===== PAGE 1 ===== ul DEAS ON [IBERTY September 2000 Vol. 50, No. 9 FEATURES 8 The Miracle of Privatization by John Blundell ¥10 Property and Liberty by James Bovard 18 Economists Against the FDA by Daniel B. Klein 22 Trade and Freedom in China: A Reality Check by Christopher Lingle ¥ 26 The Colonial Origins of American Liberty by Thomas E. Woods, Jr. 35 A Light Goes Out in New Zealand by Charles W. Baird 38 Austrian “Inflation,” Austrian “Money,” and Federal Reserve Policy by Richard H. Timberlake 43 Inflation and Money: A Reply to Timberlake by Joseph Salerno 47 Final Comment on Salerno’s Monetary Program by Richard H. Timberlake COLUMNS THOUGHTS ON FREEDOM—Self-Government by Donald J. Boudreaux 16 IDEAS and CONSEQUENCES—End the Farm Dole Once and for All by Lawrence W. Reed 24 POTOMAC PRINCIPLES—Bipartisan Drug Entitlement by Doug Bandow 33 THE THERAPEUTIC STATE—Progress in Pain Relief by Thomas Szasz $a ECONOMIC NOTIONS—Take This Job and Shove It, at the Margin by Dwight R. Lee 53 ECONOMICS on TRIAL—“An Enemy Hath Done This” by Mark Skousen 63 THE PURSUIT of HAPPINESS—Will Campaign Finance Reform Enhance the Power of the People? by Russell Roberts DEPARTMENTS 2 Perspective—Who’s to Blame? by Sheldon Richman John Winthrop 6 Female-Parent Wage Gap Requires Action? It Just Ain’t So! by Karen Palasek 51 Capital Letters 55 Book Reviews The Global Education Industry: Lessons from Private Education in Developing Countries by James Tooley, reviewed by Antony Flew; Reflections on a Ravaged Century by Robert Conquest, reviewed by George C. Leef; The Economic Consequences of Rolling Back the Welfare State by A. B. Atkinson, reviewed by David L. Littmann; Property and Freedom by Richard Pipes, reviewed by Yuri Maltsev; Plagues of the Mind: The New Epidemic of False Knowledge by Bruce S. Thornton, reviewed by Charles Stampul; Ameri- can Compact: James Madison and the Problem of Founding by Gary Rosen, reviewed by David Upham. Lesson plans for ¥ articles are available at www. fee.org. ===== PAGE 2 ===== IDEAS ——— ON [IBERTY PERSPECTIVE Who’s to Blame? Published by The Foundation for Economic Education Advocates of liberty are frequently con- Irvington-on-Hudson, NY 10533, 591-8910 fronted with the following fallback position of El Ton one 30 Fax (914) 591 their intellectual adversaries: We live in a rep- FEE Home Page: http://www. fee.org resentative democracy. If you don’t like what President: Donald J. Boudreaux is taking place, your beef is with the people Editor: Sheldon Richman who have freely chosen their representatives. Managing Editor: Beth A. Hoffman That argument is intended to blunt criticism Editor Emeritus of activist government. If the people have Paul L. Poirot freely chosen it, who are you to complain? Book Review Editor There are several problems with that argu- Edi Lee ) ment. First, the United States was supposed to Mary im Moray be a constitutional republic, not a democracy. Columnists A constitution is intended to limit the people’s Charles W. Baird power to use the government to achieve their Done pane ends. As the framers saw it, the delegation of Log Re od enumerated powers to the Congress means Russell Roberts that, barring amendment, that’s all the Con- Mark Skousen gress can do—no matter how badly “the peo- Thomas Szasz ple” want something else done. Unfortunately, Walter E. Williams the delegated powers have been stretched Contributing Editors itd : Norma! oh beyond recognition to permit Congress to Peter J. Boettke define its own powers. Clarence B. Carson Appealing to the representative nature of the Thomas J. DiLorenzo government has further problems. If those rep- Burton W. Folsom, Jr. Joseph S. Fulda Bettina Bien Greaves resentatives and the bureaucrats they empower deliberately shroud their activities so that citi- Robert Higgs zens find it virtually impossible to monitor the John Hospers government, how representative is it really? Raymond " Keating Someone of statist mindset might invoke the ame on division of labor: Citizens, the argument might Wendy McElroy ’ : Tibor R. Machan go, delegate decision-making power to special- Andrew P. Morriss ists in public policy by electing the president Ronald Nash and members of the legislature. That’s what the Ed A. Opitz . Jmund bn civics textbooks say, at any rate. But the real . y } William H. Peterson world doesn’t quite conform. Jane S. Shaw The latest evidence comes in a startling Richard H. Timberlake confession by Senator Daniel Patrick Moyni- Lawrence H. White han. In June Moynihan wrote about Social 1deas on Liberty (formerly The Freeman: Ideas on Liberty) is the month- Security in the New York Times. To provide ly publication of The Foundation for Economic Education, Inc., Irvington- on-Hudson, NY 10533. FEE, established in 1946 by Leonard E. Read, is a some context, he turned back to 1977, when non-political, educational champion of private property, the free market, . and limited government. FEE is classified as a 26 USC S01(c)(3) tax. Congress changed the method for financing exempt organization. [13 3 “« : Copyright © 2000 by The Foundation for Economic Education. Per- the program. In 1977, he wrote, Social mission is granted to reprint any article in this issue, provided credit is Security, the retirement program, was given and two copies of the reprinted material are sent to FEE. The costs of Foundation projects and services are met through dona- changed from a pay-as-you-go system to a tions, which are invited in any amount. Donors of $30.00 or more receive . I) : : a subscription to Ideas on Liberty. For delivery outside the United States: partially funded system. To accomplish this $45.00 to Canada; $55.00 to all other countries. Student subscriptions are 3 $10.00 for the nine-month academic year; $5.00 per semester. Addition- the government hiked the payroll tax two al copies of this issue of Ideas on Liberty are $3.00 each. points. Now instead of having only the Bound volumes of The Freeman are available from The Foundation for . . calendar years 1972 to 1999. The magazine is available in microform from amount requir ed to pay the r etirees, the Sys- University Microfilms, 300 N. Zeeb Rd., Ann Arbor, MI 48106. 2 ===== PAGE 3 ===== tem had a surplus with which to build a Trade with China may accelerate economic reserve fund. It wasn’t a real reserve fund, and political liberalization there. Then again, because the government spent the money. But it may not. Nevertheless, the barriers should Social Security got IOU’s, which someday come down, writes Christopher Lingle. the government will pay—by raising taxes or The Founding Fathers, as admirable as they borrowing. are, sometimes get too much credit. After all, What’s relevant about that legislative histo- Thomas Woods says, they were heirs to a ry is this comment from Moynihan: “No one uniquely formative colonial experience. noticed this [change]. I was a member of the New Zealand’s bold venture in voluntary 1977 House-Senate Conference Committee unionism, alas, has come to an end. Charles that enacted the law, and I surely didn’t notice. Baird writes the not-quite-an-obituary. Nor was it reported.” Last year Richard Timberlake wrote a Bear in mind that Moynihan is considered three-part series in these pages on the Federal one of the most intelligent and conscientious Reserve’s monetary policies before and dur- members of Congress. (He’s George Will's ing the Great Depression. Then Joseph Saler- favorite senator) But he didn't notice the no critiqued Timberlake’s thesis from the change! Moreover, it was not reported, mean- framework of Austrian economics. In a final ing the public wasn’t informed. (So much for go-around, Timberlake and Salerno rebut the crack Washington press corps.) each other and argue for their respective posi- The lesson: We have a government that tions. essentially defines its own powers and in Here’s what our columnists have come up which its officials—much less the people— with this month: Donald Boudreaux makes often don’t know what’s going on. Time to the case for true self-government. Lawrence rewrite the civics texts. Reed draws attention to continuing farm socialism. Doug Bandow assays the implica- tions of Medicare’s expansion into prescrip- Odd things can happen when public proper- tion medicines. Thomas Szasz wonders why ty turns into private property. For example, it anyone’s amazed that some pharmacies don’t can become more accessible to the public than stock certain painkillers. Dwight Lee applies when it was “public.” John Blundell resolves marginal analysis to labor. Mark Skousen the paradox. warns: beware easy money. Russell Roberts The essence of the freedom philosophy is isn’t convinced that campaign finance control that without private property there is no liber- will set us free. And Karen Palasek, hearing ty. Even the seemingly propertyless, writes arguments for government to address a wage James Bovard, are protected by this depreciat- gap detrimental to women with children, ed institution. responds, “It Just Ain’t So!” Nearly every economist who has studied This month’s book reviewers size up vol- the matter closely agrees that the Food and umes on private education initiatives around Drug Administration harms consumers and the world, the bloody twentieth century, the should be eliminated sooner or later. Daniel cost of eliminating the welfare state, property, Klein elaborates the reasons for this remark- false knowledge, and James Madison. able unanimity. —SHELDON RICHMAN * k * ===== PAGE 4 ===== ge a. Thoughts on Freedom by Donald J. Boudreaux Self-Government he United States is often described as an Smith nor Jones is self-governing. Smith is experiment in self-government. But what governed by Jones, and Jones is governing not is this thing? Most people understand “self- only himself but Smith as well. government” to mean democracy. According to this understanding, a people are self-gov- erned if they regularly vote to select the indi- True Self-Government viduals who are to occupy political offices. Self-government in a truer, more literal This method of deciding who holds political sense is both desirable and possible. power has clear advantages over conferring True self-government is just that: self- political power according to military prowess, government. Each individual governs himself. bloodlines, or other criteria remote from the Each person is free to chart his own life’s input of the ordinary men and women who are course, choosing which risks to brave and to be governed. which to avoid. Each person is responsible Understood in this way, to endorse self- only for himself, for his family, and for those government is hardly to take a courageous or whom he—of his own volition—chooses to controversial stand. No good case can be care for. Each person has a claim to the fruits made that fitness to govern is best determined only of his own labor and sacrifices, and no by bloodline or by skill at military conquest. claim to the fruits of another’s labor and sac- Clearly, whatever power the state exercises rifices. Each person has a legal right to do as ought to be exercised by people chosen in fair he wills so long as he respects the equal rights elections by those who are subject to the of others and honors all his commitments. state’s dictates. Almost no one in modern Of course, living in this way—as a free man Western society disagrees that people ought or woman— requires discipline. To be foolish to be governed in this way. and imprudent is to fail at self-government. But such government, regardless of its mer- Typically, people who don’t govern them- its, is not really self-government. It is govern- selves personally pay the price of not doing so. ment by the elected. No amount of romantic One advantage of a free society is that it focus- praise of democracy can change the fact that es the costs of irresponsible behavior on those even the best popularly elected government who behave irresponsibly, and it focuses the routinely obliges Smith—against his will—to benefits of responsible behavior on those who do the bidding of Jones. And whether Jones behave responsibly. The result is that irrespon- be an influential special-interest group or a sible behavior is kept to a minimum. popular majority, when Smith is threatened But how to distinguish responsible from with coercion to do Jones's bidding, neither irresponsible behavior? If we let each individ- ual determine how to make this distinction, Donald Boudreaux is president of FEE. won't the result be chaos? ===== PAGE 5 ===== Some behaviors are plainly and always command that every worker contribute to the destructive of social cooperation. Murder, Social Security and Medicare schemes; theft, rape, slaveholding, arson—these and taxation that consumes around 40 percent of other behaviors whereby some people coerce our income—the list of offenses against self- others are unquestionably out of bounds; the government is endless. law should prohibit them. These behaviors Many people who reflect on all that gov- should be prohibited precisely because they ernment does today will insist that it simply interfere with their victims’ rights to govern must do these things, for otherwise, too many themselves. people will fall into traps that they are either The precise means of deciding which too stupid or too weak to avoid. behaviors the law should prohibit, as well as I don’t doubt that each of us will make how to enforce these prohibitions, is debat- some choices that we later regret. Nor do I able. I don’t wish to weigh in here on the dis- doubt that some of us will prove to be espe- pute between anarcho-capitalists and advo- cially inept at making wise choices. And sure- cates of limited government. Reasonable peo- ly from time to time these unwise choices will ple can and do disagree about just how far we lead to terrible consequences. can go in ridding ourselves of the state, But what is self-government if not the although no reasonable person believes that ability to govern yourself as you choose— society can exist without laws protecting each with you taking responsibility for yourself of us against coercive threats against our per- and leaving others free to take responsi- sons and property. bility for themselves? Those who insist that But the state today does far more than government must take responsibility for the enforce laws against murder, theft, and other safety and welfare of people should stop pro- obviously predatory acts. Almost all that claiming their allegiance to liberty and self- today’s state does offends the idea of self- government. They should instead forthrightly government. Government in America today proclaim an allegiance to the principle of gov- doesn’t hesitate to coerce those who are polit- ernment by the elite few of the irresponsible ically weak to do the bidding of those who are many. politically strong. Nor does government today I would resolutely object to this principle, hesitate to treat its subjects as foolhardy but at least its advocates would be forthright. imbeciles in need of strict guidance from the They would no longer be masquerading as state. In both ways, today’s government denies friends of the noble ideals that motivated people their right of self-government. The Jefferson and Madison. They would, instead, state governs; its subjects obey. Each of us is honestly reveal themselves as patrons of the ruled to an increasingly large degree not by notion that ordinary men and women are ourselves, but by others. incapable of self-government and, hence, Consider: regulations mandating that we unworthy of liberty. The result would be a wear seat belts; minimum-wage legislation; more enlightening debate. Liberty and self- government restrictions on drug use; state government stand clearly opposed to the exer- blue laws; truancy statutes; the regulation of cise of intrusive state authority. People advo- advertising; tariffs and other import restric- cating intrusive state authority would then be tions; government controls on which foreign- explicitly aware that they reject liberty. They ers we may associate with on American soil; would be forced to concede that they do not building codes; occupational licensing; the believe in the principle of self-government. [] ===== PAGE 6 ===== IDEAS ON [IBERTY SEPTEMBER 2000 Female-Parent Wage Gap earned by women parents and those of their Requires Action? non-parent female counterparts. It isn’t clear 9 whether Hewlett thinks that lack of paid leave, too-expensive daycare, and inflexible work hours are also “hidden costs,” or are just Ai Y | another target on her general list of gripes. t ust In t 0! Child-rearing certainly involves hidden costs for women; these are better known to economists as opportunity costs. Discussing them intelligently requires understanding how Que Ann Hewlett’s New York Times arti- they arise. They do so whenever we make cle, “Have a Child, and Experience the choices: alternative courses of action have Wage Gap” (May 16, 2000), presents itself as unique consequences. When we choose path a summary of the detrimental effect that the A rather than path B, we get the consequences choice to have children imposes on women’s pursuant to path A, while the consequences wages. The author leads her readers through associated with path B never come into exis- seemingly relevant data contrasting the dollar tence. If we women choose to raise families, incomes of double-earner families with the it is presumed that we get the consequences price (exclusive of college tuition) of bringing associated with that choice: large and some- children along to the age of 18. what unpredictable monetary obligations over We are told we must not forget the hidden an extended period (as opposed to paying off costs of child-rearing, particularly for the an automobile with a set price in a few years), mother. As if it isn’t bad enough that there significant and unpredictable demands on our already exists a gap between men’s and time, and what Ms. Hewlett calls “hidden women’s wages, this children/no-children dif- costs,” which are really path-dependent alter- ference adds insult to injury. Even among native consequences, that is, higher earnings, women, those without children do better than that fail to materialize. those with kids, and the gap gets worse with To the extent that the “reduced” earnings each child. Conclusion: the policy Band-Aids Ms. Hewlett describes are the result of the that have been offered to working female par- normal time and money demands of raising ents are a welcome but pitifully inadequate children per se, they are not hidden at all, remedy for the double disadvantage under though they may be variable. They are simply which they struggle. The Clinton administra- theoretically higher earnings that never tion’s executive order banning discrimination appear. That the ordinary obligations of child- in the federal workplace against working par- rearing cut into the available time and atten- ents, according to the author, doesn’t go near- tion that mothers have to devote to another ly far enough. Ms. Hewlett cites the work of job, and that the consequences of combining economist Jane Waldfogel to lend authority to these choices reduces either the returns to the her argument for regulation of private-sector mother or the returns to the children, is per- hiring of parents as well. fectly logical. Who could reasonably expect to On the surface, Ms. Hewlett appears to be get the full results of being exclusively a making a cogent argument. Assuming that the mother or exclusively a career woman while data are accurate, we are made vividly aware in reality spending only part-time in at least of the uneven wages among men, women, and one of these pursuits? That the choices we women parents. As “hidden costs” Hewlett make do not give us the results of the choices counts the difference between wages actually we do not make should be no surprise. ===== PAGE 7 ===== 7 The Effects of Policy At the national level, the author misses the opportunity-costs boat altogether. Exactly Ms. Hewlett, as an advocate for working whose taxes should be increased to achieve the mothers, confronts us with the low-earnings/ income parity with non-parenting women or high-cost theme over and over by scattering men that Sylvia Hewlett would like to see large quantities of unrelated data throughout achieved? It’s a sure bet that she doesn’t advo- her article. By the end of her piece, we are left cate wage parity via wage reductions for with a collection of gripes and data on the everyone else. Even regulating the private responsibilities of child-rearing that by sheer employer in the way she suggests will not volume must, I suppose, convince us that pol- affect most of the items on her list, like the icy action is imperative. Do we really need a high cost of braces and the lack of satisfaction policy because, as the author alleges, kids parents get with “intangible rewards” of hugs expect preschool, braces, therapy, summer and kisses. Whose wants and desires should camp, and computer equipment? And do par- we curtail by reducing their opportunities with ents really need to be rescued by the state higher taxes and regulations so that working because they are rewarded for their sacrifices moms can “have it all”? with mere hugs and kisses, while “the nation” Though steeped in data, it is important to allegedly gets all the real benefits? I suspect recognize that “Have a Child, Experience the that what we really need is more mature Wage Gap” presents merely the author’s value adults—understanding that families can judgments dressed up like an economic calcu- involve materially uncompensated sacrifices lation problem. Our values, not statistical evi- and tradeoffs. dence of some income disparity, should deter- As a corollary to the principle of hidden mine our policies. And knowing that more opportunity costs, we must pay attention to favorable legislation will make working the effects of government policy choice on moms better off doesn’t automatically justify everyone in the community, not just on one changing a large number of third parties’ group. Regardless of what we would like to opportunity costs. The power of economic believe or how we would prefer the world to tools is in their ability to enlighten us. When operate, secondary and unintended conse- misused as window dressing, or as substi- quences, sometimes long-run consequences, tutes for a forthright discussion of values and extend beyond working mothers. At the fami- preferences, they serve only to confuse and ly level, the choices made by mothers impose misdirect. some consequences on their children, whether —KAREN PALASEK the mothers work or stay at home. The author Adjunct Professor of Economics addresses only the mother’s opportunity costs Campbell University and returns, ignoring those to the children. Buies Creek, N.C. ===== PAGE 8 ===== IDEAS ON [IBERTY SEPTEMBER 2000 The Miracle of Privatization by John Blundell hen I was a small boy I used to bicycle Privatization has totally transformed the in the hills of northwest England where British economy. Ports, airports, coal, gas, BP, Derbyshire and Cheshire meet. In the distance steel, sugar, telecomms, electricity, forests, I could often see glimpses of water, but all shipbuilding, motorway restaurants, freight, roads to it were blocked by locked gates and nuclear power, Rolls Royce, Rover, Royal signs reading “Public Property: Keep Out.” Ordnance, Short Bros., and water: all have Today, following the privatization of the been privatized to the long-term benefit of all water industry, the roads are open and the concerned, be they customers, shareholders, signs read “Private Property: Public Wel- taxpayers, or all three. And not just for British come.” Driving in now, one sees the wonderful people. The leaders of these newly privatized views, the walks, the garden, the nature center, industries have become so good at what they the restaurant, the large playground, the picnic do so fast that they are now doing it all over sites, and the parking lots. There is also a the world. regular bus service to neighboring towns. So many books have been written on the What a transformation and what a symbol privatization process and its benefits they fill of the power of privatization! a stack in the library. Indeed my own institute, When it was “public” it was very private. the Institute of Economic Affairs, publishes Indeed, it was totally captured by a small band an annual book of lectures on post-privatiza- of bureaucrats. Even members of Parliament tion utility regulation. But in general terms, struggled to find out what was going on. No let me set out Blundell’s Ten Laws of Privati- proper accounts were produced, and with a zation, that is to say, the ten most common complete lack of market signals, managers effects of moving ownership and management were clueless as to the correct course to take. from state hands to private hands. The greatest casualty was a lack of long-term capital investment. Blundell’s Ten Laws Now it is “private and very public. Not of Privatization just public in the sense of open, but also in the sense of accountable directly to its sharehold- 1. Lower prices. Competition and the root- ers and customers. Copious reports and ing out of bureaucratic practices inevitably accounts are available and questioning citi- lead to lower prices. Domestic gas consumers zens will find their concerns taken very seri- have, for example, seen their bills cut by £1 ously indeed. billion since competition was introduced. John Blundell is general director of the Institute of 2. Better quality. Anybody using a British Economic Affairs in London. phone today knows the connection is faster, ===== PAGE 9 ===== 9 clearer, and more reliable—as well as being 8. More openness. Accounts are pub- cheaper. lished, journalists can investigate, citizens get their questions answered, and we all have 3. More choice. The UK is now the only a far greater knowledge of what is actually country in the world where even the smallest happening. household consumer can choose between com- peting natural gas and electricity suppliers. 9. Better measures. Firms are now judged by the market, and the managers are free to set goals. In the past they were judged and manipulated by politicians, and the man- agers often found themselves setting politi- cal goals such as creating jobs in a marginal area. 4. Less corruption. Twenty years ago there was a three-month waiting list for a phone and a 50-pound bribe (200 pounds or $350 at today’s price levels) was needed to get to the top of the list—today you choose the time when they come to serve you! 10. Fewer strikes. These industries (partic- ularly coal, electricity, and railways) were vul- nerable to strikes, which have now all but dis- appeared. Indeed 80 percent of all days lost to strikes today occur in the Post Office, which 6. More innovation. We used to have two Was not privatized! choices of phones: white or black! Now whole shops stocking an incredible variety of equip- So, if you want more innovative, less cor- ment are a common sight. rupt, better managed firms that are more open, employ better measures, are less strike 7. Better management. The electricity gen- prone, and invest more for the future to bring erators have halved their costs since privatiza- you more choice and better quality at lower tion. There has been a real influx of private- prices, then it’s easy: go for privatization. It sector management. works! J 5. More investment. Once privatized, a long-term view could be taken rather than the annual trip to see the government minister. Telecomms in particular have benefited. Foundation for Economic Education Fall Dinner Featuring Dr. Charles Murray Author of Losing Ground and What It Means to Be a Libertarian Sunday, October 29, 2000 Harvard Club, New York, NY Reception 6:00 P.M./Dinner 7:00 P.M. For further information, please contact Nicole Gray at FEE, 914-591-7230, ngray@fee.org. ===== PAGE 10 ===== IDE AS @P Government ON IBERTY SEPTEMBER 2000 Property and Liberty by James Bovard Peery is “the guardian of all other Yet Oxford professor John Gray asserted in rights,” as Arthur Lee of Virginia wrote in 1990 that “very extensive State intervention 1775.1 The Supreme Court declared in 1897: in the economy has nowhere resulted in the “In a free government almost all other rights extinction of basic personal and political lib- would become worthless if the government erties.”6 One wonders which freedoms Bul- possessed power over the private fortune of garian and Romanian citizens enjoyed under every citizen”? Unfortunately, legislators, communism that Gray neglects to mention. judges, and political philosophers in the twen- Perpetual shortages of almost all goods char- tieth century have perennially disparaged acterized East Bloc economies; politicians property’s value to freedom. and bureaucrats maximized their power and Without private property, there is no escape maximized peoples subjugation through from state power. Property rights are the bor- discretionary doling out of goods. Shortages der guards around an individuals life that created new pretexts to demand further sub- deter political invasions. Those who disparage mission: the worse the economic system property often oppose any meaningful limits functioned, the more power government on government power. John Dewey, for acquired—until the people rose up and instance, derided “the sanctity of private destroyed the governments.” property” for providing “freedom from social control.” Socialist regimes despise property . because it limits the bower of the state to reg- The Economy Is Lives iment the lives of the people. A 1975 study, Government cannot control the economy The Soviet Image of Utopia, observed, “The without controlling the lives of everyone who closely knit communities of communism will must rely on that economy to earn his suste- be able to locate the anti-social individual nance. There is more to life than wealth. But without difficulty because he will not be able the more wealth government seizes from peo- to ‘shut the door of his apartment’ and retreat ple, the more likely that government will be to an area of his life that is ‘strictly private.”