Bastiat, who demol- of the state fisheries, scientists who had ished their arguments a century-and-a-half been conscripted into managerial positions, ago. In Essays on Political Economy, Bastiat most of them apolitical, were singled out and wrote: “The great Napoleon, it is said, thought punished. he was doing a very philanthropic work by On one level the tobacco spectacle is play- causing ditches to be made and then filled up. ing out simply as the machinations of ambi- He said, therefore, ‘What signifies the result? tious politicians and lawyers using extor- All we want is to see wealth spread among the tionary tactics to achieve their own ends. But labouring classes.”” since constitutional restraints on government But the wealth is chimeric: “While you power have been ominously rescinded in state the destination given by the State to the favor of collectivist principles, nobody is millions [of francs] voted, do not neglect to safe. [] state also the destination which the tax-payer ===== PAGE 55 ===== FREE — From The Washington Times 4 FREE Issues of our National Weekly Edition! Now you can see why The Washington Times has become the talk of the nation! Because now you can get ATER . FOUR FREE ISSUES of The Washington Times Zhe Washington Times our award-winning daily news coverage and makes it available to you every week —no matter where you live! Try it FREE! No Risk... No Cost... No Obligation! The Washington Times. It’s the newspaper they're all talking about on Talk Radio, C-SPAN, and the Sunday morning talk shows. It’s the one that’s driving Clinton, Bonior, Boxer, Daschle, and Gephardt crazy! Why? — - v — I Te = a a lt a POP, ee 23 Because it’s the only daily newspaper in the nation with Co Jorg maa 5 tethers ob 7 the courage to cover news honestly — without the liber- aa ee mes Wr we BL 2 ; al spin you always get in The Washington Post and The re ’ 3 2 New York Times. And now our NATIONAL WEEKLY TELE EE : EDITION brings it all right to your door every week! Claim your 4 FREE ISSUES of the National Weekly Edition today! PA BH % ». nz a Z, -l 4 AN A tl “The Washington “The Washington | “Like no other news- | “The Washington “I know from “I can always count Times is anewspa- | Times is insightful | paperinAmerica | Times is investiga- | personal experience | on The Washington per of first order — and accurate. The Washington tive journalism at | that you can’t be Times and The dedicated to truth, | It often breaks the | Timescoversevery | its best — with the fully informed Washington Times fairness, and good stories most battlefront of the cul- { real interests of about Washington | National Weekly old American informative to those | tural war. Andits | America at heart — | without reading The | Edition to give me common sense.” | of us who work on {| editorial and com- that's why I read | Washington Times... | the news that’s hard — Senator Orrin Capitol Hill.” mentary pages leave | The Washington if you don’t have | to find elsewhere.” Hatch — Senator Fred | no doubt as to which Times.” the Times, you are — Dick Cheney, Thompson cultural divide the ~ Newt Gingrich, only getting half | former Secretary Timesison-ourside!” | Speaker of the the news.” of Defense under — Pat Buchanan, House — Ed Meese, former | President Bush Syndicated Columnist Attomey General under President Reagan CALL 1-800-363-9118. (Mention Express Code: “UHJOUX") Call today and order 4 weeks of The Washington Times National Edition free of charge! If you like it, you'll receive 48 more issues, for a total of 52, and pay only $59.95. If you decide not to subscribe, simply write “cancel” on your invoice and owe nothing at all. The 4 sample copies will be yours to keep! ===== PAGE 56 ===== Economics on Trial by Mark Skousen FREEMAN deas On Libert NoveMBER 1998 A Golden Comeback, Part 111 “A free gold market . . . reflects and measures the extent of the lack of confidence in the domestic currency.” —LUDWIG VON MISES I the past two columns, I've highlighted the (Gold as a Profitable Investment uses and misuses of gold. Despite occa- sional calls for a return to a gold standard, the Since the United States went off the gold Midas metal has largely lost out to hard cur- Standard in 1971, gold bullion and gold min- rencies as a preferred monetary unit and mon- ing shares have become well-known cyclical etary reserve. Most central banks are selling investments. The first graph demonstrates the gold. volatile nature of gold and mining stocks, Gold has also done poorly as a crisis hedge With mining shares tending to fluctuate more lately. It has not rallied much during recent than gold itself. The gold industry can provide wars and international incidents. U.S. Trea- Superior profits during an uptrend, and heavy sury securities and hard currencies such as the ~ 10sses during a downtrend. i» German mark and Swiss franc have become One of the reasons for the high volatility of the investments of choice in a flight to safety. Mining shares is their distance from final con- Nor has gold functioned well as an inflation Sumption. Mining represents the earliest stage hedge over the past two decades. The cost of of production and 1s extremely capital inten- living continues to increase around the world, Sive and responsive to changes in interest yet the price of gold has fallen from $800 an rates! ounce in 1980 to under $300 today. What's left for the yellow metal? I see two (Gold as a Forecaster essential functions for gold: first, a profitable investment when general prices accelerate Gold also has the amazingly accurate abili- and, second, an important barometer of future tY t© forecast the direction of the general price price inflation and interest rates. level and interest rates. In an earlier Freeman column (February 1997), I referred to an Dr. Skousen (http://www.mskousen.com; mskousen econometric model I ran with the assistance @aol.com) is an economist at Rollins College, of John List, economist at the University of Department of Economics, Winter Park, Florida Central Florida. We tested three commodity 32789, a Forbes columnist, and editor of Forecasts & . Strategies. He is also the author of Economics of a indexes (Dow Jones Commodity Spot Index, Pure Gold Standard, 3rd Edition (Foundation for Crude oil, and gold) to determine which one Economic Education, 1996). He is currently working best anticipated changes in the Consumer on his own textbook, Economic Logic. Price Index (CPI) since 1970. It turned out 692 ===== PAGE 57 ===== 693 | BELA BA BRR TA ME AAA IAA 1 LALLA SARLAAAN BA 1858 - 1967 1068 - 1979 1881/1892 TSE Gold & Silver Index (US$) Comparable Lag Seale Ty CPI a year in advance. (All three indexes did a poor job of predicting changes in the CPI on a monthly basis.) Richard M. Salsman, econo- mist at H. C. Wainwright & Co. 2000, in Boston, has also done some TOPLINE INVESTMENT GRAPHICS (303) 440-0157 Copyright (C), 1997 All righte reserved 100 "1 important work linking the soo 10001 price of gold with interest rates. 