===== PAGE 1 ===== ol DEAS ON [IBERTY May 2000 Vol. 50, No. 5 FEATURES 8 The Dangers of Growing Up Comfortable by Steven Yates 14 Trust and Privacy on the Net by Daniel B. Klein 19 The Internet and the Death of the Sales Tax by Richard W. Ault and David N. Laband 21 Disaster Relief Then and Now by Janet Sharp Hermann 26 Free Markets and “Highest Valued Use” by Roy E. Cordato 29 A Breach of the Public Trust by M. Reed Hopper ¥ 31 La Lucha: The Human Cost of Economic Repression in Cuba by Patricia Linderman 37 The Cuyahoga Revisited by Stacie Thomas 39 The Starship Private Enterprise by Timothy Sandefur 42 A Privatization Story by Christopher W. Mayer 48 The Common Good Demystified by Edward W. Younkins 50 It’s About Power—Period by Roger Clites COLUMNS 4 THOUGHTS on FREEDOM—Mutual Accommodation by Donald J. Boudreaux ¥ 17 IDEAS and CONSEQUENCES—The Census: Inquiring Minds Want to Know a Lot by Lawrence W. Reed 24 POTOMAC PRINCIPLES—America in East Asia by Doug Bandow 35 THE THERAPEUTIC STATE—Remembering Masturbatory Insanity by Thomas Szasz ¥ a6 ECONOMIC NOTIONS—Freedom of the Price by Dwight R. Lee 51 ECONOMICS on TRIAL—Is Greed Good? by Mark Skousen 63 THE PURSUIT of HAPPINESS—Pulling Us Apart by Charles W. Baird DEPARTMENTS 2 Perspective—Unworthy of the Name by Sheldon Richman 6 Campaign-Finance Reform Will End Corruption? It Just Ain’t So! by Sheldon Richman 54 Book Reviews Freedom in Chains: The Rise of the State and the Demise of the Citizen by James Bovard, reviewed by Robert Batemarco; The Pity of War by Niall Ferguson, reviewed by John V. Denson; First Principles: The Jurisprudence of Clarence Thomas by Scott Douglas Gerber, reviewed by Joerg W. Knipprath; Beyond Unions and Collective Bargaining by Leo Troy, reviewed by George C. Leef; Turbo-Capitalism: Winners and Losers in the Global Economy by Edward Luttwak, reviewed by David L. Littmann; Development as Freedom by Amartya Sen, reviewed by Victor A. Matheson; In Plato’s Cave by Alvin Kernan, reviewed by Jack Sommer. Cen: States ensus 2000 Lesson plans for ¥ articles are available at www fee.org. ===== PAGE 2 ===== IDEAS e—— Unworthy of the Name Published by ) feo The Foundation for Economic Education When? a tax cut not a tax cut? When Its a Irvington-on-Hudson, NY 10533 targeted tax cut. That is the new euphemism Phone (O11) 291-7230 FAX (914) 591-8910 for government’s manipulation of people’s RL Irwww fee.org behavior with the tax code. Government can President: Donald J. Boudreaux get us to do things in several ways, including . . decree, subsidy, tax credit, and tax deduction. Editor: Sheldon Richman . . The last two are particular favorites of the cur- M ing Editor: Beth A. Hoff . anaging =avor orman rent occupant of the White House. All those Editor Emeritus Paul L. Poirot methods aim at getting people to do what they Book Review Editor apparently wouldn’t do otherwise. (Or else George C. Loef why is the inducement needed?) The analysis Editorial Assistant i 1 Mary Ann Murohy gets tricky, however, because people might . have done some of the things government Columnists ) , L Charles W. Baird rewards if they weren’t taxed in the first place. Doug Bandow For example, the government can offer a tax Dwight R. Lee deduction for saving money. As a result, peo- Lawrence W. Reed : Russell Roborts ple might save more than they would have Mark Skousen without the deduction. But they might have Thomas Szasz saved the higher amount and even more if Walter E. Williams there were no taxes at all. No one can know Contributing Editors that, however, least of all politicians and Peter J. Boettke Clarence B. Carson Thomas J. DilLorenzo bureaucrats. Besides, there’s an easier way to get people to behave as they would if taxes Burton W. Folsom, Jr. were closer to zero: cut taxes! Joseph S. Fulda Another objection to targeted tax cuts is Dein Bien Greaves that the politicians have no way of knowing if obert . Ton Hospers they are “buying” too much of the favored Raymond J. Keating conduct. They are fond of giving deductions Daniel B. Klein and credits to people who save for their chil- Wendy McElroy dren’s college education. But how do we know br peter that parents aren’t buying too much educa- Ronald Nash tion? For the policymakers, there is no such Edmund A. Opitz thing as too much education. But of course James L. Payne there is. Every choice has a tradeoff. pram ® Peterson The point is that governments manipula- ane o. aw . . . Richard H. Timberlake tion of behavior by tax code is no better than Lawrence H. White manipulation by cash subsidy or direct order. hae bh [13 Ideas on Liberty (formerly The Freeman: Ideas on Liberty) is the month- Politicians shouldn t be allowed to count tar- ly publication of The Foundation for Economic Education, Inc., Irvington- geted tax cuts” as true tax cuts. Since they on-Hudson, NY 10533. FEE, established in 1946 by Leonard E. Read, is a . . non-political, educational champion of private property, the free market, 1Mpose a cost on the taxpayer—the opportuni- d limited . FEE is classified 26 USC 50i(c)(3 - : : con oratorio 1 FEE I classified as a (©)3) tax ty forgone by engaging in the government’s Copyright © 2000 by The Foundation for Economic Education. Per- 1 OV] 1 ni mission is granted to reprint any article in this issue, except “La Lucha,” p rescribed behavior- they add insult to mjury provided credit is given and two copies of the reprinted material are sent by implying that it was the government’s to . The costs of Foundation projects and services are met through dona- money all along. tions, which are invited in any amount. Donors of $30.00 or more receive tel a subscription to Ideas on Liberty. For delivery outside the United States: Only unconditional tax cuts are worthy of $45.00 to Canada; $55.00 to all other countries. Student subscriptions are the name $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. Bound volumes of The Freeman are available from The Foundation for calendar years 1972 to 1998. The magazine is available in microform from University Microfilms, 300 N. Zeeb Rd., Ann Arbor, MI 48106. 2 ===== PAGE 3 ===== * kk government must protect the natural Does capitalism carry the seeds of its own resources. Neither was true, as Stacie Thomas destruction? Some thinkers have wondered if demonstrates. the free market’s bounty can become so com- Can space exploration be left to decentral- monplace that people forget what is required ized private efforts? Timothy Sandefur finds for its continuation. Steven Yates takes a fresh an analogy that points to the answer: Star approach to the question by examining it at Trek. the level of an individual family. It’s good for government to privatize opera- The Internet has prompted a good deal of tions that belong in the marketplace. But concern about privacy in the electronic age. unless it does so all the way, the taxpayers will Daniel Klein puts that concern through the still be on the hook. Christopher Mayer prism of the marketplace and comes up with explains. some reassuring conclusions. Before we can know if government works The electronic age has produced something for the common good, we have to know what else: new opportunities for government to the common good is. Edward Younkins impose taxes. It’s not just a bad idea, write unpacks this much-abused concept. Richard Ault and David Laband; it’s ultimate- Government programs come dressed up in ly futile. the rhetoric of the general welfare. But as In 1811 an earthquake of record strength hit Roger Clites reminds us, they all come down North America. The government did not to one thing. spring into disaster-relief mode, as it would Our columns burst with insights this do today. Therein lies a lesson, drawn by Janet month: Donald Boudreaux looks at the mar- Sharp Hermann. vel of the market in a unique way. Lawrence Champions of the free market often praise Reed doesn’t like what the Census Bureau its ability to direct resources to their “highest plans to count this year. Doug Bandow evalu- valued uses.” Can it be so? Roy Cordato says ates America’s East Asian policy. Dwight Lee the claim rests on insidious premises. calls for freedom of the price. Thomas Szasz Regulation is bad enough. But M. Reed revisits psychiatry’s paradigmatic disease. Hopper writes that there is something even Mark Skousen ruminates on the phenomenon worse: a regulatory state that can change the of greed. Charles Baird brings sense to the rules anywhere anytime. discussion of the wealth gap. And your editor, Karl Marx promised a new man under inundated with claims that campaign-finance socialism. He was right in a way he never controls will cure government of corruption, dreamed. Patricia Linderman, who lived in bellows, “It Just Ain’t So!” Cuba for several years, describes the toll that This issue’s reviewers pass judgment on the denial of economic freedom has exacted. books about government’s treatment of its cit- The environmental movement as we know 1zens, World War I, Justice Clarence Thomas, it emerged in 1969 from the flames on a river unions, “turbo-capitalism,” development eco- in Ohio. For many, that burning river was a nomics, and the decline of great universities. symbol of industrial capitalism and proof that —SHELDON RICHMAN The apple icon ® identifies articles that are appropriate for teaching students sever- al major subjects—including economics, history, government, philosophy, and current issues. We also provide sample lesson plans for these articles on our Web site www.fee.org and in written form. Professors, teachers, and homeschooling parents need only to visit our Web site or request written lesson plans to take advantage of this unique service. ===== PAGE 4 ===== sa. Thoughts on Freedorm by Donald J. Boudreaux IDEAS ON[IBERTY May 2000 Mutual Accommodation n The Future and Its Enemies, Virginia your labor, your land, oil, tungsten, cedar, Postrel notes the astonishing fact that if coffee beans, chickens, rivers, the Empire you thoroughly shuffle an ordinary deck of 52 State Building, Windows 2000, the wharves at playing cards, chances are practically 100 Houston, the classrooms at Oxford, the air- percent that the resulting arrangement of port at Miami, and on and on and on. No one cards has never before existed. Never. Every can possibly count all of the different produc- time you shuffle a deck, you produce an tive resources available for our use. But we arrangement of cards that exists for the first can be sure that this number is at least in the time in history. tens of billions. The arithmetic works out that way. For a When you reflect on how incomprehensibly very small number of items, the number of large is the number of ways to arrange a deck possible arrangements is small. Three items, containing a mere 52 cards, the mind boggles for example, can be arranged only six differ- at the number of different ways to arrange all ent ways. But the number of possible arrange- the world’s resources. ments grows very large very quickly. The Of course, the vast majority of these ways number of different ways to arrange five are useless. For example, one possible items is 120 . . . for ten items it’s 3,628,800 arrangement would have me holding a scalpel . . . for fifteen items it’s 1,307,674,368,000. in an operating room as I prepare to perform The number of different ways to arrange 52 heart surgery on a patient. This would be a items is 8.06667. This is a big number. No regrettable arrangement, for I have no med- human can comprehend its enormousness. By ical training. A drink made of vermouth way of comparison, the number of possible mixed with kerosene and served in a sugar ways to arrange a mere 20 items is cone would be another unfortunate combina- 2,432,902,008,176,640,000—a number larger tion—as would a steel mill whose receiving than the total number of seconds that have docks are loaded not with iron ore but with elapsed since the beginning of time ten billion bales of cotton. years ago—and this number is Lilliputian If our world were random—if resources compared to 8.06667. combined together haphazardly, as if a giant took them all into his hands and tossed them A Multitude of Options down like so many dice—it’s a virtual cer- tainty that the resulting combination of What's the significance of these facts about resources would be useless. Unless this numbers? Consider the number of different chance arrangement were quickly rearranged resources available in the world—my labor, according to some productive logic, nothing worthwhile would be produced. We would all Donald Boudreaux is president of FEE. starve to death. Because only a tiny fraction ===== PAGE 5 ===== of possible arrangements serves human ends, social institution that encourages mutual any arrangement will be useless if it is chosen accommodation. randomly or with inadequate knowledge of Private property eliminates the possibility how each and every resource might be pro- that resource arrangements will be random, ductively combined with each other. for each resource owner chooses a course of action only if it promises rewards to the owner that exceed the rewards promised by all other available courses. For each consumer, this How, then, to select from all the possible means spending money on those items that arrangements of resources those relatively best satisfy his individual tastes. For each pro- few that serve human ends? Central planning ducer, this means finding those uses that won’t do. To see why, assume that there aren’t promise the highest profit. Because profit in tens of billions of resources in the world, but free markets comes from satisfying as many a mere 20. Again, the number of possible consumers as possible, each producer is for- ways to arrange 20 resources is greater than ever on the lookout for better ways to use his the number of seconds that have existed since resources to satisfy consumers. the beginning of time. No human intelligence Put differently, a private-property regime can even survey all of these possible arrange- rejects top-down direction from government. ments, much less evaluate the objective prop- Instead, decisions about how each resource is erties of each arrangement. (For example, will to be used are left in the hands of each this seed corn grow better on plot of land A or resource owner, who surveys the economic on plot of land B? Will Bill Gates be more landscape within his purview to see if and effective at designing computer software or how he can better deploy the resources at his designing women’s lingerie?) When you add disposal in ways that make the resources of to this impossibility the central planner’s other people more valuable. If he succeeds, immensely greater difficulty of learning his resources as well as those of countless each person’s tastes, preferences, and dreams, others are made more valuable. Because pri- the prospect of having a person or com- vate property gives to each resource owner mittee select wisely from among the (including people who own nothing but their 2,432,902,008,176,640,000 possible arrange- own labor) both the power to reject offers that ments of only 20 resources is revealed as are unattractive relative to other options, and utterly futile. Imagine, then, the impossibility the incentive to use their resources in ways of this task given that the world’s resources that do most to help others, the result is a sys- number in the tens of billions. tem of peaceful, mutual accommodation. And yet, we witness all around us an Hayek rightly called this result a “marvel.” arrangement of resources that’s productive and It is a breathtakingly complex and productive serves human goals. Cotton bales are not arrangement of countless resources. This delivered to steel factories; Bill Gates does not arrangement emerged over time (and is still design women’s lingerie; television cabinets emerging) as the result of billions upon bil- are not made of caramel. Today’s arrangement lions of individual, daily, small decisions of resources might not be perfect, but it is vast- made by people seeking to better employ their ly superior to most of the trillions upon tril- resources and labor in ways that other people lions of other possible arrangements. find helpful. Despite being unplanned, the How have we managed to get one of the order itself is governed by a strict logic—that minuscule number of arrangements that of mutual accommodation—a logic contained work? The answer is private property—a only in the institution of private property. [J Bottom-Up, Not Top-Down ===== PAGE 6 ===== IDEAS ON [IBERTY May 2000 Campaign-Finance Reform meddles with government—by lobbying, by . . a slipping loopholes into legislation and by the Will End Corr uption? other corrupt practices. . . . One goal of the reform . . . is to curtail the lobbying system . that exists precisely to ensure that favors and It t A t S | distortions continue to flourish.” Jus IN 0! Before getting to the meat of the matter, let’s consider the solutions to this problem. Limits on contributions are limits on peaceful Perk with an investment in government (though probably not creative) activity. In a power will torture logic like a medieval free society you wouldn't expect it to be ille- inquisitor rather than face the facts. Consider gal to give as much money as you wish to campaign-finance reform. someone else so that he can campaign, that is, The standard reformist wisdom is that cam- speak to voters in an effort to get elected. Par- paign contributions corrupt the democratic ticipating in campaigns, even by giving process: Candidates need money to run for money, looks like a form of expression pro- office. Corporations and wealthy folks offerto tected by the doctrine of natural rights and provide the money in return for favors when reflected in the First Amendment to the U.S. the candidates take or resume office. Politi- Constitution. In a Supreme Court ruling cians pay their debts by writing tax loopholes, upholding a state’s contribution limits last subsidies, and other goodies into law. The “lit- winter, Justice John Paul Stevens wrote, tle guy” can’t compete in the bidding for “Money is property; it is not speech.” That’s favors and, worse, ends up financing the pay- too glib. Speech may require spending money. offs to the big contributors. Surely Justice Stevens would not overlook The proffered solutions to this problem other restrictions on the use of money that range from strict limits on contributions all had the effect of suppressing speech. Besides, the way to a ban on them, with campaigns why should property receive less protec- financed by the taxpayers. tion than speech? Ultimately, the right to The public hasn’t shown much interest in engage in speech is a property right, since the matter. But it’s a favorite of reporters, pun- it includes the use of property, beginning dits, and editorial writers, whose influence, with one’s larynx and the spot on which one coincidentally, would be magnified if cam- stands. paigning were restricted. Time magazine ran a The idea of having the taxpayers pick up cover story February 7 by the famous report- the tab for campaigns is so outrageous it’s ing duo Donald Bartlett and James Steele, the hard to believe anyone really favors it. You'd first in an occasional series titled “Big Money think that even the watered-down notion of a and Politics: Who Gets Hurt?” The editorial free society most people accept today would pages of all the major newspapers have include the freedom to abstain from con- solemnly weighed in on this threat to the tributing to candidates. Thomas Jefferson said republic. Typical was the Washington Post of compelling a person to support a cause he dis- February 4 in a discussion of presidential can- agrees with is “sinful and tyrannical.” I can’t didates (whose names have been elided so as even imagine a rebuttal. Being forced to give not to imply a dignity they do not warrant): money to politicians one despises is the kind “The scope of market freedom is defined not of thing that would have driven the Founders just by how much government meddles with to revolution had taxation alone not done the business, but also by how much business trick. ===== PAGE 7 ===== 7 It doesn’t take much intelligence to see that This is an old story. Frederic Bastiat wrote limits or bans on contributions must help about it in The Law (1850), pointing out that incumbents at the expense of little-known legalized plunder and the distribution of challengers. Considering, as James Payne has booty go hand in hand. Trying to separate written, that incumbents become bigger them is like trying to have fire without spenders the longer they are in office, this is smoke. (See Lawrence Reed’s column in this bad news to anyone wishing to see govern- issue for Bastiat’s own words.) In The Road ment power curtailed. to Serfdom, Hayek wrote, “In a planned soci- If the solutions are ghastly, the grasp of the ety we shall all know that we are better or problem is worse. To paraphrase: People buy worse off than others, not because of cir- government favors through campaign contri- cumstances which nobody controls, and butions, so let’s restrict or outlaw campaign which it is impossible to foresee with cer- contributions. What’s missing from this pic- tainty, but because some authority wills it. ture? The favors that politicians have the And all our efforts directed toward improv- power to sell, of course. ing our position will have to aim, not at fore- It hasn’t occurred to the reformers that if seeing and preparing as well as we can for politicians had nothing to sell, no one would the circumstances over which we have no be buying. On the other hand, if there is some- control, but at influencing in our favor the thing to sell, outlawing its purchase won't put authority which has all the power” (empha- a stop to the trading. (See the War on Drugs.) sis added). Hayek was referring to a society We live in a country where politicians can in which government presumes to plan all arrange for particular interests to get tax economic affairs. But the principle is in exemptions, cash subsidies, and other favor- force when the government’s ambitions are able special treatment from the tax and regu- more modest. If the government has make- latory machinery. As long as that’s so, people or-break tax and regulatory power over busi- will eagerly invest money in the politicians ness, potential beneficiaries and victims will most likely to make such arrangements. They look after their interests. will also invest to prevent politicians from The opposite principle follows: if govern- doing them harm. Fred McChesney describes ment is scaled down to, at most, constitution- this phenomenon in his aptly titled book al dimensions, the campaign finance issue Money for Nothing. (I hasten to note that there will vanish. But the people who feel our pain is an immense moral difference between pay- can’t conceive of a government without ing to stave off state aggression, for example, favors. Thus they refuse to see that they—not buying a tax loophole, and paying to get a money—are the source of the corruption. subsidy—someone else’s money.) H. L. Mencken reduced political science The irony is that the very people who decry to a single pregnant sentence when he the corruption of money in the political sys- wrote, “every election is a sort of advance tem wish to expand the scope of government auction sale of stolen goods.” The rest is and give it more favors to sell. How can they elaboration. propose that government be a comprehensive There’s a simple way to keep money out of service center, then object when people try to politics: keep politics out of our money. buy its services? —SHELDON RICHMAN ===== PAGE 8 ===== IDEAS ON IBERTY The Dangers of Growing Up Comfortable by Steven Yates e begin with a sort of parable. cy to his family steadily climb. Whatever his There lives in a typical American sub- net worth, however, he kept a very close eye urb a fellow I will call Floyd. Floyd was born on where his money went and what it was shortly before the Great Depression. His par- doing. This was force of habit. It never ents were unemployed for several of those occurred to him that anyone would do other- years. Money was extremely tight. As a child, wise. Floyd knew what hunger was. He worked at Now sometime during the early 1950s whatever he could do to help out the family, Floyd and his wife had a son, Eric. As a child, no matter what the new child labor laws said. Eric had most everything he wanted. Floyd He carefully saved every penny, and in so was determined that his son would not grow doing, he learned to be frugal. What you earn, up hungry and struggling the way he had. So you don’t spend frivolously. You save as much Eric lived in surroundings that were entirely as you can. different from those of his father at the same As Floyd grew up, he developed a natural age. Instead of a tiny, cramped apartment in understanding of money and wealth. He never which half of the appliances didn’t work, assumed the world owed him anything, Eric's environment was a comfortable house because nothing in his personal experience in a middle-class subdivision. During his suggested that. He'd seen his parents struggle childhood and early teen years, money wasn’t and skimp and scrape, and he'd learned to do a problem. He didn’t know where it came so himself. from but there always seemed to be plenty of As an adult in the 1950s, Floyd began to do it. Unlike his father, Eric came to take it for very well for himself. He got married in his granted. He loved, for example, to spend the twenties. Though earning first four, then five, money his parents gave him on stereo equip- and eventually six figures a year, his habits of ment, records, a new bicycle, and so on. frugality stayed with him. He and his wife When Eric turned 16 his father wanted him lived in a modest house, with modest furni- to get a job to begin paying some of his own ture. The two of them began to build up a sub- expenses. Eric resented it but got the job. At stantial savings account. Floyd made some work he chafed at the tasks demanded of him. cautious investments in the stock market, and He did not like following rules set by bosses watched the assets of what would be his lega- who were strangers. He did not save the money EEE—— he made but spent it on a girlfriend, taking her Steven Yates, who has a Ph.D. in philosophy, is a yo 5 plush restaurant he liked. Finally he lost writer and consultant living in Columbia, S.C. He is oo. } . the author of Civil Wrongs: What Went Wrong With his job one day because of his poor attitude. Affirmative Action (ICS Press, 1994) and numerous He had trouble getting another one, simply articles and reviews. because the economy had taken a downturn ===== PAGE 9 ===== 9 and jobs he was qualified for were scarce. Eric the medical bills for the chronic headaches couldn’t understand any of these things. He and backaches he had begun having. thought he should be hired anyplace he want- Floyd couldn’t understand what Eric’s ed, simply because of who he was. He believed problem was. Never had. Eric was becoming would-be employers should care about him a major unanticipated expense in his own personally, the way his parents did. right. This was the one thing in Floyd’s life he hadn’t counted on. Why couldn’t the kid assume some responsibility, as he had done when he was younger? Why did he resent In other words, though he wouldnt have working so much? Why did he have no sav- put it this way, Eric had come to believe the ings account worth speaking of? Why did he world owed him a living—or, at the very least, spend all his money like there was no tomor- he ought to be able to obtain money without row? Why was he so utterly uninterested in working for it. At least part of his experience money, except when he needed to borrow seemed to confirm this. After all, money had some from his parents? And what would he do always been plentiful, hadn’t it? Why