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i

FREEMAN

Ideas On (Ideas On Liberty |

May 1999 Vol. 49, No. 5

FEATURES

[) 8 A Modern Pyramid by Christopher Mayer
10 “Must I Not Be Believed?” by E. Calvin Beisner
14 Bogus Freedom by James Bovard
$18 The Green Scare by Roger E. Meiners
23 Fighting Back by John Landrum
28 Friedrich A. Hayek: A Centenary Appreciation by Richard M. Ebeling
33 The New Money by George C. Leef
36 Gold Policy in the 1930s by Richard H. Timberlake
44 Tensions in Early American Political Thought by Joseph R. Stromberg
COLUMNS
q THOUGHTS on FREEDOM—Hayek Turns 100 by Donald J. Boudreaux
12 IDEAS and CONSEQUENCES—Ending Corporate Welfare as We Know It
by Lawrence W. Reed
21 POTOMAC PRINCIPLES—Congressional Lost Opportunities
by Doug Bandow
26 THE THERAPEUTIC STATE—Gullible Skeptics by Thomas Szasz
Ya2 ECONOMIC NOTIONS—Costs Should Be Revealed, Not Concealed
by Dwight R. Lee
51 ECONOMICS on TRIAL—America Is Number 1 Again by Mark Skousen
63 THE PURSUIT of HAPPINESS—Tony Blair and “Fairness at Work” by Charles W. Baird

DEPARTMENTS

Perspective—Two Powerful Words by Sheldon Richman
6 Hayek Made No Contribution? It Just Ain’t Se! by Roger W. Garrison
53 Book Reviews

America’s 30 Years War by Balint Vazsonyi, reviewed by Clarence B. Carson; In Praise of
Commercial Culture by Tyler Cowen, reviewed by Donald J. Boudreaux; CancerScam: Diver-
sion of Federal Cancer Funds to Politics by James T. Bennett and Thomas J. DiLorenzo,
reviewed by John Hood; A Humane Economy by Wilhelm Ropke, reviewed by George C. Leef;
All the Essential Half-Truths about Higher Education by George Dennis O’Brien, reviewed by
George Roche; Commodity and Propriety: Competing Visions of Property in American Legal
Thought, 1776-1970 by Gregory S. Alexander, reviewed by Bradley A. Smith; Against Politics:
On Government, Anarchy, and Order by Anthony de Jasay, reviewed by Butler Shaffer.


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FE Ey

REEMAN AN PERSPECTIVE

deas On Liberte
CEI Two Powerful Words
Published by
The Foundation for Economic Education Last year Israel Kirzner, one of the econo-
rvington-on- udason, . : : : :
Phone (914) 591-7230 FAX (914) 591-8910 mists I most enjoy, said something during a
E-mail: freeman@fee.org lecture that was at once simple, true, and
FEE Home Page: http://www.fee.org deceptively powerful. How powerful I did not
President: Donald J. Boudreaux appreciate immediately. But in the ensuing
Editor: Sheldon Richman months, I have come to see how much was
Managing Editor: Beth A. Hoffman packed into that statement.
Editor Emeritus Professor Kirzner said that the market econ-
Paul L. Poirot omy can be reduced to two words: private
Book Review Editor property. At first glance that may seem so
George C. Leef . . .
oO i obvious as to be uninteresting. At second
Editorial Assistant . . LL.
Mary Ann Murphy glance it might summon an objection along
Columnists these lines: No, private property isn’t enough.
Charles W. Baird The market also requires individual liberty,
Doug Bandow the rule of law, limits on government, respect

Dwight R. Lee

Lawrence W. Reed for contracts, and more.

But as I understand the matter (and Profes-

Russell Roberts

Mark Skousen sor Kirzner), all those things are subsumed by

Thomas Szasz “private property.” A society characterized by

Walter Williams private property will necessarily have the
Contributing Editors other features we typically associate with free

Peter J. Boettke

Clarence B. Carson markets.

Thomas J. DiLorenzo Property, for example, is a limitation on

Burton W. Folsom, Jr. government power (one’s property of course

Joseph S. Fulda includes one’s person) because it necessarily

Bettina Bien Greaves entails rules governing how people may be

— treated, whether by other private individuals

Raymond J. Keating or state officials. (See Bradley Smith’s book

Daniel B. Klein review this month.)

Wendy McElroy Property helps to separate the wheat from

Tibor R. Machan the chaff in the matter of civil liberties, such

Ronald Nash as privacy and freedom of speech. Take the

Edmund A. Opitz

issue of falsely shouting “fire” in a crowded
James L. Payne

William H. Peterson theater. This is traditionally used to demon-

Jane S. Shaw strate that freedom cannot be “absolute.” But
Richard H. Timberlake as Murray Rothbard long ago pointed out, it
Lawrence H. White does nothing of the sort. On the contrary, it
The Freeman is the monthly publication of The Foundation for Eco- affirms property and its extension, contract. If
nomic Education, Inc., Irvington-on-Hudson, NY 10533. FEE, :
established in 1946 by Leonard E. Read, is a non-political, educational a theatergoer shouts fire, he violates the prop-
champion of private property, the free market, and limited government. 1
FEE is classified as a 26 USC 501(c)(3) tax-exempt organization. erty rights of the theater owner. If the theater
Copyright © 1999 by The Foundation for Economic Education. Per- owner does the shouting, he violates his con-
mission is granted to reprint any article in this issue, provided credit is .
given and two copies of the reprinted material are sent to FEE. tract with the patrons.

The costs of Foundation projects and services are met through dona-
tions, which are invited in any amount. Donors of $30.00 or more

Privacy issues, which modern law and the

receive a subscription to The Freeman. For delivery outside the United 1 V1 1 1 !

States: $45.00 to Canada; $55.00 to all other countries. Student sub- American Civil Liberties Union have SO badly

scriptions are $10.00 for the nine-month academic year; $5.00 per muddled, can only be sorted out when the

semester. Additional copies of this issue of The Freeman are $3.00 each. . . . . .
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for calendar years 1972 to date. The Freeman is available in microform

from University Microfilms, 300 N. Zeeb Rd., Ann Arbor, MI 48106. vate property. For example, contrary to the

Cover: Courtesy of the Cato Institute.


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—__———

ACLU, it is not a violation of privacy for an terfeiters. George Leef says theres a better
employer to refuse to hire smokers, even if way to accomplish the objective.

they smoke only at home. It is simply a mat- Richard Timberlake continues his series on
ter of freedom of association, which is an monetary policy in the fateful 1920s and
extension of private property. 1930s. In this installment he looks at the Fed-

If you're ever asked to stand on one leg and eral Reserve’s gold policy after the Great
sum up the free society in two words, you now Depression hit.
know how to do it. The political philosophy at the root of the
American Revolution was a novel mixture
pestled in the mortar of a remarkable histori-
The great pyramids of Egypt fascinate cal moment. Joseph Stromberg leads a tour
tourists, real and vicarious, by the millions. through the compound.
Yet few, unfortunately, appreciate the tragedy In the columns department, FEE President
they represent. Christopher Mayer contem- Donald Boudreaux celebrates the birthday of
plates what might have been and looks at one his hero, FA. Hayek. Lawrence Reed lam-
of our own modern pyramids. poons corporate welfare. Doug Bandow
President Clinton’s impeachment crisis has reminds us that the era of regulatory govern-
ended. His legacy is now set. Calvin Beisner ment is not over. Dwight Lee writes of the
fittingly revisits another leader whose prob- need for costs to be revealed. Mark Skousen
lem with truth-telling got him into hot water. concedes he was wrong about Japan and Ger-
Many philosophers have offered definitions many. And Charles Baird looks at the labor
of freedom. Perhaps the most pernicious has policy of the British Bill Clinton. Roger Gar-
been “freedom from want.” James Bovard looks rison reflects on Paul Krugman’s belief that

* k k

at the implications of that twisted definition. Hayek and Austrian business cycle theory are
Much of the steam of the interventionist insignificant and protests: It Just Ain’t So!
environmental movement has been provided We proudly announce that Thomas Szasz

by certain horror stories that everyone has will join us six times a year with a new col-
heard and everyone believes. What if those umn, The Therapeutic State. For about half a
stories are grossly exaggerated or untrue? century Tom Szasz has been the chief and at
Roger Meiners trains his magnifying glass on times only opponent of the medicalization of
the Green Scare. morality, particularly through the alliance of
Anyone who puts his mind to it can be a Psychiatry and State. His regular contribu-
spokesman for the freedom philosophy. A tions to The Freeman will cover an area too
ready platform exists wherever you are. The often neglected by advocates of freedom. The
Internet is one method, but, as John Landrum inaugural column skewers the strangely selec-
explains, the old-fashioned way still affords tive professional skeptics.
ample opportunities. In the book department our reviewers pass
FA. Hayek, one of the twentieth century’s along their impressions on such topics as neo-
greatest advocates of the free society, was socialism, the arts in a market economy, the
born 100 years ago this month. Richard Ebel- politicization of nonprofit health organiza-
ing surveys the long and fruitful career of the tions, a classic on the “humane economy,”

1974 Nobel prize winner. higher education, property in American legal
The U.S. government has gone to a lot of thought, and political philosophy.
trouble redesigning the money to thwart coun- —SHELDON RICHMAN


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Thoughts on Freedom

by Donald J. Boudreaux

Hayek Turns 100

conomics captivated me from the mist can possibly be greater than Friedman?”

moment that I first saw on a chalkboard a The name came. It was the first time I'd
supply-and-demand graph. That was in Janu- ever heard it. “Hayek. F.A. Hayek.”
ary of 1977. I was then an 18-year-old college The name meant nothing to me. “Never
freshman at Nicholls State University in Thi- heard of him,” I responded.
bodaux, Louisiana. I immediately took to pes- “Here,” Bill said. “Take this book and read
tering my economics professors for sugges- chapter four. It’s an article entitled “The Use
tions on what to read in economics. of Knowledge in Society.” You haven’t studied

One of my professors, Bill Field, told me economics long enough to grasp it all, but

about Milton Friedman. I began reading give it a try.” Bill lent me his copy of Hayek’s
Friedman's Newsweek columns and was 1948 book Individualism and Economic
immediately struck by his logic and passion. Order.
(One of these articles, in particular, really res- That night I read “The Use of Knowledge
onated with me; I believe that its title is “Free in Society,” an article that originally appeared
not Fair,” in which Friedman argued that gov- in the September 1945 issue of the American
ernment attempts to engineer fairness succeed Economic Review.

only in restricting our freedoms.) Soon there- Bill was right; I grasped only very little of
after I read Milton and Rose Friedman’s Cap- it. But I did grasp the main point that markets
italism and Freedom. Its power floored me. allow everyone to benefit from everyone
I was deliriously happy with my newfound else’s knowledge. This insight was so pro-
intellectual friend, Milton Friedman. found that I knew right then that I had before
my eyes the product of a mind so deep and so

Introduced to Hayek’s Works wise that I could never call myself an econo-

mist without knowing the full range of this

One afternoon, after reading something or man’s works.
other by Friedman, I wandered in to Bill “Do you understand what Hayek says in
Field’s office—a place, incidentally, where I that article?” Bill asked the next day. He and I
was always welcome—and announced that then proceeded on the first of what became
Friedman must be the world’s greatest living countless afternoons of reflecting upon
economist. Hayek’s work. Later, Bill introduced me to the
“Nope. In my opinion Friedman is the writings of other luminous economists—P. T.
world’s second greatest living economist,” Bauer, James Buchanan, Israel Kirzner, Lud-

Bill replied matter-of-factly. wig von Mises (Hayek’s teacher), Joseph
“Second greatest?” 1 sputtered. I didn’t Schumpeter. I relished their works; I learned
believe what I'd just heard. from them all. But to this day, Hayek remains

“Who 1s it?” I asked. “Which living econo- for me the premier economist of this century.


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—_——

Hayek’s Revolutionary Ideas and, because of Hayek’s influence, 1 believe
that our loose habit of calling legislation

Even in the late 1970s—still active and “law” gives to legislatures an authority that
more than a decade away from his death in they do not deserve. Legislators are not law
1992—ypictures of Hayek revealed a very old makers; if accuracy is to be served, far better
man. Here, after all, was a man who once to call legislators “law breakers” rather than
challenged Keynes for the position of most “law makers.” Legislation disrupts the common-
prominent economist of the 1930s. Here was law rules that embody patterns of expecta-
a scholar whose most famous book, The Road tions built into the law over the years and
to Serfdom, was published fourteen years through long practice. And why do legisla-
before I was born. tures upend this law? To plunder the political-

And yet whenever I read his words, I felt ly weak for the benefit of the politically
understanding being poured lavishly into my strong.
mind. These weren’t the words of an old man, Hayek wrote enduring treatises in econom-
a man whose time had long ago passed. No, ics and political and legal philosophy. But he
these words conveyed deep and timeless also wrote short, laser-like articles focused
insights into the nature of economics, law, and on dispelling prevailing nonsense. One of
politics. These were revolutionary words, for Hayek's best-known articles of this kind is his
to understand Hayek is to understand not only 1961 answer to John Kenneth Galbraith’s
that government cannot improve upon the notion of the “dependence effect.” Galbraith
operation of free markets, but also that gov- argued that in modern society consumer
ernment cannot even be relied upon to supply wants are created by advertising. Hence,
money and law—the very stuff that most because these wants are artificial, the market
economists unthinkingly assume can be sup- ought not to be applauded for satisfying
plied only by the state. Moreover, Hayek’s them.
explanations of government’s inherent limita- Hayek skewered Galbraith’s argument,
tions—and of the market’s marvelous ability pointing out that nearly all of our wants—
to peacefully coordinate human activity into a with or without Madison Avenue—are greatly
productive powerhouse—are all grounded influenced by our cultural environment. There
upon enduring truths rather than upon clever is nothing unique or sinister about Madison
algebra or bumper-sticker maxims. Avenue that renders as unworthy of satisfac-

Finding Hayek was, for me, finding the tion the desires that it helps to shape. Indeed,
most superb intellectual guide that I could said Hayek, far better to have lots of produc-
dream of. ers use advertising to compete for consumer

By my junior year I'd already devoured sev- patronage than to have government coercing
eral of Hayek’s books and essays. It was then people to spend their incomes according to
that I tackled what I still regard as his finest the fancy of the political elite.
work, the three-volume Law, Legislation and On May 8 I will celebrate—along with all
Liberty. In this work, Hayek most clearly and friends of liberty and truth—the centennial of
fully develops his idea of spontaneous order. ~~ Hayek's birth. First I'll call my old professor,

In Law, Legislation and Liberty, Hayek Bill Field, and thank him again for introduc-
also explains why common-law methods of ing me to Hayek’s works. Afterward, I'll re-
law making are far better than legislative read “The Use of Knowledge in Society” and
methods. To this day, following Hayek’s reflect on the ocean of knowledge that this
example, I cannot bring myself to use the one Austrian-born British citizen contributed
word “law” to describe legislation. The latter to the cause of human freedom.
is fundamentally distinct from the former, Happy birthday, Professor Hayek. OJ



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FREEMAN

deas On Libert

Hayek Made No Contribution? Clearly not a follower of Austrian theoriz-

ing, Krugman is, if anything, a quick study.

On the same occasion in which he denied

LI | Hayek any standing as an economic theorist,

It Just Ain t So : he launched a vitriolic attack on the Austrians

and their “hangover theory” of recessions. “I

regard [their theory] as being about as worthy

of serious study as the phlogiston theory of

“ [1 f one asks what substantive contribu- fire.” Though he failed to identify the Barron's

tions [F. A. Hayek] made to our under- article or its author as the spark that set off

standing of how the world works, one is left at this firestorm, he was clearly reacting to
something of a loss. Were it not for his poli- Epstein.

tics, he would be virtually forgotten.” “Hangover theory” is a term obviously

This assessment was offered up late last intended to denigrate the Austrian account of
year in the online magazine Slate by Paul the unsustainable boom. Yet it is descriptive of
Krugman, 1991 winner of the prestigious many—if not most—modern business-cycle
John Bates Clark Award. theories. The idea that booms lead to busts as

A few weeks before Krugman wrote that, drinking binges lead to hangovers is at home
Gene Epstein, economics editor of Barrons, in both Monetarism and New Classicism.
profiled this Yale-bred, MIT-based economic Even our sophomore-level college textbooks
theorist. Epstein’s article was largely positive feature a stilted version of the hangover theo-
and wholly respectful. But in a mildly critical ry. In the late 1970s, the analogy between the
tone, Epstein wondered if Krugman hadn’t abuse of monetary tools and the abuse of ille-
committed an error of omission. His writings gal substances became so well understood in
on recessions seemed to suggest that he knew the financial world that the argument by anal-
little or nothing about Hayek’s theory of the ogy was nearly reversed. A memorable car-
business cycle, a theory built on the cumula- toon of the period showed a balding Wall
tive efforts of Carl Menger, Eugen von B6hm- Street banker having a heart-to-heart with his
Bawerk, and Ludwig von Mises. Krugman errant teenage son: “Think of it this way,
conceded that he wasn’t familiar with the Timmy: Taking drugs is kinda like increasing
Austrian theory. the money supply. ...”

One is reminded of the notorious episode in The Austrian hangover is unique. The mis-
which John Maynard Keynes reviewed Mises’s allocation of resources during the period of
Theory of Money and Credit, which was artificially cheap credit has the feel of genuine
published in German. He faulted Mises for growth, but these good feelings are followed
failing to offer anything original and then later by bad ones. The commitment of too many
remarked that when he read German, he resources to projects that will yield output
understood only what he already knew. If we only in the remote future has as its counterpart
get our appreciation of Hayek through Krug- an undue scarcity of resources for producing
man, we can credit Hayek for very little. output in the near and intermediate future.
Unlike Keynes, though, Krugman cannot In time the misallocation becomes apparent,
invoke language as an excuse. Hayek did not after which follows a period of liquidation and
get the Nobel Prize for his political views; he reallocation—in a word: a recession.

got it for his work on business-cycle theory. None of this is to deny that a sharp
Why would Krugman not be completely famil- increase in money demand (or a collapse in
iar with Hayek’s contributions? Stay tuned. the money supply) can seriously retard recov-


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7

ery—as certainly happened in the 1930s. But the bad loans.”) is all too facile. His advice
Krugman would have us believe that mone- is well taken, but the market process that
tary disequilibrium is the whole story: Peo- implements it is time-consuming. During the
ple, for some reason, want to hold more junking and capital restructuring the demand
money than currently exists. Accordingly, his for much of the labor force (labor whose
solution is simply to print the money up and capital complement has not yet been recreat-
let them hold it. ed) is low. And low demand translates into
Krugman’s view of recessions is best put in unemployment—except under the decidedly
perspective by comparing it with the contrast- un-Austrian assumptions of instantaneous
ing views of Keynes and Hayek. These arch- wage-rate adjustment and near-infinite labor
rivals of the 1930s were in agreement that the mobility.
increase in money demand, the “scramble for Recognizing that in Austrian theory the
liquidity,” was a secondary aspect of the unemployment is somehow related to capital
downturn but in disagreement about what the restructuring, Krugman poses another ques-
primary problem was. Keynes thought it was tion: “Why doesn’t the investment boom—
investment demand, which in a decentralized which presumably requires a transfer of work-
economy is prone to collapse. Hayek thought ers in the opposite direction [from short-term
it was malinvestment induced by shortsighted projects to long-term projects}—also generate
or politically motivated actions of the central mass unemployment?” Gottfried Haberler
bank. [Editor’s note: See Richard Ebeling’s asked the same question in his 1937 book,
article, p. 28.] Krugman elevates what both Prosperity and Depression. The answer is that
Keynes and Hayek saw as a secondary aspect during the cheap-credit boom, there is a net
to the status of the primary problem. And increase in labor demand. And because of the
then, creating difficulties for the historian of low interest rate, many workers are bid away
thought, he attributes the high-money- from jobs in the late stages of production and
demand theory of recessions to Keynes into jobs in the early stages. During the down-
himself. turn, however, there is a net reduction in labor
Presumably rejecting all hangover theories, demand. As liquidation gets underway, work-
Krugman pronounces the Austrian variety ers are released from the higher stages and
“intellectually incoherent”—Ilargely on the (eventually) reabsorbed elsewhere in the
basis of a telling question: “[How can] bad economy.
investments in the past require the unemploy- Both of these future exam questions have
ment of good workers in the present?” Krug- been answered by drawing on Hayek’s contri-
man’s implicit answer: They can’t—and there- butions. Significantly, both answers involve
fore we needn’t pay any attention to Hayek. heavy doses of capital theory, which serves as
(The question itself is a good one and is like- the underpinning of the Austrian theory of the
ly to find its way onto macro exams at Auburn business cycle. One seemingly permanent
University.) effect of the Keynesian Revolution was to tear
Emphazing the time element in the econo- macroeconomics loose from these underpin-
my’s capital structure, a Hayekian would nings. Today, capital theory simply has no
argue that investment involves the employ- standing in mainstream macroeconomics.
ment of resources in a particular sequential Accordingly, Hayek has no standing in the
pattern. During the downturn, good workers eyes of Krugman and other modern main-
are out of work because the capital they need stream macroeconomists. It is a pity.

to work with is in short supply, having been —ROGER W. GARRISON
committed to long-term projects now in need Department of Economics
of liquidation. Krugman’s response (“Well, Auburn University

fine. Junk the bad investments and write off RGARRISN@business.auburn.edu


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¥ Government

FREEMAN

deas On Libert

A Modern Pyramid

by Christopher Mayer

n Anything Thats Peaceful, first published in fer losses and be driven from business. His
1964, Leonard Read took aim at U.S. efforts resources would then fall into more capable
to put a man on the moon.! He was right on hands and be more efficiently deployed (or
target. His powerful comments have tremen- left idle).
dous relevance today in light of the govern-
ment 5 aim to build an international space sta- No Resp onse to Consumers
ion. The project is expected to cost more than
one hundred billion dollars over its lifetime. As Read pointed out, exploring the moon
In discussing the moon project, Read “is not bound into the economy by mutual
wrote: “What its ultimate, useful purpose is I consent as reflected by willing exchanges in a
cannot imagine. But putting aside personal free market; it is bound into the economy by
prejudices against this multibillion dollar pro- the exertion of governmental force or coer-
ject, it is obvious that it would not, at this cion.” The efforts of NASA are possible
time, emerge from the free market.” because the government forcibly collects
Read also took note of all the specialized taxes from it citizens. Read coined a term to
labor, machines, time, and money being refer to work that would not be supported by
poured into the project. Those workers sup- the free market: “To the extent that govern-
ported themselves with money provided by ment intervenes in free action to that extent is
the government. However, that income was unnatural specialization brought into play.”
not earned in the normal sense. In the market, (Emphasis added.)
wages are earned by providing a service or The harm of unnatural specialization can
good that others are willing to pay for. Ulti- be seen through Read’s example of policing.
mately, wages are money that entrepreneurs Most everyone agrees that it is the govern-
advance to workers now in exchange for a ment’ role to keep the peace, to ensure and
greater amount generated later from the sale protect individual freedom and property, and
of the product. Of course, entrepreneurs make to forcibly restrain fraud, violence, and other
mistakes, and it may turn out that the product similar crimes. However, citizens must be vig-
is sold for less than anticipated. A loss is a ilant about government’s role even here, lest
signal that an entrepreneur must either redi- that worthy goal be corrupted. Employing
rect his resources to a good more highly val- too many police officers and soldiers places
ued by consumers or he will continue to suf- a drain on the economic system. What if
everyone were forced to become a police offi-
Christopher Mayer, a loan officer at a Maryland CCT Of soldier? We can easily see the folly of
bank, is studying for his MBA at the University of Such a scheme. Too many takers, not enough
Maryland. producers.


