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Capital Letters

agardner — Sat, 01 Nov 2008 08:00:00 +0000

What Do We Do About the Subsidy of History?

I concurred on one point with “The Subsidy of History” by Kevin Carson (June 2008). It is not sound to view the historical development of capitalism as though it evolved strictly by fairness, without including the vices of mankind. Surely history is better stated by Burton Folsom in The Myth of the Robber Barons that there were “political entrepreneurs” and “market entrepreneurs” (even though Mr. Carson might criticize the latter as well).

However the view that emphasizes the reestablishment of justice, by confiscating much that is owned by the wealthy, leaves out much of reality. Today, we are beset by those who advocate taking from the oil companies, solely because they make “exorbitant profits.” Then there are those who seek to restore to Mexico the American states that were once Mexican territory. Similarly, there are those who seek reparations for descendants of slaves. These approaches take the view (which Mr. Carson might share) that the issue is solely a matter of justice, rather than adherence to the rule of law.

Hence let us assume, arguendo, that everything written in “The Subsidy of History” is completely correct (which I take as viewing capitalism in its worst light). There remain other factors to be addressed. For example, much of what industry has produced has been earned. Moreover, much of the earnings of the wealthy have been redistributed through taxation (and other mechanisms) to others. So it is not simply a matter of taking from the thieves to return to their victims, but also of considering that which industry has developed and that which our government has stolen from them. Moreover, it is overreaching for a country to attempt to correct that which was done prior to a man’s life. Thus, while there was loss to a man whose father was enslaved, it is beyond the capability of society to compensate for that loss. It is more than challenging for society to adequately deal with the injustices where those involved are living and the facts obtainable. . . .

Consequently, to deal with the issues of our day, I would begin with the presumption that possession is evidence of ownership. Then, given a case brought by an injured party (to the extent that he has been harmed), full compensation should be made. Finally, each guilty party requires due punishment. To operate instead by conflicting visions of justice would require a nation not of laws but of men.

—ALLEN WEINGARTEN
Monroe Township, N.J.

Kevin Carson replies:

I agree with Mr. Weingarten that there are good elements in American capitalism. Every society in history has been a mixture of the political and economic means to wealth. But even in American capitalism, I believe the overall structure is largely defined by the political means and that genuine markets operate mainly in the interstices of the state-corporate system. A purely market system, in my estimation, would have a lot more Ralph Borsodi and Lewis Mumford, and a lot less Alfred Chandler.

I also agree that there are serious practical difficulties involved in any rectification of past injustice. But inaction carries its own cost in ongoing injustice. The only fair comparison is between the net levels of justice involved in action and inaction, respectively. I’ve already made it clear where I believe the advantage lies in such a comparison.

Capital Letters

agardner — Mon, 01 Sep 2008 08:00:00 +0000

Are Corporations Islands of “Calculational Chaos”?

According to Kevin Carson (“Hierarchy or the Market,” The Freeman, April 2008), a private business corporation is in effect “an island of calculational chaos in the market economy.” . . . Carson writes, “Those at the top make decisions concerning a production process about which they likely know as little as did, say, the chief of an old Soviet industrial ministry.” But that is not true with respect to modern corporations. They operate in an economy with private property, privately owned businesses, and a market for goods and services in which prices develop. Thus a corporation is not similar to a socialist state; it has market prices to guide it.

Carson mentions F. A. Hayek’s “The Use of Knowledge in Society,” which explains that the knowledge corporations need to plan their operations is widely dispersed among countless individuals. But Carson fails to note that Hayek explained how this information becomes available to businessmen through market prices. . . .

Businessmen make calculations on the basis of market prices not only when exchanging with other businesses but also when shifting goods and workers internally from one department to another. Almost every day, newspapers report some example of entrepreneurs making plans on the basis of market prices and using bookkeeping to determine income and outgo. . . .

It is true, as Carson points out, that government interventions—regulations, taxes, and subsidies—distort prices and the pattern of production, so that today’s prices are not truly free-market prices. Nevertheless, even such not-truly-free-market prices . . . make available to businessmen widely dispersed information and enable them to calculate fairly accurately, formulate plans, estimate costs and income, and anticipate profits and losses. Thanks to market prices and modern bookkeeping methods, our corporations do not yet operate “in a manner quite similar to the bureaucracy of a socialist state.”

—Bettina Bien Greaves
Hickory, North Carolina

Kevin Carson replies:

Most of the issues Mrs. Greaves raises were addressed in my June 2007 Freeman article, “Economic Calculation in the Corporate Commonwealth.” I refer her to it, since I cannot do her arguments justice in the constraints of a letter.

I would dispute Mrs. Greaves’s contention that a genuine price system operates within the large corporation, either as an effective mechanism for assigning values to production inputs or for aggregating dispersed knowledge. Corporate internal-transfer pricing, in the case of goods for which there is no external market, are essentially what Murray Rothbard denounced, in Man, Economy and State, as play-acting, directly comparable to the pricing Oskar Lange proposed under his market socialism. Peter Klein expounded on this at much greater length in “Economic Calculation and the Limits of Organization” (The Review of Austrian Economics, vol. 9, no. 2, 1996). Rothbard and Klein probably underestimated the extent of the problem. The majority of intermediate goods to which internal-transfer prices are assigned are product-specific components for which no external market exists.