701 As the second graph demon- 300 rn sog——3001 strates, the price of gold often L200 “J Vv wo| anticipates changes in interest wo rates in the United States. As 100—] Salsman states, “A rising gold 70 Gold Price a re price presages higher ‘bond g The Neat 12 Yours yields; a falling price signals Gold price fixed at $35/0z 1881/1982 . . Three major bottoms lower yields. . . . Gold predicts yields well precisely because it’s a top-down measure. It is that gold proved to be the best indicator of bought and sold based purely on inflation- future inflation as measured by the CPI. The deflation expectations; thus it’s the purest lag period is about one year. That is, gold does barometer of changes in the value of the dol- a good job of predicting the direction of the lar generally.” In sum, if you want to know Figure Two the future of inflation and : Gold Price and Treasury Bond Yields interest rates, watch the gold . - t A firtine wo presen a ow" traders at the New York Merc. If gold enters a sustained rise, I y T-Bond Yield } 1 13 } | . 6001 = + NRA Gee watch out: higher inflation rec INU || WS. WO —— and interest rates may be on the way. OJ 400-1 wannn un sesvensneriiarnsvnssunssuecccseres fl 2raen Rs 1 1. For further discussion regarding the inher- 3001 ent volatility of the mining industry, see my work The Structure of Production (New 200 TANT TT York: New York University Press, 1990), pp. 290-94. 100 2. Richard M. Salsman, “Looking for Infla- | ] tion in All the Wrong Places,” The Capitalist 0-— T TT —T T T T 4 Perspective (Boston: H. C. Wainwright & 1967 1970 1973 1976 1979 1982 1985 1988 1991 14 1997 Co. Economics), October 15, 1997. For infor- mation on his services, call (800) 655-4020. ===== PAGE 58 ===== 694 All right, so the premise behind the book is nonsensical. There is a lot more to it than that, and Rorty’s writing gives us a good look at the leftist mind at work. He complains that the old alliance between Achieving Our Country the intellectuals (to Rorty, leftists are the by Richard Rorty intellectuals) and the unions has broken Harvard University Press ® 1998 © 159 pages down, thus impeding the realization of the *® $18.95 goals so dear to his heart. Wise up, Professor - Rorty. The unions were never really interest- Reviewed by George C. Leef ed in the misty-eyed socialist vision. What unions have always wanted, as Samuel Gom- De leftists have anything new to say? Any pers said, was simply “More.” Union rhetoric interesting responses to the many argu- on “justice” and “equality” may have taken in ments advocates of freedom have lodged some ivory-tower types, but their agenda has against their coercive nostrums? Any novel and always will be narrowly self-interested. socio-economic analysis to which we oughtto Rorty, incidentally, has no criticism for pay attention? The only way to find out is to union-backed laws and regulations that drive read them. up prices for poor people and restrict job Richard Rorty is a proud, thoroughbred left- opportunities. ist (his parents were well-known socialists in Rorty also says that Marxism was bad in the interwar and postwar years) and professor practice, but that was not due to any inherent of humanities at the University of Virginia. flaw in the theory. “Had Kerensky managed to This book is a collection of lectures centering ship Lenin back to Zurich,” he writes, “Marx on Rorty’s conviction that the American left is would still have been honored as a brilliant no longer playing the role that it should in the political economist who foresaw how the rich nation’s politics. He writes longingly of would use industrialization to immiserate the bygone years: “when an intellectual stepped poor.” He drags out old warhorses such as the back from his or her country and looked at it idea that capitalists use “the reserve army of through skeptical eyes, the chances were that the unemployed” to keep wages down to sub- he or she was about to propose a new political sistence levels. We have more than two cen- initiative.” Today, Rorty frets, the left is turies of evidence that capitalism inevitably becoming “spectatorial.” leads to rising real incomes for rich and poor, Before taking up the question of whether factory owner and janitor alike, but Rorty is the book contains anything freedom lovers among those people who say, “My mind is ought to take note of, the absurdity of com- made up; don’t confuse me with facts.” plaining that today’s left is insufficiently polit- Clichés are generally a substitute for seri- ical needs a response. There has certainly ous thought, and Rorty liberally sprinkles been no slackening of the torrent of leftist them throughout his lectures. He calls the left proposals for achieving their country. No, we “the party of hope.” Never mind that millions haven’t had anything as bold and exciting (to have fled countries ruled by that party, and Rorty and his ilk) as Lyndon Johnson’s Great young people in nations such as Sweden are Society recently, but that is mostly because more accurately labeled “bored” and “list- the left now advances its control through the less” than “hopeful.” stealthy means of regulatory edicts and judi- The most annoying thing about this book, cial rulings. They seldom make headlines, but though, is that the author writes as if free- they augment the power of the state just the market intellectuals had never said anything same. Worrying that the left is becoming non- in criticism of the socialistic notions of which political is just as silly as worrying about free- he is so fond. Consider “social justice.” The market monopolies, global warming, and phrase is used repeatedly throughout the other hobgoblins. book, but never does Rorty acknowledge the ===== PAGE 59 ===== 695 writings, to cite only the most prominent crit- how urban planning can debilitate cities. In his ic of this vaporous locution, of F.A. Hayek. book The Future Once Happened Here, histo- Hayek’s The Mirage of Social Justice (volume rian Fred Siegel has added a new and insight- 2 of Law, Legislation, and Liberty) was a dev- ful chronicle of modern liberalism’s influence astating