should when the well ran dry, as eventually it would it be so difficult to obtain now? And why did at this rate? everything he made at the few jobs he'd had An aging Floyd is baffled by Eric’s behav- seem to slip through his fingers like water? ior, and sometimes lies awake at night won- As a young adult with a university degree, dering if he has done something wrong. Eric silently resented his job; his resentment was silent because insubordination and sar- Owed a Living castic comments had already cost him a cou- Lessons ple of potentially good jobs, and he had In this parable are some important lessons. learned that silent resentment has more sur- Prior to the lessons, though, it is useful to vival value than open resentment. rehearse some preliminaries. The free market He was constantly frustrated, however. He has been the greatest engine of wealth cre- looked forward to vacations on the beach with ation and distribution the world has ever seen. his friends. He and his latest girlfriend ate out Every scholar worthy of that name now real- a lot. His money still seemed to disappear. izes this. During the 1900s various kinds of With little knowledge of how to manage his socialism and welfare-statism were tried and money, he couldn’t have told you how much failed. As brutal dictators held sway over stag- he had in his checking account at any given nant economies, they brought only misery to time. He had no idea how to calculate his own their people. Only the capitalist West had bro- tax returns. His credit card debt was threaten- ken out of the cycle of stagnation and grind- ing to spiral out of control. He hadn’t started ing poverty by discovering the value of eco- any kind of a savings plan, as Floyd had done nomic freedom, rooted in such ideas as the at the same age. Retirement seemed a long natural rights of persons to keep the fruits of way off in the future. Eric was present- their labors and trade voluntarily with others oriented, not future-oriented. But since he in value-for-value exchanges. Picture Floyd didn’t have a very good job—hadn’t wanted surviving by buying, say, candy or shirts with to go to the trouble of finding one—he still what little money he had and then reselling had to borrow money from his parents from them for a profit. In a communist country, had time to time, usually around holidays or when he been caught doing this he would have been his automobile insurance payments were due. in serious trouble. In our capitalist one, he not Floyd did his son’s tax returns for him. Eric only was not penalized for his industry and had to borrow still more money, after acci- thrift, but was learning valuable lessons about dentally rear-ending another automobile, how a free economy works. because he had no reserve cash on hand to The first lesson Floyd learned is that the deal with such an unanticipated jump in his world does not take care of the individual. In insurance rates. Nor had he the money to pay a free-market society, with some limitations, ===== PAGE 10 ===== 10 IDEAS ON LIBERTY ¢ MAY 2000 individuals are expected to take care of them- none of the struggles his father had faced. He selves. Those who rise to the occasion pros- never went hungry. As a child hed never per. Those who do not rise to the occasion suf- worked to survive—never even been required fer the consequences of inaction. Rising tothe to do daily or weekly chores, like clean his occasion here means learning the first law of own bathroom or bedroom. His parents did the marketplace: that one can only serve one’s most everything for him except his school- own needs and interests and improve one’s work. While occasionally they told him he own standard of living by helping others serve should do more things for himself, they never their interests—providing them with a good followed through on it, so as Eric got older he or a service they want and are able and will- took his parents and their labors on his behalf ing to pay for. for granted. A second lesson Floyd eventually learned is He never questioned where money came that divisions of labor make it far easier fora from, but assumed it would always be there. group of people working together to help oth- When he was told to go out and earn it, he ers obtain what they want and are able and rebelled—instinctively. He couldn’t under- willing to pay for. Thus the formation of com- stand the changes he was being compelled to panies makes it easier to create larger adapt to: changes from a home life where he amounts of wealth. Floyd learned these had been protected to a work life with no such lessons in his childhood. They became protections. Eric was no economist or instinctive, a part of him. He might not have philosopher, either. He had no curiosity about been able to explain it. He had become a busi- where wealth came from. He just expected it nessman, not an economist or a philosopher. would always be there—and that others would He was a doer, not a talker. take care of him as his parents had. Floyd’s third lesson was that wealth does not consist merely of the change he carries around in his pocket but includes stored-up assets. The latter do not fall from the sky, or These stereotypes of Floyd and Eric are just appear as a result of some inexplicable, that: stereotypes. And to defenders of free miraculous force. In a world that does not markets, the above lessons are common take care of the individual, wealth can only knowledge. But there nevertheless are a few result from a careful plan of savings devised traps for the unwary, and it is important not to by each person. Even if one can keep the fall into them. The most important trap here is fruits of one’s labors, if they are immediately the belief that the comfort and safety of the spent they won’t generate wealth. Wealth is prosperity generated by markets is necessari- created when one consistently saves or invests ly good for those who grow up with it. a percentage of the fruits of one’s labors over Human beings are not exclusively rational a number of years and allows it to grow. creatures. Many intellectuals who have pro- However, there are a few things Floyd duced rational defenses of free markets (for didn’t learn, and these are less obvious. They example, Ayn Rand) have always simply help explain how and why Eric went astray. assumed that “perfectly rational man” is a They might explain why a percentage of the uniquely human ideal. But as philosophers generation Eric grew up with has remained from David Hume down through economists attracted to socialism despite its catastrophic such as F. A. Hayek never failed to point out, results. we are all far more creatures of habit than The lessons Floyd learned he learned we think—especially if these habits have through personal experience—what some call “worked.” Many of our most successful the “school of hard knocks.” These lessons of endeavors as a society revolve around tradi- life are not easily communicated to one’s off- tions that developed spontaneously through spring. The difference is between merely talk- the accumulation of the habits of a multitude ing about a sequence of events and actually of people. Some of these habits remain rela- living through them. Eric, it is clear, faced tively fixed; others change in response to new Traps for the Unwary ===== PAGE 11 ===== THE DANGERS OF GROWING UP COMFORTABLE 11 conditions, new ideas, or new inventions that leaves the “nest”—he will not have developed have proved their worth and become of value the survival skills he needs. to the people. Invariably, this is the reason an economy cannot be effectively planned, or micromanaged. None of the specifics can be predicted in advance. (Who, for example, It is both true, and necessary, that one’s could have predicted the meteoric rise of the family be nurturing in the sense of providing World Wide Web?) The problem is complexi- helpless infants and small children with the ty—the working out of the results of a multi- basic necessities of life. But a family environ- tude of variables only a small fraction of ment can be too nurturing. It is too nurturing which can be observed by any one person or if it does not teach the maturing child any- any group of persons at a given time. thing about what wealth is and where it comes Where do habits come from, and what does from—if it simply gives the child what he it mean to say that they “work”? Habits are wants out of a well-intentioned but misguided consistent patterns of action. They work if need to protect. Parents who always “do they solve the problems a person actually things to help” the child can be too nurturing, faces. They become almost automatic if they and can even discourage the child from acting yield stability in a person’s life over a long on his own. The environment will not create period—perhaps over a lifetime. The habits problems the child has to solve and can learn one develops, and whether or not a given from. Thus the child does not learn that inac- habit will work, depend quite a bit on one’s tion has consequences. environment. So while Floyd applied a lot of important We have to be very careful when we talk truths about money and wealth to his own life, about the relationship between a person and his he assumed that Eric would acquire these environment. There probably is no such single truths automatically, as if by osmosis (or per- relationship. It will vary from person to person. haps learn them in school). As a result, how- We are safe in saying that the environment is ever much his own personal lifestyle as a not everything. That is, it is not the complete businessman rejected welfare-statism in prin- determinant Marxists and other socialists ciple, he unintentionally allowed his family to would have us believe. But neither is it nothing. become a kind of welfare state in microcosm. As an explanatory tool for why some young Eric grew up too comfortable. His life illus- people continue to believe in socialism despite trates the dangers of too much comfort too the avalanche of evidence against it, or merely soon. These are the dangers of wealth and why one person succeeds and another fails, well-off circumstances, passed down instead knowledge about the way the person was raised of earned: the children can become the fami- Too Much Nurturing? could be very helpful. ly equivalent of a country’s welfare recipients. One’s immediate or proximate environment When the time comes, they find it difficult to creates the problem set a person encounters— learn as young adults the lessons their parents perhaps in childhood. If a person encounters learned in childhood. They may bitterly resent and solves problems directly connected to having to earn their own living. It is clear that skills of earning a living and building up resentment against the need to earn one’s own assets, then these translate into habits that living lies behind a lot of modern socialist ensure a prosperous life later (barring, of thinking. (This might explain why socialists course, acts of God or arbitrary edicts have tended to concentrate in modern imposed by a political system that change all research universities. Kept safe by tenure in the rules). the surrogate parent of the modern research A person who encounters no significant university, academe’s socialists exist, or sub- problems of this sort may never see the need sist, in a proximate environment without any to develop these habits, which are habits of real economic threats or problems.) thought as well as of action. Then when his What could Eric have done differently? He environment changes—as it will, when he never faced the problems his father had. To be ===== PAGE 12 ===== 12 IDEAS ON LIBERTY ¢ MAY 2000 sure, when he realized he was having trouble could have rewarded him with bonus pay. keeping jobs when others didn’t, his reason Action is always better than inaction. Develop should have told him something was wrong. a goal and a consistent strategy for reaching But Floyd had effectively held him back by that goal; judge actions by whether or not they never having sent him a consistent message help achieve the goal. Such are the keys to about the importance of work and of taking successful living. Communicating these ideas care of himself instead of relying on someone to one’s young is likely best achieved by else. This message remained in place, as requiring them to live the ideas consistently, Floyd continued to bail him out of jams when rather than simply giving them the fruits of he became an adult. one’s own labors. Some successful people What could Floyd have done differently? have recognized this, establishing relatively Hindsight, of course, is always 20/20. But small trusts for their children in their wills Floyd should have taught his son the value of and arranging to give the rest to charitable dollars and cents in ways similar to the lessons causes when they pass away. he'd once learned. He should have put Eric on a strict allowance, for exarhp le, with amounts Producing Responsible Adults in direct proportion to his having done specif- ic chores such as clean his bathroom or bed- There are, of course, schools of thought in room, or having worked in the kitchen. And academic child psychology that would find then if Eric spent his allowance and found this line of reasoning reprehensible. The ques- himself wanting something but having no tion to be posed for any such school is: does it money to pay for it, that was too bad. Floyds lead the child to recognize that comfortable best course of action would have been to surroundings have to be maintained through explain to Eric how his present lack illustrates conscious effort, or doesn’t it? Does it pro- the benefits of saving his allowance over duce responsible adults with the savvy to earn spending it. Saving rather than spending their livings and continue the wealth-building requires two important skills of wealth- traditions of their families? Or has it produced building: frugality and self-discipline. Self- lifelong quasi-adolescents, spendthrifts with discipline means learning to tell yourself No. no self-discipline and negligible personal Wanting something is not a reason for imme- assets, drowning in debt because they cannot diately going out and spending money to get it. manage their habits. Floyd and his wife should not have allowed We must realize that generations are differ- Eric to pick up the message that comfortable ent, because the environments they grow up in surroundings are automatic. If they had begun are different. It is not enough to produce intel- the lessons early enough, Eric would have lectual defenses of the free market, as impor- learned to take for granted that he had to tant as these are. It is necessary to communi- begin mastering his environment in stages—it cate this knowledge through object lessons is not the responsibility of others, including that build up habits. And it is necessary to start his parents. Another skill of wealth-building when the children are very young. The feed- is being able to control the relevant aspects of them-if-they-cry schools of thought simply your environment instead of being controlled have to go, if we are to avoid producing more by them or watching as they go to pieces. The generations of youthful socialists who assume only way to control your environment is to everything is going to be handed to them. take necessary actions and then work at trans- How to encourage this kind of education is, forming them into habits. (The adult Eric’s to my mind, an unsolved problem for freedom bathroom, bedroom, and kitchen, one can be thinkers today—particularly given that we are certain, are absolute messes!) talking about what the scientist/philosopher Floyd could have taught Eric that initiative Michael Polanyi once called “tacit knowing.” leads to reward. Should Eric have gone This is knowing that comes through lived beyond what was originally called for—for experience and the building up of habits, and example, by doing yard work—then Floyd that is therefore difficult to articulate as words ===== PAGE 13 ===== THE DANGERS OF GROWING UP COMFORTABLE 13 and lectures: as Polanyi put it, “we know automatically. They are not acquired through more than we can tell.” The Floyd of our cultural or even familial osmosis. Nor can parable knew how to prosper but did not or they really be taught in the abstract, except could not communicate this to his son. It is perhaps in rare circumstances to students likely that at least some of what went wrong actively seeking them out. They must be in the 1960s has its explanation here, along learned in the context of doing—as a way of with the fascination socialism continues to living in the world, and from early childhood have for many otherwise well-educated chil- on. Those who learn to do, will prosper. Those dren of the American middle class. who don’t, won't. CJ The laws of wealth creation that enable free " *Michael Polanyi, The Tacit Dimension (New York: Doubleday- markets to create prosperity are not learned Anchor Books, 1967), p. 4. foundation for Economic Education Annual Spring Dinner Featuring Dr. Alan Charles Kors Professor, University of Pennsylvania co-author, with Harvey A. Silverglate, The Shadow University: The Betrayal of Liberty on America's Campuses Introductory remarks by John Stossel Correspondent, ABC News 20/20 Sunday, May 21, 2000 Dinner Co-Chairs: John van Eck and Walter E. Williams Harvard Club, New York, NY Reception 6:00 P.M./Dinner 7:00 P.M. Sponsor tickets: $200.00 each For further information, please contact Nicole Gray at FEE, 914-591-7230, ngray@fee.org. ===== PAGE 14 ===== IDEAS ON [IBERTY May 2000 Trust and Privacy on the Net by Daniel B. Klein Wi the growth of the Internet has come respondent might fret over privacy as a way of a lot of talk about privacy. In a recent flattering himself. We like to think we are so cover story in The Economist, “The End of important that others want to talk about us. Privacy,” the magazine warned that “threats to That troubles of privacy and trustworthi- traditional notions of privacy will proliferate.” ness on the Net have not proven significant It cites a survey showing that 80 percent of should not surprise us. In free markets con- Americans worry about what happens to sumers reward producers only when all their information collected about them. concerns are met. Profits go to the producers The current debate over Internet privacy who are trustworthy and responsible, except seems to prove that no blessing is without its in fleeting and atypical circumstances. detractors. Public issues should be built on Suppose the consumer wants a reliable systemic patterns of actual human troubles. In watch. That want carries with it several ancil- privacy skirmishes the only actual infringe- lary wants: The consumer wants to know ments ever cited are isolated or ephemeral. where the watch is available; he wants to When the automobile became a widespread determine the claims made for the watch; he consumer product, did people fret over having wants assurance that the claims can be trust- something that could be broken into? They ed; he wants convenience in completing the installed locks and eventually alarms, built purchase; he may want discreetness in how garages and secure parking lots with fences information about the purchase is used. The and gates, and watched over them with video bundle of wants must all be addressed if the cameras. The need to secure their cars may producer is to win the consumer’s patronage have raised new problems for law enforce- and make a profit. ment, but certainly did not justify new regula- What are supermarkets, shopping malls, tion of the automobile industry or the securi- and established retailers if not ways of pro- ty industry. viding the ancillaries while relying on whole- The average citizen does not find it worth- salers for the primary want? The shopping while to inform himself about an issue when mall gives the consumer free parking, securi- he can’t affect policy. A pollster, it has been ty, pleasant surroundings, and brand-name said, is someone who asks citizens what they assurance. The supermarket too is really an think about something they don’t think about. immense fair where hundreds of manufactur- We can understand how the average survey ers sell their goods. Such places that serve Daniel Klein teaches economics at Santa Clara Uni- both the primary and ancillary wants may be versity. He is the author of Assurance and Trust in a called marketplaces. Great Society, a recently published FEE Occasional Each marketplace has to compete with Paper. other marketplaces. Safeway competes with 14 ===== PAGE 15 ===== 15 Lucky’s and to some extent with 7-Eleven. and safety. Classic examples include Under- There is a whole field of marketplaces com- writers Laboratories, Moody’s, AAA, and the peting for consumers’ dollars. It’s really a Orthodox Union. Some evaluators work on market for marketplaces. The important point the other side of the market. Consumers them- is that to succeed in the market for market- selves turn to Consumer Reports, Zagat’s, places, a marketplace must meet all the con- movie reviews, doctors, and so on to gain sumers’ wants, not just the primary want. assurance of quality and safety. Another type of marketplace is the Web site. Web sites also compete in the market for The Overlooked Market marketplaces. This manner of speaking may be confusing, but it underscores that assur- Nothing here should be startling. But a ance and privacy are just other things that careful study of that intangible good, assur- consumers demand. Just as the demand for ance, shows that the voluntary sector of soci- watches creates opportunities for entrepre- ety has developed many seemingly disparate neurs to profit by providing watches, the ways of providing it. Unfamiliarity with these demand for assurance and privacy creates practices often leads people to overlook them opportunities for entrepreneurs to profit by altogether and to suppose that the only source providing assurance and privacy. There is no of assurance is the tort system and govern- more reason for government to regulate the ment regulation. Scholarly research indicates production of those things than there is for it that, in day-in-and-day-out commerce, the to regulate the production of watches. voluntary approach is by far the most impor- Researchers have explored how producers tant, and that tort and regulation are a distant provide assurance of quality and safety. The second and third. central mechanism is reputation, the general Traditional practices are of course extended opinion of whether one’s promises of quality to the Net. What is TRUSTe.org but a seal-of- and safety are trustworthy. Producers build approval organization paid to evaluate privacy reputation by a variety of means. policy and certify deserving Web sites to Firms seek repeat dealings so that satisfied assure customers of responsible use of infor- customers gain confidence and return for mation? The auction site eBay is a complex more purchases. If the producer were to cheat approval giver: it registers users, manages customers, he would lose future purchases not interaction, insures some purchases, and cer- only by that customer but also by others tifies escrow providers for other purchases. informed of the dissatisfying experience. Amazon is a giant middleman. Because we Firms develop an array of services brought trust Amazon, we have a bridge to every under the umbrella of brand names, logos, smalltime publisher in its listing. Infomedi- and trademarks, using their reputation to aries might convert the ancillary want into the assure quality and safety. primary want and act as information handlers Retailers build bridges of trust by becom- for consumers. There is no definitive method ing regular dealers between producers and or approach to assurance and privacy, nor consumers. Rite Aid and Safeway have a con- should there be. But we may predict that there tinuing relationship with pharmaceutical sup- will be remedies to the problems that trouble pliers on one side and consumers on the other. consumers enough that they are willing to pay Buying from a trusted middleman, like Safe- to avoid them. way, assures the customer of quality and safe- Experience in traditional markets offers ty in goods from a supplier once removed. By other lessons for the Net. It should teach us serving as a middleman, Safeway makes the the mischief that government regulation cre- consumer’s relationship with the ultimate ates in the name of assuring quality and safe- manufacturer like the relationship we have ty. Regulations like occupational licensing with the friend of a friend. and those imposed by the Food and Drug Firms also seek seals of approval awarded Administration and Occupational Safety and by various organizations that evaluate quality Health Administration, despite what legitima- ===== PAGE 16 ===== 16 IDEAS ON LIBERTY ¢ May 2000 cy they may have with citizens and journal- nothing more than the nuisances of receiving ists, are a bane to all Americans. Scholarly junk mail. The issue is thus insignificant. research, especially by economists, clearly Besides, mail is really a mailbox problem, concludes that these regulations do more which persists because the mailbox and deliv- harm than good. The FDA is probably the ery are not handled by free enterprise. The worst. To illustrate this point I have gathered U.S. Postal Service fails to give customers the quotations from 13 economists who study the option of refusing unsolicited commercial FDA and believe FDA power should be mail at the most logical and convenient point: scaled back. I am not aware of any pub- the point of delivery. It is unlikely that free- lished defense or justification of the FDA by market mail delivery would continue to waste an economist—and I have gone looking resources and the customers’ time delivering for one. unsolicited, unwanted commercial mail. Let us also learn from traditional markets Finally, a note on the term “privacy.” The something about supposed privacy violations. prevalence of that term in these matters is Some activists have attacked the credit- unfortunate. In so many cases where it is used reporting industry for making up marketing the issue would be more aptly discussed as lists. Actually, consumers’ credit information one of confidentiality in transactions or in is not disclosed to marketers. The marketers information shared in completing a transac- usually do not even see the list; instead, a tion. Confidentiality is more clearly under- third-party fulfillment house sees it and stood as a matter of agreement and under- remains perfectly discreet. The privacy “vio- standing. That is what most of the Internet lation” decried so indignantly amounts to issues are really about. OJ 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. This collection of four essays provides vigorous counterarguments to those who claim that government alone is capable of policing against fraud and unfair dealing. ON SALE NOW FOR $5.95 Plus $4.00 shipping and handling ===== PAGE 17 ===== Ideas and Consequences by Lawrence W. Reed oN May 2000 ¥ Government The Census: Inquiring Minds Want to Know a Lot hat the federal bureaucracy calls “the rented. One in six households were mailed the largest peacetime mobilization effort in “long form” —a 53-query marathon of nosy U.S. history” is now underway. It’s the 2000 inquiries about everything from disabilities to census—and if you're an American citizen, employment to income. Answering the census it’s got a few questions for you. As many as is not an option; under the law, it’s mandatory. 