The phenomenon Mrs. Greaves describes, of corporate management using external market prices as a guide to internal-transfer pricing, is just the kind of estimation Ludwig von Mises argued state-socialist central planners would have to resort to in assigning prices to inputs in their domestic economies. Mises, it goes without saying, regarded this as highly unsatisfactory.

Pricing based on the available supply and the valuation of purchasers under the spot conditions of the market may lead to irrational allocations given different conditions of supply and valuation within the firm. . . . But if all that matters is that some external market continue to exist, no matter how unrepresentative of conditions within the firm, then a state-planned economy ought also to work just fine with implicit pricing based on foreign markets, so long as some market exists anywhere in the world.

To address Mrs. Greaves’s other major point, on distributed knowledge, the source of the trouble is the moral hazard resulting from the separation of “ownership” from control, and of labor from management. Management’s attempts to aggregate knowledge in a hierarchy are limited by the agent’s unique knowledge. Unless the agent is a residual claimant, who fully internalizes the costs and benefits of his own actions, he has every reason (and opportunity) to take advantage of his private knowledge to the disadvantage of the principal. Management is insulated from effective external control by its use of retained earnings for most new investment and its ability to rig the internal rules of corporate governance to thwart hostile takeovers and proxy fights.

In American corporate culture, despite management’s ostensible role as agent, its normal practice is that of an Ottoman tax farmer: gutting long-term productive capabilities in order to maximize short-term profits and game its own bonuses and stock options. . . . Double-entry bookkeeping is a doubtful instrument for controlling an agent when the agent is keeping the books.

Capital Letters

agardner — Sat, 01 Dec 2007 08:00:00 +0000

Thanks to Milton Friedman’s brilliance, charisma, and diplomacy he became an ardent spokesman for many free-market reforms in this country. And now Ivan Pongracic, Jr. (“The Great Depression According to Milton Friedman,” September 2007) gives him credit for accomplishing what seems miraculous—convincing Fed officials that the Fed itself was responsible for precipitating the crash and the 1929–1933 monetary contractions that followed. But the contractions were only the spark that brought the boom to an end. Contrary to both Keynes and Friedman, the seeds of the depression were sown in the preceding boom. In fact, the seeds were inherent in the very principles on which the Fed was founded.

The Fed was established in 1913 in the hope of avoiding the banking crises that had periodically occurred because of a shortage of funds. The Fed was to create a “flexible” money supply to satisfy the “needs of business” and to serve as the lender of last resort to banks in crisis. Thus its very purpose was inflationary. It fostered “easy money” by making loans available at relatively low interest rates. The new “easy money” lured businessmen to undertake enterprises they would not have considered profitable at market interest rates. Thus business boomed. The stock market flourished. If there had been no boom, there would have been no monetary contraction. Thus the Fed’s responsibility for the depression extends to the preceding boom.

Ludwig von Mises laid the groundwork for this Austrian theory of the business cycle in his first book, The Theory of Money and Credit, in 1912. He showed that because under inflation prices would rise sharply without apparent end (threatening runaway inflation), a crisis is inevitable.

As far as I know, Friedman gave no indication that he realized that the choice between runaway inflation and depression was inherent in the very principle on which the Fed was based. But then he was an inflationist; he believed that only by constantly and steadily increasing the money supply, to keep abreast of increases in production and population size, can an economy prosper.

—Bettina Bien Greaves

by e-mail

Ivan Pongracic, Jr., replies:

Thanks to Mrs. Greaves for these interesting and important points regarding the long-running Monetarist-versus-Austrian debate over the business-cycle theory. This topic was outside the confines of my piece, but it certainly bears closer attention.

The cause of the speculative bubble that led to the stock market crash is an unresolved and somewhat controversial topic. Whereas Milton Friedman and Anna Schwartz accepted that the bubble was caused by investors, seemingly endorsing—at least partly—the Keynesian “animal spirits” explanation, Austrian economists have argued otherwise, beginning with Ludwig von Mises, F. A. Hayek, and Lionel Robbins in the 1930s.

Following in the Austrian tradition, Murray Rothbard in his 1963 book America’s Great Depression collected his own monetary data showing that the Fed engaged in a highly expansionary policy in the 1920s, contradicting Friedman and Schwartz, who claim that the Fed engaged in a basically stable monetary policy during that period.

In the Austrian account, the Fed’s expansionary policy created an unsustainable boom, with the over-expansion of credit distorting interest rates and making it impossible for investors to correctly judge the validity of different business projects, thus leading to the mistakes that manifested themselves in the stock-market crash of 1929. (Note that the Austrian explanation was not at odds with the rest of Friedman and Schwartz’s story—in fact they are quite complementary. The Austrians argue that poor Fed policy led to the bust of 1929, while Friedman and Schwartz explain how the Fed went on to magnify that bust many times over.) Friedman and Schwartz relied on conventional measures of the money supply to come to the conclusion that the pre-crash period was not inflationary, whereas Rothbard used an unconventionally broad measure to come to the opposite conclusion.