attack on the term “social justice,” on social policy in New York, Washington, arguing that it does not and cannot have any D.C., and Los Angeles over the last 30 years. meaning. If Rorty has ever read Hayek (or Siegel identifies racial tension as a main Mises, Rothbard, Nozick, or any other serious force that has driven urban policy since the critic of welfare-state interventionism), there 1960s. He lucidly and engagingly describes is no evidence of it here. how that policy, informed by “riot ideology” Rorty loves to imagine the political system based on liberal guilt and fear, transformed riding in on a white horse to rectify all the some major American cities from communi- world’s injustices, but a large body of free- ties of tolerant strangers and great incubators market analysis—public choice economics— of ethnic integration into rolling riots and says that this expectation is hopelessly naive. sinkholes of federal largess. Naturally, you find no reference to James Associated with the riot ideology is what Buchanan or any other public choicer in the Siegel terms “dependent individualism,” the book. idea that each person has an absolute right to Leftists seal themselves off from criticism his “lifestyle,” at public expense and regard- of their ideas. Marx set the standard, saying less of the consequences for social coopera- that anti-socialist ideas couldn’t have any tion. Those consequences have been a “moral validity because they came from the class deregulation of public space,” which has erod- enemy. Rorty basks in the imagined glow of ed the trust that urbanologist Jane Jacobs the wonders of leftist activism, oblivious to identified as the lubricant that permits great the fact that his intellectual adversaries long cities to work well. ago demonstrated that welfare-state interven- The largest part of the book is devoted to tionism is harmful to the very people he New York City. Siegel explains how Mayor thinks he is saving. It’s like a teenager insist- Fiorello La Guardia’s success in getting feder- ing that Santa Claus exists. al aid from FDR’s New Deal in the 1930s set So, to answer my original question: no, you the pattern for fiscal irresponsibility in New won’t find any new ideas or arguments in this York for the next five decades. Consequently, book, testimony to the bankruptcy of leftist New York became dependent on an artificial, thought. (J make-work economy, based on federally George Leef, president of Patrick Henry Associates funded jobs and welfare bolstered by depen- in Michigan, is book review editor of The Freeman. ~~ dent individualism and the riot ideology. Nev- ertheless, its productive sector was still so large that both New York City and the state of The Future Once Happened Here: New York have regularly sent more taxes to New York, D.C., L.A., and the Fate of Washington than they have received in trans- America’s Big Cities fers. Surprisingly, supporters of big New York A government appear blithely unaware of this by Fred Siegel fact. The Free Press 1997 © 260 pages © $24.00 Siegel sees hope in the evident success of Mayor Rudolph Giuliani’s administration in New York in promoting public security by enforcing higher standards of public behavior. here are many ways to tell the story of Less tolerance of “quality of life” crimes, urban-policy failure. Economists have such as loud car stereos and prostitution, shown how rent control creates housing short- seems to discourage the incidence of more ages, sociologists how welfare programs serious crimes. As in Los Angeles, however, destroy poor communities, and urbanologists giving greater power to the New York Police Reviewed by Sanford Ikeda ===== PAGE 60 ===== 696 THE FREEMAN « NOVEMBER 1998 Department may also have had its price. vention’s unintended consequences only The sections on Washington and L.A. are encourages further intervention. The process also illuminating. The peculiar nature of consists not in the isolated failures of regula- Washington’s governance, which until recent- tion, welfare, or urban policy, but rather in ly lacked home rule, left it with no political their mutual interactions. While the definitive tradition save for that of its notorious race- work on the dynamics of urban intervention- baiting mayor, Marion Barry. The pervasive ism has yet to be written, Siegel’s compelling federal presence has stifled the growth of the book will deepen the reader’s understanding trust and informal organizations that mediate of the turbulent forces that move great Amer- between citizens and their government, what ican cities. OJ social theorists now call “social capital.” Sanford Ikeda is an associate professor of economics ly bankrupt city of Washington appears to require solutions from the outside. Siegel is somewhat more hopeful about Los Major League Losers: The Real Cost of Angeles. Siegel characterizes it as a city of Sports and Who’s Paying For It energetic small entrepreneurs and flexible, decentralized government that has practiced by Mark S. Rosentraub g p , less urban interventionism than New York or Basic Books ¢ 1997 ¢ 513 pages © $27.50 Washington. With its dispersed and diverse population, however, Siegel claims that L.A, like Washington, possesses little social capi- } } tal. Nevertheless, he argues that its growing by Michael N. Danielson Latino population, with its relatively strong Princeton University Press ® 1997 © 397 pages family and community structure and entrepre- © $29.95 neurial spirit, is a cause for hope for the future even while language and cultural barriers remain sources of some present concern. For those who would like to delve more rom the late 1980s into the first years of deeply into the history of policy failure so the 21st century, perhaps more than $15 readably presented here, the book’s lack of billion will have been spent on new stadiums references is frustrating. Nevertheless, Siegel and arenas for teams in the four major league has shown how good intentions, bad ideology, sports. Hundreds of millions of dollars more and what he calls “militant anti-consequen- will have been expended for minor league tialism” can produce urban disaster. Accord- facilities. On average, taxpayers foot at least ing to its perverse logic, “the devastation 60 percent of the costs for major league wrought by misguided politics was adduced venues and almost 100 percent for the minors. as proof that even more money had to be This spending binge has resulted in a recent spent on those same policies.” He concludes: spate of books examining the politics and “Modern