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111A

REEMAN

Ideas On Cldeas On Liberty
March 1999 Vol. 49, No. 3

FEATURES

6 To Each His Due by Tom Bethell
10 Just Deserts by Charles W. Baird
16 Crimes of the Mind by Melissa Suarez
18 Mises on Mexico by Eduardo Turrent
¥ 25 Frontiers: Last, Lost, and Found by Eric Nolte
29 The Great Bequest by Tom G. Palmer
37 The “Savings Crisis” by John Hood
43 The Bully that Acts Like a Hero by Harold B. Jones, Jr.
a7 Philosophy 1 On 1 by James R. Otteson

COLUMNS

Center NOTES from FEE—Brates in Suits by Donald J. Boudreaux

14 IDEAS and CONSEQUENCES—Night of the “Living Wage”
by Lawrence W. Reed
¥ 23 POTOMAC PRINCIPLES—America’s Forgotten War by Doug Bandow
35 PERIPATETICS—Smoke Got in Their Eyes by Sheldon Richman
¥52 ECONOMIC NOTIONS—Opportunities and Costs by Dwight R. Lee
55 ECONOMICS on TRIAL—Y2K and Entrepreneurial Error by Mark Skousen
¥e3 THE PURSUIT of HAPPINESS—Illuminating the Unseen by Russell Roberts

DEPARTMENTS

2 Perspective—Life Imitates Gilbert by Sheldon Richman

49 Asia Needs Capital Controls? It Just Ain’t So! by Lawrence H. White
54 Capital Letters: Vive la Différence?
57 Book Reviews

*For Your Own Good: The Anti-Smoking Crusade and the Tyranny of Public Health by Jacob
Sullum, reviewed by John Attarian; Star-Spangled Men: America’s Ten Worst Presidents by
Nathan Miller, reviewed by Gene Healy; Fantasies of Salvation: Democracy, Nationalism, and
Myth in Post-Communist Europe by Vladimir Tismaneanu, reviewed by David L. Prychitko; Out
of Order by Max Boot, reviewed by George C. Leef; A History of the American People by Paul
Johnson, reviewed by Burton Folsom.


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Fk EN. cxtitam

REEMAN EM AN PERSPECTIVE

C1 leas On Liberty) Life Imitates Gilbert
Published by
The Foundation for Economic Education In jolly old England Queen Elizabeth II has
Irvington-on-Hudson, NY 10533 stripped the hereditary peers of their parlia-
Phone (914) 591-7230 FAX (914) 591-8910 Pp reditary p P
E-mail: freeman@fee.org mentary power in the House of Lords. The act
FEE Home Page: http://www. fee.org constitutes the leveling of the dukes, earls,
President: Donald J. Boudreaux marquesses, viscounts, and barons, some of
Editor: Sheldon Richman whose titles go back to William the Con-

queror, Duke of Normandy, who subdued

M ing Editor: Beth A. Hoffm
anaging =attor: Beth A. Holman England in 1066 and became William I.

Editor Emeritus

Paul L. Poirot For devotees of another William—William
Book Review Editor Schwenck Gilbert (1836—-1911)—this all has
George C. Leef a familiar ring. Gilbert, of course, was the
Editorial Assistant liberal spirit and comic librettist who with
Colm y Arthur Seymour Sullivan composed the great-
Charles W. Baird est collaborative effort by Englishmen ever—
Doug Bandow Monty Python, Lennon and McCartney,
Dwight R. Lee and Churchill and Bomber Harris included.
Lawrence W. Reed Mencken called Gilbert “even above Mark
Mark Skousen Twain, the merrymaker of his generation.”
Walter Williams Gilbert’s arsenal of jibe and joke and quip
Contributing Editors and crank was reserved almost exclusively for
— ! poerte men of rank. As his alter ego, Jack Point, put
arence B. Carson it in The Yeomen of the Guard:

Thomas J. DiLorenzo
Burton W. Folsom, Jr.
Joseph S. Fulda
Bettina Bien Greaves

At peer or prince—at prince or peer,
I aim my shaft and know no fear!

Robert Higgs

John Hospers Gilbert played with the idea of radical
Raymond J. Keating change in the House of Lords in his and Sulli-
Daniel B. Klein van’s opera lolanthe. In synopsis, a band of
Wendy McElroy fairies casts a spell on the Lords for coming
Tibor R. Machan between a young shepherd and his betrothed,
Ronald Nash Phyllis. Magically, Strephon is seated in Parlia-
Edmund A. Opitz ment and “carries every bill he chooses.” But
James L. Payne the fairies go further. Speaks the Fairy Queen:
William H. Peterson

Jane S. Shaw

Peers shall teem in Christendom,
And a Duke’s exalted station

Be attainable by Com-
The Freeman is the monthly publication of The Foundation for Eco- cos . . '
nomic Education, Inc., Irvington-on-Hudson, NY 10533. FEE, Petittive Examination!
established in 1946 by Leonard E. Read, is a non-political, educational
champion of private property, the free market, and limited government.

Richard H. Timberlake
Lawrence H. White

FEE is classified as a 26 USC SOL(c)(3) tax-exempt organization. Gilbert had no more mercy for the Peers
opyrig y The Foundation for Economic Education. Per- . . h
mission is granted to reprint any article in this issue, except “To Each than the Fairy Queen did. His Lord Mount-
His Due” and “The Great Bequest,” provided credit is given and two : ses :
copies of the reprinted material are sent to FEE. ararat explains that an undistinguished group
} The costs of Foundation projects and services are met through dona- of noblemen had never barred England from
tions, which are invited in any amount. Donors of $30.00 or more A
receive a subscription to The Freeman. For foreign delivery, a donation greatness in the past.
of $45.00 a year is suggested to cover mailing costs. Student subscrip-
tions are $10.00 for the nine-month academic year; $5.00 per semester.
Additional copies of this issue of The Freeman are $3.00 each. :

Bound volumes of The Freeman are available from The Foundation When Wellington thrashed Bonaparte,
for calendar years 1972 to date. The Freeman is available in microform As every child can tell,

from University Microfilms, 300 N. Zeeb Rd., Ann Arbor, MI 48106.

Cover image of World War | soldiers courtesy of Lebanon County
(Pa) Historical Society. 2


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—_—_e———

The House of Peers, throughout the war, ten in his papers until our own Bettina Bien
Did nothing in particular, Greaves found it in 1997. It was translated

And did it very well: into Spanish and published in Mexico. Eduar-
Yet Britain set the world ablaze do Turrent discusses the significance of

In good King George's glorious days! Mises’s work.
} The cost of government regulation is not
Even a lowly sentry knew the score. Private merely the money spent but the untold things
Willis points out that members of Parliament, ye must do without because innovation is sti-
“if they’ve a brain and cerebellum, too,” leave fled. Eric Nolte provides a glimpse of what we
their brains outside Westminster Hall “and 1d be enjoying were the federal govern-
vote just as their leaders tell ’em to.” Not that + not regulating aviation.

that’s a bad thing: The Western idea of limiting government

But then the prospect of a lot power—and clearing a large space for indi-
Of dull M.Ps in close proximity, vidual creativity—is the product of a long,

All thinking for themselves, is what complex, and unplanned historical process.
No man can face with equanimity. Tom Palmer takes us on the consequential

journey from servitude to freedom and back.

All ends well, of course. Each Lord marries Everyone knows that Americans save too
a fairy—happily exchanging House of Peers little. Too few know why. John Hood puts the
for House of Pers. idea of saving into historical perspective and
No moral here, just an observation: Gilbert comes to some provocative conclusions.
saw hereditary rank, and government in gen- Remember the last time the government

eral, as something to be knocked down a declared some problem solved and disbanded
notch. It’s good to see the world catching up the agency charged with solving it? Neither

with him. do we. Harold Jones, Jr., says it’s not our
* x * memory that is failing.
It cannot be said too many times: Property To win someone over to the freedom phi-

is the key to liberty, justice, and prosperity. losophy, it helps to connect with the intu-
Which is why Tom Bethell’s new book, The itions he already possesses. James Otteson
Noblest Triumph, is such a welcome addition sets out a game plan for persuading philoso-
to the literature of freedom. In the excerpt phers that liberty is indivisible. It’s not just
reprinted herein Bethell examines the crucial for philosophers.
connection between property and justice. In columns this month, Lawrence Reed
Speaking of justice, more than a few people inveighs against “living wage” legislation,
think the gap between what corporate CEOs Dwight Lee expounds on opportunity costs,
and workers are paid is a scandal. The gap is Doug Bandow revisits the stupidest war of the
real; the injustice is illusory, as Charles Baird twentieth century, Mark Skousen ponders the
demonstrates. millennium bug, and Russell Roberts, our
Since the atrocious murder of a young newest contributor to “The Pursuit of Happi-
homosexual man in Wyoming last year, the ness,” looks for the unseen. Lawrence White
push for a national “hate crimes” law has been mulls over Jagdish Bhagwati’s nod to capital
renewed with vigor. Not so fast, writes Melis- controls, and counters, “It Just Ain’t So.”
sa Suarez, who finds good reasons to be wary Books that come under review this month
about well-meaning legislation aimed at states deal with the war on tobacco, the ten “worst”
of mind. presidents, the post-communist world, judi-
In 1943 the great classical liberal Ludwig cial corruption, and Paul Johnson's history of
von Mises wrote a book about Mexico’s eco- America.
nomic problems. The manuscript lay forgot- —SHELDON RICHMAN


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THE
FREEMAN

Ideas On Liberty

Asia Needs Capital Controls? old-fashioned run on a deposit bank to get
cash before it is gone—could in principle be
self-validating, because a central bank with
LI | fractional reserves will eventually run out of
It Just Ain t Sol foreign currency reserves and be forced to
devalue.
But in practice the speculative attacks we
witness are not of this self-validating sort.
iting the East Asian financial crisis, the Just as the historical evidence indicates that
well-known trade economist Jagdish nineteenth-century runs on deposit banks
Bhagwati has recently given support to retain- were generally triggered by bad news indicat-
ing capital controls in developing countries. ing the likely insolvency of those specific
In essays in Foreign Affairs and more recent- banks, speculative attacks on fixed exchange
ly, the Wall Street Journal (“Yes to Free Trade, rates are generally triggered by bad news
Maybe to Capital Controls”), Bhagwati cau- about economic fundamentals. The idea that
tions that the “overwhelmingly powerful” unrestricted financial markets are prone to
case for free trade does not imply an equally manias or bubbles is founded on historical
strong case for free capital flows because myth, as my colleague George Selgin has
there is “a unique downside to a policy of free shown by re-examining the historical
capital flows.” The downside is that “capital episodes cited by Kindleberger and others as
flows are subject to what the economic histo- supposed examples of bank-lending manias
rian Charles Kindleberger of MIT has called (Journal of Financial Services Research,
panics, manias, and crashes.” August 1992).

Bhagwati contends, against the well-known At its root, the fall of their currencies’
argument that speculators who bet against exchange values, and the subsequent reversal
fundamentally strong economies will be dis- of capital flows to Thailand, Indonesia, the
ciplined by losses in the marketplace, that Philippines, and Malaysia, were votes of no
“the unfortunate fact is that speculation can confidence in the exchange-rate and monetary
be self-justifying.” That is, by abandoning an policies of their governments. It is of course a
economy, investors can themselves weaken it. challenge to explain the exact timing and size
He asks rhetorically: “Is this not what most of the dramatic shifts observed. But if some
likely happened when, out of panic, investors sort of pure self-validating mania or panic had
fled from what they perceived as weakened been afoot in the region, it would be hard to
Asian economies, weakening them when they explain why Hong Kong, Singapore, and Tai-
were originally strong?” wan were spared devaluations.

No, this is not what most likely happened. The countries that crashed were basically
Blaming investors for the fall of the Thai bhat those where expansionary monetary policy
or the Indonesian rupiah is like blaming was on a collision course with the supposed
umbrella-carriers for the fall of rain. Capital commitment to a fixed exchange rate against
flows can of course be volatile, but attribut- the U.S. dollar. As basic exchange-rate theory
ing a shift in the behavior of independent and tells us, a fixed exchange rate between the
calculating investors to a self-validating local currency and the dollar cannot be main-
“panic” or “mania” is at best an explanation tained unless the creation of local money is
of last resort. A large speculative attack on a limited to the amounts consistent with hold-
central bank to get foreign currency before ing the local inflation rate down to the U.S.
the fixed exchange rate collapses—like an dollar inflation rate.



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5

To generalize rather sweepingly, large instantly.” Wriston adds: “I’m in favor of this
amounts of capital had flowed in during the kind of economic democracy. There’s nothing
1990s because, if the exchange rates really you can do to change it, except do right.”

did remain fixed, high real returns were avail- Governments, of course, deeply resent the
able from nominal interest rates well above discipline that the market imposes. In an
U.S. dollar rates. Local commercial banks interview with Business Week earlier this
became loaded with poor-quality loans, in year, Malaysian Prime Minister Mahathir
some degree because of government interven- Mohamad blamed the fall of the ringgit on the
tion or corruption in allocating loans, and in “herd” mentality of currency traders, likening
some degree because of excessively risky them to “buffaloes.” Even more notoriously,
lending encouraged by implicit government he intimates that “since most of the currency
guarantees to the banks. The nonperforming traders are Jewish, and it affects Muslim
loans of Indonesia’s banks, for example, countries in East Asia, people will think this is
reached more than a quarter of total loans a Jewish conspiracy.” The Prime Minister
before 1996. International investors finally imagines that the traders, acting with one
lost faith because it became clear that the cen- mind, can “devalue our currency at will,” and
tral banks, when forced to choose, would print that doing so is a riskless get-rich-quick
money to keep the banks afloat rather than scheme: “When you devalue currency and
exercise the monetary restraint necessary to you short-sell, you make a lot of money. You
maintain the fixed exchange rate. just push figures on a computer screen, and

The succession of crises in several south- you make a billion dollars.” One marvels that
east Asian countries, beginning with Thai- a conspiracy of traders would have waited
land, has led many commentators to speak of until 1997 to grab this windfall.

a “contagion” by which crisis spreads from In September, Mahathir announced new
one country to another. The solution suppos- restrictions on the convertibility of the ringgit.
edly lies in global crisis management by the Among other measures, Malaysian citizens
IMF. But as Anna J. Schwartz has noted in the may not take more than small amounts of cash
Cato Journal (Winter 1998), “it was not con- out of the country when they travel abroad.
tagion from Thailand, however, that made the Restrictions of that sort are a nuisance. Still
countries vulnerable to a financial crisis. They more damaging to prosperity are the restric-
were vulnerable because of their home-grown tions many developing nations impose on
economic problems. Capital flight from coun- large financial outflows. Such capital controls
tries with similar unsustainable policies is not are a cruelly effective investment repellent.

evidence of contagion.” No investor wants to bring wealth into an
Capital flight imposes a very useful, if economy where it might become trapped.
sometimes harsh, discipline. As former Citi- It is sad enough when a politician engages

corp CEO Walter Wriston notes (in an inter- in scapegoating and uses it as an excuse to
view with Wired), the flow of short-term restrict his citizens’ freedom to trade in finan-
capital “functions as a plebiscite” on a gov- cial contracts. The shame is compounded
ernment’s economic policy. When a change in when a well-meaning economist counte-
policy is observed, “by the end of the day, the nances the herd-mentality view of foreign
market will have conducted a referendum exchange markets and derives from it a coun-
reflecting the collective wisdom of people all sel of hesitation in lifting capital controls.

around the world on what they think of [the —LAWRENCE H. WHITE
new] economic policies. If your economic Department of Economics
policies are lousy, the market will punish you University of Georgia


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FREEMAN

deas On Libert

To Each His Due

by Tom Bethell

We lead lives that are so immersed in pri- million-dollar annual budget. In the consump-
vate property that we easily take its tion of energy, then, great opportunities for
benefits for granted. Some everyday situa- free riding occur.
tions give us the opportunity to examine How are property rights to utilities allocat-
aspects of life without it, however. They per- ed in the building? All apartment owners (or
mit us to see the great transformation that their tenants, for many units are rented) may
takes place when a communal arrangement is use as much water, electricity, and heating oil
privatized: efficiency is enhanced, and, far as they like, without limit. Each owner is then
more important, justice itself is routinized. assessed approximately one three-hundredth
The argument can be illustrated by an apart- of the building’s total utility bill. In short, it
ment building in Washington, D.C., in which would be a miraculous coincidence if con-
the author lived. In one significant respect, the sumption and billing were proportional. In the
living arrangement resembles Plymouth absence of separate meters, it is very difficult
colony. It is a condominium building of or impossible to achieve such proportionality.
approximately 300 privately owned apart- This leads directly to the following scenarios.
ments, bought and sold on the free market. Its Both are hypothetical, but plausible.
total population is perhaps twice as large as
that of Plymouth in the 1620s. Owners are
assessed a condo fee, arrived at by adding up
all expenses jointly incurred, and dividing Consider first Mary, a resident who consci-
them by a formula that takes into account the entiously turns off her lights and turns down
size of the apartments. But for the sake of her thermostat. By the end of the year, she
simplicity, it is here assumed that all units are will have reduced the building’s overall
the same size and that all owners are charged energy consumption by a small amount, and
the same condo fee. will personally “recapture” only one three-
The key point is that there are no individual hundredth of her own saving. She will export
utility meters. The entire building is “master to everyone else in the building the benefit of
metered” as an undivided whole. The utili- her frugality, but will herself experience the
ties—gas, water, fuel oil, and electricity— full cost of that frugality (in terms of dimmer
make up about one-third of the building’s lights, hotter summers, and chillier winters).
And she will receive a bill only fractionally
Tom Bethel is the author of The Noblest Triumph: |OWeT than it would have been if she had been
Property and Prosperity Through the Ages (St. Mar- 811 €DCTEY hog.” Let us assume that by her

tins Press, 1998), from which this is excerpted with ~~ frugality, she saves $150 in utility consump-
permission of the author. Copyright © Tom Bethell. tion in the course of a year. That saving is then

Meticulous Mary


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7

spread over the entire building. As a result, meters would effectively privatize utilities
her condo fee—and that of everyone else— within the building. Thanks to the walls sepa-
will be reduced by 50 cents per annum. rating one unit from another, energy con-

Now we come to Tom, her neighbor (whose sumption within the building is already priva-
resemblance to the author is entirely coinci- tized. The role of meters is to permit billing in
dental). At the supermarket, he buys high- proportion to consumption. The utilities in the
wattage light bulbs, and when he goes out in building would then be converted from com-
the evening he carelessly leaves lights on; he munal to private property.
turns up the heat in the winter and lets the air But the internal politics of the building
conditioner run in the summer. But he will make such a remodeling change difficult to
bear only one three-hundredth of the cost. carry out. The rewiring is expensive. Admit-
Master-metering and equal division of the bill tedly, the energy saving is large enough to
permits him to saddle everyone else with the permit the cost to be recaptured, perhaps
consequence of his extravagance, and yet to within ten years; but the condo board is reluc-
enjoy the benefits himself. He lives comfort- tant to consider such an expenditure, mainly
ably and makes others pay for it. because the owners of the units (which is to

Consider what happens when he goes away say, the people who elect the board) generally
for a week in August. He briefly considers, in do not consider their investment in the build-
a moment of public-spiritedness, turning his ing to be a long-term one. The building’s
air conditioner off. Then he thinks again: He future may not be in their future. Most are
will have to return to a hot apartment, which planning to sell and move out within a few
will take hours to cool down. So he leaves the years, and do not want to finance improve-
unit running. Let us say that the additional ments that may benefit the next generation of
cost of this extravagance is $15. Consciously occupants more than it will benefit them.
or subconsciously, he may have performed the Admittedly, separate meters would increase
following calculation: He will pay only one the value of the building, and the sale price of
three-hundredth of this increment, which is to apartment units would rise commensurately.
say five cents. But so will everyone else. His A persuasive board could possibly prevail on
cost of enjoying a cool apartment during the the membership to approve such an expense.
few hours that it would otherwise be hot is a In reality, however, the problem of free riding
nickel; but everyone else in the building will in utilities is virtually invisible. When the
be unjustly burdened with an additional nick- great scope for free riding was brought up at
el as well. a board meeting, one member responded that

Such an arrangement obviously encourages less energy would surely be used in a situation
wasteful consumption. Historically, the build- where everybody “took in” everybody else’s
ing’s utilities bills have slowly risen, as a per- consumption. He was persuaded otherwise,
centage of overall expenditures, despite the but this showed that the free-rider problem is
gradual replacement of inefficient electrical not intuitively clear, even to those elected to
equipment by more modern hardware. When an office in which they are expected to hold
you drive past the building at night, it is a down costs. The inconspicuous nature of the
Christmas tree of blazing lights. A spokesman problem, and the visible upfront cost of cor-
for the Potomac Electric Power Company recting it, ensures that the issue is perennially
reports that when individual meters are postponed. (The problem may eventually be
installed in such buildings, energy consump- solved by the development of less-expensive
tion usually drops by about 25 percent. metering technology.)

Let us take the logic of communal utilities
one stage further. Suppose that board mem-
bers do conclude that the single-meter system

The corrective mechanism is readily at is intolerable. But they resist installing sepa-
hand—separate meters for each apartment. rate meters, let us assume, not just because of
The condo equivalent of separate checks, the expense, but also because the board mem-

Separate Meters


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8 THE FREEMAN/IDEAS ON LIBERTY ® MARCH 1999

bers share a philosophical aversion to privati- ject. It was Lenin who said, in 1918: “We rec-

zation. They recognize that free riding in util- ognize nothing private.”

ities results in winners and losers—good peo- The scenario is fanciful, of course, because

ple subsidizing bad people—and they decide the membership would have elected a new

that this must be corrected. So they declare a board long before the conflict escalated to

goal of “eliminating energy selfishness,” and such a level; or the members would have sold

“achieving energy justice” within the build- their apartments and left the building.

ing, but without privatizing. How can they do Nonetheless, it is useful in suggesting that if

this? private property is banished, and exhortation
First, they try exhortation. Slogans are (or “education”) is put in its place, both eco-

posted in elevators and along corridors, circu- nomic efficiency and justice will prove elu-

lars are slid under doors, THINK OF OTHERS! sive. If coercive measures are introduced, pri-

TurN OFF LIGHTS WHEN NOT IN USE! A big vacy must be swept aside.

sign is placed along the roof (as in Soviet

Moscow): “Another Building Dedicated to The Morality of

Energy Fairness and Justice!” But within a

few months, it is clear that this is not having Private Property
the desired effect. Tom ignores the signs, According to Gresham’s Law, bad money
Mary is more frugal than ever. drives out good. According to the logic of the

Now the condo board adopts a sterner mea- commons, bad people drive out good. Consid-
sure. “Energy monitors” are hired, and they er an example that may appear unrelated to
spend their evenings patrolling the corridors energy consumption: the federal budget. The
and knocking on doors. “Is anyone at home? budget can be thought of as a common pool of
The weather just turned cooler. Did you turn money replenished every year with approxi-
down your air conditioning?” But after a few mately 1.7 trillion dollars from taxpayers.
months the occupants learn to ignore the Gathered around the pool are 435 congress-
knock. Mary has already been doing the right men and 100 senators. What gives them
thing. Tom remains unregenerate. Energy power and influence is that they have exclu-
consumption remains at its old level. sive “siphoning rights.” They are subject to

Then a more drastic step is taken. The ener- the constraint that siphoning operations can
gy monitors are provided with apartment proceed only if a majority participates simul-
keys. It is explained to all occupants that the taneously. When this constraint is satisfied,
invasion of privacy will be minimal, because money can be siphoned out and channeled
the monitors may enter only after knocking back to constituents within the congressional
and receiving no reply. That way, they will districts. The necessary majorities may be
only enter apartments when people are not at achieved by “logrolling”: one congressman
home, “and when people are away, they votes for a project in a colleague’s district, in
shouldn’t have their lights and air condition- return for a reciprocal favor for his own, and
ers on anyway.” After a while, however, it is so on.
discovered that some apartment owners, who Federal spending keeps on rising for the
are in fact absent, learn to reply to the knock same reason that utility consumption keeps on
with prerecorded “decoy” messages. Others increasing in master-metered buildings. Con-
bribe monitors to stay away. gress itself is “master metered,” because the

Meanwhile, the board has saddled the taxpayers, like the residents of our apartment
building with a considerable new expense: building, are all “billed” at the same rate,
wages for the energy monitors. And so it goes. whether or not federal projects are financed in
Nothing seems to work. Eventually the moni- their districts. The point is that the federal tax
tors are given full police powers and may code is the same in all states. This encourages
enter any apartment at any time. How does the all legislators to behave like energy hogs—to
board justify this final, draconian step? They siphon from the common pool as fast as they
cite a twentieth-century authority on the sub- can (that is, to vote for most spending bills).