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

9

Garet Garrett, a wonderful writer with a gift are vague, even if chock full of noble-sound-
for symbolism, surely must have agreed with ing humanitarian goals that seem beyond
Read. He would have called exploring the reproach. They begin with the mission “to
moon or building an international space sta- enable long-term exploration of space and
tion a “pyramid.” In his essay “The Anatomy provide benefits to the people of Earth.” They
of a Bubble,” first published in 1932, Garrett include promises “to accelerate break-
used the imagery of the pyramid to denote a throughs in technology,” “to maintain U.S.
dead asset, an unproductive expenditure of leadership in space,” and “to inspire our chil-
human labor.2 The pyramids were built dren.” NASA also claims that “every dollar
through the power of the pharaoh, who wished spent on space programs returns at least $2 in
to build a monument in honor of himself. direct and indirect benefits.” Nowhere is this

Garrett wrote that “it is believed that on the claim substantiated. In fact, NASA’s Web site
Cheops alone 100,000 men were employed (www.nasa.gov) never mentions costs. If
for 20 years. And when it was finished, all every dollar yielded two dollars in benefits,
Egypt had to show for 600,000,000 days of why isn’t this a private initiative? That kind of
human labor was a frozen asset. . . . People return would attract big-time money, money
could not consume what their own labor had that would make Bill Gates blush. The reason
produced. That is to say, they could not eat a is that individuals in society have other things
pyramid, or wear it, or live in it, or make any they would rather do with the money.
use of it whatever. Not even Pharaoh could Ludwig von Mises wrote in Human Action
sell it, rent it or liquidate it.” that “A project P is unprofitable when and

Had they not been forced to build the pyra- because consumers prefer the satisfaction
mids, the laborers might have improved expected from the realization of some other
Egyptian agriculture, built homes, and made projects to the satisfaction expected from the
clothing and other goods that their fellows realization of P.”
would have enjoyed and willingly paid for. As Mises pointed out, many fail to recog-
They might have developed and expanded nize the fact that all action involves tradeoffs.
trade. They might have invented innovative Projects have a cost because factors of pro-
products. As Garrett said, they could have duction are scarce. The money to subsidize a
insured “Egyptian civilization a longer com- project must come at the expense of the tax-
petitive life.” Instead, they made a large pile payer and the sacrifice of other wants.
of bricks. The concept of a pyramid is a useful sym-

Once spent, the labor, capital, and time bol for any number of government projects.
were gone forever. The Egyptians could not Because of Garrett’s analysis, I will never

unmake the pyramid. look on the pyramids with admiration and
amazement. I will see only that they are the
A Pyramid in Space product of a tyrant and a symbol of the wast-

, ed effort emblematic of other public works
What's the difference between the projects. I'll wonder what the Egyptians
Pharaoh s pyramid and our government’s ould have built in their stead had they been
intent to build a space station? The money free.
spent on the station can’t be unspent. It is And I'll have similar thoughts every time I
gone forever. And what will we have for our (ead about the space station. []
efforts? We cannot eat the station, we cannot
wear It, live in It, rent it, or likely liquidate it. 1. Leonard E. Read, Anything That's Peaceful (Irvington-on-
The station is a modern pyramid. Hudson, N.Y.: The Foundation for Economic Education, 1998
Advocates of the space station say it will [195%

i i . 2. Garrett’s essay was reprinted in Where the Money Grows and
provide important benefits. But the promises anatomy of a Bubble (New York: John Wiley & Sons, Inc., 1997).



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

FREEMAN

deas On Libert

“Must I Not Be Believed?”

by E. Calvin Beisner

t was mid-November 1688. King James II One of the bishops suggested that since

of England, heir to his father’s and grand- they already had denied to him privately any
father’s beliefs in royal absolutism, was des- involvement in the invitation to William,
perate. Nobles and gentry of his kingdom had James could simply report that denial pub-
invited his son-in-law Prince William of licly. “No!” cried the king. “If I should pub-
Orange to intervene for the preservation of a lish it, the people would not believe me!”
free parliament and the Protestant religion.
James was meeting with a group of bishops of sp eye
the Church of England. It was his last chance Credibility Lost
to influence these clerics, and they were the That was precisely the point. James had lost
last men who might possibly persuade the credibility with his people for two reasons.
English people to support James against First, he had been caught in manifest lies time
William, who with a force of 15,000 men had after time. Second, he had declared himself
just landed at Torbay. above the law, even packing a court to ensure

All the king asked of the bishops was that that it would rule that “the laws of England
they make a public statement that, contrary to are the laws of the King of England. . . . [T]he
William's declaration, they had not taken part king of England or any sovereign prince upon
in the invitation to William. (In fact, one of urgent occasions & necessities may dispense
them had.) But the bishops refused on the with any penal laws of their dominion. . . .
grounds that the declaration alleged to be [T]he king is sole judge of the necessities &
William’s might be a forgery and that even if urgency of these occasions upon which they
it were genuine, it was unfair to press them may dispense with the laws. . . . [T]he king’s
alone to disavow it, since that would raise sus- power is in himself independent of any & not
picions that they were uniquely suspect. King entrusted of any & not entrusted to them from
James was beside himself. “Must I not be the people of England.”
believed?” he asked in frustration. He desper- Now, with William’s invasion, James more
ately needed his people to believe that than anything else needed credibility. The sur-
William had no support among the country’s vival of his reign depended on it. His troops’
leaders. willingness to fight for his reign depended on

it. Lacking it, he watched as regiment after

_— ~~ regiment of the army, ship after ship of the
Calvin Beisner is associate professor of interdiscipli- navy, either simply refused to fight or actual-

nary studies at Covenant College in Lookout Moun- : . qs
tain, Georgia, and is completing a Ph.D. in late- ly changed allegiance and joined William.

seventeenth-century British history and political Within a month, and with hardly a battle
thought. fought, James—who had begun with superior

10



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

11

forces—found himself stripped of all ability to Because, like King James II, President Clin-
defend himself and his kingdom, and was ton had lost his credibility. Repeated lies, even
forced to abdicate, fleeing to France. The under oath, and his attempts to use “executive
“Glorious Revolution” of 1688 was brought privilege” to shield himself from the normal
on, and consummated, by the simple fact that application of the laws had combined to
the people of Great Britain did not trust their demonstrate that he was not—and is not—to
king. be trusted. That is why it is tragic that the

When President Bill Clinton, one day impeachment process was not permitted to
before a scheduled House vote on impeach- end in a bona fide trial. Such a trial, unlike the
ment, ordered air attacks on Iraq, some sham proceedings that took place, was neces-
Republican congressional leaders, like mil- sary to either exonerate the president of the
lions of American citizens, broke with the tra- charges against him and restore his credibility
dition of supporting the president in foreign or to convict him and remove him from office
military action and clearly spoke their own so that a new president can govern with credi-
incredulity at both the policy and its timing. bility. As it turned out, we are left with a pres-
Nothing Clinton could say could eliminate the ident crippled by his own dishonesty—and a
doubts. Why? nation potentially crippled along with him. []

Annual Trustees Dinner ® May 16, 1999
at the Tarrytown Hilton, Tarrytown, New York

featuring
WALTER E. WILLIAMS
John M. Olin Distinguished Professor of Economics

Chairman of the Economics Department at
George Mason University

Columnist, The Freeman

For more information and reservations, please contact
Janette Brown at FEE: (800) 452-3518.



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

Ideas and Consequences by Lawrence W. Reed

Ending Corporate
Welfare as We Know It

(Comorace welfare is one of the toughest selves—producing lifelong slothfulness and
nuts to crack in Washington. While demoralization, intergenerational dependency,
almost everyone says he is opposed to it, Con- and the breakdown of families. Reforms at the
gress hasn’t done much about it. Maybe, just federal, state, and local levels are now aimed
maybe, that has something to do with the fact at getting people off welfare and into work.
that many congressmen are on the dole too— It seems reasonable that whats good for
in the form of campaign contributions from individuals ought to be good for companies
corporate welfare recipients. A new approach too, especially since companies are nothing
is needed if American taxpayers are ever to but collections of individuals anyway. Perhaps
get this monkey off their backs. we'd be more successful at ending corporate
The Cato Institute estimates that direct sub- welfare if we made it plain that it’s only fair to
sidies from the federal treasury to businesses apply the same welfare reforms to businesses
big and small, cash-rich and bankrupt alike, that we apply to individuals. Sort of a twist on
amount to at least $80 billion annually. (No the old canard, “What’s good for General
doubt state and local governments dole out a Motors is good for the country.”
few billion dollars more on top of that.) Com- Following this prescription, here’s what
panies (most notably Archer Daniels Mid- corporate welfare reform might look like (and
land) defend the handouts as being good not I'm being only a little bit facetious).
just for them but for the economy as a whole.

That’s not an argument that was ever given Declare an end to any and all “entitle-
much credence in debates over welfare for ments” to corporate welfare.
individuals. Most people seemed to under- President Clinton signed a historic bill in

stand that taking from A to give to B doesn’t 1996 that ended individuals’ legal entitlement
stimulate anything but B’s spending at As to federal subsidies. He should put businesses
expense. Aid to Families with Dependent Chil- on notice that they are not owed anything
dren (AFDC) and other welfare programs for either, except for the same common defense
individuals were defended primarily as neces- and other constitutional functions intended by
sary and helpful to the recipients, rarely as a the Founders for all of us. States should fol-
general economic stimulus. Then came over- low suit.

whelming evidence that these programs were

actually harmful to the recipients them- Put time limits on corporate welfare.
_ If we can’t get rid of all these business
Lawrence W. Reed is president of the Mackinac Cen- handouts forthwith, then Congress should at
ter for Public Policy (www.mackinac.org), a free- least do what . ber of stat
market research and educational organization in cas ow a a growing numoer of sta es are
Midland, Michigan, and chairman of FEE's Board of doing with families formerly on AFDC: limit
Trustees. any company’s time at the trough to five years.

12


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

13

Impose a “family cap” on corporate wel- head of the Archer Daniels Midland Compa-
fare recipients. ny and recipient of massive ethanol subsidies,
New Jersey was the first state to deny addi- shouldn’t have to sit through the same social
tional aid to any families having more chil- worker lectures that other welfare recipients
dren while on welfare. Businesses should be have to endure.
advised that while on the corporate welfare

rolls, they cannot get an increase in assistance Put a “LearnFare” program in place.
if they hire additional employees. Wisconsin was the first state to cut welfare
benefits to parents if they couldn’t keep their
Start drug testing for CEOs. kids in school. Companies should be cut off

Governor John Engler of Michigan, regard- if they can’t keep their executives in remedial
ed as a national leader in welfare reform, economics classes taught by economists who
wants to deny welfare payments to individuals can explain the importance of the free econo-
found to be abusing drugs. Taxpayers should my, property rights, and keeping your hands
not be required to subsidize corporate CEOs in your own pockets.
who abuse drugs either and there’s only one

way to find out if they are: if they're gettin’ Create incentives for the bureaucracy to
handouts, test ‘em. discourage corporate welfare.

Wisconsin was also among the first states to

Get tough with work requirements. reward welfare department employees for

To one degree or another, states now helping recipients leave the welfare rolls or
require welfare recipients to show evidence of stay off them in the first place. Early retire-
conscientiously searching for gainful employ- ment with handsome severance packages for
ment or doing volunteer work in their local federal and state bureaucrats who lop corpo-
communities. Corporate executives on the rate clients off the rolls might save us a lot of
dole should also be required to prove that they money in the long run.
are trying to straighten out their lives and
develop a serious work ethic. President Clinton pledged in 1992 to “end

welfare as we know it.” He did not qualify the

Require attendance at welfare-to-work statement with anything like “it depends on
counseling sessions. what you mean by the word ‘welfare.’” So

Columnist Paul Gigot describes ethanol as let’ call his bluff and ask him to end all wel-
a mixture of corn and your tax dollars. There’s fare, as we’ve known it and as many of us
no reason why Dwayne Andreas, the longtime would like to forget it. J



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

Bogus Freedom

by James Bovard

reedom from want” is one of the most recognized that the liquidation of the individ-
frequently invoked notions of freedom in ual capitalist in agriculture had necessarily to
our time. However, it is a bogus freedom that be faced if the required increase of output was
politicians and socialists offer to lull people to be obtained.” (Output plummeted.)
into accepting policies that destroy true free- Equating liberty with satisfactory living
dom. Freedom from want has been most loud- standards became far more common as the
ly advocated in this century by those who twentieth century went on. “Real freedom
favored removing almost all limits from gov- means good wages, short hours, security in
ernment power. employment, good homes, opportunity for
For example, Sidney and Beatrice Webb, leisure and recreation with family and
two of the founders of British socialism and friends,” wrote Sir Oswald Mosley, the most
authors of The Soviet Union: A New Civiliza- prominent British supporter of Nazi Germany,
tion?, asserted in 1936: “Personal freedom in his 1936 book, Fascism.* James Gregor
means, in effect, the power of the individual noted in his book The Ideology of Fascism that
to buy sufficient food, shelter and clothing”! fascism aimed at “restraints which foster the
The Webbs did not specify how many mil- increased effective freedom of the individual 3
lions of people government should be permit- President Franklin Delano Roosevelt noted in
ted to kill in the name of “freedom from 1937 that “even some of our own people may
want.” But during Stalin’s bloodiest decade, wonder whether democracy can match dicta-
they asserted that for government economic torship in giving this generation the things it
planning to succeed, “public discussion must wants from government.’6 University of
be suspended between the promulgation of Chicago professor Leslie Pape noted in 1941
the decision and the accomplishment of the that “democracies readily admit the claims of
task” and that any criticisms of the master totalitarian states to great achievements in the
plan should be treated as “an act of disloyalty, cause of positive freedom.”
or even of treachery”? For government to be British historian E.H. Carr, writing in 1951,
able to liberate people with food and clothing, observed that, for the modern era, “freedom
it must have the power to execute anyone who from the economic constraint of want was
criticizes the official economic plan. After clearly just as important as freedom from the
visiting the Ukraine, the Webbs endorsed political constraint of kings and tyrants.”8
Stalin’s war on the kulaks (the least impover- Carr justified the array of economic controls
ished peasants), commenting that “it must be jp postwar Britain: “The price of liberty is the

James Bovard is the author of Freedom in Chains: The restriction of liberty. The price of some liber-

Rise of the State and the Demise of the Citizen (St. tY for all is the restriction of the greater liber-
Martin's, 1999), from which this article is adapted. ty of some.” However, with this standard,

14


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

15

there is no limit to the amount of freedom that sions is assumed not to be free—and in need of
government can destroy in the name of creat- political rescue. President Johnson, justifying a
ing “greater liberty for some.” The British vast expansion of government social programs,
Labour government that Carr championed declared in 1965, “Negroes are trapped—as
advanced freedom by conscripting labor for many whites are trapped—in inherited, gate-
the coal mines and empowering the Ministry less poverty. . . . Public and private poverty
of Labour to direct workers to whatever combine to cripple their capacities.”14 Vice
employment was considered in the national President Hubert Humphrey defined a poor
interest—empowering over 10,000 govern- person as “the man who for reasons beyond his
ment officials to carry out searches (including control cannot help himself.” This perspective
of private homes) without warrants—pro- on poverty and self-help mocks all of Ameri-
hibiting restaurants from serving customer can history. It implies that any individual who
meals costing more than 5 shillings (less than earns less than $7,890 a year (the official
$2 in 1947)—and fining farmers who refused poverty line for a single person) is incapable of
to plant the specific crops government any discipline or resolution.
demanded.!® The government also “national- While advocates of positive freedom insist
ized all potential land uses in the United that government must intervene so that each
Kingdom, permitting only continuation of person “can be all that they can be,” govern-
existing ones and requiring ‘planning permis- ment aid programs are notorious for reward-
sion’ for any others,” as law professor Gideon ing people for making the least of themselves.
Kanner noted.!! President Roosevelt warned in 1935 that
The Labour government offered freedom via “continued dependence on relief induces a
the solidarity of standing in the same rationing spiritual and moral disintegration fundamen-
line—liberation via deprivation. (A 1998 New tally destructive to the national fiber.’!5 Presi-
York Times article cited the Labour govern- dent Clinton declared in 1996: “For decades
ment’s postwar food rationing, which contin- now, welfare has too often been a trap, con-
ued into the 1950s, as a contributing factor to signing generation after generation to a cycle
the long-term decline of British cuisine. !2) of dependency. The children of welfare are
The more politicians promise to give, the more likely to drop out of school, to run afoul
more they entitle themselves to take. Carr, of the law, to become teen parents, to raise
serving in 1945 as chairman of the UNESCO their own children on welfare.”!6 A rising tide
Committee on the Principles of the Rights of no longer lifts all boats when the government
Man, declared that “no society can guarantee rewards people for scuttling their own ships.
the enjoyment of such rights {to government Faith in freedom from want depends on a
handouts] unless it in turn has the right to call political myopia that focuses devoutly on only
upon and direct the productive capacities of one side of the ledger of government action.
the individuals enjoying them.”’!3 Thus, the This is measuring freedom according to how
price of government benefits is unlimited much government does for people, and totally
political control over people’s paychecks and disregarding what government does to people.
work lives. Government provides “freedom” for the wel-
Once freedom is equated with a certain fare recipient by imposing tax servitude on
material standard of living, confiscation the worker. Federal, state, and local govern-
becomes the path to liberation. Thus, the more ments collected an average of $26,434 in
avidly a politician raises taxes, the greater his taxes for every household in the country, or an
apparent love for liberty. In the name of pro- average of $9,881 for every U.S. resident in
viding “freedom from want,” the politician 1998, according to the Tax Foundation.!” In
acquires a pretext to destroy the basis of pri- an age of unprecedented prosperity, govern-
vate citizens’ independence. “Freedom from ment tax policies have turned the average cit-
want” becomes a license for politicians, rather izen’s life into a financial struggle and insured
than a declaration of rights of citizens. that he will likely become a ward of the state
Anyone who does not have certain posses- in his last decades.


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

16 THE FREEMAN/IDEAS ON LIBERTY ¢ MAY 1999

Some statists insist that taxation is irrele- her 1980 book, Liberal Equality, declared:
vant to freedom. According to sociologist “Liberal egalitarians want to say that freedom
Robert Goodin, of choice is not very meaningful without a

right to those goods necessary to life itself.”2!

If what the rich man loses when his Gutmann’s elaboration of “necessary goods”
property is redistributed is described as a reveals how government would be obliged to
loss of freedom, then the gain to the poor control almost everything: “Supplying the
must similarly be described as a gain of poorest with more primary goods will be
freedom. . . . No net loss of freedom for insufficient if their sense of self-worth or their
society as a whole, as distinct from indi- very desire to pursue their conceptions of the
viduals within it, is involved in redistribu- good is undercut by self-doubt.”22 By this
tive taxation. Thus, there is no basis in standard, freedom is violated when people
terms of freedom . . . for objecting to it.!18 suffer self-doubt, and the government is
obliged to forcibly intervene to guarantee that

What does Goodin mean by “freedom for all people think well of themselves.
society as a whole”? By this standard, slavery Political scientist Alan Wolfe, a self-
would not reduce a society’s freedom, since described “welfare liberal,” asserted in 1995
the slave’s loss of freedom would be equaled that “people need a modicum of security and
by the slave owner’s gain. Nor is there any dif- income maintenance, underwritten by govern-
ference, vis-a-vis freedom, between permit- ment, in order to fulfill the ideal of negative
ting people to retain their earnings and spend liberty, which is self-sufficiency.”2> Govern-
them as they choose, and government confis- ment dependency is the new, improved form
cating their money to hire more regulators, of self-reliance: dependency on government
inspectors, and informants to better repress doesn’t count because government is a better
the citizenry. friend to you than you are yourself. But the

What are the practical results of the modern more dependent people become on govern-
“freedom from want”? Economist Edgar ment, the more susceptible they are to politi-
Browning, writing in 1993, examined the cal and bureaucratic abuse. Freedom from
marginal cost of redistribution—defined as want is conceivable only so long as people are
“the ratio of the aggregate loss to the top four allowed to want only what the government
quintiles of households to the aggregate gain thinks they should have.
to the bottom quintile of households.”!? Freedom from want supposedly results
Browning estimated that the marginal cost to from government taking away what a person
the most affluent 80 percent of households of owns so that it can give him back what it
increasing the income of the poorest 20 per- thinks he deserves. The welfare state is either
cent by $1 was $7.82.20 The marginal costs of a way to force people to finance their own
redistribution are much larger than people benefits via political-bureaucratic bagmen, or
might presume because of reduced incentives it is a way to force some people to labor for
to work, both among the taxpayers and other people’s benefit. In the first case, gov-
recipients. Also, as Browning noted, “margin- ernment sacrifices the person’s freedom to the
al tax rates must be increased very sharply fraud that government must tax him to subsi-
relative to the amount of income that is redis-  dize him; in the second, government sacrifices
tributed.” Combining Browning’s analysis and the person’s freedom in order to “liberate”
Goodin’s definition, confiscatory redistribu- someone else—often someone who chooses
tion destroys almost eight times as much not to work. If someone pays the taxes that
“freedom” as it creates. finance the government benefits he receives,

Once the notion of “freedom from want” is he is less free than he would otherwise have
accepted as the pre-eminent freedom, it been.
becomes a wish list justifying endless politi- Some “freedom from want” advocates
cal forays deeper and deeper into people’s imply that government is a great benefactor
lives. Princeton professor Amy Gutmann, in when it promises citizens “three hots and a


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

Bogus FREEDOM 17

cot’—the old-time recruiting slogan of the portion of their own property, and that their
Marine Corps. But trading freedom for a full ruler could not have given them what they
belly is a worse bargain now than ever before. were receiving without having first taken it
As economist FA. Hayek observed, “As the from them.”26

result of the growth of free markets, the “Freedom from want” is not possible unless
reward of manual labor has during the past the government is allowed to control all things
hundred and fifty years experienced an people want. Americans must beware of
increase unknown in any earlier period in his- Trojan-horse definitions of freedom—defini-
tory.”24 The average worker in industrialized tions that, once accepted, allow bureaucrats to
countries can purchase the bare necessities of take over everyone’s life. Government hand-
life with fewer hours of labor than ever outs insinuate political power into the deepest
before. Comparing current wages and prices recesses of a person’s life. And when the time
with those of 1800, economist Julian Simon is ripe, politicians take command where they
found that the average American worker today previously lavished their gifts. OJ
needs to labor less than one-tenth the time to

than his predecessors did two centuries ago.25 Hayek, Erich Streissler, ed. (London: Routledge & K. Paul, 1969),

Whi ; umm p. 126.
. ile the real price of food has p | A eted 2. Sidney and Beatrice Webb, Soviet Communism: A New
(in spite of government farm policies), the Civilization? vol. 2 (New York: Charles Scribner's Sons, 1936),
“ 1) 14d : pp. 1038-39.
real price of political servitude has not 3. id, vol. 1. p. 547.
diminished. 4. Quoted in Dorothy Fosdick, What is Liberty? A Study in Polit-
: 1 _ ical Theory (New York: Harper and Brothers, 1939), p. 28.
. It is understandable that Some well-inten 5. James Gregor, The Ideology of Fascism (New York: Free
tioned people assume that “freedom from Press, 1969), p. 212.
» 1 3 <« dif. 6. The Public Papers and Addresses of Franklin D. Roosevelt,
want” is the most important freedom. It is dif: 1937 (Now York: Macmillan. 1941). p. 361.
ficult for many people to conceive of enjoying 7. Leslie M. Pape, “Some Notes on Democratic Freedom,”
: : ; Ethics, April 1941, p. 26.
anything (much less their freedom) if they 8 Edward Hallett Carr, The New Society (London: Macmillan,
lack food, clothing, or shelter. However, free- 1951), p. 107.
. . 9. Ibid., p. 108.
dom 1s not a gu arantee of prosp erty for every 10. John Jewkes, The New Ordeal by Planning (New York: St.
citizen; the fact that some people have meager Martin's, 1968; based on his 1948 book), p. 213.
: n 11. Gideon Kanner, “Tennis Anyone?,” California Political
incomes does not prove that they are shack Review, March-April 1998, p. 17.
led. It is a cardinal error to confuse freedom 12. William Grimes, “History Explains Disparity Between Eng-
: : sm div lish and French Cuisine,” New York Times, May 9, 1998.
with the things that free individuals can 13. Quoted in F.A. Hayek, Law, Legislation and Liberty, vol. 2,
achieve or produce, and then to sacrifice the  7ne Mirage of Social Justice (Chicago: University of Chicago Press,
: . 1976), p. 184.
reality of freedom in a deluded shortcut to the 14. Quoted in Marvin Gettleman and David Mermelstein,
bounty of freedom. Freedom is not measured eds. The Grear Society Reader (New York: Random House, 1967),
p. 256.
by how much a Person possesses, but by the 15. Quoted in “The Welfare Bill: Excerpts from Debate in the
restrictions and shackles under which he Senate on the Welfare Measure,” New York Times, August 2, 1996.
lives 16. “Radio Address of the President,” Office of the Press Secre-
: . LL tary, White House, December 7, 1996.
Throughout history, politicians have used 17. “Total Tax Collections to Reach $2.667 Trillion in 1998, Tax
p Foundation Says,” Tax Notes Today, June 11, 1998.
other people SP roperty to buy themselves 18 Robert Goodin, Reasons for Welfare (Princeton: Princeton
power. That is the primary achievement of the University Press, 1988), p. 313.

