===== PAGE 1 ===== ul IDEAS ON [IBERTY October 2000 Vol. 50, No. 10 F EATURES A Man’s Home Once Was His Castle by Paul Armentano 10 The Uplifters Try It Again by H. L. Mencken 15 A Constitutional Counterrevolution by Charlotte Twight 24 P.T. Bauer’s Market-Liberal Vision by James A. Dorn 26 Is There an Anglo-American Economic Model? by Christopher Lingle : 28 The Philosophical Influence Behind the Microsoft Trial by Barbara Hunter HL Mencken ¥ 32 For-Profit Medicine and the Compassion Motive by Tom G. Palmer 36 Does Rape Violate the Commerce Clause? by Wendy McElroy 40 Harmful Tax Practices? by David N. Laband 45 Patents and Monopoly Privilege by Christopher Mayer 48 Quartering Species by Andrew P. Morriss and Richard L. Stroup COLUMNS Rep 4 THOUGHTS on FREEDOM—Thomas Babington Macaulay by Donald J. Boudreaux 13 IDEAS and CONSEQUENCES—Government Deposit Insurance: A Dumb Idea by Lawrence W. Reed 22 POTOMAC PRINCIPLES—The End of U.N. Peacekeeping by Doug Bandow ¥ 34 PERIPATETICS—The Big One? by Sheldon Richman $a ECONOMIC NOTIONS—Marginalism and the Morality of Pricing Human Lives by Dwight R. Lee 53 ECONOMICS on TRIAL—Having Their Cake by Mark Skousen 63 THE PURSUIT of HAPPINESS—Greed Versus Compassion by Walter E. Williams DEPARTMENTS 2 Perspective—Imperfect Opponents by Sheldon Richman 6 The Death Tax Is Fair? It Just Ain’t So! by Randall G. Holcombe 51 Capital Letters 55 Book Reviews The Power to Destroy by William V. Roth and William H. Nixon, reviewed by John Attarian; The Nazi War on Cancer by Robert N. Proctor, reviewed by Miguel A. Faria, Jr.; The Fall and Rise of Freedom of Contract edited by F. H. Buckley, reviewed by George C. Leef; After Liberalism: Mass Democracy in the Managerial State by Paul Edward Gottfried, reviewed by Joseph R. Stromberg; The End of Money and the Struggle for Financial Privacy by Richard W. Rahn, reviewed by Lawrence H. White; Clearing the Air: The Real Story of the War on Air Pollution by Indur M. Goklany, reviewed by Bruce Yandle. Lesson plans for @ articles are available at www. fee.org. ===== PAGE 2 ===== IDEAS Imperfect Opponents Phe Foutation for Economic Education “Microsoft and the government were the Irvington-on-Hudson, NY 10533 perfect opponents. The government has some Phone (914) 591-7230 Fax (914) 591-8910 power, but Microsoft has at least as much. E-mail: te Iw fee.org Anyone Clie fag either one of them would a e overmatched. Presidents Donal. Boudreau That is not some comedian’s line. It was Managing Editor: Beth A. Hoffman spoken in all seriousness, I presume, by David Editor Emeritus Boies, who led the Justice Department’s Paul L. Poirot antitrust case against Microsoft. If you don’t Book Review Editor believe me, you can look it up in the June 9 George C. Lect New York Times. Editorial ams Mr. Boies’s self-serving remark sets off a Columnists flurry of thoughts. But the essential comment Charles W. Baird comes from Steven Yates, who writes for this Doug Bandow magazine. When I e-mailed him the quotation, Dwight R. Lee he quickly wrote back, “Has anyone pointed arene eed out that while the federal government has the Mark Skousen power to break up Microsoft, Microsoft does Thomas Szasz not have the authority to break up the federal Walter E. Williams government?” Contributing Editors The other side of that question is that the Norman Barry Peter J. Boettke Clarence B. Carson federal government has achieved its monop- oly through the use of force, while Microsoft Thomas J. DiLorenzo has achieved its dominant position—it is not a Burton W. Folsom, Jr. monopoly—through voluntary exchange. We Joseph > Fulda may infer much from these two methods of tt ien Gre . . ena len breaves dealing with people. Robert Higgs i John Hospers Microsoft must have offered all the people Raymond J. Keating who bought its products the best alternative in Daniel B. Klein the marketplace. It doesn’t matter that for Ww El . . prendy Merry some techies Windows doesn’t measure up to Andrew P. Moriss an operating system ideal. It lets regular peo- Ronald Nash ple get their work and play done more easily Edmund A. Opitz and economically—in their estimation—than James L. Payne anything else they could have bought. If William H. Peterson . . Jane S. Sixaw something else comes along that is so much Richard H. Timberlake better that it justifies a switch, they’ll switch. Lawrence H. White It’s a peaceful process, where people have Ideas on Liberty (formerly The Freeman: Ideas on Liberty) is the month- to offer onc another benefits before they deal. ly publication of The Foundation for Economic Education, Inc., Irvington- on-Hudson, NY 10533. FEE, established in 1946 by Leonard E. Read, is a No one can force someone else to buy or sell non-political, educational champion of private property, the free market, what he does not wish to buy or sell. and limited government. FEE is classified as a 26 USC 501(c)(3) tax- . exempt organization. Now let’s look at the government, which Copyright © 2000 by The Foundation for Economic Education. Per- . mission is granted to reprint any article in this issue, except “The Uplifters Mr. Boies says has no more power—and per- Try It Again” and “P. T. Bauer’s Market-Liberal Vision,” provided credit . _ 10n_ is given and two copies of the reprinted material are sent to FEE. haps less; re read the quotation than The costs of Foundation projects and services are met through dona- Microsoft. If you don’t do what the govern- tions, which are invited in any amount. Donors of $30.00 or more receive . . a subscription to Ideas on Liberty. For delivery outside the United States: ment says, it has the legal authority to compel $45.00 to Canada; $55.00 to all other countries. Student subscriptions are d . . . $10.00 for the nine-month academic year; $5.00 per semester. Addition- you. It doesn’t treat you like a sovereign con- al copies of this issue of Ideas on Liberty are $3.00 each. 1 1 Bound volumes of The Freeman are available from The Foundation for Sumer. It treats you like a subject. It can take calendar years 1972 to 1999. The magazine is available in microform from 2 University Microfilms, 300 N. Zeeb Rd., Ann Arbor, MI 48106. ===== PAGE 3 ===== —_ee——— your property. It can take your liberty. If you stand the philosophy and philosopher behind resist, it can take your life. it. Barbara Hunter introduces us to Lawrence The last I checked, it was Bill Clinton, not Lessig. Bill Gates, who ran such an organization. What’s the difference between a for-profit and nonprofit health facility? A great deal of * kx pain and humiliation. Tom Palmer explains. The Supreme Court ruled that women can- The War on Drugs is touted as necessary to not sue their alleged rapists in federal court. Is defend the health of the nation. But if you this the end of something decent or the begin- think the health of the nation requires the ning? Wendy McElroy sorts it out. police to break into homes, trashing them and According to the government, cartels are sometimes killing the inhabitants, then, as bad—except when governments get together Ayn Rand might have said, check your to stamp out tax havens. David Laband has premises. Paul Armentano has the gruesome noticed the ominous collusion. details. The growth of high-tech industries has Many people have written that all gun- brought a rash of patent-infringement suits, control laws have an intrinsic loophole: they and more are in the offing. Christopher Mayer exempt violent lawbreakers while snagging says it’s a good time to reconsider the patent the law-abiding. But no one has managed to laws and see them for what they really are. say it as well as H.L. Mencken did in 1925. If the government can’t quarter troops on What would you call an organization that your property, why can it quarter animals uses a variety of methods to systematically there? Andrew Morriss and Richard Stroup deceive people about what it does to them and turn the “living Constitution” doctrine against makes it nearly impossible for them to object its proponents. if they learn the truth? Charlotte Twight calls This month our columnists ruminate thusly: it “government.” Donald Boudreaux shows why he admires When the name Peter Bauer comes to Thomas Babington Macaulay. Lawrence Reed mind, the words “hero” and “courage” should indicts government deposit insurance. Doug be close behind. He demolished almost Bandow wants to end UN. “peacekeeping.” single-handedly the once-reigning socialist Dwight Lee says it’s okay to put a price on development economics and showed that mar- human life. Mark Skousen drives a stake kets are the only chance for the undeveloped through the heart of taxes on capital. Walter world. James Dorn summarizes Bauer’s Williams says greed is good. And Randall remarkable work. Holcombe, hearing it said incessantly that the On a related subject, there’s a tendency in estate tax is fair, protests, “It Just Ain’t So!” some quarters to think of capitalism as a sys- Our reviewers render their verdicts on tem suitable to Anglo-Americans and unsuit- books about the Internal Revenue Service, able to everyone else. That’s suicidal thinking, the Nazi anti-cancer program, freedom of writes Christopher Lingle. contract, welfare-state “liberalism,” the future To understand the government’s antitrust of money, and air pollution. case against Microsoft, you have to under- —SHELDON RICHMAN ===== PAGE 4 ===== Thoughts on Freedom by Donald J. Boudreaux Thomas Babington Macaulay K and I named our son Thomas Macaulay Boudreaux in honor of some truly inspiring classical liberals. Two of these are our dear friends Hugh and Pinky Macaulay. Hugh taught economics at Clemson University from the late 1940s until 1983 and was instrumental in shaping that school’s economics department into one of the finest in the nation. The other inspiration for Thomas’s name is the great English historian, essayist, and poet Thomas Babington Macaulay (1800-1859). October 25th of this year is the bicentennial of his birth. It is a date that all friends of liberty, prosperity, and progress should celebrate. Macaulay was truly one of the greatest champions of liberty ever to breathe. While his most famous work is his massive History of England, 1 reproduce below some of the key passages from a far shorter and less famous—but no less impressive—product of his pen: Macaulay’s 1830 essay “Southey’s Colloquies on Society.” Reading this essay is a lavish intellectual experience. It comes closer to perfection than perhaps any essay I’ve ever read. Robert Southey was Britain’s poet laureate, who as a young man was a radical Jacobin and who as an older man became a conservative of the most wicked sort. Southey loathed com- merce and capitalism. He longed for the pre-industrial age in which peasants worked the land and lived in cottages—an age not marred by factories, an extensive division of labor, and the audacity of ordinary people choosing their own paths in life rather than submitting to the authority of political elites. The brilliance of Macaulay’s dissection of Southey’s political and economic musings takes the breath away! As you read the following selections from Macaulay’s essay, note two of its features. The first is the characteristic clarity and directness of his style. The second is the appropriateness of Macaulay’s 170-year-old themes to the policy debates currently raging in America. Southey’s Colloquies on Society by Thomas Babington Macaulay As to the effect of the manufacturing sys- phrases of Mr. Southey . . . there has been a tem on the bodily health, we must beg leave to great diminution of mortality, and that this estimate it by a standard far too low and vul- diminution has been greater in the manufac- gar for a mind so imaginative as that of Mr. turing towns than anywhere else. . . . Southey, the proportion of births and deaths. He confesses that he is not versed in politi- We know that, during the growth of this cal economy, and that he has neither liking atrocious system, this new misery, to use the nor aptitude for it; and he then proceeds to read the public a lecture concerning it which Donald Boudreaux is president of FEE. fully bears out his confession. . . . ===== PAGE 5 ===== He conceives that the business of the mag- Nothing is so galling to a people not broken istrate is not merely to see that the persons in from birth as a paternal, or, in other words, and property of the people are secure from a meddling government, a government which attack, but that he ought to be a jack-of-all- tells them what to read, and say, and eat, and trades, architect, engineer, schoolmaster, mer- drink and wear. . . . chant, theologian, a Lady Bountiful in every It is indeed a matter about which scarcely parish, a Paul Pry in every house, spying, any doubt can exist in the most perverse mind eavesdropping, relieving, admonishing, that the improvements of machinery have spending our money for us. His principle is, if lowered the price of manufactured articles, we understand it rightly, that no man can do and have brought within the reach of the poor- anything so well for himself as his rulers, be est some conveniences which Sir Thomas they who they may, can do it for him, and that More or his master could not have obtained at a government approaches nearer and nearer any price. . .. to perfection in proportion as it interferes But in the old world we must confess our- more and more with the habits and notions of selves unable to find any satisfactory record individuals. . . . of any great nation, past or present, in which The maxim, that governments ought to the working classes have been in a more com- train the people in the way in which they fortable situation than in England during the should go, sounds well. But is there any rea- last thirty-years. When this island was thinly son for believing that a government is more populated, it was barbarous; there was little likely to lead the people in the right way than capital; and that little was insecure. It is now the people to fall into the right way of them- the richest and most highly civilized spot in selves? . . .. the world; but the population is dense. . . . But we see no reason for thinking that the It is not by the intermeddling of Mr. opinions of the magistrate on speculative Southey’ idol, the omniscient and omnipo- questions are more likely to be right than tent State, but by the prudence and energy of those of any other man. None of the modes by the people, that England has hitherto been which a magistrate is appointed, popular elec- carried forward in civilization; and it is to the tion, the accident of the lot, or the accident of same prudence and the same energy that we birth, affords, as far as we can perceive, much now look with comfort and good hope. Our security for his being wiser than any of his rulers will best promote the improvement of neighbors. The chance of his being wiser than the nation by strictly confining themselves to all his neighbors together is still smaller. ... their own legitimate duties, by leaving capital Government, as government, can bring to find its most lucrative course, commodities nothing but the influence of hopes and fears to their fair price, industry and intelligence their support its doctrines. It carries on controver- natural reward, idleness and folly their natur- sy, not with reasons, but with threats and al punishment, by maintaining peace, by bribes. If it employs reasons, it does so, not in defending property, by diminishing the price virtue of any powers which belong to it as a of law, and by observing strict economy in government. Thus, instead of a contest every department of the state. Let the Gov- between argument and argument, we have a ernment do this: the People will assuredly do contest between argument and force. . . . the rest. [J So true. Happy 200th birthday, Mr. Macaulay! ===== PAGE 6 ===== IDEAS ON [IBERTY Octoser 2000 The Death Tax Is Fair? is held by a small percentage of the popu- lation. If people knew how skewed the distribution of wealth really is, Krugman LIRR | asserts, support for the repeal of the estate tax It Just Ain t Sol would plummet. The current estate tax hits only about 2 percent of all estates, so Krug- man says it is levied almost entirely on hen George McGovern was running for the very rich. The raw numbers do not tell president in 1972, he gave a talk to a the entire story. One reason the tax is levied group of auto workers in which he advocated on so few estates is that there are ways, both increasing the estate tax, and his audience legal and illegal, to avoid it. The 2 percent reacted by booing his position. McGovern number is artificially lower than it other- was baffled by the audience reaction, and after wise would be because the estate tax causes his talk, commented to his own advisers, “It’s people to minimize their taxable estates. not like they are going to inherit anything” Many more people are directly affected by the What McGovern found out was that even peo- tax. ple of modest means still perceive the unfair- Another problem with repealing the estate ness of the estate tax. Once you have earned tax, Krugman says, is the revenue loss to the something, it should be yours, and it is unfair Treasury. However, reputable academic stud- for the government to confiscate it when you ies calculate that the estate tax may actually die. A more subtle lesson is that when people be a net drain on the Treasury, because people evaluate political proposals, they don’t always engage in activities to avoid the tax when they just ask, “what’s in it for me?” Sometimes are alive, and this legal tax avoidance (such as they prefer policies that seem fair, even if setting up foundations into which one can those policies do not benefit them directly. transfer assets) lowers federal income tax rev- Paul Krugman raised these same issues in enues by more than the estate tax collects. On an essay titled “Death and Taxes,” New York net, the estate tax raises very little revenue for Times, June 14. He analyzes the House of the Treasury, and may raise no net revenue Representatives vote to repeal the inheritance when all its effects are considered. It is a tax tax by considering who gains and who loses, that provides little benefit to anybody, but and concludes that the vote was a simple mat- costs a few people a significant amount—and ter of special-interest legislation favoring a not just money. Krugman notes that cases small minority of rich people at the expense where the estate tax forces heirs to sell the of everybody else. If people knew the truth, family farm or liquidate the family business he asserts, the legislation would face a much to pay the tax are rare, but then again, so are rougher ride. But Krugman’s argument is sus- cancer deaths from secondhand smoke, and pect on two grounds. First is his analysis of the federal government works hard to prevent the facts about the inheritance tax. Second, those rare tragedies. and probably more significant, is his implica- Krugman likes the estate tax because it tion that people support legislation only when helps level the playing field, but it does so in it benefits them. the worst possible way. It hurts those at the upper end of the wealth distribution, but pro- Effects of the Inheritance Tax vides no significant benefit to those at the lower end. It follows the easy route in leveling Krugman correctly notes that a large share the playing field because it is always easier to of total private wealth in the United States hurt the rich than it is to help the poor. 6 ===== PAGE 7 ===== 7 Despite the basic statistics Krugman pre- as Krugman suggests; it is just less of a cost. sents, a broader analysis of the proposed Letting people keep more of the money they repeal shows that it is a very desirable move. earn is a good thing. Of course most tax cuts It helps some, hurts nobody, and it would go to the people with the highest income and enhance the efficiency of the economy. If peo- the most wealth, because those are the people ple really understand the issues, and if they who pay most of the taxes. consider only their own narrow self-interest, Krugman is right that in most cases paying repeal of the tax should be widely supported. the estate tax does not cause heirs to have to The only people who could reasonably mount sell the family farm or business, but so what? an opposition to the tax are people who do not Is it any less unfair that the people who invest- really understand the policy’s effects, or those ed in stocks and bonds, financing the growth who are so envious of rich people that they are of the American economy, rather than buying willing to hurt everyone a little in order to boats, expensive cars, and lavish vacations, hurt America’s wealthiest citizens a lot. must turn over so much of their estate to the government when they die? Those people . already paid income taxes on the money when Fairness they originally earned it, and it shouldn’t be I believe that Krugman has painted an over- taxed again when the people who paid taxes ly simplistic picture of the facts, but for sake on it the first time die. The family farm or of argument let’s say that Krugman is right: small business cases simply help illustrate the repealing the estate tax would benefit a small point. fraction of the population, and the wealthiest I have argued that once the facts are under- fraction at that. Analyzing the estate tax the stood, repealing the estate tax will be seen to way Krugman does implies that people favor benefit everyone, not just the rich. But even if public-policy changes only when those Krugman is right and the benefit will only go changes bring them direct tangible benefits. to a small fraction of America’s richest citi- Do people really decide whether they favor a zens, the tax is still unfair. People sense that specific piece of legislation based simply on unfairness, and that is the real reason there is whether it provides direct benefits to them? not more opposition to its repeal. Opposition Americans in general, whether they are is weak not because people hope to benefit auto workers or Silicon Valley entrepreneurs, directly from the tax, but because people believe that when people earn their income believe that once wealth is fairly earned, it is honestly, that income becomes their property. the property of the owner, and they oppose It does not belong to other people, or to the government confiscation. general public, or to the government. The —RANDALL G. HOLCOMBE money people pay in taxes is their money, and DeVoe Moore Professor of Economics if they get a tax cut, it is not a benefit to them, Florida State University ===== PAGE 8 ===== IDEAS ON [IBERTY A Man’s Home Once Was His Castle by Paul Armentano ew photos have inspired as many words as Sometimes victims possess no drugs at that of a young Cuban boy face to face all. Just ask the family of Annie Rae Dixon, with a MP-5 machine gun. The Associated an 84-year-old grandmother shot and killed Press photo of federal armed agents seizing during a 2 a.m. drug raid of her east Texas Elidn Gonzalez from his Miami relatives home in 1992. No drugs were ever found aroused outrage among many Americans on the premises. One officer later hypothe- and—perhaps ironically—several congres- sized that his pistol accidentally discharged sional conservatives. And while the photo- when he kicked open Dixon’s bedroom graph was unique, the act it captured was door. “[I] started throwing my guts up crying hardly unusual. Raids similar to the one on because I knew I had shot somebody that the Gonzalez family home occur many times didn’t have no reason to be shot,” he said. a day in the name of the War on Drugs, often No less vicious was the 1998 shooting death with far more tragic results. of Pedro Oregon Navarro by Houston Take the case of Scott Bryant. Thirteen police. Six officers stormed his home at 1:40 Wisconsin sheriff ’s deputies burst into the 29- a.m. in a military-style raid after a man arrest- year-olds trailer on the night of April 17, ed for public drunkenness said Navarro 1995, executing a no-knock warrant. Bryant, was a drug dealer. Agents shot the bleary- who was unarmed, was shot and killed during eyed Navarro 12 times, killing him. A search the assault while his 7-year-old son looked of his residence produced no illicit drugs or on.! Police seized less than three grams of weapons.5 marijuana. On review, the county district California rancher Donald Scott, 61, met a attorney found that the shooting was “not in similar fate in 1992, when a team of local and any way justified.”2 federal agents burst into his mansion during a Robert Lee Peters had just settled down to midnight raid, ostensibly to search for mari- watch a movie with his family when St. juana. When Scott reached for a pistol to Petersburg police officers smashed through defend himself, he was shot dead. An investi- his front door unannounced with a battering gation by the Ventura County district attorney ram in July 1994. Fearing that his home was later revealed that the Los Angeles County being burglarized, Peters grabbed a gun and Sheriffs Department had fabricated evidence fired at his attackers. The officers returned that Scott was cultivating pot because it hoped fire, killing the 33-year-old father of two. to seize his property, which was adjacent to a Police confiscated two pounds of marijuana.3 federal park.6 Ventura County officials even- tually agreed to pay the Scott family $4 mil- Paul Armentano is a senior policy analyst at the lion in damages; the federal government NORML Foundation in Washington, D.C. agreed to pay $1 million.” ===== PAGE 9 ===== 9 More recently, a SWAT team from El the forces of the Crown. It may be frail—its Monte, California, raided a home in neigh- roof may shake—the wind may blow through boring Compton on the evening of August 9, it—the storm may enter—the rain may 1999, killing retired grandfather Mario Pazby enter—but the King of England cannot shooting him twice in the back. Police execut- enter—all his force dares not cross the thresh- ing the search warrant said they believed the old of the ruined tenement.” house was sometimes used as a mail drop by The fact that our government and law- a local drug dealer. Although police found no enforcement personnel now view the sover- drugs and filed no charges against any of the eignty of the home as a quaint anachronism surviving family members, they refused to should disturb us all. In this regard, the photo return an estimated $11,000 dollars seized of a terrified Elidn Gonzalez is a legitimate during the deadly raid.’ cause for congressional concern. However, Some victims are the victims of sheer error. rather than use this opportunity to attack the Take the September 29, 1999, assault by Den- Clinton administration’s handling of one, ver SWAT agents on the home of Ismael highly politicized case, Congress should Mena. Mena, a 45-year-old father of nine, was address the broader issue of whether the esca- shot eight times and killed by police in the lating enforcement of drug prohibition threat- unannounced raid. No drugs were found, and ens the right of all of us to be secure in our police now speculate that they may have had homes. To the families of the victims named an incorrect address. 1° above, the answer is all too clear. J] An equally vicious police blunder claimed the life of Reverend Accelyne Williams, a 75- 1. Mikki Norris, Chris Conrad, and Virginia Resner, Shattered _ : : HI Lives: Portraits from America’s Drug War (El Cerrito, Calif.: Cre- year-old retired Methodist minister who “U< Xpressions, 1998). p. 66 suffered a fatal heart attack when Boston 2. David Kopel and Paul Blackman, “Death By Bounty Hunter,” : : : Independence Institute Feature Syndicate, September 5, 1997; police broke into his apartment on March 24, to OpEd Areviop970906 htm 1994. Acting on false information provided 3. Norris, et al., p. 62; also see the Web site “Human Rights and by a confidential informant, anti-drug agents the Drug War” htp:/iwww.hr93.org. oo fi . 4. Ibid. chased Williams to his bedroom, shoved him 5. “Tyranny and the War on Drugs,” Investor's Business Daily, : : September 21, 1999. The article is posted at http://www.mapinc. to the floor, and pointed guns at his head ore/drugnewsiv99/n1 034/208 him. inducing the heart attack that killed him. 6. Ari Armstrong and Dave Kopel, “The Drug War Kills Inno- H fact cent People,” Denver Post, December 30, 1999; http://www.mapinc. Boston Police Commissioner Paul Evans later org/drugnews/v00/n002/209 bir] admitted at a press conference that police 7. “Family of Man Slain in Raid Rewarded,” Associated Press, : : 173 : January 12, 2000. likely raided the wrong apartment. If that is 8. “Tyranny and the War on Drugs.” the case, then there will be an apology,” he 9. Anne-Marie O’Conner, “Family of Police Shooting Victim Ad 11 : : 1. Still Out $11,000,” Los Angeles Times, September 23, 1999; said.!! Two years later, the city paid a $1 mil- [1 0m rears 99/n1040/207 hem. lion settlement to Williams’s widow. !2 10. Armstrong and Kopel. 