===== PAGE 1 ===== 8 DEAS ON [IBERTY June 2000 Vol. 50, No. 6 FEATURES 8 Another Reason for Airport Privatization by Robert W. Poole, Jr. 10 Merger Policy Fails Hi-Tech Test by Henry Demmert 14 Constitutional Intentions by Wendy McElroy 19 The War Against Drug-Speech by Paul Armentano 23 Trade and the Rise of Freedom by Thomas J. DiLorenzo 30 War by Frederic Bastiat 39 Economic Insecurity: Are We the Enemy? by Christopher Lingle ¥ 41 The Evolution of Capitalism by Jim Peron 46 Punishing the Many by Russell Madden 48 The Golden Rule and the Free Market by William H. Peterson COLUMNS q THOUGHTS on FREEDOM—The Selfishness of the Unselfish Richard Henry Lee by Donald J. Boudreaux 12 IDEAS and CONSEQUENCES—Don’t Tax the Internet by Lawrence W. Reed 21 POTOMAC PRINCIPLES—NATO?s Disastrous Victory in Kosovo by Doug Bandow ¥ 37 PERIPATETICS-—Can the Free Market Provide Public Education? by Sheldon Richman $44 ECONOMIC NOTIONS—It’s the Margin that Counts by Dwight R. Lee 50 ECONOMICS on TRIAL—In Defense of the Rich by Mark Skousen 63 THE PURSUIT of HAPPINESS—Nothing Left to Buy? by Russell Roberts DEPARTMENTS 2 Perspective—Bastiat’s Birthday by Sheldon Richman 6 Internet Commerce Should Be Taxed? It Just Ain’t So! by William F. Shughart 11 53 Book Reviews A Republic, Not An Empire: Reclaiming America’s Destiny by Patrick Buchanan, reviewed by Doug Bandow; Winners, Losers and Microsoft by Stan Liebowitz and Stephen Margolis, reviewed by James L. Gattuso; Dangerous Donations by Eric Anderson and Alfred A. Moss, Jr., reviewed by George C. Leef; Environmental Cancer: A Political Disease by S. Robert Lichter and Stanley Roth- man, reviewed by Conrad F. Meier; Rethinking Orphanages for the 21st Century edited by Richard B. McKenzie, reviewed by Daniel T. Oliver; False Dawn: The Delusions of Global Capitalism by John Gray, reviewed by Aaron Steelman. 61 Capital Letters - Lesson plans for @ articles are available at www.fee.org. ===== PAGE 2 ===== [DLA PERSPECTIVE ON [IBERTY Bastiat’s Birthday Published by Frederic Bastiat b 199 The Foundation for Economic Education rrederic Bastiat was born years ago Irvington-on-Hudson, NY 10533 this month. If anyone can be described as the me FAX (914) 591-8910 guiding spirit of the Foundation for Economic -mail: iol@fee.org . . . FEE Home Page: http://www. fee.org Education, it would be Bastiat. Thanks to the President: Donald J. Boudreaux Foundation, his works, The Law, Economic oo : Sophisms, Economic Harmonies, and Selected Editor: Sheldon Richman E Political E h b kept Managing Editor: Beth A. Hoffman ssays on Political Economy, have been kep Editor Emeriias in print. They remain some of the best writing Paul L. Poirot on the workings of the free society and the Book Review Editor fallacies of statism, or what he called “legal George C. Leef plunder.” Editorial Assistant Bastiat is most famous for his essays Mary Ann Murphy . . . Co. Columnists defending free international trade, pointing Charles W. Baird out the unseen harm of intervention, and satir- Doug Bandow ically puncturing statist fallacies. His facility Dwight R. Lee at explaining complex ideas clearly and enter- Lawrence W. Reed Lo . . eo. Russell Roberts tainingly won him plaudits from his intellec- Mark Skousen tual heirs. Henry Hazlitt called him a “master Thomas Szasz of the reductio ad absurdum.” F. A. Hayek Walter E. Williams dubbed him a “publicist of genius.” Murray Contributing Editors Rothbard said he was “a truly scintillating Norman Barry advocate of an untrammelled free market.” Peter J. Boettke Clashes B. Catsat If one reads only his essays, however, one is Thomas J. DiLorenzo in danger of seeing Bastiat as “just” a highly Burton W. Folsom, Jr. effective economic journalist, although that is Joseph S. Fulda no mean feat. The essays are but the tip of the Bettina Bien Greaves iceberg. Beneath the surface is Bastiat’s com- Robert Higgs . . ce John Hospers prehensive view of law and political economy, Raymond J. Keating which he did not put in writing until his final Daniel B. Klein days. In Economic Harmonies, Bastiat shows Wendy McElroy that the question for economists is not: Is Tibor R. Machan . ) Andrew P. Morriss there natural beneficent economic regularity? Ronald Nash It can’t be doubted! The signs are everywhere! Edmund A. Opitz Paris gets fed—everyday!—permitting every- ee Le bane one to enjoy an array of consumer goods that 1lliam H. Peterson N . no one person alone could produce in a thou- Jane S. Shaw - ys . . Richard H. Timberlake sand years. The economist’s job is to explain Lawrence H. White how that unplanned regularity can exist. 1deas on Liberty (formerly The Freeman: Ideas on Liberty) is the month- Israel Kirzner, in 7) he Economic Point of ly publication of The Foundation for Economic Education, Inc., Irvington- : sat’ on-Hudson, NY 10533. FEE, established in 1946 by Leonard E. Read, is a View, notes that Bastiat’s approach was not non-political, educational champion of private property, the free market, shared by all economists. J. E. Cairnes, for and limited government. FEE is classified as a 26 USC 501(c)(3) tax- . . . exempt organization. example, thought Bastiat was unscientific Copyright © 2000 by The Foundation for Economic Education, Per- : . mission is granted to reprint any article in this issue, except “Another because he did not first prove the existence of Reason for Airport Privatization” and “The Evolution of Capitalism,” 1 : fang _ provided credit is given and two copies of the reprinted material are sent regularity. F or Cairnes, science has no fore OEE. of Foundation oro i gone conclusions.” Kirzner sides with Bastiat: projects and services are met through dona . . tions, which are invited in any amount. Donors of $30.00 or more receive recognition of “the large degree of efficienc a subscription to /deas on Liberty. For delivery outside the United State y . very outside inc vnl S: ta hd $45.00 to Canada; $55.00 to all other countries. Student subscriptions are empirically evinced by the [market] system LE $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 2 calendar years 1972 to 1998. The magazine is available in microform from University Microfilms, 300 N. Zeeb Rd., Ann Arbor, MI 48106. ===== PAGE 3 ===== hardly deserves the suspect position of a have gone hand in hand because trade is what ‘foregone conclusion.’” Did Newton have to people do when left alone. Thomas DiLoren- ask if objects fall to the ground? zo surveys some of the distinguished people Three decades after his death, Bastiats and events in the annals of the free-trade approach was incorporated into Austrian eco- struggle. nomics. In his magnum opus, Human Action, The warrior societies of the past did not Ludwig von Mises put himself in the Bastiat disprove the natural law that human beings tradition when he wrote, “In the course of must labor to satisfy their wants. Far from it, social events there prevails a regularity of as Frederic Bastiat explains in the chapter phenomena to which man must adjust his titled “War” from his treatise, Economic Har- actions if he wishes to succeed.” monies, which we reprint in honor of the Bastiat managed to produce much of his 199th anniversary of his birth. impressive volume of work while battling for Since the marketplace is us, those who freedom in the French National Assembly complain about capitalism are really com- during the turmoil that began in the revolu- plaining not about a system but about free tionary year of 1848. Gravely ill, he struggled people. Christopher Lingle reinterprets com- desperately to expose the seductive fallacies mon grievances in that light. of socialism and authoritarianism. He died of It’s no accident that capitalism evolved at a tuberculosis in 1850, just before Napoleon III particular place at a particular time and not in transformed the Second Republic into an other places. Jim Peron examines the prereq- empire. uisites for the emergence of freedom. There was no greater champion of liberty. Most people would agree that no one Bastiat’s legacy continues to inspire. should be punished for the offenses of anoth- er. So why does the law increasingly ignore that principle? Russell Madden ponders the It is generally thought that the airline indus- question. try was deregulated many years ago. This mis- Every religion teaches the Golden Rule. Yet conception permits people to believe that just as commonplace is the disdain for busi- poor service is what competition has wrought. ness. William Peterson puzzles at the failure to Robert Poole resolves the paradox. see the connection between two simple ideas. Can you tell how much competition there is In the columns department, Donald in an industry by the number of firms? Thats Boudreaux takes another look at greed. how the lawyers in the Justice Department’s Lawrence Reed finds some good arguments Antitrust Division sort it out. Henry Demmert against taxing electronic commerce. Doug relates an experience from his days in the Bandow surveys Kosovo after NATO’ tri- division. umph. Dwight Lee says it’s the margin that A prominent school of constitutional inter- matters. Mark Skousen delves into the minds pretation holds that judges should look to the of millionaires. Russell Roberts doubts the intent of the framers. Easier said than done, Garden of Eden is imminent. And William * kk * writes Wendy McElroy. Shughart, also hearing demands for Internet The War on Drugs moves into the realm of taxation, shouts back, “It Just Ain’t So!” free speech with legislation pending in the In the book section, reviewers have perused U.S. Congress. Paul Armentano warns that volumes on foreign policy, Microsoft, harm- the First Amendment seems slated to be the ful humanitarianism, environmental cancer, next war casualty. orphanages, and global capitalism. Throughout history, trade and freedom —SHELDON RICHMAN ===== PAGE 4 ===== Thoughts on Freedom by Donald J. Boudreaux The Selfishness of the Unselfish Qoverl years ago, I encountered a woman the forces of evil and greed. And I bet that if at a cocktail party in Atlanta who was the local newspaper had written a story about active in that city’s historical-preservation her efforts on behalf of historical preserva- movement. To make conversation, I asked tion, she would have been portrayed as a mod- why she thought that stricter historical- ern Joan of Arc. But it is she who is the truly preservation regulations were required. greedy one. Not only was she blithely willing “Because greedy developers tear down too to impose her own tastes on others, but the many old and beautiful homes or renovate policies she championed—by reducing the them in ways that destroy their historical supply of housing in Atlanta—conveniently integrity,” she replied. increased the value of her own home. She was “Why do you call these developers eager to use government to force countless ‘greedy’?” 1 asked. other people—in exchange for nothing from “Because they care only about money. They her—to subsidize her aesthetic sensibilities don’t care about beauty or history,” she and to enhance her balance sheet. answered. Thats genuine greed. “But because they build houses to make Sadly, the attitude of my acquaintance in money they must take account of the tastes Atlanta is merely one small case in a wide- and demands of their customers, who either spread epidemic that might be called “the cannot afford or do not want to live in histor- selfishness of the unselfish.” The selfishness ically accurate old houses. What’s wrong with of the unselfish is found whenever the self- that?” proclaimed enemies of greed bemoan, with “Everything!” she shot back. “Most home one breath, the base motivations that alleged- buyers today have dreadfully bad taste.” ly drive capitalism, and then, with their next “I’m curious: what kind of home do you breath, propose policies that are monuments live in?” I inquired. to vulgar selfishness. “An 1893 Victorian, perfectly restored,” she The most easily spotted strain of this dis- answered proudly. ease is that which compels its host to level I regret that my desire to avoid confronta- charges of greed against others merely as a tion caused me then to mumble a limp reply means of clearing the way for government and fade off to fetch another glass of wine. policies that serve the host’s own narrow self- But the exchange is instructive. Amazingly, interest. This is the strain that infected my this woman believed herself to represent the acquaintance in Atlanta: she liked old homes forces of good and altruism in a battle against and hypocritically called “greedy” anyone who built any home that she disliked. This is the strain that also triggers protec- Donald Boudreaux is president of FEE. tionism, minimum-wage legislation, and any ===== PAGE 5 ===== number of other policies that materially bene- that comes with “taking a stand” without pay- fit some people at the expense of others. Per- ing the price of assuring that the stand taken haps surprisingly, much of modern-day envi- is sound. ronmental policy is of this sort. Consider, for example, the well-meaning Consider that many of today’s environmen- nineteenth-century reformers who sought to talists are among the most vocal opponents of improve immigrant housing in America by “capitalist greed.” But environmental policies mandating higher housing quality. too often provide benefits to environmental- ists (for example, protecting land from devel- opment so that it is available for hiking) at the expense of consumers who would benefit from the greater supply of goods and services that would be available were it not for these output-reducing policies. My point here is not that preserving some land from development is undesirable. Rather, it is that those who advocate such environ- mental policies in the name of opposing “cap- italist greed” are themselves motivated by their own greed. And it is an especially galling greed. Not only are those who are motivated These reformers selfishly indulged in cam- by it blind to their own avarice, but they— paigns that made them feel good about them- unlike entrepreneurs—satisfy their selfish- selves, without bothering to explore the full ness through force. They use government to consequences of the schemes they foisted on take from others and give to them. Entrepre- innocent third parties. While the reformers neurs, in contrast, satisfy their self-interest by got good press and a warm sense of self- giving things of value in exchange for what satisfaction, the welfare of immigrants deteri- they receive from consumers. orated as a consequence of these reformers’ The other strain of the “selfishness of the selfish indulgence of their own thoughtless unselfish” disease is a bit (but just a bit) hard- notions of reality. er to spot. This strain does not lead its hosts to The same is true of today’s “reformers” advocate harmful policies that bestow materi- who clamor for banning imports of goods al benefits on them. Instead, it simply encour- made in factories that employ children. These ages its hosts selfishly to emote rather than to reformers selfishly enjoy the rush of satisfac- think rationally about various policies. tion that comes from moral posturing without It is much more difficult to study an issue once stopping to trace the consequences of and to think it through thoroughly than to the policies they advocate. react emotionally. Reacting emotionally is a Pay attention to the protestations of those cheap way to strut your sensibilities in front who demand greater government involvement of others as well as to avoid the often arduous in the economy—particularly those who intellectual challenge of learning the relevant bemoan the greed that allegedly characterizes details, studying the alternative theories, and capitalism. You’ll find that almost always the weighing all the pros and cons before reach- most outspoken opponents of greed are its ing a conclusion. Doing this hard work greatest patrons. J requires diligence. To express an opinion - —" without unde rtaking this effort is supremely breve. 1990) pry The Quest for Cosmic Justice (New York: Free selfish, for to do so is to steal the gratification The kinds of reforms being promoted in the nineteenth century did not expand the slum-dwellers’ options but reduced them. Since better housing mandated by law cost more money, immigrant slum-dwellers now had to devote a higher percentage of their incomes toward purchasing more expensive housing with features that would be more pleasing to third-party observers, rather than make the trade-offs that they themselves would have preferred with their own money.* ===== PAGE 6 ===== IDEAS ON [IBERTY June 2000 Internet Commerce Should moratorium was enacted, not on the basis of Be Taxed? principle, but rather because the tax writers in Congress have not yet figured out how to structure and administer e-taxes so as to max- imize the Internet tax take—or found a polit- It ust Ain't Sol ically acceptable way for the federal govern- ¢ ment to share in the loot. Of course, the pro-tax forces contend that closing the loophole would not impose a new irginia Governor James Gilmore, chair- tax but simply eliminate existing distortions man of the Advisory Commission on in the sales-tax code, that is, ensure that the Electronic Commerce, hoped that the group tax laws do not favor one segment of the retail would act quickly to make permanent Con- trade over another. Consumers buying prod- gress’s 1998 three-year moratorium on new ucts online currently enjoy the same immuni- Internet taxes. But faced with a Clinton ty from state and local sales taxes the U.S. administration policy statement objecting to Supreme Court has carved out for mail-order any move that would ban the collection of catalog sales. The Court ruled earlier this sales taxes on online purchases, a letter signed decade that requiring retailers located in one by 49 economists contending that Internet state to collect sales taxes from consumers in taxes are necessary to restore “neutrality” to another unconstitutionally burdens interstate the sales tax code, and the testimony of may- commerce. Hence, sales taxes are due on ors and other public officials lamenting the mail-order and Internet purchases only if the billions in revenue state and local govern- retailer has a substantial “physical presence” ments stand to lose if the tax moratorium is in the customer’s state of residence. Although extended, the commission adjourned its buyers in every state with a sales tax are recent meeting in San Francisco without obliged to report and pay “use” taxes on items reaching agreement. Given the strength of purchased elsewhere, few consumers volun- pro-tax forces being mobilized, it is doubtful tarily comply. that the two-thirds majority required for the As a result, local retailers are supposedly commission to make a recommendation pre- placed at an unfair competitive advantage rel- serving the Internet tax haven can ever be ative to Internet and mail-order retailers, and achieved. including such purchases in the tax code Economist Paul Krugman has joined the would merely restore a level retail playing chorus clamoring for closing the e-tax loop- field. But the economists who support taxing hole. Writing in the February 12 New York the Internet to eliminate perceived distortions Times, he likens today’s tax-free Internet to a are living in a fiscal fantasyland. Except inso- kind of default “industrial policy” for the Dig- far as “reform” generates more revenue or ital Age. He ought to know better. confers benefits on key electoral constituen- That new taxes on e-commerce are being cies, government has no interest in designing pushed when the economy is booming, sales a neutral tax code, nor in benevolently broad- tax receipts have swollen, and most state gov- ening the tax base so that tax rates can be low- ernment budgets are awash in black ink ered. Rather, the flesh-and-blood politicians undercuts most of what passes for serious who function in a world light years distant analysis of Internet tax policy. Indeed, the pal- from the policy prescriptions of public- pable absence of a budgetary justification for finance textbooks are motivated by more nar- taxing electronic commerce suggests that the rowly self-interested objectives. ===== PAGE 7 ===== 7 Barrier to Tax Abuse neous taxpayer preferences and to levy taxes : Lo that are excessively high. Fiscal federalism is a stubborn constitu- tional barrier to the parochial politics of tax- Retailer R ing and spending. As is the case in ordinary etailer esponse markets, competition among the nation’s Local bricks-and-mortar retailers that are 30,000 separate state and local tax jurisdic- placed at a competitive disadvantage by high tions helps hold tax rates down to their cost- ocal sales taxes do not have to stand idly by. effective minimum. If one jurisdiction impos- They can get business lost to catalog sales or es a sales-tax rate that is too high compared to the Internet back by providing services with the quantity and quality of public ser- consumers value—and are willing to pay for. vices those taxes help finance, its tax base will The opportunity to see and touch items on tend to shrink as businesses and consumers display, to try them on, to take advantage of relocate to other jurisdictions with lower product demonstrations and other point-of- taxes, better roads and schools, or both. But sale assistance in making their selections, and moving is costly. The ability to avoid high to accept immediate delivery are options not local taxes by making purchases over the available to online shoppers. Traditional Internet or through mail-order catalogs sup- retailers can also respond to Internet competi- plies an alternative margin of competition that tion by lowering their prices so that, inclusive forces governments to be more fiscally of sales tax, the prices they charge are equal responsible. to or less than those charged by out-of-state Access to the Internet allows every con- retailers, which normally add hefty shipping sumer to live on a “virtual border,” thereby and handling charges to their customers’ making it economical to exploit even small orders. differences in price. The ability to avoid high That is how competition is supposed to local taxes by making purchases online is par- work. When the playing field is instead lev- ticularly beneficial to low-income consumers eled by forcing Internet companies to raise because sales taxes are among the most their prices by collecting sales taxes and regressive ways of raising revenue: poor peo- remitting them to the treasury of the state ple consume greater percentages of their where the purchaser resides, the competitive incomes than those who are financially better market process is short-circuited and taxpay- off. ers become more vulnerable to exploitation Opposition to e-taxes is not, as Krugman by big government. Paul Krugman apparently puts it, based on a “slash-taxes-to-starve-the- thinks that a tax-free Internet has a harmful bureaucrats theory.” Tax competition instead effect on retail competition, but he ought to be promotes a situation in which taxes will tend more concerned with the damage done to to mirror interjurisdictional differences in the intergovernmental competition if the loophole demands for government services. Policies is closed. that promote tax rate “harmony” make it eas- —WILLIAM F. SHUGHART II ier for governments to ignore these heteroge- University of Mississippi ===== PAGE 8 ===== IDEAS ON [IBERTY Another Reason for Airport Privatization by Robert W. Poole, Jr. I several ways, the specter of re-regulation if government regulation is a cure worse than of the airlines raised its head in 1999. A the disease, what hope is there for belea- number of bills in Congress aimed at increas- guered air travelers? ing smaller airlines’ access into major hub air- The answer is supposed to be competition. ports like Chicago’s O’Hare by giving such If you don’t like the quality and price of Air- airlines (or service from smaller cities) legal line A, take your business to Airline B instead. preference over other new service. And sever- Surely some profit-seeking entrepreneurs will al other bills would have created a “passen- attempt to offer a better combination of price ger’s bill of rights” imposing new federal con- and performance to appeal to those frustrated trols on the terms and conditions of airline by today’s typical airline service. And indeed, service. there are some such alternatives. For millions Fortunately, none of these measures was of people, the low-fare, no-frills, but highly enacted, leaving intact the enormous con- reliable service of Southwest is a viable alter- sumer benefits of the Airline Deregulation Act native. For others, Midwest Express offers a of 1978. Thanks to the hands-off policy creat- much more luxurious form of service, albeit ed by that measure, air travelers save some at a somewhat higher fare. But for millions of $19 billion per year over what they would other air travelers, innovative airline service have paid had federal control of routes and offerings are very hard to find. This is espe- fares remained in effect. While the measures cially true at many cities with a single large considered by Congress would not have airport where the vast majority of service is brought back total government control, they provided by a single airline’s major hub—for would have put us on a slippery slope toward example, Atlanta (Delta), Minneapolis government—rather than market—decision- (Northwest), and Pittsburgh (U.S. Air). making about who can fly when, where, and at Why haven’t airline entrepreneurs broken what price. into such markets, offering clearly different That said, however, it is clear to most fre- alternatives for air travelers? It turns out that quent flyers that today’s airline service leaves many have tried, but have had great difficulty much to be desired. Record-high levels of obtaining gates at such airports. And that delay, overcrowded planes, less meal service, leads us to one of the key respects in which new restrictions on carry-on baggage . . . fly- airline deregulation is an “unfinished revolu- ing in many ways is not what it used to be. But tion.” While airline service itself has been freed of economic regulation and allowed to Robert Poole, Jr., is president of the Reason Foun- become a dynamic industry, US. airports are dation and a long-time transportation policy Still run in the old-fashioned, static, bureau- researcher. Copyright 2000 Reason Foundation. cratic manner typical of the pre-deregulation ===== PAGE 9 ===== 9 era. Among other things, this means that their at two to three times as much as what the management style is more passive and risk- incumbent is paying under its lease! averse than that of the world’s growing body These barriers to entry are well known of privatized airports, now numbering more within aviation circles. In October 1999, the than 100 (and including the main airports in U.S. Department of Transportation (DOT) such cities as Auckland, Buenos Aires, Dus- released an important report, “Airport Busi- seldorf, Johannesburg, London, Melbourne, ness Practices and Their Impact on Airline and Rome). Competition,” explaining how all this works Privatized airports (and also leading “cor- and concluding that, indeed, “Airport busi- poratized” airports such as Amsterdam and ness practices play a critical role in shaping Frankfurt) are run as businesses, intended to airline competition. Access at many of the make a profit by aggressively developing var- nation’s airports