===== PAGE 1 ===== ~~ — oo DEAS — ON [IBERTY January 2000 Vol. 50, No. 1 FEATURES 8 Across the Sea of Commerce by Anthony Young ( 12 How to Sink a Car Ferry by Andrew P. Morriss 19 The Law of Supply and Demand by Israel M. Kirzner ¥ 22 Why Crime Declines by Bruce L. Benson 28 Technology, Progress, and Freedom by Edward W. Younkins 33 William E. Rappard: An International Man in an Age of Nationalism by Richard M. Ebeling 44 Nock on Education by Wendy McElroy COLUMNS 4 THOUGHTS on FREEDOM—Two Indispensable Lessons by Donald J. Boudreaux 17 IDEAS and CONSEQUENCES—A Tribute to the Jitney by Lawrence W. Reed 26 POTOMAC PRINCIPLES—New Excuses for Old Failures by Doug Bandow 31 THE THERAPEUTIC STATE—Remembering Krafft-Ebing by Thomas Szasz ¥ a2 ECONOMIC NOTIONS—Creating Jobs vs. Creating Wealth by Dwight R. Lee 49 ECONOMICS on TRIAL—Economics for the 215t Century by Mark Skousen Yes THE PURSUIT of HAPPINESS—C Capitalism and the Common Man by Walter E. Williams DEPARTMENTS 2 Perspective—Double Take by Sheldon Richman 6 The Government Is the Stabilizer? It Just Ain’t So! by Roger W. Garrison S51 Capital Letters 54 Book Reviews The New Know-Nothings: The Political Foes of the Scientific Study of Human Nature by Morton M. Hunt, reviewed by George C. Leef; A New Deal for Social Security by Peter Ferrara and Michael Tanner, reviewed by John Attarian; Myths of Rich and Poor: Why We’re Better Off Than We Think by W. Michael Cox and Richard Alm, reviewed by Donald J. Boudreaux; The Letters of Centinel: Attacks on the U.S. Constitution, 1787-1788 by Samuel Bryan, reviewed by Richard Gamble; Foundations of Economics: Beginner’s Companion by Yanis Varoufakis, reviewed by Paul Heyne; Limited Government, Individual Liberty and the Rule of Law: Selected Works of Arthur Asher Shenfield edited by Norman Barry, reviewed by William H. Peterson. Lesson plans for ® articles are available at www. fee.org. ===== PAGE 2 ===== IDEAS Double Take Published by The Foundation for Economic ucation By now you've noticed that The Freeman: Pe 5017330 F AX (914) 591-8910 Ideas on Liberty has become simply Ideas on E-mail: iol@fee.org Liberty. We made the change for several rea- FEE Home Page: http://www .fee.org sons, the major one being the unfortunate President: Donald J. Boudreaux association of the name with a group with Editor: Sheldon Richman which we in fact are not associated. Managing Editor: Beth A. Hoffman Ideas on Liberty has as intimate a connec- Editor Emeritus tion with the Foundation for Economic Edu- Paul L. Poirot cation as The Freeman. It was the name of Book Review Ear FEE’s first periodical. When FEE founder and Editorial Assistant president Leonard Read brought The Freeman Mary Ann Murphy to FEE in 1956, he merged the two publica- Columnists tions and made Ideas on Liberty the subtitle Charles W. Baird for the new magazine. Those words have been oe Lan on the cover ever since. Rather than a name Lawrence W. Reed change, then, it is more a refinement. After all, Russell Roberts what words better describe this magazine than Mark Skousen Ideas on Liberty? That is what it has always Thomas Szasz been about. And that it will remain. Walter Williams We strove to maintain the magazine’s Contributing Editors appearance despite the change in title. That’s Peter J. Boettke - : . Clarence B. Carson our way of saying that the content will contin- Thomas J. DiLorenzo ue to be the best writing on individual free- Burton W. Folsom, Jr. dom, private property, the market order, and Joseph S. Fulda the rule of law to be found anywhere. Bettina Bien Greaves . Rotonst Higgs We see Ideas on Liberty as Leonard Read John Hospers saw it: as part of the lifelong endeavor to under- Raymond J. Keatin stand liberty in all its fullness. As Read wrote Daniel B. Klein in the first issue of Ideas on Liberty in 1955, Wendy McElroy ren [L]iberty, like truth, is an object of infi- Ror Nh omss nite pursuit, a quest without end, ever! . . . Edmund A. Opitz In brief, not a single person among us 1s James L. Payne justified in regarding himself other than as William H. Peterson a student of liberty. No know-it-all exists or Jane S. Shaw ever will. Lonard ene In searching for a student of liberty, the WIence mH. ite . . search must be within one’s self. In the Ideas on Liberty (formerly The Freeman: Ideas on Liberty) is the month- 4 3 ith ly publication of The Foundation for Economic Education, Inc., Irvington- world of persons, 1t 1s only within each of on-Hudson, NY 10533. FEE, established in 1946 by Leonard E. Read, is a us that the fertile, explorable areas exist. nonpolitical, educational champion of private property, the free market, and . . limited government. FEE is classified as a 26 USC 501(c)(3) tax-exempt The best explorer of oneself is oneself. It is organization p : Copyright © 2000 by The Foundation for Economic Education. Per- not possible to impart to others that which 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. we do not POSSESS. And even after we have The costs of Foundation projects and services are met through dona- made some progress in understanding, the tions, which are invited in any amount. Donors of $30.00 or more receive . a subscription to Ideas on Liberty. For delivery outside the United States: most we can do for others is to make $45.00 to Canada; $55.00 to all other countries. Student subscriptions are 11: $10.00 for the nine-month academic year; $5.00 per semester. Addition- known to them a willingness to shar € what al copies of this issue of Ideas on Liberty are $3.00 each. 1 ink Bound volumes of The Freeman are available from The Foundation for we have di scovered by our own thinking, or calendar years 1972 to 1999. The magazine is available in microform from University Microfilms, 300 N. Zeeb Rd., Ann Arbor, MI 48106. 2 Cover photo of the QE2 courtesy of Cunard Lines. ===== PAGE 3 ===== what we find edifying from recorded think- ing the free society and the conditions neces- ing. Whether or not what we offer is, in sary for world peace and commerce. Richard fact, shared, is beyond our power; and we Ebeling chronicles the life of one of the centu- should realize this. ry’s most eloquent defenders of civil society. The idea that everyone is equally qualified for education has been the foundation of gov- The story of the transatlantic ocean liner is ernment school systems for many years. It’s one of bold entrepreneurship and technologi- an assumption that Albert Jay Nock eloquent- cal innovation. It’s also a story of internation- ly challenged throughout his career as a al competition, triumph, and tragedy. Anthony defender of freedom and individualism. Young has the details on this titanic episode in Wendy McElroy explores Nock’s thoughts on the history of private enterprise. education. On a smaller scale, car ferries have also Our columnists have come up with provoca- succeeded in providing valued consumer ser- tive subjects this month: Donald Boudreaux vices when left to private enterprise. But draws two big lessons from the twentieth cen- politicians never seem to get the message, as tury. Lawrence Reed pays tribute to the politi- Andrew Morriss points out. cally shunned jitney. Doug Bandow debunks Everyone who studies economics begins foreign aid. Thomas Szasz reveals the purpose with the supply-and-demand diagram, which of psychiatry. Dwight Lee shows why we purports to illustrate how market-clearing shouldn’t want to create jobs. Mark Skousen prices are determined. Yet there is something looks to the economics of the next century. strangely dissatisfying about it as presented Walter Williams ponders who benefits most by mainstream economics. As Israel Kirzner from capitalism. And Roger Garrison says to * kk shows us, that dissatisfaction is justified. those who believe that government stabilizes Crime has been diminishing, and every the economy: “It Just Ain’t So!” politician has been scrambling to grab some Our reviewers give the low-down on books of the credit. Bruce Benson suggests, howev- about the enemies of science, Social Security er, that much of the praise should go to the reform, rising living standards, a forgotten private citizens who take crime prevention antifederalist writer, the nature of economic into their own hands. theory, and the rule of law. A key to a better life is technology, but it Finally, a correction regarding our Novem- has certain prerequisites. Edward Younkins ber 1999 issue. In Wendy McElroy’s article, discusses the nature, requirements, and value “Is the Constitution Antiquated?” (p. 26), the of technology, and warns that government passage in the Constitution referring to attempts to promote it are wrong-headed. “attainder of treason” is Section 3 of Article William Rappard was a Swiss classical lib- III, not Article II. eral who left a large number of books explor- —SHELDON RICHMAN The apple icon ® identifies articles that are appropriate for teaching students sever- al major subjects—including economics, history, government, philosophy, and current issues. We also provide sample lesson plans for these articles on our Web site www.fee.org and in written form. Professors, teachers, and homeschooling parents need only to visit our Web site or request written lesson plans to take advantage of this unique service. ===== PAGE 4 ===== Thoughts on Freedom by Donald J. Boudreaux Two Indispensable Lessons he 1900s are now history. I say “1900s” error, or that vital form of experimentation rather than “twentieth century” to avoid that Virginia Postrel calls “play.” This trouble irritating those sticklers for precision who is magnified a millionfold when the utopian note that the final day of the twentieth centu- scheme is enforced by the state, for then the ry is December 31, 2000, and not December arrogant task of defining and enforcing per- 31, 1999. fection is monopolized. There’s no longer the I agree, too, with sticklers of another sort comfort of competing utopias—the ability to who point out that, because time measure- leave utopia A for utopia B (or, far more sen- ment is a human convention, there’s nothing sibly, to avoid utopia-ization altogether). special about January 1, 2000 (or about Janu- When the state is in the utopia business, it ary 1, 2001). Every date—say, August 24, alone defines and insists upon the standards 1938, or June 7, 2097, or any other date you that must be met. History proves the state’s care to name—is the start of a unique 100- ruthlessness at slaughtering anyone who year period (and a unique 1,000-year period, might remotely not measure up. and a unique 10,000-year period . . .). Consider the twentieth century’s premier Nevertheless, human conventions are real; utopian scheme—communism. In exchange they matter because people pay attention to for unlimited state power, it promised every- them. While we shouldn’t impute mystical one greater prosperity, security, equality, lib- significance to our particular contrivance for erty, and cultural refinement. Instead, it deliv- marking time, it is indeed appropriate this ered only destitution; its people were made month to reflect on the past 100 years. “secure” only in the way that prisoners are What are the most critical lessons for us to secure; the masses were equally impoverished learn from that century? I offer two candi- while their rulers enjoyed bounties of special dates. privileges; liberty was crushed; and the result- ing culture was hideous and grotesque. Shun Utopia Fascism and Nazism, of course, were utopi- an evils as well. They, too, justified unlimited state power as the means to earthly paradise. They, too, delivered destitution and terror. What Thomas Sowell calls “the quest for cosmic justice”—the quest for utopia— inevitably leads to earthly hell.! If we learn only one lesson from the twentieth century, let it be that utopian visions are terrible, dreadful Donald Boudreaux is president of FEE. menaces. First, utopian schemes are disastrous. They should be avoided like the plague that they are. The trouble with any utopia—Iliterally, “no place” —is that, by its very nature, its advocates do not tolerate deviations from their visions of perfection. They do not toler- ate processes, growth, compromise, trial and ===== PAGE 5 ===== Keep Democracy in Perspective De-romanticizing democracy is frowned upon today, but I believe that it must be done. The second lesson of the past 100 years is Democracy might be the most appropriate that democracy alone is insufficient for a soci- | paane of choosing government officials, but ety to be truly free and prosperous. Private hat does not imply that democracy equals property rights are far and away the most freedom. Freedom requires more than the important bulwark protecting freedom and right to vote; it requires that each person be as ensuring prosperity. Democracy, as such, restrained as possible from the arbitrary guarantees neither. While this lesson is just as ij) of others—regardless of whether the oth- true as the one about utopia, it isn’t as widely oc are conquering tyrants, hereditary oli- understood. After all, most of us alive in the garchs, black-robed judges, or a majority of West have been bombarded with paeans to neighbors or countrymen. democracy. Schoolchildren are taught that Private property is the indispensable pro- Western nations are free because they are (ection from the arbitrary will of others, even democratic. Indeed, they are taught that free- when this arbitrary will results from a majori- dom is Synonymous with democracy. Voting = {aria election. Private property gives to each freedom = voting. of us not only the assurance that others will But voting does not equal freedom. Voting employ themselves and their resources in is merely the act of yanking a lever (or slip- ways that create prosperity for all, but also ping paper into a box) every few years to 1eg- (hat each of us has a space that others cannot ister one among thousands or hundreds of ;,ate. thousands or millions or hundreds of millions For evidence that private property rather of preferences for this or that candidate. The 1, democracy is the key to prosperity and chance that any one vote will affect the out- freedom, 1 point to India and Hong Kong. In come of any election is practically zero. No ypgia the electoral franchise is wide and elec- voter ever really chooses his or her represen- in have long been regular, but property tative—at least not in the way that each of us rights are weak. For most of the post-World chooses an occupation, a house, a church, a War II era, in contrast, Hong Kong had no college major, books to read, or a spouse. democracy, but property rights there have In our everyday, nonpolitical lives— peep among the strongest the world has ever equipped as we all are with our private proper- geen Indians are poor and shackled by a mas- ty rights—we routinely make choices that ively corrupt state; the people of Hong Kong count. If you choose to buy a Ford rather than wealthy and free. a Volkswagen, you get a Ford. What you get Private property, not democracy, is the among the available options does not depend great guarantor of prosperity and liberty. upon how others choose. You get what you Ang because it decentralizes power, it safe- want; everyone else gets what he and she guards us from madmen with utopian hallu- wants. Not so in elections. You get only whata o.oo OJ majority of the voting group wants. Thus, every time a decision is made collectively 1. Thomas Sowell, The Quest for Cosmic Justice (New York: eg. ego . Free Press, 1999). rather than individually, no individual is free. Each is a slave to the majority. ===== PAGE 6 ===== IDEAS ON [IBERTY The Government Is the “In the event of a recession, people turn to Stabilizer? Government en masse.” Though there is dispute at the most funda- mental level, there can be agreement about * 9 | the likely course of the economy in the It Just Ain t Sol months or years ahead. According to Uchitelle, “the eight-year expansion walks on precarious legs, and when it collapses, getting tability is the perennial issue in macroeco- the American economy back on its feet could nomics. The economist’s judgment about be surprisingly hard and painful.” No doubt. the stability of the market economy stems But why, specifically, do we say the legs are from what Joseph Schumpeter called the precarious? And who, exactly, is supposed to “pre-analytic vision.” To illustrate the point, be surprised that recovery will be hard and Schumpeter specifically used John Maynard painful? Keynes and his pre-analytic vision: Markets Uchitelle writes that “The strengths of this are inherently unstable; the government is the expansion are potentially destructive.” (Read: stabilizer. This belief, or vision, was held by Strengths are weaknesses; the market is inher- Keynes years before he published his General ently unstable.) He sees precariousness in the Theory in 1936. fact that “the current expansion is fueled by The most fundamental criticism of Keynes- private-sector debt.” Fueled? The Keynesian ian economics has been offered by those notion that the government can “fuel” the who embrace the opposite vision: markets economy (“goose” the economy would be are inherently stable; the government is the more apt) by deliberately spending more than destabilizer. This was the view of Ludwig von it taxes has been uncritically transplanted to Mises and F. A. Hayek. The evidence of more the private sector: “It is deficit spending that than a half-century of failed “stabilization stimulates an economy, whether it comes policy” strongly supports the Mises-Hayek from the private or public sectors.” Particular- view. The Keynesians can persist only by ly troublesome, according to Uchitelle, is the arguing that particular countercyclical mea- prospect that the private-sector stimulant will sures were too weak or implemented too late. turn into a public-sector handicap when the Underlying the whole debate, however, is a bubble bursts. The government will then have fundamental and enduring conflict of to resort to deficit finance to stimulate an visions—to use the title concept of Thomas already debt-wracked private sector. It is as if Sowell’s 1987 book. the government “were starting a one-mile race Writing for the New York Times (Week in from 100 yards behind the starting line.” Review, August 22, 1999), Louis Uchitelle Economists who understand the market’s asks, “Who You Gonna Call After the Next self-stabilizing properties find no special sig- Bust?” His answer—and those of the authori- nificance in private-sector debt. It doesn’t ties on whom he relies—are Keynesian in the fuel; it doesn’t stimulate; it doesn’t signify most fundamental sense. Note the vision- precariousness. Private-sector debt is simply bound assessment of Robert Pollin (Universi- the sum total of the indebtedness of many ty of Massachusetts): “[Markets] can’t cure business firms and individual entrepreneurs. themselves. We will have to acknowledge that Most have borrowed on the basis of sound we need government for that. It’s the stabiliz- judgment and a healthy grasp of their particu- er.” And note that Princeton’s Alan Blinder lar economic circumstances. The profits they imputes the Keynesian vision to the public: earn will put them in command of even more 6 ===== PAGE 7 ===== 7 resources in the months and years ahead. question of which view is correct would be an Some, though, have borrowed on the basis of idle one. But if a central bank is in charge of faulty judgment. They will incur losses and stabilizing the economy, the question takes on will find themselves in command of fewer critical significance. Which view does the resources. This is the nature of the market central bank think is correct? And what are process; this is the system of profit and loss. the policy implications? With each movement of the unemployment rate, speculators reform their expectations about what the Fed is likely to do and when it is likely to do it. A central Exonerating private-sector debt per se does bank trying to manipulate the market while not mean that this debt is never a symptom of the market tries to anticipate and hedge a problem. But what is the underlying prob- against the central bank’s actions is not a lem? What accounts for the increased level of recipe for macroeconomic stability. indebtedness noted by Uchitelle? Is it a credit So, who you gonna call after the next bust? expansion engineered by the central bank? Is If government is the destabilizer, it makes lit- it banking legislation that has encouraged tle sense to turn to that same government for financial institutions to take undue risks while stabilization. But the Keynesian economists the FDIC continues to provide deposit insur- are sure to make that very call, and the gov- ance at subsidized rates? Is it the too-big-to- ernment is sure to respond. Recovery will be fail doctrine that has guided regulators in hard and painful. Who, though, will be sur- dealing with overextended financial institu- prised? Not the students of Mises and Hayek. tions? According to Pollin, acknowledging that It is, of course, all of the above. Centrally we need government to provide stability “will orchestrated credit expansion is the cause of open up a broader debate about what govern- boom and bust as spelled out by Mises and ment should do.” Uchitelle has some ideas of Hayek. Externalizing risks and subsidizing his own here. The Federal Reserve, he argues, risk-taking behavior is another way of foster- has had primary responsibility for stabilizing ing an unsustainable boom. And the standard the economy over the past 20 years. It lowers classical case for the system of profit and loss interest rates when the economy begins to fal- does not fully apply to a system of profit and ter and encourages the private sector to take too-big-to-fail. To recognize these aspects of on more debt. Now, with private-sector debt at our mixed economy is to understand that it is worrisome levels, we need to shift the empha- because of government policy that the private sis from monetary policy to fiscal policy. sector “walks on precarious legs.” Uchitelle sees room for old-line Keynesian Though not noted by Uchitelle, a clear indi- programs: “More government spending on cator of “precariousness” is the markets per- housing, public works, education and income verse reaction to seemingly good economic subsidies seems likely to accompany the next news. Nowadays, when the unemployment recession.” rate goes down, speculators turn bearish. Why Students of Mises and Hayek would opt for so? Isn’t lower unemployment a good thing? decentralizing the monetary system rather One view has it that the current unemploy- than calling on the central fiscal authority to ment rate (about 4.2 percent) is unsustainable, aid and abet the central monetary authority. because it is significantly below the so-called But no. Suddenly, it’s 1936 again. Keynesian- Sign of a Problem natural rate of unemployment (generally ism is back—and in its rawest form. ] believed to be 5 to 6 percent). The alternative —ROGER W. GARRISON view is that the natural rate itself has fallen. Department of Economics In an unregulated market economy, the Auburn University ===== PAGE 8 ===== IDEAS ON [IBERTY Across the Sea of Commerce by Anthony Young he Industrial Revolution, which brought delivery of mail. Samuel Cunard won the con- about the age of steam, transformed tract by assuring the Admiralty and investors ocean travel and shipping in the nineteenth that the mail and passengers would cross the century. It resulted in a paradigm shift in the Atlantic on better steamships than theretofore size of ships and the speed with which they built, depart on time, and arrive precisely as could cross the oceans. With this shift from scheduled, all with strict adherence to safety. sail to steam came a shift from wood to iron The British and North American Royal Mail and steel. The skills, trades, and businesses Steam-Packet Company was founded on the needed to build these steamships grew dra- motto “Speed, Comfort and Safety.” The first matically as a result, providing employment ship of this line was the Britannia; it made its for thousands of workers in Europe and North first voyage to Halifax and Boston in 1840. America in the nineteenth and most of the Charles Dickens immortalized the spartan twentieth century. Ocean travel would only be Britannia when he made the crossing in Janu- eclipsed by the advent of flight. ary 1842. His caustic observations of the trip The demand for travel and shipment of were recorded in his slim volume American cargo spurred this technological shift, but Notes. It would be decades before “luxury there was another, often overlooked factor liner” would enter the vernacular. that drove the push to larger and faster ships: No doubt it was the start of Cunard’s com- the mail. Everything from personal corre- pany that influenced the establishment of the spondence to important documents of all White Star Line in Liverpool by John Pilking- kinds could be delivered between Europe and ton and Henry Threlfall Wilson in 1845. Ini- the Americas only by oceangoing ships. Even tially, White Star focused on the trade and in the mid-nineteenth century, the concept of passenger route to and from Australia. Addi- “time-sensitive material” existed. Before the tional competition came from America in age of steam, the time to deliver mail between 1850 when Edward Collins received a mail the European and North and South American subsidy from the U.S. Congress. Collins continents literally depended on the wind. A planned to build four new steamships. The typical crossing could take more than a first was the Atlantic, followed by Pacific and month. A fixed timetable was impossible to Arctic. The latter two ships were the victims establish. of maritime disasters. The fourth ship was In the late 1830s, the British Admiralty never built, and Congress stopped funding invited offers for monthly steamship service Collins’s line in 1860. between Liverpool and North America for the There was competition from other nations as well. Between 1856 and 1862, three new Anthony Young is a freelance writer based in Miami. ~~ steamship lines were founded: Germany’s ===== PAGE 9 ===== Hamburg-Amerika Line and North German A New Century Brings Lloyd, and France’s Compagnie General C Transatlantique. The White Star Line was Larger Ships weakened by trying to compete in the fierce By the turn of the century Germany had the Atlantic passenger route and by internal cor- fastest steamships plying the Atlantic. Ham- porate machinations. It attempted to merge burg-Amerika’s Deutschland won the coveted with other steamship companies, but failed. Blue Ribbon in 1900 for its record speed The company never recovered, and its floating between Europe and America. This award was assets were liquidated. What remained, then seized by North German Lloyd. The including the name, was purchased by 31- British could not catch the Germans, and this year-old Thomas Henry Ismay. His goal was was a liability neither the White Star Line nor to succeed in the transatlantic route where the Cunard could easily surmount at first. The old line had failed, using new, better appoint- French merely sniffed. But it was Cunard that ed, and faster liners. figuratively fired the shot across the bow of its Ismay received the capitalization he needed competitors when it launched the Mauritania from Gustav Schwabe in Liverpool. Schwabe and Lusitania in 1907. These two ships truly agreed to finance the brash young entrepre- were superliners with regard to their size, neur on the stipulation that the new line would speed, and appointments. order its ships from the Belfast, Ireland, ship- The Mauritania and Lusitania were over yard of Harland & Wolff. The reason? 