53, in fact. The folks who devised the long form are America’s founders felt it was important particularly interested in your house. They enough to know how many people lived in the want to know how many rooms it has, when it country that they wrote a requirement for a was built, where you get your water, what census every ten years into the third para- your utilities cost, how you financed it, and graph of Article I, Section 2, of the Constitu- how many cars, telephones, and bathrooms tion. For the important purpose of apportion- you've got. Other questions on the long form ing representation in the House of Represen- ask about your education, health, job, and ride tatives, that passage specifies that the federal to work (to find out if you drive a car or take government, under the direction of the Con- a bus). To borrow a line from a famous tabloid gress, shall count the number of people— ad, “inquiring minds want to know.” period. The more important question that cries out The first census in 1790 included a question to be asked, however, is just why do these about race and residence, but that was about inquiring minds want to know all these the sum of it. In the intervening 213 years, the things? Who and where you are is now a census has morphed into much more than a minor part of this decennial exercise; the cen- head count. Indeed, it may now be the clear- sus these days is much more about how to est index available of the growth and intru- divide the loot. The U.S. Census Bureau isn’t siveness of the federal establishment. bashful about admitting this in its literature: In mid-March, a census “short form” was mailed to nearly every American. Its seven Census 2000 will be the information cor- questions are designed to find out the recipi- nerstone for the next century. Billions of dol- ent’s name, age, sex, race, relationship to lars of federal, state, and local funds will be household, whether or not the recipient is His- spent on thousands of projects across our panic, and whether his housing is owned or nation. How and where that money is spent depends on how accurate the census count is. . .. Twenty-two of the 25 largest Federal fund- Lawrence Reed is president of the Mackinac Center i rant progr scal 1998 are for Public Policy (www.mackinac.org), a free- ng grant programs of fi rear market research and educational organization in responsible for $162 billion being distributed Midland, Michigan, and chairman of FEE's Board of 10 State, local, and tribal governments, and Trustees. about half of this money was distributed using 17 ===== PAGE 18 ===== 18 IDEAS ON LIBERTY ¢ MAY 2000 formulas involving census population data, about the remaining 10 percent. Because a according to a report by the General Account- Republican Congress figured a Democratic ing Office. We expect that at least $182 billion administration would make guesses and will be distributed annually based on formu- assumptions that would boost the electoral las using Census 2000 data. prospects of its friends, statistical sampling was on the ropes until the Supreme Court Bureaucrats and central planner wannabes landed the final blow and killed it several aren’t the only folks who want to use the cen- months ago. sus to learn a lot about you. In between each Perhaps the focus on extraneous informa- count, the Census Bureau is besieged with tion has cut into the very accuracy of the requests from private interests who want to count that is supposed to be the main purpose get their pet questions baked into the next one of the census. By its own estimates, the Cen- at taxpayer expense. Marketing and health sus Bureau missed 1.6 percent of the U.S. research people want data on behavior and population in 1990—worse than its perfor- ailments. Internet service firms want to know mance ten years before. The government who’s wired and who isn’t. Sociologists push misses millions of people, but it wants to dole to find out more about who’s going to which out their money based on such details as how church, and which individuals are providing many bathrooms they have. support to their grandparents. Maybe we owe While Census Bureau Director Kenneth Congress and the bureaucracy a little appreci- Prewitt says it’s your “civic duty” to complete ation for resisting most of the litany of the 2000 census form, not everybody thinks requests and keeping their questions on the so. The Libertarian Party captured some head- long form to a “mere” 53. lines when its national director, Steve Das- It all reminds me of the wisdom of Freder- bach, declared in January, “Real Americans ic Bastiat, the great French statesman and don’t answer nosy Census questions. You can philosopher who wrote in his magnificent strike a blow for privacy, equality, and liberty primer on the proper function of government, by refusing to answer every question on the The Law: “As long as it is admitted that the Census form except the one required by the law may be diverted from its true purpose— Constitution: How many people live in your that it may violate property instead of protect- home?” Noting the real purpose of most of ing it—then everyone will want to participate the long form’s queries, Dasbach said, “Cen- in making the law, either to protect himself sus information is used to forge the chains against plunder or to use it for plunder.” that bind Americans to failed government That a head count is no longer the primary programs, meddlesome bureaucracies, and focus of the census was dramatically illustrat- sky-high tax rates.” ed by a proposal from the Clinton administra- It’s not happenstance that as the govern- tion. In the run-up to the 2000 census, the ment’s share of our income rises and its toll on administration announced it wanted to incor- our liberties grows, the census gets longer and porate something called “statistical sampling” more intrusive with each passing decade. It’s into the counting method. Instead of trying to part of the package: a government big enough count each person the government would to give you everything you want is big enough count people in 90 percent of ‘American to take away everything you’ve got. To do all households and then on the basis of those that for you and to you, it has to ask you lots numbers, make guesses and assumptions and lots of questions. 0 ===== PAGE 19 ===== IDEAS ON [IBERTY The Internet and the Death of the Sales Tax by Richard W. Ault and David N. Laband he editors of our hometown daily news- lished by the state in which they reside. The paper, the Opelika-Auburn News, recent- sales tax is collected at the point of purchase ly came out in favor of taxing Internet com- and paid by the retailer to the state govern- merce. While noting, incorrectly, that sales ment. Heretofore, the imposition of excise taxes constitute the “largest source of rev- taxes had little influence on retailers’ location enues at all levels of government,” the editors decisions, because most customers would not forecast that Internet sales as a fraction of all find it worthwhile to drive to another state just sales “can only be expected to grow in the to save a few cents per dollar in state sales near future” and concluded by asking, “Who taxes. But the Internet changes this situation knows how much more sales tax revenue dramatically—the retailer no longer has a could be generated, particularly in about fixed location, and it is not very costly for the five or 10 years, from online sales? What consumer to observe merchandise locally but is already a very healthy economy could to purchase over the Internet. The conse- become even stronger.” quences of Internet tax freedom are not hard The notion that taxes help make an econo- to imagine. Consumers get a discount on my grow stronger is, of course, ludicrous. But goods bought from a virtual store over the the battle over Internet taxation is in full Internet as compared to purchasing the exact swing. Proponents argue that standard retail same items in a real store. The size of this dis- stores will lose business and be at a count equals the sales tax rate prevailing in competitive disadvantage if they are taxed their state, minus shipping costs. This realized and e-commerce is not. This is indisputably price/tax savings surely has played a major correct. Opponents respond that taxation role in the explosive growth of e-commerce. would restrict Internet sales and stunt the Some people believe that there is a natural economy’s growth. There is merit in this limit to the proportion of sales (and therefore argument. In our view, however, what is the lost tax revenues) that can be handled really important is that in all likelihood, through e-commerce because of the expense e-commerce will sound the death-knell on or impracticality of shipping certain items sales taxes as currently configured. and lack of customer access to the Internet. Although Wal-Mart is headquartered in However, we are not convinced that either Arkansas, patrons of their local Wal-Mart pay shipping costs or lack of Internet access will sales tax on their purchases at the rate estab- prove to be an impediment to growth in Inter- net sales. It is only a matter of time before Richard Ault is an associate professor of economics items such as groceries, which are both per- at Auburn University. David Laband is a professor in 1shable and expensive to ship relative to their Auburn's Forest Policy Center, School of Forestry. ~~ value, will be offered over the Internet. In 19 ===== PAGE 20 ===== 20 IDEAS ON LIBERTY ® MAY 2000 those states where groceries are subject to associated tax revenues to low-tax states. sales taxation, grocers will have a financial Consequently, legislators in the former will incentive to restructure the checkout. Cus- find themselves under tremendous revenue tomers at a particular store will place their pressure to reduce their sales tax rates to orders over the Internet, and be instructed to attract commerce back. In turn, of course, this pick up their merchandise at their current puts tax-revenue pressure on other states, store. This solves the problem of customers which then have financial incentive to lower wanting to inspect the merchandise firsthand their sales tax rates, and so on. The result of without having to incur additional shipping this process of hundreds of millions of con- costs, while permitting stores to offer cus- sumers seeking out low taxes with their elec- tomers significant price/tax savings. This also tronic feet is continuously falling sales tax means that Internet shopping will not be lim- rates across states. ited to customers who have personal access The question is, can states maintain viable to the Internet. Stores will provide access sales taxes at any tax rate greater than zero? It to all customers. seems doubtful, for two reasons. First, states Vendors of heavily taxed items like gaso- might attempt to enter into an agreement line will have an especially powerful incentive under which they would all agree to a com- to structure sales through the Internet. Oil mon sales tax rate. However, as with any car- companies can sell coupons tax-free over the tel, each state would have an incentive to Internet that purchasers can redeem at any “cheat” by lowering its rate in an effort to affiliated station. The implied tax savings to attract commerce with the associated tax rev- customers (and tax revenue losses to states) enues. Second, even if sales tax rates were will be enormous. uniform across states, consumers would be able to “migrate” to Internet locations based Shriveling Revenues in Mexico, Jamaica, and a host of other for- eign locations that, by definition, are not bur- But taxing e-commerce leads inexorably to dened with U.S. sales taxes. Competition the same result—shriveling sales tax rev- between countries for tax revenues will result enues. Why? Because now that they can shop in lower tax rates on e-commerce everywhere. electronically, it is virtually costless for con- Duty-free shopping no longer will require you sumers to “flee” to low-tax states for to travel to Barbados; it will be as easy as their purchases; they no longer need to spend clicking a mouse in your home anywhere in time and money transporting themselves the United States. physically to a lower tax state. Firms conduct- The development of Internet shopping pro- ing e-commerce from states with relatively vides consumers with extraordinary shopping low sales tax rates on Internet commerce will mobility. This gives them an ability to avoid have a competitive advantage over those con- the taxman to a degree that heretofore was ducting e-commerce from states with relative- simply unimaginable, even to the tax authori- ly high sales tax rates. Competition will ties. This mobility will, in due course, render induce profit-maximizing firms to migrate to sales taxes incapable of being a reliable low-tax states. This migration is virtually source of substantial tax revenues. We should costless with the advent of the Internet. Wal- not be wasting our time arguing over whether Mart can create an Internet sales location any- or not to tax e-commerce; the sales tax is dead where in the United States for a few dollars. either way. The coming battle will be over Such migration implies that states with high cuts in government spending versus alterna- sales tax rates will lose commerce and the tive sources of state government revenues. [] ===== PAGE 21 ===== IDEAS ON [IBERTY May 2000 Disaster Relief Then and Now by Janet Sharp Hermann he earthquake of October 17, 1989, had chase, had been opened to Yankee settlement no sooner struck the San Francisco Bay just eight years earlier. However settlements Area than politicians began vying for televi- were still sparse in the earthquake zone cen- sion time to offer government assistance. tered in the Mississippi Valley, where scat- Within a few hours, as reports of the damage tered small farms clustered around tiny vil- were still coming in, the Lieutenant Governor lages such as New Madrid and Little Prairie in of California publicly pledged the state’s Missouri Territory. financial assistance to the victims. The next At 2 a.m. on December 16, people up and morning the President of the United States down the mid-continent were jolted awake by declared the affected region a disaster area, the first shock of the great earthquake. Shak- opening the way for federal assistance. At the en from their beds, most fled their cabins as same time the Vice President, touring the crockery crashed to the floor, precious glass quake site, personally assured local officials windows shattered, and ridgepoles collapsed. of prompt implementation of the government In the village of Little Prairie, near the epi- relief program. Two days later the President center of the quake, screams of birds, animals, himself appeared on the scene with similar and people mingled with the rumble of the promises. Soon volunteer lawyers were offer- earth and the crashing of trees. Now and then ing to assist victims in filling out complex there was a sharp crack as a crater suddenly forms that would bring immediate cash bene- opened in the earth spewing dust, rocks, and fits. When disaster strikes, Americans auto- bits of coal shale mixed with sulphurous- matically turn to government for relief. smelling gas. Repeated shocks threw the This was not always the case. When the frightened settlers to the ground, where in the most severe earthquake in its recorded history dim glow they watched the earth undulate in struck the North American continent in 1811, waves two or three feet high, the largest of victims living near the epicenter at New which broke open as fissures. In some places Madrid, Missouri, waited two years before the ground was thrust upward in large domes even petitioning the government for assis- while other areas sank several feet. tance. The fledgling new nation that was the The most densely populated place in the United States was expanding rapidly. By 1811 quake zone that night was the Mississippi the flow of new settlers had penetrated beyond River, where clumsy flatboats and sleek keel- the Mississippi River well into Missouri Ter- boats anchored beside banks or islands. When ritory, which, as part of the Louisiana Pur- the big quake came these small boats were tossed about like toys on the huge swells Janet Sharp Hermann is an American historian and churned up by the moving earth. In some author living in Berkeley, California. places large chunks of the river bank includ- 21 ===== PAGE 22 ===== 22 IDEAS ON LIBERTY ¢ MAY 2000 ing tall trees crumbled into the water with a Richter scale, that of January 23 was nearer crash, crushing hapless boats anchored 8.4, and the final major quake of February 7 beneath and capsizing others nearby. Soon reached 8.7. By comparison the 1906 San the river was thick with trees and debris from Francisco earthquake, so costly in lives and the shore mingled with old logs, brush, and property, was weaker than any of these with a mud thrown up from the bottom. From time to Richter magnitude of 8.3, and the recent one time a loud hiss signaled the eruption of an was measured at only 6.9 or 7. underwater crater that projected refuse 30 Despite the severity of the New Madrid feet into the air. By morning light, survivors quakes, no more than a dozen deaths were noted barrels of flour, tobacco, and whiskey recorded and most of these were from drown- floating along beside boat fragments and ing. The debris on the river that passed stray garments among the tangle of trees and Natchez in subsequent weeks indicated that brush. In some places entire islands had there were undoubtedly many unrecorded disappeared, and the course of the river was deaths on the Mississippi, but on land there drastically altered. was greater loss of property than of life. Set- tlers’ cabins could be rebuilt, but many of Church Bells Rang their painstakingly cleared fields were badly fissured or covered with erupted rocks and The December 16 shock was only the first shale. In a few cases bodies of water had been of a seemingly endless series that eventually formed preventing cultivation of the affected leveled manmade structures in the New land. Often the wells were dry and useless as Madrid vicinity and were felt over perhaps a result of a shift in the water table, and the one million square miles. The quakes rang pond or stream that a farmer had counted on church bells, stopped pendulum clocks, to supply his cattle might now be located on moved furniture, and cracked pavements and his neighbor’s land. In the village of New plaster as far east as Charleston, South Car- Madrid, homeowners suffered most severely olina, and Richmond in Virginia. Residents in when the February shock caused the town to Detroit some 600 miles from the epicenter sink some 15 feet, resulting in severe flooding counted nine sharp shocks in the next three in the spring. months, while an engineer in Louisville less than 200 miles from Little Prairie recorded 1,874 tremors of varying intensity in that time. One householder in Cincinnati who had There was no organized effort to assist rigged a pendulum in his front window these hard-pressed disaster victims either in claimed that it swung constantly through the their immediate needs for food and shelter or winter and into the spring of 1812. Although the long-term restoration of their property. As there were fallen chimneys and cracked brick with any crisis on the frontier, those who were or stone walls from St. Louis in the north to able aided their neighbors in a cooperative Savannah and New Orleans in the south, the effort to rebuild. Psychiatric counseling, most severe damage was sustained in New either government or private, was unknown in Madrid County in southeastern Missouri the early nineteenth century, but the psycho- Territory. logical trauma of repeated quakes drove many Modern scientists believe that the New who had spent little time in church to sudden- Madrid earthquakes of 1811-12 probably had ly embrace religion. From informal prayer the highest magnitude and covered the widest meetings as the ground shook to well- area of any that have struck the North Ameri- organized camp meetings the next spring and can continent in historic times. After an summer, these “earthquake Christians” joined exhaustive examination of all available evi- in pious practices in unprecedented numbers. dence, Otto W. Nuttli, a St. Louis University With no mass media to publicize it, the seismologist, estimated that the December 16 plight of these frontiersmen was little known shock probably had a magnitude of 8.6 on the in the rest of the nation. The idea of seeking No Government Relief ===== PAGE 23 ===== DISASTER RELIEF THEN AND Now 23 material aid from the government seems to of the passage of the bill, speculators have occurred to the victims only gradually. swarmed into New Madrid County and On Holy Thursday, March 26, 1812, while the bought up their ruined lands for a pittance. Mississippi Valley still shook, an earthquake When these sharp dealers then exchanged the struck the city of Caracas in Venezuela, titles for valuable land around St. Louis or in killing some 20,000 people, many of whom the highly prized Boon’s Lick region of cen- were crushed in churches as they worshipped. tral Missouri, some of the original owners In an unusual gesture, the Congress of the filed suit for fraud. Over the next 20 years United States appropriated $50,000 for Congress passed three more acts, and various Venezuelan relief. Some months later when attorneys general supplied ten opinions all delegates to the Missouri territorial assembly seeking unsuccessfully to clarify the relief learned of this charitable gift, they decided law for the benefit of the earthquake victims. that a similar gesture would be in order for In 1845 the U.S. Supreme Court was still their own people. So in January 1814, two working on the legal tangle and the term years after the disaster, the assembly peti- “New Madrid claim” had become a synonym tioned the U.S. Congress on behalf of “our for fraud. unfortunate fellow citizens” of New Madrid In nineteenth-century America even a fee- County who were now “wandering around ble attempt by government to assist victims of without a home to go to or a roof to shelter a major disaster proved ineffective. However, them from the pitiless storms.” Noting con- the citizens of New Madrid County never gressional generosity to the Venezuelans, the expected any compensation. On the frontier in Missourians felt sure that Congress would be that era failure, whether from personal inade- “equally ready to extend relief to a portion of quacy or natural calamity, was a risk each set- its own Citizens under similar circum- tler took with no prospect of outside assis- stances,” because “we ought never forget that tance. The people who built America lacked what was their fate Yesterday, may be ours the security of a government cushion against tomorrow.” After another year’s delay Con- failure whatever its cause. Neighborly assis- gress approved a request that the New Madrid tance might mitigate an immediate crisis, but earthquake victims be compensated from in the long run each person knew that his public lands. Those whose property had been well-being depended solely on his own damaged could take their titles to the land efforts. Although this self-reliance entailed office in St. Louis and receive in exchange some real suffering, there were compensa- certificates allowing them “to locate the like tions; for example, these men were free to quantity of land on any of the public lands in enjoy all the fruits of their own success said territory, the sale of which is authorized unimpeded by restrictive government regula- by law.” No claimant was to receive less than tion or crippling taxation. While removing the 160 or more than 640 acres. valleys of despair from failure, the govern- Even this tardy compensation proved to be ment has also leveled the peaks of joy from ill conceived. Before the real victims learned success. ===== PAGE 24 ===== Potomac Principles by Doug Bandow DEAS ON [IBERTY May 2000 America in East Asia 8 he Cold War ended a decade ago, but become more benign. The Soviet Union has America’s defense posture has changed disappeared, and a much weaker Russia has little, especially in East Asia. Washington pol- neither the capability nor the will for East icymakers seem determined to keep at least Asian adventurism. In China, tough-minded 100,000 military personnel in the region, communism has dissolved into a cynical apparently forever. Indeed, the administration excuse for incumbent officeholders to main- is presently expanding America’s military tain power. So far Beijing’s military renewal presence in East Asia. has been modest; its posture has been assertive It’s ime for a change. Rather than enhanc- rather than aggressive—although its saber- ing security ties when threats against the rattling toward Taiwan remains of concern. United States have dramatically diminished, Southeast Asia suffers from economic and Washington should initiate a phased with- political instability, but such problems threat- drawal of American forces from the region. en no one outside the immediate neighbor- U.S. taxpayers spent roughly $13 trillion (in hood. Only North Korea constitutes a genuine current dollars) and sacrificed 113,000 lives security threat, but that totalitarian state, (mostly in East Asian wars) to win the Cold though odious, is no replacement for the War. For five decades Washington provided a threat once posed by the Soviet Union. defense shield behind which noncommunist Alas, so far neither the Clinton administra- countries throughout East Asia grew econom- tion nor Congress seems to have noticed these ically and democratically. changes. U.S. policy looks very much as it Japan is now the world’s second-ranking did during the Cold War. Washington’s economic power. Taiwan’s dramatic jump motto appears to be “what has ever been, must from poverty to prosperity encouraged the ever be.” leaders of the communist mainland to under- The Pentagon’s 1995 assessment of U.S. take fundamental economic reforms. South security policy in East Asia (the Nye Report) Korea dramatically outstrips communist made the astonishing assertion that “the end North Korea on virtually every measure of of the Cold War has not diminished” the national power. After years of failure, coun- importance of any of America’s regional secu- tries like Thailand have grown significantly rity commitments. In November 1998 the (despite their recent setbacks). Department of Defense (DOD) released an At the same time, the environment has updated report that advanced the same outdat- ed arguments. More than a year later U.S. pol- EE — .. icy remains the same. The administration’s Doug Bandow, a nationally syndicated columnist, is . A a senior fellow at the Cato Institute and the author watchword, and that of the leading Republi- and editor of several books, including Tripwire: Can presidential contenders, is simply more of Korea and U.S. Foreign Policy in a Changed World. ~~ everything. 