This issue has not been conclusively settled one way or another. The Freeman in fact ran an exchange several years ago between Richard Timberlake and Joe Salerno arguing over this very point, with Timberlake arguing pro-Friedman and Salerno arguing pro-Rothbard (April, May, June, and October 1999 and September 2000, all online at www.fee.org). See also Richard Ebeling’s “From the President” column in the December 2006 Freeman, where he claims that Friedman’s failure to fully grasp the causes of the crash were due to his “aggregate” analysis, which prevented him from seeing the distortions created by the Fed on the microeconomic level. More work is necessary on this debate, though I remain sympathetic to the Austrian argument.

I will take issue with Mrs. Greaves’s letter over one point: I think it is highly uncharitable—and ultimately inaccurate—to refer to Friedman as an “inflationist.” For most of his life he believed that the benefits of a commodity money (which he recognized as providing a greater check on inflation than fiat money) were outweighed by its costs (digging the metal out of the ground as well as removing it from industrial and ornamental use). He proposed his constant money-growth rule exactly to check the Fed’s inflationary power, which came with control over fiat money. But he eventually realized that that power is highly unlikely to be checked by such a rule and therefore changed his mind on this issue. Friedman was an honest intellectual, willing to admit when he was wrong. We do him—and ourselves—a disservice when we apply labels to him that question his dedication to liberty.

John Dewey and the Decline of American Education

agardner — Sun, 01 Jul 2007 08:00:00 +0000

Intercollegiate Studies Institute • 2006 • 200 pages • $25.00

Henry Edmondson describes his book, John Dewey and the Decline of American Education, as “a simple exegesis of Dewey’s writing, with commentary suggesting how his thought finds expression in contemporary American education.” He reminds us that ideas have consequences, and Dewey’s ideas have had disastrous consequences for American education over the past 50 years.

Anyone who attempts to write about John Dewey’s ideas is immediately presented with two problems. The first is selecting works from the vast corpus of writing by and about Dewey. The Collected Works of John Dewey covers 71 years of Dewey’s writing in a mere 37 volumes, while the Library of Congress lists 375 books written about Dewey alone. Edmondson, who teaches political science at Georgia College and State University, focuses on four of Dewey’s major works, Democracy and Education, Human Nature and Conduct: An Introduction to Social Psychology, Schools of Tomorrow, and Experience and Education. He also draws from a number of Dewey’s other major works in educational philosophy, political and social philosophy, and ethics, as well as a wide range of secondary source material. Overall, Edmondson’s coverage of Dewey’s thought is excellent.

The second problem is Dewey’s awful prose and ambiguous ideas. Even William James and Oliver Wendell Holmes, both admiring colleagues in the famed Metaphysical Club, recognized that Dewey’s writing was often vague and confusing. Although Edmondson agrees that Dewey was an abysmal communicator, he argues that readers can overcome Dewey’s lack of clarity by recognizing that he “subordinates his philosophy to his [progressive] politics.” Using that approach, Edmonson is able to provide a succinct overview of Dewey’s ideas without being weighed down by his writing.

Throughout the book, Edmonson highlights Dewey’s disdain for religion, tradition, and inherited values. Dewey claimed that such beliefs are at least signs of unintelligent thinking and, at worst, outright oppression by the wealthy and powerful. Philosophically, Dewey argued that, because human nature is always in flux, fixed values and beliefs are inimical to progress. Consequently, he declared that schools should no longer be a venue for teaching traditional religious and moral values. Instead, Dewey believed that schools should be places where the child’s impulse and whim rule—insofar as those impulses and whims are consistent with the values of Progressivism.

Dewey did not, however, contend that schools should be places of uninhibited activity, as many unfamiliar with his work believe. Edmondson points out that Dewey was a man blinded by his desire to see schools as the means to implement a comprehensive program of progressive social change. As a “microcosm of social life,” the school provided Dewey a convenient place to socialize students into adherents of progressive ideals, that is, collectivism and statism.

Dewey also rejected religion and traditional values in favor of encouraging perpetual experimentation via the scientific method. Edmondson sees this as a streak of nihilism in Dewey’s thought, which might be the most worrisome consequence of adopting pedagogy based on his ideas. One needs to look no further than the legion of constructivist-based programs, such as “I Like Me” and “values clarification,” to identify the kind of destructive influence Dewey’s ideas have had on schooling in the United States.

Within the classroom Dewey insisted that teachers should not impose abstract aims or external standards on their students. Instead, he endorsed learning through play and hands-on activities, and defended an ad hoc curriculum that favored neither vocational nor academic subjects. Dewey maintained that socialization was just as important as teaching essential skills like reading. Edmondson concludes that our current confusion over standards and goals is a “natural consequence of Dewey’s insistence on such fluid educational standards.”

Edmondson includes chapters on the educational thought of Thomas Jefferson and Benjamin Franklin. What might appear to be an unusual detour is actually a very instructive discussion of alternatives to Dewey. At times, Dewey insisted that he was heir apparent to Jefferson, but Edmondson shows that Dewey departed from both Jefferson and Franklin by repudiating those Founders’ shared belief that a vibrant republic requires an education designed to cultivate personal virtue. Dewey’s radicalism is nowhere more apparent than in his rejection of the Founders’ educational ideals.