* able to control all the other good things in life. Hungarian economist Janos Kornai observed: Once government domineers the economy, it “The further elimination of private ownership becomes far more difficult to resist the exten- is taken, the more consistently can full sub- sion of government power further and further jection be imposed.”’s into the recesses of each person’s life. Property rights are not concerned merely James Bovard is the author of Freedom in Chains: with the sanctity of the estates of the rich. The The Rise of the State and the Demise of the Citizen ~ property right that each citizen has in himself (St. Martin's Press). 1s the foundation of a free society. As James 10 ===== PAGE 11 ===== 11 Madison observed, “Government is instituted and without need for justification within some to protect property of every sort; as well that domain which is the essence of freedom, be it which lies in the various rights of individuals, of speech or of property.”12 Unfortunately, as that which the term particularly express- federal law enforcement agents and prosecu- es.”’8 The property that each citizen has in his tors are making private property much less rights is the foundation of his ability to con- private. In 1984 the Supreme Court ruled in trol his own life and strive to shape his own Oliver v. United States—a case involving destiny. Kentucky law-enforcement agents who Some contemporary liberals argue that ignored several “No Trespassing” signs, government ownership is the ultimate safe- climbed over a fence, tramped a mile and a guard of freedom. According to Alan Wolfe, half onto a person’s land and found marijuana “No one would be able to enjoy the negative plants—that “open fields do not provide the liberty of walking alone in the wilderness if it setting for those intimate activities that the were not for the regulatory capacity of gov- [Fourth] Amendment is intended to shelter ernment to protect the wilderness against from government interference or surveil- development.”® Wolfe implies that if the gov- lance”? (The Founding Fathers apparently ernment did not own much of the nation’s forgot to include a parenthesis in the original land, private citizens would ravage the land- Fourth Amendment specifying that it applied scape from coast to coast. However, private only to “intimate activities.”) And the Court landowners have a better record of safeguard- made it clear that it was not referring only to ing the environmental quality of their land open fields: “A thickly wooded area nonethe- than does the federal government.!0 The Army less may be an open field as that term is used Corps of Engineers has destroyed far more of in construing the Fourth Amendment.”!4 Jus- the natural river beauty in this country than tice Thurgood Marshall dissented: “Many has any private malefactor, and the Federal landowners like to take solitary walks on their Emergency Management Agency’s lavish property, confident that they will not be con- subsidies for “flood insurance” have made fronted in their rambles by strangers or possible vast numbers of buildings on ecolog- policemen.”!5 Even prior to this ruling, it was ically fragile coastlines.!! Wolfe also implies easy for law-enforcement agents to secure that no private forest owner would permit warrants to search private land merely by con- anyone else to walk on his land. However, the cocting an imaginary confidential informant proliferation of contracts for hunting on pri- who told police about some malfeasance.!6 vate land show that, with a sound incentive The core of the “open fields” decision is system, access to private land can easily be that the government cannot wrongfully invade negotiated. Citizens have different values, and a person’s land, because government agents many citizens prefer to keep their land in have a right to go wherever they damn well semi-pristine condition. Besides, even if all please. After this decision, any “field” not sur- citizens wanted to sell their land to develop- rounded by a 20-foot-high concrete fence is ers, only a small percentage of such land considered “open” for inspection by govern- would be developed—simply because there is ment agents. (And for those areas that are suf- no economic rationale for developing much of ficiently fenced in, the Supreme Court has rural America. blessed low-level helicopter flights to search for any illicit plants on the ground.!7) The Supreme Court decision, which has been cited in over 600 subsequent federal and The sanctity of private property is the most state court decisions, nullified hundreds of important bulwark of privacy. University of years of common-law precedents limiting the Chicago law professor Richard Epstein wrote power of government agents. The ruling was a that “private property gives the right to green light for warrantless raids by federal exclude others without the need for any justi- immigration agents; in late 1997 the New York fication. Indeed, it is the ability to act at will 7imes reported cases of upstate New York Bulwark of Privacy ===== PAGE 12 ===== 12 IDEAS ON LIBERTY ® SEPTEMBER 2000 farmers’ complaining that “immigration that thieves in some places routinely kick agents plowed into fields and barged into down doors and claim to be policemen.23 The packing sheds like gang busters, handcuffing Clinton administration, in a 1997 brief to the all workers who might be Hispanic and asking Supreme Court urging blind trust in the dis- questions later. . . . [D]oors were knocked cretion of police, declared that “it is ordinari- down, and workers were wrestled to the ly reasonable for police officers to dispense ground.”’!® In a raid outside of Elba, New with a pre-entry knock and announcement.”24 York, at least one INS agent opened fire on Law-enforcement agencies’ fear of losing fleeing farm workers.!9 Many harvests subse- small amounts of drug evidence has fueled quently rotted in the fields because of the attacks on the sanctity of homes. The Clinton shortage of farm workers. administration, for instance, appears far more concerned about the flushing of drugs than about the flushing of privacy. In a 1995 brief to the Supreme Court, the Clinton administra- The “open fields” doctrine provides an acid tion stressed that “various indoor plumbing test of conflicting views on freedom. Are peo- facilities . . . did not exist” at the time the ple more or less free when government agents common law “knock-and-announce” rule was can roam their land? Are they more or less free adopted.25 Making a grand concession to civil when they can be accosted by government liberties, the administration admitted that “if agents any time they step past the shadow of the officers knew that . . . the premises contain their front door? Is freedom the result of gov- no plumbing facilities . . . then invocation of ernment intrusions—or of restrictions on a destruction-of-evidence justification for an intruders? The scant controversy the 1984 unannounced entry would be unreasonable.”26 decision evoked is itself a sign of how statist The Supreme Court has failed to impose contemporary American thinking has become. effective restraints on police’s prerogative to Few government policies better symbolize carry out no-knock raids. Professor Craig the contempt for property rights than the ris- Hemmens observed that the Courts “recent ing number of no-knock raids. “A man’s home decisions involving the knock and announce is his castle” has been an accepted rule of rule, essentially gutted the rule, reducing it to English common law since the early 1600s little more than a ‘form of words.””’27 and required law-enforcement officials to Police also possess the right to destroy knock on the door and announce themselves property they search. Santa Clara, California, before entering a private home. But this stan- police served search and arrest warrants by dard has increasingly been rejected in favor of firing smoke grenades, tear-gas canisters, and another ancient rule—“the king’s keys unlock flash grenades into a rental home; not surpris- all doors.”20 ingly, the house caught fire and burned down. A New York Times piece observed in 1998 When the homeowner sued for damages, a that “interviews with police officials, prosecu- federal court rejected his plea, declaring that tors, judges and lawyers paint a picture of a the police “only . . . carelessly conducted its system in which police officers feel pressured routine and regular duty of pursuing criminals to conduct more raids, tips from confidential and obtaining evidence of criminal activity. informers are increasingly difficult to verify The damage resulted from a single, isolated and judges spend less time examining the incident of alleged negligence.”28 increasing number of applications for search It is as much a violation of property rights warrants before signing them.”2! The Times and liberty when government agents storm noted that “the word of a single criminal, who into the shabbiest of rental apartments as is often paid for his information, can be when they invade the richest mansion. The enough to send armed police officers to break sanctity acquired by renters to a private down doors and invade the homes of innocent domain illustrates how the exchange of pri- people.”22 vate property can give someone vested No-knock raids have become so common rights—rights within which they can build Conflicting Views of Freedom ===== PAGE 13 ===== PROPERTY AND LIBERTY 13 and live their own lives. Local and state gov- illegal in the United States.) A boss’s power is ernments routinely treat renters as second- conditional, dependent on an employee’s class citizens; many localities have mandato- choosing to continue to receive a paycheck. ry inspection policies for all rental units that In contrast, the government agent’s power is permit government officials to search private often close to absolute: for example, a citizen dwellings without a warrant or any pretext. who refuses to pull over for a traffic cop flash- Park Forest, Illinois, in 1994 enacted an ordi- ing his lights can face jail time, regardless of nance that authorizes warrantless searches of whether the cop had a legitimate reason to every single-family rental home by a city stop him. Markets allow people a choice of inspector and police officer, who are autho- whom to deal with, while government dictates rized to invade rental units “at all reasonable that citizens must submit to its orders. As times.” No limit was placed on the power of Nobel laureate James Buchanan observed, the inspectors to search through people’s “As individuals become increasingly depen- homes, and tenants were prohibited from dent on ‘the market,’ they become corre- denying entry to government agents. Federal spondingly less dependent on any identifiable Judge Joan Gottschall struck down the person or group. In political action, by con- searches as unconstitutional in February trast, increasing dependence necessarily 1998, but her decision will have little or no becomes increasing subjection to the authori- effect on the numerous other localities that ty of others.”3! Markets limit the power of authorize similar invasions of privacy. people to dictate to other people because the parties can seek other bidders or sellers. Mar- kets provide venues for people to voluntarily agree with other people. Markets are symbol- Some socialists have argued that private ic of voluntary activities in the same way that property is a bane of freedom because jails are symbolic of coercion. Bane of Freedom? inequality of wealth is equivalent to political Some friends of government legitimize tyranny. According to historian R. H. Tawney, vesting sweeping power in politicians by “Oppression . . . is not less oppressive when defining practically any private business deci- its strength is derived from superior wealth, sion as coercive. Economist Robert Kuttner than when it relies on a preponderance of declared on a 1997 PBS program that “when physical force.”30 But regardless of how much a company relocates overseas . . . that is a wealth a person owns, he has no legal right to form of violence.”32 To define practically any coerce other citizens. Offering someone the economic change as “violence” is to authorize best wage he can find is unlike holding a gun an unlimited number of political first strikes to his head; offering someone the best price against property owners. If moving a factory for a product he is selling is not like expropri- overseas is a form of violence, then moving a ation. A legitimate government must restrict factory across state lines is also a form of vio- the coercion of all citizens, including those lence—since the “violence” is presumably with the largest bank accounts. But the fact done by a factory leaving one location, that politicians are sometimes corrupted by regardless of where it relocates. When a per- bribes and deny equal protection of the law to son is given a “right” to a job, all other people the poor is not a good reason to give more are prohibited from competing for that job. power to politicians. A viable concept of freedom must consist To understand the difference between eco- of more than psychological wish fulfillment nomic wealth and political power, consider —more than a fantasy world in which every the difference between the power of a boss citizen can buy low and sell high, in which and that of a government agent. Any power every citizen gets the wages he demands and that a boss or company has over a person is pays the prices he pleases. It is crucial to dis- based on a contract, express or implied; that tinguish between frustrated economic aspira- power is limited to the work and time con- tions and government coercion. Feeling a tracted for. (Contracts for lifetime labor are compulsive need to impress neighbors by ===== PAGE 14 ===== 14 IDEAS ON LIBERTY ® SEPTEMBER 2000 buying a swimming pool is not the same as fessions, private accreditation systems— facing arrest for planting grass seed in your many of which have already been devel- yard and allegedly disturbing a federally des- oped—would provide a much more reliable ignated wetland. The compulsion to buy a suit consumer guide than politically controlled of the latest fashion is not the same compul- certification systems. sion as experienced during an IRS audit, espe- cially if the agent decides to employ a notori- . . . ous lifestyle audit” which forces citizens to Liberty in Action detail and justify how much cash they had on Property is the basis of freedom of contract, hand at any one time a year or two before, which is simply liberty in action. Without whether they have a safe deposit box and what freedom to exchange, government places all it contains, how much they spend on gro- exchanges at the discretion of the political- ceries, where they eat out, what toys they buy bureaucratic ruling class. As new forms of for their children, and what books or jewelry property and wealth have developed in the last they purchase.33 The compulsion to buy anew 200 years, it is now much clearer how vital car differs from the compulsion you feel when property is to all citizens’ freedom, not mere- police pull you over, announce that your ly that of landowners. By holding title to cer- appearance matches that of a “drug courier tain resources (including themselves and their profile,” and proceed to rummage through own labor), people can make exchanges with your trunk, glove compartment, tire hubs, and others that allow them to raise themselves, to pockets, and to ask a bevy of incriminating better provide for their families, to pursue questions about your personal life.34 The fact their own values. Freedom is more than the that a person spends himself deeply into debt right to own property or the right to buy and and thus feels obliged to keep working at a job sell. But once the citizen loses the right to he despises is not coercive because no one own—even if he previously owned nothing— compelled the person to become a mindless he loses the ability to control his own life. If consumer. the citizen is denied the right to own or con- An inability to find a satisfactory job or sat- trol his own computer disks or the clothes on isfactory career path is not a violation of lib- his back, he has little chance of being able to erty—unless government or private action shape his own future. forcibly blocks or restrains people. A person Property rights and market economies are 1s not “oppressed” by his own lack of mar- vital steppingstones to political freedom. Pri- ketable job skills: every art history major who vate property gives people a place to stand if did not find a good job after college is not a they must resist the government. Market victim of some sinister force. economies and private property allow citizens One of the clearest violations of freedom of to build up sufficient wealth to resist govern- contract is government licensing laws, which ment pressure. prohibit millions of Americans from practic- It is important to have freedom to buy and ing the occupation of their choice. Over 800 sell, to invest, to innovate, to choose one’s professions, from barbers to masseuses to risks and reap one’s profits—but it is not interior designers to phrenologists to tat- enough. It is also vital that police not be able tooists to talent agents, now require a govern- to break people’s heads, or entrap them on ment license to practice. Licensing laws are bogus charges, or intercept their e-mail at a usually engineered by professional associa- whim, or target them because of their race, tions that want to “protect” the public from ethnicity, or political ideas. Unfortunately, competitors who might charge lower prices.3> some advocates of economic freedom seem Licensing laws kept many blacks out of the nonchalant about practically any use of gov- skilled professions until the civil rights era. ernment power that does not directly interfere The Federal Trade Commission perennially with profit-making. [] ep orts on the anticompetitive asp ects of state I. Quoted in James W. Ely, Jr., The Guardian of Every Other government licensing boards.36 For many pro- Right (New York: Oxford University, 1992), p. 26. ===== PAGE 15 ===== PROPERTY AND LIBERTY 15 2. Chicago, Burlington & Quincy R.R. v. Chicago, 166 U.S.226 Report Finds,” New York Times, December 12, 1997. (1897). 20. Craig Hemmens, “I Hear You Knocking: The Supreme Court 3. John Dewey, Liberalism and Social Action (New York: G. P. Revisits the Knock and Announce Rule,” University of Missouri at Putnam’s Sons, 1935), p. 34. Kansas City Law Review, Spring 1998, p. 562. 4. Jerome Gilison, The Soviet Image of Utopia (Baltimore: 21. Michael Cooper, “As Number of Police Raids Increase, So Johns Hopkins University Press, 1975), p. 149. Do Questions,” New York Times, May 26, 1998. S. Quoted in Robert Skidelsky, The Road from Serfdom (New 22. Ibid. York: Penguin, 1997), p. 99. 23. Barney Rock, “Kicking in Doors New Trend among 6. Ibid, p. 119. Thieves,” Arkansas Democratic Gazette, January 21, 1995. 7. James Bovard, “Eastern Eurcpe, The New Third World,” 24. Hemmens, p. 584. New York Times, December 20, 1987, and James Bovard, “The Hun- 25. Brief for the United States as Amicus Curiae Supporting garian Miracle,” Journal of Economic Growth, January 1987. Respondent, Wilson v. Arkansas, no. 94-5707, February 23, 1995, 8. The Writings of James Madison, vol. 6, ed. Gaillard Hunt ~~ p. 26. (New York: G.P. Putnam’s Sons, 1906), p. 103. The quote is from an 26. Ibid., p. 28. article Madison wrote for the National Gazette, March 29, 1792. 27. Hemmens, p. 601. 9. Alan Wolfe, review of Stephen Holmes’s Passions & Con- 28. Patel v. U.S., 823 F. Supp. 696, 698 (1993). For discussion of straint: On the Theory of Liberal Democracy, New Republic, May 1, this case, see Gideon Kanner, “What Is a Taking of Property?” Just 1995. Compensation, December 1993. 10. Tom Bethell, The Noblest Triumph: Property and Prosperity 29. Kenneth Black et. al v. Village of Park Forest, 1998 U.S. Through the Ages (New York: St. Martin's Press, 1998), pp. 272-89. Dist. LEXIS 2427, February 23, 1998. 11. James Bovard, “Assistance to Flood Victims Invites Further 30. Quoted in Robert E. Goodin, Reasons for Welfare (Princeton, Disaster,” Los Angeles Times, June 18, 1997. N.J.: Princeton University Press, 1988), p. 307. 12. Richard Epstein, Takings (Cambridge, Mass.: Harvard Uni- 31. James Buchanan, “Divided We Stand,” review of Democra- versity Press, 1985), p. 66. cy's Discontent: America in Search of a Public Philosophy” by 13. Oliver v. United States, 466 U.S. 170, 179 (1984). Michael J. Sandel, Reason, February 1997, p. 59. 14. Ibid., p. 180, fn. 11. 32. “Debate on Free Trade,” Public Broadcasting Service, August 15. Ibid, p. 192. 15, 1997. 16. The National Law Journal reported in 1995 that between 33. Arthur Fredheim, “IRS Audits Digging Deeper Beneath the 1980 and 1993 the number of federal search warrants relying exclu- Surface,” Practical Accountant, March 1996, p. 20. sively on confidential informants nearly tripled, from 24 percent to 34. See, for instance, Tracey Maclin, “The Decline of the Right 71 percent, and that “from Atlanta to Boston, from Houston to of Locomotion: The Fourth Amendment on the Streets,” Cornell Miami to Los Angeles, dozens of criminal cases have been dismissed ~~ Law Review, September 1990, p. 1258, and Mark Kadish, “The Drug after judges determined that the informants cited in affidavits were ~~ Courier Profile: In Planes, Trains, and Automobiles; and Now in the fictional.” Mark Curriden, “Secret Threat to Justice,” National Law Jury Box,” American University Law Review, February 1997, p. 747. Journal, February 20, 1995. 35. See, for instance, Sue Blevins, “Medical Monopoly: Protect- 17. Florida v. Riley, 488 U.S. 445 (1989). ing Consumers or Limiting Competition?” USA Today (magazine), 18. Evelyn Nieves, “LN.S. Raid Reaps Many, But Sows Pain,” January 1998, p. 58. New York Times, November 20, 1997. 36. Interview with Federal Trade Commission spokesman 19. Associated Press, “Agent Fired During Raid on Migrants, Howard Shapiro, July 28, 1998. Next Month's Ideas on Liberty: Our October issue features Andrew Morriss and Richard Stroup on “Quartering Species,” Charlotte Twight on "A Constitutional Counterrevolution,” Walter E. Williams on “Greed and Compassion,” and much, much more. Don’t miss it! ===== PAGE 16 ===== Ideas and Consequences by Lawrence W. Reed IDEAS ON [IBERTY SepTEMBER 2000 End the Farm Dole Once and for All new program to require the U.S. Depart- Act” designed to wean farmers from handouts ment of Agriculture to pay the cost of by 2002. inspecting meat from emus and ostriches. A A funny thing happened on the way to a plan to spend $200 million to buy surplus free market in farming. Commodity prices on cranberries, black-eyed peas, and other crops. world markets took a dip, farm-state interests A $100 million proposal for payments to pro- started agitating again for bailouts, and our ducers of cottonseed. At this writing (June), courageous Congress blinked. In 1999 feder- these were among a bundle of agricultural al payments to American agriculture soared to subsidy schemes either passed by or under a record $22.7 billion—no less than three serious consideration in both houses of the times what the figure was when the Freedom U.S. Congress. to Farm Act was passed in 1996. But wait a minute! When landmark legisla- Quotas on foreign sugar already translate tion to get the government out of the crop sub- into a sugar tax of about $1 billion annually, sidy business passed in February 1996, U. S. paid for by every American consumer. Yet by News & World Report told us, “the govern- the time this column is published, Congress ment will abandon the elaborate system of may succumb to great pressure from sugar price supports that restricted the amounts of producers to buy 350 million pounds of sur- corn, wheat, cotton, rice and feed grains farm- plus sugar that nobody wants. Subsidies to ers could grow.” Private crop insurance was tobacco farmers continue as well, at the same going to take the place of incessant public dis- time the government doing the subsidizing is aster relief. Uncle Sam, we were advised, was suing tobacco companies for the illnesses it about to liberate both farmers and taxpayers says their product causes. Milk consumers from decades of public policy folly. It was to pay an extra $1 billion annually in milk prices be a crowning achievement of a new Republi- because of federal meddling, and consumers can majority pledged to curtail the size and of manufactured dairy products like cheese intrusiveness of the federal establishment. and butter pay an extra $400 million—facts Then-Speaker of the House Newt Gingrich that make a mockery of the same govern- assailed the “East German socialist” farm ment’s “war on poverty.” (See Kevin McNew, programs built up since the New Deal. Presi- “Milking the Sacred Cow: A Case for Elimi- dent Clinton signed the “Freedom To Farm nating the Federal Dairy Program,” Cato Pol- icy Analysis No. 362, December 1, 1999.) We’ve come a long way from the day when Lawrence Reed is president of the Mackinac Center President Grover Cleveland vetoed a $10,000 for Public Policy (www.mackinac.org), a free-market appropriation for Texas farmers, warning, research and educational organization in Midland, though the people support the Government, Michigan, and chairman of FEE's Board of Trustees. the Government should not support the peo- 16 ===== PAGE 17 ===== 17 ple.” American farmers are more dependent But, some would say, the free market is on politicians than ever, and today’s farm pol- hard on farmers too. In 1800, 97 percent of icy looks less like the free-market rhetoric of Americans lived on farms. Today, about 2 per- ’96 and more like the policies of 91—that’s 91 cent do. Free markets made farmers so pro- A.D., when the Roman emperor Domitian ductive that just 2 percent now produce more rigged the grape market to raise the price of foodstuffs than we Americans—and much of wine. the world—can possibly eat. The market has One of the destructively stupid things the been weeding out the least efficient farms for 1996 law was supposed to cure was the pen- at least 200 years. chant for federal farm policies to reward the Before anybody cries crocodile tears for large and corporate well-to-do and thereby agriculture, let’s recognize an important fun- confer a competitive disadvantage on small damental principle of economics: consump- family farms. Payments to the richest 10 per- tion, not production, is the ultimate end of cent of farmers—mostly large corporate agri- human economic endeavors. We produce in culture firms—were running at more than order to consume, not the other way around. twice the amount of payments to the poorest Furthermore, as human energies, physical 50 percent of farmers, mostly small opera- resources, and capital become less in need in tions run by single families. Nothing since one area, they are free to work their wonders 1996 has changed that. Even the current sec- in others. If 97 percent of our people were retary of agriculture acknowledges that the employed on the farm at today’s levels of pro- federal government continues to subsidize big ductivity, we would be buried in rotting food operations while driving smaller farms out of and deprived of endless other products and business. services today’s nonfarmers provide. While big farmers reap most of the ever- Experience since the federal government higher federal payments, the national glut of became a major player in agriculture seven foodstuffs fostered in part by those subsidies decades ago, including recent years when is choking all farmers with ever lower prices. Congress made promises to restore a free The Agriculture Department forecasts that the market but didn’t deliver, argues decisively price of soybeans this year will be the lowest for one rather obvious scenario: a genuine in 27 years and the price of wheat and corn free market in agriculture. That means no will be at their lowest level since 1987. subsidies, no quotas, no handouts of any The sad fact is that 70 years of federal med- kind—just the same market forces that deter- dling on the farm has produced almost noth- mine almost every other good’s supply and ing but trouble for both farmers and con- demand. sumers. As we’ve seen, it has been especially Congress should finally do what it only hard on small farmers and low-income con- promised in 1996. After ceaseless failures of sumers. No policy that produces such havoc intervention, legislators have no excuse for can be justified. not getting it right the next time. Cl ===== PAGE 18 ===== IDEAS ON IBERTY SepTemBER 2000 Economists Against the FDA by Daniel B. Klein Ae drug called Elixir Sulfanilamide Many economists have studied the FDA. released in 1937 killed over 100 Ameri- Their diagnosis is well expressed by Nobel- cans, mostly children. A sedative called winning economist Milton Friedman: “The Thalidomide released in Europe in 1957 and FDA has done enormous harm to the health of taken by pregnant women caused deformities the American public by greatly increasing the in 10,000 children. These famous episodes costs of pharmaceutical research, thereby strike us as horrible injustices that must be reducing the supply of new and effective prevented. drugs, and by delaying the approval of such But more deadly are quack platitudes that drugs as survive the tortuous FDA process.”