113 : : 11. “Botched Raids and Collateral Casualties in the Drug War,” William Pin exp ressed the Importance Common Sense for Drug Policy, http://www.drugsense.org/jnr/ Americans once placed on the sanctity of the botchedhtm. bg re? . 12. Ric Zahn, Zachary Dowdy, “Iron Fist of Police Swat Team home from trespass when he said: The poor Use Questioned,” Boston Globe, May 11, 1998; http://www.mapinc. est man may in his cottage bid defiance to all org/drugnews/v98/n342/203 html. ===== PAGE 10 ===== NJ Ocroser 2000 The Uplifters Try It Again by H. L. Mencken I newspapers seem to miss; it interprets that news with a freedom and a sagacity that few he eminent Nation announces with relish newspaper editors can even so much as imag- “the organization of a national committee ine. If it shut up shop then the country would of 100 to induce Congress to prohibit the plunge almost unchallenged into the lowest inter-State traffic in revolvers,” and offers the depths of Coolidgism, Rotarianism, Stanta- pious judgement that it is “a step forward” quaism and other such bilge. It has been, for a “Crime statistics,” it appears, “show that 90% decade past, the chief consolation of the small of the murders that take place are committed and forlorn minority of civilized Americans. by the use of the pistol, and every year there But the Nation, in its days, has been a Lib- are hundreds of cases of accidental homicide eral organ, and its old follies die hard. Ever because someone did not know that his and anon, in the midst of its most eloquent revolver was loaded.” The new law—orisitto and effective pleas for Liberty, its eye wan- be a constitutional amendment?—will do ders weakly toward Law. At such moments the away with all that. “It will not be easy,” of old lust to lift ’em up overcomes it, and it course, “to draw a law that will permit excep- makes a brilliant and melodramatic ass of tions for public officers and bank guards”—to itself. Such a moment was upon it when it say nothing of Prohibition agents and other printed the paragraph that I have quoted. Into such legalized murderers. “But soon even that paragraph—of not over 200 words—it these officials may get on without revolvers” packed as much maudlin and nonsensical More than once, in this place, I have lav- blather, as much idiotic reasoning and banal ished high praise upon the Nation. All that moralizing, as Dr. Coolidge gets into a speech praise has been deserved, and I am by no of two hours’ length. means disposed to go back on it. The Nation is one of the few honest and intelligent peri- II odicals ever published in the United States. It stands clear of official buncombe; it prints The new law that it advocated, indeed, is every week a great mass of news that the one of the most absurd specimens of jackass legislation ever heard of, even in this paradise _ of legislative donkeyism. Its single and sole H.L. Mencken (1880-1956) was the most influential effect would be to exaggerate enormously all newspaperman of his era and a prolific author of PE iconoclastic books and essays. This is reprinted from of the evils it proposes to put down. It would The Evening Sun of Baltimore, November 30, 1925. not take pistols out of the hands of rogues and Copyright 1925 by The Evening Sun. Republication fools; it would simply take them out of the without credit not permitted. hands of honest men. The gunman today has 10 ===== PAGE 11 ===== 11 great advantages everywhere. He has artillery in his pocket, and he may assume that, in the large cities, at least two-thirds of his prospec- tive victims are unarmed. But if the Nation’s proposed law (or amendment) were passed and enforced, he could assume safely that all of them were unarmed. Here I do not indulge in theory. The hard facts are publicly on display in New York State, where a law of exactly the same tenor is already on the books—the so-called Sullivan Law. In order to get it there, of course, the Second Amendment had to be severely strained, but the uplifters advocated the straining unanimously, and to the tune of loud hosannas, and the courts, as usual, were will- ing to sign on the dotted line. It is now a dreadful felony in New York to “have or pos- sess” a pistol. Even if one keeps it locked in a ) H. L Mencken bureau drawer at home, one may be sent to the (1880-1956) hoosegow for ten years. More, men who have done no more are frequently bumped off. The he has to do is to cross the river or take a short cops, suspecting a man, say, of political trolley trip. Or, to quote the Nation, he may heresy, raid his house and look for copies of “simply remit to one of the large firms which the Nation. They find none, and are thus baf- advertise the sale of their weapons by mail.” fled—but at the bottom of a trunk they do find The remedy is the usual dose: More law. Con- a rusted and battered revolver. So he goes on gress is besought to “prohibit the inter-State trial for violating the Sullivan Law, and is traffic in revolvers, especially to bar them presently being psychoanalyzed by the from the mails.” uplifters at Sing Sing. It is all very familiar, and very depressing. With what result? With the general result Find me a man so vast an imbecile that he that New York, even more than Chicago, is the seriously believes that this prohibition would heaven of footpads, hijackers, gunmen and all work. What would become of the millions of other such armed thugs. Their hands upon their revolvers already in the hands of the Ameri- pistols, they know that they are safe. Not one can people if not in New York, then at least citizen out of a hundred that they tackle is everywhere else? (I own two and my brother armed for getting a license to keep a revolveris owns at least a dozen, though neither of us has a difficult business, and carrying one without it fired one since the close of the Liberty Loan is more dangerous than submitting to robbery. drives.) Would the cops at once confiscate this So the gunmen flourish and give humble immense stock, or would it tend to concen- thanks to God. Like the bootleggers, they are trate in the hands of the criminal classes? If hot and unanimous for Law Enforcement. they attempted confiscation, how would they get my two revolvers—Ilawfully acquired and III possessed-—without breaking into my house? Would I wait for them docilely—or would I To all this, of course, the uplifters have a sell out, in anticipation, to the nearest pistol ready answer. (At having ready answers, bootlegger? indeed, they always shine!) The New York The first effect of the enactment of such a thugs, they say, are armed to the teeth because law, obviously, would be to make the market New Jersey and Connecticut lack Sullivan price of all small arms rise sharply. A pistol Laws. When one of them wants a revolver all which is now worth, second-hand, perhaps ===== PAGE 12 ===== 12 IDEAS ON LIBERTY ® OCTOBER 2000 $2, would quickly reach a value of $10 or no Prohibition agents; hence I never so much even $20. This is not theorizing; we have had as drank a glass of beer until I was nearly 19. plenty of experience with gin. Well, imagin- Today, Law Enforcement is the eighth sacra- ing such prices to prevail, would the generali- ment and the Methodist Board of Temper- ty of men surrender their weapons to the ance, Prohibition and Public Morals by itself Polizei, or would they sell them to the boot- authority for the sad news that the young of leggers? And if they sold them to the bootleg- the land are full of gin. I remember, in my gers, what would become of them in the end: youth, a time when the cops tried to prohibit would they fall into the hands of honest men the game of catty. At once every boy in Balti- or into the hands of rogues? more consecrated his whole time and energy to it. Finally, the cops gave up their crusade. IV Almost instantly catty disappeared. But the gunmen, I take it, would not suffer V from the high cost of artillery for long. The moment the price got really attractive, the The real victim of moral legislation is cops themselves would begin to sell their pis- always the honest, law-abiding, well-meaning tols, and with them the whole corps of Prohi- citizen—what the late William Graham Sum- bition blacklegs, private detectives, deputy mer called the Forgotten Man. Prohibition sheriffs, and other such scoundrels. And makes it impossible for him to take a harm- smuggling, as in the case of alcoholic bever- less drink, cheaply and in a decent manner. In ages, would become an organized industry, the same way the Harrison Act puts heavy large in scale and lordly in profits. Imagine burdens upon the physician who has need of the supplies that would pour over the long prescribing narcotic drugs for a patient, hon- Canadian and Mexican borders! And into estly and for good ends. But the drunkard still every port on every incoming ship! gets all the alcohol that he can hold, and the Certainly, the history of the attempt to drug addict is still full of morphine and enforce Prohibition should give even uplifters cocaine. By precisely the same route the pause. A case of whisky is a bulky object. It Nations new law would deprive the reputable must be transported on a truck. It can not be citizen of the arms he needs for protection, disguised. Yet in every American city today a and hand them over to the rogues that he case of whisky may be bought almost as read- needs protection against. ily as a pair of shoes despite all the armed Ten or fifteen years ago there was an epi- guards along the Canadian border, and all the demic of suicide by bichloride of mercury guard ships off the ports, and all the raiding, tablets. At once the uplifters proposed laws snooping and murdering everywhere else. forbidding their sale, and such laws are now Thus the camel gets in and yet the proponents in force in many States, including New York. of the new anti-pistol law tell us that they will The consequences are classical. A New York- catch the gnat! Go whisper it to the Marines! er, desiring to lay in an antiseptic for house- Such a law, indeed, would simply make hold use, is deprived of the cheapest, most gun-toting swagger and fashionable, as Prohi- convenient and most effective. And the sui- bition has made guzzling swagger and fash- cide rate in New York, as elsewhere, is still ionable. When I was a youngster there were steadily rising. [J ===== PAGE 13 ===== Ideas and Consequences by Lawrence W. Reed IDEAS ONIBERTY OcToBeR 2000 Government Deposit Insurance: A Dumb Idea headline on an Associated Press story in omy, banks shouldn’t be allowed to fail. But mid-June read, “Doubling Deposit Insur- there’s a huge “moral hazard” problem with ance Opposed.” Surprisingly, the Clinton bank bailouts. If government sends the mes- administration—which can usually be count- sage that banks can’t fail and that it will act to ed on to support anything that extends the prevent failures, it will actually produce the reach of government—had come out againsta kind of bad behavior that defines a failing proposal to raise the amount of bank deposits bank. After all, why behave in a sober fashion insured by the Federal Deposit Insurance Cor- if the government will pay you to get drunk? poration from $100,000 to $200,000. Appar- If government policy declares, “We won’t ently, broken clocks aren’t the only thing that bail out the little ones, only the big ones are right twice a day. whose failure would have massive ripple The hike was proposed not by savers, pen- effects,” then you only create a bigger moral sioners, or consumer groups but by groups hazard because big banks can and will make representing banks, which was no surprise at big mistakes if they know they’ll be taken all. Bailing out big banks and their big depos- care of. That works against the ability of itors is a form of banker welfare in which the small banks to compete, which in time under- bankers get well and you and I pay the fare. mines the soundness of the banking system in Federal Reserve Chairman Alan Greenspan general. was right on the money when he said that the Two analysts at the Federal Reserve Bank plan would give “increased subsidies to of Minneapolis, Ron J. Feldman and Arthur J. upper-income individuals.” Rolnick, have argued that the way the govern- The banker-welfare advocates will surely ment protects banks and their depositors not drop the issue any time soon, which just through its deposit insurance has indeed cre- might give the nation an opportunity to recon- ated major problems of its own: sider the larger question: Should government be insuring bank deposits at all? Count my While other explanations for the huge vote in the “no” column. number of bank failures [in the 1980s] are The federal government first got into the plausible, we view too much protection as deposit insurance business in the 1930s, and a critical underlying cause. Once its depos- ever since, the public has largely accepted the itors and other creditors are fully protect- principle that for the sake of the general econ- ed, a bank is likely to take much more risk than it would otherwise. This is especially —_— true at banks where owners can diversi Lawrence Reed is president of the Mackinac Center ca fy Sor Public Policy (www.mackinac.org), a free-market their risk or at banks that are seriously research and educational organization in Midland, undercapitalized. In effect, it’s heads the Michigan, and chairman of FEE's Board of Trustees. bank wins and tails the taxpayer loses. 13 ===== PAGE 14 ===== 14 IDEAS ON LIBERTY ® OCTOBER 2000 We should not assume, by the way, that any In other words, S & Ls that used their new failure by any bank is automatically some- freedom to invest in shaky or even uncon- thing that must be artificially prevented or that scionable things would continue to pay no would automatically cause disastrous ripple more in insurance premiums than the S & Ls effects if it weren’t. The fact that a bank can that invested prudently! (Can you imagine the fail (or any business, for that matter) tends to signal it would send if auto insurance compa- promote healthy practices that minimize the nies charged the same premiums to careful problem. And when a bank does fail, it does and drunk drivers?) not mean that all of its depositors’ money dis- What Congress should have done was to appears. A failed bank in a free market can be privatize deposit insurance. No private insur- bought out by another bank, or otherwise er would ever charge banks or S & Ls with emerge from an orderly bankruptcy process bad lending practices the same low premiums stronger than before, though its investors and it charged those with sound practices. Only depositors may lose some of their money. bureaucratic planners working in government Federal deposit insurance was intended, in do such idiotic things, and then in infantile part, to ward off widespread bank runs that are fashion, blame the free market for the results. symptomatic of financial panic. It has indeed Sadly, those who think government must accomplished that, but not without the law of provide deposit insurance fail to realize how unintended consequences operating in the much of the problem they see is already the opposite direction. As economist George G. result of government’s own handiwork. If Kaufmann put it in a recent issue of the Cato banks fail, the free market is blamed and gov- Journal, “The absence of runs removed a ernment is called on to intervene. major automatic mechanism by which troubled It is superficial and wrong to conclude that banks were previously closed and resolved. bank failures require government bailouts. Runs on troubled banks caused liquidity prob- The best thing government can do if it wants lems, which forced regulators to suspend their to avoid such disasters is to foster the sound- operations until their solvency could be deter- est possible environment for good business mined. In this way, depositors prevented insol- and banking practices: Don’t erode the cur- vent institutions from remaining in operation rency through deficit spending and credit for long and thereby limited the ability of these expansion, don’t adopt ludicrous deposit banks to enlarge their losses.” insurance practices, don’t reward banks for The savings and loan crisis of the 1980s is unsound lending practices. a perfect example of the massive harm gov- This isn’t pie-in-the-sky theory. We should ernment insurance can cause. In 1980, under now know from actual practice that govern- the Carter administration, the Congress ment monetary and fiscal policies have creat- passed a deregulatory act that gave S & Ls ed far more bank failure problems than an greater freedom to invest in a variety of unfettered free market could ever conceivably instruments. So far so good. That part was create if it wanted to. Like any other risky needed so that S & Ls could compete. But at activity, banking should secure its insurance the same time, government raised the amount from watchful, responsible private entities of deposits that it would insure from $40,000 rather than from politicians and the bureau- to $100,000. Moreover, the Federal Savings crats they employ. and Loan Insurance Corporation’s flat-rate Federal deposit insurance should not be premiums were retained. doubled. It ought instead to be privatized! [] ===== PAGE 15 ===== IDEAS ON [IBERTY OcToBER 2000 A Constitutional Counterrevolution by Charlotte Twight iven America’s carefully crafted consti- understood the dangers of overreaching gov- tutional restrictions on central govern- ernment and, through the Constitution, tried ment power, how is it that intrusive federal to limit its power. But living in a society so powers over the lives of ordinary Americans recently chafing under British rule, a young took root in the twentieth century? If you had nation whose people yearned for freedom, it just fifteen minutes to explain it to James would have been difficult to imagine how Madison, what would you say? America’s own elected and appointed offi- Here is what I would say: cials—without triggering public censure and Mr. Madison—James, if I may—I am usually without amending the Constitution— deeply saddened by the facts [ must describe. might take systematic actions to erode the You and your colleagues anticipated many explicit constitutional limits on their power things, and the product of your labors has that you designed. made possible an unprecedented degree of Yet that is exactly what occurred. The tech- freedom in this country for more than 200 niques that emerged involved a bevy of gov- years. But your work is now in jeopardy: lib- ernment actions sharing one defining charac- erty is being crowded out by an ever more teristic: they increased other people’s costs of intrusive central government. Although many resisting government expansion. In each case, others have tried to explain how this government officials made it more difficult or occurred, let me give you my own insight costly for people to perceive, or take action to about it—admittedly only a partial explana- resist, federal power-expanding measures. It tion, but nonetheless one that identifies a key, is what I call “political transaction-cost and often overlooked, source of liberty’s manipulation”: government officials’ deliber- increasing peril. ate alteration of people’s costs of undertaking As I see it, here is what happened. During collective political action in matters that the twentieth century, legislators, Supreme affect the scope of government authority.! Court judges, and executive branch officials These federal actions have included mis- began to perfect techniques for deflecting and representing the nature and consequences of curtailing people’s resistance to actions that government action, proceeding incrementally, increased the power of the central govern- concealing the cost of government actions, ment. You and your contemporaries well tying controversial measures to more popular —_— legislative bills, hiding unpopular provisions Charlotte Twight is a professor of economics at Boise in omnibus bills, concentrating the benefits State University. She is author of the forthcoming book Dependence by Design: The Rise of Federal and dispersing the costs of government Control Over the Lives of Ordinary Americans (Cato action, changing the Constitution through the Institute). back door of the Supreme Court rather than 15 ===== PAGE 16 ===== 16 IDEAS ON LIBERTY ¢ OCTOBER 2000 by constitutional amendment, and myriad analogous strategies. As I'll explain in a minute, diverse efforts in the twentieth centu- ry to expand the federal government’s power all have involved such strategies—implying that initial public acquiescence to new gov- ernment institutions often did not reflect true public consensus. Once in place, however, institutions exercising new federal powers subsequently channeled ideological change, and nurtured special interests, in ways that supported the new regime. Consider a few examples. The first one is sure to infuriate you, James. Remember the care you took in providing for the constitu- tional amendment process? You wisely and deliberately made it very cumbersome, trying to assure that the Constitution’s provisions could not be altered without great effort and widespread agreement on the desirability of the changes. In short, you hoped to make it very costly for people to alter constitutionally It is a classic type of political transaction-cost established limits on the central government’s manipulation. power. During the twentieth century, however, the U.S. Supreme Court often served to bypass the amendment process. Increasingly, One example is the Supreme Court’s rein- Supreme Court decisions changed the Consti- terpretation of the Constitution’s interstate tution’s long-established meaning without commerce clause in a 1942 case called benefit of constitutional amendment, reinter- Wickard v. Filburn. As you recall, you and the preting the document—sometimes literally other drafters gave the federal government changing the definition of its words—to power over interstate commerce (‘commerce broaden the central governments powers far among the several States) to make sure that beyond what you and the other Founders envi- the individual states did not erect trade barri- sioned. Confronted with such unilateral ers against one another. Commerce within the action by the Supreme Court, how could peo- separate states, intrastate commerce, was ple then preserve their liberty? beyond the central government’s authority. In Of course, they themselves could seek a Wickard, however, the U.S. Supreme Court constitutional amendment to spell out more proclaimed that the central government had concretely the original meaning of the Consti- power to regulate even the wheat that an indi- tution and thereby bind the Supreme Court. vidual wheat farmer grew on his own land, But the cumbersome amendment process, within a single state, for his own family’s con- meant to constrain those who would change sumption. The Court’s rationale was that if the fundamental constitutional protections, then farmer had not grown that wheat for his fam- impeded those who desired to preserve the ily’s consumption, he would have had to pur- original meaning of the Constitution. In other chase wheat that might have moved in inter- words, the political transaction costs that you state commerce. Since locally produced and intended to be a barrier to those who desired consumed wheat “competes with” wheat to change the Constitution’s substance instead moving in commerce, this purely local activi- served as a barrier to those who desired to ty was deemed to affect interstate commerce uphold the Constitution’s original substance. and thus justify federal regulation. The James Madison The Commerce Clause ===== PAGE 17 ===== A CONSTITUTIONAL COUNTERREVOLUTION 17 Supreme Court thereby threw the constitu- Further subduing resistance, this collection tional doors wide open, allowing the central method effectively hid the full magnitude of government to embed itself into virtually any an individual’s tax payment. With passage of economic activity, no matter how local. the 1943 withholding law, taxpayers no longer Throughout the twentieth century, this key had to write a check for the full amount of tactic of judicial reinterpretation allowed the income taxes due. Indeed, many came to asso- Supreme Court to effectively trump the con- ciate the tax due date with money received stitutional amendment process that you from the government in the form of tax designed. If people wanted to preserve the refunds rather than money paid to the govern- limits on central government power that you ment. Their tax burden thus obscured, most wisely created, the defenders of the original Americans today cannot come close to accu- Constitution—not its opponents—would have rately stating their total federal income tax to undergo the high transaction-cost process payments for the prior year. of constitutional amendment. With the deck Fundamental notions of the rule of law held stacked against such a costly undertaking, no sacred by your generation, James, were grad- amendment materialized to shield intrastate ually abandoned as the federal income tax commerce or other realms from the federal grew, with equal treatment under the law government’s growing regulatory reach. redefined to countenance treating people with The spirit of the preceding example per- different incomes—or even the same vades many government actions that have income—unequally under federal tax law. eroded liberties originally protected by the Today, with the bottom 50 percent of earners Constitution. Once government officials paying only 4.3 percent of the federal income learned that they could change the cost to oth- taxes collected, is it any wonder that tax resis- ers of defending their liberties, the possibili- tance no longer poses a viable threat to the ties were endless. Let me recite but a few. new political power structure? With half the Consider the federal income tax. Yes, I people paying hardly any federal income tax, know that you provided that no direct federal the other half largely unaware of the full mag- taxes could be imposed unless they were nitude of their tax, and many in both cate- apportioned among the states “in Proportion gories intent on manipulating the political to the Census or Enumeration” mandated by system to their personal advantage, a majori- the Constitution. But a federal income tax ty of the people now usually tolerate any plau- “without apportionment among the several sible federal income-tax increase, enabling States, and without regard to any census or the central governments control over enumeration” was legalized in 1913 by resources to continue to grow. The political explicit constitutional amendment. way to wealth thus predominates, the federal In implementing a federal income tax, gov- income tax now one of its primary engines. ernment officials repeatedly increased the cost to citizens of correctly appraising and actively resisting the tax. First, it was sold to the public as a tax only on the very rich. Later, All these measures were instituted incre- despite the government’s claim that the mentally, another transaction-cost-increasing income tax was a “voluntary” tax system, a strategy for minimizing resistance to expan- 1943 law required employers to take the tax sion of federal power. For instance, the politi- money from each employee’s paycheck, cal feasibility of income tax withholding in before the tax was due, without the employ- 1943 was enhanced by prior legislation man- ee’s consent. This nonconsensual “withhold- dating employer withholding of payroll ing” of federal income taxes dramatically (Social Security/FICA) taxes, instituted by increased the cost to private individuals of the 1935 Social Security Act. Employers and resisting the growth of federal power. Non- employees already had gotten used to it; with payment was no longer a feasible means of the tax withholding machinery already in resistance to overtaxation. place, the next step was that much easier. Incremental Intrusions ===== PAGE 18 ===== 18 IDEAS ON LIBERTY ® OCTOBER 2000 Government officials used similar transaction- who think as you and I do. Discussion of the cost-manipulating strategies in securing adop- original meaning of the Constitution, limits tion of that 1935 Social Security law. They on the power of government, fundamental were only able to gain passage of the law by human liberties not “granted” by the govern- tying it to other more popular programs such ment—many federal officials regard such per- as needs-based old-age assistance, unemploy- spectives as plainly anathema to their finan- ment compensation, and maternal and child cial and