Finally, Edmondson offers a number of ways that we can renounce our Deweyite inheritance. They fall into two broad categories: philosophical coherence and excellence in teaching. Philosophical coherence includes implementing reforms that restore clarity, traditional values, and the liberal arts to our schools. Edmondson also calls for the abolition of the middle-school, schools of education, and student-learning outcomes, all of which impede genuine educational innovation. He also wants to encourage excellence in teaching by maximizing teacher autonomy and improving teacher preparation.

Those aren’t bad ideas, but what we really need is the one reform that cuts the Gordian Knot—separation of school and state. Dewey’s philosophy would probably never have taken root and wouldn’t last long in an environment where parents made their own choices and spent their own money for education.

Socialism after Hayek

agardner — Sun, 01 Jul 2007 08:00:00 +0000

University of Michigan Press • 2006 • 171 pages • $60.00 hardcover; $19.95 paperback

There are very few socialists who have actually taken the time to carefully understand the critics of socialism. Beginning with Karl Marx, most socialists have either ignored the arguments of their opponents or constructed straw men to knock down.

This is what makes Theodore Burczak’s Socialism after Hayek so refreshing and intriguing. He is a socialist who has mastered Hayek’s critique of socialist central planning and concluded that Hayek was right: It is impossible to do away with private property, competition, and prices if economic rationality, efficiency, and coordination are to be maintained.

In the opening chapters Burczak explains with impressive clarity the Hayekian view of the social order. Prices are essential for a functioning economic system because they capture and convey multitudes of bits of knowledge that are dispersed among all the members of society. The price system enables each person to use his unique knowledge of his own time and place in the division of labor while coordinating his actions with those of all the other social participants.

As an extension of this, Burczak also accepts Hayek’s argument that the social order that evolves out of the interactions of the multitudes over many years and generations contains more information and wisdom than any group of intelligent planners could ever know. Hence, the idea of socially engineering a society from top to bottom is both absurd and dangerous.

Burczak defends none of the twentieth-century experiments with “socialism in practice.” He views the Soviet Union as an oppressive and exploitive system that plundered the very people in whose name the regime legitimized its power. So the reader at this point might ask, “Then what is left for a self-proclaimed socialist to defend against the Hayekian critique of political and economic collectivism?”

Burczak tries to salvage a reformulated socialism by justifying the welfare state and defending a system of worker-owned and -managed firms in place of the more traditional “capitalist” enterprise in which the businessman hires the services of workers for which they receive contracted wages.

Since Hayek emphasized that human knowledge is inherently imperfect and is decentralized among billions of individuals around the world, Burczak tries to then paint Hayek as an apostle of “postmodernist” philosophy. Since nothing can ever be known for sure and what is tentatively known is always open for revision, Burczak argues that Hayek’s case for impartial rule of law and an equality of individual rights to life, liberty, and property is totally misplaced. The rule of law, he says, is really only the interpretive opinions and ideological biases of judges who serve “class interests.”

Since law cannot be impartial and “objective” in its principles and applications, then we should rely on the greater or more inclusive diversity of democratic politics to construct a consensus about what are the “rights” and social “duties” of each member of society. Since there can be no final “truth” concerning what should be considered the content of human rights, we will merely have a floating and ever-changeable group opinion about these things.

Burczak posits a consensus that we all have obligations to each other to assure a meaningful life worth living, which means a mandatory redistribution of wealth to guarantee everyone a minimum standard. He never deals with how this will be enforced, though of course there is no way to establish this guaranteed standard of living other than through compulsory taxation. Because there are no final or ultimate moral standards, the recalcitrant who may have to be brutalized, imprisoned, or even killed to see that he “contributes” his “fair share” will not have been coerced or murdered but merely “conversed” with in the continuing postmodern dialogue over what is socially good or just.

Of course, even if we accept the premise that as human beings we have a certain ethical obligation to assist our less fortunate fellow human beings to have a fuller life, it does not follow that this requires the welfare state. Indeed, one can easily apply Hayek’s arguments concerning the division of knowledge in society to argue that only individuals familiar with the particulars of the time and place in which they live will have sufficient usable knowledge to assure that those deserving of charity actually receive it in the most effective way. The welfare state has the same inherent organizational weaknesses as all other forms of government planning: it is imposed from the top down and must have some degree of a “one-size-fits-all” design. Private charity sets in motion what Hayek called the “discovery procedure” of competition. In the rivalry for voluntary support from the citizenry, private charities have to demonstrate their ability to better achieve the goals for which they have been established. Thus the likelihood of actually solving these “social problems” is increased.

The other element to Burczak’s “post-Hayekian” reconstruction of socialism is his case for worker-owned enterprises. He merely takes for granted all the ancient Marxian theoretical baggage concerning necessary labor (that amount of work and output needed for the worker to sustain himself and his family) and surplus labor (the amount of work and output in excess of this minimum). Through the wage contract, Burczak states, the capitalist-owner of the enterprise “demands” a portion of the “surplus” output that the workers’ own labor produces and therefore “exploits” them by that amount, with this being the “profit” the capitalist keeps for himself.