? guide public policy. Platitudes such as “safe- Other economists’ prescriptions regarding the ty,” “consumer protection,” and “imperfect FDA are uniformly libertarian, ranging from information” have paved the way for a gov- gradual decontrol to outright abolition of the ernment stranglehold on the pharmaceutical agency (as Friedman recommends). Although industry. The Food and Drug Administration one can occasionally find remarks by econo- (FDA) decides whether to permit a company mists vaguely favoring government restric- to manufacture and sell a drug or medical tions on health products, those are not the device and what the company may say about economists who have written on the FDA or it. provided serious argumentation.? I have tried In medical matters, expertise and good to survey all economists’ writings on the FDA sense should decide. In policy matters, exper- and have not been able to find a single tise and good sense also should decide—but instance of an economist defending the con- they do not. The issue here is one of econom- temporary FDA or advocating tighter restric- ic policy, not medicine. The true “doctors” for tions. Contrary to the joke about laying all the drug policy are the political economists. But economists end to end, those who study the as economist John Calfee says, “the FDA has issue do reach a conclusion: Relax restrictions never sought to accumulate expertise in eco- on drugs and devices. nomics.”! Quacks make policy against the But the good policy doctors are largely doctors’ orders. ignored. The result has been like a plague. Yet the journalists and educators have not Contributing editor Daniel Klein (dklein@scu.edu) is explained it or its FDA ongins. Economists an associate professor of economics at Santa Clara and libertarians are up against a Goliath—the University. country’s entire quack political culture. 18 ===== PAGE 19 ===== 19 Today men with risk of heart trouble know to whether these deaths are to be attributed to take half an aspirin a day. By 1988 it was well side effects of the drug or excitement “under established that aspirin greatly reduces the risk the influence.”) of myocardial occlusion. But for years the FDA That said, I am prepared to grant that few forbade aspirin makers from advertising that FDA-approved drugs are flagrantly unsafe. fact (the FDA still significantly restricts adver- But here’s the important point: Drug safety tising about it). The FDA surely killed tens, and would be—and is—certified and assured by a quite possibly hundreds, of thousands of Amer- panoply of private-sector, voluntary institu- icans by this restriction alone.4 tions and by the tort system. When a compa- The FDA delays, stifles, and suppresses ny harms consumers with an unsafe drug, it life-saving drugs and devices. Such drugs and suffers devastating losses. Its reputation suf- devices as Practolol, Interleukin-2, Taxotere, fers, and it pays hefty damages to victims. In Vasoseal, Ancrod, Glucophage, Navelbine, deciding which drugs to use, consumers seek Lamictal, Ethyol, Photofrin, Rilutek, Citicol- various assurances by: ine, Panorex, Femara, Prostar, Omnicath, and Transform have been subject to long delays, + asking the doctor which drug to take; killing tens of thousands and causing awful * choosing doctors affiliated with health suffering.’ organizations (such as hospitals, clinics, The drug delays we can list, taken together, medical groups, and insurers); are just the tip of the iceberg. A 1987 study * buying drugs of brand-name manufacturers; catalogued 192 generic and 1,535 brand-name * buying drugs from reputable pharmacies tested drugs available abroad but not and supermarkets; approved in the United States. Of the drugs * being an “active patient” by researching approved by the FDA between 1987 and therapies in libraries and on the Internet 1993, fully 73 percent had already been (at encyclopedic drug databases, such as approved abroad.6 And because the FDA the WebMD or onHealth Web sites). process 1s so expensive, so protracted, and so uncertain, thousands of untold drugs are Meanwhile, our providers and agents seek never discovered or developed. It is impossi- assurances in more professional ways—mys- ble to estimate the suffering and death caused, terious to us, but not to those involved: but surely it greatly exceeds 50,000 premature deaths annually. * drug review by medical insurers; Here one might object, “But isn’t your * seal of approval or evaluations by inde- diagnosis one-sided? Doesn’t the FDA screen pendent organizations (ECRI, American out unsafe drugs?” Hospital Formulary Service Drug Infor- mation, US Pharmacopoeia); Quality and Safety Assurance . professional newsletters age Health . evices Alert, The Medical Letter); Without the FDA « scientific testing and publishing (The New First of all, “safety” is not a yes-or-no issue. England Journal of Medicine, and others). Is chemotherapy safe? Medicine is often poi- son. The safety of a drug depends on myriad Ultimately, the whole enterprise of medical particulars about the patient: age, physical science is about safety and efficacy! Malprac- strength and condition, attitude and spirit, tice or negligence is a professional scandal for activities, allergies, diet, dosage, medical the private organizations involved. They work attention, and drug regimen. In 1994 adverse hard to avoid blights to their reputation, quite reactions to FDA-approved drugs killed apart from the FDA. Consumers desire not 106,000 hospital patients.” Inevitably, many only quality and safety but also assurance of people will suffer and die from unwanted quality and safety. The quality of the thing side effects. (In 1998, about 130 people died offered may be excellent, but if consumers while on Viagra; speculation continues over lack confidence about that quality, they ===== PAGE 20 ===== 20 IDEAS ON LIBERTY ® SEPTEMBER 2000 abstain from buying. Confidence comes by Were They Dropping Like Flies in Europe? way of meaningful assurances of quality, so Most countries have their own counterparts to entrepreneurs have incentives to provide that the FDA. But other countries approve drugs assurance.8 quicker. From about 1970 to 1993 the approval times for drugs and devices in the Quality and Safety Assurance United Kingdom, France, Spain, and Ger- . . many was significantly shorter than in the Without the FDA: Four Proofs United States.!! As we have noted, delays Although some might tell you otherwise, mean morbidity for patients. Although FDA voluntary society (plus the tort system) can drug approval times have improved and are provide assurance at least as well as govern- now similar to those in Europe, the prior peri- ment intervention can. Here are four empiri- od of U.S. “drug lag” suggests a lesson about cal proofs of the claim. drug approval. !2 Assurance in Other Industries. How is safe- The European agencies took less time to ty assured in other industries? In electronics, approve new drugs, but such laxness did not manufacturers submit products to Underwrit- produce a scourge of unsafe drugs. As ers’ Laboratories, a private organization that researchers of the Tufts Center for the Study grants its safety mark to products that pass its of Drug Development write: “the probability inspection. The process is voluntary: manu- that a marketed drug will be removed for safe- facturers may sell without the UL mark. But ty reasons was not appreciably greater in the retailers and distributors usually prefer the United Kingdom than in the United States.”!3 products with it. Lighter approval requirements did not lead to Suppose someone proposed a new govern- any noticeable problem. One explanation ment agency that forbade manufacturers from would be that the European agencies function making any electronic product until approved more effectively (and there is reason to by the agency. We would think the proposal to believe this). Yet I am inclined to think that in be totalitarian and crazy. But that is the sys- both Europe and the United States the gov- tem we have in drugs. It is inconsistent to ernment approval process, as a means of favor the free-enterprise approach to assur- assuring safety, is superfluous. ance in electronics but the totalitarian Even without government approval, volun- approach in drugs. Sometimes people rejoin: tary institutions and the tort system would use “You can’t compare drugs to a toaster! Drugs scientific testing and professional certification have much larger effects on our physical well- to screen out unsafe drugs. The government being.” The point, however, cuts both ways. approval process here and abroad is a set of Because drugs are so important, the downside bureaucratic hoops and hurdles often inap- of government restrictions is enormous—as propriate or unnecessary for the drugs in we have seen. question. Calamity Before 1962? The FDA was much The Hidden Lesson in Off-Label Prescrib- less powerful before 1962. The historical ing: Proof that we don’t need FDA approval of record—decades of a relatively free market up drugs can even be found in America today. A to 1962—shows that free-market institutions drug’s FDA-approved uses are called its “on- and the tort system succeeded in keeping label” uses. Once a drug is approved for any unsafe drugs to a minimum. The Elixir Sul- use, it may be used in any way doctors and fanilamide tragedy (107 killed) was the worst users see fit. Approved drugs are often found in those decades.® (Thalidomide was never to have other benefits, and doctors learn to approved for sale in the United States.) The prescribe those drugs for such “off-label” economists Samuel Peltzman and Dale uses. Although off-label uses have absolutely Gieringer have made the grisly comparison: no standing with or approval by the FDA, they the victims of Sulfanilamide and other small are perfectly legal. Do patients and doctors tragedies prior to 1962 are insignificant com- shrink in fear from uses not certified by the pared to the death toll of the post-1962 FDA.10 FDA? ===== PAGE 21 ===== EcoNoMISTS AGAINST THE FDA 21 Absolutely not! Off-label prescribing is that the FDA accomplishes, the harms of the pervasive and vital to the health of millions of FDA are unredeemed. Americans. As economist Alexander Tabarrok Economists from Adam Smith to Milton says, “most hospital patients are given drugs Friedman have had the unenviable task of which are not FDA-approved for the pre- pointing out that popular, well-intentioned scribed use.”14 Off-label prescriptions are cures are often worse than the disease. Econ- especially common for AIDS, cancer, and omists seem nasty when they report that the pediatric patients, but are standard practice FDA is bad medicine. People don’t like to throughout medicine. hear that they have bought into quackery. In Doctors learn of off-label uses from exten- collective decision-making, quackery often sive medical research, testing, newsletters, prevails over sense. OJ conferences, seminars t ere » 5€ ’ 1 nterne sources, and 1. John E. Calfee, “The Leverage Principle in the FDA's Regu- trusted colleagues. Scientists and doctors, lation of Information,” in Competitive Strategies in the Pharmaceu- g gh p 0 § 0 prise Institute, 1996), pp. 306-21. and organizations, make official determina- 2. Quoted in Durk Pearson and Sandy Shaw, Freedom of tions of “best practice” and certify off-label Informed Choice: FDA Versus Nutrient Supplements (Neptune, N.J.: . 5 Common Sense Press, 1993), p. 39. uses in standard reference compendia such as 3. Economists making passing remarks vaguely favoring gov- AMA Drue Evaluatio A ri H. ital ernment restrictions on health products include Jerome Rothenberg, g ns, American Hospita “Social Strategy and the Tactics in the Search for Safety,” Critical Formulary Service Drug Information, and US Review, Spring/Summer 1993, pp. 159-80, especially pp. 166, 172, Pharm acopoeia Drug Information—all with- and Paul Krugman, “Natural Born Killers,” New York Times, March . oo. . 22, 2000. out FDA meddling or restriction. Economist 4, Alison Keith, “Regulating Information about Aspirin and the J. Howard Beales finds that off-label uses that Prevention of Heart Attack,” American Economic Review, May 1995, pp. 96-99. later got FDA recognition appeared in the 5. A chief source of information about drug development and Pharmacopoeia on average 25 years earlier.,15 approval is the Tufts Center for the Study of Drug Development. Its ) information is often mined and analyzed from a libertarian perspec- Where voluntary society finds room to stand, tive by researchers at the Competitive Enterprise Institute (see both its practice n llow mm organizations online). P ac . S lead, ot follo > BOVE ent 6. Kenneth Anderson and Lois Anderson, eds., Orphan Drugs determinations. (Los Angeles: The Body Press, 1987). Henry I. Miller, “Failed FDA No one would be foolish enough to suggest Re cian. 3 al Cleience of Adverse Drug Reactions that the FDA prohibit off-label prescribing. in Hospitalized Patients,” Journal of the American Medical Associa- a t int th : tion, April 15, 1998, pp. 1200-05. But as Tab rrok astu ely pots out, ere 1s a 8. See Daniel B. Klein, Assurance and Trust in a Great Society, logical inconsistency in allowing off-label Foundation for Economic Education Occasional Paper no. 2, 2000. 1bi ir 9. Dale H. Gieringer, “The Safety and Efficacy of New Drug prescribing and requiring proof of efficacy for Approval,” Cato Journal, Spring/Summer 1985, pp. 177-201, pro- b) the drug’s initial use. Logical consistency vides a table of cases worldwide, 1950-80, with at least 100 casual- would require that one either oppose off-label pies from an unsafe new drug 192). There are none listed for the uses and favor initial proof of efficacy, or 10. Gieringer; Sam Peltzman, “The Benefits and Costs of New > ‘hi Init Drug Regulation,” in Regulating New Drugs, ed. Richard L. Landau favor off-label prescribing and Oppose initial Chicago: University of Chicago Press, 1973), pp. 114-211. 4 ty proof-of-efficacy. Experience recommends the 11. Kenneth I. Kaitin and Jeffrey S. Brown, “A Drug Lag : : Update,” Drug Information Journal, 29, 1995, pp. 361-73; Robert second option. Efficacy requirements should Higgs, “How FDA is Causing a Technological Exodus: A Compara- be dropped altogether! tive Analysis of Medical Device Regulation: United States, Europe, Canada, and Japan,” Competitive Enterprise Institute, March 1995. 12. Elaine M. Healy and Kenneth Kaitin, “The European Agency * for the Evaluation of Medicinal Product’s Centralized Procedure for Quackery Often Pr evails Product Approval: Current Status,” Drug Information Journal, 33, 1999, pp. 969-78. It should be noted that approval is but the last A drug may be developed, tested, and stage in the development of a drug, and the FDA reaches far back found to save lives. But the FDA will prevent into the clinical-testing stages of drug development. Therefore, look- j , . . . ing only at approval times does not give a complete picture of Eli Lilly, Rite Aid, and Kaiser Permanente whether the FDA now keeps pace with its European counterparts. : : 2 Historically drug development has taken longer in the United States. from making the drug available until it has Whether the “drug lag” in this broader and fuller sense is diminish- gone through the tortuous and expensive ing is not yet established. : 13. Quoted in Kaitin and Brown, pp. 370-71. approval process. That might take ten years. It 14. Alexander Tabarrok, “Assessing the FDA via the Anomaly of might take forever if the drug is for a rare dis- Off-Label Drug Prescribing,” The Independent Review, Summer _ 2000, pp. 25-53. oe (and hence a smal market) ! a, 15. J. Howard Beales III, “New Uses for Old Drugs,” in Helms, untary society wou accomplisn anything pp. 281-305. ===== PAGE 22 ===== IDEAS ON [IBERTY SEPTEMBER 2000 Trade and Freedom in China: A Reality Check by Christopher Lingle hina’s authoritarian government regularly plier” effect to improve the lot of Chinese cit- and systematically ignores universally izens. It is partially true that foreign trade and recognized rights. It is beyond dispute that the investment in China can contribute to pros- Communist Party detains individuals for perity for some people in a few parts of expressing political opinions and for practic- China. However, the impact of external eco- ing religious beliefs that are viewed to be sub- nomic influences cannot raise the standard of versive to the control of the central authorities. living of most Chinese in an extensive or sub- Apologists for Beijing often try to raise an stantial manner. argument based on moral relativism or a sug- On the one hand, economists offer little gestion that China’s underdeveloped economy evidence to identify or quantify multipliers of is a mitigating factor. However, violations of any sort that generate an appreciable impact. human rights cannot be dismissed on grounds Even if multipliers have worked elsewhere, it of cultural differences or of stages of eco- is far-fetched to expect them to operate in nomic development. China’s economy. First, there are large dispar- Ironically, it can be argued that overseas ities of income between urban and rural Chinese are responsible for the limited outcry areas due to uneven economic development. over Beijing’s abuses. Although ethnic Chi- Second, these gaps can be expected to widen nese around the world exhibit pride in their until China develops the physical infrastruc- heritage, they avoid critical assessments of ture needed for a unified, national economy. what that culture has brought the country of As it is, the poor communication or trans- their origin. It would appear that individuals portation networks do not provide adequate of Chinese descent are less moved by perse- links between the commercial centers of the cution of their ethnic brethren than were hinterland. African Americans who led the anti-apartheid On the other hand, after 20 years of eco- movement. nomic reform and hundreds of billions of dol- Instead, there are assertions that the best lars in foreign investment, foreign-invested way to improve human rights in China is enterprises employ less than 1 percent of the through trade and investment. Multinational Chinese labor force. Given the slowdown in corporations are portrayed as an important foreign direct investment into China, this pro- engine of change that will generate a “multi- portion is unlikely to rise significantly. Christopher Lingle is an independent corporate con- . sultant and adjunct scholar of the Centre for Inde- Encour aging Democr acy? pendent Studies in Sydney, Australia, who authored . } The Rise and Decline of the Asian Century. His The belief that trade will democratize e-mail address is: clingle@ufm.edu.gt. China has been supported by political theo- 22 ===== PAGE 23 ===== 23 rists ranging from Aristotle to Seymour Mar- as if they were in a meritocratic setting. Most tin Lipset, who argued that democracy is multinational corporations face the hindrance more sustainable only after a country reaches of having a local joint partner, most of whom a threshold level of economic development. have acquired their wealth and power through There is some evidence to support the belief. connections to the Party. With so few oppor- Taiwan’s presidential election might be treat- tunities for individuals to work in private- ed as a case where economic development sector firms, there are still strong incentives encouraged democratization. for many others to seek their fortune by join- However, the object is not merely about the ing the Communist Party or working for a right to vote, itself a necessary and sufficient state-owned enterprise. condition for a regime to call itself a democ- Because of the severe restrictions on the racy. Rich Singapore considers itself a development of private-sector initiatives by democracy despite its petty repressions and both domestic and foreign interests, few state- government-orchestrated attacks on political owned enterprises are forced to face open opposition figures. Many other developed competition. So there is little pressure on Asian economies have political systems that them to introduce better employment prac- are paragons of “illiberal” democracy and tices to increase productivity and improve lack the trappings of a civil society. product quality. It will be a long time before There is little evidence that prosperity pro- there are enough self-made entrepreneurs to vides the impetus for the formation of civil join with employees in foreign-based corpo- institutions. A mature civil society will have rations to be an effective force to influence mechanisms for contract negotiation, the non- political outcomes. Therefore, it is a stretch to arbitrary application of the rule of law to pro- believe that foreign influences can accelerate tect individual rights and private property, and expand the middle class and contribute to a commitment to open and competitive China’s democratization. economies as well as accountable and trans- Proponents of China’s entry into the World parent political governance. Most Asian coun- Trade Organization or of permanent normal tries score low on this list. trade relations rely on similar exaggerations. The middle class may indeed be a necessary The pressure on social change is likely to be element of the formation of civil society that so slight and take so long that these initiatives serves as a counterbalance to government will have little influence over China’s authori- abuse. However, an emerging, prosperous tarian government. bourgeoisie is not sufficient to moderate In light of the small impact that can be authoritarian rule. Co-optation of the middle expected, it seems that it is time for a reality class and the implementation of government- check on what changes can be expected in sponsored organizations can supplant or fore- China. In the end, the issue is not whether free stall voluntary and spontaneous arrangements. trade is a good thing—it is. It’s whether trad- ing with China will civilize the communists (it may) and how long it might take for the benefits to take hold there. It’s likely to be a There are also claims that international very long time, especially if the communists companies will inspire the cadres to operate remain in power. OJ Encouraging Meritocracy? ===== PAGE 24 ===== Potomac Principles by Doug Bandow IDEAS ON [IBERTY SEPTEMBER 2000 Bipartisan Drug Entitlement ashington came close to wrecking the The reason drugs seem so expensive is that U.S. health-care system in 1994. Only private insurance and government programs, resolute resistance to the Clinton administra- particularly Medicare, cover a lower percent- tion’s proposal to take over American medi- age of their cost than of other care. Thus, cine prevented this nation from proceeding Americans used to getting their medical atten- down the disastrous path of nationalized care tion for “free” are horrified at having to actu- prevalent around the world. ally pay for pharmaceuticals. Although defeated in his attempt to gulp However, the very purpose of insurance is down the health-care system, President Clin- to protect against unexpected, catastrophic ton has succeeded in expanding federal con- expenses, not lesser, routine ones. Insurance trol one bite at a time. Washington is now tar- should cover cancer treatment, not birth con- geting the pharmaceutical industry. trol pills. Congressional Democrats unveiled a $200 The demand that health “insurance” pay for billion “drug benefit” as part of Medicare. everything has grossly inflated its cost. The “me-too” Republicans, determined to Indeed, the health care “crisis”—spiraling surrender on every important issue, have prices and growing numbers of uninsured, as pushed their own plan. well as rising premiums—refiects the fact that The fight over pharmaceuticals demon- expanded “insurance,” public and private, has strates how accustomed Americans have turned medicine into a cost-plus system. become to the proverbial free lunch. Drugs More than three-fourths of every medical seem expensive, but the alternatives are more bill is directly paid by someone else. Since costly. Pharmaceuticals extend our lives, patients cover only a fraction of the cost, they improve our well-being, and replace more want the most expensive and convenient treat- dangerous treatments, such as heart bypass ment as soon as possible. surgery. But those responsible for the bills want to Indeed, because even expensive prescrip- pay as little as possible, giving rise to man- tion drugs are so cost-effective, limiting their aged care and HMOs, which restrict treatment use actually increases medical expenses. An and ration by inconvenience. The government attempt by New Hampshire to restrict the has also imposed de facto price controls number of prescriptions for Medicaid recipi- through Medicare and Medicaid, reducing ents caused an upsurge in doctors’ visits, hos- access to and the quality of care. pitalizations, and nursing home admissions. A federal pharmaceutical program would —_— ] have the same effects. First, the costs would Doug Bandow, a nationally syndicated columnist, is . . a senior fellow at the Cato Institute and the author inevitably rise far faster than forecast. Cut the and editor of several books, including Beyond Good ~ €ffective cost of medical care, and people will Intentions. want more of it. The costs of Medicare, Med- 24 ===== PAGE 25 ===== 25 icaid, and renal dialysis coverage all began Finally, two-thirds or more of new drugs soaring the moment the programs took effect. that reach the market don’t ever recover their At Medicare’s inception the House Ways and full costs. Most ideas never get beyond the Means Committee predicted that the program research stage. would cost $12 billion in 1990, a staggering Not only would price controls cause com- $95 billion underestimate. Spending actually panies to spend less, but they would also exceeded $12 billion in 1975. The initial costs focus their efforts on sure things: minor of Medicare’s kidney dialysis program, improvements in existing products rather than passed in 1972, were more than twice project- dramatic innovations in new fields. ed levels. And just eight months after passage Because American pharmaceutical makers of the 1988 Medicare Catastrophic Coverage remain relatively free, drugs are one of the Act, soon repealed in response to popular nation’s most successful industries: U.S. firms protest, the Congressional Budget Office hiked have developed roughly half the pharmaceuti- its five-year cost estimates by upward of 100 cals marketed worldwide since the 1970s. percent. Between 1973 and 1986 American firms Second, as costs rise, the pressure for price accounted for ten times as many drug patents controls will grow. Congressional catfights as Germany and Japan, 16 times as many as over Medicare and Medicaid reimbursement Great Britain, and 20 times as many as rates are already routine. States like Vermont France. are threatening to limit prices because foreign Price controls in other nations don’t even citizens allegedly can purchase pharmaceuti- do much to reduce drug costs. Although a cals for less. variety of studies have claimed that U.S. Yet price controls would backfire. While prices range upward of one-third more to dou- government can effectively confiscate exist- ble those in Britain, Canada, and Mexico, ing products, it cannot create new drugs. Lim- Patricia Danzon of the Wharton School warns iting what pharmaceutical makers can charge that these analyses are typically flawed, ignor- would cause them to reduce research and ing the role of generics and volume discounts development. in America. Danzon concludes that U.S. Since 1962 both the total cost of bringing prices are in the middle. She and a colleague drugs to market, and the length of time found that “the average U.S. consumer would devoted to testing and review, effectively have paid 3 percent more in Canada, 27 per- cutting a product’s patent protection, have cent more in Germany, 30 percent less in more than doubled. The process now aver- France, 9 percent less in Italy, 8 percent less in ages 12 years. Japan, 44 percent more in Switzerland, 9 per- Moreover, the risks are enormous. There cent more in Sweden, and 24 percent less in are typically 30,000 to 45,000 medical arti- the [United Kingdom].” cles on drug therapies a year. Government At the same time, drug price controls have patents for drugs usually range between 2,000 inflated overall health-care costs. A 1999 and 4,200 a year; companies list about half Boston Consulting Group (BCG) study con- that number as investigational new products cluded that the introduction of a “drug bud- with the Food and Drug Administration. get” in Germany increased specialist refer- Nearly another half fall out