===== PAGE 1 ===== gy | REMAN February 1999 Vol. 49, No. 2 __ FEATURES 6 The Government Spiral by Eric Nolte 10 On Airports and Individual Rights by Tibor R. Machan 14 There’s No Philadelphia in Europe by Norman Barry 18 Come to America, John Paul by David Boaz ¥22 Unhappy Returns by Harry Dolan 27 Distrust and Verify by Dwight R. Lee and Jeff R. Clark 29 Sen or Sense by Barun S. Mitra 32 Abolish Legal Tender by D. Alexander Moseley 34 Small Is Awesome by Max More 40 A Program the Borg Would Love by Karen Selick 42 Wisconsin’s Choice by Jon Sanders 47 The Life of a Grand Old Liberal by Wendy McElroy COLUMNS Center NOTES from FEE—Countless Wonders by Donald J. Boudreaux 12 IDEAS and CONSEQUENCES—Privatize the Airports! by Lawrence W. Reed 20 POTOMAC PRINCIPLES—Alliances: What’s Friendship Got to Do With It? by Doug Bandow ¥3s PERIPATETICS—Captain Consumer by Sheldon Richman Was ECONOMIC NOTIONS—The Market for Honesty by Dwight R. Lee 52 ECONOMICS on TRIAL—A One-Armed Economist, Please by Mark Skousen 63 THE PURSUIT of HAPPINESS—The ILO’s Strange Use of Words by Charles W. Baird DEPARTMENTS 2 Perspective—Monster by Sheldon Richman 4 We Need a Global Fed? It Just Ain’t So! by George Selgin 54 Book Reviews «New Schools for a New Century: The Redesign of Urban Education, edited by Diane Ravitch and Joseph Viteritti, reviewed by George C. Leef; Those Dirty Rotten Taxes: Tax Revolts that Built America by Charles Adams, reviewed by James A. Woehlke and Nikolaus P. Woehlke; Enterprising Southerners: Black Economic Success in North Carolina, 1865-1915 by Robert C. Kenzer, reviewed by Richard M. Gamble; The Costs of War: America’s Pyrrhic Victories by John V. Denson, reviewed by Doug Bandow; Enviro-Capitalists: Doing Good While Doing Well, by Terry A. Anderson and Donald R. Leal, reviewed by Bruce Yandle; Higher Superstition: The Academic Left and Its Quarrels with Science by Paul R. Gross and Norman Levitt, reviewed by Thomas F. Bertonneau and Richard L. Cutler; Between Power and Liberty: Economics and the Law, edited by Richard M. Ebeling, reviewed by Philip R. Murray. ===== PAGE 2 ===== IREEMAN ~~ reeseoorve Ide (Ideas On Liberty On Liberty Monster Published by i i The Foundation for Economic Education Rule No. 1 for slaying the Hydra: slay it. Irvington-on-Hudson, NY 10533 n’t just cut n r f Phone (914) 591-7230 FAX (914) 591-8910 ho er off 0 C1 et few —o p E-mail: freeman@fee.org its heads. That's not good enough: the hea FEE Home Page: http://www .fee.org might grow back. Kill it dead. How many President: Donald J. Boudreaux times do we need to be taught that lesson Editor: Sheldon Richman before we learn it? Managing Editor: Beth A. Hoffman During the presidency of Ronald Reagan Editor Emeritus the Department of Justice ended the long, Paul L. Poirot unjust, and wasteful antitrust case against Book Review Editor IBM. Moreover, antitrust prosecutions George C. Leef dropped significantly. This happened because an Reagan's team included an antitrust staff Columnists heavily influenced by Chicago-school critics Charles W. Baird of antitrust theory and practice. Having Doug Bandow sipped from the cups of Yale Brozen and then Dwight R. Lee Robert Bork (whose Antitrust Paradox made Lawrence W. Reed Mark Skousen Walter Williams a deep impression), the staff understood that the history of antitrust prosecution was most- ly a history of government’s going to bat to Contributing Editors . ; Peter J. Bottke save weak competitors from consumer-pleasing Clarence B. Carson companies. It was about protectionism, not Thomas J. DiLorenzo monopoly. Burton W. Folsom, Jr. But the Justice Department people did not Joseph S. Fulda object to antitrust in principle. So while they Bettina Bien Greaves abstained from interfering with mergers and Robert Higgs other activity that previously would have sum- John Hospers moned the government’s wrath, they did not . Keati ’ Raymond J. Keating seek repeal of the government’s authority to Daniel B. Klein . . prosecute companies for peaceful activity. The Wendy McElroy . . Tia R. Machen Hydra was sedated, not slain. When the Clin- Ronald Nash ton team replaced the Reagan team, the Hydra Edmund A. Opitz awoke. Ask Bill Gates. James L. Payne Agriculture is another example of reform- William H. Peterson ing the Hydra. A couple of years ago congres- Jane S. Shaw sional Republicans boasted that they had put Richard H. Timberlake the appalling system of farm subsidies on a Lawrence H. White seven-year track to oblivion. They sappily The Freeman is the monthly publication of The Foundation for Eco- called their bill the Freedom to Farm Act. But nomic Education, Inc., Irvington-on-Hudson, NY 10533. FEE, . . . os established in 1946 by Leonard E. Read, is a non-political, educational in the last session, with farmers’ incomes off champion of private property, the free market, and limited government. : - FEE is classified as a 26 USC 501(c)(3) tax-exempt organization. and the election bearing down, the GOP-run Copyright © 1999 by The Foundation for Economic Education. Per- Congress did a one-eighty. Farm subsidies mission is granted to reprint any article in this issue, provided credit is given and two copies of the reprinted material are sent to FEE. were nearly doubled. The head grew back. The costs of Foundation projects and services are met through dona- f tions, which are invited in any amount. Donors of $30.00 or more In the 1970s the rock group Steppenwol receive a subscription to The Freeman. For foreign delivery, a donation 3 : : of $45.00 a year is suggested to cover mailing costs. Student subscrip- performed an intelligent Song about America tions are $10.00 for the nine-month academic year; $5.00 per semester. and its government called “Monster” The Additional copies of this issue of The Freeman are $3.00 each. ” s Bound volumes of The Freeman are available from The Foundation chorus was, There’s a monster on the loose. for calendar years 1972 to date. The Freeman is available in microform h h . » R, dl f from University Microfilms, 300 N. Zeeb Rd., Ann Arbor, MI 48106. It has our heads in a noose. cgardicss o ===== PAGE 3 ===== good intentions, most members of Congress the lot of the people. Barun Mitra contends who pay homage to the free market don’t that India has had enough of that already. understand that you can’t phase out a monster Ludwig von Mises is reputed to have said over seven years. If you try, you deserve to get that government is the only institution that bitten. But the rest of us don’t. can take a useful commodity like paper, slap some ink on it, and make it worthless. But that paper is imposed on us with the magic words Most people seem to believe that if the gov- “legal tender.” D. Alexander Moseley wonders ernment were not regulating safety in air trav- if it is time to banish those words. el, airplanes would routinely fall out of the The Big Corporation is the bogeyman of sky. Eric Nolte, a commercial airline pilot, every socialist and lesser interventionist. But shows that this belief betrays a woeful failure not to worry, writes Max More, because the k %k %k to understand how a free economy works. market process and technology favor decen- What to do with a piece of property should tralization and competition. be a fairly straightforward matter. But when Beware cost-benefit analyses for government the property is a decommissioned govern- programs. As Karen Selick points out, they ment-operated military airport, the simple stand on a foundation of quicksand: namely, becomes the hopelessly complicated, as Tibor the erroneous principle that one person’s costs Machan demonstrates. can be compared to another’s benefits. The European Union. The new euro curren- The University of Wisconsin was once a cy. What is going on in Europe? Norman bastion of free speech. Then Donna Shalala, Barry compares the ominous process of Euro- the future secretary of health and human ser- centralization with the American constitution- vices, took over. Jon Sanders says it’s been al experience. downhill ever since. Pope John Paul II's trip to Cuba last year He was a nineteenth-century American was remarkable in many ways. One of them individualist who battled for free speech and had to do with what the Pope said about fam- the right of women to be as free as men. At ily and education in Castro’s paradise. David age 75 he was sentenced to a year at hard Boaz says America’s education establishment labor for his trouble. Wendy McElroy chroni- should have been listening. cles the life of Moses Harman. President Clinton says “save Social Securi- Our intrepid columnists, Lawrence Reed, ty first” But should it be saved at all? The Doug Bandow, Dwight Lee, Mark Skousen, intrinsically flawed pay-as-you-go transfer and Charles Baird, take on government air- program is given a thorough going-over by ports, the folly of alliances, business honesty, Harry Dolan. Amartya Sen, and the International Labor Trust in government is at an all-time low. Organization. George Selgin looks at the case Those who lament this state of affairs chide for a worldwide central bank and implores, “It the people for their wariness. But Dwight Lee Just Ain’t So!” and Jeff Clark argue that government is only Book reviews this month scrutinize urban getting what it deserves. education, taxation, early black entrepreneurs, The 1998 winner of the Nobel Prize in eco- the costs of war, enviro-capitalism, anti- nomics is an Indian-born economist who science, and economics and the law. favors government intervention to improve —SHELDON RICHMAN ===== PAGE 4 ===== FREEMAN deas On (ideas On Liberty) We Need a Global Fed? e 9 | which gave rise to serious “currency short- It Just Ain t Sol ages” in 1884, 1893, and 1907. Government regulation thus played a key role in the “destructive business cycles” that Mr. Garten Qome economic pundits see every instance so unhesitatingly blames on the invisible of economic disorder as proof of the hand. defects of capitalism and of the need for more In addition to setting unnatural limits to the extensive government regulation of the econ- stock of currency, the government also pro- omy. It never seems to cross their minds that hibited national banks from setting up branch government regulations might even destabi- networks. This resulted in the proliferation of lize markets. A recent example of such think- thousands of under-diversified and failure- ing comes from Jeffrey E. Garten, dean of prone banks. In Canada, where chartered Yale’s School of Management, who in the banks were free to issue notes and to branch September 23, 1998, New York Times, urged nationwide, bank failures were few and far creation of a global central bank to stabilize between, and not a single bank failed during the world economy. the Great Depression. In the United States, by Garten begins with a summary of U.S. contrast, several thousand banks failed during financial history that would make any eco- the 1930s alone, and almost all of them were nomic historian blush. From the Civil War to “unit” banks lacking any branches. the 1930s, Garten writes, the American econ- Canada, it should be noted, established a omy “was an uncontrollable Darwinian central bank in 1935. Economic historians process” marked by frequent booms and busts still wonder why, since its monetary system and “countless bank failures.” Then, to every had withstood the depression better than those right-thinking citizen’s vast relief, the federal of other nations having central banks, includ- government stepped in, creating the Securities ing the U.S. system. Mr. Garten suggests and Exchange Commission, the Federal that central banks such as the Fed prevent Deposit Insurance Corporation, and “most business cycles. But the United States suf- important, the Federal Reserve.” The “harsh, fered a serious downturn in 1921 and its most invisible hand of Adam Smith” was thus mod- serious depression of all starting in 1929, erated, and the business cycle brought under notwithstanding the Fed’s establishment in control. 1913. The years since World War II have not So America’s financial system was unregu- witnessed another Great Depression, but the lated before 1930? It just ain’t so! In truth, business cycle has hardly disappeared, and Civil War legislation nearly wiped out the secular inflation has become an additional antebellum state banking industry, setting up problem. new national banks that were forced to back The truth is that in combating financial their notes with government bonds. Eligible crises, central banks have proven to be highly bond collateral became increasingly scarce costly and unreliable substitutes for structural during the last quarter of the nineteenth cen- improvements in the banking industry, name- tury. Over the course of any year, such banks ly, branch banking, competitive note issuance, were prevented from meeting seasonal peaks and foreign bank entry. Central banks have all in currency demands. The result was an too often undermined the solvency of private inelastic stock of national bank currency, financial firms. The U.S. savings and loan ===== PAGE 5 ===== 5 industry became insolvent in the early 1980s ministry. In the meantime, genuinely private mainly because of Fed-sponsored inflation, Russian firms went begging for funds. which dissolved the value of long-term home Eventually, the massive flows of central- mortgages negotiated a decade or more bank credit began to reduce the value of the before. The S&L mess was worsened by the ruble, undermining Russian banks’ ability to perverse effects of deposit insurance, admin- pay their foreign debts and rendering them istered in this case by the Federal Savings and that much more insolvent. And how has Rus- Loan Insurance Corporation, which subse- sia’s central bank proposed to resolve the cri- quently failed. So much for the stabilizing sis? By lending still more credit to commer- effects of “progressive” New Deal financial cial banks that should have been declared regulations. insolvent long ago! According to a recent study by Kurt Would a global central bank help? Not at Schuler, central banks have done a poorer job all. On the contrary, such a bank would mere- historically at promoting low inflation, ly encourage Russian authorities to continue exchange-rate stability, open exchange mar- their perverse policies, by forcing citizens of kets, and economic growth than non-central other countries to bail out an essentially cor- banking arrangements, including free bank- rupt system. ing and currency boards. Indeed central banks Instead of performing their self-assigned offer only one clear advantage over these task of stabilizing national financial markets, other arrangements: the ability to print money central banks have routinely attempted to for their sponsoring governments. And that is prop up unsound banking systems with easy one advantage the public can live without. money. Jeffrey Garten believes that the cure Seemingly unaware of the role national for this failure is a bigger, better central bank, central banks have played in generating finan- capable of acting as a world “lender of last cial turmoil around the world, Mr. Garten can resort,” when in fact loans from such an insti- think of no better solution to the world’s tution would only make it easier for national financial troubles than a global central bank. governments to delay needed financial market He does not appreciate the link between reforms. Perhaps Mr. Garten believes that a central-bank pegged exchange rates and spec- global central bank would rise above domes- ulative currency runs like those recently expe- tic politics, resisting any pressure to bail out rienced in Southeast Asia (runs to which non- insolvent banks. But the record of existing central-bank arrangements, such as currency central banks, and of the IMF and World Bank boards, are invulnerable); he does not consid- for that matter, provides no grounds for such er the possibility that Japan’s present slump optimism. may be the payback for its aggressively On the contrary, experience suggests that a expansionary monetary policy during the global central bank would quickly be captured 1980s; and he doesn’t contemplate the fact by international banking interests and that it that Russian bank depositors might not have would serve those interests (rather than the to watch their savings gradually erode were interest of the general public) by rushing to they free to do business with foreign banks. guarantee their loans even when doing so Worse still, Mr. Garten somehow imagines would be tantamount to rewarding irresponsi- that the errors of national central bankers ble government policies and banking practices. would somehow be avoided by an internation- So Mr. Garten, kindly spare us a world cen- al bank, as if ignorance and short-sightedness tral bank: your quaint belief that, when it were unable to transcend national boundaries. comes to regulating financial markets, gov- Take Russia as a case in point. From June to ernments can never go too far, just ain’t so. October 1992, Russia’s central bank tripled its —GEORGE SELGIN lending to commercial banks. Most of this Department of Economics credit was in turn re-lent, at a loss, to the University of Georgia banks’ own state-enterprise owners! The loss- es were then made up for by Russia’s finance ===== PAGE 6 ===== FREEMAN deas On (1deas On Liberty) The Government Spiral by Eric Nolte he graveyard spiral is a maneuver known The way out of a graveyard spiral is to level to students of airplane accidents as one of the wings, reduce the power, and ease up on the most common reasons that inexperienced the nose. But you first have to know what has pilots unwittingly kill themselves. gone wrong. In this utterly preventable maneuver, a pilot untrained to fly on instruments flies into . . clouds. Disoriented and suffering tunnel Regulating Blind vision, he doesn’t notice the airplane’s bank. Government regulation is like a graveyard At this point, the airplane’s inherent stability spiral: you know something is dreadfully has not yet become overwhelmed by the ham- wrong, but unless you understand the signals, fisted exertions of the poor pilot. If he would there is no way out. Regulation blinds an just let go of the airplane, it would right itself, economy to signals comparable to an air- but he grimly hangs on, with the plastic of the plane’s pitch and bank, signals that would let control wheel oozing out from between his producers and consumers adjust their activi- ever-whitening knuckles. ties in response to their desires and available The airstream noise gets louder, causing resources. him to pull back even harder on the control All too many people who otherwise under- wheel because he thinks that simply raising stand the virtues of a free market become the nose will pull him out of the dive. But this committed socialists when they reserve an doesn’t counter the fundamental problem, airline seat. When they think of placing their which is that the wings are banked. Pulling precious hide in some fragile tube of alu- back on the wheel, heedless of the bank, tight- minum hurtling along at nine miles a minute, ens the turn. With the noise level of the dive six miles above terra firma, while dodging all up to the roar of a rock band in live perfor- the forbidding forces of Zeus and Mother mance, the airspeed and tachometer needles Nature, their guts turn to battery acid. Sud- are pegged on the red lines, and the witless denly they are eager for Big Daddy Govern- aviator hauls back on the controls with a ment to protect them from all those capitalist mighty heave. The tail breaks off. He may pigs at the helms of airlines, who everybody wait as much as two minutes before impact knows are immoral, greedy profiteers who with the earth puts an end to his terrified and would sell their children to cannibals for the uncomprehending ignorance. right price. —— Co } A recent USA Today debate on airline safe- Eric Nolte is an airline pilot, a writer, and a classi- ... . , cally trained pianist and composer of contemporary ty offered the political mainstream’s usual concert music. E-mail him at ericnolte@compuserve. ~ false alternative between lots of government com. and lots and lots of government. The editors ===== PAGE 7 ===== 7 held that too many violations go unreported,a much to do with an inspector’s digestion as situation they said would end with more Fed- with the actual wording of any particular eral Aviation Administration inspectors edict. This arbitrariness gives to regulators the wielding greater power to issue fines on the power to examine each case “on its merits” spot. and to enjoy the power to act with a “flexibil- The editors lumped together every kind of ity” that would delight a KGB agent. James violation. But not all violations are equal. Buchanan and F. A. Hayek have shown that Failing to dot an “i” in the aircraft logbook is such arbitrariness, which is the result of insti- a violation of federal aviation regulations; so tutional incentives, frequently attracts those 1s failing to install the bolts holding on the who lust after power. horizontal stabilizer. When these transgres- When the regulators themselves cannot sions come to light, the public is scandalized agree on what the rules mean (as is famously to hear that there were two violations! the case with such other documents as the FAA administrator Jane Garvey, in her Internal Revenue Code), then the rule of law rebuttal to the editor’s call for more regula- has given way to rule by the arbitrary whims tion, correctly pointed to the dazzlingly good of those enforcing the police power. Those of safety record of the airlines: 3.6 billion people us who are regulated then do business at the on 55 million safe flights. Sleeping in your discretion of the government. own bed is more dangerous! She credited gov- Most Americans would find it asinine to ernment regulation. suggest that we live in a dictatorship, but what That’s a logical error, like concluding that x else can it mean when government forbids any- causes y because x precedes y. Goofy may suf- one to operate without its explicit blessings, or fer a streak of bad luck after breaking a mirror, calls your ability to act peacefully on your own but this conjunction of events is insufficient to behalf a “privilege” granted by its largesse, and show a causal connection. While the airlines’ dictates—through the regulations of its dozens safety record is indeed impressive, that suc- of agencies—virtually every detail of how a cess is not half so impressive as it could be business is allowed to operate? The economic without government regulation. Allow me to systems of Germany and Italy in the 1930s pro- explain this provocative assertion. vided for private ownership of business, but the I have studied economics, history, philoso- government dictated who could sell what to phy, politics, and psychology for many years, whom at what price, and the government and I have flown airplanes for 33 years. I decreed who, of which race, could be hired at know the aviation world firsthand. I fly DC- what wages. If the soul of ownership is control, 10s for a major passenger airline that uses then we are experiencing a shift away from pri- these 300-seat jumbo jets to serve destina- vate ownership to state control of the means of tions all over the world. I have seen the inside production. workings of two regional and two major air- To insure that airlines fully complied with lines. Significantly higher levels of safety will every regulation would require an inspector not be achieved by passing laws for our own from each government agency with jurisdic- good that threaten and intimidate peaceful tion over the activity to hover diligently over people into behaving as the regulators decree. each employee. But, as one wag put it, if peo- ple are too rotten to act responsibly, what Government Caprice makes anyone think the inspectors are any better than the inspected? The federal aviation regulations comprise many volumes of boilerplate legalese that is variously interpreted by every regional office of the FAA. Despite the best will in the world, Many customers mistakenly reason that if any pilot or mechanic can be found somehow an activity is regulated, it must be safer than it in violation of something at any time. The would otherwise be. But government regula- interpretation of a regulation may have as tors don’t make people safe. Aviation safety Lulling Consumers ===== PAGE 8 ===== 8 THE FREEMAN/IDEAS ON LIBERTY ® FEBRUARY 1999 results from the combination of people’s own “Oh, come on, now!” I hear lots of people prudence as passengers and an economic sys- protesting, with the exasperation of a practi- tem in which enduring success depends large- cal, action-oriented American who hates ly on how well airlines satisfy their cus- pointy-headed theorizing. “That’s voodoo tomers’ desire to travel affordably, conve- economics! Ivory tower theory! Get real! niently, comfortably, and safely. Regulators What will protect people from fly-by-night can be duped by fraudulent paperwork and predators calling themselves an airline?” other antics. But customers, given a choice, Disbanding the FAA would inform the pub- can seldom be burned more than once before lic that its safety depends on its own judg- they turn elsewhere. ment. In fact, this has always been the case, What best promotes these safe and pleasing even when we think that regulators have done outcomes? The free market. By “free market,” all our properly vigilant and wary thinking for I don’t mean our mixed economy, the unholy us. Of course, it is absurd to expect ordinary marriage between big business and big gov- people to become airline experts before buy- ernment, in which special interests vie for ing a ticket. So how would they choose safe success by lobbying for legislative advantages companies? over their competitors instead of by satisfying The power of reputation would once more their customers better than those competitors. matter hugely. A good reputation is not a per- The elements of freedom in the mixed fect guarantor. But neither is the FAA. And I economy allow people to coordinate their for one am happier with a sterling reputation activities and resources by mutual and volun- maintained over a long time than with a gov- tary action. When it intervenes, government ernment bureaucrat’s stamp of approval. A forbids people to make voluntary choices good reputation is extremely hard to win— according to their assessment of what will and quite easy to lose. work best. Every action within the economic No airline with a desire to succeed in the process is ultimately indivisible, as Ludwig long term could operate fast and loose with von Mises pointed out so lucidly. Whether safety, because passengers would shun it. This choosing a material, a supplier for an engine is not just abstract theorizing. Observe how an nacelle, a city to serve, or a price to charge, outstandingly successful start-up like Air each action ultimately must be directed by the Florida found itself virtually without passen- will of a single mind: that of a government gers from the day after its fatal crash of a 737 bureaucrat or of a private individual. The idea at Washington National airport until it finan- of a “partnership” between business and gov- cially bled to death shortly afterwards. ernment is as absurd as the notion of a part- More technically accurate assessments of nership between a planter and the slaves who airline performance would be widely avail- pick his cotton. In any disagreement, who able through rating agencies similar to the gets the final word? Consumers Union, Moody’s, Standard and Poor’s, or Underwriters Laboratories. In the The Chimera of Risklessness absence of the FAA, these companies would step forward to judge airlines, because the There 1s no such thing as absolute safety, desire to stay safe would create a demand for contrary to the wounded, strident protests of this knowledge and the lure of profits would such groups as the National Resources produce it. Defense Council, which finds even the tiniest Another powerful incentive for aviation risks anathema. The relevant questions are: safety in a free market is that no insurance how much safety, at what price, and who company would dare cover an airline that decides? So long as a legal system exists to operated without prudent procedures: the protect individuals from violence and fraud, insurer would go bankrupt for covering a car- the safety of the flying public would best be rier that crashed airplanes willy-nilly. served by the outright liquidation of the Of course, a fraudulent start-up might some- FAA. how win capital enough to begin operations. ===== PAGE 9 ===== THE GOVERNMENT SPIRAL 9 Con men have swindled people since the dawn Why is that system the world’s largest con- of time. But solid research shows that while sumer of vacuum tubes? It needs them in the sleazy operators can fleece some folks for a lit- antiquated radar systems. Why hasn’t a more tle while, customers wise up. No company ina modern system been devised? Because air relatively free market has ever achieved any traffic control is a secure government monop- huge and enduring success without winning oly, like the post office, and therefore has no the continuing satisfaction of its customers. incentive to accommodate itself to the prefer- In a free market, money changes hands ences of its users. because producers and consumers expect to Money is not a problem. We airline passen- be better off for the deals they make. This too gers have paid billions of dollars in ticket 1s not just abstract theory. Without this expec- taxes for 40 years, ostensibly collected into tation, they do not do business, absent a club the airport and airways trust fund to improve over their heads. The purpose of government equipment and facilities. But the fund is a is solely to protect every individual’s right political football. Moreover, it is used to mask to life, liberty, and property—a purpose it the full enormity of the federal government’s accomplishes by punishing fraudulent, preda- plunder: in reports to the public, this money is tory, and violent crooks. subtracted from the federal debt! Finally, here is the most important argu- By contrast to air traffic control’s ancient ment for disbanding the FAA and other regu- technology, commercial airliners, created by latory agencies: the safety engendered by companies that do stand a chance of going innovation. Regulation always benefits the broke, haven’t sported any vacuum tubes for status quo, the fat cats already in business. nearly 40 years. The status quo tends to fossilize a given level It was the Wright brothers, not Big Brother, of technology with laws that make innova- who