===== PAGE 1 ===== DEAS — ON [IBERTY April 2000 Vol. 50, No. 4 FEATURES 8 Inequality of Wealth and Incomes by Ludwig von Mises 12 Just Dial 911? The Myth of Police Protection by Richard W. Stevens 16 Toward an Austrian Critique of Governmental Economic Policy by Israel M. Kirzner 21 The Microsoft Case: Divestiture Won’t Help Consumers by D. T. Armentano 23 Barbarians at Bill Gates by William F. Shughart Il ECs 32 Economic Illiteracy by Paul A. Cleveland ¥ 36 Economic Growth and Freedom in the Coming Millennium by Christopher Lingle 38 Drifting In and Out of Socialism: The Case of Ireland by James L. Payne FR 45 Food, Famine, and Free Trade by Jim Peron “Suusts =a! 48 Free Trade and Flexible Markets by Christopher Mayer A Shad LES TL COLUMNS ¥ 4 THOUGHTS on FREEDOM—American Culture by Donald J. Boudreaux 19 IDEAS and CONSEQUENCES—Internet Access Should Be Left to the Free Market by Lawrence W. Reed 30 POTOMAC PRINCIPLES—Cut Taxes, Not the Debt by Doug Bandow 34 PERIPATETICS—The Price of Resistance by Sheldon Richman ¥ a3 ECONOMIC NOTIONS—The Economic Advantages of a Commitment to Liberty by Dwight R. Lee 52 ECONOMICS on TRIAL—What It Takes to Be an Objective Scholar by Mark Skousen 63 THE PURSUIT of HAPPINESS—Who May Harm Whom? by Walter E. Williams DEPARTMENTS 2 Perspective—Redundancy by Sheldon Richman 6 Antitrust Protects Competition? It Just Ain’t So! by Joseph T. Salerno 50 Capital Letters 55 Book Reviews The Stakeholder Society by Bruce Ackerman and Anne Alstott, reviewed by Charles W. Baird; Unpaid Professionals: Commercialism and Conflict in Big-Time College Sports by Andrew Zimbal- ist, reviewed by George C. Leef; Ceasefire! Why Women and Men Must Join Forces to Achieve True Equality by Cathy Young, reviewed by Ellen Frankel Paul; The Hayek-Keynes Debate: Lessons for Current Business Cycle Research by John P. Cochran and Fred R. Glahe, reviewed by Larry J. Sechrest; Losing Our Language: How Multicultural Classroom Instruction Is Undermining Our Children’s Ability to Read, Write, and Reason by Sandra Stotsky, reviewed by Nicholas Stix. Lesson plans for ¥ articles are available at www. fee.org. ===== PAGE 2 ===== ON [IBERTY PERSPECTIVE Redundancy Published b . . . . The Foundation for Economic Education Private property 1s again getting the atten- Irvington-on-Hudson, NY 10533 tion it deserves, thanks to two recent books. Phone (914) 591-7230 FAX (914) 591-8910 Tom Bethell’s The Noblest Triumph and FEE Home Page: http://www. fee.org ichard Pipes's Properly an [freedom won President: Donald J. Boudreaux be the last words on the subject, nor should . : they be. The subject is too important. Editor: Sheldon Richman . The centrality of property to a free and Managing Editor: Beth A. Hoffman : , . . prosperous society cannot be overstated. It’s Editor Emeritus Paul L. Poirot therefore also at the center of the case for a Book Review Editor free society. Full freedom cannot exist without George C. Leef property or with attenuated property. Every Editorial Assistant dictator has known this and so has denounced Mary Ann Murphy . . . . . Columnists private property as antisocial. The identity Charles W. Baird between property and liberty is something Doug Bandow that today’s seekers of the “third way” refuse Dwight R. Lee to recognize, erence Reed The more one examines the term “private Mark Skousen property” the more one finds packed into it. Thomas Szasz It’s been noted that the ideas of limiting gov- Walter E. Williams ernment power and the rule of law necessarily Contributing Editors follow from the concept. So do the other Peter J. Boettke Clarence B. Carson Thomas J. DiLorenzo trademarks of classical liberalism. It says it all. The rest is elaboration. Burton W. Folsom, Jr. In fact, the term is twice as long as neces- Joseph S. Fulda sary. “Private property” is redundant; “public os Bien Greaves property” is a contradiction in terms. The pub- John Hospers lic is an abstraction not an entity. It cannot Raymond J. Keating own. “People are ill served by the manufac- Daniel B. Klein ture of spurious entities,” wrote James Wendy McElroy Sadowsky in his classic essay “Private Prop- Tibor R. Machan erty and Collective Ownership.” (Beware Andrew P. Morriss « . 93s. : . Ronald Nash the term environment”; it is laden with Edmund A. Opitz collectivism.) James L. Payne If it’s not private, it’s not property. And if it’s William H. Peterson Jane S. Shaw Richard H. Timberlake called “public property” but is under the con- trol of discrete individuals, as it must be, then Lawrence H. White it 1s de facto private, albeit illicitly acquired CL. . « Ideas on Liberty (formerly The Freeman: Ideas on Liberty) is the month- p roperty. Maybe this 18 why the qualifier pri- ly publication of The Foundation for Economic Education, Inc., Irvington- vate” was thought superfluous by SO many of on-Hudson, NY 10533. FEE, established in 1946 by Leonard E. Read, isa . non-political, educational champion of private property, the free market, the ear ly liberals. d limited t. FEE is classified 26 USC 501(c)(3) tax- : : : : exempt omganation, ee sa (0) tax Property is not just a device economists Copyright © 2000 by The Foundation for Economic Education. Per- 1 1 1 1 1 _ mission is granted to reprint any article in this issue, provided credit 1s posit to assure efficiency. It is liberty 1n con ] given and two copies of the reprinted material are sent to FEE. crete form. The costs of Foundation projects and services are met through dona- tions, which are invited in any amount. Donors of $30.00 or more receive a subscription to /deas on Liberty. For delivery outside the United States: %* %k 3k k $45.00 to Canada; $55.00 to all other countries. Student subscriptions are $10.00 for the nine-month academic year; $5.00 per semester. Addition- al copies of this issue of Ideas on Liberty are $3.00 each. InJ anuary the Economic Policy Institute Bound volumes of The Freeman are available from The Foundation for - Sie: calendar years 1972 to 1998. The magazine is available in microform from and Center on Budget and Pp olicy Priorities University Microfilms, 300 N. Zeeb Rd., Ann Arbor, MI 48106. Cover photo of young Irish musicians playing for tourists by 2 Galen R. Frysinger ===== PAGE 3 ===== issued the latest in the regular stream of jere- As the horizon of a new century approach- miads about wealth inequality in the United es, are we on the threshold of a big leap in States. For the authors, the state-by-state economic freedom and living standards? report of the widening gap between the top Christopher Lingle surveys the world and and bottom earners is, ipso facto, evidence of likes much of what he sees. injustice. In response, we reprint a classic Politicians like power and dislike giving it essay from Ludwig von Mises. This one is up. Where then lies the hope for liberty? A definitely worth reading again. trip to Ireland taught James Payne a good les- Fans of paternalistic government have a son in political theory. simple answer for those who think the Second The population-control lobby carries on, Amendment, which identifies and protects the undeterred by all empirical indications that natural right to keep and bear arms, is neces- they are wrong to believe that our growing sary in the modern world: dial 911. Richard numbers endanger mankind. Jim Peron Stevens explains why legally and practically shows that the lobby’s own program would the right to keep and bear telephones can’t bring the very catastrophe they claim to want hold a candle to the Founding Fathers’ handi- to avert. work. Christopher Mayer points out that if flexi- Ludwig von Mises defeated socialism intel- bility in the face of an uncertain future is a lectually by arguing that since the planners virtue, then free trade is certainly no vice. can’t calculate, they can’t plan. After having As for this month’s columnists: Donald shown that free markets and entrepreneurship Boudreaux takes a trip around the world with- are necessary in an open-ended world rife out ever leaving New York. Lawrence Reed with error, Israel Kirzner extends Mises’s says that government will only disrupt the argument to lesser forms of intervention. Internet if it tries to guarantee access. Doug Even some friends of free enterprise think Bandow counsels that we should keep our they see a good side to an eventual breakup of eyes on taxes, not the national debt. Dwight Microsoft as a result of the government’s Lee writes that there is no substitute for a antitrust case. D. T. Armentano reviews a sim- commitment to liberty if we want to check ilar case from the annals of antitrust and government power. Mark Skousen identifies a comes to a radically different conclusion. major reason why prognosticators are so often The judge in the Microsoft case set out a wrong. Walter Williams is wary about govern- detailed set of findings as a prelude to the ment action in the name of preventing harm. penalty phase. Scrutinizing the findings, And Joseph Salerno, reading William Safire’s William Shughart has trouble finding any- plea for vigorous antitrust prosecution, thing worthwhile. declares, “It Just Ain’t So!” When students brought up in the theology Our book reviewers look over volumes on of state-worship encounter heresy in the form “equal opportunity,” allegedly amateur sports, of a good college course in economics, the sexual equality, Hayek versus Keynes, and results can be interesting and exasperating. multiculturalism in the classroom. Paul Cleveland has the details. —SHELDON RICHMAN ===== PAGE 4 ===== Thoughts on Freedom by Donald J. Boudreaux ¥ Trade American Culture mong free trade’s most vocal opponents electric razor, and splash on some French are those who insist that American cul- cologne. ture is hegemonic—that without protection- I then dress Thomas and myself. Following ism, people around the world will mindlessly our breakfasts, I succumb to Thomas’s plea adopt bland, boring, and monochrome Amer- that he be allowed to watch his favorite video: ican culture. Thomas the Tank Engine, a character as Put aside the breathtaking arrogance of British as Buckingham Palace. We then drive those who yearn to use the state to prevent to the babysitter’s home in our Nissan. I pop people from spending money in ways that in a CD (invented by the Dutch company elites think are gauche. Instead, consider the Phillips) to enjoy the original and best-selling very idea that there is an American culture. It Three Tenors recording— made, by a British is far more accurate to say that there isa world company, in Rome of selections from Ital- culture formed in America. In other words, ian, German, English, and American operas, what is called “the American culture” is the sung by a Catalan, a Spaniard, and an Ital- ever-evolving amalgam of influences from ian. The tenors are backed by an orchestra around the world. conducted by an Indian. To demonstrate, let me share with you After dropping Thomas off, I stop at the some notes on an ordinary day in the life of bagel store owned and operated by Hon- my wife, Karol, our 2-year-old son, Thomas, durans. In addition to a bagel, I buy another and me. I use boldface type to identify just cup of coffee, this time a cappuccino made some of the products, people, and ideas that, with coffee grown in Ethiopia. on this normal day, affect us from outside of At my office I begin my workday by boot- the United States. ing up my Sony computer. Among my tasks this particular morning is to find someone to translate from French into English Frederic On awakening to Beatles music blaring Bastiat’s collected correspondence. Later from my Sony clock-radio, I shamble to the that morning, while writing a talk, I consult kitchen to brew Guatemalan coffee in our books by the Austrian F. A. Hayek, the trusty Krups auto-drip coffee maker. It’s Scotsman Adam Smith, the African George then off to the shower where I lather up with ~~ Ayittey, the Hungarian Michael Polanyi, the soap milled in France. Following the shower, Italian Bruno Leoni, the Swede Eli I put in my soft contact lenses (the invention Heckscher, the Canadian David Hender- of a Czech scientist), shave with my Braun son, and the South African born in Britain of Lithuanian parents, Israel Kirzner. All this work makes me hungry, so for Donald Boudreaux is president of FEE. lunch I wolf down some moo goo gai pan. 3k ok 2k ok 3 dk ===== PAGE 5 ===== Karol and I then spend a fascinating after- across the globe also ensure that tomorrow’s noon playing hosts to visitors from Argentina gumbo will differ slightly from today’s and Ecuador. We introduce our guests to gumbo. A new insight or inspiration from a FEE’s interns, one a Bulgarian, another a Korean, an Indian, a Portuguese—no less and Mexican, and the third a Sri Lankan. no more than a new insight or inspiration That evening, Karol, Thomas, and I dine at from a Californian, a Minnesotan, a Virgin- a popular nearby Indian restaurant. ian—will further improve the mix. And con- (Thomas, incidentally, is crazy about sumers worldwide will each have a meaning- papadam.) After leaving the restaurant I stop ful say in deciding whether or not that new to fuel our car at the local Shell (as in Royal insight or inspiration is worthwhile. (No Peru- Dutch Shell) gasoline station. On our return vian or Algerian is compelled to eat at home, we bathe Thomas, dress him in his McDonald’s or to read Tom Clancy any more pajamas decorated with images of Britain's than any Pennsylvanian or Alaskan is com- enormously popular Teletubbies, and then pelled to eat at a Mexican restaurant or to read read to him some of the delightful children’s Milan Kundera.) stories penned by Beatrix Potter, an Eng- Is it senseless, then, to label the cultural lishwoman. milieu in bloom from Maine to Hawaii as With the little one fast asleep, it’s time to “American”? Not quite. While in one sense relax. While I put on some Stan Getz and this culture is truly global and resists a nation- Joao Gilberto bossa nova music from alist label, in another sense it is indeed Brazil—played on our Japanese-made CD uniquely American. But it is uniquely Ameri- player—Karol pours each of us a glass of can precisely in a way that reveals the distort- Chilean wine. Life is good . . . but our days ed perspective of those who fret about Amer- are tiring, so we soon go to bed. Before turn- ican cultural hegemony. What justifies label- ing out the lights, though, we each read for a ing this culture “American” is that America few minutes—me, an article by the Aus- contributes the essential openness and free- tralian economist Geoffrey Brennan, and dom for millions of people from hundreds of Karol some pages from the autobiography of nations to add their inspirations to it—both as the Russian novelist Vladimir Nabakov. its producers and as its consumers. America’s x culture is unique because, in its details, it is not principally an American culture! Truly, it What’s going on here? We Boudreauxs is a world culture. aren’t an unusual American family (although Recognizing that American culture is not a Thomas has yet to be swept up in the nation- homogeneous glob of fast-food-eating, blue- wide mania for the Japanese Pokémon char- jeans-wearing Ally McBeal addicts will not acters). Yet a review of an ordinary day in our calm the fears of the world’s cultural snobs. lives reveals that all three of us—from the Indeed, these self-appointed elites are fright- moment we awaken until we fall asleep—con- ened by American culture precisely because tinually enjoy comforts, conveniences, cul- it is so vibrant and variegated—and, hence, ture, knowledge, and entertainment created attractive to millions of ordinary people. by people from around the world. Elites do not and cannot control it; it has The answer is that America’s culture is in stripped them of their exalted status. Finally fact a world culture. It’s a delicious gumbo of extinguishing the power of elites to control global influences. And it’s also dynamic. The the lives of ordinary people might well turn same openness and freedom in America that out to be America’s great contribution to the attract people, products, and ideas from 21st century. OJ ===== PAGE 6 ===== IDEAS ON [IBERTY APRIL 2000 Antitrust Protects Competition? recent “anti-antitrust” myths that have been contrived to muzzle them. Unfortunately, Safire’s attempt to expunge * | those alleged myths is itself an exercise in It Just Ain t So : mythmaking based on the discredited dogmas of yesteryear. At its root, Safire’s case for antitrust is fallacious because it invokes an unrealistic and irrelevant notion of competi- (Conservative William Safire’s column tion based on the number of firms producing “The Curse of Bigness” (New York Times, and selling an identical good or service. December 13, 1999) is dedicated to “explod- Before criticizing the specific objections ing myths” allegedly spread by MCI, World- Safire raises to the argument against antitrust, Com, Sprint, and other large firms seeking a few words on the true nature and role of government approval for prospective mergers competition are in order. that will serve to magnify their market power. To begin with, the size and number of firms Safire opens innocuously enough with the in a particular industry are not the essence of comfortable platitude that “Competition is the competition but merely an outcome of it. The driving force of free enterprise.” It becomes essence of competition is the rivalry among almost instantly clear, however, that he mis- entrepreneurs who seek to earn profits and construes the real meaning and role of com- avoid losses by producing at the lowest possi- petition, for in the very next sentence he ble cost those goods most urgently demanded warns that “Concentrated power is the great- by consumers. However, since production est danger to capitalism.” takes time, and because consumer tastes, Evidently Safire follows Karl Marx in technological knowledge, and the quantities believing that an unregulated market economy and qualities of available resources are con- is fundamentally prone to increasing concen- stantly changing, each entrepreneur must con- tration of industry in the hands of a few gigan- tinually forecast and attempt to adapt produc- tic firms. If “the rising momentum toward con- tion to uncertain future market conditions. On centration throughout American big business” the basis of these forecasts, the entrepreneur is left unchecked, it may well culminate in invests his capital in the purchase of “two oil companies, two telecommunications resources—various kinds of labor, natural combines and two bank-brokerage-insurance resources, and capital goods—and transforms leviathans”” These “superpowers” will then them into consumer goods. He does this find it “infinitely easier” to “fix prices or because he anticipates that the selling price of squelch innovation.” No thoroughgoing Marx- the output will exceed the sum of the prices he ist, Safire admonishes us that “what we do not paid for the inputs including interest on his want” is a return to “regulation, with govern- invested capital. The entrepreneur earns a ment as the cartel-keeper.” profit if he is correct in his expectation. If his So who, then, is to save us from this merg- forecast is mistaken, he suffers a loss. er mania and guide our economy safely What is important to understand is that the between the Scylla of private monopoly and success or failure of every entrepreneur’s the Charybdis of government cartels? Why quest for profit is determined solely and com- the vigilant “government watchdogs” of the pletely by consumers at the moment when, Federal Trade Commission and the Justice confronted by the array of competing prod- Department, of course. To assist these gallant ucts, they choose which and which not to pur- protectors, Safire seeks to demolish several chase. In their eagerness to acquire the goods ===== PAGE 7 ===== 7 they desire most at the lowest possible prices, ven small firms from the field. So what? The consumers do not care one whit about the size competitive process operates to produce a size of producers and their record of past success. of firm that tends to ensure the lowest costs of A giant established firm is no less likely than production. a small upstart firm to suffer losses if it sup- Some 299 other automobile firms compet- plies a good that most consumers consider ed with Ford Motor Co. in 1910, most of inferior to similar products or whose costs of which were driven out of business after Henry production turn out to surpass its selling price Ford pioneered the moving assembly line, because of inefficient production techniques. which rendered the mass production of autos The competitive process determines precisely commercially viable. But it was not Ford’s the optimum size as well as the number of market power that did these competitors in. It firms producing any given product. It does so was the consumers who chose to ignore the by exerting unrelenting pressure on entrepre- products of these tiny garage-shop operations neurs, in the form of prospective profit and and purchase the Model T in great quantities, loss, to continually seek out the lowest-cost because the economies of scale from mass techniques for combining and transforming production permitted Ford to more than halve scarce resources. the price between 1910 and 1914 from $780 The irresistible power of the competitive to $360. Yet despite its tremendous success, market process to revolutionize the structure when consumers tired of the clunky old black of long-established industries at a moments Model T with its old-fashioned mechanical notice is manifested time and again in U.S. brakes in the 1920s, an upstart company, Gen- business history. The steel, bookselling, and eral Motors, jumped into the competitive fray. computer industries are three recent, dramatic By 1927, the competition from GM’s colorful examples. and modern Chevrolet forced Ford to shut In sum, competition, correctly understood, down and retool. The market determined that is a hardy and inexorable process that needs one rival provided more effective competition no antitrust watchdog to protect it from the for Ford than hundreds had previously. “curse of bigness.” Antitrust policy can only A related “myth” that Safire seeks to stifle and distort the real-world competitive debunk is that “Mere size is no sin; each case process. should be handled on its own merits.” Accord- We can now briefly address some of Safire’s ing to Safire, even if it is true that some large rebuttals of “myths” disseminated by the firms are sinless, “it is the momentum of opponents of antitrust. One such “myth” is merger mania that cries out to be reversed.” that “Technology is changing so fast that a lit- To the contrary, any firm that has attained tle pipsqueak company can bring a giant to its dominance in the market not only has com- knees.” According to Safire, however, “every mitted no sin against competition but has time that happens, a thousand small cap oper- been immaculately conceived, so to speak, ations are driven out of business or absorbed within the competitive process itself. Further- by the giant out to cover its posterior” This more, competition itself reverses so-called statement, while true, misses the point. “merger mania” when it is ascertained via the Giants like IBM and U.S. Steel were indeed profit test that its results no longer conduce to brought to their knees by competition from optimum consumer satisfaction. Or has Safire small companies that were the first to recog- forgotten the “down-sizing” phenomenon of nize the commercial potential of a new tech- the 1990s that undid many of the conglomer- nology. In probably many more instances, ate mergers of the 1980s? superior entrepreneurial forecasting and the —JOSEPH T. SALERNO economic efficiency of large firms have dri- Pace University ===== PAGE 8 ===== IDEAS ON [IBERTY APRIL 2000 Inequality of Wealth and Incomes by Ludwig von Mises he market economy—capitalism—is based supreme in giving them the power to force all on private ownership of the material means those engaged in production to comply with of production and private entrepreneurship. their orders. It forces all those engaged in pro- The consumers, by their buying or abstention duction to the utmost exertion in the service from buying, ultimately determine what of the consumers. It makes competition work. should be produced and in what quantity and He who best serves the consumers profits quality. They render profitable the affairs of most and accumulates riches. those businessmen who best comply with In a society of the type that Adam Fergu- their wishes and unprofitable the affairs of son, Saint-Simon, and Herbert Spencer called those who do not produce what they are ask- militaristic and present-day Americans call ing for most urgently. Profits convey control feudal, private property of land was the fruit of the factors of production into the hands of of violent usurpation or of donations on the those who are employing them for the best part of the conquering warlord. Some people possible satisfaction of the most urgent needs owned more, some less, and some nothing of the consumers, and losses withdraw them because the chieftain had determined it that from the control of the inefficient business- way. In such a society it was correct to assert men. In a market economy not sabotaged by that the abundance of the great landowners the government the owners of property are was the corollary of the indigence of the land- mandataries of the consumers as it were. On less. the market a daily repeated plebiscite deter- But it is different in a market economy. mines who should own what and how much. Bigness in business does not impair, but It is the consumers who make some people improves the conditions of the rest of the peo- rich and other people penniless. ple. The millionaires are acquiring their for- Inequality of wealth and incomes is an tunes in supplying the many with articles that essential feature of the market economy. It is were previously beyond their reach. If laws the implement that makes the consumers had prevented them from getting rich, the Editor’s Note: Last January the Economic Policy average American household would have to Institute and the Center on Budget and Policy Prior- forgo many of the gadgets and facilities that ities released a study decrying the growing income arc today its normal equipment. This country inequality in America and calling on government to enjoys the highest standard of living ever rectify this alleged injustice. “The economic prosper- known in history because for several genera- ity of the 1990s has not been shared equally,” wrote tions no attempts were made toward “equal- the authors. There is no better response than what . . TAS . Ludwig von Mises (1881-1973), the great economist ization” and “redistribution.” Inequality of of the Austrian school, wrote in Ideas on Liberty in wealth and incomes is the cause of the mass- May 1955. es’ well-being, not the cause of anybody's dis- ===== PAGE 9 ===== 9 tress. Where there is a “lower degree of But it is quite a different thing when these inequality,” there is necessarily a lower stan- measures which Marx and Engels character- dard of living of the masses. ized as “economically untenable” are recom- mended by people who pretend that they want to preserve the market economy and econom- ic freedom. These self-styled middle-of-the- In the opinion of the demagogues inequali- road politicians are either hypocrites who ty in what they call the “distribution” of wealth want to bring about socialism by deceiving and incomes is in itself the worst of all evils. the people about their real intentions, or they Justice would require an equal distribution. It are ignoramuses who do not know what they is therefore both fair and expedient to confis- are talking about. For progressive taxes upon