ideological interests. How might the health services—thereby deliberately increas- government limit the prevalence of these sup- ing the costs to people of resisting the power posedly offensive views? grab represented by Social Security. Through Increasingly, government officials have that program, the central government now used public education for that purpose. As in takes 12.4 percent of the wages of every the other cases, the relevant laws were both working American (up to maximum taxable passed and implemented by manipulating earnings of $76,200) through a Ponzi-type political transaction costs. For example, fed- system designed to make every retired eral officials leveraged the National Defense American dependent on federal government Education Act (1958) into law by means of checks, while preventing people from instead the Sputnik scare, using false claims of investing that money in private accounts for national emergency to build a program that their own retirement. channeled federal funds to virtually all types Where is the transaction-cost manipulation of educational programs. Senator Strom Thur- in this program today, you ask? From the mond of South Carolina clearly identified the beginning, government officials got employ- divergence between the rhetoric and the reali- ees to tolerate this tax by claiming that it is ty of the National Defense Education Act: “split” between employers and employees— that the employer “matches” the “contribu- This bill . . . although it purports to be for tion” of the employee, thereby doubling the the specific purpose of promoting the amount paid into Social Security on the national defense, is, in actuality, general employee’s behalf. It is a lie. Although the Federal aid to education. . . . [T}his bill will employer does write a check to the govern- not appreciably contribute to the national ment on behalf of the employee, economists defense. Neither the scholarship program have understood for decades that the employ- nor the student loan program are limited in ee actually bears most of the burden of the so- any way to persons undertaking a course of called “employer’s half” of the Social Securi- study considered to be critical to our ty tax in the form of lower wages; so employ- national defense. Under either of these pro- ees actually bear nearly the full 12.4 percent grams, a participating student might study burden of the payroll tax. But most Americans social welfare work, automobile driving or, today continue to believe the long-repeated for that matter, flower arranging.3 lie. Moreover, although the federal government While continuing to deny the growing federal continues to claim that people who have paid control over public education, government their payroll taxes throughout their working officials used this law and others that followed lives have a contractual “right” to their Social (such as the 1965 Elementary and Secondary Security benefits, the Supreme Court long ago Education Act) to influence the curriculum explicitly stated that they have no such right.2 and thereby change the worldview of count- There is more (for instance, people are forced less millions of Americans. to pay income taxes, unwittingly in most cases, on the Social Security payroll taxes extracted from their paychecks—money they never even received!), but I must move on. The results now dominate U.S. culture and As you can see, James, government offi- politics. Public schools have become engines cials no longer embrace the views of people of propaganda supporting a vastly expanded Engines of Propaganda ===== PAGE 19 ===== A CONSTITUTIONAL COUNTERREVOLUTION 19 presence of the central government in the Medicare bill was accomplished only by tying lives of ordinary Americans. Deliberate the legislation to politically irresistible Social reshaping of the values and ideologies of the Security benefit increases, once again increas- children is thus another manifestation of gov- ing the costs to private individuals (and legis- ernment manipulation of political transaction lators) of resisting the measure. As the quest costs, changing young people’s information for expanded federal power over people’s costs in ways that actively curtail resistance to medical care continued, the same transaction- expanding federal authority. cost-increasing techniques were employed Today, ideologies shaped by public school- again and again. The 1996 Health Insurance ing allow government power to continue to Portability and Accountability Act (HIPAA), grow. Federal influence over the minds of for instance, tied popular provisions increas- American children grew enormously with the ing the portability of people’s health insur- 1994 Goals 2000: Educate America Act; the ance to unpublicized requirements for a National Skill Standards Act; the Educational “unique health identifier” for each American, Research, Development, Dissemination, and to be used in conjunction with an HIPAA- Improvement Act; the School-to-Work mandated uniform national electronic data- Opportunities Act; the Improving America’s base of personal medical information. The Schools Act; and the 1998 Workforce Invest- 1996 act empowered the federal government ment Act. In securing passage and acceptance to require detailed information, at its discre- of this legislation, political transaction-cost tion, regarding what lawmakers called manipulation was again an important tool. “encounters” between doctors and patients. Ordinary Americans were encouraged to per- As a result of HIPAA provisions misleadingly ceive these laws as strengthening the academ- labeled “administrative simplification,” doc- ic rigor of public schools. Yet underneath that tors now may be required to divulge detailed veneer of appealing rhetoric, the new laws health information regarding patients’ physi- established federal powers and policies that cal and mental health for inclusion in the contravened the wishes of many affected national electronic database, identified by communities, weakened the academic rigor of each patient’s unique health identifier. Swayed public schools, and accorded the federal gov- by the appealing political rhetoric that accom- ernment increasing influence over the educa- panied the 1996 bill, most people embraced it, tion, ideological orientation, and career paths only to be startled two years later when the of American children. U.S. Department of Health and Human Ser- Under the rubric of “parental assistance,” vices began to implement the mandated Goals 2000 even required federal grant recip- unique health identifier. ients to fund “Parents as Teachers” and Equally alarming is the systematic surveil- “Home Instruction for Preschool Youngsters” lance of ordinary Americans now being car- programs, defined to include “regularly ried out by the federal government, also large- scheduled personal visits” with parents of ly a product of political transaction-cost aug- preschool children by government-supported mentation. For instance, when Congress “certified parent educators.” The federally passed the Bank Secrecy Act in 1970, misrep- promoted slogan embracing “outcome-based resentation again was instrumental. How education” turned out to denote social out- could people know that this innocuous- comes desired by federal authorities, not aca- sounding bill contained provisions requiring demic outcomes desired by parents. banks to make permanent copies of the checks, deposits, and other financial transac- tions of each and every bank account holder? Detailed portraits of law-abiding individuals Federal officials have used similar tactics to were thereby created at the behest of the cen- gain increasing power over Americans’ med- tral government. ical care. Culminating a decades-long incre- Similarly, by increments, the federal govern- mental process, passage of the original 1965 ment authorized widespread federal, state, and Medical Incrementalism ===== PAGE 20 ===== 20 IDEAS ON LiBERTY © OCTOBER 2000 local government use of Social Security num- Contrived Costs bers (SSNs), even though they were approved in 1935 only when officials assured Americans g . that the numbers would be used exclusively to these strategies showing that government identify their Social Security accounts. During manipulation of political transaction costs the 1980s and 1990s. a docile citizenry further falls into two broad categories: manipulation acquiesced as the federal government, by of private agreement and enforcement costs increments, required parents to get SSNs for (meaning the costs to individuals of reaching very young children—now even newborns—in and enforcing collective agreements on where order to claim them as “dependents” SSN- to draw the line between governmental and based dossiers now can be developed on young Private spheres of action) and manipulation of children, tracking them from infancy forward information costs relevant to people’s deci- through newly authorized federal databases Sions regarding where to draw that line.!! describing their educational experiences, med- Both categories involve the creation of what [ ical histories, future jobs, financial transac- call “contrived” political transaction costs. tions, the very fabric of their private lives. AAS You can see, all the examples given Imagine the power thereby put in the hands of above fall into these broad categories. One federal officials, and the diminution of Ameri- tyPe of agreement and enforcement cost iden- cans’ freedom to speak their minds without tified in the taxonomy involves “unilaterally fear of government reprisal. It is no longer the changing the locus or scope of government country you envisioned, James. decision-making authority in ways that shift As your generation so well understood the transaction-cost burden entailed in effec- people in a free society must decide how tuating or forestalling change in the role of much power to cede to the central govern- 8overnment.” It sounds cumbersome, but you ment, where to draw the line between the pri- 8¢t the idea: the Supreme Court 5 unilateral vate and public spheres. Your generation ©Xpansion of the Constitution s interstate allowed the central government but little commerce clause, sidestepping the constitu- power, influenced as you were by ideologies tional amendment process, is a prime example of liberty and by awareness of the personal in this category. Income tax withholding costs of expanded central power. My genera- and the purported “splitting” of the payroll tion, by contrast, ceded enormous power to aX described above involve a type of the central government, having lost ideologies information-cost manipulation captured in the of liberty through public education and by 'axonomy as forms of taxation that change long-standing exposure to an extensive gov- people’s perception of the tax burden imposed ernment presence in their lives. on them.” Incrementalism, such as that prac- In my view, James, one overarching mech- ticed in increasing the federal government’s anism making this transformation possible POWer over public education and health care, has been government officials’ manipulation 1S Shown to be a separate form of government of political transaction costs. In each case that Manipulation of political information costs. I have studied in detail—Social Security And the use of mellifluous-sounding titles income tax withholding,6 Medicare and its for hurtful legislation is an example of progeny,” public education, government data information-cost manipulation involving collection,® even asbestos regulation!0—gov- “semantic efforts to alter public perception of ernment officials seeking new federal powers the costs and benefits of government activi- have deliberately increased the cost ties.” I promised that this would take just fif- to private citizens of understanding the pro- {€€n minutes, so I can’t describe all the cate- posed measures and taking political action to 80ries and examples that I have suggested resist them. The particular transaction-cost- cisewhere. But the main point is clear. increasing strategies have varied, but they all ~~ Mr. Madison, we are losing the liberty for have served to reduce or deflect resistance to Which your generation committed their “Lives the growth of government. . . . Fortunes, and . . . sacred Honor” in part Some years ago I developed a taxonomy of ===== PAGE 21 ===== A CONSTITUTIONAL COUNTERREVOLUTION 21 because government officials have perfected 1. Transaction costs, in the more traditional setting of econom- techniques for reducing effective resistance to ic markets, include contract negotiation and enforcement costs that are attributable to the multiparty character of market exchange. The liberty’s erosion. Those techniques character- political analog of market exchange is collective political action that . ., » - ] I tion of political transaction costs. Today, nO individual decision makers (such as voters or legislators) in under- matter how many angry citizens call radio PCE Zee Se On EE ve agreements tht talk shows, few take serious political action tO define the role and scope of government. To individuals, political oppose government’ expanded role. in part transaction costs comprise all their costs of perceiving, and of acting na. . ’ on their assessment of, the net costs of particular government actions because of the artificially increased personal and authority. Alternatively, such political transaction costs could be costs of so doing. Federal officeholders, in labeled “constitutional-level” transaction costs, as I have done else- . . where, to emphasize their influence on the nature and extent of gov- turn, continue to find the strategy appealing emment authority over private decision-making tolerated by the pub- 3 : lic. For a more complete discussion, see my “Government Manipu- because it frequently enables them to obtain lation of Constitutional-Level Transaction Costs: A General Theory results they want without resort to overt Coer- of Transaction-Cost Augmentation and the Growth of Government,” : : : : Public Choice, Vol. 56, No. 2, pp. 131-52 (1988). cion, relying instead on changing people’s ; ; Lo . i 2. Flemming v. Nestor, 1960. See also Helvering v. Davis, 1937. individual incentives to resist. 3. US. Senate, Committee on Labor and Public Welfare, No conspiracy underlies these develop- National Defense Education Act of 1958, Senate Report No. 2242, . . 85th Congress, 2nd Session (August 8, 1958), p. 51. ments. Rather, they reflect personal incentives 4. Sec Thomas Sowell, Inside American Education: The HP : : : : : Decline, the Deception, the Dogmas, (New York: Free Press, 1993), (political, economic, and ideological) impelling 7" 0 "0h a | Ck “An Explanation for Public Provi self-interested federal legislators, Supreme sion of Schooling: The Importance of Indoctrination,” Journal of : : _ Law and Economics, Vol. 33, pp. 199-229 (1990); and Paul A. Court Justices, bureaucrats, and other execu Cleveland, “Economic Illiteracy,” Ideas on Liberty, April 2000, pp. tive branch officials to create transaction-cost 32-33. . . ce: 5. Charlotte Twight, “Channeling Ideological Change: The barriers for people who hold different politi- Political Economy of Dependence on Government,” Kyklos, Vol. 46, cal views. No. 4, pp. 497-527 (1993). . SPR 6. Charlotte Twight, “Evolution of Federal Income Tax With- Mr. Madison, a constitutional counter- holding: The Machinery of Institutional Change,” Cato Journal, revolution has occurred, without a shot being ~~ Winter 1995, pp. 359-95. ™ 4 . . 7. Charlotte Twight, “Medicare’s Origin: The Economics an fired, and with barely a whimper from an Politics of Dependency,” Cato Journal, Winter 1997, pp. 309-38, increasingly ill-educated populace. Unfortu- and “Medicare’s Progeny: The 1996 Health Care Legislation,” The telv. the 1 it end he 1 the lik Independent Review, Winter 1998, pp. 373-99. nately, the longer it endures, the less the like- 8. Charlotte Twight, “Federal Control Over Education: Crisis, lihood of liberty’s restoration, owing to the Deception, and Institutional Change,” Journal of Economic Behav- ideological ch h ] ior and Organization, December 1996, pp. 299-333. ideological changes that accompany long- 9. Charlotte Twight, “Watching You: Systematic Federal Sur- standing exercise of expanded government veillance of Ordinary Americans,” The Independent Review, Fall As th oth ds. 1 1999, pp. 165-200. power. As the twentieth century ends, let us 10. Charlotte Twight, “From Claiming Credit to Avoiding hope that government-spawned transaction- Blame: The Evolution of Congressional Strategy for Asbestos Man- . . . agement,” Journal of Public Policy, Vol. 11, No. 2, pp. 153-86 cost barriers to liberty-restoring change have (jgo1) not permanently tipped the scales against the 11. Charlotte Twight, “Political Transaction-Cost Manipulation: An Integrating Theory,” Journal of Theoretical Politics, Vol. 6, No. freedom that we both hold so dear. OJ 2 pp. 191-218 (1994), ===== PAGE 22 ===== Potomac Principles by Doug Bandow IDEAS ON [IBERTY Ocroser 2000 The End of U.N. Peacekeeping ul Vi %, A he dismal experience of Sierra Leone has But one requirement of the political “settle- struck yet another blow against United ment” pushed by the United States was to Nations peacekeeping. America’s UN. send Executive Outcomes home. Unfortu- Ambassador, Richard Holbrooke, plaintively nately, UN. peacekeepers proved to be an argues that Sierra Leone “is not a metaphor inadequate substitute. for UN peacekeeping.” But how could it be Earlier this year the RUF seized hundreds otherwise? of Zambian peacekeepers, stealing their Even U.N. Secretary General Kofi Annan equipment and even their uniforms. Then the admits that the UN. can’t do the job. Natu- guerrillas, with their trademark of chopping rally, his answer is to strengthen UN. off the hands and arms of helpless civilians, operations. began marching on Freetown, the nation’s Sierra Leone is one of a long list of African capital, sparking panic—until 800 British sol- slaughterhouses: Angola, Burundi, Chad, diers arrived to evacuate Westerners and dig Congo, Ethiopia, Liberia, Mozambique, in to defend the city, after which the RUF Rwanda, Somalia, Sudan, Zaire. The dead faded back into the bush. have ranged up into the millions. In none of Indeed, when London announced that its them has the UN. stopped the killing, let troops’ work was done, Sierra Leone’s gov- alone resolved the underlying conflicts. ernment begged Britain to reconsider. Unable Diplomatic pressure, expressions of inter- to defend itself and unwilling to trust the national outrage, and UN. missions have all U.N., President Ahmad Tejan Kabbah tried to failed. People die, refugees flee, children throw his nation back into the arms of its old starve, societies disintegrate. colonial master. The only strategy that has worked is real Secretary General Annan and others rou- military force. In 1995, Sierra Leone’s gov- tinely blame the United States for the U.N.’s ernment was tottering before an offensive of failures since Washington has fallen behind the Revolutionary United Front (RUF). For an in paying its dues, particularly peacekeep- estimated $35 million, the regime hired the ing assessments. But as Thomas Jacobson firm Executive Outcomes, made up of South of the Virginia-based Freedom Alliance African mercenaries. With the aid of forces points out, total unreimbursed “U.S. sup- from Ghana and Nigeria, Executive Out- port of UN activities, including personnel, comes routed the RUF. financial support, military hardware and coordinated activities” for U.N. operations, ran $8.8 billion last year and $25.2 billion Doug Bandow, a nationally syndicated columnist, is a senior fellow at the Cato Institute and the author back through 1992. As of the end of last and editor of several books, including Tripwire: Year, America was providing nearly 14,000 Korea and U.S. Foreign Policy in a Changed World. military and police personnel in the 19 22 ===== PAGE 23 ===== 23 ongoing U.N. observation and peacekeep- trusteeship for Sierra Leone. That nation “is a ing missions. failed state, its government long ago hijacked Washington currently stations military by gangsters,” he writes. So create a five- to forces in 141 countries. Most of those deploy- ten-year occupation to fix the country. ments are small (one soldier in Mauritius, for Although formal sponsorship by the UN., instance). But it also maintains large war- or, alternatively, suggests Mr. Ayittey, the fighting garrisons, backed by disproportionate Organization for African Unity, might reduce military outlays and an outsize force, through- the obvious colonial overtones, such a plan out Asia and Europe. For this Americans could only work through sustained military receive little thanks. support by the handful of Western states with Given his organization’s inherent flaws, Mr. sizable and effective militaries. Count out Annan really isn’t talking about the UN. when Germany and Japan, which are reluctant to act he says that “We have to rethink how we equip for historical reasons, and other countries, troops and prepare them for these operations. like Brazil, Poland, Romania, Spain, and In this way, they will be able to depend on Ukraine, which have relatively large armies of themselves and do what they have to do.” He varying effectiveness, but which are unlikely is talking about being able to call on real sol- to volunteer for long-term occupation duty in diers from real countries using real weapons. Africa and Asia. You are down to the United That is, Mr. Annan wants to be able to States, Britain, France, Italy, and maybe India, deploy forces that can fight and kill. He wants Turkey, and Russia. to forcibly prevent and suppress conflict and And while an international coalition might impose a political settlement on the combat- conceivably agree to garrison Sierra Leone ants. for years, it would be unlikely to simultane- As retired Australian General John Sander- ously occupy Angola, Burma, Congo, Kash- son, who headed U.N. operations in Cambo- mir, Liberia, Sri Lanka, Sudan, and the score dia, puts it: “you either go to war or go home.” of other nations that would equally warrant It is a more coherent view, but a much more trusteeship. The American republic is particu- dubious operation. larly ill-suited to turning its 18-year-old men It would entangle nations in potentially and women into perpetual guardians of a far- endless bloodletting in conflicts with no rele- flung empire. vance to their security. It would risk soldiers’ Nor would it ever be evident when such lives for interests unrelated to those of their trusteeships could end. After all, the former own political communities. It would turn colonies went through decades of a process Western states into new colonial powers. that, theoretically at least, should have pre- In many cases there is no good side to sup- pared them for independence. Most of them port: Not any of the three factions in the Liber- were freed with a full panoply of economic, ian civil war. Not José dos Santos’ communist legal, and political institutions. That didn’t Angolan government or Jonas Savimbi’s Unita prevent them from imploding. opposition. Neither Mobutu Sese Seko nor Nor is there any guarantee that a new cycle Laurent Kabila in Zaire (now the Congo). of five or ten years of foreign rule would be None of the multitude of warlords in Somalia. sufficient to counteract the underlying factors, In these sorts of cases, writes columnist especially past brutality and hatreds, that have Charles Krauthammer, “the only serious way sparked so many civil and guerrilla wars. to intervene is to occupy. Take over the coun- Indeed, memories are long and often outlast try, reorder the society, establish new institu- even lengthy periods of seeming peace and tions and create the basis for leaving one day.” stability—witness the Balkans. In short, if it’s serious enough to have your Yes, we should rethink peacekeeping, as soldiers kill and be killed, it’s serious enough Secretary General Annan desires. But the to stick around and finish the job. answer is not, as he thinks, to create a U.N. In fact, American University professor rapid deployment force and prepare it to George Ayittey has proposed just such a UN. fight. ===== PAGE 24 ===== IDEAS ON [IBERTY P.'T. Bauer’s Market-Liberal Vision by James A. Dorn oday it is not unusual to hear it suggested on Development, “Economic achievement that the undeveloped world’s best hope depends primarily on people’s abilities and lies in private property, the market economy, attitudes and also on their social and political and the rule of law. But a short time ago, that institutions. Differences in these determinants suggestion would have scandalized many or factors largely explain differences in levels audiences. Peter Bauer is a major reason for of economic achievement and rates of mater- that shift. ial progress.” Lord Bauer, the son of a Budapest book- What Bauer observed was that people in maker, came to Britain in 1934 to study eco- poor countries respond to price incentives just nomics at Gonville and Caius College, Cam- like people in rich countries. He also observed bridge, where he later became a fellow. His that when people have the freedom to own pioneering work in development economics, property and to trade, and when government which began with his study of the Southeast is limited to the protection of those rights, Asian rubber industry in the 1940s and his they have a better chance of achieving pros- classic 1954 book, West African Trade, led perity. him to question, and later overturn, many of The intellectual climate in the late 1950s the beliefs held by mainstream development was not hospitable to Bauer’s critique of state- experts. This work was carried out primarily led development policy. In 1956, Swedish from the London School of Economics and economist Gunnar Myrdal, later a Nobel lau- Political Science, where he taught from 1960 reate, wrote, “The special advisers to under- to 1983 and where he is currently emeritus developed countries who have taken the time professor of economics. In 1982, he was and trouble to acquaint themselves with the made a life peer and is a fellow of the British problem . . . all recommend central planning Academy. as the first condition of progress.” Bauer’s work is characterized by careful That view persisted well into the 1960s and observation of how countries move from has only recently been supplanted by a more subsistence to exchange economies, an appli- market-friendly view. It was not until after the cation of simple economic principles, and a collapse of communism in Eastern Europe sound understanding of the role of non- and the Soviet Union that the World Bank economic variables in promoting material admitted, in its 1997 development report, advance. As he noted in his book Dissent “State-led intervention emphasized market TS failures and accorded the state a central role James Dorn is vice president of academic affairs at . er the Cato Institute. This is adapted from an article In correcting them. But the institutional that will appear in the forthcoming Encyclopedia of assumptions implicit in this world view were, Libertarianism. as we all realize today, too simplistic.” 