is limited . . . because of ious profit centers, tailoring their services to long-established airport business practices.” many different groups (including airlines, What the report did not do was to contrast originating passengers, transfer passengers, these business practices with those of corpo- meeters and greeters, and employees). Recent ratized and privatized airports around the research at Oxford University has shown that world. Had DOT’s researchers done so, they the management approach of privatized air- would have found that an airport run as a for- ports is—not surprisingly—significantly profit business does not cede de facto control more passenger-friendly than that of tradi- over its facilities to its largest customers. At tionally managed airports. most such airports the gates remain under the control of the airport company and are allo- Willing to Take Risks cated hour by hour to individual airlines, as needed. (That is why at many European air- Privatized airport managements are also ports, and at the privately run Terminal 3 in more willing to take on the risk of new invest- Toronto, the airline signage at each gate is ments—such as the creation of new terminal electronic, permitting it to be changed in space to provide gates for new-entrant air- moments from one airline’s name to another.) lines. And this brings us back to the question And that is how gates will be managed at the of increased competition by such airlines, new International Arrivals Terminal at JFK in especially in “fortress hub” cities where air New York—a $1 billion project being devel- travelers today have very limited options. oped and operated by a private consortium Under typical U.S. airport management prac- including the for-profit company that owns tice, the major incumbent airlines have signed and operates Amsterdam’s Schiphol Airport. long-term gate-lease agreements (making The IAT consortium is taking the entire risk them “signatory” airlines). From the stand- of keeping the gates occupied because it point of risk-averse airport management, wants the management flexibility to get the these long-term agreements give them a most value out of each and every gate. more-or-less guaranteed revenue stream to In short, the answer to today’s serious limi- pay off the bonds they issue to build the ter- tations on new airline entry at U.S. airports is minal facilities. But in exchange for this secu- outright privatization, in which existing air- rity, they give up substantial control to the sig- port owners (cities, counties, and states) sell natory airlines. Usually, the long-term agree- or long-term lease these facilities to profes- ments give these airlines what amounts to a sional airport firms. veto power over any terminal expansions. Real airline competition is being impeded That means when new-entrant airlines want to by the outmoded management approach of start service at such an airport, there are often U.S. airports. Much of the world is moving to no gates available at all—or there is only a new paradigm—the airport as a for-profit “remnant” space available at odd hours at enterprise—that is far more consistent with a gates leased by the signatory airlines, which dynamic, competitive airline market. It is high they might make available to the newcomer, time the United States did likewise. Ol ===== PAGE 10 ===== oN JBik JUNE 2000 Merger Policy Fails Hi-Tech Test by Henry Demmert true story: In the early 1980s I worked as often been revised, the last time in 1994, the an economist in the Antitrust Division of essential approach remains unchanged. The the Department of Justice. In my first assign- focus is on “market structure.” That is, the ment I was paired with one of the division’s antitrust authorities define a market, geo- experienced lawyers to evaluate a merger graphically and by product, in which the between two electronics firms. My first step merging firms compete. They then measure was to visit the lawyer, introduce myself, and the market shares of each of the merger part- begin preliminary discussion of the task ners as well as the overall level of “concentra- before us. We got right down to business. Or tion” in the market—the extent to which a few at least he did, insisting that this was clearly large suppliers account for a substantial share an anticompetitive merger and our job was to of total market sales. If the combined shares block it. I asked how he had reached this con- of the merger partners is too high or the mar- clusion so quickly. By what measure, which I ket is too concentrated, the merger will surely had missed, was it so clear that the likely be challenged by the feds. Their fear is merger would lessen competition? His that too large a firm will wield enough “mar- response: “There are 22 competitors in the ket power” to raise prices or that a market market now. If we allow this merger, there with a few significant suppliers is susceptible will only be 21 left. That’s less competition.” to collusion. I'll be the first to admit that this particular This view is essentially static and backward- lawyer’s terribly naive view of competition is looking. It is questionable, at best, when not representative of everyone at the Antitrust applied to steel and autos, but it is downright Division, and certainly not of the economists. misleading when applied to the rapidly chang- But it is instructive as an extreme version of ing world of high technology. The recently the view of competition that the Division uses proposed merger between MCI WorldCom in formulating antitrust policy, especially and Sprint illustrates the wrong-headedness merger policy. It is a view that is enshrined in of the current approach. the Division’s merger guidelines. MCI WorldCom and Sprint are the second The guidelines were first introduced in and third largest suppliers of U.S. long- 1968 in an attempt to eliminate what, at the distance telephone service. The combined time, was a great deal of uncertainty over the firm would have a market share of 35 percent. kind of merger the antitrust authorities would With AT&T’s 45 percent share, the merger challenge. Although these guidelines have would leave a highly concentrated market in which the two largest suppliers account for 80 Henry Demmert is associate dean of the Leavey Percent of all long-distance service. By the School of Business at Santa Clara University. standard measures, the merger violates the 10 ===== PAGE 11 ===== 11 guidelines. Indeed, shortly after it was of the Baby Bells, merged with Qwest, anoth- announced, one federal regulator expressed er Internet and long-distance provider. SBC concern about greater concentration in long- Communications acquired two former Baby distance services and warned that “any further Bells, Pacific Bell and Ameritech. AT&T consolidation among the major [long- acquired TCI Cablevision and is in the distance] providers would be intolerable”! process of merging with Media One. And, of But defining the relevant market as “long- course, there is AOLs proposed blockbuster distance services” is arbitrary and misleading. acquisition of Time Warner Communications. The trend is global as illustrated by the pro- Dynamic Environment posed acquisition by British Vodaphone of } Germany’s Mannesmann, which analysts Deregulation and technology are interact- pajieve will “unleash a flurry of deals among ing to create an environment in which the only jp. wireless companies seeking to compete certain thing we can say about the telecom- global scale. munications market of the future is that it will As separate entities, MCI WorldCom and look nothing like it does today. The Telecom- gin¢ would likely founder in this brave new munications Act of 1996 eliminated the 14. combined they will create a more archaic regulatory barriers that once separat- effective competitor. To think that they would ed local phone service, long-distance phone pave enough market power to raise prices, or service, and cable, while new technologies are + ollusion is a danger in such a rapidly erasing the lines between almost all forms of changing environment, requires a real stretch communication and information-sharing. of the imagination. Moreover, with the global reach of the properly understood, competition is not a Internet, and with foreign giants such as Ger- static, zero-sum battle for shares in an arbi- many’s Deutsche Telekom and Japan's NTT (rly defined market. Rather it is a process of now free to enter the US. market, what is giscovery and innovation, a process that con- emerging is a global telecommunications (iy 4]ly expands existing markets and opens maint mn which the major players, to be COmM- yp new ones. In the world of high technology, petitive, will have to offer “all-distance” where this process is especially rapid, the old wireless broadband service not just for voice, . 4cls no longer apply. To formulate merger but for data and video as well. policy as if they did would be to stifle the cre- _ Firms are scrambling to remain competi- ,¢ive energy that true competition channels tive. The spate of recent mergers in telecom- into social benefits. 0 munications reflects the emerging new reali- ties. Bell Atlantic merged with Nynex and 1. “FCC Staff Member Objects To Sprint-MCI Buyout Plan,” : : Wall Street Journal, December 13, 1999. GTE, which had acquired BBN, a long 2. “Vodaphone Deal May Spur Globe Roaming,” Wall Street distance and Internet provider. U.S. West, one Journal, February 4, 2000. 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 12 ===== Ideas and Consequences by Lawrence W. Reed IDEAS ON [IBERTY JUNE 2000 Don’t Tax the Internet n a recent visit to the Roman ruins at three-year moratorium on any taxes directed Volubulis, Morocco, I noticed a magnif- at electronic commerce. icent stone arch the city’s officials erected State and local officials aren’t upset nearly 2,000 years ago. Etched in stone and because they’re losing revenue. They’re upset still eminently readable were Latin words because they’re missing out on a new source thanking Emperor Caracalla for two things: of revenue. South Dakota Governor William protecting the city from invaders and exempt- Janklow startled an audience when he ing the citizens from taxation. Please excuse declared that unless steps are taken to imme- the ancient redundancy. diately tax online purchases, he may “disrupt Caracalla was not generally known for his interstate commerce” by sending out state kindnesses. Indeed, he brutalized and perse- highway patrol officers to pull over “little cuted many citizens of the Roman Empire. brown trucks,” inspecting packages for those But that tax policy is the perfect answer to a originating out of state, and then “following burning question in America today: Should the packages” to their destination to force his states and localities tax the Internet? What residents to pay the state’s sales tax. Caracalla did for Volubulis, our politicians The Internet taxation debate has produced ought to do for the Web. They should leave it tough questions that must be answered if this alone. (Unfortunately, later Roman emperors promising new sphere of enterprise is to grow did tax Volubulis and that’s one reason why unmolested by government. Here are a few it’s in ruins). of those questions, with some suggested Sales over the Internet are fast capturing answers. the attention of tax-hungry politicians, but collecting sales taxes on Internet purchases Has the growth of tax-free Internet sales poses logistical, as well as constitutional, hurt government revenues? problems. If 7,500 jurisdictions with sales State governments are awash in tax rev- taxes were to apply their own tax collection enues, with a total surplus this year of $36 bil- regimes to the Internet, America would expe- lion. Investors Business Daily notes that state rience tax pandemonium. To prevent chaos revenues grew 227 percent and local revenues and allow for time to think about the issue, grew 193 percent between 1980 and 1995. Congress in 1998 passed the Internet Tax Raymond J. Keating, chief economist for Freedom Act, which instituted a national the Small Business Survival Committee, pointed out in testimony last year that “feder- P— al, state and local governments have lost no Lawrence Reed is president of the Mackinac Center © £0 Jor Public Policy (www.mackinac.org), a free-market revenues to expanding e-commerce, but have research and educational organization in Midland, gained revenues due to economic growth driv- Michigan, and chairman of FEE's Board of Trustees. en in part by information technologies.” 12 ===== PAGE 13 ===== 13 Instead of always worrying about whether e-commerce have—and always will have—a government is getting enough of other peo- decisive disadvantage in relation to tradition- ple’s money, we ought to be concerned about al retail sales: the inability of the consumer to whether people are able to keep enough of examine the goods. And, of course, there’s no what they earn to continue saving, investing, need to charge for shipping. and baking a bigger economic pie for every- The latest figures available bear out this one. counsel of common sense. E-commerce— while thriving—still only constitutes a tiny Is it “unfair” for sales over the Internet to fraction—less than one percent—of all retail be tax-free while more traditional sales are sales. E-commerce poses no danger of large taxed? income losses for traditional retailers. Indeed, No. In fact, it would be blatantly unfair to the Web offers new sales opportunities for tax out-of-state vendors that do business in a every business. Because setting up and main- state over the Internet. Taxes are supposed to taining a Web page is inexpensive, this is pay for services that governments provide, especially true for small firms. such as police protection. As Adam Thierer of the Heritage Foundation has pointed out, Does tax-free Internet shopping dispropor- “out-of-state vendors of electronic commerce, tionately hurt the poor? though subjected to the same tax burdens that No, quite the contrary. And applying taxes Main Street vendors must bear, would receive to the Internet would certainly not help the none of the benefits for the taxes they paid to poor at all. state and local governments where they did The pro-tax argument goes like this: Since not reside. This amounts to a form of taxation low-income individuals are the least likely to without representation.” have Internet access, they are the least able to shop online. The poor will end up paying the Would imposing new taxes on the Internet lion’s share of sales taxes as wealthier citizens do serious damage to the ability of this new escape through untaxed Internet purchases. form of commerce to thrive? “The Internet is especially valuable to A recent study by economists Austan Gools- inner-city residents,” notes Aaron Lukas of bee of the University of Chicago and Jonathan the Cato Institute. “Lower-income urban Zittrain of Harvard University estimates that shoppers can go online to find goods and ser- applying sales taxes to electronic commerce vices not available in their own neighbor- would reduce the number of online buyers by hoods, which often aren’t served by tradition- 25 percent and total spending on Internet trans- al stores. A recent study conducted by Price- actions by more than 30 percent. The study waterhouseCoopers and the Initiative for a suggests that these sales would not be replaced Competitive Inner City concludes that “inner- by ordinary retail sales, since the Internet is city residents with access to computers and probably a net trade creator, generating busi- the Internet use the Web as often as, and ness that would not otherwise have occurred. ~~ sometimes more frequently than, does the general U.S. population.” Does the growth of online shopping pose a Moreover, computer ownership and Inter- threat to traditional bricks-and-mortar net access among low income people are retailers? growing at rates so rapid that some observers The most pertinent answer to that question are predicting that every man, woman, and is yet another question: Do catalog sales pose child in America will be connected to the such a threat? Internet before this decade is out. Like Internet sales, catalog sales involve The Internet represents a new world of greater convenience for the shopper. They’ve enterprise, easily accessible to buyers and been a reality in America for decades. Yet cat- sellers alike. Rather than looking for ways to alog sales haven't devastated traditional retail- swipe some chunk of it, politicians should see ers. Why? Because both catalog sales and it as a means to a better life for everyone. [] ===== PAGE 14 ===== IDEAS ON [IBERTY JUNE 2000 Constitutional Intentions by Wendy McElroy A Gestion frequently arises in disputes some delegates clearly wished to establish a about how to interpret the U.S. Constitu- new compact. tion: What was the intention of those who James Madison, along with other Federal- framed the document? This question contains an ists, hoped to establish a strong central gov- invalid assumption. It assumes that those who ernment in order to overcome what he termed drafted the Constitution at the 1787 convention “the radical infirmity” of the Articles. The and those involved in the subsequent debates infirmity was that Congress had no power to were of one mind and intent. force individual states to comply with its In the introduction to his anthology The Bill requests. Without a federal government to of Rights: Original Meaning and Current collect taxes and to issue a monopoly curren- Understanding, law professor Eugene W. cy, Madison feared that America would not Hickok, Jr., wrote, “during the summer of hold together as a nation. In particular, Con- 1787 and during the formative years of the gress needed to pay for the American Revolu- early Republic, there was considerable dis- tion, which meant honoring a huge foreign agreement over the idea of appending a bill of debt and redeeming paper certificates that had rights to the new Constitution, as there was been issued as soldiers’ pay during the war. controversy over the Constitution itself.” But this centralized power violated the Arti- Hickok continued, “While it is something of cles of Confederation. an overstatement to describe the Constitution Thus when the Constitutional Convention of 1787 as nothing but the product of political opened, such giants as the great orator Patrick compromise, it is safe to say that the federal Henry and Richard Henry Lee—who had character of that Constitution . . . was ham- asked the Continental Congress to declare mered out through compromise.” independence from Britain—chose to be Indeed, some Founding Fathers believed absent. Rhode Island boycotted the conven- that the Constitutional Convention itself was tion altogether. Those who attended found illegal because it violated the Articles of Con- themselves in constant debate over issues federation, the law of the land. Samuel Chase such as centralized government versus states’ —a signer of the Declaration of Indepen- rights. From the 12 states represented, only 55 dence—refused to be a delegate. According to of 74 elected delegates actually attended the the Articles, the only proper function of the proceedings and fewer signed the resulting convention was to “amend” the existing com- document. The Virginia delegate George pact, not to create a new one. Nevertheless, Mason said he would rather cut off his hand than affix his signature to it. Wendy McElroy is a contributing editor of Ideas on Therefore, the first step in answering the Liberty. question about what intentions underlie the 14 ===== PAGE 15 ===== 15 Constitution is to realize that many prominent men expressed their intentions by boycotting the Convention or refusing to sign the result- ing document. The Anti-Federalists—those who opposed the Constitution—argued that it transferred too much power from the states to a federal government. They also objected to the absence of a bill of rights. Others argued against specific terms of the Constitution, for example, its authorization of a standing army in peacetime. Even some who supported the Constitution did not do so on principle but rather from expediency. As delegate Gunning Bedford declared on July 5, 1787, “The condition of the United States requires that something should be immediately done. It will be better that a defective plan should be adopted, than J; | that none should be recommended.” Perhaps ] James Madison (1751-1836) this was the basic intention of most delegates to the convention: to hold America together as a nation. But the issues raised by the conven- Randolph, governor of Virginia, proposed the tion threatened to tear the nation apart. plan. Gouverneur Morris of Pennsylvania Analysis of the Constitutional Convention explained the distinction between the existing encounters a severe problem. No transcript federation and the one being proposed: “the exists. Moreover, as a procedural rule, the former being a mere compact resting on the convention barred the public, thus ensuring good faith of the parties; the latter having a that no newspaper accounts exist. The debate compleat and compulsive operation.” The Vir- must be reconstructed from various delegates’ ginia Plan envisioned a tripartite government: notes. Of these, Madison’s record is by far the an executive, a judiciary, and a legislature most complete. Yet his account is burdened by with two houses. The federal government two disadvantages. First, as a staunch Feder- could veto acts of the state legislatures and alist, he may well have given short shrift to use force against rebellious states. Advocates Anti-Federalists’ arguments. Second, his of states’ rights balked. Randolph himself account was not published until decades later, admitted that the “strong consolidated union” denying other delegates the opportunity to meant that “the idea of states” would be contradict its substance. “nearly annihilated.” Thus it may not be prudent to assess the Another major sticking point was the pro- intentions of delegates solely on the basis of posed proportional representation of the what was allegedly said during the convention. states in both houses of the legislature. Small states protested against what they viewed as Some Compromises of the domination by the larger ones; Delaware . . . threatened to withdraw from the convention. Constitutional Convention On June 29 the small states lost the first bat- Madison has been called the “father of the tle. The convention established population as Constitution.” Although his was not the main the basis for representation in the House of hand behind the document’s wording, he was Representatives. The convention verged on the man most responsible for its content. The dissolution. Luther Martin of Maryland substance was embodied in what was called declared, “The States have a right to an the Virginia Plan. On May 29, 1787, Edmund equality of representation. This is secured to ===== PAGE 16 ===== 16 IDEAS ON LIBERTY e JUNE 2000 us by our present articles of confederation; we are in possession of this privilege.” Com- promise emerged. Although the House would be proportionally represented, the states would have equal representation in the Senate. The conflict over representation spilled into another issue: slavery. The North and less populous South were divided on how slaves were to be counted for taxation and propor- tional representation. The South wanted to increase its representation by fully counting the slaves. The North objected. They compro- mised. The proposed Constitution stated, “Representatives and direct Taxes shall be apportioned among the several States . . . according to their respective Numbers, which shall be determined by adding to the whole Number of free Persons . . . three-fifths of all other Persons.” The relevant “other persons” Edmund Randolph (1753-1813) were slaves. The North-South division caused other ten- sions as well. The North wanted to regulate Ratification Debates interstate commerce. The South resisted because its economy depended on the export Reaction to the Constitution varied from of raw matenals (rice, cotton, and tobacco, for convention to convention. Some states, most example), which were vulnerable to export notably the smaller ones, ratified with little taxes. When an import tax on slaves was sug- hesitation. Delaware—the first to ratify on gested, the convention erupted. The conflict December 7, 1787—did so for utilitarian rea- was resolved by what George Mason called “a sons. It needed the protection of a larger bargain.” Congress got the power to regulate union to survive. Similarly, Georgia was on commerce, but it could not interfere with the the brink of warfare both with the Spaniards slave trade until 1808. Moreover, fugitive in Florida and with Indians: it needed union. slaves who escaped northward would be Connecticut wanted protection against the returned to their owners. stiff customs imposed by large neighbors, pri- There was also concern over the presiden- marily New York. cy. If the national executive was to be vested In other states vehement debate arose. Here in one man, it was asked, would this become the Anti-Federalist attacks repeated several the “fetus of monarchy”? Again, compromise: criticisms: the Constitution lacked a bill of the national executive would consist of one rights; it discriminated against southern man whose power was limited. For instance, states; it weakened state sovereignty. Working- the president could appoint federal judges, class people feared that the Constitution was but Senate approval would be required. an aristocratic document that favored the rich, On September 17, the delegates met for the and they were particularly concerned about last time to formally sign the Constitution. On the federal government’s right to issue paper September 28, Congress ordered the states to money. At the Massachusetts convention, one call ratifying conventions to vote on the Con- delegate declared, “These lawyers, and men stitution. Again, the rebellious Rhode Island of learning and moneyed men, that . . . make declined. Ratification by nine of the twelve us poor illiterate people swallow down the pill remaining states was required for the Consti- . .. they will swallow up all us little folks like tution to become the law of the land. the great Leviathan; yes, just as the whale ===== PAGE 17 ===== CONSTITUTIONAL INTENTIONS 17 swallowed up Jonah!” From Virginia, George < Mason concurred. He believed that the feder- 2 al judiciary would dominate state courts, g allowing the rich to oppress the poor. The z absence of a bill of rights made this prospect 3 more likely. 5 The Anti-Federalist leaders did not always : speak with a single voice, however. Indeed, 2 the lack of Anti-Federalist cohesion led Madi- 2 son to write of one state, “There was not a sin- a gle character capable of uniting their wills or 5 directing their measures. . . . They had no plan ¥ whatever.” 