19. Edgar Browning, “The Marginal Cost of Redistribution,”
welfare state. The danger of government , =° =E - Ouartonsy, January 1993, p. 3,

handouts to freedom was clear to some polit- 20. Ibid., p. 3.

ical writers hundreds of years ago. The French | 2l. Amy Gutmann, Liberal Equality (Cambridge: Cambridge
i . ) . niversity Press, 1980), p. 8.

writer Etienne de la Boétie, in his 1577 Dis- 2 Ibid, p. 123.

. 23. Alan Wolfe, Review of Passions and Constraint: On the The-
course of Voluntary Servitude, noted of ory of Liberal Democracy, by Stephen Holmes, New Republic, May

ancient Rome: “Tyrants would distribute 1,199s.
: 24. Friedrich Hayek, Law, Legislation and Liberty, vol. 1, Rules
largess, a bushel of wheat, a gallon of wine and Order (Chicago: University of Chicago Press, 1973), p. 24.
. . and then everybody would shamelessly 25. Julian Simon, “What the Starvation Lobby Eschews,” Wall
3 : : 1° : Street Journal, November 18, 1996.
cry, Long live the King I” The fools did not 26. Etienne de la Boétie, The Discourse of Voluntary Servitude,
realize that they Were merely ICCOVEring a Murray Rothbard, ed. (New York: Free Life Editions, 1975), p. 70.


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

E ¥ Environment

TH
FREEMAN

Ideas On Liberty

The Green Scare

by Roger E. Meiners

| ) Joie the Cold War, anti-communist land in 1969. An oil slick on the river caught
activists were accused of using Red fire, which lit wooden train trusses. There had
Scare tactics. They were parodied along these been fires in the river before; the Cuyahoga,
lines: The communists were everywhere, an industrial sewer, was biologically dead. A
maybe even under your bed, so support the few years before the fire, a real estate compa-
politicians who would spend massive ny had sued the city for allowing the river to
resources, and perhaps strip away a few liber- deteriorate to such a condition. The trial court
ties, for the greater good of saving the nation, ordered the city to investigate the causes of
and especially the children, from a horrible the pollution and ordered “such nuisances . . .
fate. Politicians such as Senator Joseph to be abated.” The supreme court of Ohio
McCarthy rose to prominence by “revealing” reversed, holding that the river was under the
the threat the nation faced. Some stories were control of state authorities. Common-law pro-
false, some exaggerated, and some true, but tection had been erased by the Ohio Water
sensible national policy should never be based Pollution Control Board, which had granted
on horror stories by charlatans. permission for various industries to discharge
In recent years politicians have gotten good wastes into the Cuyahoga and, thereby, Lake
mileage with a Green Scare campaign. Vice Erie. When regulation takes precedence over
President Al Gore wrote Earth in the Balance, common-law rights, the result can be destruc-
a book filled with green scares, most of dubi- tive to the environment.
ous merit, far overblown, or simply false, but
all requiring central control of property and DDT Defamed
the economy. Environmental horror stories
are so widely accepted that political oppo- The book Silent Spring is referred to as a
nents are chary of sneering about them. It’s sacred writ of environmentalism; but it is
worth reviewing the facts about some famous more of a totem than a useful source of infor-
Green Scare stories, most of which are still mation since the book is filled with incorrect

repeated as gospel. information and half-truths. The single chem-
ical most bewailed by Rachel Carson was
Common Law Co-Opted DDT, which was alleged to have caused mas-

sive destruction of birds (thereby leading to

Some readers may recall the sight of flames the silent spring when chirping would no
leaping from the Cuyahoga River in Cleve- longer be heard). As a result, DDT was
Roger Meiners teaches in the economics department banned. Yet it had saved millions of lives. Paul
at the University of Texas, Arlington, and is a senior Hermann Miieller, its Swiss creator, won the
associate at PERC. Nobel Prize for the chemical, which con-

18


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

19

trolled mosquitoes and, thereby, malaria, in were so concerned about the city’s future
many parts of the world. prospects that they indicated the bonds would
Before large-scale DDT programs were be called unless effective action was taken to
introduced in 1962 in Ceylon (now Sri clear the air.# Market pressure required city
Lanka), there were some two million cases of leaders to act. Scientists at the California
active malaria reported for the country.! Dur- Institute of Technology were paid to research
ing the DDT program, the number of new the problem, and one received a Nobel Prize
active cases fell to 17 in 1963. In 1964, pres- for identifying the photochemistry of smog.
sures from Western nations brought an end to State restrictions on automobile emissions
the use of DDT. By 1969, 2.5 million people followed.
in Sri Lanka were suffering from the disease, California and the rust-belt states with
partly because it was not politic to admit that sooty coal-fired electric generators and steel
wise leaders do not know their environmental mills knew that as they took costly steps to
science and are willing to inflict massive suf- deal with their peculiar or worse-than-average
fering on tens of millions of people in lesser- air pollution problems, they would face com-
developed nations. petitive disadvantages. So California pressed
Of course there can be too much of a good for the rest of the nation to be forced to imple-
thing; the federal government was so DDT- ment the same kinds of emission controls that
happy after World War II that it dumped huge made good sense for it to impose. California
quantities from bombers, despite objections and the rust-belt states patched together what
from farmers who resisted such “help.” In should have been seen as an anti-environmen-
one case the concentration was so high from tal alliance in crafting many provisions of
a U.S. Department of Agriculture dump that the Clean Air Act. The filthiest places were
it killed a herd of cows.2 Despite Carson’s given less responsibility to clean up than
assertions, there was then and still is little evi- were the clean-air areas, and the cleanup man-
dence that individual farmers, paying for dates were expensive, special-interest driven
DDT, sprayed it in such massive quantities measures.3
that it caused environmental damage. The Since passage of the 1970 Clean Air Act,
relationship between DDT and damage to progress on air quality has been made, but it
bird eggs is no longer the certainty that was was being made before that time, perhaps
presumed. Scientific evidence is in order more rapidly, and certainly in a more cost-
before assertions are accepted and policy con- effective manner designed to address local
clusions are reached, but politicians have lit- problems.6 The billions mandated by statute
tle incentive to rely on science. to be spent on outdated technological and
command-and-control solutions, to comply
Air Pollution Solution with standards that have little to do with sci-
entific evidence of harm, force the consump-
The air in Los Angeles is much cleaner tion of many resources that could have been
today than it was in the 1950s and 1960s, devoted to other worthy endeavors.
despite the large growth in population and
number of vehicles on the road. It is not cer-
tain that the federal Clean Air Act and the Unloved Canal
Environmental Protection Agency deserve the The granddaddy of all Superfund sites is
credit. By the time the 1970 Clean Air Act Love Canal. In 1980 it generated horror sto-
was enacted, every state had some sort of air- ries of chemicals seeping from an abandoned
pollution control legislation, as did 81 coun- toxic dump site run by Hooker Chemical
ties and 107 cities.3 Citizens of L.A. had little Company (Occidental Petroleum). Publicity
choice but to find a solution to the smog prob- about the site helped spur public support for
lem, which at the time even the best scientists quick passage of the Superfund toxic-cleanup
could not explain well. British insurance com- law, the Carter administration’s final major
panies holding Los Angeles municipal bonds “gift” to citizens before leaving office.


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

20 THE FREEMAN/IDEAS ON LIBERTY ® MAY 1999

Love Canal was a failed entrepreneurial Love Canal is notorious. One environmental
canal built in the 1800s. In 1941, Hooker law textbook asserts that hundreds of people
Chemical bought the 3,000-foot long trough, suffered terrible injuries there. No doubt the
which was 8 to 16 feet deep and 60 to 80 feet hysteria caused by EPA workers in space suits
wide, to use to dump toxic waste from its hustling people from their homes may have
plant on the outskirts of the City of Niagara caused distress. Yet the court’s review of
Falls, New York. The canal soil was hard clay, injuries from chemical exposure shows only
so it made an excellent disposal site that did “relatively minor noticeable injury” That is,
not appear to cause water contamination. In the Love Canal Superfund site, the stuff of
the 1950s, the city, which had been fully environmental legends, was found, on careful
informed of what was under the soil, essen- examination, to be associated with little harm
tially condemned the Love Canal property to human beings at the time and no lasting
and, over company objections, later built a harm. But the company was liable for what
public school on the grounds and allowed minor harms it negligently inflicted on resi-
housing to be constructed there. Eventually, dents. No harm at all would have likely ever
Hooker had to pay to clean up the site under occurred had the city not demanded the prop-

the Superfund law. erty from the company and built on it, tamper-
Hooker was also sued in tort by citizens and ing with the soil cover on the chemicals.
various governments. The federal court judge These horror stories, the stuff of the Green

in 1994 provided exhaustive findings in the Scare, have achieved the status of Official
case US. v. Hooker Chemical. The govern- Truth. But each is grossly distorted in the ser-
ment requested punitive damages from Hook- Vice of interventionist environmentalism.
er, but the court rejected the request. Never- Here's yet another example of the old saying
theless, Hooker was held negligent, primarily that 1t’s not what we don’t know that hurts us.
for not coming forward with more informa- It's what we know that isn’t so. [
tion about the dangers of various chemicals in Ej zbeth Whelan, Toxic error (Ottawa, IL: Jameson Books,
later years. “While the Company should have 1985), p. 69.

d forts to k 1 ] ident 2. Christopher Bosso, Pesticides and Politics: The Life Cycle of
made greater efiorts to keep local residents  ; pypiic fssue (Pittsburgh: University of Pittsburgh Press, 1987).
off the property,” the judge ruled, “it violated 3. Arthur Stern, “History of Air Pollution Legislation in the Unit-

. . . qe ed States,” Journal of the Air Pollution Control Association, 1982,
.. . no legal obligation in failing to do so. It yo 33 no. el

responded to complaints about odors, fires, 4. See Bruce Yandle, The Political Limits of Environmental Reg-
d h ical h . ulation (Westport, Conn.: Quorum Books, 1989), pp. 65-66.

and exposures to chemicals whenever noti- 5. Robert Crandall, Controlling Industrial Air Pollution: The

fied, and there was no evidence of injury dur- Economics and Politics of Clean Air (Washington: Brookings lnsti-

. . tution, 1983).

ing the disposal operations that would have 6. Indur Goklany, “Empirical Evidence Regarding the Role of

signaled a compelling need to provide more Nationalization in Improving U.S. Air Quality,” in Roger Meiners
and Andrew Morriss, eds., The Common Law and the Environment

protection.” (Bozeman, Mont.: PERC, forthcoming).

The apple icon @ identifies Freeman articles that are appropriate for teaching high-
school students several major subjects—including economics, history, government, phi-
losophy, and current issues.

We also provide sample lesson plans for these articles on our Web site www.fee.org
and in written form. Teachers and homeschooling parents need only to visit our Web site
or request written lesson plans to take advantage of this unique service.



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

Potomac Principles by Doug Bandow

Congressional Lost
Opportunities

Ithough Republicans retain the control of Cases are legion where bureaucrats have
Congress that they won in 1994, they created rules essentially out of whole cloth.

have done little good with their power. For instance, the entire regulatory web gov-
President Bill Clinton, despite his crippling erning wetlands grows out of the Clean Water
scandal woes, retains the initiative in making Act, which never mentions wetlands. Yet
policy. Not only does he push for new under these rules people find their property
spending programs, but his administration effectively seized; an unfortunate few even
also continues to pour forth a flood of end up in jail.
intrusive regulations—=8,645 in the last two The Clinton administration made a similar
years alone. power grab through the Food and Drug

Of course, people have been suffering from Administrations proposed controls over the
runaway bureaucratic rule-making ever since tobacco industry. Such rules were never
Congress began creating agencies. Federal thought to be within the purview of the FDA.
regulations cost us $670 billion annually, Nevertheless, the agency unilaterally declared
according to Thomas Hopkins of the its authority to ban advertising, control tobac-
Rochester Institute of Technology. Thats co production, and monitor cigarette sales.
about $7,000 per family—and doesn’t count Even where the authority exists, agencies
lost economic growth. often act irresponsibly to achieve ideological

For years constitutional scholars have ends. For example, the Clinton Environmental
decried Congress’s “excessive delegation” of Protection Agency developed air pollution
power to the hundreds of departments, agen- rules, allegedly to protect children, which
cies, and bureaus that fill Washington. Aver- offered minimal health benefits to justify their
age citizens have complained too—after enormous cost.
being fined by OSHA, penalized by the IRS, Yet the GOP Congress did nothing. Repub-
sued by the SEC, or otherwise abused by one licans were unwilling to make any effort to
or another alphabet-soup bureaucracy. But explain why rules that sounded superficially
legislators have been unwilling to give up this appealing were actually environmentally as
tool to expand their power. After all, it would well as economically destructive.
take real work for them to fill in all the blanks The Clinton regulatory flood continues. As
created by their own statutes. Equally impor- Angela Antonelli of the Heritage Foundation
tant, doing so would allow voters to hold them points out, the number of pages in the Feder-
responsible. al Register, which catalogues federal rules,

— caked under President Jimmy Carter at
Doug Bandow, a nationally syndicated columnist, is p y

a senior fellow at the Cato Institute and the author 87,012. It was still a too-high 33,376 pages in
and editor of several books, including Tripwire: 1988, President Ronald Reagan’s last full year

Korea and U.S. Foreign Policy in a Changed World. in office. Last year the Federal Register was
21


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

22 THE FREEMAN/IDEAS ON LIBERTY ® MAY 1999

back up to 64,549 pages. The Center for the But three years ago Congress approved the
Study of American Business reports that Congressional Review Act (CRA). It requires
spending on 61 different regulatory agencies all agencies to submit their rules to the Sen-
will hit $17.9 billion this year, the highest ate, House, and General Accounting Office
ever. Staffing is also up, to 127,927 employees (GAO). Legislators then have 60 days to use
(full-time equivalents). an expedited lawmaking process (easing the

Congressional deregulators should push an discharge of resolutions from committee, for
aggressive agenda. They should start by instance) to pass a joint resolution disapprov-
killing agencies. There is no evidence that ing the regulations. Already agencies have
OSHA has had any impact on workplace been resisting the act’s requirements, just as
deaths and injuries, but plenty of evidence they have sought to thwart earlier attempts to
that its nitpicking rules cost far more than any restrict new regulations. The departments of
benefits they provide. By slowing the flow of agriculture and transportation, in particular,
drugs to market, the FDA has killed far more simply refuse to submit some rules to the

people than it has saved. And so on. GAO. The GAO has done little to implement
Legislators should stop delegating near ple- the law.
nary power to regulatory bureaucracies and Meanwhile, Congress has not yet blocked

allowing informal “nonlegislative rules” to be even one rule. It may be that all 8,645 rules
binding. Congress should undertake system- approved by the Clinton administration in
atic oversight of federal regulatory activity. 1997 and 1998 advanced the public interest.
Regulation can be lethal. A half dozen But it’s not likely.
rules—for chloroform at pulp mills, for Past regulatory reform legislation has had
instance—are estimated to cost literally tril- little effect. For instance, the Paperwork
lions of dollars per life saved. Yet a 1994 Har- Reduction Act and Unfunded Mandates
vard University study figured that 60,000 peo- Reform Act were both weakened before being
ple die each year as a result of today’s regula- passed in 1995 and have had only minimal
tory complex, which diverts tens of billions of impact. Other reform measures, such as prop-
dollars from productive uses to fighting just erty rights protection, regulatory budgets, and
such trivial risks. requirements for risk assessment, failed to
Congress could at least say no to bad regu- become law. Throughout most of U.S. history,
lations before they take effect. Until 1996 that Congress was viewed as the strongest branch
wasn’t easy, since both houses of Congress of government. But regulation has given pres-
would have had to pass a new law—over the idents the power effectively to make law. For
President’s veto, if necessary. Congress did the sake of liberty and the Constitution, Con-
create a one-chamber veto, which was later gress needs to act aggressively to curtail
voided by the Supreme Court. agency rule-making. [J]

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

FREEMAN

deas On Libert

Fighting Back

by John Landrum

have always envied “how-to” writers and It occurred to me that anyone who was con-

secretly hoped to become one. This is my vinced by this stuff and took it seriously
latest essay into the field. I want to bestir should make some racket. And writers such as
Freeman readers to make more noise in the Bastiat and Hazlitt gave wonderful examples
mainstream media. of how this could be done.

I'll offer some quick background, hoping to Last year I found my first chance—a news-
convince you that, if I can do it, you surely paper article in the New Orleans Times-
can. Until roughly three years ago, I was what  Picayune—and wrote a letter to the editor in
Ayn Rand would have called a “contemptible response. (A reader of my letter sent a copy
middle-of-the-roader.” 1 tended to dismiss to The Freeman, which in turn invited this
those who talked about political issues in article.)
terms of principles, thinking them poor com- I imagine I'm less well educated in free-
promisers. I thought that we could never make market principles than most Freeman readers.
democracy work if everyone insisted on his So I share this story in the hope that it inspires
own starting position. [ was well meaning and others who may not consider themselves
sincere. And I was like almost everyone else I authorities to write confidently when they see
knew. free markets challenged.

Then a friend introduced me to the writings ~~ Think of this as The Complete Idiot's Guide
of Henry Hazlitt (Economics in One Lesson), to Defending Liberty.

Frederic Bastiat (The Law and Economic

Sophisms), and Ludwig von Mises (“Eco-

nomic Calculation in the Socialist Common- Unappealing Competition?
wealth”). Suddenly, I got it.

Reading these writings, and since then The Times-Picayune is the only major
many others, I was struck by the question: NEWspaper in New Orleans. Last May, it ran a
why was all of this such a revelation to me? Page-one article headlined “Crawfish peelers
I almost never encountered even cheap imita- losers in trade war” Crawfish are a favored
tions of these writers in any newspaper— Source of protein in Louisiana. In the short

including “conservative” newspapers. season—roughly March through April—

restaurants and markets sell them freshly
ee ~~ boiled, with shells on. During the entire year,
John Landrum, a graduate of Georgetown University  qt1eq and restaurants buy them shelled and
Law Center and a former attorney, is in management fr for inclusion i d st F
at a New Orleans manufacturing company. He is the ozen Or Inclusion m Sauces and stews. ror
author of Out of Court: How to Protect Your Busi- this market, crawfish peelers remove the
ness From Litigation (Headwaters Press, 1992). shells by hand.

23


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

24 THE FREEMAN/IDEAS ON LIBERTY ® MAY 1999

The Times-Picayune explained that in the by hijacking truckloads of peeled crawfish—
past few years Chinese exporters have begun or better yet, blowing up roads and bridges.
to produce and peel crawfish in large quanti- I mentioned that confusion of these objec-
ties and sell them in Louisiana. Chinese tives underlay opposition to free trade. Pro-
prices are considerably lower than local ones, tectionists assume that foreign producers’
presumably because of the lower cost of labor success can only come at the expense of local
in China. jobs in the mistaken belief that economics is a

The article made clear that peeling crawfish zero-sum game; they fail to recognize that
is one of the least desirable jobs imaginable, trade and innovation create new wealth, with
with low wages, unpleasant conditions, utter attendant new capacity and demand.
monotony, unpredictable demand for work, I concluded with the observation—which
and frequent hand lacerations and abrasions. the Times-Picayune omitted—that the front
Nevertheless, the article called local peelers page of the same edition had a long article
“the latest victims in the trade war with celebrating the lowest unemployment in a
China.” The federal government had slappeda long time.

tariff on Chinese crawfish imports, but I was motivated by principle, but I did fall
according to the newspaper, that was not prey to something of a stunt. One paragraph
enough to create a “level playing field.” near the end of my letter stated: “Protecting

Local buyers were interviewed about the uncompetitive, labor-intensive industries is a
seeming ethical dilemma posed by the losing game. Bangladesh promotes jute pro-
prospect of putting local workers out of jobs duction because it creates so many jobs, even
by buying the cheaper foreign crawfish. In though alternative materials made jute uneco-
reading the article, I could imagine readers nomical long ago. Bangladesh is not my idea
writing angry letters to their congressmen of a good economic model to follow.”

urging stronger action against the insidious My motive was to hit the “street smart,”
Chinese. practical reader who would not easily be

swayed by Bastiat’s logic. My source was PJ.
Stealing Bastiat O’Rourke’s All the Trouble in the World—a

must-read for anyone interested in an effec-
After reading Bastiat’s Economic Sophisms tive challenge to people who want you to
one time through, I knew the rebuttals to the worry.
philosophical arguments implicit in the arti- Like Shakespeare, very little of my content
cle. My letter to the editor quoted the news is original.
article’s salient passages, then stated that we
are no more “at war” with crawfish peelers
from China than we are with wheat growers A Better App roach
from Kansas, poultry men from Arkansas, Read, or re-read, Bastiat’s Economic
cattlemen from Texas, automakers from Sophisms. You’ll get the clear impression that
Detroit, or anyone else who produces the the author is having a marvelous time—luxu-
things we need more cheaply than we can pro-  riating in the falsehoods of protectionists, like
duce them ourselves. In the same way, should a porpoise sporting in the surf. The wonderful
a French pharmaceutical company discover a thing about the free-trade controversy is that
low-cost cure for cancer, we would not be at the potential opportunities for reductio ad
war with the French, even though the cure absurdum are unlimited.
might “threaten” the local cancer-treatment After the Times-Picayune published my let-
industry. ter, it occurred to me that my article could
Still following Bastiat, I argued that the have included an entirely different approach.
purpose of an economy is to create an abun- Namely, if it is a good idea for Congress to
dance of the things we need and want, rather protect Louisiana crawfish peelers, what
than to create jobs. If the essential point were American producers is it not a good tdea for
to create jobs, then I could help the economy them to protect? (I suppose that we could


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

FIGHTING BACK 25

spare uncompetitive foreign imports, since then logically it should enrich us most to pre-
presumably no local producers would lose vent us from buying from anyone—to legis-
business to them.) late that we have to meet all of our own needs
And if protecting American producers from ourselves. We would certainly have full
all foreign competition helps the U.S. econo- employment.
my, then it should also be true that in each of But as countless free-market advocates
the 50 states, protecting in-state producers have pointed out, the total elimination of spe-
from out-of-state competition would help the cialization would also restore us to the eco-
state economy. That is, Arkansans as a class nomic condition of savages.
would presumably be richer if they could only This approach would have been a good line
buy from fellow Arkansans; Texans as a class to pursue. I haven’t seen any articles with a
would be richer if they only bought Texas- protectionist slant in the Times-Picayune
produced goods and services; and so on. since the crawfish feature and began to
And if protecting in-state businesses from despair of a chance to try it. Then last fall,
out-of-state competition would enrich each USA Today offered a debate between its edi-
state, then it would stand to reason that a law tor arguing against protection (thank good-
requiring each of us to buy only from vendors ness!) and a steel industry spokesman trying
located in our own counties would only com- to “protect American jobs.” I mailed the let-
pound the positive effect—necessitating a ter immediately.

local producer for everything that we need. Any Freeman reader can do what I’ve done.
And if it would enrich everyone to insist I encourage you all to try it.
that we buy from inside our home counties, See you in the papers. O

Economic Sophisms
by Frederic Bastiat

First published more than 150 years ago, these
essays have come to be recognized as among the
most persuasive refutations of the major fallacies of
protectionism—fallacies that are still with us today
and that will continue to crop up as long as the
public remains uninstructed: “The introduction of
machinery means fewer jobs”; “Protective tariffs
keep domestic wages high”; “We need laws to equalize the conditions of pro-
duction”; “Imports must be restricted to restore the balance of trade”; “High
prices mean a high standard of living”; “There are no economic laws or
absolute principles”; “Free trade places us at the mercy of our enemies in case
of war”; and so on. The great lesson that all these essays teach, in one form or
another, is the necessity of always looking at economic questions from the
point of view of the consumer, rather than that of the producer. Sophisms con-
tains the brilliant “Petition of the Candlemakers” (a parody of special-interest
group pleading), as well as such gems as “The Negative Railroad” and “The
Physiology of Plunder.” This edition also contains an introduction by Bastiat’s
great admirer Henry Hazlitt.