liberalism was born in the big cities economics of professional sports. Leading the and died there, a suicide of sorts. Liberals lost charge have been Major League Losers by their birthright to govern big-city America not Indiana University professor Mark S. Rosen- so much because they were overwhelmed by a traub and Home Team by Princeton Universi- well-armed foe but because their sense of ty professor Michael N. Danielson. The final moral superiority was so suffocating as to score on each is mixed at best, pleasing at make it impossible for them to either adapt to times but ultimately unfulfilling and often Home Team: Professional Sports and the American Metropolis Reviewed by Raymond J. Keating new conditions or learn from their critics.” frustrating—similar to watching a hockey Milton Friedman, Nathan Glazer, and Jane game that ends in a tie. Jacobs have each analyzed an aspect of the In Major League Losers, Rosentraub is torn dynamics of what Ludwig von Mises termed on the issue of taxpayer-financing of ball- interventionism, a process in which an inter- parks, stadiums, and arenas. He indignantly ===== PAGE 61 ===== BOOKS 697 and accurately labels this a “welfare system.” with cities, with primary emphasis on team Rosentraub understands that subsidies pad the movements and subsidies. Danielson writes bottom lines of team owners, boost player well and provides a wealth of information and salaries, and encourage owners to move their history on movements, stadium financing and teams in search of bigger subsidies. No real lease deals, league structures, and revenue economic benefits accrue to the cities. plans. His criticism of a sales-tax hike in Arling- However, Home Team falters in the late ton, Texas, for the Rangers’ new ballpark is on innings as well. For one, the author displays the mark: “It is still welfare in a state that an ignorance of market economics. He writes: abhors life on the dole; it is still a subsidy in “A market political economy legitimates pri- a state that defends capitalism and the spirit of vate ownership of professional sports, pro- the free market” He also recognizes that motes public investments in playing facilities sports are simply one part of a much wider that benefit private sports businesses and entertainment industry: “Sports can provide other powerful economic interests, and fosters entertainment, but so do movies, concerts, aggregations of economic influence that often nature trails, bicycle paths and countless other dominate the politics of professional sports.” activities.” So far, so good. Unfortunately, He’s correct about private ownership rights, Major League Losers is flush with statements but fails to see that the other points have noth- and analysis flying directly in the face of such ing to do with free markets. common sense. From such a view of the market economy, For example, while Rosentraub denigrates Danielson then naturally offers little resis- this sports welfare system, he offers a multi- tance to the sports welfare game. It’s part of tude of suggestions on how governments can the system; he takes it as a given. So when get better deals when undertaking such ven- addressing the idea of privatizing sports ven- tures, and even goes so far as to outline the tures, he is almost dismissive in tone, though best taxes for financing new facilities. offering little substantive criticism. For exam- Rosentraub completely falters when he ple, the author merely notes that team owners analyzes the St. Louis Blues’ effort for a new may not want to build their own stadiums arena. This section carries the subtitle “Sav- (shocking!); that cities seeking teams may not ing the Blues: Doing Sports Right!!” Accord- wish to rely on private enterprise to get the ing to Rosentraub, “doing sports right” means job done; and that “almost all private arenas providing taxpayer subsidies, but not “exces- and stadiums built since World War II have sive subsidies.” Golly, the total taxpayer tab involved significant governmental participa- for the Blues’ new hockey rink only came to tion.” Danielson does no more than point out $69 million, along with risk exposure on the current state of affairs, offering no justifi- another $62.5 million in bonds. To the many cation for the sports welfare system other than people who are not interested in hockey, any that team owners want it. subsidy is excessive. One of the most useful points made in Rosentraub’s problem is that while he ably Home Team is that in the early years of pro- attacks the most egregious forms of sports fessional sports, government kept out: “In welfare, at heart he favors industrial policy cities dominated by private enterprise, sports and so-called public-private partnerships. In offered another opportunity for profit seeking. his view, as long as the government has a plan Teams were privately owned; they were orga- and gets a piece of the pie, then it’s okay for nized into private leagues; and they played in some taxpayer dollars to be used in building private ballparks.” Nothing in the book will new sports facilities. Rosentraub calls this convince the reader that we cannot and should “municipal capitalism.” Some of us still call it not go back to the old days. welfare. Both Rosentraub and Danielson largely Michael Danielson’s Home Team amounts place the blame for taxpayer subsidies on to a survey on the broader subject of profes- such misnomers as sports “cartels” or sional sports teams and their relationships “monopolies,” when in fact they are another ===== PAGE 62 ===== 698 THE FREEMAN e NOVEMBER 1998 outgrowth of our massive welfare state. Big fare as an end in itself. Benevolence is instead government is alive and well in the wide a fitting public sign that you see others as world of sports. [0 possible values—material as well as spiri- Raymond Keating is a contributing editor to The tual—to yourself. Benevolence helps us “to Freeman, chief economist for the Small Business Sur- €Xploit the potential represented by other peo- vival Committee, and a columnist with Newsday. ple, to create opportunities for trade, to remake our social environment in the image of our values.” Being sensitive, sympathetic, or generous, therefore, is a prudent invest- Unrugged Individualism: ment with hopes of future returns. The Selfish Basis of Benevolence While we can defend benevolence as a by David Kelley means to rationally selfish ends, some may be chilled by this picture of good will. One is benevolent, on this model, as a way of seeking some long-term payoff. This may be the self- ish