invented the airplane. Before long, Big tions difficult to implement. Brother told Wilbur and Orville they needed a Consider one among many persistent and pilot’s license. Of course, Big Brother’s own annoying examples: airlines are chronically efforts at learning to fly, contemporaneous late out of some cities. Normal, occasional with the Wright brothers, involved subsidiz- mechanical failures and company mistakes ing Samuel Pierpont Langley, whose flying don’t explain this problem. So why does it hap- machine, launched repeatedly from a house- pen? The reason largely is that the FAA’ air boat in the Potomac, did not fly so much as it traffic control system can’t handle the traffic. ~~ tumbled into the river on each occasion. [] 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 10 ===== FREEMAN deas (ideas On Liberty) Libert On Airports and Individual Rights by Tibor R. Machan or a couple of years, Orange County, “public interest” would have us believe. The California, has been buzzing with contro- simple fact is that there is no public interest versy over what to do when the El Toro involved here. All interests are private and Marine Air Base is closed. The question on vested. The only bona fide public interest is everyone’s mind is whether it will be trans- one that actually benefits everyone equally. formed into an international airport by the And there are very few such projects in any local authorities. Airports of different sizes community—mostly they amount to keeping are being considered, but there are many citi- the peace and preserving the rule of law. zens who would just as soon avoid the trou- ples they associate with a new airport. Resolving the Unresolvable n our time, such an issue is decided by a combination of federal, state, county, and But could it be otherwise? Might there be local bureaucracies following various rules some way of dealing with an issue of wide- that have emerged over many years of simi- spread yet still essentially conflicting con- lar haggling. Everyone considers the out- cerns without several groups of people getting come a matter of public concern, and each the short end of the stick? citizen supposedly has an equal right to have Indeed, there is. Briefly, it involves the his or her ideas implemented. Nevertheless, strict, unfailing protection of individual the authorities will make a decision driven rights, specifically the right to private prop- by the special interests with sufficiently large erty. constituencies and funds to make a serious Consider the proposal to have an airport in difference. a community. How large should it be? Who In fact, there is no “right” disposition will pay for it? And how should affected third because the valid concerns of all the people parties be treated? In a system of private prop- expressing their demands are quite incompat- erty rights, those who own the land in ques- ible. The objectives of environmentalists, tion have the authority to decide how it will be business people, and residents with various used. But that is by no means a simple matter. interests—the arts, commerce, education, sci- For example, in a system of private proper- ence, travel, and more—are all over the map, ty rights the use of a parcel of land as an air- and none can be given any rational public pri- port may not place unwanted burdens on third ority, despite what those who speak of the parties—just as you may not dump trash on your neighbor’s property. Thus, the operators Tibor Machan teaches ethics in the school of busi- of the airport may use it only in ways consis- ness at Chapman University. His latest book is Gen- tent with the equal property rights of their erosity: Virtue in Civil Society (Cato Institute). neighbors. Among other things, that means 10 ===== PAGE 11 ===== 11 the operators will have to avoid impositions been gained voluntarily—is the greatest mod- on their neighbors or offer them satisfactory erator of human aspirations, keeping them in compensation for the hardships. balance with the diverse and reasonable aspi- One way to violate rights is to impose rations of all others. In short, people may unreasonable noise on others. Serious noise reach goals they aren’t able to reach during the night, for example, when folks are with their own resources only by convincing reasonably expected to be getting their rest, is others, through arguments and fair exchanges, a violation of individual rights. During the to cooperate. day the same degree of noise would not be a Unfortunately, most special-interest groups violation because nearly everyone is making —business, environmental, scientific, educa- noise as they go about their business. tional, artistic, and so on—construe their own Or take air pollution. At a certain level, objectives as superior to those of others. In “polluting” the atmosphere is normal—living the case of the El Toro facility, each side tends itself produces waste that cannot be avoided. to believe that its cause is just and that the Yet to dump excessive, unreasonable levels of others are simply using financial and political air pollution on third parties—levels not nor- muscle to thwart it. mal within a given realm—is to violate their In fact, however, many objectives are rights. The details may be difficult to ascer- equally sound and should be carried out— tain. But that’s why we have courts and arbi- within the limits of individual rights. Look at tration groups. how this system of rights works in two areas of life: religion and publishing. Many differ- Rights Constrain Activity ent religions manage to co-exist in reasonable harmony, mainly because each group is able Some people will say that stringent protec- to operate unbothered within its own realm. tion of rights would lead to small airports, at Many diverse publications also manage to best, and many constraints on construction. co-exist harmoniously. This, too, is largely Of course—but what’s so wrong with that? because publishing organizations have the Perhaps the worst thing about modern right to operate their own facilities and sell industrial life has been the power of political their own products unimpeded by the political authorities to grant special privileges to some and bureaucratic processes that govern broad- enterprises to violate the rights of third parties casting, public education, beaches, parks, and whose permission would be too expensive to forests. In those areas, individual rights do not obtain. The need to obtain that permission rule. Instead, there is a semi-democratic would indeed seriously impede what most approach in which, at the end of the day, most environmentalists see as rampant—indeed, people are left dissatisfied. Such is the reckless—industrialization. But it could also “tragedy of the commons,” especially in a significantly impede environmental enthusi- country where most people implicitly (if asts who gladly violate other people’s rights in inconsistently) believe the individual’s pursuit striving for their objectives (which at times of happiness is important. involve returning to a pre-industrial age). There is, in short, no satisfactory answer to The system of private property rights—in the El Toro controversy within our system of which building, traveling, farming, woodcut- largely politicized social decision-making. ting, and all other kinds of other human activ- But we are not necessarily stuck with this ity must be conducted within one’s own realm state of affairs. Eventually, we might tran- except where cooperation from others has scend it. O ===== PAGE 12 ===== Ideas and Consequences by Lawrence W. Reed Privatize the Airports! WWeie in long lines for everything from Twenty years have passed since Congress a boarding pass to a cheeseburger. deregulated the domestic airline industry. Slow luggage delivery. Expensive parking. With airfares down and traffic volume up con- Jammed concourses. Surly workers. Small, siderably, airports like Detroit’s have experi- dingy restrooms. Long walks from one flight enced problems of congestion and a general to another that leave you worn out, with the decline in the quality of services. Though the only “consolation” being that the connecting general public is aware that airlines were flight is delayed anyway. deregulated (specifically, their fares and All that may sound like a scene from a routes), what is much less known and appre- Woody Allen movie set in some banana ciated is that almost all airports remain large- republic, but to midwestern travelers it rings ly outside the marketplace, hostage to politi- with familiarity. It’s just another day at Detroit cal decisions and budgetary concerns of the Metro Airport, owned and operated by Wayne government entities that own and manage County, Michigan. them. For consumers, the market has worked Thirty-six U.S. airports recently commis- well in the skies. It’s on the ground, where sioned a survey of 90,000 passengers, who politicians and their employees rule the roost, ranked Detroit dead last for overall quality. that problems often seem frustratingly The poor rating comes despite hundreds of intractable. millions of dollars and many commendable These problems don’t have to exist. A efforts by county and airport officials to growing number of governments around the make Detroit Metro, in the words of director world are ending similar troubles, but they’re David Katz, “the most friendly place on the doing so by making more than cosmetic planet.” Good intentions and lots of nice new changes. They are realizing that private for- carpeting notwithstanding, the aging airport profit firms have the incentive and the exper- is simply not keeping up with exploding traf- tise to operate airports better than almost any fic volume. The planned opening of a long public, politicized bureaucracy. These govern- overdue additional terminal in 2001 will help, ments are privatizing the management and in but realizing Katz’s ambition probably will some cases even the ownership of their air- require something much more dramatic and ports. The results are impressive: privatized fundamental. airports are far more innovative, efficient, and responsive to consumers than are public ones. —_— Twelve years after Great Britain sold seven Lawrence W. Reed is president of the Mackinac Cen- of its largest airports in 1986—including ter for Public Policy (www.mackinac.org), a free- i market research and educational organization in Heathrow, Gatwick, and Glasgow—the pro- Midland, Michigan, and chairman of FEE’s Board of gram has proven successful by Cvery measure. Trustees. An astonishing 2.2 million citizens bought 1.4 12 ===== PAGE 13 ===== 13 billion shares in the newly privatized British airline revenue at the airport by 20 percent, Airports Authority (BAA). The flying public with further increases expected. The next log- has been greeted with an aggressively entre- ical step—actually selling a major commer- preneurial attitude aimed at pleasing cus- cial airport to private owners—may occur tomers. The airports themselves have under- within the next decade or so. gone substantial physical improvements, and If Indianapolis and Pittsburgh—indeed, the British treasury has stopped being drained even London and Fiji—can privatize, why by subsidies. can’t Detroit? One reason is the same political The British model is spreading. Patrick inertia that afflicts most government airports. Cowell, president and CEO of Airport Group As long as the airport is a patronage machine International, reports that, “countries from for the politically well connected, politicians Germany to Australia are now racing to priva- naturally resist any move that diminishes their tize their airports.” Operation and manage- role. ment of most of Canada’s largest airports— Another reason that may be particularly including Vancouver—are now in private acute in Detroit is organized labor. Excessive hands, as is air traffic control. This past labor costs because of featherbedding and November, I landed at Nadi International Air- cumbersome work rules have characterized port in the Fiji Islands within days after it too one Wayne County operation after another. went private, and I survived just fine. For a privately run Detroit Metro Airport In the United States there have been no out- to happen, those practices must give way right sales of major commercial airports, but to more reasonable and hospitable labor- contracting with private companies for many management relationships. elements of operation and management is tak- Yet another reason for the lack of privatiza- ing off. Allegheny County in Pennsylvania tion is the “Basic Agreement” that exists contracted with BAA in 1992 to have it between Wayne County and the airlines, over- design, build, lease, and manage a retail com- whelmingly dominated by Northwest Air- plex for Pittsburgh International Airport. The lines. The agreement effectively gives North- resulting “AirMall” of commercial business- west a veto over the privatization option at es—many entering the Pittsburgh market for Detroit Metro. The airline is worried about the first time—has increased per-passenger landing fees, among other concerns. (Interest- sales at the airport from $2.40 in 1992 to ingly, landing fees at Indianapolis have $8.10 in 1997, generating at least 900 new remained low and reasonable since BAA took jobs. over; the private company understands that In 1995, the city of Indianapolis turned gouging major customers is not in its inter- over the day-to-day management of Indi- est.) Wayne County has done what no govern- anapolis International Airport entirely to ment should ever do: grant monopoly privi- BAA. The company agreed to a performance- leges to one firm when competition was not based contract in which certain operations only possible but would surely have served and maintenance-cost savings had to be met the public far better. before it received compensation. That incen- There is nothing in the stars that ordains air- tive spurred BAA to work hard to cut costs ports to be owned and managed by govern- dramatically. At the same time, the addition of ments. Both economic theory and recent expe- 22 new retail stores, 2,300 new parking rience demonstrate that. The sooner airports spaces, and a shuttle bus service boosted non- are run by private enterprise, the better. ~~ [] ===== PAGE 14 ===== FREEMAN deas On (ideas On Liberty) There’s No Philadelphia | in Europe by Norman Barry he member states of the European Union, brings before the European Court. Indeed, in their struggles to find some form of Brussels, headquarters of the main govern- international authority, are going through mental institutions, is rapidly becoming the debates that have a strange resonance with capital of a new superstate. America’s arguments about constitutional In theory, the original Treaty of Rome forms in the late 1780s. However, there has (1957), which bound the creators of an eco- been no Philadelphia—mno equivalent Euro- nomically integrated Europe, was not espe- pean city at which the fundamental issues of cially illiberal (in the classical sense). It freedom and constitutionalism have been embodied the “Four Freedoms”—of move- thrashed out. Instead, there has been a steady ment, of goods and services, of capital, and of accretion of power to central regulatory labor—that constitute the sine qua non of a authorities in Brussels, either by international market society. International regulation was treaty or even more significantly, by innova- originally limited to the enforcement of the tive and creative decisions of the European common rules of practice necessary for free Court of Justice, which is rapidly becoming economies. True, there were regulations that what its U.S. equivalent took some time to had immediate legislative impact on member achieve—the de facto creator of a constitu- states and directives that were adopted by tional order. local legislatures to fit particular circum- Even in its original structure the European stances. But in its early days, European-wide Union (it’s had various names in the past) was law did not automatically take precedence markedly biased toward the executive. The over the laws of member states; so there was European Commission, executive arm of the some similarity with America’s Articles of EU, has always been more than a civil service. Confederation, which required the agreement It actually initiates legislation, which is of all states for laws to be nationally applica- almost routinely passed by the Council of ble. Unanimity was never achieved, and that Ministers, the nominal legislature composed is why the framers of the Constitution aimed of representatives from the member states. to make federal law directly applicable to all The Commission keeps a close watch on them Americans, as well as to permit direct taxa- to prevent the emergence of any independent, tion by the proposed federal government. competitive, and innovative actions. It nor- mally wins cases against member states thatit The End of Competitive Norman Barry is professor of social and political Governments theory at the University of Buckingham in the United oo Kingdom. He is the author of Business Ethics In Europe, there was still the possibility of (Macmillan, 1998). jurisdictional competition, which is the 14 ===== PAGE 15 ===== 15 essence of federalism, up until 1964, when European Act (1986), the Social Charter the Costa v. ENEL case was decided; the (1989), the Treaty of Maastricht (1993), and European Court held that European law was the Treaty of Amsterdam (1997), attest to superior to any domestic law with which there this. might be a conflict. Nothing in the Treaty of Rome validates this legislative capture by the ‘ PE central body. It was simply another example A Benign Beginning of a centralized court asserting its power to Much of this evolution proceeded under the create constitutional law. Ever since, the suitably benign banner of elaborating on the Court has expanded the power of the Council originally modest liberal project of fashioning of Ministers and its legislation. As the Amer- the principles of a free market as envisaged in ican authors of the Anti-Federalist Papers the Treaty of Rome. Indeed, some steps could said, a federal court is bound to augment cen- easily find a rationale in public choice theory. tral power at the expense of local autonomy: it For example, under the original arrange- reduces the effectiveness of “exit” (that is, ments, when unanimity prevailed in the Coun- voting with the feet), and eventually the cil of Ministers, progress toward a free com- domain of individual liberty is diminished. mon market was successively blocked by What is the value in moving to another state if member states anxious to preserve anti- all the laws are more or less the same? market privileges (such as restrictions on cap- Although the European authorities in Brus- ital movement). In good Virginia-school style, sels have no direct taxation powers (they do qualified majority voting was introduced have the power to set a minimum level of under the Single European Act, although una- value-added tax) and the budget is financed nimity remained in certain areas. However, by subventions from each member state, one this modest and necessary constitutional doubts that this will survive very long. innovation soon made possible a mania for Encouragement toward a European-wide “harmonization”: many competitive advan- income tax will come about through the new tages were gradually eliminated so that every European currency, which is under the control member state had to conform to uniform reg- of the European Central Bank, an institution ulations on the environment, labor law, health that will set an interest rate for all member and safety at work, and so on. A “social chap- states that join. (Britain negotiated an opt-out ter” was introduced by which a common wel- under John Major’s Tory government, but this fare policy was formulated. is not likely to survive the newly discovered Most of these standards were, in effect, set Euro-enthusiasm of Tony Blair’s Labour gov- by the richer countries, especially Germany ernment.) With a monopoly currency, a cen- and France, which did not want competition tral bank, and treaty obligations to maintain from poorer countries anxious to attract capi- various fiscal targets, the tendency toward the tal by offering more favorable regulation. promotion of European-wide economic poli- They were, in turn, “bribed” by significant cies will be irresistible. The power to tax, financial redistribution. When countries exercised in effect by a centralized state, will attempted to avoid these standards, ways were complete the European project. found to thwart them. Britain tried to veto a It is a project that subjects European citi- directive limiting the number of hours in the zens to common economic standards, welfare work week (as proposed, unanimity was arrangements, civil liberties, and ultimately required), but it was carried as a health and most aspects of law. From its inception as the safety measure, which can be passed under European Economic Community (a mere qualified majority rule. free-trading area with elementary uniform Predictably, the European Court has been a rules), each stage in its progress has been complaisant actor in all this. It doesn’t pro- toward increasing centralization. The major ceed like a common law court, working from developing institutional arrangements, from case to case and deciding by purely legal rea- the Treaty of Rome itself through the Single soning, rather than on political grounds. ===== PAGE 16 ===== 16 THE FREEMAN/IDEAS ON LIBERTY ® FEBRUARY 1999 Instead, it tends to regard itself as being tricht, there is no evidence that it will take a responsible for implementing the European stand against European legislation; in fact, “idea”; this of course lets almost anything in. with scarcely a murmur it upheld Germany’s Subordinate courts, for fear of being over- abandonment of the mark on joining the Euro- ruled, correctly anticipate what the European pean Monetary System. Court would do. Thus a British court struck down laws that exempted part-time workers What Is Federalism? rom the anti-competitive requirements (including generous redundancy payments) What the enthusiasts for Europe do not enjoyed by full-time employees. It said that understand is that freedom is better protected since most part-timers were women, the by competition, both in economics and law, exemption was in breach of various equality than by constitutional documents: “exit” provisions in European law. The court even always beats “voice” (democratic privileges).! had the audacity to add that this would have This would be so even if the embryonic Euro- no effect on employment. pean constitutional documents were them- A great stride down the road to centraliza- selves particularly friendly toward liberty. It tion was taken by the Maastricht Treaty took the U.S. Congress and Supreme Court (1993). This extended majority voting, intro- about 150 years to integrate the country under duced plans for a common currency (although one more or less uniform economic, regulato- not yet obligatory), and confirmed all the ry, civil liberties, and welfare system; Europe movements toward legal uniformity that had has done the same in less than 30. The elimi- been previously established by the Court. The nation of constitutional competition in the only interesting feature of the ratification United States was formally recognized in the process was the ruling of the German Consti- notorious Garcia v. San Antonio Transit tutional Court in Karlsruhe. Although the Authority case, where the Supreme Court, in legality of the treaty was upheld, (superficial- defiance of the Tenth Amendment, said that ly) strict conditions were laid down for future federalism consisted merely in the fact that European integration. Europe was declared to the states were represented in the Congress. be a confederation of autonomous legal sys- Europe has repeatedly given formal obei- tems (to which European law was not superi- sance to the (originally Roman Catholic) prin- or), and no regulation or directive could abro- ciple of “subsidiarity,” which in the Maas- gate any individual right protected by the Ger- tricht Treaty is held to mean that “in areas man Basic Law. which do not fall within its exclusive compe- This nicely contrasted with Britain’s much- tence, the Community shall take action . . . vaunted sovereignty system, in which its citi- only if. . . the objective of the proposed action zens had no recourse to constitutional law ... can by reason of the scale of effects of the once its parliament had signed away legal proposed action be better achieved by the authority by treaty. (There never was a British Community.” Subsidiarity is a kind of surro- constitution.) It may have been a good thing gate for genuine federalism. But even as a for liberty that sovereignty was effectively “parchment” protection for local autonomy, it renounced, but its replacement is hardly a is feeble. There is nothing like the precision of bastion of freedom. The European Court may the original American Constitution, which at have been quite efficacious at striking down least does specify the areas of competence for some national laws that were obstacles to eco- the federal government and leaves the rest to nomic liberty, but it has been singularly inef- the states. In Europe there is not even wording fective at protecting European market free- that can function as a principle for demarcat- doms from regulations and directives from the ing centralized authority from local. In any Council of Ministers; the similarity here with disputed area, the European Court will always the behavior of the U.S. Supreme Court since side with Brussels. 1937 is striking. Whatever the German Con- One solution repeatedly recommended to stitutional Court may have said about Maas- stem the growing bureaucratization of Europe ===== PAGE 17 ===== THERE’S NO PHILADELPHIA IN EUROPE 17 is the closing of its “democratic deficit.” It is cal federal government could go a great deal true that European governmental institutions toward preserving that form by specifically are not subject to much democratic account- acknowledging the right of exit. ability. The parliament has little or no formal It is continually debated now whether legislative role (in fact, it is a rent-seeker’s Britain (the least enthusiastic of member paradise, as is much of Europe), and the states) could legally leave the European members of the Council of Ministers are only Union. That question would appear to be indirectly elected. But more “democracy”— answered by an obscure clause in the as-yet- that is, legislative authority for the directly unratified Treaty of Amsterdam, where it is elected parliament—is not the answer. People declared that the Commission will bring who make this case repeat the error of Madi- actions against any member state thought to son, in Federalist 10, on the grand scale. He be in breach of its Treaty obligations; the case thought that the “extended republic” would will be heard by the European Court. These remove the danger of faction because a feder- are the two institutions least likely to be in al system with divided legislative power favor of secession. There is, then, no right of would dissipate the malign effects of other- exit; it is a permission that is never likely to be wise unrestrained majority rule. But he granted. Any such action by a member state neglected the fact that modern-day factions, will therefore be political, with all the adverse coalitions of interest groups, would form to consequences that will follow from its exer- plague the central legislature with sectional cise. Dover Castle may well be Britain’s Fort demands, and dispersed voters would have lit- Sumter. tle rational incentive to control them. The It is not the case that British Euroskeptics same public choice considerations tell against are necessarily fanatics for parliamentary sov- a democratized Europe, for well-organized ereignty, the very system that has done so and committed minorities always have an much to undermine the market economy and interest in formulating (normally redistribu- the rule of law in their country? What they tive) policies that are inconsistent with the fear most of all is the reproduction of that long-run aims and purposes of an apathetic institutional phenomenon on a much more and rationally ignorant populace. Only the dangerous scale in Europe. There 1s no escape objective enforcement of a universal rule of from its depredations except by the costly and law, which protects property rights as well as time-consuming process of amendment by civil liberties, can restrain potentially predato- treaty. And the European rent-seekers will ry government. Conventional majority-rule always be able to fend off any such move. The democracy is quite inadequate to the task. only virtue of retaining independent states One crucial feature of a genuine federal (which could still bind themselves by mini- system is the right of exit from the constitu- malist general rules, mainly for promotion of tional arrangement: this is justified not mere- free trade and protection of the right to free ly on the ground of local autonomy but also as movement) lies in the possibility of preserv- a prudential device to restrain the seemingly ing genuine institutional competition. This inevitable centralizing tendencies of all forms strategy has nothing to do with promoting of government. For if enough provinces/states grandiose schemes for a “more perfect object to the actions of the general govern- union.” J ment, then that government will find it has 1. See R. Vaubel, The Centralisation of Western Europe (Lon- very little left to govern over. There was don: Institute of Economic Affairs, 1995). always a great doubt about the constitutional- & SEI SEE, BL LE ee LR SL es ity of secession in America, and a hypotheti- no. 1, 1994, pp. 10-27. ===== PAGE 18 ===== FREEMAN deas On Libert Come to America, John Paul by David Boaz ou don’t have to be Catholic to admire the place of parents. Consequently parents, Pope John Paul IIs role in undermining without expecting others to replace them in communism in Europe and his courageous a matter that is their own responsibility, visit to Cuba last year. Who else in the world should be able to choose for their children could make Fidel Castro broadcast attacks on the pedagogical method, the ethical and communism? civic content, and the religious inspiration But some of the pope’s most significant which will enable them to receive an inte- remarks in Cuba were almost lost in the media gral education. They must not expect coverage, which focused on the delicate con- everything to be