780 feet long and weighed in at over 31,000 Schwabe’s nephew was Gustav Wolff, a junior tons. They each carried 560 first-class passen- partner in Harland & Wolff. gers, 475 second-class passengers, and 1,300 This stipulation turned out to be a salvation third-class, or steerage, passengers. But the for Harland & Wolff, which had been suffer- marvel of these ships lay deep within. Power- ing from a decline in shipbuilding orders. ing these two liners were steam turbines, not With the creation of Ismay’s Oceanic Steam steam reciprocating engines. The Mauritania Navigation Company in 1869, plans were set a new transatlantic record of 23.69 knots, immediately set to build five 420-foot steam- recapturing the coveted Blue Ribbon. Cunard ers. Those ships were the Oceanic, Atlantic, now had two powerful weapons in the battle to Baltic, Republic, and Adriatic, all delivered gain supremacy of the North Atlantic. between 1871 and 1872. Thereafter, Ismay’s Cunard embraced steam turbine technology company kept the workers at the Harland & out of necessity, but it was a fearsome gamble. Wolff shipyards busy building cargo ships, This new technology was pioneered by passenger ships, livestock carriers, even sev- Charles Parsons, who founded the Steam Tur- eral sailing ships—among the last built by the bine Company in 1894. While the steam tur- Belfast shipyard. bine was nothing new, in a marine application Aggressive competition among the it was uncharted territory. Within three years British, German, and French shipbuilding Parsons had developed the world’s first steam and steamship companies had a tremendous turbine in a small cutter named Turbinia. Sea ripple effect throughout the British Isles and trials were completed in 1897. In a brash dis- Europe. Many companies were contracted to play of showmanship before a flotilla of ships supply everything not built by the shipyards celebrating Queen Victoria’s Diamond themselves, from the massive steam-driven Jubilee, the speedy cutter left all witnesses engines to the marine chronometers placed agog. Also witnessing the display of speed on the ship’s bridge to ensure precise time- were Thomas Ismay and his son Bruce. Par- keeping during the voyage. By itself, Har- sons drew up to the Ismay’s ship and invited land & Wolff employed nearly 7,000 work- the two men on board to go for a spin. The ers, performing such varied tasks as riveting Ismays were astounded at the top speed of 40 the ship’s hull plates to making intricate miles per hour. Later, they discussed the pos- wood carving for the increasingly luxurious sibility of building steam turbines for future interiors. passenger liners with Parsons, but it was ===== PAGE 10 ===== 10 IDEAS ON LIBERTY ® JANUARY 2000 Cunard that took the plunge in using the new Ismay related the details to Pirrie. Out of engines in the Mauritania and Lusitania. It those and subsequent meetings evolved the was a gamble that paid off for Cunard. design of the Olympic and Titanic. The ships With these two ships, the gauntlet had been would be 882 feet long, have a 92-foot beam, thrown down before the White Star Line. and weigh more than 45,000 gross tons. They J. Bruce Ismay had taken over direction of the would each carry 410 first-class passengers, Oceanic Steamship Navigation Company and 300 second-class, passengers, 1,000 third- the White Star Line on the death of his father. class passengers, and a crew of nearly 900. However, the company was no longer inde- The three large construction slips at Harland pendent. In 1902, Ismay’s company had been & Wolff’s shipyards were torn down and in purchased by J. Pierpont Morgan and added to their place rose two massive slips to begin his formidable International Mercantile work first on the Olympic and later the Titanic. Marine Company. Many in British financial The keel of the Olympic was laid on Decem- circles worried over the ownership of the ber 16, 1908, that of the Titanic on March 3, prestigious White Star Line by an American 1909. The Olympic completed her fitting out company and what it might do. In fact, it and ocean trials by the spring of 1911 and took turned out that the infusion of capital by Mor- her maiden voyage in June. The Royal Mail gan’s company would permit the White Star Steamship Olympic was the largest ship in the Line to take on the Mauritania and Lusitania. world and was everything the White Star Line had promised. Cunard now had a new neme- . . sis, and another was on the way. The following The Titanic year, the Titanic was launched, with its maid- Not long after the launch of Cunard’s two en voyage set for April 1912. new superliners, Ismay was invited to the pala- Work began on a third liner, called the tial home of Lord Pirrie in London. Pirrie had Gigantic. The name was later changed to Bri- risen through the ranks at Harland & Wolff to tannic, a decision that may have been influ- become managing director. He wielded enced by the sinking of the Titanic after it tremendous power and was admired and struck an iceberg on the night of April 14, respected on both sides of the Atlantic. He saw 1912. The tragic event, with a loss of over Cunard’s two new ships as a threat to the White 1,500 passengers and crew members, has Star Line. With a virtual lock on all ships built proved to be a never-ending story. Captain for the Ismay’s company, Pirrie invited Ismay Edward J. Smith and Thomas Andrews of Har- to dinner to discuss a proposal for two luxury land & Wolff were among the casualties. How- liners to surpass Cunard’s ships. Ismay stated ever, J. Bruce Ismay survived. He stepped Cunard’s new ships would affect the White Star down as chairman of the White Star Line the Line’s bottom line unless something dramatic following year. The decision to step into a was done. Pirrie outlined the size, capacity,and lifeboat would haunt him for the rest of his life. gross tonnage of the liners he believed the The Olympic returned to Harland & Wolff White Star Line should have, and Ismay was in for extensive modifications to its hull, addi- complete agreement. Ismay assured Pirrie he tional lifeboats, and other changes, which could secure financing from J.P. Morgan. They were incorporated into the new Britannic. agreed to proceed immediately with plans for Cunard and the German and French lines two new super ships. While Pirrie went back to reviewed and modified their ships in light of discuss the possibility of building the ships the disaster. Besides the loss of the Titanic, with his key “splendid men,” as he called them, the human toll, and the damage to its reputa- Ismay sailed for New York to put the proposal tion, the White Star Line faced new competi- before Morgan. tion from Germany, which was building its It came as no surprise to Ismay that Morgan own superliners. The first was the Imperitor, backed the idea. Morgan wanted the White launched in 1912, which could carry 5,100 Star Line to eclipse Cunard, and the two ships passengers and crew members. The Vaterland certainly sounded as though they could do it. entered service in 1914. The third and largest ===== PAGE 11 ===== ACROSS THE SEA OF COMMERCE 11 unscathed. Its original ship, the France, had its maiden voyage in 1912. It was joined after the war by the Paris, later by the Ile de France, and in 1932 by the sumptuous Normandie. What was left of the two German lines merged and eventually launched the Columbus, Bre- men, and Europa. A new Italian line emerged during the ’30s with the Rex and Conte de Savoia. No new British liners entered service until the Queen Mary in 1935 following the merger of Cunard and the White Star Line. The Queen Elizabeth, at 80,000 tons, launched in 1940. The Depression had a significant CBERFAHRTSBEDINGLI GEN bo ns sain in che late 300 £2 DI KLAS . eit DE? DRITTEN KLASSE World War II brought transatlantic ocean 5 | TOURISTEN travel to a virtual halt once again, and these - mighty liners reprised their roles as hospital ships and troop transports. Together, the Queen Mary and Queen Elizabeth moved over ship, the Bismarck, was due to go into service one million troops. After the war only the later that year. These new ships of Holland- British and the French lines continued to Amerika were a threat to Cunard and the cross the Atlantic with passengers. White Star Line, with interiors and accommo- dations that rivaled the British lines. The peaceful battle for the Atlantic ended The Jet Age with the outbreak of World War I in August Transatlantic flights became a realistic pos- 1914. In 1915 the British Admiralty requisi- sibility in the late 1940s. TWA was the first tioned the liners of Cunard and the White Star airline to fly the sleek Lockheed Constellation Line and other commercial ships for use as from Washington to Paris at 300 miles per hospital and troop transport vessels. Prowling hour in February 1946, making the trip in 12 German U-boats immediately halted passen- hours. In 1948 the airline started luxury all- ger crossings. In May 1915 the Lusitania was sleeper service, and later instituted “Sky struck by a German torpedo and sank in only Tourist” class for low-cost travel between the 20 minutes. In November 1916, the Britannic United States and Europe. However, many struck a mine and sank in 55 minutes, despite travelers relished the leisure, quiet, and luxu- its double hull. ry the ships provided. In fact, 1957 marked a The ships of Germany fell to a different postwar peak with more than one million pas- fate. The Vaterland was seized by the United sengers opting for the opulent liners. When States while at port in New York. She was con- the first American commercial jet flew to verted to a hospital ship, christened Leviathan Paris in only seven hours on October 26, and entered service in 1917. Imperitor was 1958, the intercontinental jet age was born. also seized by the United States but saw no By 1960, 70 percent of the travelers between wartime service. After the war, the United America and Europe were flying in jets. States kept the Leviathan and Cunard received The superliners had entered a twilight era. the Imperitor. The Treaty of Versailles stipu- The only liners operating by the *70s were the lated that the Bismarck would be finished and QE2 and the new France. The United States handed over to the British as part of the war had entered service in 1952 and was retired in reparations. The White Star Line acquired the 1969. Today, only the QE2 travels the ship in 1922, and renamed it the Majestic. Atlantic. Those who take her do so because The French line got through the war for them, it is the only way to cross. 0 ===== PAGE 12 ===== IDEAS ON [IBERTY How to Sink a Car Ferry by Andrew P. Morriss I recently had the opportunity to travel on a between Frankfort, Michigan, and four other rare form of transportation—one that lake ports. Although thousands of people receives no government subsidies. The S.S. crossed the lake on the not-particularly- Badger, a ferry operated by the Lake Michi- comfortable ships, the railroads kept their gan Carferry Service, makes twice daily trips emphasis on year-round boxcar transport, and between Ludington, Michigan, and Mani- passenger amenities like scheduled depar- towoc, Wisconsin, from mid-May to mid- tures and food service were few. Rail-traffic October, carrying up to 180 automobiles and demand for ferry service was declining, how- 620 passengers. For only $81, I was able to ever. By the 1960s diesel train engines could avoid driving through Chicago and spent the pull 150 rail cars at 50 miles an hour around four-hour trip relaxing on a lounge chair on the rail bypass of Chicago with a crew of five deck. I also had the chance to enjoy a movie, or six, while a ferry, with its crew of 50, could eat, shop, or visit a museum on board. State- carry only 20 freight cars at a time. rooms are available. Railroads were heavily regulated by the fed- Ships began regularly carrying freight eral government, so they could not simply stop across Lake Michigan in 1875. The first car uneconomical services. With the railroads los- ferry, the Ann Arbor No. 1, began service in ing millions of dollars a year on the ferries, the November 1892 between Kewaunee, Wiscon- 1970s saw repeated attempts to secure Inter- sin, and Frankfort, Michigan, ferrying rail- state Commerce Commission’s (ICC) permis- road cars across the lake to eliminate transfer- sion to abandon service. ring cargo between trains and boats at each The Chessie System (the C&O’s successor) end. By the 1950s car ferries had expanded to finally got out of the ferry business by turning carry automobiles and passengers as well as over its three remaining ferries to a company train cars. In 1955, the peak year for the fer- formed by a Ludington businessman, the ries, the Chesapeake & Ohio (C&O) Rail- Michigan-Wisconsin Transportation Co. way’s seven car ferries carried 205,000 pas- (MWT), in 1983. In a measure of how des- sengers, 71,000 automobiles, and 204,460 perate the railroad was to shed its regulatory freight cars on 6,986 crossings among multi- burden, it gave the MWT its last three ferries, ple Lake Michigan ports. which had a tremendous scrap value, for three During that same time, the Ann Arbor Rail- dollars plus the MWT’s agreement to assume road was also operating five car ferries the Chessie’s federally mandated obligation to Andrew Morriss a contributing editor of 1deas on pay the ferry workers for six years even if the Liberty, is a professor of law and an associate pro- boats did not sail at all. fessor of economics at Case Western Reserve Uni- The MWT continued to operate the car- versity in Cleveland, Ohio. ferry service year-round as a combined 12 ===== PAGE 13 ===== 13 freight and passenger operation, as it was turned a profit its first year, and the surround- required to do as a railroad under ICC rules. ing area boomed. More recent estimates put Even so, 80 percent of its revenue came from the ferry’s economic impact at over $20 mil- the summer tourist trade and only 20 percent lion each in Michigan and Wisconsin. from the year-round freight business. The fail- ure to get out of the railroad business doomed the MWT. It ceased operation in November The Role of the Entrepreneur 1990 and filed for bankruptcy. The key to Conrad’s success was the trans- formation of the car ferry service from an extension of the railroad into a tourist orient- ed mini-cruise line. “This is really a whole When he learned that the MWT was plan- new industry because now we are ferrying ning to cease operations, local entrepreneur people instead of rail cars,” Conrad said in Charles Conrad stepped in to save the ferry. 1992. Although passenger traffic started in the Conrad’s father, James, had spent 35 years 1940s, the railroads never marketed it to the working for Pere Marquette Railway, mostly public. as chief ferry engineer. “I spent a lot of my The focus on passengers brought a new time with him crossing the lake,” Conrad told emphasis on service as well. “We’re going to an interviewer in 1992. “Those ferries were a emulate Disneyland and Disney World as big part of my childhood.” much as possible,” Conrad said. “We're going After a few years working on the ferries to give customers the highest quality of pro- Conrad went on to a successful career as an fessional services they’ll find anywhere.” A entrepreneur. In 1962 he started Thermotron stickler for detail, he insisted on on-time Industries, a maker of test chambers for departures and keeping the brochure racks everything from electronic circuitry to air- full in the ticket office—a marked change planes, with $1,000 and just one employee from the railroad’s practice of refusing to run (himself). When he retired 18 years later, it on a fixed schedule. He brought in experts to had 550 employees and $18 million in annual train his employees to ensure that everyone sales. Conrad sold the company for an esti- who got on board had a good experience. The mated $7.5 million. crew was expanded to provide on-board Finding retirement not exciting enough, entertainment—S50 of the 60 crew members Conrad formed a company to restart the ferry now concentrate on passenger services from service as a passenger and automobile ser- the free “Badger Bingo” to puppet shows for vice. He negotiated a deal with the MWT to children. buy the three ferries. A few months before the Much of the publicity surrounding the scheduled launch of the new service the ferry’s new start under Conrad focused on his MWT declared bankruptcy, however, and the love for the Ludington area as a motive for bankruptcy court blocked the deal, ruling that his actions. “He didn’t buy the ferry to make open bids were required. Despite the possibil- money, and I think everyone ought to know ity he would not get to buy the ships, Conrad that, if they don’t already,” Bruce Beda, a invested another $1 million in renovating the Milwaukee businessman and friend of Con- S.S. Badger to ensure that he would not miss rad’s, told an interviewer. “He’s running this the scheduled launch date if he got the ships. ferry because he cares about helping his Ultimately Conrad prevailed in the auction, community.” paying $500,000 for the ferries and investing It’s possible the 74-year-old Conrad didn’t $1.5 million on improvements to launch the care about increasing his personal fortune service with the Badger. through his investment in the car ferry, For the first year of service, Conrad hoped although I doubt he intended to throw his for 80,000 passengers—he got 115,000 and money away. It is impossible, however, that he extended the sailing season to October 11 to didn’t care about making money. Unless the meet the increased demand. The new service ferry made money it wouldn’t last. New Beginnings ===== PAGE 14 ===== 14 IDEAS ON LIBERTY ® JANUARY 2000 Entrepreneurs succeed by filling a need Stormy Waters Ahead others haven’t noticed. The railroads didn’t notice that their freight ferries had become _ Unfortunately, the hands-off approach may passenger ferries, and they failed to adapt. 0€ changing. Inspired by the new company’s The railroad union didn’t notice that unprof- Success, other Lake Michigan towns are look- itable operations meant eventual closure. But Ing to revive their car ferries. Instead of seek- Charles Conrad saw what others did not and 10g entrepreneurs, however, they are turning to created a profitable enterprise in a single year the federal and state governments for subsidies. where others had lost millions for decades. Looking north to the Ludington-Manitowoc His idea produced a legacy of a profitable car ferry, Milwaukee officials determined they ferry, something that will continue to benefit Should have a ferry too. Although they dis- the economies of Ludington and Manitowoc, cussed service with the Lake Michigan Car- and tourists like me, for years to come. ferry twice, negotiations ultimately failed. The Conrad sold the ferry business to some of two sides differ sharply over the reasons for the its executives in fall 1994 and died in Febru- failure. The Carferry charges that the city ary 1995. demanded hundreds of thousands of dollars in His entrepreneurial skills and interest were landing fees” and refused to participate in obviously critical to the revival of the car marketing efforts. The city claims the Carferry ferry. But just as important was the federal demanded operating subsidies as the price of government's and the state of Michigan’s will- starting service and couldn’t deliver the type of ingness to get out of the way of the transfor- service needed by the Milwaukee market. mation of the railroad car ferry into a passen- ~~ Despite their failure to interest the only ger-oriented seasonal service. The ICC successful ferry operator in the area, Milwau- allowed the service to be classified as a pas- kee officials pressed ahead. “It is kind of log- senger ship instead of a railroad, eliminating ical we should have it,” Milwaukee Mayor the requirement that it run 12 months a year John Norquist said during a 1994 budget and carry freight trains. The state exempted hearing on a request for $500,000 in city coal-burning ferries from some air pollution funds to study the idea. requirements. The company also took advan- Getting Milwaukee the ferry service politi- tage of a new state law to negotiate an agree- cians think it should have apparently takes ment with the state so that the new company quite a bit of government help: for starters, would not be responsible for its predecessors’ $80 million in loan guarantees from the U.S. contamination of the dock site, an agreement Maritime Administration to build high-speed critical to getting the service started. hovercraft and a $650,000 loan from the state Note the important difference between of Michigan to the town of Muskegon for a what Conrad and what the government dock. The loan guarantees are essentially a brought to the project. Conrad supplied the way for private entities to borrow on the gov- capital, the know-how, and the idea. The gov- ernment’s credit rating rather than their own; ernment kept its hands off. It didn’t require the guarantees can shave several percentage uneconomic service. It didn’t burden the points off interest costs and allow longer-term 1940s-built ship with 1990s air pollution reg- financing than would otherwise be available ulations. It didn’t require the company to pay from private investors. Of course, if the bor- for the environmental sins of unrelated prior rower goes bust, the taxpayers are left paying owners of the site. It didn’t subject the com- off the loan. pany to the burdensome regulations that gov- Local newspapers also quickly uncovered erned railroads. Any of those things could disturbing facts about Hydrolink, the compa- have killed the project. What the state brought ny chosen by state officials to launch the new to the table was a willingness to refrain from ferry service. Its only known investor, a Wis- destroying the project before it could start. consin neurosurgeon, has a less than confi- Sadly, we live in a society where that happens dence-inspiring past: two bankruptcy filings all too infrequently. since 1990, and guilty pleas to nine counts ===== PAGE 15 ===== How TO SINK A CAR FERRY 15 " i. 1A 6 lig ~« Lake Michigan Carferry—S.S. Badger each of false swearing, forgery, and filing development potential? And is it good for the fraudulent sales tax returns, and quite a few environment and does it clean up the water- malpractice charges lodged against him with front? We had to pick the best projects based state regulators. (In a boost to public confi- on how they were written.” The state concedes dence, the company won't disclose the identi- it didn’t consider whether the project would ties of any of the other investors.) compete with an existing business. The new ferry may yet run aground. One Michigan and Milwaukee officials have sign of trouble for a politically structured pro- been engaged in a great deal of doubletalk to posal is when politicians start distancing conceal the subsidies. The subsidized docks themselves from the opportunity to hand out aren’t a subsidy because anyone could use tax dollars instead of lining up to do so. U.S. them. The loan guarantees aren’t a subsidy Representative Peter Hoekstra, whose district because no money changes hands (until a includes both Ludington and the proposed default!). Ludington residents, however, new ferry’s docking site, Muskegon, was one have no doubts about what the state support of the first to jump ship. Although he initially and federal loan guarantees mean: “We're told the Grand Rapids Press that “it’s pretty not opposing high speed ferry service,” said typical” that congressmen are asked if they William Kratz, executive director of the agree with loan guarantees for constituents, Mason County Economic Development four days later he told Ludington officials that Alliance. “What we’re opposing is the tax- “I am not sure how much influence a con- payer subsidy of one private business versus gressman can have on an issue like this.” an existing, nonsubsidized private business.” State officials aren’t rushing to claim credit The existing ferry company also sees for their contributions either. Michigan Gov- through the Engler administration’s obfusca- ernor John Engler’s spokesman said the tion: “We do consider the grant to be a finan- administration was merely approving projects cial subsidy that gives potential competition based on voter-approved criteria. “We just a significant advantage.” All agree—subsi- determined: Does the project have economic dizing a competitor would be a good way to ===== PAGE 16 ===== 16 IDEAS ON LIBERTY ¢ JANUARY 2000 sink the private-sector success story, leaving The Superiority of the taxpayers holding the bag on Hydrolink’s Private Enterprise loans. The unfairness of subsidizing a competitor Even a quick look at the contrast between to an existing private business is sometimes the Ludington ferry and the proposed Mil- obvious even to politicians. The logical waukee ferry shows the superiority of the answer is not to subsidize either. Not surpris- unsubsidized service. One ferry was started ingly, some local politicians had a different as a labor of love by a successful entrepreneur response. One Michigan state senator said who invested more than $2 million dollars of that “If the state has made its decision to be in his own money. The other is backed by city the subsidy business on this, there’s going to officials who stand to enhance their own have to be parity for Ludington.” standing and a convicted forger, subsidized by Subsidizing both services isn’t even a second- massive government loan guarantees and best alternative. Not only could government direct expenditures. One is the result of years subsidies lead to the same kind of regulatory of involvement in the local community and nightmare that sank the railroads and their car resulting insights into the local economy. The ferries, but forcing unasked-for subsidies on other is the result of a politician’s desire to get the private firm wouldn’t level the playing what is “kind of logical” implemented despite field. The Lake Michigan Carferry Service is the lack of a private sector response. The dif- turning a profit without a subsidy. Hydrolink ference between the markets and govern- can’t even float a boat without subsidized ment’s responses couldn’t be clearer. loans. Even if equal dollar amounts of subsi- The ferries were almost sunk for good once dies went to both, the value of the subsidies to by government regulation of the railroads. Hydrolink would be much greater. The real Let’s hope that Michigan and federal officials choice should not be between one subsidy or come to their senses and remember how they two (or three or four. . .) It should be between helped save the Ludington ferry—by doing one subsidy or none. nothing. OJ ienis of || Clichés of Politics SSS || Mark Spangler, editor Al you tired of hearing people tell you that "We need government to fix this"? If so, || we've got just what you need: Clichés of Foli- 1| tics, now in its fifth printing. Edited by Mark Spangler, this book is a powerful antidote to statist claims that more government is bet- ter. Clichés is also a great resource for students addressing poli- cy issues in research papers or in debate. Counter big-government bombast with Clichés! 524 pages, paperback $9:85 on sale for $6.95 . Please send check or money order to: FEE, 30 South Broadway, Irvington-on-Hudson, NY 10533 Credit card orders: 1-600-452-3915 ===== PAGE 17 ===== Ideas and Consequences by Lawrence W. Reed A Tribute to the Jitney N° person shall operate or cause to be waiting lists, mounds of paperwork, and operated any jitney upon any street, senseless rigmarole. avenue, boulevard or other public place with- in the City of Detroit whether such jitney os . operates wholly within the City of Detroit, or Thriving Business from some point within the City of Detroit or Fortunately, the cops in Detroit look the to some point outside of the City of Detroit to other way and the jitney business 1s thriving. some point within the City of Detroit. According to the Detroit Free Press, no one has filed a complaint against a jitney in at So reads the official ban on one of the old- least 26 years and no jitney driver in recent est illegal businesses that still operate openly memory has had to face the stipulated fine of in Detroit, Michigan. The rather emphatic lan- $500 and 90 days in jail. Nearly a third of guage says, in effect, “We don’t want any part Detroit’s households don’t have cars, and the of this!” And yet on public bulletin boards at city has one of the lowest per capita incomes grocery, drug, and department stores all over of any urban area in the nation, so it’s likely the city, one can find notices that announce, that thousands of technically illegal jitney “For Jitney Service, Call This Number.” rides occur there every week. The drivers Just what is this “jitney” thing that the City charge much less than the taxicabs (which of Detroit, in the name of protecting the pub- many of their customers cannot afford), often lic, officially declares verboten? It’s a very carry their clients’ bags from the store to the popular business in which mostly retired vehicle, are easily accessible in any neighbor- autoworkers, church deacons, widowers, and hood, and are the primary means of trans- otherwise idle but able citizens charge a small portation for Detroit’s poor. fee to give poor people a ride from where they The spontaneous order that Detroit’s jitney shop to where they live. system has produced is elaborate as well as The crime is that jitneys do their good work efficient. According to a report from the without a taxi license from the city govern- Washington, D.C.