===== PAGE 9 =====

To EacH His DUE 9

Suppose that a candidate campaigns on the ing, and all talk of the budget deficit would be
promise that, unlike his opponents, he will be a thing of the past. Needless to say, no such
cautious with the taxpayers’ money. He will reform of the tax system is contemplated. . . .
dare to vote “no” on spending bills when he To return to the condo case, readers will no
gets to Washington. The problem is that his doubt agree that the installation of individual
restraint, meritorious though it may be, will meters in an apartment building will reduce
not encourage a like restraint in others. Onthe energy consumption: that is, that it will be
contrary, it will leave more money for them to economically efficient. But the more impor-
siphon back to their districts. It is unlikely, tant point is that such a change will also intro-
then, that such a candidate will be elected. duce the missing ingredient of justice. When
But let us assume that he is. Tom leaves his air conditioner running in the

Having arrived in Washington, he figures summer, knowing full well that it will cost
out something that he hadn’t quite visualized “the building” dollars but him only pennies,
on the campaign trail: If he votes “no” on the waste may be bad but the injustice is
spending bills, he will frequently deprive his worse. Systematic injustice within a society
constituents of an opportunity to get back will introduce a far greater sense of discord
from Washington what they put into the com- than systematic waste.

mon pot (in taxes). So, instead of voting to In his Summa Theologica, Saint Thomas
hold down spending, he joins in the general Aquinas argued that “the act of justice is to
logrolling, teaming up with other big render what is due. . . .” On another page,

spenders to form majorities (some of the Aquinas said that “justice, property so-called,
money being earmarked for his district). is one special virtue, whose object is the per-
Some voters back home, recalling his cam- fect due, which can be paid according to an
paign promise, may think that he “sold out” exact equivalence. But the name of justice is
In reality, it was the institutional arrangement extended to all cases in which something due
of Congress that encouraged his change of is rendered.” By seeing to it that something
heart, not weakness. due is rendered (high utility bills to the squan-
The analysis of the budget as a “commons” derers of electricity, low bills to careful
helps to explain why voters tend to elect both users), private property helps to establish jus-
big-spending legislators and fiscally conserv- tice in the economic realm.
ative presidents. Armed with the veto power, In the condo, then, the effect of privatizing
and with influence over tax proposals, the the utilities corresponds exactly to the tradi-
president (unlike the separate legislators) is in tional definition of justice. The great blessing
a position to hold down the size of the overall of private property, then, is that people can
“pool.” It also helps to explain why voters will benefit from their own industry and insulate
tend to support limits on congressional terms. themselves from the negative effects of oth-
They give voters an opportunity, not available ers’ actions. It is like a set of invisible mirrors
in regular congressional elections, to effec- that surround individuals, households, or

tively vote against all the other legislators— firms, reflecting back on them the conse-
the ones who are siphoning dollars away to quences of their acts. The industrious will
remote and unknown places. reap the benefits of their industry, the frugal

The budgetary equivalent of individual the consequences of their frugality; the
meters would be to change the tax code so improvident and the profligate likewise. They
that the income-tax rate would be adjusted up receive their due, which is to say they experi-
or down in each congressional district, ence justice as a matter of routine. Private
depending on how much the Congressman property institutionalizes justice. This is its
from each district voted to spend in the previ- great virtue, perhaps dwarfing all others. We
ous year. Big spenders would then impose may say with the economists that private
high tax burdens on their own constituents. It property “internalizes the externalities,” or
is a safe prediction that this reform would with the philosophers that it gives rise to
bring about a rapid decline in federal spend- “social justice.” Ol


===== PAGE 10 =====

FREEMAN

Ideas On Libert

Just Deserts

by Charles W. Baird

he AFL-CIO has a Web site, www.pay- percent of the private-sector work force in

watch.org, dedicated to condemning what 1997. That figure has been declining since
it considers to be.“runaway CEO pay” in pri- 1953 when it was 36 percent. The site asserts
vate corporations. It claims that high executive that “Workers have less power in today’s
pay damages all other “stakeholders” in cor- economy, which means that executives can
porations, especially workers and stockhold- take far more for themselves. That wasn’t
ers. In other words, the AFL-CIO asserts that always the case. When unions represented a
excessively paid executives and other stake- third of the workforce in the 1950s and 1960s,
holders are locked in a zero-sum struggle. workers had an effective counterweight to

The Web site had 250,000 hits in 1997. corporate greed.” A more powerful AFL-CIO
William Patterson, director of the AFL-CIO will be able to seize the ill-gotten gains of
Office of Investment, boasts that “We put a CEOs and restore them to their rightful owners.
face on runaway pay in 1997.” Betsy Leondar- What’s really going on with executive com-
Wright, an official of United for a Fair Econ- pensation? In Chapter 10 of their new text for
omy, a consortium of religious and activist MBA students, Richard McKenzie and Dwight
organizations in league with the AFL-CIO, Lee survey the literature on executive com-
asserts, “There’s nothing like this issue. This pensation and conclude that, in general, the
one just galvanizes people instantly.”’! Visitors high compensation packages paid to execu-
to the site are invited to “fight back” by send- tives can be explained by some simple eco-
ing messages to boards of directors, using nomic theory? Far from exploiting workers
their clout as shareholders, staging workplace and stockholders, high executive compensa-
actions, and e-mailing members of Congress. tion is a means for all corporate stakeholders

The site promotes enraged envy. Visitors to benefit. It is part of a positive-sum game.
are told that on average, CEOs make 326 The authors’ explanations fall into two cate-
times the pay of ordinary factory workers. gories, which I call productivity and meta-
The site offers a calculator for envious visi- productivity arguments.
tors to compute how long they would have to
work to take in what their CEOs took in dur- The Produ ctivity Argum ent
ing the previous year.

The AFL-CIO’ agenda is clear: to arrest Top executives are the ones who control
and reverse the declining market share of most resources in firms. Their decisions affect
unionized labor. Unions represented only 9.8 the performance of all other managers and
Charles Baird is director of the Smith Center for Pri- employees. Excellent executives are scarce,

vate Enterprise Studies at California State Universi- and their talents are economized by putting
ty at Hayward and a columnist for The Freeman. them at the top where their productivity is

10



===== PAGE 11 =====

11

multiplied through its effect on many others. package, and it took Gilbert Amelio only 17
General Electric’s CEO, Jack Welch, made months on the job at Apple to get $7 million.5
1,003 times the pay of the average U.S. facto- More recently, David Coulter was dismissed
ry worker in 1996. His total compensation from Bank of America, after two years on the
was $27.6 million in that year. United for a job and large hedge fund losses, with over $40
Fair Economy submitted a shareholder resolu- million as a consolation prize. Golden para-
tion that asked the GE board to set “a cap on chutes like these are likely to seem excessive
CEO compensation expressed as a multiple of to everyone except the recipients, but McKen-
pay of the lowest-paid worker at GE” GE zie and Lee suggest an explanation.
responded by arguing that Welch’s compensa- A newly hired top executive is likely to be
tion “is appropriate in light of the value that much more risk averse with respect to the
his superior leadership, vision and dedication activities of the firm than its stockholders are.
provided to the share owners during his 17- This is because stockholders have diversified
year tenure as chief executive officer” The portfolios; they own shares in many different
total value of GE shares rose by more than firms. If one gets into trouble, perhaps others
$225 billion during that period.? Welch can make up the losses. In contrast, the exec-
earned what he was paid. Moreover, increas- utive has all his human capital tied up in the
ing shareholder wealth is good for employees firm. This one firm is the executive’s sole
as well as stockholders. A successful corpora- employment, and he will be reluctant to
tion provides higher wages and salaries and undertake risky, but possibly high-yielding,
offers more job security than an unsuccessful ventures. By consenting to golden parachutes
corporation. in executive hiring contracts, boards of direc-
At Scott Paper, CEO Al Dunlap rescued the tors may just be trying to overcome excessive
firm through radical downsizing and restruc- executive risk aversion. On this reading, gold-
turing. As a result he produced $6.5 billion in en parachutes merely align executive and
additional shareholder wealth. His compensa- shareholder attitudes toward risk.
tion was only $100 million—Iess that two per- McKenzie and Lee report on several sys-
cent of what he produced. Dunlap asks, “Did tematic empirical studies of the connection
I earn that? Damn right I did. I’m a superstar between executive pay and executive produc-
in my field, much like Michael Jordan in bas- tivity. Consider three examples. Sherwin
ketball and Bruce Springsteen in rock’n’roll.” Rosen’s research indicates that on average,
He says, “You cannot overpay a good CEO when a company’s rate of return increases by
and you can’t underpay a bad one. . . . If his 1 percent, top executive pay increases by 1 to
compensation is not tied to the shareholders’ 1.25 percent.6 Inasmuch as executive pay is a
returns, then everyone’s playing a fools small fraction of company income, those
game.” executives earn their keep. Michael Jensen
Of course, in the face of imperfect knowl- and Kevin Murphy say that on average, exec-
edge mistakes can be made, and McKenzie utives get only two cents more in cash pay and
and Lee illustrate such failures. However, $3.25 in added wealth for every $1,000 they
when mistakes are discovered, they usually add to stock values. Murphy concludes that
are rapidly corrected. Corporations that allow “top executives are worth every nickel they
failed executives to keep their high-paying get””” James Brickley, Sanjai Bhagat, and
jobs soon become ideal candidates for hostile Ronald Lease report that on average, stock
takeovers. The market for corporate control prices increase by 2.4 percent within two
never rests. When hostile corporate raiders months of the adoption of executive incentive
gain control, they show the door to failed pay over what they would otherwise have
executives. been.8
Sometimes failed executives leave their The most common form of incentive pay
"firms with very golden parachutes. Michael for top executives is stock options, which are
Ovitz walked away from a 14-month tenure rights to purchase shares at a fixed, low price.
with Disney with a $90 million severance If the executive is successful, the market price


===== PAGE 12 =====

12 THE FREEMAN/IDEAS ON LIBERTY ® MARCH 1999

of shares will rise, and he will reap large cap- doesn’t follow any prescribed routine that a
ital gains. This aligns the interests of the exec- monitor could observe. A good executive is
utives and the stockholders. On average, stock alert to possibilities of turning all sorts of
options make up two-thirds of top executive daily encounters, on and off the job, into
compensation. That means that two-thirds is profit opportunities. One may say a really suc-
at risk. Therefore, part of the high yields cessful executive is one who knows how
received through stock options may be con- to make it up as he goes along. The only
sidered just a risk premium. effective monitoring of an executive is self-
monitoring. An executive can be induced to
self-monitor by a compensation package that
substantially exceeds his opportunity cost
Yet many top executives get compensation (worth in the market). An executive who
that cannot be explained by the productivity knows that shirking, once detected, means
argument. They get paid more than they are losing the difference between current com-
worth in the narrow productivity sense. pensation and what other boards of directors
McKenzie and Lee offer three arguments to are willing to pay is likely to avoid shirking.
explain such “overpayments.” This implies that the amount of the overpay-
ment will be positively related to the difficul-
Discovery. Knowledge of who has the abil- ty of detecting shirking. The more subtle the
ity to become a successful top manager is executives operations, the higher the neces-
given to no one. Within a firm top executives sary overpayment.
have to discover who among the ranks
of lower-level managers is deserving of Tournaments. One way for top executives
significant promotion. When such a person is to motivate lower-level managers to work as
identified and promoted, his discovery is hard and smart as they can is to make clear
announced to the general business communi- that rungs on the managerial ladder get
ty. If the promoted manager were paid only increasingly narrow as it is climbed. Firms
what could be justified by his direct produc- following this strategy purposefully hire
tivity, executive raiders from other firms many more low-level managers than they can
could easily bid for his services. In doing so, possibly promote, and they make sure that
these outside bidders would be avoiding their new hires understand that this is true. Promo-
own costs of search for executive talent. tions are awarded to the few who can success-
Therefore, a firm that promotes an executive fully compete for them. At each stage the
is well advised to pay more than his produc- tournament prize is a promotion and a sub-
tivity can justify to be assured of keeping the stantial increase in pay that cannot be justified
executive and conserving on future search on narrow productivity grounds. Why does
costs for executive talent. the pay increase have to be so large? Because
An interesting implication of the discovery the contestants will naturally discount the
argument is that some people who are not pro- increase by the probability of achieving it.
moted may be just as good as those who are. The higher up one is on the managerial lad-
They are simply undiscovered. To be discov- der, the lower the probability of climbing still
ered, it may pay for lower-level managers to farther. Therefore, the gaps in pay must grow
acquire self-promotion and schmoozing abili- as one climbs from one rung to the next.
ties as well as basic skills for the job. It is pos- The institution of a tournament has at least
sible, McKenzie and Lee write, to acquire two effects among the contestants. First, those
“too much in the way of basic skills and not who think they have little chance of winning
enough of, say, political savvy.” will self-select out of the contest. Job seekers
will not accept jobs with the firm to begin
Self-Monitoring. It is very difficult, and with, and those who are already with the firm
often impossible, to monitor the performance will leave and seek more accommodating
of top executives accurately. A good executive employment elsewhere. Those with substan-

Meta-Productivity Arguments



===== PAGE 13 =====

JUST DESERTS 13

tial self-confidence will remain. This increas- managers being promoted to top executive
es average productivity. Second, competition positions has substantially decreased. To keep
among the contestants who are willing to play a tournament viable under these circum-
the game will make all of them exert more stances, the gaps between top-level and aver-
effort and avoid shirking. All contestants will age compensation must grow.
be more productive than they would have It should not be surprising that the AFL-
been without the tournament. The “overpay- CIO violates the Tenth Commandment’s pro-
ments” that accompany promotion are paid scription against envy. Unions have never
from the added output of the enterprise as a been reluctant to exploit misunderstanding of
whole rather than the individual productivity economics for their own gain. The executive
of the prize winners. pay issue is just the most recent example. The
Gaps in compensation between top execu- only remedy is for people who do understand
tives and average workers are increasing. The economics to expose the spurious reasoning
tournament model explains this. Deregulation of the enemies of freedom. We should be
and globalization of competition have flat- grateful to McKenzie and Lee for having done
tened firms’ managerial hierarchies. Middle- so in this case. []
level management positions are being elimi-
decision-making monitored increasingly by Edition, April 9, 1998.

fr 2. Richard B. McKenzie and Dwight R. Lee, Managing Through
pay for performance schemes. These changes Incentives (New York: Oxford University Press, 1998).

in organizational architecture enable firms to 3. Rose.

respond more quickly to rapidly changing  } od pT Lee, p. 160.
market conditions. The changes also meanthe 6. bid. p. 161.
managerial ladder is becoming narrower 7 Pid PP
faster. Thus the probability of lower-level 9. Ibid., p. 165.

THE
FREEMAN

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.

$24.95 each

Save! Special introductory price: $19.95,
through April 30, 1999



===== PAGE 14 =====

Ideas and Consequences by Lawrence W. Reed

Night of the
“Living Wage”

| pe! years, FEE has stressed the supremacy profit and loss, incentives and disincentives
of sound economics over the political all mean nothing if you can get what you want
process. If people understand how markets through the force of law.
work, and the vital link between free markets Of course, there’s nothing in the ordinance
and personal liberty, they will support the that will make workers more productive, only
right policies and the men and women in pub- less affordable. A city that has already driven
lic office who implement those policies. out a million people and countless businesses
Those who stress politics first, and concen- with a tax burden more than six times the
trate their resources and efforts there, are average for Michigan municipalities will now
putting the proverbial cart before the horse. become even less competitive and economi-
Now from Detroit comes painful evidence of cally attractive. David Littmann, senior econ-
how true this principle is. omist at Detroit’s Comerica Bank, estimates
On November 3, Detroit voters overwhelm- that the ordinance will wipe out about 7 per-
ingly approved a so-called “living wage” ordi- cent of the city’s jobs by the year 2000.
nance that requires employers with at least Incredibly, Mayor Dennis Archer, who pub-
$50,000 worth of city contracts or financial licly supports the living-wage concept, head-
assistance to offer a minimum hourly wage of ed to Washington within days of the vote,
$7.70 if health benefits are included or $9.63 seeking federal assistance (that is, other peo-
if they are not. Furthermore, the law requires ple’s money from all over America) to help
that employers hire only city residents. Viola- keep businesses from leaving Detroit.
tors are subject to a $50 per day penalty and And it isn’t just businesses that will be
may have their city contract or grant revoked affected. Nonprofit charities will be too. For
as well. The city’s already bloated bureaucra- example, two Salvation Army sites in Detroit
cy will get larger now because contracts will receive $300,000 from the city. Most conser-
have to be monitored for compliance, which vative estimates put the new law’s cost to the
also means that businesses will be forced to Army at $1.5 million. The Army will have to
reveal confidential payroll information. raise an additional $1.5 million, lay off work-
This is magic-wand economics at its worst: ers, or become independent of the city.
Want higher wages? Just pass a law making it Every argument against the minimum
illegal to pay anything less than some arbi- wage—long familiar to readers of The Free-
trary amount. Presto! Supply and demand, man—applies in spades to living-wage pro-
posals like Detroit’s. The law can’t make a
Lawrence W. Reed is president of the Mackinac Cen- person worth $5.15 an, hour (the current fed-
ter for Public Policy (www.mackinac.org), a free-mar- eral minimum) by making it illegal to pay him

ket research and educational organization in Midland, any less. By mandating an even higher mini-
Michigan, and chairman of FEE’s Board of Trustees. mum, the living wage prices even more peo-

14



===== PAGE 15 =====

15

ple out of work. The people who push these gale. It is the cannibalization of fellow work-
cockamamie ideas never seem to ask why any ers by greedy, self-interested union bosses.
employer would hire someone at $7.70 if that Nationally, the living wage effort is being
person’s services are only valued in the mar- led by a group known as the Association of
ketplace at, say, $5. Community Organizations for Reform Now

Moreover, by imposing more unnecessarily (ACORN). Like the unions, ACORN is no
costly employment arrangements, the new paragon of either altruism or intellectual con-
law will require more city revenue or reduced sistency. Even as it was arguing for the fed-
city services. The long and short of it is this: eral minimum of $5.15 and lobbying for sky-
though some workers may keep their jobs and high living wages in a number of places
even see their wages hiked, others will pay the across the country, ACORN filed a lawsuit in
price in the form of fewer jobs or higher taxes. California in an attempt to exempt itself from
Unemployment resulting from the law will paying its own employees the states then-
boost the public welfare rolls in a city where current $4.25 per hour minimum wage. In its
the poverty rate—at 30 percent—is already legal brief, the organization declared that “the
the highest of American cities. more that ACORN must pay each individual

Detroit, sadly, is not the first municipality outreach worker . . . the fewer outreach work-
to engage in such foolishness. In 1994, Balti- ers it will be able to hire.” Hypocrisy has
more became the home of the country’s first rarely been on more arrogant display.
living-wage law. Portland (Oregon), Milwau- Meanwhile, some people and certain busi-
kee, Minneapolis, St. Paul, Jersey City, ness organizations in Detroit that have long
Boston, and Los Angeles have all adopted viewed the promotion of free-market econom-
similar ordinances. Last fall, the city council ics as “too controversial” for their tastes are
of San Jose, California, began debate on a now reaping the bitter harvest of their “mod-
living-wage ordinance that would set mini- eration.” In challenging the new law in the
mum hourly pay at an astounding $12.50 plus courts, they may spend far more than they
benefits for employees performing work for ever spent on behalf of economic education.
the city. On top of that, the San Jose proposal Whether they learn anything from it all
stipulates that any contractor who takes overa remains an open question.

city job previously performed by another enti- Too often, in Detroit and elsewhere, the
ty would be forced to hire the same people schools don’t teach sound economics; or
who had been doing that work before. worse, they teach the toxic stuff. Business-

Who is behind these silly laws? In Detroit, men devote too much of their resources to
the ballot language was drafted and the cam- politics and too little to the right ideas that
paign funded by none other than organized can really make a lasting difference for the
labor. Why? Because a city floor under wages better. That’s why living-wage nonsense suc-
will stifle the unions’ low-cost competition ceeds in becoming law. We shouldn’t be sur-
and make it more difficult for the city to con- prised at the results, and we should be
tract out for services. This is not organized ashamed if by our action or inaction we’re
labor playing the role of Florence Nightin- part of the problem. 1


===== PAGE 16 =====

FREEMAN

Ideas (ideas On Liberty) Libert

Crimes of the Mind

by Melissa Suarez

he killing some months ago of Matthew

Shepard has brought to the forefront of
debate the idea that a federal law is needed to
protect people against “hate crimes.” Propo-
nents want the law to punish individuals who
target others because of race, sex, religion,
disability, or sexual orientation.

The murder of Matthew Shepard of course
is tragic. That it was likely committed with
hatred for his sexual orientation is indeed also
tragic. A federal law against hate crimes, how-
ever, could never be constitutional nor could it
protect likely victims of such crimes.

The U.S. Supreme Court has already unan-
imously struck down a hate-crime law. R.A. ¥
v. City of St. Paul involved a city ordinance in
St. Paul, Minnesota, that prohibited the dis-
play of a symbol that arouses “anger, alarm or
resentment in others on the basis of race,
color, creed, religion or gender.”

Several white youths were charged with
violating that ordinance when they burned a
cross on the property of a black family. The
flaw with the ordinance was that it was nei-
ther content-neutral (concerned not with the
speech’s content, but where, when, or how it
takes place) nor viewpoint neutral. Writing
for the Court, Justice Antonin Scalia said the
ordinance was invalid because “it prohibits
otherwise permitted speech solely on the

Melissa Suarez (m_suarez@mindspring.com) is a
research associate for the Pope Center for Higher
Education Policy, Research Triangle Park, North
Carolina.

16

basis of the subjects the speech addresses.”

Content and viewpoint neutrality will derail
future hate-crime laws as well. The best alter-
native would be to heed Scalia’s words, when
he wrote that governments have no authority
“to license one side of a debate to fight free-
style, while requiring the other to follow the
Marquis of Queensbury Rules.”

Campus Speech Codes

Consider how similar legislation, specifi-
cally “hate speech” codes at colleges and uni-
versities, have fared. Campus speech codes
that punish students for speech, slurs, or epi-
thets that relate to a person’s race, gender,
religion, or sexual orientation are prime can-
didates for lawsuits because they, too, lack
content and viewpoint neutrality.

The most famous incident involving hate
speech began in January 1993 at the Univer-
sity of Pennsylvania. Five black, female stu-
dents claimed they were victims of racism
after a fellow student, Eden Jacobowitz, who
was interrupted in his studying by their bois-
terous behavior outside his window, yelled
at them, “Shut up, you water buffalo.”
Jacobowitz was charged with violating
Penn’s speech code, which prohibited racial
harassment.

The administrative judicial officer in charge
of his case, in a telling question, asked him if
he was “having racist thoughts” when he used
the term “water buffalo,” because, the admin-
istrator said, a water buffalo is a dark, African


===== PAGE 17 =====

17

animal. Jacobowitz vehemently denied his eral law against hate crime could possibly
remarks were racist, saying that the students’ stimulate education about racism, sexism,
noise and not their race prompted his remark. homophobia, and the like. It would also, they
Several scholars rushed to Jacobowitz’s say, probably make minorities feel more pro-
defense, including black professors at Penn tected. It’s known in some circles as “thought
who said there were no racial connotations control.”

behind the term “water buffalo.” Others point- Consider the success of hate-speech codes
ed out that the water buffalo is found not in in this area. At many institutions, students
Africa but in Asia. who violate the speech code are required to

Nevertheless, because of the code, take classes on the dangers of prejudice and
Jacobowitz’s fate depended on the black stu- stereotypes. At UCLA, for example, violators
dents’ interpretation of his remark. They of the university’s anti-harassment policy
decided it was racist, so the university usually must either perform several hours of
charged Jacobowitz with racial harassment. community service or “become educated”
The university eventually dropped the about harassment. One student accused of
charges. sexual harassment had to establish a program

Another problem that hate-speech codes to educate his fraternity about sexual harass-
have, and hate-crime laws inevitably would ment and write a paper for the dean of stu-
have, is related to their lack of viewpoint neu- dents on heterosexism and the ongins of pro-
trality. These codes are not all-inclusive. They grams that combat sexual harassment. Simi-
are usually so vaguely worded that the ban is lar punishments are handed down at other
generally on hate speech only by speakers of universities.

a certain gender and certain races, sexual ori- One wonders what kinds of “community
entations, religions, or handicaps. service” and “education” violators of a feder-

Sheldon Hackney, who was president of the al hate-crime law would be subjected to. After
University of Pennsylvania during the “water the federal government charged an individual
buffalo” incident, blatantly admitted the with having the wrong thoughts (which is
codes’ selectivity. When someone asked already a blatantly unconstitutional action),
Hackney if “racial harassment” would include would it then force him to change his mind?
“someone [who] called a black with white The last government to do that was Ingsoc, in
friends an ‘Uncle Tom’ or an ‘Oreo,’ or if George Orwell’s Nineteen Eighty-Four.
someone called a white person a ‘[expletive] Supporters of hate-crime laws also argue
fascist white male pig?’” Hackney said no. that federal legislation might heighten aware-

ness about prejudices and stereotypes. More
Punishing Th oughts, Not Acts important, they say, stiffer penalties for those
who commit such crimes would deter them to

A federal hate-crime law would also threat- begin with. How could they serve as a deter-
en selective enforcement. Such a law could rent when the act itself is already a crime?
easily be used to protect only certain groups A federal hate-crime law would also raise
and punish only certain crimes as hate crimes, questions of double jeopardy. If, for instance,
thereby making some forms of “hate” more a black person’s accused assailant is acquitted
punishable than others. at the state level, he could be retried for the

The alternative would be to punish all hate same crime in federal court under the hate-
crimes equally, which would be impossible. crime law.

