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| Vol & Nol

! Austrian Economics Newsletter

ET ee et LE A LE Le SA A EE

Labor Law and
Entrepreneurial Discovery

by
Charles W, Baird

he lahar market is one of the most highly regulated
markets in the United States. There are regulations that
prescribe such things as minimum wages, maximum hours,
workplace safety and health rules, and retirement and pen-
sion provisions. In addition there are procedural regula-
tions that specify the allowable processes by which employ-

ees and employers interact with each other. The most 3 ;
important of these procedural regulations is the Labor SHER HEIs
Management Relations Act of 1947 as amended in 1959 Gi
J—~(MRA). This is the law that specifies the rules of “collec-
[ ¢ bargaining” and union representation in the private
sector of the economy. The focus of this essay is on the
effects of the LMRA on the crucial role of entrepreneurial

. wl
GPs ate

discovery in the competitive market process. Specifically, | Professor Charles W. Baird

argue herein that the LMRA severely handicaps American

workers’ ability to compete effectively in the world market. Market discoordination shows up in several ways. One
It does so by drastically reducing innovation in American such way is the existence of price discrepancies for a given
labor-management relations. good at a given time. When more than one price exists for

good X at a given time some buyers buy units of X at

Entrepreneurs and Entrepreneurial Discovery } higher prices than those paid by other buyers of X. The

SAGCeRELMNGTINSR RRR RR L hi coin.ds.thac some sellers sell for lower
process is the entrepreneur. An entrepreneur is a person prices than other sellers receive, Some buyers, unaware of
who is alert to hitherto unnoticed opportunities to make market conditions, offer prices that are tco low and so do
pure economic profit through arbitrage, speculation, and not get all of X they would like to get or may not get any at
innovation.! In any economy the plans and actions of mil- all. Some sellers, unaware of market conditions, ask prices
lions of people must somehow be coordinated or else those that are too high, and so do not sell all they would like to
people (or at least many of them) will not be able to sell or may not sell any at all.

execute their plans. In a private property voluntary ex-
change economy entrepreneurial action is the chief coordi-
nating force. In command economies authority and rules
are used in (vain) pursuit of coordination.

Such price discrepancies give rise to opportunities for
arbitrage profit. An entrepreneur is one who notices such
opportunities and takes advantage of them by buying at
the lower prices and reselling at the higher prices. It is the

Perfect coordination of economic plans and actions is a possibility of such pure gains that “switches on” the alert-
situation in which all buyers and all sellers can execute ness of the entrepreneur to such opportunities. All the

# heir respective plans. Perfect coordination is never entrepreneur wants to accomplish thereby is to add to his
TW chieved, but entrepreneurial action moves markets from own wealth; but there is another, unintended, result of
situations of less coordination toward situations of more successful entrepreneurial action. Success breeds imitation,

coordination. : : so there is increased competition to buy at the lower prices

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===== PAGE 2 =====

and to sell at the higher prices. The price discrepancies prospective profitability thereof and therefore decrease
narrow, more accurate perceptions of actual market condi- the amount of innovation that is actually undertaken.
tions are spread, more plans can be executed, and discoor-
dination diminishes. Any government regulation that re-
duces the possibility of gaining and/or keeping such
arbitrage profits dims entrepreneurial alertness to the states
of discoordination that give rise to the profit opportuni-
ties. As a result more discoordination will exist and persist
than otherwise would.

Entrepreneurial discovery of opportunities for profil
from arbitrage, speculation, and innovation is not the re-
sult of purposive search for knowledge, the need for which
is already known. Such purposive search is often carried
out by organized research teams and involves decisions
based on the comparison of the anticipated costs and bene-
fits of the search. Entrepreneurial discovery, on the other