by Phase Three of rals, hospitalizations, and treatment costs, the testing process, and companies end up fil- wiping out about 60 percent of the expected ing applications for barely 80 to 250. The savings. FDA then approves between 20 and 60. Con- Legislators must reject any proposal that cludes Michael Ward, staff economist at the would expand government control. Election- Federal Trade Commission, “In all, firms will minded politicians see rewards in demonizing market about one out of a hundred of the the drug companies. But the pharmaceutical products for which they have developed industry is doing infinitely more than Con- patents.” gress to improve Americans’ health. OJ ===== PAGE 26 ===== IDEAS @ History ONTIBERTY The Colonial Origins of American Liberty by Thomas E. Woods, Jr. t has recently been suggested that we cease originated in the North Midlands of England to use the term “Founders” to refer to those and Wales and terminated in the Delaware Val- American thinkers and politicians who influ- ley (c. 1675-1725). Finally, from approximate- enced the formation of the American union ly 1718 through 1775, a fourth group, consist- and the writing of the Constitution and insist ing of immigrants from the borders of North instead on the term “framers.” This idea has Britain and northern Ireland, made their way to much to recommend it. “Founders” possesses the Appalachian backcountry.! certain unacceptable overtones. It suggests Naturally, these groups shared a number of that a group of men at a discrete moment in obvious and important traits. They hailed from time “founded” the United States out of thin the same part of Europe, spoke a common lan- air, as though nothing were owed to the colo- guage, and at least in a broad sense shared the nial inheritance. But to understand the true same religion. Indeed, it was precisely these history of American liberty, we have to begin shared characteristics that John Jay cited in the not with the 1780s and the Constitution, but Federalist Papers— specifically #2—as a cru- with Jamestown and Massachusetts. cial source of the comity and order that char- By now the thesis of David Hackett Fischer's acterized the American republic. “Provi- important book Albion's Seed: Four British dence,” he wrote, “has been pleased to give Folkways in America is familiar to students of this one connected country to one united peo- colonial America. The period from 1629 ple—a people descended from the same through 1775, commencing with the emigra- ancestors, speaking the same language, pro- tion of English Puritans from the east of Eng- fessing the same religion, attached to the same land to Massachusetts Bay and concluding principles of government, very similar in their with the stirrings of revolution, was character- manners and customs.” In other words, the ized by the migration of peoples from four dis- peoples of the various colonies possessed tinct regions of England. Following the Puri- enough common characteristics to make a fed- tans, Fischer identifies as a second group a eral union a plausible idea and at least theoret- small, putative aristocracy and a sizable num- ically possible in practice. ber of indentured servants who originated in But while much of Jay’s analysis is well the south of England who made their way to taken, Fischer insists that the cultural differ- Virginia (c. 1642-75). The third migration ences between the peoples who comprised the United States were real, significant, and Jolk Community College in Brentwood, New York. An enduring. In the mid-seventeenth century one earlier version of this paper was delivered at the Jan- Pur itan, speaking of Virginians, declared uary 2000 Ludwig von Mises Institute conference, them “the farthest from conscience and moral “The History of Liberty,” and appeared on Mises.org. honesty of any such number together in the 26 Thomas Woods, Jr., is a professor of history at Suf- ===== PAGE 27 ===== 27 world.” Likewise, the Virginian William Byrd II, referring to the Puritans, warned a corre- spondent that “a watchful eye must be kept on these foul traders.” The two groups, in turn, shared a dislike of the Quakers. (It was fre- quently said that members of the Society of Friends, as the Quakers were known, would “pray for their fellow men one day a week, and on them the other six.”) The Quakers returned the favor. Although the Puritans thought they had purged their worship of the ritual and “superstition” that had made the Church of England so distasteful to them, theirs was still too outward and formalistic a religion for the Quakers. Decades before William Penn settled Pennsylvania in the 1680s, Quakers living in Rhode Island and elsewhere would make their way up to Mass- achusetts in an effort to rouse its benighted inhabitants from their dogmatic slumber and awaken them to the aridity of their faith. Ff SEE 5: Quakers would disrupt Puritan church ser- Rufus Choate (1799-1859) vices, heckle ministers, and on occasion would even walk naked up and down the church aisles. The Friends were banned very idea of freedom possessed varying con- repeatedly from Massachusetts. In turn, as notations in the several colonies. When, for late as 1795 one Quaker referred to New Eng- example, the First Amendment declared that land in general as “the flock of Cain.”2 “Congress shall make no law respecting an The mutual antagonism of these groups establishment of religion, or prohibiting the contributed in a peculiar way to the develop- free exercise thereof,” this “deceptively sim- ment of American liberty. Each of these peo- ple statement,” in Fischer’s view, concealed a ples would be vigilant to exclude interference “regional compromise of high complexity.” in their internal affairs by any of the others. “Its intent,” he goes on, “was to preserve reli- The much-heralded problem of reconciling gious freedom of Virginia and Pennsylvania, the interests of large and small states at the and at the same time to protect the religious Constitutional Convention has, in Fischer’s establishments of New England from outside view, obscured the more interesting, meaning- interference.”3 To develop a policy that would ful, and revealing task of the framers, which be satisfactory to all, therefore, it was simply was “to reconcile different political cultures,” decided that the federal government should as they were found in the various regions. have no authority whatever vis-a-vis the vari- (One of the reasons Patrick Henry opposed ous religious postures adopted by the several the Constitution was that he believed it did states. not go far enough in ensuring regional integri- There was, of course, a great deal more ty; he was sure that when one section became than mutual antagonism that gave impetus to powerful enough, it would use its clout to the tradition of American liberty. What char- oppress the others.) acterized the American colonists, for the most part was, first, sheer practicality—they were . practical men, not schemers—and second, an Delicate Balance unswerving commitment to self-government. Balancing these different political cultures These two qualities are not easily separated; was often a delicate procedure indeed. The when, for example, the states cautiously rati- ===== PAGE 28 ===== 28 IDEAS ON LIBERTY © SEPTEMBER 2000 The nineteenth-century Massachusetts Whig Rufus Choate, an important American legal thinker and sometime congressman and sena- tor, pointed with pride to the sober judgment and statesmanship of his native section: There was another great work, different from this, and more difficult, more glori- ous, more improving, which they had to do, and that was to establish their system of colonial government, to frame their code of internal law, and to administer the vast and perplexing political business of the colonies in their novel and trying relations to England, through the whole colonial age. Of all their labors this was the grand- est, the most intellectual, the best calculat- ed to fit them for independence. Consider how much patient thought, how much observation of man and life, how much sagacity, how much communication of John Winthrop (1588-1649), first governor of mind with mind, how many general coun- Massachusetts Bay Colony cils, plots, and marshalling of affairs, how much slow accumulation, how much care- fied the federal Constitution in the 1780s, ful transmission of wisdom, that labor their insistence that it remain a strictly limited demanded. And what a school of civil union was based partly on their unwilling- capacity this must have proved to them ness to relinquish major prerogatives of self- who partook in it! Hence, I think, the government, and partly on their lack of inter- sober, rational, and practical views and est in making a confederation an end in itself, conduct which distinguished even the first or a self-justifying goal, as Clyde Wilson put fervid years of the Revolutionary age. How it. The American revolutionaries were not like little giddiness, rant, and foolery do you the French, the most radical of whom sought see there! No riotous and shouting proces- to extirpate the smallest remnant of pre-revo- sions, no grand festivals of the goddess of lutionary France from historical memory. The reason, no impious dream of human per- Americans had no intention of anticipating fectibility, no unloosing of the hoarded-up the French example by abandoning the Gre- passions of ages from the restraints of law, gorian calendar and beginning anew with the order, morality, and religion, such as Year I in commemoration of the establishment shamed and frightened away the new-born of the new republic. The American union was liberty of revolutionary France. Hence our simply a practical arrangement, brought victories of peace were more brilliant, into being to accomplish specific and finite more beneficial, than our victories of war.4 objectives. Nothing could have been further from the . . minds of the colonists than the suggestion that Lasting Liberty by virtue of having settled in a new land they It was precisely the lack of inclination had inherited a unique divine mandate to among any of these peoples to remake the remake the world. The Puritans, it is true, world, or even their own civilization, accord- spoke in terms of a divine mission. John ing to an arbitrary blueprint that helped make Winthrop’s biblical allusion to a “city on a American liberty both possible and lasting. hill” suggested that the godly community of ===== PAGE 29 ===== THE COLONIAL ORIGINS OF AMERICAN LIBERTY 29 Massachusetts Bay might lead to a regenera- ordered as man could arrange.”¢ It was, how- tion of the Church of England and indeed the ever, a utopianism that ended at the commu- entire world. The important proviso, however, nity’s borderline. They wanted simply to be was that this regeneration was to take place by left alone. example rather than force. With their gaze fixed firmly heavenward, the Puritans would Forgotten Commitment have considered it an act of supreme impiety . and classic human folly to expect the regener- to Liberty ation of the world through any mere human The community aspect of early New Eng- enterprise. It was only when the stern Calvin- land has been so often emphasized that the ism of the Puritans had given way to the opti- Puritans’ commitment to traditional English mistic Unitarianism of nineteenth-century liberties has tended to be forgotten. Relative- New England, and ultimately to the secular ly little known outside the rarefied circles of utopias of Progressivism and social democra- colonial scholarship is the fact that it was a cy, that the city on a hill imagery came to pos- popular movement in the late 1630s that sess the imperialistic overtones with which we demanded the explicit codification of the are so familiar today. colonists’ rights. Winthrop, the key figure in That the original Massachusetts settlements the Puritan migration and a longtime gover- had their theocratic aspect is not really in nor of Massachusetts Bay, had always favored question. The law was expected to reflect bib- having as little written law as possible in order lical precept as precisely as possible. The to give him and to give his judges the discre- franchise was restricted to church members; tionary authority they believed they needed to to become a church member, one had to rule in accordance with the Bible. In the undergo a process for which interrogation is minds of the colonists themselves, however, probably too strong a word, but one by which this discretion was simply too great. so-called “pillars of the church” would In 1641, with Winthrop temporarily voted attempt to determine, as far as it lay within the out of office on these very grounds, they province of human capacity to discern, secured passage of what became known as the whether a prospective member belonged to Massachusetts Body of Liberties. The docu- the elect—that is, had been eternally predes- ment’s provisions, of which there are over 100, tined to heaven—or to the damned. The latter include items familiar to the student of British group, although excluded from the franchise law and politics: the principle of no taxation and from reception of the Lord’s Supper, were without representation, the right to a jury trial, nevertheless required to attend church. and the guarantee that no person would be Steeped as they were in covenant theology, deprived of life, liberty, or property without the Punitans believed that if they succeeded in due process of law. (It also contains a peculiar establishing a truly godly community, God provision prohibiting wife beating, excepting would look upon them with favor; if they when the husband is acting in self-defense.)’ failed, they would be subject to His wrath. Over time, a series of factors would gradu- They wished to live among like-minded folk ally dissolve what some might consider the in order better to live out a shared ideal. more disagreeable aspects of community life In the Dedham (Massachusetts) Covenant in Puritan New England. The factors included drawn up during the 1630s, it was resolved the pressures of a growing population, which “that we shall by all means labor to keep off forced people to settle ever further from the from us all such as are contrary minded, and town center—thereby rendering themselves receive only such unto us as may probably be less easily observed and controlled by govern- of one heart with us.”S The entire enterprise ment and religious authority—as well as the contained an element of utopianism, to be increasing attraction of theological liberalism. sure, in that the settlers sought to “build the Thus what had once been a self-consciously most perfect possible community, as perfectly corporate enterprise would eventually make united, perfectly at peace, and perfectly room for a greater degree of individual liberty. ===== PAGE 30 ===== 30 IDEAS ON LIBERTY ® SEPTEMBER 2000 Virginia’s development took just the oppo- were inspired by the distant example and site path. It started off as a distinctly individ- abstract teachings of the European Enlighten- ualistic colony. The early settlement of Vir- ment! They were nothing more than an index ginia was dominated by young single males. to the problems of a Virginia planter.”? A host of factors, prominent among them Vir- Moreover, and again in contrast with the ginia’s (not entirely undeserved) reputation as philosophes, the Virginians were especially a disease-ridden deathtrap, served to discour- devoted to their region, to their particular plot age the kind of self-consciously corporate and of earth. “Their localism has been given far family-oriented migration that had character- too little attention and too little credit,” ized the Puritan experience. Gradually, as the Boorstin notes. “In these days, when States’ mortality rate declined and the colony’s pros- rights are out of fashion, we are too often told perity became widely known, it became more that a man’s preoccupation with the habits of sensible for entire families to make their the place where he lives can only drag the homes in the Chesapeake. national progress. We are fortunate that 18th- As Virginia became more settled and estab- century Virginians thought differently. Their lished, it also became more aristocratic. The concern with the special requirements of their Virginia aristocracy would grow attached to own particular place on earth not only fla- the principle of self-government, and these vored their political life and expectations; it men took their responsibilities seriously. It gave all their thinking the aroma of the spe- was a strict requirement that every member be cific and kept all their social ideals within present especially for the opening session of finite bounds.”10 the House of Burgesses, and that any absence had to be excused. Poor James Bray: in 1691 the House of Burgesses was so offended by his explanation for his absence that the Ultimately, therefore, the colonies succeed- Speaker actually issued a warrant for his ed in providing the individual liberty that arrest, and held him in custody until he made makes a rational and civilized life possible, an apology.8 This was government by an elite while at the same time cultivating a corporate and with a restricted franchise, it is true, but sentiment that provided a source of resistance the importance of the franchise in safeguard- to centralizing and consolidationist schemes. ing liberty has been greatly exaggerated. With the advantage of hindsight we can see (Recall that F. A. Hayek warned of making a the importance of this latter consideration, “fetish of democracy.”) What is important is which in some libertarian analyses might be that this elite was composed of an extraordi- overlooked. The need for vigorous intermedi- narily talented group of men who, when the ary institutions was especially emphasized by crisis came, were able to articulate precisely the outstanding classical liberal Benjamin where and how American rights and liberties Constant: “The interests and memories which were being threatened. are born of local customs contain a germ of In keeping with most of the colonial tradi- resistance which authority suffers only with tion, the Virginians were also men of a regret, and which it hastens to eradicate. With uniquely practical bent. This aspect of the Vir- individuals it has its way more easily; it rolls ginia gentry has frequently been obscured by its enormous weight over them effortlessly, as historians’ careless conflation of this colonial over sand.”!! elite with the French philosophes. It is true The French revolutionaries, for example, that Virginia planters were skilled in law, despised the local customs and peculiarities meteorology, medicine, and so forth, but this that dotted their country’s landscape and reor- was not because they were trying to make an ganized France into arbitrary “departments” ideological statement about the sovereign that bore no relation to its historic regions. In unity of reason or any such thing. As Daniel our own century, the deliberate and coordinat- Boorstin observes, “How devious it is to ed destruction of local institutions and inter- explain these plantation necessities as if they mediary associations has been a principal Intermediary Institutions ===== PAGE 31 ===== THE COLONIAL ORIGINS OF AMERICAN LIBERTY 31 weapon of various totalitarian systems in come only reinforces the point that the eliminating potential sources of resistance. integrity of self-government was the overrid- Hitler, of course, despised German federal- ing consideration in the minds of the ism, which he correctly perceived as an obsta- colonists. !2 cle to his consolidation of power. Stalin, for his part, attempted to starve the Ukraine into Overrea ching Crown submission when standard Soviet propaganda proved insufficient to divest it of its tradition- That the robust if zealous character of com- al national feeling. In the soft totalitarianism munity life in Puritan New England had of social democracy, we have seen how our accustomed its inhabitants to the principle of own government has abetted social upheavals self-government was made dramatically at the local level in order to strengthen its con- apparent toward the end of the seventeenth trol everywhere. century when the Crown attempted to estab- It was the combination of their strict practi- lish its authority more firmly there and else- cality and their well-cultivated corporate where. Partly in an effort to ensure that identity that caused the American colonists to British trade regulations would be properly look with suspicion on confederations of any enforced, and partly out of a legitimate con- kind. That good reasons could be adduced for cern for the colonies’ effective defense uniting with their fellow colonies for limited against a potentially aggressive New France, and practical purposes was not in doubt. But King James II established during the 1680s the terms of such confederations would have the so-called Dominion of New England, to be spelled out clearly and explicitly, and which combined Massachusetts, Maine, and any such intercolonial alliance would have to New Hampshire into a single government be kept under a vigilant watch. Thus it was under a single royal governor. As time went only belatedly that the Puritans banded on, James II would annex Rhode Island, Con- together in an intercolonial alliance, the so- necticut, New York, and the Jerseys to the called Confederation of New England. Persis- Dominion, and had his sights on Pennsylvania tent rumors of imminent Indian hostilities, at the time he was deposed.!3 Its first governor and ongoing suspicions of the Narragansett was the hapless Joseph Dudley, the son of the tribe in particular, led the colonies to consid- old Puritan governor Thomas Dudley, but the er such a move. And yet, in the classic Amer- most memorable figure associated with the ican tradition, the colonists kept a close watch Dominion was the hated Sir Edmund Andros, on this Confederation. who took power in late 1686. New England had lived without incident for Given the colonists’ attachment to self- some years in increasing proximity to New government, Andros would have aroused bit- Netherland. But when in 1652 Cromwell terness under the best of circumstances. But attacked the Netherlands and the two mother he was by temperament distinctly unsuited to countries were thus at war, the possibility of a the task. His style of governance seemed cal- colonial clash, with each side arming its Indi- culated to create resentment: he levied taxes an allies, worried New Englanders. Connecti- by his own fiat, for example, and jailed those cut and New Haven began to beat the drums who protested these usurpations. The enraged for war. “Massachusetts chose this moment,” colonists, vigilant in protecting their liberties, Alden Vaughan notes, “to question the funda- were waiting for an opportunity to strike. It mental right of the United Colonies to declare came with the Glorious Revolution of 1688. offensive war over the objections of any Gen- Communication was slow in the seven- eral Court. Massachusetts was not about to be teenth century, so it was several months after dragged into an international war by its three the fact that the American colonies learned small and imperious neighbors.” Vaughan that James II had been deposed and William also observes that the strength of the Confed- and Mary installed. On April 4, 1689, word eration was seriously impaired by Massachu- reached Boston that the new king and queen setts’s constitutional challenge, but this out- wanted “all magistrates who have been ===== PAGE 32 ===== 32 IDEAS ON LIBERTY ® SEPTEMBER 2000 unjustly turned out” to resume “their former Island—in acceding to the new confederation, employment.” That was all the citizenry need- explicitly reserved the right to withdraw from ed to hear. “The machinelike precision with the union at such time as it should become which [this parallel revolution] unrolled oppressive. In so doing they were only exer- points to careful plans and leadership, which cising the vigilance and libertarian principle no one has yet unearthed,” writes Samuel that had animated the American experience Eliot Morison. “The townspeople rose, the during the colonial period. countryside rose, Andros and some of his Thus when a union of polities becomes an principal councillors were thrown into jail.” A end in itself, as it had in the minds of some by meeting presided over by the last governor the time of Daniel Webster, but certainly since under the Bay Colony charter adopted the the Civil War, the repudiation and indeed per- “Declaration of the Gentlemen, Merchants, version of the colonial ideal is complete. and Inhabitants” that had been drawn up by Nothing could be more obvious than the tra- the eminent Puritan divine Cotton Mather.!4 ditional American wariness of confedera- The Dominion was at an end and self-rule was tions—which, whatever their advantages, the again in effect. colonists consistently viewed in terms of the It was the same spirit that led the colonists threats they posed to self-government. Had to reject Benjamin Franklins proposed the American union, the confederation inau- Albany Plan of Union in 1754. Under the gurated by the Constitution, been understood pressure of Indian war, Benjamin Franklin to be perpetual and indestructible, the states, and Thomas Hutchinson—the latter of whom which had just fought a war for self-govern- would play an ignominious role in the events ment against the British empire, would never leading up to the American War for Indepen- have entered it. What the colonial period has dence—drew up a scheme according to which to teach us, then, is that the truly American the colonies would yield a considerable sentiment is not Andrew Jacksons famous amount of their authority to a new inter- toast, “Our federal Union—It must be pre- colonial governing structure. Not a single served!” but John C. Calhoun’s reply, “The colonial assembly ratified the plan. Union—Next to our liberties, most dear!” [] We can see, then, why It 15 misleading to 1. David Hackett Fischer, Albion's Seed: Four British Folkways date the tradition of American liberty from the in 4merica New York: Oxford University Press, 1989), p. 6. late 1780s, since the Constitution of the Unit- 2 oid, PP ed States was in fact only the culmination of 4. Rufus Choate, “The Colonial Age of New England,” in The the part of Americans. At the time of the fram- 5. Kenneth A. Lockridge, 4 New England Town: The First Hun- ing of the Constitution and the formation of 4 Fran Ab W.W. Norton, 1985), p. 5. an allegedly “more perfect union,” the 7. Edmund S. Morgan, The Puritan Dilemma: The Story of John : : Winthrop (Glenview, Ill.: Scott, Foresman, & Co., 1958), pp. 155— colonists had p recedents for challenging the 73; Samuel Eliot Morison, The Oxford History of the American Peo- powers of a confederation, as in the case of pie, vol. 1, Prehistory to 1789 (New York: Oxford University Press, : : _ 1965), pp. 108-109. the Confederation of New England, for reject 8. Daniel Boorstin, The Americans: The Colonial Experience ing a confederation, as in the case of the (New York: Random House, 1958), p. 113. Albany Plan of Union, and for bringing down iy P 1 a confederation by force, as in the case of the 11. Quoted in Ralph Raico, “Benjamin Constant,” New [ndividu- ed alist Review, Winter 1964, p. 53. Dominion of New England. It can hardly be 12. Alden T. Vaughan, New England Frontier: Puritans and surprising, therefore, to learn that at the time indians, 1620-1675, 3rd ed. (Norman, Okla.: University of Okla- of the ratification of the Constitution, three Ro Maison 1 pp. 174-75. states—Virginia, New York, and Rhode 14. Ibid., p. 171. g 2 ’ Pp ===== PAGE 33 ===== The Therapeutic State by Thomas Szasz [DEAS ON [IBERTY SepTEMBER 2000 Progress in Pain Relief “Among the remedies which it has pleased the Almighty God to give to man to relieve his sufferings, none is so universal and so efficacious as opium.” —THOMAS SYDENHAM, M.D. (1680) he authors of the textbook of pharmacol- In the glory days of the Soviet Union, ogy used when I was a medical student butcher shops were devoid of meat. To devout (during World War II) stated: “The opium communists this was evidence of the moral alkaloids have no rival for the relief of pain. superiority of socialist “social justice” over ...” (emphasis in the original); to support this the decadent consumerism of capitalist opinion, they added: “Sydenham . . . exploitation. In the glory days of America’s remarked that without opium few physi- war on drugs, pharmacies—especially in cians would be sufficiently callous to practice black neighborhoods—are devoid of opioid therapeutics.” painkillers. To devout drug warriors and to The Oxford English Dictionary dates the their pusillanimous critics this is evidence of origin of the term “Laudanum,” an alcoholic medical progress in pain relief, with “racial tincture of opium, to 1600. For the next 300 bias” as its unintended side effect. years, this effective and safe painkiller was available for pennies to anyone who needed or wanted it. Throughout those centuries— ° we Don’t Carry That” indeed until after World War Il—the concept rp. io the title of an article published in of untreated or undertreated pain was absent the April 6, 2000, issue of the prestigious from medical discourse. 