justification for benevolence, but it had better not be one’s selfish motive. Persons who Institute for Objectivist Studies ® 1996 ® 65 pages ® $9.95 paperback Generosity: Virtue in Civil Society by Tibor R. Machan are benevolent as a means to an end will come Cato Institute ® 1998 © 116 pages off as scheming and insincere. * $8.95 paperback Suppose a friend supports another in a time of crisis. He might later explain his loyalty to his grateful friend by sincerely saying, “I just care about you.” Alternatively, he might say, ritics often wonder how an ethics of self- “I was hoping my being there for you would interest has room for good will toward later pay off for me.” Any healthy friendship others, since it seems that egoism demands a must rest in some way on legitimate expecta- ruthless unconcern for others. According to tions of reciprocity. The authentically benevo- this caricature, egoists must cherish indepen- lent person, however, is not explicitly moti- dence and eschew helping or being nice to vated by such factors. He shows good will to other people. Is this position sound? Must another because he cares about the other. egoists only growl at others? While it is true that he cares about the other Philosophers David Kelley and Tibor ultimately because doing so enhances his life Machan each explore how an egoistic ethical in some way, he must treat the other’s interests theory not only permits benevolence but as if advancing them were an end in itself. occasionally calls for it. Both authors cast Doing so is the best way of securing that long- benevolence as a key part of the good life. term payoff. They argue that enlightened egoists cultivate Machan also sees generosity as a type of good will as a means to personal enrichment. benevolence. In arguments Kelley would wel- David Kelley pays special attention to the come, Machan claims that generosity is self- role of benevolence in Ayn Rand’s philosophy ish (and virtuous) because it is part of “living of Objectivism. Kelley sharply distinguishes successfully as a good human being.” Machan benevolence from altruism. Benevolence is argues extensively that prudent generosity simply good will toward others; altruism, best enhances one’s ability to obtain goods however, mistakenly holds that one’s duty isto from others in society. promote the interests of others, even over His brief essay branches into many other one’s own interests. topics: conceptions of self, negative versus In a world where mutually beneficial positive rights, the moral significance of free exchanges are possible, Kelley argues, benev- will, the legitimacy of selling body parts, and olence is a form of showing respect for per- the public policies that foster virtue. In all sons. He does not defend such respect by say- such wide-ranging discussions, Machan ing that we ought to promote another’s wel- argues that individual sovereignty and private Reviewed by Andrew I. Cohen ===== PAGE 63 ===== BOOKS 699 property are necessary for defining the free- sun on the planet’s surface. We obviously dom through which virtue is possible. Redis- need some global warming if life is to persist tributing wealth or otherwise failing to take on the earth. The question is how much is individual rights seriously curtails freedom enough? Environmentalists who have con- and so restricts opportunities to be virtuous. cluded that any more warming would be too At times Machan argues that virtue is impos- much are seeking to reduce automobile emis- sible when individuals have no right to do sions. But James D. Johnston, former Gener- wrong. Paying taxes, for instance, is not “gen- al Motors vice president and a resident fellow erous,’ even if the money goes to a “worthy” at the American Enterprise Institute, con- cause. But a taxpayer may affirm in a spirit of tends that tightening emissions standards for generosity what the government has given automobiles is neither a necessary nor a cost- him no choice but to do. Machan’s analysis is effective means of pursuing environmental strongest when he argues that virtue is easier goals. where persons have the freedom not to do One of the auto-emission programs he chal- the right thing (as they do in free-market lenges is the Corporate Average Fuel Econo- economies). my (CAFE) regulation. Initially the CAFE Machan and Kelley have each offered com- regulation was part of the Carter administra- pelling, selfish justifications of good will to oth- tion’s energy conservation program. More ers. So long as egoists appreciate how to culti- recently, it has been adapted to an anti-green- vate authentic virtue, they may stop squirming house-gas agenda. Promoting better fuel effi- when asked why they are so nice. [J ciency doesn’t sound like a bad idea—unless Andrew Cohen teaches philosophy at the University one considers the safety mp lications. of Wisconsin, Stevens Point. The main method by which vehicle manu- facturers have complied with CAFE regula- tions has been to make cars smaller. Fuel has been conserved and emissions reduced. How- ever, there has also been an increased risk to people in the cars. Each mile-per-gallon increase in fuel efficiency is correlated with a Driving America: Your Car, Your Government, Your Choice by James D. Johnston 3.9 percent increase in the fatality risk. This is American Enterprise Institute Press © 1997 © because occupants of small cars are twice as 245 pages © $16.95 likely to be killed in collisions as the occu- pants of large cars. Cars with wheelbase lengths of 114 inches or more have a 60 per- cent lower fatality rate than cars with wheel- De America is a well-reasoned brief bases of 95 inches or less. To put this in per- on behalf of the automobile. The car is spective, the mandated air bag is estimated to the travel option of choice because it offers a reduce occupant fatality risk by 9 percent. fast, comfortable, convenient, and affordable Thus, the government’s current proposal to way of getting where one wants to go. Never- make all cars smaller will likely increase the theless, there are those who would sacrifice number of traffic fatalities. If safety is really Reviewed by John Semmens this mobility on the environmental altar. our top priority, should we be trying to pre- The crisis du jour is “global warming.” The vent people from buying large vehicles? assumption is that the planet is getting Consider the CO, emissions issue from an warmer than it should be because of the envi- order-of-magnitude perspective. Globally ronmentally “unfriendly” activities of there are over 150 