291 pages, paperback $7.95



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

The Therapeutic State by Thomas Szasz

Gullible Skeptics

“. .. the reason why liberty, of which we Americans
talk so much, is a good thing is that it means leaving
people to live out their own lives in their own way,
while we do the same. If we believe
in liberty, as an American principle,
why do we not stand by it?”

—WILLIAM GRAHAM SUMNER (1840-1910)

ebster’s defines a skeptic as “one who most educated people doubt what they regard

doubts . . . a person marked by skepti- as false claims, they do not call themselves
cism regarding religion or religious princi- “skeptics.” Most self-styled or professional
ples.” Similarly, the Oxford English Dictio- skeptics (Skeptics) are not only obsessed with
nary states that a sceptic is “One who doubts agitating against what they regard as false
the validity of what claims to be knowledge in religious claims but also act as if such doubt-
some particular department of inquiry (e.g., ing were a daring, modern attitude.
metaphysics, theology, natural science, etc); Actually, skepticism about religion is as old
... an unbeliever in Christianity, infidel.” as religion itself. Adherence to religion A

Webster’s and the OED both emphasize that implies skepticism about religion B, and vice
skeptics are likely to be especially skeptical versa. Since the Enlightenment, the debunk-
about matters pertaining to religion. Why ing of religion, especially Christianity, has
should this be so? Because skeptics, like most been a veritable growth industry. Neverthe-
Americans, think they love liberty and seek to less, religious belief remains widespread. In
“liberate” people from what they regard as the United States, support for religious belief
“religious oppression.” However, as the OED as “truth” and as a political agenda is associ-
also states, a skeptic is a person who is skep- ated with the so-called Christian Right.
tical about “some particular department of Skeptics are best viewed as the Christian
inquiry”—hence, he may not be skeptical Rights dialogic partners and political adver-
about some other department of inquiry. saries. By targeting the Religious Right, the
Indeed, we could not go through life without Skeptics ally themselves—sometimes tacitly,
being unskeptical about many things, accept- often explicitly—with the Psychiatric Left.
ing them on “faith value”—for example, that The result is that Skeptics are among the lead-
diabetes is better treated with insulin than ing supporters of the dominant “religious”
with aspirin. fraud and oppression of our age, Psychiatry.

I want to show that although contemporary The United States has a National Institute
skeptics pride themselves on disbelieving the of Mental Health, but it has no National Insti-
theology of traditional religions, most of them tute of Religion. Every state has mental health
ardently believe the theology of the Therapeu- laws, but none has religious health laws;
tic State—the alliance of Medicine and the indeed, none has physical health laws. Each
State—epitomized by Psychiatry. Although year, hundreds of thousands of Americans are
ee deprived of liberty on psychiatric grounds;
Thomas Szasz, M.D., professor of psychiatry emeritus oot a single American is deprived of liberty on
at SUNY Health Science Center in Syracuse, New oo. . .
York, is the author of many books including The religious grounds. I will not belabor my view

Myth of Mental Illness and the forthcoming Fatal that mental illnesses, like ghosts, arc non-
Freedom. existent entities and that psychiatry, like slav-

26



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

27

ery, rests on the state-sanctioned coercion of beliefs or the differences between consensual
innocent individuals. and coercive actions?

Persons engage in actions. There is no psy- Psychiatry is an instrument of the coercive
chiatry without psychiatric acts: the paradig- apparatus of the state. Separate Psychiatry
matic psychiatric acts are civil commitment and the State, and Psychiatry as we know it
and the insanity defense, both euphemisms would melt like snow under the hot sun. Skep-
for depriving people of liberty. Civil commit- ticism about psychiatry would then become as
ment is preventive detention of the innocent. politically correct as skepticism about reli-
The insanity defense or, more precisely, the gion is now.

insanity disposition, is the punitive detention Consider the contrast between freedom of
of criminals classified as “mentally ill” in religion and unfreedom from psychiatry.
prisons called “mental hospitals.” Religion as false belief—religious relations

One need not be a devout skeptic to doubt between consenting adults—harms no one,
that John W. Hinckley, Jr., is really innocent of except possibly the believer, who “deserves”
attempting to assassinate President Reagan to be helped or harmed by the exercise of
(although such is his official “diagnosis”) or his free choice of self-regarding religious
that he is really being treated for a bona fide conduct. Only Religion as political power—as
illness (in a building “diagnosed” as a hospi- violence against others masquerading as help
tal). I submit that Hinckley’s non-existent ill- (and the use of tax money to support Reli-
ness and psychiatric torture is emblematic of gion)—is dangerous to others. We have no
a large class of phenomena that Skeptics are religious health laws; hence, Religion is not a
not eager to be skeptical about. In the Thera- danger to anyone.
peutic State, the person skeptical about reli- Mutatis mutandis, Psychiatry as false
gion is acclaimed as humane and scientifical- belief—psychiatric relations between con-
ly enlightened, whereas the person skeptical senting adults—harms no one, except possi-
about psychiatry is reviled as a heretic deny- bly the believer, who “deserves” to be helped
ing science and a cruel reactionary to boot. or harmed by the exercise of his free choice of

As there is no psychiatry without psychi- self-regarding psychiatric conduct. Only Psy-
atric acts, so too there is no madness without chiatry as political power (and the use of tax
mad acts. Acts we deem “mad” are either non- money to support Psychiatry)—as violence
criminal, like depression, in which case the against others masquerading as help—is a
Skeptic rationalizes imprisoning the person in danger to others. However stubbornly true
a mental hospital as saving his mind (as the believers in Psychiatry insist that “mental ill-
inquisitors rationalized burning the heretic as ness is like any other illness,” the truth is that
saving his soul); or such acts are criminal, like we have no physical health laws, but we do
murder, in which case the Skeptic basks in have mental health laws. Hence, Psychiatry is
self-approval by demanding that the offender a danger to everyone.
be “treated,” not punished. In short, the Skep- Organized religion qua religion is separated
tic clings to the idea that mental illnesses are from the American State by the Constitution
“real diseases” that the “sufferers” would as well as by custom. Organized psychiatry is
want treated if only they recognized their true not: Religion qua Psychiatry is the danger that
interests. now faces us. It is Psychiatry—not Christian-

Why are so many Skeptics gullible about ity—that is lavishly supported by the State
psychiatry? Mainly, I surmise, because psy- and is empowered to use its coercive appara-
chiatrists tend to support the Skeptics’ claim tus. It is Psychiatry—not Christianity—that is
that religion is an “illusion.” Which raises the the grand deception of our age. It is Psychia-
rhetorical question, Are Skeptics more inter- try—not Christianity—that Skeptics ought to
ested in the differences between true and false unmask, ridicule, condemn, and combat. []


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

FREEMAN

Ideas On Libert

Friedrich A. Hayek:
A Centenary Appreciation

by Richard M. Ebeling

I 1967, English economist Sir John Hicks But by the 1960s, when Hicks wrote the
published an essay titled “The Hayek passage quoted, the general opinion among
Story” in which he said that: economists and policy-makers would have
been almost unanimous. The “New Econom-
When the definitive history of economic ics” of Keynes dominated the economics pro-
analysis during the nineteen thirties comes fession and was the guiding star for macro-
to be written, a leading character in the economic policy. Hayek was only known to
drama (it was quite a drama) will be Pro- those who took an interest in the economic
fessor Hayek. . . . Hayek’s economic writ- ideas of the earlier decades of the twentieth
ings . . . are almost unknown to the modern century. Thirty years later, however, it is
student; it is hardly remembered that there Keynesian economics that is now merely a
was a time when the new theories of Hayek passing episode in the history of economic
were the principal rival of the new theories ideas. And it is Hayek’s ideas in economics,
of Keynes. Which was right, Keynes or political philosophy, social theory, and the
Hayek?! methodology of the human sciences that have
gained increasing attention and relevancy as
In February 1931, Friedrich August von the twentieth century draws to a close.
Hayek had arrived in England from Vienna,
Austria, to deliver a series of lectures at the
London School of Economics. The lectures One War, Two Doctorates
created such excitement and sensation that he On May 8, 1899, FA. Hayek was born in
was invited to permanently join the faculty of Vienna. The occasion of his centenary serves
the LSE.2 In the early fall of 1931 these lec- as an appropriate opportunity to appreciate
tures appeared in book form under the title the man and his contributions to the cause of
Prices and Production and began the “drama” liberty and the free-market economy. Hayek
to which John Hicks referred. Indeed, in the had briefly served in the Austrian Army on the
years between 1931 and 1935, Hayek was the Italian front during World War I. Shortly after
third-most frequently cited economist in the returning from the battlefield in 1918 he
English-language economics journals. (John entered the University of Vienna and earned
Maynard Keynes and his Cambridge Univer- two doctorates, one in jurisprudence in 1921
sity colleague Dennis Robertson came in first and the other in political science in 1923.
and second.)? While at the university, he studied with one of
the founders of the Austrian school of eco-

Richard Ebeling is Ludwig von Mises Professor of nomics, Friedrich von Wieser.
Economics at Hillsdale College. But perhaps the most important intellectual

28



===== PAGE 29 =====

29

influence on his life began in 1921, when he business cycles had their origin in the mis-
met Ludwig von Mises while working for the management of the monetary system. Also, in
Austrian Reparations Commission. It is not 1931-1932, Hayek wrote a lengthy two-part
meant to detract from Hayek’s own contribu- review of Keynes's Treatise on Money for the
tions to suggest that many areas in which he journal Economica. It was considered a defin-
later made his profoundly important mark itive critique of Keynes’s work. The Great
were initially stimulated by the writings of Depression served as the backdrop against
Mises. This is most certainly true of Hayek’s which Hayek explained his own theory and
work in monetary and business-cycle theory, criticized Keynes.

his criticisms of socialism and the interven- Hayek argued that in the 1920s, the Ameri-
tionist state, and in some of his writings on can Federal Reserve System had followed a
the methodology of the social sciences. monetary policy geared toward stabilizing the

In 1923 and 1924, Hayek visited New York general price level. But that decade had been
to learn about the state of economics in the one of major technological innovations and
United States. After he returned to Austria, increases in productivity. If the Federal
Mises helped arrange the founding of the Reserve had not increased the money supply,
Austrian Institute for Business Cycle the prices for goods and services would
Research, with Hayek as the first director. have gently fallen to reflect the increased abil-
Though Hayek initially operated the institute ity of the American economy to produce
with almost no staff and only a modest budget greater quantities of output at lower costs of
primarily funded by the Rockefeller Founda- production.
tion, it was soon recognized as a leading cen- Instead, the Federal Reserve increased the
ter for the study of economic trends and fore- money supply just sufficiently to prevent
casting in central Europe. Hayek and the insti- prices from falling and to create the illusion
tute were frequently asked to prepare studies of economic stability under an apparently sta-
on economic conditions in Austria and central ble price level. But the only way the Fed could
Europe for the League of Nations. When succeed in this task was to increase reserves
Hayek moved to London in September 1931, to the banking system, which then served as
Oskar Morgenstern became the institute’s additional funds lent primarily for investment
director until the Nazi annexation of Austria purposes to the business community. To
in March 1938, when it ceased to operate as attract borrowers to take these funds off the
an independent organization. Beginning in market, interest rates had to be lowered.
1929, Hayek was also a Privatdozent (an Beneath the calm surface of a stable price
unsalaried professor) at the University of level, interest rates had been artificially

Vienna. pushed below real market-clearing levels.
That generated a misdirection of labor and
Hayek and the investment resources into long-term capital

projects that eventually would be revealed as
unsustainable because there was no savings
Hayek remained at the London School of available to complete and maintain them.
Economics until 1949. During that time he The break finally came in 1928 and 1929,
published a large body of work that estab- when the Fed became concerned that prices in
lished his international stature as one of the general were finally beginning to rise. The Fed
leading economists of his time. It was during stopped increasing the money supply, invest-
this period that he became the greatest chal- ment profitability became uncertain, and the
lenger to the emerging New Economics of stock market crashed in October 1929. Hayek
Keynes. In Prices and Production; Monetary argued that the economic downturn that then
Theory and the Trade Cycle (1933); a series of began was the inevitable consequence of the
articles reprinted in 1939 under the title Prof~ investment distortions caused by the earlier
its, Interest and Investment; and The Pure monetary inflation. A return to economic bal-
Theory of Capital (1941), Hayek argued that ance required a writing down of unprofitable

Great Depression


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

30 THE FREEMAN/IDEAS ON LIBERTY ¢ MAY 1999

capital investments, a downward adjustment ist Commonwealth.” For the volume, Hayek
of wages and prices, and a reallocation of wrote an introduction summarizing the histo-
labor and other resources to uses reflecting ry of the question of whether socialist central
actual supply and demand in the market. planning could work and a concluding chap-
But the political and ideological climate of ter on “the present state of the debate” in
the 1930s was one increasingly dominated by which he challenged many of the newer argu-
collectivist and interventionist ideas. Govern- ments in support of planning. This was fol-
ments in Europe as well as the United States lowed by a series of articles over the next sev-
did everything in their power to resist these eral years on the same theme: “Economics
required market adjustments. Business inter- and Knowledge” (1937), “Socialist Calcula-
ests as well as trade unions called for protec- tion: The Competitive ‘Solution’” (1940),
tion from foreign competition and govern- “The Use of Knowledge in Society” (1945),
ment support of various types to keep prices and “The Meaning of Competition” (1946).
and wages at their artificial inflationary levels. Along with other writings, they were pub-
International trade collapsed, industrial out- lished in a volume with the title Individualism
put fell dramatically, and unemployment and Economic Order (1948).5
increased and became permanent for many of In this work Hayek emphasized that the
those now out of work. division of labor has a counterpart: the divi-
Throughout the 1930s Keynes presented sion of knowledge. Each individual comes to
arguments to justify activist monetary and fis- possess specialized and local knowledge in
cal policies to try to overcome the imbalances his corner of the division of labor that he
the earlier monetary manipulation and inter- alone may fully understand and appreciate
ventions had created. This culminated in his how to use. Yet if all of these bits of special-
1936 book, The General Theory of Employ- ized knowledge are to serve everyone in soci-
ment, Interest and Money, which soon ety, some method must exist to coordinate the
became the bible of a new macroeconomics activities of all these interdependent partici-
that claimed that capitalism was inherently pants in the market. The market’s solution to
unstable and could only be saved through this problem, Hayek argued, was the compet-
government “aggregate demand manage- itive price system. Prices not only served as
ment.” Hayek and other critics of Keynesian an incentive to stimulate work and effort, they
economics were rapidly swept away in the also informed individuals about opportunities
euphoric belief that government had the worth pursuing. Hayek clearly and concisely
ability to demand-manage a return to full explained this in “The Use of Knowledge in

employment. Society”:
But while seemingly “defeated” in the area

of macroeconomics, Hayek realized that what We must look at the price system as such a
was at stake was the wider question of mechanism for communicating informa-
whether in fact government had the wisdom tion if we want to understand its real func-
and ability to successfully plan an economy. tion. . . . The most significant fact about
This also led him to ask profoundly important this system is the economy of knowledge
questions about how markets successfully with which it operates, or how little the
function and what institutions are essential for individual participants need to know in
economic coordination to be possible in a order to be able to take the right action.

complex system of division of labor.

In elaborating his point, Hayek wrote that
“The marvel is that in a case like that of a
scarcity of one raw material, without an order

In 1935, Hayek edited a collection of essays being issued, without more than perhaps a
titled Collectivist Economic Planning, which handful of people knowing the cause, tens of
included a translation of Mises’s famous 1920 thousands of people whose identity could not
article, “Economic Calculation in the Social- be ascertained by months of investigation, are

Debunking Central Planning



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

FRIEDRICH A. HAYEK: A CENTENARY APPRECIATION 31

made to use the material or its products more result of human action, but not the execution
sparingly.”” of any human design.” In developing this
Hayek added: “I am convinced that if it [the idea, Hayek consciously took up the task of
price system] were the result of deliberate extending and improving the notion of the
human design, and if the people guided by the “invisible hand” as first formulated by Adam
price changes understood that their decisions Smith in The Wealth of Nations and refined in
have significance far beyond their immediate the nineteenth century by Carl Menger, the
aim, this mechanism would have been founder of the Austrian school of economics.!0
acclaimed as one of the greatest triumphs of Hayek argued that many forms of social
the human mind.””8 interaction are coordinated through institu-
It was in this period that Hayek applied his tions that at one level are unplanned and are
thinking about central planning to current part of a wider “spontaneous order” Lan-
politics. In 1944 he published what became guage, customs, traditions, rules of conduct,
his most famous book, The Road to Serfdom, and exchange relationships have all to a large
in which he warned of the danger of tyranny extent evolved and developed without any
that inevitably results from government con- conscious design guiding them. Yet without
trol of economic decision-making through such unplanned rules and institutions, society
central planning. His message was clear: would have found it impossible to progress
Nazism and fascism were not the only threats beyond a rather primitive level.
to liberty. The little book was condensed in Another way of expressing this is that in
Readers Digest and read by millions. Hayek’s view, the unique characteristic of an
In 1949 Hayek moved to the United States advanced civilization is that no one mind (or
and took a position at the University of Chica- group of minds) controls or directs it. In a
go in 1950 as professor of social and moral small tribal society all members often share
science. He remained there until 1962, when basically one scale of values and preferences;
he returned to Europe, where he held posi- the chief or leader can know the potentialities
tions at various times at the University of of each member and can assign roles and
Freiburg in West Germany and the University duties so that the tribe’s physical and mental

of Salzburg in Austria. means can be applied more or less successful-
ly to the common hierarchy of ends.
Undesigned Order However, once the group passes beyond a

simple level of development, any further
The realization that something so signifi- social progress will require radical revision of
cant—the price system—was undesigned and the social rules and order: the complexity of
not intended to serve the purpose it serves so social and economic activity will make it
well became the centerpiece of Hayek’s writ- impossible for any individual to master the
ings for the rest of his life. He developed the information necessary to coordinating the
idea in several directions in another series of members of the group. Nor will the members
works, including, The Counter-Revolution of continue to agree on preferences and values;
Science (1952); The Constitution of Liberty their actions and interests will become more
(1960); Law, Legislation and Liberty in three diverse.
volumes (1973-1979); in various essays col- An advanced society, therefore, must
lected in Studies in Philosophy, Politics and always be a “planless” society, that is, a soci-
Economics (1967) and New Studies in Philos- ety in which no one overall “plan” is superim-
ophy, Politics, Economics and the History of posed over the actions and plans of the indi-
Ideas (1978); and in his final work, The Fatal viduals making up the society. Instead, civi-
Conceit: The Errors of Socialism (1988). lization is by necessity a “spontaneous order,”
His underlying theme was that most institu- in which the participants use their own special
tions in society and the rules of interpersonal knowledge and pursue their own individually
conduct are, as the eighteenth-century Scottish chosen plans without a higher will or mind
philosopher Adam Ferguson expressed it, “the guiding them.


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

32 THE FREEMAN/IDEAS ON LIBERTY ¢ MAY 1999

“Social Justice” fare-state economist Gunnar Myrdal). In
: _ . explaining its reasons for choosing Hayek for
The very complexity that makes it impossi- this highest of awards, the Nobel Committee
ble to know all the information required to grew especial attention to his contributions to
guide society, Hayek reasoned, makes it monetary and business-cycle theory and to
equally impossible to judge the “justice” or hig work on alternative economic systems.
“worthiness” of an individual’s total actions. By the time Hayek died on March 23, 1992,
As a result, the popular call for “social,” or 4 the age of 91, an answer could finally and
“distributive,” justice is inapplicable in a free clearly be given to Sir John Hicks’s question:
society. Social justice requires not merely that «who was right, Hayek or Keynes?” Hayek

individuals receive what is rightly theirs ino right, regarding both Keynesianism and
general terms, but that individuals and groups i ialism.

also receive some stipulated distributional And thanks to his ideas, the 21st century

be 9,
share of the society’ total output or wealth. may very well be a freer and more prosperous
However, Hayek showed that in the market place to live.
economy, distributions of income are not
based on some standard of “deservedness,” 1. Sir John Hicks, “The Hayek Story,” in Critical Essays in Mon-
: rndivid. etary Theory (Oxford: Oxford University Press, 1967), p. 203.
but rather on the degree to which the individ 2. Lord Robbins, Autobiography of an Economist (New York: St.
ual has directly or indirectly satisfied con- Martin's Press, 1971), p. 127.
thi 3. Brian Snowdon and Howard R. Vane, “The Development of
Sumer demand within the general rules of Modem Macroeconomics,” in Brian Snowdon and Howard R. Vane,
individual rights and property. eds, A Macroeconomic Reader (New York: Routledge, 1997),
fot : pp. 4-5.
« To attempt fo distribute income shares by 4. Hayek's review essay of Keynes’s Treatise on Money as well
deservedness” would require the government as Keynes's reply are reprinted in Bruce Caldwell, ed., The Collect-
: : ed Works of F. A. Hayek, Vol. 9: Contra Keynes and Cambridge
to establish some . overarching standard for (Chicago: University of Chicago Press, 1995). See also my review of
disbursing “social justice,” and would neces- this volume in Freedom Daily, September 1995, pp. 43-48.

] : : : _ 5. Hayek’s two contributions to Collectivist Economic Planning,
Sitate an economic system in which that gov his 1940 essay “Socialist Calculation: The Competitive ‘Solution,’”
ernment had the authority and the power tO and other related essays by him on the theme of socialism and plan-
: : : ’ ning have been reprinted in Bruce Caldwell, ed., The Collected
Investigate, measure, and judge each person's Works of F. A. Hayek, Vol. 10: Socialism and War (Chicago: Uni-

right” to a share of the society’s wealth. versity of Chicago Press, 1997). See also my review of this volume

in Freedom Daily, January 1998, pp. 43-48.
Hayek suggested that such a system would 6. F.A. Hayek, “The Use of Knowledge in Society” (1945), in
involve a return to the mentality and the rules Individualism and Economic Order (Chicago: University of Chicago
of a tribal society: government would reim- Pre dort.
pose a single hierarchy of ends and would 8. Ibid.
decide what each member should have and 9. See Hayek's essay, “The Result of Human Action But Not of
. ) Human Design” in Studies in Philosophy, Politics and Economics
what should be expected from him in return. (Chicago: University of Chicago Press, 1967), pp. 96-105.
10. Carl Menger, “The Theoretical Understanding of Those
It would mean the end of the free and open Social Phenomena which are not a Product of Agreement or of Pos-
society. itive Legislation, but are Unintended Results of Historical Develop-
ment,” [1883], in Richard M. Ebeling, ed., Austrian Economics:
In October 1974, Hayek won the Nobel Jp Lo Hillsdale, Mich. Hillsdale College Press, 1991).
Prize in economics (along with Swedish wel- pp. 183-211.