-based Institute for Justice: ment—the same city government that wouldn’t authorize a single additional taxicab for 50 Although the jitney drivers in Detroit do years. Getting a license to do just about any- not at first seem to be organized, the struc- thing in Detroit means endless delays, lengthy ture of jitney service is actually quite com- plex. While there is little camaraderie and EE — formal organization of jitney drivers, Lawrence Reed is president of the Mackinac Center no 10 g ton ot Jitney for Public Policy (www.mackinac.org), a free-market the market produces a structure of needs research and educational organization in Midland, and Services... . [They] operate mostly out Michigan, and chairman of FEE 's Board of Trustees. of strip mall shopping centers. . . . Most jit- 17 ===== PAGE 18 ===== 18 IDEAS ON LIBERTY ® JANUARY 2000 ney drivers will not service the whole nomic historians writing in the October 1972 shopping center but will attach themselves Journal of Law and Economics, the first one to one store. Thus, each driver has his ter- appeared in 1914 in Los Angeles, when L. P. ritory. Well-known jitney drivers often will Draper accepted a fare from a stranger in transport the store’s employees to and from exchange for a brief ride in Draper’s Ford work as well. Model T. The fare was a “jitney”—slang for a nickel—and it became the industry’s standard Assurance of driver reliability is handled fee for many years thereafter. By the autumn nicely by the market itself. Word of mouth of 1915, a thriving jitney industry was provid-- directs store employees and customers to par- ing inexpensive and reliable transportation in ticular drivers, who tend to live in the areas cities from San Francisco to Portland, Maine. they serve. Owners of stores vouch for certain It didn’t take long, however, for public offi- drivers by issuing them cards that are placed cials and their friends in the electric streetcar prominently in windshields. Drivers seem to industry to start piling on regulations with the prefer this private certification of competence aim of running the jitney competition out of to licensing. “When asked about the possibil- business. The Electric Railway Journal called ity of jitney licenses,” says the Institute for the jitneys “a menace,” “a malignant growth,” Justice, “many drivers are suspicious of what and “this Frankenstein of transportation.” it would mean to have to deal with the bureau- During World War I, the American Electric cracy at the City/County Building.” Railway Association even suggested that jit- Jitneys aren’t special to Detroit. They oper- ney drivers be drafted into the military. It ate in most major American cities in direct but called for the War Industries Board to “sup- illegal competition with both the government- press entirely all useless competition with sanctioned taxi monopolies and government- existing electric railways” and argued that run bus systems. In some places, they face a “men engaged in nonessential automobile ser- lot more harassment from the authorities than vice of this nature should be forced to obtain they do in Detroit. some useful occupations or compelled to In New York City, the police bust jitney dri- enter the service.” vers all the time. Writing in the New York Electric railways aren’t around much any- Times Magazine of August 10, 1997, John more, but taxicab and city bus monopolies Tierney tells the story of an immigrant from have taken their place in the war against jit- Barbados who spent years trying to go the neys. Laws against jitneys and the victimless legal route and get a license to transport resi- crime of helping people get around town dents around the city in his van. His applica- without a license, whether fully enforced or tion included more than 900 supporting state- not, represent a cynical use of the police ments from riders, business groups, and power of government by special interests. church leaders. He was approved by the City They are evidence of corrupt and stupid Taxi and Limousine Commission and sup- politicians who often express sympathy for ported by Mayor Rudy Giuliani. But in the the poor at the same time they make war on end, the city council did what it has done with poor entrepreneurs. almost every such request: it rejected his The persistence of jitneys on America’s application. Now this outlaw entrepreneur and streets is an inspiration, a testimony to the thousands just like him in the Big Apple power of the profit motive that fires up people dodge the cops every day as they earn a living to help people even when it’s illegal to do so. and their customers’ approval. As to the war against them, Mr. Bumble’s Jitneys have a long and honorable tradition famous line from Dickens’s Oliver Twist in America. According to two California eco- comes to mind: “The law is a ass.” OJ ===== PAGE 19 ===== IDEAS ON [IBERTY The Law of Supply and Demand by Israel M. Kirzner he theory of supply and demand is recog- which all those who wish to buy can find sell- nized almost universally as the first step ers willing to sell and all those who wish to toward understanding how market prices are sell can find buyers willing to buy. This determined and the way in which these prices “right” price is therefore often called the help shape production and consumption deci- “market-clearing price.” sions—the decisions that make up not only Supply-and-demand theory revolves around the skeleton, but also the flesh and blood of the proposition that a free, competitive market the economic system. Austrian economics does in fact successfully generate a powerful thoroughly agrees with this. However, when tendency toward the market-clearing price. we dig just a little below the surface of the This proposition is often seen as the most “law” of supply and demand, we encounter important implication of (and premise for) difficulties that have, directly or indirectly, led Adam Smith’s famed invisible hand. Without Austrians to explain the determination of any conscious managing control, a market prices differently from how it is often, at least spontaneously generates a tendency toward implicitly, presented. I will try to explain the the dovetailing of independently made deci- sense in which Austrians are unhappy with sions of buyers and sellers to ensure that each the textbook presentations of supply and of their decisions fits with the decisions made demand—and are yet fully in agreement with by the other market participants. Were this the general emphasis on supply and demand tendency to be carried to the limit, no buyer as being the key to economic understanding. (seller) would be misled so as to waste time attempting to buy (sell) at a price below The Basic Proposition (above) the market-clearing price. No buyer (seller) would in fact pay (receive) a price The basic insight underlying the law of sup- higher (lower) than necessary to elicit the ply and demand is that at any given moment a agreement of his trading partner. To the extent price that is “too high” will leave disappoint- that this proposition is valid, free competitive ed would-be sellers with unsold goods, while markets achieve what F. A. Hayek has justifi- a price that is “too low” will leave disappoint- ably called a “marvel.” But it is in regard to ed would-be buyers without the goods they the validity of this proposition (and in partic- wish to buy. There exists a “right” price, at ular to our reasons for being convinced that this proposition is both valid and relevant) . . . Str York University and author of The Meaning of Mar- that Austrians differ sharply with mainstream ket Process. This is the first in a series of articles lay- textbook €ConomIcCs. And it is precisely ing out some foundational elements of modern Aus- because of the universally acknowledged cen- trian economics. trality of the supply-and-demand proposition 19 Israel Kirzner is a professor of economics at New ===== PAGE 20 ===== 20 IDEAS ON LIBERTY ® JANUARY 2000 for all of economics that this disagreement is inexorably from the belief that market prices sO important. are, in effect, instantaneously known to all potential market participants. The Role of Knowledge . The mainstream textbook approach to this The Dangerous Assumption proposition is, in one way or another, explic- The assumption that all market participants itly or implicitly, based on the assumption of are always fully aware of market opportunities perfect knowledge. The Austrian approach in which they might be interested is often pre- does not make the perfect-knowledge sented, in mainstream textbook expositions, assumption the foundation for this proposi- as part of the assumption of so-called “perfect tion; quite the contrary, Austrians base the competition.” Perfect competition explicitly proposition squarely on the insight that its presumes universal market omniscience. One validity proceeds from market processes set way of expressing the Austrian unhappiness in motion by the inevitable imperfections in with the mainstream textbook treatment is to knowledge, which characterize human inter- point out that to start supply-and-demand action in society. analysis by assuming that competition is “per- In certain respects the mainstream view is fect” (in the textbook sense) is not only to be not unreasonable. In many contexts we gener- wildly (and therefore unhelpfully) unrealistic; - ally take it for granted that human beings are it is in fact also to rob the analysis of all sig- aware of the opportunities available to them. nificant economic content—since the princi- When economists believe, for example, that a pal results sought to be shown turn out to be price increase will cut the quantity people simply statements repeating the governing seek to purchase, and a price decrease will assumption in slightly different language. stimulate sales, this belief is based on the rea- To demonstrate that the interplay of supply sonable assumption that such price increases and demand in a free market generates a pow- or decreases are in fact likely to become erful tendency toward the market-clearing known to prospective buyers soon enough to price is to meet a daunting analytical chal- make a difference. lenge. To demonstrate that in a perfectly com- The mainstream view takes this not unrea- petitive market the only possible price is the sonable assumption and pursues it relentless- market-clearing price is simply trivially to ly, in effect, to its logical —but no longer quite identify what has already been planted in the so reasonable—conclusion. This conclusion initial assumption. To unpack the mathemati- is that in any free market, the market-clearing cally implied properties of a definition may, price is instantaneously (or, at least, very of course, be a significant (mathematical) rapidly) established. If every market partici- contribution. But to demonstrate the attain- pant knows what every other market partici- ment in free markets of the market-clearing pant is prepared to do (including, especially, price by restricting analytical attention to the the quantity he is prepared to buy or sell at situation in which this price is the only one any given price), it follows that any price permitted to be conceivable, is, as a matter of higher than the market-clearing price cannot economic analysis, a hollow triumph indeed. emerge (since prospective sellers would real- This difficulty that Austrians find with the ize that they would be left with unsold goods). textbook discussions of supply and demand It follows, similarly, that any price lower than can be presented in somewhat different terms. the market-clearing price cannot emerge The traditional classroom blackboard demon- (since prospective buyers would realize that stration of the law proceeds by drawing the they will be left without the goods they wish classic supply-and-demand diagram—a down- to buy and for which they are in fact prepared ward sloping demand curve intersecting an to pay a higher price if necessary). The propo- upward sloping supply curve. (For present sition that free-market prices are thus purposes we forgo the details surrounding the inevitably market-clearing prices proceeds construction of this diagram; it is one familiar ===== PAGE 21 ===== THE LAw OF SUPPLY AND DEMAND 21 to the hosts of students who have ever been shrivels instantly fo a single point—the point exposed to elementary economics.) The core where the two curves would have intersected of the classroom analysis generally consists of (had the curves themselves existed!). This is so discussion showing, first, that any market because any point on a market supply curve price higher than that indicated by the inter- or on a market demand curve that is not that section of the two curves (that is, a price high- intersection point can have analytical existence er than the market-clearing price) must tend only by suspending some or all of the condi- to produce competitive pressure toward a tions that define the state of perfect competi- decrease in price (since the high price will tion. The diagram (valuable though it certainly generate a surplus of unsold merchandise); is!) is simply not consistent with the assumed and second, that any market price lower than conditions under which it is supposed to be that indicated by the point of intersection operating. must produce competitive pressure toward an Our discussion has unfortunately been increase in price (since the low price will gen- overwhelmingly negative. We have pointed erate a shortage of goods offered for sale, as out problems that Austrians have with main- compared with the quantities prospective stream supply-and-demand analysis—but we buyers wish to buy). have not suggested how an alternative Austrians do not have serious disagreement approach might avoid these difficulties. Sub- with such discussions in themselves; they sim- sequent articles in the present series will ply point out that those discussions are utterly attempt to fill this gap. For Austrians, the law inconsistent with the assumption of perfect of supply and demand, properly explained, is competition (which textbook analysis takes as at least as centrally important for economic its operative assumption). A little careful understanding as it is for mainstream eco- analysis of the perfect-competition assumption nomics. We will show how Austrians deploy (which analysis can, however, unfortunately insight into the entrepreneurial character of not be fitted into this space) suffices to show dynamically competitive markets (insights that under perfect competition there cannot in that can have no place within the mainstream fact exist two curves (the demand curve inter- textbook paradigm) to explain the law of sup- secting with the supply curve). Under perfect ply and demand in an intuitively and analyti- competition the supply-and-demand diagram cally satisfying way. Next Month’s Ideas on Liberty: Our February issue features “The Day We Read No More,” “Lessons from the Chicago Fire,” "A Camera Reaches 100.” and much, much more. Plus: Professor Kirzner continues his series. Don’t miss it! ===== PAGE 22 ===== ¥ Law, Economics IDEAS ON IBERTY Why Crime Declines by Bruce L. Benson rime in America has fallen since 1991. In the fear of crime by investing increasing that year, the reported crime rate com- amounts of their own time and money in crime piled in the FBI’s Uniform Crime Reporting prevention. program peaked at 5,897.8 per 100,000 popu- Private-sector responses to crime have lation. Then it dropped almost continuously, taken many forms, including crime watch and reaching 4,922.7 in 1997. Preliminary statis- other types of neighborhood or building tics for 1998 indicate a 7 percent drop below watching, patrolling and escort arrangements, the 97 figure. (Monthly statistics suggest that installation of alarms and other detection the trend continued in 1999.) devises, improved locks and lighting, invest- Why? Politicians have ready answers. They ments in self-protection such as martial-arts claim credit through their support of prison training and guns, and employment of private construction, longer mandated sentences, security personnel. All these activities have greater police funding, and so on. They also been increasing dramatically as crime rates claim credit for the strong economy and low have fallen. Information on these activities is levels of unemployment, which reduce the relatively scarce, but a number of studies con- incentives to commit property crimes. Police ducted over the years give some indication of point to their efforts in the war on drugs or to the trends.! Consider private security markets, innovations in policing strategies such as for example. “community policing.” Criminologists cite Crime rates have actually been trending many of these same causes, along with the down since 1980 (after fluctuating through the changing age distribution of the population: 1970s) except for the upturn in 1985-91, dur- the number of crime-prone young males has ing a dramatic change in criminal-justice pol- been shrinking thanks to aging and reduced jcy nationwide. There were 5,950 reported birth rates. crimes per 100,000 population in 1980 versus No doubt many and probably all of these 5175.3 in 1984. crime rates, but there is another, perhaps even ed since 1970. A 1970 estimate put the num- more important factor that has gone largely ber of privately employed security personnel unnoticed. Private citizens have responded t0 in the United States at roughly equal to the number of government, or public, police. Since then, public police employment, unlike Bruce Benson is DeVoe Moore Distinguished : . rivate rity employment, has not changed Research Professor in the department of economics p security employ ’ g at Florida State University and author of To Serve much. In 1990 there were roughly 2.5 private and Protect: Privatization and Community in Crimi- Security personnel (about 1.5 million total) to nal Justice (New York University Press, 1998). every public police officer.3 This ratio is 22 ===== PAGE 23 ===== 23 rapidly approaching 3 to 1, if it has not are rising. Both increasingly sophisticated already reached that level.# Thus, in 1990 an labor and capital are being combined to pro- estimated $52 billion was spent for private duce ever higher levels of security where it is security services in the United States com- demanded. The last three to four decades pared to about $30 billion for federal, state, have witnessed dramatic changes in security and local police.> technology, with the arrival of CCTV, The private security market apparently is microwave detection systems, portable radios the second fastest growing industry in the and cameras, magnetic sensors, and laser United States, but increasing employment of technology, to name a few. And all these tech- private security personnel is only part of the nologies are constantly being improved, story. Going back to 1970 again, a study devices that were on the cutting edge only a found that the use of security equipment was short time ago are obsolete. As a salesman increasing at about 11 percent per year,” but explained to me, firms have to continue to the growth rate in expenditures on security improve products because thieves figure out equipment reached an estimated 15 percent how to circumvent security devices. Beyond in 1990 when they rose to an estimated $17 that, they have to keep pace with new and billion.8 vigorous competition. Provision of residential alarm systems Training for security personnel has had to (already the most frequently used component improve dramatically to take advantage of the of security programs for business) provides new technologies. Security personnel still one example of the spread of such security include minimum-wage night watchmen, the technology. It is estimated that at least 10 per- stereotypical security from the 1950s and cent of the homes in the United States were 1960s. But they also include highly trained and connected to central alarm systems in 1990, skilled electronic-security experts and securi- up from one percent in 1970.10 One estimate ty-design consultants, thanks to a growing by Leading Edge Reports suggests that total demand for detection and deterrent equipment sales of central alarm station services rose by and price-cutting technological advances. 36.9 percent (from $5.26 million to $7.20 Given the demand for security and the million) between 1987 and 1989 (during the increasing sophistication of many security upsurge in the war on drugs).!! personnel, it should not be surprising that While statistics are not readily available, it entrepreneurs are discovering ways to supply appears that this trend has accelerated a package of services that add up to more through the 1990s. But these services are secure environments. Residential and busi- only one of many aspects of the security mar- ness developments are increasingly being ket that rely on technology rather than or in designed with security in mind. Enclosed addition to manpower. Electronic access con- malls and office complexes are attractive to trol equipment sales grew by an estimated 23 businesses for many reasons, but security percent between 1987 and 1989, while generally is part of the contract. increases in sales of electronic intrusion Apartments and condominiums often oper- detection equipment, vehicle protection ate in a similar fashion. Such arrangements equipment, and closed-circuit television are apparently attractive: an estimated 24 mil- (CCTV) were 21, 44, and 25 percent respec- lion Americans lived in locked condomini- tively, and growth rates for sales of metal ums, apartment complexes, and cooperatives detectors, x-ray devices, computer security in 1997.13 Private residential communities, equipment, electronic article surveillance consisting of large numbers of single- and/or equipment, and other types of security tech- multiple-family homes on private streets, are nology are all comparable.!2 increasingly being developed with security as a selling point. A 1997 estimate put the num- ber of people in some 30,000 “gated” com- munities at around eight million, with a half- It is not just numbers and expenditures that million in California alone.!4 Better Technology ===== PAGE 24 ===== 24 IDEAS ON LIBERTY ® JANUARY 2000 The Results serve, but it has expanded into Miami, Jack- sonville, and Orlando. Revenues grew from Studies of the consequences of private-sec- $35,000 to roughly $2 million in 1996. The tor crime control activities are rare, but sever- firm provided security for 50 apartment com- al informative ones exist. A study done in the plexes that year, and crime dropped by an mid-1980s examined the activities and conse- average of 50 percent.20 quences of the private security force in Starrett Private security and protection arrange- City, a 153-acre complex in a high-crime area ments also can have a general deterrence of Brooklyn, with 56 residential buildings effect. A 1996 analysis of Lojack, a hidden containing 5,881 apartments and about 20,000 radio transmitter installed in cars to aid in racially and ethnically diverse but largely mid- recovery after theft, concluded that a 1 per- dle-income residents.!s Starrett City had only centage point increase in installations is asso- 6.57 reported crimes per 1,000 population, ciated with a 20 percent decline in auto thefts compared to 49.86 for the 75th precinct in in large cities and a 5 percent reduction in the which Starrett City is located. This is all the rest of the state.2! more remarkable, considering that Starrett Lojack greatly reduces the expected loss City residents are much more likely to actual- for car owners who use it, since 95 percent of ly report crimes to their security personnel the cars equipped are recovered, compared to than citizens in general are. (Victimization 60 percent for cars without it. But this direct surveys indicate that more than 60 percent of benefit is only part of the total benefit. crimes with victims go unreported. 16) Because a potential car thief does not know if Similar results appear elsewhere. For a vehicle is protected by Lojack, its existence instance, one of the most intriguing coopera- in a market creates uncertainty that deters tive privatization schemes in recent history is auto thefts. According to the study, “Lojack in St. Louis and University City, Missouri.” appears to be one of the most cost-effective In 1982 the St. Louis metropolitan area had crime reduction approaches documented in more than 427 private street-providing organi- the literature, providing a greater return than zations.!8 The titles to these formerly public increased police, prisons, job programs, or streets are now vested in incorporated street early education interventions.”?2 A recent associations to which all property owners extensive study of concealed handguns reach- must belong and pay dues. The street associa- es similar conclusions; violent crimes, includ- tions, most of which own one or two blocks, ing murder, rape, and robbery, are significant- have the right to close their streets to through- ly deterred when potential criminals know traffic to limit cars to those of residents and that citizens may carry concealed handguns. their visitors. More important, ownership gives the neighborhood a high degree of cohe- siveness, and the resulting cooperative behav- ior produces an increased awareness of activ- A comprehensive 1992 statistical study ities on the streets. That along with limited used data from 124 Standard Metropolitan access and, in a few cases, security patrols Statistical Areas in an effort to analyze the significantly lowered crime in virtually every effect of both public police and private secu- category relative to comparable public streets. rity on the overall safety of communities and For instance, Ames Place’s crime rate was 108 on decision-making by offenders.24 The addi- percent lower than the adjacent public street.!9 tion of public police showed no statistically Smaller scale private security arrangements significant deterrence, but the result of private are also effective. Critical Intervention Ser- security was significant. Additional private vices (CIS) provides private security to land- security personnel correlated with less crime, lords who own apartment complexes priced to suggesting that the benefits spill over into the attract low-income tenants. Since CIS began community at large. offering service in Tampa, Florida, in 1991, it Public police may not like this finding, but has received many more requests than it can they are increasingly recognizing its validity Public vs. Private Police ===== PAGE 25 ===== WHY CRIME DECLINES 25 as they turn to “community polici ng” to drug crimes; fewer police were available to deter nondrug crimes, . . and prison crowding increased as drug criminals flowed in, forcing arrangements. In Chicago, for instance, the ihe early release of nondrug criminals; responses by the private sec- police department is implementing a massive torandby legislators (for example, prison building) took time. Thus Co . . the general downward trend was not re-established until 1991. See change in its policing strategy, abandoning Bruce L. Benson, lljoong Kim, and David W. Rasmussen, “Deter- [19 tel " «a . . . . . . . traditional” m 1 of polici th IN rence and Public Policy: Tradeoffs in the Allocation of Police the ad a odel o policing at relies Resources,” International Review of Law & Economics, 1998, pp. on random automobile patrols, rapid 77-100; Benson, Kim, Rasmussen, and Thomas W. Zuehlke, “Is : : _the. Property Crime Caused by Drug Use or Drug Enforcement Policy?” respons © forensic technology mn after the Applied Economics, 1992, pp. 679-692; and Rasmussen and Ben- crime investigations rather than citizen infor- son, The Economic Anatomy of a Drug War: Criminal Justice in the 4 ; - Commons (Lanham, Md.: Rowman and Littlefield, 1994). mation, and a focus on arrest and Incarcera 3. William C. Cunningham, John J. Strauchs, and Clifford W. tion.25 The new Chicago Alternative Policing Van Meter, “Private Security: Patterns and Trends,” National Insti- : : tute of Justice: Research in Brief (Washington, D.C.: U.S. Depart- Strategy emphasizes the need for community meat of Justice, 1991) involvement in a “proactive” effort to prevent 4. Morgan O. Reynolds, Using rhe Private Sector to Deter Crime : : : : (Dallas, Tex.: National Center for Policy Analysis, 1994). crime. While the program is relatively new, 5. Cunningham, et al, the intentions are to help develop local citizen 6. Office of International Criminal Justice, Readings distributed : : at the Ninth Annual Futures Conference for the program on “Priva- and business crime-watch groups and to Put iin Criminal Justice: Public and Private Partnerships,” Uni- public police back on the beat in large part to versity of Illinois at Chicago, March 13-15, 1995. : : : . . 7. Predicast, Inc., Special Study 56 (Predicast, Inc. 1970). establish cooperative relationships with the 8. Robert J. Fischer and Gion Green, Introduction to Security, Sth people in neighborhoods. This is what private edition (Boston: Butterworth-Heinemann, 1992), p. 460. : i: 9. Reynolds, p. 8. security often does. In fact, noted criminolo- 14" Wiiar C. Cunningham and Todd H. Taylor, Crime and gist Lawrence Sherman defines community Protection in America: A Study of Private Security and Law Enforce- 2 . . . : ment Resources and Relationships (Washington, D.C.: U.S. Depart- policing as police acting like security guards. |. of Justice, 1985). So another consequence of the growing pri- ! Fischer and Green, p. 17. . - «oe «ge . 1D1 vate Tesponse to crime 18 that itis providing 13. David Boaz, Libertarianism: A Primer (New York: Free public police with an alternative model.2¢6 Press, 1997), p. 267. . . 14. John Jay College of Criminal Justice/CUNY, “Gated A massive 1976 report by the National Enclaves Are Not Just for the Well-Heeled,” Law Enforcement Advisory Commission on Criminal Justice News, May 15, 1997, p.S. 4 William F. Walsh, An Evaluation of “6 . . win J. Lonovan an ithiam Fr. alsh, An Evaiuation o, Standards and Goals concluded that “the P= suarren City Security Services (University Park, Pa.. Pennsylvania vate security industry . . . offers a potential for State University, 1986). . . . 16. Bureau of Justice Statistics, Highlights from 20 Years of Sur- coping with crime that can not be equaled by eying Crime victims: The National Victimization Survey, any other remedy or approach. ... Not repre- 1973-1992 (Washington, D.C.: U.S. Department of Justice, 1993). 