given to them; they should frontation with Castro. Among John Paul’s assume their mission as educators while most provocative comments were those on seeking opportunities and creating ade- education. Speaking at a mass in the city of quate structures within civil society. Santa Clara, the pope called on parents to take back the responsibility of educating their chil- The pope’s gentle but profound words were dren and chided the Cuban state for subvert- correctly understood as an indictment of Cas- ing the family’s responsibility. tro’s schools, which teach children socialism, The pope’s words found a ready audience atheism, and anti-Americanism, no matter among Cuban parents dissatisfied with the What their parents’ values may be. Indeed, communist-run schools. But they are worth there’s no question that in Cuba and other pondering in the United States as well, for communist countries, the essential purpose of they prompt some difficult thoughts about our the schools is precisely to eradicate all traces own school system. Here’s what the pope told Of the parents’ values, which are often reli- millions of Cubans in his televised mass: gious or capitalist, and replace them with Marxist theory and submission to the commu- Parents must be acknowledged as the nist state. All Americans, not just Cuban- first and foremost educators of their chil- Americans, must fervently hope that the dren. Their role as educators is so decisive pope’s message will help to liberate Cuban that scarcely anything can compensate for children from the statist indoctrination of their failure in it. . . . It is true that in the Castro’s schools. area of education, public authority has cer- tain rights and duties, since it must serve . the common good. Nevertheless, this does Does the American System not give public authority the right to take Measure Up? David Boaz is executive vice president of the Cato But how well does the American school Institute and editor of The Libertarian Reader and System meet the pope’s standard? Our own Liberating Schools. schools are mandatory and government run, 18 ===== PAGE 19 ===== 19 the style of teaching—used or the ethical val- ues transmitted in their children’s public schools. As for religious inspiration, that is entirely absent from American public schools. It’s appropriate for government-run schools in a diverse society to avoid teaching religion, but that raises the question of whether the schools should be run by the government. By the pope’s standard, it would seem that American parents are being deprived of the freedom to exercise their responsibility to direct the education of their children. But American parents may find the pope’s mes- sage a bit uncomfortable, in that it forces them to contemplate whether they are fulfill- ing their responsibilities as parents: “Their role as educators is so decisive that scarcely anything can compensate for their failure in it”; parents should not “expect others to replace them in a matter which is their own responsibility”; “they must not expect every- thing to be given to them.” The pope seems to be saying that parents must not relinquish their moral responsibility to direct the education of their children—and must not simply expect other people, or the government, to pay for something that is their responsibility. with little room for parental choice or control. That is not to say that parents must school Every line of the pope’s message can be read their children at home. In fact, the pope points as a criticism of our own educational monop- out that in “assuming their mission as educa- oly—and perhaps also as a criticism of Amer- tors” parents will “seek out opportunities and ican parents who have let the state take over create adequate structures within civil soci- their responsibilities. ety.” In the pope’s understanding, “civil soci- The pope says that “parents should be able ety” means all the associations in society— to choose for their children the pedagogical churches, schools, clubs, and businesses—but method, the ethical and civic content, and the not the government. religious inspiration which will enable them Parents, then, have a moral responsibility to to receive an integral education.” Clearly, direct the style and content of their children’s most parents can’t do that today. Taxed to sup- education, government should not usurp their port the public schools, most parents feel role, and parents should not expect education unable to pay a second time for private simply to be given to them. That’s a message schools that might better reflect their own val- we should hear in the United States. The fail- ues. Despite the Catholic Church’s extensive ure of our government-run schools is a direct network of schools, many Catholic parents result of government’s taking over a critical feel too burdened by taxes and other living family function and parents’ abdication of expenses to heed the pope’s call. And of their duty. Let's hope the pope’s health will course American parents have virtually no allow him to deliver this message in Washing- control over the pedagogical method—that is, ton, D.C., some day soon. a Pope John Paul 11 ===== PAGE 20 ===== Potomac Principles by Doug Bandow Alliances: What’s Friendship Got " to Do With It? I's. merica is the “indispensable nation,” as front lines in Korea, a tripwire for involve- Secretary of State Madeleine Albright ment in any war, even though South Korea has likes to put it. But while the United States is 29 times the GDP and twice the population of supposedly indispensable, it can’t seem to get the North. Washington is protecting Japan, along without allies—most of whom seem to the world’s second-ranking economic power, think that the purpose of their “friendship” from threats unknown. Almost every nation in with Washington is to mulct American the region expects the United States to solve taxpayers. any conflict arising from such parochial dis- The world is awash in U.S. allies. Most putes as competing territorial claims over the western and central European states are mem- Paracel and Spratly Islands. bers of NATO; most eastern European nations Yet perhaps the most vivid example of the yearn to join the organization. Allies fill East dead-weight loss created by unnecessary Asia—Japan and South Korea sport formal “allies” is Israel. There are few nations on defense treaties, Australia enjoys regular mil- which the United States has showered more itary consultations, and the Philippines, Sin- money and support than Israel. In return gapore, and Thailand benefit from less formal Israeli politicians offer nothing but contempt, contacts. A score of Latin American nations as evidenced by Prime Minister Benjamin are members of the decrepit Rio Pact. Netanyahu’s attempt to extort the release of Most of these arrangements were fashioned Jonathan Pollard, convicted in 1985 of spying during the Cold War. Today, unfortunately, on America for Israel, as part of last year’s Washington’s collection of allies is simply an Wye River peace negotiations. economic and security black hole. At least during the Cold War there was a For instance, in Europe the United States plausible security argument for a military pays to defend a collection of nations with relationship with Israel. But the United States more people and greater economic strength. never enjoyed any practical benefits. To solve European problems of no concern to Although called an unsinkable American air- America, Washington is attempting to recon- craft carrier, military aid always flowed from struct Bosnia and micromanage the Kosovo the United States to Israel, never the other civil war. way around. American policies make even less sense in Anyway, the Cold War is over. The United East Asia, where U.S. forces remain on the States can do just fine, thank you, without Israel’s help. Indeed, Israel has made Ameri- —_— cans less secure. Washington’s support for Doug Bandow, a nationally syndicated columnist, is I 1 t 1 gt d th wr b oil a senior fellow at the Cato Institute and the author Sracl not only encourage ¢ Arab 01 and editor of several books, including Tripwire: embargo a quarter century ago, but also Korea and U.S. Foreign Policy in a Changed World. turned U.S. citizens into targets of terrorists 20 A ===== PAGE 21 ===== 21 the world over. Were it not for America’s per- knows whom. Washington said it will dump ceived complicity in Israel’s occupation of additional billions into the hands of the cor- Palestinian land, Muslim fundamentalists rupt and inefficient Palestinian Authority. In might hate the United States no less, but they fact, the starting demands for economic assis- would be more likely to ignore than to kill tance are $1.2 billion for Israel and $900 mil- Americans. lion for the Palestinians. What is Israel’s claim to the largesse lav- Even worse, the United States will be ished on it? Although a democracy among less drawn more deeply into the region’s fanatical free states, it has denied freedom to the Pales- currents. And the lead agency will be the CIA, tinians in its occupied territories for three reviled around the world for its intervention in decades. Anyway, there is no plausible securi- the affairs of other nations, such as Iran (we ty threat to Israel. It enjoys peace with Egypt must not forget the coup that helped return the and Jordan; however difficult their relations at Shah to power in 1953). The CIA will formal- times, war is extremely unlikely. Israel easily ly participate in a U.S.-Israeli-Palestinian overmatches Syria, which also now finds itself committee “to assess current threats, deal threatened by Israel’s unofficial ally, Turkey. with any impediments to effective security And Israels not-so-secret nuclear deterrent cooperation and coordination and address the would make even the most extreme countries steps being taken to combat terror and terror- in the region—Iran and Iraq, for instance— ist organizations.” think many times before striking. Oh joy. Terrorism against the United States Moreover, generous American subsidies and its citizens will become even more likely. have proven costly to Israel. It has one of the Still, even this is not enough for Israeli offi- most socialized economies on earth, foolish- cials. As the agreement was being wrapped up ness made possible by Washington’s willing- Prime Minister Netanyahu demanded the ness to ship about $500 a person to Israel year release of Jonathan Pollard. in and year out. Pollard, a former navy intelligence analyst, This is the lesson of foreign aid the world turned piles of documents over to America’s over. Economic failure creates political pain, alleged friend, Israel. Israeli officials, embar- which forces economic reform. Foreign aid rassed at the spectacle of friends spying on helps to mask economic failure and thus alle- friends, first claimed that it was an unap- viate political pain—which, in turn, slows or proved “rogue” operation. U.S. officials stops economic reform. termed the resulting security breach “mas- Yet Israel retains the master key to the U.S. sive,” and Pollard was sentenced to life treasury and a claim to most anything else it imprisonment. wants. It is Washington’s biggest foreign aid However, with time on his hands Pollard client, collecting $3 billion plus a year, not incessantly lobbied Israel to arrange his counting periodic special subsidies. release. Israel finally admitted its responsibil- Muslim nations are equally undeserving of ity and granted him citizenship. Then came the aid they receive. The Camp David accords Mr. Netanyahu’s request. two decades ago promised billions for Egypt, Think of it. The U.S. subsidizes Israel and informally pegged at two-thirds Israel’s level. provides military aid for decades. America That money is almost entirely wasted, fund- endures Arab hatred and terrorist attacks in ing useless projects and propping up an inef- return. Israel responds by spying on the Unit- ficient, state-run economy. But the “aid,” like ed States, lying about it, and then threatening Israel’s subsidy, is beyond criticism. to block a peace agreement—for itself— The Wye accords will lighten the wallets of unless Washington releases Israel’s spy. U.S. taxpayers even further. The Clinton The end of the Cold War warrants a search- administration has promised billions of dol- ing review of U.S. commitments around the lars in weapons to Israel for use against who world. OJ ===== PAGE 22 ===== @P Government FREEMAN deas On Liberty Unhappy Returns by Harry Dolan O: August 13, 1920, a confidence man The members of the Committee were hard- named Charles Ponzi was arrested for ly con artists; they were sober and thoughtful running a pyramid scheme that had cheated people grappling with a serious problem. In investors out of millions of dollars. Ponzi had the depths of the Great Depression, the plight promised his investors a 50 percent return of elderly Americans without reliable sources after 45 days, and he was able to deliver, at of income or family support was dire. But least in the beginning. As news of these fab- the remedy the Committee proposed was ulous returns spread, more and more not some modest and temporary measure investors were lured into the scheme. Of designed to relieve suffering: the system they course, the money Ponzi collected was never helped put into place has become a (seeming- invested in any wealth-creating enterprise: ly) permanent arrangement by which wealth the “profits” of the earlier investors were paid is transferred from workers to retirees. with money collected from later investors. When Social Security was established, it Ponzi kept his scheme going for less than a may have seemed plausible that such a system year. He was tried and convicted on federal could be made to work. In 1940, when the and state charges and served a pair of lengthy first monthly benefit payments were sent out, prison terms. He was released in February there were only 222,000 beneficiaries. The 1934. age at which one could retire and begin to col- Later in 1934, by a kind of charming his- lect benefits was 65, four years beyond the torical coincidence, President Franklin average life expectancy. The system was Delano Roosevelt appointed a Committee on financed by a relatively small (2 percent) pay- Economic Security to study ways of dealing roll tax, paid half by the employee and half by with financial insecurity, particularly among the employer, and the amount of income sub- the unemployed and the elderly. The Commit- ject to the tax was capped at $3,000. Today tee’s recommendations were embodied in the there are over 43 million beneficiaries. The Social Security Act, which Roosevelt signed retirement age is set to rise to 67 in the com- into law in August 1935. Under the resulting ing decades—but even so, people are living Social Security system, the payroll taxes paid far longer (around 76 years on average) and by workers and their employers were not thus spending far more time in retirement. invested in any wealth-creating enterprise; The payroll tax, after a series of increases rather, the contributions were used to pay the over the years, rests at 12.4 percent, and the benefits of retirees. amount of income subject to the tax has climbed to more than $60,000—and still, no Harry Dolan is a writer and editor in Bowling Green, One expects the system to remain solvent long Ohio. enough to shepherd today’s younger genera- 22 ===== PAGE 23 ===== 23 tion of workers through their retirement. The or the age of retirement must be pushed back Social Security Administration’s own best (which is really just another way of cutting estimates indicate that the system will fall far benefits). In the United States, Social Securi- short of being able to pay its present level of ty benefits were essentially set at a fixed level retirement benefits beyond the year 2032. in 1972, with mandated cost-of-iving adjust- ments (COLAs) put into place to ensure that The Culprit: Demo graphi Cs benefits keep pace with inflation. The primary method of dealing with the declining support Unlike Charles Ponzi, the Social Security ratio has been payroll-tax increases, more system never promised to make anyone rich— than a sixfold rise since the beginning. and it hasn’t. At present, the average Social The burden imposed on workers by the cur- Security benefit replaces roughly 43 percent rent 12.4 percent payroll tax should not be of the beneficiary’s pre-retirement income (a underestimated: many workers pay more in replacement level of 60 to 85 percent is need- payroll taxes (which are levied from the first ed to maintain one’s pre-retirement standard dollar of wages, without exemptions) than of living). The key to understanding this hum- they do in federal income taxes. And while ble benefit level—and the system’s long-term payroll taxes are nominally paid half by the insolvency—lies in the demographic changes worker and half by the employer, in reality the that have taken place in the United States worker bears the full impact of these taxes. since the system’s inception. The share paid by the employer is part of the These changes are actually a broader phe- worker’s overall compensation package, and it nomenon, common to nearly all developed necessarily reduces the amount of money countries, and thus the Social Security crisis available for wages and other benefits. in the United States is mirrored by similar The most recent payroll-tax increase was troubles in the old-age social-insurance pro- passed as part of the 1983 Social Security grams of western European nations, Japan, amendments, which were intended to address and numerous other countries. The fundamen- the looming problem of how to finance the tal “problem” is that people are living longer retirement of the “baby boom” generation. At and, at the same time, deciding to have fewer their present level, these taxes generate a children. This leads to a general aging of the yearly surplus, which is invested in U.S. Trea- population, as more and more people live to sury bonds (held in the Social Security Trust collect retirement benefits—and go on col- Fund). Thus, the current system is not entire- lecting them for longer than ever before— ly pay-as-you-go, yet it is still predominantly while at the same time, proportionally fewer so, since the lion’s share of payroll taxes (80 young people are in the work force paying percent in 1998) is paid out directly to current into the system. The result is a declining “sup- retirees. Nevertheless, this “partial reserve” port ratio”—the ratio of current workers to method of financing is expected to postpone current beneficiaries. In the United States, the system’s demise. According to the Social this ratio dropped from a high of more than Security Administration’s projections, yearly 40-to-1 in the late 1930s, to 16-to-1 in 1950, outlays (benefits) will begin to exceed income to 3.4-to-1 today; it is expected to fall to 2-to- (payroll taxes) in 2013. At that time, in order 1 by 2030. to continue to meet the system's obligations, it The declining support ratio is problematic will be necessary to begin redeeming the trea- for government pension programs because, as sury bonds in the trust fund. This process is noted, these are essentially systems for trans- expected to extend the system’s life until ferring wealth from workers to retirees. In the 2032, at which time the fund will be exhaust- language of policy analysts, they are predom- ed and income from payroll taxes will meet nantly “pay as you go” plans. Over time, as only 70 to 75 percent of obligations to there are fewer and fewer workers to support retirees. each retiree, something has to give: payroll It is worth noting, however, that most crit- taxes must be increased, benefits must be cut, ics of Social Security view the trust fund as a ===== PAGE 24 ===== 24 THE FREEMAN/IDEAS ON LIBERTY ¢ FEBRUARY 1999 dubious accounting device. As they point out, course of their working lives. Their benefits— when surplus funds from payroll taxes are even if adjusted each year to keep pace with invested in treasury bonds, the federal gov- inflation—will represent a terrible return. ernment uses the money to finance its day-to- Social Security in the United States has fol- day operations. When the time comes to lowed this pattern. For example, workers who redeem the bonds, the government must come retired in 1975 received, in just two years, up with the money either through other bor- benefits equal to their entire lifetime contribu- rowing, tax increases, or spending cuts. tions. In contrast, a worker who retires in Depending on how palatable these various 2035 will take anywhere from seven to 17 options are, the need to start cashing in the years (depending on his income level) to get treasury bonds in the trust fund may precipi- back the money he put into the system. That’s tate a crisis long before 2032. assuming he lives long enough—and that the system is still around in 2035. The gravity of the situation for young workers becomes clear when we look at the The payments that individual workers and annual real (inflation-adjusted) rate of return their employers make into the Social Security on their contributions to Social Security. This system are not, in a strict sense, investments. rate is estimated to be 1 to 2 percent for most Unlike funds invested in equities, corporate workers (although it may be as much as 3 per- bonds, or even savings accounts, payroll taxes cent for the very lowest earners).2 And the sit- are not put to productive use and do not earn uation may even be worse: economist Martin a market return for the people who pay them. Feldstein estimates that those who are Nevertheless, those who retire after paying presently in their 40s or younger will earn a into the Social Security system do receive negative return: that is, they will actually benefits, and these can be thought of as the receive less in benefits than they and their “return” on their payroll-tax “investments.” If employers have paid into the system.3 Com- we think of Social Security this way, we see pare this with the real rate of return on stocks, that it has, over the years, become an increas- which has averaged 7 percent from 1926 to ingly bad investment—especially if we con- the present, or on a mixed portfolio of stocks sider the rates of return that would have been and bonds, which comes in at around 5 or 6 available through other forms of investment. ~~ percent.4 The magnitude of the difference During the early phase of any old-age means that if workers were free to invest their social-insurance system, the typically high money, rather than being compelled to con- support ratio (the high number of workers per tribute to a system that merely transfers their retiree) allows an excellent rate of return for wealth to others, they could earn returns many retirees—as might be expected, since some times larger than those promised by Social people are able to collect full benefits from Security. the system after contributing to it for only a In fact, William Shipman estimates that if few years.! As it turns out, however, the very workers born in 1970 were able to invest an best rates of return go to those who are amount equal to their Social Security contribu- between 30 and 50 years old when the pro- tions in stocks, they would (assuming they gram begins. This is because social-insurance earned historically average returns) receive programs tend to begin modestly (since a rad- almost six times the benefits they would get ical new program would be politically under Social Security. Low-income workers unpalatable), and benefits are gradually would do less well, but would still receive increased over time. Eventually, as the sup- almost three times what Social Security offers.s port ratio worsens, payroll taxes must be moreased if benefits are to be maintained at Harnessing the Market e same level. Workers who come into the system late, after payroll taxes have been It is the prospect of these kinds of returns increased, will pay much more over the that has led some critics of Social Security to Poor Investment ===== PAGE 25 ===== UNHAPPY RETURNS 25 call for privatization: they argue that it should would under Social Security. Indeed, if Feld- be replaced by a system of individualized pri- stein is right and workers in their 40s and vate retirement accounts, financed (as the cur- younger can expect a negative return from the rent system is) through compulsory contribu- current system, then any investment that tions. The difference, of course, would be that merely keeps pace with inflation would offer contributions would actually be invested (in a better deal than Social Security. If the dollar some combination of stocks, bonds, and could be relied on to hold its value, you could mutual funds), rather than being paid out as beat Social Security’ return by stuffing your benefits to current retirees. The amount con- payroll-tax money into mason jars and bury- tributed, plus accumulated earnings, would be ing them in the back yard. used to fund the individual’s retirement. The model for this type of privatization is the sys- tem instituted in Chile in 1981. Critics of this type of proposal point out What can be done to address the serious that investing in stocks can involve substantial problems facing the Social Security system? risks—to see this, we need look no farther Congress is expected to take some action on than the 19 percent drop in the market the matter this year. The two main alternatives between July 17 and August 31 of last year. that seem to be emerging both involve using That kind of volatility, critics say, is hardly a the potential gains from investing in stocks to recipe for retirement security. The trustees of shore up the system without radically altering the Social Security Trust Fund appeal to this its basic structure. The first alternative would sort of reasoning in their 1998 annual report: simply invest some part of the present annual “Social Security,” they write, “is a compro- Social Security surplus in private financial mise that assures all workers a modest retire- markets, in the hope that higher returns would ment base on which they can, if possible, add help to cover the shortfall that the system is a private pension and personal savings. The expected to experience as the baby boomers tradeoff for this safety is a lower retirement retire. The best that can be hoped for from this benefit than at least some knowledgeable indi- option is to preserve the current system as it vidual investors might build over their life- stands—to perpetuate the current meager Reform Proposals on the Table times.” level of benefits, which could not otherwise This is at least half true. The “retirement be maintained beyond 2032. base” provided by Social Security is indeed The second, more ambitious alternative is very “modest,” as we’ve seen—and is sure to backed by Senators Daniel Patrick Moynihan get even modester after 2032 if nothing is and Bob Kerrey. It would attempt to salvage done. But would only “knowledgeable the current system by supplementing it with investors” reap better returns by investing in private investment accounts—into which an private markets than they would through individual could divert 2 percentage points of Social Security? In assessing the risks of the 12.4 percent payroll tax. Individual work- investing in stocks, we need to look at the ers could choose how to invest the money in long term—and in the long term, things look their accounts—at least within government- good even for novice investors, assuming they approved limits. The returns from these recognize the limits of their knowledge and accounts would be added to the individual’s invest in broadly diversified mutual funds or standard Social Security benefits. Since stock index funds that track the performance diverting 2 percentage points of the payroll of the market as a whole. Even during the tax would actually worsen Social Security’s worst 20-year period of stock market returns, long-term financial imbalance, the difference which ran from 1929 to 1948, the market asa would have to be made up somewhere. whole yielded a real annual rate of return of Accordingly, the age of retirement would more than 3 percent—which suggests that gradually be raised to 70 between now and even under the gloomiest of conditions, work- 2029, and any further shortfall would be paid ers wouldn’t do worse on their own than they for out of general tax revenues (the plan ===== PAGE 26 ===== 26 THE FREEMAN/IDEAS ON LIBERTY ® FEBRUARY 1999 assumes that the overall federal budget will be itself, and can hardly be used as an objection running at a surplus). against the system’s critics. What should ultimately replace Social A Better Alternative Security? The Chilean-style privatization alternative mentioned above—essentially a Neither of these proposals challenges the compulsory savings plan—would undoubted- fundamental assumption underlying Social ly provide a superior return for workers if it Security (and old-age social insurance in gen- were properly implemented. Yet it fails to eral): the idea that society is responsible for challenge the idea of collective responsibility ensuring some level of retirement security for that lies at the heart of Social Security, thus all its members. Even a radical Chilean-style opening the door to large-scale government privatization plan (one that diverted all of an interference in private financial markets. The individuals contributions into a private retire- temptation to regulate investment for “the’ ment account) would not challenge this good of society” when the future of the assumption, so long as the contributions nation’s retirees is at stake would be strong. remained compulsory. What’s more, a compulsory private system But the path to security does not lie in sur- would share Social Security’s assumption that rendering responsibility to society. Indeed, to individuals are not to be trusted to plan their live a human life is to embrace the responsi- own lives. The regimented existence that any bility of living long range: it is to realize that compulsory system must impose is, at root, there may come a time when one will not incompatible with human freedom and human want-—or simply will not be able—to contin- responsibility. ue working. Planning for such a contingency The real alternative to Social Security is is a profoundly moral issue. It is a weighty privatization in a literal sense—the realization undertaking; there are any number of things that planning for retirement is a private mat- that might go wrong. The assumption behind ter, that it should be left to individuals and Social Security is that it is too heavy a burden their families, who would be free to seek the for any one