24 ===== PAGE 25 ===== 25 The administration’s formal commitment to Some analysts privately, and a few publicly, permanent, promiscuous intervention was believe that Japan poses a potential threat to preordained. Secretary of Defense William regional peace. But Tokyo has gained all the Cohen admitted: “When I first took over, I influence and wealth through peace that it had said everything is on the table for review, hoped to attain 60 years ago through war. except we are going to keep 100,000 people in Moreover, the lesson of World War II remains the Asia-Pacific region—that is off the table.” vivid there. In short, the Pentagon conducted a supposed- The weakness of the administration’s case ly searching review that ignored the most is evident from its bottom-scraping, kitchen- important issue. sink arguments that can best be characterized The Pentagon’s 1998 report envisions an as silly. For instance, the Pentagon contends: American security interest in virtually every “The presence of U.S. military personnel in East Asian country. Naturally, DOD lauds the region multiplies our diplomatic impact such traditional alliances as those with Japan through engagement with counterparts and and South Korea. It also endorses military ties the demonstration of professional military with Laos and Mongolia, countries with no ethics and conduct in a democratic society.” conceivable relevance to U.S. security. However, U.S. training programs did not pre- The administration says the presence of U.S. vent abuses by the Indonesian military in sup- troops 1s necessary only for “the foreseeable port of the brutal Suharto regime, and the future.” But if the end of the Cold War, the col- American military worked closely with a lapse of hegemonic communism, and the dra- series of ugly, military-dominated regimes in matic growth in the strength of friendly demo- South Korea. cratic and quasi-democratic states throughout Instead of enshrining the status quo, the the region aren’t enough to warrant meaning- administration and Congress should phase out ful change, what would be enough? U.S. commitments and deployments. To start, The vague specter of instability has Washington should tell Japan and South replaced the demon of communism as Ameri- Korea that it is time for them to defend them- ca’s enemy. Even in the midst of economic cri- selves. Moreover, Washington should make sis, however, Asia is not ready to plunge in the clear that it will not intervene in a war abyss. And if it were, there is little a few thou- between Taipei and Beijing. America does not sand U.S. troops in Okinawa or South Korea have sufficient interests at stake to risk con- could do about it. The internal struggles that flict with nuclear-armed China. pose the most serious threat to regional stabil- Rather than attempting to upgrade defense ity are beyond the reach of America, unless relationships with nations like Australia and Washington is prepared to repeat its Vietnam the Philippines, the United States should rely experience several times over. on informal consultations and intelligence As for the threats of real conflict—the two sharing. In cases like Laos and Mongolia, Koreas and China/Taiwan—America’s allies Washington should leave private individuals are capable of maintaining military forces to build cultural and economic links. necessary to deter war. If that is a slightly less In short, Washington should step back as certain guarantee of stability, it is a far better local parties take on responsibility for their one from America’s standpoint. If deterrence own security. Real leadership entails refusing failed, the United States would not find itself to take on problems that belong to someone automatically involved. else. [] ===== PAGE 26 ===== IDEAS ON [IBERTY Free Markets and “Highest Valued Use” by Roy E. Cordato o free markets allocate resources to their therefore that consumers will value most. highest valued use? It would seem that Hence, free markets will channel resources to for the readers of Ideas on Liberty, the answer their highest valued use. When this process is 1s a “no-brainer.” Indeed, the idea that volun- interfered with, either through intervention in tary exchange channels resources to where the exchange process or through direct gov- the value of output will be greatest has tradi- ernment allocation of resources, the result is tionally been one of the foundational argu- “misallocation”; resources are diverted to ments for a free-market economy. It is the lesser valued uses or at least to uses whose core reason why free markets are said to be value is not as high as it otherwise could be. “more efficient” than socialism or interven- Embedded in this argument are three tionism. assumptions that cannot be logically sus- But although free markets are clearly supe- tained. The first assumption is that value is rior to any other social or economic arrange- objective, which implies that it is measurable ment, it cannot be for this reason. The claim in money terms and therefore comparable that markets channel resources to their high- person to person. The second assumption, est valued use is inconsistent with the nature involving perfect knowledge, is that A’s and of value and of voluntary exchange. Ultimate- B’s entrepreneurial insights about uses of ly, the question I posed cannot even be mean- resource X are accurate; that is, their percep- ingfully asked. tions of what others are willing to pay for The argument behind what I will call the goods are correct. The third is that there is “highest valued use” hypothesis is quite sim- an overarching hierarchy of social value ple. If in a market setting, person A and per- on which the importance of resource use son B each bid for resource X, that resource can be ranked. will go to the person whose bid is the highest. If A is the high bidder, it is then assumed that he valued the resource more than B and that this implies his use of the resource will be As for the first, a pillar of Austrian eco- more “productive” than B’s. “Productive” nomics is “radical subjectivism.” This is the here means that A’s use of the resource will idea that people’s preferences are determined lead to the production of those goods and ser- within their individual contexts. Value is sub- vices that will fetch the highest price and jective in the sense of its being an internal state that 1s immeasurable and not amenable Roy Cordato is the Lundy Professor of Business Phi- to } comparison (in the way that people S losophy at Campbell University in Buies Creek, heights can be compared). It is inconsistent North Carolina. with this insight to say that A values resource 26 Subjective Value ===== PAGE 27 ===== 27 X more highly than B does because he is will- activity takes place through time. Resources ing to pay more for it. In reality, all that can be are bid for today based on expectations about said is that resources will flow to those who the state of the world tomorrow. Knowledge, are willing to pay the most money. therefore, can never be perfect, and market To go beyond this is to believe that value prices are never “competitive” prices. When can be compared among persons and that prices are not based on perfect knowledge, money can be used for such comparisons. Itis they do not measure the “social value” of the often assumed that all people value money resources being exchanged, even within an equally, permitting money to be used as a sta- approach to economics that accepts such a ble measuring rod for everyone. In the exam- concept as meaningful. ple above, it would imply that the marginal Ultimately though, the concept of “social utility of a dollar (the value placed on the last value” is not meaningful in the context of vol- or next dollar obtained) is the same for both A untary market exchange. The “highest valued and B. So if A bids two dollars and B bids one use” hypothesis misconstrues the nature of dollar, we can say A values resource X more the free market. This point goes to the heart of than B. It’s not that the statement is wrong, or a distinction, made first by Ludwig von Mises that the marginal utility of a dollar is not equal and then F. A. Hayek, between an economy for A and B, but that all such conclusions are and a catallaxy. The hypothesis makes sense meaningless: they compare the incomparable. only for a unified hierarchy of ends; namely, an “economy.” In an economy, Hayek wrote, “a given set of means is allocated in accor- dance with a unitary plan among competing The second unsustainable assumption is ends according to their importance.”? This is that market participants have perfect informa- what happens in a firm, a household, a civic tion. This is implied by the neoclassical organization, or a socialist economic system, premise that all exchanges are based on “per- where priorities are established by a central- fectly competitive” prices.! That premise ized decision-maker. Perfect Information allows the analyst to skirt the subjective value In contrast, as Hayek points out, “the mar- problem, because in the world of perfect com- ket order serves no such single order of ends. petition all market prices are accurate mea- . .. it serves the multiplicity of separate and surements of not only the (marginal) costs and incommensurable ends of all its separate benefits to the trading parties but also to soci- members.” A catallaxy is thus characterized ety. As Israel Kirzner has noted, in neoclassi- by the lack of a common hierarchy of ends, cal economics, supply-and-demand analysis and so in the context of a free market, the con- assumes perfect knowledge for all market cept of social value is meaningless, as is any participants.2 Under these circumstances, talk of resources flowing to their highest val- people bidding on resources know with ued use. A catallaxy cannot assure “that the certainty the value that others place on alter- more important comes before the less impor- native uses of those resources. By definition, tant,” Hayek wrote, “for the simple reason then, resources will flow to their highest that there can exist in such a system no single valued use. In an error-free world, no other ordering of needs.” outcome is possible. In the real world, though, there are no such Defendin g the Market assurances. As Austrian school economists are quick to point out, knowledge is never Fortunately, the case for liberty does not perfect. Considering that perfect information hinge on markets’ being perfectly competitive in a market would necessarily involve having or satisfying the efficiency criterion of neo- knowledge of what actually exists and poten- classical economics. While it is beyond the tially exists in the minds of others, it should scope of this article to detail alternative be clear that errors in bidding for resources defenses of free enterprise, it should be noted are inevitable. But beyond this, all market that Hayek’s and Mises’s advocacy of the mar- ===== PAGE 28 ===== 28 IDEAS ON LIBERTY © May 2000 ket stem in large part from their observation because it is the economic arrangement peo- that knowledge is never perfect and that free ple tend to choose when they are free. [ exchange is the best way to overcome that : : : 1. This assumption is made by Ronald Coase in his famous 1960 Imp erfection. As Kirzner noted, far from article, “The Problem of Social Cost,” Journal of Law and Econom- being necessary for the defense of capitalism, ics, vol. 3, pp. 1-44, where he argues that voluntary exchanges that : : : are made in the context of zero transactions costs and clearly defined the assumption of p erfect knowledge imp lies property rights will ultimately lead to the maximization of the “social that markets are unnecessary.® value of output.” : : 2. For an excellent discussion of the problems associated with Can we say anything about the virtue of price formulation under assumptions of perfect competition, see market allocation? Indeed we can. As Hayek Israel Kirzner, “The Law of Supply and Demand,” /deas on Liberty, : : _ January 2000, pp. 19-21. emphasized, nothing prompts people to econ 3. F. A. Hayek, Law, Legislation and Liberty, vol. 2 (Chicago: omize scarce resources as well as the market.” University of Chicago Press, 1976), p. 107. : _ 4. Ibid., pp. 107-108. See also James Buchanan, “What Should The profit motive encourages p eople to pro Economists Do?” in What Should Economists Do? (Indianapolis: duce more with less. Moreover, nothing tops Liberty Press) 1979, pp. 17-38. : : : _ 5. Hayek, p. 113. market exchange n wading to reconcile peo 6. For discussions of market efficiency in the context of imper- ple’s disparate plans. That’s saying a lot. fect knowledge and subjective value, see Israel Kirzner, Market The- : ory and the Price System (Princeton, N.J.: D. Van Nostrand Co., In the final analysis, our advocacy of the 1963); Murray Rothbard, A Reconstruction of Utility and Welfare free market has to be based on an overriding Economics (New York: Center for Libertarian Studies, 1977); and : : : Roy E. Cordato, Welfare Economics and Externalities in an Open defense of liberty p er se. Free enterprise 18 Ended Universe (Boston: Kluwer Academic Publishers, 1992). desirable because it is just, and it is just 7. Hayek, p. 113. ~ Next Month’s Ideas on Liberty: Our June issue features Robert Poole on airport privatization, Thomas DiLorenzo on trade and freedom, William H. Peterson on the Golden Rule, and much, much more. Don’t miss it! ===== PAGE 29 ===== May 2000 A Breach of the Public Trust by M. Reed Hopper | Tho things in life are more uncertain than ically bestow on the FDA the power to regu- government regulation. Long-held under- late tobacco products. But in 1996, when it standings and settled expectations can literal- became popular to bash “Big Tobacco,” the ly change overnight in the fickle halls of offi- agency did a complete about-face. Without cialdom. Consistent interpretations of federal any change in its congressional mandate, the law, relied on for years by the public, can FDA now claims it has authority to regulate abruptly change when federal agencies have a tobacco products. Even those who find smok- sudden change of heart about the scope or ing repugnant should fear a federal agency purpose of their authority, due to nothing that presumptuously wrests power from Con- more than the shifting policies of a new gress because of a subjective belief it can do administration. Without the slightest change a better job.* in the law, some federal agencies have taken it Similarly, the Clean Water Act authorizes on themselves to redefine their regulatory role the Army Corps of Engineers to issue permits and push an agenda that is not only diametri- “for the discharge of dredged and fill material cally opposed to previous agency policy, but into navigable waters.” In 1986 the Corps stands in direct violation of the law they are adopted regulations exempting from the per- entrusted to enforce. This transparent attempt mit requirement incidental soil movement by grasping federal agencies to expand their (such as overflow from a bucket) occurring power is becoming commonplace. during normal dredging operations. The For example, the Food and Drug Adminis- Corps stated in public documents that it did tration (FDA) is authorized to regulate certain not have authority to regulate dredging, but consumer products under the Food, Drug and only the discharge of dredged material. Cosmetic Act. This authority does not extend According to the Corps, this exemption for to tobacco products, however. At least, that is incidental soil movement was, therefore, what the FDA has said since 1914. For more required by the Act. But, in a sweetheart than 80 years the FDA held to this interpreta- deal with environmental groups, the Corps tion because, among other reasons, Congress reversed itself in 1993, claiming for the first chose to regulate tobacco products directly time that the Act actually required the Corps through another law. Additionally, Congress to regulate the incidental movement of soil in has repeatedly refused to grant the FDA U.S. waters. One federal court chastised the authority over tobacco products and the Food, Corps for this absurd new rule stating that it Drug and Cosmetic Act itself does not specif- would allow the Corps to regulate virtually M. Reed Hopper is a principal attorney with the Pacific Legal Foundation and chairman of the foun- + Editor's note: In March the Supreme Court ruled 5 to 4 that the dation’s Patriot Action League. FDA had no authority from Congress to regulate tobacco. 29 ===== PAGE 30 ===== 30 IDEAS ON LIBERTY ® MAY 2000 any water-related activity from digging a Dangerous Trend drainage ditch to riding a bicycle through a puddle-sized “wetland.” These incidents are symptomatic of an Likewise, since 1934 the Taylor Grazing Act increasing, and dangerous, government trend has authorized livestock grazing on the public to change the law—by “reinterpreting” statu- range. For 60 years, in accordance with the Act, tory mandates—to satisfy the political agenda the Bureau of Land Management (BLM) con- of those in power. It is a remarkable breach of sistently granted grazing permits only to appli- the public trust. Not only do public officials cants engaged in the livestock business and who engage in such sophistry usurp the role encouraged ranchers to invest in range of Congress to make the laws, but they improvements (such as fences and wells) that become a law unto themselves. By their arbi- they would then own in partnership with the trariness, these officials threaten our concept government. However, in 1995 the BLM decid- of ordered liberty. How can we know that the ed to change the rules. Again, without any inter- protections we enjoy under the law today will vening change in the law, the Bureau decided to be there tomorrow? Citizens are left to con- no longer grant grazing preferences to those in clude that the “rule of law” has no meaning the livestock business, while range improve- and that rules and regulations are based on ments built by private ranchers would be held personal whim. It is time that public officials henceforth only in the name of the United stand firm in their office as fair and objective States. However one feels about public-grazing enforcers of the law and stop bending in the laws, every American should be outraged by winds of political expediency. And it is time government action that disrupts long-standing that we start holding public officials account- interpretations of federal law and reverses set- able for such blatant abuses of power, for if tled rights and expectations. If this could hap- we don’t, we can expect to see a continuing pen to one of us, it could happen to any of us. erosion of our rights under the law. OJ Inspired? Shocked? Delighted? Alarmed? Let us know. We will print the most interesting and provocative letters we receive regarding articles in Ideas on Liberty and the issues they raise. Brevi- ty is encouraged; longer letters may be edited because of space limi- tations. Address your letters to: Ideas on Liberty, FEE, 30 S. Broad- way, Irvington-on-Hudson, New York 10533; e-mail: iol@fee.org; fax 914-591-8910. ===== PAGE 31 ===== IDEAS ¥ Current Issues ON [IBERTY May 2000 La Lucha: The Human Cost of Economic Repression in Cuba by Patricia Linderman As I opened the gate of the high security or scarce vegetables probably kept my neigh- fence around my yard in Havana, a black bors quiet. But if Marta offended them in any woman in her 30s glanced left and right and way, or if they thought she was getting too quickly wheeled her rusty Chinese bicycle rich or too friendly with foreigners like me, inside. Her name was Marta, and she was they could simply do their duty and turn her wearing a pair of my shorts, which I had once in. They had her, in fact, right where they traded her for a small watermelon. This time wanted her. she had pineapples in the plastic milk crate I lived in Havana from 1995 to 1998, when attached behind the seat of her bike. I handed my husband, a Foreign Service officer, was her a dollar for two pineapples, then poked assigned to the U.S. Interests Section there. my head out into the street to make sure the Since Cuba and the United States do not have coast was clear before Marta pedaled away. ~~ formal diplomatic relations, the Interests Sec- tion is officially part of the Swiss Embassy. uckily, there were no police officers sta- Yet it has its own large building on Havana’s tioned on the corner of my street that day. waterfront and carries out most of the usual Although farmers and gardeners have been functions of an embassy, including processing permitted since 1994 to sell excess produce, the 20,000 Cuban immigrants the United they must do so personally, in an approved States takes in each year. market stall, paying high license fees and Political repression in Cuba is the subject of taxes. Marta’s little enterprise, buying and much international attention. Cuban elections reselling fruit, vegetables, and used clothing, are neither free nor fair. The media are con- put her into one of the Cuban government’s trolled by the state and permit no alternative most reviled categories: she was a “specula- views; antennas and satellite dishes to bring tor.” If caught, she would be charged a huge in U.S. television are banned (although for- fine, maybe even sentenced to jail. Further- eigners and tourist hotels may use them). Dis- more, the Cuban Ministry of Finance could sidents are regularly jailed on vague charges confiscate everything she owned, without a such as “dangerousness.” hearing, for the crime of “profiteering.” Yet during my time there, 1 found the Surely Marta’s visits to my door had not Cubans’ lack of economic freedom to be even escaped the notice of the neighborhood more injurious to their dignity and aspirations watch, the local Committee for the Defense of than the denial of their political rights. The the Revolution. A few subtle gifts of clothing Cubans I knew were little preoccupied with obtaining forbidden reading material or Patricia Linderman is a writer and translator cur- Joining dissident groups. Instead, economic rently living in Leipzig, Germany. restrictions forced them to spend each day 31 ===== PAGE 32 ===== 32 IDEAS ON LIBERTY ¢ MAY 2000 scrounging to provide a level of subsistence her doctor was predicting a premature deliv- for themselves and their families, often by ery, but the compaiieros wouldnt give her the illicit or illegal means. La lucha, the struggle, diapers, since she hadn't yet completed he they called it—not a revolutionary or even eighth month. : counterrevolutionary struggle, but simply a struggle for survival. The rationing system, which had covered It was all supposed to turn out differently, about a quarter of family consumption before of course. After the 1959 Cuban Revolution, 1990, was expanded to nearly all basic goods. businesses and farms were nationalized, and Cubans’ ration books, or libretas, now housing, utilities, basic foods, and even enter- promised them a few pounds of rice and dry tainment were highly subsidized. Education beans a month, along with a few other food- and medical care were free. Salaries were low stuffs and personal necessities that might or and their ranges narrow; workers were might not be available. Shoes, for example, rewarded with better housing or a new Soviet- were supposed to be rationed, but none made car, rather than a raise. Eventually, arrived. Children were entitled to powdered material rewards would not be necessary at milk only up to the age of seven. The elderly all, according to the Revolution’s political were given Cerelac, a concoction of dried philosopher, Che Guevara. milk and ground soybeans. Yet this economic system was a house of As the economy floundered, Cuba desper- cards, kept upright through generous trade ately needed new sources of hard currency. arrangements with the Soviet Union amount- The promotion of tourism was stepped up, ing to a subsidy of some $6 billion per year. It and hard-currency hotels, shops, and restau- collapsed when its patron did: Cuba’s gross rants for foreign tourists began to appear. domestic product dropped by 35 percent With their bright signs, fresh paint, and well- between 1989 and 1993. The government stocked shelves, they contrasted strikingly declared a “Special Period in Peacetime,” an with the drab and barren facilities accepting economic state of emergency. ~ Cuban pesos. Traveling throughout the island, Power outages became more frequent. one could apply this simple rule: if it looks The government touted the islands “eco- good, it’s not for Cubans. The Cuban Revolu- consciousness” as gasoline supplies dwindled tion had aimed for paradise and achieved, and bicycles replaced cars. Schools remained finally, paradox. open, but without paper or pencils (students Trying to retain control over the flow of shouted back lessons recited by the teacher). money, the government issued colorful “con- Health care remained free, but medicine and vertible peso” notes, worth exactly one U.S. supplies were scarce: hospital patients had to dollar. Yet the greenback itself quickly bring their own sheets, towels, soap, and food. became the currency of choice. In 1993, As Havana residents scrambled to produce Cuban citizens were granted the right to hold their own food, the plaintive crowing of roost- dollars and shop in the tourist stores. The gov- ers became a common sound in the city. “Why ernment hoped to gather black-market money do they crow in the middle of the night?” I into its own pockets and encourage the inflow once complained to a local friend. “They're of cash from family members in the United hungry,” she explained. States. In fact, the latter has been estimated to be Cuba’s single greatest source of hard cur- Reina, a tiny woman hugely pregnant with rency, at more than $600 million a year. A her first baby, worked in a plant nursery. As I government wall slogan reads: “Hay que tener picked out some red hibiscus potted in rusty FE "—"“You’ve got to have FAITH.” Cubans cans, she explained that expectant mothers quip that FE really means “Familia en el Exte- received a voucher for cloth diapers, which rior,” family abroad. were otherwise unavailable. The voucher Yet unfortunately for most Cubans, only could only be redeemed after the eighth some 15 percent of the population received month of pregnancy. Reina complained that dollars from abroad, and very few could earn ===== PAGE 33 ===== La LucHa: THE HUMAN COST OF ECONOMIC REPRESSION IN CUBA 33 hard currency in the course of their regular ing outside glassless windows. He didn't even jobs. The vast majority were officially shut have his own phone; the number he gave me out of the expanding dollar economy. was that of a neighbor down the hall. A Cuban professional with a normal salary A Cuban acquaintance of ours estimated could not afford a cup of coffee at the Hotel that each person needed about $30 a month, in Nacional, Havana's towering 1930s land- addition to a peso salary, to procure basic mark. “It must be difficult,” I once remarked necessities such as soap, toothpaste, and lamely to a well-educated Cuban. “No,” he shoes. For many, the black market was the said with sadness and disgust, “it is not diffi- only answer. Cigars were stolen from facto- cult. It is inconceivable.” ries and sold to tourists on the street. Bold black-marketeers rang my doorbell every day, Meanwhile, the government resisted giving trying to sell stolen bags of coffee or even up its monopoly on employment, which it saw industrial-sized rolls of lunch meat spirited not only as an instrument of social leveling out of a hotel kitchen. but as an effective means of control. In 1990, Even worse, young Cubans quickly discov- 95 percent of employed Cubans worked for ered the rewards of companionship with the state; some 80 percent still do. The rest tourists. Around five each evening, women depend on the government as well, for their and girls start to line up along Havana’s main ration books, their housing, their children’s roads in tight, colorful clothes. Many are educations, and even their right to stay out of daughters of professionals, or even profes- prison—since nearly all Cubans are breaking sionals themselves. They see themselves not the law in some way as they seek to provide as prostitutes but simply women on the make, for their families. hoping for a decent dinner, a new outfit from As the tourist industry and joint ventures a hotel shop, or perhaps, if they are lucky, the with foreign companies flourished, direct hir- greatest prize of all: marriage to a foreigner ing of Cuban workers remained forbidden. and a ticket off the island. Labor contracts are handled by a government agency, which charges an average of $400 a On a hot afternoon, I went for a swim at the month for each worker. In turn, the workers Hotel Comodoro. Tourists from Europe, Latin receive some 250 Cuban pesos monthly, or America, and Canada lounged by the about $12.50, for an effective tax rate of near- sparkling pool. A can of Coca-Cola, imported ly 97 percent. through Mexico