3 One Anti-Federalist issue dominated, how- : ever—the absence of a bill of rights. At the = Constitutional Convention, a bill of rights had z not been a topic of much discussion. Most of the delegates believed that individual rights were secured by state constitutions. If state governments were weakened, however, such personal liberties as freedom of speech and trial by jury needed protection from central- ized government. ety,” Madison wrote, “the fewer probably will The Federalists considered a bill of rights be the distinct parties and interests composing superfluous or worse. Listing rights could be it; the fewer the distinct parties and interests, dangerous because some rights would be the more frequently will a majority be found overlooked or left out for brevity’s sake. The of the same party and the more easily will federal government might violate the unlisted they concert and execute their plans of rights with impunity. Alexander Hamilton oppression.” observed, “why declare that things shall not This argument was presented in one of a be done which there is no power to do?” If the series of essays written under the pen name of federal government had been granted no “Publius,” the first of which appeared in late power to censor speech, why raise the issue? 1787. Published in various New York newspa- The Anti-Federalists seemed to hold the pers, the essays were widely reprinted and upper hand in this argument, yet the Constitu- exist today under the title The Federalist tion was ratified without a bill of rights. Why Papers. Authored by Hamilton, Madison, and did Federalist arguments triumph? John Jay, the articles persuasively critiqued Several factors contributed. One was the the Articles of Confederation and advocated great skill with which Federalists such as centralized government. Madison and Hamilton argued. Consider one The Federalists also employed a superior example. Anti-Federalists disputed the possi- strategy, albeit not always a fair one. The Anti- bility that a territory as large as the United Federalists sought to delay the ratification States could have a representative central gov- process so they'd have time to circulate their ernment because such a government would criticisms of the Constitution to the people. necessarily be impersonal, unrepresentative, The Federalists had emerged from the closed and dominated by the wealthy. Madison convention with a distinct advantage. They turned this criticism around, claiming that the drew support from towns that tended to have vastness of America was an argument for a well-circulated newspapers. By contrast, Anti- strong republic. He reasoned that a large terri- Federalist support came from rural communi- tory tended to balance out the interest groups ties, which were isolated. Moreover, the ratify- that vie for dominance. “The smaller the soci- ing conventions were usually held in town ¥ Richard Henry Lee (1732-1794) ===== PAGE 18 ===== 18 IDEAS ON LIBERTY ¢ JUNE 2000 where the better-organized and better-funded On April 30, 1789, George Washington, Federalists could speed the process through. having run unopposed, became the first presi- Moreover Anti-Federalists claimed that dent of the United States. But what of North their mail, including newspapers, was being Carolina and Rhode Island, the two states tampered with by Federalist postmasters in an remaining outside the Union? attempt to silence them. Some Federalists lev- North Carolina had voted earlier to wait for eled the same accusation. a second constitutional convention that would At one point the Federalists made a brilliant ' consider suggested amendments. In face of strategic move. After the first few states had the inevitable it now became the 12th state to ratified, the Anti-Federalists began to call for ratify. ratification with attached amendments. Rhode Island stood alone. More than any Amendments might delay ratification or ren- other state, it would have felt the keen impact der it invalid. In response, the Federalists of federal tariffs. Moreover, it was not eager urged the attachment of “suggested” amend- to relinquish the right to issue currency. Each ments. In Massachusetts, John Hancock township had been polled and ratification had called this the “conciliatory proposition.” In been rejected, 28 to 1. Then, in early 1790, the vain, the Anti-Federalists cried out that the new Senate severed all commercial relations amendments would not be binding on the first and hinted at a willingness to use force Congress. The conciliatory proposition against the rebellious state. Rhode Island rat- induced Massachusetts to ratify with suggest- ified by a vote of 34 to 32. ed amendments, but even then the vote was The ratification debates revealed deep divi- 187 to 168. sions among and within the states on issues Six states had ratified; three more were ranging from freedom of religion to a stand- needed. The most important Anti-Federalist ing army. It dramatized the fact that no single state was Virginia, to which other states now intention lay beneath the surface of any par- looked for leadership. Virginia's ratifying ticular passage of the Constitution. The Con- convention should have been a touchstone if stitution—including the Bill of Rights—was only because many of America’s most promi- shaped by its critics as well as by its advo- nent leaders were Virginians. On the Anti- cates, and the intentions behind it varied Federalist side were George Mason, Patrick widely. Rather than search for any one inter- Henry, and Richard Henry Lee. The Federal- pretation of the Constitution, therefore, it is ists were equally well represented by such productive to explore the compromises prominent men as John Marshall, who later reflected in the document. To understand the became chief justice of the Supreme Court. compromises, however, it is necessary to The convention occurred relatively late in weigh anew both sides of the argument. the ratification process. On the second day of More fundamentally, one must understand debate, news of South Carolina’s ratification the political circumstances that gave rise to (the eighth state) reached Virginia. Staunch the specific wording of the Constitution. After Anti-Federalists played their ace card—south- all, the intentions of the framers were largely ern fear of northern domination. But by then, a reaction to events surrounding the American many of their fellows had decided to ratify. Revolution. For example, the Constitution’s John Randolph explained, “The accession of prohibition against a standing army makes no eight states reduced our deliberations to the sense until the abuses of the British army single question of Union or no Union.” On against the colonists are taken into account. June 26, Virginia ratified 89 to 79. Like South Thus better questions to ask regarding any Carolina and New Hampshire before her, Vir- passage of the Constitution may be, Which ginia attached suggested amendments. New political situation was it meant to prevent or York followed suit. perpetuate? And why? OJ ===== PAGE 19 ===== IDEAS ON [IBERTY JUNE 2000 The War Against Drug-Speech by Paul Armentano he “thought police” are back. And with a drug paraphernalia.” However, some drug-law vengeance. reformers warn that the legislations broad Pending congressional legislation casts language could apply to virtually any speech politicians and law enforcement as modern- deemed contrary to the War on Drugs. day book burners. Legislators have their pick “Given the vague and inclusive interpreta- of three separate bills that would impose a tion of federal conspiracy laws, almost any ten-year felony sentence on anyone who com- information about criminalized drugs and any municates, by any means, “information per- dissent against existing drug laws could be taining to the . . . manufacture of a controlled construed by federal enforcers as furthering substance,” if that information aids in the fur- drug crimes,” speculates Mark Greer, who therance of a federal crime. runs Drug Sense, the World Wide Web’s The most high-profile of these is S. 486, the largest drug-related news-clipping service. Anti-Methamphetamine Proliferation Act, “Any anti-drug war Web site [could] be shut which the Senate unanimously approved down directly or indirectly because Internet before its winter recess. It now awaits action service providers, fearing prosecution, would by the House, whose members are champing refuse to host such sites.” at the bit to rubber-stamp the proposal this Web sites, magazines, and books contain- spring despite its assault on the First Amend- ing information on procuring medical ment. “We are hoping to have hearings . . . cannabis, sterilizing needles, identifying wild and pass the bill this year, sooner rather than psychedelic mushrooms, vaporizing marijua- later,” says Representative Chris Cannon of na, and a host of other drug-related activities Utah, who shrugs off its implications for free would be censored under the Feinstein-Hatch speech. “We have worked a lot with attorneys legislation, and their publishers would be sub- at the Department of Justice; we have been ject to prosecution. Even communicating pretty thorough there. We don’t even expect a information pertaining to the personal cultiva- court challenge.” tion of medical marijuana in states where it is The amendments authors, Senators Dianne now legal to do so (Alaska, California, Maine, Feinstein of California and Orrin Hatch of Oregon, and Washington) could become pun- Utah, argue their proposal is necessary to pro- ishable by a ten-year prison term. In addition, hibit “those who embrace the drug counter- third parties such as journalists and newspa- culture . . . [from] using the Internet to pro- pers that link or refer to drug-related Internet mote, advertise, and sell illegal drugs and sites could also face felony prosecution and jail time. To demonstrate this point, a recent Paul Armentano is a senior policy analyst at The €ditorial in the Boston Phoenix newspaper NORML Foundation in Washington, D.C. included links to a trio of Web sites contain- 19 ===== PAGE 20 ===== 20 IDEAS ON LIBERTY e JUNE 2000 ing information on the preparation of illicit censor].” Nevertheless, the feds could use the substances. “Warning,” the editors wrote, “the law to target high-profile dissenters in the War editorial you are about to read would be ille- on Drugs and strike fear into the hearts of gal if Senators Feinstein and Hatch had their anyone else contemplating the dissemination way.” of non-approved drug-speech. “This bill is the single most un-American Similar censorship laws exist in other thing I have ever seen,” says Mike Hoy, presi- nations. Canada’s parliament banned all liter- dent of the publishing house Loompanics ature pertaining to illicit drug use in 1988, Unlimited, which stocks several drug-related making the importation and sale of such titles such as Opium for the Masses: A Practi- materials punishable by up to six months cal Guide to Growing Poppies and Making in jail and a $100,000 fine. (An Ontario Opium and Gourmet Cannabis Cookery. “If it provincial court eventually struck down this passes, we would probably pull all of our drug ban in 1995, and now the law is rarely books, since 1 am unwilling to spend several enforced.) Larsen reports that a handful of hundred thousand dollars that I don’t have to pro-marijuana authors and publishers have prove that my ‘intent’ satisfies Big Brother.” been fined and jailed in England and France. Just what kind of material indicates An Argentine judge is demanding that the intent to further drug crimes is also a con- United States extradite former High Times cern for Richard Cowan, publisher of Magazine editor Peter Gorman for allegedly marijuananews.com, which posts drug-related advocating the use of marijuana via the Inter- newspaper articles and press releases. “The net. Promoting criminal activity in itself is a intent will inevitably be determined by con- crime in Argentina, and Gorman could text,” a judgment that will likely be left up to receive a prison sentence if extradited and the Drug Enforcement Administration, he found guilty. Could similar situations here be suggests. far off? Saul Rubin, author of Offbeat Marijuana, . says the bill would “chill any legitimate Proving Intent exchange of information about [illicit drugs], Marv Johnson of the American Civil Liber- be it on a Web site, in a book, a magazine, or ties Union believes that prosecutors would even a conversation. The Feinstein-Hatch bill only be able to prove intent if they could show would [even] make writing and publishing that a publisher knew beforehand its literature [my] book a crime.” would serve to further a criminal act. He That is likely the true agenda of lawmakers admits, however, that the legal parameters backing S. 486 and its companion bills. By surrounding this issue are not yet well suppressing information that contradicts the defined. drug war agenda, Congress is hoping to extin- “Ultimately, this law will be selectively guish the already one-sided drug policy enforced,” assumes Dana Larsen, editor of the debate and muzzle a public that is growing Vancouver-based magazine Cannabis Cul- increasingly intolerant of Washington’s fail- ture. “The Web is too large [to thoroughly ing social policies. OJ ===== PAGE 21 ===== Potomac Principles by Doug Bandow IDEAS ON [IBERTY JUNE 2000 NATO’s Disastrous Victory in Kosovo 43 year ago the administration was beating public services based on ethnic background, the war drums in the Balkans. Secretary and forced evictions from housing recall of State Madeleine Albright, in particular, had some of the worst practices of Kosovo's recent proved more interested in bombing Serbia past.” U.N. human rights representative Jiri than encouraging a settlement. And bomb the Dienstbier similarly complains that the spring United States did, for 78 days. The result is a ethnic cleansing by Serbs was “replaced by policy of failure veering toward disaster. the fall ethnic cleansing of Serbs, Romas, NATO’s attack was to bring peace to Bosniaks and other non-Albanians accompa- Yugoslavia. But only bad news has followed. nied by the same atrocities.” Immediately after Washington’s “triumph” The situation deteriorates daily. Crimes came the mass flight of ethnic Serbs, many of against Serbs are down only because most whom were transported by the United have fled. Fighting between ethnic Albanians Nations. Explained Dennis Macnamara, and Serbs in the mixed city of Kosovska spokesman for the U.N. High Commissioner Mitrovica is worsening. for Refugees, “some people we haven’t Although leading Albanians formally dis- evacuated and who wanted it have lost their avow the violence, most do nothing to stop it. lives.” Croats, Gypsies, Jews, and even non- Those who speak out on behalf of tolerance Albanian Muslims also fled. are themselves threatened; local officials allied Serbs who did not leave have been bombed, with moderate Ibrahim Rugova have been shot, kidnapped, beaten, and robbed. Scores murdered. of Orthodox churches, monasteries, and other The Kosovo Liberation Army has disarmed religious sites have been despoiled. General in name only, formally transmuting into the Klaus Reinhardt, head of the NATO “peace- Kosovo Protection Corps. Armed thugs rule keeping” force (KFOR), admits that Kosovo the night, and organized crime is spreading. remains too dangerous for the 150,000 to The police and courts don’t function and no 230,000 refugees to return. one, Albanian or Serb, is safe. Reports Steven Reports the Organization for Security and Erlanger of the New York Times: “robberies, Cooperation in Europe: “House burnings, apartment thefts, extortion and even murders blockades restricting freedom of movement, take place with near impunity.” discriminatory treatment in schools, hospi- Human rights abuses by the Serbs were bad tals, humanitarian aid distribution and other enough. Now the same practices are being carried out under the West’s authority. Nation- —_— al Security Council adviser Sandy Berger’s Doug Bandow, a nationally syndicated columnist, is RA threat thnic Alb y g th a senior fellow at the Cato Institute and the author response. to threaten ethnic amans wi and editor of several books, including Tripwire: the loss of the “support of the international Korea and U.S. Foreign Policy in a Changed World. community.” 21 ===== PAGE 22 ===== 22 IDEAS ON LIBERTY ¢ JUNE 2000 But more than a few Kosovars don’t care the territory. But having allied itself with the what the “international community” thinks. A KLA in war, the West now upholds formal UN. bus was hit by an anti-tank rocket. Serbian rule, refusing to allow either indepen- Albanian snipers in Mitrovica have injured dence or union with Albania. Only the Clinton French peacekeepers, who in turn killed one administration could concoct such an incoher- of their attackers and arrested others. Halit ent policy. Barani, head of the Human Rights Council, America faces a situation similar to that at responded by calling the French “the same as the end of the Spanish-American War. After the Serb soldiers.” defeating Madrid, the United States grabbed American and German troops were subse- the Philippines, even though the archipelagic quently deployed to Mitrovica. When U.S. Spanish colony was irrelevant to the original forces conducted an apartment-by-apartment dispute over Cuba. search for weapons, breaking down doors During the conflict Washington allied itself along the way, they were met with a hail of with local independence fighters. Once the stones, bottles, and ice by Serbian crowds. United States decided to become an imperial German soldiers were attacked as well. power, it found itself at war with those same Thus the Kosovo civil war rages on, with forces, which had no desire to swap one colo- only a temporary lull in the worst violence. nial master for another. It took years and thou- The United States must decide whether it is sands of lives for Washington to suppress the prepared to maintain its occupation for years, guerrillas. if not forever, or will do what it should have Today, NATO faces a choice between poli- done last year—leave the Balkans to the Euro- cy failure and policy disaster, as my Cato peans. Institute colleague Gary Dempsey puts it. NATO’s decision to intervene looks ever If the alliance acknowledges reality and worse as hindsight lengthens. In early 1998 gives up on its original objective of preserv- ethnic Serbs and Albanians were locked in a ing a multi-ethnic Kosovo under Serb bitter guerrilla war, one like the conflicts in suzerainty, it will suffer an embarrassing fail- Colombia, the Democratic Republic of the ure. The war will have been in vain; econom- Congo, East Timor, Kashmir, Liberia, Sri ic costs to the region will continue to mount; Lanka, Sudan, and Turkey. Despite protesta- and the tremors loosed by the war will further tions to the contrary, the fighting was con- destabilize the region, particularly Albania, tained and threatened no major military Macedonia, and Montenegro. power. Nor did Kosovo offer special humani- However, the consequences are likely to be tarian considerations: More people had died far worse if NATO attempts to achieve its in a score of conflicts around the world. The objectives and stave off failure. Maintaining only difference was that none of the other vic- present policy is likely to turn the ethnic tims were white Europeans. Albanian majority on the allied forces, creat- Nevertheless, NATO launched what by any ing disaster. criteria was a war of aggression. Washington The best case would be overt hostility, piled on the propaganda, replicating the infa- growing demonstrations, and sporadic snip- mous “Belgian atrocities” claimed by the ing and bomb attacks. The United States and allies in World War I. But the claims of geno- its Western allies would then have to escalate cide were subsequently proved false. or withdraw; neither would be easy to explain Instead of saving lives, Washington sacri- to their citizens. ficed them. As many Serb civilians died under Far worse is the possibility of a serious NATO bombs as ethnic Albanians had died guerrilla conflict against the NATO occupiers. during the preceding year. And it was the Try to justify that to American and European allied bombing that sparked the mass expul- audiences: their sons and husbands dying to sion of ethnic Albanians. defend Serb sovereignty over Kosovo. Washington did eliminate Serb authority in The United States should get out. Now. [] ===== PAGE 23 ===== IDEAS ON [IBERTY JUNE 2000 Trade and the Rise of Freedom by Thomas J. DiLorenzo t is no exaggeration to say that trade is the people are destined to become mere wards of keystone of modern civilization. As Mur- the state. Thus, every attempt by the state to ray Rothbard wrote, “The market economy is interfere with trade is an attempt to deny us one vast latticework throughout the world, in our freedom, to impoverish us, and to turn us which each individual, each region, each into modern-day serfs. country, produces what he or it is best at, Ludwig von Mises believed that exchange most relatively efficient in, and exchanges is “the fundamental social relation,” which that product for the goods and services of “weaves the bond which unites men into soci- others. Without the division of labor and the ety”? Man “serves in order to be served” in trade based upon that division, the entire any trade relationship in the free market.’ world would starve. Coerced restraints on Mises also distinguished between two types trade—such as protectionism—cripple, hob- of social cooperation: cooperation by virtue ble, and destroy trade, the source of life and of private contract and coordination, and prosperity”! cooperation by virtue of command and subor- Human beings cannot truly be free unless dination or “hegemony.” The former type of there is a high degree of economic freedom— coordination is symmetrical and mutually the freedom to collaborate and coordinate advantageous, while the latter is asymmetri- plans with other people from literally all cal—there is a commander and a commandee, around the world. That is the point of Leonard and the commandees are mere pawns in the Read’s most famous article, “I, Pencil,” which actions of the commanders. When people describes how producing an item as mundane become the mere pawns of their rulers they as an ordinary pencil requires the cooperation cannot be said to be free. This, of course, is and collaboration of thousands of people from the kind of “cooperation” that exists at the all around the world, all of whom possess hands of the state. very specific knowledge that allows them to Western civilization is the result of “achieve- assist in the manufacture and marketing of ments of men who have cooperated according pencils. The same is true, of course, for virtu- to the pattern of contractual coordination,” ally everything else that is produced. Mises wrote.> The contractual state is guided Without economic freedom—the freedom by such concepts as natural rights to life, liber- to earn a living for oneself and one’s family— ty, and property, and government under the rule of law. In contrast, the “hegemonic society” is Thomas DiLorenzo is professor of economics at Loy- iohts or the ola College in Maryland. This is adapted from a one that does not respect natural rights o paper presented at the Ludwig von Mises Institute's rule of law. All that matters are the rules, direc- conference on “The History of Liberty” at Auburn tives, and regulations issued by dictators, University, January 29, 2000. whether they are called kings or congressmen. 23 ===== PAGE 24 ===== 24 IDEAS ON LIBERTY © JUNE 2000 These directives may change daily, and the cabal of bureaucrats, politicians, and lobby- wards of the state must obey. As Mises wrote, ists that favors government-controlled trade— “The wards have one freedom only: to obey was marked by a week of riots, protests, and without asking questions.” violence. Whenever trade is politicized the Trade involves the exchange of property result is inevitably conflict that quite often titles. Restrictions on free trade are therefore leads, eventually, to military aggression. an attack on private property itself and not Mises summarized the relationship “merely” a matter of “trade policy.” This is between free trade and peace most eloquently why such great classical liberals as Frederic when he noted: Bastiat spent many years of their lives defend- ing free trade. Bastiat, as much as anyone, What distinguishes man from animals is understood that once one acquiesced in pro- the insight into the advantages that can be tectionism, no one’s property was safe from derived from cooperation under the divi- myriad other governmental acts of theft. To sion of labor. Man curbs his innate instinct Bastiat, protectionism and communism were of aggression in order to cooperate with essentially the same philosophy. other human beings. The more he wants to It has long been recognized by classical lib- improve his material well-being, the more erals that free trade is the most important he must expand the system of the division means of diminishing the likelihood of war. of labor. Concomitantly he must more and Nothing is more destructive of human free- more restrict the sphere in which he resorts dom than war. It always leads to a permanent to military action. . . . Such is the laissez- enlargement of the state—and a reduction in faire philosophy of Manchester.8 human freedom—regardless of who wins. On the eve of the French Revolution many As Bastiat often said, if goods can’t cross philosophers believed that democracy would borders, armies will. This is a quintessentially put an end to war, for wars were thought to be American philosophy; it was the position of fought merely to aggrandize and enrich the George Washington, Thomas Jefferson, and rulers of Europe. The French quickly proved Thomas Paine, among others. “A foreign pol- this theory wrong, however, for under the icy based on commerce,” wrote Paine in Com- leadership of Napoleon they, in Mises’s mon Sense, would secure for America “the words, “adopted the most ruthless methods of peace and friendship” of the Continent and boundless expansion and annexation.” allow her to “shake hands with the world— Thus it is not democracy that is a safeguard and trade in any market.” Paine—the against war but, as the British (classical) Lib- philosopher of the American Revolution— erals were to recognize, free trade. To Richard believed that free trade would “temper the Cobden and John Bright, the leaders of the human mind,” help people to “know and British Manchester School, free trade—both understand each other,” and have a “civilizing domestically and internationally—was a nec- effect” on everyone involved in it.10 Trade was essary prerequisite for the preservation of seen as “a pacific system, operating to unite peace; for in a world of trade and social coop- mankind by rendering nations, as well as indi- eration, there are no incentives for war and viduals, useful to each other. . . . War can conquest. It is government interference with never be in the interest of a trading nation.”