person to bear, so the collective soundest advice they could find and make the will relieve the individual of the need to think best arrangements that were within their and plan for the long run. means. Such a system—which is really not a The irony is that the creators of Social Secu- “system” at all—would be far more secure rity failed to think and plan long range. The than Social Security, since it would not leave system they designed has—in less than the people at the mercy of demographics and sup- span of -a human lifetime—reached a crisis. port ratios—or of politicians. [J The burden of its payroll tax robs many peo- make investments that might actually provide old-age Social Insurance Be Justified?” in The Welfare State, ed. them with a comfortable retirement. It repre- Ellen Frankel Paul, Fred D. Miller, Jr., and Jeffrey Paul (New York: a. Cambridge University Press, 1997). sents a deal that no one would accept willing- 2. Peter J. Ferrara, Social Security Rates of Return for Today's ly and that no one should be forced to accept. Young Workers (Washington, D.C.: National Chamber Foundation, , . , 1986); Michael W. Lynch, “Retirement Plans,” Reason, August The inevitable response to the suggestion 1998, p. 56. that Social Security should be abandoned is 3 Marin Feldstein, “How to Save Social Security,” New York . Lo. . Times, July 27, 1998, p. Al7. that its elimination would betray current and 4. Testimony by Carolyn L. Weaver before the Senate Commit- : tee on Finance, September 9, 1998. future retirees who have assumed they would 5. William Shipman, Retiring with Dignity: Social Security ver- receive its benefits. Indeed, elimination Of sus Private Markets (Washington, D.C.: Cato Institute, 1995). Social Security would require a costly transi- 6. For details on how a compulsory private system might work, A i . AE see Peter J. Ferrara, “Privatization of Social Security: The Transition tion. This fact is an indictment of the system Issue,” in The Welfare State. ===== PAGE 27 ===== FREEMAN deas On Libert Distrust and Verify by Dwight R. Lee and Jeff R. Clark erhaps the most positive legacy of the any Government, in procuring & securing Clinton administration will be that it fur- Happiness to the People, depends on . . . the ther eroded the public’s trust in the federal general Opinion of the Goodness of that government. Trust has declined significantly Government.” since the Great Society programs of the John- This was no doubt a legitimate concern in son administration. According to University Franklin’s day, when the federal govern- of Michigan surveys, the number of people ment was undergoing a controversial birth who responded that the federal government and controlled little of the people’s wealth. does what is right “always” or “most of the But today, with the federal government time” has dropped from 75 percent in 1964 to commanding over 20 percent of our income less than 30 percent in the mid-1990s. directly through spending, and significantly Our view is that this decline in trust is a more through regulation, some are still con- good thing because it mirrors rather accurate- cerned that confidence in government ly the performance of a government that has might be too low to allow it to seize more of become less trustworthy. However, before our resources. For example, Joseph Nye, making our case for less trust in government, dean of Harvard’s Kennedy School of Gov- we acknowledge that most people see the ernment, worries that “if people believe that decline in this trust as a serious problem. government is incompetent and cannot be trusted, they are less likely to provide [crit- The Cart Before the Horse ical] resources. Without [these] resources, government can’t perform well.” Studies People have worried about lack of public investigating the decline in trust, and fuel- confidence in government for a long time. ing concern about the consequences, have For example, Benjamin Franklin fretted that been published recently by the Kennedy “Much of the Strength and Efficiency of School, University of Virginia, and Pew Research Center for the People and the Dwight Lee is Ramsey Professor of Economics and Press. Private Enterprise at the University of Georgia and a These studies sometimes admit that gov- monthly columnist for The Freeman. Jeff Clark is ernment’s performance leaves something to Probasco Professor of Free Enterprise at the Univer- be desired. b t that the b ¢ - sity of Tennessee, Chattanooga. The authors would e desired, but suggest that the best way to like to thank the Earhart Foundation for supporting ~1Mprove its performance is by restoring trust their work on trust in government. in it. This puts the cart before the horse. 27 ===== PAGE 28 ===== 28 THE FREEMAN/IDEAS ON LIBERTY ® FEBRUARY 1999 Where is the advantage in placing more trust Exploiting the Public’s In an organization whose performance does Trust in Government not justify trust? How many people needing heart bypass surgery would trust a surgeon ~~ Lhe nature of government programs who kills most of his patients on grounds that €nables well-placed interest groups to capture he will become a better surgeon only if more Private benefits at public expense. The Envi- people trust him? ronmental Protection Agency (EPA) has increased the size of its budget by champi- The only sensible way to restore trust in . government is by making it more trustworthy. oning command-and-control approaches to reducing pollution. Market-based measures And a trustworthy government is more likely fect: d ch b 1 to be undermined by too much trust than by 2f¢ more © ective and cheaper, but require fewer bureaucrats and have been resisted by too little. Indeed, a major reason government performs so poorly is that persistent political the EPA. Industry groups (such as the eastern influences encourage citizens to put far too coal industry) have also supported command- much trust in it. and-control approaches to protect themselves against competition (from low-sulfur western coal), at the expense of consumers (higher The Arithmetic of Voting electricity prices) and environmental quality } (more sulfuric oxides in the atmosphere). The Public trust is easily transformed into polit- {ist of government activities supported by ical power that will be used to promote private ysell-intended citizens, but perverted by orga- advantage at public expense. The reason is pjzed interests, is painfully long. rooted in the simple arithmetic of voting. Vot- Every interest group wants to convince the ing is an important civic responsibility, and public that government can be trusted to pro- nothing here is meant to suggest otherwise. mote the general well-being by increasing But in state and national elections, the proba- ome spending or regulating. The result is a bility of your vote deciding the outcome is far steady stream of rhetoric aimed at making less than that of being injured driving to the pegple feel good about trusting government to polls. This means that favoring one candidate gglve almost every imaginable problem. or proposal costs you almost nothing in terms Unfortunately, a widespread belief that dis- of sacrificing the alternative. Only in the rare cretionary government power can and should case of a tie is your vote decisive; only then solve every social problem is incompatible does your vote for one alternative cause you with government's performing well. Such to sacrifice the other. trust leads to politically compelling demands This arithmetic is important because it for government to do lots of things it has no explains why charisma and emotion can business doing, with the result that it does trump substance in politics. Registering sup- poorly the few things it should be doing. port at the polls for a superficially attractive The best way to make government more candidate or a superficially compassionate trustworthy is for voters to resist the tempta- proposal allows a voter to identify with the tion to achieve a cheap sense of virtue by vot- glamorous or feel virtuous with little concern ing for every “virtuous” proposal that comes about cost or effectiveness. For example, if along. The real virtue is in voting against most voting for a proposal to combat “global government programs (and the politicians warming” (or for a candidate who supports who support them), no matter how virtuous the proposal) makes you feel good, you might those programs are supposed to be. be tempted to shelve any doubts and vote We need plenty of public skepticism toward regardless of the cost to you if it passes, since government to counter the voters’ tendency to your vote is not decisive. The more people support government activities that purport to trust government, the more virtuous they feel “do good” with power that will invariably be when voting for a wide range of government captured and corrupted by special interests. A initiatives that end up costing far more and trustworthy government requires a healthy delivering far less than promised. measure of public distrust. Od ===== PAGE 29 ===== FREEMAN deas On Libert Sen or Sense by Barun S. Mitra n the battle over economics, the victory of No one today epitomizes this sentiment the market seemed decisive. It had not been more than Amartya Sen, the Indian-born 1998 easy. Since the days of Adam Smith, the world Nobel laureate in economics. In a congratula- economy had to cross the turbulent waters of tory message the president of India, K.R. colonialism, mercantilism, socialism, fas- Narayanan, said, “You have brought to bear cism, and communism before liberalization, upon the science of economics a compassion globalization, and privatization became for the ordinary human being and a vision of accepted as part of our general vocabulary. an egalitarian world society.” But even before the process of consolidation is over, it now seems that free market ideas are faced with insidious threats as never before. Indeed, the popular appeal of socialist ideas Sen’s recipe for inducing long-term sus- was not primarily based on economic princi- tained growth involves empowering of the ples but on ethical and political ones—an poor through education, health, entitlements, egalitarian world view. (Discussions rarely and removal of gender disparity. His method focused on the morality of the methods that for delivering these services is democracy. would be necessary to create such a world And he mainly rests his case on the evidence order.) On the other hand, many advocates of that independent democratic nations have the free market rarely went beyond economics been more successful in eliminating famines and utility, and generally ignored the moral than others. basis of the marketplace. There is much more than a grain of truth in This is best reflected in the criticism of the Sen’s arguments. However, grains are neces- market that has inevitably followed as the so- sary but not sufficient for a balanced diet. called “transition” economies in eastern Democracy may be a necessary condition for Europe, Russia, and Latin America have run alleviating poverty, but it is not a sufficient into rough weather. This criticism has gained condition. Otherwise, India, the largest considerable credibility after the turmoil in democracy, would not have remained in the the currency markets in Asia over the past club of poorest nations of the world. year. Not surprisingly, “liberalism with a Let us take a closer look at a few of Sen’s human face” has become the new mantra. propositions in broad context. Democracies, with periodic elections and a Barun Mitra is a founder and the managing trustee of free press, liep elected sepreseitiathes on their Liberty Institute, an independent think tank in New toes and the government more responsive to Delhi, India. He has published widely, including in the population. In times of large-scale the Wall Street Journal. tragedies, such as famines or floods, when 29 Empowering the Poor ===== PAGE 30 ===== 30 THE FREEMAN/IDEAS ON LIBERTY ® FEBRUARY 1999 opposition parties and the media are on The Power of Vested Interests the lookout for opportunities to discredit the authorities, representatives work overtime As Sen consistently points out, the perfor- to get as much relief as possible to their mance of the Indian state in primary educa- constituents. tion and health has been dismal. Indeed, the Indeed, so successful has this process been power of vested interests and pork-barrel pol- that, today, whether in the United States or itics in the field of education is distinctly vis- India, politicians continually vie with each ible. For instance, in a country where almost other to declare some of their constituents half the population is considered illiterate, victims of one disaster or another—famine, higher education is most heavily subsidized! flood, fire, cyclone, earthquake, crop failure, Or at a time when provincial governments can indebtedness, bankruptcy, job loss, child only try to ensure at least a primary school neglect, old age, to name just a few. Pork- within a reasonable distance of every village, barrel politics is the natural outcome of such students in Delhi travel almost free to their an approach. After all, if the benefits can be colleges and universities. Icing on top of their appropriated to a few and the cost distributed cheap education cake! Another problem is among the whole population, it would be irra- that the content of education has been com- tional not to try to corner as large a share of pletely politicized. the “public pie” as possible. Furthermore, there is no real evidence that Apart from the social and economic dam- opposition to liberalization comes from the age it may cause, this approach legitimizes millions of illiterate, low-skilled workers, an state intervention through control and expro- overwhelming majority of whom are engaged priation, even if only in the “social sectors.” in the informal and unorganized sectors of the Once that approach to governance is accept- economy. They provide a range of goods and ed, it becomes almost impossible to draw a services—f{rom collecting garbage to manu- line, since all such intervention is always jus- facturing vehicles—which either the state has tified by some alleged social good. failed to deliver despite promises or which the Moreover, this governance becomes formal sector has been unable to provide. extremely short-sighted, moving from one (There is no welfare to speak of.) Clearly, opinion poll to another, from one election to then, the basic problem is not lack of educa- the next. Such a government is hardly ever in tion, but almost total lack of employment a position to concentrate on programs that opportunity in the formal sector. require a much longer time frame, for exam- According to official estimates, barely 30 ple, education or health, two of Sen’s princi- million of India’s work force of 400 million pal concerns. On one hand, he laments the are in the organized sector. Not surprisingly, it failure of the leftist forces in democratic India is this small but entrenched minority, who to capitalize on their natural constituency fear the loss of their unearned privileges, that among the poor by stressing these two most are at the forefront of the anti-reform group. basic of “entitlements.” On the other hand, he Their share of the national pie is best indicat- points to the success of the non-democratic, ed by the fact that since the 1970s, while the socialist economies in those areas, implying consumer price index increased by about 750 an astonishing lack of regard for the methods percent, per capita emoluments rose by a that were adopted by these countries to whopping 1,600 percent—a remarkable achieve that “success.” demonstration of the power of vested inter- There is no doubt that education and health ests. The only other explanation is an amazing care are the two basic tools with which an increase in their productivity. No wonder that individual can improve himself. So Sen’s con- the quartet of politicians, bureaucrats, orga- cern for those who apparently cannot secure nized labor, and businessmen who have bene- these, and his fear that they may not benefit fited from state patronage and thrived in a from a liberalized and globalized economy, protected environment are so keen to defend need to be addressed. the status quo. ===== PAGE 31 ===== SEN OR SENSE 31 By adopting the “socialist pattern of develop- land is not recognized. Rural communities are ment” since the 1950s, the Indian state has been being torn apart by contentious litigation and very successful in choking the economy and frequent violence. Maintenance of land thereby wasting the most precious of all records by state governments is pathetic and resources, the spirit and enterprise of her people. open to rampant manipulation and corruption. As PT. Bauer, the other development econo- Also, land reform cannot be a one-way street mist deserving of the Nobel Prize, has said, itis to land distribution. There is an urgent need to policy not poverty that keeps people poor. recognize that productivity, efficiency, and The result of Indian socialism has been economies of scale are as relevant in agricul- rampant underemployment, and consequently ture as they are in other sectors of the econo- there seems to be little rational basis for the my. By obstructing consolidation of landhold- illiterate to demand better education. Is it any ing in the name of land distribution, India has surprise that despite an enrollment of over 90 been spectacularly successful in making agri- percent at the primary-school level, the culture unviable, sealing the fate of the 70 dropout rate after five years ranges between percent of the population that lives in perpet- 35 and 40 percent. ual poverty in our countryside. To successfully move away from this self- Land Reform destructive course, a new vision is required. Sen’s concern for the poor, the hungry, and Another issue Sen has stressed is land the deprived runs very deep. But there is a reform. But even the much talked-of land need to go beyond good intentions, which, reforms in states like West Bengal have not though necessary, cannot be sufficient for the been able to stimulate growth. Forcible land alleviation of India’s ills. Sen deserves credit distribution has led to fragmentation of hold- for highlighting the need to re-establish the ing, and productivity has not improved much relationship between ethics and economics. as a result. This has led to the rise of political However, the ethical premise may have to be brokers in the countryside and forced people quite different from the one Sen proposes. to stay on the land. Lower labor mobility has permitted the state government to ignore the . virtual collapse of the industrial sector. The Morality of Free Exchange Bureaucrats are more concerned about pre- It must be recognized that voluntary serving the privileges of the existing work exchange in the marketplace is infinitely more force than about increasing employment moral than expropriation under the sponsor- opportunities. Clearly, land reform in West ship of the state. It has to be acknowledged Bengal has, perhaps unintentionally, helped that the best way to empower the poor is to slow the pace of urbanization, industrializa- allow the market to operate unhindered so that tion, and, consequently economic growth. even the poorest have the widest range of Seen in this light, it should not surprise any- options. one that West Bengal, which peaked in those The world has taken over two hundred respects in 1947, has been sliding over the years just to begin to appreciate the power of past decades. Adam Smith’s “invisible hand” in economics. Land reform is necessary. But this cannot Let’s hope we don’t take another two hundred be isolated from general economic policy. years to appreciate the morality of the mar- Today, the state is the largest landlord and is ketplace. It will be a tragedy if after winning increasingly involved in disputes with indige- the battle over economics, the war is lost on nous people, whose title to their traditional ethics. Ol ===== PAGE 32 ===== FREEMAN Ideas On Libert Abolish Legal Tender by D. Alexander Moseley Al advertisement in an English newspaper define. It lies with the uncritical acceptance of offers a one-million-dollar bill for sale— legal tender rules. By maintaining those rules, at the remarkably reduced price of £29.95 national governments permit their central (about $50.00). However, this great deal banks to issue base money—effectively paper, comes with the words “Not Legal Tender.” although soon it could be electronic cash—at Thereby the advertisement unwittingly pre- their discretion. Any central bank has the sents the essential problem of national curren- legal power to print a run of million-dollar cies in a nutshell. Two magic words are all it bills, define them as legal tender, and create would take for the note to become spending new money out of thin air. money. Surely, monetary policy cannot be that simple? In an age of government-issued . . currencies, unfortunately it is. Rippling Effects Government control of national currencies The repercussions of legal tender laws are has not been stable or beneficial to say the least. quite visible: by printing paper the central In the last year, currency crises hit the news fre- bank inflates the currency. Some of that cur- quently. The resulting lack of confidence in a rency will seep into loan markets, affecting nation’s currency means that international interest rates; some will affect particular price investments will seek more profitable ventures ratios in markets, causing economic disloca- where the fear of devaluation is not so acute. tions; some will enter the foreign currency Devaluation follows from governments’ inflat- markets, reducing the price of the national ing their currencies through central banks and currency in terms of other currencies. Over- fractional reserve banking; as money is all, local prices will rise and the exchange rate “created,” exchange rates are affected and will fall. The effects are complicated by the investors have to reconsider their projects. actual paths that the new money takes, but the Traders have long learned to avoid a great overall qualitative result can be ascertained— part of exchange rate risk by employing cur- resource allocation is distorted and irrevoca- rency futures and options. Even so, an unan- ble damage done. It does not matter if the cen- ticipated currency movement can have a dele- tral bank’s inflation was anticipated before- terious effect on a company’s profit forecasts hand—something that modern macro theory and its investments and employment. The attempts to argue—for no one is in a position ensuing effects on national economies can be to pursue the transactions of every single new disastrous; yet the cause is not difficult to note printed. Therefore, no one is in a position to establish the overall quantitative effects Alex Moseley teaches economics at the University of until afterwards, at which point the damage Evansville’s British campus at Harlaxton Manor. has been done. 32 ===== PAGE 33 ===== The Foundation for Economic Education Irvington-on-Hudson, New York 10533 Tel. (914) 591-7230 Fax (914) 591-8910 E-mail: freeman @{ee.org Web site: www.fee.org February 1999 Countless Wonders n a recent drive through an afflu- My good fortune is that I live in a soci- O ent San Francisco neighborhood ety in which I benefit immensely and boasting truly spectacular homes, directly from other people’s creative I did what almost every ordinary person ideas—no one of which I would have does in such circumstances: I wondered to dreamed up in several lifetimes. The dis- myself, “What can I do to earn enough tinguishing feature of a depoliticized free- money to be able to afford such a home?” market economy is that it not only inspires My thinking continued: “To earn such .| creative people to create, but it also inspires wealth requires that I produce a product these creative people to create things and that lots of people value more than it processes that benefit even me and others would cost me to produce. Okay! Good! who are hopelessly non-creative. I've identified the general formula. Now Here’s what I mean. I'm writing these all I need to do is to think of a product for words somewhere over the State of Utah which people will pay a price higher than as I hurtle toward New York City at a my cost of production.” speed of 600 miles per hour. Less than a “What can I produce? . . . What can | foot from my arm the air temperature is produce? . . . What creative idea can I 50° Fahrenheit below zero. And yet I'm come up with that will earn me a bundle? cozy, comfortable, and safe as I sip compli- ... What can I produce? . . . Think, Don: mentary gourmet coffee. Two hours ago I think, think, THINK!” was in California; three hours from now Melancholy engulfed me as I drew a I'll be in New York. My thoughts are being blank—the same embarrassing blank that | recorded (with help from my fingers) on a drew on each of the thousand-and-one laptop computer that has more computer previous occasions when I tried to think of | power than was on Apollo 11. I can check a new product or service that consumers my e-mail messages by plugging my lap- would value. top into the telephone nestled in the seat in Fact is, I possess absolutely no such front of me. entrepreneurial creativity. None. Zippola. Each of these wonders—and they are And yet, despite my mind’s barrenness ‘'wonders!—is made possible by countless on this front, how fortunate I am! How creative ideas of people whom I don’t amazingly, breathtakingly fortunate—and know and who don’t know me. I am wealthy—I am! responsible for none of the ideas that ===== PAGE 34 ===== enable me to write on a computer as I fly W. Michael Cox and Richard Alm— safely across the continent. But here I am, document how the real cost of living in the happy beneficiary of these astonishing America has fallen dramatically over the creations. past century, and how it continues to fall. What's more, I'm an ordinary American. | Cox and Alm measure cost of living by I'm not rich by modern American stan- using work time—the amount of time the dards. But so what? In truth, I'm astound- typical American worker must labor to ingly wealthy. I (like nearly all other purchase various goods and services. Americans) can acquire these luxuries in Almost any good or service you can exchange for just a tiny fraction of my name costs less work time today than it work time. cost just a few years ago. For example, in Let's tally up the cost to me, today, of 1984 the typical American worker had to the luxuries that I identify above. The work 435 hours to purchase a personal round-trip coach airfare is $338. My new computer. Today, a vastly more powerful laptop, complete with modem and all of computer is available for only 76 hours of the requisite software for word processing work by the typical American worker. A and for e-mailing, costs a total of $2,000. cell phone in 1984 cost 456 hours of the Because I'll probably keep this laptop for typical American’s work time. A much bet- at least two years, the daily cost to me of ter cell phone today costs a mere nine this laptop is no more than $2.74 (which is hours. $2,000 divided by the 730 days that there Of course, many goods and services that are in two full years). To check my e-mail we today take for granted could ten years will cost me about $35 in telephone ago be purchased at no price whatsoever— charges—a figure calculated on the such as checking e-mail from a commercial assumption that I'll be on the air-phone for | jetliner. ten minutes (which is far more connect The marvels to which we each have time than I'll probably need). daily access are the product of millions of - So what do we have? All told, it costs creative minds figuring out how better to me a paltry $375.74 to fly from New York please consumers—by producing new or to California and back and to write this col- | improved products and by reducing the umn en route and to check my e-mail. costs of producing existing products. $375.74—that’s all! A mere $375.74 is all Many of these creative people earn (and that I paid to do what twenty years ago no deserve) millions of dollars; some earn one at all could do,-and what only four or (and deserve) billions of dollars; most earn five years ago only the wealthiest of the handsome but not princely sums. wealthy could do. Everyone, however, in industrial society Yet today laptop computing on a jetliner | profits greatly from every market entre- is so common in Western society that we preneur’s creativity. take it for granted. My fellow passengers I need not lament that I, personally, are no more astonished to see me typing have no creative, productive ideas. I have on my laptop than they would be to spot a the great good fortune to live in a society pigeon in Central Park. that encourages truly creative people to The 1997 annual report of the Federal share the fruits of their creativity with me. Reserve Bank of Dallas is entitled Time My blessings are literally too great to Well Spent: The Declining Real Cost of Living count. in America. I encourage you to read this remarkable document. (Note: The Dallas Fed is something of a renegade among 2 75) : / [J government agencies. Its leadership and staff of economists rank among the most free-market-oriented group of scholars in Donald J. Boudreaux America today.) The report’s authors— President ===== PAGE 35 ===== FEE Heritage Book Sale hroughout its history, a number of notable authors have been associated with the Foundation. This month we highlight that legacy by featuring the works of former FEE staff members and Trustees. In each of these books you'll find a discussion of some important aspect of the freedom philosophy. Moreover, each work reflects the studied inquiry of a lifelong defender of liberty. American Federalism, George C. Roche III. George Roche is now President of Hillsdale College, but prior to going to Hillsdale in 1971, he was Director of Seminars at FEE. A talented historian and biographer of Bastiat, Dr. Roche is also a uniquely capable advocate of individual liberty and free markets. American Federalism is one of our older publications, but its message remains imper- ative. In it, Dr. Roche discusses the intellectual origins of our federal system, how federalism developed in the 19th century and then, sadly, eroded in the 20th. In his concluding remarks, he calls for a return to a decentralized political system and a reinvigorated moral ethic of individual responsibility. This concise pamphlet explains why limited government is the best government— an excellent choice for handing out! Paper, 46 pages: $166 Sale: $.50 Can Capitalism