billion tons of CO, emitted humans. The most unfriendly human activity, per year. Of this total, human sources con- according to Vice President Al Gore, is dri- tribute about 7 billion tons (less than 5 per- ving a car. Even “clean burning” auto cent). All the cars in the United States con- engines emit carbon dioxide (CO,). CO, is a tribute about 280 million tons. Consequently, greenhouse gas that helps trap heat from the even if every car in America were permanent- ===== PAGE 64 ===== 700 THE FREEMAN e NOVEMBER 1998 ly parked, annual global CO, emissions would be reduced by less than two-tenths of one per- cent. Obviously, it is unlikely that anything as drastic as a permanent ban on all auto travel Edited by William F. Shughart II will be enacted. So, the potential magnitude Transaction Books ® 1997 ® 411 pages of impact from any politically feasible anti- © $39.95 cloth; $19.95 paperback auto measure would be extremely small. - The fact is, there is not much more room Reviewed by Roy E. Cordato for environmental improvement to be had from efforts to mandate cleaner-burning s faith in big government programs has engines, or restrictions on auto travel. Huge waned in the past two decades so has the gains have already been achieved. Per-vehi- ability of the government to raise revenues cle-mile carbon monoxide emissions are through income-tax increases. Until recently, down 96 percent. Hydrocarbon emissions are deficit spending has been the route around the down 97 percent. Nitrous oxide emissions are public’s resistance, but the people have caught down 88 percent since the 1960s. on to that deception. What are revenue hungry Rather than mandating new, lower stan- congressmen and bureaucrats to do? The dards, which may be infeasible or extremely answer: give taxation a greater purpose. Use it costly, we need better enforcement of existing as the weapon of righteousness against the standards. The author reminds us that the forces of evil. Make it taxation, not to raise worst 7 percent of emitters cause 50 percent revenue, but to ward off the devil. The tax of of the pollution. Remedying this source of the 2Ist century is the sin tax or, more appro- pollution through a mobile emission-testing priately, the “choice tax.” Taxing Choice: The Predatory Politics of Fiscal Discrimination program would be the most cost-effective way Taxing Choice: The Predatory Politics of to make a significant reduction in vehicle- Fiscal Discrimination, edited by William caused air pollution. Shughart, economics professor at the Univer- Johnston makes use of interesting historical sity of Mississippi, is a collection of essays statistics to illustrate that when it comes to that looks comprehensively at selective excise pollution, the car is a substantial improvement taxes through the lens of public choice theory, over its predecessor. In 1900, horses in New or what can be called the economics of York City “emitted” over 1,000 tons of interest-group politics. As Shughart points manure and 70,000 gallons of urine per day. out, the argument for those taxes actually While these emissions are biodegradable, the finds support in the economics literature. He health risks were considerably more immedi- writes in his introductory article, “The Eco- ate and pervasive than the risks posed by nomics of the Nanny State,” that according to today’s automobile emissions. standard economic theory, an excise tax is The book is a well-reasoned and carefully justified when “the economic agents interact- documented answer to the critics of the auto- ing in an unfettered market do not bear the mobile. Its flaws are minor, springing from a full social costs . . . of their own decisions or “choose the lesser evil philosophy,” which choices. . . . [Tthe consumption of certain leads the author to support the “Partnership products, such as alcohol and tobacco, impos- for a New Generation of Vehicles,” a govern- es costs on society that the consumers do not ment-business endeavor. themselves bear and which they consequently Johnston urges those who appreciate the do not take into account when making deci- car to take political action on its behalf. sions about how much to consume.” Regardless of whether one follows this pre- This quotation calls forth my one criticism scription, he offers a wealth of valuable infor- of the book: it does not refute the theory of mation and insight for those interested in market failure and the case for social-cost transportation and the environment. [J taxes. In fact, the theoretical arguments John Semmens is an economist with the Laissez-Faire against the theory are scarcely recognized by Institute in Chandler, Arizona. any of the authors. ===== PAGE 65 ===== BOOKS 701 The book is divided into four sections, each Professor Shughart and the Independent covering a different aspect of the issue. Sec- Institute are to be commended for assembling tion 1, “The Political Economy of Excise Tax- this collection of essays on what is likely to be ation,” features three articles examining the the most important fiscal policy issue of the economic “justification” for excise taxes and coming decades. J presenting a historical look at the use of these oy Cordato is Lundy Professor of Business Phi- taxes in the United States. losophy, Campbell University, Buies Creek, North Section II, “The Politics of Excise Taxa- Carolina. tion,” examines how political decision-mak- ers craft such taxes with an eye toward appeasing special-interest groups and diffus- Hamilton’s Republic: Readings in the ing taxpayer resistance. This section gets t0 American Democratic Nationalist the heart or public choice analysis. Professor Tradition andy Holcombe states the premise: “argu- } A A ments on both sides of the tax Fou are almost edited by Michael Lind always made by individuals who personally Free Press 1997 © 345 pages $25.00 have something to gain from winning the argument. People choose to favor or oppose taxes based on the costs and benefits of the taxes to them.” Thus, the crafting and imple- I this anthology, Michael Lind has com- mentation of the tax is a function of the polit- piled excerpts from speeches and writings ical influence of the various winners and by important American statesmen and intel- losers from the tax. lectuals that are illustrative of what Lind calls In addition, politicians are aware that they the Hamiltonian or “Democratic Nationalist can buy their way to a new tax by earmarking Tradition.” Included among the Democratic revenues for popular causes—education, chil- Nationalists are such