All of this was answered long ago, in the late nineteenth century by another Austrian economist, Eugen von Böhm-Bawerk. He showed that in the long run, in a competitive market, there are no profits. Entrepreneurial rivalry results in resource prices (including wages) being bid up as enterprisers attempt to expand output where profits exist; then when that greater output is offered on the market, consumer prices are bid down in the attempt to attract more customers until profits have been competed away.

Even in the long run, however, there is normally a discrepancy between what entrepreneurs pay for resources (including labor) and what the products sell for. But Böhm-Bawerk demonstrated that this is the implicit interest earned by businessmen-employers for advancing wages to their workers during the production process. Since all production takes time, if those employed in the enterprise are not to wait until the product is ready for sale in the future to receive their wages, then someone must pay them today for work that will not result in a completed product until tomorrow. To forgo other uses for which he could have applied his savings, the businessman-employer receives a “premium” over even the long-run costs of production as compensation for “waiting” until the product is in finished form and sold to the buying public.

The other element that Burczak completely misses is that production does not just happen. It almost always requires a guiding mind that envisions a demand for a product in the future, who imagines ways of combining the factors of production to transform them into a useful finished product, and who sees ways of effectively organizing the enterprise to achieve this end. In other words, the entrepreneur is the element missing from Burczak’s analysis, and therefore he fails to fully understand why what most enterprises produce cannot be the result of some joint democratic decision-making process by the worker-owners.

Nothing prevents workers from pooling their savings and other resources and forming jointly owned firms among themselves. But we see few instances of this. This suggests that many people do not want to take on the time, risk, and uncertainties of being a boss. They want to have the greater certainty of a contracted wage for which they do a specified amount of work each day, while someone else bears the costs of planning, overseeing, and directing the enterprise.

If workers did see the benefits and advantages to more widely participating in worker-owned firms, it would not be necessary for Burczak to make the case for political prohibition of traditional employer-employee contractual relationships to force worker-ownership on “the masses.”

While a worthy attempt to honestly confront the challenge that Hayek made against socialism, Burczak’s analysis ends up simply demonstrating how hollow the socialist ideal remains, even in this reformulation.

Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy

agardner — Tue, 01 May 2007 08:00:00 +0000

Doubleday • 2006 • 320 pages • $26.00

Economics professors often present public-policy issues as though well-intentioned leaders pull the levers of government to maximize the welfare of the people. Bruce Bartlett in his new book, Impostor, tells the dark side of public policy: what happens when a president pulls the levers of government for short-term political gain with no concern for the long-term consequences to public welfare.

Impostor lays out numerous charges that Bush administration economic policy has been driven by short-term political goals. Early on, a 30 percent tariff was slapped on steel imports. The main political goal, according to many observers, was to shore up political support for Republicans in Ohio and Pennsylvania, where some companies and workers would benefit from high steel prices. The tariff also helped Bush work with protectionist Republican members of Congress. In what Bartlett calls doublespeak, the administration said that the tariff was a step toward free trade.

Put aside the question of what President Bush’s motivations actually were. Does our structure of economic policy allow the president to conduct policy for short-term political gain, even to the detriment of the welfare of the public? The answer is sadly yes. Although one can fault a president who uses such tools, the greater fault lies with the Congress, which put those tools in place, and with the public, which tolerates the system.

As another example, the President’s push for a larger federal role in education is described by Bartlett as an effort to bribe soccer moms into supporting him. This decision didn’t convince advocates of a larger federal role in education that Bush was their man. Instead, it merely moved the battlefield so that two sides fought over how to expand the federal role. That the Constitution prescribes no role for the federal government in education was of no concern to the administration.

Similarly, Bartlett sees the President’s support for the Medicare drug benefit as Bush’s attempt to buy the backing of senior citizens. Bartlett describes the huge unfunded liability created by this benefit as another case of long-run expansion of government undertaken just for fleeting political advantage.

Bartlett’s view of President Bush and other recent White House occupants is enhanced by conclusions reached by Public Choice theory. One key conclusion is that politicians will seek programs that have benefits concentrated in a small, cohesive group and costs spread over a population so large that each person’s share is inconsequential. Even if the costs far exceed the benefits, so long as the benefits are concentrated and the costs are diffused, political gains are achieved. Again and again, the Bush administration provides examples.

Even the most partisan supporters of the President must recognize that our current structure of economic policy presents the opportunity for bad policy by vote-seeking incumbents. This is the most valuable lesson from Impostor.

Although Bartlett wrote his book as an attack on President Bush, along the way he does an excellent job of explaining economics. His discussion of tax policy—incentive effects versus Keynesian theories—is first class. His discussion of the benefits of foreign trade will help any economics student.

For those interested in political battles, Bartlett draws some sad conclusions about how to fight the increase in government. The old-fashioned Republican approach had been to argue for higher taxes to lower budget deficits. The Reagan administration followed a different course: cut taxes to stimulate the economy and to “starve the beast.” In the wake of the Reagan tax cuts, the deficit blossomed and Congress felt the need for fiscal restraint. Thus was born the idea that tax cuts would reduce the size of government. According to Bartlett, though, Republicans during the George W. Bush administration assumed that all they needed to do to restrain government was to cut taxes. They never followed the tax cuts with fiscal restraint. As a result, the government has grown larger since the Bush tax cuts, not smaller.