Survive? Benjamin Rogge. Dr. Rogge was professor of political economy and dean at Wabash College and a FEE Trustee for many years. He is remembered fondly as a much val- ued regular lecturer at FEE's Seminars. This truly insightful, clear, and eloquent book is, like American Federalism, one of our older titles but, is it ever good! Starting from Joseph Schumpeter’s famous hypothesis that capitalism cannot survive because its success inevitably undermines the social institutions that protect it, Dr. Rogge examines the case for economic freedom, the libertar- ian philosophy, and the nature of economics. He looks at several topics in some detail: money, labor, education, and cities. He concludes with a challenging discussion of FEE’s role as a dis- seminator of these ideas and as a force for change in the United States. Paper, 329 pages: $1895 Sale: $5.00 Faith of Our Fathers, Mary Sennholz, ed. Back in the late 1940s and early 1950s Mary Sennholz (then Homan) worked for FEE’s founder, Leonard Read. She returned to the Foundation in 1992 with her husband, Dr. Hans Sennholz. From 1992 until 1997 Mrs. Sennholz helped the Foundation with its book publication program. Faith of Our Fathers, published in 1997, contains essays by Clarence Carson, Ridgway Foley, George Roche, F.A. Harper, Ben Rogge, and Ed Opitz, among others. The authors discuss the importance of the natural-rights philosophy for the Founding Fathers while also examining the negative influence of the 19th-century doctrine of positivism. This compilation is a useful resource for all students of history, philosophy, and free- dom. Paper, 389 pages: $1895 Sale: $7.00 Reflection and Remembrance, Hans Sennholz. Dr. Sennholz was a long-time Trustee of the Foundation as well as a regular seminar lecturer. From 1992 until 1997 he served as President of the Foundation. Dr. Sennholz is known for his knowledgeable and enthusiastic support of the Austrian School of Economics. This book collects his “Notes From FEE” columns. Grouped into six categories, these essays address first principles, education, the poverty of politics, ideas and policies, a look abroad, and the future. This anthology presents a broad overview of Dr. Sennholz’s unique perspective. Paper, 255 pages: $1295 Sale: $6.00 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 ===== FREEMAN deas On Liberty) 1998 Bound Volume T= 12 issues from January through December 1998 have been gathered into a single volume—sturdily sewn with navy blue cloth cover and gold foil stamping—768 pages, fully indexed for handy reference to the latest literature of freedom. More than 100 feature articles on topics such as antitrust, education, environment, government regulation and control, health care, individual rights, labor, money, private property, and international trade. Columns by Walter Williams, Mark Skousen, Larry Reed, Dwight Lee, Doug Bandow, and Chuck Baird. Reviews of more than five dozen books— and all the 1998 issues of Notes from FEE by Don Boudreaux. Available February 15, 1999 $24.95 each Save! Special introductory price: $19.95, through April 30, 1999 A Special Message from the President Help FEE Meet the Challenge... A rare opportunity for your support to multiply! Late last year it was my privilege to announce that FEE had received a major new challenge grant from two anonymous contributors. If FEE raises $150,000 in new money (gifts received and deposited by March 31, 1999), these supporters will give FEE an additional $100,000. Put another way, if we meet this challenge every three dollars you help us to raise will yield an additional two dollars! “New money” is any money from people who have never before given to FEE, as well as contributions by existing donors above the level of their last contribution. We are making progress toward our goal—and invite you to be part of this exciting effort. DRIP Donald J. Boudreaux President Contributions can be made by telephoning (800) 452-3518 and using your Visa, MasterCard, American Express, or Discover Card, or by using the reply envelope included in this issue. For those who have recently contributed, a heartfelt thanks from the entire FEE staff and Board of Trustees. ===== PAGE 37 ===== 33 The inflationary policy can only be effec- out the good. Gresham’s Law prevails when tive if governments decree that the notes be legal tender rules apply; however, if traders deemed legal tender. Legal tender imposes on were free to choose between currencies, the traders the requirement to accept the note at good money would drive out the bad, a point its face value. Therein lies the rub. If the gov- noted by F.A. Hayek. Ample evidence of the ernment had to pay off a million-dollar debt Hayek-Gresham Law can be found in eco- but could not stomach a rise in taxation, its nomic history from early American currency central bank could print the necessary legal history to pre-Revolutionary Russia and to the tender bill, and the newly printed note could more recent hyperinflations in which street discharge the governments debt. Such an traders clamor for alternative currencies such action costs the government nothing but the as the dollar and deutschmark. paper and ink the note is printed on, and traders cannot discount the bill except Money Can’t Be Invented through increasing their prices. Legal tender thus provides national govern- Legal tender laws effectively have national- ments with a covert method of raising funds ized currencies, making them the prerogative without raising taxes. But once the money of the state. Economics teaches that money seeps into the foreign currency markets to pay cannot be invented or created by decree, that for increased imports or to pay off debts, the it is very much the result of traders’ decisions currency must depreciate, for in the interna- across many markets and over much time. It is tional arena traders mark down the value of time to return currency to the market. the currency against others. With free choice in currency, traders It would be otherwise for national traders if would converge on the money that best suit- legal tender laws were abolished. Under a free ed their needs. In the last two decades econ- tender scenario, traders would use those cur- omists have conjectured what forms such rencies in national and international trade that money could take, from electronic cash to prove to be useful to them—that is, those that redeemable currencies, some redeemable keep their value. Which currency traders against a basket of goods or even a basket of would choose is not something that can be futures, or against gold and silver. What is determined by legislation or a priori; the certain is that the choice is and should be the choice is fully in the hands of the millions of market’s. No one can predict the media that traders in millions of markets. present businesses would find most useful— If legal tender laws were abolished, traders most probably they will converge onto one would discount government notes in local as medium or onto a few universally accepted well as international markets, which would media, but the definite result would be an remove from government the possibility of end to the credit creation and inflationism of earning revenue from inflation (that is, paying central banks and national governments. off debts with legal-tender devalued curren- Central banks would most certainly lose cy). The resulting effect is the reverse of their powers, but currencies would lose their Gresham’s Law, in which bad money drives chains. Od ===== PAGE 38 ===== FREEMAN Ideas On Libert Small Is Awesome by Max More Go corporations controlling national ernment intervention, whether in the form of governments. Corporate behemoths direct government ownership, subsidies, legal regimenting their workers, controlling their privileges, trade protection, and so on. Con- customers, and obliterating their smaller temporary enemies of the market may suggest competitors. The rich get richer and the large that advanced technology has changed the get larger until a small handful of megacorpo- rules, making megacorporations and monop- rations rule the planet. oly inevitable. We have heard this warning about King On the contrary, an analysis of what makes Kong capitalism from Marxists and other sta- firms a certain size, combined with an under- tists for decades. The future is always about to standing of technological change, reveals a bring about the death of small companies and far different and more exciting picture. individual initiatives. Since the 1980s a new, Over 500 million years ago, sparked by the popular form of science fiction known as introduction of sexual reproduction, the Cam- “cyberpunk” has reinforced this view in the brian Explosion brought a massive prolifera- popular imagination. Books such as William tion of new life forms. Multicelled organisms Gibson’s Neuromancer suggest that our eco- appeared (jellyfish, sponges, and worms) nomic system will become utterly dominated along with the first shelled creatures. As we by a few faceless bureaucratic megacorpo- enter the 21st century, technological changes rations. One of the great appeals of a free- will have a similar effect on another kind of market economy is precisely that it promises ecosystem: the economy. Contrary to the to distribute power widely. But the image of expectation of highly concentrated corpora- the future being pushed at us will undermine tions, we will see the proliferation of new that appeal if it goes unchallenged. Ironically, organizational forms. The keys to success will the result will be a call for more intervention not be overwhelming size but flexibility, agili- by the state—the most monolithic, bureau- ty, rapidity of response, and the ability to cratic institution imaginable. reform, spin off, dissolve, and recombine into Those who understand how free markets new business structures. These changes are really work have long responded to these dire already underway. predictions with economic theory and history. To understand what kind of corporate envi- We know that harmful monopolies have little ronment will emerge in the markets of the next chance of forming and surviving without gov- century, we need to answer two questions: * What economic forces determine the size Max More is president of Extropy Institute in Marina of firms? . } Del Rey, California. He may be reached at more@ * How will information technology affect extropy.org. those forces? 34 ===== PAGE 39 ===== 35 The answer to the first question lies in Firms will continue to grow so long as the economist Ronald Coase’s theory of transac- cost of adding activities by organizing labor tion costs. The answer to the second lies in the and resources within the firm is less than the Internet and a powerful new form of business cost of contracting for those factors on the software called enterprise resource planning market. The firm will stop growing at the software. point where the costs of organizing a transac- tion internally equals the cost of carrying it The Size of the Firm out through market transactions. Firms will tend to grow under several con- Why do firms exist in the first place? And ditions. If workers are closer together, it why do they grow to a particular size? Ronald becomes easier to organize them. The move- Coase won a Nobel prize for being the first to ment of people to cities in the Industrial Rev- seriously tackle these questions. His answer olution helped companies to get bigger. Gov- involves the concept of “transaction costs.” ernment policy can also alter transaction costs We might wonder why, for any production to favor growing firms. For example, sales tax job, individuals do not simply make contracts is imposed on market transactions but not on with each other on the market instead of activities within the firm. The higher the sales forming a firm. Why not carry out production tax the more the cost advantage to corporate in a completely decentralized manner rather organization of economic activity. than centralizing activity within a firm? The problem is that negotiating and settling Technology and contracts for every exchange transaction con- ya neaction Costs sumes time and energy. Every time something new is to be done, contracts have to be rene- Technological change can strongly alter gotiated. These transaction costs often make it transaction costs and so affect the size of difficult and expensive to be productive. If you firms. Coase himself noted that an invention simply want someone to paint your garage, an like the telephone may tend to increase the individual agreement with the painter makes size of the firm. It does this by making it eas- sense. It would be pointless to form a corpora- ier to organize widely dispersed individuals. tion with the painter. But if you wanted to Yet as Coase also noted, every invention will work with the painter and 20 of his buddies to change not only the costs of internal organi- paint a variety of buildings over a long period zation but also the costs of using the price of time, forming a corporation and hiring them mechanism. Whether firms get larger or as employees might make sense. smaller depends on which effect is greater. In Carl Dahlman has identified several kinds today’s world of a rapidly evolving Internet of transaction costs. Search and information and increasingly powerful business software, costs involve the difficulty in finding the right technology is already changing the optimal people with whom to, make a contract for each size of the firm and the look of the business task. Bargaining and decision costs involve ecosystem. the time and energy used to reach agreement We don’t need to look to the future to see on the terms for each task. Policing and the effect of technology on the size of firms. enforcement costs involve the expense in Twenty-five years ago Fortune 500 companies ensuring compliance with each individual employed 20 percent of workers. Now it’s contract. When individuals form a firm, a sin- only 10 percent. Many observers have noted gle employment contract replaces this com- that the widespread use of e-mail has flat- plex series of contracts. The contract states tened corporate hierarchies. These companies that the person agrees to do what the employ- may be larger than ever in terms of money er or entrepreneur says within certain limits in flows, but the number of layers of communi- exchange for specified compensation. Direc- cation between top executives and lower-level tion by the entrepreneur replaces numerous operatives has shrunk. Some fast-paced tech- contracts made in the market. nology companies actively encourage their ===== PAGE 40 ===== 36 THE FREEMAN/IDEAS ON LIBERTY ® FEBRUARY 1999 employees to communicate directly with ware it is not simply running another piece of high-level planners. The popularity of soft- business software. It is installing a business ware such as Lotus Notes and “groupware” is model—a way of doing business embodied in enabling groups of employees to communi- the structure of the program. Enterprise sys- cate with less managerial mediation. tems organize and integrate a company’s Two areas of technology will have the most reporting, sales and delivery, financials, man- profound impact on business organization, ufacturing, service, inventory and supply, and flattening hierarchies, enabling innovative human resources. More and more businesses business structures, and fostering temporary, are installing these programs in pursuit of flexible work teams in place of fixed giant enormous productivity gains. A company corporations. These areas—computer net- might reduce the time it takes to re-price all works and enterprise systems—work together its products from five days to five minutes, to alter the incentives of business. reduce credit checks from 20 minutes to three Computer networks include the rapidly seconds, and ship products within 24 hours growing Internet. The utility of the Internet instead of two weeks. grows as the number of computers and users The development and convergence of com- on it grows and as bandwidth expands. Fax puter networks and enterprise systems are machines were not terribly useful when only a changing the shape of corporations by reduc- handful of people had them. Once they ing transaction costs. Even when companies became almost ubiquitous, their utility appear very large, as measured in terms of improved drastically. Similarly, when only a their revenues, they employ relatively few few physicists in Switzerland used the World people. They are becoming increasingly “hol- Wide Web, its utility was severely limited. As low.” Dell Computer, for example, differs millions of individuals and tens of thousands greatly from traditional manufacturers. It not of businesses go online, more and more of us only does not make computer parts, it does find the Internet indispensable. As bandwidth not even buy the low-level components. improves, its utility will grow further as we Instead it buys subsystems and assembles move to real-time video and interactive virtu- them into a range of computers. Since Dell al environments. does no manufacturing, it can fulfill orders Along with the Internet, businesses are rapidly. Thanks to its enterprise system, developing “intranets” and “extranets.”” it carries an incredibly low eight days of Intranets are computer networks accessible inventory (compared to two months for only within the corporation. They allow the competitors). . easy and efficient sharing of corporate infor- Some companies are so decentralized that mation, tracking of activities, and communi- they never even handle their products at any cation of ideas. Extranets extend a company’s point. One fashion accessories company with networks over the Internet to its suppliers, $80 million in revenues has only three customers, and partners. Intranets reduce employees. It contracts with other companies transaction costs within the firm, while and individuals to make its products, design its extranets and the Internet itself also reduce packaging, and distribute and sell its products. costs in the market. The automobile industry is experiencing simi- lar changes. A modern factory will simply fit Dramatic Productivity Gains together pre-assembled pars. ompanies are not only hollowing out; they Enterprise systems add to the business are becoming more fluid in organizational transformations being wrought by computer structure. I have already noted that e-mail and networks. Enterprise systems take the form of intranets allow employees to communicate enterprise resource planning (ERP) software directly and easily. Intranets also give every- (and related packages such as supply-chain one ready access to corporate information management and sales-force automation soft- without having to go through management. ware). When a company installs ERP soft- As the flow of information has improved, it ===== PAGE 41 ===== SMALL IS AWESOME 37 has become easier to loosen the corporate these corporate mutations to emerge and structure while continuing to track activity. flourish. Largely autonomous temporary work teams have been one result. Traditional companies Government: Stay Out of maintain a strict organizational hierarchy. E the Way ach employee has a superior, and that supe- rior has a higher level superior. Increasingly, Governments may slow down this process, employees are forming independent work but cannot stop the forces of technological teams with no fixed boss. Business units with- change. The best way to help is to stay out of in corporations even deal with one another as the way as new business structures form. if they were independent companies, having They can also help by cutting sales taxes. to make competitive offers for their services. Sales tax is paid on exchanges between com- This is sometimes called “intrapreneurship.” panies but not within a company. This makes Hollow corporations, outsourcing, inde- it more economic to organize activity inter- pendent business units, and intrapreneurs join nally rather than contracting for it on the mar- other trends to transform the corporate land- ket, making companies bigger. scape. Temporary workers and free-lancers We will not become citizens of Microsoft add to organizational flexibility. The tempo- or General Electric. While large corporations rary agency, Manpower Services, now will probably continue to exist in the future, employs more people than any other private they will not dominate the economy. On the company. As Internet access improves and contrary, the continuing reduction in transac- bandwidth expands, telecommuting becomes tion costs, the expansion in computer network an option for more and more people. As bandwidth, and the ability to quickly create these new options proliferate, bigness often a business using off-the-shelf processes becomes less appealing. More companies will accelerate today’s trends toward a more spin off operations into new corporations, diverse and flexible business environment. adding to their flexibility and focus. Free markets will bring not King Kong capi- Computer networks continue to spread and talism but a network of dynamically changing to expand in capacity. We find sound and organizations. Permanent corporations will be video appearing all over the Web. Full motion only one of many species in the business ecol- teleconferencing is becoming feasible. Before ogy of the 21st century. long we will see virtual reality technology The market is vastly smarter than any indi- reach a point where virtual meetings can take vidual, so we cannot predict exact or com- place, making physical proximity unneces- plete details of the emerging economy. Yet the sary. Individuals will search for one another trend clearly favors flexibility over rigidity, over the Net, set up businesses using off-the- responsiveness over resistance, and speed shelf enterprise systems, then dissolve their over size. Ol team when the job is done, perhaps never hav- ing physically met at any time. Large, stable, enduring corporations will not disappear. But they will cease to dominate Ronald H. Coase, “The Nature of the Firm,” the corporate ecosystem. The new face of in The Firm, The Market, and the Law business will look far more diverse. We will (Chicago: University of Chicago Press, References see constellations of activity, including large 1988). corporations, corporations with vast revenues Carl Dahlman, “The Problem of Externality,” but few employees or production facilities, The Journal of Law and Economics, April temporary firms formed for a single project 1979. (which might be hugely complex), and semi- Thomas W. Malone and Robert J. Laubacher, independent work teams. The existing large “The Dawn of the E-Lance Economy,” companies may perform the valuable role of Harvard Business Review, September- creating the cultures and standards that allow October 1998. ===== PAGE 42 ===== Peripatetics by Sheldon Richman ¥ Economics Captain Consumer “The direction of all economic affairs is in the market society a task of entrepreneurs. Theirs is the control of production. They are at the helm and steer the ship. A superficial observer would believe that they are supreme. But they are not. They are bound to obey unconditionally the captain’s orders. The captain is the consumer.” —LubwIG VON MISES, Human Action Er day the business pages of the news- What happened to these once-booming paper affirm Mises’s claim about con- companies? Captain Consumer found some- sumer supremacy. Within a three-week span thing he liked better. last fall, the Washington Post reported: Parents came to feel the Toys R Us stores were poorly organized and unfriendly; kids’ Toys R Us to Close 90 Stores taste in toys shifted to high-technology, and Retailer Announces Restructuring, the chain was slow to notice. Hungry folks Charge Against Earnings decided that, rather than stop at Boston Mar- ket for dinner, it was more convenient to buy rotisserie chickens and other ready-to-eat meals at the supermarket. People changed their minds. Without notice and without asking anyone’s permission, they abandoned Toys R Us and Boston Market and took their money elsewhere. (Try that with the public school or post office.) Mises had it right: consumers “are merci- less bosses, full of whims and fancies, changeable and unpredictable. . . . If some- thing is offered to them that they like better or that is cheaper, they desert their old purvey- ors. In their capacity as buyers and consumers they are hard-hearted and callous, without consideration for other people.” Critics of the free market focus their ani- mosity almost exclusively on the business- man. He is the boss. He decides what to pro- Sheldon Richman is editor of The Freeman. duce and what to charge for his goods. He 38 Boston Chicken Files for Protection, Lays Off 500, Shuts 178 Restaurants For years, Toys R Us has been the largest toy retailer in the United States, with 25 per- cent of the market. Yet in September it announced it would close 90 of its 900 stores in the United States and elsewhere around the world and redesign the rest. Boston Chicken (which calls its restaurants Boston Market) said in October it would close 178 of its 1,143 outlets, lay off 500 employees, and reorganize under the bankruptcy laws. It was once a hot stock, as patrons found the rotisserie chickens and other dishes attractive dining alternatives. But from a high of almost $40 in late 1996, the company’s stock closed at 50 cents a share when the bankruptcy was announced. ===== PAGE 43 ===== 39 decides who is hired and at what wage. As Unless the government intervenes. The Mises notes, it does look that way. Appear- market’s critics will point to notorious cases ances, however, are deceiving. of highly paid executives who run inefficient Entrepreneurs at one level drive the market companies. Blame the mixed economy. That process. But in an important sense, they don’t term is a euphemism for a market-based soci- act independently. They try to anticipate what ety in which government routinely counter- Captain Consumer will want. He doesn’t mands Captain Consumer. When the govern- always know what he will want tomorrow ment bailed out Chrysler, permitting Lee because he doesn’t know all that there is to Iacocca and his managers to remain in charge, want. No one wanted a personal computer politicians forced people to do as taxpayers before the idea was thought up. But a few what they had refused to do as consumers. entrepreneurs bet that people would want PCs (The bailout consisted of taxpayer-backed when they learned of their existence. In that loan guarantees. Diversion of capital to case, the businessmen were right. With the Chrysler of course left less for projects con- Edsel and countless other things, business- sumers would have embraced.) men were wrong. Those who anticipate cor- Government has more subtle ways to keep rectly make money; those who don’t, lose it. consumers from carrying out their will. In a Bankruptcy is the consumers’ way of telling a free market, if they are unhappy with a corpo- businessman they would prefer that his capi- ration’s products, investors will anticipate low tal were in more capable hands. or no profits in the future. That will translate “Their buying and their abstention from into a lower stock price. Noticing the squan- buying decides who should own and run the dered potential, an entrepreneur specializing plants and the farms,” Mises wrote. “They in takeovers might buy the stock (undervalued make poor people rich and rich people poor. in terms of the profit potential), put in better They determine what should be produced, in managers, and reap the benefits of a later rise what quality, and in what quantities.” in the stock price. This process is what econ- In terms of law, particular individuals own omist Henry Manne calls the market for cor- the means of production. But in economic porate management. It protects consumers terms, they hold their property only at the and stockholders. Of course, it also threatens pleasure of consumers. “Thus the owners of the jobs of bad managers, which is why the the material factors of production and the takeovers are called “hostile.” entrepreneurs are virtually mandataries or How might the government, backed by trustees of the consumers, revocably appoint- incumbent managers, interfere with the mar- ed by an election daily repeated,” Mises said. ket for corporate management? It can enact The point applies as well to the business- measures to impede takeovers. The federal man’s employees. He may write the pay- Williams Act, for example, makes it illegal for checks, but “The consumers, not the entrepre- entrepreneurs quietly or anonymously to buy neurs, pay ultimately the wages earned by up controlling shares of a company’s stock. every worker, the glamorous movie star as Under cover of “full disclosure” and “investor well as the charwoman,” Mises wrote. confidence,” the Act requires that entrepre- That’s the answer to the markets critics, neurs show their hands early. That of course who can’t understand why Jim Carrey or gives targeted managers time to defend their Mark McGwire command such high salaries, jobs. Disclosure also tends to push stock while people in “more important” occupa- prices higher, spoiling many takeover plans. tions are paid much less. When fans stop Ironically, the same market critics who going to Carrey’s movies or McGwire’s ball believe that businessmen rule consumers also games, those salaries will fall. The same is favor anti-takeover laws, which shelter busi- true for the “obscenely” large paychecks that nessmen from the same consumers. corporate executives collect. If consumers Maybe it’s not so ironic. Maybe the mar- reject a corporations products, its executives kets critics think someone else should be will see their incomes shrink. captain. OJ ===== PAGE 44 ===== FREEMAN ideas On Libert A Program the Borg Would Love by Karen Selick NTARIO, CANADA—Suppose youre out national headlines in Canada because of its for a stroll one evening. A scruffy- dazzling cost-benefit analysis. An expenditure looking stranger approaches you and says, of $5.3 billion on child care, it said, would “Hand over all your valuables, and make it generate benefits to children and parents of snappy.” “Is this a stickup?” you gasp, $10.6 billion—exactly double. Such a pro- stupidly. gram should therefore be looked upon not as “Why, no,” says the stranger, “it’s merely an expense, but rather as an “investment.” the result of a cost-benefit analysis 1 just performed. I saw you come out of that nice- Misuse of Cost-Benefit An alysis ooking house over there, with the late-model car in the driveway. You're pretty well dressed, Unfortunately, the authors of the study and that’s a nice Rolex youre