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

Regan

The New Money

by George C. Leef

y now you have probably received and among the easiest of all currencies to counter-
spent some of the U.S. Treasurys new feit. It had remained unchanged since 1929,
currency. Starting with the hundred-dollar bill giving counterfeiters a lot of time to hone
in 1996, the Treasury has redesigned all three their skills. Moreover, scanners and laser
of our larger denomination bills, and plans to printers can do a very good job of reproduc-
redesign the smaller bills in the future. Trea- ing the old bills. Other nations have updated
sury Secretary Robert Rubin, on release of their currency over the decades. The Aus-
the new twenty-dollar bill in 1998, said that tralians, for example, produce their currency
each new bill “marks a new stage in the gov- on plastic with clear windows, making coun-
ernment’s assault on would-be counterfeiters.” terfeiting difficult. But the old U.S. bills relied
The new money certainly does contain an on what was the state of the art in 1929. So
impressive array of features that seem to even if the new bills are hard to counterfeit,
make it more difficult for anyone to produce a there currently isn’t any need to try.
bill that would pass careful inspection: color- Edward J. Green and Warren E. Weber,
shifting ink; security threads; microprinting; economists with the Federal Reserve Bank of
fine line printing patterns; larger, more Minneapolis, sought to evaluate the prospects
detailed portraits; and other security features for success of the Treasury’s policy of printing
designed to foil counterfeiters. new bills, but honoring the old and only grad-

While the new currency is being put into cir- ually removing them from circulation in “Will
culation, the old will not be recalled. A reason, the New $100 Bill Decrease Counterfeiting?”
if not the reason, for not recalling the old cur- (Federal Reserve Bank of Minneapolis Quar-
rency is that so much of it is abroad. Upwards terly Review, Summer 1996). After a sophisti-
of two-thirds of all U.S. currency is held in for- cated analysis, they conclude that they can’t
eign countries, and the Treasury feared disrup- say: “Although we do not show that the cur-
tion of those economies if the old money were rent policy will necessarily be effective in the
declared to be invalid as of a certain date. So near term, we do show that a long-term failure
the old currency will continue in circulation cannot be taken for granted.” As federal pro-
alongside the new for years to come. grams go, that is actually not too bad.

This has led some people to question
whether the introduction of new bills will
really do much to defeat counterfeiting. The
old U.S. currency, according to experts, was People, including government officials,

generally act in accordance with their incen-
George Leef is the book review editor of The Free- tives. Where they stand to make a significant
man. gain (or avert a significant loss) from taking

33

A Question of Incentives


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

34 THE FREEMAN/IDEAS ON LIBERTY May 1999

action, they can be counted on to do so. As retail clerks, vendors, and others who handle
public choice economists have been saying a lot of money, you conclude that the optimal
for a long time, we should not expect that gov- level of precaution is very low indeed. They
ernment officials will do things just because rarely examine the money they receive with
they are in “the public interest.” The interests any care.
of the state do not often coincide with the The new currency has features that make it
interests of the ordinary citizen. Counterfeit- possible for the average person to tell a real
ing is a species of fraud and should be illegal. bill from a high-quality counterfeit with a
But government officials devote their efforts good deal of certainty. Listen to Secretary
and resources to fighting the crimes that do Rubin: “If you tilt the note back and forth,
them the most good. you will see the color-shifting ink change
If violent crimes are on the increase, politi- from green to black, and back again. And by
cians take notice and will at least take some holding the note up to the light, you will see a
grandstanding measures so that opponents watermark on the right, and a security thread
won’t accuse them of being “soft on crime.” If on the far left with its own tiny lettering and
tax evasion is on the increase, politicians will graphics. These are simple things each and
really take notice, since tax evasion reduces every one of us can and should do.” Sure, but
their ability to spend money on the programs how many money-handlers are going to take
that voters like (or at least think they like). the time to look for those features unless a bill
Counterfeiting, however, does not have much is printed badly enough to arouse suspicion?
impact. Competition in the production of

money is definitely not welcome, but if the Private Enterprise

unlucky citizen occasionally gets stuck with a ore
bogus twenty-dollar bill, the loss is his, The YEFsus Counterfeiting

political incentive to combat counterfeiting The problem of counterfeiting is not unique
isn’t very strong compared to other goals and to government currency. Businesses stand to
it should not surprise us that it has not been a lose money if people are able to counterfeit
high priority. their products, and for that reason have a
Furthermore, we may wonder if the attack strong incentive to search for the most cost-
on counterfeiting won’t turn out to be more a effective means to prevent or detect counter-
matter of bravado than of effect. Printing the feits. Consider, for example, the credit card
new bills may deter some counterfeiters who industry.
conclude that it is too costly to produce new When bank credit cards were first intro-
bills that will pass, but it is not going to keep duced in the early 1970s, the issuers suffered
creative people who want to augment their large losses due to counterfeiting. It was easy
incomes from trying to make and pass bills. for criminals to create and use phony plastic
In fact, shortly after the introduction of the cards. The resulting losses were not diffused
new twenty-dollar bill, I read an article in my among the general public, but were felt by the
local newspaper about an unsuccessful card issuers, who realized that they had to find
attempt to pass a very poor counterfeit bill. It a solution.
was two sheets that had been copied and The solution was the hologram. Master-
glued together—upside down! A store clerk Card pioneered the use of holograms in 1983
easily identified the bill as a fake. and since then they have become almost ubig-
Store owners and everyone else taking uitous. Because hologram technology was not
money in exchange for valuable goods and widely dispersed, this innovation dramatically
services have a strong incentive to see to it reduced the amount of fraud through counter-
that they are paid with genuine money (or feiting.
checks or credit cards). They will take what However, just as offense tends to catch up
they believe to be the optimal degree of pre- to defense and vice versa in war, eventually
caution against accepting counterfeits, and if criminals found out how to produce them and
you observe the behavior of bank tellers, get back into the card fraud game. But the



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

THE NEW MONEY 35

card issuers, with a constant eye on the bot- problem of stability of value. Money issuers,
tom line, continue to work to minimize losses. private and governmental, would have a
Some cards now bear a photo identification, strong incentive to maintain the value of their
and cardholders are also required to confirm money if they faced competition in the mone-
receipt of new or replacement cards via tele- tary marketplace. Depreciating money would
phone, which has proved effective in cutting be as undesirable as foodstuffs that rapidly
down on theft. rotted. Subjected to the test of the market-
Counterfeit software is also a financial place, good money would drive out bad
problem for software makers. The new Win- money. (No, that is not contrary to Gresham’s
dows 98 booklet has an elaborately printed Law, which says that artificially overvalued
certificate of authenticity and says in fine money tends to drive out of circulation artifi-
print: “IS IT GENUINE? If you believe this cially undervalued money; in a free monetary
certificate or the software you obtained with market, government cannot artificially over-
your system is not legally licensed and/or may value anything.)
be counterfeit, please e-mail Microsoft at A good side effect of monetary competi-
piracy@microsoft.com.” It is safe to conclude tion, however, would be that it would also
that Bill Gates has his executives constantly bring into play the market’s incentives to
on the lookout for the most effective means of combat counterfeiting. Private issuers would
dealing with software counterfeiting. compete In many respects, among them the
Yes, credit cards, computer software, and reliability of their products. The firms that
many other items continue to be counterfeited, have already ventured into the realm of elec-
as does our money, old and new. The key dif- tronic money (e-cash) have taken pains to
ference is in the incentives of the people assure customers that accounts will be secure.
responsible. While business people who stand Producers of tangible money would have the
to lose money are always alert to the problem of same strong incentive to see to it that their
counterfeiting and thus search for the optimal users had confidence in the genuineness and
methods to deter it, government officials do not worth of their money.
have such a direct, powerful incentive. After We are used to thinking that the production
doing nothing innovative for decades, the Trea- of money is one of the core functions of gov-
sury has come up with an anti-counterfeiting ernment, but there is no reason why the pro-
program about which the best that can be said duction of money must be a governmental
is, to repeat Green and Weber, “its failure can- monopoly, or even a governmental function at
not be taken for granted.” all. There were private money producers—
mints—in operation in America during the
colonial period and also well into the nine-
teenth century. They had to pass the test of the
Back in 1976, the Nobel laureate economist market, unlike federal mints, and when they
E A. Hayek published a provocative essay did so, they thrived. (For an interesting histo-
entitled “The Denationalization of Money.” ry, see Brian Summers, “Private Coinage in
He argued that it was a grave mistake to America,” The Freeman, July 1976.)
allow governments a monopoly on money Marketplace competition provides the opti-
and that we should do away with legal tender mal incentives for maximizing consumer wel-
laws and permit individuals to trade in what- fare—giving people the greatest value for
ever media of exchange they think best. their money. That applies to money itself. The
His reason for advocating this idea was not next time you receive some money, hew or
the problem of counterfeiting, but rather the old, you might think about that. 0

Private Money?


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

FREEMAN

deas On Libert

Gold Policy in the 1930s

by Richard H. Timberlake

etween 1929 and 1933, the Federal Failure in other aspects of human endeavor
Reserve System, which is the central often generates learning that subsequently
bank of the United States, monetarily starved leads to correction and eventual success.!
the country into the worst economic crisis it Federal Reserve policy failure in 1929-1933,
has ever experienced. Markets, and the mar- however, led only to federal legislation that
ket system generally, did not fail, and nothing increased the number and power of federal
was inevitable about the collapse that government agencies. The Republican Hoover
occurred. Rather, the monetary system was so administration, for example, initiated the
mismanaged that even a healthy and vigorous expensive Reconstruction Finance Corpora-
market system could not correct the disequi- tion in 1932 to carry out lending policies that
librium that resulted. the elaborately structured Federal Reserve
The popular application of “market failure” System had failed to undertake. The Roo-
to describe the economy during the years of sevelt administration then took control of the
the Great Contraction, 1929-1933, is wrong. political machinery in 1933 and began a pro-
Market actions in that era made the political- gram of federal intervention and bureaucratic
ly inspired crisis less severe than it otherwise propagation that is mind-boggling even today.
would have been. Furthermore, “market fail- Two items of Roosevelt-era legislation
ure” is a term people often apply to events markedly affected the U.S. banking and mon-
when they cannot understand the complexities etary system. The first was the so-called Gold
of economic processes that result from ill- Reserve Act of 1934. This legislation gave the
conceived government policies. The opera- president the unconstitutional power to call in
tions of just about any monetary system, and all privately owned gold for deposit in the
especially one with a central bank, are always U.S. Treasury. It also gave him the unconstitu-
puzzling to the layman. Consequently, when tional power by his fiat to revalue the price of
things go wrong owing to monetary misman- gold (devalue the dollar) by as much as 60
agement by central bankers or some other percent.

political intervention, the instigators can ring Congress’s constitutional power to “regu-
in “market failure” as an excuse for their per- late the value of money” was a power that
sonal failures to make the right decisions. could not be delegated to the executive. Fur-

thermore, “regulate” did not mean a massive

E—— change in the monetary values of either gold
Richard Timberlake is a professor of economics

or silver. Its sole was to provide
retired from the University of Georgia and author of ° sol DD 5 as k pro a
Monetary Policy in the United States: An Intellectu- means Ior congressional housekeeping con-

al and Institutional History (University of Chicago trol over the coinage system. Properly used,
Press, 1993). This is the second in a series. it allowed Congress to make incremental

36



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

37

changes in the legal tender value of either the government’s bills, it does so by creating
gold or silver so that both metals would stay money. This new money is either commercial
in circulation. It was put into the Constitution bank reserves or Federal Reserve note curren-
to counteract Gresham’s Law. Otherwise, cy. Clearly, if a 12-person board is determin-
changes in the market value of one or the ing the quantity of money that exists, the
other metal would result in what had now quantity of gold in the system has little or
become the cheaper metal going to the mint nothing to do with the money. Either a gold
and the other, dearer, metal going into the standard specifies the quantity of money in

markets as a commodity.2 the economy, or a central bank does. A mar-
riage of the two never lasts longer than an
A New Central unhappy weekend.

The Gold Reserve Act of 1934 was the final
divorce decree between gold and the mone-

The other piece of legislation, the Banking tary system. After January 31, 1934, no pri-
Act of 1935, was more momentous than the vate household, bank, or business was
original Federal Reserve Act passed in 1913. allowed to own or hold more than a trivial
In fact, the Act of 1935 might better have been amount of gold. Gold coin was forbidden for
labeled “The Central Banking Act of 1935,” monetary purposes. This Act also authorized
because it virtually rewrote the earlier Act. the president, Franklin Roosevelt, to raise the

A central bank, like a gold standard, can price of gold by 60 percent. Roosevelt, how-
assume many institutional forms that differ ever, did not use all the power given him—
markedly from one another. The 1913 Fed only 98 percent of it. In early 1934, he
Banks, for example, were regionally auto- increased the official mint price of gold,
nomous; the Board in Washington was rela- which had been $20.67 per ounce for 100
tively powerless. Board members were treated years, to $35 per ounce. The Treasury gold
and paid on a scale similar to government stock, valued at $4,033 million in January
employees in the U.S. Treasury, while the 1934, became $7,348 million in February
presidents of the regional Fed Banks com- 1934, an increase of $3,405 million by the
manded salaries comparable to those of exec- decree of one man.3 The federal government
utives heading major corporations. The Fed had also, unconstitutionally, repudiated all
Banks’ gold reserves severely restricted their gold clauses in its contracts and debts, so it
lending policies, as was proper under an oper- did not have to share any of its newfound
ational gold standard. Finally, the real bills wealth with the private sector. In one month
doctrine was supposed to furnish the grounds Congress and Roosevelt, by their legislative
for Fed Banks’ accommodation of credit to and administrative fiats, created seigniorage
their client member banks. revenue from gold equal to one year’s ordi-

The Banking Act of 1935 changed the nary tax revenues. In contrast, the federal
whole paraphernalia of monetary control. It government of 1834-1837, when it realized
vested the Federal Open Market Committee one year’s extraordinary revenue from land
(FOMC) with complete discretionary control sales, returned that surplus to the state gov-
to determine the stock of money in the United ernments to be used or distributed as those
States. Regional Fed Bank presidents still had sovereign governments saw fit.4
five of the 12 seats on the FOMC, but the President Roosevelt rationalized this
Board was now a seven-man majority. From usurpation of private property rights in gold
that time on, the FOMC has fashioned mone- in one of his notorious fireside chats. “Since
tary policy by authorizing the purchase (or there was not enough gold to pay all holders
sale) of U.S. government securities in the of gold obligations,” he claimed, “the Gov-
open market, an operation that the Fed Bank ernment should in the interest of justice allow
of New York conducts week by week. none to be paid in gold.”s

When the FOMC buys the U.S. securities This rationalization of government confis-
that the Treasury has previously sold to pay cation was fatuous pretension. Gold in banks

Banking Measure


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

38 THE FREEMAN/IDEAS ON LIBERTY ® MAY 1999

was then and had always been a fractional The Treasury in Control—

reserve against outstanding obligations. When
the banks were on their own, they had ade- The Fed Plays Ball

quate means to protect their reserves—gold, With all of the new gold coming into the
silver, or other legal tender. The Fed Banks system, the FOMC did not need to use its
and the U.S. Treasury—government institu- newly legislated powers. From 1933 to 1936,
tions—also held only fractional reserves the M2 money stock grew at annual rates of
against their outstanding currencies. Use of 9.5, 14.0, and 13.0 percent. In fact, so much
gold as a recognized fractional reserve always gold was coming into the Fed-Treasury’s cof-
precluded immediate liquidation of all mone- fers that sentiment in both the Fed and Trea-
tary obligations into gold. So in effect Roo- sury leaned toward monetary restriction.
sevelt was saying, “Since there was not The Fed had active hands-on control of
enough gold to pay all holders of gold obliga- monetary policy. Not only did it have the
tions, . . . the federal government should power to initiate open-market operations in
expropriate and keep all of the gold.” government securities through the FOMC, but
The increase in the dollar price of gold, the Banking Act of 1935 also gave the Fed
though other countries had gone off the gold Board extensive control over member bank
standard or had also raised the price of gold in reserve requirements. Prior to the Banking
their own currencies, started a massive inflow Act, reserve requirements were statutory at 7,
of gold to the United States. Political appre- 10, and 13 percent—not based on the size of
hension in Europe and elsewhere also con- the bank, but on the size of the city in which
tributed to the U.S. accumulation. By 1940 the the bank was located. The larger the city the
U.S. gold stock totaled $20 billion, or almost higher the legal reserve requirement.” The
20,000 tons! The contrast was notable between Banking Act of 1935 used the existing set of
a government awash in gold and a depressed reserve requirements as the lower end of a
economy denuded of money and functioning new range of requirements: 7-14, 10-20, and
with a shell-shocked banking system. 13-26 percent. Board of Governors’ decisions
Fed Banks and the Treasury still accounted in Washington were to specify the precise set
new gold coming into the U.S. system as of requirements in force at any time. Thus Fed
though the gold were a monetary asset. The policy could be restrictive by mandating an
Treasury issued “Gold Certificates” —curren- increase in requirements.8
cy notes in $100,000 denominations— Banking Act or not, the Treasury was still
accounted at the new gold price of $35 per very much in the monetary picture. Treasury
ounce, which it “deposited” in Federal Secretary Henry Morgenthau, Jr., had recom-
Reserve Banks. Fed Banks then debited their mended to President Roosevelt the appoint-
“Treasury deposit” liability account, and ment of Marriner Eccles to be chairman of the
credited their “Gold Certificates.” Whoever Federal Reserve Board. Eccles outspokenly
had received a check for the gold from the favored lots of federal spending and fiscal
Treasury, however, had by now deposited that budget deficits. By his stance, he effectively
check in a commercial bank that in turn sent signed over monetary policy to the Treasury.
it to the Fed Bank for clearance. The Fed Bank (Morgenthau had recommended Eccles for
cleared the check against the “Treasury this reason.) The upshot of the arrangement
deposit” account and debited the deposit- was that Morgenthau ran the show. Both men
reserve account of the client bank by the same favored a dominant fiscal policy that had Fed-
amount. No one could get the gold out of the eral Reserve support. Although the new
Treasury, or touch it, or see it, or use it. (It was Banking Act took the secretary of the Trea-
now a criminal act to use gold for monetary sury off the Fed’s Board of Governors (he had
purposes!) Nonetheless, the gold provided an been the ex officio chairman), he now had a
accounting medium for increasing the basic surrogate as chairman. He was more than sat-
money stock of bank reserves and Federal isfied to see his purposes served from behind
Reserve note currency. the throne.


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

GOLD PoLIcy IN THE 1930s 39

Even a surrogate position was not enough Unprecedented Depression
for Morgenthau. The realized seigniorage

from the gold devaluation had given the Trea- However, the rest of the economy, unlike
sury a $2 billion windfall, accounted in an politically prosperous Washington, was mov-
Exchange Stabilization Fund, that the Trea- ing at an unprecedentedly slow rate. Never
sury was supposed to use to “stabilize” the before had a recession-depression been so
dollar price of foreign currencies. The Trea- tenured or so intense. By late 1936 business
sury thus had a gold “position” and license for was picking up, but the price level was still 18
conducting gold policy. percent below its 1929 value, and unemploy-
Federal Reserve policy directed the first ment was still 16 percent of the labor force.
increase (50 percent) in reserve requirements Nonetheless, the great concern in the Trea-
in August 1936—from 7, 10, and 13 percent sury and Federal Reserve was the danger of
to 10%, 15, and 19% percent. A few months inflation! Fed and Treasury officials looked at
later the Treasury initiated its own gold steril- the overhang of excess legal reserves in the
ization policy—the same policy the Fed had banking system and imagined what would
fostered in the 1920s. Its purpose was “to halt happen if the commercial banks expanded all
the inflationary potentialities [sic]” of all those reserves into an avalanche of checkbook
incoming gold. Beginning December 22, money. Monetary mismanagement had just
1936, the Treasury placed its gold purchases provoked the most disastrous hyper-deflation
in an “inactive” account. Instead of issuing in history. Yet, before all the foreclosures had
gold certificates and depositing them in Fed been properly settled, the government’s
Banks to raise the necessary credit balance to monetary managers were contriving to coun-
pay for the gold, the Treasury paid for the teract the inflationary potential that they
gold by selling government securities in had systematically built into the monetary
financial markets. By this means, it carried machinery.
out its own open market operations—sales in Secretary Morgenthau announced in a
this case—with its own “FOMC.” This way press release, dated December 20, 1936, that
the gold remained stockpiled but unmone- Treasury gold policy was coordinated with
tized in the Treasury. the Fed’s reserve requirement increases.!® By
Besides neutralizing the gold inflows, the mid-1937 “inactive” gold in the Treasury was
policy was further deflationary because it $1,087 million, or about 9 percent of total
brought more government securities into mar- Treasury gold.
kets to compete with consumers’ and Meanwhile, the banking system and the pri-
investors’ dollars. It thereby tended to raise vate economy foundered in a new recession.
interest rates as it inhibited general spending. If one were to write a script that chronicled
In March and May of 1937, the Fed comple- the end of free-enterprise capitalism, the
mented this generally deflationary policy by events of 1929-1938 would logically serve
increasing reserve requirements to the maxi- the purpose. Since few people understood the
mum allowable percentages: 14, 20, and 26 nuances of Fed-Treasury monetary policies,
percent. the common perception was that the Reces-
Fed-Treasury policy makers had acted sion of 1937-1938 posed yet another failure
deliberately and purposively. They believed of the market system. Dozens of tracts, nov-
in human management of the monetary els, plays, and newspaper editorials reflected
system. Just before he was appointed Fed this notion.
chairman, Eccles had boldly stated that the The appearance of the depression-recession
Fed should “support expansionary fiscal evidently convinced Morgenthau that the
policy through discretionary monetary poli- “danger of inflation” was passed. In Septem-
cy.”? Unfortunately, the discretionary mone- ber 1937 he released $300 million of gold
tary policy now being practiced was anything from the inactive account thereby restarting
but expansionary. It was, in fact, extremely the machinery of gold monetization. Gold
repressive. certificate accounts at Fed Banks responded


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

40 THE FREEMAN/IDEAS ON LIBERTY ® MAY 1999

and gave rise as usual to increases in mone- Clearly, the awesome monetary powers the
tary base items in Fed Banks’ balance sheets. Fed-Treasury had wielded were not the prod-
Finally, on April 19, 1938, Morgenthau uct of either “wisdom” or scientific analysis.
announced the discontinuance of the inactive They were simply discretionary, seat-of-the-
gold account altogether. pants responses, sometimes politically moti-
The time span of the Treasury’s gold policy vated, by political authorities who faced no
was 16 months—December 1936 to April responsibility for their decisions. Further-
1938, while the Fed’s reserve requirement more, the “risk of abuse” did not need to be
increases occurred in August 1936 and “assumed” under a democratic government
March-May 1937, and continued in force suitably restrained by the rule of law. Finally,
with little change until after World War II. the electorate knew less about these policies
Treasury policy cut off new gold at the initial than it knew about Sanskrit, and it had no
point of monetization; Fed policy effectively power at all either to pass judgment on them
smothered the money-creating potential that or to change them .
old gold had already provided. For the next Under a true rule-of-law gold standard, the
three years the economy stagnated. By 1941 Treasury would not have had a “gold policy.”
the price level was still 14 percent below its The gold standard itself would have been
1929 value, and unemployment was still 10 the gold policy and would have been self-
percent of the labor force. Treatises appeared regulating through the concerted actions of
analyzing “the stagnant industrial economy.” thousands of households and businesses that
The Keynesian notion of less-than-full- bought and sold goods and services in hun-
employment equilibrium seemed documented dreds of markets. The gold, more important,

beyond reasonable doubt. would not have been stockpiled in Treasury
Fed-Treasury methods in the mid-1930s vaults unavailable and illegal for human use,
reflected the prevailing notion of the times— like some dangerous drug or weapon. It would

that someone had to run the show, that opera- have been in commercial banks primarily,
tions without the rule of men were destined to serving its conventional function of securing
be “chaotic.” Economists and financial gurus bank-issued money.
were just as convinced of this argument as The monetary mismanagement chronicled
politicians and political scientists. One econ- here should serve as the all-time example of
omist, Gove Griffith Johnson, commented in the failure of discretionary monetary policy.
his contemporary book on Treasury policy: Although a gold standard was still on the
“One may be skeptical of the wisdom with books, it was nothing more than a facade for
which monetary instruments will be used, but Fed-Treasury manipulations. First the Fed by
the possibility of abuse extends throughout itself in the 1920s, then the Treasury ten years
the whole sphere of governmental activity and later, simply fit this “gold standard” into their
is a risk which must be assumed under a other hands-on policies. Both agencies saw to
democratic or any other form of government.” it that the gold was safely tucked away where
The Treasury’s gold policy, Johnson contin- it could do no one any good. Approximately
ued, “was an essential instrument for produc- seven thousand banks failed in the early 1930s
ing desired political aims.” Congress had for want of reserves while the stockpiling went
given over the Fed’s powers of monetary reg- on. Congress then gave the executive the
ulation to the Treasury because the central power to enact an unprecedented increase in
bank had proven ineffectual. These powers the price of gold, and added as well significant
had become more democratic because “they new powers to the Federal Reserve’s authori-
were now exercised by politically responsible ty. By 1936 the Fed-Treasury managers, fear-
officials . . . [and] would eventually be subject ing they had overdone monetary expansion,
to review by the electorate. . . . In large part,” decided to put on the brakes by again steriliz-
he concluded, “the [Federal Reserve] System ing gold and doubling bank reserve require-
has served merely as a technical instrument ments. The result was a virtual paralysis of the
for effecting the Treasury’s policies.”!! monetary system and the economy.