Although Impostor offers valuable lessons in policy and economics, it’s not without some drawbacks. First, some readers will be turned off by the strident tone. In addition, Bartlett spends a fair amount of space laying out what the GOP needs to do to regain political power after the current anti-Bush backlash. That will be irrelevant to many readers who have become disillusioned with partisan politics.

Moreover, Bartlett portrays President Bush as if manipulation of economic policy for political purposes is unusual. A similar book could have been written about almost every past president, Democrat or Republican.

The ultimate takeaway from Impostor is simple, although Bartlett doesn’t express it directly: those of us who believe in limited government should not put our faith in politicians.

Immigrants: Your Country Needs Them

agardner — Tue, 01 May 2007 08:00:00 +0000

Little, Brown • 2006 • 374 pages • $28.00 (Canadian)

Between 1840 and 1920, over 60 million people emigrated to North and South America, mostly from Europe . More than 40 million of them came to the United States . They came to escape political oppression, religious persecution, and economic stagnation due to the heavy hand of government on commerce, trade, and industry in the Old World.

During most of this time neither passports nor visas were required. In 1942 the German free-market economist Gustav Stolper referred to this earlier period as the era of the three freedoms: the free movement of men, money, and goods. At a cost as little as the price of a steerage ticket on a ship, anyone could make his way to the shores of America to have a second chance in life—and who, at some time, has not wanted a second chance?

Those immigrants often clustered in port communities made up of people from the same part of the old country. This provided a private safety net that enabled the new arrivals to become acclimated to their new home. Countrymen who had arrived earlier often helped the newcomers obtain shelter, find a first job, start to learn the language, and adjust to a different culture.

Of course, there were opponents of free immigration even during these relatively laissez-faire days of the nineteenth century. They argued that immigrants were arriving in too large a number and that they would never assimilate. It was said that many of the Germans who arrived in the 1860s and 1870s only wanted to speak German, listen to military-band music on Sunday afternoons in the park, and seemed to drink a lot of beer. Then it was said that the Poles and Italians who arrived in large number in the 1880s and 1890s could never be “real” Americans—they were all drunkards and “Pope worshipers,” just like those Irish who had arrived even earlier! Then it was the turn of the Eastern European Jews, who came to America in large number in the 1890s and the first decade of the twentieth century—they were accused of being countryside penny-pinching peddlers, as well as being the “Christ killers.”

Well, all these people came, and many more from many other lands. We are their lucky descendants. They crossed oceans, gave up all they knew in the old country, so they and we, their children, grandchildren, and great-grandchildren, could be freer and more prosperous than if they had never left their homes. They helped make our unique melting pot of many cultures, languages, religions, and ethnicities a combination that produced something new and special— America.

The nineteenth-century period of free immigration was a momentous epoch in the history of mankind. It is too little understood or appreciated in the new era of legal restrictions on the movement of people.

In his new book, Immigrants: Your Country Needs Them, Philippe Legrain tries to explain the benefits that may be expected from permitting a wider door to global migration. He reminds us of the cost that is borne today by those trying to have their second chance. Hundreds of would-be new arrivals to the United States and the European Union never get that chance because they die in the desert or in the waters off southern Europe as they attempt to get through the border patrols determined to keep them out. A vast black market in human beings feeds corruption, abuse, and violence as the poor and the oppressed try to make it to nations with greater freedom and economic opportunity.

But Legrain’s main point is not to tug on our heartstrings by pointing to the tragedy and suffering of modern illegal immigrants—though he wishes us not to forget this human cost. Instead, he wants us to appreciate the economic and social benefits from taking advantage of what new people can offer to the developed and more prosperous nations of the world.

First, he explains that America and Europe can gain from the arrival of low-skilled workers. In fact, our native populations have become so well educated and wealthy by global standards that most of our fellow citizens are unwilling to do many jobs that need doing for an economy to run smoothly. Who will clean our office buildings, be the nannies for our children, serve as orderlies in our hospitals, mow our lawns, be waiters in our restaurants, or do hundreds of other low-paying but essential tasks? Each earlier wave of immigrants to the United States filled these jobs as the first step to a new life in America . If immigrants can’t get on the bottom rung, many tasks may not get done or will cost far more, for they will be done by people who could be profitably employed at more productive jobs.

Legrain understands why there is a greater openness to higher-skilled immigrants who are considered more likely to financially pull their weight and significantly add to the productivity of the workforce. But he argues that it is economically absurd for governments to try to micromanage the selection of new entrants to the workforce. In this case some bureaucrats and politicians, such as in Australia, decide what sectors of the market are or should be expanding and then screen for immigrants who would fit those sectors. Central planning works no better in picking people than in guiding the manufacture of hats and shoes. The market is its own natural attractor for potential immigrants and works far better than the stiff and usually misguided and politically motivated hand of the government.