It would also be superfluous. For example, in We can never know for certain the motive
Shepard’s case, there are already laws against behind a person’s speech or action. For that
murder, and the penalties are greater than and other reasons, laws designed to punish the
those of any proposed hate-crime legislation. thought behind the crime are dangerous and
Nevertheless, many people argue that a fed- inappropriate in a free society. LC]


===== PAGE 18 =====

FREEMAN

deas On Libert

Mises on Mexico

by Eduardo Turrent

To should be a day of celebration for One of the principal points in Mises’s essay
students, book lovers, and all who are was his vote of confidence for Mexico
interested in reflecting on the economic devel- because of the capabilities of its people and
opment of Mexico. Mexico's Economic Prob- the progress of the country. As he put it: “It is
lems by Ludwig von Mises, which Bettina beyond doubt that the Mexicans are endowed
Greaves found in 1997 among Mises’s papers, with the spirit of workmanship. The achieve-
is truly a treasure.! Although there are obvi- ments of the autochthonous [indigenous]
ous differences, it calls to mind musicologist craftsmen and artisans meet with the admira-
Alberto Gentili’s rediscovery in the 1920s of tion of all experts. The workers in the already
the complete works of Antonio Vivaldi, more existing industrial plants and in the mines are
than 200 years after the composer’s death. We not less efficient than those of other coun-
economic historians are more fortunate than tries.” And the same may be said with respect
musicians and music lovers were, since to their entrepreneurial and other skills.
Mises’s text has reappeared only 25 years Thus the problem of Mexico’s develop-
after his death. ment was not capital scarcity, geography
The monograph by Mises on the Mexican (which Mises judged favorably), climate, or
economy is outstanding in many respects. geology, even though the soil “in the greater
One particularly important aspect is that it is part of the country is dry and barren.” Devel-
relevant to more than just the economic situa- opment depends on the application of “an
tion he found when he visited in 1942. Mises appropriate economic policy”; that is, a
was concerned with the long-run historical “wise” economic policy aimed at the “estab-
context; or as one says nowadays, he focused lishment of a durable system resulting in a
on fundamental structural change. He was continuous improvement of the nation’s well-
interested in uncovering the fallacies on being.”
which the principal positions and policies of Unfortunately, this was not the case in
Mexico’s former socialist regime, as well as Mexico when Mises wrote this paper. Nor has
all socialist regimes, were based. it been the case since, especially not from
1970 to 1982, even if one considers the sever-
Eduardo Turrent is the historian of the Bank of Mex- al forms such a “wise” policy may take.

ico. This is excerpted from a paper delivered at a
conference of the Ludwig von Mises Cultural Insti-

tute of Mexico City, September 23-24, 1998, cele- Attack on Easy Money

brating publication in Spanish of Ludwig von Mises’s . eo
Mexico’s Economic Problems: Yesterday and Today, Only five or six years after the publication

which was written in 1943 but unpublished until last Of Keynes's Gener al Theory, Mises took a
year. Translated by Bettina Bien Greaves. well-aimed shot at the economic policies that

18


===== PAGE 19 =====

19

stemmed from the noted English author’s
ideas. According to Mises, the “easy money”
policies of the interwar years, policies that
tended to generate inflation, had been based
on the doctrines of Lord Keynes, doctrines
that Mises called “fallacious.” To Mises, the
Keynesian dictum that “in the long run we are
all dead” was no more than a new version of
the cruel-hearted motto attributed to Madame
de Pompadour, “After us, the deluge.” Thus,
every strategy that “is indifferent about the
tomorrow strives after ephemeral success and
carelessly sacrifices the future.” Such strate-
gies must not be considered “progressive, but
parasitic.” Growth may be sustained only by
having fundamental policies favorable to the
stability of money and exchange.

Mises said in this study, not without cause,
that the monetary history of Mexico, like that
of many other countries, has been “a record of Ludwig von Mises
failures and disasters.” He hit the bull’s-eye
when he said that “Monetary troubles are himself in 1942 to be an advocate of the gold
never the inextricable outcome of conditions standard. However, one should look at the
beyond the control of a country’s government. matter from the perspective of history. Basi-
They are always the result of a deliberate pol- cally, what Mises wanted was not something
icy,” which, only too often, has been “the radically different from what Domingo Caval-
result of erroneous monetary doctrines.” lo introduced in Argentina, fixed exchange
Thus, with a nod to the then-current financial with a monetary policy subject to discipline.?
authorities in Mexico, Mises pointed to the At a time when public deficits have come to
need to return to a firm path toward stability. be considered virtuous, Mises insisted on the

But stability is not a goal in and of itself. advantages of fiscal health. He explained
“Monetary stability” must be recognized as a clearly that excessive public spending con-
means, “an indispensable requirement for the tributes neither to disposable income for the
formation of capital.” Moreover, the conse- masses nor to the supply of social capital. If
quences of applying an “easy money” infla- the public budget is in disequilibrium, this
tionary policy are, and have been, economic must be financed either by issuing central
depressions with millions unemployed and bank credit or by using internal debt. If cen-
social unrest. “Easy money” policies “result tral bank credit is used to finance the public
for a short time in the creation of an artificial debt, it is doubly pernicious because, in addi-
boom, but must later end in a slump and in tion to leading to inflation with all its harmful
depression.” consequences, it affects the balance of pay-

Few of the wise observations, prescriptions, ments and hinders the maintenance of
clairvoyant remarks, and even prophetic exchange stability. If internal debt is used to
visions in Mises’s text appear obsolete, not finance the public debt, wealth is simply with-
even his proposals concerning exchange. drawn from the private sector and transferred
Nevertheless, one must remember that this to the public sector. Public spending propos-
manuscript was written years before Bretton als assume, also, that the government will
Woods and more than a decade before the cel- spend resources better than individuals will.
ebrated article by Milton Friedman, “Fixed But is this by any means certain? Withdraw-
vs. Flexible Exchange Rates” (1953). It ing purchasing power from the private sector
should not be surprising that Mises showed not only reduces the total resources entrepre-



===== PAGE 20 =====

20 THE FREEMAN/IDEAS ON LIBERTY ® MARCH 1999

neurs will have available to invest, but it may other expenses. Such cooperatives could also
also reduce the income and consumption of arrange for leasing machinery, selling farm
the needy. produce, and obtaining credits for members.
It is possible, even likely, that in his Mexi- The government could also help with institu-
can travels under the guidance of Montes de tions to promote technological education and
Oca, Mises became acquainted with the Mex- agricultural research. Nevertheless, every
ican historian Daniel Cosio Villegas. Mises’s individual farmer should be “the master on
opinions concerning the apparent and abun- his own farm.”3
dant “natural wealth of Mexico and the
chances of its future prosperity” were con-
trary to the views then commonly held. But
they were remarkably similar, particularly in Surely Mises was one of the first visionar-
emphasis and approach, to those expressed by ies to recognize the demographic problem
Cosio Villegas in his essay “The Legendary from which Mexico has long suffered. Mexi-
Wealth of Mexico.” Mises’s sharp observa- co, he noted, is “a comparatively overpopulat-
tions were, and still are, particularly applica- ed country,” with the surplus population liv-
ble to the agricultural capabilities of Mexico. ing in rural areas. The potential productivity
To Mises the natural supply and quality of the of the country was insufficient to assure a
land were not insuperable obstacles. Rather, decent standard of living for these excess peo-
he looked on agricultural policy, which was ple. Therefore, the only viable solution was
rooted in the heart of the revolutionary ideol- for industries to be developed to absorb that
ogy, as the obstacle to the country’s progress. excess population. But truly productive indus-
Mises cited figures to illustrate what he tries could develop only in response to defi-
called the harmful effects “of the agrarian nite commercial opportunities.
reform of the revolution.” The crops of corn In 1942, Mises called for something that
and wheat had been much less in 1937 thanin was then strictly taboo, something that could
1907 and those of beans less than in 1897. not be undertaken in Mexico until more than
Mises saw clearly, as did Manuel Gomez four decades later: an “open door” trade pol-
Morin and a few other illustrious intellects, icy. If the dismantling of our ancient protec-
that in Mexico, as in any other country, the tionist structure in recent times provoked no
agricultural sector could not make progress few laments and rending of garments, imag-
without a clear definition and absolute respect ine the reaction to the Austrian economist’s
for the rights of property. The plain fact was proposal in the 1940s, in the midst of the
that those rights were not well defined in the great World War. Contrary to archaic mer-
arrangement made for common land. There- cantilist doctrines, Mises looked on imports
fore, land was not only not cultivated with the as something desirable; he considered the
devotion required, but investments necessary opening of trade as the indispensable means
for the development of the land were not for obtaining the best possible allocation of
made either. resources. “The advantage derived from for-
The right to property is the necessary con- eign trade lies entirely in importing, not in
dition for all modern productive activity. exporting,” he said. According to Mises, only
Therefore, Mises argued strenuously in 1942 by competitive industry emerging in an open
against the desire of many to look to the Sovi- environment can manufactured products be
et system of agricultural collectives as the produced at prices that permit living stan-
example for Mexico to follow. Granting that, dards in the country to rise while at the same
however, Mises did not object to, and he even time generating exports to pay for the
looked with favor on, other forms of collec- nation’s indispensable imports. The problem,
tive activity even with the active participation he lamented, is that many Mexican patriots
of the state. For instance, he mentioned coop- were “entangled in the neo-mercantilist fal-
eratives that could be formed to acquire farm lacies” then in vogue—and I would say still
equipment, seed, and fertilizers, and to cover in vogue among many groups.

The Demographic Problem


===== PAGE 21 =====

MISES ON MExico 21

The whole process of industrialization of enterprises and employment, and indirectly
based on protectionism is damaging in three affects inflation and economic growth. As
ways. First, protection inhibits the agricultur- Mises expressed it:
al sector from exporting. Second, it raises the

prices of manufactured consumers goods, There is but one means to raise Mexican
which could otherwise be acquired by the wage rates: industrial expansion. Every
rural inhabitants. And third, because of its new plant improves the standard of living
high costs, industrialization based on protec- of the Mexican masses by creating an addi-
tionism prevents the manufactured products tional demand for labor. But industry can-
from penetrating international markets. It is not allow higher wages than such as safe-
true that, given such industrialization, many guard the conduct of business. If trade
people would find employment in the protect- unions are anxious to enforce higher
ed industries. But what they would gain as wages, they prevent the establishment of
employees others in other sectors of the econ- new plants and the expansion of existing
omy would lose through the high cost of the plants. They succeed, it is true, in raising
manufactured articles. In this way any possi- wage rates for a comparatively small group
bility of raising “the standard of living of the of workers; but they force, on the other
average Mexican” would be lost. Therefore, hand, hundreds of thousands to remain in
Mises concluded, industrialization by means agricultural occupations, in which their
of protection would lead the nation down a income is extremely low, i.e., much lower
“blind alley” since it would perpetuate the low than it would be if they could find industri-
living standards of the people. al jobs.
Although Mises argued for opening up
trade gradually, he predicted that there was no Mises was absolutely clairvoyant in sug-

need to fear that, by removing tariff barriers, gesting in 1942 that private initiative should
“any plant will be forced to discontinue pro- participate in the production of petroleum, the
duction. Some plants, it is true, will have to management of the railroads, and the genera-
rearrange their lines of production in order to tion of electricity. He was also right in insist-
obtain a higher degree of specialization.” But, ing that unless investment and production
to the great surprise of many, the visiting have confidence, they cannot thrive and thus
Austrian recommended opening up trade uni- cannot contribute to economic progress.
laterally—removing commercial barriers

even though other countries maintained pro-

tective policies without. offering commercial Railroads, Electricity,

reciprocity. and Petroleum
Mises’s expectations about opening the
country up to trade were absolutely correct, as More than half a century after Mises’s visit,

they were in other instances. Although the his recommendation with respect to the rail-
Mexican opening was not gradual and the roads is becoming a reality. In the case of
policy adopted was unilateral in the begin- investment in the field of electricity, there are
ning, practically no failures that could be now indications that private capital will be
attributed to that fact were reported. permitted greater participation in the future.
Mises explained how the opening up of As for the production of petroleum, we are
trade, with all its benefits, cannot yield its full still far from a decision; some isolated voices
benefits without a coherent and a compatible suggest only occasionally, rather timidly, that
wage policy. Today those who think real the matter be reconsidered.
wages can be determined by decree or by Further, Mises was several decades ahead
employer-employee negotiations still organize in predicting what would happen in Mexico
in battalions. But those who are serious know between 1970 and 1976 with respect to coop-
the painful consequences of such a wage pol- erativism. In that six-year period the manage-
icy; it directly diminishes the competitiveness ment of cooperatives in some sectors, like that


===== PAGE 22 =====

22 THE FREEMAN/IDEAS ON LIBERTY ® MARCH 1999

of fishing, was entirely given up. The results First, his views were in opposition in many
had been very disappointing; they fulfilled to regards to the most widely accepted ideas of
the letter what Mises had written years before. the time and the years to follow. Moreover,
“No serious economist believes that a cooper- there was resistance from the powerful groups
ative society could successfully compete with that were surely disturbed, or would have been
private enterprises. The experiments have disturbed, by this text. International experience
resulted in complete failure.” This, he said, reveals that one of the great obstacles to under-
applied especially in the field of industrial taking reforms is special-interest groups. And
production. Mises’s paper touched directly on many of
One of the themes emphasized in Mises’s them, especially syndicalism, the agrarian
essay is the importance of maintaining the reform bureaucracy, the administrators of pub-
confidence of investors in order to improve the lic enterprises that would be dismantled, the
country’s material welfare. In Mexicos Eco- industrial beneficiaries of protectionist mea-
nomic Problems there are more than ten refer- sures, the clientele of subsidized organizations,
ences to this. On this point Mises was and even the teachers who were preaching in
absolutely positive: “What Mexico needs most the schools and universities “the religion of
is capital, either foreign or domestic. The étatism.” In this connection, Chapter XI of
repudiation of the national debt and the expro- Mises’s essay, “Education,” is recommended.

priation of foreign investments deter the for- However, as Keynes said, the ideas of econ-
eign capitalist. The methods of taxation pre- omists and social philosophers are more pow-
vent the accumulation of domestic capital.” erful than generally believed. There is a ten-

The investor, domestic or foreign, fears dency to exaggerate the power of special
every attack on property rights, lack of pub- interests as compared with the gradual pene-
lic safety, and arbitrariness. Strictly speaking, tration of ideas. And something that Keynes
when we consider the situation, confiscatory did not say, but which I firmly believe, is that
taxation is aggression against the right of in the long run, correct ideas will succeed in
property. According to Mises, very high taxes asserting themselves over the fallacies and the
“paralyze the spirit of entrepreneurship.” economic deceits. OJ
Therefore, he recommended that Mexico dis- —

itself fr “suicidal” t Ii f I. Translated into Spanish as Problemas Economicos de México,
tance 1tse om a suicidal” tax poliCy OI yer y Hoy by Daniel Sotelo Kucharik and Ana Maria de Sotelo
this kind. Taxes should never discourage sav- (Mexico: Instituto Cultural Ludwig von Mises, 1998). Publication of
. . . . the original English-language version is scheduled by Liberty Fund
Ing or the accumulation of capital. In this of Indianapolis in Volume 4 of Mises’s Lost Papers.
same vein, personal and entrepreneurial 2. Domingo Cavallo, formerly associated with Argentina’s cen-

. Co. tral bank, became foreign minister and then minister of economic
mcome that is invested should be taxed at a affairs under President Carlos Sail Menem. He was instrumental in

lower rate. stopping the inflation, establishing a currency board and stabilizing
Mi , . lish . 1 Ls the exchange rate of the Argentine peso at one U.S. dollar.
ISCS§ €ssay 1S enlig tening and ¢ ear; it 3. Editor's Note: Mises wrote in his 1943 manuscript that “The

refutes fallacies, destroys myths, is analytical, economic backwardness of a part of Mexico's agricultural popula-
d advi h . fir . d tion justifies intervention on the part of the government. It is all right
and aavisory. When 1t was st written an for the government to advise the peons how to establish and to run

made available in Mexico, it had practically co-operatives. Even small subsidies for newly formed co-operatives

LC: . 9 may be advocated. But it would be a mistake to subsidize them per-

no effect; in fact it was forgotten. Why ? 1 ven- manently or to grant them tax privileges. It does no good to mask the

ture a few theories. failure of any institution by such measures. Mexico is not rich
enough to indulge in the luxury of waste.”


===== PAGE 23 =====

Potomac Principles by Doug Bandow

¥ Government

America’s Forgotten War

he war that did the most to transform the however, citing the negative reaction from
world for the worse was formally settled surviving veterans. Yet at the same time the
80 years ago. Not World War II, which British government allowed relatives of sol-
employed greater destructiveness, exhibited diers executed for cowardice and desertion
greater cruelty, and slaughtered greater num- during World War I to hold a ceremony at the
bers of people. But World War I, which Cenotaph, Whitehall’s monument to the war
birthed World War II, along with the greatest dead.
of the totalitarian delusions—communism, To the extent that Americans know any-
fascism, and Nazism. Yet the Great War, as it thing about the war, they probably think of
was originally called, is largely forgotten in supposed idealist Woodrow Wilson leading
America. the fight to make the world “safe for democ-
Today the United States celebrates Veterans racy.” This was pure cant. Instead, Wilson was
Day on November 11, which replaced the dedicated to reforming the entire world and
original Armistice Day. But when Americans would have a chance to do so only if he head-
think of veterans they think of Vietnam, ed a belligerent power. His high-flown
Korea, and World War II. Not so in Europe. rhetoric disguised the fact that he had allied

There World War I continues to loom large. America with one militaristic bloc against the
As it should. The Triple Entente, with other.
which America was allied, had won when the While Germany helped bring on the war

guns fell silent on November 11, 1918. But as by isolating itself and adopting a hair-trigger
the Versailles peace conference, which mobilization plan, it was not bent on war.
opened in January 1919, proceeded through- German diplomacy after Chancellor Otto
out the spring, the Western powers managed von Bismarck was maladroit and stupid, not
to lose the peace. Tens of millions in the next malicious.
generation would pay for their mistakes. France, in contrast, was aggressively revi-
And the Europeans continue to fight left- sionist. It wanted to recover the provinces of
over issues of the war. For instance, last Alsace and Lorraine, lost in 1871 in the after-
November French Prime Minister Lionel math of the Franco-Prussian War (which had
Jospin suggested rehabilitating army muti- been started by France). This required not
neers who had been executed during a mas- just war between France and Germany, but a
sive soldiers’ revolt in 1917. President European-wide conflict, since France alone
Jacques Chirac sharply rejected Jospin’s idea, could not defeat Germany.
Doug Bandow, a nationally syndicated columnist, is Austria-Hungary, Germany's ally, was aso
a senior fellow at the Cato Institute and the author a status quo power, desperately seeking to

and editor of several books, including Tripwire: avoid internal collapse. In contrast, Italy,
Korea and U.S. Foreign Policy in a Changed World. which eventually joined the Entente, desired

23


===== PAGE 24 =====

24 THE FREEMAN/IDEAS ON LIBERTY ® MARCH 1999

Austro-Hungarian territory; Russia hoped to The French mutineers about whom Chirac
gain influence in the Balkans at the expense of and Jospin quarreled represented soldiers
Vienna. refusing to lose their lives in useless offen-

Most important, the blood-stained Serbian sives pushed by fantastically overoptimistic
regime, built on the brutal murder of the king generals who commanded far from the front.
and queen of the previous dynasty in 1903, Who could blame the poilus for resisting?
wanted to break apart Austria-Hungary in Especially since the politicians knew what
order to build a greater Serbia. In fact, it was going on. British Prime Minister David
was the Serbian-supported assassination of Lloyd George admitted that people could
Austria-Hungary’s heir apparent that lit the not be told the truth about the war or they
fuse of the war. The contending alliance sys- would end it the next day. He finally limited
tems acted as transmission belts of war for all troop replacements to the front because of
of the major European powers. what he termed the generals’ “reckless

After the deaths of some ten million peo- wastage of the manpower so lavishly placed
ple, all the contending nations’ goals looked at their disposal.”
downright frivolous. Washington’s formal jus- No one was immune from the effects of
tification for war was its desire to protect the this reckless wastage. The carnage sparked
right of Americans to travel on armed British revolution in Russia, breakup in Austria-
merchantmen carrying munitions through a Hungary, dissatisfaction with democratic pol-
war zone. itics in Italy, and, most important, collapse in

The celebrated Lusitania, sunk by a Ger- Germany.
man U-boat in 1915, carried just such a mixed Unfortunately, after all this mindless
cargo of babies and bullets. Wilson’s elo- bloodletting, the Allies came up with a peace
quence notwithstanding, the Germans were that French Marshal Ferdinand Foch pre-
perfectly justified in sinking it and other such sciently called “an armistice for 20 years.”
vessels. In fact, there is a continuing contro- The Allies blamed Germany for the war, dis-
versy over whether British officials, particu- membered Austria-Hungary and the Ottoman
larly then-First Lord of the Admiralty Win- Empire, plundered the defeated states, award-
ston Churchill, hoped the Lusitania would ed Third World peoples to the victors like
end up on the ocean floor, thereby inflaming prizes in a sporting competition, and mixed

American opinion against Berlin. different ethnic groups in a host of unstable
The war offers many ugly precedents. new nations.
There was, for instance, the brilliant British A decade later Britain was embarrassed by

propaganda, which convinced the world that its handiwork and refused to defend it; France
the “Huns” were ravaging Europe. Alas, it lost the will to act alone. They would neither
was all false, but it helped drive America into ruthlessly enforce Versailles to contain Ger-
the war. Joseph Goebbels modeled the Nazi many nor voluntarily revise the treaty to con-
effort after that of the British. ciliate Germany. Then came Adolf Hitler, and

There was also the war against noncombat- the Allies yielded on every point. World War
ants. London imposed a “hunger blockade,” II was not long in coming—followed inex-
denying foodstuffs to all European civilians, orably by the Cold War.
even though it was against international law. Even today we are not free of the lingering
Britain maintained the blockade even after effects of World War I. The continuing Balkan
Germany had surrendered. Hundreds of thou- civil wars are a bloody bit of unfinished busi-
sands died of starvation. ness from Versailles in 1919.

Finally, soldiers were treated as cannon The world was full of hope 80 years ago, as
fodder to be slaughtered. The Western front Allied leaders sought to create the world
became a static “sausage machine” once anew. But they failed: not only did ten million
trenches stabilized positions in the fall of people die in vain, but some 40 million more
1914. From then through the spring of 1918 would perish a generation later. It is the kind
no attack moved the lines more than ten miles. of history that we cannot afford to repeat. []


===== PAGE 25 =====

¥ Innovation

FREEMAN

deas On Libe

Frontiers: Last, Lost, and Found

by Eric Nolte

r J cnerosica innovation is the most pow- focused on producing more expensive aircraft
erful force for improving our safety and for business.

health, but such creativity withers under gov- In 1996, Cessna announced the production
ernment control. It flourishes in the rich soil of its homely model 172 for the first time in
of freedom. nearly two decades, thanks to the recent

Government intervention subsidizes busi- changes that Congress authorized to protect
nesses that are mediocre, obsolescent, and manufacturers from completely open-ended
inept. Such firms survive not because they liability claims. This is virtually the same
have won consumer dollars through the logic airplane that Cessna had produced since the
of superior products and voluntary trade with late 1940s till 1978. The price? Around
consumers, but because they have succeeded $200,000, three times its cost in its last year
in lobbying for legislative advantages that of production.
hobble their betters in the marketplace and sti-
fle the creativity behind innovation. Aviation The Will to Create
presents many examples of this.