cate the surplus of the rich or at least a con- incomes and upon estates are incompatible siderable part of it and to give it to those who with the preservation of the market economy. own less. This philosophy tacitly presupposes The middle-of-the-road man argues this that such a policy will not impair the total way: “There is no reason why a businessman quantity produced. But even if this were true, should slacken in the best conduct of his the amount added to the average man’s buying affairs only because he knows that his profits power would be much smaller than extrava- will not enrich him but will benefit all people. gant popular illusions assume. In fact the lux- Even if he is not an altruist who does not care ury of the rich absorbs only a slight fraction of for lucre and who unselfishly toils for the the nation’s total consumption. The much common weal, he will have no motive to pre- greater part of the rich men’s incomes is not fer a less efficient performance of his activi- spent for consumption, but saved and invested. ties to a more efficient. It is not true that the It is precisely this that accounts for the accu- only incentive that impels the great captains mulation of their great fortunes. If the funds of industry is acquisitiveness. They are no less which the successful businessmen would have driven by the ambition to bring their products ploughed back into productive employments to perfection.” are used by the state for current expenditure or given to people who consume them, the fur- Suprem acy of the Consumers ther accumulation of capital is slowed down or entirely stopped. Then there is no longer any This argumentation entirely misses the question of economic improvement, techno- point. What matters is not the behavior of the logical progress, and a trend toward higher entrepreneurs but the supremacy of the con- average standards of living. sumers. We may take it for granted that the When Marx and Engels in the Communist businessmen will be eager to serve the con- Manifesto recommended “a heavy progres- sumers to the best of their abilities even if sive or graduated income tax” and “abolition they themselves do not derive any advantage of all right of inheritance” as measures “to from their zeal and application. They will wrest, by degrees, all capital from the bour- accomplish what according to their opinion geoisie,” they were consistent from the point best serves the consumers. But then it will no of view of the ultimate end they were aiming longer be the consumers that determine what at, viz., the substitution of socialism for the they get. They will have to take what the busi- market economy. They were fully aware of the nessmen believe is best for them. The entre- inevitable consequences of these policies. preneurs, not the consumers, will then be They openly declared that these measures are supreme. The consumers will no longer have “economically untenable” and that they advo- the power to entrust control of production to cated them only because “they necessitate fur- those businessmen whose products they like ther inroads” upon the capitalist social order most and to relegate those whose products and are “unavoidable as a means of entirely they appreciate less to a more modest position revolutionizing the mode of production,” i.e., in the system. as a means of bringing about socialism. If the present American laws concerning Demand for “Distribution” ===== PAGE 10 ===== 10 IDEAS ON LIBERTY ¢ APRIL 2000 > the taxation of the profits of corporations, the ET incomes of individuals and inheritances had HL: been introduced about sixty years ago, all those new products whose consumption has raised the standard of living of the “common man” would either not be produced at all or only in small quantities for the benefit of a minority. The Ford enterprises would not exist if Henry Ford’s profits had been taxed away as soon as they came into being. The business structure of 1895 would have been preserved. The accumulation of new capital would have ceased or at least slowed down considerably. The expansion of production would lag behind the increase of population. There is no need to expatiate about the effects of such a state of affairs. : Profit and loss tell the entrepreneur what the consumers are asking for most urgently. And only the profits the entrepreneur pockets enable him to adjust his activities to the demand of the consumers. If the profits are expropriated, he is prevented from complying with the directives given by the consumers. Then the market economy is deprived of its give income equality must be left to an analy- steering wheel. It becomes a senseless jumble. sis of socialism.) People can consume only what has been But, say the middle-of-the-road enthusiasts, produced. The great problem of our age is pre- we do not want to abolish inequality altogeth- cisely this: Who should determine what is to er. We want merely to substitute a lower be produced and consumed, the people or the degree of inequality for a higher degree. State, the consumers themselves or a paternal These people look upon inequality as upon government? If one decides in favor of the an evil. They do not assert that a definite consumers, one chooses the market economy. degree of inequality which can be exactly If one decides in favor of the government, one determined by a judgment free of any arbi- chooses socialism. There is no third solution. trariness and personal evaluation is good and The determination of the purpose for which has to be preserved unconditionally. They, on each unit of the various factors of production the contrary, declare inequality in itself as bad is to be employed cannot be divided. and merely contend that a lower degree of it is a lesser evil than a higher degree in the same sense in which a smaller quantity of poison in a man’s body is a lesser evil than a larger The supremacy of the consumers consists dose. But if this is so, then there is logically in in their power to hand over control of the their doctrine no point at which the endeavors material factors of production and thereby the toward equalization would have to stop. conduct of production activities to those who Whether one has already reached a degree serve them in the most efficient way. This of inequality which is to be considered low implies inequality of wealth and incomes. If enough and beyond which it is not necessary one wants to do away with inequality of to embark upon further measures toward wealth and incomes, one must abandon capi- equalization is just a matter of personal judg- talism and adopt socialism. (The question ments of value, quite arbitrary, different with whether any socialist system would really different people and changing in the passing Ludwig von Mises Demand for Equalization ===== PAGE 11 ===== INEQUALITY OF WEALTH AND INCOMES 11 of time. As these champions of equalization It is certain that only a small minority in Con- appraise confiscation and “redistribution” asa gress will seriously oppose further sharpening policy harming only a minority, viz., those of the progressive element in the tax rate whom they consider to be “too” rich, and ben- scales if such a sharpening should be suggest- efiting the rest—the majority—of the people, ed by the Administration or by a congressman they cannot oppose any tenable argument to anxious to enhance his chances for re-election. those who are asking for more of this alleged- For, under the sway of the doctrines taught by ly beneficial policy. As long as any degree of contemporary pseudo-economists, all but a inequality is left, there will always be people few reasonable men believe that they are whom envy impels to press for a continuation injured by the mere fact that their own income of the equalization policy. Nothing can be is smaller than that of other people and that it advanced against their inference: If inequality is not a bad policy to confiscate this difference. of wealth and incomes is an evil, there is no There is no use in fooling ourselves. Our reason to acquiesce in any degree of it, how- present taxation policy is headed toward a ever low; equalization must not stop before it complete equalization of wealth and incomes has completely leveled all individuals’ wealth and thereby toward socialism. This trend can and incomes. be reversed only by the cognition of the role The history of the taxation of profits, that profit and loss and the resulting inequali- incomes, and estates in all countries clearly ty of wealth and incomes play in the operation shows that once the principle of equalizationis of the market economy. People must learn that adopted, there is no point at which the further the accumulation of wealth by the successful progress of the policy of equalization can be conduct of business is the corollary of the checked. If, at the time the Sixteenth Amend- improvement of their own standard of living ment was adopted, somebody had predicted and vice versa. They must realize that bigness that some years later the income tax progres- in business is not an evil, but both the cause sion would reach the height it has really and effect of the fact that they themselves attained in our day, the advocates of the enjoy all those amenities whose enjoyment is Amendment would have called him a lunatic. called the “American way of life.” J THE FREEMAN (ideas On Liberty) 1999 Bound Volume T= 12 issues from January through December 1999 have been gathered into a single volume—sturdily sewn with navy blue cloth cover and gold foil stamping—768 pages, fully indexed for handy reference to the latest literature of freedom. More than 100 feature articles on topics such as antitrust, education, environment, government regulation and control, health care, individual rights, labor, money, private property, and international trade. Columns by Walter E. Williams, Mark Skousen, Larry Reed, Dwight Lee, Doug Bandow, Charles Baird, Russell Roberts, Sheldon Richman, and Thomas Szasz. Reviews of more than five dozen books—and all of Don Boudreaux’s messages. $24.95 each Save! Special introductory price: $19.95, through April 30, 2000 ===== PAGE 12 ===== IDEAS ON [IBERTY Just Dial 911? The Myth of Police Protection by Richard W. Stevens nderlying all “gun control” ideology is Practically speaking, it makes little sense to this- one belief: “Private citizens don’t disarm the innocent victims while the crimi- need firearms because the police will protect nals are armed. It is especially silly to disarm them from crime.” That belief is both false the victims when too often the police are sim- and dangerous for two reasons. ply unable to protect them. As Richard Mack, First, the police cannot and do not protect former sheriff of Graham County, Arizona, everyone from crime. Second, the govern- has observed: “Police do very little to prevent ment and the police in most localities owe no violent crime. We investigate crime after the legal duty to protect individuals from criminal fact.” attack. When it comes to deterring crime and Americans increasingly believe, however, defending against criminals, individuals are that all they need for protection is a telephone. ultimately responsible for themselves and Dial 911 and the police, fire, and ambulance their loved ones. Depending solely on police will come straight to the rescue. It’s faster emergency response means relying on the than the pizza man. Faith in a telephone num- telephone as the only defensive tool. Too ber and the local cops is so strong that Amer- often, citizens in trouble dial 911 . . . and icans dial 911 over 250,000 times per day. die. Yet does dialing 911 actually protect crime Statistics confirm the obvious truth that the victims? Researchers found that less than 5 police in America cannot prevent violent percent of all calls dispatched to police are crime. In 1997 for example, nationwide there made quickly enough for officers to stop a were 18,209 murders, 497,950 robberies, and crime or arrest a suspect.3 The 911 bottom 96,122 rapes.! All those crimes were unpre- line: “cases in which 911 technology makes a vented and undeterred by the police and the substantial difference in the outcome of crim- criminal justice system. inal events are extraordinarily rare.”* Many criminals use firearms to commit their crimes. For example, in 1997 criminals did so in 68 percent of murders and 40 per- No Duty to Protect cent of robberies.2 Thus criminals either have It’s not just that the police cannot protect or can obtain firearms. The existing “gun con- you. They don't even have to come when you trol” laws do not stop serious criminals from call. In most states the government and police getting guns and using them in crimes. owe no legal duty to protect individual citi- zens from criminal attack. The District of Richard Stevens is a lawyer in Washington, D.C., Columbia's highest court spelled out plainly and author of Dial 911 and Die (Mazel Freedom the “fundamental principle that a government Press, 1999). and its agents are under no general duty to 12 ===== PAGE 13 ===== 13 provide public services, such as police protec- Like a George Orwell slogan, that doctrine tion, to any particular individual citizen.” says: police owe a duty to protect the public In the especially gruesome landmark case in general, but not to protect any particular the “no-duty” rule got ugly. Just before dawn individual. on March 16, 1975, two men broke down the back door of a three-story home in Washing- . eae 66 3 ton, D.C., shared by three women and a child. Police Advice: “Get a Gun On the second floor one woman was sexually A Massachusetts statute spells out the rule attacked. Her housemates on the third floor there: the government has no legal duty “to heard her screams and called the police. provide adequate police protection, prevent The women’s first call to D.C. police got the commission of crimes, investigate, detect assigned a low priority, so the responding offi- or solve crimes, identify or apprehend crimi- cers arrived at the house, got no answer to nals or suspects, arrest or detain suspects, or their knocks on the door, did a quick check enforce any law.”8 That “no-duty” rule brings around, and left. When the women frantically tragedy, as one Massachusetts woman learned called the police a second time, the dispatch- in the worst way. er promised help would come—but no offi- James Davidson had been abusing and cers were even dispatched. harassing his wife, Catherine Ford, after their The attackers kidnapped, robbed, raped, separation.’ Catherine got a court order and beat all three women over 14 hours. When against James to stop his misconduct. The these women later sued the city and its police Grafton police knew about James, and told for negligently failing to protect them or even her that they couldn’t provide protection to answer their second call, the court held that around the clock. One officer frankly advised government had no duty to respond to their her to “buy a gun because the only way to deal call or to protect them. Case dismissed. with violence is violence.” The law is similar in most states. A Kansas Catherine did not take that advice. Over statute precludes citizens from suing the gov- the next 15 months James continued to harass ernment or the police for negligently failing and stalk Catherine, and he repeatedly to enforce the law or for failing to provide threatened to kill her and her family. James police or fire protection. A California law terrorized Catherine and her family at their states that “neither a public entity nor a public homes. He attacked her at her workplace. employee is liable for failure to establish a James’s own psychiatrist warned Catherine police department or otherwise provide police that James had plans to kill her. Despite all of protection service.”6 As one California appel- his vicious and unlawful behavior, the police late court wrote, “police officers have no affir- never arrested James for violating the court mative statutory duty to do anything.”? order. The state legislatures and courts protect James issued his final death threat on Janu- government entities and police departments ary 16, 1986. Catherine reported this threat from civil liability for failing to provide to the police. At about 6 o’clock the next adequate police protection. Some states evening, James started kicking down Cather- invoke the “sovereign immunity” defense, ine’s back door. When she ran out the front a throwback to the days when the subjects door, James spotted her and chased her even were forbidden to sue the king. Other states as she charged through moving traffic on the have statutes that prevent legal challenges street. She pounded on a neighbor’s door, but to police “discretionary” functions. Courts no one would let her inside. As she ran to the preclude lawsuits in those states by holding next house, James caught her and shot her that answering emergency calls or provid- three times in the face and neck. He then shot ing police protection are “discretionary” himself. Miraculously Catherine survived, but functions. was totally paralyzed for life. Many states evade liability by relying on Catherine sued the town of Grafton for fail- the ironically named “public duty” doctrine. ing to protect her. Her lawyers argued that the ===== PAGE 14 ===== 14 IDEAS ON LIBERTY e APRIL 2000 police owed a legal duty to stop James, and Picture the situation: government establish- thus the police owed a legal duty to protect es a police force and installs 911 emergency Catherine. A Massachusetts statute required call service. Then the government announces the police to arrest James for his repeated vio- to the world that “you don’t need a firearm for lations of the court order, but the police had self-defense,” and so enacts “gun control” failed to arrest him. laws to make it difficult or impossible legally The Massachusetts court in Ford v. Town of to get and use a gun. Meanwhile violent crim- Grafton held the city was not liable. The court inals remain illegally armed with guns and order that was supposed to restrain James and other weapons. protect Catherine did not amount to an “assur- Now imagine you are snapped awake one ance of safety or assistance” from the police night by the sounds of your door breaking in. department. According to the court, when the You reach for the telephone to dial 911. The police advised Catherine “to get a gun for pro- 911 emergency operator never answers. Or tection,” that was a warning to her that the the police answer, take your frantic report, but police were unable to assure her safety or pro- don’t come. Or they come too late. In any of tect her. Because she got no assurances of these scenarios, the burglar gets in, knifes safety from the police, she had no legal right you, and steals your VCR. to rely on the police to protect her. Case Crouching behind a chair with a telephone dismissed. in your hand, you were defenseless because Catherine Ford might have escaped James’s the government took away your private murderous intentions unharmed if she had defense tools and handed you a telephone taken the police officer’s advice to “get a number to call for emergency help. You relied gun” and had received a basic course in on that telephone number, and the help never defensive firearms handling and safety. came. The government’s policy made you a Studies show that Americans use firearms crime statistic. successfully up to two million times each year Government lulls the public into trusting it to stop criminals.!® Tragically, she chose to provide everything, takes away the people’s instead to rely on a court order and the means of providing for themselves, and then police. claims it has no duty to provide after all. Not- These two cases are not legal oddities. The ing the fatal irony in the “gun control” con- general rule of law in the United States is text, James Bovard has written that “govern- that government owes a duty to protect the ment has a specific, concrete obligation to dis- public in general, but owes no legal duty to arm each citizen, but only an abstract protect any particular person from criminal obligation to defend the citizen.” “Gun con- attack. Neither the U.S. Constitution nor the trol,” Bovard notes, “is one of the best exam- federal civil rights laws require states to pro- ples of laws that corner private citizens— tect citizens from crime. As a federal appeals forcing them either to put themselves into court bluntly put it, ordinary citizens have “no danger or to be a lawbreaker.”12 constitutional right to be protected by the state against being murdered by criminals or Laying Bare the State madmen.” . Exceptions to the no-duty rule apply when Protection Myth the police have expressly promised to protect The drive to prohibit private firearms own- a specific person from an identifiable danger. ership highlights the statists’ goals in a way Informers in a witness protection program, everybody can understand. They aim to dis- for example, might have an enforceable right arm ordinary nonviolent citizens, even those to protection. Yet it will make little difference who face high risk of criminal attack, and to a dead victim if a court some years later substitute police protection in place of self- decides that the police did owe a duty but defense. Meanwhile the police will not be failed to protect him, and then awards dam- held liable to individual citizens for failing to ages to next of kin. defend them. ===== PAGE 15 ===== Just DIAL 911? THE MYTH OF POLICE PROTECTION 15 Government “social programs” and various Government power ratchets up the same mandatory “insurance” programs operate in way under a “gun control” regime. As laws the same way. First, the government programs discourage innocent citizens from defending distort the market forces that provide housing, themselves, the violent criminals remain food, medical care, transportation, and other undeterred. Absent some other, overweening goods and services. People shift to depending factor, violent crime cannot possibly decrease on the government programs instead of taking in that environment; it more likely must individual decisions and action. increase. The statist response will naturally be When the government programs fail, how- to restrict firearms ownership even more, and ever, the people relying on those programs to enhance the police presence. Greater police have little or no effective recourse. At best, presence means more police, more surveil- dissatisfied people can file bureaucratic lance, more reporting to government what cit- appeals to the very agencies that harmed or izens are doing. Nearly 170 million citizens cheated them. There can be judicial review of lost their lives to their own governments in the bureaucratic decisions in some cases also, but twentieth century.!3 There is little reason to the judges are usually part of the same gov- celebrate a police state. ernment, and they typically defer to the origi- Revealing the lie underlying the “gun con- nal government agency’s decision anyway. trol” agenda strengthens the case against In nearly all cases the citizen bears the socialism and the welfare state on many lev- stress and expense of pursuing appeals of els. If the argument advances the cause of bureaucratic decisions. The cost of appealing individual liberty, then it is an argument worth a government decision is already high. The making. OJ effect of high appeal costs is to stop people from appealing—which gives results just like 1. Federal Bureau of Investigation, Uniform Crime Reports for the United States (1997), pp. 9, 22, 19. the “no duty,” “sovereign immunity,” and 2. bid, pp. 14, 25. “ : tL 3. Gordon Witkin, Monika Guttman, and Tracy Lenzy, “This is p ublic duty rules. Government grabs power 911 . . . Please Hold,” U.S. News & World Report, June 17, 1996, but sheds accountability. p. 30. The problem with government programs is ~~ _, rr University Professor George Kelling not just that citizens have only narrow and 5. Warren v. District of Columbia, 444 A.2d 1,4 (D.C. 1981), quot- fod ing the trial court decision. costly avenues for appeals of decisions. 6. California Government Code, § 845. While a government social program is oper- 7. Souza v. City of Antioch, 62 California Reporter, 2d 909, 916 : aa 1s : _ (Cal. App. 1997). ating, it is likely making worse the very prob 8. Mass, Gen. Laws Ann. Ch. 258 § 10(h). lem it was trying to “solve.” People cannot 9. The facts and law of this case are set forth in Ford v. Town of Grafion, 693 N.E.2d 1047 (Mass. App. 1998). get out of a government program and return 10. See Gary Kleck and Marc Gertz, “Armed Resistance to Crime: to private action or free-market solutions The Prevalence and Nature of Self-Defense with a Gun,” Journal of : Criminal Law and Criminology 164 (1995), p. 86. because of the effects of the program itself. 11. Bowers v. DeVito, 686F. 2nd 616, 618 (7th Cir. 1982). Legislators point to the “failure” of the mar- 12. James Bovard’s introduction to Richard W. Stevens, Dial 911 : : _ and Die (Hartford, Wisc.: Mazel Freedom Press, 1999). ket, whine about the problems with the gov 13. R. J. Rummel, Death By Government (New Brunswick, N.J.: ernment program, and then prescribe more Transaction Publishers, 1994), pp. 1-25. government. The voters reward those legisla- tors by re-electing them. ===== PAGE 16 ===== IDEAS ON [IBERTY Toward an Austrian Critique of Governmental Economic Policy by Israel M. Kirzner n preceding articles we outlined the way in he meant by this provocative assertion has which Austrian economists understand the often been misinterpreted. Mises did not entrepreneurial competitive market process claim that a socialist system cannot exist; nor that is responsible for the law of supply and did he predict unequivocally that such a sys- demand. In the present article we pursue this tem cannot survive for many years. What understanding further, to permit us to see why Mises meant was that, with the best will in the government interventions in spontaneous world, with the most dedicated and incorrupt- market processes tend to frustrate and ible central planners in the world, it is simply obstruct the coordinative tendencies that the impossible to plan centrally for an entire market process generates. The most extreme economy. The decisions made by the central sense in which such obstruction may occur is authorities in an economy without a market in the pure socialist economy (in which all for productive resources cannot possibly take productive activities are governed wholly by a into account all the alternatives that would, in central planning authority). Here the obstruc- principle, need to be taken into account in tion is total; market tendencies toward sponta- order for decisions to be able to be described neous coordination are completely paralyzed. as socially efficient. Without a market for pro- But less extreme (less “total”) forms of gov- ductive resources (and thus without market ernment intervention, particularly so-called prices reflecting the urgency with which con- “mixed” systems, incorporating significant sumers in other industries are demanding central regulation of market activity, will be the services of these resources), central plan- seen to suffer from the same kind of difficul- ners have no way of ensuring that resources ty—the frustration of market tendencies flow to satisfy the more urgent, rather than toward spontaneous coordination. the less urgent, demands among consumer preferences. In a market economy the price of a resource expresses the priority with which consumers It was in 1920 that renowned Austrian wish entrepreneurs to direct that resource for economist Ludwig von Mises enunciated his the satisfaction of their preferences; a high thesis that centralized socialist planning was, resource price means that entrepreneurs, in a definite sense, simply impossible. What somewhere, are aware of a productive employment for this resource that consumers Israel Kirzner is a professor of economics at New value highly. For an entrepreneur io allocate York University. This is the fourth (and last) of a this resource to any particular industry, he series of articles laying out some foundational ele- Must, in the market competition for the ments of modern Austrian economics. resource, outbid other entrepreneurs; that is, 16 Mises on Socialism ===== PAGE 17 ===== 17 he must be convinced that he has identified a Remarkably, but in a sense disastrously, use for it which consumers value more highly mainstream economics for some four decades than consumers value alternative uses for that ignored this weakness and pronounced the resource. Without themselves necessarily Lange-Lerner suggestion a valid and defini- being aware of the nature and value of these tive solution to the problem identified by alternative uses, the entrepreneurs are led, Mises. Only during the past two decades have yes, as if by an invisible hand, to allocate economists finally conceded the power of resources in a way that takes account, in Mises’s argument. In an outstanding 1985 effect, of these alternative uses. revisionist work devoted to the socialist eco- But for the central planners, operating as nomic calculation debate—a work rooted in they must without market prices for resources the Austrian understanding of the market (since there can, by definition, be no resource process—Donald Lavoie effectively dissected markets in the socialist economy), a decision the fallacies that underlay the mainstream made as to whether to allocate steel to the illusion that Lange and Lerner had solved the construction of a bridge or to the construction Misesian dilemma.