24 ===== PAGE 25 ===== 25 Bauer recognized, as noted in his book efforts, if only governments would safeguard Reality and Rhetoric, that “the critics who both economic and personal freedom. When propose replacing the market system by polit- people are free to choose and bear the respon- ical decisions rarely address themselves to sibility for their choices, as they do under a such crucial matters as the concentration of system of private property and free markets, economic power in political hands, the impli- they will be more able to improve themselves cations of restriction of choice, the objectives and provide for their families—as well as of politicians and administrators, and the have stronger incentives to do so—than when quality and extent of knowledge in a society they are dependent primarily on the state. and its methods of transmission.” In observing economic reality and adhering to the logic of the price system, Bauer refuted key propositions of orthodox development Bauer was one of the first economists to economics, the most basic one being the idea clearly see that state-led development policies of a “vicious circle of poverty.” Poor countries and the quest for “social justice” would politi- were said to be poor because people had low cize economic life, impair individual free- incomes and could not generate sufficient sav- dom, and fail to achieve long-run prosperity ings to allow for capital accumulation, one of for the majority of people. He also noted that the prerequisites for economic growth, as those countries that had the fewest commer- spelled out in mainstream growth models. cial contacts with the West were the least Bauer observed that many people and many developed. Thus, he recognized the dynamic countries had moved from poverty to prosper- gains from free trade. In his most recent book, ity and that large-scale capital investment is From Subsistence to Exchange and Other neither necessary nor sufficient for material Essays, he wrote, “Contacts through traders advance. His study of small holdings in the and trade are prime agents in the spread of Malaya (now Malaysia) rubber industry and new ideas, modes of behavior, and methods of his observation of the importance of small- production. External commercial contacts scale traders in West Africa convinced him often first suggest the very possibility of that the reality of development was different change, including economic improvement.” from the rhetoric of development experts. Certainly the experience of people in Japan, A corollary of the vicious circle is that South Korea, Taiwan, China, and Hong Kong poor countries cannot become rich without support that observation. external aid from developed countries. How- Bauer’s emphasis on individual merit, char- ever, the nations that have become rich had no acter, culture, property rights, and markets, access to foreign aid, while those that have and his distrust of big government, foreign received substantial external aid are for the aid, and the welfare state place him squarely most part still poor, as in Africa. So Bauer in the classical-liberal tradition. His life’s argued that foreign aid is more likely to per- work has been in the broad context of politi- petuate poverty than to alleviate it. And histo- cal economy, not in the narrow technical con- ry has borne him out. fines of modern development economics or Bauer also strongly disagreed with the the even narrower space of formal economic widely held view that population growth is a modeling. drag on development. In his essay “Popula- Bauer’s keen understanding of how indi- tion Growth: Disaster or Blessing?” he wrote, viduals and nations grow rich comes from “Economic achievement and progress depend practical experience combined with plain on people’s conduct not on their numbers.” economic theory and a deep knowledge of Unlike many of the development experts who history. His work has stood the test of time. wanted to use government to “help the poor,” That is why he is now widely recognized as Bauer thought that poor people could lift a hero of the revolution in development themselves out of poverty through their own economics. [ Politicizing Life ===== PAGE 26 ===== IDEAS ON [IBERTY Is There an Anglo-American Economic Model? by Christopher Lingle hose who wish to avoid the painful acteristics that cannot be experienced else- changes wrought by increasingly compet- where. Instead, it represents a natural and his- itive and open global markets speak derisive- torical evolution toward a harmonious blend ly of an Anglo-American economic model. of individualism and the market. Many of Allusions to a cabal of white men in dark suits those who resist the process of institutional involve a racial epithet that is distasteful. It is innovation are interest groups as well as rule- also ill-informed in that it belittles the enor- bound bureaucrats and politicians with a fixa- mous contribution made by women, Asiatic tion on social engineering, or cultural conser- peoples, and individuals of African descent to vatives who resist the changes wrought by these successful economies. modernization. It may be true that the economies of the Nonetheless, it is useful to examine fea- United States, Great Britain, and some mem- tures and results that set the British and Amer- bers of the Commonwealth have performed ican economies apart. First among the fea- differently (and for the most part, better) than tures are their relatively flexible labor markets others. However, the term “Anglo-American that allow rapid adjustments within the highly economic model” is inappropriate and its use competitive global economy. Second, a rigor- counterproductive. Indeed, it is just as inaccu- ous set of laws and rules that provide guaran- rate as the claims of a Japanese or an Asian tees for the rights of shareholders and other economic model, a delusion put in sharp owners of business enterprises, including focus by the ongoing crises in that region. adjudication of disputes by competent and This approach to economic organization is independent judges. Third, capital markets not limited to any particular region of the tend to be more important than bank lending world. Similarly, suggestions that globalism is so that there is more publicly available infor- an outgrowth of the “Westernization” of the mation on issuers and borrowers. Finally, world economies are misguided and misinter- there is a tendency to curb the power of gov- pret the dynamics of the process. ernments to intervene in the market. This has What has happened in America or the Unit- been accomplished through lower tax rates, ed Kingdom should not be thought of as the deregulation, and privatization. outcome of ethnic, regional, or cultural char- In terms of results, it is interesting to note that the American and British economies —— provide incentives that support new job cre- Christopher Lingle is an independent corporate con- 4100 By being more open to competition, sultant and adjunct scholar of the Centre for Inde- h d d entr 1 pendent Studies in Sydney and author of The Rise they encourage and reward entreprencuria and Decline of the Asian Century. His e-mail address innovation. Consequently, these economies is clingle@ufm.edu.gt. exhibit unemployment rates that are lower and 26 ===== PAGE 27 ===== 27 economic growth rates higher than most other holder model are forced to measure perfor- industrialized economies. mance against profits. In the past, producers Implicit in critiques of the so-called Anglo- in Korea, Japan, and other Asian countries American model is a presumption that its eco- focused on market share and cash flow instead nomic actors are immune to a certain sense of of profitability. Their indifference to profits humanity. It is as though the world would be was prompted by access to cheap capital, better if kinder, gentler bureaucrats and politi- which induced them to make imprudent cians were more active in guiding economic investments that did not consider rates of matters. But there is little evidence that polit- return. Firms operating under this approach ical judgments are consistently made on the did not build up capital reserves to protect basis of fairness. Citizens in most emerging them against downturns. market economies are aware that corruption, Looking at the U.S. economy, double-digit cronyism, discrimination, and nepotism come interest rates combined with high inflation from the politicization of economic life. and unemployment rates during the 1970s An alternative approach to more market- prompted substantial restructuring of the driven economies is an active government American economy during the 1980s. Though hand in protecting certain factions that are pre- inflicting considerable pain, reinventing U.S. sumed to have a stake in the outcome of cor- businesses set the basis for the current boom. porate decisions. In turn, corporate executives Business and political leaders in Europe and are told they must include a contrived group of Asia are trying to avoid these adjustments. “stakeholders” even at the expense of the Indeed, many in the current management elite interests of owners (stockholders). From the fear their dismissal will be a condition for beginning, the assertion of stakeholders and a access of foreign lending or buyouts. demand for their “rights” was flawed on prin- Opening up domestic capital markets in ciple and intrusive on the rights of owners. Asia and Europe may be the single most Advocating stakeholder rights reflects an important change. Liberalization of financial explicit resistance to an open and competitive markets would force an unprecedented shift global market. Trade unions encourage this in political and corporate culture. It would notion to protect jobs of their members. Yet allow foreign ownership that can provide this hinders workers and owners of more com- initiative and funds to recapitalize their petitive companies from being successful. economies as well as restructuring of their By contrast, the shareholder model is guid- industries. ed by profitability that arises from satisfying In sum, it would be foolish to believe that customers so that the mutual interests of hired the growing dominance of a single economic managers and shareholders are also served. system associated with globalization is a form The shareholder model is also associated with of neo-imperialism or is the outcome of a increased efficiency in the use of capital. conspiratorial design. To do so ignores the nature of cultural and political evolution. In Indifference to Profits this dynamic process, those models of organi- zation that provide better results for their By operating in a competitive capital mar- respective communities are better able to sur- ket, companies operating under the share- vive and are imitated by others. J ===== PAGE 28 ===== IDEAS ON [IBERTY The Philosophical Influence Behind the Microsoft Trial by Barbara Hunter “. .. trial moves rapidly on when the judge has determined the sentence beforehand.” —SPOKEN BY MALVOISIN in Sir Walter Scott’s Ivanhoe t may seem that the Microsoft antitrust trial pronouncements that issued both from the was anything but rapid, but a closer exam- court and from the antitrust division. What ination reveals a pattern of inevitability akin emerges is an inevitable course leading to a to the trial referred to in the quotation above. foregone conclusion and waiting only for A review of the testimony shows a highly dis- sufficient time and testimony to create at turbing pattern, in which the prosecution least some appearance of a genuine trial. A (directed by Joel Klein, assistant attorney close examination of the government’s (and general in the Justice Department’s antitrust the judge’) statements, both written and division, and managed by lawyer David oral, reveals a line of logic (if it can be called Boies) and U.S. District Court Judge Thomas that) whose nature is not legal but rather Penfield Jackson in effect double-teamed philosophical. This is not a mystery; rather, Microsoft. The judge made little if any it exemplifies the views of the one man who attempt to take the role that would normally has had his hand in the process in all its be expected of the robed member of the court. stages—Harvard law professor, self-appoint- Even worse, when the judge announced his ed “cyberlaw expert,” and constitutional intention to order a breakup of the company, consultant Lawrence Lessig. he welcomed an additional brief from In both the first (trial) phase and the second Microsoft’s opponents while refusing to allow (sentencing) phase, Lessig served as a “spe- so much as a word of testimony from either cial master” to Judge Jackson, advising him the company or its defenders. So much for in every detail of the proceedings. The judge, judicial fairness. knowing that he was way out of his element in A closer examination of the cast of char- this trial, relied on Lessig day by day. An acters provides some disturbing insights into examination of Lessig’s views, as presented in what was really going on, including the both his interviews and his recently published sometimes bizarre announcements and book, Code and Other Laws of Cyberspace, leaves no ambiguity concerning his con- Barbara Hunter is an advanced level computer sup- tention that the companies which design and port specialist at a large law firm. write computer code threaten to control 28 ===== PAGE 29 ===== 29 cyberspace and that government must step ers a good deal of ground, as seen in this in to regulate the world of code. Throughout excerpt from the same interview: his book the word “regulability” (apparently coined by Lessig to describe his goal) appears You argue that the year 2000 problem again and again. The future, either positive or stemmed, at least in part, from a lack of negative, is measured by the degree to which government regulation. How might regu- computer-related companies and other orga- lation have helped? nizations are “regulable” by the government. The question is whether some kind of con- One of Lessig’s examples of the importance tract law or tort law might have created the of this regulability deals with the FBI’ incentive for people to deal with the prob- request to the Internet Engineering Task Force lem much sooner. We could have mini- (IETF) to modify the computer protocols so mized the cost of this problem through a the government could “monitor” (read, spy law that made it clear that companies on) traffic on the Internet. The IETF refused would be liable if they produced software to participate in such a process, and as Lessig [with Y2K flaws]. . . . told a Computerworld interviewer, “There is relatively little the FBI could do to get them to This identical point of view can be found in come along.”’! (Perhaps a sigh of relief is in Lessig’s book: order at this point!) Here’s what followed: It is a lack of a certain kind of regulation that produced the Y2K problem, not too But couldn’t legislation compel the much regulation. An overemphasis on the IETF to comply with such requests? private got us here, not an overly statist Legislation is only as effective as enforce- federal government. Were the tort system ment mechanisms. It’s easy to get better at holding producers responsible for Microsoft or AT&T to obey the law the harms they create, code writers and because if they don’t, you can seize their their employers would have been more assets. But the IETF is just this group of concerned with the harm their code would individuals—basically, whoever shows up create. . . . And were the intellectual prop- at meetings—and it’s not clear whose erty system more concerned with captur- assets you'd seize.2 ing and preserving knowledge than with allowing private actors to capture and pre- “Seize their assets”? What country is this serve profit, we might have had a copyright anyway? It is noteworthy that in this case no system that required the lodging of source law was involved; it was simply a request code with the government before the pro- from the FBI, with no process, either legisla- tection of copyright was granted, thus cre- tive or judicial, behind it. ating an incentive to preserve source code In the current Microsoft case, Lessig, at and hence create a resource that does not Judge Jackson’s request, filed a brief in now exist but that we might have turned to advance of the judge’s initial ruling. In it, this in undoing the consequences of this bad “expert” submitted a classic bit of circular code 4 reasoning with the judgment that Microsoft’s browser bundling (the original issue in the Anyone with even a moderate familiarity trial) was illegal because it was “unfairly with the process of software design, develop- competitive.”? As might be expected, the term ment, and modification can recognize the “unfairly competitive” was never defined, and ridiculousness of this government-speak we are left to wonder when competition cross- notion that all that is necessary to fix software es the line of fairness and thus warrants inter- is to pass a law and punish those who fail to vention by the heavy hand of government. work miracles (to say nothing of the concept Lessig’s faith in government as protector of of legislation jumping in and interfering with the people in the brave new cyber world cov- the private contract process). In the case of the ===== PAGE 30 ===== 30 IDEAS ON LIBERTY ® OCTOBER 2000 Y2K phenomenon in particular, the seeds of costs, thousands of hours spent preparing tes- the problem were sown in the very earliest timony and appearing in court (hours that days of what we now refer to as “software cannot be used for the productive purposes design.” The modern computer languages had that benefit consumers), and billions of dol- not yet been invented, and code had to be lars lost to both employees and stockholders written within the confines of 80-character as the government (literally) tears the compa- lines so they would fit on an IBM punch card. ny to pieces. The real purpose is to give the The pioneers who designed this early code government “fast-track” power to interpose actually had little faith in the longevity of its will on private companies, breaking them their code; little did they realize how good up, rearranging them, redesigning them, or those early designs were or how many mil- whatever else the antitrust bureaucrats decide lions of databases would still be using them. will be “fairer” than whatever currently Lessig’s “bad code” notion displays the gross exists. It’s the precedent that counts. ignorance of a current-day “Monday morning If we put together the government’s entire quarterback” passing judgment on the early antitrust division, the special master, and the developments of the industry pioneers of 50 judge, they would be incapable of develop- years ago, without which the modern software ing a single piece of software, much less an we take for granted today might never have operating system, no matter how many years been developed. they were given. They know only how to But there’s more (again from Lessig’s inter- destroy. view): Throughout his book, Lessig expresses his faith in government to make things right by Is our antitrust system agile enough for the process of regulating. As he sees it (in the the fast-paced IT [information technolo- following quote regarding “certification” as gy] world? not just a mechanism but also as a require- .. . enforcement mechanisms are extreme- ment for permission to use the Internet), “If ly expensive and cumbersome. . . . if they commerce alone cannot succeed in establish- [Microsoft] lose, there will be the claim ing these architectures, government is in a that, “Why did it have to take us six years strong position to bring about just the changes to resolve it?” We will see the government that commerce needs. . . . The government can try to find ways to fast-track the process. help commerce.’ In the next chapter of his book, he describes But will the industry have changed how this “help” is to be accomplished: so much that the result just doesn’t matter? Even if it is hard to regulate behavior given It may be irrelevant with respect to the Net as it is, it is not hard for the gov- Microsoft. But the reason the government ernment to take steps to alter, or supple- brings these cases [to trial] is not always to ment, the architecture of the Net. . . . This deal with a particular party but zo establish is a regulatory two-step: the Net cannot be precedents that will govern behavior in the regulated now, but if the government regu- future. So it could have a positive effect, as lates the architecture of the Net, it can be long as the perspective is on the rules we regulated in the future. And when govern- are trying to set up for the Information ment regulation of the architecture of the Age generally, as opposed to what are we Net is tied to the changes that commerce is [sic] doing about Microsoft. [Emphasis already introducing, I argue, the govern- added.] ment will need to do very little to make behavior on the Net highly regulable.6 There in a nutshell is the heart of the Microsoft case: Litigate Microsoft into com- With regard to new possibilities for regula- pliance with government decrees, even if it tion once the government constrains the archi- costs the company millions of dollars in legal tecture of code, he writes, “When the con- ===== PAGE 31 ===== THE PHILOSOPHICAL INFLUENCE BEHIND THE MICROSOFT TRIAL 31 straint is imposed by code . . . Congress can Is it any surprise that Judge Jackson’s require that telephone companies adopt a opinions, advised throughout the trial by code architecture that makes the network Lawrence Lessig, evidence no concern for wiretap-accessible.”? intellectual property rights with regard to the Lessig’s faith in government betrays a con- system code developed by Microsoft and pro- cept of the purposes of the U.S. Constitution duced by, literally, thousands of man-years of that may seem quite foreign to students of labor including research, development, cod- classical constitutional law. In effect, he turns ing, testing, debugging, and all the accouter- the Constitution on its head, making the gov- ments of software production? ernment our friend when it uses its regulatory power to “protect” us against those bad pri- 3 141 3 ” vate companies. His vision for the Internet is Distracted by “Fairness one in which everything we do in cyberspace How has it been possible for this consis- will be able to be traced by a supposedly tently pro-government-control, anti-private- benevolent government: property point of view to dominate the Microsoft antitrust trial? Partly because, from The government could require Internet ser- the very beginning, attention has been vice providers (ISPs) . . . to employ soft- focused away from the principles of the case ware that facilitates traceability by condi- 2nd toward the various “fairness” issues that tioning access on the user’s providing some ~ €2sily distract attention: Has this or that “traceability regulation.” Many ISPs would that product? Does this cost more or less than resist it, but the government could then that? Perhaps some of Microsoft's actions require that major commercial institutions May be amenable to litigation between or (including credit institutions) be prohibited ~2MOng persons or companies in courts of law. from dealing with any ISP not certified to Ihe real issue here is how the government has be in compliance with the traceability reg- been given the authority to intervene and to ulation. Some major institutions, in turn, represent the aggrieved parties. might resist this requirement, but not Lt is noteworthy that the high profile corpo- many. For major institutions in a competi- rations that have joined the attack on tive market, the threat of government pros- Microsoft may be setting a precedent in which ecution far outweighs any incentive to vio- the sown wind could reap the whirlwind many late the law. These two steps would create times over. If every step taken by a company, a great incentive for local ISPs to facilitate Not just mergers and the like, must be done traceability.8 with one eye on the job and the other check- ing whether the bureaucrats in the antitrust division of the Justice Department are going to say, “No, no, we won't let you do that,” there will be no winners, just an entire world of losers. “Never send to know for whom the bell tolls; it tolls for thee.” [] Lessig’s concept of intellectual property, especially as it applies to copyright law, is far removed from the idea that intellectual prop- erty is, above all, property. As he sees it, “Pri- vate law creates private rights to the extent that these private rights serve some collective 1. “Who's Controlling Cyberspace?” Computerworld, February good’? And later, he states, “The state has an rn: tpi. computerwarid.comewilsory/0, 199, NAV4T_ interest in defining rights to private property 2. Ibid. because private property helps produce a gen- : Lawrence Lessig, Code and Other Laws of Cyberspace (New eral, and powerful, prosperity.”10 As the York: Basic Books, 1999), p. 232; emphasis added. author sees it, copyright protection is > oy Pda, bestowed by the state to “encourage” intellec- 7. Ibid, p. 45. tual creation, rather than a recognition that 5 id P Ta ee) intellectual property is property. 10. Ibid. ===== PAGE 32 ===== IDEAS @ Economics ON [JBERTY For-Profit Medicine and the Compassion Motive by Tom G. Palmer Foner medicine must be a terrible and duced herself, explained every step, and then immoral thing. After all, I hear it attacked proceeded with both notable professionalism as such all the time. Indeed, as I write this I’m and evident concern for my well-being. listening to a bitter attack on private hospitals Fast forward a few weeks. My condition, over the Canadian Broadcasting Corporation. although still painful and debilitating, was When doctors, nurses, and hospital adminis- greatly improved. My doctor recommended trators care only about their income, compas- another epidural injection to advance me even sion is replaced by cold-hearted selfishness, more toward a normal state. Unfortunately, many people say. But I just got a new view of the for-profit pain clinic was booked up com- the issue when I found myself having to visit pletely for three weeks. I didn’t want to wait two hospitals—one for-profit, the other non- that long and called some other hospitals in profit—for relief from a painful and crippling the area. A very well-known and highly condition. regarded nonprofit hospital could fit me in in I recently suffered from a ruptured disk in two days. I gladly made an appointment. my spine that caused kinds of pain that I had When I got to the nonprofit hospital, I never imagined possible. I visited a specialist spoke first with some helpful retired ladies at a local for-profit hospital, and he arranged and gentlemen who were wearing neat volun- for me to get an MRI (magnetic resonance teer uniforms. They were clearly benevolent imaging) scan within an hour at a nearby for- people, as one might expect in a nonprofit profit radiology clinic. Then he arranged for hospital. Then I hobbled with my cane to the me to have an epidural injection to reduce the pain clinic, where I signed in with the desk. A inflammation of the nerves coming into the nurse came out and announced my name and spinal column, which were the source of the after I identified myself, sat down next to me pains. I was in such agony that I could barely in the lobby. The interview took place while I move at all. The for-profit pain clinic at the was surrounded with strangers. Thankfully, for-profit hospital I visited was staffed by doc- there were no embarrassing questions. I tors and nurses who showed me extraordinary noticed that the other nurses were actually kindness and treated me with gentleness. ordering patients about in the imperative After the nurse had made sure that I under- voice. One nurse told a lady who was clearly stood the procedure and that I could under- in pain to sit in another chair and after the stand all the directions, the doctor who patient said she was more comfortable where administered the epidural injection intro- she was, the nurse pointed to the other chair Tom Palmer is fellow in social thought at the Cato and said, “No. Sit!” When that same nurse Institute and a member of the board of trustees of the ~~ approached me, I think that my look told her Foundation for Economic Education. that I had no intention of being treated like an 32 ===== PAGE 33 ===== 33 enrollee in obedience school. Wordlessly, she work. After all, if I need additional treatment pointed at the examination room, which I or if I find myself asked for a recommenda- entered. tion, I’m going to think of the for-profit hos- The administering doctor walked in. No pital. But I will neither go back to nor rec- introduction. No name. No hand to shake. He ommend the nonprofit hospital, and I think I looked at my file, muttered to himself, and know why: the doctors and nurses there had told me to sit on the bed, pull down my pants, no reason to want me to. And now I also and hoist my shirt. I told him that the proce- understand why the nonprofit hospital could dure had been done before while I was lying fit me in so quickly. I doubt they had many on my side, and that that position was more repeat customers. comfortable, since sitting was quite painful. The experience does not suggest that prof- He said that he preferred it with me sitting. I its are a necessary or even sufficient condition responded that I preferred to lie on my side. for compassion, benevolence, or courtesy. 