in defiance of the U.S. embar- In spite of the low salary, workers in tourist go, cost 31.50 at the pool bar. In front of me, hotels and joint venture enterprises at least an elderly foreign man bobbed in the water, had the chance to receive dollar tips, extra smiling. Two Cuban girls, about 15 years old, payments under the table, or “bonus” baskets floated beside him, whispering in his ears and of scarce consumer goods. The country’s kissing his sinewy neck. incentive scale gradually turned upside down, with hotel maids and valets earning more than In September 1993, the Cuban government doctors, professors, and scientists. Unsurpris- reluctantly authorized self-employment in ingly, university enrollment in Cuba has more than a hundred occupations, such as taxi dropped by half since 1989. driver, electrician, and artist. However, strict rules governed these new professions. The After a prominent pediatrician treated my self-employed are strictly forbidden to hire son at Havana's leading children’s hospital, others; only close relatives can assist them. he invited me to follow his rattling little car to University-educated professionals cannot sell his nearby home, so I would know where to services in their area of training. High month- find him in case of an emergency. His apart- ly license fees are charged, whether or not the ment was in a four-story concrete-block build- enterprise makes any money. The state also ing with open stairways and laundry flutter- takes a large cut of any income received. ===== PAGE 34 ===== 34 IDEAS ON LIBERTY ® MAY 2000 Tiny in-home restaurants, called paladares, I stepped under the corrugated roof of the were authorized by the new rules, yet they can market in my neighborhood. Today there were seat only 12 patrons at a time, may use only shriveled green peppers, small onions, and a family members as cooks and waiters, and are few piles of seasonal fruit. Off to one side, forbidden to serve shrimp and lobster, which flies buzzed and circled over a worn wooden remain a government monopoly. Many quick- counter. Men in dirty aprons stood behind it, ly surpassed the state-run tourist restaurants each with a single pig carcass. Farmers were in quality and value. Yet the closure rate required to sell their wares personally and remains high, since profits often don’t cover pay high fees for the privilege. There were few the license fees, and crackdowns are common buyers. The pork cost 20 pesos a pound. A on those trying to get around the confining sugar cane cutter in Cuba earned 107 pesos a rules. month, a doctor about 400. I paid for five green peppers with a ten-peso note, the back A Cuban-born colleague put us in touch of which depicted a sea of uplifted fists clutch- with his uncle who still lived on the island. ing machine guns. Tiny background lettering We invited the uncle, a professional actor, to repeated “Patria o Muerte” (Fatherland or a gathering at a paladar. We were served a Death). The woman selling the peppers would simple but satisfying meal of red snapper, also happily accept U.S. dollars. rice, black beans, fried ripe plantains, and salad, finishing up with coconut flan and cof- For ideological reasons, Cuba refuses to fee. After talking animatedly over a beer, our implement further reforms that would unleash guest polished off his dinner in silence. As the economic vigor of its people. After a we pulled out $50 to pay the bill for five peo- strongly worded address by Armed Forces ple, amazement and embarrassment showed leader and heir apparent Raul Castro, the Fifth on his face. “This is like a dream, a dream of Communist Party Congress in 1997 rejected the old days,” he said, tears shining in his further liberalization. In a speech to the eyes. National Assembly in July 1998, Fidel Castro maintained: “The more contact I have with The regime makes no secret of its reluctant capitalism, the more revulsion it causes me.” toleration and suspicion of self-employment. Meanwhile, Cuba is again becoming a Fidel Castro has likened it to “a cancer playground for foreign tourists, yet there are devouring the revolutionary spirit.” In 1996, a no wealthy or even middle-class Cubans this sudden 300 percent jump in license costs and time around. There are simply the poor, who a 650 percent increase in fees led many to struggle to make ends meet and wait for relinquish their permits; the total of registered things to change. After 41 years, many who self-employed dropped from over 200,000 to dream of a better life can only imagine 170,000. achieving it somewhere else. In 1994, however, the Cuban leadership realized that food shortages were threatening As I left the market, I passed a man selling the regime’s survival. By June, vegetables had garlic. A four-foot strand of neatly braided practically disappeared from Havana’s official bulbs was 20 pesos, or one dollar. “Where are markets, and the first open demonstrations you from?” grinned the gap-toothed, gray- and riots were taking place. The government whiskered vendor as I handed him a green- announced that surplus agricultural products back. “United States,” I answered warily, could be sold at farmers’ markets, under high- smiling in return. His grin widened. “Will you ly controlled conditions, of course. marry me?” he asked. OJ ===== PAGE 35 ===== The Therapeutic State by Thomas Szasz IDEAS ON [IBERTY May 2000 Remembering Masturbatory Insanity “Every age has its peculiar folly; some scheme, project, or phantasy into which it plunges, spurred on either by the love of gain, the necessity of excitement, or the mere force of imitation.” —CHARLES MACKAY Extraordinary Popular Delusions and the Madness of Crowds he contemporary mental health move- Masturbation was—and, in principle, ment—epitomized by the dogmatic belief remains—the ideal mental illness. First, it is a that “mental illness is like any other ill- form of behavior: that is, something people ness”—is an instance of what Charles do, not something that happens to them. Sec- Mackay called a “crowd madness.” Itisin the ond, it is a form of behavior universal to very nature of such a popular delusion that, mankind, engaged in from early childhood*: while it rages, it is impervious to criticism. this makes it ideally treatable, since behaviors The belief’s overwhelming popularity and the can be controlled, especially in children who absence of authoritative opposition to it are are powerless to resist the well-intentioned viewed as proof of its validity. brutality of adults. Third, the act makes use of Long ago I became persuaded that it is not a sexual organ, ideally suited for attaching possible to understand modern psychiatric fantasies of great harm (as well as great plea- practices unless they are seen as manifesta- gyre) to its uses and abuses. tions of a popular madness; and that it is not Not surprisingly, masturbation is a disease possible to perceive them in such a light with- ,f modernity. In antiquity and the Dark Ages, out being familiar with the history of psychi- people worried about real diseases, such as atry, which furnishes ample evidence to com- the plague and consumption. Only after the promise its moral and scientific pretensions. Enlightenment did people awaken to the pos- In my January column—on Krafft-Ebing and gjpilities of scientific medicine, assigning the birth of sexology—1I presented an illustra- paterial (physical), rather than spiritual (reli- tive episode from that history. Here, I shall gigs), causes to disease, disability, and death. briefly retell the story of what, until relatively Not having the faintest idea what caused recently, had been the most commonly diag- ost diseases, the medical mind went in nosed and most enthusiastically treated men- arch of a scapegoat and found it in self- tal disease in the history of medicine, namely, pe. By the end of the 1700s, it was medical masturbation. dogma that masturbation caused blindness, Thomas Szasz, M.D., is professor of psychiatry emer- €pilepsy, gonorrhea, tabes dorsalis, priapism, itus at SUNY Health Science Center in Syracuse, New York. He is the author of Fatal Freedom. * Actually, masturbation occurs in utero as well. 35 ===== PAGE 36 ===== 36 IDEAS ON LIBERTY ¢ MAY 2000 constipation, conjunctivitis, acne, painful aspect of the medical-economics of the anti- menstruation, nymphomania, impotence, con- masturbation business, the reader may consult sumption, anemia, and of course insanity, the facsimile catalogue of the 1898 American melancholia, and suicide. Armamentarium Chirurgicum—which contains How did physicians know and why did peo- pictures and prices of many anti-masturbation ple believe that masturbation caused all these devices. diseases? The same way that physicians now Belief in masturbatory insanity and its know and people believe that chemical imbal- treatment with castration and clitoridectomy ances cause mental diseases, such as attention was not an innocent error. This belief—Ilike deficit disorder: by “diagnosing” and “treat- beliefs in other popular delusions—enhanced ing” the (involuntary, child) “patient” and by the identity and self-concept of the believers. discovering “cures” for the disease. Among Ostensibly, such beliefs assert facts; actually, the widely accepted treatments of masturba- they credential believers. tion, the most important were restraining Henry Maudsley, the acknowledged founder devices and mechanical appliances, circumci- of British psychiatry, stated: “The sooner he sion, cautery of the genitals, clitoridectomy, [the masturbator] sinks to his degraded rest, and castration. As recently as 1936, a widely the better for the world which is well rid of used pediatric textbook recommended some him.” For this and similar views he was hailed of these methods. as a great humanitarian: A famed psychiatric Who were the beneficiaries of these med- institute in London is named after him. For ical miracles? Children and the insane—then, Freud, too, sexual behaviors of all kinds, espe- as now, the two groups of ideal (involuntary) cially masturbation, were manifestations of “patients.” Powerless vis-a-vis their relatives maladies of which he was a master diagnosti- and doctors, minors and mental patients could cian and therapist. not resist being fitted with grotesque appli- As recently as 1938, Karl Menninger—the ances, encased in plaster of Paris, having their undisputed dean of American psychiatry in genitalia cauterized or denervated, or being mid-century—declared: “In the unconscious castrated—for their own good. mind, it [masturbation] always represents an aggression against someone.” (Emphasis added.) None of psychiatry’s classic mistakes— The contemporary reader is likely to dismiss from masturbatory insanity and its cures, to masturbation-as-disease as a medical mistake. the disease of homosexuality and its compul- However, scientific errors, especially obvious sory treatment with “aversion therapy,” and to ones, are usually soon detected and corrected. the attribution of the cause of schizophrenia Young males always experienced and dis- to reverberating circuits in the frontal lobes played nocturnal emissions, the manifesta- and its cure with lobotomy (rewarded with a tions of normal pubertal male genital physiol- Nobel Prize in Medicine)}—are “innocent” ogy. What, in the eighteenth century, made errors. Invariably, the false belief and the nocturnal emissions turn into the dreaded medical interventions it appears to justify “symptoms” of dangerous “spermatorrhea”? serves the needs of the believers, especially The same thing that has turned youthful male the relatives of “patients” who seek control exuberance into the dreaded symptoms of over the misbehavior of their “loved ones,” dangerous attention deficit disorder in our and the physicians who gain prestige and day: parental annoyance and anxiety com- power by “diagnosing” and “treating” misbe- bined with medical imperialism and furor havior as if it were disease. therapeuticus. Today, diagnosing ADD and We fool ourselves if we believe that psychi- prescribing Ritalin are big business. A hun- atry’s current popular delusions—such as the dred years ago, it was big business to diag- chemical causes and cures of depression, nose “spermatorrhea” and “treat” it with schizophrenia, suicide, and so forth—do not spike-lined rings. For a glimpse into this fit the same mold. [] Error or Arrogance? ===== PAGE 37 ===== Nghe May 2000 The Cuyahoga Revisited by Stacie Thomas arly in the summer of 1969, the Cuya- debris, and household waste washed down- hoga River caught fire. Piles of logs, pic- stream by the periodic storms that roil the nic benches, and other debris had collected deep, fast-moving river many miles above below a railroad trestle, which impeded their Cleveland. movement down the river. These piles only lacked a spark to set them afire. A passing » Most important for our understanding of train with a broken wheel bearing probably environmental problems, the fire came provided that spark, igniting the debris that, in about because political control replaced turn, lighted the kerosene-laden oil floating the emerging common-law rule of strict on top of the river. liability. Had that doctrine been allowed to The fire burned only 24 minutes—too short hold sway, there would probably not have a time for the Cleveland Plain Dealer to catch been a fire in 1969. a photo—and at first it attracted little atten- tion. However, in the following months the The industrial stretches of the Cuyahoga fire became a symbol of a polluted America. River were indeed polluted in 1969 and had It helped galvanize the environmental move- been for many years. In the 1930s, for exam- ment. Even today, the idea of the burning river ple, the people of Cleveland had clean drink- remains a symbol of industrial neglect of the ing water from Lake Erie. So municipal environment. authorities left the Cuyahoga River alone— A few things have been ignored in the leg- allowing firms along its banks to discharge end surrounding the Cuyahoga fire: into it at will. Not everyone was content with that policy. e The Cuyahoga, which flows through the In some cases Cuyahoga water was too pol- city of Cleveland into Lake Erie, had luted even for industrial use. In 1936, a paper caught fire at least two times before (in manufacturer on Kingsbury Run, a tributary 1936 and 1952). The earlier fires burned of the Cuyahoga, sued the city of Cleveland to much longer and caused much more dam- stop it from dumping raw sewage into the age. stream. The city responded by saying that it had » While oil on the river burned, most of the used the stream as a sewer since 1860 and that fuel was not industrial but, rather, logs, therefore it had a “prescriptive right” to use it that way. The Ohio court agreed with the city. Stacie Thomas is an economist with the Senate Bank- It stated that when part of a stream being ing Committee in Washington, D.C. This is adapted Wholly within a municipal corporation, so that from PERC Reports, June 1999. none but its residents are thereby affected, is 37 ===== PAGE 38 ===== 38 IDEAS ON LIBERTY ® MAY 2000 generally devoted to the purposes of an open to stop pollution of the Cuyahoga. Those sewer for more than 21 years . . . it becomes complaints were redirected to the state or charged with a servitude authorizing its like local agency in charge of managing water use by other riparian owners” (City of Cleve- quality, with one exception. In 1965, Bar land v. Standard Bag & Paper Co.). Realty Corporation sued the city and the So much for protection of riparian rights in board to compel them to enforce the city’s 1936! However, that attitude changed rapidly. pollution control ordinances against industrial By 1948, the doctrine of strict liability was polluters. The judge agreed, and directed the taking hold. Another Ohio court decision city and the board to stop pollution of the states that “one may not obtain by prescrip- Cuyahoga. However, the Ohio Supreme Court tion, or otherwise than by purchase, a right to overturned the ruling because Cleveland’s cast sewage upon the lands of another without ordinances were in conflict with state statutes. his consent” (Vian v. Sheffield). Other rulings Management by permit continued to domi- were similar. nate other institutional arrangements on the Cuyahoga. Cleveland Mayor Carl Stokes, who helped draw attention to the Cuyahoga fire, criticized Incomes were rising, and concern about the state for letting industries pollute. “We industrial wastes was mounting. Pollutants have no jurisdiction over what is dumped in were corroding sewage treatment systems and there. . . . The state gives [industry] a license impeding their operation. In another part of to pollute,” the Cleveland Plain Dealer quot- the state, the Ohio River Sanitation Commis- ed him as saying (June 24, 1969). Stokes was sion, representing the eight states that border not far off the mark. However, he thought the the Ohio River (which runs along Ohio’s solution was to move to federal regulation southern border), developed innovations to rather than back to the guidance provided by reduce pollution. The municipalities and the court decisions. industries along the Ohio began to invest in The famous fire illustrates the unfortunate pollution control technology. history of pollution control in the United Unfortunately, this progress soon ended. States. Growing citizen concern about pollu- The evolving common law and regional com- tion was leading to voluntary cleanup, but pacts hit a snag in 1951 when the state of the emerging common-law rule of strict lia- Ohio created the Ohio Water Pollution Con- bility was abandoned in favor of a political trol Board. The authorizing law sounded good process that allowed continuing pollution of to the citizens of Ohio. It stated that it is certain segments of the state’s waters. “unlawful” to pollute any Ohio waters. How- By catering to special interests, Ohio’s reg- ever, the law continues: “except in such cases ulatory scheme stopped the emergence of a where the water pollution control board has doctrine that would have spurred cleanup. It issued a valid and unexpired permit.” also helped propel the nation toward national The board issued or denied permits legislation and its costly technological speci- depending on whether the discharger was fications. The Clean Water Act of 1972 may located on an already-degraded river classi- have led to change on the Cuyahoga, but it fied as “industrial use” or on trout streams also stifled innovation in pollution control and classified as “recreational use.” Trout streams wasted vast sums of money, both industry’s were preserved; dischargers were allowed to and the taxpayer’s. (See Bruce Yandle, Com- pollute industrial streams. The growing ten- mon Sense and Common Law for the Environ- dency of the courts to insist on protecting pri- ment [Lanham Md.: Rowman & Littlefield vate rights against harm from pollution was Publishers, 1997], pp. 76-77.) replaced by a public body that allowed pollu- In sum, the Cuyahoga fire, which burns on tion where it thought it was appropriate. in people’s memory as a symbol of industrial During the 1960s, attempts were made to indifference, should also be viewed as a sym- revive the application of common-law rights bol of the weaknesses of public regulation. [] Concern About Pollution ===== PAGE 39 ===== oxi May 2000 The Starship Private Enterprise by Timothy Sandefur he television series Star Trek has inspired that NASA consider privatizing the space a whole generation of astronauts and shuttle—are steps in the right direction, much space scientists. Its optimistic vision of remains to be done. humanity’s future in space has been credited NASA could learn from Star Trek: not with the wide popularity of what has become from its bureaucratic vision, but from the one of the most successful entertainment methods that have made the franchise itself franchises of all time. And social commenta- so successful. tors have often found important cultural mes- While many entertainment companies jeal- sages in Star Trek. In fact, libertarians have ously protect their creations through copy- frequently argued the merits of Star Trek’s right law, Paramount Pictures’ policy toward vision. While many are attracted to Star Trek’s Star Trek has been somewhat different. Until emphasis on freedom, cooperation, and toler- recently, it has generally kept hands off, ance, others complain that it presents a bland, encouraging private individuals to write bureaucratic universe, where sleek govern- their own stories, start their own clubs— ment spaceships, not entrepreneurs, explore even make their own movies or write the great beyond. In an episode of Star Trek: episodes for Star Trek: The Next Generation, The Next Generation, Captain Picard even Voyager, and Deep Space Nine. It has explains to an alien that humans have “out- spurred the initiative of individual fans, and grown the need for material possessions.” that is largely the cause of Star Trek’s vast This subject is more serious than it may success. seem at first. The privatization of America’s Law professor Dorothy Howell writes in space program is a hot topic today, especially her book Intellectual Properties and the Pro- since NASA's two recent Martian blunders. At tection of Fictional Characters, “Fandom has a cost of some $14 billion a year, NASA has played a major creative role in the evolution become a vast bureaucratic machine that has of the crew of the Enterprise”! Soon after the so far almost entirely prohibited competition original series’ cancellation in 1969, fans from private space ventures. A law repealed began writing their own stories involving the only in 1998 forbade private companies to crew members and publishing them in ama- return anything—hardware, moon rocks, or teur magazines called “fanzines.” The popu- passengers—to Earth from space. While the larity of the fanzines helped to keep Star Trek repeal of this law—and Congress’s insistence alive and to bring about the first movie in 1979. David Gerrold, who wrote the popular Star Trek episode “The Trouble with Trib- Timothy Sandefur is a law student at Chapman Uni- bles,” describes fanzines in his book The versity in Orange, California. World of Star Trek: 39 ===== PAGE 40 ===== 40 IpEAS ON LIBERTY ® MAY 2000 A fanzine—Ilook it up, it’s in the diction- I asked one amateur Webmaster about Para- ary—is an amateur magazine. . . . The fan mount’s attitude toward fan-created clubs. He publisher pays for it himself and generally described how in 1996 Paramount’s parent edits it himself, too: all the articles and art- company, Viacom, tried to close down fan- work are voluntary, and generally the fan created Web sites that competed with its offi- sells just enough copies to other fans to cial site. “Fortunately, they came to their sens- break even on the whole thing. . . . es, made their site free to all, and only went Fanzines are probably the most important after those Webmasters that had blatantly dis- avenue of communication between fans.2 tributed stolen property on the Web,” he told me. “I asked for permission! Of course, I had Rather than cracking down on fanzines, to make a few changes to the site (disclaimers Paramount took an almost laissez-faire atti- on every page and such), but that was a small tude toward them. (Some fanzines even fea- price to pay to be allowed the freedom to con- tured sexually explicit stories about the Enter- tinue using ‘copyrighted’ content. . . . Of prise crew. As one fan put it in the recent doc- course, Paramount has now realized the obvi- umentary film Trekkies, “We thought that ous: fan sites translate into free advertising!”s either Gene [Roddenberry, the show’s Other fans complained that Paramount has creator] or the studio would put a stop to it, recently changed its attitude toward Star Trek but the studio never really seemed to care.”3) fans and consequently damaged the franchise. Star Trek: The Next Generation, Deep Space “There have been instances, especially and Nine, and Voyager are the only shows in Hol- quite frankly only in recent years, that Para- lywood that accept unsolicited scripts from mount has made some mistakes in the treat- fans. ment of the fan base,” Koerner told me.¢ The Star Trek’s fans are an often-lampooned studio began to take action not just against bunch, ranging from politicians and profes- Webmasters, but also against some amateur sors to obsessive teenagers. One teen-aged theater productions and makers of prop repli- fan featured in Trekkies, Gabriel Koerner, cas such as toy phasers. “It was not like this showed how his local club had written their before, when fan replicas were a booming own Star Trek-based movie, complete with industry at conventions. Convention dealer costumes and spectacular special-effects tables have become less colorful and interest- sequences that Koerner rendered on his home ing as a result of Paramount’s cracking down.” computer. The private Star Trek entrepreneurs In short, Paramount’s recent change in atti- were also responsible for the now frequent tude has had the worst results: “Not only has Star Trek conventions. Paramount Pictures the mainstream audience basically drifted didn’t begin the conventions—but they away from Star Trek completely, the fan base haven’t discouraged them either. As William began to turn a bit sour with this.” Shatner (Captain Kirk) writes, in the 1970s It would be terrible if Paramount Pictures “Star Trek parties began springing up on col- were to abandon its hands-off attitude toward lege campuses, where whole groups of Trek- fans. So far it has yielded a great deal. Radio nuts got together to watch the show and cele- shows about Star Trek, sea cruises with a Star brate their fascination with the series.” Now Trek theme, and even a Las Vegas casino conventions are monthly events, with thou- weren’t devised by Paramount executives— sands of participants and millions of dollars in but Paramount encouraged private enterprise sales. to expand the popularity of the series until it Starfleet International, a club of about had millions of fans on every continent. Star 4,000 Star Trek fans, with a vast Web site and Trek the phenomenon is the result of decen- its own newsletter, is another example of Star tralized planning and private decision- Trek activity. Like many other clubs, it’s not making. David Gerrold calls this the “Dande- officially licensed by Paramount. In fact, the lion Effect” (“Blow on a dandelion. You'll see studio sponsors only one official fan club— what I mean.”): “Organized (you should par- and it’s not all that popular. don the expression) fandom touches about ===== PAGE 41 ===== THE STARSHIP PRIVATE ENTERPRISE 41 five thousand people in the United States. good as it is that you all have space in your Disorganized fandom reaches a lot more. I hearts, it will only work and last if you also make no guesses at the number, but every have money in your pockets. It is a business, really intense fan is merely a nucleus at the and we must treat it like one in order to suc- core of ten or twenty other human beings, ceed.”