* The source of the illusion of an apartment building cannot be made on is the mainstream preoccupation with states the basis of any measures of alternate urgen- of equilibrium, to the exclusion of any appre- cies of need; there simply are no such mea- ciation for the way in which the dynamically sures. The central authorities may decide to competitive ventures initiated by profit-seek- build the bridge, but their decision is not ing entrepreneurs are responsible for the “rational” (in the sense of expressing a ratio- calculative usefulness of real-world market nal selection among alternatives). Central prices. To imagine that a central planning planning, in the ordinary sense of the term “to bureaucracy might generate numbers in a plan” (which expresses the idea of taking into manner that might remotely resemble the way account the need to balance conflicting objec- in which prices are generated in the course of tives), is, as Mises showed, impossible. market competition is fundamentally to mis- understand the way markets work. The Myth of So-Called To put this in somewhat different terms: the : mainstream’s willingness to accept the Lange- “Nonmarket” Prices Lerner notion of nonmarket prices” arallols In the interwar debate that ensued as a result precisely that mainstream’s enunciation of the of Mises’s provocative assertion, one attempt- “law of supply and demand” in strictly equi- ed socialist response stood out among the oth- librium, nonentrepreneurial terms. Mises’ ers. This was the suggestion, offered separate- (and also F. A. Hayek’) refusal to acknowl- ly in the 1930s by two competent socialist edge meaningfulness in such nonmarket economists, Oskar Lange and Abba P. Lerner, “prices” parallels precisely the Austrian insis- that socialist planning might be possible, pro- tence on understanding the law of supply and vided decisions, to be made by socialist demand as the manifestation of an entrepre- employees, could be guided by nonmarket neurial process. “prices” for resources—that is, by prices pro- mulgated by a central authority, without any The Economics of resource market, but as based on regular G t Int ti reports to the authority of shortages or sur- overnment Intervention pluses of each particular resource during the Our articulation of the Austrian version of preceding production period. Space limitations the law of supply and demand, and our corre- do not permit us here to spell out the details of sponding understanding of the Austrian this suggestion. As we shall see, its central, refusal to accept the Lange-Lerner solution damning weakness is the notion that resource (in terms of centrally promulgated nonmarket “prices” can be promulgated without the spon- — profit-hungry competing entrepreneurs. ty Press, 1985). ===== PAGE 18 ===== 18 IDEAS ON LIBERTY ¢ APRIL 2000 prices) to the socialist economic calculation science needed to do so; it is also to fail to problem first identified by Mises permits us to realize how their activities are inevitably des- push the logic a little further. It seems reason- tined to distort and/or paralyze that market able to interpret Mises’s well-known general process through which society grapples cre- rejection of government intervention (not atively and constructively with its lack of only for the socialist model, but more partic- omniscience. It was Ludwig von Mises who, ularly for the “mixed” economy) as a con- in his critique of the possibility of socialist sistent application of his insights into the planning, drew indirect attention to the central impossibility of rational central planning in a planner’s crippling lack of the knowledge nec- socialist economy. Each and every act of gov- essary to plan centrally. It was Mises’s subtle ernment regulation constitutes, no matter understanding of the dynamics of the compet- what noble intentions for social betterment itive market process that made him, more than such regulation may reflect, an act of interfer- all other twentieth-century economists, the ence with the spontaneous market process complete skeptic regarding the social useful- generated by entrepreneurial competition. ness of government intervention in otherwise No one claims that the results of this spon- market economies. taneous market process are, at any given We commenced this four-part series with moment, those that would express perfect an Austrian critique of the textbook version of social efficiency as seen from a vantage point the law of supply and demand. Consideration of imagined omniscience. What Austrians of the Austrian understanding of that law claim for the spontaneous market process is in terms of a competitive-entrepreneurial that it is the only procedure available to less- process of mutual discovery and coordination than-omniscient humans to move systemati- led us to a thoroughly negative perspective cally in the direction of social efficiency, concerning well-meaning attempts to “main- properly defined and understood. For govern- tain competition” through so-called antitrust ment regulators to believe themselves able policies. We have now concluded with brief systematically and deliberately to improve on attention to the manner in which the Austrian the results of the free-market competitive view leads, not only to a critique of the pure process is not only arrogantly to assume socialist economy, but also toward the critique themselves able to approximate the omni- of interventionism in a// its forms. J Next Month's Ideas on Liberty: Our May issue features “The Dangers of Growing Up Comfortable,” "La Lucha: The Human Cost of Economic Repression in Cuba,” "Trust and Privacy on the Net,” and much, much more. Don’t miss it! ===== PAGE 19 ===== Ideas and Consequences by Lawrence W. Reed IDEAS ON [IBERTY APRIL 2000 Internet Access Should Be Left to the Free Market he explosive growth of the Internet in popularity is growing enormously. One pro- recent years has transformed the lives of jection suggests that the number of Internet millions of people at home and work in ways users who use narrowband will fall from near- that were unimaginable a generation ago. The ly 100 percent just a couple of years ago to 50 benefits to society have been enormous. The percent by 2005. Cable firms will even be able proliferation of e-mail addresses, personal- to offer telephone service because unlike ized Web pages, and e-commerce are now narrowband, broadband technology can trans- integral parts of our burgeoning “cyber- mit voice and data simultaneously. culture.” Always eager to crash the party, gov- ernments and their special-interest allies are looking for excuses to tax, regulate, censor, and otherwise spoil the fun. Rather than standing up to this challenge Access to the Internet is one issue that with the money and effort required to com- already elicits controversy and promises to pete, major Internet service providers (ISPs) generate even more. Do-gooders itching to such as Mindspring Enterprises have joined regulate argue that the marketplace will notbe with some telecommunications firms and able to sustain competitive, affordable access “consumer advocacy” groups to form a new in many U.S. communities because cable lobbying organization called the OpenNet companies are in a position to monopolize coalition. OpenNet is trying to convince fed- something new called “broadband” technolo- eral, state, and local regulators to intervene gy. Some form of government intervention, and force cable television companies to say the do-gooders, must counter this so that “share” their broadband cables with other everyone can afford to be “wired” in the companies. Legislation pending in many future. states would do just that. The Clinton admin- Broadband technology allows cable- istration endorses forced access as well. television providers to offer Internet access Meanwhile, any economist worthy of the through their cable connections. Its emer- name would argue that the likely result will be gence represents a challenge to the more tra- higher costs for consumers and no significant ditional dial-up (narrowband) technology that increase in the number of Internet access uses telephone lines. Largely because broad- options. band permits much faster Internet speeds, its This story is typical of what happens when innovation opens new vistas for free enter- Lawrence Reed is president of the Mackinac Center prise. Some people are always in better post- Jor Public Policy (www.mackinac.org), a free-market tion to take advantage of a new opportunity research and educational organization in Midland, than others. But that doesn’t justify the gov- Michigan, and chairman of FEE's Board of Trustees. ~ ernment’s stepping in and disrupting the 19 Lobby for Intervention ===== PAGE 20 ===== 20 IDEAS ON LIBERTY e APRIL 2000 process by which the market shakes out supply many localities, purchase this service from a and demand. If that happens, it sabotages a wide range of suppliers, with each one offer- process that most often produces the best and ing a different technology with distinct advan- widest variety of services for the lowest price. tages and disadvantages. The late economist Alfred E. Kahn put it well when he explained the importance of deregulating the airline industry. His observa- tion is just as relevant to a discussion of the Alexander points out that if government market for Internet access: “The essence of requires cable firms to provide access to its the case for competition is the impossibility cables to any ISP, the resulting increase in of predicting most of its consequences. The users would cut transmission speeds—a superiority of the competitive market is the major reason why people prefer broadband in positive stimuli it provides for constantly the first place! Congestion problems would improving efficiency, innovating, and offering undoubtedly then be blamed on the cable consumers diversity of choice.” companies. In the long run, those companies If government implements “forced access,” would likely cut back on their investments in the edge will come off the urgent market broadband technology, which would have the incentive for ISPs—including new upstart effect of limiting future access options for companies—to develop broadband capacity. consumers—the exact opposite of what The incentive for cable operators to take OpenNet says it wants to achieve. advantage of their head start also will dimin- For these reasons and a host of others, says ish. And the competition over price that would Alexander, politicians and regulators should naturally ensue in an unhampered market—to reject specious claims about “leveling the the advantage of consumers—will be far playing field” and refrain from passing weaker and produce far fewer options and “forced access” legislation. advantages. Instead, they could actually stimulate com- This is precisely what happened when Con- petition by ending the system by which cable gress passed the 1996 Telecommunications companies gain monopoly franchise agree- Act, designed to “level the playing field” in ments in local areas. Since the 1960s, local telephone service by forcing established tele- governments have granted cable operators phone companies to make their network facil- monopoly status, stifling what would other- ities available to competing firms. Here in wise become a healthy competition among Michigan, instead of facilitating competition, cable operators. This—not the cable opera- “forced access” stifled it. In 1998, despite all tors’ broadband capability—is the real the advertising we heard from new compa- inequity lawmakers should address. Nation- nies, the big local telephone companies wide, only 3 percent of cable subscribers can Ameritech and GTE-Michigan still earned 96 select from competing providers. That percent of all local service revenues. enforced lack of competition boosts prices to A recent study from the Mackinac Center consumers while allowing local governments for Public Policy argued that by all measures to rake in millions in franchise fees. the market for Internet access is dynamic and What’s the bottom line? Government competitive and will remain so if government should not force cable operators to make their butts out. Author Donald Alexander, a cables available to their competitors, and it telecommunications economist from Western should not grant exclusive local monopolies Michigan University, maintains that con- to those cable operators either. Better Internet sumers who want access to the Internet can, in access, better cable television service, and even cheaper telephone calls are all on the *Alfred E. Kahn, “Deregulation and Vested Interests: The Case ~~ horizon as broadband technology spurs inno- of Airlines,” in Roger G. Noll and Bruce M. Owen, eds., The Polit- vations. Free markets, not new regulations, ical Economy of Deregulation (Washington, D.C.: American Enter- . . prise Institute, 1983), p. 140. will bring that about. Wm Undermining Innovation ===== PAGE 21 ===== IDEAS ON [IBERTY APRIL 2000 The Microsoft Case: Divestiture Won’t Help Consumers by D. T. Armentano ritics of Microsoft, rallied by Judge Alcoa, and AT&T, all of which prospered Thomas Penfield Jackson’s finding that after the government broke up the parent the company has monopoly power over much companies. of the computer industry, have urged a Yet it strains belief to imagine that the trust- breakup of the company. For example, the busters or courts know how to maximize Consumer Project on Technology (affiliated shareholder return better than private entre- with Ralph Nader) suggests that Microsoft be preneurs. If divestiture were better for John D. forced to divest its Web browser, Internet Rockefeller or Bill Gates, they could always Explorer. But other far more radical divesti- have spun off their own companies. When ture proposals are under consideration. firms are worth more apart than together, they The 19 state attorneys general who were co- are broken up by management or, when man- plaintiffs in the antitrust suit are said to be agement is oblivious to market realities, pressing for a horizontal breakup that would by outsiders in hostile takeovers, such as divide Microsoft into three companies: one occurred with many large conglomerates in with the operating system, one with applica- the 1980s. tions software, and one with Internet busi- Contrary to Huber and others, government nesses. Still other critics have called for a ver- divestiture is no panacea. Standard Oil, Amer- tical divestiture that would divide Microsoft ican Tobacco, Alcoa, United Shoe Machinery, into three or more fully integrated companies and AT&T were all broken up with mixed (“Baby Bills) that would then, presumably, results for the companies and consumers. compete with one another in the marketplace. Standard Oil did well after the 1911 breakup Even friends of liberty have suggested that because it was still the largest integrated some sort of divestiture might make econom- domestic refiner. American Tobacco pros- ic sense. Peter Huber, in an important article pered because divestiture did not affect the in the Wall Street Journal (“Breaking Up Isn’t success of its popular brand names. Alcoa sur- Hard to Do,” November 10, 1999) argued that vived its split from Alcan in 1951 because the it could be good for Bill Gates and for breakup had no significant effect on domestic Microsoft’s investors since “the children of aluminum production or sale. However, Unit- broken up corporate marriages tend to fare ed Shoe Machinery declined rapidly after remarkably well.” He cites Standard Oil, divestiture in 1968, and the AT&T situation is Nr a. Lo . clouded because radical telecommunications D.T. Armentano is professor emeritus in economics d lation—and h . breaku at the University of Hartford and author of Antitrust eregulation—and not the antitrust breakup and Monopoly (Independent Institute) and Antitrust: Per se—was responsible for the explosion in The Case for Repeal (Mises Institute). post-divestiture revenues. 21 ===== PAGE 22 ===== 22 IDEAS ON LIBERTY ® APRIL 2000 Effect on Consumers The effects of divestiture on consumers are even more problematic. In petroleum, for example, refined oil prices fell for decades prior to divestiture; in the decade after the breakup—and even before World War I— prices increased sharply and stabilized. Alcoa had a near “monopoly” in virgin ingot alu- minum for almost 50 years, and prices declined from $5 per ingot pound in 1887 to 22 cents in 1937, when the monopoly trial began; after the decision against Alcoa in 1945 and after the divestiture of Alcan, prices increased and stabilized. Subsequent to the oil and aluminum breakups, dominant firm market shares declined somewhat and smaller competi- tors expanded their business. But this devel- opment was not necessarily efficient or pro- consumer. More likely, the breakups prevent- ed the exploitation of the efficiencies from integration (especially in the oil industry), causing increases in costs and prices that competitors. In 1968, at the insistence of the allowed less efficient competitors to expand Department of Justice, the Supreme Court production and sales. In aluminum, the court- Went further and ordered United Shoe to spin ordered restraints on the purchase of World off significant shoe machine assets, subsidize War II aluminum facilities, plus the compul- @ new “competitor,” and refrain from active sory licensing of patents to rivals, made Alcoa competition with the newcomer for up to five a less efficient supplier. In both cases particu- years. This regulatory attempt to “create com- lar competitors, but not necessarily con- Petition” proved disastrous: United Shoe sumers, benefited from antitrust regulation. ~~ Machinery, and the domestic shoe industry The closest case to Microsoft is the 1968 that it served, both declined steadily after breakup of United Shoe Machinery, which divestiture. Now most shoes are made over- was blatantly anti-consumer and anti-investor. S¢dS. Like Microsoft, United Shoe was an aggres- Standard Oil, Alcoa, United Shoe Machin- sively competitive dominant firm that main- ery—and especially Microsoft—all earned tained its market position through mas- their initial market positions by being more sive investments in shoe machine technology efficient than their rivals. Any regulation or and low prices. And like Microsoft, it devolution of a successful corporate organiza- often bundled the lease of its machines with tion is likely to reduce efficiency and con- certain services. The trial judge in the case sumer welfare. Antitrust history is littered actually praised United’s overall economic With attacks on successful companies and efficiency. with regulatory attempts to redistribute the But as in the Microsoft case, smaller rivals spoils of success to less efficient rivals. Such found it difficult to compete with United’s antitrust protectionism is both immoral and superior line of machines and favorable long- destructive of productivity and wealth. term leases. That difficulty—and not any con- Judge Jackson, having already decided cern with consumer welfare or efficiency— incorrectly that Microsoft is a monopoly that was the judge’s determining consideration. He restrains trade, ought not to compound his shortened the leasing contract arbitrarily and errors of “fact” by ordering some punitive and ended the bundling in order to help smaller socially harmful industrial reorganization. [] Bill Gates ===== PAGE 23 ===== IDEAS ON [IBERTY APRIL 2000 Barbarians at Bill Gates by William F. Shughart II t was a glorious fall day on the East Coast mulated during the commission’s investiga- when Assistant Attorney General for tion in response to pressure from Senators Antitrust Joel Klein stepped up to the micro- Howard Metzenbaum (since retired) and phone at a news conference called hard on Orrin Hatch, both of whom urged her to take the heels of the release of Judge Thomas over the Microsoft case. Penfield Jackson’s “findings of fact” in the The substance of the charges of unlawful government’s case against the Microsoft behavior against Microsoft has been in meta- Corporation. An obviously pleased Mr. Klein morphosis over the course of the company’s declared that Judge Jackson’s findings, which protracted encounter with the federal antitrust accepted the Justice Departments charges authorities—and with the 19 states and the nearly in total, proved once again that no District of Columbia that have filed their own company—and no man—is above the law. antitrust lawsuits against it. At the outset the Adding unintended irony to the scene, Bill FTC’s attorneys maintained that Microsoft Clintons guardian angel, Attorney General had illegally foreclosed the market for com- Janet Reno, stood at Mr. Klein’s shoulder. puter operating systems by entering into con- Thus ended the first act in a continuing tracts with manufacturers of personal comput- drama that began in the summer of 1993, ers, granting them substantial discounts in when, after the Federal Trade Commission return for agreeing to preload Microsoft’s twice failed to vote out a complaint against own operating system, MS-DOS (later Microsoft, the Justice Department launched upgraded and marketed as Windows), on all its own investigation of the company’s possi- their PCs. Indeed, some of the contracts ble antitrust violations. The Department of obligated the manufacturers to pay Microsoft Justice’s intervention in its sister agency’s a royalty on every computer processor they three-year-long inquiry was both unprece- shipped even if some other operating system dented—in order to avoid unseemly competi- had been installed. The FTC’s investigation tion the FTC and Justice have since 1948 had centered particularly on the lack of suc- operated under a liaison agreement that cess experienced by DR-DOS, an operating divides the antitrust territory between them— system marketed by Novell, Inc., headquar- and politically inspired. Anne Bingaman, tered in Utah and represented in the U.S. Sen- President Clinton’s first assistant attorney ate by Orrin Hatch. general for antitrust, requested the files accu- When the Justice Department took over the William Shughart Il is the Frederick A. P. Barnard investigation, the focus shifted to Web-browsing Distinguished Professor of Economics and holder of software. Reacting to the spectacular growth the Robert M. Hearin Chair in Business Administra- Of the Internet and to consumers’ desires for a tion at the University of Mississippi. product that would allow them to navigate 23 ===== PAGE 24 ===== 24 IDEAS ON LIBERTY © APRIL 2000 easily around the information superhighway it of a 1995 consent decree in which the compa- spawned, Microsoft developed its Internet ny agreed not to bundle computer software Explorer Web browser and formed plans ulti- applications with its operating system. mately to integrate it with Windows. Those And so, by the time the Department of Jus- plans bore fruit with the release of Windows tice submitted its proposed findings of fact to 95, raising the competitive stakes between Judge Jackson, the basis of the government’s Microsoft and Netscape, Inc., which marketed case against Microsoft had shifted once again. its own Web browser, Navigator, as a stand- The Justice Department’s new theory, ultimate- alone software product. ly embraced by the judge, is that Microsoft has engaged in a variety of anticompetitive prac- Tyin g that Binds? tices—including its decision to incorporate Web-browsing capabilities within Windows— Following meetings between James Barks- calculated to protect and extend its monopoly dale, then CEO of Netscape, and Assistant power in the market for “Intel-compatible PC Attorney General Klein, the Justice Depart- operating systems” (about which more below) ment filed suit in federal district court seeking by erecting and maintaining a so-called appli- to force Microsoft to offer a version of Win- cations barrier to entry. dows without Internet Explorer. The Justice That entry barrier is based on the positive Department charged that Microsoft’s practice feedback loop between a computer’s operat- of bundling Internet Explorer with its operat- ing system and the software applications that ing system violated the Clayton Act’s pro- run on top of it. The greater the number of scription on “tying,” whereby the sale of one copies of a particular operating system in use, product 1s conditioned on the purchase of the more potentially profitable it is for soft- another. By requiring purchasers of Windows ware vendors to write compatible applications to also buy its Web browser, Microsoft, (such as word processors, spreadsheets, and according to the government, had leveraged tax-preparation and e-mail programs), which its market power in operating systems to fore- after all are why consumers want to buy per- close Netscape from distributing Navigator. sonal computers in the first place. The more Not only did Microsoft’s strategy represent an applications written to run on a particular unlawful restriction on consumer choice, but, operating system, the greater the demand for given that Internet Explorer was included in that operating system will in turn be. Hence, Windows at no additional charge, the strategy applications and operating systems are sub- also may have been intended predatorily to ject to a proverbial “chicken-and-egg” prob- drive Netscape from the browser market. lem. With its large installed base of users— The district court agreed and ordered something on the order of 90 percent of new Microsoft to offer two versions of Windows, PCs are shipped with Microsoft’s operating with and without Internet Explorer. But only a system—thousands of Windows-compatible month after the Justice Department filed more software applications are available on the far-reaching charges of anticompetitive behav- market. Few applications are written for alter- ior against Microsoft on May 18, 1998, the native operating systems because few copies D.C. Circuit Court of Appeals overturned the of those operating systems are in use, and few lower courts ruling. Wading through mind- alternative operating systems are in use numbing details on the question