1 He said that sitting allowed better access, work at a nonprofit organization, which is which was at least a reason that appealed to dependent on the continued support of a wide my interests as well as his, so I acquiesced. base of donors. If I were to fail to fulfill my Then, unlike the doctor in the for-profit hos- fiduciary obligations to them, they would stop pital, he slammed in the needle and injected supporting my work. It so happens that I and the medication with such surprising and ago- my colleagues work there because we share nizing force that it caused me to let loose a the same concerns as the donors, so the real yell, quite unlike my previous experience. arrangement works out harmoniously. But Then he removed the needle, made a note in when the donors, the employees, and the his file, and disappeared. The nurse handed “clients” (whether people in pain or journal- me a sheet of paper and pointed the way out. ists and educators in need of information and I paid and left. insight) don’t all share the same values or goals, as in the nonprofit hospital, the profit motive acts powerfully to bring those goals into harmony. That’s too small a set of experiences on the Profits earned in the context of well-defined basis of which to compare for-profit and non- and enforced legal rights (as distinguished profit medicine. But it may suggest some- from the profits that accrue to being a brilliant thing about the profit motive and its relation thief) may provide the foundation not of cold- to compassion. It’s not that for-profit hospi- ness, but of compassion. The search for prof- tals alone attract the kindly and compassion- it requires that the doctor consider the inter- ate, since the elderly volunteers in the non- ests of the patient by putting himself or her- profit hospital were surely kindly and com- self into the patient’s position, to imagine the passionate. But I can’t help thinking that the suffering of others, to have compassion. In a doctors and nurses who worked in a for-prof- free-market economy, the profit motive may it pain clinic in a for-profit hospital had some be but another name for the compassion incentive to exercise their compassion at motive. OJ Profit and Compassion The apple icon @ identifies articles that are appropriate for teaching students sever- al major subjects—including economics, history, government, philosophy, and current issues. We also provide sample lesson plans for these articles on our Web site www.fee.org and in written form. Professors, teachers, and homeschooling parents need only to visit our Web site or request written lesson plans to take advantage of this unique service. ===== PAGE 34 ===== Peripatetics by Sheldon Richman IDEAS ¥ Government ON [IBERTY Ocrtoser 2000 The Big One? case may be headed to the U.S. Supreme Before discussing the current case, it is Court that could legally resolve the dis- worth a quick detour to mention the gun con- pute over what the Second Amendment trollers’ favorite Supreme Court case, the means. In a reasonable world no ruling would 1939 U.S. v. Miller, which involved the inter- be required, since these words couldn’t be state movement of an unregistered and more straightforward: “A well regulated mili- untaxed sawed-off shotgun allegedly in viola- tia being necessary for the security of a free tion of the 1934 National Firearms Act. The state, the right of the people to keep and bear case would seem to comfort the gun con- arms shall not be infringed.” trollers on two counts: First, the Court said But politically we don’t live in a reasonable the Second Amendment was written “with the world, and some people say those words mean obvious purpose to assure the continuation that the individual states may maintain and render possible the effectiveness of” National Guard units. The National Guard the militia that the Constitution authorizes wasn’t established until 1903 and since 1933 Congress to call forth, organize, arm, and has been under federal jurisdiction. Go discipline. figure." Second, the case hinged on whether a Moreover, in an important sense, it really sawed-off shotgun is a military weapon: “In doesn’t matter what the Second Amendment the absence of any evidence tending to show means. When someone urges the central gov- that possession or use of a ‘shotgun having a ernment to exercise a power, such as putting barrel of less than eighteen inches in length’ restrictions on the possession of arms, one at this time has some reasonable relationship should consult the main Constitution, not the to the preservation or efficiency of a well reg- Bill of Rights. The matter to be decided is not ulated militia, we cannot say that the Second whether the people have a certain right, but Amendment guarantees the right to keep whether the central government has been del- and bear such an instrument.” The case was egated a certain power. As the framers saw it, sent back to the lower courts, but it was not in a free republic individuals may do anything pursued because Miller had died and his except that which is expressly and by due codefendant had disappeared. process forbidden, while government may not A close reading shows that this case is no do anything except that which is expressly help to what has been dubbed the anti-self- permitted. Nowhere does the Constitution defense lobby. On the first point, the Court empower the government to restrict the pos- quickly noted that the term “militia” refers session of firearms. not to a special force like the National Guard: DE — } } *See my article, “Reading the Second Amendment,” The Free- Sheldon Richman is editor of Ideas on Liberty. man: Ideas on Liberty, February 1998. 34 ===== PAGE 35 ===== 35 “[T]he history and legislation of Colonies Second Amendment rights. . . . That such a and States, and the writings of approved com- routine civil order has such extensive conse- mentators . . . show plainly enough that the quences totally attenuated from divorce pro- Militia comprised all males physically capa- ceedings makes the statute unconstitutional.” ble of acting in concert for the common His opinion goes far beyond that. It is a ver- defense.” On July 5, the U.S. Eight Circuit itable treatise on the textual structure of and Court of appeals, citing Miller, acknowledged history and political philosophy behind the that “an individual's right to keep and bear Second Amendment, drawing on the best arms is constitutionally protected” (U.S. v. classical-liberal constitutional scholars. Savor Hutzell). his words: On the second point, the fact that the Court wondered whether a sawed-off shotgun was The plain language of the amendment, appropriate for military use implies that without attenuate inferences therefrom, weapons unambiguously appropriate for mili- shows that the function of the subordinate tary use (assault rifles, for example) are cov- clause was not to qualify the right, but ered even by the gun controllers’ distorted instead to show why it must be protected. rendering of the Second Amendment. The right exists independent of the exis- tence of the militia. If this right were not protected, the existence of the militia, and consequently the security of the state, Now we come to the pending case. It has an would be jeopardized. inauspicious origin. In 1998 the wife of Dr. Timothy Joe Emerson of Texas sued him for (The opinion and other material can be found divorce. She also applied for a temporary at the Second Amendment Foundation’s Web restraining order, a common instrument used site, www.saf.org.) to protect a party’s financial and other inter- The government of course appealed. ests. At the hearing on her application Mrs. According to gun writer Neal Knox, last Emerson said her husband had threatened her June’s hearing before the Circuit Court of adulterous lover over the telephone, but the Appeals three-judge panel had some note- judge made no finding in that matter. worthy moments. In response to a judge’s What Emerson did not know at the time— question, the Justice Department’s lawyer said and what no one informed him—was that at the Second Amendment protected no individ- the moment the restraining order was issued, ual right. When the judge asked if that meant he became a criminal under a little-known the government could outlaw his shotgun, 1994 federal law that forbids someone under the lawyer said yes. The judge, a Clinton such an order to possess a firearm. He owns a appointee, proceeded to list the guns he owns. handgun. Sometime later he displayed the gun Then pointing to the senior judge seated next to Mrs. Emerson, which led to his indictment to him, he said “between us [we] have enough for violating the federal statute (but not any guns to start a revolution in most South Amer- state law pertaining to endangerment). Emer- ican countries.” son challenged the constitutionality of the law Two of the judges apparently made no on Second Amendment and other grounds, effort to hide their view that the government and—mirabile dictu!—Federal District Judge misunderstands the Miller case, on which it Sam R. Cummings dismissed the indictment bases its appeal. For one thing, there is no because the law “allows a state court divorce question about Emersons handgun being proceeding, without particularized findings of appropriate for military purposes. It’s a the threat of future violence, to automatically Beretta Model 92 9mm pistol-a standard mil- deprive a citizen of his Second Amendment itary weapon. rights. . . . It is absurd that a boilerplate state As of September 1, the appeals court hadn’t court divorce order can collaterally and auto- ruled yet, but either way, the next stop will matically extinguish a law-abiding citizens likely be the Supreme Court. C] U.S. v. Emerson ===== PAGE 36 ===== IDEAS ON IBERTY OcTtoBer 2000 Does Rape Violate the Commerce Clause? by Wendy McElroy ast spring the U.S. Supreme Court struck ed that the issue under consideration was down as unconstitutional a key section of “Did Congress exceed its powers when it gave the 1994 Violence Against Women Act victims of sex crimes the right to file civil (VAWA). That section allowed a victim of lawsuits against their attackers?” The Court rape or other violence “motivated by gender” answered yes. Writing for the 5-4 majority, to sue the perpetrator for civil damages in Chief Justice William H. Rehnquist conclud- federal court for violating her civil rights. ed that a federal civil remedy for such crimes The act was part of the 1994 Omnibus could be justified by none of the constitution- Crime Bill. It established both a federal right al provisions invoked by those who defended to be “free from crimes of violence motivated the act. by gender” and a federal remedy for violating Two constitutional arguments were used by that night: namely, a new tort claim that defenders: first, that violence against women included both compensatory and punitive interferes with interstate trade and thus vio- damages. The federal claim was not meant to lates the Commerce Clause by which Con- replace punishment by state criminal statutes gress may regulate interstate commerce to but to supplement them. ensure the free flow of goods and services, In 1995, Christy Brzonkala became the first and second, that the Fourteenth Amendment person to sue under the act, over a rape that protects citizens against violation of due allegedly occurred in her dormitory room process, which occurred in Brzonkala’s case while she was a student at Virginia Polytech- because the state courts were indifferent to nic Institute. The men accused—two football violence against women. Both parts of the players named James Crawford and Antonio Constitution had also been used to support the Morrison—had been cleared by both a uni- act during lengthy congressional hearings. versity judicial committee and a criminal grand jury. Nevertheless, Brzonkala broughta The Commerce Clause case against them in federal court. In 1999 the U.S. Court of Appeals for the Fourth Circuit and VAWA (Richmond, Va.) ruled against her, saying that The Commerce Clause (Article I, Section Congress had exceeded its constitutional 8, Clause 3) delegates to Congress the power authority in passing VAWA. to “regulate Commerce with foreign Nations, U.S. v. Morrison eventually came before the and among the several States, and with the Supreme Court. In its decision the Court stat- Indian Tribes.” The clause gave a broad grant of authority over commerce to Congress with- Contributing editor Wendy McElroy is the author of Out clearly delineating restrictions on that The Rational Woman. power. The purpose was to overcome the ten- 36 ===== PAGE 37 ===== 37 dency of states to interfere with trade through cult to perceive any limitation on federal tariffs, which had caused great problems, power, even in areas such as criminal law especially for the smaller states, under the enforcement or education where states histor- Articles of Confederation. Interstate com- ically have been sovereign. Thus if we were to merce was deemed to require uniform laws accept the Government’s arguments, we are to encourage nationwide trade. According to hard-pressed to posit any activity by an indi- Roger Pilon in the Cato Handbook for Con- vidual that Congress is without power to reg- gress (www.cato.org/pubs/handbook/hb105-3. ulate.” (In September 1996, Congress passed html), “Framers gave Congress the power to a revised Gun-Free School Zones Act, confin- regulate—or ‘make regular’—commerce ing it to guns that pass through interstate among the states. It was thus meant to be a commerce.) power primarily to facilitate free trade.” VAWA was another example of an expan- Court decisions dating from the days of sive reading of the Commerce Clause. Advo- Franklin Roosevelt’s New Deal have inter- cates stated that violence against women and preted the clause so as to grant Congress fear of violence reduced women’s productivi- the right to regulate virtually anything that ty and mobility as employees. Women com- affects interstate commerce. As a result, Pilon monly lose their jobs after being injured, it observes, Congress used the regulation of was argued. The cost of sexual violence to the commerce among the states “for all manner of national economy was estimated at between social and economic purposes, actually frus- $5 billion and $10 billion. trat[ing] the free flow of commerce.” For In 1999 the Fourth Circuit Court of Appeals example, the Church Arson Prevention Act of rejected this reasoning on the grounds that to 1996 gave the federal government power to extend the Commerce Clause “beyond the prosecute those who burned down churches context of statutes regulating economic activ- on the grounds that such arson impeded “indi- ities and uphold a statute regulating noneco- viduals in moving interstate.” With such broad nomic activity merely because that activity, in interpretations, Congress has repeatedly the aggregate, has an attenuated, though real, used the Commerce Clause to regulate non- effect on the economy, and therefore presum- economic conduct that crosses state lines, ably on interstate commerce, would be effec- such as child custody. Advocates of states’ tively to remove all limits on federal authori- rights have opposed Congress’s expanding ty, and to render unto Congress a police power power under the Commerce Clause because impermissible under our Constitution.” the increased federal authority often infringes The Supreme Court agreed. on areas that have traditionally been under the jurisdiction of the states. The Fourteenth Amendment In recent years, the Court has begun to take and VAWA a different view, producing a tug of war between it and Congress. In 1995 the Court The second argument for the constitutional- ruled (5-4) in US. v. Lopez that Congress had ity of VAWA was based on the Fourteenth exceeded its authority under the Commerce Amendment, by which Congress may protect Clause in passing the Gun-Free School Zones citizens against state violations of their rights. Act of 1990, which prohibited the possession Section 1 of the amendment states in part, of a firearm within 1,000 feet of a school. In “nor shall any state deprive any person of life, defending the act before the Court, the Clin- liberty, or property, without due process of ton Justice Department argued that guns and law; nor deny to any person within its juris- crime disrupt education, which in turn dis- diction the equal protection of the laws.” Dur- rupts the employment opportunities of stu- ing the 1994 congressional debates on the act, dents and thus interstate commerce. Chief dozens of studies were cited to support the Justice Rehnquist, again writing for the contention that women were hindered from majority decision, stated, “Under the theories seeking relief for crimes such as rape because that the Government presented, . . . it is diffi- state judicial systems did not consider them as ===== PAGE 38 ===== 38 IDEAS ON LIBERTY ® OCTOBER 2000 serious as other violent crimes. Brzonkala feminists have tried to equate pornography claimed that the state courts had denied her with discrimination on the basis of sex, thus due process because of their indifference to bypassing First Amendment concerns. violence against women. Thus she sought The second advantage of the civil courts is relief in the federal courts. that they are far less stringent than criminal Chief Justice Rehnquist disagreed with this ones. This factor is particularly important for logic and found, instead, that the Fourteenth crimes such as rape that are notoriously diffi- Amendment prohibited discrimination only cult to prove. In a criminal court the alleged by the states and not by private individuals. victim must sustain her.case beyond a reason- The proper defendant under the amendment able doubt. Civil court requires only a pre- would have been the state of Virginia, not ponderance of the evidence, which can mean Morrison. Moreover, he held that following as little as 51 percent certainty. Moreover, in the logic of VAWA would “completely oblit- civil court, the rules of evidence are more erate the Constitutions distinction between relaxed. Therefore, a rape case dismissed by a national and local authority.” criminal court may well succeed in a civil Political observers may be astonished to action. In the matter of Brzonkala, the defen- hear politically correct feminists appealing to dants did not even reach criminal court: a the Constitution, which they often vilify as a grand jury found insufficient evidence to “dead white male document” drafted by slave- indict. Nevertheless, VAWA allowed her to owners. In fact, the Commerce Clause and the bring civil suit against them. In short, it Fourteenth Amendment were arguments of allowed her to pursue a criminal case that was convenience and part of a well-established too weak to be admitted into criminal court. campaign to use civil litigation as a weapon against “gender-motivated” violence. VAWA attempted to use federal remedies if state ones proved unsatisfactory. In her book Toward a Ominously, VAWA does not clearly delin- Feminist Theory of the State, Catharine eate what constitutes “gender-motivated vio- MacKinnon describes what she calls “Femi- lence,” allowing the term to cover conceivably nist Jurisprudence,” writing, “Civil remedies any situation of abuse that involves sexual in women’s hands would be emphasized.” hostility. This is promising for feminists who The civil court system—which deals with routinely consider even words and images to private harms—affords at least two advan- be a form of sexual violence. Such logic led tages for PC feminists. First, it allows women Supreme Court Justice Sandra Day O’Connor Statutory Vagueness to punish “abuses” that fall outside the crimi- to state, “Your approach . . . would justify a nal statutes. Second, it has less stringent stan- federal remedy for alimony or child support.” dards than the criminal court system. Arguably, that is precisely what radical femi- To address the first advantage: men who are nists wanted and hoped to achieve through not criminals, and so are of no concern to the VAWA. police, can nevertheless be punished through Such feminists want a war on “gender vio- civil money damages. For example, sexual lence” similar to the War on Drugs—that is, harassment laws are rooted in Title VII, the zero tolerance backed by maximum force. To fair employment provision of the Civil Rights this end, VAWA attempts to create a special Act of 1964, which provides civil penalties. class of crime defined by ideology. A major Perhaps the first example of radical feminist tenet of radical feminism is that violence use of the civil courts comes from the Min- against women is part of a political campaign neapolis Anti-Pornography Ordinance of that men as a class inflict on women as a class. 1983, which would have given individual The fact that real violence against women— women or groups of women the right to sue murder, battery, rape—has been steady and producers or distributors of pornography for steeply declining since 1990 in no way affects damages. (The ordinance was vetoed by the their passionate cry for harsher enforcement. mayor.) Through such local measures, radical Facts are often irrelevant to ideology. In refus- ===== PAGE 39 ===== DoES RAPE VIOLATE THE COMMERCE CLAUSE? 39 ing to expand congressional power under the drive toward nationalizing selected crimes, a Commerce Clause, the Supreme Court deci- return to fundamental constitutional consider- sion inadvertently dealt an unexpected blow ations and to the rule of law. William Mellor, to this feminist agenda. It was unexpected president of the Institute for Justice, explained because the Supreme Court tends to overturn that the decision addressed “whether or not rather than to uphold earlier rulings in the the Congress operates under enumerated and, cases it hears. Moreover, Justice O’Connor therefore, limited powers; or whether it has has a strong track record of ruling in favor of authority to basically regulate any activity it “women’s rights,” yet she voted with the sees fit.” majority. The most loudly debated question sur- No wonder National Organization for rounding the Morrison decision will be its Women (NOW) president Patricia Ireland felt impact on violence against women. Some betrayed. She declared, “The Supreme Court have argued that VAWA’s civil-rights remedy has said not just that women’s right to be free would not have benefited many women any- from violence is not protected by the U.S. way. In cases of rape, for instance, the perpe- Constitution but that the Constitution actually trator rarely has real assets that can be prohibits Congress from providing such pro- attached in a judgment. Arguably, the real tection. I've never seen a more compelling beneficiaries of VAWA would have been argument for a constitutional amendment women who bring “deep pocket” defendants guaranteeing women’s equality.” to court: for example, well-to-do women in NOW further proclaimed, “The Rehnquist divorce proceedings who might use the law as Court’s ruling in U.S. v. Morrison is a setback leverage, or women who have complaints for women’s rights and a triumph for those against entities such as universities. that seek to roll back 30 years of federal civil VAWA’s greatest value to its proponents rights law under the guise of states’ rights. may be as an ideological symbol. It symbol- .. . For them, ending violence against women izes and institutionalizes the political belief takes a back seat to preserving states’ rights that women must receive special protection to deal with violence—or not deal with it at from men. When confronted with violence all.” and its redress, VAWA said that women are not to be treated as individuals but are to be . accorded privileges as the members of a class. Impact of U.S. v. Morrison Yet Curt Levey, an attorney for the Center for With the likes of NOW and Hillary Clinton Individual Rights (CIR), which represented calling for a restoration of VAWA, the issue is Antonio Morrison, commented that “although not likely to vanish from the political scene. today’s decision will be viewed as a historic But it is a mistake to view the Supreme Court setback for feminist advocacy groups, it is a decision as an attack on women in any man- victory for American women, whose safety is ner. As Senator Joseph R. Biden, Jr, an advo- best preserved by strengthening local law cate of VAWA, declared, “this decision is real- enforcement, rather than by relying on feder- ly all about power: who has the power, the al bureaucrats.” court or Congress?” The Supreme Court’s decision was not a The case was a victory for those who wish blow to women’s equality or safety, which was to limit congressional power. In rejecting not at issue. It was an attempt to check the VAWA, the U.S. Court of Appeals stated, seemingly infinite and unenumerated powers “Such a statute . . . cannot be reconciled with claimed by Congress. As Michael E. Rosman, the principles of limited federal government CIR general counsel, put it, “The court is now upon which this nation is founded.” Morrison requiring Congress to toe the constitutional constitutes a stop sign in the recent political line.” ] ===== PAGE 40 ===== IDEAS ON [IBERTY OcToBER 2000 Harmful Tax Practices? by David N. Laband he Organization for Economic Coopera- welfare caused by tax-induced distortions in tion and Development (OECD), a Paris- capital and financial flows and to protect their based group of 29 governments (including the tax bases” (emphasis added). Evidently, the U.S. government) is demonizing tax havens OECD has a problem with tax competition: around the world. Consider this statement “If nothing is done, governments may increas- from a recent OECD report: “Harmful tax ingly be forced to engage in competitive tax practices may exist when regimes are tailored bidding to attract or retain mobile activities. to erode the tax base of other countries. This That ‘race to the bottom’, where location and can occur when tax regimes attract investment financing decisions become primarily tax dri- or savings originating elsewhere and when ven, will mean that capital and financial flows they facilitate the avoidance of other coun- will be distorted and it will become more dif- tries’ taxes.” ficult to achieve fair competition for real eco- In June the OECD published a list of 35 tax nomic activities.” havens, warning of sanctions a year from now Furthermore, the OECD warns that tax if these countries fail to change their ways. A havens make collecting taxes on “mobile CNN.com story quoted from an OECD state- activities” difficult—creating serious conse- ment that these countries “are being given the quences: “If spending is not reduced to make opportunity over the next 12 months to deter- up for this revenue loss there is a real risk that mine whether or not they wish to work with taxes on labour, consumption and non-mobile the OECD to eliminate harmful features of activities will need to be increased. This shift their regime” and that “defensive measures” will make tax systems less equitable and, by could be taken against places that chose notto narrowing the tax base, will introduce further conform with international tax standards. distortions. By increasing non-wage labour The OECD Web site (see note) is particu- costs, it may also have a negative impact on larly illuminating. Beneath the headline employment... . The potential impact of these “Harmful Tax Practices” is written: “Globali- developments is significant.” sation and new electronic technologies can OECD estimates that “foreign direct invest- permit a proliferation of tax regimes designed ment by G7 countries in a number of jurisdic- to attract geographically mobile activities. tions in the Caribbean and in the South Pacif- Governments must take measures, in particu- ic island states, which are generally consid- lar intensifying their international coopera- tion, to avoid the world-wide reduction in ———— : . *Organization for Economic Cooperation and Development, ; ; :_ “Harmful Tax Practices,” www.oecd.org/daf/fa/harm_tax/harmtax. David Laband teaches economics at the Forest Poli htm#Report. According to the organization's Web site, the OECD cy Center, Choo of Forestry and Wildlife Sciences, wo importantly, provides governments a setting in which to dis- Auburn University. cuss, develop and perfect economic and social policy.” 