!! free trade that is the source of international George Washington agreed. “Harmony, lib- conflict. Indeed, naval blockades that restrict eral intercourse with all nations, are recom- trade are the ultimate act of war. Throughout mended by policy, humanity, and interest,” he history restrictions on trade have proven to stated in his September 17, 1796, Farewell be impoverishing and have instigated acts of Address.!2 Our commercial policy “should war motivated by territorial acquisition and hold an equal and impartial hand; neither plunder. seeking nor granting exclusive favors or pref- It is no mere coincidence that the 1999 erences; consulting the natural course of meeting of the World Trade Organization—a things; diffusing and diversifying by gentle ===== PAGE 25 ===== TRADE AND THE RISE OF FREEDOM 25 means the streams of commerce, but forcing right to the free exercize of his faculties pro- nothing.”’13 vided he does not employ them to the injury of himself or others.”16 The Eternal Struggle Between When Anne Robert Jacques Turgot, a pre- vee cursor of the Austrian school, became finance Freedom and Mercantilism minister of France in 1774, his first official act The period of world history from the mid- Was to free the import and export of grain. At dle of the fifteenth to the middle of the eigh- around the same time, Adam Smith was teenth centuries was an era of growth in world defending trade on moral as well as economic trade, technology, and institutions suited to grounds by identifying it is as part of the sys- trade. Technological innovations in shipping, tem of “natural justice.” One of the ways he did such as the three-masted sail, brought the this Was to defend smuggling as a means of merchants of Europe to the far reaches of evading mercantilist restrictions on trade. The America and Asia. This vast expansion of smuggler, explained Smith, was engaged in trade greatly facilitated the worldwide divi- Productive labor” that served his fellow man sion of labor, greater specialization, and the (consumers), whereas if he were caught by the benefits of comparative advantage. 4 government and prosecuted, his capital would But whenever human freedom advances, as be “absorbed either in the revenue of the state it did with the growth of trade, state power is OF in that of the revenue-officer,” which is an threatened. So states did all they could then, unproductive” use “to the diminution of the as now, to restrict trade. It is the system of general capital of the society.”!? trade restrictions and other governmental interference with the free market, known as The Manchester School mercantilism, that Adam Smith railed against in The Wealth of Nations. As Rothbard has Despite powerful arguments in favor of free written: trade offered by Quesnay, Smith, David Ricar- do, and others, England (and other countries Mercantilism, which reached its height in of Europe) suffered from protectionist trade the Europe of the seventeenth and eigh- policies in the first half of the nineteenth cen- teenth centuries, was a system of statism tury. The British public was plundered by the which employed economic fallacy to build mercantilist Corn Laws, which placed strict up a structure of imperial state power, as quotas on the importation of grain. By raising well as special subsidy and monopolistic food prices, the laws benefited landowning privilege to individuals or groups favored political supporters of the government at the by the state. Thus, mercantilism held that expense of consumers, especially the poor. exports should be encouraged by the gov- But this changed thanks to the heroic and bril- ernment and imports discouraged.!5 liant efforts of what came to be known as the Manchester School, led by two British busi- Classical liberals waged an ideological war nessmen (and later, statesmen), John Bright against mercantilism during the eighteenth and Richard Cobden. Bright and Cobden and nineteenth centuries, and scored some formed the Anti-Corn Law League in 1839 major victories for freedom. The French phys- and turned it into a well-oiled political iocrats, led by the physician and economist machine with mass support, distributing liter- Francois Quesnay, were influential from the ally millions of leaflets, holding conferences 1750s to the 1770s. They were among the first and gatherings all around the country, deliver- laissez-faire thinkers who denigrated mercan- ing hundreds of speeches, and publishing tilist propaganda and called for complete free- their own newspaper, The League.'8 dom of domestic and international trade. The Irish potato famine of 1845 created Their position was based on sound economics great pressures for repeal of the Corn Laws, as well as Lockean notions of natural rights. which was finally achieved on June 25, 1846. Quesnay wrote, “Every man has a natural The elimination of all other import duties fol- ===== PAGE 26 ===== 26 IDEAS ON LIBERTY ¢ JUNE 2000 lowed, and a 70-year period of British free The Struggle Against trade began. Cobden was also influential in Mercantilism in America pushing through the Anglo-French treaty of 1860, which lowered French tariffs and There is no clearer example of how trade helped put that country on the road to freer restrictions are the enemy of freedom than the trade. American Revolution. In the seventeenth cen- tury all European states practiced mercantil- The Great Bastiat ism. England imposed a series of Trade and Navigation Acts on its colonies in America From his home in Mugron, France, Freder- and elsewhere; they embodied three princi- ic Bastiat single-handedly created a free-trade ples: (1) all trade between England and her movement in his own country that eventually colonies must be conducted by English (or spread throughout Europe. Bastiat was a gen- English-built) vessels owned and manned by tleman farmer who had inherited the family English subjects; (2) all European imports estate. He was a voracious reader, and spent into the colonies must “first be laid on the many years educating himself in classical lib- shores of England” before being sent to the eralism and in almost any other field that he colonies so that extra tariffs could be placed could attain information about. After some 20 on them; and (3) certain products from the years of intense intellectual preparation, arti- colonies must be exported to England and cles and books began to pour out of Bastiat (in England only. the 1840s). His book Economic Sophisms is In addition, the colonists were prohibited to this day arguably the best defense of free from trading with Asia because of the East trade ever published. Economic Harmonies India Company’s state-chartered monopoly. quickly followed, while Bastiat published in There were duties placed on all colonial magazines and newspapers all over France. imports into England. His work was so popular and influential that it After the Seven Years War (known in Amer- was immediately translated into English, ica as the French and Indian War), England’s Spanish, Italian, and German. massive landholdings (Canada, India, North Because of Bastiat’s enormous influence, America to the Mississippi, most of the West free-trade associations, modeled after one he Indies) became expensive to administer and had created in France and similar to the one police. Consequently, the Trade and Naviga- created by his friend Richard Cobden in Eng- tion Acts were made even more oppressive, land, began to sprout in Belgium, Italy, Swe- which imposed severe hardships on the Amer- den, Prussia, and Germany. ican colonists and helped lead to revolution.20 To Bastiat, collectivism in all its forms was After the American Revolution trade immoral as well as economically destructive. restrictions nearly caused the New England Collectivism constituted “legal plunder,” and states—which suffered disproportionately to argue against the (natural) right to private from them—to secede from the Union. In property would be similar to arguing that theft 1807 Thomas Jefferson was president and and slavery were moral. The protection of pri- England was once again at war with France. vate property is the only legitimate function England declared that it would “secure her of government, Bastiat wrote, which is why seamen wherever found,” which included trade restrictions—and all other mercantilist U.S. ships. After a British warship captured schemes—should be condemned. Free trade the U.S.S. Chesapeake off Hampton Roads, “is a question of right, of justice, of public Virginia, Jefferson imposed a trade embargo order, of property. Because privilege, under that made all international commerce illegal. whatever form it is manifested, implies the After Jefferson left office his successor, denial or the scorn of property rights.” And James Madison, imposed an Enforcement “the right to property, once weakened in one Act, which allowed war-on-drugs—style form, would soon be attacked in a thousand seizure of goods suspected to be destined for different forms.”19 export. ===== PAGE 27 ===== TRADE AND THE RISE OF FREEDOM 27 This radicalized the New England seces- ered.”2* He wrote of the “indissoluble conex- sionists, who had been plotting to secede ever ions” between both “the freedom of industry since Jefferson was elected, and who issued a and national prosperity” and also “between public declaration reminding the nation that national distress and protecting duties, boun- “the U.S. Constitution was a Treaty of ties, exclusive privileges, and heavy taxa- Alliance and Confederation” and that the tion.”25 The former produces national happi- central government was no more than an ness, whereas the latter produces national association of the states. Consequently, misery, according to Taylor. In pointing out “whenever its [the Constitution’s] provisions the folly of economic autarky (self-sufficiency) were violated, or its original principles he asked: departed from by a majority of the states or their people, it is no longer an effective Will Alabama want nothing but cotton, instrument, but that any state is at liberty by should that State select this species of the spirit of that contract to withdraw itself labour for its staple? Can she eat, drink, from the union.””2! and ride her cotton? Can she manufacture The Massachusetts legislature formally it into tools, cheese, fish, rum, wine, sugar, condemned the embargo, demanded its repeal and tea? . . . . Is not Georgia a market for by Congress, and declared that it was “not manufacturers, and Rhode-Island a market legally binding.” In other words, the Massa- for cotton, in consequence of the division chusetts legislature “nullified” the law, just as of labor?26 South Carolina would nullify the 1828 Tariff of Abominations some 20 years later. Madi- Many of Taylor’s arguments were adopted son was forced to end the embargo in March and expanded on by the South Carolinian 1809. statesman John C. Calhoun during the strug- There has always been a collection of men gle over the 1828 Tariff of Abominations, in America who wanted to bring the British which a South Carolina political convention mercantilist system here precisely because it voted to nullify. The confrontation between was so destructive of freedom. They figured that state, which was very heavily dependent to be the commanders of the system and its on imports, as was most of the South, and chief beneficiaries. As John Taylor of Caro- the federal government over the Tariff of line observed, these men “included Hamilton Abominations almost led to the state’s and the Federalists and later, the politicians of secession some 30 years before the War the Era of Good Feelings in the 1820s who Between the States. The federal government eventually became Whigs.”22 These men backed down and reduced the tariff rate in “sought to bring the British system to Ameri- 1833. ca, along with its national debt, political cor- The northern manufacturers who wanted to ruption, and Court party.”23 impose British-style mercantilism on the Taylor, a noted Anti-Federalist, was a life- country did not give up, however; they long critic of mercantilism, who laid out his formed the American Whig party, which criticisms in his 1822 book, Tyranny advocated three mercantilist schemes: pro- Unmasked. Like Bastiat, Taylor saw protec- tectionism, corporate welfare, and a central tionism as an assault on private property that bank to pay for it all. From 1832 until 1852 was diametrically opposed to the freedom the the Whigs, led by Henry Clay and later by American revolutionaries had fought and died Abraham Lincoln, fought mightily in the for. Taylor sought to “unmask” the tyranny of political arena to bring seventeenth-century the fables and lies that the mercantilists had mercantilism to America.?’ devised to promote their system of plunder. If The party died in 1852, but the Whigs sim- one looked at England’s mercantilist policies, ply began calling themselves Republicans. Taylor wrote, “No equal mode of enriching The tariff was the centerpiece of the Republi- the party of government, and impoverishing can party platform of 1860, as it had been the party of people, has ever been discov- when the same collection of northern eco- ===== PAGE 28 ===== 28 IDEAS ON LIBERTY ® JUNE 2000 nomic interests called itself “Whigs” during After the war the northern manufacturing the previous 30 years. interests who financed and controlled the By 1857 the level of tariffs had been reduced Republican party “ushered in a long period of to the lowest level since 1815, according to high tariffs. With the tariff of 1897, protection Frank Taussig in his classic Tariff History of reached an average level of 57 percent”! the United States.28 But when the Republicans This political plunder continued for about 50 controlled the White House and the southern years after the war, at which time internation- Democrats left the Congress, the Republicans, al competition forced tariff rates down mod- as former Whigs, did what they had been itch- erately. By 1913 the average tariff rate in the ing to do for decades: go on a protectionist United States had declined to 29 percent. frenzy. In his first inaugural address Lincoln stated that he had no intention to disturb slav- ery in the southern states and even if he did, Protectionists Triumph there would be no constitutional basis for doing so. But he promised a military invasion if tariff revenues were not collected. Unlike Andrew Jackson, he would not back down from the South Carolinian tariff nullifiers. By 1862 the average tariff rate had crept up to 47.06 percent, the highest level ever to that point, even higher than the 1828 Tariff of Abominations. These high rates lasted for decades after the war. Many of the newspapers that supported the Republican party openly called for a military invasion of southern ports to keep the South from adopting free trade, which was written into the Confederate Constitution of 1861. On March 12, 1861, for example, the New York Post advocated that the U.S. Navy “abolish all of more and more of their freedoms. ports of entry” in the South? On April 2 Since the seventeenth century all the great 1861, the Newark Daily Advertiser in New classical liberals have defended free trade and opposed trade restrictions. Restrictions on trade are an attack on the institution of private property, interfere with the international divi- sion of labor that is the source of our prosper- ity, and are nothing less than an act of theft. As Murray Rothbard remarked: But the same clique of northern manufac- turers was begging for “protection” and per- sisted until President Herbert Hoover signed the Smoot-Hawley Tariff of 1929, which increased the average tariff rate on over 800 items back up to 59.1 percent.32 Smoot- Hawley spawned an international trade war that resulted in a 50 percent reduction in total exports from the United States between 1929 and 1932.33 Poverty and misery were the inevitable result. Even worse, the government responded to these problems of its own cre- ation with a massive increase in government intervention, which only produced even more poverty and misery and deprived Americans Jersey warned ominously that southerners had “apparently taken to their bosoms the liberal and popular doctrine of free trade” and that free trade “must operate to the serious disad- vantage of the North” as “commerce will be largely diverted to Southern cities.” The “chief instigator” of “the present troubles,” South Carolina, has all along been “preparing [T]he impetus for protectionism comes not the way for the adoption of free trade” and from preposterous theories, but from the must be stopped by “the closing of the ports” quest for coerced special privilege and by military force.30 restraint of trade at the expense of efficient As mentioned above, by 1860 England. competitors and consumers. In the host of itself had moved to complete free trade; special interests using the political process France sharply reduced her tariff rates in that to repress and loot the rest of us, the pro- very year; and the free-trade movement start- tectionists are among the most venerable. ed by Bastiat was spreading throughout It is high time that we get them, once and Europe. Only the northern United States was for all, off our backs, and treat them with clinging steadfastly to seventeenth-century the righteous indignation they so richly mercantilism. deserve.34 [J ===== PAGE 29 ===== TRADE AND THE RISE OF FREEDOM 29 . . } Burton W. Folsom, Jr, ed., The Industrial Revolution and Free 1. Murray Rothbard, “Protectionism and the Destruction of 7,4, (Irvington-on-Hudson, N.Y.: Foundation for Economic Edu- Prosperity,” found on www.mises.org/fullarticle.asp?title= cation, 1996), p. 28. protectionism&month=1. 19. Frederic Bastiat, Selected Essays on Political Economy, George 2. Ludwig von Mises, Human Action: A Treatise on Economics, B. de Huszar, ed. (Irvington-on-Hudson, N.Y.: Foundation for Eco- Scholar’s Edition (Aubum, Ala. Mises Institute, 1998 (1949]), [omic Education, 1995), p. 111. p. 195. 20. Samuel Eliot Morison, Henry Steele Commager, and William 3. Ibid. Leuchtenburg, The Growth of the American Republic (New York: 4. Ibid, p. 196. Oxford University Press, 1980), pp. 112-25. 5. Ibid., p. 198. 21. James Banner, To the Hartford Convention: The Federalists 6. Ibid., p. 199. and the Origins of Party Politics in Massachusetts, 1789-1815 (New 7. Ibid., p. 819. York: Alfred A. Knopf, 1970), p. 301. 8. Ibid, p. 827. 22. John Taylor, Tyranny Unmasked (Indianapolis: Liberty Fund, 9. Thomas Paine, Common Sense, p. 20, in Philip S. Foner, ed., 1992), p. xvi. Complete Writings of Thomas Paine (New York: 1954). 23. Ibid. 10. Ibid. 24. hid. p. 11. 11. Ibid. 25. Tbid,, p. 19. 12. W.B. Allen, ed., George Washington: A Collection (Indi- 26. Ibid., p. 24. anapolis: LibertyClassics, 1988), p. 525. 27. Michael F. Holt, The Rise and Fall of the American Whig 13. Ibid. Party (New York: Oxford University Press, 1999). 14. Nathan Rosenberg and L.E. Birdzell, Jr., How the West Grew 28. Frank Taussig, 4 Tariff History of the United States (New Rich (New York: Basic Books, 1986), pp. 71-112. York: Putnam, 1931), p. 157. 15. Murray Rothbard, “Mercantilism: A Lesson for Our Times?” 29. Howard Perkins, Northern Editorials on Secession (Glouces- in his The Logic of Action II (Cheltenham, England: Edward Elgar, ter, Mass.: Peter Smith, 1964), p. 600. 1997), p. 43. 30. Ibid., p. 602. 16. Cited in Henry Higgs, The Physiocrats (New York: Langland 31. Wilson Brown and Jan Hogendom, International Economics Press, 1952), p. 45. (New York: Addison-Wesley, 1994), p. 188. 17. Adam Smith, An Inquiry into the Nature and Causes of the 32. Ibid., p. 192. Wealth of Nations (New York: Oxford University Press, 1976), p. 898. 33. Ibid, p. 193. 18. Nick Elliott, “John Bright: Voice of Victorian Liberalism,” in 34. Rothbard, “Protectionism.” 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 igh adoudsiat aes return it to us in the postpaid The Case of ireland. 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! To: FEE 30S. 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 30 ===== IDEAS ON [IBERTY JUNE 2000 War by Frederic Bastiat mong all the circumstances that have in terms of keeping soul and body together some part in giving to a people its dis- (however prosaic this admission may be) and, tinctive features, its moral tone, its character, secondly, of living better and better, if possi- its habits, laws, and peculiar spirit, the one ble. That this is so is proved by the fact that it that overshadows all others, because it is for no other reason that they are hunters, includes virtually all of them, is its manner of manufacturers, farmers, etc. Similarly, the providing its means of existence. We owe this civil servant, the soldier, the magistrate enter observation to Charles Comte,! and it is sur- upon these careers only in order to ensure the prising that it has not had greater influence on satisfaction of their wants. Nor should we the social and political sciences. hold it against the man who follows a voca- In fact, this circumstance affects the human tion calling for disinterestedness and self- race in two equally powerful ways: by being a sacrifice if he, too, invokes the proverb: To the constant concern, and by being the concern of priest the altar is a livelihood; for before he everyone. Earning a living, supporting one- became a priest, he was a man. And if at this self, improving one’s condition, raising a fam- very moment such an individual is writing a ily—these are not matters of taste, opinion, or book against the vulgarity of this observation choice, involving one time or one locality of mine, or rather against the vulgarity of the only; these are the daily, lifelong, inescapable human condition, the sale of his book will preoccupations of all men at all times and in argue against his own thesis. all places. God forbid that I should deny the existence Everywhere the major part of men’s physi- of self-sacrifice. But it will be admitted that cal, intellectual, and moral forces is devoted examples of it are exceptional, and this is directly or indirectly to creating and replen- what makes them meritorious and worthy of ishing their means of subsistence. The hunter, our admiration. For, if we consider mankind the fisherman, the sheep raiser, the farmer, the as a whole, unless we have made a pact with manufacturer, the businessman, the laborer, the demon of sentimentality, we must admit the artisan, the capitalist, all think, first of all, that disinterested acts cannot be compared, numerically speaking, with those that are dic- - tated by the hard necessities of our nature. Frederic Bastiat (1801-1850) was a French econo- And it is because these acts, which make up mist, free-trade activist, and member of the French the sum total of our labors, occupy so large a legislature after the Revolution of 1848. This is a . chapter from his treatise, Economic Harmonies, part of the lives of each one of us, that they translated by W. Hayden Boyers, which along with ~ cannot fail to influence greatly the phenome- his other works is available from FEE. na of our national life. 30 ===== PAGE 31 ===== 31 Saint-Marc Girardin interest of only a few nations, and those of a and Rousseau most unimaginative kind; that other nations, more worthy of the name, had devoted them- M. Saint-Marc Girardin? says somewhere selves to nobler pursuits. that he came to realize that political forms are Were not M. Saint-Marc Girardin and relatively unimportant compared with the Rousseau perhaps the victims of one of the great general laws that are imposed upon peo- illusions of history? May they not have mis- ple by their wants and by the labor they do. taken the amusements and the diversions, that “Do you desire to know what any nation real- is, the devices and instruments of despotism, ly is?” he asked. “Ask not how it is governed, in which some of the citizens indulged, for the but what it does for a living.” occupations of the entire nation? And may not As a general judgment this is correct. But this illusion be due to the fact that historians the author soon gives it a false sense by turn- are always talking about the class that does ing it into a system. The importance of politi- not work and never about the classes that do, cal forms has been exaggerated; so what does so that eventually we come to identify the he do? He reduces it to nothing, he denies it entire nation with the leisure class? completely, or he recognizes its existence only to laugh at it. Political forms, he says, interest Cultivatin g Force and Fraud us only on election day or during the hour we set aside for reading the newspaper. Monarchy I cannot help thinking that among the or republic, aristocracy or democracy, what Greeks, as among the Romans and in the difference does it make? And so we must look Middle Ages, men were just as they are today, at the conclusion he reaches. Maintaining that that is, subject to wants so strong, so recur- young nations resemble one another, regard- rent, that it was necessary to provide for them less of their political organization, he likens on pain of death. Therefore, I cannot help the United States to ancient Egypt, because concluding, that then, as now, these wants both have carried out enterprises of gigantic were the chief and most absorbing preoccupa- proportions. But I protest. When the Ameri- tion of the great majority of the human race. cans clear vast tracts of land, dig canals, build What does appear certain is that a very railroads, they do it all for themselves, because small number of men managed to live without they are a democracy and are their own mas- working, supported by the labor of the ters! The Egyptians erected temples, pyra- oppressed masses. This small leisured group mids, obelisks, and palaces for their kings and made their slaves construct sumptuous their priests, because they were slaves! And palaces, vast castles, or somber fortresses. this is only a slight difference, a mere matter They loved to surround themselves with all of form, hardly worth noticing, or, if we do the sensuous pleasures of life and with all the notice it, deserving only to be laughed at! Oh, monuments of art. They delighted in dis- the deadly contagion of the veneration for coursing on philosophy and cosmogony; and, things classic! How it corrupts its superstitious above all, they carefully cultivated the two devotees! sciences to which they owed their supremacy Soon after, M. Saint-Marc Girardin, still and their enjoyments: the science of force and pursuing the same point, that the principal the science of fraud. occupations of a people determine its nation- For beneath this aristocracy were the count- al character, goes on to say: In the past, less multitudes occupied in creating, for nations concerned themselves with war and themselves, the means of sustaining life and, religion; today, their chief preoccupation is for their oppressors, the means of surfeiting with commerce and industry. For this reason them with pleasures. Since the historians the generations that preceded us had a warlike never make the slightest mention of these and religious character. multitudes, we forget their existence; they do Rousseau had earlier declared that concern not count for us at all. We have eyes only for with one’s mere existence was the dominant the aristocracy. It is this class that we call ===== PAGE 32 ===== 32 IDEAS ON LIBERTY e JUNE 2000 ancient society or feudal society. We imagine fishing, agriculture, industry, commerce, the that such societies were self-sustaining, that sciences, and the arts—are at work simultane- they never had recourse to anything so mun- ously, although in varying proportions in dif- dane as commerce, industry, or labor; we ferent countries. For this reason the differ- admire their unselfishness, their generosity, ences among nations are not and cannot be as their love of the arts, their spiritual qualities, great as they would be if each nation devoted their disdain for servile occupations, their itself exclusively to one occupation. lofty thoughts and sentiments; we declare, But if the nature of a people’s occupations with a certain quaver in the voice, that at one greatly influences its morality, it is also true time the nations cared only for glory, at anoth- that its desires, its tastes, and its morality er only for the arts, at another only for philos- exert in their turn a great influence on the ophy, at another only for religion, at another nature of its occupations, or at least