0 h New England Journal of Medicine. The sub- S recently as the S, Cough Syrup Con- ine te]ls the story: “Failure of pharmacies in taining codeine was available over the counter predominantly nonwhite neighborhoods to and opiates were widely prescribed for p al- stock opioid analgesics.” The pharmacists T © terms “prescription d ug abuse” and told the authors that they do not stock opioid improper prescribing habits” had not yet drugs because of “fear of theft” and “fear of entered J vodilary. Todey, the angel. penalties imposed by state and federal agen- ability of opioid analgesics (painkillers con- cies.” Anyone who lives in the United States LE alkaloids b fopium) L pharmacies 5% and reads the papers or sees television could problem studied by medical scientists. have told them this without conducting a pre- ——— a : [13 b2] : M Thomas Szasz, M.D., is professor of psychiatry emer- tentious “study,” paid for by the Open Society itus at SUNY Upstate Medical University in Syra- Institute’ Project on Death in America, cuse. He is the author of Fatal Freedom. funded by financier George Soros, and the 33 ===== PAGE 34 ===== 34 IDEAS ON LIBERTY ® SEPTEMBER 2000 National Institute on Aging, funded by the ber of black youths deprived of liberty taxpayer. because of drug law violations, a “fact” the As if the study itself were not enough of an authors of neither the study nor of the editor- insult to any informed adult’s intelligence, the ial consider worth mentioning). authors’ recommendation borders on being What, moreover, are we to make of physi- obscene. “The problem of inadequate supplies cians associated with prestigious institutions of opioids calls for a program to educate calling facts “unacceptable”? Don’t they pharmacists about the safe and appropriate know that the adjective “unacceptable” per- use of opioid analgesics. . . . ” (emphasis tains to behaviors or policies, not to facts added). For centuries, uneducated peasants (which simply are)? Or do they know it and knew how to use opioid analgesics safely and choose this language to lower the volume of appropriately. When did pharmacists unlearn their criticism of drug policies to the point this ancient knowledge? where no one will hear it and hence no one It gets worse. The authors’ recommenda- will take offense? This supposition is support- tions include “an evaluation of regulations ed by their spouting politically correct plati- that may act as disincentives for pharmacists tudes such as: “We believe the common to stock controlled substances.” Don’t we thread in these findings is a subtle form of know—without further studies—that if opi- racial bias on the part of medical care oids were deregulated and sold in the open providers. The level and extent of this prob- market, thieves would have no more reason to lem are unknown, but it is real and potential- steal opium from pharmacies than they have ly harmful, even though predominantly to steal onions from supermarkets; and that unintentional.” The “unintentional bias”—an there would be a plentiful supply of oxymoron—is no doubt the symptom painkillers in pharmacies, just as there is a of a mental illness, due to an as yet undiscov- plentiful supply of food in our markets? ered brain disease, for which no one is responsible. ‘ 9 The mind boggles. We spend more money Unaccep table Facts on medical care than any other people in the Our collectivistic-totalitarian drug control world. And what is the result? That we live in policies not only deprive suffering patients of a society in which suffering patients who, the kinds of pain relief to which people had according to doctors, have urgent need for free access in the days of prescientific medi- legal narcotics have no access to them, while cine, but they also debauch the language, rob- people who should not have access to illegal bing people of the tool necessary for recog- narcotics have unlimited access to them. Who nizing that they are responsible for the prob- is at fault? No one. Everyone is a victim: lem, created by their own longing for statist patients, of lack of effective painkillers; protection from “drug abuse.” physicians, of draconian drug laws making Underscoring the importance the editors of them afraid to prescribe narcotics; and the Journal attach to the study, an editorial — pharmacists, of high crime rates, making titled “Racial injustice in health care”—calls them avoid stocking opioids in black neigh- the disproportionate deprivation of black borhoods. patients of opioid painkillers an “unaccept- Sydenham, as I noted at the beginning, able fact.” However, the phenomenon they attributed the miraculous powers of opium to deplore is not simply a “fact.” Rather, it is the relieve pain and suffering to the Almighty consequence of a deliberate policy (another God. What God has given, the Therapeutic consequence being the disproportionate num- State has taken away. OC ===== PAGE 35 ===== IDEAS ON [IBERTY A Light Goes Out In New Zealand by Charles W. Baird have often referred to New Zealand’s 1991 ry unionism, most New Zealand workers Employment Contracts Act (ECA) as a chose to be union-free. Between 1991 and model of voluntary unionism that we in the 1999 the percentage of workers represented United States would be wise to emulate. by unions fell from 50 to 20 percent. Employ- Notwithstanding its shortcomings—including ment growth accelerated, unemployment its mandatory personal grievance provisions, plunged, average real wages increased, and its creation of the specialist Employment strikes almost disappeared. Public opinion Court, and its failure to do anything about the polls indicated substantial and growing sup- minimum-wage law—the ECA made the port for the ECA throughout the period. employment relationship in New Zealand a matter of voluntary exchange for most work- The Unions Strike Back ers and most employers on most issues. It stripped unions of most of the special Union leaders, of course, abhorred ECA. privileges and immunities they enjoyed before Their declining market share meant fewer and 1991, which placed them above the rule of fewer dollars came into their treasuries and law. Unions, like everyone else, were made more and more workers, journalists, and subject to the common law of property, con- politicians were losing interest in what union tract, and tort. Unions could represent only leaders had to say about anything. Threatened their voluntary members, and workers could with penury and irrelevance, union bosses choose union or nonunion third parties to rep- pulled out all stops to return the Labour Party resent them or could choose to represent to power in the 1999 elections. They were themselves. Like unions, nonunion third par- assisted by the incumbent National Party gov- ties could represent only those workers who ernment that seemed to have run out of all its contracted with them to do so. Bargaining reformist energy and had nothing new to was wholly voluntary. No unions, nonunion offer. Labour and its coalition partner, the representatives, employers, or individual Alliance, won the election, giving the impres- workers could be forced to bargain with any sion they would make only minor changes to other party against their will. There was true ECA. However, it didn’t take long for the freedom of association, which includes the union bosses to present their IOUs. At the right not to associate, for all parties in New unions’ behest the coalition government cob- Zealand labor markets. Freed from compulso- bled together the Employment Relations Act Charles Baird, a professor of economics and the (ERA), which became law August 1. director of the Smith Center for Private Enterprise ERA turns the clock back to the days of Studies at California State University at Hayward, is ~ special privileges and immunities for unions. a quarterly columnist for Ideas on Liberty. Its authors adopted many of the bad features 35 ===== PAGE 36 ===== 36 IDEAS ON LIBERTY ® SEPTEMBER 2000 of our National Labor Relations Act (NLRA) Replacement Workers. Under the principles and came up with some equally bad features of voluntary exchange, if person A refuses an of their own. offer from person B, person B is free to make the same offer to person C. This is now the Worker Choice. Unlike NLRA, ERA still rule in all markets in New Zealand except the permits individual workers to opt out of union labor market. ERA provides that during any representation, but it stacks the decks against strike an employer is forbidden to hire that option. ERA says that a union may con- replacement workers, and nonstriking work- sist of as few as two employees; and all ers may not be assigned to do the jobs of employers, whether unionized or union-free, strikers. American unions have tried and are forced to allow union organizers on their failed to get this privilege ever since 1935. property to recruit workers. Unions, and only ERA implies that unions, not employers, own unions, have this privilege. the jobs performed by union workers. Once two workers join up, the employer becomes unionized and is forced to bargain Labor as a Fixed Cost. ERA forces any with the union in good faith. Only unions may employer “covered by a collective bargaining engage in collective bargaining and enter col- agreement to continue to employ every lective agreements with employers. Where a employee bound by it during the whole of the collective agreement is in effect, all newly period the agreement is in force” notwith- hired workers are made subject to its provi- standing any changes in business conditions. sions for 30 days, after which a worker may Union labor becomes a fixed cost of doing opt out of the collective agreement, remain business, and union labor cannot be kept out union-free, and work out an individual con- of any firm. This will do wonders for New tract with the employer. However, notwith- Zealand firms trying to compete in the global standing any terms in an individual contract, economy. an employer must allow every union-free worker to join the union and become subject Inequality of Bargaining Power. The ERA to the collective agreement at will. So most asserts that it “acknowledges and addresses employers are likely to be forced to bargain the inherent inequality of bargaining power in with unions, and union-free workers will find employment relationships.” This is strange it difficult to avoid the blandishments of union because most New Zealand workers opted for organizers. Moreover, employers must pro- individual employment contracts under ECA. vide only “neutral” advice to workers on join- I guess they were not aware of their inherent ing collective agreements. ERA tolerates only bargaining-power inferiority relative to pro-union propaganda. Employers may not employers. They didn’t realize how much they “undermine the integrity of a collective agree- needed the unions, which they were always ment” by offering inducements to workers, free to join, in order to reach bargaining- but unions may undermine the integrity of power parity. They must be overjoyed now individual contracts by offering inducements that Labour Party politicians and unions have to workers. ERA states that it “protects the enlightened them. integrity of individual choice.” Some integri- As I and others have repeatedly explained, ty, some choice! the hoary myth of a worker’s inherent bar- Speaking of propaganda, ERA forces gaining power disadvantage has support nei- employers to give union workers from five to ther in logic nor in history. Bargaining power 35 days (depending on firm size) of paid leave comes from having alternative employment each year for “employment relations educa- opportunities. A prosperous economy, within tion leave.” Of course the education is provid- which entrepreneurs and investors are creat- ed by the unions. I am reminded of the ing increasing employment opportunities, mandatory “sensitivity training” imposed on gives workers more bargaining power than many American college campuses for stu- any union is likely to give. By decreasing the dents with politically incorrect views. flexibility and resilience of labor and product ===== PAGE 37 ===== A LIGHT GOES OuT IN NEW ZEALAND 37 markets, ERA will make New Zealand much Good faith means only unions can speak less hospitable to entrepreneurs and investors, for workers whether the workers like it or not. decrease real economic growth, and increase The only effective defense against a charge of unemployment. New Zealand workers will bad faith bargaining is a record of conces- lose, not gain, bargaining power. sions to the union. Inasmuch as Harre speaks favorably of the “North American model” of Cartelization of Markets. It is widely good-faith bargaining, there is little doubt that understood that unions are labor cartels. A her good-faith codes will be written to give cartel is a group of sellers of something who unions as much of an advantage in collective agree with each other to suppress competition bargaining as possible. among themselves in order to extract monop- oly prices from customers. Workers are sellers Freedom of Association. The authors of of labor, and if wages can be taken out of ERA boast that it brings New Zealand into competition, buyers of labor (employers) will compliance with the International Labour have to pay monopoly wages. ERA doesn’t Organization (ILO) Conventions 87 (Free- stop at promoting labor cartels; it also makes dom of Association) and 98 (Collective Bar- it easier for unions to help employers to gaining). Here, at least, they speak the truth. cartelize product markets. It permits strikes in Those two conventions are used by the ILO pursuit and enforcement of multi-employer to promote compulsory unionism all over the collective agreements. A group of employers world. The unions complained about ECA to who are covered by a multi-employer collec- the ILO on these grounds in 1993. It chas- tive agreement will all face the same labor tised New Zealand for focusing too much on costs and can easily translate this into uniform individual rights at the expense of collective product prices. Associate Labour Minister or group rights. To the ILO freedom of asso- Laila Harre likes this feature because it “will ciation means that individual workers should put an end to price competition by putting all be herded together into collectives. Any workers on the same wage.” conflict between the interests of individuals and the rights of the collective are to be Mandatory Good-Faith Bargaining. The resolved in favor of the latter. The ILO worst feature of NLRA copied by the authors explicitly refused to include the right not to of ERA is mandatory good-faith bargaining. associate with unions as part of the freedom New Zealand employers are forced to bargain of association. This should not be surprising with unions that represent two or more work- since the ILO was formed by democratic ers. At least in the United States, a union must socialists who saw all labor issues through have the support of a majority of an employ- the prism of Marx’s labor theory of value and er’s workers before it can force him to bargain. class struggle. Mandatory bargaining is bad enough, but the The forces of reaction have extinguished good-faith requirement makes things worse. the light of freedom in New Zealand labor ERA doesn’t define “good faith.” It says that relations. However, I think their victory is “codes of good faith” must be developed intri- only temporary. ECA continues to enjoy partite negotiations among unions, employers, widespread public support. It is the union and the government. NLRA doesn’t define bosses and their Labour Party mandataries, good faith either. However, even though it not the workers, who are repealing ECA. If specifically states that it does not require the the opposition parties, particularly the “making of a concession,” case history implies National Party and ACT, can muster the ener- that employers must compromise with unions. gy and focus necessary to run an effective No take-it-or-leave-it bargaining is permitted. campaign that promotes continuing the free Employers must watch their language and market reforms of the late 1980s and early show proper deference to the union negotia- 1990s, chances are the voters will put things tors. It is bad faith for employers to poll work- right. The future still belongs to the forces of ers to find out what they want. freedom. OJ ===== PAGE 38 ===== [DEAS ON [[BERTY Austrian “Inflation,” Austrian “Money,” and Federal Reserve Policy by Richard H. Timberlake oseph Salerno’s essay in The Freeman: intellectual progress in methods of economic Ideas on Liberty, October 1999, extensive- measurement. It is useful as no other word ly criticized the series of three articles I had can be for describing general price-level published in previous issues of the magazine.! increases. Salerno’s insistence, quoting Mur- I find none of Salerno’s alternative analyses ray Rothbard, that it should mean only an valid. increase in the stock of money “not consisting My disagreements serve to highlight the in, i.e., not covered by an increase [in the dissents many economists have with what quantity] of gold,” violates current meaning passes as “Austrian” monetary analysis. These that the word has both for economists and the differences deserve to be aired in depth. How- public. It deprives us of the word that most ever, in the short compass of this reply I can robustly describes a general increase in treat only the immediate monetary issues ger- prices. mane to the 1920s and 1930s. Therefore, I Some ancient economists undoubtedly used limit the remarks to four main topics: the evo- “inflation” to mean an increase in the stock of lution of the word “inflation”; the definition of paper money together with an increase in “money”; Federal Reserve policy before and prices. They had an intuitive understanding of after 1933; and Federal Reserve-Treasury pol- the general level of prices but only an imper- icy on gold and excess reserves. fect means of expressing it, because mathe- maticians had not developed statistical price Evolution of the indices. Nonetheless, most English econo- . mists, such as John Stuart Mill, Henry Thorn- Word “Inflation” ton, and David Ricardo, writing in the early Whether the word “inflation” is “new” or nineteenth century, distinguished clearly “old and venerable” is largely irrelevant to between changes in money stocks, whether substantive issues. “Inflation” is a word that covered” by gold or not, and changes in the has emerged in economic thought and theory aggregate of money prices.2 because of institutional developments and Economists of that era were preoccupied with a search for a talisman of value so that — . : they could specify more precisely the value of Richard Timberlake is a retired professor of eco- nomics and author of Monetary Policy in the United 3 MONEY unit.’ Statistical development of States: An Intellectual and Institutional History (Uni- Price indices in the mid-nineteenth century versity of Chicago Press). provided a more precise means of measuring 38 ===== PAGE 39 ===== 39 price level changes. With this tool economists The Definition of Money could usefully describe the value of money as the inverse of money prices, an eminently The question of which items economists sensible idea. They could also properly distin- should include in the definition of money has guish between increases in the stock of money been debated for two centuries. Obviously, and general increases in money prices. any item that is directly exchangeable for Everyone is well aware of the limitations of goods and services over the counter as a price indices; they are not perfect measuring medium of exchange is money. Currency and devices. However, they furnish us with mea- demand deposits, subject to check, are clearly sures of central tendency so we do not have to money. However, what about time and savings trust our gut feelings to tell us that inflation or deposits, savings and loan share capital, and deflation has occurred. cash surrender values of life insurance poli- The development and use of the price index cies—the items Salerno (and Rothbard) is analogous to the development and use of include in the accounted money stock? the thermometer. Thermometers do not mea- More than 30 years ago in a path-breaking sure temperature perfectly; to some extent article, Leland Yeager devised a means of test- pressure changes and other factors bias the ing this question.# Yeager noted that “many temperature reading. Also, thermometers only definitions of money can be self-consistent. measure temperature “objectively”; they do But no mere definition should deter us, when not show how an individual reacts subjective- we are trying to understand the flow of spend- ly to whatever the temperature is. So are we to ing in the economy, from focusing attention throw away all our thermometers because on the narrow category of assets that actually they are technically imperfect and non- get spent. . .. Certain assets do and others do subjective, that is, “non-Austrian™? not circulate as media of exchange. . . . The During the period 1921-1929 in the United medium of exchange can ‘burn holes in pock- States, the Bureau of Labor Statistics Whole- ets’ in a way that near moneys do not. . . . sale Price Index (WPI) fell by 2.4 percent, and These are observed facts, or inferences from the Consumer Price Index (CPI) fell by 4.1 facts, not mere a priori truths or tautologies.”> percent. Is it possible to assert in the face of When people try to get rid of excess this data, as Salerno-Rothbard dogma would (unwanted) money, they unwittingly set in have it, that the economy experienced an motion market machinery that raises the “inflation”? money prices of wealth and income. This A simple thought experiment best address- activity continues until people have bid up es the question of a 1920s “inflation.” Say money prices and bid down the value of the that a U.S. householder or businessman had money unit to where everyone is content to the choice between $2,000 of 1921 income in hold the existing quantity of money at its cur- 1921 dollars, or $2,000 of 1929 income in rent value. Money, being an item that appears 1929 dollars? Is it conceivable that he, or in all markets, has no single market of its own even an “Austrian” economist, would choose in which an equilibrium can develop because the former income unless he reveled in “the money market” is all markets where asceticism? Yet if 1921-1929 witnessed the money is exchanged.¢ “inflation” that Salerno laments, he would No such process affects near-moneys, have chosen the 1921 income. Since average which include savings deposits and the other incomes increased over the period, a worker items mentioned above. If people have excess of that era had more dollars of income in amounts of any near-money asset, they do not 1929 and also lower prices for almost every- spend the excess in all markets. Indeed, they thing. He also had much improved qualities cannot do so because the item is not a money. of goods and services and more choices than The adjustment to “too much” takes place in he had in 1921. Would that the U.S. economy the particular market affected. People who had had such an “inflation” over the last 33 have “too much” savings and loan shares can- years! not spend the excess in other markets. They ===== PAGE 40 ===== 40 IDEAS ON LIBERTY ® SEPTEMBER 2000 simply turn in their shares for cash. Interest add significantly to the effectiveness of M1, rates and other variables then adjust to this except for the period 1933-1938. In all other change in preferences, but no disruptive periods, time deposits had negative effects: macroeconomic upheavals occur.” For the 1920-1929 period, an increase of one Yeager’s discussion provides an unexcep- dollar in the stock of currency or demand tionable means for deciding what to include in deposits increased total spending by five dol- “the” stock of money and what to classify as lars. An increase of one dollar of time financial assets. The financial items in ques- deposits, however, diminished total spending tion, though they are clearly wealth, are not by one dollar. money. Excess supplies of them have no per- Savings and loan share capital and cash sur- vasive macroeconomic consequences, but render values of life insurance were not even work themselves out in specific markets. For in the ballpark. Increases in their stocks all had the 1920s, currency, demand deposits, and negative effects on GNP spending changes. (possibly) time deposits in commercial These assets, while wealth, have no monetary banks—banks that also issue checking properties, and by no scientific standard can accounts—were exclusively money. one include them in any measured money The Monetary Control Act of 1980, howev- stock. To insist dogmatically that they are er, changed the ball game. It provided for money is to deny epistemological progress checking privileges against savings and loan from painstaking scientific scholarship. shares and savings bank accounts. The spend- able money stock then had to include these Federal Reserve Policy Before issues, just as it included commercial banks and After 1933 demand deposits. Another means of classifying money stocks In my original article in The Freeman: is by testing the effects of the different classi- Ideas on Liberty (April 1999) I distinguished fiable money stocks on the flow of total between the Federal Reserve Banks’ gold spending that becomes realized income. The assets and their holdings of interest-earning narrow money stock, MI, which includes assets—their loans, discounts, and advances hand-to-hand currency and demand deposits to member banks. I labeled the gold “Fed adjusted for interbank holdings, is the bell- Gold,” and the other assets “Net Fed.” Only wether. No one doubts their moneyness. the Net Fed assets were under the policy con- Changes in this stock fairly well correlate trol of the Fed Banks. They could enlarge or with changes in total spending. If the other reduce this quantity solely by lowering or financial assets Salerno wishes to classify as raising their discount rates. “money” have monetary properties, adding I reported that overall Fed Bank lending them to the narrow stock of money should from 1921 to 1929 was decidedly negative. improve the more inclusive stock’s ability to The Net Fed asset total declined from $2.16 correlate with changes in gross spending. billion to $1.39 billion, even while the Fed A colleague of mine and I carried out an Banks’ gold stock was increasing from $2.63 experiment in the late 1960s that used this billion to $2.86 billion. These data reflect the method.8 Gross National Product (GNP) data overall deflationary tendency of Fed policy: for several reference cycle periods from 1896 Fed Banks allowed their earning assets to to 1966 were our dependent variable. To pre- decline even as they stockpiled, or “steril- dict GNP spending, we included the various ized,” the new gold. Without their earning money stocks noted above. assets (Net Fed), the Fed Banks would have Our findings were instructive. First, in been nothing more than warehouses for bank- all non-wartime periods, the correlations owned gold; their policy effects would have between changes in the stock of narrow been zero. money, M1, and changes in GNP were very Bank of England directors, particularly high. Adding time deposits in commercial Montagu Norman, persistently tried to get banks to M1, thus making it M2, did not Fed officials to change to an inflationary poli- ===== PAGE 41 ===== AUSTRIAN “INFLATION,” AUSTRIAN “MONEY,” AND FEDERAL RESERVE PoLICY 41 cy so that their job with price levels and has ever experienced,” Salerno asserts: “On exchange rates in England would be easier. the contrary, the factors controlled by the Fed However, Benjamin Strong and other top Fed continued to exercise a highly inflationary executives resisted.? impact on bank reserves and the money sup- Salerno’s assertion that “During this peri- ply from late 1929 through 1932, as the Fed od, it was the chosen policy of the Fed to lend attempted desperately to ward off the depres- liberally and continuously to all banks at an sion precipitated by the termination of the interest, or ‘discount,’ rate below the market bank credit inflation that it had orchestrated in rate,” is just plain untrue. Fed Bank lending to the 1920s.”13 member banks diminished steadily from 1921 This statement contains at least three to 1924, and only increased slightly to 1928. errors. First, the “factors controlled by the In 1921, the monetary base was $6.55 billion, Fed,” namely, the interest-bearing debt of of which Fed Bank lending accounted for member banks to Fed Banks, was at the same $2.16 billion—33 percent. By 1929, the mon- trivial value—$1.25 billion—in 1932 that it etary base was $7.10 billion, and the Fed’s was in 1927. Had the Fed Banks been “trying contribution to that total was $1.39 billion— desperately to ward off a depression,” they 20 percent.10 would have been lending freely to the member Unfortunately, Federal Reserve policy banks on the Bagehot principle.!4 Second, the remained strongly deflationary despite the Fed Banks were absorbers of new gold: Their bank panics in the early 1930s. When bank gold stock increased by $700 million, but panics occurred in earlier eras—1893 and their net monetary output increased by only 1907—mprivate clearinghouse associations, $680 million. Third, as I showed above and in which the banks themselves managed, created my original article, the “inflation” the Fed and issued clearinghouse loan certificates to Banks “orchestrated” in the 1920s was not an solvent but temporarily illiquid banks. Recip- inflation but a deflation. ient banks used this media to meet adverse The real bills doctrine—the core belief of clearing balances at the clearinghouse, and by what Salerno refers to as “the Banking this means stopped the hemorrhaging of School”—ruled Fed policy of that era.!s The reserves and collapse of bank credit.!! economist Clark Warburton explained in one The Federal Reserve System came into of his excellent articles on monetary policy existence on the presumption that it would how Fed “authorities” let this doctrine para- make the clearinghouse issues official and lyze their lending largess. In the early 1930s, legitimate. The 1929-1933 episode of bank Warburton noted, Fed Banks “virtually fragmentation and destruction, however, stopped rediscounting or otherwise acquiring emphasized the difference between privately ‘eligible’ paper [that is, real bills]. This was operated clearinghouses and a regulatory gov- not due to lack of eligible paper. . . . [Fed ernment agency: “The Federal Reserve alter- Banks] did not hold sufficient eligible paper native . . . introduced a discretionary political [to extend the necessary credit to member element into monetary decision-making and banks] solely because the Federal Reserve thereby divorced the authority for determin- authorities had discouraged discounting ing the system’s behavior from those who had almost to the point of prohibition.”’16 a self-interest in maintaining its integrity.”12 The data from the Great Contraction The governmental clearinghouse system, the (1929-1933) and resulting Depression Federal Reserve System, failed because the (1933-1942) disprove Salerno’s assertions. decision-makers in the Fed faced no bottom From a stable value around 74 (CPI) in the line. : late 1920s, money prices tumbled &§ percent When Salerno gets to the events of per year over the next four years to a value of 1929-1933, he makes statements that hardly 55.3 in 1933. Yet Salerno insists that the Fed need any formal refutation. In “answer” to my tried to maintain the “inflation” it had initiat- observation that the Fed “monetarily starved ed. While it was maintaining all this “infla- the country into the worst economic crisis it tionary” financing during the great purging of ===== PAGE 42 ===== 42 IDEAS ON LIBERTY ® SEPTEMBER 2000 1929-1933, the price level fell 25 percent, tion a dozen years earlier. Once the Fed’s and approximately 9,400 (39 percent) of the monetary excesses began, the unemployment commercial banks closed their doors forev- of the 1930s quickly ended and genuine infla- er.!” The inability of Fed and Treasury offi- tion became the problem. One then wonders: cials to interpret properly their disastrous how do “Austrian” economists distinguish a policies and to make the necessary correc- real inflation—one that features greatly tions was as astounding as the event itself. expanding fiat moneys and burgeoning price- level increases—from their 1920s “inflation” Federal Reserve-Treasury Policy with its falling prices? And, given the long series of paper-money excesses since 1942, on Gold and Excess Reserves where are the “Austrian” deflations and I pointed out in the third article on this peri- depressions that would rectify the Fed’s mon- od, “The Reserve Requirement Debacle of etary increases over the last 55 years? I have 1935-1938” (June 1999), the factors that in mind many changes 1 would have made in most depressed bank credit and the money Fed policy, but the “Austrian” prescription of stock were the complementary policies of monetary desiccation that Salerno offers is raising reserve requirements on member clearly a “cure” that is worse than the disease. banks and the sterilization of current gold The late Paul Heyne reviewed a book for inflows. Those actions plainly continued and Ideas on Liberty that the publishers advertised enhanced the deflationary thrust of earlier as an “economic handbook for beginners policies. Some economists of the era failed to from a Marxian viewpoint.” Heyne notes that grasp the full import of the Fed’s deflationary “Varoufakis [the author], because he does not effects because they thought only of the cen- believe that theories can be either confirmed tral bank’s ephemeral effect on interest rates. or refuted by facts, allows himself to make That same mistaken outlook thrives today.!8 sweeping assertions about what’s wrong with Bankers were both dumbfounded and shell- the world and what must be done to repair it shocked. The ones who had survived the bank on the basis of a theory that is far more melo- debacles of the early 1930s were the more dramatic than plausible. Varoufakis quotes conservative members of the profession. none other than Ludwig von Mises in support Additionally, the experience of survival made of the claim that we cannot use facts to test them even more reluctant to lend no matter economic theories.”!? how much “excess reserves” they had. Salerno’s arguments on the events and poli- My conclusion in The Freeman article was cies of the 1920s and 1930s presume this that the Fed-Treasury gold-reserve require- same methodology. It is also the one Rothbard ment policy during 1936-1938 was immense- proudly flaunted. No natural scientist, and ly deflationary. Before the gold could become no economist who considers his work “scien- bank reserves, the Treasury sterilized it. And tific,” would accept such a constraint. Scien- before the banks could use their existing tific method must use and does use both “excess reserves” to expand credit, the Fed inductive and deductive methods for a valid sterilized them by reclassifying them from analysis of events. OJ “excess” to “required.” To the banks those redefining them as “required,” by doubling pp. 31-40. My series appeared in April, May, and June 1999. tion of reserves deficient in the view of many Co. Inc., 1939), pp. 109-110, 195-98, and David Ricardo, The bankers. Works and Correspondence of David Ricardo, ed. Piero Sraffa and . M.H. Dobb (Cambridge, England: Cambridge University Press, The Fed loosened up monetary policy dras- 1953), especially chapters 1, 20, and 27. : : _ 3. I treat this issue in “The Classical Search for an Invariable tically during the war (1942 1 946). The Measure of Value,” The Quarterly Review of Economics and Busi- results confirm how readily a policy based on ress, Spring 1966, pp. 37-44. : 4, Leland Yeager, “Essential Properties of the Medium of the quantity theory of money could have . - 5% =F 1968). pp. 45-69. (Republished in several ended the first symptoms of business contrac- collections, most recently in The Fluttering Veil (Indianapolis: Lib- ===== PAGE 43 ===== AUSTRIAN “INFLATION,” AUSTRIAN “MONEY,” AND FEDERAL RESERVE POLICY 43 erty Fund, 1997), pp. 87-110. I use this latter source for reference 12. Ibid., p. 212. Highly restrictive banking laws after the Civil here. War both provoked and aggravated any chance monetary disequilib- 5. Yeager, Fluttering Veil, p. 89. rium in the commercial banking sector. 6. Ibid., p. 93. 13. Salerno, p. 37; emphasis added. 7. Ibid., pp. 93-96. 14. Richard H. Timberlake, “Money in the 1920s and 1930s,” 8. Richard H. Timberlake, Jr., and James Fortson, “Time The Freeman: Ideas on Liberty, April 1999, p. 41 and note 6. Deposits in the Definition of Money,” American Economic Review, 15. Contrary to Salerno’s charge, I do not subscribe to this doc- March 1967, pp. 190-94. trine and never have. See Monetary Policy, especially pp. 193, 9. For a definitive review of Federal Reserve policies and 259-60. actions during this period, see Milton Friedman and Anna J. 16. Clark Warburton, “Monetary Difficulties and the Structure of Schwartz, Monetary History of the United States, 1867-1960, “Gold the Monetary System,” Journal of Finance, December 1952, pp. Movements and Gold Sterilization” (Princeton, N.J.: National 535-36. I cannot recommend the works of this economist too high- Bureau of Economic Research and Princeton University Press, ly. See especially the book of his collected work, Inflation, Depres- 1963), pp. 279-87. In my first article | wrote, somewhat carelessly, sion, and Monetary Policy (Baltimore: Johns Hopkins University that the Fed wanted to help the Bank of England “achieve and main- Press, 1966). tain gold payments” (p. 40). But the “help” the Fed offered did not 17. See again my Monetary Policy, pp. 266-69, for an account of extend to a U.S. price-level increase. It meant only loans and other the public’s attempt to convert demand deposits into currency. temporizing measures to the Bank of England. 18. For a contrary view, see my article “The Fed Sets Interest 10. See Richard H. Timberlake, Monetary Policy in the United ~~ Rates? It Just Ain’t So!” The Freeman: Ideas on Liberty, December States: An Intellectual and Institutional History (Chicago: Universi- 1999, pp. 6-7. ty of Chicago Press, 1993), Table 17.1, p. 264. 19. Paul Heyne review of Yanis Varoufakis, Foundations of Eco- 11. For an extended treatment of the clearinghouse episode, see ~~ nomics: Beginner's Companion (Routledge: New York, 1998), Ideas ibid., chapter 14, “The Central Banking Role of Clearinghouse Asso- on Liberty, January 2000, p. 60. ciations,” pp. 198-213. Inflation and Money: A Reply to Timberlake by Joseph Salerno n his reply to my October 1999 Freeman: and unacceptable meaning” (my emphasis) in Ideas on Liberty article, Richard Timber- order to “discover” a nonexistent inflation in lake fails to address or misconstrues most of the 1920s. I spent a substantial part of my arti- the substantive issues I raised in my comment cle responding to his erroneous claim and on his earlier three articles. Space constraints, documenting that inflation in Rothbard’s however, permit me to respond only to a few sense has a long and venerable history in of his more important arguments. These monetary thinking. involve the evolution of the word “inflation” Now Timberlake shifts ground and argues and the definition of money. that the pedigree of a definition of “inflation” is “largely irrelevant to substantive issues.” Evolution of the Whether or not this latter claim is true, he is « cs arguing to a conclusion that does not bear on Word “Inflation the issue at hand, an issue that Timberlake lake himself who, in his first article, described Iimberlake shifts ground yet again, now link- Rothbard as “endowing inflation with a new ing Rothbard’s definition with that of some nameless “ancient economists” who he Joseph Salerno is a professor of economics in the alleges “used the term ‘inflation’ to mean an Lubin School of Business at the Pace University. increase in the stock of paper money together ===== PAGE 44 ===== 44 IDEAS ON LIBERTY ® SEPTEMBER 2000 with an increase in prices.” Is Rothbard’s Austrian economists, like classical monetary definition of inflation a newly invented ploy or theorists, argue that what exists in objective an ancient fallacy? Timberlake cannot have it reality at any moment, and what market par- both ways. ticipants therefore use in their economic cal- Timberlake is also incorrect in asserting culations, are particular money prices actual- that it was only after the invention of price ly paid or expected to be actually paid in the indices in the mid-nineteenth century that future. As noted above, the value of money is economists were able to “describe the value embedded in the structure of individual of money as the inverse of money prices” or money prices, and cannot be conceived of to “properly distinguish between increases in apart from it. Any attempt to average this the stock of money and general increases in structure into a unitary price level is com- money prices.” In fact, the earlier British clas- pletely arbitrary because it entails a subjective sical economists whom Timberlake cites, choice by the statistician among the variety of namely, Thornton, Ricardo, and Mill accom- available methods for constructing indexes. plished precisely these things without Nor is such a unitary index for measuring recourse to a price index. As Jacob Viner, the changes in the value of money needed by great historian of classical economic thought, households and businesses in planning their pointed out long ago, “When [the classical everyday transactions. For as Ludwig von economists] speak of the value of money or Mises pointed out: the level of prices without explicit qualifica- tion, they mean the array of prices, of both A judicious housewife knows much more commodities and services, in all its particu- about price changes as far as they affect larity and without conscious implication of her own household than the statistical aver- any kind of statistical average”! In other ages can tell. She has little use for compu- words, the classical economists recognized tations disregarding changes both in quali- that the value of money consisted of the ty and the amount of goods which she is “array” of alternative quantities of particular able or permitted to buy at the prices enter- goods purchasable by the monetary unit, for ing into the computation. If she “mea- example, two candy bars or one frozen yogurt sures” the changes for her personal appre- cone or one-tenth of a baseball cap, and so on. ciation by taking the prices of only two or If we assume that the monetary unit is the dol- three commodities as a yardstick, she is no lar, then each of these quantities of goods rep- less “scientific” and no more arbitrary than resents the inverse of the respective good’s the sophisticated mathematicians in choos- dollar price—3$.50 per candy bar, $1.00 per ing their methods for the manipulation of frozen yogurt cone, $10.00 per baseball cap. the data of the market.3 Furthermore, the leading classical economists were insightful enough to recognize that the Thus from a substantive standpoint, Roth- individual elements constituting the value of bard and the Austrians object to the definition money, that is, the reciprocals of particular of inflation as a general rise in the CPI or money prices, were heterogeneous and con- GDP deflator because this definition obscures tinually varying in relation to one another. the relative changes within the price structure This led some of them to deliberately shun or caused by an expansion of the money supply. explicitly criticize the use of a price index, the In other words, an increase in the money sup- first of which was developed in England in ply will cause prices to rise unevenly, with 1798.2 some rising earlier and to a greater extent than This brings me to Timberlake’s mischarac- others. Indeed, the very notion of a “price terization of the modern Austrian case against level” is a profoundly misleading metaphor, price indices. According to Timberlake, the because it suggests the level of a body of thrust of the Austrian case is that price indices water rising and falling uniformly and instan- are “non-subjective.” But this is not the Aus- taneously. The more instructive metaphor is trian objection at all. Quite to the contrary, that of a swarm of bees, in which the individ- ===== PAGE 45 ===== INFLATION AND MONEY: A REPLY TO TIMBERLAKE 45 ual bees are never lost sight of as they contin- ging the question by assuming what is to be ually alter their relative positions within the proved.6 Obviously, if Rothbard’s definition is swarm as it changes altitude. In the same assumed to be wrong from the outset and, manner, as the “price swarm” rises or falls as therefore, inflation is defined as a general rise a result of a change in the supply of money, in prices, and prices have indeed fallen, then the relative positions of the individual prices, it can be validly inferred that no inflation has and therefore of the distribution of individual occurred. But Timberlake’s argument proves incomes and demands, undergo continual nothing against the usefulness of Rothbard’s alteration and remain permanently altered definition of inflation. I could just as easily even after the price swarm adjusts to its new argue that if the Fed had not “inflated” the height.4 money supply during the 1920s, the value of The revolution in the price structure that money would have been even higher in 1929 inevitably accompanies any change in the pur- than it actually was and people would prefer chasing power of money is instructively illus- $2,000 of income in the 1929 dollars of this trated by the experience of the 1920s. As Tim- counterfactual world to the same nominal berlake recognizes, consumer and wholesale income in actual 1929 dollars. This would prices gradually declined during this decade hardly prove that Timberlake’s definition of due to a productivity-driven increase in the inflation is useless, though I believe it is for supplies of goods and services that out- the reasons stated above. stripped the increase in the supply of money. However, what he fails to mention is that this The Definition of Mon ey expansion of the money supply, as a conse- quence of its initial injection into credit mar- In discussing the issue of which items to kets, also increased the prices of capital goods include in the definition of the money supply, relative to the prices of consumer goods. The Timberlake refers to Leland Yeager’s empiri- relative increase in the prices of capital goods cal test for identifying those assets that func- was manifested in the boom in real estate and tion as a general medium of exchange. stock markets, in which titles to aggregates of According to this test, when people feel that capital goods are exchanged. In addition, they are holding too much money they long-term and short-term interest rates, which attempt to rid themselves of the excess by reflect the differential between capital and spending it on various goods and services, consumer good prices, were driven down thus causing money prices in these markets to from 1921 through 1928.5 Owing to their begin to rise. The extra spending and rising reliance on a definition of “inflation” that prices spread throughout the economy will mandates exclusive attention to a nonexistent continue until the value of money has been price level, Timberlake and the monetarists driven down to the point at which people are are oblivious to movements in real money satisfied with holding the entire existing stock prices that crucially affect the economic cal- of money because their anticipated transac- culations and plans of entrepreneurs and, tions will now require greater sums of the therefore, the real production processes of the less-valuable money. Thus for Yeager, the economy. money supply consists of those things, such Finally, Timberlake invokes a strangely as currency and demand deposits, that are irrelevant “thought experiment” to disprove routinely spent and accepted as final payment Rothbard’s claim that a major inflation in all markets. occurred during the 1920s. According to Tim- However, demand deposits do not pass Yea- berlake, an inflation could not have occurred ger’s test just because checks drawn on them between 1921 and 1929 because anyone are spendable or because they operate as an would prefer $2,000 of income in 1929 dol- independent medium of exchange alongside lars to the same income in 1921 dollars, given currency. Rather, demand deposits can be that prices were lower in 1929 than in 1921. considered part of the money supply because While this is true, it is a textbook case of beg- they are interchangeable at par and on ===== PAGE 46 ===== 46 IDEAS ON LIBERTY ® SEPTEMBER 2000 demand into currency, that is, Fed notes, “time,” or savings, deposits vis-a-vis demand which in our present system is the ultimate deposits, because businessmen were induced embodiment of the general medium of by the payment of interest on savings deposits exchange. But once this is realized, it to hold the less active portion of their bal- becomes immediately clear that noncheckable ances in this type of bank account.8 savings deposits at commercial and savings Timberlake offers a second test that banks as well as the share accounts of savings allegedly supports his narrower definition of and loan associations operate likewise as the money supply. According to this econo- instantaneously redeemable, par-value claims metric test, a particular type of asset is to be to definite quantities of currency.” The fact included in the definition of the money supply that the owner of a savings deposit in the if its inclusion improves the positive correla- 1920s could not spend by directly transferring tion between the empirical monetary aggre- a portion of his deposit balance to a third gate and total dollar spending on final goods party via check but had to walk or drive tothe and services or gross national product. The bank to redeem it before making his expendi- logic of this test implies that if the addition of ture 1s a technical detail that does not affect the supply of peanut butter to the monetary the essence of the economic transaction. Sav- aggregate being tested improved its “explana- ings deposits and savings and loan share tion” of total spending, then peanut butter accounts, no less than demand deposits, there- would be considered part of the money sup- fore, offer unconditional access to immediate- ply. But this positivist test is in direct conflict ly spendable dollars and thus meet Yeager’s with Yeager’s test, which is designed to iden- criterion for inclusion in the money supply. tify only those assets as money that function Rothbard clarified this point with the fol- essentially as a general medium of exchange, lowing example. Let us assume that as a result that is, which are purchased in anticipation of of the development of a sudden and wide- being resold for other goods in the future. spread cultural aversion to the number 5 Thus Yeager’s essentialist test would exclude among the nonbank public, five-dollar bills peanut butter because, in our economy at are no longer accepted in exchange. When least, it is a consumer’s good, an excess sup- someone now wishes to exchange some of his ply of which results in a fall in its own money five-dollar bills, he must first travel to the price and not directly in an increase in the bank to convert them into dollar bills of other money prices of other goods. In fact, in the denominations. Now as long as these bills same article that Timberlake quotes from, remain interchangeable at par and on demand Yeager strongly criticizes precisely the very into dollar bills of other denominations, no positivist approach to defining money that one would have reason to object to their inclu- Timberlake defends. sion in the money supply. Indeed, they would pass Yeager’s test: thus, if a helicopter were 1. Jacob Viner, Studies in the Theory of International Trade sent forth by the Fed to shower the country (Ney York: Harper & Brothers Publishers, 1937), p. 314. : .\ or . . Tbid., pp. with additional billions of dollars in five- 3. Ludwig von Mises, Human Action: A Treatise on Economics, soon begin a general rise as the populace sion of how to change the CPI to improve its “measurement” of infla- ances. But as Rothbard pointed out, Savings “volatility,” are themselves based on the subjective preferences of the five-dollar bills in this example: other gasoline prices in allocating their expenditures just because they are things equal, an increase in their total would Yo he suggestion that the concept of a price swarm is superior to create an excess supply of spendable dollars that of a price level is due to the brilliant but neglected monetary the- process that lowers the value of money. In Augustus M. Kelley Publishers, 1966 [1938-1942]), vol. 2, pp. fact, in the 1920s bank credit expansion 33036 i . } ji 5. Sidney Homer, A History of Interest Rates, 2nd ed. (New resulted in a disproportionate growth in Brunswick, N.J.: Rutgers University Press, 1977), pp. 354, 372. ===== PAGE 47 ===== INFLATION AND MONEY: A REPLY TO TIMBERLAKE 47 6. Antony Flew, Thinking Straight (Amherst, N.Y.: Prometheus 8. On this neglected aspect of the 1920s inflation, see C. A. Books, 1977), pp. 65-66. Phillips, T. F. McManus, and R. W. Nelson, Banking and the Busi- 7. As 1 pointed out in my previous article, savings deposits and ness Cycle: A Study of the Great Depression in the United States S&L share accounts were, for all intents and purposes, effectively (New York: Amo Press, 1972 [1937]), pp. 95-101; Benjamin M. convertible into currency on demand. Moreover, just as in the case Anderson, Economics and the Public Welfare: A Financial and Eco- of demand deposits, after 1934 the par-value interchangeability nomic History of the United States, 1914-1946, 2nd ed. (Indianapo- between savings deposits and S&L share accounts on the one hand lis: LibertyPress, 1979), pp. 139-43. Not coincidentally, the authors and currency on the other was insured by an agency of the federal of these two volumes were heavily influenced by Austrian monetary government. This occurred for credit unions only after 1971. and business-cycle theory. Final Comment on Salerno’s Monetary Program by Richard H. Timberlake am not going to re-argue the points of dif- tractions and great depressions over the last ference between Salerno’s arguments and five generations. So why was the period mine in this final rejoinder. The reader must 1929-1941 unique? Why was this particular decide for himself which parts if any of our business depression so deep, so stubbornly respective views are most logical and most protracted, and so resistant to the “therapy” of useful in dealing with the events under scruti- monetary authorities? ny. I find that nothing in Salerno’s final Salerno notes that I fail to mention that the account refutes anything I have argued. I increase in the money supply during the must, however, correct a few of his fallacious 1920s “also increased the prices of capital notions. goods relative to the prices of consumer Salerno and I share much common ground goods.” This disparity, he claims, set in in our advocacy of free markets and other motion a boom in real estate and stock market characteristics of a society ruled by individual prices—the “Austrian Theory of the Business preferences and minimal constitutional gov- Cycle” (ATBC). Then, he adds, all interest ernment. Clearly, however, we speak—per- rates “were driven down,” presumably by the haps imperfectly—for different tools and dif- “increase” in Fed money. ferent approaches on how to analyze mone- This compounding of assertions is wrong tary disturbances, especially the “Big One” of from beginning to end, and is not verified by 1929-1941. Salerno would even change the any empirical studies. Fed-created money time of this disequilibrium to 1921 and on, declined all through this period, while gold- perhaps to the present. Indeed, if his (and based money increased nominally. And did Rothbard’s) doctrine is to be consistent, finan- the prices of consumer goods decrease rela- cial markets have not been stable since 1858. tive to the prices of capital goods? Where is For not since the Civil War has the money the empirical measurement of this phenome- stock been ruled exclusively by, and based on, non? What are the norms for judging the dif- the presence of the precious metals. Thus the ferences? When money has entered the econ- Great Contraction and Great Depression omy from whatever sources during business should have been one of only many great con- fluctuations in the past, has there been a dis- ===== PAGE 48 ===== 48 IDEAS ON LIBERTY ® SEPTEMBER 2000 parity between the increases in prices of cap- empirically. 