of whether because few software vendors write applica- Internet Explorer was truly “integrated” with tions compatible with them. Windows 95, the appeals court held that The threat posed by Netscape’s Navigator because Internet Explorer 3.0 contained fea- (and by Sun Microsystems’ Java program- tures that went beyond browsing capabilities, ming language) was not that they competed it did not constitute a separate product within with Microsoft’s Web browser per se, but that the meaning of the law’s anti-tying language; they exposed interfaces that might serve as an hence, Microsoft’s decision to include Internet alternative platform for running network- Explorer in Windows did not violate the terms centric application programs—applications ===== PAGE 25 ===== BARBARIANS AT BILL GATES 25 capable of running on Web servers rather than operating systems, such as IBM (0S/2) and on a computer’s hard drive. Navigator and Be (BeOS), or “cross-platform” operating other such “middleware” thus endangered systems, such as Linux, capable of running on Microsoft’s dominance of the operating sys- both Intel-based and non-intel-based PCs. tem market, and according to the Justice Judge Jackson defended his decision to Department, the company moved aggressive- define the relevant market in this way by ly and unlawfully to quash the competition. pointing to the high cost consumers face in Microsoft was particularly worried that switching to the available alternatives. For Navigator, which had captured about 80 per- one, unlike Windows, the Mac OS is licensed cent of the browser market (and had “been only for use on Apple’s own hardware—the ported to more than fifteen different operating two products are sold as a bundle. The owner systems”!), would be seen as such an attractive of an Intel-compatible PC is therefore platform for applications by software develop- required to purchase an Apple machine to ers that, in the words of Netscape’s co-founder, take advantage of that substitution possibility. Marc Andreessen, Windows eventually would In addition, because it is considerably more be relegated to an unimportant collection of expensive at current prices, the Mac OS “slightly buggy” device drivers.2 option places few competitive constraints on the market for Intel-compatible PC operating The Relevant Antitrust Market ~~ SSe™° : The applications barrier to entry provides a As in any antitrust case, the definition of second justification for a narrow market defi- the market that is relevant for analyzing the nition, according to Judge Jackson. Even if competitive effects of Microsoft’s business consumers could easily overcome the costs of practices is the key issue in Judge Jackson’s installing and learning to use an alternative findings of fact. Drawn narrowly enough, the operating system, they would still be deterred boundaries of relevant antitrust markets can from switching because of the relatively small limit the number of products that ostensibly number of application programs written for compete with one another so severely that those operating systems. almost any firm can be determined to possess Defining the relevant market as including “market power’—the ability to raise prices only Intel-compatible PC operating systems above competitive levels. In the case at hand, leads inescapably to the conclusion that Judge Jackson chose to define the relevant Microsoft enjoys substantial market power. market as “Intel-compatible PC operating That conclusion is reinforced in Judge Jack- systems,” the narrow definition advocated in son’s mind by the testimony of Frederick the government’s pleadings. Warren-Boulton, one of the government’s The curious conclusion produced by the economists, suggesting that, because the price judge’s finding on the relevant market defini- of an operating system represents a small tion is that Microsoft does not compete with fraction of the total cost of a personal com- the very firms it is accused of injuring. puter, which consists of a central processing Excluded from the market so defined are unit and peripheral devices such as a Netscape and Sun, which, as indicated, mar- keyboard, a monitor, and a printer, consumers ket software products that interface with a are not very sensitive to changes in the price computer’s operating system (and which of Windows; that is, Microsoft confronts a might also serve as alternative platforms for demand for its flagship product that is highly running application programs); Apple, which inelastic. And since Microsoft could raise the markets an operating system (Mac OS) thatis price of Windows substantially without induc- incompatible with Intel-based PCs; and the ing large numbers of consumers to switch to many other companies striving to develop the alternatives, the company possesses market next ubiquitous applications platform. The power. : only other firms in the “market” are those It is a well-established principle of the neo- offering either alternative Intel-compatible classical theory of the firm that a monopolist ===== PAGE 26 ===== 26 IDEAS ON LIBERTY e APRIL 2000 will never sell at a price where demand is operating systems to force the manufacturers inelastic. That is because a seller facing an of PC hardware, writers of software applica- inelastic demand can increase its total rev- tions, Internet access providers, Internet con- enues and profits by reducing output and rais- tent providers, and other customers and com- ing price. Hence, saying that the demand for petitors to agree to contractual terms calculat- Windows is inelastic at the current price is the ed to protect its monopoly by reinforcing the same thing as saying that Microsoft has failed so-called applications barrier to entry. Put dif- to maximize its profits. Bill Gates has been ferently, Microsoft has forgone profits it could accused of many things, but making less have earned now and in the past to forestall the money when he could have made more is not entry of new software application platforms one of them. (or the expansion of sales of existing plat- Relevant market definition is supposed to forms), thereby preventing the erosion of be about the problem of identifying the alter- future profits. By offering discounts, free natives to which consumers could turn if con- advertising, access to pre-release (“beta”) ver- fronted with an increase in the price of the sions of software, placement on the Windows product at issue. Judge Jackson’s stated con- desktop, and other valuable considerations, cern that there seem to be few good substi- Microsoft “beguiled” customers into entering tutes for Windows available at current prices a “special relationship” with the company.s misses that important point. The key question Stripped to its essentials, the government’s is not whether there are good substitutes for case against Microsoft is one of unlawful pre- Windows at the current price, but rather dation. And while the list of the alleged victims whether substitution possibilities exist in the of Microsoft’s anticompetitive business prac- event that Microsoft attempts to charge a tices is long, judged by the amount of narrative monopoly price. The fact that a substantial space devoted to describing how Microsoft number of alternative Intel-compatible PC attempted to destroy its competition, the case is operating systems are on the market present- all about Netscape. According to Judge Jack- ly—a list that includes, among others, IBM, son, Microsoft employed a variety of tactics to Oracle, Sun, AT&T, Hewlett Packard, NeXT, stave off the threat posed by Navigator. That Xerox, Wang, Be, Linux, DEC, Psion, 3COM, threat, to reiterate, was the prospect that Navi- Geos, and GEM—points to the conclusion gator would expose interfaces to software that Microsoft’s pricing discretion is tightly developers that would eventually weaken the constrained.# Taken together with the asser- applications barrier to entry by providing an tion of inelastic demand, the observation that alternative platform for running application the sellers of alternative Intel-compatible PC programs and, hence, jeopardize the Windows operating systems collectively now account operating system “monopoly.” for only about 10 percent of sales suggests Among other tactics, beginning with the that the current price is the competitive price. release of Windows 95, Microsoft integrated In other words, Microsoft sells Windows at a Web-browsing functionality within its operat- price where demand is inelastic because it ing system and adopted a policy of giving thinks its sales would fall dramatically if price subsequent versions of Internet Explorer were increased. away for free. It also took steps to exclude Navigator from important distribution chan- nels. Microsoft did so by preventing the hard- ware manufacturers to which it had licensed But in any case, Microsoft is not accused of Windows from modifying the sequence of exploiting its market power by raising its screens seen by consumers on first use, prices and profits at consumers’ expense. Nor including deleting Internet Explorer from the is it charged with acquiring that power by start sequence, and, if it had also been pre- unlawful means. Instead, Judge Jackson con- installed, from giving more favorable place- tends that the company has used its dominant ment to Navigator’s desktop icon on the Win- position in the market for Intel-compatible PC dows default screen than given to the Internet Microsoft’s Contracting Practices ===== PAGE 27 ===== BARBARIANS AT BILL GATES 27 Explorer icon. With similar ends in mind, Access Kit” (IEAK), which allowed Internet Microsoft also entered into agreements with access providers conveniently to download Internet access providers, such as America Internet Explorer at no charge and to modify Online, to bundle its browser with their pro- certain of its features to create distinctive prietary client software and to endorse and identities for their services. Indeed, Microsoft promote it, paying bounties for every sub- allowed Internet access providers to preset the scriber converted from Navigator to Internet browsers default home page so that cus- Explorer.6 Microsoft likewise entered into tomers would be taken directly to the access agreements with the Disney Channel and provider’s Website whenever they logged on other Internet content providers to promote to the Internet, thereby supplying them with Internet Explorer in return for favorable valuable advertising and promotional oppor- placement of their own icons on the Windows tunities. “Netscape, by contrast, refused to default screen. allow its [Internet access provider] licensees Such policies, in Judge Jacksons words, to move Navigator’s home page from “guaranteed the presence of Internet Explorer Netscape’s NetCenter portal site.”!! It was on every new Windows PC system.”” slow to follow Microsoft’s lead, continuing to Netscape was thereby forced into less desir- charge Internet access providers between $15 able distribution channels, such as “carpet and $20 for every copy of Navigator they dis- bombing” consumers with free disks they tributed, and failing to offer them a tool com- must install themselves, a task supposedly parable to Microsoft’s access kit. When daunting to novice computer users.® And Netscape finally released a tool kit, known as indeed, Microsoft’s browser strategy ultimate- “Mission Control,” with the same capabilities ly paid dividends: “from early 1996 to the late as IEAK in June 1997, it charged $1,995 per summer of 1998, Navigator’s share of all copy. Too much, too late. By that time, about browser usage fell from above seventy per- 2,500 Internet access providers had executed cent to around fifty percent, while Internet licensing agreements for the IEAK.12 Explorer’s share rose from about five percent Whatever else may be said about to around fifty percent.” It is worth noting, Microsoft’s allegedly unlawful contractual however, that Microsoft did not begin taking practices, it is clear they did not work. market share away from Netscape until it had Netscape continues to distribute copies of invested considerable resources in improving Navigator in droves—primarily by allowing a product that, at the time of its initial intro- consumers to download the program from its duction, was widely seen as inferior to that of Website—despite Microsoft’s attempts to its rival. In particular, “from 1995 onward, limit its access to important distribution chan- Microsoft spent more than $100 million each nels. Moreover, although Netscape has been year developing Internet Explorer. The firms forced by Microsofts policy of giving Inter- management gradually increased the number net Explorer away for free to also charge a of developers working on Internet Explorer zero price for Navigator—the same strategy from five or six in early 1995 to more than one Netscape had employed initially to build a thousand in 1999.10 dominant market share in browsing soft- When Internet Explorer 4.0 was released in ware—Netscape’s continued economic viabil- late 1997, Microsoft had caught up technologi- ity was assured when, while the trial was still cally with Netscape, and so, explanations for underway, America Online agreed to purchase Internet Explorer’s success based on the com- the company in a stock transaction worth $10 pany’s restrictive contractual practices cannot billion. be disentangled easily from those based on In sum, if Microsoft’s contractual practices technological improvements. There is no doubt, were intended predatorily to drive Netscape however, that Netscape’s own business deci- from the market, thereby preserving the appli- sions contributed to its loss of market share. cations barrier to entry, that strategy failed In September 1996, Microsoft announced utterly, as economic theory would predict.!3 A the introduction of the “Internet Explorer plausible theory of predation requires a rea- ===== PAGE 28 ===== 28 IDEAS ON LIBERTY e APRIL 2000 sonable expectation that the predator, once market because his product has achieved the successful in eliminating the competition, status of an industry standard. The market for will be able to recoup his losses. The ability to ‘Web browsers is a case in point: Netscape’s 80 recoup, in turn, presupposes that at some percent market share evidently did not deter point in the future the predator will raise his Microsoft’s successful entry. The growing price above competitive levels. Sustaining an popularity of Linux, a cross-platform operat- above-competitive price in the future requires ing system freely available for download, the existence of barriers to entry that prevent casts further doubt on the proposition that rivals from undercutting that price, thereby entry is hopelessly barred.16 eroding the above-normal profits that make the whole sequence of events pay off. Microsoft’s Defense The difficulty of recouping predatory loss- iB d es in general, a point that the Supreme Court an yon has recognized increasingly in recent years, If Judge Jackson’s prose reads like a carbon is even more manifest in the case at hand. copy of the government’s proposed findings of Because no competitor in the “browser wars” fact, Microsoft has no one but itself to blame. has been eliminated, any attempt on Its defense team apparently adopted a strategy Microsoft’s part to raise the price of Internet of retaining economists who had spent Explorer would quickly be defeated. A zero their careers defending antitrust in the hope price for browsers is more plausibly seen, not that, if they questioned the charges against as predatory, but as competitive. This conclu- Microsoft, their credibility would be sion follows by recognizing that, like the enhanced. That strategy backfired. Forced on newspaper business, money is to be made by the stand to explain at great length why their charging advertisers for the right to access opinions in the case at hand were so inconsis- consumers rather than by charging consumers tent with their previous writings, the sub- for the right to access the Web. stance of their testimony got lost. If it were shown to be sound, of course, Microsoft’s leading expert witness was Judge Jackson’s finding of an applications MIT Professor Richard Schmalensee, the barrier to entry might provide the basis for a architect of the infamous “shared monopoly” predatory scenario underlying Microsoft’s case brought by the FTC against the, nation’s actions. But a careful study of software mar- leading producers of ready-to-eat breakfast kets by economists Stan Liebowitz and cereals in the early 1970s.!17 That case, which Stephen Margolis raises doubts about the the commission ultimately dismissed “with existence of “network externalities” said to prejudice,” was based on the novel and untest- raise barriers to the entry of new competi- ed theory that Kellogg, General Foods, and tors.15 (A “network good,” such as a tele- General Mills had deterred the entry of new phone, a fax machine, or a computer operat- rivals by adopting a strategy of “brand prolif- ing system, is one whose value increases with eration,” pre-empting scarce grocery store the number of units in use.) Examining the shelf space by taking advantage of every evolution of market shares of the sellers of a opportunity to introduce new cereal brands variety of computer software applications, and, hence, making it more difficult for new they report three key findings. First, entrants to fill niches in the market. On record Microsoft’s software applications begin to in support of the notion that it is somehow capture significant shares of total sales only less desirable to have consumers’ wants satis- when they garner favorable quality ratings by fied by existing firms than by new entrants, independent experts. Second, successful entry Professor Schamlensee’s testimony was by Microsoft into software markets brings immediately suspect. Not surprisingly, except prices down. Third, there is no evidence of a to disparage data relied on by him to calculate “tipping point”—a threshold market share usage shares for different brands of Web- that, when reached, allows the dominant sell- browsing software, Judge Jackson ignored er quickly to gain control of the balance ofthe Microsoft’s experts completely. ===== PAGE 29 ===== BARBARIANS AT BILL GATES 29 The findings of fact leave little room for It is common knowledge that Netscape, doubting that Microsoft will be found guilty Sun Microsystems, and other interested par- of using its monopoly of Intel-compatible PC ties lobbied hard to convince the government operating systems unlawfully. Moreover, to battle Microsoft on their behalf, thereby Judge Jackson provides some fairly clear sig- shifting the cost of litigation from sharehold- nals about the remedies he has in mind. For ers to taxpayers. In the beginning, Microsoft one, despite the D.C. Circuit’s 1998 decision tried to ignore the powerful political forces to the contrary, he seems to think that there is arrayed against it, hunkering down in Red- “no technical justification™'8 for Microsoft's mond, Washington, to focus on its core busi- refusal “to supply a version of Windows 98 nesses. Guess which side prevailed. The that does not provide the ability to browse the moral of the story is that antitrust is not about web, to which users could add a browser of market efficiency or the welfare of con- their choice.”’!® The findings of fact also hint sumers. It is about interest-group politics.2! at remedies aimed at undoing Microsoft's As such, antitrust is no different from any restrictions on the ability of computer manu- other modern public policy process in which facturers to modify the Windows boot the police powers of the state can be mobi- sequence and permitting Internet access lized selectively to benefit one group at the providers to promote and distribute expense of others. Netscape’s Navigator.20 Observers have spec- Microsoft from imposing certain restrictive “Findings.” far as to order the company to separate ts Microsoft?” National Economic Research Associates, September op erating system business from Its software 5 Hy Naan Jackson does say, however, that including the Mac OS applications or declare the operating SySt€m in the relevant market would not lead him to alter his conclusions. MN : ig, 2? : :_ Findings, p. 21. an “essential facility,” granting access to Win 4. See Richard B. McKenzie and William F. Shughart II, “Is dows proprietary code to all who wish it. Microsoft a Monopolist?,” Independent Review, Fall 1998, pp. prop 165-97 Remedies are always an afterthought in 5. Findings, p. 252. antitrust proceedings, and the difficulties of 6. Thid., p. 139. crafting one in this case that will not interfere ie p. 18 unduly with Microsoft’s ability to innovate are 9. Thid., p. 372. ; Ce 10. Thid., p. 135. great. Judge Jackson's unexpected appoint 11. Ibid. pb. 249. ment of Judge Richard Posner to have a go at 12. Ibid., pp. 250-51. Tati 13. Recent evidence casts even more doubt on the logic underly- mediating a settlement acceptable to ing theories of predation. See John R. Lott, Jr., Are Predatory Com- Microsoft and the Department of Justice sug- mitments Credible? Who Should the Courts Believe? (Chicago: Uni- gests that neither Jackson nor the government bi boy a von Brooke Group Lid. v. Brown & Williamson has a clear idea about what is to be done. The Tobacco Corp., 113 St. 2578 (1993) (predatory pricing is “rarely real tragedy is that Judge Jackson's findings ~"eXGENT TEL MEIC. oi, Winners, Losers of fact will provide Microsoft’s rivals with a and Microsofi: Competition and Antitrust in High Technology (Oak- : : land, Calif : Independent Institute, 1999). legal basis to sue for compensation for the 16. As the trial was coming to a close, Red Hat, a major distrib- damages caused by its allegedly unlawful utor of Linux, went public. The company had a market value of $8 behavior. Two such claims have already been pilion iy of September 10, 1999. Evans, “Antitrust on Intemet filed. These follow-on private antitrust suits 17. In the Matter of Kellogg Co. et al., FTC Docket No. 8883 : : fr 1144 : (1972). The theory underpinning the case is laid out in Richard L. promise to entangle Microsoft In litigation for Schmalensee, “Entry Deterrence in the Ready-to-Eat Cereal Indus- years to come, distracting Bill Gates from try,” Bell Journal of Economics and Management Science, Autumn . . _ 1978, pp. 305-27. doing what he does best, namely putting use 1% Findings, p. 177. ful new products in the hands of consumers. 19. Ibid., p. 187. : _ 20. Tbid., pp. 218, 247. Aided and abetted by the Department of Jus 21. See, for example, William F. Shughart II, Antitrust Policy and tice, that is what Microsoft’s rivals wanted all interest-Group Politics (New York: Quorum, 1990) and Fred S. McChesney and William F. Shughart I1, eds., The Causes and Con- along and, unfortunately, they seem to have sequences of Antitrust: The Public-Choice Perspective (Chicago: won the first battle. University of Chicago Press, 1995). ===== PAGE 30 ===== Potomac Principles by Doug Bandow IDEAS ON IBERTY ApPRIL 2000 Cut Taxes, Not the Debt / ’ ast fall’s standoff over the budget between The rise in taxes has been particularly sharp the Republican Congress and Democratic during the Bush-Clinton administrations. President generated a curious by-product: Because of these spendthrifts, every Ameri- more money to reduce the national debt. can pays an extra $2,000 to accommodate the Some analysts want to devote future surplus- steadily expanding federal behemoth. es to the same purpose, perhaps eventually Of course, increasing incomes in a boom- paying off the entire $5.6 trillion national ing economy have helped mask the impact of debt. higher taxes. But that doesn’t make a serious Eliminating not only the budget deficit but tax cut any less imperative. also the national debt is obviously a worthy Reducing the tax burden would strengthen goal. Interest payments were the second the economy ata time when some analysts fear largest federal expenditure in 1999. an approaching slowdown. With the Federal Although low interest rates have been Reserve hinting at higher interest rates and reducing this burden, it will remain above pessimists predicting the imminent arrival of $250 billion annually despite expected sur- the stock market bear, let Americans keep pluses throughout the next decade. We all will more of their incomes. Economists Aldona be paying the price of Washington’s past and Gary Robbins figure that even last year’s profligacy for years to come. modest GOP tax cut proposal would have gen- However, it is more important to provide erated enough new economic activity to cover tax relief to Americans who bear this cost. nearly a third of the lost revenue. According to the Tax Foundation, the per Cutting taxes would also encourage private capita expense of taxes this year is $10,298; saving. As the Robbinses observed: “Because the burden is even heavier in high-tax states the increased federal tax burden (running at such as Connecticut, New Jersey, and New 20.8 percent of GDP for the current fiscal York. year) imposes high marginal rates which dis- This expenditure dwarfs everything else courage saving and investment, the current in people’s budgets: shelter ($5,833), health policy of running surpluses will result in care ($3,829), food ($2,693), transportation less—not more—U.S. saving.” ($2,568), recreation ($1,922), and clothing The biggest economic bang for the buck ($1,404). If you separate federal ($7,026) and would come from reducing capital gains tax local (83,272) levies, taxes still top the list, rates, liberalizing IRA and pension rules, and while taking fourth place as well! adjusting other business levies. However, Doug Bandow, a nationally syndicated columnist, is reducing tax rates on every working person 15 a senior fellow at the Cato Institute and the author even more important because it is the right and editor of several books, including The Politics of thing to do. People are paying too much for Envy. too little. The budget is larded with immoral 30 ===== PAGE 31 ===== 31 income transfers, pork, unnecessary pro- the bills were enacted the jump would be $1.4 grams, special-interest subsidies, and blatant trillion, nearly doubling the federal budget. waste. Washington politicians insult people’s Writes McCluskey: “for a sizeable number of intelligence when claiming there’s little or no Members, belonging to the first Congress money to give back. since 1970 that inherited a budget surplus has It 1s particularly important that any tax cut served as a green light to spend the entire be across-the-board. Even Republicans often windfall on new programs.” fall prey to demagoguery about not giving tax While it is good that legislators now gener- cuts to “the rich.” Yet the latest analysis of the ally eschew huge spending initiatives, their Tax Foundation shows that the top 5 percent reliance on what McCluskey terms “policy of taxpayers account for over half of income incrementalism” is probably more insidious. tax revenues, up sharply from a decade ago. It is far easier for politicians to approve a col- The top 1 percent bear one-third of the bur- lection of small outlay increases than massive den. The top 50 percent pay 96 percent of all new programs. Indeed, Congress is steadily income tax revenues. moving U.S. health care toward President Clinton’s original goal of nationalization through an accumulation of small steps. The best way to meet the spendthrift tempta- However, opponents of tax cuts now rou- tion is to eliminate the surplus by cutting taxes. tinely play the Social Security card. They say In any case, the debt has nothing to do with we should pay down the national debt to save Social Security. Because of the demographic Social Security. Having spent years advocat- tsunami—more elderly, and more of them liv- ing a policy of tax, borrow, and