® But NASA also recently prohibited whose interest in science fiction is not quite advertising on the surfaces of the space sta- so rabid, but who enjoy the contact with tion. Advertising, of course, could bring in someone whose interest is.”” much-needed revenue. Pizza Hut recently paid the Russians over $1 million to paint their logo on a rocket. Lessons for NASA Privatizing space is becoming a fashionable NASA should learn from the Dandelion idea. Although some people believe that pri- Effect. Organizations like the Space Frontier vate industry can’t finance the pure research Foundation and ProSpace argue that explo- Of space exploration, the SETI program, ration off the earth can’t come from central- Which uses radio telescopes to listen constant- ized planning, but only from entrepreneurial ly for signs of alien life, has been privately missions—from the free market. As the Space funded since 1994, and boasts only 15 percent Frontier Foundation’s Rick Tumlinson puts it, overhead costs—far below NASA's. More imagine that at the end of the Lewis and Clark abstract, “nonproductive,” “pure research” expedition, the government had reserved the can hardly be imagined! A group called the west for itself: “A new Waggonautics and X-Prize Foundation is offering $10 million Wildernautics Agency is created to manage for the first privately built three-man rocket, the frontier. . . . Some 30 years after the orig- and the 1988 ban on privately built re-entry inal expedition a small but relatively high- Vehicles has been lifted. In December, Space- tech cabin is reaching completion some hun- hab Inc. announced plans for a privately built, dred miles west of the Mississippi. Serviced Privately owned module to be part of the by a completely self-sufficient giant Conesto- space station. Appropriately enough, it’s ga Shuttle, the cabin faces delay after delay as called “Enterprise.” government priorities shift, and there is doubt Much remains to be done. Star Trek's vision as to if it will ever be ready for its first four Of futuristic bureaucracy is certainly unrealis- Wildernauts.” tic, as Star Trek’s own success testifies: the After 30 years, NASA has become a bloat- franchise has succeeded through decentral- ed government program, using tax dollars to 1zed marketing, not central planning. So can subsidize $150 million space shuttle launch- space exploration. ] €s, building $100 billion space stations (while 1. Dorothy J. Howell, Intellectual Properties and the Protection private companies could do it for $70 mil- of Fictional Characters (New York: Quorum Books, 1990), p. 23. 3 : _ 2. David Gerrold, The World of Star Trek, rev. ed. (New York: lion), and employing thousands of bureau Blusjay Books, 1984), pp, 92.93. crats to do things not even slightly space- 3. Trekkies (Paramount Pictures Corp., 1999). _ 4. William Shatner, Star Trek Movie Memories (New York: related—such as the 200 member office of HagurColho, 1990) 21 the Inspector General, which costs $20 mil- 5. Stephen Nispel, Webmaster, uss-argis.com, communication f ith the author, December 17, 1999 : : . Wit! e author, December | /, R lion per year to (ironically enough) prevent 6. Gabriel Koemer, letter to author, December 17, 1999. wasteful spending. NASA administrator 7. Gerrold, p. 93. Daniel Goldin recently embraced the idea of 8. Remarks at Eighth Annual Space Frontier Foundation Con- | Co. | i w« ference, September 24, 1999, http://www.space-frontier.org/ privatizing space exploration, saying that “As MEDIA_ROOM/OtherVoices/1999/19990924-goldin html. ===== PAGE 42 ===== IDEAS ON [IBERTY May 2000 A Privatization Story by Christopher W. Mayer O: July 28, 1998, shares of USEC, a glob- idea to investors and creditors. Investors can al energy company, went on sale on the be specialists like venture capitalists or New York Stock Exchange in the company’s investment banking firms, or everyday folks initial public offering (IPO). This was no ordi- looking for a place to put some portion of nary IPO, however. It was held under the 1996 their savings. Creditors can be commercial USEC Privatization Act. The seller was the banks or commercial finance companies, or U.S. government. perhaps specialty bond underwriters. In any Privatization is to be cheered by advocates event, the means for raising funds is through of the market economy and those who seek to the free and voluntary interaction of the reduce the size and scope of government. In marketplace. Making Economic Sense, Murray Rothbard Success is far from certain. Only investors wrote that “Privatization is a great and impor- or creditors who are willing to risk their tant good in itself.” It represents the “reversal money participate. The entrepreneur’s idea of the deadly socialist process” by returning may find few willing to take the risk, and he productive resources to the market where they may have to pay a high price to acquire at are more efficiently deployed. In short, priva- least some of the money he wants. Or he may tizing USEC was a good idea. not find the money at all, in which case the But now, less than two years later, the com- market has rendered the verdict that the idea pany is asking for up to $200 million in relief is not profitable or worth the risk at that time. from the government. USEC warns it could To say the same thing a different way, the lose $200 million to $300 million over the market (the investors and creditors) believes next two years. The company’s stock, which its resources are presently better used else- opened at $14.50 per share was trading where where the risk/reward relationship is around $4.63 at this writing. more favorable. What went wrong? Privatization would USEC, on the other hand, was not created have been a good idea had the separation from in this fashion. Its initial capital represents an government been more than skin deep. Alas, it investment made by the U.S. government. The was not. government’s money was obtained through In a market economy, the typical means coercive levy: taxation. This is an important for an entrepreneur to raise money for a distinction from the typical market-based new business or for expansion is to sell his means of raising money. It allowed USEC to bypass the market test for raising capital and Christopher Mayer, a commercial loan officer, is thereby to circumvent the will of the investors studying for his MBA at the University of Maryland. ~~ and creditors. USEC was born by government Contact him at cwmayer@aol.com. fiat, its reason for existence established inde- 42 ===== PAGE 43 ===== 43 pendent of need and wants as expressed by After privatization, the company’s share- buyers and sellers in the market. USEC was holders elected a board of directors, which in formed for political reasons. turn assembled its management team. For the most part, these were the same people who had been involved with the company before it went private, although some of the top people The company’s roots go back many years, came out of the business world. reaching into the 1940s when the U.S. gov- The company’s management took some ernment first began to enrich uranium. Urani- immediate steps that illustrate the market’s um enrichment is, as the company’s market- drive for efficiency. It discontinued develop- ing literature notes, “a critical step in trans- ment of a uranium enrichment process called forming natural uranium into nuclear fuel to AVLIS, which uses lasers to separate uranium produce electricity.” In the 1950s U.S. plants isotopes. It did so because “the returns were supplied enriched uranium for nuclear not sufficient to outweigh the risks and ongo- weapons and nuclear submarines. All phases ing capital expenditures necessary to develop of the nuclear fuel cycle became privately and construct an AVLIS plant” The $34.7 owned in 1964—all except uranium enrich- million cost to discontinue a project that ment. began under the governments aegis included More than an artificial creation of the U.S. employee severance, shutdown, contract ter- government alone, the entire industry seems minations, and other matters. This after the to owe its existence to governments around company had already invested $370 million the world. A glance at the backing of some of over the previous three years. Of course, the other major players in this industry reveals entrepreneurs make mistakes too. So that a thick tangle of government-run operations. alone may not be enough to indict the govern- Eurodif is a multinational corporation con- ment for its waste. trolled by the French government. TENEX In addition to AVLIS, the company took is controlled by the Russian government. $33 million in charges during fiscal year 1999 Urenco is controlled by a consortium owned for employee severance and other worker one-third by the British government, the reduction costs. It is uncertain how many Dutch government, and private German cor- workers the company has shed since its IPO. porations. One wonders if any of these “busi- Again, that is what we might expect, given the nesses” would exist if not for the support of government’s reputation for turgid bureaucra- their governments. cy and rampant waste. Today, USEC is a world leader in the sale of Considering that governments are often uranium fuel enrichment services. USEC sup- the worst polluters, we would expect that the plies over three-quarters of the U.S. market company had problems in this area while for those services and one-third of the world under government ownership. In fact it did. market. It operates the only such facility in A Washington Post investigation reported the United States. To give some sense of its that “thousands of uranium workers were size, USEC generated sales of $1.5 billion exposed to radioactive materials without during its fiscal year ending June 30, 1999, their knowledge” (Martha Hamilton, “Urani- with a net income of $152 million. um Company Seeks Federal Aid,” October The initial economic problems associated 30, 1999). The company does not dwell on with a company created with conscripted cap- this, saying only that it occurred in the 1950s ital seemed to be mitigated by the IPO. The through the 1980s while under government company now faced the market test. Investors control and that matter “remain[s] the could bid the shares up or down to reflect their responsibility of the U.S. government.” This market value, and investors poured $1.9 bil- is in accord with the Privatization Act. The lion into the government’s coffers in exchange company does tout its recent track record, for USEC shares. However, the break was not including worker accident rates below indus- so clean. try average. Enriching Uranium ===== PAGE 44 ===== 44 IDEAS ON LIBERTY ® MAY 2000 Profitable Enterprise incur heavy losses over the next two years. Hence, it has gone back to the nest, so to Thus USEC management has been trying speak, pleading for $200 million in federal to transform what was once a government aid. operation into a leaner commercial enterprise USEC has warned that it may have to close capable of making a profit. Indeed, in the one of its plants or walk away from its role as 1999 annual report, president William H. executive agent and break the contract. This Timbers, Jr., and board chairman James R. has caused a stir in Congress, given the polit- Mellor stated: “Our highest priorities this year ical importance of the accord and considering included making substantial progress in trans- that an issue during the privatization process forming USEC into an investor-owned busi- was how to keep the plants open and the 4,000 ness that is commercial and profitable.” workers employed. The workers are represent- The real anchor around the company’s neck ed by the Paper, Allied-Industrial Chemical, is a 20-year contract entered into by the com- and Energy Workers International Union, pany’s federal predecessor with the executive which has been critical of the privatization for agent of the Russian Federation, TENEX, in fear that one of the company’s two plants 1993. The purpose of the “historic agree- would be closed. ment” of which the contract was a part, said Some observers disagree that the Russian the Washington Post, was “to help rid the contract indicts the political nature of USEC world of nuclear weapons.” It called for the before privatization. Thomas Neff, a senior conversion of highly enriched uranium (HEU) member of the Center for International Stud- from Soviet warheads to lowly enriched ura- ies at MIT, said, “People do sign contracts nium (LEU), which is unsuitable for weapons. with prices in them and sometimes it turns out Under this program, the company has con- later that they may not have been as smart as verted more than 3,000 Russian nuclear war- they thought they were, and that’s too bad.” heads into fuel. The company’s literature Neff, however, was one of the architects of the notes that over 20 years, 500 metric tons of TENEX deal. Moreover, the agreement was HEU will be diluted to about 15,000 metric not signed in the free market, but rather was tons of LEU. The lowly enriched uranium is an agreement between governments for polit- shipped to USEC facilities in Ohio. Under ical ends. the contract with TENEX, USEC purchases What has made the situation worse for the enrichment portion of the blended- management’s case for a subsidy is that USEC down material and sells it to its electric utility pays a relatively rich dividend, yielding more companies. USEC, acting as the U.S. govern- than 12 percent. This payout totaled $82.5 ment’s executive agent, expects that the total million in fiscal year 1999. In addition, the enrichment portion to be bought will cost $8 company has been aggressively repurchasing billion. shares this year, to the tune of nearly $100 USEC made money under this arrangement million. With all this money flowing out of the during the first few years when the price for corporate treasury, why does the company LEU was higher than it is now. The company need $200 million in relief? states that buying LEU from TENEX now Other problems plague USEC. The govern- costs much more than the cost of processing ment built one of the company’s plants near uranium in its own U.S. plants. Compounding the New Madnd fault line. The company this difficulty is that many of the company’s spent $21 million in fiscal year 1999 for seis- contracts are expiring and being replaced with mic improvements and will spend an addi- the new lower-priced LEU. tional $20.5 million in 2000 to fortify the This agreement, born in the bowels of the plant in the event of an earthquake—more federal bureaucracy, looks like a bad one in waste and more evidence of a lack of reason- light of current market prices. Management able foresight by government. predicts that because of this agreement and Further, the company is under a number of the falling price of LEU, the company will restrictions created as part of the privatization ===== PAGE 45 ===== A PRIVATIZATION STORY 45 deal. For example, no one may hold more than an open question. There are both supporters 10 percent of the company’s stock for three and detractors in Congress and the adminis- years after the IPO. This removes, or at least tration. significantly mitigates, the threat of a corpo- The USEC story captures in microcosm rate takeover, that is, the market for corporate many of the things that are wrong with gov- management. The company is also restricted ernment efforts to run businesses. Interven- on the type and amount of asset sales it can tion leads to more intervention and waste. conduct. Again, the company is handcuffed in USEC is attempting to fulfill two roles: meeting the market’s demands and employing profit-making enterprise and instrument of its assets efficiently. political aspirations. It cannot successfully Whether USEC will get its relief money is do both. [] LEONARD E. READ Government—An Ideal Concept Leonard E. Read by Leonard E. Read (1898-1983) founded FEE in hat should government be like? Most 1946. He wrote of us have spent hours and hours more than two thinking about and debating this ques- dozen books and tion. In this short work, Leonard Read offers hundreds of arti- his vision: government should defend us, our cles. delivered over persons and our property, from harms inflict- one thousand ed by others. Period. Government should lectures. and enforce a strict equality before the law, but it influenced count- should go no further—it should not, for exam- 4 A less individuals ple, attempt to create any sort of equality of through FEE seminars and a prodigious outcome among different citizens. The “ideal” correspondence. government would not be one that “rules” its citizens; instead, “Government has only the limited function of serving the sovereign peo- Foundation for Economic Education ple as a defensive agent! The people shall be Irvington-on-Hudson, NY 10533 their own rulers in a creative sense.” Read 800-452-3518 emphasizes that people can only be creative Fax: 914-591-8910 when they are free and that all too often gov- E-mail: kwalsh@fee.org ernment impedes our creative abilities by I ) tying us down with regulatory and fiscal On-line bookstore: www.fee.org chains. He calls for decentralized government Phone, fax, mail, or e-mail your order to: SHIPPING: power, separating school and state, stopping Total Purchases Add government aggression in its many forms, and $250rless ......iiiiiiiniinL. $4 getting government out of the money-print- $2501-34999 ................ $5 ing business. The best government is one that $50.00-$74.99 ................ $6 allows people to freely achieve their unique, $75.00-$99.99 ................ $7 highest purpose—only a strictly limited gov- $1000rover.................. $8 ernment meets that test. Call or e-mail for express rates. 149 pages, paperback $5.95 ===== PAGE 46 ===== Economic Notions by Dwight R. Lee ¥ Economics Freedom of the Price ast month I explained why our liberties our freedoms would be impossible without will be steadily eroded without a genuine the information and motivation communicat- commitment to liberty in general. ed through market prices. Yet governments Fortunately some liberties are widely rec- routinely distort this communication with ognized as crucial and have influential inter- policies that force prices above or below what ests protecting them from political violation. they would be in a free market. This price cen- An interesting example is freedom of sorship violates our right of free expression as speech—freedom against government censor- much as government’s dictating the content of ship. Recent examples of the censorship of daily newspapers and TV news. politically incorrect speech have occurred on, Minimum-wage laws censor unskilled of all places, state college campuses, and too youth who would like to communicate with much of this censorship remains, even if potential employers: “I have few skills and unofficially, despite court decisions outlawing college is not feasible, so I am willing to work it\ But the freedom to communicate in speech for little now while I have few financial and writing is for the most part protected. If responsibilities to acquire the on-the-job train- the government attempts to censor the news ing that will allow me to be more productive media (even in the name of national security) later.” Agricultural price supports victimize all there is an immediate and powerful outcry families by censoring the ability of farmers to from journalists. (Remember the Pentagon communicate with them. Without that censor- Papers.) We can be proud of our long tradition ship dairy farmers, for example, would com- of freedom of the press and appreciative of municate that they are willing to make more the journalism profession for helping protect milk available to children (and adults) by low- that freedom. At best, however, journalists ering milk prices. This censorship is particu- deserve only two cheers for resisting censor- larly harmful to poor families because they ship, since they not only condone, but often devote a larger percentage of their budgets to report sympathetically on, a very pernicious basic foods than do wealthy families. type of censorship. The censorship of rent control prevents peo- As valuable as the communication of the ple from communicating their desire for hous- news media is, it is less valuable than com- ing space through higher prices. The result is munication through market prices. As I have that people who would be willing to provide explained in earlier columns, the global coop- additional housing don’t have adequate infor- eration that provides our wealth and protects mation on how valuable the housing is and lit- Dwight Lee is Ramsey Professor at the Terry College tle motivation to provide the ri ght amount even of Business, University of Georgia, and an adjunct if they did. Rather than helping the poor, who fellow at the Center for the Study of American Busi- are supposedly the beneficiaries of rent con- ness at Washington University in St. Louis. trol, the available housing space generally 46 ===== PAGE 47 ===== 47 goes to well-connected nonpoor families; the resources at a disadvantage. If this argument poor end up with less housing than they would were correct, it would also be true that the tra- have been willing to pay for in an open market ditional freedom of expression discriminates and are often relegated to the squalor of public against those lacking education and the abili- housing. If journalists were as informed as ty to express themselves. But no one is put at they want us to believe, and as socially con- an absolute disadvantage by the freedom to cerned as they claim, they would help the poor communicate either through prices or words. by attacking price censorship with the same Obviously those who are knowledgeable and fervor as they do press censorship. articulate benefit from free speech, but can Journalists can fill newspapers and news anyone believe that censoring verbal and writ- broadcasts with stories of jobless teenagers, ten communication would help the ignorant write compellingly of the need to increase the and inarticulate? The best hope for acquiring availability of food to the nation’s poor, and knowledge and developing intellectual skills urge landlords to make more low-income is through the free flow of spoken and written housing available. But the effectiveness of information. Similarly, the best hope for the this free expression is nil compared to the free poor is through the free flow of market com- expression that would allow lower wages, munication, which informs them of their best lower food prices, and higher housing prices. opportunities, motivates them to increase I am not arguing that we should be compla- their productivity by taking advantage of cent about low wages and farm incomes, or those opportunities, and keeps others respon- high rents. But we should recognize that low sive to their preferences and concerns. wages and incomes and high rents are only No one would argue that price communica- the symptoms of the problems that should tion is always completely honest and accurate. concern us. Low wages inform us that pro- But who is prepared to argue that distortions ductive skills are lacking; low farm incomes and misrepresentations are not easily found in send a message that some farmers would cre- newspapers, magazines, books, and TV and ate more value elsewhere in the economy; and radio programs? Such imperfections can high rents tell us that housing space should be never be eliminated, but the most effective expanded. We may not like the news commu- way of moderating them is not through nicated through market prices, but that is no censorship but through the competition of reason for censoring it. No one would suggest free expression, as any self-respecting jour- that we censor news of natural disasters, polit- nalist will quickly inform you. But any ical scandals, or outbreaks of disease. We may journalist informed enough to warrant self- not like to hear such news, but suppressing it respect should also recognize that the most would reduce our ability to respond in ways effective way of moderating the imperfec- that reduce the costs of such unfortunate tions in price communication is by allowing events. Similarly, censoring price communi- more competition in price communication, cation reduces the information and incentive not by stifling that competition with price needed to respond appropriately to the prob- censorship. lems created when our efforts and resources Journalists should understand the impor- are not being directed to their most urgent tance of freedom in communication. And cer- employments. tainly no group is as quick to defend that free- dom, or more articulate at making the case for . it, than journalists. But if journalists ‘were Harming the Poor fully committed to freedom of communica- Some will object that the freedom of price tion, they would find price censorship just as communication puts those with few financial abhorrent as press censorship. = ===== PAGE 48 ===== IDEAS ON BERTY May 2000 The Common Good Demystified by Edward W. Younkins he idea of the common good has been Along with professors of philosophy, polit- one of the most vague and most difficult ical science, and economics, I regularly par- concepts to clarify in the history of man. For ticipate in a senior seminar for the political many, the common good has primacy over and economic philosophy majors at my uni- persons and thus takes precedence over self- versity. At one session, several faculty mem- interest. Some even reify the abstract com- bers and students engaged in a debate in mon good, acting as if it had an existence of which references were vaguely and frequently its own. When the common good of society is made to the common good. One student looked on as something separate from and bravely asked a political philosophy professor superior to the individual good of its mem- to define what he meant. Stunned by the stu- bers, there is a tendency for the common good dent’s question, the professor exclaimed, “If to be interpreted as the good of the majority. you don’t know what the common good is, In politics, economics, and culture, the term is then you haven’t learned a damn thing during frequently used when the speaker is encour- the last four years!” Sensing that no answer aging others to make sacrifices. It is often was forthcoming, I decided to jump in. evoked with reference to the poor and concern To discover what constitutes the common with equality and the distribution of wealth. good, I said, it is necessary to determine what The expression is also often used by those makes man what he is. who wish to impose their wills on others. Man’s distinctive nature is exhibited in his Advocates of socialist schemes tell us that we rational thinking, the process of abstraction must join in because all human beings have a and conceptualization, that is necessary for moral obligation to serve the common good his survival and self-actualization. Reason is rather than their own desires. We are told that the faculty that perceives, identifies, and inte- government must provide for the common grates the input received from the senses. His good since individuals cannot be trusted to rational faculty sets him apart from all other voluntarily sacrifice for it. Exhibiting a disre- living species. To live as a human being, man spect for persons, political authorities fre- must think, act, and create the conditions that quently dictate the course of action to be his life requires to survive and prosper. undertaken to achieve the common good Freedom, a fundamental personal and and set standards to gauge the extent of its social good, is another natural requirement of realization. man’s existence. Each person has the ability to think his own thoughts and control his own Edward Younkins is professor of accountancy and ~~ CNCT8ICS IN his efforts to act according to business administration at Wheeling Jesuit Universi- those thoughts. Men are rational beings with ty, Wheeling, West Virginia. free wills, who have the ability to form their 48 ===== PAGE 49 ===== 49 own purposes, aims, and intentions. If a man is to maintain his life and fulfill his potential, he must understand what’s required for human survival and flourishing, face a multitude of choices and actions, and act in accordance with his rational conclusions. The right to lib- erty (and to life) is the right to engage in that process. Freedom is a necessary, but not a suf- ficient, condition for survival, moral well- being, and happiness. The object of the right to liberty is to allow people to live life as they choose, as long as they do not aggress against the freedom of others. Individuals are free to act when they are free from coercion by other individuals, groups of