on their only for virtue; we very sincerely weep over relative importance. I shall not add anything our own sorry state; we speak of our age with more to this observation, which has already sarcasm because, unable to rise to the sublime been presented elsewhere in this work, and heights attained by such paragons, we are thus I reach the main subject of this chapter. reduced to according to labor and to all the A man (and the same may be said of a peo- prosaic virtues associated with it so important ple) can secure the means of existence in two a place in our modern life. ways: by creating them or by stealing them. Let us console ourselves with the thought Each of these two main means of procure- that it played a no less important role in ment includes a variety of procedures. ancient life. The only difference was that the We can create means of existence by hunt- labor that a few men had managed to escape ing, fishing, farming, etc. fell crushingly on the oppressed masses, to We can steal them by bad faith, violence, the great detriment of justice, liberty, proper- force, fraud, war, etc. ty, wealth, equality, and progress; and this is If, remaining within the limits of either the first of the disturbing factors to which I one of these two main categories, we observe must call the reader’s attention. that the predominance of one or another of the procedures appropriate to it is sufficient Securing the Means to give rise to considerable differences of Existence among the nations, how much greater must not this difference be between a people that The ways by which men provide their lives by producing and a people that lives by means of existence cannot fail to exert a great plundering! influence on their physical, moral, intellectu- For there is not one of our faculties, of al, economic, and political condition. whatever order, that is not called into use by If we could observe a number of primitive our need to provide for our existence; and tribes, ‘one of which had devoted itself exclu- what can we conceive of that is more likely to sively to hunting, another to fishing, a third to modify the social condition of a nation than agriculture, and a fourth to navigation, who that which modifies all the human faculties? could doubt that these tribes would present This consideration, in spite of its impor- considerable differences in their ideas, opin- tance, has received so little attention that I ions, habits, customs, manners, laws, and reli- must pause to comment on it for a moment. gion? No doubt we should find human nature In order for man to obtain a satisfaction, he basically the same everywhere. Therefore, must have performed a certain amount of their laws, habits, and religions would have labor; hence, it follows that plunder, in all its many points in common, which, I believe, varieties, far from excluding the act of pro- could well be called the general laws of duction, presupposes it. human society. And this thought, it seems to me, is such as However, in our great modern societies all to moderate somewhat the infatuation of the or nearly all the processes of production— historians, the poets, and the novelists for ===== PAGE 33 ===== WAR 33 those heroic ages past when, according to the same laws, the same morality, or the same them, what they call industrialism did not yet religion. dominate society. In those days, as in our own, And surely one of the saddest sights that people had to live; then, as now, labor per- can present itself to anyone who loves formed its hard task. But some nations, some mankind is that of a productive age bending classes, some individuals had succeeded in all its efforts to infect itself—by way of edu- loading off onto other nations, other classes, cation—with the thoughts, the sentiments, the other individuals, their portion of the general errors, the prejudices, and the vices of a toil and drudgery. nation of plunderers. Our age is often accused of a lack of consistency, of a failure to show any correlation between the ideals it profess- es and the way of life it pursues. The criticism The characteristic feature of production is, is just, and I believe that I have here indi- so to speak, to create out of nothing the satis- cated the principal reason why this situation factions that sustain and beautify life, so that prevails. an individual or a people is enabled to multi- ply these satisfactions indefinitely without inflicting privation of any kind on other men Plunder by War or other peoples; quite the contrary: for care- Plunder by way of war, that is, rudimentary ful study of the economic mechanism of a plunder, simple and undisguised, has its roots free society has shown us that the success of in the human heart, in man’s nature, in the one man in his work improves the chances of universal motive force that actuates the social success for others in their work. world—his attraction toward satisfactions and The characteristic feature of plunder is its his aversion to pain; in a word, in that moti- inability to provide any satisfaction without a vating force that we all have within us: self- corresponding privation, for it does not cre- interest. ate; it diverts to its own ends what has already And I am not distressed at now being the been created by the labor of others. It entails one to indict self-interest. Until now the read- the absolute loss of all the effort it itself costs er may well have believed that my veneration the two parties concerned. Far from adding to of this principle amounted to idolatry, that I the enjoyments of mankind, it decreases attributed to it only happy consequences for them, and, moreover, it allots them to those humanity, perhaps that I even placed it above who have not deserved them. altruism, devotion, self-sacrifice. No, I have In order to produce, we must direct all our not passed any judgment on it; I have merely faculties toward the conquest of Nature; for it noted that it exists and that it is all-powerful. is Nature that must be fought, mastered, and 1 should poorly appreciate its all-powerful subjugated. That is why iron beaten into a nature and I should be guilty of contradicting plowshare is the emblem of production. myself in calling self-interest the universal In order to plunder, we must direct all our motive force of mankind, if I did not now faculties toward the conquest of men; for they point it out as a source of discord, just as I are the ones we must fight, kill, or enslave. previously indicated that it was the source of That is why iron beaten into a sword is the the laws that govern the harmony of the social emblem of plunder. order. As great as is the difference between the Man, as we have said, strives irresistibly to plowshare that feeds and the sword that kills, assure his own preservation, to improve his so great must be the difference between a lot, and to attain, or at least to come as near as nation of workers and a nation of plunderers. possible to attaining, happiness as he con- It is not possible for there to be any common ceives it. For the same reason he shuns pain ground between these two. They cannot have and suffering. the same ideas, the same standards, the same Now, labor, the operation that he must per- tastes, the same character, the same customs, form upon Nature in order to produce any- Production or Plunder ===== PAGE 34 ===== 34 IDEAS ON LIBERTY ® JUNE 2000 thing, is itself pain and drudgery. For this rea- let me repeat, for it is too often forgotten, the son he is averse to labor and resigns himself labor has not been lessened; it has merely to it only when it is the means of avoiding an been shifted to other shoulders.3 even greater evil. Taking the philosophical Man, thus confronted with a choice of point of view, there are those who say that pains, the pains of want and the pains of toil, labor is a boon. They are right if we consider and driven by self-interest, seeks a means of its results. Relatively speaking, it is a boon; in avoiding them both in so far as possible. And other words, it is an evil that spares us greater it is then that plunder presents itself as the evils. And that is precisely why men have solution to his problem. He says to himself: It such a great tendency to avoid labor, when, is true that I have no means of procuring the without recourse to it, they believe they can things necessary for my preservation and my reap its rewards. enjoyment—food, clothing, and shelter— Others say that labor is in itself a boon; that unless these things have previously been pro- apart from the results it brings in terms of pro- duced by labor. But they need not necessarily duction, it strengthens man morally and phys- be produced by my labor. They need only ically and is a source of happiness and health. have been produced by someone, provided I All this is very true, and reveals once again am the stronger. the marvelous fecundity of God’s providential Such is the origin of war. design so abundantly evident in all His hand- I shall not dwell long on the consequences. iwork. Yes, even apart from its results in terms When things come to this pass, when one of production, labor promises man, as its sup- man or one nation labors while another man plementary rewards, strength of body and joy or another nation lies in wait, ready to spring of soul; and since we have said that idleness is and to seize the fruits when the labor is com- the mother of all vices, we must also recog- pleted, the reader can appreciate at a glance nize that labor is the father of many virtues. ~~ what a loss of human energy is entailed. But while all this is very true, it in no way On the one hand, the plunderer has not changes the natural and irresistible bent of the been able, as he had hoped, to avoid every human heart nor the attitude that causes us not kind of labor. Armed plunder itself requires to seek work for its own sake. We always com- effort and sometimes tremendous effort. pare our labor with its results. We do not Thus, while the producer devotes his time to devote more effort to a given task if we can creating the objects fitted to yield satisfac- accomplish it with less; nor, when confronted tions, the plunderer uses his time in preparing with two toilsome tasks, do we choose the the means of stealing them. But when the greater. We are more inclined to diminish the work of violence has been consummated or ratio of effort to result, and if, in so doing, we attempted, the objects of satisfaction are nei- gain a little leisure, nothing will stop us from ther more nor less plentiful. They may satisfy using it, for the sake of additional benefits, in the wants of different persons, but they cannot enterprises more in keeping with our tastes. satisfy a greater number of wants. Thus, all the efforts that the plunderer has expended for The Roots of War plunder, and in addition those that he has not expended for production, are entirely lost, if Man’s universal practice, indeed, is conclu- not for him, at least for mankind. sive in this regard. Always and everywhere, Nor is this all. In the majority of cases a we find that he looks upon toil as the dis- similar loss is involved for the producer. It is agreeable aspect, and on satisfaction as the not at all likely that he will passively await, compensatory aspect, of his condition. without taking precautionary measures, the Always and everywhere, we find that, as far as event that threatens him; and all his precau- he is able, he places the burden of his toil tions, weapons, fortifications, munitions, drill, upon animals, the wind, steam, or other forces are labor, and labor forever lost, not only for of Nature, or, alas! upon his fellow men, if he him who looks to it for his security, but for the can gain mastery over them. In this last case, human race. ===== PAGE 35 ===== WAR 35 But, if the producer does not feel that, by The traces war has left are equally wide- thus undergoing double labor, he will be spread. Apart from the blood it has spilled, the strong enough to resist the threatened inva- booty it has captured, the minds it has sion, the situation is much worse, and the warped, the faculties it has perverted, it has waste of human energies is on an even larger everywhere left scars, and among them must scale; for in that case his work stops altogeth- be listed slavery and aristocracy. er, since no man is disposed to produce mere- Man has not been content to plunder wealth ly to be plundered. as rapidly as it is produced; he has seized As for the moral consequences, the manner upon wealth already created, capital in all its in which both parties are affected, the result is forms. He has especially cast his eyes upon its no less disastrous. God decreed that man most stable form, landed property. And final- should wage war only against Nature, peace- ly, he has seized upon man himself. For since fully, and should reap directly from her the human faculties are a means of production, he fruits of victory. When he gains dominion over has found it quicker to seize them than to Nature only through the indirect means of seize their products. dominion over his fellow men, his mission has What powerful disturbing factors these been perverted; he has turned his faculties ina great events have been, what obstacles to the wrong direction. Just consider, for example, natural progress destined for mankind! If we the virtue of foresight, the anticipatory view of take into account the extent to which labor has the future, which in a certain manner elevates been wasted by war, if we consider the extent us to the realm of Providence, for to foresee, to to which what remained of the product of look ahead, is also to provide, to look out for;* labor has been concentrated in the hands of a consider how differently it is employed by the few conquerors, we can well understand why producer and by the plunderer. the masses are destitute, for their destitution The producer must learn the relation cannot be explained in our day on the hypoth- between cause and effect. To this end, he stud- esis of liberty. ies the laws of the physical universe and seeks to bring them more and more to his aid. Ifhe How the Warlike Spirit observes his fellow men, it is for the purpose 14 Fostered of foreseeing their desires and providing for them, in the hope of a return. Aggressor nations are subject to reprisals. The plunderer does not observe Nature. They often attack; sometimes they have to And if he observes his fellow men, it is as a defend themselves. When they are on the hawk spies out its prey, seeking a way to defensive, they feel that justice is on their side, weaken it, to take it unawares. and that their cause is holy. Then they laud The same differences are to be observed in courage, devotion, patriotism. But, alas! They the other faculties and extend to men’s ways carry these ideas over into their wars of aggres- of thinking. sion. And in that case what is patriotism? Plunder by means of war is not an acciden- When two races, one victorious and idle, tal, isolated, temporary phenomenon; it is a the other conquered and humiliated, occupy very widespread and constant fact. Only labor the same land, everything that arouses likes iS more permanent. and desires is the portion of the former. To it Show me, then, a place on the globe where belong the leisure, gala affairs, love of the two races of men, one a race of conquerors, arts, wealth, military pomp and parades, and the other a race of conquered, are not grace, elegance, literature, poetry. To the con- superimposed. Show me in Europe or in Asia quered belong calloused hands, desolate hov- or in the islands of the sea a favored spot els, repulsive clothing. still occupied by its original inhabitants. The consequence is that the ideas and atti- If the migrations of peoples have spared no tudes of the dominant race, always associated land, it is because war has been a universal with its military ascendancy, determine public phenomenon. opinion. Men, women, children, all place the ===== PAGE 36 ===== 36 IDEAS ON LIBERTY ¢ JUNE 2000 soldier’s way of life above that of the worker, laws of the social world would never be har- war above labor, plunder above production. monious, even in the limited sense that I have The conquered race itself shares this senti- indicated, if in the long run the urge to pro- ment, and when it overcomes its oppressors, it duce were not destined to overcome the spirit shows itself in its process of readjustment dis- of plunder. OJ posed to imitate them—more than disposed, indeed. for this imitation becomes a frenzy 1. Charles Comte (1782-1837), French economist, son-in-law of , 4 J. B. Say. Co-editor, with Charles Dunoyer, of Le Censeur européen.— Translator. 2. Saint-Marc Girardin (1801-1873), literary critic and scholar, How War Ends professor of literature in the Sorbonne, member of the French Acad- emy, also active in political life. —Translator. : a : 3. We forget this when we ask: Is slave labor cheaper or more Since the spirit of plunder, like the urge to expensive than free labor? produce, has its origin in the human heart, the 4. In French, prévoir and pourvoir —Translator. Let us take a man belonging to a modest class in society. . . . It is impossible not to be struck by the disproportion, truly incommensu- rable, that exists between the satisfactions this man derives from society and the satisfactions that he could provide for himself if he were reduced to his resources. | make bold to say that in one day he consumes more things than he could produce himself in ten centuries. What makes the phenomenon stranger still is that the same thing holds true for all men. We should be shutting our eyes to the facts if we refused to recognize that society cannot present such complicated combinations in which civil and criminal law play so little part without being subject to a prodigiously ingenious mechanism. This mechanism is the object of study of political economy. —FREDERIC BASTIAT (1801-1850), Economic Harmonies ===== PAGE 37 ===== Peripatetics by Sheldon Richman IDEAS @ Education ON IBERTY JUNE 2000 Can the Free Market Provide Public Education? he short answer, of course, is: yes, look marginal price of zero, much private educa- around. Right now, private enterprise and tion will never come into being. How ironic nonprofit organizations provide all manner of that government vigilantly looks for predato- education—from comprehensive schools with ry pricing in the private sector when it is the classes in the traditional academic subjects, to major offender. specialized schools that teach everything There is certainly nothing about education from the fine arts to the martial arts, from that should lead anyone to doubt that the mar- dancing to dieting, from scuba diving to scru- ket could provide it. Like any other product or tinizing one’s inner self. service, education is a combination of land, If we define “public education” as “what labor, and capital goods directed at a particu- the government does now,” then it’s a trick lar objective—instruction in academic sub- question. Every school serves members of the jects and related matters demanded by a class public. For the sake of this discussion, we can of consumers, primarily parents. ignore that the word “public” has been cor- Here’s where things may get contentious. rupted to mean “coercively financed through Critics of market-provided education are the tax system.” As an aside, there are signs uncomfortable with education’s being treated that the words “private” and “market” are on like a commodity, subject to supply and their way to corruption as well. demand. In the marketplace, consumers ulti- The free market—and I include here both mately determine what is produced. Entrepre- for-profit and nonprofit organizations—would neurs take risks to serve them. And fickle con- provide even more education than it does now sumers show no mercy when something new but for the “unfair competition” from govern- and attractive comes along. Ask the share- ment. Since government has a resource that holders of Boston Chicken, among others. private organizations lack—the taxpayers— Why should parents alone determine what it’s able to offer its services for “free.” They’re is and what is not acceptable education? But not really free, of course; in the government why not parents? To whose hearts are the context, “free” means that everyone pays interests of children closer? Besides, most whether he wants the service or not. Clearly, parents would no more make educational as long as government can tax its citizens and decisions without consulting knowledgeable then provide educational services to them ata authorities than they would make medical decisions without consulting doctors. The —— uninformed-consumer argument against free- Sheldon Richman is editor of Ideas on Liberty. These a ket education is a red herring. remarks were presented at the Children’s Scholar- Pp t d th vat t hould b ship Fund conference “Freedom and Equal Opportu- arents, an © pnvaie sector, shou © nity in Education,” January 12, 2000, in New York free to determine What is and what is not City. acceptable academic education for the same 37 ===== PAGE 38 ===== 38 IDEAS ON LIBERTY e JUNE 2000 reasons they are free to determine what is The world is open-ended. We don’t know proper religious education. We don’t use the exactly what we will learn tomorrow. As falli- small number of neglectful parents as a pre- ble beings, we can be sure that at any time, text for government control or finance of reli- valuable information and opportunities are gion. Nor should we use it as a pretext for being overlooked. Scarce resources are being government control or finance of schooling. ~~ misdirected because our knowledge is incom- Defenders of government schooling have plete. This is as true for education as for any- enlisted various economic arguments related thing else. to “market failure” to dispute the idea that What can we do to hasten the discovery and parents in a free market should ultimately correction of error? We already have a determine what educational services are method: entrepreneurship. What entrepre- offered. These arguments fail. Education neurs do is search the landscape for instances does not have the characteristics of a “pub- where resources are being under-used, that is, lic good.” One person’s consumption of a devoted to the production of goods and ser- given service can detract from another per- vices that consumers value less highly than son’s consumption, and nonpayers can be other things those resources might be devoted excluded. to. What lures entrepreneurs to discover those Nor does the positive-externality case suc- instances is profit. Nothing approaches its ceed. Education obviously does have spillover power to stimulate discovery. Profit accrues benefits, but that is not enough in economic when an alert entrepreneur, noticing what oth- theory to justify government action. You ers have overlooked, switches resources from would have to believe that the external bene- producing things consumers value less highly fits would cause education to be under- to producing things consumers value more consumed unless the government subsidized highly. it. No one has ever shown that. Nor could any- The application of this principle to educa- one. To believe that, you'd have to believe that tion should be obvious. Since we don’t know parents engage in the following reasoning: I'd today all that we may learn about educational like to buy X amount of education for my methods and objectives tomorrow, we need child, but since society will benefit by my entrepreneurship in education. Government child’s erudition without paying anything for isn’t up to the task. Bureaucracy is the oppo- it, ’ll buy less than X amount of education. site of enterprise. It stifles enterprise. Govern- Ridiculous, isn’t it? ment domination of education assures that the The argument that high-quality education entrepreneurial innovation and creativity we is intrinsically too expensive for a significant are accustomed to in, say, the computer indus- portion of the population to afford also fails. try will be missing from education. There is A free market that can saturate society with no good substitute for the decentralized, refrigerators, microwave ovens, washing spontaneous entrepreneurial process that full machines, and telephones—cellular and oth- privatization of education would stimulate. erwise—can surely produce good education But entrepreneurship has preconditions: free- for a mass society. The key is entrepreneur- dom and private property on both the supply ship. and demand sides. That means no government We think we know what education is and money. Asking for government finance is what methods work. And we do know some equivalent to the Founding Fathers’ asking things. This sense of certainty might encour- King George to finance the American Revolu- age us to think that education is best left to tion. He might have agreed—but it would government. But we shouldn’t be so presump- have been a very different revolution. tuous, or we could wind up like the nineteenth- Thus it is not only the case that the free century Patent Office official who said the market can provide education. We may con- office should be closed because everything clude further that only the free market should useful had been invented. provide education. UJ ===== PAGE 39 ===== IDEAS ON [IBERTY JUNE 2000 Economic Insecurity: Are We the Enemy? by Christopher Lingle great paradox of our time is that former shakers cannot match the power of the face- communist dictators win electoral credi- less masses. Power in competitive markets is bility and the approval of international always limited ultimately by the refusal of bankers by embracing the market while some consumers to pay higher prices for what they candidates in America win considerable perceive as lower quality products or when support and some elections by damning the preferences shift without warning. market. It is useful to understand what the market is In some eyes the global capital market is a and what it is not. Unfortunately it is difficult pernicious threat to global stability. Each new to make sense of the market in the context round of populist rhetoric implies that we are of an ongoing political debate that demonizes faced with a fundamental peril. Radical or it. Despite having weathered withering criti- revolutionary change is promoted to rid us of cisms and surviving real-world experiments the malevolence of the market and its driving with communism, the market economy force, competition. remains under assault. Arguments that blame markets for our woes fail to see that we are the targets. This is because markets are merely a summation of the results of actions arising from the myriad Many critiques of the market are deemed of decisions made by each of us every day. A credible even though beginning university full understanding of market processes indi- students could debunk most anti-market cates that if there is an enemy, it 1s us. hype after a few weeks in an introductory Some commentators describe markets as if economics course. It is understandable that they were the outcome of a conspiracy con- non-economists like Robert Reich or Pat cocted on Wall Street. However, it is more Buchanan can muddy the intellectual waters. accurate to describe markets as the outcome This confusion is worsened by the apostasy of of choices made on Main Street. Certainly the reputed economists with the prominence of choices of mutual fund managers and bond Lester Thurow or John Kenneth Galbraith, dealers