At one time a small factory-built light air- The human yearning to create and improve
plane could be purchased for the price of a things is like a flower that wriggles out to sun
nice automobile. No more. Those who want a and air from under rocks. While regulation
little Cessna now need to raise enough money and the tort system have destroyed much
for a home mortgage, not a car loan. innovation in small, commercially produced

While aviation electronics have seen big airplanes, a loophole in federal legislation
advances, that is largely a result of the boom allows average people to build airplanes at
in computers and consumer electronics that home. They buy plans and parts for simple
has proceeded mostly without government airplanes, and network with others under the
interference. But the structures, materials, and auspices of the Experimental Aircraft Associ-
power plants used in the construction of light ation. While the name suggests an organiza-
airplanes have not improved much for half a tion devoted to cutting-edge matters, their pri-
century. Between the huge costs of govern- mary function is to help ordinary citizens get
ment regulation and the way tort law has been into the air with simple machines.
interpreted for decades, manufacturers of One part of the EAA’s membership is
small airplanes have either gone bankrupt or devoted to advancing aviation. It produces

kits that make good use of new composite
Eric Nolte is an airline pilot, a writer, and a classical- materials, new power plants, and structures to

ly trained pianist and composer of contemporary con- Produce machines that in their performance
cert music. E-mail him at ericnolte@compuserve.com. and convenience put to shame anything

25


===== PAGE 26 =====

26 THE FREEMAN/IDEAS ON LIBERTY © MARCH 1999

offered by today’s makers of little planes. For tion, at the very least, a true Orient Express: a
example, the Beechcraft Bonanza, which first second generation of big, long-range, super-
rolled off the Wichita production line in 1945, sonic jet transports (SST) that would be qui-
is still among the hottest factory-produced pri- eter, environmentally cleaner, and more fuel
vate airplanes in general aviation. In efficien- efficient than the Concordes and similar prod-
cy, speed, and comfort, it is a dinosaur com- ucts that were on the drawing boards at Boe-
pared to what home-builders can offer today. ing, Lockheed, and Douglas in the 1960s. But
Much attention has focused on the benefits the government—in thrall to the politically
of airline deregulation to the flying public. connected lobbyists, Luddites, and human-
Airline traffic is twice what it was in 1978, haters of the time—passed legislation that
encouraged by fares that are so much lower killed all such efforts before the first Ameri-
that airline travel has become the primary can SST appeared even in prototype.
mode of traveling long distances. It is also my belief that we would have—or
Little known is that airlines remain among would shortly have—viable, reusable, single-
the most highly regulated industries in the stage-to-orbit rockets, plying the skies in low-
country. The highly touted deregulation of earth orbit between Europe, the Americas,
1978 merely allowed airlines the power to set and Asia, carrying mail, people, and high-
rates and choose which cities to serve. priority freight with greater safety, speed, and
One result of regulation is that airliners value than anything we have today.
today neither look nor perform much better The whole history of technology validates
than those introduced 40 years ago. What this point. And these are not the most impres-
would airliners look like absent government sive innovations that G. Harry Stine outlines
regulation? And how might this contribute to in his book Halfway to Anywhere: Achieving
advancing aviation safety? America’s Destiny in Space. Stine presents a
Compare the huge leap in safety that sample business plan produced by experi-
occurred when the old piston-engine airliners enced venture capitalists that marshals scien-
were replaced by the jets that started coming tific and economic savvy. The plan shows how
online around 1960. Suddenly, instead of get- big profits are available to those who get into
ting their feathers knocked off as they slogged low-earth orbit, from where, as science fiction
through nasty weather systems down in the author Robert Heinlein put it, one has already
lower reaches of the troposphere, jets had the expended the energy to be “halfway to any-
speed and range to top or circumnavigate where in the solar system.” Big floating space
much of the bad weather. The improvement in stations would serve as hotels for gawkers and
comfort and safety was a quantum leap over well-to-do honeymooners. Factories in space
those of the old propeller-driven transports. (as Stine pointed out in his 1979 book, The
The technology has existed for decades that Third Industrial Revolution) could exploit the
would allow a similarly dramatic improve- unique characteristics of a zero-gravity envi-
ment over the current generation of jets. But ronment that would allow the production of
trying to use much of this technology is as certain drugs and the use of some industrial
hopeless as trying to compete with the post processes that are simply impossible outside
office. It’s forbidden by law. that environment. Earth-orbiting industries
Those who are familiar with particular could serve as hubs for mining precious
fields, as I am with my profession of aviation, resources from the asteroid belt. Getting into
are in a position to have some idea of what space would allow human beings to transform
might be. Abundant technology is on hand the earth into a new garden of Eden, at a pace
today that would astonish you. set by the rewards that market forces offer us
for moving off the planet. (Getting into space
ultimately promises an answer even to the
threat that will otherwise doom human beings
In my professional opinion, if it weren’t for when our sun begins to burn out.)
regulation, we would already have in opera- More immediately, getting into space

Air Orient Express


===== PAGE 27 =====

FRONTIERS: LAST, LOST, AND FOUND 27

promises a renewal of the psychological ben- arriving in Paris, the return flight would
efits long said to have ended with the closing require another six months to replace the
of the American frontier a century ago. It missing components, perform a major over-
might restore the idea of progress, the death haul of the remains, and to engage in the same
of which has been proclaimed by the extravagant process of preparation with the
crabbed, depressed, minimalist, dyspeptic same cast of thousands.
human haters and anti-technology zealots This small group of Douglas engineers
who tell us that we are merely a cancerous embarked on an unofficial program, funded
blight on the earth. (Some of these folks, like with shoestring capital that they raised almost
the misanthropic Norwegian philosopher and entirely by their own efforts. By the late
founder of deep ecology, Arne Naess, yearn 1980s, they had produced and flown the first
for a new virus to wipe out the horrible curse proof-of-concept prototype that would ulti-
of man.) mately be a fully reusable single-stage-to-
People need to get into space for a multi- orbit (SSTO) vehicle able to deliver satellites
tude of reasons. But we will never get there and other payloads to low earth orbit (LEO)
without free markets to implement the tech- with the reliability and ease of airliners plying
nology we already have and bring to fruition the sky between New York and Paris.
the equipment to satisfy this widespread Despite smaller budgets than in the glory
human desire. Regulation thwarts innovation days of the moon program, in the late 1980s
by making creativity a crime, and by punish- the space agency was still a bureaucratic,
ing businesses that would otherwise be suc- empire-building institution, quick to lunge at
cessful enough to attract the necessary ven- any threat to its health. To some of NASA's

ture capital. bureaucrats, the Douglas DC-X project
appeared to threaten its turf. At the very least,
The NASA Bureaucra cy its success was an embarrassment to NASA

owing to the contrast between its tiny budget

Harry Stine offers an insider’s lucid discus- and the bloated financing of the space
sion of the scandalous way in which the fed- agency’s projects. By offering Douglas money
eral government and NASA have throttled a to fund the project, NASA succeeded in the
rich vein of creativity through the bureaucrat- time-tested ruse of hijacking it for itself. The
ic “empire-building” of regulation, sub- agency turned it into another massive govern-
terfuge, political back-stabbing, lying, and ment program by divvying up the carcass
logrolling. among Its many aerospace contractors

According to Stine, a group of Douglas (including, not incidentally, the corporate
engineers noticed that NASA's way of han- remains of McDonnell Douglas itself, now
dling the problem of lofting payloads into that this company had been taken over by rival
space was fixed at the mentality of 1940s- Boeing).
style rocket artillery: the multistage booster NASA has a new, improved version of the
and payload capsule. Imagine how far com- SSTO vehicle and, a decade after the first (and
mercial aviation would have come, thought to date, last) flights of the DC-X, has spent
these few engineers at Douglas, if an airliner years running studies of all the various mat-
required a Cecil B. De Mille cast of thousands ters involved. It estimates a first flight of its
to prepare six months in advance for every spacecraft far in the future, following still
trip from New York to Paris. Passengers more years of studies and tests.
would have to be trained for the ride weeks in
advance, garbed in special, expensive tailor-
made suits. When the day of the trip arrived, Another Blow to State Dogma
the vehicle would launch and proceed to jetti- One frequently hears that the development
son 95 percent of its parts, dropping these of aerospace vehicles is a textbook example
hideously expensive components into the of the kind of capital-intensive venture at
ocean, never to be used again. And finally, which private industry could never exhibit


===== PAGE 28 =====

28 THE FREEMAN/IDEAS ON LIBERTY © MARCH 1999

either the foresight or wherewithal to succeed. duction today. All of these aircraft use com-
It is said that only the wise, all-knowing gov- posite materials and an unusual tail-first
ernment can selflessly surmount the tawdry “canard” configuration. Rutan also designed
motive of short-term profit to focus on expen- the privately created Voyager aircraft that was

sive, long-term, noble projects. the first airplane to fly around the world with-
This perennial claim by freedom’s enemies out refueling.
recently received another blow. A recent arti- Gary Hudson, Rotary’s chief executive,

cle in Flight International magazine reports says that Roton will begin deployments and
that the Rotary Rocket Company has raised retrievals of LEO telecommunications satel-
$17 million from investors and hired Barclays lites and other cargo during the first half of
Capital to help it raise another $20 million in 2000.

private funds in order to offer by the year 2000 Other missions for the Roton include solar
commercial launches of satellites or other pay- power satellites and space manufacturing of
loads weighing 3,200 kilograms to low earth new materials. Because it is piloted, a Roton
orbit for a cost of $7 million, or $2,200 per will be able to conduct a final check of satel-
kilogram. This is much less than today’s going lites before their release, a service never
rate. To put this in perspective, compare the offered before. While other commercial
cost of launching John Glenn back into orbit, launchers charge clients a non-refundable
a recent publicity stunt by the attention- advanced payment, Rotary Rocket’s bill will
starved space agency: something on the order be due only on successful delivery of the pay-
of $500 million—for a single mission. load into orbit; any problems would result in

Rotary’s goal is “to herald the arrival of a returning the payload and launching it again
new space age—the age of routine, commer- with no further charge.
cial space transportation” by operating a fleet Rotons will also repair or retrieve damaged
of aerospace craft called “Roton,” which will or “dead” satellites, which should lower insur-
be the world’s first successful reusable com- ance costs.
mercial SSTO vehicle. The two-pilot Roton The Roton may well be the first profitable
booster will be 20 meters high and 6.7 meters spacecraft. It is the product of imagination
in diameter. The name of the Redwood Shores, and funding that are entirely private and cost
California, company refers to the rotary a tiny fraction of the time and money spent by
pumping action of the Roton’s Rocketjet its government-led competition.
engine and its free-spinning helicopter-style Who says only the government can succeed
blades that deploy during the last phase of with big, time-consuming, capital intensive
descent, enabling precise control for landing. projects?

Scaled Composites is producing sections of Freedom is the great engine that draws out
the Roton’s fuel tank. This company was the breathtaking creativity of our human
founded by Burt Rutan, the designer of many potential, because only freedom unleashes
highly creative aircraft, including the very every person’s desire to achieve happiness. In
popular home-builts Vari-Ese and Vari-Viggin, a free market, such achievement is advanced
and the prototype of the twin-turboprop when we offer goods or services that please
Beechcraft Starship, which may be the most our customers, wherever they may be found
advanced turboprop corporate airplane in pro- on—or off—the planet. C

The apple icon W 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 29 =====

FREEMAN

deas On Libert

The Great Bequest

by Tom G. Palmer

I Lmted government is one of the greatest ing their just Powers from the Consent of
accomplishments of humanity. It is the Governed, that whenever any Form of
imperfectly enjoyed by only a portion of the Government becomes destructive of these
human race, and, where it is enjoyed, its Ends, it is the Right of the People to alter
tenure is ever precarious. The experience of or to abolish it, and to institute new Gov-
the twentieth century is surely witness to the ernment, laying its Foundation on such
insecurity of constitutional government and to Principles, and organizing its Powers in
the need for both courage in achieving it and such Form, as to them shall seem most
vigilance in maintaining it. likely to effect their Safety and Happiness.

Advocates of limited government are not
anti-government per se, as some people would On this foundation the American Founders
charge. Rather, they are hostile to concentra- established a system of government based on
tions of coercive power and to the arbitrary delegated, enumerated, and thus limited
use of power against right. With a deep appre- powers.
ciation for the lessons of history and the The American Founders did not pluck these
dangers of unconstrained government, they truths out of thin air, nor did they simply
are for constitutional limitations: government invent the principles of American govern-
should have the delegated authority and ment. They drew from their knowledge of
means to protect our rights, but not be so thousands of years of human history, during
powerful as to destroy or negate them. which many peoples struggled for liberty and
The American system was established to limited government. There were both defeats
provide limited government. The independent and victories along the way. The results were
existence of the United States was based on distilled in the founding documents of the
certain truths: American experiment in limited government:
the Declaration of Independence, the Articles
that all Men are created equal, that they are of Confederation, the state constitutions, and
endowed by their Creator with certain the Constitution of the United States.
unalienable Rights, that among these are
Life, Liberty, and the Pursuit of Happi- .
ness—That to secure these Rights, Gov- Students of History
ernments are instituted among Men, deriv- The American Founders were careful stu-
dents of history. It was Thomas Jefferson, in
Tom Palmer is director of the Project for a Civil his influential 4 Summary View of the Rights

Society at the Cato Institute. This article is adapted of British America, prepared in 1774, who
from the Cato Handbook for Congress. noted that “history has informed us that bod-

29


===== PAGE 30 =====

30 THE FREEMAN/IDEAS ON LIBERTY ® MARCH 1999

ies of men as well as individuals are suscepti-
ble of the spirit of tyranny.” Another Founder,
Patrick Henry, devoted great attention to the
study of history. He summed up the impor-
tance of history thus: “I have but one lamp by
which my feet are guided, and that is the lamp
of experience. I know of no way of judging
the future but by the past.” History—the lamp
of experience—is indispensable to under-
standing and defending the liberty of the indi-
vidual under constitutionally limited, repre-
sentative government.

Through the study of history the Americans
learned about the division of power among
judicial, legislative, and executive branches;
about federalism; about checks and balances
among divided powers; about redress and rep-
resentation; and about the right of resistance,
made effective by the legal right to bear arms,
an ancient right of free persons. Liberty and
limited government were not invented in y 1
1776; they were reaffirmed and strengthened. Patrick Henry (1736-1799)
The American Revolution set the stage for the
benefits of liberty and limited government to by Pope Gregory IV in the eleventh century
be extended to all. As John Figgis, professor under the motto, “freedom of the church.”
of modern history at Cambridge University, This movement, which created an institution-
noted at the turn of the century: al distinction between the church and the sec-

ular authorities, was the first major “privatiza-

The sonorous phrases of the Declaration of tion” of a previously state-owned industry

Independence . . . are not an original dis- (the church) and provided the foundation for

covery, they are the heirs of all the ages, such important institutions as the rule of law

the depository of the emotions and the and legal accountability, federalism, and the
thoughts of seventy generations of culture. independent and self-governing associations
that make up civil society.

The roots of the history of limited govern-
ment stretch far back, to the establishment of * The growth of civil society in the self-
the principle of the higher law by the ancient governing chartered towns of Europe, in which
Hebrews and by the Greek philosophers. The the guiding principle was “city air makes one
story of the Golden Calf in the Book of Exo- free.” The independent cities of Europe were
dus and the investigations of nature by Aristo- the seedbeds of modern civil society—of the
tle both established—in very different ways— market economy, of personal liberty, and of the
the principle of the higher law. Law is not security of person and property.
merely an expression of will or power; it is

based on transcendent principles. The legisla- * The fixing of limits on the powers of
tor is as bound by law as is the subject or cit- monarchs and executives through written con-
izen; no one is above the law. stitutions. The Magna Carta of 1215 is the

Many strands have been entwined to form most memorable of those documents to inher-
the fabric of liberty: itors of the Anglo-Saxon political tradition. It

included the requirement that taxes could not
» The struggle between church and state, be imposed without the consent of the “gen-
which was put into high gear in the Latin West eral council of the realm,” which provided the


===== PAGE 31 =====

THE GREAT BEQUEST 31

origin of the English parliament, as well as be understandable and actually capable of
other specific limitations on the king’s power, being followed.
including the stipulations that no one be There was also widespread recognition of
imprisoned, outlawed, or exiled, or his estate the principle of reciprocity between the hold-
seized, “except by the lawful judgment of his ers of power and the general populace. Rights
peers or the law of the land” and that “mer- were spelled out in contractual form in con-
chants shall have safe conduct in and out of stitutions and charters. Those rights were not
England.” This was the precursor of the Peti- gifts from the powerful, which could be taken
tion of Right of 1628, the Bill of Rights of away on a whim, but something on which one
1689, the American Declaration of Indepen- could take a stand. Tied up in the notion of a
dence, and the American Constitution and chartered right was the ancillary right to
Bill of Rights. defend that right, even to the point of resis-
tance with force of arms. The higher law, rec-
Those various movements reinforced each iprocity and mutuality of obligations, written
other in a multitude of ways. The assertion of charters of rights, the right to be consulted on
the freedom of the church and even of its policy and to grant or refuse one’s consent,
supremacy over the secular powers was and the right of resistance in defense of those
bound up with the idea of the higher law, by rights are the foundations of constitutionally
which all are judged—emperor, pope, and limited government. They were won over
peasant alike. As legal scholar Henry Brac- many centuries at great sacrifice.
ton, a judge during the reign of Henry III, Just how precious this heritage is can be
noted of the royal authority, “The law makes gleaned from comparing it with the history of
him king. Let the king therefore give to the Russia, where, until very recently, there was
law what the law gives to him, dominion and no reciprocity between rulers and ruled, no
power; for there is no king where will, and independent power able to challenge the
not law, bears rule.” Were the king to consid- rulers. The principality of Muscovy and its
er himself above the law, it was the job of the successors were despotic to a high degree,
king's council—the precursor of parlia- with no charters of liberty, no power higher
ment—to rein him in: “if the king were with- than the Tsar (or his successor, the Commu-
out a bridle, that is, the law, they ought to put nist Party), no limits on power—in effect, no
a bridle upon him.” Not only was the nascent law. As Harvard University historian Richard
parliament above the king; the law was above Pipes noted in his book Russia under the Old
the parliament, as Sir Edward Coke noted in Regime, “There is no evidence in medieval
the seventeenth century: Russia of mutual obligations binding prince
and his servitor, and, therefore, also nothing
when an act of Parliament is against com- resembling legal and moral ‘rights’ of sub-
mon right and reason, or repugnant, or jects, and little need for law and courts.” The
impossible to be performed, the common immense difficulties in establishing the rule
law will controul it, and adjudge such Act of law, a system of well-defined and legally
to be void. secure property, and a market economy are
testimony to the great and vital importance of
building on a tradition of stable, constitution-
ally limited government. They also remind us
The supremacy of the law over the exer- how important it is for us to maintain our her-
cise of power is a hallmark of the Western itage of limited government and the rule of
legal tradition. The rule of law is not satisfied law.
by merely formal or ceremonial exercises,
such as the publication of edicts in barel .
understandable form, whether in the archaic Liberty Versus Power
“Law French” of the king’s courts or the The struggle for limited government was a
pages of the Federal Register; the laws must struggle of liberty against power. The

Law Supreme


===== PAGE 32 =====

32 THE FREEMAN/IDEAS ON LIBERTY ® MARCH 1999

demands for religious liberty and the protec- That all-too-common view turns the notion
tion of property were fused in the heroic resis- of limited government on its head. Limited
tance of the Netherlands to the Empire of government means that government is limited
Spain in their great revolt. The Dutch became both to the exercise of its delegated powers
a shining example of what was possible when and in the means it can employ, which must be
people were free: prosperity was possible both “necessary and proper” The English
without the guiding hand of the king and his Revolution of 1640, the Glorious Revolution
bureaucrats; social harmony was possible of 1688, and the American Revolution of
without enforced religious conformity; law 1776 were fought precisely to combat unlim-
and government were possible without an ited government. What Americans need is not
unlimited and absolute sovereign. The Dutch unlimited government, as Days proposes, but
inspired the English to rise up against the limited government under law, exercising del-
Stuart kings, who sought to fasten upon the egated and enumerated powers. That is how
English the absolutism that had made such the equal liberties of citizens are protected. As
headway on the Continent. The American the philosopher John Locke, himself an active
Revolution was one link in a long chain of participant in the struggles for limited gov-
revolutions for liberty. ernment in Britain and the primary inspiration
The story of the attempts to institute abso- of the American revolutionaries, argued in his
lutism in the Netherlands and in England was Second Treatise of Government: “the end of
well known by the American Founders, who Law is not to abolish or restrain, but fo pre-
were, after all, British colonists. One cannot serve and enlarge Freedom: For in all the
understand the American attempt to institute states of created beings capable of Laws,
limited representative government without where there is no Law, there is no Freedom.
understanding the history of England. What For Liberty is to be free from restraint and
they were struggling against was the principle violence from others, which cannot be, where
that the powers of the state are “plenary,” that there is no Law.”
they fill up the whole space of power. King
James I of England (then King James VI of .
Scotland) had written in 1598 that “the King Unprecedented Liberty
is above the law, as both the author and giver The American experiment in limited gov-
of strength thereto.” In 1610 James made 4 ernment generated a degree of liberty and
Speech to the Lords and Commons of the Par- prosperity that was virtually unimaginable
liament at White-Hall in which he railed only a few centuries before. That experiment
against the notions of popular consent and the revealed flaws, of course, none of which was
rule of law and stated that “as to dispute what more striking and repugnant than the tolera-
God may do is blasphemy . . . so it is sedition tion of slavery, or “man-stealing,” as it was
in subjects to dispute what a king may do in called by its libertarian opponents, for it
the height of his power.” deprived an individual of his property in his
In other words, there are no limits to power. own person. That particular evil was eliminat-
Distinct echoes of that view are still heard ed by the Thirteenth Amendment to the Con-
today. For example, the solicitor general of stitution, showing the self-correcting nature
the United States, Drew Days, arguing in the and basic resilience of the American constitu-
case of United States v. Lopez before the tional system, which could survive such a cat-
Supreme Court, was unable to identify a sin- aclysm as the Civil War.
gle act of Congress, other than those express- Other flaws, however, have been revealed
ly prohibited by the Constitution, that would or have surfaced since. Among them are the
be impermissible under the administrations following:
expansive view of the Commerce Clause.
Solicitor Days contended that the powers of * An erosion of the basic principles of fed-
Congress are plenary, that is, unlimited, eralism, as the federal government has consis-
unless, perhaps, specifically prohibited. tently encroached on the authority of the


===== PAGE 33 =====

The Foundation for Economic Education
Irvington-on-Hudson, New York 10533
Tel. (914) 591-7230

Fax (914) 591-8910

E-mail: freeman @fee.org

Web site: www.fee.org

March 1999
| J LJ
Brutes in Suits
tatists on the left habitually congratu- do is sophisticated thuggery. They're
late themselves on their humanity. brutes in suits who sell to the highest bid-
They croon on endlessly about peace, ders their willingness to coerce innocent
harmony, cooperation, community, mutual people.

- understanding, tolerance, and diversity. Here's an imperfect, but useful, way to
They profess to abhor violence and cruelty. test whether or not some government
They apparently regard candlelight vigils— | activity is thuggery. Ask: Is the activity
featuring dozens of people swaying in uni- one that ordinary people could ethically
son and singing about love—as the most do on their own, either individually or in a
transcendent form of self-entertainment. group, in the absence of government? If

Statists on the right don’t get teary-eyed the answer is yes, the government activity
at the mention of “peace” or “diversity,” isn’t thuggery. If the answer is no, the gov-
and most are as likely to attend a candle- ernment activity is thuggery.
light vigil as Bill Bennett is to model fash- Consider, for example, a police officer

ions by Dennis Rodman. But statists on the | directing traffic. This activity is legitimate;
right nevertheless profess a high regard for | itisn’t thuggery. It’s legitimate because

peace and a hatred of violence. there is nothing inherently unethical about
But while their particular goals may dif- a private citizen directing traffic on a busy
fer, all statists are hypocrites. Their distin- street. The same is true for government
guishing mark (whether they realize it or efforts to nab murders, rapists, thieves,
not) is that they all advocate government- and arsonists. Depending on your view of
as-thuggery. Statists, whether on the left or | government, you might or might not trust
on the right, advocate that government government to perform these tasks effec-
unleash its coercive powers in various and | tively. You might also believe that even
sundry ways, most of which would be these tasks are best left to the private sec-
criminal if done by private people. tor, or, instead, you might believe that it’s
The thugs in question happen to dress prudent to assign these tasks to govern-
well, are well-coifed, and are (usually) ment exclusively. Either way, none of
articulate. But what makes someone a thug | these tasks would be considered criminal
is not how he looks or what he proclaims or illegitimate if carried out by private per-

to be his ultimate motive, but, rather, what sons in the absence of government. (Even
he does. And most of what politicians now | legitimate activities arguably become ille-



===== PAGE 34 =====

gitimate if they are funded through coer- find that in the privacy of their own home

cive means, such as taxation by govern- your neighbors smoke marijuana or Cuban
ment. No private citizen can ethically con- cigars?

fiscate resources from others even if these Would it be morally acceptable for you
resources will be used in ways that nearly to inflict violence on Americans who
everyone approves. Recognizing that I am refuse to obey your command that they
skipping blithely over a fundamentally not hire Mexican or Filipino workers?
important issue, I ignore here the problems None of these activities enjoys any legit-
created by taxation.) imacy when pursued privately. Indeed,

Regrettably, the overwhelming bulk of they are all considered criminal.
what government actually does today— So why should government be allowed
even apart from using taxation to fund its to do these things?
efforts—would be (correctly) considered Most statists respond by intoning that

~ criminal if private persons did these things. | democratic governments carry out the will

Examples are legion. Here’s one: mini- of the people. If it’s the will of the people
mum-wage legislation. Suppose your that, say, no worker be paid less than $5.15
neighbor offers to hire at $3.00 per hour per hour, then the few selfish reprobates
someone to work in his supermarket. who would violate the collective will
Would it be moral for you to stick a gun to should be prevented from doing so.
your neighbor’s head and order him not to Numerous problems afflict this
hire anyone for less than $5.15 per hour? response, not least of which is the fact that
Of course not. Would it be moral for you democratic government at best carries out
to round up several of your friends into a only the will of the majority. One of the
mob and threaten to lynch your neighbor most pernicious myths that today plague
if he insists on hiring workers for less than the popular political mind is that the
$5.15 per hour? Of course not. appetite of some mysterious phantom

So what makes it legitimate for govern- called “the will of the people” is justly sat-
ment to threaten people with violence if isfied if as few as 50% of voters plus one
they insist on hiring workers at less than acquiesce in schemes concocted by a cabal
the government-stipulated minimum of politicians who are beholden to special-
wage? Nothing. Nothing at all. interest groups.