people, or the government. Whatever is alleged to be the common good must be good for everyone. Liberty fulfills this requirement, since self-directedness is good for every person. The common good rests not in what men do when they are free, but rather in the fact that they are free. It con- sists in treating each person as an end and never solely as a means. This simply means respecting the autonomy of each individual. freedom that allows individuals to pursue Freedom and self-directedness can be pos- happiness or the good that each defines for sessed by all persons simultaneously. Their himself. Government ensures the common commonness lies in their indivisible and good when its functions are restricted to pro- nondiminishing availability to all members of tecting the natural right to liberty and main- the human community. Each person can pos- taining peace and order. The necessity of self- sess those intangible goods without lessening direction provides a rationale for a political another persons possession of them. Any and legal order that will not require the auton- number of people can experience them and omy of any individual to be sacrificed. Limit- each person can possess them in total. ed government only guarantees man the free- In contrast, when socialists (of whatever dom to seek his own happiness as long as he variant) speak of the common good, they are does not trample the equivalent rights of oth- often actually referring to what are really ers. A libertarian institutional framework is material goods divided up among various concerned with a person’s outward conduct individuals. Today’s welfare-state liberals use rather than with his virtuousness. A proper the term common good for rhetorical purpos- social system should not force a particular es when they advocate programs that distrib- good on a man, nor should it force him to seek ute resources. the good. It should only maintain the condi- tions that leave him free to seek it. As I concluded my explanation, several stu- The Common Good Is dents were nodding in agreement while the Protected Individual Liberty other professors sat in silence. Perhaps they were in awe of my uncommonly clear deriva- Each person has the right to protect himself tion of the common good. Or they might have against all forms of external aggression initi- been thinking, “Younkins, you’ve been teach- ated by private individuals or by the state. The ing college for over half your life and you still proper role of government is to protect the haven’t learned a damn thing!” [] ===== PAGE 50 ===== IDEAS ON [IBERTY May 2000 It’s About Power—Period by Roger Clites f we dig deep enough into any government have also suffered eroded choice of service by program or policy, regardless of its stated the postal monopoly, lost transportation aims, we will find that its basic purpose is the options because of the Interstate Commerce accumulation of power. We constantly allow Commission, and limitations on speech by ourselves to be flim-flammed by debates, restrictions on contrived categories such as compromises, or other distractions from this “commercial speech.” The list could go on for underlying point. By straying in any way from pages. Actually, it is more difficult to list areas this truth we enable power-grabbers to of our lives in which liberty has not been encroach a little bit further into our liberty. eroded. That is the problem. They creep into addition- Every one of those losses of liberty was al power a little bit at a time. promoted as something good that was being Politicians always tell us that the cost will “given” to us. be small and the benefits will be large. That It is bad enough that the promoters of alone should alert us. TANSTAAFL. There infringements declare that they are acting for ain’t no such thing as a free lunch. The free our benefit. But even those who see the dam- lunch is their repeatedly used ploy. They sell age they do often credit them with “good whatever it is as something for nothing. intentions.” We must constantly expose these In reality, there is always a carrying charge. people for what they are: tyrants. They are That carrying charge is described by most of seeking to lead us down what FA. Hayek their critics in terms of money. Of even called The Road to Serfdom. They are not greater significance than that loss of money is working in our best interest. They are, in the loss of a little more liberty. Just as lost every instance, seeking more power over us. pennies add up to lost dollars, lost little bits of We must always focus on that. They will liberty add up to a major loss and eventually accuse us of being mean-spirited, say that our lead toward enslavement. language is inflammatory, or use some other It is easy to list areas in which we have lost pejorative. When they do, we must insist that liberty. High on the list are loss of our chil- they address the subject of aggregation of dren’s minds to indoctrination by the educa- power. We must constantly hold their feet to tional establishment and loss of choice in the fire. We must not deviate nor allow them medicines and other health care to such agen- to get away with a smoke screen. cies as the Food and Drug Administration. We It’s about power—period. [1] Roger Clites is a freelance writer. 50 ===== PAGE 51 ===== Economics on Trial by Mark Skousen IDEAS ON [IBERTY May 2000 Is Greed Good? “Unbridled avarice is not in the least the equivalent of capitalism, 29 still less its ‘spirit’. -—MAX WEBER! Rely greed has become a popular term Part of the problem is in the definition of of endearment. There’s even a TV game the word. If greed simply means enthusiasti- show by that name. In 1987, Oliver Stone cally pursuing one’s self-interest, there is no released a popular movie called Wall Street, in harm in it and a great deal of good. Unfortu- which Gordon Gekko, the fictional dealmaker nately, greed carries excessive baggage extraordinaire, declares, “Greed is good.” beyond honest initiative. Webster’s Dictionary In the 1990s, as capitalism, technology, and defines greed as “excessive desire for acquir- the financial markets advanced, some free- ing or having.” A greedy person “wants to eat market economists defended Gekko’s speech, and drink too much” or “desires more than arguing that the pursuit of greed is beneficial one needs or deserves.” This conjures up pas- and an integral feature of market capitalism. It sages of conspicuous consumption from motivates individuals to work harder, to create Veblen’s Theory of the Leisure Class, or new and better products. As Bernard Mande- scenes of the miserly banker foreclosing on ville wrote in The Fable of the Bees (1714), the poor in Frank Capra’s film It’s a Wonder- the private vices of greed, avarice, and luxury ful Life. Is that what capitalism leads to? lead to abundant wealth. Greed is no virtue in the financial markets. On the other hand, critics of capitalism, Too many inexperienced, gullible investors from Thorstein Veblen to John Kenneth Gal- get caught up in the latest hot market, only to braith, have long argued that capitalism buy in at the top. As J. Paul Getty warns, “The unleashes greed, creating greater inequality, big profits go to the intelligent, careful and alienation, and deception in society. Capital- patient investor, not to the reckless and ism is, in short, morally corrupting, both for overeager speculator.”2 the individual and business. Which view 1s more accurate? Montesquieu to the Rescue Mark Skousen (http://www.mskousen.com; mskousen In researching my forthcoming book, The @aol.com) is an economist at Rollins College, : Modern Eco ics (M. E. Sharpe Department of Economics, Winter Park, FL 32789, a Sats of 0 nomics A Co > P Forbes columnist, and editor of Forecasts & Strate- u 1s ers), ave uncoverec Several eco- gies. His textbook, Economic Logic, is now available NOMIC thinkers who make an important con- from FEE. tribution to this issue. Charles de Mon- 51 ===== PAGE 52 ===== 52 IDEAS ON LIBERTY ¢ MAY 2000 tesquieu (1689-1755) was the first major fig- way, and to bring both his industry and capi- ure during the Enlightenment to maintain that tal into competition with those of any other commercial activity restrains greed and other man, or order of men.”¢ passions. In his classic work, The Spirit of the Smith favored enlightened self-interest and Laws (1748), Montesquieu expressed the even self-restraint. Indeed, he firmly believed novel view that the business of moneymaking that a free commercial society moderated the serves as a countervailing bridle against the passions and prevented a descent into a violent passions of war and abusive political Hobbesian jungle, a theme echoing Mon- power. “Commerce cures destructive preju- tesquieu. He taught that commerce encour- dices,” he declared. “It polishes and softens ages people to defer gratification and to barbarous mores. . . . The natural effect of become educated, industrious, and self- commerce is to lead to peace.” Commerce disciplined. It is the fear of losing customers improves society: “The spirit of commerce “which retrains his frauds and corrects his brings with it the spirit of frugality, of econo- negligence.”” my, of moderation, of work, of wisdom, of Finally, Smith supported social institu- tranquility, of order, and of regularity.” tions—the competitive marketplace, religious Adam Smith (1723-90) held similar views. communities, and the law—to foster self- He wrote eloquently of the public benefits of control, self-discipline, and benevolence.? pursuing one’s private self-interest, but he was In sum, no system can eliminate greed, no apologist for unbridled greed. Smith disap- fraud, or violence. Socialism and communi- proved of private gain if it meant defrauding tarian organizations promise paradise, but or deceiving someone in business. To quote seldom deliver. Oddly enough, it may be a Smith: “But man has almost constant occa- freely competitive capitalist economy that can sion for the help of his brethren. . . . He will best foster self-discipline and control of the be more likely to prevail if he can interest passions. [] their self-love in his favour. . . . Give me that . . . 1. Quoted in Jerry Z. Muller, Adam Smith in His Time and Ours which I want, and you shall have this which (Princeton, N.J.: Princeton University Press, 1993), p. 194. : : 2. J. Paul Getty, How to Be Rich (New York: Jove Books, 1965), you want, is the meaning of every such p- 154. This book is required reading for all investors. offers In other words, all legitimate 3. Charles de Montesquieu, The Spirit of the Laws (Cambridge: ’ " Cambridge University Press, 1989), p. 338 ambridge University Press, , p- 338. exchanges must benefit both the buyer and the 4. Quoted in Albert O. Hirschman, The Passions and the Inter- seller, not one at the expense of the other. esis (Princeton, N.J.: Princeton University Press, 1997), p. 71. I high- a) : : ly recommend this book on pre-Smithian views of capitalism. Smith $ model of nama liberty reflects this 5. Adam Smith, The Wealth of Nations (New York: Modern essential attribute: “Every man, as long as he Library, 1965), p. 14. does not violate the laws of justice, is left per- oid. P 635 Italics added. fectly free to pursue his own interest his own 8. Muller, p. 2. Mark Skousen’s Economic Logic 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). Discover why this book has won praise from economics professors across the country! 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 53 ===== Have you heard the latest from Washington? These days it seems as if everybody is crying for the truth. But how often do you actually feel that you can believe what you hear or read? If puréed truth and strained journalism makes you want to scream, we'd like to invite you to subscribe to The Washington Times National Weekly Edition, the only nationally circulated newspaper in the country with the courage and conviction to cover the news honestly. Every week, we’ll bring you a fresh, honest, unbiased look at the people and events that shape the news in Washington D.C. and around the world. No liberal spin. No hidden agenda. Just vigorous, unapologetic journalism and clean, crisp writing. Anything less would be downright Try It FREE! Call today and order 4 weeks of The Washington Times National Edition free of charge! If you like it, you’ll receive 48 more issues, for a total of 52 and pay only $59.95. If you decide not to subscribe, simply write “cancel” on your invoice and owe nothing at all! The 4 sample copies will be yours to keep! Name Address City State Zip Credit Card # Exp. Date Signature - Phone Make checks payable to: The Washington Times NWE. Clip and mail with payment to: PO Box 96601, Washington, DC 20090 For lightning-fast delivery, call 1-800-363-9118 (mention express code: 2055) ===== PAGE 54 ===== 54 As the idea of the state’s benevolence grew, more American thinkers came to see coercion as a small price to pay for the “blessings” it could bestow on us. Thus John Dewey was only slightly ahead of his time (1916) when Freedom in Chains: The Rise of the he opined that “no ends are accomplished State and the Demise of the Citizen without the use of force. It is consequently no presumption against a measure, political, by James Bovard international, jural, economic, that it involves St. Martin’s Press ® 1999 ® 326 pages ® $26.95 a use of force” Indeed, those sentiments today probably have the tacit support of the great majority of Americans. Each chapter of this book is organized t has been said that one of the devil’s around an idea that has served as cover for the favorite tricks is to make you think he does power grabs by the state. Prominent among not exist. In Freedom in Chains, James Bovard them are democracy, fairness, sovereignty, shows how the cheerleaders for statism have equality, and pragmatism. Bovard’s chapter on spent the last two and a half centuries trying democracy is particularly well done. He takes to persuade us that government coercion does on not democracy itself, but rather the extent not exist, or at least is unimportant. To the to which democracy has been oversold as a extent that they have succeeded, they have protector of liberty. Democracy is merely a paved the way for wholesale expansion of that means to select leaders. Like government very object whose existence they deny. itself, “Democracy can be more noble for The central theme of this book is that the what it prevents than for what it achieves.” Of idealist theory of the state, which depends on far greater import to the health of our liberty the concealment of governments coercive are restrictions placed on what those leaders nature, has made the American republic can do. As the author aptly puts it, “since something that would be unrecognizable to its there is no sure-fire method of choosing good Founders. They were so keenly aware of the rulers, the amount of power available to any clear and present danger of state coercion that ruler, good or bad, must be minimized.” they painstakingly sought to establish institu- To illustrate the consequences of the ideal- tions designed to minimize it. ist theory of the state, Bovard produces a Freedom in Chains is proof positive that depressing parade of trampled rights ranging ideas have consequences. The author alter- from the state-sanctioned murders of the nates between identifying the origins in polit- Branch Davidians at Waco to killing with ical philosophy of the ideas that have corrupt- kindness those it has entrapped in its welfare ed the American experiment in limited gov- system. Indeed, the litany of depredations at ernment and providing numerous concrete times makes the reader feel things are hope- examples of the unhappy results of such way- less. But, if things were that hopeless, this ward thinking. The first culprit singled out is book would not have been written; indeed it Jean Jacques Rousseau, who “effectively would not have been allowed to be written. made self-delusion about the nature of gov- Bovard writes with an admirable passion for ernment into the highest political virtue” by liberty. Occasionally, that passion leads him to using the notion of the General Will to overstate his case. For instance, he cites the “prove” that any depredation visited on sub- fact that 6 percent of the entire U.S. population jects by their government, no matter how was arrested in 1996 as prima facie evidence egregious, was done with their consent. of government perfidy. It would have been Bovard then shows how those ideas reached helpful had he broken down the arrests into American shores by the late nineteenth and those resulting from violations of the “tradi- early twentieth centuries via Germany and tional, accepted principles of justice” and England. those from running afoul of arbitrary edicts. Reviewed by Robert Batemarco ===== PAGE 55 ===== 55 As one might expect from a book that iden- argued that the war was not only necessary, tifies the root of the problem as the glorifica- but inevitable. tion of the state, Bovard’s solution begins with Ferguson asks and answers ten specific demystification and desanctification of the questions about the First World War, one of state. This requires that we call things by their the most important being whether the war, right names, and Bovard does so with gusto. with its total of more than nine million casu- Thus he unmasks trade policy as the “arbi- alties, was worth it. Not only does he answer trary power to restrict Americans’ freedom to in the negative, but concludes that the world buy from and sell to 96 percent of the world’s war was not necessary or inevitable, but was population,” labels the community service instead the result of grossly erroneous deci- some states now require for a high school sions of British political leaders based on an diploma “a Kiddie Draft,” and characterizes improper perception of the “threat” to the the Motor-Voter Act as making “it a federal British Empire posed by Germany. Ferguson crime for state and local governments to be regards it as “nothing less than the greatest vigilant against voter fraud.” Statism thrives error in modern history.” on the use of language to manipulate people’s He goes further and puts most of the blame thinking. Bovard fights back hard. on the British because it was the British gov- Freedom in Chains is a wonderful polemic ernment that ultimately decided to turn the aimed at alerting Americans that they are continental war into a world war. He argues being duped into surrendering their freedom that the British had no legal obligation to pro- bit by bit to government. I recommend it tect Belgium or France and that the German enthusiastically. [J naval build-up did not really menace the Robert Batemarco is a vice president of a market- British. i ing research firm in New York City and teaches eco- British political leaders, Ferguson main- nomics at Marymount College in Tarrytown, New tains, should have realized that the Germans York. were mostly fearful of being surrounded by the growing Russian industrial and military might, as well as the large French army. He The Pity of War argues further that the Kaiser would have hon- ored his pledge to London, offered on the eve of the war, to guarantee French and Belgian territorial integrity in exchange for Britain’s neutrality. Ferguson concludes that “Britain’s decision to intervene was the result of secret planning iall Ferguson is a history professor who by her generals and diplomats, which dated taught at Cambridge and is now a back to 1905” and was based on a misreading tenured Oxford don. Those are the credentials of German intentions, “which were imagined of an establishment, or “court,” historian, to be Napoleonic in scale.” Political calcula- whose main purpose is to protect the patri- tions also played their part in bringing on war. otic and political myths of his government. Ferguson notes that Foreign Minister Edward Professor Ferguson, however, has written Grey provided the leadership that put Britain an iconoclastic attack on one of the most on the bellicose path. Although a majority of venerable patriotic myths of the British, the other ministers were hesitant, “In the end namely that the First World War was a great they agreed to support Grey, partly for fear of and necessary war in which the British per- being turned out of office and letting in the formed the noble act of intervening to protect Tories.” Belgian neutrality, French freedom, and the The First World War continues to disturb empires of both the French and British from the British psyche today, much as the Civil the military aggression of the hated Hun. War still haunts Americans. British casualties Politicians like Lloyd George and Churchill in the war numbered 723,000—more than by Niall Ferguson Basic Books ® 1999 ® 563 pages ® $30.00 Reviewed by John V. Denson ===== PAGE 56 ===== 56 IDEAS ON LIBERTY ® MAy 2000 twice the number suffered in World War II. The author writes that “The First World War remains the worst thing the people of my country have ever had to endure.” by Scott Douglas Gerber One of the most important costs of the war, New York University Press ® 1999 © 280 pages which was prolonged by British and Ameri- © $30.00 can participation, was the destruction of the - . Russian government. Ferguson contends that Reviewed by Joerg W. Knipprath in the absence of British intervention, the most likely result would have been a quick he nomination of Clarence Thomas to the German victory with some territorial conces- Supreme Court produced two confirma- sions in the east, but no Bolshevik Revolu- tion “debates.” The first, of interest primarily tion. There would have been no Lenin—and to lawyers and other Supreme Court watchers, no Hitler either. “It was ultimately because of included occasionally fascinating exchanges the war that both men were able to rise to about natural law, its role in constitutional establish barbaric despotisms which perpe- interpretation, and contemporary constitu- trated still more mass murder.” tional issues. The second was the sorry spec- Had the British stayed on the sidelines, Fer- tacle of tawdriness that arose from the leaking guson argues, their empire would still be of Anita Hill’s charges of sexual innuendo and strong and viable; instead, their participation off-color remarks by Thomas while he was and victory “effectively marked the end of her boss. British financial predominance in the world.” The fury of Thomas’s opponents barely He believes that the British could have easily cooled after the hearings. The visceral hatred coexisted with Germany, with which it had that many academics and other leftists had good relations before the war. But the British toward Thomas has carried over to commen- victory came at a price “far in excess of their tary about his tenure on the Supreme Court. gains” and “undid the first golden age of eco- As quoted by Scott Douglas Gerber in First nomic ‘globalization.’ ” Principles: The Jurisprudence of Clarence World War I also led to a great loss of indi- Thomas, the typical analysis ranges from the vidual liberty. “Wartime Britain . . . became apocalyptic (Nat Hentoff’s “No new justice by stages a kind of police state,” Ferguson has ever before done so much damage so writes. Of course, liberty is always a casualty quickly”) to the truly bizarre. An almost hilar- of war and the author compares the British sit- ious example of the latter is the late judge uation with the draconian measures imposed A. Leon Higginbotham’s psychoanalysis of in America by President Wilson. The sup- Justice Thomas in a law review article. Hig- pression of free speech in America “made a ginbotham characterized Thomas’s views as mockery of the Allied powers’ claim to be “shameful” and concluded that they were pro- fighting for freedom.” duced by his “racial self-hatred.” While the book is addressed mainly to a These attitudes have poisoned the academy, British audience, it is relevant to Americans as well, and have produced “research” on Jus- who tragically followed the British into both tice Thomas that almost uniformly denigrates world wars at a tremendous cost in freedom as him and his work. In that regard, Gerber a result of the centralization of power in the recounts an e-mail he received from a friend leviathan government in Washington, D.C. and fellow professor. This colleague warned There are many valuable lessons to be learned ~~ Gerber that, unless his book was “very, very from this timely and important book. [J critical” of Thomas, Gerber’s “career may be damaged by the Thomas curse!” Gerber, both a lawyer and a political scien- tist, sets as his goal to write a dispassionate analysis of Thomas's early years on the Court. He succeeds admirably. The book is an engag- First Principles: The Jurisprudence of Clarence Thomas John Denson is an attorney living in Opelika, Alaba- ===== PAGE 57 ===== Books 57 ing account that does not require of the read- the commerce clause an act of Congress that er an extensive background in constitutional targeted private behavior. Thomas used re- law. Yet this is not dumbed-down “popular invigorated federalism in Lopez to protect history.” Gerber devotes only a small portion individuals and states against an overbearing of the book to nominee Thomas. His objective national police power. From a libertarian per- there is primarily to explore Thomas’s ideo- spective, it is interesting to speculate what logical roots and attitudes before the nomina- Justice Thomas might say about the constitu- tion and during the confirmation hearings, to tionality of gun control in a case shorn of help the reader understand Justice Thomas’ states’ rights considerations. He has given a views in his Supreme Court opinions. In a tantalizing hint in Printz v. U.S., a more recent similar vein, Gerber in only a few mercifully case that struck down portions of the Brady brief passages refers to Anita Hill and then Act, also on federalism grounds. Concurring only to describe the reactions of, primarily, in the decision, Justice Thomas pointed out Thomas’s political adversaries. that the Second Amendment might be read to Gerber correctly identifies “federalism,” confer a personal right to bear arms, which the question of state-national relations, as a therefore might raise obstacles to the federal central issue in Justice Thomas’s constitution- government’s regulation of handguns. He alism. His chapter on that topic is particularly approvingly quoted Justice Joseph Story’s well done. In a close examination of two sig- characterization of the right to bear arms as nificant cases, U.S. Term Limits, Inc. v. Thorn- the “palladium of the liberties of a republic.” ton, and U.S. v. Lopez, Gerber succinctly pre- In sum, Gerber’s book is a breath of fresh sents the various opinions and lays out their air, because it treats Justice Thomas and his textual and precedential foundations. In Zerm work with respect and intellectual curiosity. Limits the Court, by 5-4, held unconstitution- What emerges is a picture of a Supreme Court al term limits placed by the people of justice who can be counted on more than most Arkansas on their U.S. representatives and to protect individual rights in cases about senators through a constitutional amendment. affirmative action, political and commercial In Lopez the Court held the Gun-Free School speech, property rights, free exercise of reli- Zones Act of 1990 to be an unconstitutional gion, and associational rights. 