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

GoLD POLICY IN THE 1930s 41

Had the banks held their own reserves or 2. For further discussion of this issue, see Richard H. Timberlake,
. . . . Gold, Greenbacks, and the Constitution (Berryville, Va.: The
had them available in their own clearinghous- George Edward Durell Foundation, 1991), pp. 8-9.

es, as they did before the coming of the Fed, 3. Board of Governors of the Federal Reserve System, Banking
and Monetary Statistics (Washington, D.C.: Government Printing

bank and clearinghouse executives (Who were  office,1943), p. 537.

often the same people) would have parlayed 4. See my Monetary Policy in the United States: An Intellectual
. . . and Institutional History (Chicago: University of Chicago Press,
the gold into strategic trouble spots where it 993) chapter 5.

would have prevented failures of healthy 5. James D. Paris, Monetary Policies of the United States (New
. York: Columbia University Press, 1938), p. 18.
banks and general monetary destruction. 6. Milton Friedman and Anna J. Schwartz, A Monetary History of

Gold to be effective cannot be declared illegal the United States, 1867-1960 (Princeton: National Bureau of Eco-
nomic Research and Princeton University Press, 1963), p. 544.

and buried in the ground where no one can get 7. This pattern of law reflected the flawed notion that banks in

it. If that is the best that civilization can do larger cities were more subject to “speculative” influences and were
. . . > more likely to make risky loans than banks in the “country.”
we might as well have left the gold in Califor- 8. In next month’s issue of The Freeman, I will treat the reserve

nia, the Klondike, Australia, and South requirement episode in more detail.
9. Donald F. Kettl, Leadership at the Fed (New Haven: Yale Uni-

Africa. [] versity Press, 1986), pp. 48-53.
10. U.S. Treasury, Press Releases, nos. 9-20, December 20, 1936.
1. See, Dwight R. Lee and Richard McKenzie, Failure and 11. Gove Griffith Johnson, The Treasury and Monetary Policies,
Progress: The Bright Side of the Dismal Science (Washington, D.C.: ~~ 1933-1938 (Cambridge, Mass.: Harvard University Press, 1939), pp.
Cato Institute, 1993). 205-11, 223; emphasis added.

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

Economic Notions by Dwight R. Lee

¥ Economics

Costs Should Be Revealed,
Not Concealed

\Y Fs sound economic decisions is Possess. This coordinated effort is possible
impossible without information about only because of the guidance provided by
opportunity costs. Thinking about the cost of market prices. Read’s example also illustrates
doing anything is crucial; it amounts to con- how the opportunity costs incurred by every-
sidering the value of the alternatives. one involved in getting a pencil to the con-
A major advantage of the market process is Sumer (both in terms of the value of their
that it gathers up information on costs and time and other resources) is incorporated into
transmits it to market decision-makers its price. The consumer is thereby implicitly
through prices that cannot be ignored. In con- aware of the value of every tiny sacrifice
trast, the political process fails either to trans- made in producing it.
mit cost information to political decision- All prices reveal a similar collection of dif-
makers or to motivate the proper use of this fused costs to consumers. Therefore, each
information. It fails partly because organized Product is consumed only to the point where
interest groups want to ignore the costs of €ONSUMCIS value another unit by an amount
their pet projects, and partly because political equal to the value sacrificed to make it avail-
institutions are unable to acquire and commu- able. As I've emphasized before, the market
nicate information on cost. Markets promote ~ generates a pattern of cooperative interaction
wealth-creating decisions by revealing costs, bY people pursuing their own advantages in

while politics promote wealth-destroying Ways that take into account the concerns of
decisions by concealing costs. others. If only the diffused costs of govern-

ment action could be collected through the

. . political process and revealed to decision-
Revealing Lots of Little Costs makers with the same compelling clarity as in

The costs of doing anything—for example, the marketplace! That the costs of government
buying a pencil—result from tiny sacrifices decisions are commonly ignored goes a long
made all over the world. Leonard Read's pri- Way In explaining the perversities of so many
mary point in his justly famous 1958 article Public policies.

“I, Pencil” is that making something as sim-

ple as a pencil requires the coordinated Concealing Lots of Little Costs
efforts of thousands (probably millions) of
people with a wide range of specialized When the costs of government action are

knowledge that no one person could ever spread wide, as they commonly are, they are
generally ignored. For example, a tariff that

protects a domestic industry against foreign

Dwight Lee is Ramsey Professor of Economics and competition will cost consumers far more in
Private Enterprise at the University of Georgia. higher prices than it benefits the industry. But

42



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

43

while the benefits are easily attributed to the The Cost of the 55-MPH
tariff and concentrated on a relatively small Speed Limit

number of people, the costs amount to only a
few dollars a year for each of millions of con- Enactment of the 55 MPH speed limit on
sumers, few of whom will notice the extra the grounds that it saves lives also shows the
costs or the connection with the tariff. And tendency of the political process to conceal
even if a consumer does know of these costs, rather than reveal costs. We have all heard that
his share is so small that it doesn’t pay him to the speed limit reduced traffic fatalities,
actively oppose the tariff. which then increased when it was raised. But
The benefits of any special-interest propos- what were the costs of the 55 MPH limit? One
al are communicated through the political cost was the additional time people had to
process loud and clear. The costs, however, spend on the highway, a cost that came to bil-
are borne in silence and therefore largely lions of hours per year (20 extra hours a year
ignored by politicians. Organized interest on the road for 200 million people is 4 billion
groups are aware that lots of small, widely hours). Evaluated at the minimum wage, this
diffused costs are difficult to register through amounts to $21 billion. Because this cost was
the political process, and they aggressively spread over the entire population, it was large-
exploit this fact to capture benefits at others’ ly ignored.
expense. But the inability of the political Unfortunately, an even greater cost—also
process to collect and concentrate diffused politically ignored—was the cost in lives. The
cost would result in popular support for per- claims that traffic fatalities were reduced by
verse public policies even without interest- the speed limit are based on fatalities on the
group lobbying. interstate highways, which, because they are
For example, after an airplane crash in multilane divided highways, are the safest
Sioux City, Iowa, in the late 1980s, in which roads. But when the limit was imposed, traffic
an infant was killed when torn from his moth- was diverted to two-lane state roads that are
er’s arms, pressure arose for the federal gov- far less safe. This diversion occurred because
ernment to require that all infants have their the speed limit of these roads became rela-
own airplane seats. The benefit to children on tively higher than before, and they were
planes was obvious; they would be safer. But not policed as effectively as the interstates.
what was the cost? The cost of an extra seatis The result was an overall increase in traffic
obvious. Other costs, however, were less obvi- fatalities even though interstate fatalities
ous because they were diffused and remote. If decreased. It has been estimated that when
families with infants faced higher costs for states were allowed to raise the speed limit on
airline travel, more infants would travel in Interstates outside the cities, fatalities on all
cars instead of airplanes. This would result in roads declined by 3.4 to 5.1 percent. (See
more infants being killed in automobile acci- Charles Lave and Patrick Elias, “Resource
dents than would be saved in airline accidents, Allocation in Public Policy: The Effects of the
since car travel is many times more dangerous 65-MPH Speed Limit,” Economic Inquiry,
per passenger mile than air travel. Several July 1997, pp. 614-20.)
studies suggested that the cost of saving one If the market did as poorly as government
child with the seat requirement would have at collecting information about dispersed and
been the lives of four to six children lost in fragmented costs and imposing them on those
car accidents. Fortunately, the requirement responsible, we would live in an impoverished
never became law, but that it was seriously economy. Governments are tempted to med-
considered illustrates the difficulty the politi- dle precisely because of their ability to con-
cal process has perceiving widely dispersed ceal costs, and their inability to reveal them.
costs and concentrating them on the relevant That’s why the benefits from government
decision-makers. action are low and the costs high. OJ


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

FREEMAN

deas On Liberty

Tensions in Early American
Political Thought

by Joseph R. Stromberg

According to the eminent historian of combined the virtues of monarchy, aristocra-
political thought J.G.A. Pocock, republi- cy, and commonwealth (“republic” in the nar-
can theory (or “civic humanism”) was the row sense), and thereby avoided the degener-
most significant current of eighteenth-century ation into tyranny, oligarchy, and democracy
English and American political philosophy. In (mob rule) inherent in unmixed systems. A
the form of “country ideology,” republicanism substantial “middle class” was needed to pro-
gave “left” and “right” critics of government vide stability by preventing exploitation of the
policies a framework and believable rhetoric masses by a narrow oligarchy or, alternative-
for their arguments. The so-called “radical ly, the plundering of the wealthy by a great
Whiggism” of the American Revolution was mass of desperate poor. This middle class was
itself, on this reading, merely an extreme and not “bourgeois,” or commercial, but a class of
consistent version of the republican ideas of independent landed yeomen.
the English opposition. In Machiavelli’s republicanism, the monar-

From 1656, when James Harrington pub- chical element lessens as emphasis on the
lished a definitive statement of English repub- social “balance” grows. Machiavelli’s English
licanism in Oceana, down to the Americans’ interpreter, Harrington, stressed that the key
secession from the empire, republicanism fur- to preserving a republic was for “the soldiers
nished ideas for Tory party dissidents around [to] be citizens and the citizens soldiers.”! The
Viscount Bolingbroke and their magazine, independent landed proprietor of small or
The Craftsman, and for various “common- middling fortune, able to bear arms on his
wealthmen” and True Whigs on what we own account, was the ideal citizen and the
could perhaps call the original Left. guarantor of the republic.

Civic humanism was an outlook grounded
in the renewed classicism of the Renaissance. . . sf ge
Niccolo Machiavelli (1469-1527) was its Reading the English Constitution
major prophet in his Discourses. His ideas Pressed into the service of many causes,
rested on a view of ancient Greek and Roman this ideal was at the heart of country ideology,
political life that came to him via Aristotle, or republicanism. An important difference
Polybius, and Titus Livy. For these writers, the over the interpretation of English history sep-
ideal state had a “mixed constitution” that arated Harrington himself from later thinkers

who were in other respects his disciples. The

—_— 1 nti n Eng-
Joseph Stromberg is a part-time college lecturer in point of contention was the nature of Eng

history who has contributed to the Journal of Liber- land’s Ancient Constitution, which—
tarian Studies, Reason, Independent Review, and allegedly—included the common law, Parlia-

other publications. ment (which thereby gained many centuries in
44


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

45

antiquity and traditionalist prestige), fee sim- teenth century onward, so that “there can be
ple tenures, and various rights and customs traced a major movement of Country ideas
from “time out of mind.” Aware of the feudal into the radical-democratic tradition; not only
basis of medieval English society, Harrington much of the Chartist program, but a good deal
knew that the Constitution was the work of of its ideology as well, can be shown to pos-
recent times and sought its origins in the pass- sess a history continuous since the days of
ing away of the “Gothick” (i.e., feudal) bal- Shaftesbury.”? An important strand of country
ance of power and property. Royal encroach- ideology appears in the writings of the
ments had overborne real feudalism and its early eighteenth-century Tory leader Henry
basis in military tenures (great estates held by St. John, Viscount Bolingbroke, and his allies
nobles in exchange for their bearing the costs (including Jonathan Swift). Tory in his basic
of providing military forces for the King). A principles, socially conservative, and not at all
new social “balance” thereby came into opposed to a strong monarch as such, Boling-
being, one nearer to the republican ideal and broke nonetheless expounded a sort of “Tory
one reflected in the political struggles of the populism.” Championing limited free trade,
seventeenth century. defending small craftsmen against state-
Later “Harringtonians” inverted his analy- sponsored monopolies, and attacking Court
sis, arguing that the old order had corre- corruption, Bolingbroke and his circle often
sponded to the proper balance and that later took positions that overlapped those of the
developments unbalanced state and Constitu- growing pro-commercial and anti-monopolist
tion. They were thus able to say that the “bourgeois” opposition.
Ancient Constitution—from as far back as His attacks on social upstarts and econom-
Alfred the Great—had embodied republican ic change separate his views from those who
liberty and that this libertarian inheritance criticized state grants of privilege as impedi-
was now under attack. The King’s “standing ments to the market and the rise of new men.
army”—made possible by the financial revo- Thus this “right-wing” opposition would have
lution (in effect, the invention of national opposed an unsettling laissez-faire political
debt)—was the instrument of anticonstitu- economy almost as much as the unsettling
tional forces. Hence the fundamental political “growth” made possible by Court-sponsored
division was between “Court” and “Country.” mercantilism and rent-seeking. Many histori-
ans who deal with these questions muddy the
waters by lumping together all opponents of
Court policies as “agrarians” and throwing
The Court was the clique of stockjobbers, all others together as “capitalists” (or, for
placemen, pensioners, and courtiers who U.S. historians, “industrialists”). The groups
made policy by means of high taxation, mon- on both sides of the water that were pro-
etized national debt, and all manner of “cor- commercial but anti-mercantilist and pro-
ruption” (in the narrow sense). Their program laissez faire thus fall by the wayside.
undermined the Constitution (the larger “cor- Bolingbroke’s group—dedicated to pre-
ruption” in republican thought) by overthrow- serving an older England of gentry (large
ing the republican balance of “classes,” prop- landholders below the ranks of the nobility)
erty, and power. The Country, by contrast, and retainers, ready to defend old established
consisted of the public-spirited opponents of freedoms but seemingly radical in its assaults
such state-capitalism, or mercantilism. Over on the Court party—had an influence on the
time, the concept of a Country party came to American colonists, however ambiguous.
stand for an ever broader range of indepen- Certainly in the South, the conservatism of
dent property owners, finally taking on this kind of republican thinking proved attrac-
board—in the radically altered American con- tive. (Jefferson, for one, had read his Boling-
text—every farmer and planter on the land. broke.) The overlap between Bolingbrokean
As Pocock sees it, republicanism influ- and bourgeois versions of republicanism
enced the English opposition from the seven- made it easy for American radicals to treat the

Court and Country


===== PAGE 46 =====

46 THE FREEMAN/IDEAS ON LIBERTY ® MAY 1999

broad stream of English opposition ideas included self-ownership, acquisition of prop-
(including those of John Locke) as a unified erty by “mixing” one’s labor with resources

inheritance. (“homesteading”), and the right to defend
oneself and one’s justly acquired property
Levellers, Locke, from aggression by others. With the “inven-

: : tion” of money by tacit universal consent (a
and Libertarians notion that anticipates Ludwig von Mises’s
Something must be said now about the rela- “regression theorem”), a wider division of
tionship of classical liberalism to republican labor and bigger marketplace comes into
theory. Republicans idealized the indepen- being that allows inequalities to arise but only
dent armed proprietor as citizen and basis of along the lines of differing natural ability.
the social balance, which in turn preserves the Owing to the inconvenience of each man’s
constitution. They worried little about the ori- being judge in his own cause, these pre-
gin and justification of the state (which Locke political individuals establish government
sought to supply), but provided a world-out- mainly to overcome the lack of judicial ser-
look and language useful to various property- vices and common defense of their properties.
owning opposition movements. If pressed, a This is the “social contract.” Men do not actu-
knowledgeable republican thinker might have ally give up their natural rights for all time,
fallen back on Aristotle, who rooted the polit- but merely put them in trust. Property and
ical community in man’s social nature. self-ownership cannot be transferred for
For liberalism (by which we mean classical Locke even by conquest and change of
liberalism) the point of departure is different. regime. (One doubts he had the Irish case in
The liberal begins with the “natural” individ- mind.)
ual in full ownership of his natural rights who The “applied” portion of Locke’s system is
cooperates with others in “civil society” less liberal than his discussion of pre-state
before the creation of any government (state). civil society. From the high ground of reason
The liberal is not unaware—as is so often sug- and justice we arrive at the actual distribution
gested—that families and social relations of property in England. Locke persuasively
exist, but sas noticed that only individuals can sketches out a highly libertarian theory of
act. property rights and then pretends that the
Already in the Puritan Revolution, 1642-1658, actual distribution of English properties rests
so-called “Levellers” like John Lilburne and on labor title (homesteading) rather than on
William Walwyn developed a radical program conquest, enclosure, force, fraud, and (fre-
based on individuals’ ownership of them- quent) expropriation of real homesteading
selves, natural rights, and equal access to peasant farmers. (Marx, of course, pointed
unappropriated resources. (They did not actu- this out before wandering into his own erro-
ally want to “level men’s estates”—as their neous conclusions.) As Murray Rothbard
enemies charged—but merely wished to open observed, it is critical when applying the
up the market.) Unlike Locke, these “Lock- Lockean theory to criticize pre-existing titles
eans before Locke” did appeal to history; but in the light of the theory. The difference is
theirs was not the conventional “Country between apology for a semifeudal status quo,
party” argument from an Ancient Constitution as in England, or assertion of popular rights to
of Liberties but a denunciation of the “Nor- property as in revolutionary North America.3

man Yoke” fastened on the free Saxons at the Whatever the limitations of Locke’s writ-
Conquest in 1066 and which must be swept ings, liberal ideas were broadly compatible
away. with republicanism, and the new English

In the Second Treatise of Government John opposition that arose after the Revolution of
Locke derived individual rights from natural 1688 (which Locke’s writings served to justi-
law and made a case for government by con- fy before the fact) employed both sets of ideas
sent that stood independent of historical rather interchangeably. Republicans and liber-
specifics. Men’s rights in a “state of nature” als believed in property rights, however they


===== PAGE 47 =====

TENSIONS IN EARLY AMERICAN POLITICAL THOUGHT 47

denived them, and Locke’s pre-state propri- come directly from Locke.
etors looked a lot like the ideal republican cit- The American colonists, whose leading fig-
izen, armed and on his own land. In the end, ures were deeply read in the whole Radical
natural and historically prescriptive rights Whig tradition, were primed to fear the over-
(“the rights of Englishmen,” the Common throw of liberty by a Court clique using stand-
Law, and even Saxon freedoms) coexisted ing armies and abusing the power to tax.
with little difficulty in the minds of Anglo- Royal policies after 1763, rather harmless by
American radical Whigs on both sides of the present-day standards,* were ideally fitted to
water, and led to the same program of repub- touch the radical nerve of the Americans.
lican politics, freer markets, and (potentially) English and Roman history and current events
revolution. English opposition writers—the in Turkey, Denmark, England, and elsewhere,
“Commonwealthmen” or “True Whigs”— as understood by the colonists, prepared them
placed side by side, and began mixing, two to expect the worst from kings and ministers:
separate traditions into a potent new outlook: corruption, overthrow of constitutional forms,
liberal republicanism. The writings of Alger- military rule, public debt, standing armies. . . .
non Sidney, John Trenchard, and Thomas (They also understood that they were
Gordon (the latter two writing under the name expected, by consuming and paying taxes on
“Cato””) made their way across the Atlantic in tea, to make good the East India Company’s
a broad stream alongside those of the Tory losses in the inflationary South Sea Bubble
Bolingbroke and early liberals like Locke, scandal.)
Richard Price, and Joseph Priestley. Stifled by Working within a framework that drew
moderate Whigs who turned to political capi- from both liberalism and republicanism, the
talism once the Catholic Stuarts were colonial radicals believed that the minimum
deposed, liberalism and republicanism took practical content of natural law was already
on new meaning and life across the water. embodied in the “rights of Englishmen.”
English opposition ideology entered into and Imperial acts infringing on these rights neces-
helped frame the debates that preceded the sarily excited resistance. The republican idea
American Revolution. George III and his that the safety of the republic rests in the
ministers, by their intrusive policies, unwit- hands of virtuous property-holders able to
tingly set fire to this ideological tinder. bear arms held a central place in the Ameri-
cans’ theory and practice. The differences
between American social reality and that of
The American England had democratized the concept.
Revolutionary Synthesis Broader ownership of property and firearms
gave Country party ideas greater appeal and
According to American Revolutionary relevance in the colonies. The notion of an
thought, political life is a constant struggle armed people was of great importance in
between Power and Liberty. The former is a revolutionary war in which the militia
inherently aggressive, constantly attempting may have played a decisive—if still under-
to escape its constitutional bounds. Society is  appreciated—role.5
therefore best served when people guard their Pocock comments on the absence of an
liberty jealously. appropriate “bourgeois” (that is, modern and
People have rights—by nature or by Eng- commercial) ideology in the eighteenth centu-
lish law—and continued violation of their ry. As a result, he says, radicals fell back on
rights by government justified armed revolu- republicanism, which they developed along
tion and the institution of new forms of gov- new lines. In America, both the rural gentry
ernment. Justification of popular revolution and yeomen, as well as urban strata, were
against governments that fail “to secure these therefore in hock to pre-bourgeois ideas. Thus
rights” was, after all, the central message of revolutionary statesmen such as Sam Adams,
Locke’s Second Treatise, and many passages John Adams, and Thomas Jefferson returned
in the American Declaration of Independence again and again to a pre-modern concern over


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

48 THE FREEMAN/IDEAS ON LIBERTY ¢ MAY 1999

the negative results of prosperity (“luxury”
and “effeminacy”: dreaded nemeses of repub-
lican virtue), something over which more eco-
nomically oriented leaders like Thomas Paine
and—a bit surprisingly—John Taylor of Car-
oline showed little concern.

Paine, Taylor, and many others set out a
kind of libertarian republicanism, which com-
pleted the synthesis begun over the water, and
which was certainly far more compatible with
market relations (“capitalism”) than Pocock
would care to admit. Americans used republi-
can ideas alongside classical liberal ideas, and
this synthesis became “the transforming ide-
ology of the American Revolution.Ӣ Liberal
republicanism became the common American
political language within which later strug-
gles over mercantilism and laissez faire and
slavery and emancipation would take place.

A Unique Balance

John Taylor of Caroline (c. 1753-1824)

In the American Revolution “classical
republicanism” underwent considerable change In effect, they made an end-run around the
as its key ideas were intertwined with those of ~ Anti-Federalists by suddenly becoming more
liberalism. Gone was the concern with bal- democratic. Attributing a general “sovereign-
ancing the three classical forms of govern- ty” to the people (carefully avoiding the ques-
ment. Instead, as Robert Shalhope writes, a tion of who were the people—the people as a
“unique frame of mind emerged,” which dealt whole or the people as thirteen states), the
with the balance between the people and their  Federalists assimilated popular will to the
rulers. Americans went into their Revolution new federal regime. So doing, they “created a
with “a negative view of government”? With distinctly American political theory but only
the substitution of people versus government at the cost of eventually impoverishing late
for the older contrast of Country versus American political thought.”
Court, the stage was set for characteristically Be that as it may, what we may loosely call
American debates in which each side claimed early “liberalism” (with some of this coming
better to protect the people’s rights against the out of English law and not from Locke) and
rulers’ power. republicanism run all through the Constitu-

Shalhope adds that the wide acceptance of tion, especially if the Bill of Rights is taken
liberal/republican ideas made political stabili- into account. The provisions about freedom of
ty possible after the Revolution. The debates religion, speech, and assembly, search and
over the ratification of the second U.S. Con- seizure, and so forth reflect the liberalizing
stitution (the Articles of Confederation being thrust of the English political battles of the
the first) underlines the point. Acting in the seventeenth century, while the Second
best Radical Whig tradition, the misnamed Amendment enshrines the ideal republican
Anti-Federalists opposed the new charter as citizen armed on his own land. (A complete
creating uncontrolled power. Gordon Wood account of American Revolutionary ideology
has shown how the Constitution’s proponents, would have to trace how trends in English law
the Federalists, justified creating a stronger ran parallel with liberalism and individual
federal government while staying within the rights, as did the Protestantism of the thirteen
theoretical confines of revolutionary thought. colonies.)