Consider other activities currently pur- Sadly, the very logic of modern politics
sued by government. Would it be morally is that politicians and bureaucrats use the
acceptable for the president of Bethlehem coercive powers of the state to transfer
Steel to stand on the wharves in Seattle wealth from politically unorganized
and threaten to shoot anyone who dares to | groups (for example, sugar consumers) to
unload steel made in Asia? Obviously not. politically powerful groups (for example,
It follows that import restrictions are sugar producers). But whether the state is
immoral; only thugs promote and imple- coercing the minority to bow to the will of
ment them. the majority, or coercing the majority to

Would it be morally acceptable for you bow to the will of politically potent inter-
to burgle your wealthy neighbors” home est groups, such coercion is wrong—and it
and then give the funds to a poor family gains not a smidgen of legitimacy when
living across the tracks? Obviously not. It carried out by telegenic talking heads who
follows that government's efforts to redis- work in marble-domed buildings and are
tribute wealth are illegitimate. dressed by Armani.

Would it be morally acceptable for you Beware of brutes in suits.

to imprison your neighbor and confiscate

her property if she refuses to install a / 75)

wheelchair ramp at her place of business? . ) wreorf
Would it be morally acceptable for you

to storm into your neighbors’ house and Donald J. Boudreaux
tote them off to a jail in your garage if you President



===== PAGE 35 =====

fli The March of History if

W hat comes to mind when you think about the month of March? For many

people it is the ominous-sounding “Ides of March,” the day when Brutus

slew the dictator Caesar, announcing as he committed the act, “Sic semper
tyrannus”—"Thus always to tyrants.” In recognition of the connection between
March, history, and the state, we are putting four of our most interesting history titles
on sale. These books will help bring new worlds to life for you—something Caesar
could have used!

Leviathan at War, Edmund Opitz, ed.

Published in 1995, this anthology addresses a number of war-related topics, including the
causes of war, conscription, weapons and prosperity, war and liberty, and peace and free trade.
This collection contains work by Leonard Read (including his important “Conscience on the
Battlefield”), Ayn Rand, Ludwig von Mises (on the economics of war], military historian B.H.
Liddell Hart, and Mark Twain, among others. One of our best Freeman Classics, this book pro-
vides an excellent foundation for arguing against the aggressive militarism so many govern-
ments adopt.

195 pages, paper $9.95 SALE: $4.00

Capitalism and the Historians, F.A. Hayek, ed.*

How often do you hear that the Industrial Revolution was a disaster for workers? Many histori-
ans argue the Industrial Revolution caused wage rates and standards of living to plummet; that
the movement away from farms and villages toward cities and factories was a truly dreadful
development. This small book debunks these myths and provides evidence that the Industrial
Revolution caused standards of living to rise, which in turn, led to a vastly improved quality of
life. A great antidote to the leftist diatribes one often encounters when reading about the 19th
century.

191 pages, paper $12.95 SALE: $6.00

The Industrial Revolution and Free Trade, Burton Folsom, ed.

More good stuff on the Industrial Revolution — one of mankind's true “great leaps forward.”
Dr. Burt Folsom brings together 22 essays that investigate the economic theories that under-
girded the Industrial Revolution, the consequences of the Industrial Revolution, and the case
for free trade. This book has been called “a veritable gold mine of facts about the history of free
trade and of the free market.” This 1996 work is great on its own or as a companion volume to
Hayek's Capitalism and the Historians.

182 pages, paper $14.95 SALE: $7.00

Theory and History, Ludwig von Mises*

In his preface, Murray Rothbard says this book “provides the philosophical backstop and elab-
oration of the philosophy underlying Human Action.” This neglected work includes chapters on
the Philosophy of History, the Concept of Historical Individuality, and the Meaning and Use of
the Study of History. It is a powerful volume that illuminates Mises’s earlier writings.

393 pages, cloth $14.95 SALE: $7.00

*quantities limited

Postage & Handling: Please add $3 per order of $25 or less; $4 for orders of $25-50; $5 for orders over $50.
Send book orders with check or money order to FEE, 30 S. Broadway, Irvington-on-Hudson, NY 10533.
Visa, MC, Amex, Discover accepted ($10 min. please). Call 800.452.3518



===== PAGE 36 =====

An Evening with the Editor. ..

Sheldon Richman
“Separating School
and State”

Saturday, April 24, 1999, at FEE

§ 1 heldon Richman has given a new
“tam look and fresh editorial voice to The
Ao’ Freeman. He has recruited some of the
world’s top journalists and renowned free-market scholars to
write for FEE’s monthly magazine. And his own lively
“Perspective” and “Peripatetics” columns are welcome additions
to the editorial mix.

Sheldon is also an informative and entertaining speaker. Get
to know him better at our April Roundtable. This informal gather-
ing starts at 5 p.m. with a reception and dinner, followed by a
spirited discussion on the perils of public education. Price is $35
per person.

For reservations, call Janette Brown at (800) 452-3518.

Other Forthcoming Events at FEE

Undergraduate Seminar, March 18-20

Trustees Annual Dinner, May 16

Introductory Seminar in Economics, Politics, and History, June 26-July 1
Advanced Seminar, “The Economics and Ethics of the State,” August 7-12



===== PAGE 37 =====

THE GREAT BEQUEST 33

states. Federal criminalization of acts that are
already criminalized by the states, for exam-
ple, usurps state authority (as well as circum-
venting—opinions of the Supreme Court
notwithstanding—the prohibition of double
jeopardy in the Fifth Amendment to the Con-
stitution). An even more striking contempo-
rary example of the overreach of federal law
is the continued exercise of federal controls
over marijuana use in states—California and
Arizona—that have legalized the medical use
of that drug. The Tenth Amendment is quite
explicit on this point: “The powers not dele-
gated to the United States by the Constitution,
nor prohibited by it to the States, are reserved
to the States respectively, or to the people.”

* Violation of the separation of powers
between the various branches of government.
In article I, section 8, for example, the Con-
stitution explicitly reserves the power to Harlan F. Stone (1872-1946)
declare war to the Congress, a power that the
Congress has allowed to be usurped by the y the Congress in ratifying judicial nomi-
executive branch and which it should retake to pees to fulfilling the role of the courts in
itself. Further, the Congress has illegally enforcing constitutional restraints on both the
exceeded its authority by delegating its leg- federal and the state governments. For exam-
islative powers to administrative agencies of ple the Supreme Court has not consistently
the executive branch, such as the Food and  pplied the prohibitions of the First Amend-
Drug Administration and the Federal Trade ment to either commercial speech or political
Commission. In addition to violating the Con- speech (the latter in the context of campaign
stitution, that has led to the erosion of the rule finance), nor has the Court rectified the novel
of law, as such administrative agencies have (and specious) distinction between personal
burdened the population with an unimagin- [jperties and economic liberties drawn by Jus-
ably complex welter of edicts; the Federal (ice Harlan F. Stone in United States v. Caro-
Register runs to some 60,000 pages per year, ene Products Co. (1938).
representing a degree of minute regulation
that is unreasonable and burdensome and that The failure to pass a constitutional
virtually guarantees that any citizen involved amendment limiting members of the Senate to
in a commercial transaction, for example, will two terms and members of the House of Rep-
run afoul of some part of it, no matter how resentatives to three terms. Just as the presi-
well intentioned or scrupulous he may be. dent is limited in the number of terms he can
Such a situation is an invitation to the arbi- serve, so should be the other elected branch of
trary exercise of power, rather than the appli- government, to guarantee the rotation in
cation of law. office that the Founders believed essential to

popular government.

o Inattention to the important role of the
federal judiciary as a check on arbitrary and .
unauthorized exercises of power. Especially Needed Corrective
since the threatened Court-packing “constitu- Those flaws can, however, be corrected.
tional revolution of 1937,” there has been too What is needed is the courage to place the
little attention by the federal judiciary—and health of the constitutional order and the


===== PAGE 38 =====

34 THE FREEMAN/IDEAS ON LIBERTY © MARCH 1999

future of the American system above short- gle for Liberty. San Francisco: Fox &
term political gain. The original American Wilkes, 1993.

Founders were willing “to mutually pledge to Ely, James W., Jr. The Guardian of Every
each other our Lives, our Fortunes, and our Other Right: A Constitutional History of
sacred Honor.” Nothing even remotely Property Rights. New York: Oxford Univer-
approaching that would be necessary for sity Press, 1998.

today’s members of Congress to renew and Epstein, Richard A. Simple Rules for a Com-

restore the American system of constitutional- plex World. Cambridge, Mass.: Harvard
ly limited government. University Press, 1997.

The challenge facing Americans today in . Takings: Private Property and the
defending constitutionally limited govern- Right of Eminent Domain. Cambridge,
ment was succinctly stated by the English lib- Mass.: Harvard University Press, 1985.
ertarian Herbert Spencer in 1884: ~ Hamilton, Alexander, James Madison, and

i i i i John Jay, The Federalist Papers. New York:
The function of Liberalism in the past Mentor, 1961.

was that of putting a limit to the powers of _— .

: : . Lo ayek, F. A. The Constitution of Liberty.
kings. The function of fue Liberati Sm in Chicago: University of Chicago Press,
the future will be that of putting a limit to 1960

the powers of Parliaments. 0D Higgs, Robert. Crisis and Leviathan: Critical
. Episodes in the Growth of American Gov-
Suggested Readings ernment. New York: Oxford University

Berman, Harold. Law and Revolution: The Press, 1987.
Formation of the Western Legal Tradition. Jefferson, Thomas. “A Summary View of the
Cambridge, Mass.: Harvard University Rights of British North America.” In The

Press, 1983. Portable Jefferson. New York: Penguin
Boaz, David. Libertarianism: A Primer. New Books, 1977.
York: Free Press, 1997. Locke, John. Two Treatises of Government.

Boaz, David, ed. The Libertarian Reader: 1690. Cambridge: Cambridge University
Classic and Contemporary Readings from Press, 1988.
Lao-tzu to Milton Friedman. New York: Sidney, Algernon. 1698. Discourses Concern-
Free Press, 1997. ing Government. Indianapolis: Liberty
Bramsted, E. K., and K. J. Melhuish, eds. Fund, 1990.
Western Liberalism: A History in Docu- Spencer, Herbert. Political Writings. Cam-
ments from Locke to Croce. New York: bridge: Cambridge University Press, 1994.
Longman, 1978. Storing, Herbert, ed. The Anti-Federalist.
Brooks, David L., ed. From Magna Carta to Chicago: University of Chicago Press,
the Constitution: Documents in the Strug- 1985.



===== PAGE 39 =====

Peripatetics by Sheldon Richman

Smoke Got in Their Eyes

conomics pervades life. Many people burse” them for medical expenses paid on
(not Freeman readers) will misinterpret behalf of residents with smoking-related ill-
that remark to mean that money is all that’s nesses. At first, state officials were licking
important. And that common misinterpreta- their chops over what they will be able to do
tion testifies to the dearth of economic educa- when the money starts rolling in. Now it is

tion in America. dawning on them that there might not be as
To say economics pervades life is the same much money as they thought.
as saying that choice pervades life. Every- The state of Arkansas is a case in point. “Is

thing we do volitionally requires that we Windfall for State All Smoke, No Cigar?”
choose one thing and forgo another. This is asked a headline in the Arkansas Democrat-
inescapable in a world where everything of Gazette. The state was expecting a $20 mil-
value, including time, is limited. lion check from the tobacco companies by the
We all understand this implicitly about our end of 1998. But to pay that bill, the tobacco
own actions. If you explain it to a child of, say, companies raised the price of cigarettes by 60
10, he will know what you're talking about cents. The state’s Department of Finance esti-
right away. He makes choices all the time. mated that because of the price hike, cigarette
But because economics, in this broad sense, sales would drop 11 percent, reducing tax rev-
is not taught early on to most children, and enues by $10 million in 1999. Easy come,
surely is not taught in schools and universi- easy go.
ties, people have a hard time applying it to With the price increase comes an increase
most abstract matters, such as government in the amount of tax smokers will pay on each
policy. When they focus on that realm, sud- pack, 2.8 cents to be exact. That led some
denly there are no choices, and resources at people to believe that even if sales drop 11
any moment are limitless. Policymakers are percent, the state will still come out about $7

the worst offenders. million ahead in tax revenues. Not so fast.
No better example exists than the recent Remember the broken-window fallacy.
settlement between the tobacco companies At this point I must acknowledge, reluc-

and 46 state attorneys general. Economics tantly, that Arkansas has a director of eco-
was almost completely missing from the nomic analysis and tax research who under-
analysis of the settlement. stands Bastiat’s broken-window principle.
To recap, the tobacco companies, under the “With people having to spend more for ciga-
threat of pending liability suits and new gov- rettes, that money has to come from some-
ernment regulation, agreed to pay the states where, so we look at that as a wash in sales
$206 billion over the next 25 years to “reim- tax,” Joe LaFace said.
Good point. If smokers reduce other pur-
Sheldon Richman is editor of The Freeman. chases to keep smoking as much as before,

35


===== PAGE 40 =====

36 THE FREEMAN/IDEAS ON LIBERTY © MARCH 1999

they will simply shift from one taxed item to Medicare won't pay for your coronary bypass
another. There won’t be an increase in tax operation. If you have a cyrrhotic liver and a

revenue. boozy past, you might be turned down for
Aside: That, of course, is a good thing. I treatment.
never regard it as meritorious that a policy, But that won’t be the end of it. If you're an

even the repeal of a bad policy, produces more octogenarian needing a new hip, well, maybe
tax revenue. What’s good about governments those resources would be better devoted to a
having even more money with which to com- younger person with productive years still

mit mischief? ahead.

Well now. The windfall won’t be as large as That’s the risk we run when we let govern-
the states anticipated. And the reason is that ment pay medical bills.
the tobacco companies raised prices, presum- To cover all bases, we have to entertain the

ably dampening demand for cigarettes. Surely possibility that higher prices won’t reduce the
no one is surprised that the tobacco compa- demand for cigarettes. There were early indi-
nies will pay the states from money obtained cations of that. We can’t predict how people
from customers. Do the companies have some will act in the face of new alternatives. Let’s
other source of money? Moreover, since assume demand falls not at all. What hap-
smokers are disproportionately low-income pens? As we’ve already seen, there will be no
people, we have the Alice-in-Wonderlandish new revenue for the states. Furthermore, since
spectacle of smokers’ indirectly reimbursing smokers don’t suddenly have additional
the states for the medical services the state income with which to pay the higher price,
ostensibly pays for on their behalf. they will reduce other purchases. The falling

To truly appreciate this, let’s walk through demand for other products could result in cut-
it step by step. The states, through Medicaid, backs and layoffs in those industries. Let’s
pay for the treatment of low-income people assume all the people laid off are nonsmokers.
with smoking-related illnesses. The states That leaves us with an odd outcome. People
demand that the tobacco companies, which who don’t smoke will be made to suffer so
made the product that produced the illnesses, that people who do smoke can have their med-
pay the states the money spent on treating ical expenses paid for. Not exactly justice, is
their customers. The tobacco companies raise it?

their prices in order to have the money to pay I think we can conclude that this tobacco

to the states for the treatment. deal is a fiasco. It’s a mass of fallacy, confu-
Wouldn't it be more efficient—not to men- sion, and dishonesty.

tion honest—to cut out the middle man? But But it didn’t begin with the states’ lawsuits.

doing so would give the game away. It would It’s been going on for years. When the Clinton
be equivalent to telling low-income people administration came in it spoke of raising the
that smoking disqualifies them from Medic- federal cigarette tax to, first, discourage
aid. How ominous would that be? The gov- smoking and, second, pay for health care and
ernment would be announcing that personal anti-smoking campaigns. Now I’m no Rhodes
habits will determine eligibility for govern- scholar, but isn’t there a conflict between
ment benefits. Precedent is powerful. If that those two objectives? If you have plans for the
policy 1s adopted for Medicaid, surely revenue from the cigarette tax, you'd better
Medicare is next. And as the government hope people keep smoking. That would help
slowly absorbs the medical industry (the save Social Security too.
attempted quick absorption came a cropper in They never learn. President Clinton wants
1993), it will have set the stage for the gener- the states to use their tobacco windfalls for
al denial of medical care on the basis of per- anti-smoking programs. (Some states are
sonal habits. Government will be in the triage resisting.)
business. I have an idea: the government shouldn’t
So, if you have clogged arteries and a pay for anyones medical care or tax our
life of ham and eggs behind you, perhaps habits or lecture us on how to live. 0



===== PAGE 41 =====

THE
FREEMAN

The “Savings Crisis”

by John Hood

t’s a constant refrain among politicians and What Is Savings?

the news media: America has a low savings N
rate. This, it is said, has dire consequences for It’s worth pausing to consider the definition
the long-term health of the economy. Some and origin of savings. After all, economists
analysts put the personal savings rate—the aren't talking simply about a bank account, or
percentage of disposable income that isn’t €Ven an investment in stocks or bonds, when
consumed in a given year—as low as 2.1 per- they address the issue of savings. For exam-
cent in 1997, a 63-year low. Although this ple, one’s home is a form of savings, in that
undercounts the real amount of American sav- the value of the home usually appreciates
ings and investment, there is no doubt that the €V€n a§ ONE uses the home for current con-
private savings rate is near an all-time low. ~~ Sumption (shelter).

Why is this? Are Americans simply irre- Indeed, the official savings rates don’t factor
sponsible? Should government force house- in the appreciating value of assets. They reflect
holds to save more money for a rainy day, as the difference between reported income and
some doomsayers have suggested? reported expenditures. The Commerce

On the contrary. America’s savings crisis is Department, which generated the 2.1 percent
almost totally manufactured by government rate cited above, doesn’t actually track inflows
itself. Through punitive taxation and the and outflows of wealth. It doesn’t include the
growth of the welfare state, big government ise in the value of investments in individual
has legislated against the habits of thrift and retirement accounts, 401(k) plans, real estate
delayed gratification on which human appreciation, or the rise in value of mutual
progress is based. The decline in the savings funds or corporate stock. It doesn’t count the
rate over the course of the twentieth century implicit wealth people accumulate in pension
isn’t just a minor economic trend. It repre- Plans. The Federal Reserve computes an alter-
sents the threat that government expansion Dative measure incorporating some of these
poses to the principles on which successful factors and estimated that the 1997 savings
human civilization rests. rate was actually 7.1 percent of disposable
John Hood is president of the John Locke Founda- fncome. Sul, hats pretty small coipared
tion, a non-profit think tank based in Raleigh, North with the savings rates of other countries. In

Carolina, and the author of The Heroic Enterprise: Asia, rates reach as high as 20 percent.
Business and the Common Good (The Free Press). The reason the issue of savings is so impor-

37


===== PAGE 42 =====

38 THE FREEMAN/IDEAS ON LIBERTY ® MARCH 1999

tant is that deferring consumption—which is means of saving and transporting food of
probably the best definition of savings—is more than limited quantities, these earliest
essential to human happiness. That statement human societies provided little reward or
may seem paradoxical. How can forgoing cur- incentive for hard work. All that was hunted
rent pleasure or satisfaction by choosing not or gathered was consumed relatively quickly.
to buy a good or service today increase one’s An individual who was exceptionally talented
happiness? To answer that question, it’s as a hunter or gatherer had no reason to invest
important to look at how four closely related much of his time performing those tasks.
economic behaviors—savings, insurance,
investment, and specialization—arose among Stages of Economic Discovery
prehistoric human cultures.

Even under these conditions, however,
developments occurred in economic
exchange and institutions. The earliest hunt-

The earliest societies historians can identi- ing and gathering humans cooperated with
fy are the nomadic hunter-gatherers who each other to derive sustenance from a some-
inhabited various regions of Africa, Asia, times-forbidding environment. They had to
Europe, and the Americas. Throughout most develop terms of trade and rules of work and
of their history, these hunter-gatherers trav- reward in order to put members of the clan or
eled in small groups of 20 to 30 related indi- band to productive use. A simple division of
viduals—a patriarch and matriarch, their chil- labor did evolve, based on age, sex, and phys-
dren and grandchildren, mates from neighbor- ical prowess (or infirmity). We know that
ing groups, and other assorted relatives. They these small societies, while primitive and
worked together both to hunt animals for meat sometimes brutal, also gave opportunities for
and to gather fruits, vegetables, nuts, simple those with different natural talents and skills.
tools, and other useful objects. Because these And while the invention of money was far in
groups were constantly on the move, their the future, these early humans engaged in
housing consisted of either portable shelters mutually beneficial trade in valuable goods
(tents, or yurts) or structures they found or that sometimes spanned surprising distances.
could construct quickly (caves, lean-tos). Archaeologists and anthropologists divide

In this earliest of human societies, the line human prehistory before metallurgy into three
separating political, economic, and spiritual periods: Paleolithic (Old Stone Age),
institutions was blurred or nonexistent. Few Mesolithic (Middle Stone Age), and Neolith-
of the tools future civilizations would use to ic (New Stone Age). The names suggest a cat-
draw such lines were available to the hunter- egorization based on stone technology, but the
gatherers. Their nomadic lifestyle, for exam- real dividing lines among these periods
ple, provided little opportunity to develop or involve changes in geography and corre-
enforce private property rights, not only over sponding changes in economic technology
land but over the products that land might and organization.
produce. Private property rights are indis- For the purposes of understanding econom-
pensable if societies are to separate the public ic history, the Paleolithic Period is critical. It
from the private, the sphere of human activity lasted from 2.5 million years ago until about
over which political power is freely wielded 10,000 B.C. Humans during this period
and the sphere over which it is limited or include Homo erectus and archaic Homo
excluded. sapiens. Early in the period, humans used

Furthermore, the small size of these soci- simple tools made either of the core of a stone
eties necessarily reduced the extent to which after pieces had been flaked off, or the flakes
differences in knowledge or talent resulted in themselves. They used fire (discovered some-
the development of markets or a division of time between 1 million and 500,000 years
labor beyond the most rudimentary one. ago) to drive or prod animals, to prepare food,
Finally, because they lacked any practical and of course to keep warm.