figures as Alexander dren’s health care, for example. But as Dwight Hamilton, Abraham Lincoln, Franklin Roo- Lee points out in “Overcoming Taxpayer sevelt, and Lyndon Johnson. Lind argues that Resistance,” money is fungible and new rev- they share a common attachment to four main enues from earmarked taxes simply free up political principles that distinguish them from other money. In other words, earmarking is their chief rivals, the “Jeffersonians”: the pri- simply a ruse to draw in supporters of the tax macy of the national community versus local who might not otherwise have an interest in communities; the sovereignty of the national the issue. people, rather than the sovereignty of the The remaining two sections—“Alcohol, states; nationalist political realism instead of Tobacco, and Drugs” and “Constitutional isolationism or world federalism; and a broad Liberties and Excise Taxation”—are more understanding of the powers and role of the case-orientated. Mark Thornton’s “Prohibi- federal government. tion: The Ultimate Tax” and Bruce Benson Lind clearly favors the Hamiltonian tradi- and David Rasmussen’s “Predatory Public tion, even going so far as to say that it is “the Financing and the War on Drugs: 1984-1989” source of most of what is sensible and sound are especially interesting. Benson and Ras- in American foreign policy, constitutional law, mussen argue that even though illegal drugs and economic policy.” He confidently hopes cannot be directly taxed, the drug war is being for a revival of the Hamiltonianism (or at least driven by what amounts to a tax on illegal his view thereof) most recently championed drugs, namely, asset forfeiture and confisca- by New Deal and Cold War liberals and an tion. Indeed, the authors argue that what lured end of the current domination (again in Lind’s local law-enforcement agencies into accept- view) by the “Jeffersonian” conservative ing the Washington-driven “war on drugs” Republicans. was the possibility of reaping some of these The chief and ruinous flaw in Lind’s argu- gains. ment is that he ignores the fact that whatever Reviewed by David Upham ===== PAGE 66 ===== 702 THE FREEMAN ¢ NOVEMBER 1998 the disagreements between Hamilton and the would most certainly have opposed the recent Federalists, on the one hand, and Jefferson establishment of a multitude of federal agen- and his allies, on the other, they were small cies to exercise extensive control over the compared to the divergence of opinion details of economic and social life in the Unit- between all of the leading men of the Found- ed States. Lyndon Johnson would hardly have ing generation and the “Progressives” of the agreed with Hamilton’s statement at the New twentieth century. Hamilton, no less than Jef- York ratifying convention that “whatever is not ferson, would have repudiated the political expressly given to the federal head is reserved projects of such Progressives as Herbert Croly to its members.” Yet Lind calls Johnson one of and Franklin Roosevelt, whom Lind calls the “greatest Hamiltonian presidents.” “Hamiltonian.” On a more fundamental theoretical level, Lind can obfuscate the difference between what separates Lind’s twentieth-century Hamilton and the Progressives mainly “Hamiltonians” from Hamilton and the rest of because he presents only a few short excerpts the Founders is their rejection of the earlier from Hamilton's writings. In a 34S5-page American consensus, according to which anthology entitled Hamilton's Republic, one there is a universal, natural law from which would expect to find more than 15 pages one can derive fixed governing principles. In devoted to Hamilton’s own work. Moreover, “The Farmer Refuted,” another work Lind did Lind presents these excerpts in a misleading not include, Hamilton (at the age of 18!) way. For example, under the heading “The wrote that “the deity . . . has constituted an Need for Direct and Plenary Federal Authori- eternal and immutable law, which is, indis- ty,” Lind includes a few passages from The pensably, obligatory upon all mankind, prior Federalist Papers. Yet he fails to include those to any human institution whatever.” Accord- passages in which Hamilton emphatically ing to this universal law, all men have certain states that the federal power is not plenary, rights, including the right to property: “no such as insistence in Federalist 17 that if the man had any moral power to deprive another federal government were to undertake to con- of his life, limbs, property, or liberty.” Legiti- trol “the administration of private justice mate government is instituted “for the securi- between the citizens of the same State, the ty of [these] absolute rights.” This under- supervision of agriculture, and other concerns standing of good government is, of course, of a similar nature,” it would represent virtually identical with that set forth in the “usurpations” of state authority. Declaration of Independence. Franklin Roo- While it is true that in opposition to Jeffer- sevelt, Lyndon Johnson, and the others whom son, Hamilton held that the federal govern- Lind praises saw things quite differently. [] ment did have the constitutional power t0 David Upham is a doctoral student in political sci- establish a national bank, for instance, he ence at the University of Dallas. Check Out FEE and The Freeman on the Web! www.fee.org Log on and explore The Foundation’s improved Web site. Several features and attractions have been added to enhance the appearance and content of this invaluable source of information. A complete upgrade of www.fee.org is now online. Questions? Contact Karol Boudreaux: kboudreaux@fee.org. A great way to introduce friends and relatives to the wonders of freedom! ===== PAGE 67 ===== The Pursuit of Happiness by Charles W. Baird Paycheck Protection in California: What Went Wrong? roposition 226, which was on the primary campaign. Why? Two threats and one tempta- ballot in California last June, would have tion. First, the unions collected signatures to put required unions to get annual written permis- three initiatives on a later ballot that would sion from workers before spending their dues increase the tax and regulatory burdens on and agency fees on politics. The proposition businesses. Then they promised not to submit lost 53 to 47 percent. In January, just after the the signatures if the business community did initiative qualified for the ballot, polls indicat- not support 226. The unions proposed a Faust- ed that over 70 percent of likely voters and a ian bargain: let us continue to tax