40 ===== PAGE 41 ===== 41 ered to be low-tax jurisdictions, increased or Montenegro. The seeking of a safe haven is more than five-fold over the period 1985-1994, symptomatic of underlying pathology in the to more than US$200billion.” home country; it is not the pathology itself. Sounds bad, huh? Well, it is bad. Only the Not everyone who is oppressed can or will real problem is that the OECD is trying to kill move. A variety of factors (family or social a tried-and-true cure for the underlying prob- reasons, not easily transferable labor skills, lem of high taxes. Throughout recorded histo- immobile physical capital, religious beliefs) ry, when taxes, social or religious policies, or may make an individual immobile, despite other political conditions have become oner- political, religious, social or other oppression. ous, freedom-loving individuals have either It hardly seems efficient to preclude those fought to overthrow the oppression or fled to who are willing and able to move on the other locations where they were not so grounds that there are others who are unable oppressed. Like the Pilgrims who fled reli- or unwilling to do so. gious persecution in England in favor of Yet that is exactly what the OECD argues America, the oppressed vote with their feet. for: “There is no reason why taxpayers that do This clearly is welfare-enhancing for the for- not or cannot take advantage of harmful tax merly oppressed individuals, although likely practices should have to pay the taxes avoided welfare-reducing for the former oppressors. by those who have easy access to tax havens On net, it almost certainly is the case that and harmful preferential tax regimes.” social welfare is enhanced by voting with the This position reflects only one possibility feet; otherwise the oppressors would have and one that likely misses the mark by a wide been willing and able to strike a bargain with margin. Perhaps those left behind should pay the oppressed to induce them not to leave. the taxes avoided by those who have fled to tax havens. If one group of citizens is politi- cally able to use the fiat power of the state to force everyone to pay taxes to fund projects Corporate raiders specialize in taking over valued highly only by members of that group mismanaged companies and finding better but abhorred by everyone else, welfare is management. The raider is not the cause of enhanced by increasing the taxes on the for- the acquired company’s problems; he is an mer and reducing taxes on the latter. Seeking entrepreneur who helps cure the underlying tax havens is one way of accomplishing this problem of mismanagement. Similarly, capi- result; eliminating tax havens in this context tal flight away from political mismanagement is welfare-reducing, not welfare-enhancing. serves the same purpose. Whether the politi- Back to the issue of causation: the problem cal mismanagement takes the form of direct here is not tax havens and not mobile capital. seizure of real or financial assets or indirect Tax havens do not create mobile capital. seizure through high taxes or onerous regula- Rather, mobile capital (just like mobile labor) tion, capital flight sends an unmistakable mes- continuously seeks a better place to live. The sage that individuals are oppressed. Labor real problem is high taxes and oppression. flight serves the same purpose. The point is, High taxes reduce the return to owners of cap- the problem does not originate in the country ital and labor. The owners of both react pre- where the owners of labor and capital settle; it dictably: by reducing the amount of capital originates rather in the country from which and labor they supply. They do so either by the owners of labor and capital fled. converting their immobile capital to mobile Indeed, if the discussion were focused on capital and leaving the area entirely in favor the large-scale movement of politically or eth- of a location where the returns are higher, or nically oppressed refugees from Rwanda to by refusing to work (or to put their capital to Uganda or from Kosovo to Montenegro, there work). Either way, the impact of high taxes is likely would be strong agreement within welfare-reducing. By implication, then, the OECD that the real problems lay in Rwanda impact of tax havens is unmistakably welfare- and Kosovo, not in the safe havens of Uganda enhancing. The more capital (or labor) that Fleeing Oppression ===== PAGE 42 ===== 42 IDEAS ON LIBERTY ® OCTOBER 2000 flees to tax havens, the stronger the message simultaneously doing its utmost to prevent an sent to the politicians that taxes are too high. effective flow of information from taxpayers This is information that political leaders need to politicians. Absent this information, taxes to have in order to make fully informed deci- almost certainly will be too high. sions about tax policy. Full information is a The OECD policy initiative (Forum on sine qua non of efficient decision-making. Harmful Tax Practices) that is responsible for Key factors used by the OECD in identify- identifying and attacking tax havens does not ing and assessing harmful preferential tax promote welfare (although it claims to, of regimes include no or low effective tax rates, course). Rather, it is a mechanism designed to lack of transparency, and lack of effective protect members of the OECD cartel. A rea- exchange of information. It is ironic, if not sonable person could infer the OECD’ real hypocritical, that the OECD faults tax havens intent from the previously highlighted quote for their lack of “transparency” and lack of from its Web site: countries need “to protect effective exchange of information while their tax bases.” Enough said. OJ 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 43 ===== Economic Notions by Dwight R. Lee » Economics Marginalism and the Morality of Pricing Human Lives hen I ask students in my large econom- omists talk about the price of human life, they ics classes if some things are just too are referring to the marginal value of life— important to put a price on, someone always the value of a slightly longer life expectan- answers, “human life.” This seems like a rea- cy—not the total value. The total value we put sonable answer. After all, how many people on our lives is extremely high (in most cases would sacrifice their lives for cash, no matter infinite), so we would not agree to be killed how much was offered? What is the point of for any amount of money. Yet we put a very being a rich corpse? But economists reject the low marginal value on our lives. We routinely notion that human life is priceless. They puta do things that reduce our life expectancy by price on human life, not because they are marginal amounts in return for rather minor uncaring, callous, and completely lacking in conveniences and pleasures. We often stay up moral sensitivity, but because they have a pro- too late, eat and drink too much, fail to get fessional interest in understanding human enough exercise, and drive too fast. When we action and because they understand that there do so, we are putting a price on our lives, and is nothing morally lacking about pricing a pretty low price. Just how much is it worth human life. to eat that extra cream puff or drink that extra All of us put a price on our own lives every beer? You would probably forgo the cream day with the choices we make and the actions puff for $10, but not to avoid reducing your we take. And pricing human life provides life expectancy by a marginal amount. If so, information that can save large numbers of the implication is clear—the marginal value, lives, certainly not an immoral activity. or price, you place on your life is no more Unfortunately, the moral superiority that so than $10. many people feel when expressing outrage at pricing human life helps keep in place gov- The Risks of Government ernment policies that cause many people to . . die needlessly. Policies to Reduce Risks Recognizing that prices reflect the margin- There is nothing wrong or irrational about al value of things is the key to understanding putting a low marginal value on our lives. We why economists put prices on human life. The face tradeoffs in everything we do, and living price of asparagus gives us information onthe a meaningful and satisfying life requires value of one more pound of asparagus, not the doing things that reduce how long we can value of the entire crop. Similarly, when econ- expect to live. It is sensible to avoid paying Dwight Lee is Ramsey Professor at the Terry College very much to avoid very small risks and the of Business, University of Georgia, and an adjunct corresponding reductions in life expectancy. fellow at the Center for the Study of American Busi- In many situations We can choose how ness at Washington University in St. Louis. much to pay to avoid risks. We can choose to 43 ===== PAGE 44 ===== 44 IDEAS ON LIBERTY ® OCTOBER 2000 sacrifice time by slowing down a little, taking between wealth and life expectancy. Obvious- a somewhat less dangerous job that pays a lit- ly healthy people are more productive and tle less, or buying a slip-resistant rubber mat therefore wealthier. But cause and effect also for the bathtub (bathtubs are dangerous goes the other way; studies show that costly places). Government policy attempts to policies, by reducing our wealth, also reduce reduce many risks we face, but we have little life expectancy, with an estimated one life lost choice in how much we pay for the risk reduc- for every $10 million to $50 million in regu- tion we receive. The justification for govern- lation costs. Using the $50 million estimate, ment action is that the risks are general, like this implies that saving one life with the the risks from pollution, and it would be diffi- formaldehyde regulation would cause the loss cult, if not impossible, for individuals to pro- of over 1,854 lives due to reduced wealth. tect themselves acting alone. This is a reason- Another problem with extremely costly able justification for some risks, although it regulations to reduce risk brings us back to cannot be used for many government regula- the importance of marginal considerations. tions, such as those requiring seat-belt use When the marginal cost of saving life is high- or outlawing smoking in all bars. But even er with one regulation than with another, it is when government action is justified, it doesn’t possible to save more lives at the same cost by make sense to enact regulations that make reducing the high-marginal-cost regulation people pay more to reduce risks than the and expanding the low-marginal-cost regula- reduction is worth. Unfortunately, this is com- tion. For example, if the EPA land-disposal mon practice. regulation (which saves fewer than three According to many studies of how much lives) were scrapped, and just a small portion people pay for safety devices and how much of the $4.5 billion in saving were used to income they sacrifice to take safer jobs, they expand low-marginal-cost-per-life-saved reg- are willing to spend from $3 million to $7 ulation, thousands of additional lives could be million to save a life. Yet many government saved and there would be a net reduction in regulations impose a far greater cost per life government regulation. In addition, by reduc- saved. For example, Environmental Protec- ing costly regulations, more resources would tion Agency (EPA) regulations on benzene be available for the creation of wealth and this storage are estimated to cost $260 million per would save even more lives. life saved; EPA regulations on contaminated By refusing to put a price on human life gov- land disposal over $4.5 billion per life saved; ernment regulators can justify regulations with and Occupational Safety and Health Adminis- extremely high costs for a life saved. Despite tration (OSHA) regulations on formaldehyde the superficial morality suggested by this over $92.7 billion per life saved.” The prob- “save-a-life-at-any-cost” approach to regula- lem with the high regulatory cost of saving a tion, the result is more lives lost than if the life is not only that these costs are far higher marginal cost of saving lives were consid- than the amount individuals would pay, but ered—ifa price were put on human life—when that these regulations increase the number of we legislate and implement regulations. Od lives lost. Such costly policies may reduce some *The figures in this and subsequent paragraphs come from W. : : Kip Viscusi, “The Dangers of Unbounded Commitments to Regulate risks, but they also reduce wealth, and there is p80 EO Rok, Costs, and Lives Saved (New plenty of evidence of a positive relationship York: Oxford University Press, 1996), pp. 135-66. ===== PAGE 45 ===== IDEAS ON [IBERTY OctoBer 2000 Patents and Monopoly Privilege by Christopher Mayer “Discovery can give no right of ownership, for whatever is discovered must have been already here to be discovered. If a man makes a wheelbarrow, or a book, or a picture, he has a moral right to that particular wheelbarrow, or book, or picture, but no right to ask that others be prevented from making similar things. Such a prohibition, though given for the purpose of stimulating discovery and invention, really in the long run operates as a check upon them.” —HENRY GEORGE Progress and Poverty he role and scope of patents has recently Former software executive and angel emerged as a point of debate among investor Peter Schaeffer has railed against pundits, legislators, and corporate execu- “promiscuous patenting” and noted that “I tives. High-profile legal battles, such as those have not seen any evidence that the Patent between Amazon.com and Barnes and Noble Office really understands software.”! over one-click shopping and between Price- Many cases could serve to illustrate Schaef- line.com and Microsoft over price-searching fer’s point. Two MIT professors filed a software, have drawn attention to the inade- software patent infringement suit against quacy of the current system of patent law. AskJeeves. They allege that the Internet Jeff Bezos, who is Amazon.com’s chief search engine company’s “natural language executive, recently called for a revision in the queries,” which conduct searches based on patent protection afforded to software and questions in plain English, violate their Internet companies primarily by shortening patent. They are seeking royalty payments and the duration of patents to three to five years an order to prevent AskJeeves from selling or instead of the current 17-year term. using natural-language—based tools.? And beneath these more prominent compa- This case has yet to be decided and the nies, many smaller entrepreneurs and start- legal experts who have commented on it say ups are beset with what they perceive as friv- that the professors won’t win. However, many olous lawsuits regarding new software and cases have been successful so far. In Decem- business processes.’ ber 1999, a federal court granted Amazon a temporary injunction against b&n.com Christopher Mayer is a commercial loan officer and (Barnes and Noble) for “one click” online freelance writer. Contact him at cwmayer@aol.com. shopping. In another recent case, Stac Elec- 45 ===== PAGE 46 ===== 46 IDEAS ON LIBERTY ® OCTOBER 2000 tronics won a $120 million suit against pendent discoverers are not penalized and Microsoft. The threat of patent litigation is copyright infringement is not ruled in cases quickly becoming a big problem for many where similar works were produced indepen- technology companies. dently. In this way, copyright infringement is “Promiscuous patenting” is not new. In the implicit theft. 1970s, SCM Corporation brought a suit As Henry George wrote, “The copyright is against Xerox Corporation charging that the not a right to the exclusive use of a fact, an company was maintaining a “patent thicket” idea, or a combination. . . . It does not prevent of sleeping patents to pre-empt rivals. The anyone from using for himself the facts, the court acknowledged Xerox’s success in build- knowledge, the laws or combinations for a ing a web of patents to deter rivals, but similar production, but only using the identi- nonetheless ruled that SCM was not entitled cal form of a particular book.” For George, to any damages because Xerox's patents were then, a copyright rests on “the natural, moral obtained legally. right of each one to enjoy the products of his While not new, the problem will only get own exertion, and involves no interference more serious in the so-called New Economy. with the similar right of any one else to do According to the U.S. Department of Com- likewise.” merce, the number of new patents issued A producer marks his work “copyright” annually nearly doubled from 60,000 per year and, as a condition of sale, the buyer agrees to over 110,000 per year from 1970 to 1992. not to reproduce the work. This is part of a And yet, by the department’s own research, basic right of freedom of contract and would just over 6,000 new products were introduced be supported in a free market. Rothbard’s annually. This points to the fact that many “acid test” for any policy or law was: “Is the patents go unused or are employed as sleeping outlawed practice implicit or explicit theft? If patents to deter potential new rivals. it is, then the free market would outlaw it; if not, then its outlawry is itself government Rothbard’s Criti que interference in the free market.” While copyright has its basis in the prohi- The late Murray Rothbard provided free- bition of implicit theft, the patent has no such market advocates with a systematic critique basis and is thus completely different in its of the patent system that gives many answers enforcement. and points to a way out of the current confu- As Rothbard notes, the patent is an exclu- sion. The analysis, which is presented in his sive grant of monopoly privilege for the first treatise, Man, Economy, and State, is the inventor. Any subsequent inventors, no matter source of the Rothbard quotations below and how unaware they were of the first inventor’ the basis for this discussion.3 efforts, are debarred by violence from using Nearly everyone seems to want to treat their invention. patents and copyrights in the same way. Two Henry George, in comparing the patent and notable exceptions are Rothbard and Henry copyright, wrote, “The patent, on the other George. As Rothbard acknowledged, both a hand, prohibits any one from doing a similar patent and a copyright are exclusive property thing, and involves, usually for a specified rights and both protect innovations. However, time, an interference with the equal liberty on legal enforcement of the two differs. As Roth- which the right of ownership rests. . . . It pro- bard wrote, “The crucial difference is that hibits others from doing what has already copyright is a logical attribute of property been attempted.” right on the free market, while patent is a monopoly invasion of that right.” In a copyright infringement suit the plain- tiff must show that the defendant had access The patent is defended usually on grounds to and reproduced the work in violation of his that it encourages innovation and that with- contract with the seller. In other words, inde- out it, the incentive to incur the cost and Encouraging Innovation ===== PAGE 47 ===== PATENTS AND MONOPOLY PRIVILEGE 47 risk of inventions would be diminished. consumers and producers on the market.” To say the patent is needed because it Since resources are scarce, this artificial stim- encourages innovation is to implicitly assume ulation of patentable research comes at the that the free market is not innovative enough. expense of those technologies that are not This is an arbitrary belief, and patent defend- patentable. ers who espouse such a view are asserting The proper free-market policy is to extend their own arbitrary preferences. The free mar- copyright protection to inventors of machines, ket has its own rational test for any new processes, and the like and to eliminate the undertaking, indeed, for allocations of all whole body of patent law. Inventors could kinds: present against future, between differ- mark their creations “copyright,” serving ent branches of production, between different notice that anyone who buys the machine goods, and even between research expendi- buys it on the condition that it will not be tures and other forms of investment. Profits reproduced and sold. As Rothbard wrote, and losses guide entrepreneurs to serve con- “The patent is incompatible with the free sumers according to consumer preferences, as market precisely to the extent that it goes expressed in their buying and abstention from beyond the copyright.” buying. The copyright would be perpetual and Criticism of the pattern of production that would pass to the inventors heirs and assigns. emerges from the expressed preferences of Anything else would be a violation of the consumers is, then, arbitrary. In a free market, basic property right of ownership. Rothbard of course, those who believe that there is not wrote, “If the State decrees that a man’s prop- enough innovation are free to invest funds for erty ceases at a certain date, this means that this purpose or to undertake research pro- the State is the real owner and that it simply grams of their own. However, to force a dis- grants the man use of the property for a cer- tinct pattern of production through the use of tain period of time.” patents is a violation of property rights. Independent inventors ought to be allowed Second, without the existence of patents, to use and sell their invention, whether or not the incentive to innovate in patentable tech- someone else has the protection of the gov- nologies would be diminished. But under- ernment patent office. To prohibit that is to stand that with the existence of patents violate the property rights of independent dis- resources are artificially diverted from their coverers. J most economical use, again as expressed by 1. Dan Egbert, “Patents: The New Threat to Entrepreneurs?” in the buying public. As Rothbard wrote, “Coer- Washington Techway, March 13, 2000. cively to encourage research expenditures ~~ 2 Ibid . . . 3. Murray N. Rothbard, Man, Economy, and State (Los Angeles: would distort and hamper the satisfaction of Nash Publishing, 1970 [1962]), pp. 652-60. fi ===== PAGE 48 ===== IDEAS ON [IBERTY OcroBer 2000 Quartering Species by Andrew P. Morriss and Richard L. Stroup ost Americans seldom think about the and dens, for example, effectively ending the Third Amendment. Relegated by most ability to develop or otherwise use land. scholars and courts to footnotes and history What’s the connection with the Third books, the Third Amendment states, “No Sol- Amendment? We started wondering what dier shall, in time of peace be quartered in any would happen if we took one of the left’s house, without the consent of the Owner, nor favorite constitutional legal theories seriously in time of war, but in a manner to be pre- and applied former Supreme Court Justice scribed by law.” The federal government pays William Brennan's “living constitution” theo- for quartering soldiers, and military bases are ry to the Third Amendment. Could ESA pass highly sought after political prizes, not the constitutional muster? subject of popular discontent. Unlike some of the other parts of the Con- That wasn’t always the case, however. All stitution, the Third Amendment’s language during the colonial period Americans resisted appears to be straightforward with a plain and British military authorities’ attempts to quarter obvious meaning: The Founders did not want soldiers on individuals’ property without com- soldiers put into people’s houses in peacetime pensation. That experience led to the Third without the homeowners consent or during Amendment’s inclusion in the Bill of Rights wartime without due process. But this is no and in numerous state constitutions as well. bar to a “living constitution” approach. Be The federal government may no longer forewarned—the “living constitution” is not involuntarily quarter troops but it is still for the faint of heart. And, we hasten to add, attempting to use private property to “quar- we don’t think it is a legitimate mode of con- ter” living creatures. Under the Endangered stitutional interpretation. But what if the same Species Act (ESA), the federal government courts that found nude dancing to be speech routinely forces private property owners to had to apply their theories of interpretation to bear the cost of supporting those species offi- the Third Amendment? In an article appearing cially listed as “endangered.” Those costs can this fall in Environmental Law, a leading envi- be substantial—many species require large ronmental law review, we argue that if the areas of undisturbed land around their nests Constitution forbids the government to quar- ter soldiers in private homes, then it forbids Andrew Morriss, an Ideas on Liberty contributing it also to require people to quarter birds, rats, editor, is professor of law and associate professor of or grizzly bears simply because they are economics at Case Western Reserve University. endangered.! Richard Stroup is professor of economics at Montana . . State University. They are both senior associates at Our law review essay in part poked fun at the Political Economy Research Center, Bozeman, the “living constitution” interpretations con- Montana. tinually being offered to “update” the Consti- 48 ===== PAGE 49 ===== 49 tution. Our essay was partly tongue-in-cheek, ESA’s failure is not due to a lack of fund- but the question is sensible: If it is wrong— ing. In 1993, for example, more than $500 legally and morally—for a person to be com- million federal dollars were spent on endan- manded to provide a home for a soldier, why gered species protections; the figure has been should he or she be commanded to offer food rapidly rising.6 States, too, bear substantial and lodging to animals? Here we outline the costs, running in some cases into the tens of legitimate comparison (minus the legalistic millions of dollars per year. Far more is spent debate over how expansively to interpret pro- by private sources across the nation. Indeed, visions of the Constitution). We begin with a the power of ESA comes from its ability to bit of history. use private property without compensation. And therein lies the problem. The ESA process today gives biologists of the Fish and Wildlife Service (FWS) veto Quartering problems in colonial America power over any use of land, public or private, became serious in 1754 and 1755 because the that they consider potentially important as French and Indian Wars caused additional home to a listed species. FWS biologists British troop movements. American inns were decide whether land can be used for logging, small, and Americans objected to quartering. farming, or building. They become, in impor- They resented sharing their homes with often tant respects, the land’s managers. They need rude and boorish strangers—at their own not consider the value of the alternative uses expense and at the sole discretion of the of the land. British military authorities. Some colonies Land is not, however, free, even when gov- enacted specific bans on quartering. ernment bureaucrats treat it that way. As a Now consider the Endangered Species Act, result, government land managers will allo- enacted by Congress in 1973. A sweeping cate “too much” land to habitat protection. piece of command-and-control legislation, it There are three reasons for that: dictates that species listed as “endangered” or First, a zero price is artificially low relative “threatened” will be granted extraordinary lev- to the cost of other methods, such as active els of protection from human beings. The Con- land management, that can add to land’s abil- gressional Research Service labeled ESA “one ity to support the species in question; so too of this country’s most important and powerful much land is used; environmental laws.”2 Habitat destruction, Second, the decision-maker has no reason after all, is serious. Habitat destruction and to economize on the true cost of the land degradation are by far the leading threats to inputs by, for example, using a bid process to biodiversity, contributing to the endangerment find low-cost providers of land services; so of at least 88 percent of the plants and animals = the wrong land is used; and on the endangered species list.