0 intrusion of the national commerce power into Joerg Knipprath is professor of constitutional law at the reserved powers of the states. Southwestern University School of Law. Gerber concludes that Thomas’s dissent supporting states’ rights in 7erm Limits was incorrect, but that his concurring opinion sup- Beyond Unions and porting states’ rights in Lopez was correct. He Collective Bargaining rests those conclusions on Madison’s Federal- ist No. 39, which says that “in the sources by Leo Troy from which the ordinary powers of govern- ME. Sharpe ® 1999 © 256 pages ® $60.95 ment are drawn, [the central government] is partly federal and partly national.” Using his yardstick of “liberal originalism,” that is, interpreting the Constitution in light of cer- abor unions are nonprofit businesses tain influences outside its text (including the whose managers benefit to the extent that Declaration of Independence and the struc- they can get workers to accept their represen- ture of federalism), Gerber believes that Jus- tation services in exchange for the payment of tice Thomas’s “compact theory” in Term Lim- dues. Supposedly—and there is some statisti- its is wrong. I am not convinced that Gerber cal evidence to support the claim—unionized ultimately makes his case, but his analysis is workers enjoy higher earnings than non- superb. unionized workers in comparable jobs. Unions Lopez is significant as the first case in two also claim that they give workers greater job generations to declare unconstitutional under security, safety, and “voice.” So why is it that Reviewed by George C. Leef ===== PAGE 58 ===== 58 IDEAS ON LIBERTY ¢ May 2000 for almost half a century, the percentage of petitive than they were 50 years ago is also workers who are not represented by labor important in the ascendancy of individualism unions has been increasing? in labor relations. In highly regulated indus- The salient fact is that the percentage of tries facing little foreign competition, the costs unionization among private-sector workers of unionization were readily passed on to con- peaked in 1953, at 36 percent. Although sumers. But with global competition and, at unionization has rapidly grown among gov- least in some respects, a freer business envi- ernment workers since then (for the obvious ronment today, a unionized company is like a reason that government agencies don’t have to runner in a race with lead shoes. Many old worry about competition or costs), private- unionized companies have gone out of busi- sector unionization has been falling steadily. ness or now operate as mere shadows of their Now, only about one in ten workers has union former selves while non-union newcomers representation. In his new book, Beyond thrive. The steel industry is a good example. Unions and Collective Bargaining, Rutgers Troy is not predicting extinction for unions University economics professor Leo Troy and collective bargaining. He believes that attempts to explain why. there will remain a core of unionized firms His conclusion is simple: Most workers that will comprise roughly 7 to 9 percent of prefer self-representation. Yes, unions promise the private-sector work force. But union talk various benefits, but most workers have fig- of a big comeback is, he maintains, just ured out that the benefits are dubious and the puffery. Even if the unions managed to elect a costs, both in dues and the possibility of job friendly president and Congress and prevail loss because of the well-known propensity of on them to enact new labor laws designed to unions to make firms uncompetitive, are very make organizing easier, Troy thinks there will real. The product the unions are selling—their be no union comeback. He points to Canada, services in negotiating and administering a where labor law 1s much more pro-union than collective labor contract—is one that many here and unionization has been declining. workers have come to see as unattractive or What are the implications of all this? Troy irrelevant. That is why the great organizing leaves that largely to his readers. Even if campaign announced with bravado by AFL- private-sector unionism vanished, organized CIO President John Sweeney on taking office labor would still be able to extract huge has had no discernible effect. Union numbers amounts of money from its government work- continue to slide. The customers just aren’t ers to finance political campaigns aimed at buying. electing politicians who favor the further A key reason why they aren’t is that busi- expansion of government. Statists like Lyndon ness managers have become, on the whole, far Johnson used to depend on money largely more sophisticated in their handling of work- taken from steelworkers and autoworkers. In ers than they were in the era of advancing the future, statists like Bill Clinton will depend unionism. The old managerial style that largely on money taken from public-school sometimes rivaled the Prussian army has teachers and government “service” workers. given way to greater flexibility and attention The interventionist damage done to the econ- to employees. While management at one time omy and the freedom of the individual by the told workers to check their brains at the door, union political agenda is not going to end just today managers seek ideas from workers. because private-sector unionism has reached Union contracts and rules mean higher costs what Troy calls its “twilight years.” and lower efficiency for companies, and it Beyond Unions is worth reading for many should come as no surprise that they have dis- reasons, not the least of them that it reaffirms covered methods that keep workers content an important truth: Human interests are better enough that they will say “No thanks” if served by freedom than coercion. 0 union organizers come around. George Leef is the director of the Pope Center for The fact that many sectors of the American Higher Education Policy at the John Locke Founda- economy are now much more vigorously com- tion and book review editor of Ideas on Liberty. ===== PAGE 59 ===== Books 59 proliferating two-income households, sudden mass firings, repeated layoffs, and increased labor mobility with the added distance from Turbo-Capitalism: Winners and Losers in the Global Economy by Edward Luttwak loved ones it requires—all this creates crime HarperCollins Publishers ® 1999 ® 290 pages and alienation. The same complaints have * $26.00 been heard and refuted over and over. - - - Yet he follows with the challenging point Reviewed by David L. Littmann that two forces operate in the United States to avert wholesale revolt against the evil fallout t’s always tricky for a reviewer to judge a of turbo-capitalism. First is the legal system, book written by a classmate. That’s the case where two million lawsuits per year against here. Edward Luttwak is a good writer, but U.S. companies deliver “empowerment” and has written a book that, while purporting to be bring restitution to the “economically victim- about economics, is actually the stuff of worn ized” among the population. Second is our sociology and tired psychology. Calvinist value system. He defines the Calvin- As the title, Turbo-Capitalism, indicates, ist system by three interconnected rules: Luttwak is aware of the economic power of (1) winners (that is, the rich) diminish envy by market capitalism. He goes to great lengths self-restraint, giving to charity, and not over- describing the efficiency, wealth-creating flaunting their wealth; (2) most losers blame track record, and possibilities of markets and only themselves for their fate; and (3) both their superiority over socialism and other winners and losers vent their frustrations by government-directed economic systems. He demanding harsh punishment for rebellious clearly explains how capitalism’s efficiencies losers. Luttwak warns that other nations and moneymaking benefits are changing the importing turbo-capitalism generally lack world. these institutionalized safeguards of societal But Luttwak doesn’t stop there. This 1s just stability and therefore risk being destabilized point one on the journey to lambaste the beast to the point of destruction if capitalism is not he identifies as “turbo-capitalism,” a capital- restrained. ism infused with technology, free trade, At least this argument is new. I do not, how- deregulation, and the most recent supercharg- ever, find it persuasive because I don’t accept er: privatization. Luttwak swoons over the Luttwak’s premise that there is anything so “good-old days” when markets were con- frightful or “destabilizing” about economic strained by punitive tax rates on the rich, liberty, no matter what label is attached to it. redistributive social policies, and regulations At the heart of Luttwak’s book is a populist covering nearly every industry, from trans- theme that runs like this: Trial lawyers are to portation and energy to agriculture and com- be applauded, because they are the tamers of munications. When government was there to greedy corporations. America’s tax system constrain capitalists, greedy corporate execu- is not nearly progressive (redistributive) tives, and unfettered entrepreneurship, con- enough. Free trade is an ideological plot by sumers were protected, workers felt more powerful firms to weaken unions, impoverish secure and earned more, and families had a workers, and make them capitulate to man- higher quality of life. Less stress, less crime, agement demands. Ditto deregulation. He less pornography, Luttwak declares. claims that many airline pilots and mechanics Alas, “turbo-capitalism” blows all that today, after deregulation, can’t afford to own a away, particularly in nations that havent house or pay for a college education for their grown up with capitalism. Luttwak makes a kids. Even if true, which is doubtful, others hackneyed point followed by an interesting have benefited from deregulation and can one. He argues that the new post-1970s strain now afford more for themselves and their of capitalism is extremely tough on most families. What’s the good in stifling competi- American families. Technical change, longer tion just to keep earnings high for select work weeks, greater competition from abroad, groups of workers? ===== PAGE 60 ===== 60 IDEAS ON LIBERTY ® MAY 2000 Turbo-Capitalism is bound to confuse read- called a “student of the world’s miserable.” ers who were never exposed to economics. On Sen’s research has concentrated on the eco- the one hand, Luttwak does an excellent job nomic problems that affect the world’s poorest of describing the costs of a labor contract in citizens: chronic hunger, famine, illiteracy, Europe versus the United States, thereby infant mortality, and disease. For the past 35 explaining Europe’s astronomical unemploy- years, he has devoted his considerable schol- ment rates. But he also claims that the U.S. arly talent to solving the problems of eco- economy is in a “surplus-of-everything” nomic development in poor countries. phase that causes low unemployment. For In his latest book, Development as Free- example, he finds it “unexpected” that a con- dom, Sen defines development as “the enhance- sequence of turbo-capitalism is low unem- ment of freedoms that allow people to lead ployment, but ascribes it to “cheap labor.” He lives that they have reason to value.” He misses the fact that “titan” industries like steel believes that economists have put a misplaced and autos have been compelled to downsize emphasis on GDP as the golden measure by more agile, lower-cost, higher-quality pro- of development, and thus his definition goes ducers. He never mentions that most of the far beyond that of simply maximizing per employment downsizing he complains about capita income. Sen argues that if increasing has been accomplished by generous early incomes in a country are not accompanied by retirement payouts, attrition through retire- other factors that define a high standard of ment, and the decision not to fill openings. living (such as political freedom, the avail- Luttwak does utter some important eco- ability of “social goods,” including education, nomic truths. For example, applying public health care for all citizens, and protection choice theory to trade policy, he writes, from hunger and premature death) then the “Nothing is more natural than the attempt of country is only getting richer. It is not truly bureaucrats to find new justifications to keep “developing.” their bureaucracies well funded.” And regard- Though many economists assume that a ing government intervention in markets, high per capita income is a necessary prereq- Luttwak recognizes that “virtually any form uisite for these other forms of progress, Sen of industrial policy can easily become a fur- cites several examples that refute this assump- ther way of looting the public treasury, or tion. One such exception is the Indian state of exploiting hapless consumers, or both.” Nev- Kerala, which has a high life expectancy, low ertheless, the author ignores that wisdom and fertility, and low illiteracy compared to coun- endorses more government power to alleviate tries such as Brazil, South Africa, and Gabon, the supposed evils of turbo-capitalism. which are much richer economically. (Indeed Luttwak ends the book with this sentence, the life expectancy of the citizens of Kerala “Turbo-Capitalism, too, shall pass.” Readers exceeds that of African Americans despite a who hold time precious might consider taking 20-fold difference in average incomes.) a pass on Turbo-Capitalism. ] Political, economic, and social freedoms David Littmann is senior vice president and chief are often complementary goods, Sen main- economist with Comerica Bank in Detroit, Michigan. tains. For example, expanding social free- doms by providing educational opportunities (especially among women) tends to increase Development as Freedom income and reduce infant mortality. Similarly, economic freedom leads to faster income by Amartya Sen growth, which in turn provides the resources Alfred Knopf ® 1999 © 366 pages ® $27.50 necessary for education, health care, and sim- ilar goods. Perhaps the most interesting complemen- tarity of freedoms Sen addresses relates to his martya Sen, the winner of the 1998 well-known work on the relationship between Nobel Prize for Economics, has been famine and democracy. Although famines Reviewed by Victor A. Matheson ===== PAGE 61 ===== Books 61 have occurred throughout history and remain veterans of the culture wars even as he reveals common today, Sen documents that famine the depths of lunacy of the postmodernist pat- has never occurred in a functioning democra- ter that has invaded the campus-present. cy. He reasons that freely elected govern- In one particularly insightful chapter Ker- ments cannot allow their own people to dicen nan manages with acidic humor to mock the masse and expect to remain in office very deconstructivist diatribes of Paul de Man, long. Thus a democracy not only provides its Jacques Derrida, and Michel Foucault while citizens the freedom of political process but acknowledging the mischief they have also offers a degree of security from the most wrought within academe. Writes Kernan: destructive political bungling. Sen’s childhood memories of growing up in Using language to do its daily business, the famine-stricken Bengal, India, have given larger world thought it [deconstruction] all him a strong sympathy for the plight of those seemed obvious nonsense. Words point to in “grinding poverty,” but he does not gener- things. But inside the academy, decon- ally advocate a systematic transfer of income struction’s challenge of language—empha- from rich to poor. Instead Sen focuses on pro- sizing its difficulties rather than its suc- viding the poor with the freedom to live cesses, its artificiality rather than its refer- rewarding lives. While this may entail public entiality, its undecidability rather than its expenditures for education, health care, or precision, its emptiness rather than its full- emergency income security, he argues that ness, its falsity rather than its truth—had one cannot live a fulfilling life accepting extraordinary effects. . . . Words, because handouts. Alas, Sen evidently holds to the they were empty, grounded in no reality conventional belief that only government can other than themselves and other words, be counted on to provide those benefits. were said to be the means by which the Although there are points to disagree with, wealthy and the powerful imposed their free-market thinkers will find much to praise “hegemony” on others and made their self- in this intelligent and thought-provoking serving ideology, their metaphysics, their book. 4 world-picture, into “reality.” Victor Matheson is an instructor of economics at } CL ] Kernan avers, to the attack on classic core curricula by Marxists, “ethnics” of one stripe In Plato’s Cave or another, and militant feminists who damn . the “phallocratic” nature of the great works of by Alvin Kernan Western thought because these are the prod- Yale University Press ® 1999 © 336 pages ® $25.00 ct of a “hegemonic male culture.” Moreover, “gay and lesbian rights groups saw in the tra- ditional literature the suppression of sexual freedom and the concealment of homoerotic lato’s Cave is a memoir—perhaps energies.” Really. And all these years I “reflection” is more in keeping with the thought it important just to let Plato be Plato! title—of an Ivy Leaguer who has seen the This book is full of regrets about the cap- elite of American universities in better times, ture of much of university discourse by the and who has the skill to reveal this truth in the deconstructivist crowd. Kernan’s perspective fullness of its tragic and its comedic phases. is particularly vivid because his self- Kernan, now retired from the university described social realm is primarily in the duties of an English professor and administra- humanities rather than the sciences, where tor at both Yale and Princeton, infuses a half- such cant is consigned to cartoon files or is century of insights into higher education with posted on bulletin boards. The predominant wry and wise critique. He has avoided the bit- field of discourse at universities is probably terness that has become the false refuge of not American Standard Post-Modern/PC/ Reviewed by Jack Sommer ===== PAGE 62 ===== 62 IDEAS ON LIBERTY * MAY 2000 Deconstructivist gibberish, but the university To whom should this book be recommend- culture is so averse to interpersonal criticism ed? Frankly, I think it is good reading even if that much prattle at faculty lunch tables goes it is littered with the names of the brilliant and unchallenged. In a world where the bottom famous who crossed the author’s path. Such is line is coherent action these paralogical utter- the stuff of memoirs, and it is fun to find an ances would be regarded as silly pretension old friend or two in the author’s crosshairs. It and sure evidence of “the leisure of the theo- is also a humorous insight into the private ry class.” lives of academics, replete with Volkswagens, Kernan’s work is also a valuable chronicle Volvos, false protestation of poverty (so as to of the demise of authentic evaluation of stu- be aligned with the ‘“workers™), and over- dent performance at all levels by faculty; the drawn visions of self-importance. But the rise of plagiarism to ever-more sophisticated measure of the book is in its demonstration of levels by students (and some faculty); the cor- a craftsman at the quill. Alvin Kernan is a ruption of academic decision processes by splendid writer, and his subject will appeal to interest-group pressure for special treatment those who are interested in the university, past in hiring, promotions, and tenure; and the and present. The book may have some predic- squandering of institutional “reputational tive value as well; it is a well-known phenom- capital” by administrators who in better times enon that what occurs at Yale, Princeton, and might have been academic leaders. These ills Harvard generally trickles down the academic may come as a surprise to alums who harbor pecking order. This, of course, may be well or an idyllic vision of college days gone by, but ill. [ the mp oriance of the crhque will have been Jack Sommer is Knight Distinguished Professor at missed if it stirs none to inquire of dear old University of North Carolina-Charlotte. Alma Mater. Ideas on Liberty—Reaching Out to New Readers If you know of a friend or colleague who might appreciate a free sample issue of Ideas on Liberty, please fill out the form below and return it to us in the postpaid envelope. Make sure to include your own name—we will mention you in the covering letter we send to the potential subscriber. We appreciate your assistance in finding new friends for liberty! + Drifting In and Out of Socials The Case of refand ~~ * Inequality of Wealiy sus Dialoi? Ze sBabarans at | Bill Gates To: FEE 30 S. Broadway / Irvington-on-Hudson, NY 10533 e-mail: iol@fee.org / fax: 914-591-8910 Please send a sample of Ideas on Liberty to: Name Address City __ State _ Zip Suggested by: : ===== PAGE 63 ===== The Pursuit of Happiness by Charles W. Baird IDEAS ON [IBERTY May 2000 Pulling Us Apart ecently, two Washington, D.C., think can help moderate the growing income tanks—the Economic Policy Institute divide.” and the Center on Budget and Policy Priori- There are at least three things wrong with ties—issued a study of the income gap this study. First, its authors have overstated between rich and poor American families the size of the gaps. Second, they ignore the titled “Pulling Apart.” According to the fact that families and individuals move from authors, by the late 1990s average income quintile to quintile. Finally, gaps, no matter among families in the top 20 percent (top how large, if they are the result of voluntary quintile) of the income distribution was exchange, are no cause for alarm. They are $137,500, while that of families in the bottom both desirable and just. quintile was only $13,000—a gap factor The authors based their work on pre-tax exceeding ten. In nine states the gap factor data from the Census Bureau’s Current Popu- exceeded 11, and since the late 1970s the lation Survey (CPS). In September 1999 the income gap had increased in 46 states. Heritage Foundation published a study that The authors attribute the gaps to such fac- shows that CPS data systematically overstate tors as the growing importance of skilled income gaps. For example, in 1997, according labor relative to unskilled labor; the increas- to CPS data, families in the top quintile ing value of higher education; the decline of received 49.4 percent of total household low-skilled manufacturing employment; income, while those in the bottom received increased immigration; the stock market only 3.6 percent. When the data are corrected boom, which disproportionately benefits to take into account the effect of taxes, gov- higher income people; and declining union- ernment subsidies, and capital gains, the two ization. Except for the latter, all those factors figures are 45.3 and 5.6 percent respectively. have, indeed, affected the “distribution” of When the data are further adjusted to put an income. equal number of people, rather than families, The authors imply the gaps are unjust, and in each quintile, the numbers are 39.7 and 9.4 they propose remedies. “Through policies percent, respectively. Therefore, all the gaps such as raising the minimum wage, strength- in “Pulling Apart” are exaggerated. ening unemployment insurance, implement- A quintile distribution of income is a snap- ing a wide range of supports for low-income shot of family income at a point in time. Sup- working families, and reforming regressive pose that the 1990 distribution indicates the state tax systems, state and federal lawmakers top quintile received 50 percent and the bot- tom quintile 6 percent of total income, and Charles Baird is a professor of economics and the that the 1999 distribution shows the same. director of the Smith Center for Private Enterprise his does not mean that the people in the bot- Studies at California State University at Hayward. tom or top quintile in 1990 are still in the bot- 63 ===== PAGE 64 ===== 64 IDEAS ON LIBERTY ¢ MAy 2000 tom or top quintile in 1999. Some people in provide the means for entrepreneurs to under- the bottom in 1990 will have moved up to take new ventures, create new products, and higher quintiles, even the top, by 1999. Simi- provide new employment and purchase larly, some people in the top quintile in 1990 opportunities for people. Other people con- will have moved down to lower quintiles, even sume most of their incomes. Savers and the bottom, by 1999. An unchanging quintile investors are likely to accumulate assets that distribution is perfectly consistent with some will generate more income for them than the poor getting richer and some rich getting spendthrifts will have. Yet spendthrifts have poorer. A study reported by the Federal no legally enforceable moral claim on the Reserve Bank of Dallas indicates that 29 per- incomes of savers and investors. The authors cent of the families in the lowest quintile in of the study may want to grant people who 1975 had moved to the top quintile in 1991. make poor choices an enforceable claim to the Only 5.1 percent of those in the bottom in incomes of people who make better choices, 1975 remained there in 1991. In a free-market but there are no moral grounds to do so. Of economy there is constant movement. Quin- course, anyone is free to redistribute his own tile distributions themselves mean very little. income, but no one has a moral right to redis- tribute incomes created by other people with- out their consent. Hooray for Gaps The very term “income distribution” to implies that there is a given total lump of Whose Equality? income that belongs to everybody that must Jefferson proclaimed that it is “self-evident be divided up by some authority. But in a mar- that all men are created equal.” He meant that ket economy, income is created by voluntary all people have the same natural rights and exchange between people. Each individual that a just government is one that enforces owns the income he creates. The distribution them equally for all people. It is also self- (use) of his income is for him to decide. evident that all people are not created equal in Abstracting from sheer luck, in an economy terms of mental and physical abilities, alert- based on voluntary exchange there is only ness, attitudes, and other human attributes. In one way to create income: giving other a market economy those natural differences people opportunities to make themselves inevitably result in different people creating better off by agreeing to exchange with you. different amounts of income and wealth. As It is desirable for those who serve others Hayek pointed out, for government to impose well to have higher incomes than those who an income distribution different from the one don’t, because those differences provide that emerges spontaneously in the market, incentives for people to try to serve others government has to “treat unequal people as best they can. Widespread prosperity unequally.” Governments impose income dis- comes from widespread efforts to serve others tributions by taking from some people and well. giving to others. The victims of the takings If you choose your occupation on the basis are treated one way by government, and the of what you like to do without regard to what recipients of the takings are treated another other people are willing to pay you to do, you way. If a government wants to impose a more may end up happy but poor. I like to sing. But equal income distribution to mitigate the no one is willing to pay me to sing. So I talk effects of natural human inequalities, 1t must and write for a living. If I chose to sing for a discard Jefferson’s principle that a just gov- living I would be justly poor. My poverty ernment must treat all people equally under would give me no legally enforceable moral the law. We have already gone far down that claim to the incomes earned by other people. road, and it has already pulled us apart. The I would have chosen to be poor. authors would have us go further. Like social- Some people choose to save and invest part ists around the world, they think there is never of the income they create. In doing so, they enough coercive redistribution. J