spend, they ing longer—by around 2014 the system will now denounce the debt they did so much to be spending more than it takes in. accumulate. Cutting the debt won’t change that. Social Indeed, the surpluses only invite Congress Security is an unsustainable Ponzi scheme to increase outlays, which it has been doing. that is breaking down as ever more retirees During the budget fight at the end of last year, depend on ever fewer workers. both major parties tossed money out the Trea- Of course, lower interest payments would sury door with wild abandon. The GOP was make it easier to shift general revenues to often worse, determined to prove that it was as Social Security. But cutting the nonessential “compassionate” as was the President. The programs that dominate the budget would Republican Congress wouldn’t even live up to achieve the same end. And those programs its meaningless promise not to spend the should be eliminated in any case. Social Security surplus. However, the resulting savings shouldn’t be Unfortunately, reports Tom McCluskey, a poured into Social Security’s bottomless pit. budget analyst with the National Taxpayers By 2070 the annual flood of red ink will be $7 Union Foundation, “Although the new battle trillion. In fact, between 2010 and 2070 the cry to ‘Save Social Security first’ has forced system is committed to paying out $140 tril- many lawmakers to retreat from backing large lion more than it is projected to take in. budget bills, the data show that a sizeable con- Social Security can be “fixed” only by tingent in Congress has continued to advance allowing workers to opt out in favor of private spending increases.” Although net spending investment plans. People would collect better agendas were mercifully down (while the benefits while dropping their claim to a tax- number of spending bills was up) in the 106th paid retirement. Denouncing Debt Congress, compared to the 105th, legislators The federal government expects to collect were still willing to waste taxpayers’ money $22.8 trillion in revenue over the next decade. on all manner of parochial projects. All this money, and not just the surplus, McCluskey found that 98 members of the belongs to the taxpayers, not to the govern- House had net spending agendas that would ment. Washington should leave it with its entirely consume the on-budget surplus; if all rightful owners. OJ ===== PAGE 32 ===== IDEAS ON [IBERTY APRIL 2000 Economic Illiteracy by Paul A. Cleveland uring the fall semester, the first examina- was not to be. Only half the 50 students tion given to my principles-of-economics answered the question more or less correctly. students included this: The other half espoused a kind of incoherent Marxist dogma that would have suited the Discuss the following statement: When an taste of not only Karl himself, but of Lenin, economic function is turned over to the Stalin, and Mao as well. government, social cooperation invariably replaces self-interest as the motivation for Know Better The proper answer to the question, of course, is that the statement is “false” and that To put the situation into better perspective redistributing control over property cannot it is important to understand my institution change the underlying nature of human and the kind of students I teach. Birmingham beings. In truth, “self-interest” remains an Southern is a small, private liberal arts college adequate term for describing human behavior, that has gained a reasonable national reputa- and it applies as much to government officials tion for quality education. In Alabama the as it does to anyone else. If the demise of the college is considered the premiere school of Soviet system taught us anything, it is that higher learning of this type. As such, it communism will not reconstruct humanity attracts students of high caliber. Our students and or usher in the “new man” who suddenly generally go on to graduate and professional becomes only concerned about others. schools and often do well in their careers. In I had chosen the question because one of addition to this, because it is a private college, the six chapters of our text covered on the the students are generally from middle-class exam dealt with the field of Public Choice, or upper-middle-class backgrounds. There- which analyzes these matters. I had also spent fore, the majority would have received their a significant amount of time in class dis- lower education in some of the better public cussing the essence of human action. I schools in the state, while a minority would thought that the question was clear cut, and so have had private school education. I naively assumed that the majority of the Given all this, it might be curious that my class would easily answer it correctly. That students did so poorly with the question. More surprising perhaps is that among the Paul Cleveland is an associate professor of econom- students who answered the question correctly, ics at Birmingham Southern College in Birmingham, ~tWO Were from other countries, the former Alabama. Yugoslavia and China. It is interesting that 32 ===== PAGE 33 ===== 33 these two young women who have firsthand The second conclusion is that the govern- knowledge of government control over the ments socialized educational system has entire economy were able to discern the falsi- done an excellent job of propagandizing stu- ty of the statement I presented, while those dents into accepting socialistic dogma. reared in some of the best circumstances the Throughout the classroom presentations there United States has to offer could not. was little debate and almost no discussion that As I pondered this, I came to a few con- might have allowed us to dispense with the clusions. First, there is a real problem in edu- myths of socialism. Yet it would appear that cation today. Students seem unwilling to for the students none was necessary, for they accept a position purely on the basis of ratio- felt no need to actually think about the issues nal argument. My knowledge of political themselves. economy and the evidence 1 provided in class My final conclusion is that there is much were not enough to persuade my students that work to be done in this country to teach peo- human nature does not change because the ple the nature and value of human freedom government takes over something. At least and private initiative. I am determined to step half were apparently unwilling to relinquish up my own efforts to engage my students in their socialistic views despite the facts and meaningful discourse so that they might see arguments I had presented. This reminds me the falsehoods of socialism. Perhaps I am too of Ben Franklins statement, “Experience pessimistic, for half the class did get the ques- keeps a dear school, but the fool will learn in tion right. But as a teacher, I am compelled to no other.” believe that that success rate is too low. [] Clichés of Politics > | Mark Spangler, editor | Ar 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- 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 Clichée! 324 pages, paperback $3-85 on sale for $6.95 Flease send check or money order to: FEE, 30 South Broadway, Irvington-on-Hudson, NY 10533 Credit card orders: 1-600-452-3516 ===== PAGE 34 ===== Peripatetics by Sheldon Richman IDEAS ON [IBERTY ApPriL 2000 The Price of Resistance onsider this remarkable sentence in the ernment would become the buyer of the elder- New York Times last winter: “Brandish- ly’s prescription drugs. Anyone who thinks ing new data showing that the drug industry that wouldn’t give the government the power earns higher profits and pays lower taxes than to set prices hasn’t thought about the matter. most other industries, White House officials The feds may not control prices immediately, say drug companies may bring price controls but when the inevitable price spiral sets in, as on themselves if they continue to resist Presi- the elderly act as if the drugs are free (or dent Clinton’s plan to have Medicare provide cheap), price controls will be the next stage. pharmaceutical benefits.” This was said to be Thats what happened with Medicare. At first the “personal view” of Daniel N. Mendelson, the government did not set prices. The system associate director of President Clintons operated on a cost-plus basis. But when prices Office of Management and Budget. Yet soared, the government started a series of Mendelson was speaking for the President. price-control schemes. It’s one reason that What does it mean to say that the pharma- doctors are increasingly reluctant to see ceutical companies “resist” President Clin- Medicare patients. ton’s plan? If the companies have launched a Economic theory and at least 4,000 years of guerrilla war against the government, the experience with price ceilings lead to one newspapers have missed the story. So I inescapable conclusion: they create shortages. presume the resistance consists of speech, To understand this, we have to begin with the printed materials, and lobbying—all protect- principle that prices in a market are not the ed by the U.S. Constitution (not to mention result of businessmen’s kindness or callous- the philosophy of natural rights) at last check. ness. While capitalists own their means of The administration, then, is saying that ifthe production in the moral-legal sense, econom- companies continue peacefully to oppose its ically speaking they hold them at the pleasure plan, they will lose their freedom to set the of consumers. Although business owners typ- prices of their products. That’s a tough choice: ically seek to maximize their revenues, and the freedom to speak in defense of their free- set prices accordingly, their decisions are sub- dom or the freedom to control their property. ject to the preferences, needs, tastes, and Unfortunately, the companies dropped their whims of potential buyers, who are constant- opposition. Where was the bellow of protest ly being wooed by sellers of competing prod- from the “civil libertarians”? ucts. (See my article “Captain Consumer” in Ironically, the plan being resisted would The Freeman, February 1999.) bring price controls anyway. Under the pro- Thus entrepreneurs are limited by the com- posed Medicare expansion, the federal gov- petitive process in what they can charge for their products. If the market price for a prod- Sheldon Richman is editor of 1deas on Liberty. uct is too low to enable an entrepreneur to bid 34 ===== PAGE 35 ===== 35 the necessary scarce resources (labor, raw ly increase the cost of bringing drugs to mar- materials, and so on) away from other uses, ket. Naturally, the companies try to recoup that’s a signal that consumers want the that investment. A genuine concern with the resources devoted to other purposes. But if high price of medicine would begin with an consumers are willing to pay a price that cov- examination of the FDA’s malign effect on the ers the entrepreneur’s expenses and yields an marketplace. attractive profit, they are signaling that the But, someone will say, people need medi- project is worthwhile compared to alterna- cine. Unlike food, clothing, and shelter? But tives. Profits are the rewards the entrepreneur even if medicine were unique, it would not reaps by noticing hitherto unattended-to con- change the fact that price ceilings make things sumer needs: the higher the profits, the bigger less, not more, accessible. Motives notwith- the previous oversight. standing, the laws of economics can’t be If the government imposes a maximum repealed. price on a product below what the market It is particularly outrageous for the Clinton would set, producers will make less of it or administration to hold the pharmaceutical none at all. Moreover, the quality will suffer, industry’s high profits and low taxes against it. as producers minimize expenses beyond the As noted, if profits are high, it is because the point they would have minimized them in a companies are constantly addressing urgent free market. (Milton Friedman used to say consumer needs and cutting costs. (I leave that under price controls, there’s more air in aside the issue of patents and the returns they the candy bars.) And entrepreneurs will be make possible. Suffice it to say that the discouraged from looking for new profit administration favors intellectual property opportunities in fields where prices are sub- rights in other contexts.) The industry’s taxes ject to government control. Businessmen are lower than in other industries because the will surely not be encouraged to take risks tax rules allow credits for research and for developing cutting-edge products like exotic taxes paid to foreign governments. If the medicines. authorities think it is unfair that the industry This is not “only a theory.” Anyone who pays less in taxes than other industries do, let lived through the energy shortages of the them lower the taxes of the others. Taxes stifle 1970s has firsthand experience of how a prod- production. uct can disappear when government refuses to If the government is really concerned about let the market set prices. the price of medical care, it should look to its own complex of policies that stimulate Market for Medicine demand and reduce supply. Medicare is a prime culprit but not the only one. The tax- The market for prescription medicines is induced system of employer-based health intrinsically no different from other markets. insurance seriously distorts the medical mar- Entrepreneurs strive for profits by making ketplace by hiding prices from consumers. investments to develop products that con- Licensure and control over medical schools sumers believe will satisfy a need. This is restrict the supply of medical services. complicated by government prescription reg- We shouldn’t overlook the possibility that ulations—a paternalist intervention that price controls on medicine may be intended to should be abolished—but the economics are disrupt the pharmaceutical industry and offer basically the same. (The President’s wish to the government new opportunities to inter- crack down on Internet sales of medicine vene. Ever since the Clinton health plan was shows how technology can help us to ignore turned back, advocates of socialized medicine government dinosaurs.) There is another com- have pursued incremental socialization, plication, however. The Food and Drug knowing that the harm of each measure would Administration’s bureaucratic demands great- provide grounds for the next increment. [1] ===== PAGE 36 ===== IDE AS @ Economics ONIBERTY Economic Growth and Freedom in the Coming Millennium by Christopher Lingle here are many reasons to believe that the Skeptics should note that globalization is a year 2000 will usher in a period of rising phenomenon that empowers people by giving living standards and greater overall freedom. them another voice. In some settings a vote is This positive outlook is supported by the of little use, especially in one-party states. For experience of emerging economies in Asia some there is the option to migrate, or “vote and Latin America, as well as the transition with their feet.” But only the best educated, the economies escaping from the disasters of healthy, or the wealthy are normally able to authoritarian socialism and communism. emigrate. With fully liberalized financial sys- What has been learned is that globalization tems, all citizens can “vote” by moving their has been the most effective liberalizing savings or capital assets into the most attrac- process in the history of mankind. Such a tive currency or country. As such, global capi- claim might cause Karl Marx to roll over in tal provides another way for citizens to com- his grave and induce apoplexy in his diehard municate their preferences to their leaders. disciples. But history speaks for itself. Inter- But some governments, such as in China, national capital flows and greater trade inte- seek to introduce market reforms while hold- gration over the past three decades have lifted ing back political reforms. Time will tell nearly half a billion people out of poverty, whether this is a disastrous course. There are mostly in Asia. those who insist that China’s approach to Global trade and capital flows are forcing reform has been more successful than Rus- governments to be more accountable to their sia’s. But this assessment is likely to be people, who wish nothing more than to be reversed within a decade or perhaps less. able to prosper. Where markets are most open, Russia can be expected to make consider- the productive instincts of their people have ably more progress toward prosperity while been unleashed, allowing entrepreneurs to China begins to lag behind. This is because create wealth and new jobs. Despotic govern- leaders in Moscow have reached a point ments in Indonesia and much of Latin Ameri- where they must begin providing institutional ca have given way to more democratic leader- structures to pull out of a deep economic ship that is embracing the formula of market malaise. To become integrated into the global €CoNnomics. economy Russia must introduce (at last!) pri- - vate property rights and a system of law to Christopher Lingle is an independent corporate enforce them. Abiding by the rule of law consultant and visiting professor at Universi- . ITER ap under the eyes of an independent judiciar dad Francisco Marroquin in Guatemala. He is y p ] y the author of The Rise and Decline of the Asian will provide support for a “contract culture” Century (4sia 2000, 1998). His e-mail address is that is the basis of modern market-based clingle@ufm.edu.gt. economies. 36 ===== PAGE 37 ===== 37 In the case of China, there are two rate, watch Cuba become the Hong Kong of entrenched “institutions”—the People’s Lib- the Caribbean when the chains of Castro’ eration Army and the Communist Party—and communism are cast off!) An increasingly these are unlikely to give up their obstructive open global trading system will allow more powers. China’s biggest problems are the rapid technology transfers while free capital entrenched inefficiencies and distortions movements will aid in economic develop- introduced by central planning. ment. As the incomes of the emerging economies rise, they will become a source of . . export income for more developed economies Unrest in China in North America and Europe. At the same Heavy industry in China’s economy is time, they will be able to increase their own mostly state-owned and highly inefficient. savings and provide a domestic source of cap- These factories receive funds from state ital that will also increase efficiency of inter- banks that are disguised as loans. As a result, national markets, driving down the cost of nonperforming loans are at least one-fourth of capital. all loans. If this continues, there will be a While there will be adjustment costs, there banking crisis and social unrest. However, if will be considerably more benefits accruing to the loans cease, there will be a social crisis most people in most countries. Most of the from the massive numbers of workers who losers will be workers or owners of previous- will be made redundant—and social unrest. ly protected industries whose privileges cost Avenues of escape from impending social tur- consumers in the form of higher prices and moil have been cut off by a decrease in export robbed jobs from newcomers to the labor growth, declining inflows of foreign capital, market. It is only just that the few who and a slowdown in economic growth. imposed so many costs on so many should be Although China’s people are likely to suf- the ones to bear the greatest burden. fer, the expansion of economic freedom as the A lesson of globalization is that protection- basis of promoting political freedom else- ism is wrong not so much for the economic where will continue. As there is a shift from distortions and technical inefficiencies that it centralized or authoritarian economies toward has always caused. Rather, protections for free markets, individuals will react to chang- domestic industries are immoral because they ing incentives to work and earn profits. These steal job opportunities from the young by growing private initiatives will stimulate eco- reducing growth potential and innovation. nomic growth and raise living standards. Future generations will have more hope if Many emerging economies offer relatively there are fewer restrictions on trade and capi- low wages relative to education levels as well tal flows, for that is what will create more as a strong work ethic. (With its high literacy opportunities in their future. [J 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 38 ===== IDEAS ON [IBERTY Drifting In and Out of Socialism: The Case of Ireland by James L. Payne ational economic policy is generally toward the principles of the free market. But thought to be set through an intellectual this shift has not been the result of any party, battle over social philosophy. Collectivists, faction, or pressure group. with their ideology of greater government So far as I could detect in weeks of search- control, oppose individualists, with an equal- ing, there are no prominent Irish think tanks ly comprehensive theory of limited govern- espousing the cause of limited government. ment—and a nation’s level of taxation, regu- There are no politicians with an underlying lation, and government ownership is assumed skepticism of government action, no talk- to reflect the relative strength of these con- radio hosts critical of big government, no one tending forces. who questions government welfare programs This model has tended to fit England and on principle. Names like Hayek and Mises, or the United States, which have had a recogniz- for that matter, Jefferson, Thoreau, and Paine, able “left” and “right” in their politics. In are unknown in Ireland. Practically everyone most countries of the world, however, ideolo- accepts the general notion that government gy does not play such a significant role. Politi- should be comprehensively involved in cians and parties are pragmatic, and govern- national life. ment interventions have been adopted not to Yet despite this overwhelming pro- implement an overall philosophy, but through government sentiment, and despite the lack of a day-to-day process of accommodation. And anti-government voices, there is a clear drift the movement in the other direction, toward against government ownership and control in less state control, is equally pragmatic. The Ireland! This remarkable tendency cries out politicians make what they think are reason- for explanation, especially since it is not able ad hoc adjustments, without reference to unique. Many countries with a strongly left- theory or philosophy. leaning public opinion are nevertheless mov- Ireland is a good example of a country with ing away from systems of government con- this kind of non-ideological politics. It has not trol. They haven’t reached anything like a had a meaningful left and right. Over the past genuine limited government, of course, yet century it has adopted socialist policies not the trend is significant. because parties and leaders were convinced socialists (most of them were said to be con- The Potato Famine and the servatives™), but because such policies were . s superficially appealing. In recent years, it has Guilt of Empire moved somewhat away from these policies and The roots of pro-government sentiment in Contributing editor James Payne recently returned Ireland reach back many centuries. As an from a stay in Ireland. English colony from the days of Henry VIII, 38 ===== PAGE 39 ===== 39 Ireland did not have the opportunity to devel- number of government firms turned over to op strong traditions of self-government and private ownership, including steel, tele- self-reliance. The tendency was to look to the phones, and the airline company (Aer Lin- colonial government in England to solve gus). Competition between government firms problems. The potato blight and famine of and private ones has been introduced in a 1845-49 greatly exacerbated that tendency. number of sectors, including banking, parcel Although England did send considerable food delivery, bus transportation, radio, and televi- relief, it was not enough to prevent wide- sion. Overall, the relative size of the govern- spread suffering. For the rest of the century, ment sector has declined somewhat from its English elites felt guilty about not having peak about 20 years ago. In 1980, government done enough for Ireland, and they instituted expenditures were 50.5 percent of GDP; in numerous relief and assistance schemes that, 1997 they had fallen to 40.3 percent. In the in their own country, would have been seen as period 1988-98, as a result of privatization unacceptably intrusive. Their policies includ- and cutbacks in subsidies, employment in ed expropriations of lands (which were then government commercial entities fell by 19.6 practically given away to Irish tenants), and percent. the development of numerous systems of pub- lic relief and subsidies. The result was that the . . Irish developed, as historian Mary Daly puts The Rise of Analysis it, “a strong dependence on government assis- One important explanation for this move- tance for everything from famine relief to ment away from government control has been land reform.” the rise of economic measurement and calcu- After independence in 1921, the new Irish lation. Cost-benefit analysis is the nemesis of government took the same paternalistic role, socialism. Any number of government especially under the leadership of Eamon de schemes can look attractive when you don’t Valera in the period 1932-48. Motivated by know the numbers behind them. At first nationalistic and anti-British sentiments, de glance, a government firm like Ireland’s Bord Valera tried to create a self-sufficient Ireland. na Mona—the peat authority—looks like a To that end he jacked up protective tariffs and wise and humane undertaking. It digs up peat, prohibited foreign ownership of industry. which is used to warm homes and generate With investors scared off, de Valera and his electricity, and at the same time gives work to Fianna Fail party began creating government people in areas of high unemployment. It is firms to fill apparent gaps in the economy. only after you call in the fellows with the Later, as misguided economic policies put green eyeshades that you discover the waste increasing pressure on private firms, the gov- and harm of such entities. By adding up the ernment stepped in to take them over when (generally unnoticed) costs, they reveal that they went bankrupt. By the 1970s the govern- Bord na Mona can survive only through a ment owned some 100 entities, including a huge tax subsidy. If that same amount of steel company, a peat-processing firm, banks, money were spent on cheap coal and more and the telephone service. useful employment, Ireland would have more Undoing this centralized, government- jobs and cheaper electricity. directed economy has been a slow, halting It is only recently that Ireland has developed process, but the overall trend is now clear. The capabilities to analyze and evaluate govern- first steps of liberalization were taken in the ment programs. Perhaps the first unit to work 1960s when tariffs were sharply reduced and in this field was the Irish Economic and Social the prohibitions against foreign firms were Research Institute, a nonprofit think tank start- lifted. In fact, foreign firms were given tax ed in 1960 with help from the Ford Founda- breaks to set up in Ireland. Crushing tax bur- tion. In 1973 the government set up its own dens were somewhat reduced in the 1980s, evaluation unit, the National Economic and when the top income tax rate was lowered Social Council, while other analytical units from 60 to 48 percent. The 1990s have seen a have sprung up in the Department of Finance, ===== PAGE 40 ===== 40 IDEAS ON LIBERTY ¢ APRIL 2000 Since 1961, there has