> Under ESA, Third, the total money cost to the decision- more than 1,200 species are now listed as maker for each project is far less than the pro- “endangered” or “threatened,” resulting in use ject’s true cost to society; so voters and politi- restrictions on millions of acres of public and cians never face the true cost of what the reg- private land because of their presence. ulations demand. The success of ESA in actually saving The actions required of landowners by the species, however, is questionable at best. By FWS are high cost and land-intensive because May 1998, 34 species out of 1,138 listed had land use is free to the agency. It fails to take made it off the endangered and threatened even simple steps to increase the productivity lists. But of those, five were de-listed owing to of habitat because, while restrictions placed their extinction, four had been removed on land are “free” to the FWS, other simple because their listing had been due to taxo- steps are not, even when those steps cost little nomic error, ten more were listed due to data and work well. They cannot force a landown- error, and several others, arguably, had recov- er to place an inexpensive nest box in a tree ered for reasons other than ESAS under ESA's authority, but they can limit land French and Indian Wars ===== PAGE 50 ===== 50 IDEAS ON LIBERTY ® OCTOBER 2000 use on many acres around a nest. Ironically, his land “quartering” within the meaning of the past century gives many examples, such as our interpretation of the Third Amendment? bluebirds and waterfowl, where without ESA Americans objected to the involuntary hanging over their heads, many landowners quartering of soldiers on their property for were happy to allow enthusiasts to place nest several reasons: Property owners lost the use boxes for threatened species. Under ESA, of the part of the property the soldiers physi- however, landowners are almost surely pun- cally occupied; they lost privacy in other areas ished by restrictions brought on by the of their homes; they also had to deal with species’ presence. They are now reluctant to problems from the behavior of the soldiers allow any such action that would attract a list- and their visitors on the premises, losses from ed species. As a result, habitat protection is the increased wear and tear created by the sol- made far more costly to society than it needs diers’ presence, and losses from the need to to be. Over time, this can lead to too little deal with the British military on numerous habitat protection, as voters come to sense the small problems that arose while the soldiers high cost to people of such projects—even were quartered. though much of the cost is off-budget. ESA imposes similar costs on property Even more important for species protec- owners, who must deal with government reg- tion, treating land use as free creates perverse ulators concerning the use of their land. Prop- incentives for landowners to pre-emptively erty owners have even been forbidden to build destroy habitat, since the presence of a desig- new homes or protect existing homes on or nated or “listed” endangered species is an near property where endangered species have economic liability. And animal species, unlike been located. British soldiers, can often be kept away by The original Third Amendment ended simple land-management techniques. The the quartering problem by putting it on bud- actions of the FWS, if not those of the pro- get and making it voluntary. Local enthusi- tected animal, have become feared and unwel- asm for soldiers now is so great that we have come. The logic is clear. ESA gives private too many domestic military establishments, landowners an incentive to manage their land not too few. The same respect for property to keep away listed species. Many do just that. rights and the market process that allows Examples are plentiful in the news media, but voluntary quartering of soldiers and mini- there is statistical evidence also. mizes the cost to all of doing so would work Economists Dean Lueck and Jeffrey for animals as well. Species, landowners, Michael examined how the presence of the and constitutional government would be the red-cockaded woodpecker affected timber worthy winners. J harvest rates and the age of harvests in North Carolina.” Using data from the U.S. Forest 1. Anyone interested in a copy of the article should contact Mor- Co ] riss at apm5@po.cwru.edu. The article provides extensive references Service’s Forest Inventory and Analysis and @ on the “living constitution” theory, the history of the Third Amend- : : : _ ment, and the ESA. 1997-98 North Carolina State University sur 2. M. Lynne Corn, Endangered Species Act Issues (Congression- vey of over 400 landowners, and sophisticat- al Research Service, May 27, 1992), p. 1. : : 3. David S. Wilcove, “The Promise and the Disappointment of ed econometric techniques, Lueck and the Endangered Species Act,” New York University Environmental Michael found statistically significant evi- Law Journal 6, 1998, pp. 275, 277-78. 4. US. Fish d Wiidlif Service data from http://endangered < : font . U.S. Fish and Wildlife Service data from http://endangered. dence that “increases n the proximity of a fws.gov/boxscore.html (“last updated Nov. 30, 1999”). plot to [woodpeckers] increases the probabil- 5. A report on the species that had been delisted is the National : : _ Wildemess Institute’s “Babbitt’s Big Mistake,” released in July 1998 ity that the plot wi oe harvested and decreas and available at http://www.nwi.org/SpecialStudies/BabbittRe- es the age at which the forest 1s harvested. port/Overview.html. 6. Robert E. Gordon, Jr., James K. Lacy, and James R. Streeter, “Conservation Under the Endangered Species Act,” Environment International 23, 1997, pp. 359, 400. Involuntar y Host 7. Dean Lueck and Jeffrey Michael, “Preemptive Habitat Lo. Destruction Under the Endangered Species Act,” Working Paper, Now let us return to our theme: Is requiring Montana State University. a landowner to host an endangered species on ===== PAGE 51 ===== sale rather than the product’s destination would be the fairest solution, but that would require the five states that do not currently levy a sales tax to begin doing so. If the moratorium on new Internet taxes serves to restrain increases in existing sales taxes or even to spur reductions, then we all will benefit. Selective Taxation Worse To the Editor: Defending the Rich Lawrence Reed argues against taxation of Internet sales in his recent article “Don’t Tax To the Editor: the Internet” (June 2000). There is an evil “In Defense of the Rich” by Mark Skousen worse than excessive taxation: that of selec- (June 2000) is not only an amoral defense of tive taxation. . . . Exemption of Internet- the rich, it is much more sinister than that: It originated sales from taxation, while still is an immoral defense of the rich. In the arti- allowing taxation of phone-originated sales cle, Dr. Skousen discusses the auxiliary bene- taxes, amounts to a form of discrimination. fits that the rich provide society, as well as Indeed, arguments in Congress for the tempo- some of the moral attributes and undertakings rary moratorium on Internet sales taxes of some rich people. No argument could be always talk about trying to support the made that is more harmful to capitalism, and nascent industry. no argument could more effectively deliver up A better solution is to allow jurisdictions to the rich to their attackers than the one offered levy sales taxes based on the source point of ip this article. the sale (rather than the destination). This The only proper defense of the rich is a would encourage competition between taxing moral one. In a free society, the people who entities as merchants move from high-tax own a large sum of wealth created it by means states to low-tax states in order to offer best of their own toil, and this is why they are enti- prices to consumers, tled to it. The wealth that they created is their —JOHN SHELTON own, regardless of whether this is good for the Redwood City, California economy, and regardless of what the people who own it spend it on. The argument that is Lawrence Reed replies: used in the article is in defense of the latter Mr. Shelton is right that “selective taxa- two issues instead of the primary one. This is tion” is bad because it involves governments an egregious error because it abdicates the creating an unlevel playing field by picking moral argument. . . . As long as the majority winners and losers and bestowing discrimina- of people think that all wealth is created and tory special privileges. But it’s important to owned by society, then an attempt to persuade remember that government indirectly taxes people in favor of the rich is doomed. Just some Internet purchases already (those made imagine the implications of such an idea: if through dial-up connections) via the taxes it society owns the wealth, then it is by the grace imposes on telephone service. Also, Internet of society that any person can own property. firms do pay all relevant taxes in the respec- An attempt to persuade people that it is better tive states where each is physically located, for them not to confiscate the property of the just like other companies. rich and to wait patiently for whatever crumbs One could argue that allowing jurisdictions the rich people drop their way will convince to levy sales taxes based on the source of the only a very few people. The implicit argument 51 ===== PAGE 52 ===== 52 IDEAS ON LIBERTY ® OCTOBER 2000 of the article is as follows: “The rich are good sumption.” I wished to dispel the Marxist citizens. They pay their taxes, they give to view that “behind every great fortune is a charity, and they have families. And since great crime.” Early critics such as Thorstein they create opportunities for the rest of us, let Veblen, Matthew Josephson, and Sinclair us as a society decide to let them keep their Lewis portrayed the wealthy as robber barons money.” Not only will this fail, but it is who smoked $100 bills, built 25-room man- immoral because using this type of argument sions, and abandoned their families in favor strips the rich of the proper moral defense that of trophy wives and frivolous activities. This is necessary for people to understand if they negative image was far from harmless. It cre- are ever going to be convinced that capitalism ated an age of envy and censure—and is a just system. inevitably high income-tax and estate-tax Just as it is in every other aspect of capital- rates, and attacks on big business. ism, it is interesting and useful to examine the My purpose in writing my column was to reasons it is actually better for the people “as alert the readers to the growing evidence a whole” if they are secure in their property. favoring a better image for the rich and for But the positive attributes of capitalism capitalism, and to diffuse the anti-capitalist should not be used as its defense for the rea- agenda of the politicians and the media. sons stated above. By titling his article “In Recent evidence from Professor Thomas Defense of the Rich” and then leaving out the Stanley and others confirms an unusual state- moral, i.e., proper, defense of the rich, Dr. ment made by Nassau Senior, the first profes- Skousen is promoting the downfall of that sor of political economy, who said in his inau- which he claims to be defending. . . . That gural address at Oxford in 1825, “the pursuit having been said, the information contained of wealth . . . is, to the mass of mankind, the in the article is interesting to read, but any great source of moral improvement.” Finally, future attempt to defend any aspect of capital- in the year 2000, Professor Senior’s statement ism needs to include the moral argument. is coming true. —NicHOLAS A. CUROTT This is all good news, and we need to Colorado Springs, Colorado spread the word rather than to accentuate some extreme laissez-faire tenet. If indeed the Mark Skousen replies: wealthy are today more actively pursuing the Nicholas Curott protesteth too much. I old-fashioned virtues of frugality, modesty, agree wholeheartedly with his moral defense and faithfulness, then the public and our leg- of property. Everyone, rich or poor, has aright islators need to know it. They are less likely to to his own wealth—to spend, invest, or even attack the rich and engage in anti-capitalist waste it as he pleases. The state has norightto policies. They may even encourage wealth tax or confiscate his property without his per- accumulation. I’m happy to report, by the mission, no matter how egregious his behav- way, that my column has been reprinted ior. I did not think such an elementary princi- around the country and been translated ple needed to be explained to readers of Ideas recently into Spanish and published in several on Liberty. Latin American newspapers. But amoral? Give me a break. If anything, my article is all about high moral standards We will print the most interesting and and how the rich have a responsibility to make | provocative letters we receive regarding money honestly and to spend it wisely. Other- Ideas on Liberty articles and the issues wise, politicians and the media will continue they raise. Brevity is encouraged; longer to bash the rich and promote high marginal | letters may be edited because of space tax rates and anti-rich policies. My purpose | [imitations. Address your letters to: Ideas was to debunk a long-standing myth held by | 4, Liberty, FEE, 30 S. Broadway, Irving- the public and the media—that the rich are ton-on-Hudson, NY 10533; e-mail: profligate pigs, womanizers, and “robber | jsi@fec.org; fax: 914-591-8910. barons” who engage in “conspicuous con- ===== PAGE 53 ===== Economics on Trial by Mark Skousen IDEAS ON [IBERTY OcToBser 2000 Having Their Cake “The duty of ‘saving’ became nine-tenths of virtue and the growth of the cake the object of true religion.” —JOHN MAYNARD KEYNES! I his 1920 bestseller, The Economic Con- War isn’t the only enemy of capital accu- sequences of the Peace, John Maynard mulation. Since World War II, the greatest Keynes made a profound observation about threat to capital formation (the growth of the the success of capitalism before the Great cake) has been the direct and indirect taxation War. He lauded “the immense accumulations of capital. of fixed capital” built up by the “new rich” Take, for example, the federal estate tax. during the half century before the war and The estate tax is often viewed as an “inheri- compared the huge capital investment of this tance” tax and even a “death” tax. But it’s golden era to a “cake,” noting how “vital” it much worse than that. It’s also a tax on capi- was that the cake “never be consumed,” but tal. An estate’s taxable property includes continue to “grow.” stocks, bonds, business assets, real estate, Keynes was intensely optimistic about the coins and collectibles—all after-tax, after- prospects of humanity, “if only the cake were consumption investments. not cut but was allowed to grow in the geo- If your net worth exceeds $675,000, your metrical proportion predicted by Malthus for heirs will be forced to pay at least 18 percent population.” Rapid capital accumulation to the IRS. The tax rate hits a confiscatory would result in the elimination of “overwork, 55 percent at a mere taxable estate of $3 overcrowding, and underfeeding,” and work- million. ingmen “could proceed to the nobler exercis- Capital is the lifeblood of the economy. es of their faculties.” Capital investment finances new technology, Alas, it was not to be. The First World War new production processes, quality improve- destroyed Keynes’s dream of universal ments, jobs, and economic growth in general. progress. The cake was consumed. “The war When those investment funds are taxed—$28 has disclosed the possibility of consumption billion in 1998—the funds are removed from to all and the vanity of abstinence to many.”’2 the investment pool and transferred to Wash- _ ington, where they are consumed. For the Mark Skousen (http.//www.mskousen.com; mskousen@ most part the funds are consumed through aol.com) is an economist at Rollins College, Depart- government expenditures and “transfer pay- ment of Economics, Winter Park, FL 32789, a Forbes ts” If lari £ ment columnist, and editor of Forecasts & Strategies. His ments” (welfare, salaries of governme textbook, Economic Logic, is now available from workers, and so on). oo FEE. The estate tax also creates economic distor- 53 ===== PAGE 54 ===== 54 IDEAS ON LIBERTY ¢ OCTOBER 2000 tions. It encourages individuals to engage in Thus capital can move freely throughout “estate planning,” expensive legal exercises to Hong Kong and around the world without dis- avoid the death tax. It forces individuals to tortion. And the cake has grown rapidly buy insurance policies they would not other- because of capital’s tax-free status. Hong wise buy and create tax-exempt trusts and Kong does have an estate tax on values foundations that they would not ordinarily exceeding HK$7 million, but the maximum create. Undoubtedly, millions of funds are rate is only 18 percent. transferred every year into foundations and Fortunately, the U.S. government has charities just to avoid estate taxes. Charitable recently recognized the negative drain these giving and public foundations have become taxes have on the economy. It has reduced big business, but what is the price? Misman- long-term capital gains, and Congress has agement and waste are common features in even entertained a bill to abolish federal these nonbusiness organizations. estate taxes altogether. Eliminating taxes on estates and capital gains has been criticized as a break for the Another Inefficient Tax: rich. Moreover, critics say, estate taxes should Capital Gains Taxes be kept in order to establish a level playing P field. They argue, “Children and grandchil- Perhaps an even more sinister tax is the dren of wealthy people didn’t earn inherited capital gains tax. If you sell an asset (stock, money. They should have to work for it, just bond, commodity, real estate, or collectible), as their parents did. Inheritances create disin- the profits are taxed between 20 and 40 per- centives to work.” cent, depending on how long you held the ~~ But these critics fail to understand the asset. (If you hold for more than a year, the broader implications of a large tax-free estate maximum rate is 20 percent.) This is a terrible and tax-free capital gains. Everyone—not just penalty on capital. It means that every time a the rich—benefits from eliminating these stock or other asset is traded outside a tax- taxes because wealthy people’s capital would exempt vehicle, 20 to 40 percent of the profits be left intact, invested in the stock market, are removed from the private economy and businesses, farms, banks, insurance compa- sent to Washington, never to be invested nies, real estate, and other capital assets, thus again. With the recent bull market on Wall insuring strong economic growth and a high Street, annual capital gains taxes have exceed- standard of living for everyone. As Ludwig ed $100 billion. What a terrible drain on the von Mises once stated, “Do they realize that economy. every measure leading to capital decumula- Capital gains taxes also result in economic tion jeopardizes their prosperity?” inefficiency. Because of the high tax on capi- As an investment adviser, I share the con- tal gains, many investors refuse to sell their cern that unrestricted inheritances to children assets. They may prefer to switch into a poten- or grandchildren can be morally corrupting, tially more profitable investment, but they but there are other solutions besides a confis- stay with their original investment because catory tax. For example, a will can limit the they hate the idea of paying Uncle Sam. use of inherited funds until a certain age of Clearly, capital would be more efficiently responsibility is reached, or a trust can offer allocated to its more productive use without matching funds as a way to encourage work this burdensome profits tax. and responsibility. [] . The United States can learn a lot from for- 1. John Maynard Keynes, The Economic Consequences of the eign nations. Hong Kong has a flat 15 percent Peace (New York: Harcourt, Brace, 1920), p. 20. personal income tax, a 16.5 percent corporate 2 ron or uIATEY of tax policies throughout the world, income tax, and no tax at all on capital gains. see International Tax S ies, published annually by Coopers & In fact, most of the New Industrial Countries Lybrand (New York: John Wiley & Sons). . . . . 4. Ludwig von Mises, Planning for Freedom, 4th ed. (South Hol- in Southeast Asia do not tax capital gains. land, Il: Libertarian Press, 1980), p. 208. ===== PAGE 55 ===== history. The book mostly reports on the find- BOOKS ings of his committee. The authors do not say that the IRS is staffed exclusively with abusive people who thrive on power—although there are some— but rather that the culture of the IRS drives its The Power to Destroy by William V. Roth and employees to treat taxpayers as exploitable William H. Nixon resources. Within the IRS, incentives push The Atlantic Monthly Press ® 1999 ® 290 pages agents to try to wring all they can out of tax- * $23.00 payers. As Roth and Nixon write, “despite - - laws against the practice, goals and quotas Reviewed by John Attarian still drive the performance of auditors, groups, divisions and even districts.” Career he Internal Revenue Service penalizes a advancement hinges on how much revenue taxpayer $46,806 for an alleged under- one can bring in, how many cases one can payment of ten cents. Armed IRS agents close, and so on. Therefore agents can and do storm the homes of a restaurant owner and his take advantage of the indecipherability of manager because of unsubstantiated charges the tax code and the natural fear most people from a fired ex-employee that the men were have of the IRS. Moreover, IRS training drug dealers. A taxpayer is driven to suicide encourages employees to “see taxpayers as by the IRS’s hounding after it had disallowed liars and cheaters” who are guilty until proven business losses he had claimed ten years innocent. earlier. That mindset produces several conse- Those are some of the horror stories told in quences, including padded tax liabilities and this powerful book by Senator William Roth penalties and use of Bureau of Labor Statis- of Delaware, co-author of the 1981 Kemp- tics data to impute income through agency- Roth tax cut, and his executive assistant, generated “substitute returns” (when an agent William Nixon. They wrote The Power to believes that a nonfiler should have filed) or to Destroy in the belief that “real change will inflate income to the level the agent thinks is take place within the IRS only when Ameri- “right.” And of course some agents are quick cans are fully aware of how the agency works to resort to brutal property seizures, liens, and and possess the knowledge necessary to pro- levies to collect money, and plain threats and tect themselves.” The best protection against harassment. the IRS would be its non-existence. Although Small businesses are favorite targets. Like Roth and Nixon are not aiming for that ulti- any predator, the IRS likes to go after those mate objective, their book, by showing the who are least able to fight back. Large com- IRS’s fangs in all their viciousness, may help panies can afford high-priced legal counsel to catalyze a true tax rebellion. that can argue relentlessly over the interpreta- As the most powerful agency in America tion of the tax code; small ones usually can’t, the IRS cuts a huge swath through our lives. and tend to cave in under an IRS onslaught. Property seizures have increased 400 percent Many small businesses have been driven to since 1980 and every day 300,000 households bankruptcy by the IRS. receive IRS demands for more information or Roth and Nixon point out that Congress is notifications of audits. As chairman of the partly to blame for this terrible state of affairs. Senate Finance Committee, Roth is one of the Frequent changes in the tax laws have two members of Congress empowered to con- spawned a nightmarishly complicated tax duct a full-scale investigation of the IRS. (The code, creating difficulties for taxpayers. Thus other is the chairman of the House Ways and the authors argue, modestly, for a far simpler Means Committee.) In 1996, as evidence of tax code. abuses mounted, Roth decided to undertake The Internal Revenue Service Restructur- the first thorough investigation of the IRS in ing and Reform Act of 1998, enacted follow- 55 ===== PAGE 56 ===== 56 IDEAS ON LIBERTY ® OCTOBER 2000 ing Senator Roth’s hearings, was designed to responsible [programs].” But what disturbs curb the abuse of taxpayers, such as shifting Proctor is that he is uncomfortable in the the burden of proof from the taxpayer to the company of some of history’s foremost butch- IRS in some circumstances and restricting the ers, for he shares with them the view that it is use of liens and property seizures. Never- permissible to use state power for the advance theless Congress, with its spending addic- of “public heaith.” tion, likes the extra revenues that IRS zeal Proctor points out German physicians and produces. scientists produced genuine medical research, Get this revealing book, read it, and pass it not only during the Nazi era, but long before on. The tax nightmare you prevent may be that. Through much of the nineteenth and your own. [J twentieth centuries, Germany led the world in John Attarian is a freelance writer in Ann Arbor, scientific achievements, particularly medical Michigan. He has recently completed a book on Tesearch. Nevertheless, those accomplish- Social Security. ments must be viewed within their ethical, moral, and historical context. Proctor writes almost dispassionately and always objectively, as the science historian he is. Unfortunately, this book lacks the perspective of a medical The Nazi War on Cancer by Robert N. Proctor ethicist. As a neurosurgeon with a back- Princeton University Press ® 1999 ® 380 pages ground in medical history and a more than * $29.95 passing interest in medical ethics, I don’t see x ; ; the Nazi “achievements” in the same positive Reviewed by Miguel A. Faria, Jr. light that the author does. The subject of “bioethics” and “medical his is a deeply disturbing book for it ethics” and their long-term consequences to describes in a good light what the author German society (or for that matter ours) are calls “the lesser-known ‘flipside’ of fascism— not broached in this book until the very end, the side that gave us struggles against smok- and then the author’s discussion is contained ing, campaigns for cleaner food and water, for within only two pages. He even reproaches exercise and preventive medicine.” medical ethicists when he adds: “Bioethical The Nazi “accomplishments” include the discussions are full of facile identifications of establishment of medical registries (that is, Nazism with everything from abortion and databases) and medical surveillance, both rationalized medicine to doctor-assisted sui- later used for “euthanasia,” and the linkage of cide.” That is, Proctor declines to discuss the occupational diseases and cancer to environ- ethics of the Nazi war on cancer because he mental poisons. The author, professor of his- dislikes the fact that some medical ethicists tory of science at Penn State, also details how have gone too far in linking practices and Nazi scientists were the first investigators to policies they abhor with Nazism. link and ultimately prove with elegant epi- I side with the medical ethicists and with demiological studies that cigarette smoking those souls, not all of them libertarians as the causes lung cancer. author implies, who are troubled by further Armed with scientific proof, Nazi officials government efforts in our country to protect moved aggressively in an all-out campaign us from ourselves—for the good of “soci- against cigarette smoking, and tobacco was ety”’—at the expense of our autonomy and lib- proclaimed “an enemy of the people” (Volks- erties. In Proctor’s utilitarian calculus, free- feind). As the author states early in his pro- dom evidently counts for nothing. It counted logue: “The participation of doctors in Nazi for nothing to the Nazis, too. racial crimes is disturbing, but it is equally Consider that the Nazis themselves disturbing that Nazi doctors and public health declared that occupational medicine, one of activists were also involved in what we today the disciplines dear to their hearts, was to might regard as ‘progressive’ or even socially make a “worker who would remain productive ===== PAGE 57 ===== Books 57 until retirement and then pass away shortly thereafter” The aim of the Nazis was “to reduce the difference between the age of retirement and the age of death ideally to edited by FE. H. Buckley zero.” And those were the lucky ones—the Duke University Press ® 1999 ® 461 pages ® $65.95 members of the master race. For the rest of the expendable “undermen” there was slavery, Reviewed by George C. Leef ghastly medical experimentation, and death in the abominable concentration camps. his is a book about a turning of the tide. There is danger in the unholy partnership of The tide in question is the intellectually the medical profession and government plan- important question of how society will treat ners, namely the perversion and subversion of contracts. Once a pillar of the common law the medical sciences and public health for the and a cornerstone of the American legal sys- new collectivist ethics of population-based tem, by the 1970s the idea that people should medicine. Once medical professionals ally be free to contract as they choose was rapidly with the state and abandon the individual- giving way to legal theories that call for gov- based ethics of Hippocrates in favor of the ernmental interference with contractual free- collective good, or as the Nazis put it, “the dom in many circumstances. Egalitarian sen- health of the nation,” the stage is set for a ter- timent had invaded the law schools and then rible drama. the courtrooms, giving judges and juries con- Parallels must be drawn with our present siderable latitude to undo or rewrite contracts situation, as much as the author wants to where they felt that the parties had “unequal avoid it. In the areas of public health, the bargaining power,” “unequal access to infor- politicization of AIDS policy, mandatory vac- mation,” or for other reasons. An influential cine programs, biased research on guns (and book proclaimed The