wearing. By make the same fundamental error as my ficti- comparison, the rent’s overdue on my grungy tious robber. A cost-benefit analysis makes apartment, my 12-year-old car needs its sense only when the costs are incurred and the engine overhauled, my bank account’s over- benefits are received by the same person. If drawn, and just look at these worn-out clothes costs are inflicted on one person while bene- I’m wearing. I estimate that the benefit to me fits are reaped by someone else, it is simply of having your valuables outweighs the cost to impossible to say whether the world has been you of losing them by at least two to one. So made a better place. For the person receiving hand them over.” the benefits, things have improved. For the If the robber’s logic wins any points with person bearing the costs, things have deterio- you, then I’ve got a new government program rated. But there is no way to measure the to sell you. It’s called national child care. Of absolute quantity of either person’s happiness. course, it’s not really new, but with all the Individuals can rank their preferences (having recent talk about the “fiscal dividend,” we can more money usually ranks higher than having expect to see renewed hoopla over it in com- less), but they can’t quantify them. There are ing months. no units of satisfaction or contentment. Using An opening salvo was fired in March 1998 dollars as proxy measuring sticks doesn’t with the publication of a study titled “The help, because each additional dollar a person Benefits and Costs of Good Child Care” by acquires adds less to his well-being than the the University of Toronto’s Centre for Urban previous dollars. You can’t measure some- and Community Studies. This study made thing when the measuring stick itself continu- ally alters in size. Karen Selick is a practicing attorney in Ontario and If you can’t measure one person’s quantity a columnist for Canadian Lawyer. of happiness, it’s even more obvious that 40 ===== PAGE 45 ===== 41 you can’t compare quantities of happiness of the advantages that would accrue if the between different people. same $5.3 billion were spent on something Economists have recognized these concepts other than child care. Somewhere out there, for years, yet some people insist on fudging toiling away in some laboratory, there is the issue by speaking of costs and benefits to undoubtedly someone who could make a “society,” as if we were the Borg of Star Trek plausible case for “investing” $5.3 billion on fame, all controlled by a single communal his own pet project—perhaps a cold fusion brain, all willingly subordinating our individ- machine. If he were successful in inventing ual personalities and goals to the will of the such a device, the benefits to mankind would collective. We aren’t-—at least, not yet. (One be incalculable—far more than the paltry can’t help wondering, however, whether the $10.6 billion that child care would supposed- push toward government control of the coun- ly produce. try’s children at ever younger ages reflects There are always competing uses for proponents’ desire to achieve a state of Borg- any resource. In deciding how to invest like submissiveness.) resources, you don’t look just at the potential The fact is, some people would be net ben- returns from a single alternative. You com- eficiaries of national child care—primarily pare the expected returns from many differ- families with young children in which both ent alternatives. parents wish to work outside the home. Other We don’t know what alternative uses tax- people would be net payers—namely, child- payers would find for their money if we sim- less taxpayers, families with older children, ply gave it back and let them invest it them- and families that prefer to have one parent selves, instead of spending it collectively. We provide care to preschoolers at home. There is can’t calculate the benefits their myriad indi- no fair, just, or moral case to be made for vidual projects would generate. We do know, harming the second group in order to indulge however, that taxpayers would probably prefer the first. this to all other alternatives. Otherwise, we wouldn’t have to force them to pay their taxes The Unseen Neglected on pain of imprisonment. There are many other good reasons for The study contains a second fundamental opposing national child care. Suffice it to say flaw. In computing the cost side of the balance that if it’s going to be as effectual as the pub- sheet, the authors fail to include any estimate lic school system, let’s nip it in the bud. [] The apple icon ¥ identifies Freeman articles that are appropriate for teaching high- school students several major subjects—including economics, history, government, phi- losophy, and current issues. We also provide sample lesson plans for these articles on our Web site www.fee.org and in written form. Teachers and homeschooling parents need only to visit our Web site or request written lesson plans to take advantage of this unique service. ===== PAGE 46 ===== E TH FREEMAN ldeas On Liberty Wisconsin’s Choice by Jon Sanders he plaque is proudly posted at the front orientation, religion, disability, or ethnicity. In entrance to Bascom Hall on the campus 1991 a federal judge struck it down as uncon- of the University of Wisconsin at Madison. It stitutional. The faculty speech code, however, memorializes the eloquent defense of acade- has faced no such court challenge. mic freedom made by the university’s Board The speech codes were part of several polit- of Regents in 1894 in exonerating Richard T. ically correct campus initiatives designed to Ely, an economics professor accused of teach- make minority students feel more welcome on ing socialism and other “dangerous” ideas. campus. Other initiatives included requiring “Whatever may be the limitations which students to take ethnic-studies courses, trammel inquiry elsewhere,” the plaque pro- designing orientation programs to increase claims, “we believe the great University of awareness of racial and ethnic diversity, set- Wisconsin should encourage that continual ting enrollment goals for black, Hispanic, and and fearless sifting and winnowing by which American Indian students, and urging that the alone the truth can be found.” ROTC program be banned from campus until Donna Shalala walked by that plaque count- the military stopped discriminating against less times when she served as the university's homosexuals. chancellor from 1988 to 1993, the year she became Bill Clinton s secretary of Health and Sp eech Further Restricted uman Services. But she paid no attention to it. Her ideal campus of sensitive minds had no Wisconsin’s faculty speech code was origi- place for the plaque’s dangerous idea. nally established in 1981, but Shalala consid- Under Shalala’s administration, and ered it insufficient to protect minorities from counter to the school’s heritage, Wisconsin being offended in the classrooms. She asked suffered severe limitations on inquiry in the the faculty senate to pass a revised code that form of speech codes for faculty members further restricted faculty speech, which it did and students. The student speech code that in 1989. went into effect in 1989 was one of the first The enhanced code has trammeled speech standards on “hate speech” in the nation. It in Wisconsin's classrooms for nearly a prohibited students from uttering slurs or epi- decade. It forbids faculty members from slur- thets based on a person’s race, gender, sexual ring students according to their gender, race, ethnicity, and so on, but it also punishes the Jon Sanders is a research associate for the Pope use of teaching . techniques th at make the Center for Higher Education Policy, Research Trian- instructional setting hostile or intimidating, or gle Park, North Carolina, and editor of the center’s demeaning” to students according to their journal on higher education, Clarion. “group.” If a professor invokes a theory in 42 ===== PAGE 47 ===== 43 class that offends a particular group, he vio- lators frightened them, which was exactly the lates the code, probably without even realiz- intent behind the code, said Stanley G. Payne, ing it. Under the code, however, the offense is a professor of history at Wisconsin. “This in being offensive—whether intended or not. helps to guarantee that no one will very seri- Wisconsin’s revised faculty speech code ously question any P.C. proposition,” he told quickly became a wellspring of consternation The Chronicle of Higher Education. “[The for the teachers. Although no faculty mem- code] doesn’t need to be invoked to police bers were ever formally investigated and dis- discussion in the classroom.” ciplined for violating the code, several under- By this declension, “fearless sifting and win- went grueling informal investigations for nowing” on the Madison campus became fear- alleged violations about which they were told ful shifting and whimpering. The code turned very little. The Kafkaesque investigations the faculty lounge into a Damocletian feast. made it patently clear on campus that Wis- consin tolerated no breach, however slight, of The Last Straw the PC ethic. In 1990, Richard Long, an art professor, The Frykenberg case, however, proved to was investigated by the Affirmative Action be the final straw for some Wisconsin pro- Office after two graduate students accused fessors. In 1996 Payne formed the Faculty him of being anti-Semitic, racist, sexist, and Committee on Academic Freedom and Rights homophobic. Although formal charges were (FCAFR). Well-known academics were never brought and he was never officially brought to campus to denounce the code. In informed of his situation, Long underwent a 1996, for example, Harvard University Law six-month investigation before the matter was Professor Alan Dershowitz, known to many dropped for lack of evidence. “I never Americans for serving on the team of attor- received anything resembling due process,” neys who defended O.J. Simpson, called the he wrote in 1995 in a letter to the Wisconsin faculty speech code “abominable” and urged State Journal. the capacity crowd in attendance to defeat it, In 1992 Lester Hunt, a philosophy profes- saying the university would make national sor, was investigated after a student accused headlines by repealing it without being forced him of making racist jokes and comments. to do so by the courts. In 1997 Professor Glen Like Long, Hunt was neither told of the C. Loury of Boston University argued that charges against him nor given an opportunity any legislation restricting speech is wrong. to confront his accuser. “I would not want my “Our job as faculty members is to be provoca- worst enemy to go through what I went tive and challenging,” Loury told the Wiscon- through,” he told The Daily Cardinal, Wis- sin crowd. “You’re not there to make students consin’s online student newspaper. comfortable, you're there to break through In 1995, Robert Eric Frykenberg, a history conventional ways of thinking.” professor, was accused of making disparaging Meanwhile, Hunt and FCAFR member comments to female graduate students. Dur- Donald A. Downs, a professor of political sci- ing the nine-month investigation, Frykenberg ence, shamed the University Committee into was never told which university rule he had taking another look at the code, charging that allegedly violated. Finally, after he retained a it infringed free speech and academic free- lawyer and threatened to sue the university, dom. The charge struck at the heart of the the investigation was dropped and the univer- matter, pitting Shalala’s legacy against the sity agreed to pay his legal bill. Frykenberg university’s. In May 1997 the University retired not long afterward. Committee formed a panel of ten faculty Other teachers, understandably unwilling to members, four academic staff members, and risk the problems faced by their colleagues, three students to investigate the code. voluntarily excised from their lectures any- The panel, the Ad Hoc Committee on Pro- thing that could be construed as offensive. hibited Harassment Legislation, was as con- The fierceness in investigating supposed vio- genial as a coalition of Middle East coun- ===== PAGE 48 ===== 44 THE FREEMAN/IDEAS ON LIBERTY ® FEBRUARY 1999 tries. Among the members who favored the Drechsel, all three student members, and two Shalala code were Ted Finman, an emeritus others on the committee. That report would professor of law who wrote the original narrow the speech code further than the speech code; Evelyn Howell, a professor of majority recommendation, penalizing profes- landscape architecture who had served as sors only for using slurs expressly for the pur- chairman of the University Committee when pose of harming a student. it selected the panel members; Phillip R. Cer- A split in such a committee is unusual, and tain, dean of the College of Letters and Sci- it has set the stage for a potentially raucous ence; and Stanlie M. James, an associate pro- faculty senate meeting. It is fitting that the fessor of Afro-American and women’s stud- fight end there. The issue is essentially ies. Among those seeking to overturn the whose idea of academic freedom will rule, code were Downs, journalism professor Shalala’s or the 1894 regents’. Essentially, Robert E. Drechsel (the panel chairman), and but not exactly. The compromise revision, the three student members. which likely will be adopted, represents only Early last October, the so-called liberals on a step back from the PC precipice to which the panel succeeded in getting enough of their Shalala brought the university. The minority conservative counterparts to agree to send a report recommends a narrower speech code, compromise revision of the code, which but as the student editorial staff of The Daily would scale back the Shalala revisions, to the Cardinal opined, “The committee must faculty senate. The new revision would penal- understand that any new speech code—no ize professors who use “an epithet or a com- matter how well written—is still a speech ment concerning a specific student that clear- code.” Neither allows inquiry as open as it ly derogates and debases the student on the was before 1981. basis of the student’s gender, race, religion, As that statement shows, it is the students, ethnicity, sexual orientation, or disability” or the supposed beneficiaries of the code, who who utter such comments without “a reason- are most vociferous in trying to end it. More able pedagogical justification for using the so than the faculty and administration, they teaching technique in question.” seem to understand the importance of free, The revision would add a preamble dis- even offensive speech. In fact, they appear to cussing the university’s legacy of academic be less insulted by ill-advised faculty speech freedom and include examples of teaching than by the idea that such speech would harm techniques that would and would not be pro- them. “Are they saying I can’t stand up for tected. Protected speech would include an myself?” asked one student on the panel, Amy instructor’s assigning a “pertinent novel that Kasper, in The Chronicle of Higher Educa- expresses racist ideas or contains a racial epi- tion. “Am I being wrapped in a security blan- thet” or asserting that “the intellectual capac- ket here, and I'll go out in the real world and ity of men for scientific analysis is superior to find there isn’t one?” that of women.” Prohibited speech would The student panel members should be of include an instructor’s referring to Africans particular interest to those of the PC mindset. transported to the United States in slave trades They are a white woman, an Asian woman, as “niggers” or responding to a female stu- and a gay man. All consider the code—and dent’s rebuttal of his assertion of women’s the attitude behind it—‘“demeaning.” For inferior scientific intelligence with “See! Your unlike the Wisconsin teacher who argued that stupid female comments just prove my point.” the code is needed so students “don’t get The faculty senate recommended adoption of insulted or assaulted by a professor,” Wiscon- the revision late last year. sin students of all stripes know that words, The faculty senate also received a report even those uttered by professors, are neither from a stubborn minority comprising Downs, sticks nor stones. [] ===== PAGE 49 ===== Economic Notions by Dwight R. Lee ¥ Economics The Market for Honesty he recurring theme of all my columns has people in all walks of life, some will cheat, been that economics is a study of how lie, and steal to snatch short-run advantage. people cooperate with each other and that But they are not nearly the scoundrels as pre- market economies succeed because of the sented in the media and popular entertain- incredible amount of cooperation they pro- ment. According to one study, almost 90 per- mote. Market cooperation, like all coopera- cent of all business characters on television tion, depends on a high level of honesty. Peo- are portrayed as corrupt.! In fact, business ple who cannot trust each other cannot coop- people can be depended on to act more hon- erate with each other, certainly not for long. estly than most. This is not because business And with the market, it’s not just a matter of people are inherently more virtuous than oth- trusting a few people whom we know and care ers (though there is no reason to believe they about. Market cooperation depends on our are less virtuous), but because the free mar- being able to trust large numbers of people, ket penalizes those who do not provide con- most of whom we will never know. sumers with things they value—and con- Consider the behavior of business people. sumers value honesty. If the proverbial man from Mars observed our The reason the market penalizes dishonesty business activity, he would surely conclude is obvious at one level. Those who fail to pro- that business people are extraordinarily hon- vide the quality they promise, and charge for, est. For example, they sell precious gems that may profit in the short run, but not in the long really are precious to customers who cannot run. But even in the short run there are gains tell the difference between diamonds and cut from honest dealing, and those who can cred- glass. They promise not to raise the price of a ibly promise to deal honestly can capture product once customers commit themselves some of those gains. So business people are and make switching to another product cost- strongly motivated to put themselves in situa- ly—and they keep the promise. They make tions in which dishonest behavior is quickly good-faith promises that the business they penalized. By doing so they are better able to own, but are about to sell, will continue to entice customers with assurance of everyday give their customers good service. The exam- honest dealing. ples could be continued indefinitely since honesty and trust are essential for all but the C ommitting to C ontinuity simplest business transactions. I am not naive enough to argue that busi- Consider the fear of dishonesty that can ness people are never dishonest. Just like arise when it is believed that a business is about to shut down, say, because the propri- Dwight Lee is Ramsey Professor of Economics and ~~ €tOT is getting old. Even if such a proprietor Private Enterprise at the University of Georgia. has no intention of cheating customers, they 45 ===== PAGE 50 ===== 46 THE FREEMAN/IDEAS ON LIBERTY ® FEBRUARY 1999 will have reason to worry without some cred- maintain competitive prices by giving up its ible assurance of the proprietor’s long-run monopoly. Committing itself to honest deal- interest in the business. An owner can often ing was more important to Intel, and more provide this assurance by bringing his off- profitable in the long run, than exploiting a spring into the business (“Samson and Sons” monopoly position in the short run.2 or “Delilah and Daughters”). Not surprising- ly, research shows that children of single pro- . so orictors are three times more likely to follow Selling and Repairing in their parents’ lines of work than the chil- It is difficult for consumers to determine dren of others. Even large corporations, with the quality of automobile repair. They can lives that extend far beyond those of any of generally tell if the work eliminated the prob- their managers, often depend on single pro- lem: the car starts, the rattle is gone, the oil prietorships to represent and sell their prod- light is off, and so on. But few people know if ucts. This explains why Caterpillar, for exam- the repair shop charged them for only the ple, has a school on running Caterpillar deal- repairs necessary, or if it charged them for lots erships for the sons and daughters of the of parts and hours of labor when all the owners of those dealerships. mechanic did was tighten a screw. One way To consider another example of the impor- repair shops can reduce the payoff from dis- tance of business continuity in promoting honest repair charges is through joint owner- honesty, ask yourself where you would rather ship with the dealership selling the cars being shop for an expensive piece of jewelry, a jew- repaired. In this way the dealer makes future elry store with a well-advertised brand name car sales largely dependent on honest repair and ornate fixtures, or a sidewalk vendor work. Dealerships depend on repeat sales operating out of a Volkswagen van parked at from satisfied customers, and an important the curb? What could the store do with its factor in how satisfied people are with their brand name and fixtures if it went out of busi- car is the cost of upkeep and repairs. The ness? Not much, and this tells customers that gains a dealership could realize from over- the store has a lot to lose by misrepresenting charging for repair work would be quickly its merchandise to capture short-run profits. It offset by reductions in car sales. has made a commitment to staying in busi- Automobiles are not the only product for ness by being honest. which it is common to find repairs and sales tied together in ways that provide incentives for honest dealing. Many products come with Embracing Competition guarantees and warranties entitling the buyer to repairs and replacement of defective parts for a specified period. These guarantees pro- vide confidence in the seller’s honesty when advertising the quality of his product. Some will always go for the short-run gain through deceit and dishonesty. But the greater the freedom of others to compete with credi- ble commitments to honesty, the less dishon- esty pays even in the short run. The coopera- tion that characterizes the free market would never be possible without the high level of honesty and trust motivated by market com- petition. 0 Intel, having received a patent on its 286 microprocessor in the early 1980s, immedi- ately gave up its monopoly by licensing a competitive firm to also sell the microproces- sor. Why would any company give up a legal monopoly? Because of the importance of honesty. Intel was willing to sell its new microprocessor to computer manufacturers at a reasonable price, and promised to do so. But the manufacturers were afraid that once they committed to using the new microprocessor (making expensive changes in their produc- tion process that would be difficult to reverse), Intel could exploit its long-term 1. See Robert Lichter, Linda Lichter, and Stanley Rothman, patent monopoly by raising the price. Intel Watching America (New York: Prentice Hall, 1990), p. 146. . ) 2. Adam M. Brandenburger and Barry J. Nalebuff, Co-opetition could make a credible promise that it would (New York: Currency/Doubleday, 1996), pp. 105-106. ===== PAGE 51 ===== FREEMAN ideas On Libe The Life of a Grand Old Liberal by Wendy McElroy Me Harman (1830-1910) is the sort of expressed in my Man and Superman that social visionary whom historians often ‘marriage is the most licentious of human overlook, even though his influence during his institutions,” what chance should I have of own lifetime was immense. Harman lived escaping?” most of his life in the American midwest, Harman and Shaw shared the same opinion sharing many of the values that are associated of nineteenth-century traditional marriage: it with the region: he was a soft-spoken, hard- was defined by laws and customs that working, and devoted family man with an enslaved women, who were stripped thereby unswerving sense of right and wrong. of the right to their own wages, custody of He was also one of the most stubborn their children, and the ability to defend them- and persistent nineteenth-century Americans selves against physical or sexual attack by involved in the fight to preserve individual their husbands. As a personal matter, Harman rights. Most of his writing remains buried in believed in monogamy and conducted his life the pages of the now obscure periodical he without scandal. But as a point of social theo- edited for 24 years. His main impact derives ry and practice he insisted that “true mar- from his decades-long fight for freedom of riage” must be an equal union between con- speech, which resulted in numerous imprison- senting adults in which the state had no right- ments and culminated in his breaking rocks at ful place. It was his insistence on speaking out Joliet (Illinois) prison at the age of 75. for true marriage and the rights of women that George Bernard Shaw referred to Harman’s led to Harman’s many years of legal persecu- last imprisonment in a letter to the New York tion under the Comstock Act, which forbade Times (September 26, 1905), in which he the circulation through the mail of informa- explained why he would not visit the United tion on “obscene” matters such as birth con- States: “The reason I do not go to America is trol or marriage reform. that I am afraid of being . . . imprisoned like With the streak of stubbornness that often Mr. Moses Harman. . . . If the brigands can, arises in the American personality, Harman without any remonstrance from public opin- persisted in speaking out because, as he ion, seize a man of Mr. Harman’s advanced phrased it, “I believe in Freedom—equal free- age, and imprison him for a year under condi- dom. I want no freedom for myself that all tions which amount to an indirect attempt to others may not equally enjoy. . . . The kill him, simply because he shares the opinion Spencerian formula: ‘each has the right to do as he pleases, so long as he does not invade Wendy McElroy, a Freeman contributing editor, is the equal right of others,’ tells what freedom author of The Reasonable Woman: A Guide to Intel- means. It is equivalent to saying that liberty, lectual Survival (Prometheus Books, 1998). wedded to responsibility for one’s acts, is the 47 ===== PAGE 52 ===== 48 THE FREEMAN/IDEAS ON LIBERTY ® FEBRUARY 1999 true and only basis of good character, or of ticular would determine much of his future morality.” He wished to offer women equal course. freedom with men to control their bodies and Harman became involved in the Valley their property, especially within the context of Falls Liberal League, a local branch of the a true marriage. It was part of his lifelong bat- National Liberal League, which sought to tle to secure what he called the right of private separate church and state. This was an issue judgment in moral matters. around which many figures in the American individualist tradition gathered after the Civil War. In the words of Harman, the local “club was the successor of an older club . . . which Born in western Virginia to a poor family, meetings were conducted on the plan of equal Moses Harman grew up in southern Missouri. rights for all, regardless of race, color, party Although he had only a few months of formal or creed.” The League soon became involved schooling, the young Moses became an avid in an exchange conducted with clergymen in reader, especially after an accident left him the local Republican paper on “issues divid- crippled. At 16 he began teaching school and ing the current and popular theologies from then went on to attend Arcadia College, in the deductions of modern science.” Although Missouri; the education came at great finan- respectful of Christianity, Harman argued the cial sacrifice to his family. Harman soon scientific point of view under the pseudonym became galvanized by the ideal of abolition- “Rustic.” ism—the pre-Civil War movement that When the newspaper proved unwilling to demanded an immediate cessation to slavery continue the voluminous debate, the Liberal on the grounds that every human being had a League issued its own periodical, the Valley right to his own body. When the Civil War Falls Liberal in August 1880, with Harman erupted, Harman was unable to enlist in the serving as one of the unofficial editors. It Union army owing to his lameness. But he became the foremost voice in Kansas of liber- remained such an outspoken abolitionist that alism in the nineteenth-century sense of indi- the pro-slavery county of Crawford, Missouri, vidualism in active opposition to state inter- once voted to run him out because of his ference. In 1881, it was rechristened the unpopular sentiments. Kansas Liberal, and Harman shared editor- When Harman married Susan Scheuck, the ship with Annie L. Diggs, a well-known pop- daughter of a Union sympathizer who had ulist. After a dispute about prohibition, which been executed by a roving band of Confeder- the teetotaling Harman opposed in the belief ates, their marriage was a harbinger of his that temperance must be voluntary, he later commitments. Although the ceremony assumed sole control. was conducted according to law, the young The Kansas Liberal would eventually be couple also entered into a personal contract renamed Lucifer, the Light Bearer (1883- that based their voluntary union on love, not 1907) for which Harman would soon become duty. Their two children, George and Lillian, notorious nationwide. The name was unfortu- were both born in Missouri. A third child died nate because it raised the worst suspicions with Susan during birth in 1877. One can only within and created an emotional backlash speculate on how deeply watching the death among many religious-minded people. of his much-loved wife in childbirth influ- Indeed, since periodicals as controversial as enced Harman's later insistence on the avail- Lucifer were able to publish without facing ability of birth control information to women. the legal problems that constantly confronted In 1879, Harman took his young children to Harman, it is probable that at least some of his live in Valley Falls, Kansas, where his cousin subsequent persecution was sparked by the Noah was a well-to-do farmer. Moses took a provocative title. Harman had chosen it inno- job teaching at the district school, and