Opportunities for entrepreneurial profit also exist to be hand, involves knowledge the need for which and the
discovered when there is discoordination between market usefulness of which is as yer unnoticed and unknown.’
situations at different points in time. Present coffee con- ~ Entrepreneurs, motivated by the prospect of profit to be
“sumption, for example, could continue unabated at exist- tuned in to hitherto unnoticed opportunities, discover
ing prices even though next year’s coffee crop has just been what others have overlooked, or ignored, or could not
drastically reduced by some natural disaster that ruins imagine. It is spontaneous discovery that cannot be dupli-
most of the currently growing beans. An entrepreneur who cated by planned search, for all planned search involves an

IRCA TR Sh = LJ

+
£ CCRT TAS). SATS]

first notices thy piri Neva
crop implies much higher "DriCes NeXt year than this “can
can make speculative profirs by buying u up. some ‘of the neurial discovery usu:
currently harvested crop, holding it, and reselling it next 1 think of that?’
period. Again such behavior by the more alert will inform

the less alert of such possibilities, the actions of the more Government Regulation and
alert will be imitated, the prospective intertemporal price Entrepreneurial Discovery
discrepancies will decréase, present coffee consumption Government regulation adversely affects entrepreneur-
will decrease, and prospective consumption of coffee next ial discovery in four ways. Israel Kirzner labels these effects
year will increase. The unintended result of the successful undiscovered discovery, unsimulated discovery, stifled dis
entrepreneurial action is to make the plans and actions of covery, and wholly superfluous discovery.* 9
bath buyers and sellers in the coffee market mote consis-
tent with actual market conditions than they otherwise
would be. Again, it is the possibility of speculative profit
that switches on the entrepreneurial alertness to such price
discrepancies over time. Any restriction on the. possibility
for speculative profit will dim that alertness and thus lead
to more discoordination than otherwise would exist.

Pr ouccesstul ett
ly ca causes s others to sav, “Why didn’ t

First, government regulation is often undertaken to cor-
rect some perceived failure of the private market. In the
absence of such regulation, if there were a genuine problem
that could be corrected, entrepreneurs would be alert to
discover novel and profitable ways of dealing with it.
There is a strong tendency for entrepreneurs to discover
existing efficient solutions and imagine innovations that

In both of the kinds of discoordination thus far dis make efficient solutions possible in the future. Govern-
cussed successful entrepreneurial action depends on alert- ment regulations imposed as solutions to the perceived
ness to situations that exist now or will inevitably exist in problem tend to keep that which is as yet undiscovered
the future which-hitheree :
profit and speculative profit are ained by
discovery of what is. There is another kind of discoordina-

rion which also gives rise to the possibility of entrepreneur
{al profit—discoordination between what is and what
could be. As Kirzner puts it, “Alertness must, importantly,
embrace the awareness of the ways in which the human
agent can, by imaginative, bold leaps of faith, and deter-
mination, in fact create the future for which his present acts
are designed.”? Here the entrepreneurial action that leads
to more coordination than otherwise would exist is innova- |
tion. And, as before, it is the possibility of pure entrepre- Third, government regulation often takes the form. of
neurial profit that switches on the necessary alertness to restriction of particular market activities such as mark
what could be but is as yet unimagined by anyone. Any entry by interlopers who may have new ideas about how to"
regulation that makes such innovation more difficult or do things. A major vehicle for entrepreneurial discovery,
more costly than it otherwise would be will diminish the . in -other words, is the freedom of newcomers to innovate. If

nd, it.is impossible for government: functionaries to
simulate the entrepreneurial discovery process because
they cannot capture the profits that result from successful
discovery and so will not be alert to such opportunities.
Even a bureaucrat who is dedicated to the public interest is
unlikely to discover that which is as yet undreamed of by
anyone. The best a dedicated bureaucrat can do is engage
in purposive search for that which he knows he doesn’t
know.



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union not only gets to represent those employees who

freely choose such: representation, it also gets to represent

those employees who want to be represented by some other

( union as well as those employees who do not want to be

represented by any union. The winning union gets to be a

monopolist in the provision of representation services to

\ the employees. Competition from other unions and from

) nonunion modes of representation is blocked by force of

law. Those who argue in favor of this monopoly unionism

do so by analogy with the principle of exclusive representa-

tion in Congress. The winning congressional candidate in a

3- congressional district is the exclusive representative of all

the citizens in thar district, and that monopoly represen-

tative is picked by majority vote. If it is all right to do this

in che case of Cg, these proponents of monopoly

ioni SO proper to do so in the case of
ar entirely inappror . |

priate analogy because what is proper in the case of | govern-

ment, which by definition has a monopoly in the legal use

of force, is not necessarily proper in the case of a private

association of private people such as a labor union.