Rise and Fall of Free- its publication in medical journals), and so on, dom of Contract. the U.S. government is following the Nazi But a funny thing happened on the way to precedent by casting aside our cherished con- the demise of freedom of contract—its cepts of individualism in a quixotic crusade defenders arose to rescue it from oblivion. for “the common good.” Over the last three decades, law and econom- I strongly recommend this book, particular- ics scholars have staged an intellectual coun- ly to history buffs and those interested in terattack showing from many different angles the perpetual struggle between the individual the superiority of freedom of contract and the and the state. Its history is immensely valu- counterproductivity of governmental interfer- able, even if the author fails to draw the right ence. In The Fall and Rise of Freedom of Con- conclusions. [J tract, F. H. Buckley, a professor at the George Miguel Faria, M.D., is editor-in-chief of the Medical Mason University Law School, discusses the Sentinel, published by the Association of American ~TeSCue operation. The book is a collection of Physicians and Surgeons (AAPS), and author of Van- papers given at a series of colloquia at the dals at the Gates of Medicine: Historic Perspective on George Mason University Law and Econom- ne Battle Over Health Care Reform and Medical jog Center and brings together some of the arrior: Fighting Corporate Socialized Medicine. sharpest thinkers in the field. The attack on freedom of contract was root- ed in the same mundane intellectual errors that plague us in so many ways. The critics overestimated the problems associated with freedom and underestimated (or entirely ignored) the costs of interference with free- dom. As Buckley observes, “Consumers are not as helpless as they were made out to be; and intrusive legal rules designed to protect The Fall and Rise of Freedom of Contract ===== PAGE 58 ===== 58 IDEAS ON LIBERTY ® OCTOBER 2000 them not infrequently left them worse off” Essays by Professors Paul Rubin and But legal theorists, like politicians, enjoy the Robert Cooter explore the boundary between luxury of making rules that sound good but tort and contract, suggesting that consumers mainly affect other people. The common-law would be better off if they were allowed to rules of contract were an easy target for them: contract out of tort, leaving their remedy Why stick with musty old legal principles against a seller to the terms of the bargain when ingenious and compassionate thinkers and/or ordinary contractual remedies. could devise better, fairer ones? Zoning and land-use restrictions are another A crucial question that occupies Professor area where we have placed mistaken faith in Buckley in his introduction is how best to government and would benefit from greater defend freedom of contract. He discusses reliance on contract. Professor Robert Nelson's three approaches: neo-formalism, which is “Zoning by Private Contract” demonstrates based on the objection that the enemies of that the putative goals of zoning could be real- contract have politicized the law; Kantianism, ized through contract, without the coercion and the positing of a human right to freely enter favoritism with which zoning is so rife. into contracts; and consequentialism, the For the rest of the menu, visit the restau- argument that freedom of contract leads to rant. O better outcomes than misrvention, Buckley, George Leef is the director of the Pope Center for like his contributors, believes that the most Higher Education Policy at the John Locke Founda- powerful and convincing arguments for free- tion and book review editor of 1deas on Liberty. dom of contract are consequentialist, and per- haps he’s right. While readers of Ideas on Lib- erty may see freedom of contract as a moral issue and regard it as unnecessary to demon- strate that interference has bad consequences, } for many other people the case will not by Paul Edward Gottfried stick unless bolstered with consequentialist Princeton University Press ® 1999 o 186 pages arguments. * $27.95 There is too much in this volume to cover in a short review. It is like trying to tell a friend what’s on the menu at a terrific restau- rant. So here are some of the outstanding mericans have given up freedom and .1tems. The redoubtable Richard Epstein leads self-government for a mess of pottage. off with “Contracts Small and Contracts Modern “liberalism,” argues political science Large: Contract Law Through the Lens of professor Paul Gottfried in his insightful new Laissez-Faire.” His essay is an extended book, rests on a “patricide” of the older liber- rebuttal to four notorious critics of freedom of alism. Whereas liberalism and democracy contract, arguing that they simply beat up on were once opposed concepts, they are now a few peripheral problems and then conflated, to the great detriment of the former. announced that they had killed off the case for Meanwhile, “democracy,” which replaced contractual freedom. Epstein cuts their argu- liberal republicanism, gave way to irresponsi- ments to ribbons, exactly as anyone familiar ble centralized bureaucracies. Thus “liberal with his legal and economic acuity would democracy” is “less and less” liberal or demo- anticipate. cratic by any standards. The liberals’ manage- In his essay “In Defense of the Old Order,” nal state “succeeds by denying that it exercis- Timothy Muris argues that standard form con- es power,” Gottfried writes. Liberals aspire to tracts, far from being an assault on consumers run the economy and “socialize” children by big business, enhance efficiency and give away from their parents’ outworn values; they consumers benefits that would probably never now wish to do so worldwide, as an outreach be realized by most if they had to “bargain program of American imperialism. They are from scratch.” building a New Society that they, at least, After Liberalism: Mass Democracy in the Managerial State Reviewed by Joseph R. Stromberg ===== PAGE 59 ===== Books 59 expect to like better than the imperfect one “plural” only in terms of organized factions, they see around them. accredited victims (lately), and the adminis- Modern liberals—from J. S. Mill through trators themselves. Gottfried quarrels with Herbert Croly, Walter Weyl, Walter Lipp- paleoconservatives who see modern liberal- mann, and John Dewey and his followers— ism as a “front” for New Class public med- justified the all-embracing state. Those social dlers. The truth, he says, is much worse: the democrats stole their name from laissez-faire administrators actually believe in their ideolo- liberals, but talked a good game of democra- gy and wish to impose it everywhere. cy. As far back as Mill, they foresaw their Fearing, after 1945, that “fascism” might ability, as a “new clerisy,” to guide democracy come back, liberals turned education into an along desired paths. engine of social reconstruction. Egged on by Gottfried argues that liberalism had to that emigré Marxist charlatan Theodor become an “armed doctrine,” since “letting Adorno, they fretted over the backward Amer- people go their own way will not suffice to icans’ “mental health” and psychoanalyzed make them open-minded or civic-spirited.” the “Radical Right” long distance. (This Only constant intervention by trained admin- remains fashionable.) In the hands of journal- istrators with a “universal faith in rationality” ists incapable of making distinctions, this atti- could avert the horrors attendant on actually tude became a weapon of mass demonization. leaving anyone, anywhere, alone. “Multiculturalism” serves as another Fascist and Bolshevik “social reconstruc- weapon in the liberal arsenal of dirigiste tion” fascinated the “liberals.” They settled weaponry: “the present regime assigns ‘eth- for John Dewey’s “experimental-scientific” nicity’ and other generic categories to approach, allegedly open-ended and rooted in rearrangeable groups of citizens as an exer- “neutral” criticism of all “values.” Natural cise of power,” writes Gottfried. From the scientists, who use this method in fields where managers’ standpoint, the “behavior modifi- it actually works, generally know when an cation” of Americans/Mankind “must go on experiment is over. In the New State it is the indefinitely.” This is Bolshevism Light, I lab rats who are blamed for bad outcomes (if guess. Stalin could never completely achieve failure is even admitted) and ordered to ride a state composed of “new Soviet men” and the mass transit system of Progress and quit the modern liberals will never completely reading that pre-scientific Constitution. achieve a state of ideally servile, collectively By the 1940s liberals defined their outlook minded citizens, but to give up would put the as a “fighting faith” opposed to fascism (com- entire project at risk. Liberal managerial med- munism having somewhat escaped their atten- dling has no logical stopping point. .tion). “Value relativity” had been a useful Gottfried surveys sundry American and cudgel against existing bourgeois, Christian European populist movements, concluding values—*“social acids” as one Deweyite put that little can be done to roll back, or even it—but liberalism itself was exempt from slow, the advancing Leviathan. Its pessimism inquisition. Ongoing experiment gave ever- aside, I strongly recommend this densely shifting “content” to an ever-new liberalism. packed and reflective book (to which I have The welfare state was means and end, since hardly done justice), which rests on Profes- planning and economic redistribution were sor Gottfried’s great erudition and close keys to a rational society. Freedom, Gottfried reading of the relevant European and Ameri- observes, was reduced to “what judges, public can literature. OJ administrators, and journalists see fit i to Joseph Stromberg is the JoAnn B. Rothbard historian- impose on other people.” Bored with handing jy-residence at the Ludwig von Mises Institute. out pottage, welfare states “also tried to shape or reshape social relations to fit particular worldviews.” This social engineering and therapy is known, oddly, as “pluralism,” although it is ===== PAGE 60 ===== 60 IDEAS ON LIBERTY ® OCTOBER 2000 digital world will force change toward small- er, less intrusive, and less centralized govern- ment everywhere.” The End of Money and the Struggle for Financial Privacy by Richard W. Rahn The book develops these arguments in a Discovery Institute Press ® 1999 ® 219 pages breezy style, offering a parade of colorful * $25.00 anecdotes rather than tight reasoning or sys- - - tematic empirical evidence. The language is Reviewed by Lawrence H. White sometimes overly dramatic, and some of the anecdotes are beside the point. Particularly in he first sentence of this provocative book Chapter 2, there are a number of regrettable reads: “Money—as we know it—is com- misstatements of economic theory and histo- ing to an end.” Money “as we know it” con- ry. These features will put off academic econ- ststs of cash (notes and coins) issued by gov- omists, but others will consider it more ernment and checkable deposits issued by important that the book is enjoyable to read. regulated banks. Paying with cash preserves Even academics will find that it describes the your privacy, but is inconvenient for many new payment and encryption technologies transactions. Paying by check or debit card and analyzes banking regulations in accurate (or by credit card) compromises your privacy but accessible terms. because the government can look at your Rahn confronts head-on the two leading bank records. Soon there will be a better rationales for restrictions on financial privacy: alternative. Richard W. Rahn enthusiastically tax collection and the war on drugs. He argues describes new “non-governmental digital that “the digital revolution is about to cause money” technologies that combine the priva- the death of most taxes on capital.” Because cy of cash with the convenience of electronic taxes on interest, dividends, and capital gains deposit transfer. The central thesis of his hamper growth, and because their collection book is that these new technologies will requires governments to invade financial pri- spread widely, and—rather like the spread of vacy, he urges that the governments simply Gutenberg’s technology of movable type S00 abandon them. Rather than replace the rev- years ago—will have profoundly liberating enue through other taxes, governments should implications. shrink. In a few passages Rahn implausibly pre- For some unstated reason, despite his dicts that a sophisticated barter system, emphasis on personal liberty, Rahn does not involving payment by the direct transfer of propose that the war on drugs should be non-money financial assets, will come to abandoned. He instead argues only that it is supersede monetary exchange in the near not cost-effective to fight the drug trade future. But his central thesis does not really through invasions of financial privacy. It is depend on the end of money, only on plausi- far easier to detect and interdict physical ble changes in the methods of transferring it. shipments of marijuana or cocaine than to Rahn rightly insists that financial privacy is detect or interdict payments for them, espe- itself a valuable civil liberty, and enhances the cially encrypted electronic payments. Adding enjoyment of other civil liberties. He predicts the budgets of the federal enforcers to the that the new encryption technologies for .estimated regulatory compliance costs of financial privacy will make laws against banks, and dividing by the number of convic- “money laundering” unenforceable, and taxes tions, he finds that the “total cost for each on financial capital uncollectable, except at money laundering conviction . . . appears to extreme cost. A nation will prosper if and be over a hundred million dollars.” The peo- only if its government adapts to this new real- ple who have been caught and convicted have ity. A government that tries to repress the new naturally been novices and small fry, not the technology—or tries to continue taxing, sophisticated major operators. spending, and regulating as usual—will con- In addition to the budgetary cost, Rahn sign itself to the dustbin of history. Thus “the emphasizes that a major drawback of enforc- ===== PAGE 61 ===== Books 61 ing laws against money-laundering is the loss Clearing the Air: The Real Story of privacy and the associated threat to person- . ) al liberty for perfectly innocent citizens. He of the War on Air Pollution cautions us to consider governments as they by Indur M. Goklany are, not as wishful thinking would have them Cato Institute ® 1999 189 pages ® $19.95 be: “there is little reason to believe that the same people that have had the responsibility Reviewed by Bruce Yandle for the oversight of the IRS and FBI will not abuse their knowledge of the most intimate rom the mid-1960s on into the early details of your financial life.” To illustrate the 1980s, it seemed obvious: Were it not for danger, he provides chilling anecdotes about the benevolent protection provided by the fed- the use of asset forfeiture statues. At bottom, eral government, America’s smoke-filled his case for allowing financial privacy is like cities and slime-ridden rivers would have the case for allowing private gun ownership: it become environmental wastelands. The caves provides the average citizen with a defense were beckoning. Somehow simultaneously against tyranny. Rahn courageously calls struck dumb, citizens by the millions happily for the elimination of laws against money- traded the last smidgen of clean air for yet one laundering and the abolition of the Financial more Pontiac GTO, another hula-hoop facto- Crimes Enforcement Network of the U.S. ry, or a chemical plant producing Agent Treasury. Orange. As evidence that financial privacy does not “Whose garden was this?” Tom Paxton’s breed lawlessness, Rahn points to Switzer- lovely song asked. How could people allow land, a country that respects the privacy of themselves to slip to the edge of environmen- bank accounts and yet has low crime. (He tal disaster? “Woe be unto us. Externalities might have added that financial privacy does overwhelm us; the markets have failed.” This not prevent the Swiss government from col- was the response from the freshly minted lecting large tax revenues.) Switzerland also environmentalists and ever-apt politicians. provides an example of depositor safety with- The 1970 Clean Air Act then took possession out the expense and bad incentives associated of the filthy commons and cleared the air. with government deposit insurance. Clean-water legislation gave similar protec- Despite some gaps in the argument, Rahn tion to the poisoned rivers and shores. The makes a fairly persuasive case for his central race to the bottom ended. We now live happi- thesis. Greater mobility for financial assets ly ever after, forever in the debt of far-sighted through secure and private electronic funds Earth Day celebrants. transfer certainly will constrain governments. Thank heavens for federal command-and- Inefficient and destabilizing bank regulations, control regulation! such as reserve requirements and deposit In this powerfully documented book, Indur insurance, will be harder to enforce when Goklany, formerly chief of the technical savers and borrowers can more easily and assessment division of the national Commis- securely deal with offshore banks that offer sion on Air Quality, does fatal damage to that better risk-adjusted rates. Important policy story. Focusing on air pollution, he provides a battles loom over whether governments will totally different rendering. With meticulous accept these new realities gracefully or try to attention to detail, Goklany carefully straps fight them in ways that waste resources and together disparate series of data on air emis- invade financial privacy. [J sions and air quality, examining each of the Contributing editor Lawrence White is the Friedrich “criteria } pollutants” —things determined A. Hayek Professor of Economic History, University harmful like sulfur dioxide, nitrogen oxides, of Missouri—St. Louis. and suspended particulates. He demonstrates that Americans were not struck environmen- tally dumb in the 1960s, 1950s, and before. No, it was just the reverse. When scientific ===== PAGE 62 ===== 62 IDEAS ON LIBERTY ® OCTOBER 2000 knowledge and data showed environmental of human action. Goklany’s presentation harm was in the offing, people in communities showing how perception of a problem and took positive action to protect the valuable transition generate EKCs remedies this short- biological envelope that sustains human life. ~~ coming. The timing of the “period of perception,” The book concludes with a carefully drawn which understandably varies for different pol- and sad assessment of the federal regulatory lutants, is a crucial part of his theory of envi- experience. One part of the unpleasant out- ronmental human action. Once costly health come is related to the following facts: problems are perceived and income allows it, (1) Command-and-control regulation has been Goklany’s “period of transition” arrives. This excessively costly, relative to performance is the time when action is taken to limit fur- standards or use of economic incentives. ther environmental degradation. Recognizing (2) Federal programs unduly limit state action the complexities of the institutions that arose, in the name of controlling interstate pollution Goklany’s assessment examines data and when much of the problem is intrastate. trends that reach back as far as the nineteenth (3) There are profitable risk-reducing oppor- century. The data are compelling. Reductions tunities for increasing the level of control for in the concentration of each criteria pollutant some pollutants and decreasing the level for begin well before the federal period. others. The second part of the unhappy resuit Goklany provides almost exhaustive treat- relates to the central finding of the book: Sig- ment of city ordinances, county regulations, nificant progress in controlling air pollution and state legislation that were designed to occurred in the absence of federal programs clear the air. Unfortunately, he pays little whenever problems were perceived and attention to the significant role played by incomes allowed for action to be taken. If left common law protection of environmental to state, local, or private action, at least part of rights, which is the one fault I find with the the cost of the federal saga could have been book. Those bent on direct federal regulation avoided and some of the benefits expanded. generally neglect common law, and the book Those looking for a polemic on the evils of would have been more complete if Goklany big government and inefficiencies of federal had ventured into the field. programs will be disappointed with this Clearing the Air supports the conclusion book. It is not a polemic. It is a carefully that when incomes are high enough, intelli- researched report on the nation’s experience gent human beings will find ways to protect with air pollution control and how the pre- themselves from environmental harms, espe- federal and post-federal periods compare. cially those of their own making. Rigorous Goklany’s excellent treatise tells us that the and interesting discussion is given to the rela- pre-1970 decentralized approaches were tionship between income and environmental Working rather well. Markets were not fail- quality, which when displayed graphically is ing. Externalities were not ubiquitous. In called an environmental Kuznets curve spite of this, political environmentalism was (EKC). In recent years, EKCs, typically on the rise. Free-market environmentalism showing a period of environmental decay and Was forced to give ground. Now is the time to then recovery, have become an artifact of reverse the forces. Ol environmental economics. But they have not gryce vandle is professor of economics emeritus at been associated with a well-articulated theory Clemson University and a FEE trustee. ===== PAGE 63 ===== The Pursuit of Happiness by Walter E. Williams IDEAS ON [IBERTY OcTOoBER 2000 Greed Versus Compassion hat’s the noblest of human motivations? Idaho potato farmers arise early in the morn- Some might be tempted to answer: ing. They do backbreaking work in potato charity, love of one’s neighbor, or, in modern, fields, with the sun beating down on them and politically correct language, giving something the bugs maybe eating them. Similarly, the back or feeling another’s pain. In my book, result of their sacrifices is that New Yorkers these are indeed noble motivations, but they can also enjoy having potatoes on their super- pale in comparison to a much more potent market shelves. motivation for human action. For me the Why do Texas cattle ranchers and Idaho noblest of human motivations is greed. I don’t potato farmers make these sacrifices? Is it mean theft, fraud, tricks, or misrepresenta- because they love New Yorkers? Only the tion. By greed I mean being only or mostly most naive would chalk their motivation up to concerned with getting the most one can for one of concern for their fellow man in New oneself and not necessarily concerned about York. The reason Texas cattle ranchers and the welfare of others. Social consternation Idaho potato farmers make those sacrifice is might cause one to cringe at the suggestion that they love themselves. They want more for that greed might possibly be seen as a noble themselves. In a word, they are greedy! motivation. “Enlightened self-interest” might But that is the miracle of the market. be a preferable term. I prefer greed since itis Through serving the wants of one’s fellow far more descriptive and less likely to be con- man, one acquires more for oneself. That is fused with other human motives. precisely what Adam Smith meant when he That greed is the greatest of human motiva- said, “It is not from the benevolence of the tions should be obvious to all; however, a few butcher, the brewer, or the baker, that we examples will make it more concrete. Texas expect our dinner, but from their regard to cattle ranchers make enormous sacrifices to their own interest. We address ourselves, not husband and insure the safety and well-being to their humanity but to their self-love, and of their herds: running down stray cattle in the never talk to them of our own necessities but snow to care for and feed them, hiring veteri- of their advantages.” He added, “By pursuing narians to safeguard their health, taking them his own interest he frequently promotes that to feed yards in time to fatten them up prior to of the society more effectually than when he selling them to slaughterhouses. The result of really intends to promote it. I have never these sacrifices is that New Yorkers can enjoy known much good done by those who affect- having beef on their supermarket shelves. ed to trade for the public good.” One might Walter Williams is the John M. Olin Distinguished Da tem on No Yo ere onion if Professor of Economics and chairman of the eco- nomics department at George Mason University in it all depended on human love, charity, and Fairfax, Virginia. kindness? I'd be worried about New Yorkers. 63 ===== PAGE 64 ===== 64 IDEAS ON LIBERTY ® OCTOBER 2000 Greed promotes other wonderful outcomes. those things that protect the forest’s produc- It’s nice that present generations conserve on tivity whether or not he will be alive in 2010 scarce resources in order to make those or 2030. In other words, his wealth is held resources available to future generations. hostage to his doing the socially responsible Owners of buildings make sacrifices of cur- thing—conserving society’s scarce resources. rent consumption and spend resources on Thus one easily predicts that goods privately maintenance that extends the useful life of the held will receive better care than goods com- building—long past their own lives. For munally held no matter what the good: cars, example, the original owners of the Empire houses, land, and so forth. Owners tend to State Building are now dead; however, the take better care of cars, houses, and land than sacrifices they made to maintain the building renters or other non-owners. mean that today’s generations can enjoy it. We should hasten to add that for private When timber companies harvest trees on their property to have these beneficial effects it land, they spend the resources necessary to requires more than simply holding its title. plant seedlings and insure that the forest will The owner must have options. One could hold continue to produce trees long after the own- title to land but be restricted by government in ers are dead. its use. An example is when a person holds Can one realistically produce an argument title to a 1,000-acre plot of forest land but the that present generations make sacrifices of U.S. Fish and Wildlife Service decrees that current consumption to insure that goods such some or all of it cannot be used, for fear of as buildings and lumber will be available for threatening an endangered species. Such a future generations because they actually care decree reduces the private use-value of the about future generations? After all there’s no land and hence weakens incentives to care for quid pro quo, no way for future generations to it. Similarly, if there were high transfer taxes compensate them for the sacrifices made on for land sales, it too would weaken incentives their behalf. So why? Again, it’s greed but to care for the land. In fact, anything that with its facilitator, private property rights weakens the owner’s private property rights in (rights residing in the owner to acquire, keep, the land weakens his incentives to do the use, and dispose of property as deemed fit so socially responsible thing—conserve society’s long as that use does not violate similar rights scarce resources. held by another). While human motivations such as charity, The present value, or selling price, of say love, or concern for others are important and 10,000 acres of forest depends not only on salutary, they are nowhere nearly as important how much lumber the forest will yield in the as people’s desire to have more for them- year 2000, but also in the years 2005, 2010, selves. We all know that, but we pretend it is 2030, and so on. The forest’s capacity to pro- not so. That unwillingness to acknowledge duce lumber in these out years is summarized personal greed as vital to human welfare, and in its present selling price. The longer the for- instead view it with disapproval, makes us est will produce trees, the greater will be its easy prey to charlatans and quacks who'd take price. Therefore, the current owner of the for- away our liberties in the name of combating est has a vested financial interest in doing greed. []