17. Oscar Newman, Community of Interest (Garden City, N.Y.: sented on the boards or staffs of State Plan- anchor press, 1980). nin A encies rarel us d b m nici al or 18. Fred Foldvary, Public Goods and Private Communities: The g Ag i y . N y mu p Market Provision of Social Services (Aldershot, England: Edward county planners, only infrequently consulted Eigar Publishing, 1994). lected officials, [this] . . . i has 19. Newman, pp. 137, 140. by elected 1 i [ ] industry [ ] 20. Joseph N. Boyce, “Landlords Turn to Commando Patrol,” crime prevention answers desperately needed wail Sireer Journal, September 18, 1996, pp. B1-B2. ; 3 - 21. Ian Ayres and Steven D. Levitt, “Measuring Positive Exter- by homes, schools, businesses, neighbor nalities from Unobservable Victim Precaution: An Empirical Analy- hoods and communities.”?” Even though sis of Lojack,” No. 197, John M. Olin Center for Law, Economics, politicians have rarely recognized, and crime 2nd Business Discussion Paper Series, Harvard University, Septem- researchers are only beginning to recognize, 22. Ibid, p. 30. 1 > 3 ; i 23. John R. Lott, Jr., More Guns, Less Crime: Understanding how accurate this study S conclusion 1S, pri Crime and Gun-Control Laws (Chicago: University of Chicago vate citizens clearly know it already. The Press, 1998). : : : 24. Edwin W. Zedlewski, “Private Security and Controlling results are becoming increasingly apparent. Crime,” in Privatizing the United States Justice System: Police They and the private entrepreneurs who Adjudication and Corrections Services from the Private Sector, ed. respond to their demands deserve much of G.W. Bowman, S. Hakim, and P. Seidenstat (Jefferson, N.C.: . i . McFarland & Company, 1992). the credit for falling crime rates, despite 25. Chicago Police Department, Together We Can: A Strategic PE ’ : Plan for Reinventing the Chicago Police Department (Chicago: the politicians assertions that they are Chicas Police Deputmont, Octoper 1995), responsible. O 26. Lawrence W. Sherman, “The Police,” in Crime, ed. James Q. Wilson and Joan Petersillia (San Francisco: Institute for Contempo- 1. See Bruce L. Benson, To Serve and Protect: Privatization and rary Studies Press, 1995). Community in Criminal Justice (New York: New York University 27. National Advisory Commission on Criminal Justice Stan- Press, 1998), pp. 75-127. dards and Goals, Private Security: Report of the Task Force on Pri- 2. The upsurge in crime during this period resulted from a rapid ~~ vate Security (Washington, D.C.: U.S. Department of Justice, shift for public police and prisons from property and violent crimes ~~ 1976). ===== PAGE 26 ===== Potomac Principles by Doug Bandow New Excuses for Old Failures Foe aid, argues President Bill Clinton, had been stolen since 1995 even as the West 1s “designed to keep our soldiers out of was providing $5.1 billion in aid. Alexandra war.” He threatened to veto this year’s $12.7 Stiglmayer, spokeswoman for the High Rep- billion foreign assistance appropriations bill resentative, said “The figure is probably high- after Congress reduced his request by $2 bil- er than $1 billion.” lion. But the evidence is overwhelming that To argue, as the State Department did, that increasing foreign aid would only throw good the bulk of the loss was the Bosnians’ own money after bad. funds ignores the fact that money is fungible The United States alone has contributed and most of the economy remains under state more than $1 trillion (in current dollars) in control. It is bad enough to force Western tax- foreign assistance since World War II. payers to subsidize local corruption. It is Although some individual development pro- criminally irresponsible to make them under- jects have undoubtedly worked, there is no write a system that actively impedes econom- evidence that what we inaccurately call “for- ic development and growth. eign assistance” has generated economic growth or promoted political stability in the Russian Woes eveloping world. In 1996 the United Nations reported that 70 Russia is no different. Moscow has collect- countries, aid recipients all, were poorer than ed more than $20 billion from the Interna- they were in 1980; 43 were worse off than tional Monetary Fund alone since 1992; the they were in 1970. Admits the U.S. Agency money is gone and the country is poorer than for International Development (U.S. AID): ever. Russia defaulted on billions in loans in “much of the investment financed by U.S. 1998 and last August reached an agreement AID and other donors between 1960 and 1980 with Western creditors to put off repaying has disappeared without a trace.” $8.1 billion falling due in 1999 and 2000. A The already overwhelming evidence that $640 million loan issued by the IMF in July foreign aid is not aid just keeps accumulating. was simply shifted among Fund accounts to There was, for instance, last summer’s New pay down Russia’s outstanding debt. York Times exposé detailing an investigation Even the IMF makes little pretense that its by the Office of the High Representative in activities promote economic reform. The Bosnia, which concluded that as much as $1 Fund’s Stanley Fisher admits that “we were billion of that artificial nation’s public money lied to” when Russia transferred hundreds of — .. millions of dollars of its 1992 loan to offshore Doug Bandow, a nationally syndicated columnist, is . . a senior fellow at the Cato Institute and the author accounts to speculate in Russian bonds. and editor of several books, including Tripwire: There are concerns that looted IMF funds Korea and U.S. Foreign Policy in a Changed World. may have been laundered through the Bank of 26 ===== PAGE 27 ===== 27 New York, which appears to have become a Kosovo and related programs, “make no mis- transit station for the Russian mob. But Fund take—there will be another bloody war.” officials say that they can’t be expected to track the disposition of IMF disbursements: “We are not a bank,” Thomas Dawson, the Oud Argument director of external relations, told the Wall It’s a superficially appealing argument, but Street Journal. hardly new. Former U.S. AID Administrator J. Nor, it would appear, is the Fund a trust- Brian Atwood peddled the mission of “crisis worthy forecaster. A Heritage Foundation prevention” for years. Before departing last study released last August found that while the July, he said that without more aid money organization did a reasonably good job of “you could see more countries becoming assessing the economies of industrialized anarchies in Africa. You certainly could see states, it did a lousy job of predicting events in that as a possibility in Russia.” poor nations—the ones to which it was lend- In fact, however, U.S. and international ing. Whether the IMF shaded the truth to jus- assistance has flowed freely not just to Russia, tify its activities or displayed a hopeless but to virtually every country that has descend- naiveté in judging the creditworthiness of its ed into anarchy and/or war. Between 1971 and borrowers is impossible to say for certain. 1994 the United States, Europe, and multilater- However, wrote William Beach, Aaron al institutions gave Sierra Leone $1.8 billion, Schavey, and Isabel Isidro, the Fund’s consis- Liberia $1.8 billion, Angola $2.9 billion, Haiti tent failure weakened “the IMF’s effectiveness $3.1 billion, Chad $3.3 billion, Burundi $3.4 because early diagnosis of its member coun- billion, Rwanda $4.7 billion, Uganda $5.8 bil- tries’ vulnerabilities to potential crises is criti- lion, Somalia $6.2 billion, Zaire $8.4 billion, cal to fulfilling the IMF’s mandate of ensuring Mozambique $10.5 billion, Ethiopia $11.5 bil- the international financial system’s stability” lion, and Sudan $13.4 billion. It’s not just the IMF. The World Bank stood Aid failed to forestall crises in all of these by for decades as the Suharto regime and espe- states because money was never the basic cially his family looted the Indonesian econo- problem. Most of these nations are riven with my. The organization finally felt compelled to clan, ethnic, or tribal rivalries. Most lack a hold up planned disbursements before parlia- basic rule of law. Most have repressive, dis- mentary elections last year to prevent govern- honest governments. Most suffer from highly ment manipulation of aid for political purpos- politicized militaries. es and threatened to halt its entire lending pro- More money from abroad would solve none gram because of a banking scandal. of these problems. To the contrary, pouring Also in 1999 economists Alberto Alesina cash into states such as Ethiopia, Somalia, and Beatrice Weder produced a shocking Sudan, and Zaire subsidized the very worst study for the National Bureau of Economic autocratic and corrupt dictators who con- Research. In assessing the experience of aid sciously wrecked their nations. This made from 1970 to 1996, they concluded that more chaos and war more, not less, likely. Observes assistance, whether bilateral or multilateral, Alex De Waal, onetime vice-director of Africa tends to flow to more corrupt governments. Watch: “The more aid a country receives, the Stephen Knack of the University of Maryland less the government of that country has to completed a survey which found that “higher answer to the people.” aid levels erode the quality of governance, as President Clinton’s attempt to dress up yes- measured by indexes of bureaucratic quality, terday’s disastrous policies with new justifica- corruption, and the rule of law.” tions will fail. There is perhaps no greater In short, aid has proved to be a disaster. tragedy today than the failed societies that dot Which may explain President Clinton’s the globe. But there is no evidence that attempt to come up with a new argument: for- increasing aid flows will benefit Third World eign assistance will prevent wars. He warned peoples, let alone prevent new human cata- that without the $2 to $3 billion he wants for strophes. Od ===== PAGE 28 ===== IDEAS ON [IBERTY Technology, Progress, and Freedom by Edward W. Younkins echnology represents man’s attempt to reinvested. New technology may require the make life easier. Technological advances development of new skills and the need to improve people’s standard of living, increase relocate, but it does not cause greater overall leisure time, help eliminate poverty, and lead unemployment. As technological improve- to a greater variety of products. Progress ments increase productivity, the demand for allows people more time to spend on higher labor will tend to rise, creating more job level concerns such as character development, opportunities and raising wages. The increase love, religion, and the perfection of one’s soul. in labor productivity also raises the potential If people resisted technological change, of some unemployed workers, whose margin- they would be expressing their satisfaction al costs previously exceeded their marginal with existing levels of disease, hunger, and productivity. Finally, as consumers, wage privation. In addition, without experimenta- earners will gain from the decrease in product tion and change, human existence would be prices that tends to result from the increase in boring; human fulfillment is dependent on productivity and output. novelty, surprise, and creativity. An innovative idea from one man not only Freedom Promotes contributes to the progress of others, but also : creates conditions permitting people to Technological Progress advance even further. Ideas interact in unex- There is a reciprocal relationship between pected ways, and innovations are frequently technology and freedom. A free market used in unforeseen applications. Technologi- unhampered by government intervention is cal progress involves a series of stages con- the most fertile environment for technological sisting of experimentation, competition, and economic progress. Freedom is a prereg- errors, and feedback. uisite for progress in an unpredictable and Innovations do not simply replace other risky world. It encourages profit-seeking and “products. Rather, they develop new and innovation, which in turn result in greater pro- expanded markets of their own. New technol- ductivity and employment. Technology fur- ogy does not cause a net increase in unem- thers a free society by providing new oppor- ployment or make labor obsolete. While tech- tunities to communicate, work, compete, and nology eliminates some jobs, it is a net creator deal with others across social and physical of jobs because resulting higher profits are barriers. In the past, the wheel and the steam engine enhanced and complemented human Edward Younkins is professor of accountancy and physical powers. Today, innovations such as business administration at Wheeling Jesuit Universi- the MICTOProcessor amplify human intellectu- ty in Wheeling, West Virginia. al capabilities. The electric motor, internal 28 ===== PAGE 29 ===== 29 combustion engine, fluorescent and incandes- and error, feedback loops, incremental cent lighting, and the Internet have had enor- improvement, diversity, and choice. They are mous effects on the way we live and work. learners, experimenters, risk takers, and Emerging technologies such as cryogenics, entrepreneurs who understand the importance photovoltaics, aerogels, fuel cells, and radio- of local knowledge and evolved solutions to wave lighting may do the same in the future. complex problems. Not surprisingly, When legislators pass laws that restrict or dynamists are frequently attracted to biologi- forbid the use of technology, they grant a priv- cal metaphors as symbols of unpredictable ilege to stagnant firms and their workers at change and growth, variety, experimentation, the expense of the firms that would have used feedback, and adaptation. the new technology and the workers who Stasists have an aversion to change and would have had different, often better jobs. either abhor progress or want to control it Resources remain in inefficient protected according to their own vision. They include technological processes, creating waste and those who long for the good old days, techno- impeding progress. phobes, technocrats, supporters of big gov- Calls for protectionism come from firms ernment programs, and individuals whose that have not modernized their production investments or jobs are in jeopardy due to processes and thus are unable to compete with some innovation. They may come from the more efficient, lower-cost companies. Both “left” (unionists, environmentalists, Luddites) mandated compensation to displaced laborers or from the “right” (traditionalists, nativists). and restrictions on the use of technology will Stasists on the left want to regulate the market reduce the profits of the firms affected, there- and the development of technology. Those on by reducing capital accumulation and its re- the right loathe change and have protectionist investment that would have led to an eventual economic leanings. increase in the level of employment. Of course, not all change is for the good. The desirability of a given change is subject Friends and Enemies to rational assessment. What is required 1s a of Progress libertarian institutional framework that guar- antees man the freedom to seek his material Virginia Postrel’s 1998 book, The Future and moral well-being as long as he does not and Its Enemies, defies conventional political infringe the equivalent rights of others. Only boundaries of left and right and liberal and then will a person be able to use his rationali- conservative to divide the world into ty and free will to choose, create, and inte- dynamists and stasists. The book’s thesis is grate all the values, virtues, and goods that that the most useful and pertinent intellectual can lead to individual well-being. This natu- concept is about those who welcome the rally includes the rational evaluation, choice, future and those who want to stop, turn back, and use of technology and innovations. or regulate change. According to Postrel, dynamists prefer an Privatizing Federal Research open-ended society where creativity and and Development enterprise, operating under general and pre- P dictable rules, generate progress in unpre- Science and technology fare better under free dictable ways. Dynamists appreciate evolu- markets than under central planning. The indi- tionary processes such as market competition, vidual is better than the government at gaining playful experimentation, scientific inquiry, knowledge, and the system of private property and technological innovation. They work cre- and private enterprise is able to reward human atively across barriers and obstacles and in ingenuity. There is no evidence that innovations areas once thought to be disparate to construct come from government bureaucracies, but combinations based on the free play of imag- entrepreneurs can often accomplish what gov- ination and discovery. Further, they seek ernment planners say can’t be done. progress, rather than perfection, through trial Since the engine of innovation and produc- ===== PAGE 30 ===== 30 IDEAS ON LIBERTY e JANUARY 2000 tivity is investment in the private sector, it fol- facilities. The task of linking research with lows that we should favor an economic cli- human needs is not suitable for a political mate that rewards private investment in bureaucracy. That’s why the private sector research and development and promotes the hasn’t been much interested in what the fed- effective and innovative use of technology by eral labs create. private firms. We need to reallocate the responsibility Reducing Federal Techn ology for technological innovation away from the . eis state and into the hands of private technolo- Transfer Activities gy makers and consumers. Currently, some With the passage of the Stevenson-Wydler 700 scientific and technological research Innovation Act of 1980 and the Federal Tech- labs are owned or supported by the federal nology Transfer Act of 1986, all Federal labs government. Recently, they have expanded were required to develop programs for trans- their scope beyond basic R & D to provide ferring technology to the private sector and to services that compete with private-sector state and local governments. President Rea- scientific, testing, and energy firms. Privati- gan supported the second act because he zation would end subsidies to major indus- believed that investments in R & D for feder- tries (such as petroleum and aerospace). It al programs were not returning sufficient div- would also free labs from the constraints of idends to taxpayers in terms of new products, the federal budget process, cumbersome pro- processes, and jobs. This legislation was curement and civil service rules, and the amended in 1996 by Public Law 104-113, inability to sell their services at market which created incentives and encouraged the prices. commercialization of technology created in Advocates of federal research funding federal labs. A National Technology Transfer argue that the private sector will do too little Center (NTTC) was established in 1989 by because of market failures resulting from Congress to provide American firms and indi- firms’ free riding on others’ research. Conse- viduals with access to federal R & D to better quently, the argument goes, there will be an enable them to compete in the international underinvestment in R & D. marketplace. In addition, the government, There is no evidence that government will rather redundantly, has six Regional Technol- triumph or that markets will fail. In the ogy Transfer Centers (RTTC’) to help U.S. public sector, research funds are awarded on firms improve their competitiveness by assist- political grounds; it’s a form of pork-barrel ing them in the location, assessment, acquisi- spending. Politicians, facing the impossible tion, and utilization of technologies and sci- job of assigning priorities to a myriad of entific and engineering expertise within the research projects, tend to choose those with federal government. the greatest number of supporters or those The use of federal R & D results has been helping their local constituencies. On the meager; studies indicate that only about 10 other hand, private-sector scientists and entre- percent of federally owned patents have ever preneurs are guided by price signals and been used. This is unsurprising. Since R & D choose research projects that, if successful, in federal labs is undertaken to meet an would be the most profitable and the most agency’s mission, decisions reflect political likely to meet human needs. Markets and rather than commercial needs. price signals permit superior targeting of Ultimately, the privatization of federal labs research projects and resources, and private will transfer resources out of the hands of firms can earn large rewards by solving stasist government bureaucrats, technology important problems. In addition, the private transfer agents, and scientists and into the sector’s superior ability to select and use R & hands of private-sector dynamists who are D resources will increase technological more likely to foster economic prosper- progress over the years. ity, technological progress, and cultural inno- Privatization is overdue for federal research vation. J ===== PAGE 31 ===== The Therapeutic State by Thomas Szasz Remembering Krafft-Ebing I my previous column (November 1999), I than in Vienna. Contrary to popular knowl- showed that mental illness is not a disease edge, the most famous expert on sex in those because it does not meet the scientific crite- days was not Sigmund Freud, but Richard von rion of disease. In this column I will show that Krafft-Ebing (1840-1902), whose enduring the primary purpose of psychiatry is not fame rests on his book Psychopathia Sexu- medical-therapeutic because its historical alis, first published in 1886. This work went mandate and primary purpose is not to reme- through numerous editions in German and dy a patient’s diseases but to soothe society’s became an international best seller. Especial- conscience about its attitude toward unwanted ly in retrospect, it is obvious why this book persons. became so vastly popular: It was the first In large part because of Freud’s influence, modern pornographic tract successfully mer- people now view psychiatry as a medical spe- chandised as medical science, a feat accom- cialty devoted to helping persons suffering plished largely by larding the text with Latin from mental illnesses. This is an error. Before words. Given that in those days most educat- psychiatry was called “psychiatry,” it was ed people had a working knowledge of Latin, called “mad-doctoring” and its aim was to this must have made the book all the more tit- protect society from dangerous and trouble- illating. There is indirect evidence for this some madmen and madwomen. Today, psy- assumption: In the Preface to the Twelfth Edi- chiatrists perform two mutually antagonistic tion of Psychopathia Sexualis, Krafft-Ebing functions: they help society (involuntary psy- explained: “The number of technical terms chiatry) and they help patients (voluntary psy- has been increased, and the Latin language is chiatry). However, these functions are typical- more frequently made use of than in the for- ly confused and intermingled, with the result mer editions.” The medical mask succeeded that helping society—even if doing so harms in transforming the voyeurism to which the patient—is also defined as a “treatment.” Krafft-Ebing was pandering from sexual per- The situation was much clearer a hundred version into scientific compassion. years ago. The technique worked like a charm. The public continued to devour this nonpictorial precursor to Playboy. This was not surprising. For the first time in history, Psychopathia Sex- Sex was a hot subject in fin-de-siécle walis offered people a catalogue of the count- Europe and perhaps nowhere else more so less ways—other than the missionary position in heterosexual intercourse—in which human Thomas Szasz, M.D., is professor of psychiatry emer- beings could extract sexual pleasure from itus at SUNY Health Science Center in Syracuse, New their bodies. Prior to the publication of Psy- York. He is the author of The Myth of Mental Illness. chopathia Sexualis, abnormal sexual acts 31 Psychopathia Sexualis ===== PAGE 32 ===== 32 IDEAS ON LIBERTY ® JANUARY 2000 were, literally, “unspeakable abominations,” But if an act is defined as a cnme, and if a shoved under the carpet of human conscious- person commits that act, is caught, and is ness as bestial, unnatural, and sinful, and of brought to trial for it, what is or ought to be the course criminal as well. This meant that the role of a physician in the adjudication of that law, and hence society, could not turn its back person’s guilt or innocence? Obviously, the on what were then—in a telling conflation of answer hinges on whether the act is perceived sin and sickness—called “perversions.” and defined as caused, partly or wholly, by a I can here provide the reader only with a disease from which the defendant suffers. If small sample of the wares offered in this 617- the act is viewed as having nothing to do with page tome. Masturbation was, of course, high disease—and there are few acts still so viewed on Krafft-Ebing’s list of perversions, as it was today, but bank robbery will do as an exam- also on Freud’s. He declared: “Nothing is so ple—then, clearly, doctors have no rational prone to contaminate—under certain circum- role in the trial. On the other hand, if the act is stances, even to exhaust—the source of all viewed as being a direct manifestation or noble and ideal sentiments, which arise of “product” of a disease—the “meaningless” themselves from normally developing sexual violence of a “diagnosed schizophrenic” is an instinct, as the practice of masturbation in example—then, as we now see it, doctors have early years.” Homosexuality also came in for a decisive role to play in the trial. One of the its share of attention. main architects of this modern—ostensibly And so it went, offering the reader a manu- scientific, but actually pseudoscientific—per- al on how to perform perversions, acts that, ception was Krafft-Ebing. He declared: “It is for the most part, have since been “discov- the sad privilege of medicine, and especially ered” to be basic human rights. of psychiatry, to ever witness the weaknesses of human nature and reverse side of life. The The Method in Mad-Do ctoring physician finds, perhaps, a (satisfaction) solace in the fact that he may at times refer Shakespeare said there is “method in mad- those manifestations which offend against our ness.” He meant that madness—say, such as ethical or aesthetical principles to a diseased Lady Macbeth’s—had meaning and purpose, condition of the mind or the body. He can save attributes we cannot attach to a disease, such the honor of humanity in the forum of morali- as gout. There was method in mad-doctoring ty, and the honor of the individual before the as well, and Krafft-Ebing told us what it is. judge and his fellow-men. It is from the search “The object of this treatise [Psychopathia of truth that the exalted duties and rights of Sexualis],” he wrote in the Preface to the First medical science emanate” (emphasis added). Edition, “is merely to record the various psy- Res ipsa loquitur. The thing speaks for chopathological manifestations of sexual life itself. Krafft-Ebing candidly acknowledged in man and to reduce them to their lawful con- that the basic aim of institutional psychiatry is ditions.” Krafft-Ebing did not record “psy- moral and legal, not medical or therapeutic. I chopathological manifestations”; he named claim no originality for this opinion, only the certain forbidden behaviors “psychopatholog- courage to express it in America at the dawn ical manifestations.” of the 215 century. Karl Kraus (1874-1936), Why did he do so? He told us: “The med- the famed Viennese satirist, said it all: “The ical barrister only then finds out how sad the donkeys [psychiatrists] are led in, see through lack of our knowledge is in the domain of sex- the accused, and say yeah just as the prosecu- uality when he is called upon to express an tor wants them to. However, inasmuch as psy- opinion as to the responsibility of the accused chiatrists call their task . . . ‘disposition of dif- whose life, liberty, and honor are at stake” ficult cases,” they do not consider themselves (emphasis added). Krafft-Ebing identified his stupid asses. Thus, they invite comparison role as that of medical barrister. He did not with a more intelligent species of domestic pretend to make a bona fide diagnosis, much animal: Our loyal psychiatrists are rather like less claim to treat a patient. good dogs—they protect house and yard.” [J ===== PAGE 33 ===== IDEAS ON [IBERTY William E. Rappard: An International Man in an Age of Nationalism by Richard M. Ebeling n April 1, 1947, 35 free-market econo- al. An economist as a scholar may be mists, political scientists, philosophers, learned or ignorant, intelligent or dull, journalists, and businessmen met at the Swiss profound or superficial, but he cannot be Alpine resort of Mont P¢lerin. They had been liberal or illiberal. Rather, if he is illiber- brought together by F. A. Hayek to found a al as a man of science, that is, if he dog- society of classical liberals devoted to the matically and intolerantly denies the restatement and defense of the principles of rights of liberty of thought without which the free society. Among the attendees were there can be no true science, then he is Milton Friedman, F. A. Harper, Henry Hazlitt, not worthy of being called a man of sci- Frank H. Knight, Ludwig von Mises, Michael ence. Policies can however be liberal or Polanyi, Karl Popper, FEE President Leonard illiberal. Most policies all over the world E. Read, Lionel Robbins, Wilhelm Répke, today are in fact illiberal and it is because and George Stigler. we believe that they should be liberal that The opening address was delivered by we are assembled here today. It is as William E. Rappard, co-founder and director economists in the second sense of that of the Graduate Institute of International equivocal word that we are liberal. Or Studies in Geneva, Switzerland. After wel- rather we are liberals by conviction, by coming the participants he reminded them faith, while most of us are by profession that “economics” can be viewed either as a scientific economists. science concerned with objectively explaining how the market functions or as a policy that, The contemporary world had turned its based on scientific insights, proposes how back on the classical liberal, free-market men may more effectively arrange their social alternative in favor of socialism, intervention- relationships to improve their circumstances. ism, and welfare statism. It was to begin “an Rappard emphasized that: intellectual, economic and political renais- sance” for liberty that the Mont Pelerin Soci- Science cannot be liberal or illiberal. ©ty Was being founded, Rappard said. become completely mad, it must sooner or Richard Ebeling is the Ludwig von Mises Professor later come to realize and to admit the produc- of Economics and chairman of the economics depart- tive superiority of a society based on the prin- ment at Hillsdale College. ciple of free enterprise.”