Beso

"It's worse than the Austrian Army, Sire -- The Austrian economists are invading!"

gains from innovation are foreclosed by blocked entry
{government-granted monopoly) there will be less alertness

to opportunities to innovate than there otherwise would
be.

Finally, government regulation creates-its own opportu-
nities for profits from political competition. Alertness is
diverted away from market competition and innovation
toward political competition: for special favors. General

7 through entrepreneurial discovery in the private
rarket are sacrificed in favor of attempts to discover
opportunities for political gains by organized interests who
pursue narrow benefits for themselves at the expense of all
others. The positive sum game of entrepreneurial discov-
ery in the private market is gradually replaced by the zero

sum game of entrepreneurial discovery in the political mar-
ket.

Section 8(a)3 of the LMRA empowers labor unions that
‘are exclusive bargaining agents to agree with employers
that all employees either must join the union thirty days
after being hired (a union.shop) or, in other cases, may
refrain from joining the union bur still must pay union
dues (an agency shop). Not only must employees who do
not want to be represented by the union acquiesce to such
representation “‘services,” where there is a union shop or an
agency shop they must pay for what they don’t want or be
fired. Not only is the union granted a government pro-
tected monopoly, it is empowered to force people to pay
for what it monopolistically provides no matter how
poorly it performs. These two forms of union security are
The Labor Management Relations Act designed to protect the unions against dissatisfied employ-
ees who would otherwise withhold support from unions
_thac perform Dootly, One. of She x most important mecha-

This law » was originally enacted i in 1933, and it was then.

nar ar, a PIL: Tis =o.

poor performance —is blocked. Those who argue in favor
of such union security arrangements do so by claiming that
since a union by law represents all the employees of a firm,
all those employees gain from the representation. An em-
ployee who did not have to pay union dues would be a free
rider —i. e., he would get union-generated benefits for free.
Of course, these same proponents of union security are not

There are chree features of the LMRA that. have pat- willing to advocate that the law be changed so that a union
ticularly adverse effects on entrepreneurial discovery in the would represent only those employees who want such

the Wagner Act, The NLRA. was amended i in 1947 and
renamed the LMRA or the Taft-Hartley Act. The LMRA
was again amended in 1959, but those amendments in no
way “affected the features of the law that are of concern
here. While the current law is often called the NLRA, its
actual name is the LMRA, and that is the | name [ use in this
essay.

labor market: exclusive representation, union security, and representation. If the law were changed in that way there
the proscription of employer-sponsored unions. could be no free riders.
‘aa Section (a) of the LMRA states that a union that is Section 8(a)2 of the LMRA forbids employers to be
®. by a majority of employees of a firm in a union involved in the “formation or administration” of any labor
representation election shall be the exclusive bargaining union or to contribute either financial or nonfinancial sup-
agent for all the employees of that firm.’ The winning port to any labor union. This feature of the law is ad-



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dressed to the alleged role of company-sponsored unions in tion and union security together with the proscription of

the years prior to the passage of the original Wagner Act. It alternative forms of unionism involving active employer
was widely asserted that such “company unions” acted participation have blocked the discovery of superior forms _|
merely as fronts for the employer who would use them to of labor management relations that would have permitted
exploit his workers. According to union folklore, company these industries better to adapt to changing market condi-
unions were formed merely to meet the requirements of tions.