been a 50 percent reduction of families living in government housing, and today over 80 percent of Irish housing is owner-occupied. the Central Bank, and in connection with the its houses away to the tenants! The findings universities. The agencies of the European prompted authorities—always hard-pressed Union, to which Ireland belongs, constitute for cash—to institute programs to enable ten- another source of economic analysis. None of ants to buy their dwellings on highly favor- these entities can be classified as ideologically able terms (usually at 50 percent of their mar- favoring free markets, but their studies of the ket value). The overall result has been a major costs and inefficiencies of government enter- decrease in government involvement in hous- prises have had a strong effect in nudging pol- ing. Since 1961, there has been a 50 percent icymakers toward market approaches. reduction of families living in government In housing, for example, the introduction of housing, and today over 80 percent of Irish accounting methods and cost-benefit analysis housing is owner-occupied. This is just one of has revolutionized government policy. Earlier, many instances where the new awareness of local authorities built and rented housing sim- economic realities has led politicians toward ply as one of those nice things that govern- private solutions. ment could do to help people. Then analysts began to make economic and budgetary stud- ies of housing programs. These revealed that maintenance and management costs of gov- The second force that seems to be pushing ernment housing were so high that the gov- Irish policymakers away from government ernment would come out ahead if it just gave alternatives is the desire to avoid conflict. How Happy a Family? ll ga ===== PAGE 41 ===== DRIFTING IN AND OUT OF SOCIALISM: THE CASE OF IRELAND 41 The doctrines of collectivism tend to see a of the housing business. Ireland saw a great nation as one big happy family, with the gov- deal of tenant-government friction in state ernment acting as the father, taking “from housing units: angry demonstrations, as well each according to ability,” and giving “to each as a prolonged strike by the National Associ- according to need.” Unfortunately, this vision ation of Tenants’ Organizations in 1973. The contains two fallacies. First, it assumes that politicians’ desire to avoid this animosity was, the citizen-children will respect the government- I believe, another important motive for priva- father who is doling out the benefits. Today, tizing government housing. this condition of public respect is not met in In October 1999, the country saw more any country. In Ireland, when people are social conflict caused by economic centraliza- asked what they think about their politicians, tion. The occasion was perhaps a welfare most wriggle their noses and call them “gang- state’s worst nightmare: a nationwide strike of sters”—not violent gangsters, they hasten to nurses. After all, when government takes over point out, but thieving ones. (A recent string the health-care system, as it largely has in Ire- of corruption scandals involving the highest land, it does so in the name of guaranteeing officials has strongly reinforced this view.) medical care for everyone. When the nurses Hence, people do not believe that the officials walked out of the government hospitals who determine benefits act with justice or around the country, they left unattended chil- integrity. No matter what the policy decision dren crying in the wards and cancer patients is, it 1s viewed with cynicism and hostility. without their chemotherapy. Parents, doctors, The second error in the “one big happy and hospital administrators struggled to fill family” view is that it overlooks the tendency the gaps but with only partial success. In one of human beings to squabble about what they psychiatric ward, an unattended young need and deserve. Even in families, children woman committed suicide. make resentful comparisons: “Johnny’s bal- The public sided overwhelmingly with the loon is bigger than mine”; “Ellen gets to stay nurses and against the government, which was up later than I do”; and so on. In a national criticized not only for underpaying the nurses, community where people are free to form but also for underfunding the entire health- pressure groups and to air and inflame griev- care system. (One consequence of the funding ances, social spatting becomes a major prob- shortfall is that waiting times for many oper- lem. When you make government the arbiter ations are over two years.) The cabinet mem- of benefits and privileges, the politicians and bers, for their part, had no desire to appear administrators become the “bad guys” who stingy and certainly didn’t want the nurses to stand between each group and what it believes strike. But they were constrained by the prob- it deserves. Naturally, this is a role they donot lem of “tit for tat” wage demands. As the enjoy, and therefore they seek ways to escape employer of many other groups of workers, it. One solution is to turn the problem of decid- the government had negotiated a general ing who gets what over to the free market. wage-restraint package with all of them. If it Consider government housing projects. broke the agreement and boosted the pay of According to socialist ideology, the occupants the nurses, then, as one columnist explained, are supposed to be grateful and content. But “everyone else will be looking for more. . . . real-world beneficiaries turn out to be grasp- Paramedics, junior doctors, teachers, the ing and impatient. They are upset by inade- army, and the guardai [police] have all been quate facilities and irritated by poor mainte- circling this dispute waiting to pounce.” nance. Furthermore, they generally think that The position of paramedics was an espe- their rents, even though subsidized by taxpay- cially sore point with the nurses. The nurses ers, are too high. Eventually, politicians who believed they should be given the same pay thought they would earn adulation and votes and benefits because they had the same quali- by providing public housing realize this fications and responsibility. “We’ve been involvement is making them objects of abuse. doormats for too long,” one nurse told a They begin to see the wisdom of moving out reporter. “Now it’s time we got fair recogni- ===== PAGE 42 ===== 42 IDEAS ON LIBERTY e APRIL 2000 tion for our work.” But the paramedics, witha (with 16 percent of all beds) remained open union even bigger than that of the nurses, had during the strike. Some said this was unfair, had a strike in 1997 to boost their compensa- that nurses should have struck these hospitals tion above that of nurses. It was clear that they too, so their patients would suffer equally would not allow nurses to catch up. with patients in the government hospitals. But In the end, the strike hurt everyone. After since these hospitals were willing to pay nurs- eight days, the nurses grudgingly went back es more, the nurses could hardly close them to work, accepting a compromise offer from down out of socialist spite. The success of the the government. They were both embarrassed private hospitals in bypassing the dispute and bitter at having been forced to deny the inspired one columnist—Ellis O’Hanion of high ideals of their profession—caring for the the Irish Independent—to spot the free- sick—to make their demands heard. Relations market solution to destructive conflict in the with hospital colleagues deteriorated. The health-care industry. “Perhaps it’s time,” he doctors, who had been forced to cover for the wrote, “to start exploring the possibility of nurses, condemned them for leaving patients privatizing the health service in its entirety. in the lurch. Opinion polls showed that gov- This would instantly take all decisions on ernment leaders had lost support. Calling nurses’ pay out of the political arena. Compe- them “greedy and corrupt,” one letter writer tition between various sectors of a privatized to the Irish Times concluded, “If patients die, industry for the best staff would ensure that it’s the politicians who kill them.” The minis- nurses’ pay found its natural level.” ter of health, Brian Cowan, was especially The politicians are unlikely to take this singled out for criticism. One of the striking advice immediately, there being too many nurses’ favorite picket-line placards said, socialist shibboleths to be overcome. But grad- “Help Stop Mad Cowan Disease.” For the ually the system is likely to head in this direc- minister, who certainly hoped that a career in tion. As strikes, bickering, funding shortages, politics would bring him approbation if not and waiting lists make government hospitals glory, this could not have been pleasant. increasingly unattractive, both patients and staff will continue to migrate to systems of pri- vate care. Politicians are likely to allow this movement, and even facilitate it, as a way of In a centralized government health-care shedding the blame for health-care problems. system, there is no solution to this problem of There may be no partisans of limited gov- strife. The government is always in the posi- ernment in Ireland, but that doesn’t mean tion of determining the relative rewards of government’s role won’t be reduced. People different groups of employees and deciding don’t like to waste resources, and they don’t which services to give different groups of cus- like conflict and bitterness. These pressures tomers. All these groups will hold it responsi- would seem to lead, in the long run, to scaling ble for every shortcoming, real and imagined. back government systems of economic and It is significant to note that private hospitals social management. OJ No Solution ===== PAGE 43 ===== Economic Notions by Dwight R. Lee ¥ EConomics The Economic Advantages of a Commitment to Liberty n my last column I discussed the bias regulating businesses, or subsidizing agricul- toward excessive government caused by the tural production, reduce our liberty to some dead-weight costs of taxation. Because these degree. Of course, some restrictions are neces- costs go unseen, while the benefits from gov- sary for maintaining the social order on which ernment spending are readily apparent, gov- other liberties depend. Traffic laws, sanctions ernment expands beyond reasonable limits. against criminal activity, and the requirement Unfortunately, the unseen cost of taxation to pay enough taxes to defend our borders is only one factor pushing for too much gov- come to mind. However, beyond some mini- ernment. Much of the cost of government isin mum level the loss of liberty begins imposing lost liberty—decisions on how we live our costs without offsetting social benefits. lives are increasingly made by government But even when a government restriction on authorities. And just as with the dead-weight liberty imposes large net costs on society, it costs of taxation, the costs of gradually losing still creates benefits commonly captured by a our liberties go largely unseen. On the other relative few. An example is an import restric- hand, benefits (typically temporary and small) tion, which concentrates benefits on those in from restricting liberty are easily seen. The the protected industry by restricting con- result is a political bias that steadily erodes sumers from buying from those who offer our liberty. Pragmatic politics, free of ideo- them the best deal. As discussed in earlier logical considerations, with each issue decid- columns, consumers lose far more than those ed solely on its perceived costs and benefits, in the protected industry gain. But because gives free rein to this bias against liberty. the reduction in liberty spreads cost over all Only with a genuine ideological commitment consumers, the political process easily over- to liberty, one that creates serious obstacles to looks it. Likewise, government regulations all proposals for sacrificing it to some public that restrict people from going into certain objective, can we halt, and hopefully reverse, occupations are advertised as necessary to the erosion. protect consumers from the unqualified. Yet these restrictions reduce the competition The Hidden Cost of faced by existing members of the protected Restri cting Lib erty occupation (who lobby for the restrictions) with the benefits they receive more than offset All government actions, whether taxing by the costs to those whose freedoms are income, restricting imports, controlling prices, restricted. But again, the costs are widely — spread and largely unnoticed. Dwight Lee is Ramsey Professor at the Terry College hy t c ~ tine our liberties are eas- of Business, University of Georgia, and an adjunct € costs of restricting erues fellow at the Center for the Study of American Busi- ily ignored not only because they are spread ness at Washington University in St. Louis. widely over the general public, but also 43 ===== PAGE 44 ===== 44 IDEAS ON LIBERTY o APRIL 2000 because they are indirect and delayed. Often are considered, many of the financial costs the greatest advantage we realize from free- and almost all the costs of reduced liberty are dom is its availability to others. For example, politically ignored. The minor benefits to a only a relatively few people will choose to few trump the far greater loss of the liberty by become entrepreneurs. But most of the bene- the many in case after case. Seldom does any- fits from entrepreneurial freedom take the one oppose a particular program because it form of better products and lower prices for will erode our liberty; and when someone untold millions of consumers who will never does, he is typically dismissed as an ideologi- start companies themselves. As F. A. Hayek cal crackpot. But unless we restore a broad observed, “The benefits I derive from free- and deeply felt ideological commitment to dom are thus largely the uses of freedom by liberty in general, the value of the particular others, and mostly of the uses of freedom that liberties lost to each government expansion I could never avail myself of”! So most of will do nothing to retard that expansion, and those harmed by the erosion of a freedom will our liberty will be surely and steadily sacri- notice no additional restriction on their own ficed to the special-interest influence of ordi- freedom and remain unaware of the harm they nary politics. are suffering. Quite apart from the value of liberty as an Also, freedom is vitally important because end in itself, genuine commitment to liberty is we have no idea how it will be used. No one essential for sound, long-run economic policy. can confidently predict the advances that will The importance of freedom to the innovations be made in the future if people are free to try and technological improvements on which all things most would never consider trying. economic progress depends cannot be Quoting Hayek again, “If we knew how free- overemphasized. Consider that the national dom would be used, the case for it would income of the U.S. economy is now a little largely disappear”? So most of the cost of over $8.5 trillion annually. If average eco- restricting freedom today will be doing with- nomic growth is reduced from 2.5 to 2 percent out things we otherwise would have had per year because of liberties eliminated by tomorrow. The cost is not only delayed, but government action, in 25 years the national almost impossible to recognize when it does income will be $1.81 trillion less per year arrive because it comes as the absence of than it would have been. That amounts to a things we never knew we could have had. loss of approximately $6,830 for every Amer- Finally, our liberty is seldom lost all at ican, a loss that almost no one will notice and once. Instead, it is nibbled away a little at a which would be difficult to connect to the ero- time. Supposedly, if you place a frog in a pan sion of liberty even if it is noticed. What will of water and heat it up gradually, the frog will be noticed, and appreciated, are the benefits remain in the water completely unaware of the of particular government activities, even increased temperature until it boils to death. though the entire country is far worse off Similarly, as our liberties are eroded slowly, because of many of them. one by one, we hardly notice the loss. The advantage of a commitment to liberty, with respect rather than ridicule accorded those who champion it, is that it would replace the political pragmatism of case-by- Because we overlook the costs of eroding case considerations with an ideological rule liberties, the bias in favor of excessive gov- of restraint that would better promote the ernment is more pronounced and harmful long-term interests of all. The problem with than indicated in previous discussions. Even political pragmatism is that it doesn’t work, if all the financial costs of expanding govern- not if the objective is to serve the general ment were fully considered, there would still interest. OJ be too much government if the personal costs : — of restricting our liberties were ignored. _ AF ro Pree aor oa" of Liberty (Chicago: University Unfortunately, when government proposals 2. Ibid., p. 31. Commitment to Liberty ===== PAGE 45 ===== IDEAS ON [IBERTY APRIL 2000 Food, Famine, and Free Trade by Jim Peron or decades population doomsayers have bomb hysteria, Paul Ehrlich, even came up been predicting that massive famines with a new definition for overpopulation: were around the corner. Yet the United Nations Population Fund recently released its The key to understanding overpopula- report “The State of the World’s Population tion is not population density but the num- 1999,” which says, “The world’s population is bers of people in an area relative to its healthier from infancy through old age than it resources and the capacity of the environ- ever has been.” In a press release the United ment to sustain human activities; that is, to Nations admits that “More people are being the area’s carrying capacity. When is an fed adequately today than ever before.” In area overpopulated? When its population fact, “food production grew from the equiva- can’t be maintained without rapidly deplet- lent of 2,300 to 2,700 calories per person” ing nonrenewable resources (or converting between 1960 and 1991. renewable resources into nonrenewable The Population Fund says this is because ones) and without degrading the capacity “Malthus’s theory [of over-population] was of the environment to support the popula- overtaken by quantum leaps in agricultural tion. In short, if the long-term carrying technology which have kept food production capacity of an area is clearly being degrad- ahead of population growth.” In October 1999 ed by its current human occupants, that the U.N.’s Food and Agriculture Organization area is overpopulated. said that during the period 1995-97 the raw number of hungry people was 790 million or Ehrlich adds, “By this standard the entire 13 percent of the world’s population. In 1970 planet and virtually every nation is already the U.N. said that the number was 918 mil- vastly overpopulated.” lion, or one third of the world’s population.2 Ehrlich says we know an area is overpopu- The trends have been in this direction for lated when it is “rapidly depleting nonrenew- years, but the doomsayers haven’t changed able resources.” But if a resource is being their tune. While their dire predictions are depleted, the price of the resource, all things repeatedly wrong, they have offered up new constant, will rise. The way we know a arguments. The grandfather of the population- resource is being depleted relative to demand is through increasing prices. Ehrlich understood this at one time. In fact, Jim Peron is the author of Exploding Population . . : Myths (Heartland Institute). He is executive direc- bis famous 1980 wager with the luis Julian tor of the Institute for Liberal Values in Johannes- Simon was based on this fundamental eco- burg, South Africa, and can be reached at peron@ nomic principle. Ehrlich picked five resources global.co.za. that he said were being depleted and predict- 45 ===== PAGE 46 ===== 46 IDEAS ON LIBERTY ® APRIL 2000 ed that their prices would therefore increase. shoes. According to Ehrlich, this is proof that Simon said they would decline in price and your community is overpopulated. Thus a tiny thus, in economic terms, become more boun- farm community that produces enough corn tiful. After ten years every one of Ehrlich’s to feed a small nation is considered overpop- choices had declined in price in real terms. ulated because it doesn’t produce enough If, as Ehrlich says, resources are being shoes for a handful of people. depleted in virtually every country of the Ehrlich seems to be condemning the divi- world, the most basic laws of economics have sion of labor. Yet, as Ludwig von Mises noted, to be false. His conclusion can only be true if the division of labor turns the self-sufficient the depletion of resources somehow leads toa man “into the social animal of which Aristo- reduction in price. tle spoke.”s Hostility in a society or world Ehrlich also claims that a nation is over- with a division of labor (and resources) is populated when it isn’t self-sufficient. He uses more costly than in a world of self-sufficien- the Netherlands as an example, arguing that cy. A world that fails to meet Ehrlich’s defini- since the Dutch import many products and tion of “overpopulation” is a world more like- resources, it is wrong to say that “the Nether- ly to go to war. As Mises wrote: “Self-suffi- lands is thriving with a density of 1,031 peo- cient farmers, who produce on their own ple per square mile . . . [because this] simply farms everything that they and their families ignores that those 1,031 Dutch people far need, can make war on one another. But when exceed the carrying capacity of that square a village divides into factions, with the smith mile.” Thus, that the Dutch import beans on one side and the shoemaker on the other, proves that the Netherlands is overpopulated.# one faction will have to suffer from want of shoes, and the other from want of tools and weapons.”6 The very process of complex trade rela- With this argument Ehrlich enters the twi- tionships that Ehrlich condemns is to a large light zone. Ehrlich ignores how the Dutch degree responsible for the decrease in mili- have access to the world’s resources. Were tary conflicts. As the trade boundaries the beans charitable donations given because expanded people found it increasingly absurd the growers felt sorry for them? Or did the to make war. Where village once made war Dutch exchange something of value for the on village, free trade meant they now benefit- beans? Ehrlich ignores that trade is a two- ed from each other’s existence. They cooper- way street. ated and prospered. Trade is a process where The people of every nation trade with the we discover the mutually beneficial relation- people of nearly every other nation. We all ships that exist between all peoples and all import some things and export other things. nations. The division of labor increases the Canadians imports bananas from Panama, level of productivity of each individual while and the Panamanians may in return purchase encouraging voluntary, peaceful cooperation. computers built in Canada. Does this mean The world that Ehrlich yearns for would the Canadians and Panamanians are exceed- be a primitive one. By returning to a self- ing the carrying capacities of their countries? sufficient society without a division of labor, Nations are not equally rich in resources just and thereby not “overpopulated,” we would be as people are not equally talented. Because of returning to a time that predates even the dark the uneven nature of talent and natural ages. The mutually beneficial relations resources, we trade to improve our standard of between regions and nations would degener- Trade and Population living. ate. The worst kind of tribalism would arise Nations specialize in much the same way once more. that people do. You may live in a manufactur- Opposition to the division of labor and free ing community that produces a large number trade would in fact create the very problems of shoes. It may import grain from communi- Ehrlich lays at the door of increasing popula- ties that have a lot of grain but are short on tions: mass starvation. ===== PAGE 47 ===== FooD, FAMINE, AND FREE TRADE 47 While we humans are able to mitigate the ply. The increased prices also encourage disastrous cruelties of nature, we are not able increased production by farmers. The reduc- to abolish them. We can reduce the death rate tion in consumption is a short-term solution; but not abolish death. We can increase food increased production is a long-term solution. production but not abolish droughts or Anyone who is truly concerned about the freezes. We are able to handle minor instances plight of the world’s hungry should be in the of drought or some freezes, but we will still forefront to encourage the division of labor, suffer under severe, naturally occurring free trade, and free markets. But the doom- weather anomalies. In the past when a sayers are, in fact, proposing measures that drought ravished a country the entire popu- increase the likelihood of famine. lace suffered. The destruction of crops meant Ehrlich forgets that in the economic realm mass starvation. Today when a drought hits man responds to incentives. Human behavior the American midwest it hurts the farmers’ is not set in stone, but can go in many direc- bottom line and may slightly increase food tions. When prices rise humans consume less. prices for others, but nobody starves. This is But because of Ehrlich’s contempt for eco- so because most Americans are not farmers. nomics he can’t understand, or refuses to The fact that most American people produce understand, how economic incentives can something other than food allows them to change behavior. This is why he says, “over- trade those products for food produced in population is defined by the animals that countries or regions that aren’t suffering occupy the turf, behaving as they naturally drought. Because the American people aren’t behave, not by a hypothetical group that self-sufficient they don’t suffer from famine. might be substituted for them.”’ On the other hand, the bulk of Africans are Sheep will graze a field until it is no longer peasant farmers producing the foods they able to sustain them. As they graze there is no consume. If drought hits, they starve. They change in the price of grass because sheep don’t have other goods and services to trade don’t have a price system. They cannot plan for food. for the future. To Ehrlich human beings are no The division of labor coupled with free different from sheep. trade allows us to spread the risk of famine. It should therefore come as no surprise that Free trade is like an insurance policy that Ehrlich has not made one major correct pre- pools the risk among many individuals. It diction regarding resources, population, seems odd that so many people want coercive, famine, and so on. Even psychics have better mandatory social insurance and are opposed track records. OJ to this much fairer system. With free trade a . . he b i f ial i 1. “The State of the World’s Population 1999” (New York: Unit- nation receives the benefits of social IMSUr- 4 Nagios Population Fund), p. 19. ance without the drawbacks of a coercive 2. Associated Press, “Third-World Hunger Slightly Alleviated,” t Business Day, October 15, 1999, p. 2. System. . 3. Paul and Anne Ehrlich, The Population Explosion (London: The market solves the problem in several Arrow Books, 1990), p. 38. oo . 