are more prominent and better chron- who repeat ill-formed utterances about the icled. Yet these self-important movers and workings of the market. Similarly, pronounce- ments by renowned financiers like George Soros or Felix Rohatyn or Robert Rubin reveal Flimsy Critiques Christopher Lingle is an independent corporate con- : . : an expertise based on economi rtunism sultant and adjunct scholar of the Centre for Inde- p ¢ oppo pendent Studies in Sydney, Australia. He's the author mixed up with their own political orientation. of The Rise and Decline of the Asian Century. His Lt is little wonder the general public becomes e-mail address is clingle@ufm.edu.gt. confused when stock market mavens are igno- 39 ===== PAGE 40 ===== 40 IDEAS ON LIBERTY © JUNE 2000 rant of how their own success depends on the Markets require a set of certain supporting forces behind all market activities. institutions such as property rights and exten- If the market reflects human choice, then sive individual freedoms protected by an competition is at its heart. Competition is the independent judiciary under a rule of law. logical outcome of choices that drive eco- Under these arrangements, free people can nomic behavior. Contempt and condemnation pursue their life purposes within the context for market outcomes reflect an elitist view of of the market. In many ways, markets serve as the choices of the unwashed and ill-tutored. a civilizing agent. Those who accept such nonsense have taken the notion of “fallen man” a bit too far while being equipped with too little knowledge. It might be said that the market, like democracy, is the worst economic system available except Once accustomed to the interactions of the for all the others. market, people tend to develop a greater In the first instance, economics is best regard for and sense of trust in strangers, understood to be a study of exchange arising which itself represents a form of investment out of choices guided by the life purposes of in personal and corporate reputation. Transac- individuals. Second, it is these choices made tions based on trust are more inclusive than in the face of competition that constitute the purely personal relationships. market. Finally, exchanges generate mutual Markets inspire the development of a con- advantage for trading partners and leads to a tract culture where the spirit of compromise “positive-sum game” where all trading part- becomes part of human interaction. In such a ners gain. Too often, anti-market forces por- setting, equals are treated as equals just as tray international trade as a “zero-sum game,” unequals must also be treated as equals before where gains to one country come at the the law. Governments or large corporations expense of some others. should not receive special treatment in the Although prices and markets can be tem- courts over individual citizens, and domestic porarily distorted by government decree, they interests should not override those of foreign can never be eliminated. Markets operate claimants. Development of Trust whenever and wherever human beings act out In this sense, markets are a necessary their lives and whenever the setting is more underpinning for democracy’s success rather complicated than Robinson Crusoe’s. than a sufficient one. It is through the Several aspects of economic life are individualist-based institutions associated inescapable; as in other aspects of life, excep- with and arising from the market that people tions tend to prove the rule. These can be can exercise true self-ownership to pursue combined in a single simple sentence that their own chosen goals. appears as banal to professional economists Condemning markets ignores the human as it is considered evil by others. Self-serving content that lies behind them. Experiments actions taken by individuals in a competitive with communism show that legislating market setting provide benefits that spill over against self-interest can have disastrous to the entire community. It is also true that results. Instead, it is better to provide institu- there are spillovers of costs to other groups, tions that reward entrepreneurial actions so but the fact that individuals have continued to the overall community can benefit through rely on markets suggests that the spillover the wealth and opportunities created by the benefits dominate. market. 0 ===== PAGE 41 ===== IDEAS @ Economic History ON [IBERIY JUNE 2000 The Evolution of Capitalism by Jim Peron few centuries ago things looked pretty In The Future and Its Enemies, Virginia hopeless for Europe, at least according Postrel talks about how much more advanced to “common wisdom” now accepted in politi- the great Chinese empire was than European cal circles. The region was splintered among culture. Yet China shunned the dynamism of hundreds of local principalities with no unify- an evolving system. Postrel writes “that reac- ing government, no common currency, and no tionary ideals, technocratic administration common language. If today’s typical political and monopoly power converged to enforce scientist had had to guess where a system stability at the cost of stagnation. Even in its of market capitalism would have arisen, it is creative period, China’s dynamism was pri- doubtful he would have considered Europe a marily technological, not social, economic, or likely candidate. Instead China, with a unify- political; the government was both highly ing government and legal system, would have bureaucratic and absolutist. . . . The governing topped the list. philosophy was one of order, subordination, Yet capitalism did not arise in China’s and stasis. And like most bureaucracies, the structured environment. It was amid the per- mandarinate developed a strong interest in ceived political chaos of Europe that capital- protecting the status quo. The system became ism flourished. The very facets of medieval reinforcing—a sterile verge between interests European life that today would be frowned on and ideology.” were necessary for the rise of capitalism. It More important than the regime’s hostility evolved because it was free to evolve; its rules to innovation was its monopoly on power. and principles were discovered, not imposed. Would-be Chinese innovators had no outlet. And with the rise of capitalism, Europeans The Chinese empire encompassed the equiva- saw the emergence of classical-liberal politi- lent of a continent, leaving no havens of cre- cal theories and concepts of human rights. ativity nearby. And because Chinese invention The centralized system of China, in com- had always occurred under state auspices, parison, did not allow such freedom, and thus there were no private enterprises to provide short-circuited the discovery process. As money and encouragement once the govern- David Landes writes in The Wealth and Pover- ment stopped supporting innovation. State ty of Nations, what the Chinese state “did not subsidy and hence progress itself could be take, it oversaw, regulated and repressed.”! turned off like a faucet. Jim Peron is the author of Exploding Population . . . . Myths (Heartland Institute). He is executive director Liberation of Civil Society of the Institute for Liberal Values in Johannesburg, oo South Africa, and can be reached at peron@ In The Origins of Capitalism Jean Baechler global.co.za. Copyright © 2000 by Jim Peron argues, “The first condition for the maximiza- 41 ===== PAGE 42 ===== 42 IDEAS ON LIBERTY ¢ JUNE 2000 tion of economic efficiency is the liberation of right to negotiate as well as petition—with civil society with respect to the state. . . . The gains to the freedom and security of econom- expansion of capitalism owes its origins ic activity.’ and raison d’€tre to political anarchy.”3 Histo- The involuntary devolution of power in rian Ralph Raico says that Europe benefited Europe encouraged the social evolution that because it was “radically decentralized” Postrel discusses. In every culture there unlike China and India. “Instead of experi- always have been visionaries who see a poten- encing the hegemony of a universal empire,” tial for advancement and betterment. Each Raico writes, “Europe developed into a mosa- one of them, concentrating on his own wish- ic of kingdoms, principalities, city-states, es, in uncoordinated cooperation transforms ecclesiastical domains, and other political and expands human potential. Landes notes entities.” that “where authority is divided, dissent flour- The great modern European nations like ishes. This may be bad news for certainty and France, Germany, and Italy were broken into conformity, but it is surely good for the spirit hundreds of smaller political jurisdictions. and popular initiatives.” The citizen of a German principality could The conservative, in the true sense of the move to another German political jurisdiction word, fears this change. Centralized power without experiencing a major culture shock. and a regulated economy are “conservative” The only things that changed were the politi- means to prevent the dynamism and evolution cal policies. of a free society. The truly radical movement Because of this mosaic, economic policies of the time was economic individualism. And were localized. Areas experimented with dif- many observers have rightfully seen socialism ferent systems, and while some retained the as a “conservative” counterrevolution that feudal top-down system of control, others attempted to preserve the feudal order. started freeing up the economy. If taxes and regulations in one kingdom became oppres- peg otion Against Individualism sive, people could move to a neighboring one. The difficulty in preventing such migration Social reform movements formed in acted as a check on the power to tax. Regions response to individualism. In A General His- that followed more liberal policies prospered tory of Socialism and Social Struggle Max over those that didn’t. This is known as the Beer writes that these movements advocated demonstration effect. “The ‘demonstration “a modernized medieval order.” Frightened by effect’ that has been a constant element in change, the reformers “could not accept ideas European progress—and which could exist and demands and economic practices which precisely because Europe was a decentralized were based on individual freedom . . . [which system of competing jurisdictions—helped placed] egoism and self-interest before subor- spread the liberal politics that brought pros- dination, commonality and social solidarity.8 perity to the towns that first ventured to exper- W. D. P. Bliss, a founding father of Ameri- iment with them,” Raico writes.5 can socialism, in an article for the New Ency- Landes elaborates: “European rulers and clopedia of Social Reform, spoke glowingly enterprising lords who sought to grow rev- of the guild system of medieval Europe. He enues . . . had to attract participants by the admitted, “This was paternal. Often socialis- grant of franchises, freedoms, and privi- tic in the extreme. It was as we have seen leges—in short, by making deals. They had to cruel—but it was with a just cruelty.” E. R. A. persuade them to come. . . . These exemptions Seligman, a prominent economist who helped from material burdens and grants of econom- found the American Economic Association, ic privilege, moreover, often led to political approvingly notes that the guild era “was a concessions and self-government. Here the period of supremacy of labor over capital, and initiative came from below, and this too was the master worked beside the artisan.” an essentially European pattern. Implicit in Thomas Davidson, a founder of the British it was a sense of rights and contract—the Fabian Society who later in life acknowledged ===== PAGE 43 ===== THE EVOLUTION OF CAPITALISM 43 the superiority of individualism and private tural and religious values with western property, wrote, “Feudalism was socialism; Europe. “When pagan Russia entered the that is often forgotten.” No wonder Walter society of Christian civilization,” Barbara Lippmann said that collectivism “is reac- Ward writes in Faith and Freedom, “the mis- tionary in the exact sense of the word.”10 sionary task was accomplished by the monks We are accustomed to think of dissent in and priests of Eastern Orthodoxy. Absolutist ideological or religious terms only. But it cov- traditions of government were transmitted to ers a wide range of human activity. Dissent in the new society at the same time. The Russian Europe did challenge traditional political state, which began to be reformed in Muscovy arrangements and theological doctrines. But it after the interregnum of Tartar invasion, grew also led to a questioning of scientific and from the fusion of two tyrannical traditions of technological positions. With the Reforma- government—Orthodox absolutism and Tar- tion and the end of the Catholic monopoly on tar despotism.”14 theology, the human mind was set free to pon- Ward notes that “the total collapse of der every aspect of human existence. Innova- Roman authority” was the reason western tors came to fresh, often radical conclusions. Europe evolved toward liberalism while east- The result was a new technological thinking ern Europe didn’t. “In Byzantium . . . bureau- that exploded into the Industrial Revolution. cracy remained intact. . . . But in the West the “The economic expansion of medieval barbarians broke up the old order.”!5 Europe was thus promoted by a succession of “Europe’s great good fortune lay in the fall organizational innovations and adaptations,” of Rome and the weakness and division that Landes writes, “most of them initiated from ensured,” Landes writes.!¢ Thus, ironically, below and diffused by example.”!! He calls the barbarians who invaded western Europe this “The Invention of Invention.” were unwittingly responsible for the develop- The demonstration effect took place in spe- ment of capitalism. [] cific locations with specific policies. Holland 1. David Landes, The Wealth and Poverty of Nations (London: is one example. K.W. Swart writes that “the Little, Brown and Company, 1998), p. 35. Dutch Republic was unique in permitting an recs, 1958)» Postel, The Future and Its Enemies (New York: Free unprecedented degree of freedom in the fields 3. Jean Baechler, The Origins of Capitalism (Oxford, England: of religion, trade and politics. te In the cyes a Rh Rico, “TF European Miracle’” in The Collapse of of contemporaries it was this combination of Development Planning, ed. Peter Boettke (New York: New York freedom and economic predominance that Uys Bridal p. 41. constituted the true miracle of the Dutch 6. Landes, p. 37. Republic.” According to Raico, Holland ; Mon Bios A General History of Socialism and Social Strug- “emerged itself as a decentralized polity, gles, vol.2 (New York: Russell & Russell, 1957), pp. 88-89. : : SP _ 9. William Knight, ed., Memorials of Thomas Davidson (Boston: without a king or court—a ‘headless com- & Co. 1907 po. 142.43, monwealth’ that combined secure property 10. Walter Lippmann, The Good Society (Boston: Little, Brown rights, the rule of law, religious toleration, and % o- eon intellectual freedom with a degree of prosper- 12. K.W. Swart, The Miracle of the Dutch Republic as Seen in the ity that amounted to an early modern SO ico 47, (London: H. K. Lewis, 1969), p. 20. Wirtschafiswunder.”13 14. Barbara Ward, Faith and Freedom (London: Hamish Hamil- Capitalism did not appear in Russia, RY 3859. although, unlike China, it shared similar cul- ~~ 16. Landes, p. 37. ===== PAGE 44 ===== Economic Notions by Dwight R. Lee ¥ Economics It’s the Margin that Counts FE conomists, like everyone, have opinions machines would be wonderful things, and it’s about how the world should be. And it too bad everyone doesn’t have one. But the would be disingenuous to claim that econo- “defeatist” attitudes of physicists discourage mists never let their opinions influence their work on them. conclusions and recommendations. But the One of the most useful economic concepts power of economics is in fundamental con- is marginalism—the effect of incremental, or cepts that prevent economists from letting small, changes. Marginalism shows how eco- their imaginations obscure reality. They may nomic reasoning allows us to accomplish wish that scarcity didn’t exist, that agonizing more by accepting limits on what can be tradeoffs could be avoided, that people would accomplished—by focusing on marginal subordinate their private interests to the pub- (some will say mundane) adjustments to make lic interest, or that world peace and global things better, rather than on more heroic cooperation could be achieved by all joining attempts to solve problems totally and com- hands and singing “We Are the World.” But pletely. It also shows that what many people economists don’t let such fantasies pollute see as objectionable outcomes and actions are their analysis because they take seriously actually reasonable accommodations to scarcity, opportunity cost, self-interest, scarcity and that attempts to “correct” them imperfect knowledge, market prices as neces- are harmful. I illustrate marginalism with two sary for social cooperation, and economic examples. In following months I shall discuss failure as necessary for economic success. how failure to understand marginalism This attachment to reality strikes some as reduces the good we can do, and often ends defeatist, as too hasty to dismiss proposals for up being deadly. making the world a better place. There is no denying that economists dismiss many pro- . posals to improve the world. But economists Diamonds and Water, see their realism as essential for genuine Wvrestlers and Nurses improvements. As Nobel-Prize winning econ- omist F. A. Hayek observed, “For it has always been the recognition of the limits of the possible which has enabled man to make full use of his powers.” Perpetual-motion We have all heard arguments like these: Something 1s wrong with the economy when professional wrestlers are paid a lot more than nurses. Food is far more important than golf, so we are making a big mistake by converting so much prime agricultural land to golf cours- Dwight Lee is Ramsey Professor at the Terry College €S- If you are going to do a job, do it as well of Business, University of Georgia, and an adjunct fellow at the Center for the Study of American Busi- *F.A. Hayek, Law, Legislation and Liberty, Vol. 3: Rules and ness at Washington University in St. Louis. Order (Chicago: University of Chicago Press, 1973), p. 8. 44 ===== PAGE 45 ===== 45 as you possibly can. Most people enjoy their fessional wrestlers’ earning a lot more than work and don’t have to be bribed with bonus- nurses, although some consider it objection- es and merit pay to get them to perform well. able. But what some really see as objection- Some things, such as human life, are simply able in the large ratio of wrestlers’ to nurses’ too valuable to put a price on. earnings is that people with “disagreeable” Each of these sounds plausible. But all of preferences have the freedom to communicate them are flawed because they ignore the those preferences through market prices. importance of marginal considerations, and if There is nothing wrong with trying to reduce we acted on them we would end up reducing the earnings gap between different occupa- the good that can be accomplished. tions by trying to change peoples’ prefer- For years economists and others were per- ences. But if people try, as some do, to reduce plexed that the price of diamonds is far earning gaps with government controls over greater than the price of water, even though wages and salaries, they are trying to distort water is far more valuable than diamonds. the price communication that benefits us all. This diamond-water paradox wasn’t resolved until the 1870s when the Austrian economist Carl Menger and the British economist William Jevons independently recognized the Government could mandate higher salaries difference between marginal value and total for nurses, for example. This would send a value. Price reflects the value people place on signal that the marginal value people receive one more unit of something (its marginal from nurses has increased, and more people value), not the value of all of it (its total should train to become nurses. Few profes- value). The total value of water is obviously sional wrestlers will want to shift into nurs- much greater than the total value of dia- ing, but many other people will. Unfortunate- monds—we would pay orders of magnitude ly, the higher salary communicates the wrong more to avoid living in a world without water information. While telling more people to than we would to avoid living in a world with- become nurses, the higher salaries are telling out diamonds. But because water is so plenti- consumers that the marginal cost of nurses is ful (except in unusual circumstances), the greater than their marginal value, and so amount people are willing to pay for one more fewer should be employed. The result would gallon is close to zero—the marginal value of be that few newly trained nurses will find water 1s low. On the other hand, diamonds are jobs, some practicing nurses will lose their so rare that people are willing to pay thou- jobs, and consumers will have fewer nurses Unintended Consequences sands of dollars for one more. than they want at market salaries, that is, This brings us to wrestlers and nurses. salaries that reflect their marginal value. Because so few have the physical attributes to Because people fail to distinguish between satisfy the demand for wrestling perfor- marginal value and total value, they believe mances, people are willing to pay a lot to nurses (and those in many other occupations) attract one more person with those attributes are suffering an injustice and recommend into the ring. Many more have the attributes to solutions that harm everyone, particularly satisfy our demand for nurses, and so people nurses. are willing to pay a lot less to attract one more Several more columns will be required to person into nursing. Although the total value adequately explain the concept of marginal- of nurses is far greater than the total value of ism and to provide examples of the mistakes wrestlers, the marginal value of nurses is far people make when they confuse marginal less. And it is the marginal value of people in value and total value. In the next column I an occupation, not total value, that is impor- shall use marginalism to provide comfort to tant in determining salaries in that occupation. those who worry that we are running out of So there is nothing remarkable about pro- agricultural land. OJ ===== PAGE 46 ===== IDEAS ON [IBERTY JUNE 2000 Punishing the Many by Russell Madden Aen who has observed children will If good and evil are to mean anything, our recognize that, ironically, they often moral autonomy as beings with the capacity demonstrate a more stringent and uncompro- for rational behavior must be accepted. Any mising sense of justice than the adults around other basis for determining who is responsible them. A small child who must divide a piece for destructive or constructive outcomes leads of cake, for example, will be excruciatingly to the kind of confused legal and political precise in cutting it lest the “chooser” glom realm we labor under today. onto a larger slice. Whether the issue is whose This individualistic conception of justice turn it is to clear the dishes or take out the did not always hold sway. Indeed, collective trash, or who broke that lamp, young people guilt has a long history. Throughout the past, appeal to an almost innate sense of propriety whole families—sometimes entire cities— in demanding they be treated fairly. were held responsible for what fathers or kings This tendency to rigor is perhaps even more might have done. The average citizen of evident when parents must mete out punish- ancient Carthage would have had little influ- ments and rewards. To be falsely penalized for ence on the policies of his leaders. Neverthe- something they did not do will stir up the less, he paid the price of Rome’s disfavor when loudest and shrillest of complaints among the his home was razed and the ground salted. innocent offspring. Unfortunately too many Our Founding Fathers recognized the inher- adults mildly, meekly, and silently accept such ent injustice in accepting the doctrine of visit- mistreatment when dealing with social and ing unto the sons the sins of the father. Article political issues. III of the Constitution says that “no Attainder The essence of a moral view of justice of Treason shall work Corruption of Blood.” entails a recognition that only individuals can In other words, the family of a traitor cannot be held accountable for the right and wrong be punished simply because the members are they do. Because each of us possesses free related to the perpetrator. will and thus the capacity to make choices ~~ The bulk of today’s legal code, however, is among alternatives, when we act on our best rife with violations of this principle. The gen- (or sometimes worst) judgment, we and we eral collectivization of our culture in the alone should reap the benefits of selecting twentieth century permeates every crack and wisely and appropriately; and we and we crevice of our relationship with the law. Inco- alone should suffer the negative consequences herently, our politicians hold individual citi- of picking hastily, foolishly, or ignorantly. zens blameless for many of their deficiencies (being poor, homeless, drug- or alcohol- Russell Madden teaches at Mt. Mercy College in besotted, sexually promiscuous, or abysmally Cedar Rapids, Iowa. ignorant), while pointing a narrow finger at us 46 ===== PAGE 47 ===== 47 all. “Society” does not provide enough (whether for sex, race, ethnic background, resources or understanding or opportunities. age, or disability) make us out to be bigots But “society” is only an abstraction, a way held in check only by the good graces of the of describing the relationships, actions, and bureaucrats. beliefs of individuals. Tens of thousands of gun control laws treat In addition to supplying a (poor) rationale peaceful, rights-respecting individuals as for the plethora of social programs dragging criminals held at bay only because they must us down, from Social Security and Medicare jump through arbitrary, unconstitutional hoops to business subsidies and disaster relief, the that disarm and endanger millions while leav- notion of collective responsibility, obligation, ing the field unchallenged to the rapists, rob- or guilt obliterates proper understanding and bers, and burglars. application of justice and equity by punishing The rule of law has morphed into the rule the innocent majority for the transgressions of of men. The Constitution has been turned on the criminal few. its head. Instead of the individual being at the Most regulations, laws, and prohibitions pinnacle of the pyramid, he is crushed by the are propounded by pointing out that abuses weight of the masses who take precedence in have occurred in the past. Thus because cer- their anonymity over his unique life and per- tain people have engaged in improper behav- sonality. Instead of the individual being able ior, everyone must be presumed to be a poten- to do anything not prohibited and the govern- tial criminal and have his choices and actions ment only that which is permitted, in modern inspected, constrained, or curtailed. Such society the state has virtual carte blanche to legal machinations act as a kind of prior chase after every whim. The true, fundamen- restraint. They sanction the notion that the tal component of our culture—a single real, agents of the government must, in essence, breathing person—is bound and chained, able punish citizens for potential improprieties to choose only from a shorter and shorter list beforehand by means of dictates, fees, or of what is allowed him as a privilege, not a restrictions on what they do and how they right. do it. The very notion of rights has been both But an implicit assumption of guilt— bloated and choked. On the one hand, “rights” before a person has even acted—violates the to health care, housing, food, education, and constitutionally recognized principle that one on and on are manufactured out of thin air. On can be punished only after one has actually the other hand, property rights—the founda- done something wrong. Even then, the legal tion for implementing the right to your own system must assume the innocence of the existence—are suppressed by the rampant accused until proven guilty. To make the moral inflation of bogus rights. Coupled with accused prove he is innocent—as most regu- both malign neglect and direct attacks on lations on business and individuals in effect property, we drift without legal anchor or do—is rank injustice. To add insult to the direction. injury, many of the laws strangling us today To restore freedom, we must reclaim the are based on some group’s notion of morality moral initiative. We must reconsecrate respect regardless of whether or not offenders have for justice as applicable to the individual, not actually violated anyone’s rights. (The con- the collective. We must hold as sacrosanct our sensual “crimes” related to prostitution, drug right to earn and hold property, to direct its use, and gambling come to mind.) use, and to wield it as a shield against male- Affirmative action policies punish those factors. We must proclaim our right as free, who were never racist for the sins of those autonomous, and sovereign individuals to do long dead, an indirect “corruption of blood.” what we want, say what we will, and build our Business regulations assume that only state lives without the permission, sanction, or scrutiny prevents all entrepreneurs from being approval of any group. We should and must polluters, swindlers, and cheaters. Sexual never be punished for the transgressions of harassment and anti-discrimination laws others. Cl ===== PAGE 48 ===== IDEAS ON [IBERTY The Golden Rule and the Free Market by William H. Peterson ow tantalizing to find that virtually all on the campaign trail in New York State con- the world’s major religions exalt the demning high prescription prices. And there’s Golden Rule in one way or another: “globophobia”—Mexican president Ernesto Zedillo’s neat word for the fear of world mar- Christianity: All things whatsoever ye [et integration. And there’s U.S. Judge would that men should do to you, do ye even Thomas Penfield Jackson ruling that software 50 to them —Matthew 7:12 giant Microsoft is an anti-consumer “monop- Judaism: What is hateful to you, do not Jy» Those are the sorts of things that com- to your fellow man.