! 33 ===== PAGE 34 ===== 34 IDEAS ON LIBERTY ® JANUARY 2000 The years between the two world wars were 1917 to 1919, Rappard was a member of var- a dark time for the advocates of individual lib- ious Swiss diplomatic missions to Washing- erty, free markets, and limited government. ton, D. C., London, and Paris, including ser- The dominant ideologies had been socialism, vice with the Swiss delegation to the peace communism, fascism, national socialism, conference in France that ended the First interventionism, and political and economic World War. He made a strong impression on nationalism—in short, practically every President Woodrow Wilson and was highly imaginable form of collectivism. influential in persuading him to choose Gene- The voices that spoke out against this trend va as headquarters of the League of Nations were few. Among them, and one of the most beginning in 1920. articulate and influential, was that of William From 1920 to 1925 he was the director of E. Rappard. He was an international man in the Mandates Division of the League for over- an age of collectivism and nationalism, speak- seeing the administration of colonial territo- ing in defense of global peace, free trade, and ries lost by the Central Powers at the end of human freedom. His long-time friend and for- the war, and was a member of the Permanent mer colleague Ludwig von Mises considered Mandates Commission of the League from him one of “the world’s foremost experts in 1925 to 1939. From 1928 to 1939 he also the field of international political and eco- served as a member of the Swiss delegation to nomic relations.” Mises called Rappard’s the annual meetings of the Leagues General 1938 book, The Crisis of Democracy, “the Assembly. most powerful refutation of the doctrines of But in the struggle for classical-liberal and Communism and Nazism. There are but few free-trade ideals, Rappard’s greatest institu- authors whose judgment, competence, and tional contribution between the world wars impartiality enjoy a prestige equal to that of was his co-founding in 1927 of the Graduate Rappard.”2 And Lionel Robbins, professor at Institute for International Studies in Geneva, the London School of Economics, considered with Paul Mantoux, the internationally Rappard to be “one of the truly great men of respected economic historian and expert on the interwar period.” the industrial revolution. Rappard’s goal was to offer to international students “the most eminent specialists available. If these special- ists are well chosen, not only for their intelli- William Emmanuel Rappard was born in gence and erudition, but also for their charac- New York City on April 22, 1883, of Swiss ter, and if they are made to realize that their parents, his father working in the United sole professional duty is to contribute to the States as a representative of various Swiss progress of science through their own work,” industries.# William Rappard did his graduate then the Institute would have done all that it studies in economics at Harvard University could to train a new generation of scholars from 1906 to 1908. During the academic year and advance the cause of peace and freedom.5 1908-1909 he did additional study at the Uni- Throughout the 1930s the Institute’s financial versity of Vienna in Austria-Hungary, attend- status was secured by the generosity of the ing the seminars of Eugen von Bohm-Bawerk Rockefeller Foundation. and Eugen Philippovich von Philippsberg, two Among the teaching staff at the Graduate of the leading figures of the Austrian school of Institute in the 1930s, along with Rappard and economics before the First World War. And Mantoux, were Maurice Bourquin, professor from 1911 to 1913, he was an adjunct profes- of diplomatic history; Guglielmo Ferrero, sor of political economy at Harvard. professor of contemporary history; Michael In 1913 he was appointed professor of eco- A. Heilperin, professor of international mon- nomic history and public finance at the Uni- etary relations; Hans Kelsen, professor of versity of Geneva in Switzerland. He also international law; Mises, professor of interna- served as rector of the University of Geneva tional economic relations; Pitman Potter, pro- during 1926-1928 and 1936-1938. From fessor of international political relations; and Born in New York ===== PAGE 35 ===== WILLIAM E. RAPPARD: AN INTERNATIONAL MAN IN AN AGE OF NATIONALISM 35 Wilhelm Roépke, professor of international three interdependent themes: (1) international economic relations. Each was internationally order and collective security as represented by renowned as a leading contributor to his the League of Nations; (2) free trade and pri- respective discipline, and several had found vate commerce to depoliticize economic rela- sanctuary at the Graduate Institute as exiles tionships and reduce international tensions; from Nazism and fascism in their own home- and (3) respect for the dignity of the individ- lands. ual and protection of his rights to liberty and property to assure a free and just society. Hoste d Visiting S cholars After the disillusionment with and failures of the League of Nations, Rappard’s fervent Rappard also brought to Geneva during defense and support of it in the 1920s and these years an array of famous visiting schol- 1930s may seem peculiar and misplaced in ars, many of them leading classical liberals, the context of more recent classical-liberal who would deliver lectures over a week; their and conservative criticisms of concentrated lectures often were sponsored for publication power in international organizations. But it by the Graduate Institute. Among those visi- needs to be appreciated that in the nineteenth tors were Ropke (before he joined the Insti- and twentieth centuries many if not most of tute’s staff), FE A. Hayek, Lionel Robbins, the free-market liberals considered private Louis Rougier, Quincy Wright, Luigi Einaudi, commerce and free trade as essential not only Eric Voegelin, Fritz Machlup, Gottfried for enhancing the wealth of nations but for Haberler, and Bertil Ohlin.” fostering peace by reducing to the minimum The Institute also held a lecture program the intervention of governments in human every summer from 1927 to 1939 on the topic intercourse. of international peace and order. The lectures As an extension of this, they also consid- were published in an annual series under the ered treaties and agreements among govern- title Problems of Peace. In 1938, to mark the ments for the uniformity of law and contract Institute’s tenth anniversary, Rappard edited a to be essential for international trade and collection of essays by the Institute’s faculty commerce. They believed that an internation- on the theme of The World Crisis, through al court to adjudicate disputes between which the world was then passing.8 nations would reduce the likelihood of war. In September 1939, days after the begin- And to prevent war some supported an inter- ning of the Second World War in Europe, national system of collective security, com- Robbins recalled his last visit to the Graduate posed of a consortium of nations’ military Institute as a guest lecturer and said nostalgi- power, to provide mutual defense against cally: “How much of all that was most stimu- would-be aggressors.!0 lating and inspiring in the period between the Even as principled an advocate of laissez wars 1s typified in their lovely college by the faire and strictly limited government as Lud- lake. Long may it flourish, an oasis of sanity wig von Mises said in 1927 that “The [classi- in a mad world, to preserve and advance the cal] liberal therefore demands that the politi- great principles of international citizenship cal organization of society be extended until it for which it so conspicuously stands.” The reaches its culmination in a world state that Graduate Institute survived the war and con- unites all nations on an equal basis. For this tinued to flourish after 1945, with Rappard as reason he sees the law of each nation as sub- its director until his retirement in 1955. He ordinate to international law, and that is why died on April 29, 1958, a few days after his he demands supranational tribunals and 75th birthday. administrative authorities to assure peace among nations in the same way that the judi- Three Themes cial and executive organs within each country are charged with the maintenance of peace Throughout the interwar period Rappard’s within its own territory.” And he offered the writings focused on what he argued were hope that “a world super state really deserving ===== PAGE 36 ===== 36 IDEAS ON LIBERTY e® JANUARY 2000 of the name may some day be able to develop the second half of the nineteenth century. In that would be capable of assuring the nations the 1874 revisions to the Swiss constitution the peace that they require.”!! the federal government was given socialist Rappard wrote four books on the ideal, the and welfare-statist responsibilities over both practice, and the failure of the League of the cantons and individual citizens; those Nations.!? These were supplemented by vari- powers had increasingly come to threaten the ous articles on the workings and reality of the liberty of the Swiss people. In 1936 Rappard League.!3 expressed concern that what was developing was a form of “state socialism” and wondered Swiss Model if Switzerland was not on a road to serfdom: “How much further this economic anti- Rappard’s model of international organiza- liberalism can be carried without seriously tion for world peace was based on his analy- threatening the political liberalism to which sis of the evolution of collective security in the Swiss people are still firmly attached, is the Swiss confederation. !4 Starting in the thir- the great problem of the future.”!7 teenth and fourteenth centuries, a coalition of In Rappard’s eyes, the League of Nations independent states in the Swiss Alps began to was meant to serve as an association of the be formed for mutual military assistance countries of the world for purposes of mutual against external threats. It eventually incorpo- defense against violators of international rated most of the territory now known as peace, whether or not the aggressor was a Switzerland. The common policy was strict member. The internal affairs of the member neutrality and noninterference in the affairs of states were not subject to interference from surrounding countries (though many individ- the other members, though the hope was that ual Swiss soldiers sold their military services those nations not yet wholly guided in their to other governments in Europe). Switzerland home policies by allegiance to liberty, proper- was invaded and conquered by Napoleon in ty, and free enterprise would eventually see 1798. After the defeat of France by the Allied the benefits of establishing a regime of nations, Swiss independence and neutrality domestic freedom. were once again recognized by the European The peace treaty of 1919 that ended World powers. In 1848 a new federal constitution War I had included the covenant that estab- was established in Switzerland that was mod- lished the League of Nations. The new orga- eled after the U.S. Constitution, with two leg- nization was assigned three primary tasks: islative chambers but no presidency because (1) implementation of the terms of peace; of the people’s suspicion of any concentration (2) establishment of a system of justice of power in one person’s hands.!5 through an international court to adjudicate The Swiss federal authority had responsi- disputes between nations; and (3) formation bility only for national defense and neutrality- of an association for collective security to based foreign policy issues. All other matters maintain the peace if one or more nations vio- were strictly left up to the respective cantons lated the territory and freedom of any of the and to the private citizens. The constitution member countries. was also imbued with the spirit of classical What was a new and important principle in liberalism and economic freedom. “Freedom the peace treaty, Rappard argued, was the of trade, residence, conscience and worship, insistence that no people may be ruled with- of the press, of association and of petition out their consent. This was reflected in the were guaranteed for all. . . . [A]ll forms of ideal of self-determination, under which indi- protectionism were condemned as being con- viduals within geographical areas in Europe trary . . . to the fundamental principle of could determine through plebiscite whether equality before the law,” Rappard explained.!¢ they would be citizens of one nation rather The danger from concentration of federal than another or form their own independent power manifested itself, however, with the national entity. In the case of Germanys for- growth in socialist and interventionist ideas in mer African and Asian colonies this meant not ===== PAGE 37 ===== WILLIAM E. RAPPARD: AN INTERNATIONAL MAN IN AN AGE OF NATIONALISM 37 outright annexation of these territories by one peoples through plebiscites. They refused to of the victorious powers, but supervision and recognize or respect decisions made by the oversight by the League of how they were international court at the Hague; indeed, gov- administrated as a “mandate” by one of the ernments tried to manipulate the selection of victorious powers. The goal was to assure the judges appointed to serve their national pur- rights of the people in these territories and poses. They filled League commissions, possibly their eventual independence rather bureaus, and departments with members of than permanent colonial control.!8 their national bureaucracies both as a spoils The idea behind an international court of system and to influence League activities. In justice was that no claimant in a dispute was the League’s General Assembly and ruling capable of objectively judging his own case. Council, governments instructed their repre- Instead, a court of internationally selected and sentatives to vote in the service of their respected judges would sit in the Hague in respective “national interests” rather than for Holland, and member states of the League the protection and improvement of an interna- would obligate themselves to present their tional order of freedom, justice, and peace. claims against and disputes with other coun- And finally, in the 1930s when imperial tries before this judicial body and accept its Japan, fascist Italy, and Nazi Germany began decisions as binding. International law and to violate international treaties and law justice would replace the costs and catastro- through war, conquest, and annexation, the phe of war in the settling of potential global League members chose to follow not the idea conflicts. of collective security, but policies of national Finally, the members would agree to sup- armament and defense.!? port politically, militarily, and financially any Why had so many nations turned their necessary armed resistance that the League as backs on the potential and possibility for a a body might agree was required to repel and classical-liberal world of freedom and peace? defeat an attack on one of the member states Rappard tried to answer this in three insight- by an aggressor nation that had initiated inter- ful monographs and a book, the latter origi- national violence. The hope was that the threat nally delivered as a series of lectures at the of such collective resistance would serve as a University of Chicago.20 deterrent against any nation contemplating After the disruptions, dislocations, and disruption of the international peace. destruction of World War I, the countries of The ideal for which Rappard argued was a the world had participated in numerous con- world of peace, freedom, law, and order. The ferences in the 1920s and early 1930s at League was not and had not been planned to which it was pointed out that permanent eco- be a world government. For many classical nomic stability and improved material pros- liberals like William Rappard, the logical perity could only be assured through renewed extension of limited national government was free trade, more open immigration, a safe to develop the practice of international justice environment for global private investment, under law, the adjudication of national dis- and stable foreign exchange rates linked to putes before an international court, and an gold. Instead the nations of the world prac- international policing against war and vio- ticed “super-protectionism,” with high tariffs, lence between nations. import quotas, export restrictions, foreign- exchange manipulations and controls, agri- A Different Reality cultural and industrial subsidies, redistribu- tive welfare schemes, and domestic planning, That was one version of the classical- often with the goal of creating national eco- liberal ideal. The reality was very different. nomic self-sufficiency. While governments Rappard was a dispassionate recorder of the may have given lip service to the ideal of eco- League in practice. In violation of the peace nomic liberalism, what they all practiced was concepts of 1919, governments either manip- in fact economic nationalism. Rappard ulated or prevented self-determination for explained this idea and policy: ===== PAGE 38 ===== 38 IDEAS ON LIBERTY e JANUARY 2000 Economic and political nationalism . . . are, however, so closely related one to the other that we can in no case avoid the necessity of defining the latter if we wish to fully understand the former. National- ism, then, is the doctrine which places the nation at the top of the scale of political values, that is above the three rival values of the individual, of regional units and of the international community. . . . If we wished to define economic nationalism by its underlying purpose, we should say that it was a doctrine destined to serve the nation by making it not richer, but freer, by promoting not its material welfare, but its independence of foreign influences. Eco- nomic nationalism is the policy of national self-sufficiency.2! ’ While Rappard pointed out the most extreme forms of economic nationalism were practiced in fascist Italy and Nazi Germany, it was the dominant economic policy in all the Western democracies as well. During the First World War, governments had introduced eco- nomic planning in the name of the war effort, gaining control or influence over many aspects of commercial and social life previ- climate of political insecurity in which gov- ously viewed as the exclusive domain of pri- ernments built up not only their military vate choice, association, and enterprise. After armaments but also their tools of economic the war, many groups desired intervention warfare to assure domestic supplies of raw and planning in peace time; some because materials, agricultural produce, industrial they thirsted after the ideal of social engineer- commodities for military preparedness, and ing, others because they wished their vested artificially manufactured substitutes for goods interests to be politically protected in the that might not be available during times of changed environment of the postwar period. international conflict. “By economic arma- Still others expected government to guarantee ments,” said Rappard, “we mean all those leg- or provide employment and business profits islative and administrative devices intended to or market shares. After the start of the Great restrict imports and to develop domestic pro- Depression in 1929, the pressures and appeals duction with a view of reducing international for such policies only increased. It was said interdependence. Economic armaments are that the various forms of national intervention the tools of economic nationalism.”22 needed to be isolated from international mar- Rappard tried to explain how this shift from ket forces that otherwise might undermine economic liberalism to paternalistic govern- them, an isolation for which the weapons of ment and economic nationalism had come economic nationalism were applied. about. He gave a concise answer in a lecture he delivered in the United States in 1936. After citing the individualist and antistatist rationale for the American and French revolu- In addition, the experience of the last war tions and the political evolution of England, and the fear of a new war generated a general he noted: Tool of Economic Warfare ===== PAGE 39 ===== WILLIAM E. RAPPARD: AN INTERNATIONAL MAN IN AN AGE OF NATIONALISM 39 In the latter half of the nineteenth cen- hope, then, did he have for the world that tury and up to the present day, the indi- emerged from the second “Great War” of the vidual, having emancipated himself from twentieth century? the state and having subjected the state to his will [through the democratic process], Dubious about the U.N. has furthermore demanded of the state that it serve his material needs. Thereby In the immediate aftermath of the war, dur- he has complicated the machinery of the ing a visit to the United States, he delivered a state to such a degree that he has again series of lectures in which he expressed little fallen under subjection to it and has been confidence in the new United Nations that had threatened with losing control over it. superseded the old League of Nations. Rap- . . . [The individual has increasingly pard argued that the United Nations was the demanded of the state services which the product of a “victors’ peace.” It was designed state is willing to render. Thereby, howev- and brought into existence by the United er, he has been led to return to the state an States, Great Britain, and the Soviet Union authority over himself which it was the before the war had even ended, and was con- main purpose of the revolutions in the trolled and dominated by them. The initial beginning of the nineteenth century to membership was restricted to those nations shake and break.23 who had allied themselves with the Big Three in the war, and excluded neutral countries like Preserving the liberty that men still had and Switzerland. The U.N.s real power resided in regaining the liberty that men had already lost the Security Council, in which five govern- was possible, Rappard argued, only with a ments—the United States, the Soviet Union, reversal of state control over economic affairs Great Britain, France, and China—not only through a return to economic liberalism, and determined when and how military force with it a reduction in the powers and respon- Would be used against the other nations of the sibilities of the state: world, but in which each also had a veto power that prevented any U.N. sanctions and As we see it, the defense of democracy actions against themselves. Any decision on demands a return to greater economic free- Which the Big Five could agree could be dom, without which no state, however orga- virtually imposed on the other members of the nized, can give its citizens more than the United Nations. It was an organization con- illusion of governing themselves. . . . It is, structed for these five powers to be the mas- therefore, not only because we believe pri- ters of the postwar world. vate enterprise to be more creative, more ~~ In 1954 Rappard delivered a lecture in progressive, more efficient, and consequent- Which he reviewed the attempt for global ly more productive of greater general pros- peace since the end of the First World War.26 perity than that of the state, that we venture In the post-World War II period, he said, glob- to advocate a limitation of the latter. It is al peace through the U.N. had been impossi- also because we believe that no state that ble not only because of the Big Five monop- has been allowed to become totalitarian in oly, but also because the two leading pow- its activities can fail to become totalitarian ers—the United States and the Soviet in its claim on the subservience of its sub- Union—held radically different conceptions jects. Our plea for more private liberty is, of the meaning of “freedom,” “justice,” “self- therefore, political no less than economic.24 determination,” and “peace.” Peace had depended on the two military alliances sur- For Rappard, the calamity of the Second rounding the United States and the Soviet World War was the inevitable outcome of the Union. The worst fear was that a war would collectivist, nationalist, and socialist tenden- break out between these two camps, resulting cies set loose during the First World War and in a nuclear calamity far more terrible than that reached their apex in the 1930s. What the other world wars of the century. ===== PAGE 40 ===== 40 IDEAS ON LIBERTY ® JANUARY 2000 What was Rappard’s hope for the long 1. William E. Rappard, “Address at the Opening Meeting [of the run? He believed that eventually the Soviet Mont Pelerin Society] on Tuesday, April Ist, 1947.” 2. Ludwig von Mises, “The Secret of American Prosperity” Union would collapse from internal forces. [195s], in Bettina Bien Greaves, ed., Economic Freedom and Inter- He argued that however meager living ventionism: An Anthology of Articles and Essays by Ludwig von . 4 . Mises (Irvington-on-Hudson, N.Y.: Foundation for Economic Edu- standards may be under socialist planning cation, 1990), p. 163. . . York: St. Martin’s Press, 1971), p. 159. would stimulate the Russian people to want 4. The following brief summary of Rappard’s professional life . P P tions de la Baconniére, 1963) and Victor Monnier, William E. Rap- well: pard: Défenseur des Libertés, Serviteur de Son Pays et de la Com- munauté Internationale (Geneva: Edition Slatkine, 1995). . 5. Monnier, pp. 489-90. [M]ay we not hope that, as they [Soviet 6. On the history of the Institute, see HEI: Quarantiéme Anniver- HE : saire, 1927-1967 (Geneva: Institut Universitaire de Hautes Etudes peop le] become less indigent, they will Internationales, 1967) and HEI, 50: 1927-1977 (Geneva: Institut become less subservient? And as they Universitaire de Hautes Etudes Internationales, 1977). become more impatient of police rule and 7. F. A. Hayek, Monetary Nationalism and International Order . (London: Longmans, Green, 1937); Lionel Robbins, Economic of censorship, may they not grow IMOIC Planning and International Order (London: Macmillan, 1937) and . 