4. Ibid, p. 39. ways. First, 1t spreads the risk SO that no one S. Ludwig von Mises, Liberalism in the Classical Tradition (Irv- starves but everyone pays a bit more. The ington-on-Hudson, N.Y. and San Francisco: Foundation for Eco- . : _ nomic Education and Cobden Press, 1985), p. 25. increased prices encourage people to con 6. Ibid, p. 25. sume less or purchase foods not in short sup- 7. Ehrlich, p. 40. ===== PAGE 48 ===== IDEAS ON [IBERTY APRIL 2000 Free Trade and Flexible Markets by Christopher Mayer J omational trade plays a critical and often equally responsible and equally capable of overlooked role in the prosperity of the ending the conflict by simply abandoning tar- world’s economy. Imprudence on the part of iffs altogether. A tariff is, after all, a tax on governments can stifle growth and trigger domestic consumers. painful unnecessary contractions. The Smoot- Hawley tariff of 1930 was a major cause of the Great Depression. Punishing protective tariff rates precipitated an international trade Other evidence of an emerging trade war war that caused U.S. farmers to lose a third of can be seen in smaller sectors of the economy, their markets. Agricultural prices plummeted like making men’s suits. In “Is This How Tar- as those farmers were caught with a supply iffs Should Work?” Investor's Business Daily that exceeded domestic demand. Their debts outlined the loss of jobs in the domestic tai- became a tremendous burden. Many farmers lored-clothing industry. The workforce in this went bankrupt. The banks that lent these industry has been cut in half in just under a farmers the money soon followed them into decade from 58,000 to 30,000. Why? Because bankruptcy. This started a credit contraction the United States imposed punishing tariffs that rippled back east to the banks that had on imported fabrics, often exceeding 30 per- lent money to the midwestern banks. cent. Canada smartly dropped its tariffs on The Smoot-Hawley tariff was perhaps the imported fabrics entirely, and its suit makers most protectionist piece of legislation ever are thriving. They’ve increased their exports adopted in this country’s history. While no to the United States 250 percent. such legislation currently appears on the hori- Here the shortsightedness of protectionism zon, that tariff should be a lesson for current is evident. In its effort to save jobs in the tex- policymakers, who seem to be forgetting the tile industry, the government harmed domes- power of international trade. Witness the well- tic producers and consumers. You would think publicized and escalating trade war between such stark evidence, and the broad-based sup- the United States and the European Union, port for a reduction or elimination of the tar- which originated over bananas and continues iff from suit makers and retailers, would dis- with the latest tussle occurring over beef. pose of the matter. Wrong. Instead, there is Since trade wars are really fought against one- talk of slapping a big tariff on imported suits. self, all nations partaking in this nonsense are As IBD notes, “That, of course, would be self-defeating. No one wins a trade war. They Christopher Mayer, a commercial loan officer, is only make matters worse. When a country studying for his MBA at the University of Maryland. ~ fires a shot (a tariff created or increased), the Contact him at cwmayer@aol.com. targeted country responds in kind.” 48 Ominous Signs ===== PAGE 49 ===== 49 A futile, costly, and stupid policy once what it should be doing. The south has lost again seems to be the order of the day. The thousands of jobs in traditional industries lessons of free trade need to be continually such as textiles, chemicals, and paper. Those preached, because it’s clear that the policy- jobs tend to pay low wages and require few makers don’t get it. skills. But the south could not compete with They would do well to read Frederic cheaper foreign labor in these areas. So the Bastiat, who wrote, “Assume, if it amuses capital in these industries migrated to where it you, that foreigners flood our shores with all would be more efficiently employed and new kinds of useful goods, without asking any- industries have taken advantage of a relative- thing from us; even if our imports are infinite ly well-educated labor force. and our exports nothing, I defy you to prove What government did not do is revealing. If to me that we should be the poorer for it.” protectionist policies had been followed, Unfortunately, protectionism is among the these new industries would likely never have most durable of economic sophisms. The come into being, and Hickory, emblematic of arguments never change. Yet the lesson of free economic conditions in the bulk of the south, trade is so easy to learn. It is so basic, so fun- would have been on the front page for less damental to the nature of exchange; “so clear, favorable reasons, like unemployment and so obvious, so indisputable,” Ludwig von stagnation. Tariff protection would have per- Mises wrote, “that its opponents were unable haps ensured a longer life for the south’s-tex- to advance any arguments against it that could tile mills, but at what cost? Citizens would ‘not be immediately refuted as completely have been subsidizing textile mills and forgo- mistaken and absurd.” ing the benefits of cheaper textiles and the additional goods created by the new indus- tries. These people would have been worse Constant Change off. The new industries freely stand on their In a living, breathing economy, change is own merits in the competitive market. perhaps the only constant. Individuals’ sub- Belief in markets requires some vision and jective valuations of goods and services, and faith. In a sense, what's happening 1a Hickory of money itself, are like quicksilver. Market is a microcosm of what is going on through- prices, therefore, adjust according to the out the country. Our economy is constantiy-: demand for and the supply of a particular shifting to serve consumers better. Think of good. Prices also respond to the demand for how this country has shifted from farming to and stock of money. An economy unable to heavy manufacturing to financial services and adjust, to reconfigure labor and capital to technology. And the changes will continue. yield the best results, is an economy likely to be highly unstable and fraught with persistent misallocation. An example of the benefits of free trade and The trouble in Japan illustrates the same the virtues of economic flexibility is to be seen point but in a different way. While Hickory is in Hickory, North Carolina. Certain tradition- booming, Japan is mired in a slump of historic al sectors of Hickory’s economy—namely, the proportions. Unemployment is the highest furniture, textile, and chemical industries— since statistics have been kept—despite have been shrinking for many months as Japan’s ingrained social pattern of lifetime cheaper importers beat out domestic produc- employment. Or, more accurately, because ers for market share. But Hickory is booming, of it. Japan’s tale is one of inflexibility and and unemployment is at a 30-year low. of trying to overlay a matrix of rigidity and Why? Because of new fiber-optic cable stability on a changing complex market plants, medical centers, semiconductor plants, economy. and satellite manufacturing companies. While Despite major economic distress, Japanese some may credit state incentives and educa- companies are reluctant to cut workers. This tion, I see the market economy doing exactly has the effect of choking off the development Japanese Woes ===== PAGE 50 ===== 50 IDEAS ON LIBERTY ® APRIL 2000 of new industries and stifling the shifting of we are not likely to stay in one job for 20 workers to where consumers would want years and that we will have to upgrade our job them. Instead, they remained trapped in skills continuously. However, change is inher- industries that bleed with losses. The diffi- ent in the real world. The societies that have culty in letting workers go has a flip side: the most flexible economies are equipped to Japanese companies are reluctant to hire new handle their changing needs. They will grow, workers. prosper, and change, while those anchored by Flexibility means change and, for some political chains or societal bonds will go people, a sense of uneasiness. It means that through periods of struggle and suffering. [] moment.” Without getting into a deep discus- sion about this, the Federal Reserve is an influencer, not a controller. Its essential func- tion is to stand ready to bail out the banking system if and when it gets into trouble. Since Professor Timberlake is mistaken in his premises, he is equally mistaken in his conclusion: “By controlling the basic stock of Who Controls the Money? money in the Us. economy, Fed policy deter- : mines the level of prices.” Simply put, “It just ain’t so.” This said, he is correct that the Fed does not control interest rates; it can only influence them. CAPITAL To the Editor: v “It Just Ain’t So!” by Richard Timberlake (December 1999) contains material errors that inislead readers. The Federal Reserve ~does not, as Professor Timberlake writes, ,~ have “monopoly power to increase or decrease the economy’s stock of money.” It is the banking system (of which the Fed is a component) that has that power. Most money is created by the banks, not the Fed. Richard Timberlake responds: Since 1950, of the approximately $6.4 tril- When I wrote the “It Just Ain’t So” explain- lion that has been created by the banking sys- ing that the Federal Reserve System—in prac- tem, only about $500 billion was created by tice, the Federal Open Market Committee the Federal Reserve. People need to under- (FOMC)——could not raise interest rates, I stand that the Congress has improperly dele- could not also take the space to write a text- gated to the banks a power that the Congress book on how commercial banks and the Fed- does not have under our Constitution. We eral Reserve System create money. I have have, in effect, a statist monetary system that already written that book. —LARRY PARKS Foundation for the Advancement of Monetary Education New York, N.Y. is at odds with the Constitution. To talk about First, the Fed is not “a component of the the Fed having a money-creation monopoly banking system.” The Fed is the central bank, clouds the issue. and despite the label “bank” is an institution Professor Timberlake is equally mistaken fundamentally different from the banks in the when he writes, “Federal Reserve policy is fractional-reserve commercial banking sys- responsible for the quantity of money—cash tem. The latter consists of some thousands of and bank deposits—that all households and individual banking firms that operate to make business firms have in their possession at any a profit. The industry cannot and does not set ===== PAGE 51 ===== 51 policy or deliberately create money. Indeed, per year—for its government owners. The commercial bankers are renowned for believ- commercial “member” banks also get a pit- ing and claiming that they do not create tance, perhaps $1 billion, for their “member- money. All the demand deposits they create ship.” are an unintentional by-product of their lend- I will state my conclusion again in more ing operations. Just as important, they do not detail in order to contradict the misinterpreta- initiate the creation of money. Only the Fed’s tions Parks introduces and to clarify my orig- FOMC can and does initiate changes in the inal statement: “By controlling [increases or monetary base that the commercial banks use decreases in] the basic stock of money in the to make new loans and investments. The U.S. economy, Fed policy determines the level FOMC carries out its policies deliberately, of prices [and any change in direction the with an avowed policy goal. price level will take].” This statement does not Second, Congress has not “delegated pow- deny that other real factors—production of ers to the banks.” It has delegated unlimited goods and services, and the public’s demand (and unconstitutional) powers of money cre- for cash—also influence the price level. ation to the Federal Reserve System, which is Nonetheless, the Fed’s control over the stock not “a bank” in any functional sense of the of money is of a magnitude and a means that word. It is a governmentally controlled insti- can counteract or subordinate these other fac- tution that operates primarily for the benefit tors. The one thing lacking in Fed control over of the federal government. Only the policy- the monetary system ‘is its” ability to effect making central bank part of “the monetary changes immediately. In other words, a sub- system” is statist. If the Fed and all its trap- stantial lag of months and even years exists pings were obliterated, the commercial bank- between the Fed’s immediate policy actions ing system still in existence would have no and their results on the economy. But that policymaking powers and no organization to problem is another story. create additional money. The stock of bank- The conclusion here is that Parks’s criti- created demand deposits would be fixed. cism is a medley of conceptuai and factual Third, the Fed’s “essential function” is not errors by someone who does not really under- “to bail out the banking system when it gets in stand the monetary system. trouble,” as Parks alleges. (To assert that the Fed still has this anachronistic function is to admit that the Fed and the commercial banks We will print the most interesting and are indeed different animals.) Far from it. provocative letters we receive regarding Even though the Fed continues to hold this | jgeqs on Liberty articles and the issues propaganda goody in front of the media and they raise. Brevity is encouraged; longer the public, its essential function is the creation letters may be edited because of space of new base money by monetizing outstand- limitations. Address your letters to: ing government securities—securities that the Ideas on Liberty, FEE, 30 S. Broadway, U.S. Treasury has issued and sold previously Irvington-on-Hudson, NY 10533; e-mail: to finance federal government excesses. From iol@fee.org; fax: 914-591-8910. this base-money creation the Fed realizes huge seigniorage profits—about $30 billion ===== PAGE 52 ===== Economics on Trial by Mark Skousen IDEAS ON [IBERTY APRIL 2000 What It Takes to Be an Objective Scholar “It was the facts that changed my mind.” —JuLiaN Simon! uring, the 1990s, we watched the Dow ume, and other technical indicators to deter- Jones liidusiriai Average increase four- mine the direction of stocks and commodities. fold and Nasdaq stocks tenfold. Yet there were Most financial technicians are free of preju- well-known investment advisers—some of dices and will invest their money wherever them my friends—who were bearish during they see a positive upward trend, and avoid the entire period, missing out on the greatest (or sell short) markets that are seen in a bull market in history.2- downward trend. But my friend is a gold bug How is this possible? What kind of preju- and no matter what the charts show, he some- dices would keep an intelligent analyst from how interprets them to suggest that gold is missing an overwhelming trend? In the finan- ready to reverse its downward trend and head cial business the key to success is a willing- back up. Equally, he always seems to think the ness to change your mind when you’re wrong. stock market has peaked and is headed south. Stubbornness can be financially ruinous. As a result, throughout the entire 1990s, he When a market goes against you, you should missed out on the great bull market on Wall always ask, “What am I missing?” Street and lost his shirt chasing gold stocks. Over the years, I’ve encountered three kinds I also see this type of prejudice in the acad- of investment analysts: those who are always emic world. Some analysts are anti-market no bullish; those who are always bearish; and matter what. Take, for example, Lester those whose outlook depends on market condi- Brown, president of the Worldwatch Institute tions. I’ve found that the third type, the most in Washington, D.C., who puts out the annual flexible, are the most successful on Wall Street. State of the World and other alarmist surveys and data. He gathers together all kinds of sta- Confessions of a tistics and graphs showing a decline in our . standard of living and the growing threat of Gold-Bug Technician population growth, environmental degrada- A good friend of mine is a technical analyst tion, the spread of the AIDS virus, and so on. who searches the movement of prices, vol- For example, despite clear evidence of - sharply lower fertility rates in most nations, Mark Skousen (http:/fwww.mskousen.com; mskousen@ Brown concludes, “stabilizing population aol.com) is an economist at Rollins College, Depart- may be the most difficult challenge of all.’”3 ment of Economics, Winter Park, FL 32789, a Forbes . . columnist, and editor of Forecasts & Strategies. His Too bad Julian Simon, the late professor of textbook, Economic Logic, is now available from €COnOMIcs at the University of Maryland, is FEE. no longer around to dispute Brown and the 52 ===== PAGE 53 ===== 53 environmental doomsdayers. Simon was as articles on his pet theory, it’s almost impossi- optimistic about the world as Brown is pes- ble to recant. This propensity applies to schol- simistic. Simon’s last survey of world eco- ars across the political spectrum. nomic conditions, The State of Humanity, was We admire those rare intellectuals who are published in 1995. That book, along with his honest enough to admit that their past views The Ultimate Resource (and its second edi- were wrong. For example, when New York tion), came to the exact opposite of Brown’s historian Richard Gid Powers began his histo- conclusions. “Our species is better off in just ry of the anticommunist movement, his atti- about every measurable material way.” tude was pejorative. He had previously writ- Yet Julian Simon was not simply a Pollyan- ten a highly negative book on J. Edgar na optimist. He let the facts affect his thinking. Hoover, Secrecy and Power. Yet after several In the 1960s, Simon was deeply worried about years of painstaking research, he changed his population and nuclear war, just like Lester mind: “Writing this book radically altered my Brown, Paul Ehrlich, and their colleagues. But view of American anticommunism. I began Simon changed his mind after investigating with the idea that anticommunism displayed and discovering that “the available empirical America at its worst, but I came to see in anti- data did not support that theory.”s communism America at its best.”¢ That’s my kind of scholar. ] Scholars Who See the Light 1. Julian L. Simon, The Ultimate Resource 2 (Princeton, N.J.: Princeton University Press, 1996), preface. The best scholars are those willing to 2. See the revealing article, “Down and Out on Wall Street,” New change their minds after looking at the data or ork Times, Money &: Business Section, Sunday, December 26, discovering a new principle. They admit their 3. Lester R. Brown, Gary Gardner, and Brian Halweil, Beyond : Malthus (New York: Norton, 1999), p. 30. mistakes when they have been proven wrong. 4. Julian L. Simon, The State of Humanity (Cambridge, Mass.: You don’t see it happen often, though. Once a Blackwell, 1995), p. 1. scholar has built a reputation around a certain 3. Simon, The Ultimate Resource 2, preface. . A . 6. Richard Gid Powers, Not Without Honor: The History of Amer- point of view and has published books and ican Anficommunism (Free Press, 1996), p. 503. Mark Skousen’s Economic Logic “Economic Logic is a first-rate and exciting introduction to economics. It's clear and accessible, uncommon among today’s textbooks.” —Don BOUDREAUX The first volume of Mark Skousen’s breakthrough college text- book, Economic Logic, is available from FEE. This “micro” text covers supply and demand, monopoly vs. competition, entrepre- neurship, wages, capital and interest, and the financial markets. Economic Logic is a no-compromise free-market college text- book, with a hands-on approach (it begins with a profit-and-loss income statement). Special price: $21.95, plus $4.00 shipping and handling. Send your check to FEE, 30 S. Broadway, Irvington-on-Hudson, NY 10533, or call 800-452-3518 with your credit card order. ===== PAGE 54 ===== 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. 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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 55 ===== 55 they call a “trusteeship tax” and a “privilege BO OKS tax.” The “trusteeship tax” would be used to pay for the $80,000 “stakes” and would be raised or lowered enough each year to guaran- The Stakeholder Society tee that enough money would be in the “stake- holder” fund to pay everyone who becomes by Bruce Ackerman and Anne Alstott “entitled.” The “privilege tax” would “require Yale University Press ® 1999 © 296 pages ® $26.00 each American to pay a tax based on the - - degree of privilege that she enjoyed durin Reviewed by Charles W. Baird her childhood.” Privilege would ba measured by “the amount of money that his parents earn his book amounts to nothing more than a While he is growing up.” (Besides their finan- new version of how to take wealth from cial egalitarianism, the authors insist on equal some and give it to others in the name of treatment for pronouns!) “social justice” Its principal theme is that ~~ To keep “too much” wealth from accumu- Jefferson’s proclamation in the Declaration of lating in any private hands, they also call for a Independence of equality and freedom of all tremendous reduction in the lifetime tax people cannot be realized in the United exemption on gifts, from the present $650,000 States because of the wide disparities in to $50,000. And to make sure that money wealth and income that naturally occur in a doesn’t escape their tax net, they advocate a market economy. limit of $1,000 per recipient per year for hol- The authors, professors of law at Yale, com- iday and birthday gifts. Imagine a solemn IRS plain that there can be no true “equality of agent saying, “Grandpa, you can’t give John- opportunity” when the children of parents ny that tricycle—it puts you over the annual with high incomes have “unjust privileges” of gift limit.” family, environment, and education that Our brave redistributionists issue this stir- enable them to speak “fluent and standard ring cry, “Against the cynicism of the age, we English,” attend “elite private schools or a are not embarrassed to announce our mes- prosperous high school in the suburbs,” and sage: by the taxes they pay as well as the be “surrounded with eager guides to the skills stakes they receive, Americans should be pre- of social advancement and the mysteries of pared to reaffirm their common commitment college education.” Because children of the to economic citizenship as an enduring aspect not-so-wealthy and poor do not have those of a revitalized political identity.” advantages, Ackerman and Alstott lament, So if you had been wondering if leftists still they do not have “equal opportunity.” wrote books laying out new plans for society To address that timeworn complaint, the according to their grand visions, the answer is authors propose to give every American a yes. The Stakeholder Society reaffirms one-time “stake” of $80,000 on entering col- Hayek’s point that the lessons of sound eco- lege or reaching the age of 21. Subsidies nomic reasoning must be relearned in every resume later in life with a $670 per month generation. Absurd plans like this have been “citizen pension” on reaching 67. The latter advanced many times before and intellectual- handout is supposedly justified because ly demolished, but we cannot rest. everyone has “a right to a dignified retire- Ackerman and Alstott assert that their ment” irrespective of work history and finan- scheme promotes “social justice,” freedom, cial preparation. Those welfare measures will, and respect for private property. However, as the authors assert, build a strong sense of Hayek forcefully argued, social justice is a “community” needed to counteract excessive nonsensical mirage. Moreover, freedom does individualism. Americans, they say, suffer not come from government handouts, but from an “infatuation with individual rights” entails the absence of government interfer- Naturally all this largess must be paid for, ence with your life. And respect for private and the authors advocate two wealth taxes that property could hardly be encouraged by the ===== PAGE 56 ===== 56 IDEAS ON LIBERTY e APRIL 2000 incessant involuntary transfers of wealth that That, of course, is the bright face that col- their plan necessitates. lege sports always wants people to see. There Most of all, the authors are badly confused is, however, a darker side that is rarely seen about equality. They are hung up on the term except by those who pierce the glitzy exterior. “equality of opportunity.” Jefferson’s “equali- Andrew Zimbalist, professor of economics at ty” in the Declaration is, of course, what Smith College and a long-time student of col- Hayek called isonomia—equality before the lege sports, has done exactly that in his new law. Philosopher Robert Nozick called it book, Unpaid Professionals. It is worth read- process equality, which he carefully distin- ing even if you are not a sports fan; it may guished from end-state equality. The authors spoil some of the fun if you are. pursue the latter of those mutually exclusive Among collegiate sports powerhouses, the concepts. concept of the “student-athlete” has long been There’s a lesson here. Classical liberals something of a joke. Well back into the 1800s, sometimes carelessly misrepresent isonomia Zimbalist notes, colleges were using mercenar- as “equality of opportunity.” But given the ies to improve their chances of beating rivals, unavoidable differences in the means avail- claiming that they were students when in fact able to families as they bring up their chil- they were not. Things are not much different dren, true equality of opportunity is a today, except that the pretend students are actu- chimera. Ackerman and Alstott exploit the ally enrolled and soak up money (ultimately ambiguity surrounding equality of opportuni- taken from taxpayers in most instances) all ty to sell their version of collectivist redistrib- year long, rather than just on game day. Many ution while claiming to represent the middle take courses with no intellectual content so ground between libertarianism and utilitarian- they can maintain the minimum grade point ism. Classical liberal arguments based on average and leave college (usually without a “equal opportunity” are vulnerable to such diploma) as dull as the day they entered. exploitation. The words we use to express our People and institutions respond to incen- ideas, as well as the ideas themselves, have tives, and there are big bucks to be had in win- consequences. [J ning in college sports—at least football and Charles Baird is a professor of economics and the basketball. Schools seldom resist the tempta- director of the Smith Center for Private Enterprise tion to build successful teams by letting acad- Studies at California State University at Hayward. emic standards slide. Zimbalist writes, He is a quarterly columnist for this magazine. “[M]any NCAA schools find the temptations of success too alluring to worry about the rules. Schools cheat. They cheat by arranging Unpaid Professionals: Commercialism to help their prospective athletes pass stan- and Conflict in Big-Time College Sports dardized tests. They cheat by providing illegal payments to their recruits. They cheat by set- by Andrew Zimbalist ting up rinky-dink curricula so their athletes Princeton University Press ® 1999 © 252 pages can stay qualified. And when one school * $24.00 cheats, others feel compelled to do the same.” There is a lot of evidence that the athletic tail is wagging the academic dog, and Zim- balist provides his readers with interesting To on your television set almost any Sat- facts