1 did so once upon a time, and ital and consumer goods? established some answers. These answers were I raise these questions because those who not written in stone; they can be altered or profess “Austrian” economics have largely, if refuted, but not by laid-back theorizing from not exclusively, failed to raise or answer them. some supposedly “irrefutable” doctrine. They assert logical possibilities, such as the The three articles I wrote for The Freeman: ATBC, but offer no empirical evidence to Ideas on Liberty last year concluded that the substantiate them. In spite of the many worth- Great Contraction and Great Depression were while values in Austrian doctrine, therefore, results of badly conceived central bank and their stock among conventional thinking Treasury policies. A “good” central bank, economists is not high, especially with refer- such as the Federal Reserve System is today, ence to monetary affairs. would never have allowed that debacle. Salerno also claims that I and “the mone- Nonetheless, this conclusion does not excuse tarists are oblivious to movements in real the institution of central banking generally money prices.” How he can seriously make and its interference in the money-creating this charge is more than I can understand. In process. In other research I have done I have fact, the most important use of price indexes found that the privately designed and operat- 1s to distinguish between money prices and ed “central bank”—the informal system of real prices. Anyone who examines my work, clearinghouse associations—did much better or that of any monetarists, will see that real in operating as a lender of last resort. In fact, values bulk large in our writings. the Federal Reserve System was meant to be In assessing the question of what to include the government designed clearinghouse sys- in “the” stock of money, I offered the Yeager tem and failed because private incentives for test: Do disruptions in the supply of the alleged doing the right thing at the right time were money work themselves out in a particular lacking. market without macroeconomic disruptions, or Yet again, the clearinghouse system only does a large variation in the supply of the came into existence because of the rigidities alleged money spread to all (or many) other and complications that government banking markets? Clearly, this test washes out savings policies forced on the banking system. Were deposits, savings and loan share capital, and the money industry as free to innovate and cash surrender values of life insurance compa- produce as the computer industry, it is very nies as moneys. These items, while wealth, probable that we would see the end not only have no monetary properties—no more so than of Great Contractions and Great Depressions, real estate and common stock holdings. Here but also even those of minor magnitudes. I again, however, is a question that can be tested look forward to such a day. OJ Read the entire Timberlake-Salerno exchange online at www.fee.org. ===== PAGE 49 ===== Economic Notions by Dwight R. Lee ¥ Economics Take This Job and Shove It, at the Margin any believe that pay is overemphasized Economists are often criticized for assum- and much too unequal in market ing that workers have to be paid because peo- economies. Supposedly, most people enjoy ple like leisure and dislike work. For example, working, and so while they have to be paid to Kohn (p. 131) claims, “Economists have it survive comfortably, they don’t have to be wrong if they think of work as a ‘disutility’ bribed with bonuses tied to performance to do. . . something unpleasant that we must do in a good job. Indeed, psychological experi- order to be able to buy what we need, merely ments indicate that the intrinsic interest peo- as a means to an end.” In fact, economists ple have in doing a task declines when they have no problem admitting that most people are paid for doing it. enjoy their work. But they also recognize And why the large differences in the some other important considerations regard- amounts different people are paid? Since peo- ing work.2 ple enjoy working, big pay differences aren’t If a person enjoys one job, he will also needed to overcome the unpleasantness of enjoy others. So what job should he take? working, at least not in most jobs. Anyway, Clearly his preferences for the type of work how can you explain that people who have the he most enjoys should be considered. But so most enjoyable jobs (such as professional should the preferences of consumers who will athletes, successful entertainers, and corpo- value the contribution of a worker more in rate executives) typically receive far larger some jobs than in others. Fortunately, con- incomes than those who have the least enjoy- sumers can communicate their preferences able jobs (such as custodians, trash collectors, effectively through their purchases, which and coal miners)? Also, the argument contin- translate into greater demand and higher ues, pay differentials reduce productivity by incomes for workers who produce the most shifting the emphasis in the workplace from valued products. This communication would cooperation to competition. be censored by government policies that arbi- Those arguments can be persuasive at first trarjly reduced the pay differentials generated glance, as they are in a very readable book by in labor markets. Such censorship would Alfie Kohn.! But the case is seen to be seri- reduce not only the value of what workers ously flawed when examined with an under- produce, but their freedom. Workers can be standing of basic economic concepts, such as 3)jowed to choose a job that is less productive, marginalism. but more enjoyable, only when they are held — h 1 for the reduc- Dwight Lee is Ramsey Professor at the Terry College accountable through lower pay for the of Business, University of Georgia, and an adjunct tion in value created for consumers. . fellow at the Center for the Study of American Busi- In the psychological experiments cited by ness at Washington University in St. Louis. Kohn that show interest in performing a task 49 ===== PAGE 50 ===== 50 IDEAS ON LIBERTY ® SEPTEMBER 2000 declining when people are paid, it makes little ees are being paid about the same, even difference what tasks are being performed. In though some are better workers than others, the economy, attracting workers into the right long-term considerations can still connect pay jobs is crucial and requires pay differentials to performance. Those who miss too much that critics like Kohn find objectionable. Even work are dismissed; less productive workers if the pay differentials generated by the mar- are more likely to be laid off in business ket do reduce the performance of workers (a downturns; and more productive workers are doubtful proposition, as we are about to see), more likely to be given better work schedules it is better having people working at less than and promoted. Responding to consumers full capacity at valuable tasks than at full effectively requires that firms have compensa- capacity at useless tasks. tion arrangements that, over time, connect pay Economists also recognize that while peo- to contribution. ple generally enjoy their work in total, most Jobs are a pain at the margin. Even if you get Imp ortance of Co op eration emendous satisfaction from your job, the marginal satisfaction can be very low, in fact Obviously cooperation is important in the negative. Well before the work day is over, workplace. But few things can reduce cooper- most of us are tired of the grind and would ation more than the perception that compen- love to leave work early and do something sation isn’t tied to contribution. There is a else. We would like to tell the boss, “Take this strong temptation for workers to shirk, at the job and shove it, at the margin” People putin margin (and it can be a wide margin), even eight hours of diligent effort because there is when they enjoy their jobs, if they don’t see a a financial inducement to do so. financial reward for diligent effort. Even In fact, the ability of consumers to commu- assuming that most workers were willing to nicate their preferences to workers through put in a full day of responsible work without differential pay acts to guarantee that workers the incentive of pay, a few will always take receive marginal “disutility” from their jobs. advantage of the opportunity to shirk if there The value a worker is contributing to con- is no penalty. This will be noticed by the sumers by remaining on the job is positive dependable workers, who find their effort even though the marginal value he receives harder and less productive because of the from working longer has declined to zero and shirking of the few, and who will begin to feel is about to become negative. Since consumers like suckers since they are receiving no more can communicate through additional pay that than the slackers. So a few more will decide it the value to them is greater than his cost of is better to be a shirker than a sucker, increas- staying on the job, he continues working. The ing the temptation of the rest to slack off. The additional pay compensates him for the mar- result is a destructive cycle of shirking that ginal “disutility” of working as long as that undermines productive cooperation among disutility is less than the marginal value he is workers. creating. I am not arguing that money is the only Even popular entertainers and athletes, who thing that motivates workers. Also important receive enormous total satisfaction from their are such things as respect from supervisors, jobs, perform in late-night shows, take road an uplifting sense of mission, and a feeling trips, and put in extra hours rehearsing and of comradeship. But the effectiveness of practicing when they would rather be doing these considerations will soon crumble with- something else. But because their perfor- out a reasonable connection between pay and mance is valued so highly by consumers who performance. OJ communicate that value with extremely lucra- tive compensation, they put in the extra hours. Company. 1993) Punished by Rewards (Boston: Houghton Mifflin I am not claiming that compensation is 2. See Richard B. McKenzie and Dwight R. Lee, Managing : : : Through Incentives (New York: Oxford University Press, 1998), always tied directly to worker output. That is chapter 20, for a more detailed discussion of the argument in this not always practical. But even when employ- column. ===== PAGE 51 ===== Constitution, as written, should be ratified. Nor do they deny that both the content, and the specific wording to express that content, were the result of compromise upon compro- mise in the convention. They are also aware that there was very careful deliberation on the precise wording to be used to convey the ulti- CAPITAL LETTERS mately decided-upon content. Chosen Words Have But I think they would tend to hold that Meaning there was some significant degree of agree- ment among the people of the colonies as to the intended meanings of the words in the To the Editor: Constitution as hammered out in the conven- I have enjoyed and appreciated Wendy tion, and that these meanings were clarified McElroy’s articles in the Ideas on Liberty for considerably in the subsequent debates, in the quite some time, but I must take issue with writings of people like “Publius” and others, her fundamental premise in “Constitutional in practice following ratification, and in court Intentions” (June 2000). interpretations and legal commentaries in the Let me quote the first paragraph in order to early years of the Republic. [Seekers of origi- refer more clearly to it: “A question frequent- nal intent] therefore [believe] it is valid to ly arises in disputes about how to interpret the consider what those common interpretations U.S. Constitution: What was the intention of of the intended meanings of the provisions those who framed the document? This ques- were at time of ratification and in the early tion contains an invalid assumption. It years of the Republic. Because if we can assumes that those who drafted the Constitu- change the meanings of words and provisions tion at the 1787 convention and those in our foundational documents at will as years involved in the subsequent debates were of pass, what have we to build upon but shifting one mind and intent.” sand? The balance of the article deals for the most I feel Ms. McElroy has not spoken in her part with the many minds and many intents of article to this issue of commonly understood the many types and persuasions of people in meanings of words and provisions in the the various colonies as to whether the Consti- Constitution at the time of development and tution, as drafted, should be ratified, and if ratification. . . . ratified, what its effects would be. [It also She goes on to say, “Rather than search for deals] with the large amount of compromise any one interpretation . . . , it is productive to involved in its development. But these things explore the compromises reflected in the doc- are not . . . germane to the questions, What ument.” But the words and provisions of the is the meaning of the words in the various Constitution are legal language, and legal lan- provisions of the Constitution, how should guage is, or at least should be, subject to pre- they be interpreted in practice, and how were cise, and at least some would hope, unchang- these questions addressed at the time of the ing interpretation. The delegates understood it convention and ratification? These are the to be legal language and that it would be bind- questions, I believe, in the minds of those who ing if ratified, and I for one believe, based on look to “the intention of those who framed the my study, that they sought carefully and delib- document.” erately (all the more so because of their divi- Those who look to original intent do not sions and suspicions) to use wordings which deny there was considerable and frequently would not be subject to many interpretations. passionate disagreement as to whether the Ms. McElroy implies that it is fruitless to 51 ===== PAGE 52 ===== 52 IDEAS ON LIBERTY ® SEPTEMBER 2000 attempt to understand what was the common- those who consented to the Constitution are ly understood meaning of particular words dead and their agreement had “no natural and provisions in the Constitution to those power or right to make it obligatory upon their who signed and those who debated and rati- children.” Mr. Kautz is quite correct that the fied it. But if that is the case, does it have, or Constitution is a legal document in the sense has it ever had, any meaning at all except as a that it was adopted and has been enforced by symbol, like the Statue of Liberty, which after government, but this tells me nothing about all needs no words to convey its meaning? whether it is inherently just or politically —PauL C. KAUTZ practical. Maynard, Mass. Third, I tend to emphasize principles rather than wording because, unless the principles Wendy McElroy replies: are entrenched, the wording will protect very I would like to thank Mr. Kautz for his little. You might well respond that how princi- thoughtful response to my article “Constitu- ples are worded is inseparable from what they tional Intentions.” I think our key difference is are, and this is a compelling point. With the that he approaches the Constitution as a legal Constitution, however, I believe the wording document and thus states “the words and pro- has been over-emphasized. visions of the Constitution are legal language, Fourth, from a political perspective, I have and legal language is . . . subject to precise reservations about a precise legalistic inter- ... unchanging interpretation.” I approach the pretation of the Constitution. In some Constitution as a political document under a instances, I prefer absolute adherence to every constant debate that often introduces the syllable written; for example, the First intentions of the drafters and ratifiers as “evi- Amendment—*“Congress shall make no law. dence” to support a particular interpretation. ...” Yet the logic of this approach does not For example some anti-gun advocates insist allow me to argue against aspects of the Con- that the Second Amendment’s opening stitution of which I am less fond. words—*“A well regulated militia being nec- In short, we have an interesting difference essary to the security of a free state . . ”— of approach. However, I think we are probably reveal an antiquated intention to preserve in accord on the main purpose of “Constitu- militias and should not be used to protect tional Intentions,” which was to draw atten- individual gun ownership. My purpose in the tion away from the intentions of the Constitu- article was to suggest shifting the political tional Convention and onto a more substan- discussion away from the original intention tive matter—whether that matter is the behind the Constitutions words in order to wording or the principles. focus on: (1) the principles they were meant to embody and (2) the political problems they sought to address. I do not generally take a legalistic view of the Constitution, for a number of reasons. First, I am not a legal scholar. Second and per- haps more important, I do not consider the document to be legally binding on anyone. Lysander Spooner opens his work No Treason with the words, “The Constitution has no inherent authority . . . unless as a contract between man and man.” He observes that 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: iol@fee.org; fax: 914-591-8910. ===== PAGE 53 ===== Economics on Trial by Mark Skousen IDEAS ON [IBERTY SEPTEMBER 2000 “An Enemy Hath Done This” “Government measures . . . give individuals an incentive to misuse and misdirect resources and distort the investment of new savings.” —MILTON FRIEDMAN! Qo months ago, I had the opportunity Jesus tells the story of a wheat farmer of speaking before a Miami chapter of whose crop comes under attack by an Legatus, a group of Catholic business leaders unknown assailant. In the middle of the night organized originally by Tom Monaghan, this enemy sows tares (weeds) in his wheat founder of Domino’s Pizza. The topic was the fields. Soon the farmers servants discover outlook for the stock market, which had that the farmer’s crop appears to be twice the reached sky-high levels and by any tradition- normal size. Yet the master realizes that half al measurement appeared extremely over- the crop is fake—weeds instead of wheat. But valued. Even many experienced Wall Street he warns his servants not to tear out the weeds analysts recognized that a bear-market correc- for fear of uprooting the good shoots; they tion or crash was inevitable and necessary. As must wait and let the wheat and the tares grow the old Wall Street saying goes, “Trees don’t up together until harvest time. Months later, grow to the sky.” Indeed, in the spring the the wheat produces good grain, while the stock market took a well-deserved tumble. tares are merely weeds and provide no fruit. What is the cause of this boom-bust cycle The servants pull out the weeds and burn in the stock market? Does capitalism inher- them, and store the grain in the barn. ently create unsustainable growth? Is the bull The parable is imminently applicable to the market on Wall Street real or a bubble? recent wild ride on Wall Street. In today’s robust global economy, the wheat represents The Parable of the Wheat and ~~ 8¢Puine prosperity—the new products, tech- nologies, and productivity generated by capi- the Tares talists and entrepreneurs. It represents real To answer these questions, I applied Jesus’ €conomic growth and when harvested, parable of the wheat and the tares (Matthew reflects a true higher standard of living for 13:24-30) to today’s financial situation. everyone. Under such conditions, stock prices -_ are likely to rise. Mark Skousen (http://www.mskousen.com; mskousen On the other hand, the tares represent arti- @aol.com) is an economist at Rollins College, fg. ial prosperity that bears it in the end Department of Economics, Winter Park, FL 32789, a prosperity ars no fru Forbes columnist, and editor of Forecasts & Strate- and must be ‘burned at harvest time. Where gies. His textbook, Economic Logic, is now available ~d0€s this artificial growth come from? The from FEE. central bank’s “easy money” policies! The 53 ===== PAGE 54 ===== 54 IDEAS ON LIBERTY ® SEPTEMBER 2000 Fed artificially lowers interest rates and cre- ket, and recently the Consumer Price Index. ates new money out of thin air (through open- At some point, a “burning” of excessive asset market operations). This new money, like reg- values in the financial markets must occur. As ular savings, is invested in the economy and Ludwig von Mises stated long ago, “if a brake stimulates more growth and higher stock is thus put on the boom, it will quickly be prices—higher than sustainable over the long seen that the false impression of ‘profitability’ run. created by the credit expansion has led to Who is the enemy who sows artificial pros- unjustified investments.”2 perity? Alan Greenspan! (Or, to be more Lesson: Globalization and supply-side free- accurate, central bankers.) The money sup- market policies have justified genuine eco- ply—which is controlled by the Fed—has nomic growth and higher stock prices over the been growing by leaps and bounds, especially past two decades, but “easy money” policies since the 1997 Asian crisis. have at the same time created an artificial But there is no free lunch, as sound econo- boom and “irrational exuberance” on Wall mists have warned repeatedly. At some point, Street. Ignore this lesson at your own peril. the harvest time comes and the wheat must be Remember the parable of the wheat and the separated from the tares. This is the crisis tares! ] stage, where the boom turns into the bust. : : : : : 1. Milton Friedman, Capitalism and Freedom (University of Harvest time in wheat is fairly easy to predict, Chicago, 1962). p. 38. but not so in the economy. Clearly economic 2. Ludwig von Mises, “The ‘Austrian’ Theory of the Trade y y es : Cycle,” in The Austrian Theory of the Trade Cycle and Other Essays, conditions are heating up, as measured by compiled by Richard M. Ebeling (Auburn, Ala.: Ludwig von Mises asset inflation, real estate prices, the art mar- Institute, 1996), p. 30. Mark Skousen’s Economic Logic Economic Logic is a no-compromise free-market college textbook, 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 55 ===== The findings of this study are astonishing BOOKS and should prove invaluable to all of those in the United States who are working to privatize and introduce competition into the provision of education services. In Brazil, for instance, there are seven or eight large chains of private schools, several of which also run universities The Global Education Industry: Lessons from Private Education in Developing Countries by James Tooley and sometimes educational television stations. Institute of Economic Affairs ® 1999 e 136 pages Not only is the private sector large in ® $14.00 paperback Brazil, but it is also strikingly innovative. The most dramatic example of this is provided by Reviewed by Antony Flew the COC chain. For fees of about $4,800 a year, it provides each student with a specially fier all the privatizations of the Thatcher devised desk with a fold-away computer ter- years, the British-maintained school sys- minal networked to CD-ROMs, the Internet, tem is one of the two largest industries that and the teacher’s “smart-board,” a device that still remain under state ownership and con- enables the student to take home a copy of all trol. (The other is the National Health Ser- the teacher’s blackboard writings on a floppy vice.) Both are effectively monopolistic and disk. therefore liable to all the notorious faults of An example of the willingness and versatil- monopolies, particularly those run by the gov- ity of educational enterprisers comes from ernment. State education in Britain is not India, where computer training in the state strictly speaking a monopoly because the pri- universities is poor, producing graduates who vate provision of educational services is per- are unemployable in today’s computing indus- mitted and exists on a relatively small scale. tries. Private enterprise in the form of NIIT But is there any anti-monopoly legislation in (the National Institute for Information Tech- the world that would not be activated if a firm nology), however, offers superior training in achieved a market share of over 90 percent its 400 campuses around the country, and and kept it through a policy of predatory non- employers now regularly state in their job pricing? advertisements that they are seeking a James Tooley, the author of the present GNIIT—a graduate of NIIT. work, opened his campaign for the privatiza- Two other features of NIIT are especially tion of educational institutions in 1995 with instructive. First, because of the need to earn the publication of his first book, Disestablish- a profit, NIIT is acutely aware of the value of ing the School: Debunking Justifications for time and space. On NIIT campuses, all rooms State Intervention in Education. His second and computers are in use constantly from book, Education Without the State appeared a morning to night—very different from state year later. Those works firmly established institutions! Second, NIIT has two research Tooley’s credentials as an educational radical departments devoted solely to education. and earned him the enmity of the education Their performance indicators are publications establishment. in research journals and attendance at confer- The current book was initiated, as we are ences. NIIT is convinced that the work of told in the foreword, by “the International their researchers will pass the test of the mar- Finance Corporation (the private-sector arm ket, and if not, changes are bound to be made. of the World Bank Group),” which “had Again, how different from the “research” become aware of the potential to participate in usually done by academics in government private sector educational investments”— universities. most especially in developing countries. What After his chapter surveying the develop- an unexpected development, given the World ment of private education alternatives in 13 Bank’s usual inclinations to support state developing countries, Tooley proceeds to institutions. chapters on “Factors for Success,” “Equity 35 ===== PAGE 56 ===== 56 IDEAS ON LIBERTY ® SEPTEMBER 2000 Issues,” “Regulation and Investment Cli- and why these disastrous mental distortions mate,” and “Conclusions and Policy Propos- arose, how and why they came to motivate als.” In “Equity Issues,” we are unsurprising- movements, parties and states” One can ly told that for-profit suppliers in developing scarcely imagine a more important project, countries, as in the developed, mainly serve and Conquest has performed brilliantly. the middle and upper classes. But in develop- Conquest is best known as a historian— ing countries there are also some services arguably the historian—of the Soviet Union. geared toward the poor. Most of his 20 books have been devoted to a Tooley notes “how total public spending on clear-eyed exposition of the facts about the education in low-income countries typically regimes of Lenin, Stalin, and their successors. favours the affluent, and can often be a sub- While others were evading the facts or mak- sidy from the less well off to the higher ing excuses for the unspeakable barbarity of income groups.” Indeed it can, as it tends to those tyrants, Conquest insisted on the unvar- be in high-income countries too. But if the nished truth. Read, for example, The Harvest private market for education continues to of Sorrow for his account of the deliberate develop, with more and more people paying famine Stalin brought about in the Ukraine, for just the education they choose, the “rob which claimed several million lives without the poor to give to the rich” phenomenon will firing a shot. dissipate. Lenin, Stalin, Hitler, Mao, Castro, Pol Pot, In helping to undermine the intellectual Idi Amin, and dozens of other villains brought support for government education and, in misery and death to millions. They did it by the current book, demonstrating that pri- exploiting the power of ideas. Conquest vate enterprise is providing superior edu- writes, “The book’s general theme is that any cation alternatives for people around the concept given anything like absolute status globe, James Tooley has done truly valuable becomes not a guide to action but an abstrac- work. [0 tion whose imposition on reality reveals an Antony Flew is emeritus professor of philosophy, incompatibility, as engineers say of parts that University of Reading, England. do not fit, and that can only be made to fit by main force, and even then ineffectively or ruinously.” The sword and gun alone do not enable tyrants to kill and enslave on a vast scale. Ideas, very bad ideas, are necessary. by Robert Conquest The title for the first section of the book sums W. W. Norton ® 2000 © 317 pages ® $26.95 things up beautifully: Mindslaughter. But what accounts for the ideological fren- zies of the twentieth century? Conquest’s insights are legion. everal years ago, R. J. Rummel’s book Part of the explanation is that “great caus- Death by Government documented the es” provide many people with “an excuse for horrifying numbers of people killed by gov- behaving badly,” giving the actor “the right to ernment during the twentieth century—more dishonor” (here quoting Dostoyevsky). Sadly, than 100 million. Governments have always civilization is a thin and uncomfortable been the leading cause of violent death, but in veneer that is easily cracked, releasing the the last century, the toll far surpassed any- most vicious behavior. Marxism, fascism, and thing previously. Why? the like provided the necessary excuse, and In his new book Reflections on a Ravaged the KGB, Gestapo, and similar organizations Century, historian Robert Conquest tries to had no trouble filling their ranks. find the answer. Ideas motivate men, and the Another element of mindslaughter is the terrible fact is that, as he writes, “humanity idiotic idea of collective guilt. When not in has been savaged and trampled by rogue ide- the thrall of some ideology, most humans ologies.” The author sets out to show “how would laugh at the idea that people can be Reflections on a Ravaged Century Reviewed by George C. Leef ===== PAGE 57 ===== Books 57 guilty of something simply because of some as still more officials do what officials do: characteristic of theirs. But during the twenti- spend other people’s money and invent more eth century that idea took root and grew pro- work for themselves. fusely. Stalin ordered the arrest and deporta- Despite that quibble, this is a book to tion of millions of peasant farmers (the savor. OJ kulaks) for no other reason than that they George Leef is the director of the Pope Center for owned some private property and therefore Higher Education Policy at the John Locke Founda- were the “class enemy.” The servile Stalinist tion and book review editor of Ideas on Liberty. writer Ilya Ehrenburg explained that “Not one of them was guilty of anything; but they belonged to a class that was guilty of every- The Economic Consequences of Rolling thing” Lots of “useful idiots” (to use Lenin's p..1 the Welfare State phrase) fell for that line. i Among the