Section 7(a) of the 1933 National Industrial Recovery Act | . ) :
Because of the principle of exclusive representation

so that the “real” unions, such as the Ameérican Federation , . $-

: there cannot be active competition between two or more
of Labor, could be kept out. The truth of the matter is that p : ,
: . . labor unions at the same firm at the same time. Neither can
most company-sponsored unions were formed in an effort

. ) there be competition between union and nonunion provid-
by both employees and employers to discover effective ag
ers of representation services. Individuals cannot even rep-
modes of labor management relations. Many of them

resent themselves. Protected by its government-granted
could reasonably be regarded as early forms of what today : DY 1s government-grant

ee Lots ot 32 monopoly, an exclusive bargaining agent has less incentive
are called “quality circle” arrangements whereby employ-

. : . than it otherwise would have to be alert to possible innova-
ees participate in the formation of management decisions :
. : . tions which would benefit both managers and workers by
regarding production arrangements. Company unions | .
lowering costs and thereby allowing the firm to be a better
stressed the fact that labor and management are comple- : .
competitor. Indeed, the exclusive bargaining agent has lit-
mentary manbers of he production team The indepen > Ses
“dent Unions Si the =
idea that management and labor are . natural enemies. :. The
massive recognition strikes of 1933-1935 were, by and
large, not strikes by a majority of employees of the in-
volved firms. More often than not an outside union got a
few employees of a firm to go on strike and then the union
would send in “flying squadrons” of nonemployees to act
as pickets and to intimidate the majority of the employees,
members of company unions, who wanted to continue to
work.® The role of company unions was nicely stated by
Judge John P. Nields in his decision in the 1934 Wierton
Steel case which involved a fight between a Wierton-spon-
sored and an independent union:

© Improve its own services to employees. It does not have to
fear that dissatisfied employees will seek representation
services elsewhere or decide to represent themselves. The
only way individual employees can escape from union
abuse is to organize a majority in favor of undertaking a
lengthy and costly decertification procedure which is pur-
posively structured to make success difficult. If more than
one union were permitted to function at the same time,
and if individual employees always had the ability immedj- g{.
ately to opt out of the services provided by an ensatiofa
tory union, every union would have a keen incentive to
remain alert to opportunities to improve its services to
: employees.
It is said that this relation (between management and
workers) involves the problem of an economic bal-
ance of the power of labor against the power of capi-
tal. The theory of a balance of power is based upon
the assumption of an inevitable and necessary diver-

The principle of union security makes it even easier for
exclusive bargaining agents to survive without being alert
to opportunities to discover how better to serve the com-
mon interests of employees and employers. If employees

cannot even withdraw financial support from union offi-

sity of interest. This is the traditional old-world the- : :
cers who perform unsatisfactorily, those officers can tune
ory. It is not the 20th century American theory of that
Ny their alertness to wa 8,10 better serve themselves fs att
relation .as ‘dependent upon. n dere. pie CRE 5 : Ai YT 4

standing, and goodwill: The drt, theory i is embod SEE Srced union dues
: are frie to , undertake ‘what, from. the point of view of
ied in the Wierton plan of employee organization.’

employees and employers, are wholly superfluous discov-
The LMRA and Entrepreneurial Discovery ery processes. A symptom of this is the current enthusiasm
of labor union leaders for laws enforcing the spurious doc-
trine called “comparable worth.” If such laws were passed
wages would no longer be determined by collective bar-
gaining; they would be determined by political wage
boards. Apparently union officers now think they are bet-
ter at political manipulation than collective bargaining.”

It is no secret that many basic industries in the United
States such as autos and steel are in trouble. They are
unable to compete effectively with foreign producers, no-
tably the Japanese, and so they are declining. In response to
this decline both management and unions have appealed
to the federal government for protection against foreign

competition and for taxpayer subsidies. I contend that it is The proscription of employer involvement in labor
no accident that the industries that are most imperiled by unions cuts off an obvious avenue of entrepreneurial dis g! %
competition from the Japanese are precisely those indus- covery in labor relations. Since workers and the owners g* 5
tries that are most heavily unionized according to the stric- capital are complementary participants in production it

tures of the LMRA. The principles of exclusive representa- seems likely that if workers and management were free



===== PAGE 5 =====

—"