such as these: urday afternoon from September to March and the chances are pretty good that * The University of North Carolina gives Reviewed by George C. Leef you will be able to find a college football or more than $3 million in athletic scholar- basketball game. You'll see a lot of color and ships yearly to around 700 athletes, but excitement. Dazzling athletic feats performed only some $600,000 in academic merit in a state-of-the-art facility before thousands scholarships among the rest of its 15,000 of cheering fans. students. ===== PAGE 57 ===== Books 57 * Clemson University paid young black get concern for “gender equity” in large men from Columbia, South Carolina, to be doses. There’s strong support in the book for a on campus and pretend to be members of a laissez-faire approach whereby college sports black fraternity so the university would would be told, “You survive only as long as look more appealing to visiting black you can pay your own way,” but Zimbalist’s athletes. recommendations are rather pallid ones, decidedly not of the Gordian Knot-cutting * The president of the University of Okla- type. homa said in a speech to the state legisla- Still, there is a substantial amount of good ture, “I hope to build a university of which in Unpaid Professionals. It might have been a our football team can be proud.” home run, but a double isn’t bad. OJ i . . George Leef is director of the Pope Center for High- Unlike some writers who shed crocodile or Education Policy at the John Locke Foundation tears over the supposedly exploited college and book review editor of Ideas on Liberty. athlete, Zimbalist doesn’t think their plight so bad. “Full scholarship rides, special eating and housing privileges, the right to carry Pell Grants on top of their scholarship, to receive several hundred dollars a year in special needs Ceasefire! Why Women and Men Must support, and preferential access to summer join Forces to Achieve True Equality jobs are all adequate remuneration. Yes, there by Cathy Young are star players who may generate a half- million dollars of revenue or more for their Free Press ® 1999 ¢ 360 pages © $25.00 teams, but many of these stars will soon earn millions in the pros and they can leave any- time they like.” Defenders of the sports system often claim Cay Young has not lost any of the spunk that the “big-time” sports of football and bas- that drove her as a youngster to question ketball generate profits for the rest of the ath- the absurdities of daily life in the Soviet letic department, but Zimbalist is skeptical. Union and impelled her family’s immigration He observes that there is no set of uniform to the United States. Ceasefire!, much like her accounting rules for college athletics and the first book (Growing Up in Moscow) displays defenders can therefore get away with absur- an uncanny ability to puncture the shibboleths dities like this: The University of Massachu- of a dominant culture, this time the contradic- setts basketball team supposedly made a tions of radical feminism. In it, she skewers $1.78 million profit in 1997, but examination many of the sacred cows of contemporary of its budget shows that the basketball team feminism, while criticizing conservative tra- was charged with none of the cost for, among ditionalists as well. All in all, it is a tour de other things, insurance, maintenance, adver- force. tising, utilities, medical expenses, or debt ser- Once its earlier goals of achieving legal and vice on the arena in which the team plays its social equality for women had been largely home games. With a conservative cost alloca- achieved, feminism took a lurch to the left. tion, Zimbalist thinks that the team actually Abandoning equal rights, which Young backs lost around $1.1 million. fervently, the new incarnation of feminism Although the book contains much that sup- glorifies women as a class while demonizing ports a free-market critique of the college men, exaggerates any remaining disadvan- sports system, the author doesn’t explicitly tages women may experience while ignoring make one. He never mentions the word “tax- impediments unique to men, and routinely payer,” even though it’s obvious that the colle- distorts statistics to portray women as victims giate sports mania is heavily subsidized by in desperate plight (and therefore worthy of them. Instead of concern for taxpayers, we special political dispensations). Reviewed by Ellen Frankel Paul ===== PAGE 58 ===== 58 IDEAS ON LIBERTY ® APRIL 2000 Young amasses evidence aplenty to counter Step Program.” Among the twelve are such the radicals’ “Phony Statistics Hall of Fame.” recommendations as: recognize that behaving For example, the National Organization for badly is not a monopoly of the male sex; insist Women claims that many judges and attor- that advocacy groups get the facts straight; neys are still biased against women and there- acknowledge that both sexes are from earth fore that fathers are granted custody 70 per- (not Venus and Mars), with large similarities cent of the time when they seek it. As she does and smaller differences; presume that fathers with each of the radicals’ favorite statistics, are equal parents with mothers despite their Young traces that claim back to its origins. different roles; stop treating women as an She finds three sources: a book by a feminist interest group with claims that are more legit- widely criticized for its sloppy statistics and imate than men’s. “penchant for hyperbole,” another book that Although Young’s attack is directed mainly claimed a similar percentage but for uncon- at feminist radicals, traditionalist conserva- tested cases; and a gender-bias study that tives do not emerge from Ceasefire! actually found that women who filed for sole unscathed. Pro-patriarchy conservatives who custody received it 75 percent of the time, as revel in the supposed inevitability of male opposed to 44 percent for men. Digging deep- domination or define women principally as er, Young finds data from state studies that sexual creatures are roundly condemned. clearly display the overwhelming advantage F. Carolyn Graglia’s Domestic Tranquility: A that women enjoy both in contested and Brief Against Feminism, a huge hit among tra- uncontested custody cases. ditionalists for its glorification of women’s Throughout the book, Young evinces a role as homemaker, mother, and contented sympathy for men that radical feminists will sexual soul mate, “rivals any radical feminist find appalling. Rather than being the histori- tract in shrill extremism and sheer nuttiness.” cal victors in a war between the sexes—the What Young finds most disagreeable in foot-soldiers of the patriarchy that oppresses, Graglia’s vision is that without striving or rapes, sexually harasses, and underemploys aspirations of their own, women are less than women— Young contends that men are con- human. Young embraces a more proactive life demned as a sex with little regard for their for women. Built on serious pursuits outside individual differences or for the impediments the family, “it is a life of doing and not just that they suffer as men. Men die on average being.” For women who choose to put chil- seven years earlier than women, have no dren above career, she proffers “respect,” but choice about engaging in a lifetime of work to doubts that such a choice, if made over an support their families, commit suicide four entire lifetime, will lead to the fulfillment times as often, suffer ten times as many work- Graglia expects. (Editor’s note: See Candace related fatalities, receive much harsher prison Allens review in the February Ideas on sentences for identical crimes, and are the Liberty.) only group in society that it is permissible to Individualists will find Young’s vision caricature. appealing. As for traditionalists, Ceasefire! is Declining to endorse a nascent men’s filled with so much evidence and common movement that would champion men’s status sense directed against radical feminism, the as victim, Young issues a clarion call for all short chapter attacking traditionalism should individuals to be treated as human beings. In be easier to bear. [] a saner age, this admonition might sound NV" Ellen Frankel Paul is professor of political science ial, but in ours it 1s nearly revolutionary. and philosophy and deputy director of the Social Phi- Instead of a National Organization for losophy and Policy Center at Bowling Green State Women, she envisions a National Organiza- University. tion for Gender Equality. This equal-rights and equal-responsibility movement for both sexes would be built on what she calls (with tongue firmly in cheek, no doubt) a “Twelve ===== PAGE 59 ===== Books 59 . ural rate, Keynes concluded that the principal The Hayek-Keynes Debate: Lessons for problem was too little investment. Current Business Cycle Research Hayek, building on the pioneering work of by John P. Cochran and Fred R. Glahe his mentor, Ludwig von Mises, argued that in Edwin Mellen Press ® 1999 ® 200 pages the short run, increases in the “money stream” * $89.95 (the stock of money times the rate at which it - is spent) would drive the market rate of inter- Reviewed by Larry J. Sechrest est below the natural rate and induce an over- investment in capital goods. | some, this book’s title accurately This “malinvestment” could not be sus- reveals the theme and goal of the text. tained in the long run because it represented a The authors have set for themselves an production structure that was inconsistent admirable task. In a book of only about 200 with consumers’ time preferences (the ratio of pages they review the debates that occurred consumer goods to capital goods that they during the 1930s between F. A. Hayek and desire). For Hayek, the natural rate of interest, John Maynard Keynes over the cause of busi- which reflects consumers’ time preferences, ness cycles, explain in detail both to what must eventually win out. All of this is indica- extent and why these two famous economists tive of the crucial fact that Hayek wove disagreed, and then argue that most of the together monetary theory and capital theory recent work on cycle theory is deficient pre- into a coherent whole. It must be admitted cisely because it ignores the insights offered that both Hayek and Keynes were aware by Hayek many years ago. In short, this is not that the real world of time, money, and a book designed for the lay reader. It does not uncertainty required an analytical departure inundate the reader with econometrics or dif- from the pure barter models of classical eco- ferential equations, but it does presuppose a nomics. However, Hayek understood, as knowledge of economics. did Mises, that capital is heterogeneous, Cochran and Glahe set the stage by noting often specific to a particular firm or project, that today’s conventional macroeconomics is and driven by changes in relative prices. flawed by a troubling group of propositions. Keynes understood little or none of this. Macroeconomics asserts that investment and Indeed, he seemed mystified by Hayek's consumption are positively related in the short explanation of the interface between money run and inversely related in the long run, and and capital. yet the long run “emerges as a seamless The Hayekian approach to cycles differs sequence of short runs.” This paradox is the even from that espoused by other, seemingly legacy of the Keynesian detour taken in the like-minded economists, such as the mone- 1930s. Both Keynes and Hayek rejected the tarists and New Classicals, in that “the method classical emphasis on the long run. Indeed, of analysis is diametrically opposed . . . the both reasoned within the same broad frame- key features of Hayek’s analysis are absent in work, namely the savings-investment approach models that use the national income concept used by Swedish economist Knut Wicksell. as a starting point for macroeconomic analy- The Wicksellian view proposes that the key to sis.” Hayek’s is a microeconomic explanation the puzzle is the process by which ex ante of what most economists believe can only be investment can differ from ex ante saving explained in terms of macroeconomic aggre- owing to departures of the market rate of inter- gates. Like all Austrians, Hayek was con- est from the “natural rate” of interest. Keynes vinced that aggregates or averages cannot be argued that the underlying real economic fac- causally related to one another. Only individ<’ tors, as embodied in the natural rate, need not ual actions can be made truly intelligible, so to dominate. The market rate of interest could be comprehend business cycles fully economists maintained indefinitely at a level different from should focus on relative prices rather than the the natural rate. And since he believed that price level, the structure of production rather ~ banks could keep the market rate above the nat- than the level of aggregate production, and ===== PAGE 60 ===== 60 IDEAS ON LIBERTY ® APRIL 2000 disequilibrium in the short run as well as equi- tists because they tended to be white males. librium in the long run. Thus children are given to believe that Amelia I found this book to be a very worthwhile Earhart invented the airplane, and the only addition to the existing literature on business “George Washington” they hear of is George cycles. Although most of the text is devoted to Washington Carver. When presented at all, Hayek and Keynes, there are brief but insight- white males are portrayed as despicable ful presentations of classical theory, mone- racists. The focus, instead, is on American tarism, real business cycles, and rational Indians, blacks, and Hispanics, all of whom expectations. Nevertheless, the authors make are presented as victims. it clear why the explanation of cyclical phe- The editors of these readers, and the pro- nomena offered by Hayek and other Austrians fessors of education and state education com- is superior to all others. Only the Austrians missars whose recommendations they follow, have successfully combined monetary and are concerned primarily with quotas for the capital theory. And if macroeconomics is ever number of politically correct readings by to be meaningful, it must address these writers who are black, Hispanic, Indian, dis- “issues in capital theory and the time struc- abled, and so on. The quotas and ideology ture of production.” leave little room for exciting, new children’s The next time I teach a university course on literature, and since classic children’s litera- business cycles I intend to use this book as the ture largely comes from the politically suspect main text. J pre-1970 “dark ages,” it has practically been Larry Sechrest is associate professor of economics at outlawed. Sul Ross State University, Alpine, Texas. Stotsky cleverly intuits that the claim of prejudice in classic children’s literature (for example, by Robert Louis Stevenson and Rudyard Kipling) is a cover story for the Losing Our Language: How Multicultural source of multiculturalists’ real anger: that Classroom Instruction Is Undermining the stories are so bloody good! The fantasy, Our Children’s Ability to Read, Write, whimsy, and relatively rich vocabulary of the great literature children have traditionally and Reason : ‘ wanted to read creates a special, private world by Sandra Stotsky of the imagination. Free Press ¢ 1999 307 pages © $26.00 Stotsky indicts multiculturalists as seeking to imprison children in a regimented, mean little public world. The preachy pseudo- literature they force on children uses vocabu- andra Stotsky, a researcher at the Harvard lary that is a mix of leaden, abstract nouns; Graduate School of Education, has for useless foreign terms that are often presented over 20 years studied the cognitive and politi- with no guide to pronunciation; confusing cal (she prefers “civic”) consequences of con- pidgin languages such as “Spanglish” and temporary educational fads, as well as their “ebonics”; and little or no vocabulary that historical predecessors. Losing Our Language children can build on in their future studies. argues that during the past 30 years the peda- Thus at ages when children’s learning should gogical theories and strategies used to teach be accelerated, it is actively decelerated. And children English have harmed their cognitive instructional guides demand that teachers development by supplanting academic goals lead small children in discussions of grown- with social goals and increasingly anti- up concerns such as the evils of capitalism intellectual methods and materials. and racism. Stotsky reports that contemporary English The impoverished vocabularies are part of a “language arts” readers misrepresent Ameri- war on English, which the educationists and can history by refusing to tell children about state education officials who run the textbook- great American leaders, inventors, and scien- adoption process insist oppresses black and Reviewed by Nicholas Stix ===== PAGE 61 ===== Books 61 Hispanic children. Instead of improving the Concluding that dodges by multicultural teaching of English for these children, the education professors and teachers are the “solution” is to destroy the English language: result of their laziness, unconscious racism, “Self-righteous educators have chosen to take and desire to enhance their own self-esteem at out their professed anger at this country’s children’s expense, Stotsky gives parents social problems on the English language advice on how to regain control of their chil- itself. Unwilling to engage in the hard work of dren’s education. helping all children learn how to read and This is an exhaustively researched, rigor- write, they have spitefully made the English ously argued work. However, in her insistence language the object of their seeming frustra- on maintaining a civil tone, Stotsky has avoid- tion because it is so vulnerable, especially in ed telling the occasionally brutal social histo- its written form. What is not clear is how ry from which this pedagogy derived. The these educators can be held accountable for Black Power and New Left movements grew the damage their pedagogical notions are into the apartheid movement of multicultural- inflicting on a fundamental biological process ism, which mixes notions from communism, in human development.” national socialism, and caste thinking. Stotsky observes repeatedly that no Through affirmative action and violent “com- scholarship supports the multiculturalists’ munity control,” multiculturalists took over pedagogical claims. Influential education both university schools of education and slum- researchers such as Carl Grant of the Univer- district public schools. They installed incom- sity of Wisconsin and James Banks of the petent professors and often functionally illiter- University of Washington constantly refer to ate school teachers based on the color of their other “research” that supposedly backs up skin and their degree of hatred, while running their own outlandish claims. But no such Off competent educators of all colors. Only research exists. Stotsky notes that in contrast then did the pedagogy and teacher guides to early twentieth-century progressive peda- come along to rationalize the apartheid. gogues, multiculturalists consider the mere The truth can be a nasty business. LJ request for factual support proof of racism. Nicholas Stix is a freelance writer in New York. FEE is pleased to announce the arrival of the second in our series of Occasional Papers: Assurance and Trust in a Great Society by Professor Dan Klein An intriguing look at the ways markets promote and reward relationships built upon trust. a This collection of four essays provides F | vigorous counterarguments to those who claim that government alone is capable of policing against fraud and unfair 4 dealing. ON SALE NOW FOR $5.95 Plus shipping and handling ===== PAGE 62 ===== BARNETT MENSA PALMER BRANDEN BOUDREAUX BEITO POSTREL STUDY LIBERTY A CATO UNIVERSITY THIS SUMMER! RANCHO BERNARDO INN SAN DIEGO JULY 29-AUGUST 4 CATO UNIVERSITY IS OFFERING A FULL CURRICULUM— HISTORY, ECONOMICS, LAW, PHILOSOPHY, FOREIGN AFFAIRS, AND MORE. FAacuLTY: Randy Barnett, Professor of Law, Boston University. Author, The Structure of Liberty; Charles Mensa, Director, Institute of Economic Affairs—Ghana. 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Call (202) 218-4633 or visit www.cato-university.org for program and for scholarship applications. 5 Single: $1 2507 Cato University will also hold a long-weekend seminar at the Hotel Omni = “Couple $2; 300 Montréal in Montreal, Quebec, October 19-22. Check www.cato-universi- = ty.org for tuition, faculty, and program. Cato Institute * 1000 Massachusetts Avenue, N.W. ® Washington, D.C. 20001 ===== PAGE 63 ===== The Pursuit of Happiness by Walter E. Williams IDEAS ON IBERTY APRIL 2000 Who May Harm Whom? moking has been one of the hot controver- We cannot say whose harm is more worthy of sies of our time. Many people find tobac- being avoided because it’s impossible to make co smoke annoying, smelly, and just plain interpersonal utility comparisons. In other dirty and unpleasant. Some smokers them- words, there is no scientific way of deciding selves agree. But today’s smoking restrictions, whose well-being is more important. not to mention the attack on smokers and The impossibility of interpersonal utility extortion of tobacco companies, could not comparisons is applicable to most situations. have been engineered simply on the grounds Suppose a beautiful lady is pursued by Jim that tobacco smoke is unpleasant. We needed and Bob. If Jim wins her hand, Bob is another reason. So the Environmental Protec- harmed, and if Bob wins her hand, Jim is tion Agency (EPA), using bogus science, liter- harmed. We cannot scientifically determine ally manufactured the finding that second- whose harm is more worthy of being avoided. hand smoke is a class A carcinogen causing In a socialistic society, conflicting harms death and illness for tens of thousands of non- are resolved through government intimidation smokers. The major news media, along with and coercion. In a free society, conflicting anti-tobacco zealots, convinced us of the wis- harms are settled through the institution of dom of the EPA report. They downplayed or private property rights. Private property rights ignored findings of outright EPA fraud.! are owners’ rights to keep, acquire, use, and The EPA “proved” that smoke harms other dispose of their property as they deem fit, so people. Preventing harm to others, especially long as they do not violate the property rights children, is something most Americans sup- of another. port. Thus all manner of smoking regulations descended upon the nation, including bans in Who Owns the Air? airplanes, airports, restaurants, bars, and workplaces, and even open-air stadiums. In a free society, whether smoking harms Lets pretend that the EPA’s bogus science others or not is irrelevant. The relevant issue is legitimate and examine this business about is who owns the air? It is clear that if you own harming others. First, we should acknowledge it, you have the right to decide how it is used. that we live in a world of harms. The second- If you do not want tobacco smoke in your air, hand smoke from my cigarette might harm that is your right and the government should you. However, your preventing my smoking protect it. By the same token, if I own the air, harms me, since I will have less enjoyment. I also have the right to decide how it is used. — I to have t 1 Walter Williams is the John M. Olin Distinguished ul want to or ebacco smoke ih my air, , Professor of Economics and chairman of the eco- ave every nght to do so an € governmen nomics department at George Mason University in Should protect my property rights just as it Fairfax, Virginia. protects yours. 63 ===== PAGE 64 ===== 64 IDEAS ON LIBERTY e APRIL 2000 Most people will agree that for all intents it. This is true for a free society; however, so and purposes the air in your house belongs to much of mankind exhibits a generalized con- you. That being the case, other people do not tempt for the principles of liberty. We suc- have the right to use your air in ways that you cumb to the temptation of using the state to do not approve. Similarly, the air in my house forcibly impose our preferences on others. In belongs to me and other people do not have doing so, we establish dangerous precedents rights to use my air in ways that I do not that have dire implications for liberty. After approve (like keeping it smoke-free). Most all, if health concerns become the reason for Americans probably agree that people have violating private property rights and forcibly the right to decide whether smoking is per- overruling people’s preferences, where does it mitted in their own homes, but that is where end? There are people who want high taxes on the agreement ends. so-called junk food, with the proceeds used to A majority of Americans approve of laws build hiking and biking paths. There are peo- prohibiting smoking in restaurants, bars, air- ple who want to regulate caffeine in coffee, planes, factories, offices, and other “public” sodas, and chocolates. There are people who places. But why should their wishes be want to regulate the size of meals in Chinese indulged through force of law? Are those and Mexican restaurants because they are places publicly owned? No. For the most part, deemed too large and contribute to the they are private property simply doing busi- nation’s obesity problems.? ness with the public. As such, the institution Health concerns can be used to justify con- of private property rights should resolve any trol of a considerable part of our day-to-day conflict over smoking. The owner of a restau- lives, from what time we go to bed to whether rant or bar has the right to decide whether we exercise. Some might claim that such a smoking is permitted on his premises. Cus- concern is overly alarmist and that kind of tomers have the right to decide the terms on government control is impossible. But back in which they patronize the restaurant. If the the 1960s, when anti-tobacco zealots were owner does not permit smoking, then people simply asking for nonsmoking sections on who wish to smoke during dinner can decide airplanes, who would have predicted what we not to go there. Similarly, an employer who have today? Had the zealots revealed their wishes to permit smoking in his offices true and complete agenda when they started should have the right to do so. People who out, they never would have gotten those first wish to work in a smoke-free office envi- nonsmoking sections. Od ronment can simply choose some other place 1. In July 1999, U.S. District Court Judge William L. Osteen of employment where the owner prohibits found reason to nullify the EPA’s 1992 report that claimed second- smoking hand smoke to be a class A human carcinogen and cause of lung can- " cer. He found that the EPA knowingly, willfully, and aggressively There is absolutely no moral argument for put out false and misleading information. : 2. Michael Jacobson, director of the Center for Science in the using the power of the state to force a restau Public Interest, says about large food servings, “It’s high time the rant owner who does not want smoking in his [restaurant] industry begins to bear some responsibility for its con- establishment to accommodate smokers. tribution to obesity, heart disease and cancer.” Dr. Ronald Griffiths . | at Johns Hopkins University, concerned about coffee addiction says, Likewise, there is no moral argument for “If health risks are well-documented, caffeine could be catapulted in : _ public perception from a pleasant habit to a possibly harmful drug of using the power of the state to force a restau abuse.” Along with Jacobson, he wants the FDA to regulate caffeine rant owner who permits smoking to prohibit content in soda, coffee, tea, and chocolate.