A Short Economic Prehistory


===== PAGE 43 =====

THE “SAVINGS CRISIS” 39

Later, in the so-called Middle Paleolithic spread the risk of starvation over a broader
Period, flake tools were developed into a wide number of hunters and gatherers, thus improv-
array of scrapers, borers, and points used to ing the chances of survival for all.
manipulate animal kills and other materials. The concepts of savings and insurance are
This was the period of Neanderthal Homo closely related; indeed, one might think of
sapiens in Europe and some humans even insurance as a way of realizing the benefits of
closer in appearance to modern humans. Their savings without 1) having to develop tech-
tools may have improved their hunting but, nologies for saving food over a long period
more important, there is evidence of extensive and 2) having to wait until a stock of savings
social cooperation not only in hunting but in is sufficiently large to tide a family or group
storing and exchanging food. As one writer over during hard times. Insurance-type
has noted, hunting is not just about killing arrangements, if they are of large enough
animals. Killing animals is the easy part, breadth for their members to escape simulta-
whether it is by using weapons, by trapping, neous misfortunes, represent a reasonable
or by driving prey over cliffs. The difficult technique for coping with risk under difficult
part lies in the organization of personnel so technological conditions.
that they are in the right place at the right time The Upper Paleolithic, beginning about
and with the right gear to ensure a better-than- 50,000 years ago in various regions, repre-
average chance of success. sented the appearance of humans roughly

Even more difficult is the task of coping identical to us today. It also brought two addi-
with failure, weather, and the decline of ani- tional economic innovations of critical impor-
mal stocks. Remember that these societies tance: specialization and investment. The
lacked effective technologies for storing food, Cro-Magnon and other advanced Homo sapi-
and a diet of nuts, berries, and other gathered ens of the Upper Paleolithic, unlike their pre-
foods was of insufficient quantity or nutrition- decessors, seem to have specialized in the
al value to tide families and clans over in the hunting or gathering of specific species,
event of a seasonal decline of game. rather than being purely opportunistic and
pursuing whatever was visible in their range
areas. Like savings and insurance, specializa-
tion was a form of risk management in the

It is here, in the Middle Paleolithic populat- sense that it usually involved careful study of
ed by humans whose language skills were lim- particular animals with the goal of predicting
ited or nonexistent, that economic institutions their behavior—and thus increasing the likeli-
extending beyond kinship probably developed. hood of catching them. Specialization took
More specifically, these Middle Paleolithic some of the risk out of hunting and gathering
people pioneered the crucial economic behav- by allowing for the accumulation of knowl-
ior of managing risk—in this case, the risk of edge with which small human societies could
starvation. They did it with two innovations: ensure a more stable and predictable food
savings and group insurance. In the former supply. It not only required study of animal
case, they learned to put stores of food in habits and movements, but also a more
secure places in their hunting and gathering detailed understanding of the climate and
territory, and then budget them to cover sub- topography of their range areas.
sistence needs over the lean times. In the latter, Accumulating such knowledge had a cost.
nearby small kinship groups established social It took a great deal of time and effort, which
networks through alliance, intermarriage, vis- earlier human societies had probably devoted
iting, and feasting that served as regional to less taxing and more recreational activities.
insurance policies. A group facing a decline in Indeed, many people assume that economic
game (or lack of success in hunting) could progress throughout history has meant a pro-
make claims on the food stores of neighbors gressive increase in leisure time, but until
with whom they had previously invested time, recently the opposite has been true. In earlier
attention, or their own food. This served to Paleolithic groups, there was little to be

Humans Beings Invent Savings


===== PAGE 44 =====

40 THE FREEMAN/IDEAS ON LIBERTY ® MARCH 1999

gained by spending more time on hunting and the specialty becomes more attractive. It rep-
gathering activities rather than on leisure resents variety and diversion. A coastal group
activities. Hunting and gathering was such a specializing in catching fish and gathering
hit or miss process that increased time and shellfish would have something of value to
effort invested in it wouldn’t have yielded offer an inland group specializing in hunting
much more in the way of results. deer, horses, or other big game. This increased
But with the introduction of specialization, value of trade would apply not only to food-
increased time and effort devoted to the study stuffs but also to other goods. In both western
of quarry and environment could pay off in and central Europe of the Upper Paleolithic,
higher returns. So the more sophisticated for example, there is evidence that several
hunters and gatherers of the Upper Paleolith- species of seashells were traded or exchanged
ic discovered the value of investment—forgo- over hundreds of miles. Similarly, there is evi-
ing consumption or leisure in the short run for dence of relatively long distance trade in high-
greater material benefit in the long run. Until quality flints and other raw materials.
it became practical to store information The Upper Paleolithic Period ended with
(through better language skills and specializa- the end of the last Ice Age and the impact of
tion in a relatively narrow field of inquiry) global warming on the environment. The ini-
investment would have had paltry returns. tial stages of this warming can be traced back
This revolution in hunting and gathering to about 11,000 B.C., and affected different
had repercussions beyond improvements in parts of the Old and New Worlds at different
the food supply. It was also associated with times. The oceans rose as ice melted, forests
the development of larger, multi-family expanded over the expanses left behind by the
groups. For one thing, specialization and retreating glaciers, and portions of the globe
investment made population growth much saw climate change of cold to temperate or
more desirable. Additional people meant temperate to hot. These changes led either to
additional opportunities to gather useful human migration or to significant changes in
information and carry out the more complex the way humans lived in their home areas.
strategies required to catch more game. At the One further note about the end of the Upper
same time, the improved food supply made it Paleolithic is that it coincides with the final
possible to support larger populations. Spe- settlement of every habitable continent.
cialization and the increased scale of human The key point for our purposes is that the
populations led to larger and more permanent development of multi-family societies, and
settlements, and the beginnings of a territori- later towns and cities, was based on the inven-
ality that would eventually lead to concepts of tion of economic practices involving delayed
private property. And both the larger popula- gratification, or savings. The habit of savings
tions and the increased productivity of hunt- and investment paid its greatest returns once
ing and gathering made possible a greater human settlements developed around new
division of labor within the groups, allowing notions of private property. Once families
some individuals the option of specializing in could work their own land or tend their own

tasks other than hunting and gathering. herds, the economic value of hard work

soared. After all, at a very basic level, agri-
Savings and Investment culture and animal husbandry were the epito-
Create Trade me of savings and investment. Rather than lit-

erally “eating the seed corn,” farmers planted

Finally, the development of larger groups it in the ground, tended it for months (perhaps
with a higher level of specialization created nearly starving the whole time), and then
the conditions required to inaugurate trade reaped a far greater bounty at harvest time.
among unrelated groups. After all, if one With herders, delaying gratification meant
group chooses to specialize in a particular feeding scarce grains and water to stock ani-
form of hunting and gathering, then the occa- mals rather than to their own families. It
sional acquisition of game or artifacts outside meant tending, not eating, the stock. Those


===== PAGE 45 =====

THE “SAVINGS CRISIS” 41

who could learn to do this would, in the long Unfortunately, the advent of the New Deal
run, be far better off that those hunter-gather- in the 1930s, followed by the Great Society
ers who worried only about today’s meal. programs of the 1960s, began to suggest to
If one considers the broad sweep of human Americans that these big-ticket items in their
history, this radical revolution in how human lives might be paid for by someone else. Roo-
beings live has occurred only recently. The sevelt’s Social Security and unemployment
passage of time from the last Ice Age and insurance promised income in case of sudden
early human settlements to the modern day is, loss of employment, disability, or old age.
geologically speaking, a blink of the eye. Yet Johnson’s Medicare and Medicaid promised
consider how radically different our lives are families that they wouldn’t have to save and
compared with our hunter-gatherer ancestors. invest to take care of elderly relatives who
needed lots of medical attention or institu-
. . tional care.
The Savings-Rate Decline At the same time, these expansions of gov-
Although no data exist on the personal sav- ernment spending required increasing
ings rate per se throughout recorded history, amounts of revenue. The government got this
one can safely say that it was extremely high. revenue in large part by taxing private savings
Even as recently as the nineteenth century, and investment. The first permanent income
most Americans still lived and worked on taxes arose in the early 1900s. Marginal rates
farms. They spent most of their waking hours soared during World War I and then rose again
saving and investing—working the land for during the New Deal and World War II. Pay-
the promise of future return. Few could afford roll taxes were added to fund entitlement pro-
luxury items, vacations, or other forms of cur- grams, taking money that families would oth-
rent consumption. erwise have saved for their own needs. Today,
The Industrial Revolution changed all that. the income tax code is strongly biased in
Mass production, first of clothes and later of favor of current consumption and against
other goods, significantly reduced their cost long-term savings. For example, a worker
and thus reduced the amount of time and who earns $1,000 will pay income and payroll
effort consumers had to save and invest in taxes only once on that money if he chooses
order to afford them. Advances in transporta- to spend it immediately. If he invests it in cor-
tion technology came next, facilitating trade porate stock, however, he will likely pay
and thus the comparative advantages in price income tax on the money three or more addi-
and quality of purchasing goods from others tional times, as the corporation pays taxes on
rather than making them oneself. Finally, dra- earnings, the worker pays taxes on his divi-
matic advances in agricultural technology and dends, and then pays again if he leaves the
practices so increased the productivity of investment to his heirs.
farming that prices fell, far more food and Is it any wonder that the rise of the welfare
fiber could be produced per person, and farm- state has coincided with what many
ers gradually found their time and effort more observers, of varying political persuasions,
profitably invested elsewhere. call a new ethic of instant gratification and
The purpose of savings and investment self-indulgence? Public opinion polls show
changed from acquiring basic necessities to that Americans have become convinced that
addressing “quality of life” goals. As workers government will help them through the big
moved to cities, then to suburbs, in the new expenses they will face in their lives, be it
industrial economy, savings and investment unemployment, education, health care, home-
became a means of purchasing a new auto- buying, disability, or retirement.
mobile, buying a nice home, sending children This is a mirage, of course. If one thinks of
to college, affording higher levels of health the money taxed out of families and “invest-
care, dealing with sudden disability or unem- ed” by government for these future needs as
ployment, and providing for a comfortable the real rate of personal savings, then it’s not
retirement. being invested very well. Everyone knows the


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42 THE FREEMAN/IDEAS ON LIBERTY ¢ MARCH 1999

crisis that faces Social Security in the long remains a savings crisis. Too little of our seed
run, as Baby Boomers retire and base their corn is being invested in long-term productive
expectations of a comfortable old age on the enterprise, with a promise of future harvests.
prospect of government transfer payments Instead, government is feeding this seed corn
from a smaller cohort of working Americans. to current beneficiaries of entitlement pro-
But the problem isn’t just limited to retire- grams. Americans have lost the impulse that
ment. Medicare will go broke far earlier, per- industrious human beings throughout history
haps in the next decade. Medicaid—increas- have maintained to work and save for the
ingly a program of nursing-home payments future.
for the middle-class elderly instead of an anti- This is the real savings crisis. It isn’t just
poverty program—will collapse next. Unem- one of dollars and cents, but of thrift and self-
ployment insurance is already an awful deal reliance. The solutions are clear: end the tax
for most workers, who are eligible to draw code’s bias against private savings and invest-
money only if they are terminated without ment, and end government’s false promise of
cause, and even then they get paltry returns. saving and investing on our behalf. There is
The money Americans are forced to save and no more serious challenge facing American
invest in education also gets poor returns, as society and American freedom. O
the mediocre test scores of American school-
children and the declining academic standards (For further background, see Barry Cunliffe,
of American universities illustrate. The Oxford Illustrated Prehistory of Europe
So even if one defines the savings rate in (Oxford: Oxford University Press, 1994) and
the most expansive manner—as not only pri- Mark Kishlansky, Civilization in the West,
vate savings but also the amount of money Volume 1 (New York: HarperCollins Publish-
government “saves” on your behalf—there ers, 1991).

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,
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===== PAGE 47 =====

FREEMAN

Ideas On Libert

The Bully that Acts Like a Hero

by Harold B. Jones, Jr.

n 1995 President Clinton established what One particular hospital received such a let-

he called “Operation Restore Trust,” a ter on November 21, 1996. The letter stated
Health and Human Services initiative aimed that in the 85-month period ending on
at wiping out fraud and abuse in the health- December 31, 1994, the hospital had submit-
care industry. According to the administra- ted 13,726 Medicare claims for a total of
tion, only terrorism surpassed health-care $140,648,474. Of these, the government said
fraud as a criminal problem in this country. 36 were “false claims.” Of the amount that
The initiative relied on the False Claims Act, had been billed, $7,998 had been billed incor-
a piece of legislation dating back to the Civil rectly. Under the terms of the False Claims
War and designed to frighten Army contrac- Act, if the hospital had defended itself in
tors into honest billing practices by threaten- court and lost, its penalty would have been
ing them with a substantial fine plus triple $153,576.15, in addition, of course, to its
damages for every false claim. legal expenses. It settled out of court for a fine

An Operation Restore Trust demonstration of $12,257.
project in five states supposedly identified $23
in overpayments for every dollar spent on the

9
project, and the program was expanded. Abuse or Error?

Eighty percent of American hospitals and Let’s look at this case a little more careful-
nearly 100 percent of those participating in ly. The total number of Medicare claims was
Medicare were targeted for investigation. 13,726. Thirty-six were supposedly false

The program used demand letters that claims. That figures out to be a “false claims”
began with a reference to the False Claims Act rate of about one quarter of one percent. The
and went on to tell hospital administrators that false claim dollar amount was less than one
“It has been determined that your institution percent of one percent. To state the matter
should be civilly prosecuted pursuant to that precisely, we have here the case of a complex
act.” A statement like that is a good attention- bureaucratic process that was accurate in
getter. It was, however, followed at a short dis- 99.74 percent of the cases and for 99.99 per-
tance by these words of comfort: “In order to cent of the dollars involved.

expedite and simplify this matter, we are This raises some questions. The most obvi-
extending to all hospitals the opportunity to ous is about the government’s characterization
settle before litigation.” of the hospital’s behavior as “fraud and abuse.”

Could it not be more appropriately described

Harold Jones teaches at Mercer University’s Eugene 35 8 simple billing error? What does this say
W. Stetson School of Business and Economics in about the honesty of our government? On the
Macon, Georgia. one hand, it goes to a hospital with a demand

43


===== PAGE 48 =====

44 THE FREEMAN/IDEAS ON LIBERTY © MARCH 1999

that is probably better described as extortion 600 pesticides and determining which should
than regulatory oversight. On the other, it goes be removed from the market because they
to the American people with a deliberate mis- were hazardous. The Insecticide, Fungicide
characterization of the way private institutions and Rodenticide Act gave the agency three
have conducted themselves. It acts like a bully. years to carry out this project. More than 25
It represents itself as a hero. years have passed since then, and for most of

The government’s behavior in cases of this this time over a thousand EPA employees
kind undoubtedly has something to do with have been hard at work on it. They have come
the character of the current president, but it to conclusions on the safety of about 30 pes-
has even more to do with the fact that govern- ticides. The rest, including those with regard
ment is an organization. Organizations differ to which the data indicate a significant risk,
in many ways, but beneath that variety are remain on the market.

certain common denominators of organiza- If we content ourselves with believing that
tional behavior. Let’s examine the govern- the actual purposes of our government and its
ment’s regulatory activities in this light. agencies are the same as their stated purpos-

es, we will conclude simply that the FDA and
The Real and the Pal atable the EPA are incredibly ineffective. Something

needs to be done, we will say, and we will

The student of organizations soon learns vote for the person who claims to have a plan
that there are at least two explanations for for doing . . . well, something. If we want to
everything an organization does: an explana- understand what’s happening, though, we
tion that sounds good and the real explana- must recognize that the actual purposes of an
tion. (There could be several of each kind.) organization are not necessarily the same as
We learn the first by looking at the organiza- its stated purposes.
tion’s statements about its purposes. We learn
about the second by studying its behavior.

In his wonderful book The Death of Com-
mon Sense, Philip Howard looks at issues Every organization we know has sought to
through the eyes of an attorney. He gives perpetuate its own existence. I won’t say there
examples of government’s stated objectives are no exceptions to this rule. Now and again
(the reasons that sound good), notes its com- one encounters exceptions to almost every-
plete failure to attain these objectives, and thing. The case of the organization that volun-
concludes that government is ineffective. It tarily ceases to exist is approximately as fre-
can be argued, however, that although it sel- quent as the case of the happy, healthy, and
dom attains its stated objectives, government well-adjusted man who decides to drive his
is massively effective in reaching its real car off a cliff. It is not logically impossible,
objectives. These objectives are never articu- but it is extremely rare.
lated, but they do exist, and they have been One of the best guarantees for an organiza-
identified in the behavior of every organiza- tion’s continued existence is a public percep-
tion ever studied. They are in fact the driving tion that it is involved in something impor-
force in the life of an organization, and gov- tant. Even organizations with large endow-
ernment is, if anything, more effective than ments need public endorsement. This creates
other organizations in reaching them. a strong incentive for organizations either to

Consider the Food and Drug Administra- expand their missions or to draw them out. In
tion and the Environmental Protection spite of flowery statements about their pur-
Agency as Howard describes them. The FDA poses, organizations display mixed senti-
set out in 1962 to examine the possibly harm- ments about actually completing whatever it
ful effects of some 200 food-color additives. is they are supposed to be doing.

The task was supposed to take 30 months. It The original purpose of the March of
actually took 28 years. In 1972, the newly cre- Dimes was the discovery of a cure for polio.
ated EPA was assigned the task of examining Well, the cure was discovered. The March of

The Law of Self-Preservation


===== PAGE 49 =====

THE BULLY THAT ACTS LIKE A HERO 45

Dimes should have disbanded. Its work was more concerned about selling orange juice
done. But you already know the rest of that than about customers’ health. But an ad cam-
story. paign based on that truth wouldn’t get very

Spinoza said everything seeks to persist in far. To succeed in advancing its own interests,
its own being. When applied to government an organization must represent itself as seek-
and its agencies, this helps to explain the exis- ing to advance the interests of outsiders. (As
tence of regulatory codes that Howard says we’ll see, with private companies the two sets
are so complex as to guarantee noncompli- of interests coincide.)
ance. The Occupational Health and Safety This law of organizational behavior holds
Administration has estimated that at least 80 true across the wide spectrum of organiza-
percent of all workplaces are not in compli- tions and in no way depends on the personal-
ance with the law. The reason? It’s simple. Not ities or ideologies of the individuals involved.
even the most conscientious businessperson Government always manifests this tendency.
has time to keep up with four thousand That has been evident in both Republican and
detailed regulations. Democratic administrations.

Howard suggests that we need to develop
more general laws that can be interpreted
according to the demands of the situation and
then hold people accountable. In the long his- A good example is antitrust legislation,
tory of governments on this planet, however, whose ostensible purpose is to protect con-
there have been very few changes of that kind. sumers from monopolies that operate to
Almost without exception, legal systems restrain trade and therefore to raise prices. An
become more detailed and complex over time. examination of how the laws have been used,

however, may raise some doubt. If the stated
. and real purposes were the same, the laws
Complexity Breeds Power would provide a clear description of prohibit-

Complex legal systems increase a govern- ed behaviors. A businessperson could use
ment’s power over its citizens. The Resources them to determine what was legal and what
Conservation and Recovery Act (known as was not. As Ayn Rand pointed out, though, the
“Rickra”), for example, requires every com- antitrust laws are designed and have been
pany that receives hazardous materials to interpreted in a way such that one cannot
keep track of them and eventually dispose of know whether they have been violated until
them. RCRA also requires a ledger showing after the fact. Numerous students of business
exactly where each container is located on the ethics have pointed to this problem as charac-
premises. Federal environmental agents go teristic of the regulatory laws in general. They
into large companies that could not possibly are like a powerful trap with a defective trig-
maintain minute-to-minute paperwork on the ger mechanism. Several people step over it
exact location of thousands of barrels and without harm. Then all of a sudden and for no
threaten criminal indictments unless the com- apparent reason, it takes off someone’s leg.
panies pay large fines. Once again, the gov- During the 1930s, Alcoa had become an
ernment’s behavior is more like extortion than aluminum monopoly in the sense of being
regulatory oversight. A complex rule has the only producer in its industry. But it was
allowed a government agency to make unrea- not a monopoly that constituted a restraint of
sonable demands without fear of being chal- trade. It had kept the price of primary alu-
lenged in the courts. minum at a level compatible with the maxi-

Organizations never represent themselves mum expansion of its market. At that price,
as striving for their own preservation, of profits were possible only by means of cost-
course. They always appear to be seeking to cutting efficiency.
advance the interests of outsiders. I don’t Alcoa had not entered into collusive
suppose too many people would challenge arrangements with any other producer or with
me if I said that Minute Maid is infinitely any of its customers or suppliers. It had done

Antitrust Law


===== PAGE 50 =====

46 THE FREEMAN/IDEAS ON LIBERTY © MARCH 1999

nothing to dominate the aluminum industry or was its effect. It explained away the Alcoa
forcibly prevent the entry of new competitors. case, set the Justice Department free to initi-
It had done nothing to violate the law. All it ate more cases of the same kind, and provid-
had done was attempt to maximize its profits ed justification for the expansion of the
in exactly the way that economic theory says antitrust division through the hiring of more
they can be maximized, by setting its margin- lawyers. The government said it was protect-
al revenues equal to its marginal costs. Other ing the public. It was in fact expanding the
companies did not enter the market because at area under its own control.
the going price it was not profitable to do so. The laws of organizational behavior apply
If Alcoa had raised its prices, though, or if a quite as much to businesses as to the govern-
cost-cutting technology had been discovered, ment and its agencies. Businesses, too, offer
competitors would have appeared almost both real reasons and reasons that sound
immediately. Given the opportunities of a free good. Businesses, too, seek to advance their
market, innovation would have happened own interests and represent themselves as
sooner or later. seeking to advance the interests of outsiders.
Under the antitrust laws, a monopoly, as Businesses, however, come with a safety
such, was not illegal. What was illegal was device called competition. A business oper-
“the intent to monopolize.” Under those laws, ates under the hard necessity of providing
Alcoa should never have been found guilty something of value to its customers because if
unless there was evidence that it had tried to it doesn’t, they will find another place to
maintain an artificially high price by taking spend their money. If Ford doesn’t provide me
aggressive action to exclude competitors from with a good car in exchange for my dollars,
the market. No such evidence was ever pre- there are plenty of other companies that will.
sented. Judge Learned Hand, however, in Competition puts constraints on the degree to
United States v. Aluminum Company of Amer- which the actual performance of a private
ica (1945), argued that the mere fact of being enterprise can vary from its stated purpose.
so productive that competitors had no incen- Governments, as monopolies, do not oper-
tive to enter the market was in itself sufficient ate under this constraint. The only thing that
evidence of monopolistic activities. Alcoa was can constrain the behavior of a government is
penalized, Ayn Rand said, not for breaking the an informed and active citizenry.
law, but for being a well-run business. The net We need to start looking at the difference
effect was a higher price for consumers. between the government's stated purposes and
Five years later, the Cellar-Kefauver Act what it actually does. It claims to be protect-
would sprinkle holy water on this injustice by ing us. What it is actually doing is gradually
declaring that market share could be used as taking away our liberty. Businesses are easy
evidence of intent to monopolize. It was noth- targets. Ever since 1902, when Theodore Roo-
ing but an after-the-fact justification of some- sevelt initiated the trust-busting era with his
thing that had already happened. Behavior of attack on the Northern Securities Company,
this kind is what the great organizational the- the government has portrayed private institu-
orist Karl Weick has described as retrospec- tions as offenders and itself as the defender of
tive sense making. The federal government the public interest. It does not take much
was in effect looking back at its previous thinking to see that this is a misrepresenta-
actions and reinterpreting them in such a way tion. We need to remember that the govern-
as to make itself look good. Instead of cor- ment’s freedom to harass a business is the
recting the injustice, legislators re-defined the freedom also to harass the individual. Ayn
situation in such a way as to make Judge Rand would remind us that when one citizen’s
Hand’s decision seem reasonable. The legisla- rights can be legally violated, no one’s rights
tion was not described in these terms, but that are safe. J


===== PAGE 51 =====

FREEMAN

ideas On Libert

Philosophy 1 On 1

by James R. Otteson

t is no secret that classical liberalism Connecting to Intuition
receives little attention in American acade-

mic philosophy, and then generally only as a In my experience arguments for classical
historical artifact. What one hears is some- liberalism rarely get off the ground unless
thing like this: “No serious philosopher today they can first make this connection to intu-
believes that people can get on without sub- ition. Hence the method I have settled on for
stantial, organized help from the government. extending liberty’s cause in my discipline of
The only issues are in what way the govern- philosophy is one that, first, seizes on a few of
ment should help and to what extent; the issue the adversary’s deeply held intuitions and then
of whether the government should help canno uses those intuitions as bases on which argu-
longer be seriously entertained.” ments can be built. I think three intuitions in
There are of course exceptions—Robert particular combine to make an initial case for
Nozick, David Schmidtz, and Eric Mack the free society that almost any person,
come to mind—but they are a decided minor- regardless of his political position, will find
ity and, in my experience at least, are often formidable.
not considered to be within the philosophical Here’s how I propose going about it.
mainstream. I have thus faced considerable Begin by asking whether there is anything
difficulty convincing my colleagues that clas- wrong with rape. Now of course such a ques-
sical liberalism is worth thinking about at all, tion may well shock its hearer, but a shock is
let alone worth careful examination. But a sometimes necessary to get people to think
free society is worth the effort, and so I have hard about a different way of looking at the
explored many methods of opening the closed world. Ask your adversary to answer the ques-
intellectual doors I have encountered, believ- tion seriously. So: yes, there is something
ing that if I can get others to think about clas- wrong with rape. Well, what is it exactly? It
sical liberalism for just a few minutes, I will does not suffice to say that rape is self-
find some place where it matches up with— evidently wrong because it might not be self-
or, if I am lucky, accounts for—a deep moral evidently wrong to everyone. The rapist, for
or political intuition they already have. When example, might not think so.
that happens, I have found that classical liber- To bring the matter into sharper focus, ask
alism suddenly gains a footing as a position this next: Is rape always wrong—or might
that has at least the possibility of plausibility. there be occasions when it is acceptable?
And that is a start. What if raping a person would lead to some
greater good? For example, should we consid-
James Otteson teaches in the department of philoso- © whether the rapist might not receive such a
phy at the University of Alabama. degree of pleasure from the rape that it effec-

47


===== PAGE 52 =====

48 THE FREEMAN/IDEAS ON LIBERTY © MARCH 1999

tively cancels out the pain and suffering the can never be justified, no matter how many
victim experiences? On that ground, then, people voted for it. And now one’s adversary
should we judge each rape on a case-by-case will believe what has already been said with
basis, asking in each instance whether the act almost unshakable conviction: slavery disre-
in question led to a net increase or decrease inspects the inherent dignity in a human being
welfare? This question is typically met with and is therefore always wrong. A person may
horror: of course rape is always wrong and of not in any way be used against his will for the
course its wrongness is not subject to any util- sake of another person, and his sovereignty
itarian calculation. It is wrong absolutely and over his own life is immune from democratic
simply so. The following suggestion will now (or any other) lawmaking.
seem quite apt and will almost always meet
with approval: rape is wrong always and Is Theft Wrong?
everywhere because a person’s body is invio-
lable; a person has an absolute right to his (or Now the foundations of the free society are
her) body, and anyone who breaches that right almost entirely laid. Only one more element is
is acting immorally regardless of his reasons. required. Is there anything wrong with steal-
A person is, as it were, the owner of his own ing? This matter can be a bit tricky, because
body, and as such he has absolute say over there will be those who think that stealing is
what gets done to it. justified in the case of a poor man stealing
At this point the case for a free society has from a rich man. Put that possibility off for a
already begun to be built, though one’s adver- moment and ask the hearer to answer whether
sary probably does not see it. It is time to call theft as a general practice is acceptable. Is it
up the second intuition, again by asking a all right for anyone who wants something
question whose answer will seem obvious. Is simply to take it regardless of who owns the
there anything wrong with slavery? Well, thing in question? To this question the answer
what exactly? Again we must not allow “self- will be “no.” But once again, why is it not all
evidence” to justify our belief that slavery is right?
wrong because many people evidently have Although the intuition that stealing is
believed and continue to believe that slavery wrong is strong, people are often not quite
is at least in some circumstances acceptable. sure what to say about why it is wrong. Pro-
Might slavery be wrong because it violates ceed, then, with this question. Suppose Con-
the dignity of the enslaved by treating him as gress took a vote, and the majority, which car-
a means to someone else’s end? Might it be ried the day, passed legislation licensing local
wrong because it dehumanizes the enslaved, police authorities to take anyone’s property
treats him as if he were the moral equivalent whenever in their judgment, and in their judg-
of a pack animal? ment alone, they saw fit to do so. Would there
Yes, that is it: slavery is wrong because it be anything wrong with that? Would the fact
treats a man as if he were not a man; it fails to that such a practice had been signed into law
respect his inherent dignity, his inherent thereby make the practice morally accept-
worth as a human being. But suppose that able? Odds are that the answer to this will be
Congress—and congressmen, note, are popu- “no” as well.
larly elected—passed legislation requiring the Make, then, this suggestion. People have a
enslavement of some minority of the popula- right to what they own—that is, to what they
tion. Suppose that to supply vital industries have legitimately acquired (through labor,
with much-needed cheap labor, the majority trade, or gift); stealing violates that right and
of us decided to enslave all, let us say, Irish- for that reason is wrong. To return to the case
men. This would be democracy in action; the of the poor man stealing from the rich man:
whole process would be strictly according to how wealthy a person is does not seem relevant
protocol in a democratic country. That would to our explanation of why theft is wrong. Theft
be acceptable, would it not? violates a right, and hence it is wrong regard-
Of course not! the reply will come. Slavery less of whose right is in question. If one’s