Re

explicitly to cooperate in experimenting with alternatives
to the existing structure of unionism, significant innova-
tions would be discovered and implemented. The Japanese

odel of labor-management relations is often held up as
he one we ought to emulate. That model is squarely based
on employer participation in labor unions. It is striking to
realize that the infamous company unions of the 1930s
could have evolved into labor management institutions
similar to those so highly regarded and recommended to-
day. If it hadn't been for the adoption of the LMRA they
might have done just that. Or some altogether different
and superior forms of unionism might have emerged. The
tragedy is that we can never know what might have been
discovered in the absence of these government-imposed
blocks to entrepreneurial discovery. All we know is that we
are the victims of undiscovered discovery.

Deregulation is in style. It has been undertaken in vari-
ous degrees in several industries such as airlines, banking,
trucking, and telecommunications. It is time to add the
labor relations industry to that list. Only by deregulation
of the labor market can the benefits of entrepreneurial
discovery be realized. The only way we can discover what
we don’t know about improving unionism is to set up the
necessary conditions for that discovery process to occur.

[A is the most necessary of all those necessary
onditions.

Footnotes

I. Israel M. Kirzner, "Uncertainty, Discovery, and Human Action,” in
Israel M. Kirzner, ed., Method, Process, and Austrian Economics, {Lex-
ington, MA: D. C. Heath and Co., 1982), Chapter 12.

2. Ibid, p. 150, emphasis in the original.

4 ibid. PP. 13-19.

5. For a “thorough description and discussion of each of the major
features of-the LMRA see Charles W. Baird, Opportunity or Privilege:
Labor Legislation i in America, (Bowling Green, OH: Social Philosophy

and Policy Center, Bowling Green State University, 1984).

6. Ibid., pp. 42-44.
7. Ihid., p. 43.

8. See Charles W, Baird, “Comparable Worth: The Labor Theory of
Value and Warse,” Government inion Review, Rnvheoming.

&

r. Baird, professor of economics at California State University, Hay-
ward, is a member of the editorial board of the Mises Institute's Journal
of Austrian Economics.

3. Israel M. Kirzner, The Perils RA Reg te lesbian Ath

“Rational Expectations” Offers
Nothing That’s Both New and True

by
Roger W. Garrison

When John Maynard Keynes’ General Theory was pub-
lished in 1936, it ignited a revolution in the teaching of
economic theory and the prescription of economic policy.
Bur Ludwig von Mises was not inclined to abandon the
then-emerging Austrian theory of the business cycle and
join the revolution. Instead, he reminded the profession of
some Old Economic Truths, and he demonstrated that
Keynes’ “revolutionary ideas” were nothing but crankish
and shop-worn inflationist schemes cloaked in new eco-

nomic jargon. Henry Hazlits, who based his own critique of

not a single proposition in the General Theory that is both

new and true.

Today, Mises would be amused if he could witness the
newest revolution in economics. The New Classicists, with
their notion of “rational expectations,” may create as
much of a stir in the closing decades of the twentieth
century as Keynes created in the middle decades. But Haz-
litt's assessment of Keynesianism applies equally well to the
New Classicism: They have nothing to offer that is both
new and true.

There is a kernel of truth in their mathematical descrip-
tion of the reactions of market participants to the policy
moves of government. But this truth is Old Truth. Adam
Smith explained over 200 years ago that the “man of
system’ (Smith’s term for the economic planner), failed to
realize that market participants would act in ways that
tended to conform to their own individual plans rather
than those of the central planner:

arrange the different ‘members of a aoe Hae with |
as much ease as the hand arranges the different pieces
upon a chess-board; he does not consider that the
different pieces upon the chessboard have no other
principle of motion besides that which the hand im-
presses upon them; but that, in the great chess-board
* of human society, every single piece has a principle of
motion of its own, altogether different from that
which the legislator might choose to impress upon it.
—from the Theory of Moral Sentiments

In the 1953 edition of Theory of Money and Credit, Mises,
in effect, made use of this insight to explain the fallacy in
the Keynesian policy of inflationary finance. At the same
time his explanation anticipated by decades the insights
that have been newly discovered by the New Classicists:



===== PAGE 6 =====

Let us leave the problem of whether or not it is monetary stimulant. In this view, the “rationality” of mar-

advisable to base a system of government finance ket participants translates directly into a “rational” alloca-
upon the intentional deception of the immense ma- tion of the economy's resources. A boom-bust cycle antici- ;
jority of the citizenry. It is enough to stress the point pated is boom-bust cycle avoided, and the fully anticipateeg ]
that such a policy of deceit is self-defeating. Here the price inflation, which is the only effect of the artempte
famous dictum of Lincoln holds true: You can’t fool monetary stimulant, is perfectly harmless.
all the people all the time. Eventually the masses : : :
) If the rational-expectations view were correct, the New
come to understand the schemes of their rulers. Then | :
: Classicism would have raised more troublesome questions
the cleverly concocted plans of inflation collapse. .
: than it seeks to answer, How do the market participants
Whatever complaint government economists may . oo Lo .
1 . acquire cheir information independent of the price system! |
have said, inflation is not a monetary policy that can
If they actually have this information, what function does 4
be considered as an alternative to sound-money pol-
: : : the price system serve! And how is it that the market
icy. It is at best a temporary makeshift. The main t
oo : participants understand the workings of the economy and
problem of an inflationary policy is how to stop it , .
) x the economy’s response to various government policies
before the masses have seen through their rulers . .
: : . . when professional economists have been debating these
artifices. It is a display of considerable naivete to : oo
unsettled questions for well over two centuries!

recommend openly a monetary system that can work
only if its essential features are re ignored by the public.

a SIRT TY pe on WH

ny from its be Innings | in Vienna ¢ over a 8 hundred

These are the old Truths that ie at the heart of che New "
tance of “expectations” in any theory of economic activity.
Classicists’ web of equations which incorporate the inter- »
lav betw erament pols p ket activit And market participants are always taken to be “rational
; een governmen icy and market activity. ) ) : .
play € poucy ¥ in the sense that they, in their own judgment, make the

best use of the means available to them to achieve their
chosen ends. But while Austrian economists today can
applaud the on-going retreat from Keynesianism, they
have little to learn from the “rational expectations” of the

New Classicism. |

Dr. Garrison, assistant professor of economics at Auburn
University, is the Mises Institute's AU Academic Advisor.

For sure, the New Classicism involves something more
than the insights of Smith and Mises. But the new ideas of
New Classicism turn out to be untrue ideas. Formally, their
equations stretch Lincoln’s dictum to the point of claim-
ing: You can’t fool any of the people any of the time. This
idea is pushed to such an extreme that some of the most
basic principles of economics are contradicted. F A.
Hayek, one of Mises’ most renowned students, identified
the price system as a “communications network’: Prices
communicate essential information about consumer de-
mands, resource availabilities, and profit opportunities.
And both Mises and Hayek saw as one of the market's
virtues the fact that it could serve its function without the
market participants having any theoretical understanding
of its principles. They also saw as one of the market's
vulnerabilities the fact that monetary manipulation could
falsify price signals; it could ‘jam’ the “communications
network’ causing the discoordination of economic activity
and the misallocation of resources on an economy-wide
basis.

These important ideas have no place in the New Classi-
cism. The “rationality” imbedded in “rational expecta-
tions” requires the market participant to know—or to act
“as if” he knows—how the economy works, to anticipate
government policy moves, and to anticipate their specific
effects upon the economy. The “rational” market partici-
pant has information —or acts “as if” he has information —
about consumer demands and resource availabilities inde-

pendent of the prices that convey this information. This is the |
information, in fact, that allows the market participant to (left to right) Professor Roger W. Garrison and Mises Institute Fellows von
sort out “real” price movements from the effects of mone- Thornton, Sten Thommesen, and Don Boudreanx at the Instizute offices on the

tary disturbances and thus to avoid being misled by a Auburn campus.