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

TENSIONS IN EARLY AMERICAN POLITICAL THOUGHT 49

Pa - - [EO

It seems fairly clear that the two separate | ~
doctrines—Iliberalism and republicanism— | —
were fused together by the English opposition |
writers and the American revolutionaries |
because together they made for a stronger,
and reasonably coherent, worldview. Liberal- |
ism, as such, had no theory of government.
The French physiocratic school of laissez- |
faire liberal economists had no better political
theory or plan than simply to get the King to |
sweep away barriers to trade. Republicanism, |
as such, had no theory of individual rights.
Writers like Rousseau showed how unalloyed
republicanism can easily justify militaristic
and authoritarian rule on the model of ancient
Sparta or the Roman Republic. (The “radical |
phase” of the French Revolution teaches this
lesson very well.) By combining the two ide-
ologies, the Anglo-Americans forged a pow- |
erful outlook favorable to liberty and limited |
government. !

Some recent writers have tried to ride the '- rr rn
renewed interest in republicanism, set off by Henry David Thoreau (1817-1862)
the work of Pocock, Bernard Bailyn, and oth-
ers, to the left. They hope to find in American Southern secession and creation of an alterna-
republicanism a charter for state intervention- tive confederation (1860-1861). The Jeffer-
ism, mercantilism, or communitarianism. sonian and Jacksonian political movements,
This is futile precisely because revolutionary in particular, carried with them the ideas and
American republicanism was a unique out- language of the revolutionary generation.
look that thoroughly blended republicanism Inevitably, Northern and Southern heirs of
and liberalism. (Anyway, there are plenty of liberal republican thinking diverged more and
“foreign” ideologies they can work with.) As more from their original common ground.
regards the Second Amendment, for example, Already from the beginning there had been
Stephen P. Halbrook makes clear that the differences of emphasis.
founding generation saw no conflict between In the North, some successors to liberal
an individual right to bear arms and defense republicanism—Henry David Thoreau,
of the larger society through a militia system. Lysander Spooner, Stephen Pearl Andrews,

and others—developed the logic of natural

C . . law and rights all the way into individualist
Liberal Republicanism anarchism.19 In the South, the felt need to
Reappears defend Southern interests and culture (and

American liberal republicanism as defined not merely slavery, the relationship being
here did not die out after the adoption of the more complex) led first John Taylor and,
Constitution, however, but kept reappearing later, such figures as John C. Calhoun, Jeffer-
in slightly different guises. The asserted right son Davis, and Alexander H. Stephens to
to resist abusive rulers who corrupt the con- assert the South’s right of resistance to feder-
stitution or trample on the people’s freedom al innovation and intrusion. Ironically, slav-
found expression in the Whiskey Rebellion, ery itself may have contributed to Southern-
the Kentucky and Virginia Resolutions of ers’ assertion (for whites) of an extreme
1789, the Hartford Convention (1815), the degree of personal liberty. Liberty for some
Nullification controversy (1833), and even in and slavery for others reinforced one another



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

50 THE FREEMAN/IDEAS ON LIBERTY ¢ MAY 1999

on several levels, and all attempts at con- 1. Quoted in J.G.A. Pocock, “Machiavelli, Harrington, and Eng-

Mary Quarterly, October 1965, pp. 549-83.

ma foundered on the problem of race. The 2. Ibid., p. 582.

painful evasions on the part of Jefferson and 3. Murray N. Rothbard, Conceived in Liberty, vol. 1 (New
. - Rochelle, N.Y.: Arlington House, 1975), p. 123, note.

Taylor were characteristic. !! 4. As Bernard Bailyn writes, “The condition of British America

In this connection it might be said that the by the end of the Seven Years’ War [that is 1763] was therefore
anomalous: extreme decentralization of authority within an empire

slavery question, among others, led to a par- presumably ruled by a single, absolute, undivided sovereign” (The
1 : : : : Ideological Origins of the American Revolution [Cambridge, Mass.:
tial unraveling of liberal republicanism. Harvard University Press, 1967], p. 204). George III and Lord North
Southern thinkers became very good republi- wanted to tighten up this loose structure and collect enough revenue
can theorists indeed—but somewhat at the to make it pay for itself. The Americans were quite happy to be
) . neglected by arbitrary officials across the water.

expense of the liberal elements of the Ameri- 5. See John Shy, “The American Revolution: The Military Con-
: flict Considered as a Revolutionary War,” in Stephen G. Kurtz and

can synthesis. By the same token, Northern James H. Hutson, eds., Essays on the American Revolution (Chapel
abolitionists (at least those working with lib- Hill, N.C.: University of North Carolina Press, 1973), pp. 121-56,

: and William F. Marina, “Militia, Standing Armies, and the Second
eral, contractual thought rather than with 0 "oOo C00 Liberty, 11, Spring 1976, pp. 1-4.

post-P uritan religious ideas) focused rather 6. See generally Bailyn, especially chapter 5, “Transformation,”
: ge opp. 160-229.
exclusively on the individual rights and liber 7. Robert E. Shalhope, “Toward a Republican Synthesis,”

ties found in liberalism and English law. William and Mary Quarterly, January 1972, p. 65.

8. Gordon S. Wood, Creation of the American Republic,
The Southern Confederacy was the embod- 1776-1787 (Chapel Hill: N.C.: University of North Carolina Press,

iment of a consistent, if socially conservative 1969), p- s62 c oe |
. . . . While the Constitution can be read—as by William Appleman
variety of republican theory and its defeat Williams—as a partially “merchantilist” document, the Americans’

could be taken as a sort of last stand of the reading of such Scottish Enlightenment figures as David Hume and
Adam Smith and French economists like J. B. Say (popularizer of

Anglo-American Country party. We might Smith, but more importantly, someone possessed of many “proto-

equally well take the Spanish-American War Austrian” insights) pushed their liberal republicans in a direction in
which laissez faire became a real option. On the Second Amend-

(1898)—with its leap into the uncharted and eq sce Stephen P. Halbrook, That Every Man Be Armed (Albu-

unrepublican territory of overseas empire—as querque: University of New Mexico Press, 1984). See also Robert E.
. . . . Shalhope, “The Armed Citizen in the Early Republic,” Law and
the final step in the marginalization of real Contemporary Problems, Winter 1986, pp. 125-41.

republican thought (as well as real liberal- 10. See Staughton Lynd, Intellectual Origins of American Radi-
calism (New York: Pantheon, 1968), pp. 100-48, and James J. Mar-

ism). 12 American participation in World War in, Men Against the State (Colorado Springs, Colo.: Ralph Myles,
I. on that view. made the steps taken in the 1970), for the connections between abolitionism and individualist
’ . ’ . . anarchism.
1860s and in 1898 nearly irreversible. All the 11. For the paradoxes of liberty and slavery in the South, see
ce ”__ ] :_ Edmund S. Morgan, American Slavery, American Freedom: The
Same, the Founders Federalist and Anti Ordeal of Colonial Virginia (New York: Norton, 1975); on Jeffer-
Federalist alike—appear to have had a better son’s and Taylor’s grapplings with the problem, see Robert McCol-
: ley, Slavery and Jeffersonian Virginia (Urbana, Ill.: University of
grasp of human nature and the notions } of Mlinois Press, 1973) and Duncan J. MacLeod, Slavery, Race and the
responsible power (that is, power “answering American Revolution (New York: Cambridge University Press,
» : : HPO 1974), especially pp. 89-94.
to those with whose rights and safety It 1s 12. For a classical liberal and republican critique of our fin de sié-
temporarily entrusted), liberty, and the rest, cle adventure, see Joseph R. Stromberg, “The Spanish American
: tots _ : War as Trial Run, Or Empire Its Own Justification” in John V. Den-
than do either of our existing post I epublican son, ed., The Costs of War (New Brunswick, N.J.: Transaction Pub-
factions called political parties. [1 lishers, 1997), pp. 169-202.


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

Economics on Trial by Mark Skousen

FREEMAN

deas On Libert

May 1999

America Is
Number 1 Again

“By the year 2000 Japan may well be enjoying the highest standard
of living of any industrialized country.”
—Economics textbook, 19871

n 1991, I prepared an advertising campaign number of occasions.) My prediction of Ger-

for my book Economics on Trial (Irwin). man and Japanese dominance went awry. Not
The headline was: “Japan and Germany Win because the market formula for growth is
World War III,” followed by the subtitle, wrong, but because Germany and Japan aban-
“Their formula multiplies wealth so rapidly doned their model of success. Germany
that they will achieve their goal of world dom- adopted high-cost labor-union controls,
ination by the year 2000.” In this ad, I refer- imposed anti-business regulations, and dra-
enced the sound economic model that had matically increased taxes to pay for a unified
transformed war-torn Germany and Japan Germany. Japan exacted substantial tax
into economic powerhouses in one generation increases (including a capital gains tax),
and vulcanized their stock markets. These propped up inefficient banks, and imposed a
principles were high savings rates, low taxes severe tight money policy in the early 1990s
on capital and investment, low inflation, bal- (following an excessive liberal monetary pol-

anced budgets, and free markets. icy in the 1980s that created a bubble in real
estate and stocks). Japan is still trying to
Friedman Sets Me Straight recover from these devastating anti-market

measures. Easier money and a higher nation-
I sent a copy of my ad to the Nobel laureate al sales tax haven't helped. If Japan and Ger-
economist Milton Friedman, who wasted no many want to regain their fast-track status,
time debunking it: “This prediction is a bunch they need to embrace a healthy dose of sup-
of nonsense,” he wrote to me. “I will not live  ply-side tax cuts and deregulation (known as
long enough to see it falsified, but you will. In Reaganomics in this country).
the [year 2000] as in 1991, the U.S. standard Meanwhile, the good ol’ USA is rolling
of living will be higher than the Japanese.” right along. The tax increases in the early
It wasn’t long before Professor Friedman 1990s are being reversed (long-term capital
was proven right. (He has set me straight ona gains are now taxed at only 20 percent). Cor-
Mark Skousen (http://www .mskousen.com; mskousen porations have downsized and labor remains
@aol.com) is an economist at Rollins College, Depart- wage-flexible and productive. We lead the

ment of Economics, Winter Park, FL 32789, a Forbes world in technology and employment cre-
columnist, and editor of Forecasts & Strategies. ation, among other categories.

51


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

52 THE FREEMAN/IDEAS ON LIBERTY ® May 1999

Friedman (and others) convinced me to the United States dominates in movie
turn bullish on the U.S. economy and stock revenues.)
market in the early 1990s. In January 1995, I
made a major prediction in Forecasts & The United States was edged out by Canada
Strategies, arguing that America was on the for number 1 in the Human Development
comeback, and would lead the world in stock Index (longevity, educational achievement,

market performance. So far it has. and standard of living). Japan is number 3.
Lest you think America can do no wrong,
How Does the U.S. Rank? the United States is also ranked number 1 in

several negative categories: teen pregnancies,
Recently I came across a delightful book divorce rate (among industrial nations), sulfur
that confirms my view that America is once and carbon emissions and nuclear wastes,
again on top of the world: the fourth edition of AIDS cases, and number of prisoners. How-
The Illustrated Book of World Rankings, edit- ever, it is way down the list in several crime
ed and compiled by George Thomas Kurian.2 statistics.
Out of some 100 positive listings, the United
Sates them top billing in 33 categories. Debunking the Pessimists
A new book confirms America’s lead in the
* Most powerful nation (based on military world. In Myths of Rich and Poor, Michael
manpower and economic capacity), way Cox and Richard Alm highlight a slew of facts
ahead of number 2 Russia. demonstrating American prowess and deny-
* Largest gross domestic product (GDP), ing economic decay since the mid-1970s: real
way ahead of number 2 Japan and number wealth has skyrocketed, the poor have not
3 Germany. gotten poorer, corporate downsizing has cre-
 World’s highest per capita income based ated jobs, and the trade deficit suggests the
on purchasing power parity (though num- United States is the “best place to invest.”3
ber 6 based on exchange rates), ahead of ~~ What about the future? Another fascinating
number 2 Switzerland. book argues that the United States has a
e World’s biggest exporter and importer, monopoly position on future technology. In
ahead of number 2 Germany and number Probable Tomorrows: How Science and Tech-

3 Japan. nology Will Transform Our Lives in the Next
* World’s leader in retail sales. Twenty Years, Marvin Cetron and Owen L.
* Leader in production of electricity, tim- Davies compile an exhaustive list of possible

ber, and milk. technological breakthroughs in engineering,
* Number 1 in airline travel, passenger manufacturing, computers, communications,

cars, and commercial vehicles. energy, space, and medicine, noting which
* Primary country of destination based on countries are likely to produce these innova-

tourist expenditures. tions.4 The United States was named the like-
* Number 1 in mail, telephones, faxes, and ly choice in 95 percent of the cases.

e-mail addresses. No wonder so many people from abroad

* Tops in number of scientists and engi- want to come here. Their best alternative:
neers, patents in force, and Nobel Prize invest in U.S. stocks, businesses, and real

winners (three times more than number 2 estate. 7]
United Kingdom). , , ,
e Number 1 in televisions and radios 1. Richard G. Lipsey, Peter O. Steiner, and Douglas R. Purvis,

. . Economics, 8th ed. (New York: Harper & Row, 1987), p. 735.
per capita, number of movie theaters, 2. Sharpe Reference, 1997.

s 3. See chapter 5, “Still on Top of the World,” Myths of Rich and
museums, botanical gardens, and z00S.  p, " New York: Basic Books, 1999), pp. 91-105.

(India produces more films per year, but 4. St. Martin’s Press, 1997.


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

53

These peoples are the only ones, in his view,
BOOKS who have produced political theories worth
attending to.

This way of characterizing the opposing
sides may well produce more heat than light.
i Neither the French nor the Germans are apt to
by Balint Vazsonyi be pleased at being credited with a series of
Regnery Publishing ® 1998 ® 285 pages ® $24.95 disastrous, discredited ideas; nor have the
: Anglo-Americans been pure defenders of the
Reviewed by Clarence B. Carson ideas of individual liberty and limited govern-

ment. England has as good a claim to the title
AS a child of eight, Balint Vazsonyi expe- “birthplace of evolutionary socialism” as any.
rienced National Socialism (Nazism) It is not at all clear to me that ideas have a
when the Germans took control of his native native habitat and that there are national traits
Hungary during World War II. In 1948, the in political philosophy. We do ill, I think, to
Communist Party came to power, followed by attribute the liking for or antipathy to various
Soviet occupation and the elimination of all political arrangements to whole peoples. Vaz-
opposition. Those events left a lasting impres-  sonyi would have done better to avoid pinning
sion on him, and he concluded that Nazism a national label on the contending theories.

America’s 30 Years War

and communism were branches of the same That aside, Vazsonyi provides many clear
socialist plant, differing only slightly in the insights into how socialist thought has mutat-
details. ed through hard experience to become more

Vazsonyi was able to escape to the United dangerous to America. He writes, for exam-
States in 1959. A virtuoso pianist with a ple, “The appetite to manage all corporations,
strong interest in philosophy, he has been a large and small, has given way to the realiza-
keen observer of the American scene ever tion that a combination of threats, restrictions,
since. He concludes that for at least 30 years and controls will provide access to the fruit,
a struggle (he terms it a war) has gone on without ever having to plant the tree, buy the
between those who would transform the Unit- fertilizer, or perform any of the ongoing
ed States into a socialist nation and those who chores that go with production.” This is the
would preserve—or perhaps we should say triumph of the fascist (Nazi) side of social-
restore—the principles of the Constitution. ism, the realization that you encounter less
This book expresses his observations on the resistance and get “better” results by insinuat-
course of that war. ing the state into a position to take key

The frame in which he encloses his argu- decision-making power away from private
ment is original, and his insights into how the owners, rather than trying to expropriate those
United States is being transformed (which is owners directly.
to say that the war is not going well) are worth Having lived under the control of the com-
studying. Vazsonyis early experiences with missars, Vazsonyi is able to clearly see current
the twin evils of Nazism and communism trends in the United States. He can see how
make his book all the more compelling. our own bureaucrats are increasingly resem-

He argues that the war is really between two bling those commissars in their control over
different ways of looking at the relationship our lives. Rightly, he understands that the
between man and government: what he calls environmental movement and its accompany-
the “Anglo-American” view that individual ing hordes of bureaucrats are erecting a struc-
rights are prior to government and that gov- ture for a vast expansion of government
ernment must be constitutionally restrained to authority. Since almost every use of land or
protect those rights, and what he calls the activity could be said to have some impact on
“Franco-German” view that government the environment, we are moving toward a
needs to be absolutist and wield enormous future in which government officials will have
power to bring about the best possible society. enormous control over us.


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

54 THE FREEMAN/IDEAS ON LIBERTY © MAY 1999

Vazsonyi also correctly sees that piecemeal The menace of this left-right alliance
opposition to the modified socialist program against the alleged cultural inadequacies of
is a losing game. If we argue over the “right” capitalism is reason alone to applaud—Ioudly,
amount of government control, each time while standing! —Tyler Cowen’s In Praise of
hoping to negotiate a somewhat better deal Commercial Culture. But this book’s virtues
from the socialists than they initially propose, go well beyond the assistance it delivers in the
we are certain to see a continuing erosion of intellectual battle against those who would
our freedom. He argues strongly in favor of an substitute the whims of a political elite for the
uncompromising return to our original consti- wishes of individuals. Cowen’s book is also a
tutional principles, and to that I shout wellhead of information about art, music, and
“Bravo.” [J literature, brimming with economically

Clarence Carson, a contributing editor of The Free- inspired insights into the patterns of culture
man, has written and taught extensively, specializing and people’s responses to those patterns.
in American intellectual history. Cowen, a professor of economics at George

Mason University, uses as a springboard in his
book the continuing debate between “cultural
pessimists” and “cultural optimists.” He casts
his lot squarely with the (outnumbered) opti-

In Praise of Commercial Culture

by Tyler Cowen mists. His case for cultural optimism is woven
Harvard University Press ® 1998 © 278 pages skillfully from sound economics and a careful
® $27.95 study of cultural history.

One element of Cowen’s argument grows
from his exploration of the sources of cultur-
al pessimism. Many pessimists are simply
| DA most of this century, capitalism was unimaginative old coots—as Cowen writes,

regularly accused of not delivering the they “identify great culture with what they
goods as efficiently as could socialism. Today, know and have learned to love.” If you spend,
this accusation packs as much persuasive say, the first 40 years of your life listening
force as do claims that ouija boards foster only to the music of baroque composers,
communication between the living and the when you first hear the music of romantics
dead. Even capitalism’s most strident critics such as Tchaikovsky, it sounds barbarous. In
today admit that capitalism can’t be beat at economic terms, you dislike post-baroque
satisfying people’s material needs. “In fact,” music because you haven’t yet developed the
bark the critics, “that’s the real problem with human capital required to appreciate it.
capitalism: it’s too responsive to consumers!” Cowen also exposes the self-centeredness
Capitalism’s unparalleled capacity for deliver- of many cultural pessimists. If the masses can
ing new 'n’ improved things to satisfy the vul- enjoy a new work immediately, cultural pes-
gar needs of the masses supposedly results simists haughtily pan it; but if the cultural
in a shallow culture, whose dumbed-down pessimists themselves are baffled by the work,
denizens recognize Ronald McDonald’s mug they dismiss it as illegitimate. Each pessimist
more readily than they recognize Mozart’s regards his or her own unique accumulation

Reviewed by Donald J. Boudreaux

music. of cultural human capital to be the only legit-
Unlike the productivity-based criticisms of imate accumulation.
capitalism, the cultural criticism of free mar- Another source of cultural pessimism that

kets comes not only from the left, but also Cowen identifies is fear of the future. Many
from the right. When the likes of hyper- people truly fear for society when they see its
feminist Catharine MacKinnon are joined in cultural basis changing. This fear, however,
their crusade against free markets by influen- owes far more to lack of imagination than to
tial conservatives such as Pat Buchanan and any evidence that cultural change necessarily
William Kristol, the resulting coalition might portends social dry rot or disintegration. The
well turn out to be fatal to capitalism. culture of 1990s America differs from that of


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

Books 55

1950s America—but is it really worse (as CancerScam: Diversion of Federal
many people believe)? vee

Workers’ greater productivity today means Cancer Funds to Politics
that they have more time to enjoy cultural by James T. Bennett and
amenities. Musical recordings of all types are Thomas J. DiLorenzo
more readily available than ever, as are broad- Transaction Publishers ® 1998 © 189 pages ® $32.95
cast performances and videotapes of dance,
opera, and theater. The recent advent of book Reviewed by John Hood
superstores brings to most Americans a selec-
tion of books that as recently as a decade ago erhaps the most critical chapter of
was available only to residents of a few large CancerScam, a slim but effective exposé
cities. Far from destroying culture, the free of the politicization of America’s health-care
market is bringing it within reach of more charities, begins with this famous quotation
people than ever. from Thomas Jefferson: “To compel a man to

Mention of these bookstores points to a furnish contributions of money for the propa-
third source of cultural pessimism—interest- gation of opinions which he disbelieves is sin-
group agitation. Among those who wail about ful and tyrannical.” This statement has prop-
the cultural Armageddon allegedly foretold erly been used to criticize taxpayer funding of
by book superstores are smaller book retail- political campaigns, of obscene art, and of
ers. Those retailers naturally don’t like the various advocacy groups and lobbies.
efficiencies that characterize Barnes & Noble In CancerScam, economists James Bennett
and Borders. But it’s uncouth to complain and Thomas DiLorenzo apply Jefferson’s
honestly about these new merchants (“I don’t maxim to critique the phenomenon of major
like em because they’re better than I am at health charities, such as the American Cancer
selling books!”). So smaller booksellers Society, using taxpayer money to lobby for
instead ominously prophesy cultural damna- laws or ballot initiatives restricting the free-
tion if the book superstores aren’t stopped. dom of tobacco smokers. A case in point was
Cowen’s discussion, replete with examples, of the 1988 passage of a California initiative
how cultural pessimism has been used raising cigarette taxes and using some of the
through the centuries to mask attempts at proceeds to subsidize tobacco control,
undermining consumer choice is fascinating. research, and “public education” (read: lobby-

My only complaint is that Cowen is too ing) programs run by these very charities.
easy on those who support government fund- The American Cancer Society, the Ameri-
ing of the arts. Given the wealth of evidence can Lung Association, and the American
assembled here on how markets promote a Heart Association all spent time and money
vibrant culture, he could easily have called for pushing for approval of the initiative. They
the abolition of the National Endowment for were rewarded by receiving at least $8 million

the Arts, but does not. a year from the cigarette tax increase to pro-
Reading Cowen’s book is itself an act of mote anti-tobacco education programs.
cultural betterment; it is learned and sophisti- Bennett and DiLorenzo quote one journal-

cated without being pedantic. It complements ist sympathetic to the tobacco-control move-
nicely the economics of the late Julian Simon, ment, who wrote that the formerly “starved
as well as the work of Reason editor Virginia for funds’ movement . . . found itself awash in
Postrel. The message of each of these authors California gold.”
is that we should welcome, not fear, the The money-grubbing aspect of the health
results of freedom. [J charities’ involvement was underscored by the
Donald Boudreaux is president of the Foundation for legislative history of the initiative. A cigarette
Economic Education. tax hike would likely have been passed by the
SL California legislature in 1988, but because of
a constitutional spending limit, much of the
proceeds from the tax would have had to be



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

56 THE FREEMAN/IDEAS ON LIBERTY ® MAY 1999

refunded to taxpayers. Instead of pushing for stood this. He would see no justification for
the tax hike legislatively—which would have forcing anyone to finance campaigns against
accomplished the anti-smoking activists’ pur- the right of smokers to do what they want with
ported goal of raising the price of cigarettes their own lives and property, and neither do
and thus discouraging smoking—the activists Jim Bennett and Tom DiLorenzo. CJ
pushed for and gota tax hike written into the John Hood is president of the John Locke Foundation
state constitution. This may have been a jy, Raleigh, North Carolina.
bizarre way to raise a tax, but it was the only
way to route the new revenues to the charities
themselves.