He also points out that immigrants do not “steal” jobs that otherwise would go to Americans. If there were a fixed number of jobs to be filled, then how would native-born Americans find employment when they reached working age? The fact is there are always more wants that can be satisfied if we have more resources available to do the work—and this includes the two hands and mind that come with each new member of a society. Flexible markets and competitive prices and wages are always able to accommodate greater supplies of useful things, including labor, that can improve the human condition. Furthermore, this “stealing our jobs” view suffers from the “lump of labor” fallacy, namely, that all labor is perfectly interchangeable. Labor skills are just as diverse as resources, raw materials, and specifically designed capital equipment. They complement each other in the market to expand the ability to meet consumer demands. Thus new immigrant workers most often enhance the productivity and demand for other workers in the market, increasing the opportunities of almost everyone in society.

Legrain also challenges the often-expressed fear that current waves of immigrants are threatening the cultural and national identity of the country. He points out that there is no homogeneous American culture. Each new group has both assimilated and added a new element to the cultural mix. Even when most immigrant waves came from Europe in the nineteenth century, they represented a wide variety of languages, religions, cultural heritages, and ethnic backgrounds. They and their descendants have made America different from what it had been. Each generation makes its society distinct from what its grandparents would have taken for “normal” and “American.” We should not be afraid of such changes, for future generations will look back on a vast number of them as improvements.

Furthermore Legrain contends that like virtually all earlier waves of immigrants, those coming to America today will slowly but surely end up integrating into the society. The first generation has difficulty with the language, but their children are bilingual, and the grandchildren often do not speak (or do not speak well) their grandparents’ original language. The immigrant still feels a strong tie to the old country, where he still has relatives, friends, and all his childhood memories. The immigrant’s children may visit the old country and have a hyphenated sense of identity—Polish-American, or Italian-American, or Irish-American, or, today, Dominican-American. But the grandchildren have far less or no such identity. They are just “American.”

Finally, Legrain looks at the evidence and shows that the impression that immigrants—especially illegal immigrants—place an excessive burden on the services of the welfare state, and therefore on the American taxpayer, is not borne out by the facts. Even if it were otherwise, legalizing the illegal immigrants would end their underground existence, making them eligible to be fully plundered as taxpayers like the rest of us.

The immigration issue will not go away. Indeed, it will continue to challenge the thinking of Americans and the policies of the government here and in other parts of the world. With all the fears expressed about the dangers from greater immigration, it is important that someone has articulated the benefits that a country might expect from having more-open borders. Philippe Legrain does an excellent job in explaining those potential gains, and his book offers important insights into this ongoing debate.

Modern Liberty and the Limits of Government

agardner — Sun, 01 Apr 2007 08:00:00 +0000

W.W. Norton • 2007 • 217 pages • $24.95

In calling his book Modern Liberty and the Limits of Government, Charles Fried, professor of law at Harvard University and former solicitor general of the United States in the second Reagan administration, was inspired by the early nineteenth-century French classical liberal Benjamin Constant. In 1819 Constant delivered a lecture in Paris called “The Liberty of the Ancients Compared to the Moderns.” Among the ancient Greeks, Constant explained, freedom meant the ability of the free citizens of the city-state to debate and vote on the affairs of their community.

Liberty, in other words, referred to collective decision-making to which all individuals were bound, since through the “democratic” process they had given their consent—regardless of how tyrannical the outcomes might be for their personal lives and fortunes.

Constant contrasted this majoritarian and communal conception of “freedom” with the nineteenth-century classical-liberal ideal of liberty: “It is the right of everyone to express their opinion, choose a profession and practice it, to dispose of property, and even to abuse it; to come and go without permission, and without having to account for their motives or undertakings. It is everyone’s right to associate with other individuals, either to discuss their interests, or to profess the religion which they and their associates prefer, or even simply to occupy their days or hours in a way which is most compatible with their inclinations and whims.” For the moderns, Constant said, liberty consisted of “peaceful pleasures and private independence.” Modern men want “each to enjoy our own rights, each to develop our own faculties as we like best, without harming anyone. . . . Individual liberty, I repeat, is the true modern liberty.” (See my review of Constant’s 1815 book, Principles of Politics Applicable to All Governments, in the June 2004 Freeman.)

Fried wants to restore Constant’s ideal of liberty against the statist trends of our time. Indeed, in his preface he expresses hopes that his book can do for the contemporary world what F. A. Hayek’s Road to Serfdom did more than 60 years ago in helping to stem the tide of government power. Unfortunately, while many parts of his book are insightful, Fried shows that he, too, has been captured by a great deal of the “ancient” notion of liberty.

He defends the idea of self-ownership as the most fundamental basis for individual liberty. He argues that the most intimate aspects of self-ownership are control over our own minds and bodies. What meaning can be given to liberty if the individual is not respected and secure in his right to think, speak, and write? If you don’t own your own mind and have the liberty to express your thoughts free from government control, then at the deepest level freedom does not exist.

Likewise, if you don’t own your own body, then surely you are a slave to whoever claims the right to use and abuse your physical person. One of the most intimate forms of such physical self-ownership, therefore, is the liberty of consenting adults to choose sexual partners and sexual acts. Fried therefore defends both heterosexual and homosexual relationships as a fundamental right of any individual to decide with whom to share such intimacy—even though some people will find another’s choice of partners offensive.