===== PAGE 7 =====

Books Hazlitt thought that the IMF system would probably

, = bring disruptively frequent and large adjustments in ex-
ww Henry Hazlitt, From Bretton Woods change rates. He apparently did not foresee the long delays

ee. in making necessary adjustments that turned out to bedevil

to World Inflation: A Study of the system. He did note in 1944-45 that the system was
Causes and Consequences being sold under contradictory interpretations—in the
Reviewed by Leland B. Yeager United States as almost a restoration of the gold standard,
in England (notably by Lord Keynes) as practically the

i opposite.

During the discussions of 1944-45, Hazlitt recommended
modifying the charter of the World Bank to permit its
making currency-stabilization loans, while delaying if not
withholding ratification of the IMF charter. He thought it
ironic that prominent bankers making the same recom-

- , mendarion were being denounced as isolationists. They,

of ‘ndividuals to collaborate i in A transactions
across as well as within national boundaries. Cooperation
among governments in managing foreign-exchange mar-
kets and in controlling trade and capital movements was
not at all the same thing.

In 1969 Hazlitt correctly predicted the early collapse of
oo oo the Bretton Woods system. He recognized the inflationary

Mr. Hazlitt here republishes 23 of his editorials in the character of the IMF's issue of special drawing rights
New York Times. The first, written in 1934, urges a return ~~ (SDRs). |
the gold standard. The others, written in 1944-45; con-
sider whether the United States should ratify the charters
of the Bretton Woods institutions—the International Bank
for Reconstruction and Development (“World Bank’) and
the International Monetary Fund. The book also includes a
journal article of Winter 1944-45 on world trade and mone-
tary arrangements and commodity controls, as well as ex-

? .
cerpes from Wil Dollars Save the World? (1947). Two col regrets that the IMF is now using its leverage “to force the

umns of 1967 and 1969 point out signs of impending extension of old and the making of new private loans.”

monetary collapse. An article gvidently wiliten shortly be- R scuing governments ae being. nu dee Jd to throw still
fore 15 August 1971, when President Mixon gciosed the

Oa CAAT tties ta encH age them
o

In his new introduction he explains why inflation cannot
continue indefinitely to “stimulate” an economy, and he
explains the perils of gradualism in stopping inflation. He
finds it ironic that the Bretton Woods institutions, al-
though having failed to achieve their announced purposes,
are “still operating, still draining the countries with lower
inflations to subsidize the higher inflations of others.” He

ay

© gola Window 10 ASE ATL (TF OTT ii arge, and IM pOSeq
‘price and wage controls, includes a reprinted Newsweek
column on the currency devaluations of 1949. Most items

to continue the very policies of over-spending that brought
on their predicament.”

are preceded by newly written summaries, The republished In his new epilogue, Hazlitt recognizes how the demo-
{ material is flanked by an introduction and an epilogue cratic process tends to create government budget deficits,
i (“What Must We Do Now?”"), both written in 1983. with ultimately inflationary consequences. The gold stan-

dard has the virtue of taking money out of the hands of
the politicians. Yer Hazlitt does not deny the difficulties of
“moving back to the gold standard (particularly, of choos-
ing the correct dollar price of gold). He urges freedom for
private parties to own gold, to trade it, and to make con-
tracts denominated in it; he would expect gold to become a
nongovernmental international money.

Mr. Hazlitt’s chief message throughout is a warning
against institutionalizing fiat-money inflation. From the
beginning, he argued that the Bretton Woods gold-ex-
change system of “economizing” on reserves would relax
any constraints on inflationary policies. So would loans by
the International Monetary Fund to countries in balance-

-payments difficulties. Countries with relatively strong

rrencies would be required to subsidize those with weak ~~ A reviewer is expected to assess a book, not just describe
ones. The provision of the IMF charter allowing uniform it. Hazlitt was prescient in seeing, from the beginning, the
devaluation of currencies against gold also was ominous. inflationary implications of the Bretton Woods system. [n



===== PAGE 8 =====

his 1971 article he even mentioned the international trans-
mission of U.S, inflation under fixed exchange rates.