3 : The Economic Causes of War (London: Jonathan Cape, 1939); skeptical about the myths on which their Louis Rougier, Modern Political Mystiques and Their International ignorance has heretofore been fed about impact (Paris: Libraire du Recueil Sirey, 1935) and Modern Eco- 3 tats nomic Mystiques and Their International Impact (Paris: Libraire du the West, about Its exploitation of the Recueil Sirey, 1938); Quincy Wright, The Causes of War and the masses, about capitalism, and about itS Conditions of Peace (London: Longmans, Green, 1935); and Wil- necessarily aggressive imperialism? . . . Crom German Commercial Policy (London: Longmans, But even if it be deemed unlikely, it seems 8. William E. Rappard, ed., The World Crisis (London: Long- : mans, Green, 1938). to me that the policy of the West should not 9, Robbins, The Economic Causes of War, p.9. dismiss it as necessarily untrue. Nothing is 10. See Edmund Silbemer, The Problem of War in Nineteenth : : : Century Economic Thought (Princeton: Princeton University Press, to be gained by acting as if the masters of 1946); also, my article “World Peace, International Order and Clas- the East were omniscient in declaring war sical Liberalism,” International Journal of World Peace, December : : : 1995, pp. 47-68. to be inevitable and everything would be 11. Ludwig von Mises, Liberalism: The Classical Tradition (Irv- assuredly lost if we let ourselves be per- ington-on-Hudson, N.Y.: Foundation for Economic Education, 1996 . . [1927]), pp. 148, 150. suaded that they Were as infallible as they 12. William E. Rappard, International Relations Viewed from are dogmatic.27 Geneva (New Haven: Yale University Press, 1925); Uniting Europe: The Trend of International Cooperation Since the War (New Haven: . . Yale University Press, 1930); The Geneva Experiment (London: But besides any eventual internal collapse Oxford University Press, 1931); and The Quest for Peace, Since the . : : . War (Cambridge: Harvard University Press, 1940). of Communism m the Soviet Union, the West 13. William E. Rappard, “The League of Nations as an Historical had to have its own ideal. In his last book, The Fact” in Problems of Peace (London: Oxford University Press, . . : 1927), pp. 18-49; “The Evolution of the League of Nations,” in Secret of American P rosperity, Rappard tried Problems of Peace (London: Oxford University Press, 1928, pp. to explain to his fellow Europeans the lessons 1-45); “The Future of the League of Nations,” Problems of Peace . : (London: Oxford University Press, 1929), pp. 1-30; “The Begin- to be learned from the United States without nings of International Government,” American Political Science forfeiting their own traditions and cultural Review, November 1930, pp. 1001-16; “The League in Relation to . ; 28 the World Crisis,” Political Science Quarterly, December 1932); contributions to the world.22 What underlay “Nationalism and the League of Nations Today,” in Problems of America’s technological superiority and pro- Peace (London: Longmans, Green, 1934) pp. 17-40; “Small States . : : ie in the League of Nations,” Political Science Quarterly, December ductive strength, he said, was its spirit of free 1934, pp. 544-75; and “What is the League of Nations?” in William and open competitive enterprise, which creat- E. Rappard, ed., The World Crisis, pp. 36-59. : : : : 14. William E. Rappard, “Switzerland and Collective Security,” ed the innovations and material achievements Pis. 1 & I, The New Commonwealth Quarterly, March and June that were the envy of the world. The secret of 1936, pp. 299-320, 53-64; and, Collective Security in Swiss Experi- sad, . _ ence, 1291-1948 (London: George Allen & Unwin, 1948). America’s Success was human liberty, Rap 15. William E. Rappard, “Pennsylvania and Switzerland: The pard emphasized. The ideal of liberty had American Origins of the Swiss Constitution” [1940}, reprinted in : . Varia Politica: Publiés Réimprimés a L ‘occasion du Soixante-dix- originally come to America from Europe. iéme Annniversaire de William E. Rappard (Zurich: Editions Poly- Europe now needed to relearn some of that graphiques, 1953), pp. 316-38. - : : 16. William E. Rappard, “Switzerland and Democracy,” Fort- lesson from America. If it did, a world of nightly Review, September 1937, p. 297, freedom, free trade, peace, and prosperity 17. William E. Rappard, The Government of Switzerland (New : York: D. Van Nostrand, 1936), p. 123. Rappard was more optimistic could become a reality, rather than only the about Switzerland's future after the Second World War. See his arti- classical-liberal ideal. [J cle “The Economic Position of Switzerland,” Lloyd's Bank Review, ===== PAGE 41 ===== WILLIAM E. RAPPARD: AN INTERNATIONAL MAN IN AN AGE OF NATIONALISM 41 December 1948, p. 32: “Still it would seem as if, in the struggle 1938). “The Common Menace” and Post-War Efforts were delivered between liberty and equality which is going on all over the world, as Richard Cobden Lectures in London in, respectively, 1936 and liberty were holding its own more successfully at the foot of the Alps ~~ 1938. than in most if not all other European states. In the sphere of eco- 21. Rappard, “Economic Nationalism,” pp. 78, 83-84. nomic policy, this makes for a larger measure of liberalism and for a 22. Rappard, “The Common Menace,” p. 10. stronger opposition to state control.” 23. William E. Rappard, “The Relation of the Individual to the 18. William E. Rappard, “The Practical Working of the Mandates State,” Annals of the American Academy of Political and Social Sci- System” [1925], reprinted in Varia Politica, pp. 163-80; “Human ence, January 1937, pp. 216-18. Rights and Mandated Territories,” Annals of the American Academy 24. Rappard, The Crisis of Democracy, pp. 267-68. of Political and Social Science, January 1946, pp. 118-23; and “The 25. William E. Rappard, “The United Nations as Viewed from Mandates and the International Trusteeship Systems,” Political Sci- Geneva,” American Political Science Review, June 1946, pp. ence Quarterly, September 1946, pp. 408-19. 545-51; “The United Nations and Switzerland,” Annals of the Amer- 19. William E. Rappard, “Why Peace Failed,” The Annals of the ican Academy of Political and Social Science, July 1946, pp. 64-71; American Academy of Political and Social Science, July 1940, “The United Nations from a European Point of View,” Yale Law pp. 1-6. Journal, August 1946, pp. 1036-48; and “Collective Security,” The 20. William E. Rappard, “The Common Menace of Economic Journal of Modern History, September 1946, pp. 195-201. and Military Armaments” [1936], reprinted in Varia Politica, pp. 26. William E. Rappard, The Quest for Peace Yesterday and 76-100; “Economic Nationalism” in Authority and the Individual: ~~ Today (London: The David Davies Memorial Institute of Interna- Harvard Tercentenary Conference of Arts and Science (Cambridge, tional Studies, 1954). Mass.: Harvard University Press, 1937), pp. 74-112; Post-War 27. Ibid., pp. 46-47. Efforts for Freer Trade (Geneva: Geneva Research Centre, 1938); 28. William E. Rappard, The Secret of American Prosperity and The Crisis of Democracy (Chicago: University of Chicago Press, (New York: Greenburg Publisher, 1955). + ra pt. | + 2 ine pr A Primer on Modern Ensayos Sobre Temas Themes in Free Market Modernos de la Economics and Policy Economia de Mercado JOHN M. COBIN JOHNAL CORBIN A Primer on Modern Themes in Free Market Economics and Policy introduces and summarizes some of the important advances in contemporary free-market economics and policy. Chapters include: Austrian methodology and the knowledge problem, Entrepreneurship: an Austrian perspective, and Ludwig von Mises: a compendium of his thought, among many others. “This is the best textbook I have seen on market economics, and I would recommend it to anyone whose main task is to teach economics or to those who want to understand how the economy works.” — Dr. Alejandro A. Chafuen, President & CEO, Atlas Economic Research Foundation, Fairfax, Virginia, USA To order, visit Universal Publishers at: http: / /www.upublish.com/books/cobin.htm or http:/ /www.Amazon.com. Electronic book price $6.00, or $29.95 paperback plus $4.90 shipping and handling. ===== PAGE 42 ===== Economic Notions by Dwight R. Lee ¥ Economics Creating Jobs vs. Creating Wealth (Goyemment policies are commonly evalu- Creating Jobs Is Not ated in terms of how many jobs they cre- the Problem ate. Restricting imports is seen as a way to protect and create domestic jobs. Tax prefer- The purpose of all economic activity is to ences and loopholes are commonly justified produce as much value as possible with the as ways of increasing employment in the scarce resources (including human effort) favored activity. Presidents point with pride to available. But no matter how far we push back the number of jobs created in the economy the limits of scarcity, those limits are never during their administrations. Supposedly the vanquished. Scarcity will forever prevent us more jobs created the more successful the from securing all the things we desire. There administration. There probably has never been will always be jobs to do—far more than can a government spending program whose advo- ever be done. So creating jobs is not the prob- cates failed to mention that it creates jobs. lem. The problem is creating jobs in which Even wars are seen as coming with the silver people produce the most value. This is the lining of job creation. point of the apocryphal story of an engineer Now there is nothing wrong with job cre- who, while visiting China, came across a ation. Working in jobs is an important way large crew of men building a dam with picks people create wealth. So the emphasis on job and shovels. When the engineer pointed out to creation is an understandable one. But it is the supervisor that the job could be complet- easy for people to forget that creating more ed in a few days, rather than many months, if wealth is what we really want to accomplish, the men were given motorized earthmoving and jobs are merely a means to that end. equipment, the supervisor said that such When that elementary fact is forgotten, peo- equipment would destroy many jobs. “Oh,” ple are easily duped by arguments that elevate the engineer responded, “I thought you were creation of jobs to an end in itself. While interested in building a dam. If it’s more jobs these arguments may sound plausible, they you want, why don’t you have your men use are used to support policies that destroy spoons instead of shovels.” wealth rather than create it. I shall consider a As I tell my students at the University of few of the depressingly many examples in this Georgia, I will employ every person in our column and the next. college town of Athens if they’ll only work for me cheaply enough, say a nickel a month. Lower the wage a bit more and I’ll hire every- — one in the entire state of Georgia. If I hir Dwight Lee is Ramsey Professor at the Terry College I t th I I °c Kk od of Business, University of Georgia, and an adjunct WOrKETS at those wages, 1 could make a pro fellow at the Center for the Study of American Busi- having them build dams with spoons. Of ness at Washington University in St. Louis. course, the students recognize that my offer is 42 ===== PAGE 43 ===== 43 silly since they can make far more working for One of the arguments for restricting other employers, which reflects the more imports is that it will create (or protect) important reason my offer is silly—concen- domestic jobs. True, it will create some trating on the number of jobs ignores the value domestic jobs, just as destroying a section of being created, or not created. More value will a rail line will create domestic jobs. But also be produced in the higher-paying jobs my stu- like a break in a rail line, import restrictions dents can get than in the ones I am offering. A make it more costly to obtain valuable prod- big advantage realized from the wages that ucts. The only reason a country imports prod- emerge in open labor markets is that they ucts is that it is the cheapest way to acquire attract people into not just any employment, them; it takes fewer workers to obtain the but into their highest-valued employment. imported products through foreign trade than Another advantage of market wages is that by producing them directly. In this way trade they force employers to consider the opportu- is like a technological advance, freeing up nity cost of hiring workers—their value in workers and allowing them to increase the alternative jobs—and to remain constantly production of goods and services available for alert for ways to eliminate jobs by creating the consumption. Import restrictions create jobs same value with fewer workers. All economic in the same way dynamiting our railroads, progress results from being able to provide bombing our factories, and requiring that the same, or improved, goods and services workers use shovels instead of modern earth- with fewer workers, thus eliminating some moving equipment would create jobs. Always jobs and freeing up labor to increase produc- keep in mind that creating jobs is a means to tion in new, more productive jobs. The failure the ultimate end of economic activity, which to understand this source of increasing pros- is creating wealth. perity explains the widespread sympathy with destructive public policies. Crea ting Government Jobs Dynamiting Our Way to Because people tend to think of jobs as More Jobs ends rather than means, they are easily fooled into supporting government programs on In the 1840s a French politician seriously grounds that jobs will be created. We have all advocated blowing up the tracks at Bordeaux heard people argue in favor of military bases, on the railroad from Paris to Spain to create highway construction, and environmental reg- more jobs in Bordeaux. Freight would have to ulations on business on these grounds. To jus- be moved from one train to another and pas- tify spending, government agencies common- sengers would require hotels, all of which ly perform benefit/cost studies in which the would mean more jobs. (This proposal was jobs created are counted as benefits. This is discussed and demolished by the nineteenth- like counting the hours you work to earn century economist and essayist Frederic Bas- enough money to buy a car as one of the car’s tiat in Economic Sophisms, pp. 94-95, avail- benefits. The jobs created by a government able from FEE.) project represent a cost of the project: the This proposal is even more absurd than my opportunity cost. The workers employed in offer to hire people for a nickel a month. At government activities could be producing least I would employ workers to produce value doing something else. The relevant something of value, rather than to partially question is not whether a government project undo damage that is inflicted needlessly. creates jobs, but whether the workers in those Unfortunately, absurdity does not prevent jobs will create more wealth than they would economically destructive policies from being in other jobs. This is a question advocates proposed and implemented. Using the jobs- of government programs don’t want asked. creation justification, politicians commonly If it were, there would be far fewer low- enact legislation that increases the effort productivity government jobs and far more required to produce a given amount of value. high-productivity private-sector jobs. O ===== PAGE 44 ===== DEAS ON [IBERTY Nock on Education by Wendy McElroy he self-proclaimed “philosophical anar- including, for example, Latin and a stress on chist” Albert Jay Nock thought he was so history—were replaced by programs aimed at superfluous to the society around him that he creating “good citizens.” titled his 1943 autobiography Memoirs of a In the optimistic years before World War 1, Superfluous Man. He felt utterly out of step Nock enthusiastically embraced the “new with the twentieth century. education.” On seeing its application, howev- Born in 1870, he witnessed the severe soci- er, he became one of Dewey’ earliest and etal changes resulting from world wars, revo- staunchest critics. Nock’s later admirers lutions in ideology, and the consequences of attempted to revive classical education. Mor- political measures passed decades earlier. He timer Adler, Stringfellow Barr, and Robert watched with particular concern as American Maynard Hutchins translated their love of a schools abandoned classical education in classical curriculum into the Great Books favor of the less disciplined liberal arts program. But it was not until the 1950s, when approach favored by John Dewey and his fol- the alleged superiority of Russian scientific lowers. Nock charted what he saw as the dis- knowledge and training became a national astrous consequences to American society of concern, that Americans seriously questioned democratizing education. In doing so, he whether public schools adequately educated opposed one of the most popular trends of the their children. early twentieth century: mass education. Nock’s critiques of the American educa- Michael Wreszin, author of The Superflu- tional experiment ring fresh today because ous Anarchist: Albert Jay Nock, called popu- they offered fundamental objections to the lar education “the watchword of the progres- underlying theories of popular education. He sive era” because “no other field of reform rejected, for example, educational egalitarian- promised such grand possibilities.” The pub- ism. He saw no reason to believe that equal lic school system was viewed as an invaluable rights and treatment under the law implied means to reconstruct society by molding the that everyone had equal intellectual capacities generations to come. In his watershed book any more than it implied that everyone would Democracy and Education (1916), Dewey grow to the same height. wrote that popular education should be used Yet he was careful to praise the intentions as a conscious tool to remove social evil and of parents who sent their children to public promote social good. Slowly, the classical schools. In his book Free Speech and Plain curricula aimed at rigorous ‘education— Language, Nock wrote: “The representative American, whatever his faults, has been Wendy McElroy is a contributing editor of Ideas on notably characterized by the wish that his Liberty. children might do better by themselves than 44 ===== PAGE 45 ===== 45 he could do by himself. . . . [In its essence was on us and no one else, least of all our and intention our system [of education] may instructors; they were not there to help us be fairly called no less than an organization of carry it or to praise our efforts, but to see that this desire; and as such it can not be too much we shouldered it in proper style and got on admired or too highly praised.” Nevertheless, with it.” Being given the opportunity to pur- public schools were doomed to fail because sue knowledge and then being left alone to do “from beginning to end” they were “gauged to so remained Nock’s ideal. Robert M. Crun- the run-of-mind American rather than to the den’s biography, The Mind and Art of Albert picked American.” They were designed to Jay Nock (1964), contains the following anec- accommodate the lowest intellectual denomi- dote: nator, rather than the highest. For his views on education, some commen- Nock’s friend, Edward Epstean, told tators have called Nock an elitist. Be that as it him, “You’ve done a great deal for all those may, the probing questions he asked about young people [who worked at Nock’s mag- American education and its impact on the azine, The Freeman].” American character deserve to be explored “I don’t know that I’ve ever done any- and answered. thing for them except leave them alone,” Nock said. . “Yes, I understand,” answered Epstean. Nock: The Man “But if someone else had been letting them Albert Jay Nock was born in Scranton, alone, it would have been a very different Pennsylvania, to a respectable but poor fami- story.” ly, which relocated a few years afterward to Brooklyn, New York. He learned to read with- Nock did some graduate work at Berkeley out formal assistance by staring at a news Divinity School in Connecticut, then decided clipping posted on his wall until, at the age of in 1897 to be ordained as a minister of the three, he could spell out words. The first book Episcopal Church. After 12 years, he with- to catch his fancy was Websters Dictionary, drew from preaching to join the staff of the which he read for the sheer joy of learning American Magazine, where he stayed until language. His father was an Episcopal clergy- 1914. man and thus no stranger to providing instruc- During this period, he developed a specific tion, but he exercised only unobtrusive guid- social philosophy. He became a single- ance over his son’s self-education, which taxer—a follower of the classical-liberal included mastery of Greek and Latin. reformer Henry George—because he believed Eventually, Nock went to a private prepara- that private ownership of land led to monop- tory school in order to pass the entrance oly and, in turn, a war between labor and cap- examinations for college. Of the private ital. By abolishing all taxes save one on land, school, Nock stated that the students were that war, as well as extremes of “unearned” never told not to put “beans up our noses, or wealth, could be avoided. * subjected to any sniveling talk about being on As a pacifist, Nock opposed American our honour, or keeping up the credit of the entry into both world wars. As a radical indi- dear old school, or any such odious balder- vidualist, he spoke out against collectivism dash. Nevertheless, we somehow managed to and the policies of Franklin D. Roosevelt. behave decently.” In short, students were left Nock was deeply influenced by Franz Oppen- alone to learn at their own pace, being given heimer’s masterpiece, The State—published only the instruction they requested or clearly in German in 1908, with an English transla- required. tion in 1915. Oppenheimer argued that people At college—St. Stephen’s, now Bard Col- achieved their goals, including basic survival, lege—the same spirit of academic indepen- to understand that the burden of education pp. 512-13, 813-14. ===== PAGE 46 ===== 46 IDEAS ON LIBERTY ® JANUARY 2000 either by economic means (work) or by polit- diminishing returns—and he wanted people, ical means (theft). Nock immediately adopted particularly through government, to stop try- this distinction and used it as a touchstone in ing to thwart those “natural laws.” his social analysis. Although Nock was often Nock’s first law of social order was named called a liberal, he rejected the label, prefer- after his friend Edward E. Epstean from whom ring to call himself a radical. To him, a liber- he first heard the principle. As rephrased in al used the political means to improve and Free Speech and Plain Language, the law is, expand the State as a social institution. Nock “Man tends to satisfy his needs and desires proposed to eliminate the State from society. with the least possible exertion. Not, it must be (He distinguished the State from the govern- understood, that he always does so satisfy ment.) His unswerving suspicion of the them, for other considerations—principle, State—the political means—would be key to convention, fear, superstition or what not— his approach to public education. may supervene; but he always tends to satisfy In 1920 Nock, along with the British clas- them with the least possible exertion, and, in sical liberal Francis Neilson, founded the the absence of a stronger motive, will always individualist periodical The Freeman.* By the do so.” Nock applied this law to the political time it closed in 1924, Nock had gained wide means. He believed that as long as the State respect as an editor. could “confer an economic advantage at the While teaching briefly at Bard College, mere touch of a button,” people would maneu- Nock delivered what are known as the Page- ver to “get at the button, because law-made Barbour lectures at the University of Virginia. property is acquired with less exertion than There he roundly defended classical educa- labour-made property.” tion against the theories of Dewey. The lec- Nock’s second law was adapted from Gresh- tures were published in book form as The am’s law on the nature of currency. Simply Theory of Education in the United States stated: bad money drives out good. When (1932). From February 1936 to September government dictates equivalency of value, the 1939 Nock wrote a series of monthly essays worst form of currency will circulate and the for the American Mercury titled “The State of better money will disappear. Nock extended the Union.” This series won him renown as a Gresham’s law to cover culture. He asked the writer. (See Albert Jay Nock, The State of the reader to imagine a concert being played for Union: Essays in Social Criticism, ed. an audience of 300 randomly chosen people. Charles H. Hamilton, 1991.) He argued that the program would not include the best music produced through the cen- Nock’s Laws of Social Order turies, but the most popular music of the moment. So too with education: bad educa- Before discussing the specifics of Nock’s tion would drive out good. Mass education theories on education, it is useful to examine did nothing more than reduce the quality of the more fundamental principles, or laws, education to what Nock called “the dreadful with which he approached any social issue. average.” In Free Speech and Plain Language, Nock Nock’s third law was based on the law of explained that “With regard to . . . all . . . diminishing returns. He wrote that “The law aspects of our equalitarian social theory, my of diminishing returns is fundamental to only aim is the humble one of suggesting that industry. It formulates the fact, which strikes we bear in mind the disregard that nature has one as curiously unnatural that, when a busi- for unintelligent good intentions, and the vix- ness has reached a certain point of develop- enish severity with which she treats them.” He ment, returns begin to decrease, and they keep believed three laws defined social life— on decreasing as further development pro- Epstean’s law, Gresham's law, and the law of ceeds.” Consider the experience of vacation- ing at a location that has not yet been “dis- *Editor’s Note: That publication was not formally related to The covered” by floods of tourists. When tourists Freeman that is the predecessor of /deas on Liberty, which was . ) founded later by admirers of Nock. begin to flock to the location, the return to ===== PAGE 47 ===== NocCK ON EDUCATION 47 everyone abruptly decreases. In accommodat- tine and formula.” The educated man was ing popular demands, the vacation site (like capable of independent thought. Unfortunate- other things in life) falls prey to the law of ly, Nock believed few people were educable. diminishing returns. By contrast, Nock thought most people For Nock, the third law contradicted a great could be trained. The trainable person profit- myth of American education, namely, that “if ed from instrumental knowledge. In his essay a few qualified persons get this [educational] “The Nature of Education,” Nock explained benefit, anybody, qualified or unqualified, that “When you want chemists, mechanics, may get it.” But the “margin of diminishing engineers, bond-salesmen, lawyers, bankers returns” mandates that “the larger the propor- and so on, you train them; training, in short, is tion of unqualified persons” who attempt to for a vocational purpose. Education contem- receive the benefit, the swifter the benefits to plates another kind of product.” Nock did not all will vanish. mean to denigrate those who should be trained rather than educated. He wrote in his memoirs that “Education, properly applied to suitable material, produces something in a In The Theory of Education in the United way of an Emerson; while training, properly States, Nock claimed that American public applied to suitable material, produces some- schools were “based upon the assumption, thing in the way of an Edison.” Thus to Nock, popularly regarded as implicit in the doctrine science was a matter of training and many of of equality, that everybody is educable. This the world’s most eminent men were not edu- has been taken without question from the cated but trained. “Training is excellent,” he start.” Nock questioned it. As noted, he did not wrote in Free Speech and Plain Language, believe that equal rights and equal treatment “and it can not be too well done, and opportu- under the law held any implication for equal nity for it can not be too cheap and abundant.” intellectual ability. The main problem with the American edu- Nock made a crucial distinction between cational system was that, in attempting to being “educable” and being “trainable.” An educate everyone equally, it encountered educated person was one who had profited Gresham’s law and ended up educating no one from absorbing “formative” knowledge. As a adequately. Instead, it provided only training, result, he had developed “the power of disin- even to those who were educable. He believed terested reflection”; that is, he could reason that, in his era, “the study of history, like other toward truth, unencumbered by emotional formative studies, does not even rise to the reactions or prejudice. Rather than aiming ata dignity of being a waste of time. What with vocational goal, education aimed at the joy of the political, economic and theological capital ideas and produced men to whom learning that has to be made of it . . . it is a positive was pleasure. A knowledge of Greek and detriment to mind and spirit.” Indeed, he con- Latin was particularly important, in Nock’s tinued in The Book of Journeyman (1930), view, because it allowed people to view the “Following the strange American dogma that record of inquiring human minds for over all persons are educable, and following the 2,500 years. equally fantastic popular estimate placed In On Doing the Right Thing and Other upon mere numbers, our whole educational Essays, Nock explained that education pro- system has watered down its requirements to duced “intelligenz” [sic]—"the power invari- something precious near the moron standard. ably, in Plato’s phrase, to see things as they The American curriculum in ‘the liberal arts’ are, to survey them and one’s own relations to is a combination of bargain-counter, grab-bag them with objective disinterestedness, and to and Christmas-tree.” apply one’s consciousness to them simply and Nock’s solution? The two categories of peo- directly, letting it take its own way over them ple should attend separate learning centers. uncharted by prepossession, unchanneled by As a blueprint, Nock praised Thomas Jeffer- prejudice, and above all uncontrolled by rou- son’s scheme for public education. In Free Education versus Training ===== PAGE 48 ===== 48 IDEAS ON LIBERTY ® JANUARY 2000 Speech and Plain Language, Nock wrote that system. He wrote that “Education . . . leads a “when Mr. Jefferson was revising the Virginia person on to ask a great deal more from life . Statutes in 1797, he drew up a comprehensive . . and it begets dissatisfaction with the plan for public education. Each ward should rewards that life holds out. Training tends to have a primary school for the R’s, open to all. satisfy him with very moderate and simple Each year the best pupil in each school should returns. A good income, a home and family, be sent to the grade-school, of which there the usual run of comforts and conveniences, were to be twenty, conveniently situated in diversions addressed only to the competitive various parts of the state. They should be kept or sporting spirit or else to raw sensation— there one year or two years, according to training not only makes directly for getting results shown, and then all dismissed but one, these, but also for an inert and comfortable who should be continued six years. . . . Atthe contentment with them. Well, these are all end of six years, the best ten out of the twen- that our present society has to offer, so it is ty were to be sent to college, and the rest undeniably the best thing all round to keep turned adrift.” people satisfied with them, which training Unfortunately, Nock’s praise of Jefferson’s does, and not to inject a subversive influence, education scheme did not include a counter- like education, into this easy complacency. balancing criticism of how this system was to Politicians understand this.” When you edu- be financed—namely, from the public trough. cate a man, you send him “out to shift for As an anarchist, Nock must have opposed a himself with a champagne appetite amidst a tax-supported school system, but his com- gin-guzzling society.” ments give the opposite impression. For In her introduction to Nock’s Snoring as a example, of Jefferson’s scheme, he wrote, “As Fine Art, Suzanne La Follette paid tribute to an expression of sound public policy, this plan her friend and colleague in terms that would has never been improved upon.” have surely delighted him. She spoke of his As noted, dividing society into the “educa- unique talent for recognizing and encouraging ble” and the “trainable” left Nock vulnerable ability in anyone he met. And she cautioned to charges of elitism, especially when consid- that his benevolence to those of ability was ered in conjunction with his theory of “the not “a conscious service to society or his Remnant”—the select few of mankind on country or even to the beneficiary. It was, I whom falls the burden of maintaining and suppose, the teacher’s instinct in him; the advancing civilization. But his questions and instinct to serve truth. But he never tried to insights cannot be dismissed lightly. impose his truth on his pupil. Rather, he was For example, sensitive to the difference concerned to put the pupil in the way to find between an individual and a citizen of a State, truth for himself—as if he had revised the Nock believed that public schools were more Biblical saying, ‘Ye shall know the truth, and interested in turning out good citizens than the truth shall make you free, to read, ‘Ye good individuals. For one thing, educated shall be free in order that ye may know the people were likely to question the political truth.” Od ===== PAGE 49 ===== Economics on Trial by Mark Skousen IDEAS ON IBERTY JANUARY 2000 Economics for the 21st Century “Nature has set no limit to the realization of our hopes.” —MARQUIS DE CONDORCET ecently I came across the extraordinary ebrating our being “emancipated from its writings of the Marquis de Condorcet shackles, released from the empire of fate and (1743-94), a mathematician with an amazing from that of the enemies of its progress, gift of prophecy in /’age des lumieres. Robert advancing with a firm and sure step along the Malthus (1766-1834) ridiculed Condorcet’s path of truth, virtue and happiness!”