===== PAGE 53 =====

PHILOSOPHY 1 ON 1 49

adversary wavers on this point, remind him ing privately to be wrong. Certainly among
that there is always someone poorer than one- my colleagues in philosophy I have met no
self, and thus everyone is a “rich man” relative one who would bodily assault another person
to someone else—so if he is willing to allow an (except perhaps in self-defense), who would
exception for a “poor man” to steal from a enslave another person, or who would steal
“rich man,” he is effectively licensing not only from another person. The challenge for the
everyone else but also himself to be robbed. Is supporter of a free society, then, is threefold.
he still willing to make this exception? First, he must get his adversaries to see that

these three principles—the right to one’s
Government Violates Rights body, the right to one’s labor, and the right to

one’s belongings—are the fundamental orga-

One can now move in for the coup de grace: nizing principles of classical liberalism. Sec-
one’s adversary, whether he realizes it or not, ond, he must show his adversaries that they
is a classical liberal. Everything the state does already subscribe to these principles, a fact
beyond protecting these basic, negative rights demonstrated by their reaction to the series of
of individuals is a violation of these same questions raised above. And, finally, he must
rights. Conscription, for example, is a use of bring his adversaries to understand that these
your body to which you did not assent. The principles are binding on everyone, including
income tax and the staggering national debt those who work for the government.
are nothing but obligations on you to labor for This last point is especially difficult since
the benefit of someone else. Wealth transfers many people are inclined to believe that the
to the poor, subsidies to farmers, support for government has an authority all its own. That
the arts, and Social Security are all the is, they think that if the government says
forcible seizure of some people’s property in something, it must be right; and if the govern-
order to give it to others. And however noble ment tells one to do something, one’s sole
the cause, however good the intentions, how- duty is to obey. But one can summon a strong
ever many people voted in favor—rape, slav- impulse to reconsider this thinking by point-
ery, and theft are still wrong. And hence all ing out that the government is nothing more
the government programs that are merely par- than other people. If one would expect one’s
ticular instances of the principles underlying neighbors to live by the three principles of
the immorality of rape, slavery, and theft are respecting others’ lives, liberty, and property,
wrong as well. then one should expect government employ-

One concrete example will show that the ees to live by them as well. A person gains no
strong language of rape, slavery, and theft is special knowledge and earns no exemption
justified in the case of government action. from the requirements of morality merely by
Estimated projections are that an average becoming an employee of the government.
American born in 1999 will face an effective Now I have not demonstrated that the free
income tax rate of one hundred percent of his society is the only morally acceptable society
lifetime earnings simply to pay off the finan- (though I believe that it is). A philosophically
cial obligations that the American federal sophisticated person will demand further
government will have incurred—and that is argument for the principles underlying each
assuming that no more government programs of these intuitions, even if he shares them. It
are created. One hundred percent of lifetime does not follow from the fact that one has a
earnings to make good on debts that these certain intuition about a moral matter, or even
people played no part in creating and from from the fact that many people have the same
which they will receive no benefit. How do intuitions, that the matter is thereby settled.
you define slavery? One’s intuitions might after all be wrong.

My genuine suspicion is that virtually all Moreover, I have not yet shown that the
people are libertarians in their personal, moral principles that I have suggested under-
everyday lives. In practice they regard any- lie these intuitions are in fact the principles
thing that violates the sanctity of a person act- that underlie them. It is possible to construct


===== PAGE 54 =====

50 THE FREEMAN/IDEAS ON LIBERTY ® MARCH 1999

moral condemnations of rape, slavery, and The Virtue of Consistency
theft—and thus justifications for the respect

of life, liberty, and property—without appeal All that would remain is to remind one’s
to natural rights. It might be possible, for adversaries of the importance of consistency
example, to give a utilitarian or consequen- in applying these principles generally. The
tialist rationale for these principles, although classical liberal society is not alien or extreme
the sense that these principles deserve or licentious or bizarre or naive. It is simply
absolute recognition will be difficult to pre- our own moral principles writ large; it is the
serve within a utilitarian moral framework. It manifestation and reflection of the person of
is also quite possible that one either has these dignity each of us believes himself to be.

intuitions or embraces these principles Many years ago Hayek called on classical
because one subscribes to Austrian economic liberals to “make the building of a free soci-
thought. A follower of Ludwig von Mises or ety once more an intellectual adventure, a
FA. Hayek may well adhere to the sanctity of deed of courage” and to develop a program
these moral principles without thereby think- that would at once inspire us and serve as a
ing that they are made sacred because of their blueprint for us to realize freedom under law.
reliance on natural rights. Mises himself I think that such a program must begin by
thought that the notion of natural rights was appealing to our deeply held intuitions, our
an intellectual fiction. Or one might subscribe pre-theoretical sense of right and wrong.

to these principles because one is a Christian It is frequently remarked in America today
who believes that each of us, as a child of that voters have a deep distrust for politicians
God, is sacred. A follower of Father Robert and for politics; they are cynical about the
Sirico will believe that it is a violation of whole political system, a fact that is regularly
God’s will to treat another human being as evinced by their exceedingly low interest in
anything other than inherently valuable and finding anything out about the people running
inviolable, and that one cannot fulfill one’s for office. One will probably not understand
Christian duty to others unless one is radical- this distrust and cynicism until one sees the
ly free to choose to do so. Or, finally, one constitutional, if perhaps unconscious, liber-
might think that man’s rational autonomy pre- tarianism that runs through many Americans.
supposes allegiance to certain universal rules, I suspect they distrust politicians and dislike
among which are the principles under consid- politics because they are aware on some level
eration here. A Kantian will believe he is cat- that almost everything that goes on in politics
egorically commanded to treat others as ends is a violation of moral propriety. When the
in themselves and never merely as means, and government bestows largess on them, they are
he might for that reason believe that the free, by and large happy to receive it; but I suspect
classical liberal society is just the Kantian that most of them nevertheless harbor the per-
“kingdom of ends.” haps vague sense that there is something

I would not presume to resolve here which wrong with this state of affairs.

of these foundations for believing in the prin- Even if they think that they cannot but take
ciples of the free society, if any, is correct. But advantage of the government’s “free money”
that is not my intent. My belief is that sub- before someone else does, they would, if they
stantially all of us share the intuitions that were candid and forced themselves to reflect
suggest these principles, regardless of the spe- on the matter, admit that these are dishonor-
cific set of background beliefs we hold that able actions. This, in part, is what stands
lead us to accept them. My purpose rather is behind Americans’ general belief that politics
to galvanize adherents to a wide array of is a sordid affair (and that politicians are little
beliefs to fight for the free society by showing better than moral reprobates). What is
them that anything beyond the minimal, liber- required, then, is to bring into the open exact-
tarian state violates moral principles they ly what makes these actions sordid and dis-
already hold—whatever the basis on which honorable, and to discover explicitly the close
they hold them. connection between people’s notions of


===== PAGE 55 =====

PHILOSOPHY 1 ON 1 51

impropriety and the libertarian principles that strong intellectual appeal of the free society
give rise to them. and to replace their perhaps present desire for
One way to begin this process of discovery a socialist utopia with a desire for a classical
is to get people who spend their time thinking liberal utopia.
about moral and political issues on a philo- The free society is worth fighting for, and
sophical level—like philosophy professors— even a person in a tiny corner of human
to begin to focus their mental energy on the life—a person in academic philosophy, for
philosophical underpinnings of the free soci- example—can take up the cause of liberty
ety. The hope is that more and more of them and make a difference. The strategy I have
will come to see the classical liberal concep- outlined here can be an effective way to
tion of society as a compelling manifestation make people within academic philosophy
of some of their own fundamental moral open to the power of classical liberalism, but
beliefs, and, further, that they will then teach it can also, I believe, bear fruit with people
it to their students. In this way one might get outside philosophy. It can thus be a first step
people who are already prone to intellectual toward answering Hayek’s call. I commend it
investigations to become intrigued with the to you. Cl

The FReeMAN goes to high school!

Thousands of intellectually curious people, young and old, each year awaken to the
world of ideas. Those whose “awakening” arrives in high school often participate in
speech and debate. These young men and women deserve an opportunity to consider the
great heritage of Western civilization and learn the role that private property, freedom of
contract, and freedom of association have played in promoting prosperity and protecting
Americans from arbitrary authority.

FEE's new Speech and Debate Program will make The Freeman, FEE books, and our
redesigned web site valued resources for students. Qur new newsletter, Freeman Notes on
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The 1999-2000 national high school debate topic will be
“Resolved: That the federal government should establish an education
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Please consider supporting this exciting new program. For further
information, contact Gregory F. Rehmke, FEE's Director of Program | Welcome to the FEE website!
Development (grehmke @ fee.org).



===== PAGE 56 =====

Economic Notions by Dwight R. Lee

¥ Economics

Opportunities and Costs

y previous columns have been devoted scarcity create costs only when there are
to an overview of how markets work by opportunities. Eliminate the opportunity to
facilitating social cooperation: providing peo- choose among alternatives and there are no
ple with the information and motivation to costs. If, for example, I am forced to live in a
pursue their own advantages in ways that best particular house, take a particular job, marry
create opportunities for others. My emphasis a particular woman, and consume a set bundle
has been on the forest rather than the individ- of goods, I incur no costs when I do those
ual trees of economic understanding. Now I things. So the bright side of costs is the oppor-
shall begin looking at some of the key con- tunities that create them. Expand our opportu-
cepts essential to applying economic reason- nities and the costs of everything we do
ing to all human activity. I begin with oppor- increase.
tunity cost. Although we commonly see cost as some-
thing to avoid, in fact we are better off living
I om in an economy where we are forced to con-
Limits and Opp ortunities front the cost of everything we do. I personal-
Economics has been called the dismal sci- ly might be better off if I could consume prod-
ence because it studies the most fundamental ucts without having to consider their costs
of all problems, scarcity. Because of scarcity because I could shift them to others. But any
we all face the dismal reality that there are advantage I could realize would be more than
limits to what we can do. No matter how pro- offset if others could ignore the costs of their
ductive we become, we can never accomplish activities and shift them to me. As a result, we
and enjoy as much as we would like. The only would all lack the information and motivation
thing we can do without limit is desire more. to choose wisely. Only when the costs of
Because of scarcity, every time we do one choices are imposed on those who make those
thing we necessarily have to forgo doing choices can we best use the opportunities
something else desirable. So there is an available.
opportunity cost to everything we do, and that This is one way of explaining the advantage
cost is expressed in terms of the most valuable of market prices. The prices people pay in the
alternative that is sacrificed. marketplace reflect the opportunity costs of
But the pervasiveness of costs suggests that their choices. You cannot generally purchase a
the dismal reality of limits is only one side of good or service in a free market for less than
a coin with a brighter side. The limits of others are willing to pay for it, or for less than
the amount spent to make it available, which

Dwight Lee is Ramsey Professor of Economics and is an important part of the social cooperation
Private Enterprise at the University of Georgia. that emerges out of market transactions.

52


===== PAGE 57 =====

53

Special Interests Don’t Want special-interest pleading illustrates the power

Costs Considered of deception over logic in political debate.
Not considering the alternatives to doing

Unfortunately, many economic decisions something would make sense only if it were
are made not in a market setting in response always more valuable than anything else. But
to market prices, but by government in this means that we should devote all of our
response to political considerations. This cre- resources to this one thing. If it were really
ates opportunities for the politically influen- true that fine orchestral music, for example,
tial to acquire benefits paid for by the general was so valuable that costs shouldn’t be con-
public. Invariably, those seeking political ben- sidered, then everyone should go homeless
efits downplay the costs in the hope of justi- and hungry and spend all of their time listen-
fying larger expenditures; they commonly ing to orchestras in the nude. This is obvious-
argue that some things are so important that ly silly, but not one bit sillier than claiming

costs shouldn’t even be considered. that something is so important that it is inap-
Educators argue that education is too propriate to consider its cost.
important to be considered in terms of costs; As soon as two or more groups claim that

environmentalists argue that saving the earth their program should be funded without con-
is so imperative that environmental programs sidering costs, the relevance of costs should
should be implemented regardless of the be obvious. Educating our youth and curing
costs; recipients of medical research grants our sick cannot both be too important to con-
argue that human health trumps any crass sider cost, not in a world of scarcity. The cost
consideration of costs; and people supported of doing more to educate our youth is doing
by the National Endowment for the Arts claim less to cure our sick, and vice versa. To ignore
that the value of “art goes to the very soul of the cost of one is to treat the other as unwor-
what it means to be human” and is “contami- thy in comparison.
nated when compared with dollars and cents.” Of course, the reality of scarcity, and the
(That’s a close paraphrase of a statement on opportunity costs that result, intrude into the
arts funding that I heard on National Public political process despite the special-interest
Radio.) rhetoric disparaging considerations of cost.
All these statements are best understood as Comparisons have to be made among com-
attempts by organized groups to capture more peting alternatives, so opportunity costs are
public money. To consider costs has nothing considered in the political process. Unfortu-
to do with exaggerating the importance of nately, imperfections and biases in the politi-
money. Money provides a convenient way of cal process prevent the opportunity cost of
expressing costs, but money is not the cost of government action from being adequately
anything. When I put down a ten-dollar bill to considered. The result is what one should
pay for a meal, the money may appear to be expect when alternatives are poorly consid-
the cost, but the real cost is the opportunity ered. Waste occurs as decisions direct
cost—the subjective value I forgo by spend- resources out of more valuable and into less
ing the money on the meal rather than spend- valuable activities, and often into activities

ing it on the most valuable alternative. counterproductive to the stated objectives.
Market prices do not perfectly reflect
Silly Claims opportunity costs, but one can appreciate how

close they get by considering the perversities

To claim that we shouldn’t consider the cost that arise because political decisions often
of doing some things is equivalent to claiming ignore most of the costs of a policy. I shall
that we should do those things without con- consider this problem next month as a way of
sidering the alternatives. That such a transpar- further illustrating the importance of opportu-
ently silly claim continues to be used in nity costs in understanding economics.  []


===== PAGE 58 =====

54 THE FREEMAN/IDEAS ON LIBERTY ® MARCH 1999
Although I am not an Objectivist, I think Ayn

CAP ITAL AN Rand would agree with me on this: You can’t
LETTERS: heesugaee: have strong men and dominant women at the
° same time. “Strength” for each has a different

frame of reference.
—W. EDWARD CHYNOWETH

Vive la Différence? Sanger, California

Wendy McElroy responds:

It is difficult for me to tell how deeply the

To the Editor: two of us may disagree on the issue of femi-
In her articles on “individualist feminism,” nism, as [ simply do not hold the beliefs you
Wendy McElroy is offering merely a core- ascribe to me. Individualist feminists routine-
feminist approach in sheep’s clothing, much ly encounter an understandable problem in
like “equity” feminism and “equal opportuni- today’s politically correct environment: name-
ty” feminism, both of which single women ly, the “feminist” label overwhelms the word
out as androgynous integers needing vindica- “individualist,” when exactly the opposite is

2% CC

tion for centuries of “brutalization,” “exclu- true. For example, as a feminist, I oppose both
sion,” “mistreatment,” and so forth, none of affirmative action and sexual harassment
which jibes with the truth. Our grandmothers laws.
were not that helpless! If one has not studied Rather than deal with particulars, however,
feminism, such nuances get lost in the shuffle. let me clarify what I consider to be the theo-
The problem with all types of feminism is retical foundation of individualist feminism.
that men and women are on this earth togeth- It is natural rights, based upon a Lockean
er, and the trick is not to focus on one or the model. Men and women have equal rights,
other as feminism does (and possibly libertar- which should be acknowledged in the same
ianism tends to do). It is necessary to seek a manner by law. This means neither oppression
common good felicitous to the human race, as nor privilege. It does not mean equity in the
the Founders had in mind. McElroy’s sense of redistributing wealth or power; it
approach is too one-sided and thus inevitably means equality under a system that fully
futile. That there were brave and active reflects the natural rights of both sexes. If
women in the past should not require our such a system existed—embodying neither
apostheosizing them now when they’ve oppression nor privilege—I would cease to
already been accorded their due in the melting actively call myself a feminist. Unfortunately,
pot of history (Nightingale, Barton, etc.). government currently treats women different-
Whether McElroy likes the idea or not, ly from men. It generally assumes a protective
society is not founded on activist, adventur- role toward women, which I believe to be as
ous, manly women but on Joving, nurturing, damaging as an outright denial of rights. As
womanly wives, mothers, housewives, teach- long as the law accords different treatment to
ers of the young, and so forth. As Midge women and men, there will be a need to
Decter has put it, feminists are merely oppose that difference.
females who balk at adult womanhood, and Whether women should choose to raise
the idea of “individualist feminism” comes strong sons, as you suggest, iS a personal
dangerously close to Tocquevillian dysfunc- choice every woman must make for herself.
tion. My personal lifestyle is rather traditional, but
In the end, the big problem for feminism is my political emphasis is on choice itself in the
that good women rear strong sons, and a broad sense.
healthy, natural division of labor serves to fos- I, too, look forward to a day when there is
ter strong male leaders. Thanks to “sex equal- no need to discuss men and women as though
ity” and bans against “sex discrimination,” two legal categories. I hope to play a small
we're not seeing male leadership anymore. part in bringing such a society about. Hl



===== PAGE 59 =====

Economics on Trial by Mark Skousen

FREEMAN

deas On (ideas On Liberty)

MaRrcH 1999

Y2K and
Entrepreneurial Error

“No businessman in the real world is equipped with perfect
foresight; all make errors.”
—Murray N. Rothbard!

Os the past year, I’ve been involved ina lems almost automatically. They seem to fit
series of debates over the impact of the into the rational equilibrium-always school of
Year 2000 Problem, the potential collapse of economics where entrepreneurial misjudg-
computers—and perhaps of the economy— ment, imperfect knowledge, and uncertainty
owing to the fact that since computer pro- play little or no role.
grams use two digits instead of four to indi-
cate years, the year 2000 will be treated as
1900. On the one extreme is Gary North, who Markets Are Not Perfect
claims that the Y2K problem is so serious that The Austrian economists teach otherwise.
it will gravely disrupt society for years. On Israel Kirzner, noted for his studies on entre-
the other end is Harry Browne, who says that preneurship, attacks the model of perfect effi-
enlightened entrepreneurs will avert a world- ciency as “wholly unsatisfying.” He adds that
wide disaster. “It is most embarrassing to have to grapple
What’s interesting about the debate is that with the grossly inefficient world we know
free-market advocates are found on both with economic tools that assume away the
sides. North and other naysayers focus on the essence of the problem with which we wish to
propensity of market players to make entre- deal.”
preneurial errors and engage in shortsighted- The market is characterized by profit and
ness. Browne and other optimists stress the loss, success and failure, certainty and uncer-
entrepreneurs’ ability to solve problems, espe- tainty. There is always room for improvement,
cially when so much is at stake. (Some busi- and the entrepreneur’s role is to eliminate
nesses could go bankrupt if they don’t address errors and inefficiencies. Thus, it should come
the Y2K problem.) In short, the market works. as no surprise that many businesses and finan-
My concern is that the “market always cial institutions are making significant head-
works” camp comprises true believers who way in fixing their computer programs to
blindly think the market can solve all prob- avert the Y2K problem.
On the other hand, it would be folly to

Dr. Skousen (http://www.mskousen.com; mskousen ignore that many businesses have budgeted
@aol.com) is an economist at Rollins College, insufficient time and money to fix or replace

Department of Economics, Winter Park, FL 32789, a their computers. Evidence is growing that
Forbes columnist, and editor of Forecasts & Strategies. most firms, especially small businesses, are

55


===== PAGE 60 =====

56 THE FREEMAN/IDEAS ON LIBERTY © MARCH 1999

not doing enough. Many major corporations ness cycle in general to monetary inflation by
and government agencies, both here and government.

abroad, admit that they only have time to Yet can’t error with far-reaching harm
fix critical systems. The rest will fail on occur in the market without government being
January 1, 2000. responsible? Austrian economists don’t nor-

Free-market advocates sometimes place too mally discuss this possibility, but it undoubt-
much faith in the market’s ability to solve edly exists. Market decision-makers have
problems and ignore ubiquitous error in an made shortsighted blunders that have had uni-
entrepreneurial economy. Think about all the versal consequences. Examples of such error
ways people make mistakes every day in the include asbestos in construction, pesticides in
marketplace: Investors buy the wrong stock. agriculture, and air and water pollution in
Businessmen declare bankruptcy. Marriages manufacturing. The Y2K computer glitch is a
break up. Consumers over-spend and over-eat, particularly tough challenge because it is uni-
especially during the holidays. Kids fail to do versal and time-sensitive. In most cases, the
homework. Drivers have accidents. Ships deadline cannot be postponed.
sink. Builders don’t meet deadlines. Econo-
mists make false predictions. Entrepreneurs The Market’s Self-Correcting
cut corners, deceive customers, and embezzle Mechanism
funds. Economic failure, stupidity, and
incompetence are common to human nature. Fortunately, the market has a built-in mech-
As Ludwig von Mises noted, “To make mis- anism to minimize mistakes and entrepreneur-
takes in pursuing one’s ends is a widespread ial error. The market penalizes mistakes and
human weakness.” rewards correct behavior. Business leaders

The decision by computer programmers in know that computer problems can destroy
the early 1950s to use two digits instead of their business; fixing the Y2K bug will avoid
four is a classic example of individual short- losses and may even be profitable. They are
sightedness. To save space, they cut corners, willing to pay the price. As Kirzner has said,
and now, a generation later, the whole world is “Pure profit opportunities exist whenever error
paying a heavy price for their blunder. occurs.” At the same time, the market will

severely penalize businesses that have ignored
the Y2K problem or have procrastinated.
Cluster of Errors Followers of free markets should take note:

In most cases, entrepreneurial error is ran- markets may be self-correcting, but they are
dom, unpredictable, and self-correcting. As not all-seeing.
Murray Rothbard stated, As arule only some 1. Murray N. Rothbard, Man, Economy and State (Los Angeles:

businessmen suffer losses at any one time; the Nash Publishing, 1970), p. 746.

: 9%4 2. Israel M. Kirzner, “Economics and Error” in Perception,
bulk either break even or earn profits. Opportunity, and Profit (Chicago: University of Chicago Press,
There are, however, cases of widespread 1979), p. 13s.

SPU. : 3. Ludwig von Mises, Theory and History (New Haven: Yale
error mistakes that affect virtually every University Press, 1957), p. 268. Mises adds that “Error, inefficiency,
part of an industry or economy. Rothbard, in and failure must not be confused with irrationality. He who shoots
standard Austrian school fashion. explained wants, as a rule, to hit the mark. If he misses it, he is not ‘irrational’;

i . « ? p he is a poor marksman.”
depressions in terms of “a sudden general 4, Murray N. Rothbard, America’s Great Depression, 4th ed.
cluster of business errors.”s Of course, the (New York: Richardson & Snyder, 1983 [1963]), p. 16.
- . . * 1 *
Austrians attribute those errors and the busi- 6. Kirzner, pp. 132-33.