workers for similar percentage of union households politics and we will not increase your govern- planned to vote for it. Exit polls on June 2 ment-based headaches. This amounted to showed that 69 percent of the voters support- blackmail by ballot initiative, and too many ed the idea of protecting paychecks against businesses succumbed. It wouldn’t surprise me involuntary deductions for politics. John if the unions submitted their signatures anyway. Sweeney, president of the AFL-CIO, called Second, the unions threatened businesses the outcome “a modern political miracle.” As with negative publicity campaigns asserting a proponent of the initiative, I have to ask that employers who support 226 are anti- what went wrong? employee. Unions have discovered the effica- Opponents of 226, mainly unions, spent cy of such efforts in their “corporate cam- $30 million to defeat it, while supporters paigns” against firms they seek to organize could muster only $3.5 million. Unions could and firms they seek to punish for continuing take their money from dues and fee payers to do business with strike targets. Well-inten- across the country. Supporters had to ask for tioned but ill-informed members of the caring donations. The opposition ran an intensive TV ~~ class—including clergymen, academics, and ad campaign three months before the first journalists—are often complicit in these “Yes on 226” ad appeared. Early lies that went efforts. And there are far too few business unanswered became established truths before people, like T.J. Rodgers of Cypress Semicon- the pro-initiative TV campaign began. In the ductor, who dare to stand up and defend them- final month before election day, opposition selves against such unjustifiable attacks. ads outnumbered proponents’ ads by over 2 Third, many businesses believed they could to 1. get a free tide. They interpreted the 70 percent The California business community gave support in the early polls as a guarantee that almost nothing to support the “Yes on 226” the measure would pass without their help. By the time it became clear that the vote would Charles Baird is a professor of economics and the be close, it was too late. The good news, per- director of the Smith Center for Private Enterprise haps, is that when such measures are under- Studies at California State University at Hayward. taken in other states, fewer businesses will fall 703 ===== PAGE 68 ===== 704 THE FREEMAN e NOVEMBER 1998 prey to the free-rider temptation. Sweeney’s to regret their concession. Most people give political miracle clearly proves the power of to support charitable activities, not political forced dues to change minds. causes. The charities’ support of the unions seemed to imply that they are involved in politics. In any case, the exit polls indicated that if Proposition 226 also included a section that the proposition had been written to apply only required employers to get annual written per- to unions, it would have passed. The unions mission before they deduct any money from were unable effectively to use any part of the paychecks for political contributions and section that applied directly to them in their expenditures. I believe that this section was campaign. They argued that it was an effort to totally unnecessary, and it caused major prob- silence working people in the political lems. The authors included it to insulate process, but everyone, including most union themselves from the charge that the initiative members, saw through that claim. Workers was anti-union. The unions made that charge would have been free to authorize unions to anyway, claiming they were the only member- use their dues and fees for political purposes. ship organizations affected. More important, No limits on voluntary political spending the employer section created an opportunity through unions would have been imposed. In for unions to scare charitable organizations, fact, by giving workers a choice, the initiative health-insurance providers, and other groups would have amplified the political voice of that receive payroll deductions into believing working people. that they would be hurt by passage of 226. There was at least one happy outcome of The union arguments about this provision the campaign. Most California workers are were disingenuous. First, the initiative applied now fully aware of their right, under the only to “employers” and “labor organiza- Supreme Court decisions in the Hudson tions” as already defined in California law. No (public-sector) and Beck (private-sector) health-insurance provider, except in its role as cases, not to have their union dues spent on employer, would be affected. Second, payroll politics against their will. Until the cam- deductions in exchange for something of paign, unions had tried to keep those deci- value, such as health-insurance coverage, sions a secret. At their behest, President Clin- would have been excluded according to a pre- ton had rescinded an executive order that vious law. Nevertheless, because this big lie would have required federal contractors to went unanswered in the mass media until the post notice of their employees’ Beck rights at very end of the campaign, many voters job sites. During the campaign the unions believed it was true. argued that the Hudson and Beck decisions The unions also used this argument with made 226 unnecessary. Of course, that’s respect to charities; and here, because charita- untrue, because those decisions are not ade- ble contributions are not for “consideration,” quately enforced and they impose a heavy they may have had a point. It is easy to imag- burden on employees to prove that unions ine a judge deciding that an employer who spend more money on politics than they deducts voluntary charitable contributions admit. But California unions have now from employee paychecks would be liable for informed all their members that these deci- the political expenditures and contributions sions exist and that they all may seek refunds made by charitable organizations such as the of dues and fees used for politics. I predict a American Cancer Society. If so, many substantial increase in the number of Califor- employers would stop gathering charitable nia workers who try to do so in spite of the contributions that way, and there would be threats, intimidation, and hurdles the unions less charitable giving. will put in their way. That argument convinced some major One more thing. The initiative will be back charities to oppose 226, but they may come on the primary ballot in 2000 OJ Unnecessary Provision