—Talmud, Shabbat 31a pelled Ludwig von Mises in 1956 to pen The Islam: No one of you is a believer until Anti-Capitalistic Mentality. he desires for his brother that which he The long and short of the Golden Rule is desires for himself.—Koran that, for all its common sense, it runs up Buddhism: Hurt not others in ways that 404inst a cultural wall when it comes to the you yourself would find hurtful. —Udanavar- orld of business. Oh, all right, business ga 5:18 has a place in the big scheme of things, but Confucianism: Is there one maxim which aissez-faire economics is simply bad; uncon- ought to be acted upon throughout one’s trained business activity will never do; and whole life? Surely it is the maxim of loving- government regulation such as OSHA and kindness: Do not unto others what you would apitrust enforcement has to discipline way- not have them do unto you.—Analects 15:23 ard commerce. Of course. Sadly, the history of such anticommerce sentiments is as long as the history of the Golden Rule. Sophocles, for example, com- plained in Antigone (c. 450 B.C.), “Money lays waste cities; it sets men to roaming from home; it seduces and corrupts honest men and virtue to baseness; it teaches villainy and impiety.” Plato groused in The Republic (c. 390 B.C.), “Wealth is the parent of luxury and indolence, and poverty of meanness and viciousness, and both of discontent.” Paul in William Peterson is a Heritage Foundation adjunct his first epistle to Timothy (3:8) complained scholar and Distinguished Lundy Professor Emer- of greediness and “filthy lucre.” Later in the itus at Campbell University, Buies Creek, North Same epistle he protested that “The love of Carolina. money is the root of all evil.” 48 Yet how equally curious to find that this + near universality of the Golden Rule doesn’t always mean like exaltation in its natural expression in trade, commerce, business— that is, in the free market. Look: A not uncommon campus joke today is: “Business ethics—isn’t that an oxymoron?” And there’s Oliver Stone’s character Gordon Gekko in the movie Wall Street proclaiming that “greed is good.” And there’s First Lady Hillary Clinton ===== PAGE 49 ===== 49 What to do? Let me respond: Educate, edu- people poor. Mises adds to this line of reason- cate, educate. ing by reminding us that inequality of income Educate just what? Educate, first, that and wealth is but the result of previous con- “greed” denoting narrow-minded cupidity sumer votes, that to stay successful entrepre- and covetousness is often a pejorative for neurs must continue to serve best the innate self-interest, that self-interest is in fact demands of the very demanding and often an integral part of human nature, a point cap- fickle consumers. tured in the very title of the Mises master- Finally, educate that the Golden Rule reach- work, Human Action (1949). Indeed, here es magnificent critical mass in the global mar- Mises introduces the word “praxeology” as ketplace, that it tends to enlist peoples and the science of human action, saying the “ulti- private-property rights everywhere to engage mate end of action is always the satisfaction in “World Peace Through World Trade” (a of some desires of the acting man” (emphasis motto of IBM), that buyers and sellers, con- added). Too, Nobel-Prize-winning economist sumers and producers—all broadly embodied Milton Friedman said self-interest serves both in one and the same person, by the way, if in money-grubbing misers and the “great Saints different modes at different times and differ- of history.” Friedman continued, “Every indi- ent places—serve others to serve themselves, vidual serves his own private interest,” adding that they say in effect: “Let me buy/sell with that the “private interest is whatever it is that you in order that you will buy/sell with me.” drives an individual” (Encounter, November Thus does the marketplace become a vast 1976). Or as the late Nobel economist George vehicle for “social cooperation,” in the phrase Stigler reflected, “Man is eternally a utility- of Mises, or for “spontaneous order,” in the maximizer—in his home, in his office (be it language of F. A. Hayek. And thus is the mar- public or private), in his church, in his scien- ket, unlike the state, strictly voluntary and tific work—in short, everywhere” (Tanner self-regulating, with high prices repelling Lectures, Harvard University, April 1980). demand and encouraging supply, and low prices repelling supply and encouraging demand. It spurs a spirit of service and com- munity, of contract and duty, of self-account- Educate further that the real bosses turning ability, self-responsibility, and future-orienta- the wheels of industry and commerce are not tion; it nurtures saving, entrepreneurship, and the captains of industry, nor tycoons and invention to boost capital creation, resource bankers bestriding Wall Street, nor Matthew optimization, world job productivity, and liv- Josephson’s “robber barons” of yore, but the ing standards. And all without the dead sovereign consumers. These individuals, with weight of party and politics. No wonder their life-and-death power of the purse in the Hayek called the marketplace a “marvel.” marketplace, vote poor people rich and rich I call it the Golden Rule in action. OJ The Sovereign Consumer ===== PAGE 50 ===== Economics on Trial by Mark Skousen IDEAS ON [IBERTY June 2000 In Defense of the Rich “The substantial canons of the leisure-class scheme of life are a conspicuous waste of time and substance and a withdrawal from the industrial process.” —THORSTEIN VEBLEN! ver since Thorstein Veblen wrote The * They are frugal. They prepare shopping Theory of the Leisure Class in 1899, lists, resole their shoes, and save a lot of wealthy Americans have been under assault. money. But they do not live Spartan lives. Veblen had nothing good to say about the so- » Ninety-seven percent are homeowners; called idle rich and robber barons—they were they tend to live in fine homes in older neigh- predatory, wasteful, and ostentatious.2 Politi- borhoods. (Only 27 percent have ever built a cians and Hollywood producers have followed custom home.) up by portraying the rich as big spenders who « Ninety-two percent are married; only 2 per- use drugs, engage in white-collar crime, avoid cent are currently divorced. Millionaire couples taxes, and dump their original mates in favor have less than one-third the divorce rate of non- of trophy wives. millionaire couples. The typical couple in the Now a new study by Thomas J. Stanley, for- millionaire group has been married for 28 mer professor of marketing at Georgia State years and has three children. Nearly 50 percent University, shows that this pejorative image of of the wives do not work outside the home. wealthy Americans is profoundly mistaken. » Most are one-generation millionaires who According to his new book, The Millionaire became wealthy as business owners or execu- Mind, millionaires are model citizens. Here tives; they did not inherit wealth. are the results of his survey of over 1,000 * Almost all are well educated: 90 percent millionaires: are college graduates and 52 percent hold advanced degrees. However, few graduated * They live far below their means and have top in their class; most were “B” students. little or no debt. Most pay off their credit They learned two lessons from college: disci- cards every month; 40 percent have no home pline and tenacity. mortgage at all. e Most live balanced lives; they are not EE workaholics: 93 percent listed socializing Mark Skousen (htip:/fwww.mskousen.com; mskousen@ with family members as their number one aol.com) is an economist at Rollins College, Depart- activity; 45 percent play golf. ment of Economics, Winter Park, FL 32789, a Forbes . columnist, and editor of Forecasts & Strategies. His * Fifty-two percent attend church at least textbook, Economic Logic, is now available from OnNcea month, 37 percent consider themselves FEE. deeply religious. 50 ===== PAGE 51 ===== 51 They share five basic ingredients to suc- The existence of a wealthy class provides cess: integrity, discipline, social skills, a sup- numerous benefits to the entire economy: portive spouse, and hard work. « Sixty-four percent contribute heavily to » Wealthy people are the first to buy new charity, church, and community activities. consumer products. They are the only ones e Their number one worry: taxes! Their who can afford to buy automobiles, comput- average annual federal tax bill: $300,000. The ers, cell phones, and other technological top one-tenth of 1 percent of U.S. income breakthroughs when they are first introduced earners pays 14.7 percent of all income taxes as high-priced prototypes. The profits from collected!3 the wealthy consumers are used to expand * “Not one millionaire had anything nice to operations and cut prices so that eventually say about gambling” But 33 percent have everyone can afford them. As Andrew played the lottery at least once during the year! Carnegie said, “Capitalism is about turning luxuries into necessities.” Inequality of Thus we see how the upper-income fami- income makes this possible. lies of this nation are not the ones contribut- The wealthy class is the main source for ing to crime, welfare, divorce, child abuse, investment capital. The rich provide the cap- and a spendthrift society. But they are paying ital base for investing in new technologies, a lot of taxes and making a lot of contribu- improved production processes, and job tions to solve these social problems. creation. Without the wealthy, there would be little surplus wealth for an expanding Low-Profile Living economy. e The rich help finance higher education, Stanley is famous for his previous best- libraries, churches, galleries, and charitable seller, The Millionaire Next Door (Pocket organizations. Books, 1998). His research revealed that most millionaires in America appear ordinary; they Instead of bashing the rich, let’s salute own modest homes and drive older cars. But them. If indeed the wealthy are such good cit- they work hard, save a lot, and make their own izens, as Stanley’s work suggests, we should investment decisions. In other words, the guy aim not to impoverish the rich, but rather to living next door may be a millionaire. enrich the poor. [] Although Stanley did not cover this issue, I've also seen studies indicating that higher- 1. Thorstein Veblen, The Theory of the Leisure Class (New York: income individuals live, on average, five tO Penguin Books, 1994 {1899]), p. 334. (76 years) and enjoy better health, fitness, and (Princeton, N.J.: Princeton University Press, 1999 [1978]). quality of life. They aren’t the ones causing Andeews Mienteel, 2000) 5. 375, | onaire Mind (Kansas City: Medicare to go bankrupt. 4. Ibid,, p. 11. 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 52 ===== Have you heard the latest from Washington? These days it seems as if everybody is crying for the truth. But how often do you actually feel that you can believe what you hear or read? If puréed truth and strained journalism makes you want to scream, we'd like to invite you to subscribe to The Washington Times National Weekly Edition, the only nationally circulated newspaper in the country with the courage and conviction to cover the news honestly. Every week, we'll bring you a fresh, honest, unbiased look at the people and events that shape the news in Washington D.C. and around the world. No liberal spin. No hidden agenda. Just vigorous, unapologetic journalism and clean, crisp writing. Anything less would be downright childish. ) es Call today and order 4 weeks of The Washington Times National Edifion 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: Tbe Washington Times NWE. Clip and mail with payment to: PO Box 96601, Washington, DC 20090 For lightning-fast deliver y, call 1-800-363-9118 (mention express code: 2055) ===== PAGE 53 ===== 53 debits are shockingly numerous: commitments BOOKS to central as well as western Europe, the Balkans, the Middle East and Persian Gulf, a A Republic, Not An Empire: variety of Asian states, and Latin America. Washington is taking on those many risks i even though in none of them, observes by Patrick Buchanan Buchanan, “would any vital U.S. interest be at Regnery © 1999 © 437 pages © $29.95 stake to justify sending a large American army to fight or to risk nuclear war” Washington should, he contends, conduct “a ‘bottom-up’ review of all of its commitments.” “rhe year 1989 was the American Generally, Buchanan’s arguments are high- moment,” writes Patrick Buchanan in 4 ly persuasive. Intervention not only tends to Republic, Not An Empire. The United States be costly in the short term, but also is usually was supreme around the globe. “But such disastrous in the long term. There was, he moments never last,” he continues. Rather notes, “not a trace of national interest” than leaving others with no choice but to involved in World War I. Either a German vic- break U.S. power, Buchanan writes, “It is time tory or a compromise peace, the most likely to let go of empire.” occurrence in the absence of America’s entry, A Republic, Not An Empire is a genuinely would not have endangered the United States. important book. Although Buchanan has However, Washington’s involvement allowed gained greatest attention for his economic the allies to impose a one-sided peace, with- nationalism, he is probably America’s most out which there would have been no Hitler. visible proponent of a more nonintervention- And, writes Buchanan, “There might have ist foreign policy. In this book, the author pre- been no Holocaust, no quarter-century reign sents his vision of a foreign policy fit for a of Stalin, no Cold War.” constitutional republic. Alas, an economic nationalist to the end, It’s a message that deserves wide dissemi- Buchanan would discard free trade along with nation because the stakes are high. This cen- corporate welfare (Export-Import Bank), tury, he notes, has witnessed the collapse subsidies for collectivist autocracies (Interna- of five great Western empires: Austro- tional Monetary Fund), and world govern- Hungarian, British, French, German, and ment (“war crimes” tribunals). Unfortunately, Russian. Today “America survives as the sole he confuses voluntary individual action and superpower because it stayed out of the coercive state action. It is protectionism, not slaughter pens until the other great powers free trade, that relies on the latter, and thus had fought themselves near to death” That fits most comfortably with other globalist mixture of good fortune and sense is at risk, institutions. however. Buchanan warns that “today, Ameri- Buchanan’s proposed foreign policy, one ca’s leaders are reenacting every folly that relying on a militarily strong America pre- brought these great powers to ruin—from pared to defend its sovereignty and vital inter- arrogance and hubris, to assertions of global ests, but unwilling to engage in fruitless and hegemony, to imperial overstretch, to trum- costly international crusades, is the only peting new ‘crusades,’ to handing out war appropriate policy for a republic. Neverthe- guarantees to regions and countries where less, crafting a more restrained foreign policy, Americans have never fought before.” he concludes, would leave America “serene The fundamental question of a foreign poli- and secure,” and perhaps cause men looking cy is: for what should young Americans be back a century hence to conclude “that, yes, expected to fight and die? Today's strategic the twenty-first century, too, was an American “balance sheet,” as Buchanan refers to it, Century.” 0] should be positive, given America’s status as Doug Bandow is a monthly columnist for Ideas on the world’s sole superpower. However, the Liberty. Reclaiming America’s Destiny Reviewed by Doug Bandow ===== PAGE 54 ===== 54 IDEAS ON LIBERTY ¢ JUNE 2000 for lock-in. During the 1930s, a competing system—the Dvorak Simplified Keyboard— by Stan Liebowitz and was developed and was, according to the Stephen Margolis story, far more efficient. But few would learn Independent Institute ® 1999 © 304 pages ® $29.95 Dvorak because no typewriters were made with that arrangement, and no typewriters Reviewed by James L. Gattuso were made because few would learn it. Its failure to become the prevailing keyboard rtemus Ward once remarked that the Indicates that the market doesn’t work, many problem with the world isn’t what we economists say. oo don’t know: “It’s the things we know that just Nonsense, say Liebowitz and Margolis in ain’t so.” That observation aptly describes the their classic article, “The Fable of the Keys,” current debate over standards and competition Which appears in this volume. No reputable in the high-tech field. Everyone knows that in Study exists showing that Dvorak was better. video recorders Beta was better than VHS, but All evidence suggests that QWERTY is as that VHS somehow won an illegitimate victo- good as or better than its alternatives. Yet the ry in the marketplace. And who doesn’t have legend dies hard. In the ten years since their a Macintosh fan for a friend who knows Macs research first appeared, no one has rebutted it, are better than PCs, but lost out because of a Yet QWERTY is still routinely, and wrongly, market failure. cited as a “market failure.” Going beyond In Winners, Losers and Microsoft, econo- QWERTY, Liebowitz and Margolis examine mists Stan Liebowitz and Stephen Margolis several similar—and more recent—alleged put the lie to these long-standing high-tech Cases of the lock-in effect, including the Beta- legends. Sifting through the historical record, YHS and Mac-IBM contests. In each case, they find that the best product is, after all, usu- they find that quality factors explain the suc- ally the winner. This well-researched, fact- cesses more easily than path dependence or filled volume has obvious implications for the other “economic things that go bump in the ongoing prosecution of Microsoft, as well as night.” other attempts to regulate high-tech network- At the core of this volume is an empirical based firms. Though written before the analysis of competition in software applica- release of Judge Thomas Penfield Jacksons tions. Specifically, the authors look at six decision, Liebowitz and Margolis thoroughly applications markets: spreadsheets, word undercut the economic basis of the judges Processors, personal finance, desktop publish- conclusion. ing, browsers, and online services. Is there The primary target of the book is the eco- any evidence, they ask, of lock-in in software? nomic theory of “path dependence,” or “lock- Or are market shares determined by product in,” under which some (including Judge Jack- quality? Do Microsoft products get an unfair son) argue that inferior products can sur- leg up? vive—and thrive—because consumers are But how can one empirically measure prod- locked in to their use. Each individual con- uct quality? Here the authors come up with a sumer may want to move to a competing Creative approach: they use trade magazine product, but is unable to do so because of fear reviews of each product to judge how each that other consumers would not also make the fared against its rivals over time. The results change. The classic (though far from high- Showed no evidence of lock-in: time and tech) example of path dependence has long 28ain, products rated more highly push out been the typewriter keyboard arrangement market incumbents—Excel over Lotus, Word now in use (known as “QWERTY,” from the OVer WordPerfect, AOL over CompuServe. first five letters on the second row). QWERTY Is Bill Gates leveraging his Windows mar- was developed for the typewriters of the nine- Ket power to give Microsoft applications an teenth century and according to popular myth unfair edge? No, say the numbers. Microsoft would have been replaced long ago were it not products that dominate are those rated higher. Winners, Losers and Microsoft ===== PAGE 55 ===== Books 55 Those that lose the quality battle—such as voluntarily supported the education of south- Microsoft Money—do not dominate. More- ern blacks when government support was over, the evidence shows that Microsoft’s suc- almost entirely absent. That was the good cess isn’t always based on its Windows home- news. field advantage: many of its applications suc- The book also gives the bad news—how cesses have come first in Mac applications, that support was gradually shifted from inde- where Microsoft has no such advantage. pendent schools for blacks to the promotion Importantly for the Microsoft case, the study of public education for them, which would of also finds that Microsoft Internet Explorer’s course be under the control of the white polit- gains against Netscape Navigator can also be ical establishment. That tragic shift was explained by quality differentials. brought about by “professional” philanthrop- Liebowitz and Margolis do find one clear ic managers who pushed a socialistic agenda effect of Microsoft’s involvement in a market. financed by people who for the most part Rather than increase prices, as Judge Jackson hated socialism. (That problem is discussed in would have one believe, markets with a Martin Morse Wooster’s The Great Philan- Microsoft presence have actually seen prices thropists and the Problem of Donor Intent, decline four times as fast as those without a which I reviewed in the October 1999 issue.) Microsoft entrant. There had been increasing financial support While comprehensive and fact-filled, Win- for the education of southern blacks in the ners, Losers and Microsoft is written in an years between the end of the Civil War and the informal, and at times even humorous style, turn of the century, coming mainly from making it good reading for laymen as well as church groups in the north. Those efforts were experts. It makes a convincing case that com- dwarfed in 1902, however, when John D. petition is not nearly so fragile in high-tech Rockefeller established the General Educa- network markets as we’ve been told. Instead tion Board (GEB) and gave it $33 million of many products competing at the same over the next decade. Several other funds with level, there is often a dominant one. But no the same mission were established within the product is immune from challenge by a better next 15 years. The combined efforts of the one. In the end, consumers get better things at church groups and the philanthropists led to lower prices. [0 the founding of numerous private schools for James L. Gattuso is vice president for policy and and mostly staffed by blacks. Their Success 1 management at the Competitive Enterprise Institute. ~~ €videnced by the precipitous decline in illiter- acy among southern blacks in the early years of the twentieth century. But black education was unpopular with white supremacists. The authors write, Dangerous Donations by Eric Anderson and “White extremists denounced both [Booker Alfred A. Moss, Jr. T.] Washington and his northern friends, University of Missouri Press ® 1999 & 245 pages accusing the promoters of black schools of * $34.95 failing to prepare African Americans for their subordinate place in a segregated society.” Educational freedom was as much a threat to the comfortable world of the white racist as f government didn’t build and support freedom of information would be to the world schools, almost everyone would be igno- of communist dictators decades later. rant—right? Believers in liberty often have to The northern church groups were never argue against that canard. Dangerous Dona- concerned that black education might upset tions: Northern Philanthropy and Southern white racists, but the philanthropic managers Black Education, 1902-1930, by historians took a different view. Anderson and Moss Eric Anderson and Alfred Moss, shows the state that “fear of southern white opposition remarkable extent to which northern citizens played an important role in the structuring of Reviewed by George C. Leef ===== PAGE 56 ===== 56 IDEAS ON LIBERTY e JUNE 2000 northern philanthropy for the south. This is your school that is lacking in all our schools, especially true of the GEB’s decision in 1911 white as well as colored. We need that quality, to endorse “the policy of cooperating with the but with the passing of Burrell, it will be white people of the South in promoting Negro gone.” education, thus making the stimulation of Depressing but instructive, Dangerous government spending on public education the Donations tells