===== PAGE 61 =====

57

The 1964 Surgeon General’s report stated
BOOKS that smoking, linked to cancer and other ail-
ments, was a health hazard serious enough to
warrant “appropriate remedial action.” This
opened, in Sullum’s words, “the most concert-

For Your Own Good: The Anti-Smoking  ©d; sustained, and successful effort in history
Crusade and the Tyranny of to discourage the use of tobacco.” For Your

Public Health Own Good carefully narrates that effort. At

first, public health officials realistically recog-
by Jacob Sullum nized that Americans would not abruptly kick
The Free Press © 1998 © 288 pages © $25.00 the habit, and opted to steer them to safer cig-

arettes with low tar and nicotine. But gradual-
ly the objective changed to eliminating all
tobacco use. The anti-smoking movement
Hn by billboards and other “public- won several victories. Cigarette advertising
service” exhortations, barred from light- on television and radio was banned after
ing up almost everywhere but in their own 1970. Increasingly blunt warnings were man-
cars and homes, and saddled with rising ciga- dated on cigarette packs and cartons.
rette taxes, smokers are being treated like Feeling the pressure and terrified of law-
pariahs—for their own good, of course. The suits, the tobacco companies responded by
anti-smoking crusade asserts that tobacco criticizing the evidence of health hazards as
companies concealed the dangers and addic- inconclusive, sponsoring its own research into
tive nature of cigarettes, and manipulated the link between tobacco and lung cancer, and
their nicotine content to addict smokers; that introducing filter-tipped and other “safer” cig-
all tobacco forms are bad; that secondhand arettes. Sullum observes that this refusal to
smoke greatly endangers others; that people, acknowledge smoking’s well-known dangers
especially impressionable teenagers, smoke “has made the cigarette business the most
because of insidious advertisements like Joe reviled and distrusted industry in America.”
Camel; and so on. The unrelenting threat of lawsuits finally
In this levelheaded and well-informed broke the tobacco companies’ resistance, and
book, Reason magazine senior editor Jacob in 1997, to limit their liability, they offered
Sullum convincingly debunks these claims. the (in)famous $368.5 billion agreement with
Smoking’s health hazards have been known, the federal government.
and openly discussed, for decades. So has Sullum acknowledges the cancer risk and
manufacturers’ control of cigarettes’ nicotine describes nicotine as “the most dangerous
levels. Cigars and smokeless tobacco are far recreational drug.” He describes the tobacco
less dangerous than cigarettes. No evidence companies as “cynically dancing around the
exists that casual exposure to secondhand truth to ward off liability and protect [their]
smoke is a significant danger. As for suppos- profits,” but he adds that they “didn’t fool
edly sinister old Joe, the most important fac- anyone who didn’t want to be fooled.”
tors influencing teenagers’ decisions to smoke By contrast, one of the anti-smoking move-
are their sense of smoking’s risks and benefits, ment’s worst aspects is its end-justifies-the-
the demonstration effect of family members means dishonesty, which Sullum abundantly
who smoke, and peer behavior. presents: twisting research to fit its agenda,
Opposition to smoking, Sullum points out, attacking researchers for saying what they in
is nothing new. King James I, Pope Innocent fact did not say (for example, that some ciga-
X, and others denounced tobacco as addictive, rettes are safe), and relying on hysterical
unhealthy, inconsiderate of others, and down- rhetoric, ad hominem assertions, and outright
right wicked. But people kept smoking for the falsehoods. Sullum himself has been smeared
benefits and pleasures they got from it, and as being “in the pay of the tobacco industry,”
brushed off warnings of health hazards. because R.J. Reynolds used one of his articles

Reviewed by John Attarian



===== PAGE 62 =====

58 THE FREEMAN/IDEAS ON LIBERTY ® MARCH 1999

in an ad campaign and a tiny fraction of the Nathan Miller, author of Star-Spangled
Reason Foundation’s budget comes from Men: America’s Ten Worst Presidents, shares
Philip Morris contributions. the conventional bias. For example, he
A favorite recent recourse of the smoking- indicts Silent Cal Coolidge with Mencken’s
bashers is cigarette tax increases. This will faint praise: “He had no ideas, and was not a
reduce smoking marginally, but will also nuisance.”
spawn corruption and smuggling. Further- Those of us who favor limited government
more, stating that smoking is sensitive to see it differently. This would have been a hap-
price defeats the argument that cigarettes are pier century by far if the worst that could be
irresistibly addictive. As Sullum wryly notes, said of any president was, “He had no ideas,
“giving up cigarettes when the price of a pack and was not a nuisance.” One (unintended)
goes up twenty-five cents is not the behavior virtue of Miller’s book, then, is that it reminds
of someone who is powerless over nicotine.” us of some of the forgotten men who have
Indeed, addiction receives much attention. held America’s most powerful office, yet
Sullum concludes that smoking is a habit dif- somehow managed to leave well enough
ficult to break, but not impossible (America alone.
has about as many ex-smokers as smokers). Miller picks his losers by asking, “How
Will power is crucial. Smoking bashers who badly did they damage the nation they were
assert that cigarettes are irresistibly addictive supposed to serve?” What’s strange, then, is
are in effect abolishing man as a moral agent; that the presidents he selects were mostly
“they criticize individualism itself, because it peacetime leaders who did little perceptible
implies that people are responsible for their damage to the Republic and its institutions.
own behavior.” Take Coolidge, whom Miller writes off as
Given the anti-smoking crusade’s premises, “a reluctant refugee from the nineteenth cen-
a cigarette ban is its logical culmination. But tury.” Miller fairly sneers at Coolidge’s
Prohibition and the war on drugs, Sullum emphasis on fiscal probity and laissez faire.
shows, provide a valuable cautionary tale of Unable to find much to criticize in the unin-
crime, corruption, and despotic encroach- terrupted prosperity of Coolidge’s tenure,
ments on individual liberties. Miller tries a cheap shot: Coolidge’s “penny-
For Your Own Good is a rare, welcome pinching refusal to cancel [the war] debts
voice of reason and truth about cigarettes. If contributed to the rise of Adolf Hitler.” Well,
you want to make sense of the smoking war, maybe. But as long as we’re doling out
don’t miss it. [1] responsibility for Nazi atrocities, why don’t
John Attarian is a freelance writer in Ann Arbor, WC 81VC SOME to Woodrow Wilson? Wilson's
Michigan, and an adjunct scholar with the Midland, dragging the United States into World War I
Michigan-based Mackinac Center for Public Policy. ~~ allowed the Allies to impose a punitive peace
on Germany in the first place. Why, then,
does Miller consider Wilson a “near great”
Star-Spangled Men: president?
America’s Ten Worst Presidents Unlike Wilson, Coolidge was never awake
] for long enough to do much damage; as
by Nathan Miller Miller recounts. he slept 11 hours a day. Dur-
Scribner © 1998 © 272 pages © $23.00 ing his waking hours, Silent Cals sound
instincts allowed him to hew to the presiden-
tial equivalent of the Hippocratic Oath. As
Coolidge put it, “Nine-tenths of a president’s
istornians who evaluate American presi- callers at the White House want something
dents suffer from a bias against inaction. they ought not to have. If you keep dead still
In the conventional view, great presidents are they will run out in three or four minutes.”
the nation builders and the war leaders; the Miller’s chapter on William Howard Taft
failures are the ones who “never did anything.” inspires reflection on the varieties of presi-

Reviewed by Gene Healy



===== PAGE 63 =====

Books 59

dential obesity. Mencken saw Grover Cleve-
land’s great bulk as indicating a kind of
implacable strength. But Taft’s girth reflected
placidity and inaction, complementing his
sedate view of the presidency: “the president by Vladimir Tismaneanu

cannot make clouds to rain, he cannot make Princeton University Press ® 1998 © 216 pages
the corn to grow, he cannot make business to © $29.95

be good.” Miller rates Taft as the ninth worst,
but his tenure in the White House was marked
by peace and prosperity.

Warren G. Harding receives the most unde-
servedly rough treatment of any president (Communism is dead, but collectivism is
examined. From a classical liberal perspec- quite alive. Vladimir Tismaneanu’s book
tive, Harding was arguably the greatest presi- Fantasies of Salvation explains why. Tisman-
dent of the twentieth century. He initiated the eanu, once a Romanian dissident and now
largest spending cut in history—a 40 percent professor of government and politics at the
reduction from Wilson's last peacetime bud- University of Maryland, argues that while the
get. And Harding’s good nature and liberal centrally planned, socially engineered visions
instincts led him to overrule his political of Marxism-Leninism are dead, the false,
advisers and pardon Socialist presidential utopian hope of emancipation through the
candidate Eugene Debs. Debs had been jailed state lives on. The myth of socialist interna-
during Wilson’s jihad against opponents of tionalism has now been replaced by a new
World War I, but Harding turned him and myth, populist nationalism.
other dissenters loose; “I want [Debs] to eat Communism declared that its aim was the
his Christmas dinner with his wife,” he said. unification and collective freedom of workers
The scandals surrounding Harding’s adminis- around the world, but the new post-commu-
tration push him near the top of Miller’s hit nist vision abandons that myth for a much
list. But, as Miller notes, he never took “so narrower but equally deadly one. The new
much as a nickel” from any of his corrupt political vision in many former socialist
cronies. regimes is not the Western ideal of individual

Despite the author’s depressingly conven- freedom and civil society. Instead, “the
tional perspective on presidential greatness, nation” is the focus of attention.
Star-Spangled Men is tremendously enjoy- The 1990s are a stubborn and sobering
able. Miller can turn a memorable phrase: (for reminder that classical liberalism does not
example, he writes that Kissinger “looked like necessarily replace socialism by default.
a Bronx Butcher and operated with the cyni- Although there have been success stories—
cism of a Renaissance Cardinal”) and has an countries like the Czech Republic, Poland,
eye for the kind of detail that makes reading and Slovenia, for example—the 1990s might
history fun. be better remembered for the Bosnian war, the

Read with the proper attitude, Star- growing Kosovo crisis, and the return of
Spangled Men inspires reflection on what refugee camps. Who would have thought that
we should value in a president. [J the collapse of the Berlin Wall would be fol-
Gene Healy is a student at the University of Chicago lowed by the return of ethnic cleansing?

Law School. Tismaneanu shows that the problems of
post-communism remain because the fight is
less about the freedom of individuals and
more about the emancipation of the ethnic
enclave. Throughout eastern and central
Europe “the nation” is paraded as the true
center of history, the source of dignity, the
subject of sorrow and oppression. The author

Fantasies of Salvation: Democracy,
Nationalism, and Myth in
Post-Communist Europe

Reviewed by David L. Prychitko



===== PAGE 64 =====

60 THE FREEMAN/IDEAS ON LIBERTY ® MARCH 1999

demonstrates how this emergent _populist- Out of Order

nationalism seeks to destroy individuality,

pluralism, and democracy and instead cham- by Max Boot

pions unity, stability, and authoritarianism. Basic Books ® 1998 ® 252 pages ® $25.00
Tismaneanu’s explanation of why collec-

tivism has re-emerged in many post-commu- Reviewed by George C. Leef

nist states is worth quoting at length:

ax Boot is a journalist and editor at the
Wall Street Journal who has made a
name for himself (and a lot of enemies) with
his articles exposing the despicable practices
of plaintiffs’ lawyers who will do almost any-
thing to squeeze money out of “deep pocket”
defendants. With Out of Order, he turns his
considerable writing and reportorial skills
toward another facet of our legal system—
judges. Once highly respected pillars of the
community, the ranks of the black-robed con-
tain, Boot argues, many who have little or no
regard for justice. This is a serious problem
that has received too little attention. Thus this
1s a welcome book.
The bad-judge problem has several facets.
One that Boot addresses is partisan judges,

d d ethn: : ones who have an ingrained preference for
and reconquered ethnic unity Serves pre-  o i;in litigants, lawyers, or causes, so that

sisely this purpose: to *phain defonts and their courtrooms are about as fair as the Stal-
alienation and reassure the individual that ..ct how trials of the 1930s. Plaintiffs’

he or she has a place within the volkisch
community.

The end of communism has left individuals
with a sense of loss: even if they hated their
cage, it offered at least the advantage of
stability and predictability. Like former
prisoners, they now have freedoms but do
not know exactly what to do with them.
Under these circumstances, they are ready
to espouse the rhetoric of the tribe with its
emphasis on group identity and communi-
ty values. The neurosis of the transition
period, the collective fear of a general col-
lapse, the closing of the historical horizon
and the anger at the new economic barons
nourish sentiments of revolt, distress, and
intolerance. There is need to find scape-
goats, to identify those culpable for the
ongoing sorrows. The political myth of lost

lawyers know who they are and naturally con-
trive to file suits in their courts. You have

In the face of all this, Tismaneanu remains Probably heard of the multimillion-dollar
optimistic over the prospects of the liberal punitive damage awards in cases where there
intellectual dissidents in the post-communist Was truly no harm at all, such as the infamous
countries and their continued resistance repainted BMW case in Alabama. But how do
against collectivist nationalism. The emer- these absurd instances of legal plunder ever
gence of classical liberal institutions—a mar- get to trial at all?

ket economy, a fully flourishing civil society, The answer is that some judges—elected
and constitutional democracy—remains criti- With copious amounts of money contributed
cally dependent on them. by lawyers who will have cases before them—

I highly recommend this book. Those are unwilling to serve the interests of justice
familiar with Ludwig von Mises’s Nation, by dismissing suits that are transparently
State, and Economy: Contributions to the Pol- nothing more than legal extortion. Boot
itics and History of Our Time will find in names names and gives the nasty details.

Tismaneanu’s book a fascinating and probing But the harm done by rogues who play
updating to our time. [] favorites is minimal when compared to the

harm done by another class of bad judges—
David Prychitko studied the former Yugoslav system those who have aided and abetted in the
on a Fulbright grant in 1989, and currently heads the oo ctitutional expansion of power of gov-

department of economics at Northern Michigan Uni- . .
versity in Marquette. He is co-editor, with Nevenka ernment. This has mainly been the work of the

Cuckovié, of a collection of classic articles by Mises Supreme Court and the lower federal courts,
and Hayek, translated into Croatian. many of whose members have been chosen



===== PAGE 65 =====

Books 61

for their philosophy that the Constitution’s may be even harder to identify judges who are
restraints on governmental power should be puppets of organized labor or the plaintiffs’
“interpreted” in such a way as to give the bar.

Congress and President virtual carte blanche. The bad-judge problem has the same roots
This category includes judges who insist on as most of our other problems, which is to say,
amending the Constitution through creative our over-politicized society. Trying to rein in
interpretations. As an example, Boot cites partisan and Constitution-wrecking judges is,
Justice Ruth Bader Ginsburg—Ilong an advo- 1 fear, an exercise in futility as long as so
cate of the vague, never ratified “Equal Rights many people see politics as a legitimate way
Amendment”—who managed to smuggle it of getting what they want.

into the Constitution with her opinion in the But even if there is no easy remedy for the
Virginia Military Institute case. bad-judge problem, we still ought to be cog-

Yet another facet of the bad-judge problem nizant of it. Out of Order skillfully assists
is the phenomenon of judges who regard us. Cl

themselves as potentates, taking over prison
systems, ordering busing schemes, and even
decreeing that taxes be raised for their utopi-
an visions. Consider, for example, the Kansas
City judge who decided that he was going to
“equalize” educational opportunity by order- by Paul Johnson
ing an incredibly costly program of inner-city HarperCollins Publishers ® 1998 ® xv + 1,088 pages
school construction, or the New York judge © $35.00
who ordered the City of Yonkers to build hun- -
dreds of units of low-income housing in Reviewed by Burton Folsom
middle-class neighborhoods. Power always
attracts authoritarians. That judges can get he creation of the United States of
away with a lot of tyranny bodes ill for the America is the greatest of all human
future. adventures. No other national story has such
Given that we have a judicial system infest- tremendous lessons, for the American people
ed with judges who are partisan and judges and for the rest of mankind.” So begins Paul
who use their positions to coercively reshape Johnson in his upbeat and first-rate 4 History
society, what are we to do? Boot discusses of the American People.
several ideas for ameliorating the problem. As a British historian and non-academic,
He suggests, for example, ending the practice Johnson avoids the pitfalls of so many Amer-
of popular election of judges, which has had ican historians. Academic historians in partic-
the unfortunate effect of putting justice up for ular often impose a double straitjacket on U.S.
sale—read his account of a race for the West history: first, that economic issues have been
Virginia Supreme Court. That might help, but paramount in shaping American politics; and
it might just as well turn out like so many second, that government intervention in the
other attempts to clean up the political system American economy has been necessary and
and merely hide the problem. benign. Johnson disputes both of these points.
Assume that judges were chosen through Johnson gives due attention to economic
some other political mechanism. The special issues, but he also highlights the crucial role
interest groups that have been getting the of religion in shaping American history. For
judges they want through elections will not example, he takes the Puritans seriously as
give up their quest merely because we enact men of ideas. Later, he analyzes the Great
some reform statute. They will simply con- Awakening, the religious fervor of the 1740s.
centrate their efforts on influencing the new “The Great Awakening,” Johnson argues,
judicial selection method, perhaps by getting “was thus the proto-revolutionary event, the
friendly faces appointed to the judicial selec- formative moment in American history, pre-
tion board. Under a “reformed” system, it ceding the political drive for independence

George Leef is book review editor of The Freeman.

A History of the American People



===== PAGE 66 =====

62 THE FREEMAN/IDEAS ON LIBERTY ® MARCH 1999

and making it possible.” George Whitefield, Johnson showed impatience with historians
its leader, “was the first ‘American’ public fig- who “niggle” at his work, but more niggling
ure, equally well known from Georgia to New by his editors would have cleared up a variety
Hampshire.” of misspellings and minor errors. Zachary

In Johnson’s history, the rise of America to Taylor was a Whig, not a Democrat; it’s
world prominence is a fascinating story, full Alfred Sloan, not “Sloane,” and John W.
of key inventions and daring entrepreneurs. Davis, not “Davies.” But let me niggle no
Liberty, not government, is what extended the more.

American dream to millions of Americans, Critics accuse Johnson of being biased, but
immigrants and natives alike, during the he is in fact balanced and nuanced in his treat-
1800s. ment of historical events and personalities.

The 1900s might well be called the century Johnson appears biased to other historians
of big government in U.S. history. “It was because so many of them are accustomed to
[President Woodrow] Wilson who first intro- teaching from the standard “liberal” texts that
duced America to big, benevolent govern- dominate the market—for example, Samuel
ment,” Johnson asserts. But Wilson “was cor- Eliot Morison’s Oxford History of the Ameri-
rupted by power, and the more he had of it the can People.
deeper the corruption bit, like acid in his Where Johnson treats Coolidge with
soul.” respect, Morison lashes out, calling him “a

Johnson prefers Calvin Coolidge: “No one mean, thin-lipped little man, a respectable
in the 20th century defined more elegantly the mediocrity . . . dour, abstemious, and unimag-
limitations of government and the need for inative.” Where Johnson dissects the New
individual endeavor, which necessarily Deal, Morison is filled with gushing praise,
involves inequalities, to advance human hap- saying that it was “just what the term
piness.” Coolidge cut taxes, promoted free implied—a new deal of old cards, no longer
enterprise, and had the lowest misery index stacked against the common man. . . . Proba-
(inflation plus unemployment) of any presi- bly it saved the capitalist system in the United
dent in this century. “Of those who came to States.”
power at the same time as Coolidge, all the These snippets are typical of the “history”
most notable were dedicated to expanding the most Americans have learned. Johnson’s
role of the state.” excellent work often stands in opposition to

When the Great Depression hit, both the conventional wisdom. It deserves a wide
Hoover and Roosevelt brought bigger govern- readership among students as well as adults,
ment to America—and much of it had nega- and if so, we may yet train our next generation
tive consequences, according to Johnson. “No to appreciate American history. UJ

series of events in modern history is sur- Burton Folsom is senior fellow at the Mackinac
rounded by more mythology than the New Center for Public Policy. He is author of The Myth
Deal,” Johnson writes. “There was no actual of the Robber Barons and Empire Builders.

economic policy behind the program.” Demo-

cratic Presidents Kennedy and Johnson and
Republican Nixon expanded government fur-
ther. But, Johnson says, Ronald Reagan, a
“conservative revolutionary,” challenged the
Democratic hegemony. Johnson curiously
ignores Nixon's failed economic intervention,
but praises him for challenging the Kennedy
money and the “liberal” media.

Johnson’s history is a superlative achieve-
ment, not only for his knowledge and insights
but also because he is an able writer and cap- 2 oe
tivating storyteller. In a recent interview, Independence Hall



===== PAGE 67 =====

The Pursuit of Happiness by Russell Roberts

@ Economics

Illuminating the Unseen

he good effects of laws are often easily their numbers. In short, while the minimum

seen. The bad effects, unseen. So wage helps some low-skill workers by giving
observed Frederic Bastiat 150 years ago. His them a modest pay increase, it has a devastat-
basic insight remains true today. We live in ing effect on others, pushing them out of the
busy times. Information bombards us. In such work force and into the street. The minimum
a world, even that which is seen is often over- wage thwarts human possibility among those
looked. The unseen is that much more elusive. it tries to help. And as Bastiat understood, it 1s

If we are to make the case for economic easy to see those who are helped by the mini-
freedom, we have to bring these unseen costs mum wage. Those who are harmed are much
to light. Consider an increase in the minimum harder to identify.
wage. What is seen: businesses give some of We've done a decent job explaining the hid-
their low-wage workers a raise. The direct den costs of the minimum wage. We’ve done
effects of the minimum wage—more money such a good job, in fact, that proponents of the
for low-wage workers, less money for busi- minimum wage have actually tried to argue
nesses that pay them—frame the entire that increases in the minimum wage have no
debate. Senator Christopher Bond of Missouri effect on low-skill employment. To paraphrase
says the minimum wage is bad because it Orwell, you'd have to be an academic econo-
hurts small business—as he argued in his mist to find that argument compelling. But in
recent re-election campaign. So most people other areas, we have a long way to go if we
see the minimum wage as a tax on small busi- wish to cast light on the unseen costs of gov-
ness that helps the poor. No wonder many ernment intervention.
people think it’s a good idea.

If we want to dent the consciousness of the
average American, we have to talk about how
the minimum wage doesn’t just tax small Here’s how trade often gets discussed in the
business. We have to show how it bankrupts media: should we destroy jobs in America in
some firms that hire low-skill workers. That order to have cheap imports? That’s like being
means fewer opportunities for low-skill work- asked how long you’ve been beating your
ers. But even the firms that survive will try to wife. Why does it get discussed this way?
reduce the hours of low-skill workers and Opponents of free trade want the American

people to think that trade is about destroying
a? jobs in order to get cheap foreign goods. It
Russell Roberts (roberts@mail.olin.wustl.edu) is avec free trade look mean-spirited and mer-

director of the Management Center at the John M. .
Olin School of Business at Washington University in cenary. But another reason is that these are the

St. Louis. He is the author of The Choice: A Fable of MOSt obvious effects of free trade. If Ameri-
Free Trade and Protectionism (Prentice Hall). cans buy from foreign suppliers, people

63

Free Trade and Protectionism


===== PAGE 68 =====

64 THE FREEMAN/IDEAS ON LIBERTY © MARCH 1999

understand that fewer Americans will be hired world to be explored is a more vibrant and
in the competing domestic companies. alive place when the factory goes under.
Unseen are the jobs created to make the prod- Allowing the factory to die frees up capital
ucts we exchange with foreigners. Unseen is and management skill that can be used else-
the impact of specialization and comparative where. If we maintain all of the factories and
advantage. Unseen is the power of foreign all of the companies that cannot survive com-
competition to induce our domestic industries petition, then the American economy is a
to innovate. much more static place.

Unless we can illuminate the unseen, mak- If we try to make everything for ourselves
ing the case for free trade will be an uphill and be self-sufficient, we lose the opportunity
battle. Unfortunately, one of the best things to specialize in doing what we do best. Our
about free trade is extremely difficult to see: capital gets tied up in industries that do not
free trade allows resources to flow to their take the greatest advantage of our unique
highest use. But to make the argument com- skills. Free trade allows a high school kid in
pelling, we have to describe it in a way that South Carolina to inherit a world of maximum
allows it to be seen without a semester’s worth human potential, with the maximum chance
of economics. for her to use her gifts, whatever they may be.

A skeptic would ask how the girl in South
. . Carolina is going to achieve her potential if
Freeing Up Opportunity her mom is out of work. And that in turn

Somewhere in South Carolina, there’s a might lead to a discussion of how past gener-
high school girl whose mom works in a textile ations have managed to survive and thrive in
factory. This girl doesn’t know what she wants a dynamic economy. In 1900, one-third of the
to do with her life, but like most high school American work force was in agriculture.
kids in America, she probably doesn’t want to Today the number is around 3 percent. Do you
work in the same job or career as her parents. think the kids on the farms of 1900 are glad
The security of the textile factory is appeal- that we let agriculture become more capital
ing, but she might want to go to college and intensive with fewer jobs? It wasn’t a trivial
try something different. It all depends on her transition, but in 1900, we couldn’t see the
options. industries that would arise to use the skills of

That factory is threatened by Chinese com- the next generation. And we can’t know the
petition. Should we let the factory go under or opportunities that will arise to help that girl in
should we protect it from the cheaper Chinese South Carolina if we let the textile factory
imports? We could spend hours on the pros fail. But they will arise. What they will be
and cons and the economic impact of that depends on the gifts and aspirations of the
decision. But let’s look at the impact on that next generation.
girl in high school. If we keep the factory If we want to inspire people to support free
around, we make the choice of working in the trade, we must touch their imagination. Basti-
factory more appealing. If we let the factory at understood that 150 years ago. Our best
die, we change the available options. We push chance is to make the unseen, seen. Econom-
her out into the world. ics can bring the unseen to light, but only if

Exploring the world is a good thing, but we leave the jargon behind and show how free
that’s not reason enough for letting the facto- trade and other economic freedoms help
ry go under. What is harder to see is that the transform our lives. J]