New Edition of Theory and History

Yet one must admit that he did not describe the infla- A labl
tionary bias of the Bretton Woods system in adequate oo vailabic -"
detail. Briefly, the rules of the system required countries |
running balance-of-payments surpluses to buy up foreign
currencies (chiefly dollars) to keep their own currencies

from appreciating on the foreign-exchange market. Coun- cory and HOY
tries running substantial and sustained surpluses were al-
most bound to create domestic money in the process. The mere A

more the IMF helped deficit countries finance their defi-
cits, the more it threw the problem of inflationary pay-
ments surpluses onto countries with relatively prudent do-
mestic policies. “Imported inflation”, or even inflation
generated by the exchange-rate system itself, was a genuine
phenomenon. (It still is, to the extent that exchange-rate
pegging and heavy exchange-market intervention persist
amid generally : DE IE

transmission © 3 is NE wT)
worldwide last-ditch defense of the Bretton Woods system sor Murray NR rg sad pps his new ho ce to Theory
up to its final collapse in early 1973. Foreign authorities and History, “each of them making important con-
created vast amounts of local money trying to keep their tributions to the theory afd application of economic
currencies from appreciating against the dollar. Priceinfla- science. .
tion then accelerated. All this seems to be forgotten by “But Mises’. . . last great work, Theory and History
those “supply-side” economists, including editorial writers (1957), has made remarkably litele angact, It remains
of the Wall Street Journal, who nowadays yearn to revive the by far the most neglected masterwork. And yee it
Bretton Woods system. provides the philosophical backstop {to} Human Ac- “| 4
~ Being a collection of articles (mostly short ones) re- tion. It is Mises’ great methodological work, explain Ng
printed at the suggestion of his friends, Hazlitt’s new book ing the basis of his approach to economics, and pro-
is repetitious. It serves less to convey a deep understanding viding scintillating critiques of such fallacious ;
of the Bretton Woods system than to muster evidence on alternatives as historicism, scientism, and Marxian |
Hazlitt’s foresight about its consequences. : : | dialectical materialism. ce
From Bretton Woods to World Inflation further testifies to | “Austrian economies will never enjoy a genuine
Henry Hazlict's good judgment on issues of economic policy rénaissatice until economists read and absorb the vital
and to his learning in an astonishing variety of fields. Be- lessons of this unfortunately neglected work. |
sides being an economist, he has been a financial journalist, The Ludwig von Mises Institute has reprinted this |
literary critic, editorial writer, political theorist, novelist, masterwork with a new preface by Murray N. Roth- {
-and moral philosopher. (Probably my favorite among his bard, and copies will sell for $20.00 (hardback) and a
many books, which I like to plug; at every opportunity; ETON $1000 {quality p: ‘in luding postage angels 4
The Foundations of Morality.) By assembling his latest book ~~ | handling. |
and writing substantial new sections for it, Mr. Hazlitt =~ | = However, AEN readers may order copies at a spe-
continues to provide instruction and inspiration to -his cial discount price of $16.00 (hardback) or $8.00 (pa- 1
many old and new admirers. {1 perback) with no additional charge for postage and i
handling.

“If you would like to order a copy, write Theory
(hb) or Theory (p) in the upper right-hand corner of

From Bretton Woods To World Inflation: A Study of | your return card, and enclose your check for $16.00
Causes and Consequences by Henry Hazlitt is available or $8.00, plus any tax-deductible contribution for the
from the Mises Institute for $10. 95 including postage Institute's work, in 1 the enclosed postage-paid enve-
and handling. oo CL lope,

vim

© Copyright 1985 by the Ludwig von Mises Institute. Academic offices: Auburn University, Auburn, Alabama. (205) 826-2500. Policy offices: 322
Massachusetts Avenue, N.E., Washington, D.C. 20002 (202) 543-7696. Volume 6, Number 1. Editors: Don Boudreaux, Mark Thornton, John McCallie,
Sven Thommesen. Managing Editor: Judy Thommesen. Production Editor: Cynthia M. Dunlevy. Publisher: Llewellyn H. Rockwell, Jr.

8