This story is replicated several times as } .
Bennett and DiLorenzo chronicle the growing by Wilhelm Répke
involvement of anti-smoking health charities Intercollegiate Studies Institute ® 1998 © 350 pages
in the political process. The book, not surpris- ® $24.95
ingly, spends a fair amount of time rebutting
claims made by these anti-smoking forces on
such issues as the risks of secondhand smoke,

A Humane Economy

Reviewed by George C. Leef

the impact of smoking on government bud- his volume is a beautifully prepared new
gets, and how smokers perceive the risks of edition of Wilhelm Ropke’s 1957 classic
their habit. defense of the market economy and non-inter-

There’s little new here to a reader already ventionist government. Ropke (1899-1966), a
familiar with the debate, but it will help other renowned German economist, lecturer, and
readers put into perspective the pervasive writer, stood with Ludwig von Mises, FA.
sense of moral rectitude that the anti-smoking Hayek, and a few other intellectuals in the
zealots exhibit when criticized about their middle decades of this century to warn
taxpayer-funded lobbying efforts. against the perils of what he called “cen-

Bennett and DiLorenzo don’t focus only on  trism.” By this term he meant not what it
the smoking issue. They argue that the cor- means to most Americans (political namby-
ruption of charitable institutions—their pambyism), but rather the tendency toward
seduction onto the government dole and into concentration of power in the hands of a few.
the political game—is a trend with far-reach- Ropke feared the crushing effects of big
ing negative consequences. A free society is government, big business, and big labor on
based, in part, on drawing clear lines between the forgotten, statistically insignificant indi-
various social institutions, be they businesses, vidual. Reading this book of over 40 years
governments, families, or charities. Govern- ago reminds one of another great 1957 book,
ments have a unique role to play in our lives, Ayn Rand’s Atlas Shrugged. Although poles
as do the other institutions. Corruption sets in apart on some questions (especially religion),
when businesses act like governments (for Rand and Ropke both clearly identified the
example, the Mafia), governments act like ominous social and political trends that were
businesses (for example, providing rail trans- deforming the world, and both are worth
portation), governments act like families (for revisiting.
example, giving food stamps and subsidized The subtitle of Ropke’s book is The Social

day care), and so on. Framework of the Free Market. He seeks to
CancerScam tells a cautionary tale. To per- show that the network of voluntary economic
vert government public health spending— relationships we call the market requires a

which in any event should be limited to com- certain social framework. He writes, “Even if
bating communicable diseases and other we conscientiously credit the market with cer-
immediate threats to innocent bystanders— tain educational influences, we are led back,
into a means of supporting political causes is therefore, to our main contention that the ulti-
to erase the lines that protect individual liber- mate moral support of the market economy
ty and the market process. Jefferson under- lies outside the market. Market and competi-


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

Books 57

tion are far from generating their moral pre- Ropke was a population worrier. He emphati-
requisites autonomously.” cally did not want to see government in the
What the author has in mind, for example, family-planning and resource-planning busi-
are moral constraints on the means by which ness, but his alarmist statements are ammuni-
people go about trying to get what they want. tion for those who do. And sometimes he
Ropke writes, “A spirit of ever alert and sus- sounds like an early Earth Firster: “We violate
picious rivalry, not too particular in the choice nature at every turn, even to the total disap-
of its means, must not be allowed to predom- pearance of the countryside. . . .” Ropke
inate and to sway society in all its spheres, or would not have taken kindly to the Environ-
it will poison men’s souls, destroy civilization, mental Protection Agency with its blatant
and ultimately disintegrate the economy.” He hostility to private property rights, but
argued that what any society needs, if it is to rhetoric like that almost inevitably promotes
protect the moral norms that make the market the “centrism” he deplored.
possible is a nobilitas naturalis, a natural It is easy to ignore foibles like that, how-
“aristocracy of the public spirit”—that is to ever, in a book having such an abundance of
say, men and women whose integrity and clear thinking. Over and over again, 4
moral authority would lead most others to fol- Humane Economy reminds us of what is at
low their example. stake in the battle between those who con-
I suspect that there is much truth in this sistently defend freedom and those who
breathtakingly politically incorrect idea. The won’t: “Once the mania of uniformity and
support for the ethical basis of market deal- centralization spreads and the centrists
ings needs to come from moral authority fig- begin to lay down the law of the land, then
ures. Without that support, we will slowly we are in the presence of one of the most
sink into barbarism. Unfortunately, Ropke’s serious danger signals warning us of the
thesis means that America is in grave danger. impending loss of freedom, humanity, and
The way most Americans are educated today the health of society.”
makes them almost impervious to any sort of
leadership except by the idols of sports and
popular music. Moreover, where does one see
respected men and women emp hasizing the All the Essential Half-Truths
importance of, say, the freedom of individuals about Higher Education
to enter or decline to enter into contracts? } ns
Ropke was a keen observer and elegant by George Dennis O’Brien
writer. Most of what he said is still true today, University of Chicago Press ® 1998 © 244 pages
if not more so. Consider this attack on the ten-  ® $19-95
dency to turn economics into a branch of
mathematics: “[S]Juch concepts as the ‘elastic-
ity’ of supply and demand, the ‘multiplier’. . .
and so on . . . simulate a scientific and mathe- Gor Dennis O’Brien, retired president
matical precision which does not really exist. of Bucknell University and the Universi-
They are not physical constraints like . . . ty of Rochester and author of What to Expect
gravity, but relations dependent upon the from College, has addressed himself to a vital-
unpredictable behavior of men.” Or this ly important subject—the many myths and
observation about left-wing moralists: “The misconceptions surrounding American higher
moralist, with his lofty admonitions, becomes education. Although he identifies serious
an intolerant hater and envier, the theoretical problems and sometimes makes telling obser-
pacifist an imperialist when it comes to the vations, the book ultimately proves to be mad-
practical test, and the advocate of abstract dening because the author will not for the life
social justice an ambitious place-hunter.” of him make hard decisions. His proposals are
Sadly, the book also contains some sections always safe and temperate. O’Brien’s book
that prove useful to enemies of freedom. circles at 30,000 feet over the major issues

George Leef is book review editor of The Freeman.

Reviewed by George Roche



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

58 THE FREEMAN/IDEAS ON LIBERTY ® MAY 1999

confronting universities and the reader standards, the perversion of the curriculum,
exclaims, “Land somewhere! Take a position! the short-changing of students in universities
Offer a solution! Act in some principled way where teaching takes a back seat to “research”
even if it might create some enemies!” (which often means abstruse writings that are
At almost every turn, O’Brien takes the never read and no one would voluntarily pay
safe road, trying to keep establishment for), and of the spreading politicization of
friends happy through equivocations and con- courses, to mention just the top of the list. It
ciliation. One example: “If faculty are to must then propose solutions.
administer—as I believe they should. . . ” Unfortunately, All the Essential Half-
This is a “respectable” position, but one that I Truths about Higher Education comes up
view as entirely mistaken. The faculty should short. O’Brien says that his purpose “has been
no more administer the institution than the to raise issues.” He does raise a number of
players should manage the team. Many them (nine “half-truths”), but misses others
schools started to go horribly wrong when and, more important, semantically skirts the
they tried mixing teaching and administra- issues without offering any real solutions.
tion. But the author declines to challenge this And he unwittingly tells the reader why he
conventional idea. adopts this inoffensive approach, when he
In another place O’Brien writes, “I think writes, “The political cost of changing
that multiculturalism is dead wrong.” The entrenched interests is staggering.”
reader earnestly hopes for a tough position That is unquestionably true, and anyone
and suggestions for curing this intellectual who proposes more than minor, cosmetic tin-
cancer (or at least halting its spread). But no, kering with higher education will certainly
he does not want to offend his politically cor- incur the wrath of the entrenched interests,
rect colleagues and thus adds, “However, if comfortable as they are with the status quo.
multiculturalism is bizarre in astronomy, it is O’Brien, sad to say, is like so many in the edu-
not so in the area of the lost moral curriculum. cation establishment who readily sacrifice
It starts in the right place.” He thus criticizes principle and correct action to popularity.
without really criticizing at all. This reminds A reading of this book will give one who
one of Yogi Berra’s saying, “When you come knows little about the terrible state of higher
to a fork in the road, take it.” O’Brien usually education some familiarity with the issues,
follows this advice and manages to take both but for deep analysis and tough solutions, it is
paths. a disappointment, reminiscent of Matthew
Near the end of the book, O’Brien writes, Arnold’s description of the poet Percy Bysshe
“The issue that faces higher education is Shelley: “a beautiful and ineffectual angel,
whether current faculty expectations and edu- beating in the void his luminous wings in
cation will allow them to join in with admin- vain.” O

istration or cause them to fight a generally los- George Roche is the president of Hillsdale College

ing battle against the social and economic gud author of The Fall of the Ivory Tower.
forces that have created the need for decisive

institutional direction.” Indeed, we might
wonder how the largely overpaid and under-
worked faculty of the typical American uni-
versity will react when confronted with the
need for “decisive . . . direction,” but exactly
what this “decisive . . . direction” must entail,
the author will not hazard to guess.

A book that is to deal sensibly with the
many problems of higher education in the
United States must inquire about the real
causes of exorbitant college costs, high drop-
out rates, the dumbing-down of academic



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

Books 59

ongoing dialectic in which the proprietarian
and commoditarian views are continually
refined in response to concrete legal and
social issues of the time.

Commodity and Propriety:
Competing Visions of Property in
American Legal Thought, 1776-1970

by Gregory S. Alexander To trace this history is an enormous task.
University of Chicago Press ® 1997 486 pages Alexander reviews 200-plus years of thinking
® $39.95; $25.00 paperback from David Hume, Adam Smith, and John

Adams, through FA. Hayek, Michael Har-
Reviewed by Bradley A. Smith rington, and Justice William Brennan. In

doing so, he offers up some controversial

o discuss the meaning of property is, in Propositions. For example, while classical lib-
many ways, to discuss the meaning of lib- ~ €rals have usually turned to Thomas Jefferson

erty. If property is an individual right, secure for political inspiration, Alexander portrays
from encroachment by government, then gov- Jefferson’s antagonist Alexander Hamilton as
ernment power is necessarily restricted by the the true father of the individual rights-
existence of property. If, on the other hand, oriented, commodity view of property in
property is merely a private basis for creating America. It was Hamilton, not Jefferson, who
a public good, then government has a right, recognized and promoted property rights in
and at times even a duty, to dictate or regulate intangible objects such as securities and even
its use. vested interests. It was Hamilton who envi-

In Commodity and Propriety, Cornell Uni- Sioned America not as a stable, agrarian soci-
versity law professor Gregory Alexander ©ty of individuals tied to the land, but as “a
chronicles the history of this debate in Amer- Society of great wealth and power whose life
ica. Alexander argues that in colonial Ameri- blood was the class of enterprising merchants
ca, most lawyers, if not most citizens, [With] none of the vestiges of feudal society
believed that the role of property was to pro- to inhibit [their] entrepreneurial strivings.”
vide for the “public good.” Property, especial- On the other hand, modern liberals, who
ly land, filled this role by anchoring the citi- like to point to slavery as a great evil of lais-
zen to his “rightful” place in society, thereby sez-faire capitalism, will find Alexander cor-
promoting social stability. rectly demonstrating how the philosophy of

What individuals gained from holding Slavery reflected proprietarian views of prop-
property was not independence from govern- erty. The abolition of slavery was a triumph
ment, but rather independence from the for the classical liberal, commoditarian view.
swings and roundabouts of the marketplace. ~~ Despite such triumphs, the commoditarian
With this independence, however, came a VIEW has never vanquished the proprietarian
duty to use property to further alleged societal View. The common perception that property in
interests. If one failed to properly use his America has always been considered a basic
property, the state could compel him to act for Individual right, to be held free from the pow-
the public good. This is the “proprietarian” ©rs of government, is simply not true, says
view of property. Alexander. Readers of this magazine may

During the American Revolution, views on wish it were so, but a quick look at recent EPA
the role of property shifted dramatically. A regulations in the Federal Register demon-
new conception of property, as an alienable Strates his point.
market commodity, took root. In this “com- Still, the strength of the commodity vision
modity” conception, property serves to define has been such that in the late twentieth centu-
the “legal and political sphere in which indi- Ty those who favor the activist state have
viduals are free to pursue their own private Sometimes abandoned proprietarian rhetoric
agendas and satisfy their own preferences, and attempted to put their theories into com-
free from government coercion or other forms modity terms. This is seen in efforts to define
of external interference.” Alexander suggests 2 commoditarian type “right” to welfare,
that the last 200 years have been marked by an health care, or other government benefits.


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

60 THE FREEMAN/IDEAS ON LIBERTY © MAY 1999

What Alexander’s book lacks is a sense of the public goods and economies-of-scale
passion. Though describing a great clash of rationales, he thoughtfully analyzes, and casts
ideas, there is little sense of drama or energy doubts on, the case for the authority of the
in these pages. Alexander reports the theories state.
as equals, with little seeming interest in which De Jasay’s explorations of the concept of
view ought to prevail, or even in evaluating “limited government” reveal an awareness of
the merits of the arguments he describes. It the difficulties inherent in all forms of collec-
must fall to others to demonstrate why and tive behavior: namely, that “collective choice
how a classical liberal view—the commodity is never independent of what significant num-
conception of property rights—promotes bers of individuals wish it to be.” In any kind
prosperity, peace, and liberty. [0 of political system—including a democrati-
Bradley Smith is associate professor of law at Capi- cally constituted one—it 1s impossible for
tal University Law School, Columbus, Ohio. political authority to remain “limited” except
by imposing on it a higher sovereign authori-
ty, whose own actions must, in turn, be super-
vised by an even higher sovereign power, ad

Against Politics: infinitum. The United Nations, for example,
On Government, Anarchy, and Order has been given some measure of authority to
by Anthony de Jasay control the excesses of nation-states, but what
Routledge © 1998 ® 256 pages ® $75.00 will control the United Nations?

“Limited government with popular sover-
Reviewed by Butler Shaffer eignty,” de Jasay tells us, “is precarious,’

dependent on widespread acceptance of cer-
hile studying political philosophy in tain philosophical propositions. The case for
college, I often pondered: why should liberty, in other words, is never stronger than
my preferences for liberty have to depend on the insistence by each of us that it be pre-
philosophical principles rather than my per- served. Liberty must crumble when its philo-
sonal will? Why should it not be sufficient sophical foundation does.
simply to declare that I do not choose to be De Jasay has no sympathy for such tradi-
coerced by a political system? Such a propo- tional fictions as “the common good” as a
sition did not seem to me to be so out of the basis for state power. Noting that “[n}ine-
ordinary—after all, the marketplace operates tenths of practical politics is the making of
on such voluntaristic assumptions with obvi- nonunanimous decisions by some, which hurt
OUS SUCCESS. others,” he proceeds to explain how an alleged
That inquiry led me to other questions, “common good” need not, in fact, “be good
such as, “Why isn’t personal liberty the pre- for, nor desired by, any individual, past, pre-
sumed condition in human society, with the sent, or future.” The result is social engineer-
burden of proof placed on those who would ing, which he defines as “a series of political
restrict it?” The “social contract” theorists’ decisions making people allocate their efforts
answer that we have agreed to the state’s and wealth otherwise than they would if
restrictions on our liberty rang hollow in the allowed to do it as they saw fit.” Even Hayek
face of the tyrannical and butcherous regimes comes in for criticism for his treatment of
that had come to represent the modern world “public goods.” Hayek’s vision of “social

of nation-state politics. order,” de Jasay explains, would make “the
To those who share this love for liberty, and state’s place in society . . . ad hoc, open-

who have likewise been troubled by such ended, [and] indeterminate.”

questions, Anthony de Jasay’s book will prove In a politicized society that no longer dis-

worthwhile. In a lucid and intellectually tinguishes between positive law that is
invigorating manner, he challenges the classic imposed by the state and common law that
justifications that have been offered on behalf arises out of human customs, practices, and
of state power: from social contract theory to expectations, de Jasay’s resurrection of the


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

Books 61

distinction is not only refreshing, but essential Those who understand the distinction
to the case for nonpolitical systems of social between “rights” and “liberties,” and of how
order. The cult of state power appears to be in “property” and “liberty” are inextricably inter-
retreat in the minds of increasing numbers of twined, will appreciate de Jasay’s analysis. To
people, and de Jasay’s analysis is most useful those who wish to challenge the foundations
in sweeping aside the dust-laden assumptions of all systems of collective authority, his book
and faithfully chanted doxologies on which will be of great value in confronting the argu-
such power has rested. ments that have been historically offered on

Economic and systems analysis, “chaos” behalf of such systems. The author’ title is, in
theory, and a growing spiritual revulsion at the end, perfectly descriptive, for the book
what state collectivism has wrought in this indeed makes the case against politics and in
century alone have combined to fuel a resur- favor of liberty as the means of establishing
gent interest in the processes of “spontaneous” order in human society. 0
order. Such order depends on a concept of Buster Shaffer is professor of law at Southwestern
“rights created by voluntary contracts,” which, University School of Law and author of Calculated

de Jasay tells us, are derived from prope Chaos: Institutional Threats to Peace and Human

hich y . t a “rioht b oo i rty Survival (1985) and The Redistribution of Authority:
which, 1n turn, 1s no a right... but a hberty Privately Owned Property as a System of Social
to act upon owned objects.” Order (forthcoming).

Inspired? Shocked?
Delighted? Alarmed?

Let us know.

We will print the most interesting and provocative letters we receive

regarding Freeman articles and the issues they raise. Brevity is
encouraged; longer letters may be edited because of space limita-
tions. Address your letters to: The Freeman, FEE, 30 S. Broadway,
Irvington-on-Hudson, New York 10533; e-mail: freeman@fee.org;
fax (914) 591-8910.



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

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

The Pursuit of Happiness by Charles W. Baird

Tony Blair and
“Fairness at Work”

ony Blair, prime minister of Great strikes without ballots, mass picketing, closed
Britain, heads the “New Labour” Party. shops and secondary action are over.” The
The old Labour Party was a wholly owned purpose of the White Paper, he said, is “to
subsidiary of the Trades Union Congress replace the notion of conflict between
(TUC), the umbrella organization for most employers and employees with the promotion
British unions. In 1976 Labour Prime Minis- of partnership.”
ter James Callaghan asserted that “no modern In the post-Thatcher status quo, there is no
government can govern against the trade statutory requirement that employers recog-
unions.” During the 1978-79 “Winter of Dis- nize any union or even bargain with any union
content,” the TUC and its constituents assault- on the subject of recognition. Recognition is a
ed Britain with crippling strikes, violence, matter of voluntary negotiations between
and sabotage. The electorate then elected employers and unions. Government doesn’t
Margaret Thatcher, who set about taming the intervene in labor relations except to uphold
unions through a series of statutes designed to the rule of law.
make them subject to the ordinary rule of law
and is Dott workers against predatory po. Weather Voluntarists
In the early 1990s Blair began to repackage British unions supported this voluntary sys-
the Labour Party. New Labour would no tem of labor relations when they enjoyed the
longer take its orders from the TUC. It would privileges and immunities granted to them in
favor entrepreneurship in the private market- the Trade Disputes Act of 1906. From then
place, continue with the Conservative policy until the 1980s British unions were exempted
of privatization, and work in the interests of from all claims for damages arising out of
the increasingly affluent British middle class. labor disputes. Employers were subject to the
Like his friend and mentor, Bill Clinton, Blair pyle of law, but unions were not. Unions used
was a successful salesman. In 1997 he defeat-  «pJacking” (violence-enforced boycotts) and
ed John Major and became the first Labour mags picketing to force employers to agree to
Prime Minister in almost 18 years. closed-shop collective bargaining. Now that
Blair resembles Clinton in another way— the Thatcher reforms have removed their priv-
he favors compulsory unionism. In his fore- jleges and immunities, the unions no longer
word to a May 1998 White Paper titled “Fair- Jie voluntarism. They want the Labour gov-
ness at Work,” Blair assured his readers that ernment to force employers to recognize and
“There will be no going back. The days of to bargain with them. Blair proposes to do

Charles Baird is a professor of economics and the exactly that—American-style.
director of the Smith Center for Private Enterprise Exclusive representation and mandatory
Studies at California State University at Hayward. collective bargaining are central to American

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64 THE FREEMAN/IDEAS ON LIBERTY ® MAY 1999

labor-relations law. Exclusive representation explain that the Central Arbitration Commit-
is the imposition of union recognition on the tee (CAC), a government agency, can deter-
basis of majority vote among workers. A mine whether a union has majority support
union that wins such an election at a firm rep- among workers without a ballot. Once a bar-
resents all the employees eligible to vote, even gaining unit is defined by the CAC, and if the
those who vote against the union. Mandatory employer does not voluntarily recognize a
bargaining means that an employer is forced union seeking recognition, the CAC can com-
to bargain with a union certified by majority pel recognition “if it is satisfied, having exam-
vote, and during bargaining the employer ined carefully suitable evidence from the
must compromise with the union. union and, if he wishes, from the employer,
Apologists for exclusive representation that more than 50% of the bargaining unit are
argue that it 1s merely workplace democracy. members of the union seeking recognition.”
The will of the majority rules in politics; so, The CAC doesn’t have to consider evidence
they argue, it should also rule at the work- from the employer; it may compel recognition
place. Mandatory bargaining is necessary solely on the basis of union-provided evi-
because the whole purpose of union recogni- dence. The ballot procedure is used only when
tion is bargaining. Recognition without bar- the CAC is unwilling to compel recognition
gaining is meaningless. without a ballot. The union evidence on which
the CAC is to make its determination “might
take the form of membership records or a
petition signed by a sufficient number of
These apologists conveniently forget that employees.”
democracy is a form of government, not a rule American unions have long tried to get
for private decision-making. The classical lib- Congress to amend the National Labor Rela-
eral principle of freedom of association tions Act to compel employers to recognize
requires that in their private lives (1) all indi- unions on the basis of signatures. Why?
viduals (even employers) be free to choose to Union organizers collect signatures on a face-
associate with other willing individuals for to-face basis, and they are not known for their
legal purposes, and (2) all individuals be free gentle manners. It is much more difficult for
to choose not to do so. Exclusive representa- workers to resist face-to-face organizers than
tion and mandatory bargaining violate free- to vote no in a secret ballot election.
dom of association. To be represented by a However, the White Paper does not propose
union is to associate with it. To have a union to adopt American “union security.” American
as a bargaining agent is to associate with it. To workers in untonized firms may be forced to
bargain with a union is to associate with it. pay union dues and fees as a condition of
So what is Blair up to? Chapter Four of the continued employment. This coercion is
White Paper explains that the Labour govern- excused by saying that since a certified union
ment will propose legislation to force an must represent all workers in a bargaining
employer to recognize a union “where a ballot unit, every worker should be forced to pay a
shows that a majority of those [workers] vot- share of the union’s operating costs, otherwise
ing and at least 40% of those eligible to vote many workers would be free riders.
are in favour of recognition.” Moreover, a In the 1930s Senator Robert Wagner, the
union so recognized will represent all the principal author of the National Labor Rela-
workers in the “appropriate bargaining tions Act, advocated a “camel’s nose under
unit”—that is, all the workers eligible to vote. the tent” strategy. First, make a few changes
This is American-style exclusive representa- in the law, then a few more, and so on. Even-
tion. The White Paper also states, “Recogni- tually your goal will be reached—the union-
tion will cover pay, hours and holidays.” In free tent will collapse. Given his affinity for
other words, recognition implies mandatory the American model, could it be that Blair
bargaining on those subjects. will impose union security once forced bar-
In Annex 1 of the White Paper the authors gaining has been digested? [

Freedom of Association