! optimism in his famous Essay on Population As we enter the year 2000, the public has (1798). Today Malthus is well known and focused on the history of the twentieth centu- Condorcet is forgotten. Yet it is Condorcet ry. Condorcet’s essay reflects two characteris- who has proven to be far more prescient. tics of this incredible period. First, the misery In an essay written over 200 years ago, and vicious injustices of the past hundred translated as “The Future Progress of the years, and second, the incredible economic Mind,” Condorcet foresaw the agricultural and technological advances during the same revolution, gigantic leaps in labor productivi- time. ty, a reduced work week, the consumer soci- ety, a dramatic rise in the average life span, . deal breakthroughs, cures for common The Crimes of the diseases, and an explosion in the world’s pop- Twentieth Century ulation. Paul Johnsons Modern Times, by far the Condorcet concluded his essay with a state- twentieth-century history of the world ment that accurately describes the two major demonstrates powerfully that this century has forces of the twentieth cenfury—the destruc- been the bloodiest of all world history.2 Here tive force of war and crimes against humani- op ool down of the carnage: ty, and the creative force of global free-market capitalism. He wrote eloquently of “the @jvilians Killed by Governments errors, the crimes, the injustices which still (in millions) pollute the earth,” while at the same time cel- ggyiet Union 62 (1917-91) — i ist). ........... 1949- Mark Skousen (http://www.mskousen.com; mskousen China (communist) 35(19 ) . : Germany ................... 21 (1933-45) @aol.com) is an economist at Rollins College, China (K int 10 (1928-49 Department of Economics, Winter Park, FL 32789, a ina (Kuomintang) . .......... (1928-49) Forbes columnist, and editor of Forecasts & Strate- J8PAN o.oo... 6 (1936-45) gies. His textboook, Economic Logic, is now available Other...................... 36 (1900- ) from FEE. Total. . .................. 170 million 49 ===== PAGE 50 ===== 50 IDEAS ON LIBERTY e JANUARY 2000 Deaths in War (in millions) debauchery of sound currency by interven- Internationalwars. .................... 30 tionist central banks. Most important, ivory- Civilwars. .......... iii. 7 tower economists need to concentrate more Trees on applied economics (like the work of Leber- gott) instead of high mathematical modeling. As far as a positive program is concerned, the right direction can be found in an essay on the “next economics” written by the great Austrian-born management guru Peter F. Drucker almost 20 years ago: “Capital is the future . . . the Next Economics will have to be again micro-economic and centered on sup- ply.” Drucker demanded an economic theory aiming at “optimizing productivity” that Economists use a statistic to measure what national output could exist under conditions of full employment, called Potential GDP. Imagine the Potential GDP if the communists, Nazis, and other despots hadn’t used govern- ment power to commit those hateful crimes against humanity. Another great French writer, Frederic Basti- at (1801-50), wrote an essay in 1850 on “What Is Seen and What Is Not Seen.” We donot see 6,14 benefit all workers and consumers.4 the art, literature, inventions, music, books, [yterestingly, Drucker cited approvingly from charity, and good works of the millions who the work of Robert Mundell, the newest Nobel lost their lives in the Soviet gulags, Nazi con- prize winner in economics, who is famed for centration camps, and Pol Pot’s killing fields. ~~}. advocacy of supply-side economics and a gold-backed international currency. The Economic Miracle of the Twentieth Century Beware the Enemy Yet the twentieth century was also the best Market forces are on the march. The col- of times, for those who survived the wars and lapse of Soviet communism has, in the words repression. Millions of Americans, Euro- of Milton Friedman, turned “creeping social- peans, and Asians were emancipated from the ism” into “crumbling socialism.” But let us drudgery of all-day work by miraculous tech- not be deluded. Bad policies, socialistic think- nological advances in telecommunications, ing, and class hatred die slowly. Unless we are agriculture, transportation, energy, and medi- vigilant, natural liberty and universal prosper- cine. The best book describing this economic ity will be on the defensive once again. miracle is Stanley Lebergott’s Pursuing Hap- We need to deregulate, privatize, cut taxes, piness: American Consumers in the Twentieth open borders, stop inflating, balance the bud- Century (Princeton University Press, 1993). get, and limit government to its proper consti- Focusing on trends in food, tobacco and alco- tutional authority. We need to teach, write, hol, clothing, housing, fuel, housework, and speak out for economic liberalization as health, transportation, recreation, and reli- never before. Let our goal for the coming era gion, he demonstrates powerfully how “con- be: freedom in our time for all peoples! [J sumers have sought to make an uncertain and convenient place.” As a result, Americans (Penguin Books, 1995), p. 38. Several of Condorcet’s writings can have increased their standard of living at least oe baal Toho Modem Tone World from the Twenties to tenfold in the past 100 years. the Nineties, rev. ed. (New York: Harper, 1992). The best survey of in the new millennium? Certainly not to Press, 1999), written by six French scholars, some of whom are for- ep eat the blunders of the past. In the halls of Frederic Bastiat, Selected Essays on Political Economy (Irv- Congress, the White House, and academia, ington-on-Hudson, N.Y: Foundation for Economic Education, 1995 we need to reject the brutality of Marxism, the (1964): . . 4. Peter F. Drucker, Toward the Next Economics, and Other weight of Keynesian big government, and the Essays (New York: Harper & Rowe, 1981), pp. 1-21. ===== PAGE 51 ===== 51 But statistical arguments cannot confirm the existence of a right! I have the right appropri- ately to use lethal force in self-defense regard- less of its effect at deterring crime, for that matter regardless of the Constitution. The Sec- ond Amendment does not grant me the right to keep and bear arms; it recognizes that right and protects it. In this case, the statistical argu- : . ments offered can only impotently attempt to Live by the Stats, Die by the Stats prove the effectiveness of gun ownership in To the Editor: deterring violent crime. And they can’t even Regarding Mark Skousen’s column, accomplish that for the reasons cited above. “Chicago Gun Show,” in the October 1999 While I agree with the argument that criminal issue of The Freeman: Ideas on Liberty the behavior must logically be deterred by the statistical arguments advanced by the Chicago potential for self-defense, the means by which school allegedly demonstrating gun owner- 1arrive at that conclusion matter. The Austrian ship reduces violent crime are methodologi- Mmethodology—verbal logic —is the appropri- cally flawed. Though I am a proud gun owner ate one. I’m surprised and slightly disappoint- and lifetime NRA member, I believe citing ed to see a specious Chicago school statistical these specious arguments is decidedly un- argument finding its way into this esteemed CAPITAL LETTERS Austrian. Austrian school publication. There are several reasons statistics are —Tobb SHOENFELT invalid proofs for explaining human action. San Francisco First, they are descriptions of the past. Past behavior does not determine future behavior. Mark Skousen replies: Second, because the competing potential True, you can’t prove anything with statis- causal factors cannot be held constant, it is tics, but quantitative studies do provide evi- impossible to assign cause to effect. Mr. Lott’s dence in support of basic economic principle. graph could also be used to show the drop in In the case of crime, John Lott provided violent crime after the Brady Bill, which strong evidence that when you raise the cost occurred at approximately the same time, by of committing a crime, fewer crimes are com- simply changing the caption at the bottom. mitted—essentially confirming the law of Third, statistical samples are always incom- demand. Now you can use “verbal logic” till plete, as was stated in the article. Even the you're blue in the face in defense of the down- U.S. census fails to account for 100 percent of ward-sloping demand curve, but statistical the population. It is pure speculation as to evidence from the past can do wonders to lib- how the missing part of the population would erate the mind from false notions (many of have affected the statistics gathered and the which exist in the controversial issue of gun conclusions drawn. Last, statistics are always control). summaries of sample data, which is another I grant you that sometimes data contradict a way of saying they are incomplete explana- theory, but that does not mean that statistical tions. For instance, an average only accurate- work is never valuable. It simply means fur- ly explains a very small part of a sample. ther analysis is necessary. But in no case The article ends with a specious conclu- should economists ignore statistical studies sion: “All this confirms a long-standing con- that contradict a hypothesis. stitutional principle: People have the right to I should point out that many “Austrian” own a gun for self-protection.” economists have used statistical evidence in ===== PAGE 52 ===== 52 IDEAS ON LIBERTY ® JANUARY 2000 support of their position, including Murray tion. But the inability to do this at this time Rothbard in America’s Great Depression and should not detract from the current scientific Walter Block in his work Economic Freedom insight that mental illnesses or brain disor- of the World (co-authored with James Gwart- ders are physical diseases that can be treated ney and Robert Lawson). The latter work with medications the same as other physical included a graph demonstrating that the high- diseases. er a nation’s level of economic freedom, the —JAMES A. WEBER higher the per capita income. Such graphs Chicago have a far greater influence for good than mere “verbal logic.” Thomas Szasz replies: D) It is disheartening to read Mr. Weber’s Mental Illness a Myth? statement that I say “that mental illnesses or To the Editor: [sic] brain disorders are not physical dis- According to Thomas Szasz, the scientific eases.” I clearly stated that I do not consider criterion for disease is a “derangement in the “mental illnesses” to be synonymous with structure or function of cells, tissues and brain disorders, and that “[if] ‘mental illness’ organs” (The Freeman: Ideas on Liberty, means brain disease, then it is not a disease of November 1999). Based on this definition, he the mind and psychiatry would be absorbed states that mental illnesses or brain disorders into neurology and disappear.” The brain is an are not physical diseases because they can be organ of the body; any process found to be a neither detected nor diagnosed by examining disease of the brain therefore lies within the cells, tissues, or organs. province of neurology. The mind is not an But research over the past several decades organ of the body. shows that mental illnesses or brain disorders Mr. Weber also states: “However, mental are in fact physical diseases. The brain is of illnesses or brain disorders are unique among course an organ. Brain disorders are caused by physical diseases in that symptoms of this dis- biochemical imbalances, i.e., derangements, ease are primarily mental or behavioral rather in the brain’s neurotransmitting systems. than physical.” This is erroneous. The initial However, mental illnesses or brain disor- symptoms of many bodily diseases may be ders are unique among physical diseases in primarily “mental” (fatigue, insomnia). The that symptoms of this disease are primarily presence of bodily disease cannot be reliably mental or behavioral rather than physical. Ide- inferred from symptoms or from response to ally, in the future, medicine will be able to “treatment,” as Mr. Weber suggests. It is look into the brain, analyze the malfunction- inferred from finding lesions. In “mental dis- ing of neurotransmitters such as serotonin or ease” there is no lesion; that is why, in psy- dopamine, diagnose the biochemical imbal- chiatry, diagnosis is mistaken for—and is ance, and prescribe an appropriate medica- accepted as—a disease. We will print the most interesting and provocative let- ters we receive regarding articles in Ideas on Liberty and the issues they raise. Brevity is encouraged; longer letters may be edited because of space limitations. Address your letters to: Ideas on Liberty, FEE, 30 S. Broadway, Irvington-on-Hudson, NY 10533; e-mail: iol@fee.org; fax: 914-591-8910. ===== PAGE 53 ===== Have you heard the latest from Washington? These days it seems as if everybody is crying for the truth. But how often do you actually feel that you can believe what you hear or read? If puréed truth and strained journalism makes you want to scream, we’d like to invite you to subscribe to The Washington Times National Weekly Edition, the only nationally circulated newspaper in the country with the courage and conviction to cover the news honestly. Every week, we'll bring you a fresh, honest, unbiased look at the people and events that shape the news in Washington D.C. and around the world. No liberal spin. No hidden agenda. Just vigorous, unapologetic journalism and clean, crisp writing. Anything less would be downright childish. — Try It FREE! Call today and order 4 weeks of The Washington Times National Edn free of charge! If you like it, you'll receive 48 more issues, for a total of 52 and pay only $59.95. If you decide not to subscribe, simply write “cancel” on your invoice and owe nothing at all! The 4 sample copies will be yours to keep! Name Address City State Zip Credit Card # Exp. Date Signature Phone Make checks payable to: The Washington Times NWE. Clip and mail with payment to: PO Box 96601, Washington, DC 20090 For lightning-fast delivery, call 1-800-363-9118 (Mention express code: 2055) ===== PAGE 54 ===== 54 differences, and consequently the mild- BOOKS mannered (but stubborn) Jensen has been subjected to the kind of abuse one would expect playground bullies to mete out to a The New Know-Nothings: weak, unpopular child. Hunt goes into detail The Political Foes of the Scientific about the numerous times Jensen has been Study of Human Nature shouted down, threatened with physical vio- lence, subjected to actual violence, and had by Morton M. Hunt his appearances canceled because of bomb Transaction Publishers © 1998 404 pages threats and mob action. ® $59.95 cloth; $24.95 paperback Hunt recounts many other similar unpleas- , ant stories. Hans Eysenck has been roughed Reviewed by George C. Leef up and had his glasses smashed for daring to say that heredity plays a role in intelligence. Mer Hunt is one of those honest “lib- “Fascists have no right to speak,” screamed erals,” that is to say, someone who his leftist tormentors. J. Philippe Rushton has holds some statist beliefs, but is dedicated to been subjected to a campaign that might have freedom of inquiry and the marketplace of been hatched by the Ku Klux Klan and threat- ideas. His book The New Know-Nothings ened with loss of his professorship for publi- explores an important phenomenon, namely, cizing his politically incorrect findings on the use of political and other coercive means heredity. Hunt also writes of the travails of to obstruct research into and discussion of those who have had the temerity to suggest aspects of human nature. There are plenty of that there might be a hereditary predisposition people who turn Jeffersonian tolerance on its toward crime, that genetics explains some of head and say, “I disagree with what you say, the observed male-female differences in aca- and will do everything I can get away with to demic performances, and more. This section make you shut up.” The book is about them. of the book is a good reminder that many left- Hunt, a sociology professor at the State ists have no more use for the marketplace of University of New York, Stony Brook, divides ideas than they do for the marketplace of his book into three sections—attacks on goods. inquiry from the left, attacks on inquiry from The last section of the book, “attacks from the right, and attacks from points in between. points in between,” also covers some interest- Readers of Ideas on Liberty will find the first ing controversies, among them the attacks and last most interesting. against individuals who question “repressed The first part is the longest and most impor- memory syndrome,” the animal rights move- tant. Hunt addresses what he rightly calls ment, and the “thou shalt not speak ill of day illiberal liberalism. He writes, “What is illib- care” crowd. eral . . . is the effort of partisans of any posi- The least convincing part of Hunt’s book is tion in the debate to stifle or prevent the the central section, detailing “attacks from the expression of opinions by the other side and right” We find here no violence, threats, or particularly to block or forbid the efforts of mob action. The author’s complaint is that researchers whose possible findings they view “right-wing” politicians have occasionally with fear or revulsion.” succeeded in defunding federal research. Consider, for example, the treatment Although he argues that some of those politi- accorded to Arthur Jensen, the emeritus pro- cians were pursuing a “know-nothing” agen- fessor of psychology at the University of Cal- da, he admits that often the “rightist” opposi- ifornia who concluded years ago that tion stems from a philosophical view that the observed IQ differences among racial groups government just doesn’t have any business in have a hereditary basis. That conclusion calls paying for nosy research. Correct, and an into question the statist/collectivist dogma important point. There is a world of difference that environment must explain all group between using violence and intimidation ===== PAGE 55 ===== Books 55 against people who say unpopular things and Security’s defenders claim that raising taxes saying that the government shouldn’t subsi- by just 2.2 percentage points will fix it. Fer- dize research. rara and Tanner neatly dispatch this argument, Moreover, Hunt informs us of instances pointing out that at best this postpones the where, after political funding for research date of “trust fund” exhaustion. projects was shut off or denied, the The second problem is that Social Security researchers succeeded in obtaining financial offers today’s workers poor returns for their support from private foundations. Still, he taxes. Using calculations of lifetime tax pay- worries that we might not get enough research ments and projected benefits for two-earner if government doesn’t intervene. His defense couples, one-earner couples, and single peo- of government funding falls flat on its face, ple, the authors show that most of today’s however. Not all knowledge is worth what it young workers will actually get negative costs to obtain, and the best way to filter out returns. Despite short-term fluctuations, pri- wasteful research is to ask people or institu- vate capital markets perform much better. tions if they are willing to pay for it. Third, Social Security is unfair to the Overall, a readable, stimulating book with poor, minorities, and women. The poor more hits than misses. [J depend on it more than wealthier Americans, George Leef is director of the Pope Center for High- yet tend to die sooner and hence receive less er Education Policy at the John Locke Foundation 1n benefits. Having lower life expectancies and book review editor of Ideas on Liberty. than whites, blacks are likewise disadvan- taged, paying taxes all their adult lives but often getting little or no retirement benefits. Social Security gives women either 50 per- A New Deal for Social Security cent of their husbands’ benefits or benefits i based on their own employment, whichever by Peter Ferrara and Michael Tanner is larger. The former usually is larger, mean- Cato Institute ® 1998 ® 264 pages ® $19.95 cloth; ing that many women get no return at all for $10.95 paperback the taxes they paid. Social Security is also damaging to the economy. Its high payroll tax makes many Americans unable to save. Lost savings mean n 1980 Peter Ferrara produced the path- less money for investment and therefore slow- breaking critique Social Security: The er economic growth. The payroll tax also dis- Inherent Contradiction. Now he and the Cato courages employment. Social Security is Institute’s Michael Tanner ably update his probably reducing Gross Domestic Product exposition of Social Security’s flaws and offer by 6 to 11 percent annually. Ferrara and Tan- a thought-provoking solution. ner argue that “Privatizing Social Security Social Security 1s a federal “social insur- would reverse these effects and lead to ance” program paying retirement, disability, increased economic growth and a better stan- and survivors’ benefits from taxes levied on dard of living for all Americans.” labor income. Its flaws are glaring, and the Facing similar problems, other nations have case for repeal is powerful. The authors pro- been abandoning “social insurance.” The vide a concise, if uneven and derivative, his- authors survey privatization developments, tory of Social Security, followed by a thor- from Chile’s pioneering 1981 reform to more Reviewed by John Attarian ough discussion of its problems. recent efforts in other Latin American coun- The first problem is the looming bankrupt- tries, Britain, Australia, and China. cy. Because the huge “Baby Boom” genera- Any reform, Ferrara and Tanner argue, tion is due to retire in the near future, the should “irrevocably commit and emphasize” Social Security “trust funds” will be unable to that benefits for current retirees would not be pay full benefits after 2032 unless the govern- changed. It should also give payroll tax ment imposes crippling tax increases. Social relief, provide a government-guaranteed ===== PAGE 56 ===== 56 IDEAS ON LIBERTY ® JANUARY 2000 minimum benefit, and give private retire- offers a welcome exercise in thinking the ment accounts the same tax treatment as issues through. Cl Individual Retirement Accounts. They PIO" john Attarian is a freelance writer in Ann Arbor, pose letting workers create their OWN Michigan, and adjunct scholar with the Mackinac accounts, financing them with 10 percentage Center for Public Policy. He has recently completed points of the current payroll tax and using a book on Social Security. the remaining 2.4 percentage points to pay current benefits. Workers choosing the pri- Myths of Rich and Poor: Why vate option would receive government We’re Better Off Than We Think “recognition bonds” to compensate for past . . Social Security taxes. At retirement, workers by W. Michael Cox and Richard Alm could buy annuities with their account Basic Books ® 1999 256 pages + xvi ® $25.00 money, make withdrawals, or both. "Critics of privatization argue that workers would have to finance simultaneously their own retirement and benefits for current I dy recall a 1972 visit to the Sears store retirees. The authors deny this, and devote in our local mall. I was 14 years old and many pages to explaining the financing of the had never before seen an electronic calculator. transition. Possibilities include continued But there at Sears, for the first time in my life, payroll taxes, the sale of federal assets, and was this wonder to behold! Three different reducing other federal spending. They also models were displayed beneath plexiglass cut expect new revenue from taxes on the returns so that the keyboards could be operated by to the new investment. Economist Martin shoppers—but also so that no one would steal Feldstein estimates the real, pretax average this valuable inventory. rate of return on capital at 9.3 percent. Taxing My parents had difficulty dragging me three percentage points at the business level away from these magical machines—so mag- (before payment of interest and dividends), ical that the high-end models could even cal- the authors argue, would generate abundant culate square roots! Unfortunately, 1 couldn’ revenue to defray transition costs and still afford one. The cheapest model was priced at leave workers with much higher returns than nearly $100. “Oh well,” I sighed. “In ten years Social Security offers. when I have an adult job and a credit card, I'll Their proposal has prima facie appeal. buy one.” However, they assume that the historical real I’m sure that if a visitor from 1999 had then rate of return on capital will continue to be swooped down to inform me that in just a few realized, without making a case for it. And years these technological marvels would cost they seem to have forgotten that Feldstein no more than a movie ticket, I would have estimates that federal, state, and local govern- howled derisively. W. Michael Cox and ments are already taxing capital at the busi- Richard Alm aren’t visitors from the future; ness level at the rate of 3.9 percent. When we instead, theyre researchers of today who do add the proposed 3 percent tax, we get a total fascinating and pioneering research on the tax rate of 6.9 