soon cently. He wrote, “Lucifer, the ancient name became known for speaking his mind in a dig- of the Morning Star, now called Venus, seems nified but blunt manner. One exchange in par- to us unsurpassed as a cognomen for a journal Little Formal Schooling ===== PAGE 53 ===== THE LIFE OF A GRAND OLD LIBERAL 49 whose mission is to bring light to the dwellers teen, and daughter Lillian, aged thirteen who in darkness.” When more cautious minds had already learned to set type. We lived on a advised against the name, Harman character- little fruit farm one mile from the printery at istically dug in his heels and continued to which the typesetting and press work were maintain that “words are not deeds” and that done. Editorial work was mainly done at neither the state nor society could rightfully home, in the early morning hours and late at restrict the words he chose. night, while much of the day was spent by all three at work on the farm, raising fruits and The Censor’s Watchful Eye vegetables, from the sale of which we sup- plied our own daily wants, besides helping to If the kindly and cultured Harman had been defray the expenses of publication; the fold- the only one to choose the words printed in ing and wrapping of the paper being done at Lucifer, his policy might have proven harm- night by the entire family, including wife less. For better or worse, however, Harman Isabella, whom I had married since our permitted his contributors to write what they removal to Kansas.” pleased. He believed that absolute freedom of This contented picture was shattered in speech cleansed society by allowing individu- February 1887, when a warrant was served als to feel honestly drawn or repelled by cer- for the arrest of the editors and publishers of tain ideas, and to understand their reactions Lucifer: Moses Harman, Edwin C. Walker, rather than suppress them. Lucifer was not and George Harman. Harman and his son salacious, but merely blunt in its social and were taken to Topeka where, on executing political discussions. For censors of the day, bonds of $500 each to appear at the April term this was enough. of court, they were allowed to go home. In June 1886, Lucifer published a letter (Walker, and his 16-year-old wife, Lillian from W.G. Markland, which described an Harman, were already in jail for their non- especially brutal instance of forced sex with- state marriage, which Moses called an in marriage and called it rape. Indeed, it may “autonomistic marriage.”) have been the first discussion in print of this subject on the American scene. The letter was graphic, but used no words that were nottobe The Legal Persecution of found in a dictionary or a medical textbook. Moses Harman In sending the issue of Lucifer containing the letter through the mails, Harman ran afoul After attending the April term court, Moses of the Comstock Act, which provided a penal- and George Harman were ordered to execute ty of up to ten years’ imprisonment for anyone another bond and to reappear the following who intentionally mailed or received obscene July. At the July term, they were told the material. Ominously, the word “obscene” had weather was too hot to present the charges not been defined by the Act. But Anthony against them to the grand jury. They executed Comstock, its author in 1873 and organizer of another bond to appear at the October term the New York Society for the Suppression of and went home. Over the next eight years, Vice, defined “obscenity” to include the dis- Harman was forced to waste large portions of cussion of and protest against rape within time traveling back and forth to Topeka at the marriage. Under the Act, the Post Office legal whim of the court and to spend scarce assumed the power to destroy mail arbitrarily money in executing dozens of bonds, even without either reimbursing the sender or pro- though one bond alone would have answered viding due process. the requirements of law. There is a sense in which Lucifer was an Finally, in October, the accused learned the unlikely target for Comstock: it seemed to be nature of the charges brought against them. an idyllic family business, a labor of love. The grand jury indicted Lucifer on 270 counts Harman described the set-up: “I did the office of obscenity, which were eventually quashed work, assisted by my son George, aged fif- because neither the judge nor the district ===== PAGE 54 ===== 50 THE FREEMAN/IDEAS ON LIBERTY ® FEBRUARY 1999 attorney could discern a legally intelligible exhausted editor moved his family and charge in any one of the counts. Not to be Lucifer to Chicago. thwarted, the district attorney procured a new Of this period, he later wrote, “[F]Jor more set of indictments, totaling 216 counts in all. than nine years, I was never for one moment The indictment was based on four newspaper free from the ‘shadow of the jail’—that is, I articles, though charges were withdrawn on was either securely locked within prison walls two of them. The articles included the Mark- or was under bonds outside of those walls, land letter and a letter to the editor written by with the threat of imprisonment, like the Celia B. Whitehead, a well-respected main- sword of Damocles, constantly hanging over stream reformer. Ironically, Whitehead’s letter my head.” He continued by proudly declaring, argued against the birth control that Com- “Meantime Lucifer, the real object of the stock considered obscene. prosecutors, did not die; Lucifer did not sus- As a consequence of their withdrawing pend; Lucifer did not retract; Lucifer, ‘Son of from the management of Lucifer, charges the Morning,’ did not cease to shine on friend were dropped against George Harman and and foe alike.” Walker in 1888. Moses Harman stood alone as the sole defendant. He was a defiant one. In . . the June 22, 1888, issue of Lucifer, he reprint- The Final Imprisonment ed the Markland letter—along side the 38th From battling the Comstock laws, Moses chapter of Genesis, to demonstrate that the Harman had acquired the aura of a folk hero, language of the letter was no more offensive which extended into mainstream periodicals. than that of the Bible. But the move to Chicago did not prevent the Meanwhile, Harman’s ordeal stirred up a same sort of legal problems that had arisen in storm of protest. As a result of the controversy, Topeka. Postal harassment preceded Har- the district attorney continued the case until man’s final arrest, with Lucifer being denied 1890, when he would no longer be in office. the use of second-class mail rates until the In February 1890, Harman was arrested on matter was appealed to Washington. Then the fresh charges arising from a letter written by a Chicago post office began to confiscate and New York physician, known as the O'Neill destroy certain issues it declared to be letter. Graphic in its language and speaking obscene. One issue was destroyed because it from 19 years’ experience in the medical contained an article by the venerated feminist practice, Richard V. O'Neill testified that he Alice Stone Blackwell that had been reprinted had seen many cases of the derangement or from the Woman's Journal. Another article early death of women caused by “rape within declared obscene by the postal authorities was marriage,” similar to what had been described an excerpt from a United States Bureau of in the Markland letter. For publishing the Animal Industry report that had been issued ONeill letter, Harman was escorted to Tope- by authority of Congress. ka once more, then released on bail of $1,000. Finally, Harman was indicted and tried in In May 1890, Harman was finally tried and May 1905 for mailing two articles: “The sentenced to five years’ imprisonment and a Fatherhood Question” (written by an author $300 fine for mailing the Markland Letter. identified only as T.V.A.), arguing in an inof- The following August he was released by fensive manner that every prospective mother virtue of a writ of error, but a new bond was had the right “to select the best possible con- required. In January 1891, Harman was sen- ditions for” procreation, and “More Thoughts tenced to one year’s imprisonment for the on Sexology” by Sara Crist Campbell, who O’Neill letter. Another writ of error and was nearly 70 years old, arguing that sexual another bond ensued in March. The legal ignorance inflicted needless pain on women. harassment continued for years, until in June The court refused to allow testimony about 1895 a new sentence was passed under which Harman’s medical condition, and the judge’s Harman was lodged in the Kansas state instructions to the jury left little doubt as to prison at Lansing. On release in 1896, the his opinion that the articles were legally ===== PAGE 55 ===== THE LIFE OF A GRAND OLD LIBERAL S51 obscene. Thus, at the age of 75, Moses Har- century reformers. The eugenic theories of man was sentenced to one year at hard labor. Harman and similar individualist radicals From Cook County jail in Chicago, Har- were based largely on the work of such popu- man wrote a “hail and farewell” letter to his lar scientists as Francis Galton (coiner of the friends, restating the object of Lucifer’s publi- word “eugenics”), who believed the human cation: “to help woman to break the chains race could be improved through heredity. For that for ages have bound her to the rack of Harman, the main barrier to proper reproduc- man-made law, spiritual, economic, industri- tion was the state. He believed its oppressive al, social and especially sexual, believing that marriage, divorce, and anti-birth control laws until woman is roused to a sense of her own almost ensured that poverty-stricken women responsibility on all lines of human endeavor, would give birth to ill-nourished, sickly chil- and especially on lines of her special field, dren. In calling for removal of the state from that of reproduction of the race, there will be reproduction, rather than stricter regulation, little if any real advancement toward a higher the American individualists were a unique and truer civilization.” voice for individual freedom within a move- At Joliet, where he broke rocks during the ment that tended toward state control. bitter winter months, Harman’s health deteri- On January 30, 1910, Moses Harman died orated disastrously. A transfer to Leaven- in Los Angeles, where he had moved in 1908. worth—secured by the determined interven- The American Journal of Eugenics died with tion of family and friends—probably saved him. Although two memorial services were his life. There, he spent a large portion of his held for the venerated editor—one in Los remaining sentence in the hospital. Angeles, the other in New York City—the On release in 1907, the 76-year-old Harman most fitting memorial may well have been a changed Lucifer’s name to the American Jour- letter written to Lucifer by Lizzie Holmes nal of Eugenics. The format became more almost 20 years earlier. She called Harman’s scholarly, and the focus shifted more firmly to periodical “the mouthpiece, almost the only improving reproduction and the human race, a mouthpiece in the world, of every poor, suf- subject that captivated many early twentieth- fering, defrauded, subjugated woman.” [] Mr E D Lex “With his masterful grasp of history and} his ingenious insight into economics, phi- |; losophy, politics, and human nature, Dr.| Faria has provided us with an enormous| contribution to the recent literature on} health care reform, and an important]. weapon in our life-or-death struggle tof preserve private medicine.” — Jerome C. Arnett, Jr, M.D.| = Medical Sentinel] Miguel A. Faria, Jr., M.D. argues that managed care and HMOs | are not “free market” alternatives, but rather an unholy partnership { ~~", of government and corporate interests seeking monopolistic {- =~ - .*~ > government protection to eliminate competition... Mico, A Fg ad Faro gi gs § Miguel A. Faria, Jr., M.D. 3 Editor-in-Chief of the Medical Sentinel of the Association "Wi. €F of American Physicians and Surgeons (AAPS). and author of Vandals at the Gates of < d Medicine — Historic Perspectives on the Battle Over Health Care Reform. » Order Direct Call 1-800-757-9873 $23.95 ®h Hacienda Publishing ~~ S%N09%197724 Fax: 1-912-757-9725 » P.O. Box 13648 » Macon, GA 31208-3648 ===== PAGE 56 ===== Economics on Trial by Mark Skousen FREEMAN Ideas On Liberty FEBRUARY 1999 A One-Armed Economist, Please “[While purity is an uncomplicated virtue for olive oil, sea air, and heroines of folk tales, it is not so for systems of collective choice.” —AMARTYA SEN! resident Harry Truman hated what he president of the American Economic Associa- termed two-armed economists, those who tion in 1994. His mentors are Joan Robinson, would advise him first “on the one hand” and Kenneth Arrow, and philosopher John Rawls. then “on the other hand.” Give me a one- A prolific scholar, Sen has written and read armed economist, he demanded, an adviser everything imaginable on his favorite subjects. who wouldn’t waffle. He cites dozens and dozens of authors. He I was reminded of this story when I read engages in heavy mathematical modeling and some of the writings of the Indian economist game theory. He weighs the pros and cons of Amartya Sen, the latest winner of the Nobel every nuance of high theory. And yet, when it Prize in economics. He won the prestigious comes to his own view, he never seems to come award (worth nearly $1 million) for his work to a simple conclusion. For Sen, everything is on poverty, famine, inequality, growth theory, complex and indeterminate. human rights, and ethics, all those wide- For example, in 1985 he gave a series of ranging debate topics common to develop- lectures at Cambridge University, subsequent- ment economics. ly published as The Standard of Living (Cam- Writing on these topics is commendable; I bridge University Press, 1987). Is it possible just wish I knew what he was saying. Sen is to measure and compare living standards one of those economists that Truman com- between individuals or nations? Sen is never plained about. He represents everything that is sure. In his works on inequality, he rejects wrong-headed about modern economics, utility-based comparisons of income and even which Peter Drucker has rightly described as distinguishes between “well-being” and “clever, brilliant, and bankrupt economics.” “standard of living.” When you’re through reading Sen, you feel like joining the pure Too Much Sen subjectivists-relativists. In an often-cited arti- cle, “Rational Fools,” Sen offers a critique of Sen has all the establishment credentials. \ijitarianism and self-interest, saying at one He's taught at Harvard and Cambridge and was point. “this approach presumes both too little d too much.”3 Only i ’s world would Mark Skousen (http://www .mskousen.com; mskousen anc 100 Only in Sen’ @aol.com) is an economist at Rollins College, Depart- that be possible. i ment of Economics, Winter Park, FL 32789, a Forbes The only case know where Sen establishes columnist, and editor of Forecasts & Strategies. a clear position is on famines, an area he 52 ===== PAGE 57 ===== 53 knows firsthand. Liberal democracies, he the shrewd and quick responsiveness of farm- says, avoid famines. “In the terrible history of ers to incentives and disincentives, the superi- famines round the world, no substantial ority of competitive private over public trad- famine has ever occurred in a democracy.” ing systems.”6 In trying to be ultra-scholarly, Sen obfus- Like Sen, Bauer has extensive experience cates more than he elucidates. As Sylvia in the developing world, having spent years in Nasar wrote in the New York Times (October Asia and Africa as a writer and consultant. He 15, 1998), Sen is “highly influential, but warned the Indian government repeatedly that wide-ranging, diffuse, lacking a single killer its five-year plans would never achieve their theorem.” The Chinese philosopher Lin lofty goals. (The only Indian economist he Yutang put it best, “If one is too well-read, respected was B.R. Shenoy, a lone dissenter.) then one does not know right is right and The IMF could learn a lot from reading wrong is wrong.’ Bauer’s classic textbook, The Economics of Under-Developed Countries, co-authored by B.S. Yamey (Cambridge University Press, 1957). And one of the best short essays ever Give me a one-armed economist! In devel- written is “The Lesson of Hong Kong.’ opment theory, that candidate would be Lord Other essays can be found in Dissent on Bauer. Whether you agree with him or not, Development (Harvard University Press, you have no doubt where he stands. He is an 1976) and The Development Frontier (Har- ardent polemicist in defense of democratic vester, 1991). The Cato Institute recently pub- capitalism (including private property, free lished a book, The Revolution in Development trade, and limited government) in developing Economics, edited by James A. Dorn, Steve countries. H. Hanke, and Alan S. Walters, that was ded- P. T. Bauer is a long-time dissenter in devel- icated to Lord Bauer and includes many of his opment economics who has finally been vin- articles. Nothing could be better, short of a dicated. In that sense, he follows in the foot- Nobel Prize. | steps of other free-market economists— including Milton Friedman, who was ultimately proven right about the efficacy of 1. Amartya K. Sen, Collective Choice and Social Welfare (San monetary p olicy, and Ludwig von Mises and Ey A evolution (New York: Harper F. A. Hayek, who accurately predicted that & Row, 1976), pp. 114-15. In the postwar period, Bauer waged a lone- Models and Men (New York: Oxford University Press, 1978), ly battle against foreign aid, comprehensive PP Amaya Sen, Prospect, October 1995, cited in Chris Patten, central planning, nationalization, and other East and West (New York: Macmillan, 1998), p. 198. anti-market schemes. He denied the then- a a on oun a recently bec current orthodoxy, such as the vicious cycle reprinted by William Morrow. I highly recommend it. nomic growth. Today even Rostow admits, p.3ss. “there are, evidently, serious and correct 7. P. T. Bauer, “The Lesson of Hong Kong,” Equality, the Third Lo. . oo World and Economic Delusion (Cambridge, Mass.: Harvard Univer- insights in the Bauer position; for example, sity Press, 1981). “One-Armed” Bauer ===== PAGE 58 ===== 54 intellectuals, know that the system isn’t work- BOOKS ing, but want to modify and improve it with- out giving up on the system itself. While there are many insightful points in the ten essays New Schools for a New Century: included, not one grapples with the funda- The Redesign of Urban Education mental problem: turning education from a pri- } g ] vate investment into a government entitlement edited by Diane Ravitch and ensures politicization and decay. Popular Joseph Viteritti ideas such as charter schools, contracting, Yale University Press ® 1997 © 320 pages ® $30.00 vouchers, and choice abound, but conspicu- - ously missing is any radical, Mises-like Reviewed by George C. Leef author arguing against continued reliance on government education. Qocialism cannot work, Ludwig von Mises What I regard as the best essay in the book, argued from the 1920s until his death, Chester Finns “The Politics of Change,” because of a central flaw—the lack of market comes rather close to arguing that trying to prices. Socialists argued back that they could reform public education is a lost cause. He simulate market prices, but Mises countered recounts numerous episodes in which defend- that pretending to have a market could never ers of the system defeated changes that even come close to the real thing. Following the remotely threatened their beloved status quo. collapse of communism in Europe, even some Consider, for example, the reaction of the hard-core statists admitted that he had been New Jersey education establishment when right. PepsiCo announced its participation in a pro- What does that have to do with a book on gram to provide scholarships to poor young- education in the United States? The two cases sters so they could get out of the Jersey City are remarkably similar. Socialism necessarily public schools. Suddenly, the company was produces poor results because it does away faced with a union-instigated boycott of its with the market. No amount of tinkering can products, and there was a mysterious wave of change that. Likewise, “public education” vandalism aimed at its vending machines. (another of those mushy phrases that get in Pepsi backed down. The education establish- the way of clear thinking) necessarily pro- ment presents a smiling face to the public, but duces poor results because it does away with turns into a pack of snarling Dobermans when the market. anyone comes near its turf. In place of property rights, competition, Far worse is the incessant thought-control entrepreneurship, and the search for profit, the campaign waged by the educational establish- socialization of education gives us coercion, ment. Finn writes that it “cleverly manipulates bureaucracy, taxation, and the search for Americans’ strong affection for the concept of political power. The incentives for quality and public education while imposing a double efficiency that drive market participants are standard on proposals to reform its reality.” diminished and perverted when schools and The propaganda organs never stop informing educators do not derive their revenues from voters that “their” schools are award-winning, willing customers, but instead derive them progressive, and improving. Furthermore, through the tax system. That’s the ineradica- they automatically label any proposed change ble, disastrous flaw in “public education.” that doesn’t involve more money and authori- Market-imitating reforms in education are a ty for the schools anti-education. This works shabby substitute for the market itself. marvelously; opinion polls show that the This book, edited by Diane Ravitch, a great majority of parents are satisfied with the Brookings Institution scholar, and Joseph public schools their children attend and leery Viteritti, a New York University professor of of “dangerous” changes. public administration, is typical of the books When all else fails, the public education by educational theorists who, like the socialist crowd resorts to political intimidation. Finn ===== PAGE 59 ===== 55 recounts how one of those market-imitating Although the ponderous tax code is still very reforms was beaten in Arizona when the edu- much alive, its future is in doubt. cation lobby persuaded several Republicans In this legislative milieu, Charles Adams in swing districts that it would be wise for has unleashed his new book, Those Dirty Rot- them to vote against the bill. ten Taxes, in which he shares his view of From this essay, one might conclude that American history as a hotbed of tax revolt. the prospects for significant change in—much The book tells of the injustice and oppression less the defeat of—public education through wreaked by tax collectors, and shows how tax the political system, are nil. Finn is not quite avoidance and revolts have influenced our so pessimistic, noting some “cracks in the current tax system. glacier.” He acknowledges, however, that a The book abounds in historical detail. For glacier can continue on, grinding down all in instance, the whiskey rebellion of 1794: its path, even with some cracks in it. Perhaps farmers were unfairly taxed for producing people who care about education should just whiskey, which for some was the only viable give up on the political process and concen- means of transporting their corn. The farm- trate instead on creating a modern version of ers quickly rebelled and refused to pay the the Underground Railroad to help children tax. The new federal government, which had escape from the public education trap. only recently been founded on, among other If you want to know more about the prob- things, the principle of fair taxation, lems and prospects of the Milwaukee school- responded harshly by sending an entire choice plan, what has become of the Edison army, led by President George Washington Project, or the battles over public school con- in general’s garb, to force the farmers into tracting, this book will serve you well. If you compliance. want to raise your blood pressure over the Adams emphasizes the role taxes played in venality of the teachers unions and their polit- causing the Civil War. The Republican Party’s ical supplicants, this book will get you hot key plank in the 1860 election was the impo- under the collar. But if you want a book on sition of a severe tariff, a disguised subsidy to education that challenges the prevailing wis- northern industry that would have hurt the dom that public education is both necessary agrarian southern economy. Adams argues and reformable, look elsewhere. [J that the concessions Lincoln offered the George Leef, president of Patrick Henry Associates: South on the issue of slavery —including a Liberty Consultants in East Lansing, Michigan, is constitutional amendment that would have book review editor of The Freeman. preserved the “peculiar institution”—prove that economic exploitation of the South was a more significant cause of the war than was These Dirty Rotten Taxes: slavery. His view of the War Between the Tax Revolts that Built America States makes this a particularly thought- by Charles Adams provoking counterweight to the typical U.S. history text, which presents slavery as the prime cause of the war. Reviewed by James A. Woehlke American history includes another tax on and Nikolaus P. Woehlke whiskey that led to yet another whiskey insur- rection, this one a small-scale war between RS reform has been a hot topic in Wash- the moonshiners and the revenuers that began ington recently. Last spring, more than 80 shortly after the Civil War. (At this point, the legislators attempted to repeal the Internal reader has to wonder if Americans were char- Revenue Code—unsuccessfully. Fundamental acterized more for their hatred of taxes or tax reform, the attempt to replace the graduat- their love of good whiskey!) This whiskey ed income tax with a flat tax or national sales rebellion can be regarded as successful, since tax, was a guiding theme for the newly elect- the government chose to repeal a tax that the ed reformist Republican Congress in 1995. people simply wouldn’t pay. The Free Press ® 1998 © 242 pages ® $25.00 ===== PAGE 60 ===== 56 THE FREEMAN/IDEAS ON LIBERTY ® FEBRUARY 1999 Adams then comes to the ugliest monster of view of the economic condition of North Car- them all, the income tax. He blames it for olina blacks in the 50 years between the end intruding into the private lives of citizens and of the Civil War and the First World War. By chasing some of our most prosperous busi- no means dismissing or even minimizing the nessmen out of the country. For Adams, the impact of racism and the legacy of slavery in IRS is an abomination. He reveals, for shaping the black experience in those years, instance, that it paid agents according to how Kenzer presents compelling evidence of many foreclosures they caused. How quick “slow but steady progress” in land-ownership the IRS has been to take cars, homes, or and business énterprises. Drawing imagina- money, yet unbearably slow to fix its mistakes tively on extensive primary statistical evi- or the damage it caused to innocent people’s dence, yet going far beyond mere quantitative lives! Adams also discusses the high death tax history, Kenzer analyzes the range of eco- and how it causes the elimination of over 90 nomic, cultural, and political factors that percent of family businesses after the encouraged economic success among an founders die. exceptional group of blacks in the postbellum Those Dirty Rotten Taxes makes a strong South, a success that they took pains to pass case for abandoning intrusive direct taxation on to their children through higher education to the greatest extent possible. Adams, like for careers in teaching, the ministry, medi- the Founders before him, prefers indirect tax- cine, and business. ation, such as a sales tax, and so is no fan of Kenzer found that blacks’ success in acquir- any of the various flat tax proposals. ing land, launching viable businesses, and Those Dirty Rotten Taxes is not a rigorous- achieving political and social leadership in ly documented book, unlike Adams’s previous their communities was related to several clear- work, For Good and Evil: The Impact of Taxes ly identifiable factors, some economic, some on the Course of Civilization. It is lighter, and cultural. Land-ownership, for example, was at times prone to hyperbole. But its straight- highest both in amount of and value of acreage forward view of the ingrained American among blacks who had been free before the antipathy to taxation is exhilarating. There are war, were mulattos, held non-agricultural lots of illustrations and political cartoons, and occupations, and lived in the more fluid real the writing is engaging and easily understood. estate market of the cities. Similar patterns We highly recommend this book to anyone held true for success in business and politics. interested in taxes, history, or government. [] To be sure, success was not limited to blacks James Woehlke is counsel and director of technical who fit this statistical profile, but urban blacks services for the New York State Society of Certified who had been free before the war experienced Public Accountants. Nikolaus Woehlke is a freelance the highest degree of success as landowners, writer from Poughkeepsie, New York. businessmen, and political leaders. From the perspective of free-market eco- nomics, two important contributions stand out Enterprising Southerners: in Kenzer’s work. While not the main point of Black Economic Success in his study, his observations about blacks’ rela- North Carolina, 1865-1915 tionship to the market economy and their net- work of self-help organizations bear noting. by Robert C. Kenzer Black leaders in North Carolina defended an University Press of Virginia ® 1997 open market in real estate free from govern- ® xvi + 178 pages © $30.00 ment intervention and special-interest legisla- tion. Faced with proposed legislation in 1915 designed to prevent blacks from buying land in majority-white districts, for example, black I this meticulous and tightly argued vol- leaders argued for a free market for both ume, historian Robert Kenzer corrects what blacks and whites in which to buy and sell he describes as the prevailing “monolithic” property under the most favorable terms. Reviewed by Richard M. Gamble ===== PAGE 61 ===== Books 57 Blacks simply wanted the freedom to acquire general reader may be put off by its compre- land and homes in an open market. Under hensive detail. Nevertheless, his gift for orga- pressure from