intellectuals, totalitarian argu- by A. B. Atkinson ments were especially potent. Conquest MIT Press ® 1999 e 228 pages © $25.00 writes with contempt for the American, British, and French writers and academics who served as unpaid propagandists for the tyrants. In an especially penetrating chapter t took America’s professional politicians titled “The Answer Is Education,” he bemoans little more than three decades to spend the tendency among bright young people to more than $5.5 trillion on welfare programs become unthinking devotees of those rogue for their constituents. Looking back, we know ideologies: “Often at the age of eighteen or the results have not been pretty: work incen- twenty, a student meets a glittering general tives were stood on their head by moral haz- Idea and, far from feeling any responsibility ards created by government largess. Millions to submit it to serious questioning, hencefor- of able-bodied people have been trapped in ward follows it like a duckling imprinted with poverty and dependency despite our record- its mother.” setting economic expansion. Reflections is not just a backward-looking Now along comes A. B. Atkinson, warden book as its title would indicate. Conquest also of Nuffield College, Oxford, with his book, peers into the future and is not altogether The Economic Consequences of Rolling Back pleased with what he sees. In the chapter “The the Welfare State, warning advocates of wel- Europe Idea,” he examines the mania for a fare reform and rollback of the untoward out- European megastate. He envisions no benefit come of such policy reversals. The book, a but the considerable cost of another layer of compilation of the author’s lectures, revisits bureaucratic intervention. “More rules mean supposedly “settled issues” in an effort to more bureaucrats,” he observes, and that “the convince us that it’s economically beneficial more numerous the bonds, the more difficult to have a welfare system. Really. they will be to get out of.” Exactly. Atkinson clearly has a soft spot for the The only part of the book that I find uncon- totality of the welfare state, but he concen- vincing is the final chapter, “A More Fruitful trates on two pillars of welfarism: state pen- Unity.” Here Conquest proposes a hazy sions (Social Security) and unemployment English-speaking “unity” encompassing the insurance. “Weakening” those pillars could, United States, United Kingdom, Canada, he worries, have regrettable economic conse- Australia, and New Zealand. Why we need a quences. It is a position worth contemplating. supra-national entity is never explained. In any objective inquiry it is useful to analyze Free people will form whatever “unities” the economic effects associated with policy suit them. It’s hard to see how an “English- changes, especially those programs carrying speaking Union” could do anything to expand immense entitlement dollars. the liberty of the people living under it. The author devotes much of his book to Almost inevitably, it would diminish liberty warning readers and fellow economists of the Reviewed by David L. Littmann ===== PAGE 58 ===== 58 IDEAS ON LIBERTY ® SEPTEMBER 2000 unintended consequences that might accrue incorporate the long-run employment, from policies that remove worker security or income, and financial consequences of not incentives to remain idle. That discussion isa removing the moral hazards associated with curiosity unto itself: How complete is an the welfare state. analysis that concentrates on the supposed Another difficulty is present throughout the costs of eliminating our “social safety nets” text. Atkinson equates “trade union” wages while ignoring the costs of maintaining them? with “good jobs” and generally ignores jobs That is Atkinson's blind spot. invisibly destroyed in the process of union He argues that Social Security and unem- efforts to promote protectionist legislation. ployment insurance provide “universal reduc- Concluding his rather one-sided survey of tion in the uncertainty faced by individuals.” the arguments for and against welfare pro- The trouble with that view is that there are grams, Atkinson writes that “There are still alternative means for individuals to reduce grounds for agnosticism.” One is tempted to risk that provide greater security than reliance reply, “Welfare states have guaranteed the on government. Transfer payments, he says, impoverishment of spirit and pocketbook tend to “even out differences in life’s chances” alike; get over it!” [ and promote “equity between generations and David Littmann is senior vice president and chief to redress inequality by race, gender, or health economist with Comerica Bank in Detroit, Michigan. status.” Yes, we know that egalitarian pro- grams make people like Atkinson feel good, but that is not the same as showing that they produce net economic benefits. ) } Atkinson also relies on the old warhorse DY Richard Pipes that welfare payments (especially unemploy- Alfred A. Knopf ® 1999 © 384 pages ® $30.00 ment insurance) are “automatic stabilizers” : : that will give us “economic stimulus” in times Reviewed by Yuri Maltsev of recession. Of course, the notion that gov- ernment spending—shifting money from one ichard Pipes is professor emeritus of his- set of pockets to another—ever stimulates the tory and former director of the Russian economy is one that has been severely criti- Research Center at Harvard University. Pipes cized, but the author accepts it as an article of has also had an extensive career in govern- faith. Finally, in his biggest argument, Atkin- ment, serving as director of East European son says that doing away with welfare might and Soviet affairs in President Reagan’s make workers “demotivated” because they National Security Council. He is the author of would feel less secure. Insecurity, to the con- several books on the Russian Revolution, trary, is a strong motivator, as evidenced by including the seminal Three “Whys” of the the tremendous work ethic of Americans of a Russian Revolution. century ago, when we had no government Significantly, Pipes was among the very “safety net.” few Western experts on Soviet socialism who At least Atkinson causes one to think about were not charmed by the subject of their study welfare. Many welfare state programs have and had a realistic view on the future of institutionalized paternalism. Human beings socialism. This view, ridiculed by liberal will behave like children if treated like chil- Sovietologists as “blind anti-communism” dren. After a generation or two of such treat- was vindicated by modern history. ment, do we really expect recipients or pur- Property and Freedom differs in subject veyors of such benefits to enthusiastically from Pipes’s previous books. Yet it grows nat- embrace change? All changes have their urally out of his lifelong research. “From the adjustment costs, but we ought not adopt a time I interested myself seriously in Russia, I myopic time horizon when judging the worth became aware that one of the fundamental of policy reform. Atkinson’s analysis has this differences between her history and that of the proclivity. A more complete study would other European countries lay in the weak Property and Freedom ===== PAGE 59 ===== Books 59 development of property,” he writes. “The sion and exploitation.” The results can be con- idea occurred to me some forty years ago that sidered as the worst tragedy experienced by property, in both the narrow and broad senses humanity. It is beyond the abilities of eco- of the word, provides the key to the emer- nomic analysis to calculate the opportunity gence of political and legal institutions that cost of the socialist experiment in Russia, but guarantee liberty.” the human toll is estimated by Russian writer First, Pipes analyzes “The Idea of Proper- Aleksandr Solzhenitsyn at over 60 million ty” in classical antiquity, the Middle Ages, people who perished during Stalin’s collec- seventeenth-century England, and eighteenth- tivization, purges, campaigns against century France; the attack against it by social- “unearned” incomes, and other devilish ists, communists, and anarchists; and the sta- experiments. tus of the idea at the end of the twentieth cen- The enormous suffering of people in Russia tury. Then he describes the “Institution of and the other socialist countries is a powerful Property” as it evolved from possessiveness warning against socialism, statism, and inter- among animals, children, primitive peoples, ventionism in the West because the “most and societies of hunters and gatherers to the audacious attempt in human history to abolish emergence of property in land, and the rela- private property has ended in disaster. It is tion between the institution of property and unlikely to be repeated as long as the memo- political organizations especially in medieval ry of that calamity remains fresh.” England and “patrimonial Russia.” Unfortunately, the majority of people The rise of the Western world coincided scarcely understand the importance of proper- with the rise of the idea and the institution of ty rights. “The trouble,” observes Pipes, “is property rights. Wherever property rights that because schools fail to teach history, were secure and stable, growth of economic especially legal and constitutional history, the activity occurred. England had a long respect vast majority of today’s citizens have no for property rights. Beginning in the twelfth inkling to what they owe their liberty and century with Magna Carta, the process was prosperity, namely a long and successful set in motion for the elimination of arbitrary, struggle for rights of which the right to prop- random government. The people were freer to erty is the most fundamental. They are there- use their property for their own purposes, and fore unaware what debilitating effect the as they did so, the nation began to emerge restrictions on property rights will, over the from the economic torpor of the Dark Ages. long run, have on their lives.” OJ The most Interesting parts of the book are Yuri Maltsev is professor of economics at Carthage on Russia. Summarizing the drama of Russ- College in Kenosha, Wisconsin. ian history, Pipes writes: “Prior to 1991, Rus- sians and the nations on which they imposed their rule enjoyed few civil rights and (with pjagyes of the Mind: the exception of the single decade 1906-17) The New Epidemic of False Knowledge no political rights. In the age of absolutism, Russia’s sovereigns exercised authority in a by Bruce S. Thornton more absolute manner than their Western [SI Books ® 1999 e223 pages © $24.95 counterparts; in the age of democracy, Russia clung to absolutism longer than any other European country. And during the seven Reviewed by Charles Stampul decades of Communist rule, she produced very generation wants to believe that it a regime that deprived her people of liberties will know more than the previous one, to an extent previously unknown in world and this knowledge will lead necessarily to history.” material and spiritual improvement and the Communist Russia was the first country to elimination of the moral and physical evils officially abolish property rights, which were from which humanity has suffered for ages. declared “a sanctification of capitalist oppres- Although faith in progress has enabled people ===== PAGE 60 ===== 60 IDEAS ON LIBERTY ® SEPTEMBER 2000 to achieve great things, it has also led people True, there are no laboratory experiments to to believe that there is almost no problem that prove the underlying suppositions of psy- can’t be solved and no risk that can’t be elim- chotherapy to be true, but many individuals, inated. Furthermore, progress has caused peo- going back to World War I shell-shock vic- ple to overlook the reality that all decisions tims, say that it has helped them. Undoubted- involve tradeoffs and has fostered a perspec- ly, there is a lot of hype and even fraud in tive regarding misfortune that our ancestors psychotherapy—demonstrated, for example, would have considered childish. Many have by efforts to rehabilitate violent criminals, been led to believe that if only government which have had some tragic results. Neverthe- and businesses took appropriate precautions, less, the author’s broad-brush dismissal seems most tragedies and accidents would be pre- unwarranted. vented and diseases would be eradicated. As a His attacks on other instances of false result of this conviction, they look to govern- knowledge, however, are well warranted. He ment for protection from everything from treats the reader to a penetrating analysis of economic stagnation to beach erosion. How multiculturalism, demonstrating that it is not did we get that way? about respecting differences or the diversity In Plagues of the Mind, Bruce Thornton, of ethnic groups in America, as its apologists professor of classics and humanities at Cal claim. It is instead “a melodramatic tale of the State Fresno, traces unrealistic expectations wickedness of the West and its role in destroy- back to the Enlightenment. This period of dis- ing the peaceful paradises in which other peo- covery, and its promise to improve the human ple (usually ‘of color’) lived before Euro- condition, created the hope that through peans and then Americans came along to knowledge and reason all forms of suffering inflict racism, sexism, slavery, colonialism, could be conquered. Although a great deal imperialism, homophobia, technology, and was accomplished during this period, aspira- environmental degradation.” tions for a more just world went unrealized. Another venerable bit of false knowledge As a result, people began to doubt the value of that comes in for Thornton’s withering scruti- knowledge and reason. They abandoned the ny is the idea that American Indians were eth- scientist as a source of inspiration and turned ical paragons. We have put Indian culture on a instead to the artist. But Romanticism, demot- pedestal. Thornton knocks it back off, show- ing reason and extolling “feelings,” did not ing that Indians could be wasteful despoilers keep wars from breaking out, disasters from of the environment to the limited extent that striking, and people from starving. their technology permitted and that their treat- Today those who hope to eliminate suffer- ment of other human beings was often repul- ing and hardship embrace what some cultur- sively brutal. al critics have called the therapeutic vision. Plagues of the Mind provides a much- Thornton describes this vision as “an unholy needed explanation of why, despite increasing alliance of Enlightenment and Romantic levels of formal education, people are more assumptions,” which “has created expecta- and more apt to give credence to fallacious tions for human life that are totally unre- ideas and claims. In addition, it makes the alistic and doomed to disappointment.” In important point that, while civilizations have Thornton’s view, the therapeutic sensibility always been plagued by epidemics of false “encourages false knowledge: it creates not knowledge, the spread of false ideas at this just unattainable expectations of happiness, time in history is more dangerous “not just but also various pseudoscientific techniques because high-tech media multiply exponen- and procedures supposed to deliver on the tially the mischief that falsehood can work, promise.” but also because we are a democracy and Psychotherapy, the most widely used of democracy cannot thrive without a certain those techniques, has, Thornton argues, creat- diet of truth.” ed a nation of helpless victims. His attack on Overall, Plagues of the Mind is a worth- the practice seems to me rather overdone. while book that warns of a spreading disease ===== PAGE 61 ===== Books 61 that medical science cannot treat—the inabil- Madison argued that the establishment of ity to think clearly. [J government requires an initially aristocratic Charles Stampul writes “On Principle” (on_principle action: namely, a proposal made by a small @excite.com), a column offering philosophical and number of individuals who possessed those moral guidance to young adults. virtues (especially prudence) necessary for good deliberation. Rosen notes that unlike the multitude, these few “were capable of arriving at an indepen- dent view of the Constitution that was based on something more than the exigencies of the American Compact: James Madison and the Problem of Founding by Gary Rosen moment.” Consequently, they could “do for University Press of Kansas ® 1999 © 237 pages the people what [the people] could not do for * $29.95 themselves.” Madison argued that the Philadel- ; : hia convention had served this vital Ose. Reviewed by David Upham pu y vite putp In this way, Rosen says, Madison introduced into modern social compact theory a feature of A t the time of independence, virtually all classical political philosophy; for the justifica- ericans believed, with the authors of tion of the framers’ right to propose, like that of the Declaration of Independence, that govern- the right to rule in classical thought, was ment derives its “just powers from the consent derived not from the will of the many, but from of the governed.” Yet the principle of popular the superior virtue of the few. sovereignty does not indicate how a people At the same time, Rosen notes, Madison can be organized so that they may exercise remained a committed republican. He believed their right to establish new government. A that no individual or group was so virtuous people cannot spontaneously assemble and that it should be entrusted with the interests adopt a plan of government. Some individual and rights of a people without being regularly or group must first assume the authority of accountable before this same people. More- submitting a formal proposal before the peo- over, he held that both the people’s expecta- ple. In light of the principle of popular sover- tions and their spirited desire for rule had to eignty, then, on what basis can this proposing be accommodated. In fact, this spiritedness, if authority be justified? rightly directed, would benefit the endurance That theoretical difficulty was faced by the of good government. Through their ratifica- constitutional convention that met in 1787. tion of the Constitution, the people would One of the main objections leveled against the understand the government as a work of their convention was that, in proposing the Consti- own making and would consequently possess, tution, it had acted without popular authoriza- in Rosen’s words, “[a] constitutional passion, tion. In effect, while the established popular an unthinking attachment to the Constitution government in Congress had directed the con- as an end in itself.” vention to propose revisions to the existing According to Rosen, it was Madison’s national constitution, the Articles of Confed- understanding of the Constitution, “an under- eration, the convention recommended a com- standing that gave proper attention to both the plete abolition of the Articles and the adop- prudence of the founders and the claims of the tion of an entirely new constitution. people,” that explains his subsequent disagree- According to Gary Rosen, managing editor ments with Jefferson and Hamilton. Jefferson, of Commentary, James Madison met those the strict majoritarian, proposed that new con- objections by setting forth a theory of popular stitutional conventions be held at least every government that substantially modified the 19 years. Madison argued that such conven- prevailing social contract theories. While pre- tions would both undermine the popular rever- vious contractarians had assumed that a ence for the Constitution and would be unlike- people in their pre-political state had the ly to enjoy the degree of prudence manifest in capacity to institute government on their own, the 1787 convention. At the same time, Madi- ===== PAGE 62 ===== 62 IDEAS ON LIBERTY ® SEPTEMBER 2000 son opposed Hamilton's “loose construction” the degree to which Madison’s compact theo- of the Constitution, according to which the ry was influenced by that of Thomas Hobbes. federal government could assume any general Contrary to Rosen’s claim, Madison did not power of sovereignty without reference to a share Hobbes’s understanding of the “law of specific power granted by the Constitution. nature” as a law of physical rather than moral Madison held that such an interpretation actu- necessity. On the other hand, Rosen suggests ally did violence to the people’s will as that Madison located prudence in the republic expressed through their ratification of a writ- solely in the constitutional convention. Yet ten charter. The federal government could not Madison surely expected the prudence of both rightly exercise any power unless it were the people and their elected representatives to granted to them by the people, either formally, play an enduring and vital role in the new through a constitutional amendment, or infor- republic. mally, through a popularly endorsed prece- Despite these difficulties, Rosen success- dent. It was for this reason that Madison ini- fully demonstrates that Madison deserves to tially opposed as unconstitutional the estab- be studied as a political theorist and vindi- lishment of a national bank, but later signed cates Madison against the prevailing view that into law the second charter of the same bank he was a man of inconstant principle. Rosen’s while president, for the bank had been repeat- analysis is lucid and thoughtful. This book edly approved by the people’s representatives merits serious attention. J in Congress. There are two major weaknesses in Rosen's pgyig Upham is a doctoral student in politics at the analysis. On the one hand, he overestimates University of Dallas. Student Internships at FEE The Foundation for Economic Education offers internship opportunities throughout the year to undergraduate students who would like to help us promote classical liberal and free- market ideas. We are especially interested in students who can write proficiently and who have experience with the Internet and a wide variety of software applications. Internships are competitive. In return for working full time, interns receive a monthly stipend and housing on the grounds of FEE. During their stay, students may also wish to take advantage of FEE's convenient location in Irvington-on-Hudson, NY—just 45 minutes from midtown Manhattan. See www.fee.org/about/internships.html for additional information—or contact Meredith Kapushion at 914-591-7230, mkapushion@fee.org. ===== PAGE 63 ===== The Pursuit of Happiness by Russell Roberts IDEAS ON JIBERTY Will Campaign Finance Reform Enhance the Power of the People? common cry among the reform set these the next four years. While there were two days is that there is too much money in manufacturers, only one was chosen to actu- politics. Those who decry the role of money ally produce and sell the car. A vote of the in politics imagine a world where the 535 people determined the producer. To let the members of Congress along with the presi- voters and consumers make an informed dent sit around in togas discussing the best choice, the car manufacturers took the cars on way to serve the people. Rather than being tour. Unfortunately, voters couldn’t drive the influenced by money or special interests, cars, so the people turned to various other these modern-day Platos and Aristotles would ways for information about the candidates. 1 be motivated by the public good. mean, cars. For example, they watched the To achieve that utopia, some would ban soft advertising campaigns of the manufacturers. money, the money that can be donated in In those campaigns, GM knocked Ford’s unlimited amounts to the political parties. product and vice versa, but that was often This may violate the First Amendment. But informative. People also relied on information ignoring constitutional issues, can reform from the media—the writers, reporters, and enhance or reduce the power of the people? talk show hosts who covered the car industry Getting the money out of politics is a little and had specialized knowledge of the products. like trying to take the grinder out of the sausage factory. The federal government currently spends about $1.7 trillion annually. With that much money up for grabs, it’s In this weird car market the two manufac- awfully hard to stop people from trying to turers picked their cars carefully. They chose influence how it’s spent. It’s only a question of cars familiar to the voters because the voters how that influence will manifest itself. Will it already knew something about their quality. be out in the open or hidden? Sometimes, a manufacturer would introduce a If you want to see the effect of a ban on soft radical new concept, a minivan or a convert- money, consider the following fable. Once ible. For these new models to have a chance, a upon a time, there were only two manufactur- lot of money would have to be spent advertis- ers of cars, Ford and GM, but cars could only ing the product to get voters acquainted with be marketed and sold in a very unusual way. it. Each manufacturer was allowed to nominate Even rarer than a new product from GM one car that it would manufacture and sell for and Ford was a new party—oops, manufac- turer. On rare occasions, one would come Russell Roberts (roberts@csab.wustl.edu) is an econ- along and try to get the voters to take a chance omist with the Center for the Study of American Busi- Onl 8 NEW offering. They were hesitant to take ness at Washington University in St. Louis. a chance on an untested brand. But if the 63 Choosing the Familiar ===== PAGE 64 ===== 64 IDEAS ON LIBERTY e SEPTEMBER 2000 product was good enough and sufficient put forward. They took reporters and TV money was spent to inform the voters, a new anchormen to dinner to tell them the virtues manufacturer could succeed from time to of their favorite cars. They placed people time. sympathetic to their outlook on the car com- One day, people decided that the companies pany payroll and on newspaper staffs. They were spending too much money advertising befriended talk show hosts. In this way they their cars. Why not limit the total amount they insured sympathetic treatment of their views could spend? Less money would be wasted on ~~ without looking heavy-handed. advertising, and there would be less influence But few noticed the corruption. And while by special interests, the families always lob- some complained that the cars seemed to get bying for minivans and the young folks push- duller and duller every year, few attributed ing for convertibles. A law was passed to rad- this to the limits on advertising. Instead peo- ically limit the amount of advertising. To ple looked for new reforms and regulations to make up for the lost advertising, debates were reduce the role of money even further. They held, where representatives from GM and didn’t realize that each step in that direction Ford stood in front of their nominated cars made the market less competitive. and argued over their relative merits. Most reforms of the political marketplace With limits on advertising, brand names are taking us in the same direction. While became even more important. A new manu- they appear to enhance the power of the peo- facturer found it almost impossible to intro- ple relative to the special interests, they do so duce a new model. Without the ability to use by reducing competition, the consumer’s and a substantial advertising budget to overcome voter’s best friend. the brand-name advantage of incumbent cars, With less competition, the biggest benefi- even high-quality products were unable to get ciaries of a ban on soft money will be incum- a foothold in the market. They were rarely bents. They will find it easier to use their invited to the debates. After all, explained the already powerful brand-name recognition to organizers, those no-name cars don’t really overcome challengers who can no longer have a chance. So the two major manufactur- expect party money to help them establish ers became even more powerful. their name and ideas. Incumbent cars became difficult to defeat. Ironically, the best way to reduce the power Ford and GM usually nominated the same of special interests is to allow hard money to cars over and over again because they were flow without limitations—remove the limits familiar to voters. Innovation in the industry on how much individuals and organizations came to a standstill. Why would Ford and GM can give directly to candidates. This would improve their cars? Such improvements came expand the field of potential candidates. at a cost. To let voters know about the quality The ultimate arbiter is always the ballot of the new product required advertising that box. Unlimited hard money allows voters to was no longer possible. have more choices. Promptly post all contri- Defenders of the limits on advertising butions on the Internet. Candidates who are found the greatest solace in what appeared to in the pocket of special interests can be be the reduction in the power of special inter- reviled by the media and then by the voters. ests. But special interests found new ways to When the government spends almost $2 tril- influence the process. Because these methods lion and writes myriad regulations, keeping were now behind the scenes, they were harder the political marketplace competitive remains to detect. Special interests befriended people our best hope for enhancing the power of the at Ford and GM to influence which cars were people. O]