percent, which leaves an after- progress of American living standards. They tax rate of return for workers of just 2.4 per- find, in a nutshell, that the affordability of cent (9.3 percent rate of return minus 6.9 per- nearly every good or service you care to name cent taxes), not 6.3 percent. Finally, they has risen over the years and continues to rise. retain the compulsory payroll tax. If Social This finding contradicts the conventional Security is so awful, why keep one of its cen- wisdom spewed out daily by popular com- tral features? Better to repeal the Social Secu- mentators. A favorite refrain is that the typical rity law and ditch this punishing tax. American today enjoys living standards that Still, the book superbly illuminates the are no higher than those in 1973. The impli- flaws in Social Security. The plan Ferrara and cation is that the market has sputtered for a Tanner propose might not be ideal, but it quarter century. Reviewed by Donald J. Boudreaux ===== PAGE 57 ===== Books 57 Of course, personal observation over these typical middle-class Americans of a genera- years should be sufficient to convince most tion ago. For example, in 1971 about 83 per- people of the absurdity of the “myth of 73.” cent of all American homes had a refrigerator. Anyone born before 1960 can easily list In 1994, nearly 98 percent of poor households dozens of marvelous goods and services that owned one. The same general pattern holds today are commonplace, but which were for washing machines, clothes dryers, auto- unavailable to ordinary Americans (or anyone matic dishwashers, stoves, microwaves, color else) 25 years ago. Here’s my (very) partial televisions, air conditioners, and several other list: personal computers, online bookstores, familiar items. So much for the canard that cell phones, quality disposable diapers, auto- today’s prosperity is built on the backs of the mobiles that almost never need tune-ups, and poor. Jiffy Lube. While this is a superb book, it isn’t without But there’s no need to rely on personal some minor flaws. One is the authors’ claim anecdotes and observations now that the data- that World War II “shook the country out of rich research of Cox and Alm has been col- the decade-long Great Depression.” This is a lected in Myths of Rich and Poor. Cox, the curious claim coming from scholars who chief economist at the Federal Reserve Bank rightly emphasize that an economy’s perfor- of Dallas, and Alm, a reporter for the Dallas mance is best measured by what its people Morning News, use readily available data to can consume. Wartime production did not directly confront and blow the “myth of 73” ease the lives of average Americans. Robert to smithereens. Higgs’s pioneering research shows that while Cox and Alm calculate how long the typi- the war years increased employment and mil- cal American worker of the past had to work itary output, the Depression didn’t end until to acquire various goods and services versus late 1946. the amount of time required of the typical An even more curious claim by Cox and American worker of today. This calculation Alm is that “government can bolster competi- is far more revealing than the more standard tion through antitrust laws.” Not so. More calculations drawn from data on wages or than a century of antitrust regulation in the household incomes, for the Cox-Alm calcu- United States has provided ample evidence lation measures directly what ordinary that such regulation is far more likely to Americans are able to consume. (Wages and stymie competition—by being targeted at income are affected by inflation; the size of especially entrepreneurial and successful the average household has shrunk over time; firms—rather than bolster it. History also and increasing amounts of compensation teaches that the market itself is extraordinari- come as fringe benefits—all of which make ly adept at ensuring that, except for firms pro- changes in wages and income relatively poor tected from competition by government, no measures of changes in living standards.) company succeeds while behaving monopo- The Cox-Alm findings are stunning. From listically. milk and assorted grocery items to televisions The market’s ability to keep private firms and other home electronics to gasoline, auto- from gaining harmful monopoly power mobiles, and housing, the time the typical should be evident to Cox and Alm, who American must work to acquire any of those explicitly (and properly) build their analyses items is today significantly less than it was 25 upon the insights of Joseph Schumpeter. In years ago. his 1942 book Capitalism, Socialism, and This increasing affordability, of course, Democracy, Schumpeter penned what translates into greater material comfort for remains today the finest explanation of the almost all Americans. Table 1.2 in the book is capitalist competitive process. Schumpeter one of the most illuminating collections of understood that “pure cases of long-run numbers I’ve ever seen. It shows that poor monopoly must be of the rarest occurrence Americans today are more likely to own . .. unless buttressed by public authority.” almost all household conveniences than were Indeed. There's no need to empower bureau- ===== PAGE 58 ===== 58 IDEAS ON LIBERTY ® JANUARY 2000 crats to parade around pretending to keep ments of the American people. A handy markets competitive. compilation of Centinel’s trenchant critique My complaints with this book are minor. of the Constitution is now available thanks to Myths of Rich and Poor is a major accom- Warren Hope, who has edited and annotated plishment. Buy a copy and learn how remark- 24 brief topical letters that appeared in Penn- ably productive a free society is. [J sylvania newspapers during and just after the Donald Boudreau is president of FEE. ratification debate in 1787 and 1788. While the quality of these essays is uneven, the content redundant, and the tone at times The Letters of Centinel: Attacks on the shrill, the best of them brilliantly answer U.S. Constitution. 1787-1788 Publius’s more famous pro-ratification argu- ’ ments in The Federalist Papers. Centinel’s warnings are arresting and prophetic. by Samuel Bryan edited and introduced by Warren Hope Centinel’s objections to the Constitution Fifth Season Press ® 1998 © 160 pages © and his predictions for the future of the $19.99 paperback Republic stand up well, especially in contrast to Hamilton’s comical reassurances in The Federalist Papers that the new government would be a model of restraint, modesty, and derstanding the Antifederalist com- frugality. Subsequent experience with plaint against the Constitution requires a Leviathan has proven Centinel and his fellow sympathetic ear and an active historical Antifederalists correct on a number of counts. imagination. It is not easy for a generation He warned with penetrating foresight about taught to revere the Constitution as holy writ the very features of the Constitution that we to recognize what the Antifederalists feared have come to regret by sad experience: the in the form and powers of the new govern- ambiguous “necessary and proper” and “gen- ment proposed by the Philadelphia conven- eral welfare” clauses as windows to limitless tion. Where today we see a model document federal power; the imperial tendencies of a praiseworthy for well-defined constraints, standing army; the bottomless pit that the fed- precise separation of powers, carefully bal- eral Congress’s power of taxation has anced interests, and wise checks on political become; and, above all, the “melting down” ambition, the Antifederalists saw a conspira- of the state legislatures and courts into mean- cy to rob the American people of the liberties ingless and redundant entities, hopelessly recently preserved by them in their war inadequate bulwarks against national against Britain. Assuming telling pseudo- encroachment and consolidation. nyms like “Brutus” and “Cassius,” the Moreover, Centinel’s essays help puncture Antifederalists campaigned relentlessly two enduring myths about the Antifederalists: against what they saw as a diabolical plot to first, that they opposed the Constitution in build an empire, a plot as bold and dangerous toto and without offering a reasonable alter- as Julius Caesar’s bid to overthrow the native, and second, that they were reckless ancient Roman Republic. political radicals who loved liberty to the Among the lesser-known Antifederalists point of anarchy. Throughout his letters, Cen- was “Centinel,” the pen name of the eloquent tinel conceded the need for a more ‘“ener- and contentious Pennsylvania patriot Samuel getic” general government, including a solu- Bryan. In step with Antifederalist themes, he tion to the nagging problems of taxation and a blasted the new frame of government as a hobbled Congress. He denied that the choice conspiracy of the “well-born few” to enslave was between this constitution and no constitu- the many, a stealthy and calculated attempt tion, between the order, prosperity, peace, to found a despotic empire by means of security, and happiness promised by the Fed- unwarranted innovations in government, eralists and the anarchy, poverty, fragmenta- contrary to the history, habits, and senti- tion, international humiliation, and misery Reviewed by Richard M. Gamble ===== PAGE 59 ===== Books 59 allegedly certain if the Antifederalists had their way. Centinel asked for time to debate, revise, and “correct” the Constitution, not to destroy by Yanis Varoufakis it. His central concern was that once lost, lib- Routledge ® 1998 ® 396 pages ® $100.00 cloth; erty would never be regained, and once $32.99 paperback gained, power would never be relinquished. Far from a lover of anarchy, Centinel sought Reviewed by Paul Heyne a modest and frugal government that suited the disposition of the American people. He his is an angry book. The administration praised tradition, experience, and America’s of the University of Sydney, Australia, rootedness in the common law; he warned of where Varoufakis is a senior lecturer in eco- the “lust of dominion” that lay at the heart of nomics, did something in 1997 that “with a human nature and human history; and he stroke of brilliance destroyed the atmosphere appealed to the authority of Blackstone and of collegiality and public spiritedness” that Montesquieu to expose the proposed Consti- had previously characterized efforts to make tution’s flaws. In his mind, the Federalists the introductory economics course “a decent were the true innovators who would unsettle educational experience for the students.” The the habits of the people. Sounding like the administration thereby released Varoufakis, patriots of two decades before, Centinel he writes, “from any moral imperatives, renewed the fight to defend inherited English namely teaching introductory economics pas- rights from the encroachments of a remote sionately,” and led him to turn this book “into and despotic government. He was determined a kind of a testimonial.” to preserve the liberties that Pennsylvanians The author never discloses exactly what the already enjoyed under their state constitution. University of Sydney did. But if he and his In short, he believed he was trying to prevent colleagues were introducing undergraduates a revolution in government. to economics in the manner that this book rec- Centinel was on the losing side of Ameri- ommends and exemplifies, I know what it can history, but his essays force the modern ought to have done: It should have told them reader to confront uncomfortable questions to choose between teaching introductory eco- about the meaning of the founding. Did the nomics in a reasonable way or turning the Constitution preserve the name and form of course over to someone who would. the Republic while subverting its chaeacter? Varoufakis does not disclose whether he Did the design of the Constitution itself slow- was required to teach general equilibrium the- ly but inexorably transform the United States ory in the introductory course or whether he into the bloated empire that Centinel predict- (and his colleagues) decided on their own that ed? Was the Constitution of 1787, even with general equilibrium theory was the best form the addition of a Bill of Rights, fatally flawed? in which to present it. And there is another The Antifederalists would not be the least sur- possibility. Disliking standard economic theo- prised by the vastly changed condition of the ry intensely, they decided to teach it in a form United States two centuries later. [J that was most likely to repel college students Richard Gamble is professor of history at Palm encountering economics for the first time. Beach Atlantic College. The author tells us that the book was designed to complement conventional intro- ductory economics textbooks and to relieve the “monotony and austerity” that is usually associated with them. If Varoufakis is a charismatic teacher, he may be able to teach this book along with a standard text without inciting a student rebellion. However, for any- one who is not both charismatic and thor- Foundations of Economics: Beginner’s Companion ===== PAGE 60 ===== 60 IDEAS ON LIBERTY ® JANUARY 2000 oughly committed to the author’s views on Varoufakis quotes none other than Ludwig (1) the nature of economic theory, (2) the his- von Mises in support of his claim that we can- tory of economics, (3) the insightful and illu- not use facts to test economic theories. Mises minating character of very simple Marxian maintained that the basic theorems of eco- economic analysis, (4) the ideological nature nomics were a priori truths, not derived from of all social thought, and (5) the impossibility experience and therefore incapable of empiri- of testing any theory with reference to facts, I cal refutation. Whether or not one agrees with would counsel strongly against the attempt. that position, Mises was decidedly not saying No sensible economist who reads this book that the basic theorems of economics are arbi- would assign it for an introductory course. trary assertions grounded on nothing more My comments will be directed to the first, than the political or ethical preferences of the third, and last of the views just listed. I have economist. It is frightening to encounter peo- spent a little time in Australian universities ple who, like Varoufakis, assert that there is and suspect that academic economists in Aus- no truth (which Mises never claimed), while tralia try harder than economists anywhere vehemently demanding radical changes in else to make the undergraduate degree a pro- long-established institutions. fessional degree. But even they, so far as I Recall that the author intended this book as know, don’t begin with formal general equi- a testimonial. Its publication is an unintended librium theory and all the unrealizable condi- testimonial —to the fact that a significant tions it assumes. number of economists are still unaware of all There are versions of introductory econom- that has gone on in economics in the past ics that owe more to F. A. Hayek, Ronald quarter century to transform the mainstream Coase, and Douglass North than to general from a “monotonous and austere” collection equilibrium advocates like Leon Walras and of theorems to a powerful framework for Gerard Debreu. Whatever might be true of understanding society. Ol advanced economic theory texts, introductory Paul Heyne is senior lecturer in economics at the ones do not have to be “monotonous and aus- University of Washington. tere.” Textbooks modeled after the pioneering efforts of Armen Alchian and William Allen induce more students to go on to advanced y jnited Government, Individual Liberty work in economics than do books that confine and the Rule of Law: Selected Works themselves to technicalities remote from the , 3 i oo . of Arthur Asher Shenfield students’ experience and without application to the issues of the day. edited by Norman Barry The Marxian perspective Varoufakis Edward Elgar Publishing ® 1998 ® 378 pages prefers to the “austere” theory he first pre- © $100.00 sents is one that has the capitalist appropriat- ; — ing all the surplus value produced by the Reviewed by William H. Peterson laborer and thereby causing every economic ill from. business cycles through decreasing How well I remember Arthur Shenfield real wages and the stifling of economic (1909-1990), an unforgettable man learned in progress. His Marxian outlook renders him law and economics and a keen student of a oblivious to anything that has happened in the free society. We used to debate privately about twentieth century except perhaps the Great who was the greater economist, Mises or Depression. But Varoufakis, because he does Hayek. I chose Mises, he Hayek. I had the not believe that theories can be either con- good fortune to hear Shenfield lecture, usual- firmed or refuted by facts, allows himself to ly without notes, at the Philadelphia Society make sweeping assertions about what’s wrong and the Mont Pelerin Society (where he with the world and what must be done to served a term as president). repair it on the basis of a theory that is far And what a lecturer! Those lectures—most more melodramatic than plausible. are captured in articles reprinted in this ===== PAGE 61 ===== Books 61 insightful book—were impeccable, percep- with the concept of “the best of socialism,” tive, witty, rich in history and philosophy. Shenfield argues, is that there is no “best”; it Shenfield recognized the stark fact of is an illusion, a will-o’-the-wisp that socialists scarcity and the need for sound economics sell to a gullible public with emotional, envy- and the rule of law to cope with it. He saw laden arguments that capitalism is based on capitalism as the way to generate widespread selfishness, domination, and income inequali- social cooperation as well as engage each ty. Socialists foretell disaster if atomistic indi- individuals pursuit of happiness. No easy vidualism is allowed free play without the trick, but it is done, if hardly infallibly, daily cement of “social justice” to hold society around the globe. together and if private property, especially Shenfield thus saw capitalism as a system “undemocratic” ownership of the tools of pro- driven not just by competition but also, again duction, is not controlled by the state. hardly infallibly, by moral principles such as Shenfield and his wife (Dame Barbara trust, honesty, equal rights, and personal Shenfield) spent much time in Sweden inves- responsibility—including responsibility for tigating the truth about the third way. His find- charitable acts. ings are reported in these pages. He maintains Shenfield was enthralled by Adam Smith’s that the ruling Swedish intelligentsia is guilty concept of the invisible hand by which self- of what Hayek called “the fatal conceit” for interest, under the rule of law, translates into its encouragement of a virtually complete the public interest, which is to say, into rising welfare state. living standards for the sovereign consumer. Not only was the third way economically As for competition, he found himself at odds ruinous, but Shenfield also indicted welfarism with the early Chicago school, especially for inducing social breakdown. He cites with the late George Stigler and his long- approvingly Nobel economist Gunnar time embrace of the Sherman Antitrust Act Myrdal’s surprisingly honest description of of 1890 as a means of precluding monopoly, his countrymen as reduced by welfarism to collusion, cartels, and predatory pricing. “hustlers and criminals.” Crime rates for rob- Shenfield confesses that at first he embraced bery, burglary, prostitution, street violence, the Sherman Act for its supposed protection car theft, drug trafficking, public drunken- of competition, but was won over by the ness, and welfare fraud are on the rise. Sui- arguments of Mises and Hayek. They led him cide has also increased, most notably among to conclude that the natural corrective forces younger people bored with life in the welfare of the marketplace are far superior to paradise. Concludes Arthur Shenfield: “The bureaucratic agencies, such as the Justice true cause of Sweden’s failure is socialism Department’s Antitrust Division, which seek itself.” to bully competitors into behaving as the There is far more wisdom on a broad array regulators think they should. In his excellent of subjects to be found in this book than a treatment of antitrust, Shenfield quotes review can possibly do justice to. Shenfield’s fellow Mont Pelerin member Henri Lepage writings will prove to be worthwhile reading of France: “Let us not kill competition in for anyone who is a friend of liberty. J the name of competition.” Certainly Shen- — ; : field would have opposed the federal gover- William Peterson is an adjunct scholar at the Her- PP g itage Foundation in Washington and Distinguished ment’s competition-numbing case against Lundy Professor Emeritus in Business Philosophy at Microsoft. Campbell University in North Carolina. Another important issue Shenfield raises is the so-called “third way” embraced by Presi- dent Bill Clinton, British Prime Minister Tony Blair, and numerous intellectuals. The third way attempts to meld the best of capitalism with the best of socialism. Shenfield forceful- ly attacks this perennial delusion. The trouble ===== PAGE 62 ===== Ideas on Liberty—Reaching Out to New Readers If you know of a student, friend or colleague who might appreciate a free sample issue of Ideas on Liberty, please fill out the form below and return it to us in the postpaid envelope. Make sure to include your own name—we will mention you in the covering letter we send to the potential subscriber. We appreciate your assistance in finding new friends for liberty! » Actos the Sea of Commerce * How to Sink a Car Ferry Supplyand Demand * Why Crime - Dedlines 2 To: FEE 30 S. Broadway / Irvington-on-Hudson, NY 10533 e-mail: iol@fee.org / fax: 914-591-8910 / phone: 914-591-7230 Please send a sample of Ideas on Liberty to: Name Address City State Zip Name Address City State Zip Name Address City State Zip Name Address City State Zip Name Address City State Zip Suggested by: ===== PAGE 63 ===== The Pursuit of Happiness by Walter E. Williams ¥ Economics Capitalism and the Common Man here are some arguments, having a wealthy is that the dollar dealer is a racist, faint measure of plausibility, that have sexist, or multi-nationalist—or just plain served politicians, charlatans, and assorted mean. Economic justice requires a redealing do-gooders for well over a century in their of the dollars, income redistribution, where quest for control. One of those arguments is: the ill-gotten gains of the few are returned to capitalism primarily benefits the rich and not their rightful owners. the common man. That vision prompts decla- In a free society, for the most part, people rations such as Representative Richard with high incomes have demonstrated extra- Gephardt’s assertion that high-income earners ordinary ability to produce valuable services are “winners” in “the lottery of life.” Then for, and therefore to please, their fellow man. there’s Robert Reich, former secretary of Sam Walton, founder of Wal-Mart; Bill Gates, labor, who calls high-income earners the “for- founder of Microsoft; and singer Michael tunate fifth.” This nonsensical vision leads to Jackson provided services deemed highly calls for those who’ve been “blessed” to “give valuable by their fellow men who voluntarily back” either voluntarily or coercively through took money out of their pockets to purchase the tax code. those services. Their high incomes stand as While demagogic statements like these unambiguous proof of that service. Their high have high emotive worth, they reflect resolute, incomes also reflect the “democracy” of the nearly incurable stupidity about the sources of marketplace. For example, millions upon mil- income. Listening to some of the talk about lions of independent decision-makers decided income differences, one would think that out to fork over $200 for Gates’s Windows 98 there somewhere is a pile of money. People operating system. Those who think Gates is who are wealthy just happened to get there too rich and want to redistribute his income first and greedily took an unfair share. Justice are really registering disagreement with the requires that they give back. Or there’s talk “democracy” of the marketplace and want to about unequal income distribution. The way cancel or offset the market “vote.” some people talk, you'd think there’s a dealer Indeed, we might consider the dollars peo- of dollars who shells out $1,000 to one per- ple earn as certificates of performance. Think son, $100,000 to another, and a million dol- of it in the following way. You hire me to mow lars to yet another. Thus the reason why some your lawn. After I have completed the task, people are wealthy while others are not you give me $20. I go to the grocer and demand a pound of steak and a six-pack of Walter Williams is the John M. Olin Distinguished beer that my fellow man produced. The grocer Professor of Economics and chairman of the eco- says, “Youre demanding something that your nomics department at George Mason University in fellow man has produced. What have you Fairfax, Virginia. done to serve him?” I reply, “I have served my 63 ===== PAGE 64 ===== 64 IDEAS ON LIBERTY ® JANUARY 2000 fellow man by mowing his lawn.” The grocer on their appearances, identify which persons says, “Prove it!” That’s when I hand him my are wealthy. Years ago, that wouldn’t have $20, my certificate of performance. been a difficult challenge. Ordinary people Income earners owe nothing else to their wouldn’t be dressed as well, surely not wear- fellow man; they have met their social obliga- ing designer clothing, nor would they have tions. If “giving something back” means any- nice-looking jewelry. They wouldn’t be dri- thing, it should be the admonition to thieves ving by. Compare the income status of and social parasites: people who have taken today’s airline passengers with those of a few and given nothing in return. We have it back- years ago and you’ll find a much greater per- wards. Highly productive (rich) people like centage of ordinary people. Walton and Gates are held up to social That’s one of the great benefits of capital- ridicule, while thieves and bums are shown ism; it has made it possible for common peo- compassion and concern and have become ple to enjoy at least some of what wealthy society’s mascots. people enjoy. One might assert that common people don’t have access to Rolls Royces and Good for the Masses yachts. You’re wrong. Gates is super-rich and can afford to ride in a Rolls Royce and go Capitalism is the best thing that ever hap- yachting; but so can the common man—just pened to the common man. The rich have not as long. He can rent a Rolls or a yacht for always had access to entertainment, often in a day, a half-day, or an hour. the comfort of their palaces and mansions. Capitalism 1s relatively new in human his- The rich have never had to experience the tory. Before the rise of capitalism, the way drudgery of beating out carpets, ironing their people amassed great wealth was by looting, clothing, or slaving over a hot stove all day to plundering, and enslaving their fellow man. have a decent dinner; they could afford to hire Capitalism made it possible to become people. Capitalism’s mass production and wealthy by serving one’s fellow man. Capital- marketing have made radios and televisions, ists seek to discover what people want and vacuum cleaners, wash-and-wear clothing, then produce and market it as efficiently as and microwave ovens available and well with- possible. in the means of the common man, sparing him Here’s a question that we should ponder: the boredom and drudgery of the past. Today are the wealthy people who have created the common man has the power to enjoy more unprecedented convenience, longer life than what only the rich had yesteryear. expectancy, and more fun for the ordinary What about those who became wealthy person deserving of all the scorn and ridicule making comforts available to the common heaped on them by intellectuals and politi- man? Henry Ford benefited immensely from cians? Are the wealthy really obliged to “give mass-producing automobiles, but the benefit something back”? Exactly what more do the for the common man from being able to buy a wealthy discoverers and producers of, say, car dwarfs anything Ford received. Individu- life-saving antibiotics owe us? They've als and companies that produced penicillin already saved lives and made us healthier. and polio and typhoid vaccines may have Despite the miracles of capitalism, it doesn’t become very wealthy, but again it was the do well in popularity polls. One reason is that common man who was the major beneficiary. capitalism is always evaluated against the In more recent times, computers and software nonexistent, unrealizable utopias of socialism products have benefited our health, safety, and or communism. Any earthly system will pale quality of life in ways that far outstrip what- in comparison to a utopia. But for the ordi- ever wealth was received by their creators. nary person, capitalism, with all of its warts, Here's a little test. Stand on the corner and is superior to any system yet devised to deal watch people walk or drive by. Then, based with our everyday needs and desires. 0