like-minded white landowners, nization, his sense of narrative flow, and his who did not want their freedom restricted effective use of telling anecdotes combine to either, the state senate rejected the bill. In make this an accessible study of the period business enterprises as well, black entrepre- even for the non-specialist. Overall, Kenzer neurs proved their business savvy by their has provided historians and economists with a ability to adapt to changing market condi- convincing account of the diverse world of tions, even in enterprises and localities for- postbellum black success, a commendable merly dominated by white Southerners. They book that is lucid, grounded in extensive understood that an open market was their archival research, conversant with the sec- friend, politics their enemy. ondary literature, and a pleasure to read and More striking is Kenzer’s discussion of learn from. Ol black leaders’ efforts to strengthen their COM Richard Gamble is a professor of history at Palm munities’ economic and social well-being Beach Atlantic College. with a network of effective voluntary organi- zations. Local chapters of the Masons, for example, provided financial assistance and The Costs of War: emotional support in times of sickness, unem- ployment, and bereavement. Drawing mem- bers largely from the black economic and edited by John V. Denson political elite, these voluntary societies Transaction Publishers ® 1997 ® 450 pages encouraged success by providing a framework © $44.95 cloth; $29.95 paperback of moral and ethical accountability and help- - ful practical experience in managing lodge Reviewed by Doug Bandow assets. To advance their business opportunities dvocates of limited government have further, enterprising blacks also founded long known that war and preparation for banks, building and loan associations, and war are enemies of liberty. War obviously insurance companies, and joined state and destroys lives and consumes wealth—new national black industrial organizations. The technologies have made genocide a simple extent of black economic success that Kenzer matter of pushing a button. But war has recounts is both remarkable and at odds with another, long-lasting consequence: it central- the prevailing notion that post-Civil War izes power. “War is the health of the state,” blacks all lived in grinding poverty. observed Randolph Bourne. Beyond individual and collective economic Many conservatives were willing to pay success as landowners and businessmen, post- this high price during the Cold War because bellum black elites in North Carolina also of the threat of hegemonic communism. But achieved a degree of political success. Begin- now America reigns supreme internationally. ning as loyal party members, generally in the Those who believe in individual liberty must Republican ranks but later in the Populist work to limit government power internation- movement as well, blacks often held patron- ally as well as domestically. age jobs (such as tax collectors) before seek- John V. Denson’s The Costs of War: Ameri- ing elective office. They found political suc- cas Pyrrhic Victories provides a desperately cess as local, state, and national officeholders needed call to arms. As he explains: and, not immune to the temptations of rent- “[Blecause liberty is so fragile, its true seeking behavior, used their positions to defender recognizes that war is its greatest enhance their business opportunities, dis- enemy, and therefore the true patriot is often pense patronage jobs, and shape tax policy. the courageous individual who opposes a par- Kenzer’s history is intended for the special- ticular war because he recognizes that it is ist in American economic history, and the unjust—that it would be fought for the wrong America’s Pyrrhic Victories ===== PAGE 62 ===== 58 THE FREEMAN/IDEAS ON LIBERTY ® FEBRUARY 1999 purposes or that the risk for the loss of liber- historian Ralph Raico. There is perhaps no ty 1s greater than any benefit to be gained by more venerated figure from World War II, but the war.” Raico’s view is rather less positive. He con- The Costs of War emphasizes the fragility tends that “Churchill was from first to last a of liberty and chronicles the devastating Man of the State, of the welfare state and of impact of past conflicts. This comprehensive the warfare state.” Indeed, argues Raico, war volume covers everything from the War of “was his lifelong passion.” This is the record Northern Aggression (sometimes called the that virtually no one knows. Civil War) to the role of conscription and the Some of the impacts of war are unintended record of Winston Churchill. and even unimagined. Allan Carlson of the Denson leads off with a sweeping essay on Rockford Institute explains how war swells U.S. history. The nation’s founders feared the the state; in turn, “as the state grows, the fam- costs of war, which is why they worked to pre- ily declines.” He warns that the military today vent intervention in foreign conflicts. Their is “being used to re-engineer our society to fears were well founded: the Civil War and serve the total state.” He therefore calls on Spanish-American War both spurred the conservatives to “cast off lingering delusions growth of federal power. World War I, howev- about the ‘conservative traditions’ of the mil- er, was a truly epochal event. Not only did the itary.” national government institute mass conscrip- Real patriotism means risking the lives and tion and seize control of the economy, but, as wealth of Americans when their future as a Denson relates, “President Wilson followed free people is at stake. The Costs of War illus- Lincoln’s example and ruthlessly crushed the trates why there may be no more important civil liberties of those Americans who duty today for advocates of limited govern- opposed his war.” Although government ment than to steadfastly oppose war. Cl power receded some after the conflict, World Doug Bandow is a senior fellow at the Cato Institute War II and the Cold War fueled state growth 44 author of Tripwire: Korea and U.S. Foreign Pol- anew. icy in a Changed World. He formerly served as a spe- The lack of serious opposition to warlike cial assistant to President Reagan. policies today conflicts with America’s long anti-interventionist tradition, of which Justin Raimondo, of the Center for Libertarian Enviro-Capitalists: Doing Good Studies, writes: “It wasn’t just the founders While Doing Well : , g We who opposed fighting other people’s wars. There was strong opposition to the Spanish- by Terry A. Anderson and American War and World War I—which is Donald R. Leal why Wilson resorted to jackboot tactics Rowman & Littlefield Publishers, Inc. ® 1997 against his critics.” ® 189 pages ® $52.50 cloth; $16.95 paperback What makes The Costs of War particularly - valuable is its willingness to slaughter sacred Reviewed by Bruce Yandle cows. Such as Abraham Lincoln and his war for the Union—which ended up killing more riting about Austrian economics and than 600,000 people, distorting the constitu- the market process, Israel Kirzner tional order, and violating civil and political explains how entrepreneurs play a crucial role liberties. History professor Richard Gamble in discovering products, markets, and explores Lincoln’s ugly legacy of the processes for improving human welfare “destruction of the old Republic, a more mod- (Journal of Economic Literature, March est federation with a regard for localism and 1997). The interesting aspect of all this is sur- states’ rights, a sense of limits, and a relative prise. In Kirzner’s view, entrepreneurs identi- freedom from foreign entanglement.” fy profit opportunities that, once revealed, Equally subversive, but also persuasive, is seem rather simple and obvious. An accompa- the analysis of Winston Churchill’s record by nying expression of surprise usually charac- ===== PAGE 63 ===== Books 59 terizes the outcome. The question “Why the habitat of the fish. They consented to didn’t I think of that?” is more common than these dictates, which happened to largely the statement “Boy, that surely is complicat- coincide with their plans, but it is easy to ed; I can’t imagine how they came up with it” imagine that bureaucratic red tape and Paper clips with wrinkles, self-serve super- micro-management could easily stifle other markets, moving assembly lines applied to environmental projects. auto production, Post-It notes—all relatively Another case the authors discuss is Interna- simple things that reflect a combination of tional Paper’s realization that large amounts imagination and market savvy. This is the of its forestland produced more wealth when stuff that built America’s market economy. Is managed and maintained as wildlife habitat it possible for this same creative energy to and recreational space than when used as a provide improved environmental quality? source for cut timber. This led the firm to allo- Readers of Enviro-Capitalists: Doing Good cate more than a million acres of land to those While Doing Well, by economists Terry purposes. Why did International Paper do it? Anderson and Donald Leal, will be convinced The same reason that causes the firm to search that the same unquenchable entrepreneurial for lower-cost paper and timber products— spirit that delivers an abundance of food, profit. Market forces are delivering environ- clothing, communications, health, and other mental quality. critical features of life can be relied on to What about Yellowstone, that paragon of deliver environmental quality—if only entre- America’s park system? Was it the unblem- preneurs could be encouraged rather than ished foresight of government that preserved delayed and discouraged by government this collection of natural wonders? Hardly. action. Instead, we learn that “robber baron” railroad The authors do not dwell on theories and capitalists recognized the market value of the assertions about free-market environmental- territory that became Yellowstone Park. See- ism. Instead, they recount fact-filled stories ing a promising attraction for eco-tourism and about past and present activities of enviro- rail traffic, railroad capitalists sought to pur- capitalists. Those who erroneously cling to chase the land from the federal government, the idea that capitalism is inherently destruc- but were prevented from doing so by an egal- tive to the environment will find their preju- itarian federal law limiting land ownership to dices strongly challenged. This collection of only 160 acres. Frustrated in their attempt to stories about real people and their profit- purchase the asset they wanted, the railroad- making ventures in environmental production ers then lobbied for Congress to establish Yel- reminds us again that capitalism works. lowstone National Park and once it had done We learn, for instance, about Joseph Crisa- so, they promptly built the rail lines and fulli, a successful entrepreneur in Glendive, hotels. Montana, who established a paddlefish roe Anderson and Leal also explain how entre- enterprise. He discovered that paddlefish roe preneurs are finding market niches for pro- would pass the market’s test for caviar. Sens- tecting endangered species, such as the pere- ing a profit opportunity, Crisafulli and other grine falcon. The common assumption that town business people began a paddlefish government action is the only means to pro- cleaning service for fishermen who prize the tect species cannot survive a reading of this fish but dislike cleaning them; they obtained book. pounds of valuable roe in the bargain. Enviro-Capitalists should be read both by However, Crisafulli and his associates had environmentalists and friends of liberty. True to work through a deep political bureaucracy. environmentalists, those who seek to protect They needed permission from both state and the precious biological envelopes that sup- federal regulators before beginning their port life and are not simply dedicated to the enterprise. Moreover, the regulators insisted replacement of individual freedom with that net proceeds go to “community command-and-control regulation, will be improvements” including the preservation of encouraged to know that markets are on their ===== PAGE 64 ===== 60 THE FREEMAN/IDEAS ON LIBERTY ® FEBRUARY 1999 side. Friends of liberty, who sometimes find speare and Melville: all authority and claims to themselves hard-pressed to defend markets in truth are but shams whose only purpose is to the face of attacks from environmentalists, protect the unjust distribution of power that will welcome the reinforcements provided by earmarks our “oppressive” society. Feminists, this excellent, if too-short book. [J for example, indict Newton for attempting to Bruce Yandle is Alumni Professor of Economics and master the universe by constraining it under Legal Studies at Clemson University. “patriarchal” laws and Darwin for his “male” notion of the survival of the fittest. Gross and Levitt note that claims of this type are not entirely new—prototypes may be seen in Rousseau and Blake—but they argue that in America’s colleges and universities the Higher Superstition: The Academic Left and Its Quarrels with Science by Paul R. Gross and Norman Levitt anti-science ideology has grown dangerously Johns Hopkins University Press ® 1997 ® 314 pages influential. Academic careers are now built on ® $35.95 cloth; $16.95 paperback jeremiads against “sexist” canons of proof- , through-replication and the alleged exclusion Reviewed by Thomas F. Bertonneau of women (that is, feminists) from scientific and Richard L. Cutler debate. Ideas that used to be regarded as the rantings of reactionaries now find fulsome cience, along with the technology that praise in the tracts of academicians who claim develops out of it, is a unique and vital to be in the vanguard of radical liberation. source of the high civilization in which we When one remembers the distortions that dwell. Science is enthroned as the reigning Soviet biology suffered under Lysenko’s Stal- model of Enlightenment thought; the methods inist genetics, it becomes clear that the real of science represent an epistemology involv- conflict is not between reactionism and sci- ing objectivity, real-world absolutes, and the ence but between power-mongering and sci- pursuit of truth through hypothesis, observa- ence. It is no coincidence that the left-wing tion, validation, replication, and prediction. professors who think that they can play the Science presents an ordered, reasoned, rigor- same games with the third law of motion that ous world marked by precision, unambiguous they do with Virgil and Shakespeare gener- definition, and the established rules of logical ally follow Michel Foucault, a pseudo- argument. Nietzschean who claims that there is no If science is the monarch of our world- knowledge, only power, and that those who view, however, it is increasingly the target of have power are, a priori, evil. That this posi- would-be revolutionaries and regicides— tion entails a claim of knowledge and that its members of what Paul Gross (professor emer- exponents themselves wantonly seek the very itus of life sciences at the University of Vir- power that they denounce never enter the ginia) and Norman Levitt (professor of math- argument. ematics at Rutgers University) identify as the Nuttiness among intellectuals flourishes “academic left,” who insist that there are no perennially. So tight is the grip of the left on absolutes, that objectivity is a fiction used by institutions of higher education, however, that vicious oppressors, and that the world is Gross and Levitt fear an impending struggle essentially chaotic. in which affirmative action will force science Higher Superstition is a defense of science departments to change their practices under against attempts by badly informed non- naked political pressure. The authors also see scientists to dethrone and discredit the Western another problem. Real science is so badly tradition of scientific investigation. They were taught to undergraduates that many get only not satisfied with their deconstructive waste- “science studies” courses concocted by the laying among the treasures of Western art and postmodern anti-scientists. Gross and Levitt literature. They make the same claims, say, for decry the trendiness of schools of education Newton and Darwin as they do for Shake- that have embraced anti-science and that send ===== PAGE 65 ===== Books 61 into K-12 schools newly certified teachers a question between power and liberty.” whose knowledge of physics, chemistry, and The essays in this book brilliantly make the biology is nugatory. case for liberty over power. Three key points In their penultimate chapter, the authors emerge: First, that private property is the key speculate on the psychological origins of anti- to individual liberty. Second, that the Consti- science. They trace the pretensions of the tution was intended to protect private proper- feminists, earth-worshipers, and “deep ecolo- ty against government intrusions. And third, gists” to resentment. Precisely because sci- that we have reasons to be optimistic, despite ence succeeds, and because it so impressively the panoply of governmental restrictions on informs the daily reality of modern life, the our private property and individual liberty. intelligentsia feel diminished; they exercise Richard Ebeling, chairman of Hillsdale’s no similar influence. A feeling of inferiority economics department, contrasts “The Free breeds petulance, manifested in puffed-up Market and the Interventionist State.” The vocabularies, moral posturing, and a need to role of government in a free society, he disparage. Those who hate the West because argues, is to protect private property, maintain they despise their own paltriness naturally order, and thus maximize the incentive to cre- attack science and scientists as ready scape- ate wealth. Interventionism violates property goats. rights so that government officials can redis- Representatives of the sciences, Gross and tribute wealth according to their own plans. Levitt say, have too long stood on the side- Ebeling laments the conception of “public lines, amused perhaps by the display of folly. policy” as synonymous with government The time for that is over; the folly portends intervention. Discussions of public policy real danger. Science must begin to answer the almost always center on “What can the gov- absurd but pernicious claims of anti-science, ernment do?” instead of “What can we do as if only to remind the public that the strutting individuals?” or even “What did the govern- peacocks of postmodernism are not free from ment do to get us in this mess in the first chastisement, and that their fantail of claims place?” Ebeling explains how to defend the collapses—epistemologically speaking—at free market against attacks based on spurious the pressure of a glance. [J economic theory, “social justice,” and “the Thomas Bertonneau is the author of Declining Stan- P ublic interest.” Those who wish to improve dards at Michigan Public Universities and teaches lit- their ability to defend the market will learn erature at Central Michigan University. Richard Cut- much from his essay. ler is president of the Michigan Association of Schol- Several of these lectures make an excellent Vi and a former vice president of the University of introduction to constitutional economics. ORG. Hillsdale President George Roche notes that the Declaration of Independence proclaims Between Power and Liberty: the unalienable Rights” of individuals, as opposed to the idea that rights are grants from the state. He outlines the economic philoso- Economics and the Law edited by Richard M. Ebeling phy of the Constitution: that government tax- Hillsdale College Press ® 1998 ® 169 pages ation, borrowing, and spending should be * $9.95 paperback kept to a minimum and that government should permit free trade to grow. Cato Institute fiscal analyst Stephen Moore calls the Constitution “A Rulebook for Gov- Bee Power and Liberty: Economics ernment.” He says that “No matter how long and the Law, is the publication of the one searches, it is impossible to find in the 1997 Ludwig von Mises lectures at Hillsdale Constitution any language that authorizes at College. The book’s title comes from James least 90 percent of the civilian programs that Madison’s description of the Constitution and Congress crams into the federal budget.” the Bill of Rights: “every word . . . describes Moore relates that early in our nation’s histo- Reviewed by Philip R. Murray ===== PAGE 66 ===== 62 THE FREEMAN/IDEAS ON LIBERTY ® FEBRUARY 1999 ry members of Congress and presidents used Despite the reduction in our property rights to reject even charitable acts of government and the corresponding loss of liberty, we have spending as unconstitutional. What led to the reasons to be optimistic about the future. In current high levels of government spending? his essay, “The Grassroots Legal Reform The Sixteenth Amendment (which permitted Movement,” Clint Bolick of the Institute for a federal income tax), a glaring misinterpreta- Justice recounts his organization’s successes tion of the “general welfare” clause of the in eliminating restrictions on economic liber- Constitution, and the New Deal. ty through constitutional litigation. Likewise, No discussion of economics and the law Bernard Siegan sees promise in a revival of would be complete without recognition of the the “takings” clause of the Fifth Amendment, great French economist Frederic Bastiat. which bars government from taking property Harry Browne explains Bastiat’s definitions of without paying for it. “the law” and “the law perverted.” The law Perhaps the most valuable contribution protects life, liberty, and property. The law these lectures make is their emphasis on self- perverted transfers property. For example, government. It is primarily the duty of each Social Security taxes the income of workers citizen to restore liberty through the practice and transfers it to retirees. The law perverted of self-government. This means refusing to plunders people rather than protecting them. take assistance from government and using What are the results of using the political our own talents in conjunction with the vol- process instead of the market process to untary cooperation of others to live the free, achieve what we want? Roche puts it well: responsible life. Ll “The average person no longer looks to his Philip Murray is an associate professor of economics own talents to get ahead; he looks to the state.” at Webber College in Babson Park, Florida. The Foundations of Morality by Henry Hazlitt In this impressive work Hazlitt explores the proper foundation of morality. It would give the game away to reveal his conclusion, but suffice it to say that Hazlitt conducts a detailed and scholarly inquiry into the many possibilities. Leland B. Yeager, noted economist, has written a new foreword to the book, in which he says that The Foundations of Morality “provides (in my view) the soundest philosophical basis for the humane society that is the ideal of classical liberals.” This challenging work on ethics fits in the great tradition of Adam Smith’s Theory of Moral Sentiments and David Hume's Treatise of Human Nature. It is a well-reasoned, tightly argued book that amply rewards its readers. 398 pages Regular Price: $4895 Sale Price: $14.95 ===== PAGE 67 ===== The Pursuit of Happiness by Charles W. Baird The ILO’s Strange Use of Words | Phe June the International Labor Organi- countries abolished child labor by statute only zation (ILO) put forth its “Declaration on after labor productivity had risen to the point Fundamental Principles and Rights at Work.” that markets had abolished it by choice. Item U.S. Labor Secretary Alexis Herman asserted (d) is also problematic because of the wide that the declaration is “a big step forward for variety of meanings attached to the word “dis- the ILO and its members as we enter the 21st crimination.” In the United States, for exam- century.” John Sweeney, president of the ple, most so-called civil rights leaders say that AFL-CIO, called it “an historic breakthrough it is discriminatory not to discriminate. More- that dramatically underscores the importance over, elimination of discrimination in employ- of basic rights for workers in the global econ- ment by law often means legal mandates to omy.” pay equal wages for labor services of unequal The core of the declaration requires the value. governments of all ILO member countries “to However, most problematic of all is item promote and to realize, in good faith” four (a). What does it mean? If “freedom of asso- basic principles: “(a) freedom of association ciation” means that government is forbidden and the effective recognition of the right to to interfere with individuals who wish to affil- collective bargaining; (b) the elimination of iate with each other for legal purposes, or to all forms of forced or compulsory labour; interfere with other individuals who choose (c) the effective abolition of child labour; and not to enter into such affiliations, then I con- (d) the elimination of discrimination in cur. If “collective bargaining” means volun- respect of employment and occupation.” tary bargaining involving individuals who Forty-three developing countries refused to have each chosen to be represented by the support the declaration because they saw it as same agent, then I concur. an attempt by industrialized countries to elim- A brief glimpse at ILO documents through inate their competitive advantage in labor the years, however, shows that this is not what costs and as a pretext for the imposition of the organization means. protectionist trade restrictions. They were Its definitions of these terms are made clear right. That, I submit, is what makes Herman in the 1994 report of its Committee of and Sweeney tingle all over. Experts, “Freedom of Association and Collec- While all classical liberals can enthusiasti- tive Bargaining,” and in how its Committee on cally agree to item (b) in the declaration, item Freedom of Association applied these princi- (c) 1s problematic. Today’s industrialized ples in its 1994 evaluation of New Zealand’s Employment Contracts Act (ECA). Charles Baird is a professor of economics and the The Committee of Experts wrote that director of the Smith Center for Private Enterprise trade union rights violations may . . . result Studies at California State University at Hayward. by reason of legislation . . . which favour[s] 63 ===== PAGE 68 ===== 64 THE FREEMAN/IDEAS ON LIBERTY ® FEBRUARY 1999 individual rights to the detriment of collective Under this principle employers are forced to rights.” This distinction between individual bargain with unions and to make concessions rights and collective rights is curious. Human to unions. The word “voluntary” in Article 4 rights reside in individuals. They are prior to is meaningless. government, and it is government’s duty to New Zealand’s ECA became law in 1991. It protect them for all individuals. Individuals eliminated almost all forms of compulsory can voluntarily associate with each other in unionism. Individual workers are free to the pursuit of legal ends, but the association is decide whether to represent themselves or to nothing more than the sum of its constituents. authorize an agent to represent them. Agents It can have no rights other than the rights that can be unions, individuals, or non-union orga- its individuals bring into it, and those individ- nizations. While employers must recognize uals have exactly those rights that all individ- agents chosen by individual workers, they do uals have, no more and no less. not have to bargain with them. Unions may The ILO endorses rights to trade-union represent only workers who choose to join. association that are distinct from, and in con- There can be no forced membership or forced flict with, individual rights to free association. dues. Employers and workers are free to It asserts that those who wish to join trade choose whether to enter individual or collec- unions must be free to do so, but it does not tive contracts. In 1993 the New Zealand say that those who choose not to join, be rep- Council of Trade Unions complained to the resented by, or to pay union dues should be ILO that the ECA violated Conventions 87 free to abstain. In 1947 the ILO rejected an and 98 on freedom of association and the amendment to its Convention No. 87, “Free- right to collective bargaining. The 1994 dom of Association,” that would have “Report of the Committee on Freedom of “grant[ed] workers the right not to join an Association” that evaluated the complaint organization.” But correctly understood, free- speaks for itself: It could not accept the ECA’s dom of association means just that. Likewise, “underlying philosophy, which puts on the the Experts endorse the principle of exclusive same footing (a) individual and collective representation, under which unions are grant- employment contracts, and (b) individual and ed the legal privilege of representing workers collective representation.” other than their voluntary members. They also Imagine that! The ECA “allows” workers espouse union security, which means workers freely to choose to negotiate employment can be forced to join unions or at least to pay contracts individually or collectively. But the union dues. ILO doesn’t approve. It prefers “promoting Article 4 of the ILO’ Convention No. 98, and encouraging” (read “coercing”) mandato- “Right to Organize and Collective Bargain- ry good faith collective bargaining through ing,” states, “Measures . . . shall be taken . .. trade unions vested with collective rights that to encourage and promote the full develop- trample individual rights. ment and utilization of machinery for volun- This is Secretary Herman's “big step for- tary negotiation between employers or ward into the 21st century” and John employers’ organizations and workers’ orga- Sweeney’s view of “basic rights for workers in nizations.” This sounds good but it’s not what the global economy.” In reality the ILO’ it seems. First, note that individual employers views are based on the nineteenth-century can bargain with workers’ organizations, but idea of class struggle and the twentieth- there is no provision for individual workers to century illusion that the working class needs bargain with employers. The word “volun- compulsory trade unionism to defend itself tary” doesn’t apply to workers who choose to against predatory employers. In my view the bargain for themselves. Furthermore, the ECA is the real giant step forward into the Experts approve mandatory good-faith bar- 21st century precisely because it is based on gaining between trade unions and employers. genuine rights. []