us much about the ill effects first priority of its programs.” of philanthropy managed by “professionals” One of the villains of the piece is Abraham pursuing their own visions, and justifies a Flexner, better known for his report that laid healthy dose of skepticism about government the cornerstone for the American Medical education. O] Association’s domination of medical educa- George Leef is the director of the Pope Center for tion. Flexner, a GEB trustee of great influence gigher Education Policy at the John Locke Founda- and dyed-in-the-wool educational “progres- tion and book review editor of Ideas on Liberty. sive,” feared competition between private and public schools, contending that “public school development might be retarded or injured if these private schools are made more perma- Environmental Cancer: nent.” No wonder that by 1915, many blacks A political Disease had come to view the GEB more as a foe than by S. Robert Lichter and Another villain is Edwin Embree, president Stanley Rothman of the foundation established by Sears, Roe- Yale University ® 1999 © 235 pages © $35.00 buck executive Julius Rosenwald. Embree wrote scornfully of “little private Negro schools” that could never “meet the problem of education.” Embree believed that could be nvironmental Cancer: A Political Disease, done only through “the public funds of the by S. Robert Lichter and Stanley Roth- states and localities.” He even went so far as to man, is a studied attempt to prove that the discourage donations to private black schools. phrase “environmental cancer” has been used All of this was bad enough, but the “pro- insincerely by activists, politicians, and the fessional” attitude spread to the churches media in an attempt to further public-policy eventually. By 1930 the Protestant missionary agendas that often undermine individual free- societies were actually closing down success- doms. Lichter (president of the Center for ful black schools they had previously support- Media and Public Affairs) and Rothman ed. Anderson and Moss write, “Only the (director of the Center for the Study of Social steady reassurance of unexamined assump- and Political Change at Smith College) have tions enabled the northern religious philan- created a tightly written, highly readable thropies to [close their schools], certain that examination of the controversy surrounding simply seeking denominational adherents was environmental cancer and the great abyss an atavistic goal, that private schools were between the realities of hard science and the inferior to public institutions, that distant cen- cancer “crisis-of-the-week” reports from tral planners were more likely to create a use- assorted activist groups and journalists. Reviewed by Conrad F. Meier ful curriculum than local parents, and that The authors begin with an environmental long-established loyalties could be readily history lesson and proceed to explain the bio- transferred to new organizations.” logical and medical understanding of cancer. One vignette is especially poignant. In Second, they address the relative importance 1930 northern financial support for the of various environmental causes of cancer and Burrell School in Florence, Alabama, was examine some of the scientific and political stopped. A white Presbyterian minister who controversies. Third, they review the uses and was a member of the local school board abuses in the analysis of environmental can- expressed his regret: “There is a quality about cer data. Finally, they describe the “issue net- ===== PAGE 57 ===== Books 57 work” of interest groups, politicians, journal- herbicides, food additives and preservatives, ists, lawyers, and others involved in environ- and air and water pollutants, among other mental regulation. It is a thoroughly valuable things.” effort. The scaremongers have done great dam- Of particular merit in the attempt to sepa- age—the Alar campaign is a case in point— rate fact from fiction are the surveys of cancer but Lichter and Rothman conclude on a mod- researchers and environmental activists. The estly positive note: “practicing scientists have authors identify the sharp differences between begun to take a more active role in publicly the two groups’ views and compare them to assessing risks from various activities and the content of media accounts over two substances. In some respects segments of the decades. That comparison shows that the public are gradually taking a more realistic media frequently cite the views of environ- view of environmentally triggered cancer.” mental activists as if they were the views of That optimism, however, is tempered by the the scientific community. fact that most Americans are scientifically The skewing of scientific data is accom- ignorant. Reflecting on a 1996 National Sci- plished not just by the choice of stories to ence Foundation study, the authors write, report, but also a reporter’s selection of “only 9 percent of adult Americans know “experts” to quote. Two “experts” frequently what a molecule is, and only 5 percent can cited are Sidney Wolfe of Public Citizen and give an explanation of acid rain. More star- Samuel Epstein of the University of Chicago. tlingly, less than half know that the earth Both claim that just about everything in the orbits the sun annually. It is little wonder that environment causes cancer and that private the struggle against the bending of science to enterprise is usually responsible. Yet three of serve ideal or material interests never ends.” four cancer researchers surveyed express little Precisely. [] confidence in the work of Wolfe and Epstein. Conrad F. Meier is health policy adviser for the We also learn scientists are not happy that Heartland Institute in Chicago and assistant in their scientific findings are distorted and mis- research at the Center for Advanced Social Research, reported to the public. Using an example of University of Missouri-Columbia. three natural carcinogens—tobacco, sunlight, and radon—half of the scientists surveyed believe the media’s presentation of cancer’s Rethinking Orphanages for causes and risks is unfair and inaccurate. the 21st Century In addition, the studies reveal serious dif- . } } ferences attributed to the news media: 72 per- ©dited by Richard B. McKenzie cent of the scientists surveyed found the New Sage Publications ® 1999 ® 327 pages ® $27.95 England Journal of Medicine highly reliable, - : ; while less than a rt found the New York Reviewed by Daniel T. Oliver Times trustworthy. Since the general public does not read the Journal it is fair to say many merica’s government-run foster care sys- Americans have been dumbed down with tem has miserably failed the most vul- environmental falsehoods, and the authors nerable children in our society. It is a complex conclude that misplaced fears about the risks and expensive bureaucracy administered by of environmental cancer have seriously dis- social workers whose overriding goal is “fam- torted public policy. ily preservation”—that is, counseling trou- “Environmental cancer,” the authors write, bled or abusive parents in efforts to reunite “is ambiguous, conveying quite different them with their children who have been meanings to cancer researchers and lay audi- placed in what is supposed to be temporary ences. This confusion about definitions pro- outside care. The trouble is that this counsel- vides a partial explanation for the sometimes ing may go on for years as children are shuf- exaggerated charges made against consumer fled from foster home to foster home, never goods, industrial products, pesticides and experiencing life in a stable, loving family. ===== PAGE 58 ===== 58 IDEAS ON LIBERTY ® JUNE 2000 Children are also sometimes returned to abu- providers greater authority to make their own sive parents. As many as 700,000 children staff and program decisions; eliminate will spend all or part of this year in foster statutes and regulations that discourage the care, and the number is growing. use of volunteers and resident labor that could Rethinking Orphanages for the 21st reduce operating costs; convert government Century argues convincingly that the private child-welfare funds to block grants, allowing sector is better able to care for these children. states greater flexibility in placing children It includes 15 essays that discuss the history into permanent adoptive or children’s homes of children’s homes, or private orphanages, rather than in temporary foster care. and the policy reforms needed to revive them McKenzie and other contributors also pro- (only a handful remain). pose reforms to reduce the amount of time McKenzie, who grew up in an orphanage in children spend in foster care and to make the 1950s (and who rates his experience very placement in permanent care settings more highly), challenges the widespread notion that common. Two are noteworthy: assign the orphanages are undesirable places. He asks police and the criminal justice system, rather why it is considered acceptable for wealthy than social workers, to conduct the initial parents to send their children to boarding investigation of cases of significant abuse and schools to receive education and moral neglect (eliminating a conflict of interest in instruction, but inappropriate to send children the current child welfare system that usually from unsafe, abusive homes to similar institu- investigates and also apportions funds for tions. He presents findings from his own sur- cases of abuse and neglect); and place a time vey of middle-aged and elderly alumni from limit, preferably 12 months, on abusive and nine orphanages, almost all of whom look negligent parents to rehabilitate themselves. If back on their orphanage experiences favor- children cannot be safely returned to their ably. And interestingly, most of them outpace parents after one year, those parents should the general population in terms of education, forfeit any right to regain custody of their income, and attitude toward life. children. The essayists identify several reasons why Rethinking Orphanages is a worthwhile orphanages have declined in this century. As attempt to re-evaluate a private institution that poverty rates fell in the 1950s and 1960s, has almost disappeared from the American fewer parents had to abandon children they landscape. It is an outstanding collection of could not afford to keep. The social work pro- well-argued essays that should rekindle inter- fession has also disparaged orphanages and est in a viable private alternative to govern- vigorously lobbied to expand state foster care. ment bureaucracy that could greatly benefit And the cost of running orphanages has tens of thousands of needy children. OJ increased because of new liability laws that Daniel T. Oliver is a research associate at the Wash- hold institutions accountable for any harm ington, D.C.-based Capital Research Center and a children might incur while working. Most freelance writer. orphanages have reduced or eliminated child labor, such as on-site farm work, that at one time reduced their operating costs. Yet the essayists note that such work once instilled the values of discipline, responsibility, and team effort. Indeed, critics often cite “regi- by John Gray mentation” as the chief drawback of orphan- The New Press ® 1999 @ 262 pages ® $25.00 ages. Yet this is what former orphans believe False Dawn: The Delusions of Global Capitalism is their chief strength. Reviewed by Aaron Steelman Rethinking Orphanages suggests several policy reforms that could help to revive chil- ohn Gray’s new book, False Dawn: The dren’s homes. Among them: broadly liberalize Delusions of Global Capitalism, is exas- state licensure statutes and regulations, giving perating. Gray makes big predictions, such as: ===== PAGE 59 ===== Books 59 “There can no longer be much doubt that we really a broader attack against classical liber- are approaching a major upheaval in the inter- alism, or the “Enlightenment project,” as Gray national economic system. It is a pretty safe calls it. bet that, a few years hence, it will be difficult Gray, a professor at the London School of to find a single person who admits ever hav- Economics, was once a classical liberal him- ing supported the global regime which estab- self. But he abandoned that position several lished opinion still insists is immutable.” And years and books ago in favor of a rather odd he bitterly condemns capitalism. “Free mar- pro-welfare state, pro-green conservatism. kets, the desolation of families and communi- False Dawn is animated by little more than ties and the use of the sanctions of criminal maudlin sentiment about the supposed vic- law as a last recourse against social collapse tims of capitalism. He concedes that the free go in tandem,” he claims. market’s “productivity is prodigious.” But he But nowhere in the book do we find an quickly adds that “so are its human costs.” argument—at least not a sustained, consistent Free markets, according to Gray, “corrode one. Instead, Gray offers numerous contradic- some of the central institutions and values of tory statements. On one page Gray argues, bourgeois life.” For example, he argues that “Worldwide mobility of capital and produc- they contribute to family dysfunction. “How tion triggers a ‘race to the bottom,” in which many American households eat together as more humane capitalist economies are com- families? How many children live in the same pelled to deregulate and trim back taxes and neighborhoods or cities as their parents? If an welfare provision.” A few pages later, he American becomes unemployed, can he or states, “European capitalisms will continue to she find support from an extended family, as differ profoundly from American free mar- can Spaniards and Italians in European coun- kets. No European country—not even the tries?” Gray asks. The obvious answer is that United Kingdom—is ready to tolerate the lev- people are free to choose to live as close els of social dereliction produced by the free together as they wish. The wealth that capital- market in the United States.” Which one is it? ism creates simply gives people more options. What's more, Gray concedes that, 20 years It doesn’t dictate anything—unlike socialism ago, Great Britain needed to unshackle its and its many interventionist cousins. economy. “Thatcherite policy was an attempt Gray also states that the traditional career is to impose a much needed modernization on a casualty of unfettered capitalism. “In tradi- the British economy. . . . British corpo- tional bourgeois societies, most middle-class ratism—the triangular coordination of eco- people could reasonably expect to spend their nomic policy by government, employers, and working lives in a single vocation. Few can trade unions—had become an engine of now harbor any such hope.” The result? industrial conflict and strife over the distribu- “Many expect, not without reason, that their tion of the national income rather than an incomes may fall in the future,” Gray writes. instrument of wealth creation or a guarantor True enough. Job stability is not what it once of social cohesion,” he writes. But Gray then was, but that is no reason for hand-wringing. spends several pages attacking the effects of Many young people now expect to have a these “much needed” policy changes. He does half-dozen different jobs before retiring and a similar about-face when discussing reforms understand that there may be a pay cut some- in New Zealand. where along the line. People can and do adjust Gray’s attempts to be on both sides of so to variations in income, something that hap- many issues would leave the reader confused pens under every economic system. Besides, if it weren’t for the highly polemical nature of many—maybe most—people find changing the book. His vicious swipes at the free mar- jobs to be an exciting and liberating experi- ket and at the United States—which he argues ence, not one filled with dread and anxiety. are synonymous—make it clear where his At bottom, what bothers Gray about the sympathies lie. False Dawn purports to be a free market is that it exposes people to risk— case against the global free market. But it’s the risk of making poor decisions. But classi- ===== PAGE 60 ===== 60 IDEAS ON LIBERTY e JUNE 2000 cal liberalism doesn’t promise people happi- choices made by government officials. In ness; it promises them a shot at it. Some peo- making mountains out of molehills in his fer- ple inevitably make bad choices. It is much vor to discredit “global capitalism,” Gray better to have the liberty to make your own ignores that truth. Hl choices than to have to live with the often dis- Aaron Steelman is a graduate student in the social astrous and irremediable consequences of iiences at the University of Chicago. second 1n 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 61 ===== Charles Baird replies: CAP ITAL REND First, some firms and some workers may, LETTERS \ NC m= depending on circumstances of time and place, and for some purposes, prefer long- term to short-term contracts. But long-term contracts involving workers can be made To the Editor: without unions just as long-term contracts In response to Charles Baird's article involving materials can be made without pro- “Sources of Pro-Union Sentimentality” ducer cartels. Second, it is unlikely that com- (Ideas on Liberty, March), 1 would like to panies find it advantageous to have one labor respond with a few points overlooked. contract rather than thousands. After all, most Although I agree with most of the points firms choose to try to remain union-free, and brought up by Professor Baird, I think unions union-free firms are more successful on aver- do play a legitimate role in the marketplace 28¢ than unionized firms. Third, a market for several reasons. First, large companies and Price emerges out of a process that involves workers alike both find it to their advantage to cOmpetition among sellers and competition secure long-term contracts to counter the fluc- 3MONg buyers. A union exists primarily to tuations of the market (just as companies and eliminate competition among sellers of labor suppliers of energy, material, and others do). SCTVICES. Wages set in collective bargaining Second, it is certainly more advantageous for ar no more market prices than the prices that companies to have one contract rather than 2 planning board would announce under a thousands. Third, just as any price negotiated System of market socialism. by a company and its other suppliers becomes Finally, I agree that economists and others the market price, the wage negotiated by a should examine government’s role in what company and its union(s) becomes the market Unions are and what they do. I have nothing wage. Many companies, such as Southwest 283inst unions comprised of voluntary mem- Airlines, have very harmonious relations with bers who strive to obtain the largest market their unions and remain very profitable. Other Share” they can while adhering to the rules of companies take a more adversarial position to voluntary exchange. What I object to are the everyone's disadvantage. 1 agree that the Special privileges and immunities that govern- National Labor Relations Act is antiquated Ment has conferred on unions and that have and that government intervention is counter- Placed them beyond the rule of law. productive, but this is the case in almost all areas of government. As far as individuals committing criminal acts during a strike (or any time), I don’t believe that is, or should be, condoned. Finally, unions, like any other enti- ty, will strive to obtain the largest market share (including monopoly) possible. In clos- ing, I think it would be better to examine gov- ernment’s role rather than the existence of unions themselves. —HENRY S. WOODRUFF III Golden, Colo. We will print the most interesting and provocative letters we receive regarding Ideas on Liberty articles and the issues they raise. Brevity is encouraged; longer letters may be edited because of space limitations. Address your letters to: Ideas on Liberty, FEE, 30 S. Broadway, Irvington-on-Hudson, NY 10533; e-mail: freeman@fee.org; fax: 914-591-8910. 61 ===== PAGE 62 ===== Bastiat Birthday Sale! F: has played Selected Essays on amajorrolein political Economy rediscovering Frederic Bastiat's astiat’s lucid sfpostion ol fundamental works and keeping economic principles includes such mas- them alive. 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Williams, antagonism between the welfare of one an d and a foreword by Ideas on Liberty editor Shel- the welfare of all, that all people can live in don Richman, The Law may be the single most ~~ Peace and prosperity, provided there is a essential of our books. No one who loves liber- free and open market for goods and services. ty should be without it. 596 pages, paperback Sale $8.99 $9:95 75 pages, paperback Sale $1.99 $2.95 Sale ends July 14, 2000 cloth Sale $7.99 $955 Carton price Phone, fax, mail, or e-mail your order to: (100 paperback) Sale $99.00 $347:00 nation for Economic Education Irvington-on-Hudson, NY 10533 Phone: 800-452-3518 Fax: 914-591-8910 E-mail: kwalsh@fee.org On-line bookstore: www.fee.org Economic Sophisms his masterful volume of essays by Bastiat exposes the fallacies of protectionism. Basti- at's devastatingly accurate attacks of the illogical, self-serving arguments of protection- SHIPPING: ists remain both relevant and entertaining. Total Purchases Add Sophisms contains the brilliant “Petition of the $2500 188 on $4 Candlemakers,” as well as such gems as “The $25.01-$49.99 ................ $5 Negative Railroad” and “The Physiology of $50.00-$74.99 ................ $6 Plunder.” This edition also contains an introduc- $75.00-$99.99 ................ $7 tion by Bastiat's great admirer Henry Hazlitt. $1000rover.................. $8 291 pages, paperback Sale $6.99 $295 Call or e-mail for express rates. ===== PAGE 63 ===== The Pursuit of Happiness by Russell Roberts IDEAS ON [IBERTY JUNE 2000 Nothing Lett to Buy? merica is now in the middle of an unpar- Picassos on the walls, and so on. In the Times alleled economic expansion. In the piece, one older rich guy, worth a mere $890 fourth quarter of 1999, the economy grew at million, bemoans having to deal with having the frenetic rate of 6.9 percent. The Dow his own plane. The new guys, the dot-com climbs upward. Even some so-called serious kids, have fleets of planes. Ah, the vicissi- people have started to wonder if the business tudes of life. cycle has been abolished. I remember as a young man asking my I think we’ll manage to have a recession father what Jackie Kennedy would find of someday. But barring a major war or unfore- interest about Aristotle Onassis. One factor he seen catastrophe, the future, meaning the next mentioned was that Onassis had a lot of 20, 50, or 100 years, looks very bright. The money. But doesn’t she already have a great source of that optimism is the inexhaustible deal of it? I asked. Yes, he explained patiently, font of human creativity and innovation chan- but more is preferred to less. A giant diamond neled by a mostly free-market system. And ring is nice. Two are better. Jetting to an island the system is fueled by a capital market thatis paradise on a whim is nice. Owning one is richer and more flexible than it has ever been. better. Or two or three. All of this is encouraging, but in the mod- This seminal truth about human nature is ern era, every silver cloud has a dark lining. the central tenet of economics, along with One of the new concerns of the day can be there being no free lunch. Economics is the found in a recent headline in the New York study of infinite wants clashing with finite Times: “Nothing Left to Buy?” The theme of resources. Not just very big wants. Infinite the article was that with the new riches people wants. are accumulating via the Internet and high- But some people have raised the possibility tech go-go stocks, people are running out of that even the rest of us, the great unwashed, things to buy. All the extravagances have been may find our wants sated by our wealth. Ata 3 exhausted. percent growth rate, income doubles every 24 This is not the first story I’ve read with this years. In a mere century, if the economy can theme. The usual example is a Manhattan or grow at the fairly modest rate of 3 percent Silicon Valley party where the host can’t find annually, we’ll be 16 times richer than we are enough incredible items to awe the guests. now. Sixteen times. Over the past century, real There’s the ice-carved centerpiece, the rock per capita GDP has grown about sevenfold. If star hired to entertain the guests, the rented we could have avoided the Great Depression and a few other economic potholes, we could Russell Roberts (roberts@csab.wustl.edu) is an econ- have managed that 16-fold increase over the omist with the Center for the Study of American Busi- Past 100 years. Surely, claim the pundits, if we ness at Washington University in St. Louis. were 16 times wealthier than we are now, we'd 63 ===== PAGE 64 ===== 64 IDEAS ON LIBERTY ¢ JUNE 2000 all be left trying to figure out what way-out to buy except a few wild indulgences? Will all chic décor we could add to our parties. We'd our economic problems be solved? have solved the economic problem of infinite To see the absurdity of this claim, go back wants and finite resources. We'd have every- 600 years ago to a shepherd on the land of that thing we could possibly want. Food, clothing, wealthy king. Imagine telling him that the and housing would take a tiny fraction of our average man in 600 years would live better income, and we'd spend the rest on empty toys than a king. Well, he'd ask, what would he and impressing our guests with our decadence. spend his money on? You'd have everything. What would you buy, a gold shepherd’s crook? A roof with extra thatch? Twice as many sheep? It would be impossible to spend Steven Landsburg in his book Fair Play, all that money! notes that at even 1.5 percent annual growth Today, we're in the same darkness with | in real income, in 600 years the average respect to the future as that shepherd. He American family will live as well as Bill couldnt possibly imagine what the world Gates, on about $2 million a year. And that’s would be like in 600 years, and neither can $2 million in today’s dollars, not inflated ones. we. What will we spend our money on when Most folks find this calculation absurd, but as we all make $2 million per year? I don’t know Landsburg points out, the average family of but it will be pretty amazing stuff. It will be today lives better than the richest king of the whatever human creativity manages to come year 1400. up with in the next 600 years. New medical The king’s meals may have been served on devices, new entertainment products, new gold plates, but he didn’t have a flush toilet or ways to travel, to live, to share information, to penicillin or a microwave, let alone a car ora sing, to dance, and to dream. VCR or an iMac. Those meals on the gold Most of us probably won’t be around to plates probably had more bacteria and with enjoy it, but who knows? Maybe we’ll grow his arteries choked with cholesterol from all faster than 1.5 percent and get there sooner. that mutton, he died young. Cardiology in And some of those innovations will surely those days was a bit primitive. extend our life spans, even possibly in ways But if we could all live like Bill Gates, that make being old a lot more pleasant than won’t we be just sitting around with nothing it appears to be now. I can’t wait. a Every Man a Gates