The trouble arises, Fried says, when self-ownership over mind and body is extended to the physical objects around us. Fried understands that without private property, all issues of self-ownership fall to the ground. What meaning is there to freedom of speech if individuals may not have some degree of ownership and control of the resources through which speech may be expressed? He understands that property has been the engine for prosperity and innovation that has raised man up from barbarism. And he emphasizes that such property rights, like the rule of law in general, must be secure and stable if we are to be able to plan for the future and have trust in our dealings with each other.

To secure rights under the law, Fried argues, there must be a government to serve as the arm of enforcement. Thus we have an obligation to part with a portion of our wealth and income to fund the provision of that security. In addition, he insists that it is the duty of government to supply a variety of “public goods,” such as roads, parks, and streets, that may not get funded without taxation because some may try to free-ride on what others contribute.

However, the public-goods argument soon takes Fried down a slippery slope. From roads and streets he extends this rationale for government activity to education, health care, and a variety of other items in the grab bag of the modern welfare state. How does his slide down this slope begin? While wishing to defend Constant’s conception of individual liberty against state compulsion, he cannot escape the rationale for these redistributive schemes.

We may be individuals, but we are born and nurtured in a community of other human beings. Our language, beliefs, ideas, customs, and culture all come from the wider social order to which we belong. Fried contends that we have duties to this wider community without which we would not be who we are. Common decency requires us to not turn a blind eye to the hardships, misfortune, and maltreatment of our fellow men. The state, Fried believes, is the means through which we all participate in and contribute to what we owe to that larger community.

What Fried misses in his argument about the nature and role of government is that the state is not the same thing as society. The state is that agency in society that either is delegated or usurps the legitimate use of violence to enforce its laws. But society is the wider concept that represents the associations individuals form among themselves. It is through these institutions of civil society that free men cooperate for mutual benefit and furtherance of shared values.

The role of government in a truly liberal order is to secure and protect the rights of free persons so they may go about their peaceful business. Government becomes especially dangerous to liberty when it exceeds those limited duties. It by necessity diminishes and finally threatens the existence of liberty when it replaces associations and activities of free persons with its own monopoly control and exercises its regulatory or redistributive power through the threat or use of force.

Fried has bought into the statist premise that coercion must replace consent if enough people don’t act in decent and moral ways toward others. But there is no moral conduct when the individual has no choice in the matter other than to obey those who hold the threat of force against him. Nor can we be sure that the best means have been found to further those goals of “social” concern when the government taxes and distributes portions of people’s incomes rather allowing those individuals the freedom to make their own decisions and commitments.

What Fried and many others are trying to do is devise ways of making freedom compatible with the welfare state. Accept a certain minimum of such “social work” by the government, resign yourself to paying some part of your income to finance them, and then be content with the “liberty” to use what’s left in our pockets. The task, in Fried’s view, is somehow to limit what government does in these areas so it doesn’t become too tyrannical and overbearing.

Thus by a roundabout route, Fried returns to the liberty of the ancients over the “modern” liberty of individuals so brilliantly defended by his hero Constant. In fairness, it must be said that Fried challenges and undermines many of the more recent arguments for greater state control. He often does so in creative and thought-provoking ways.

Nevertheless, his book is more an attempt to reconcile liberty with the welfare state than a strong case for extending liberty by reducing and abolishing the compulsory redistributive political order in which we live.

The End of Poverty: Economic Possibilities for Our Time

agardner — Thu, 01 Mar 2007 08:00:00 +0000

Penguin Press • 2005/2006 • 396 pages • $27.95 hardcover; $16.00 paperback

In the mid-nineteenth century Baptist preacher William Miller predicted the second coming of Christ on March 21, 1843, or between that date and March 21, 1844. When Christ failed to show, Miller “discovered” that the actual date of arrival was October 22 of that same year. This day came and went with nary a hint of Christ’s arrival. Undeterred, Miller awaited Christ’s return until his death in 1849. As Miller was to write in his memoir, “Were I to live my life over again, with the same evidence that I then had, to be honest with God and man, I should have to do as I have done.”

I was reminded of this tragically comic event as I read Jeffery Sachs’s The End of Poverty: Economic Possibilities for Our Time, a purported “blueprint” to solve global poverty. In clear, concise, and at times convincing prose, Sachs shames the world for not doing more to promote development in poor countries and argues for an increase in foreign aid to jump-start the growth process. His obdurate faith in foreign aid contradicts the majority of empirical evidence gathered over foreign aid’s 60-year modern history. Undeterred, Sachs forges ahead with a flawed strategy.

Sachs uses as his blueprint the United Nations Millennium Project, which, among other things, seeks to halve the number of individuals living on less than $1 a day and reduce by two-thirds the mortality rate for those under 5 by 2015. Ambitious stuff, no doubt. After a couple of hundred pages of autobiographical ruminations, Sachs finally outlines his course for reaching these goals: money, money, money. Rich countries, writes Sachs, have consistently shorted the developing world in foreign aid. Accordingly, he called on the U.S. government and their Western counterparts to increase “Official Development Assistance” to 0.44 percent of GDP in 2006 and to 0.54 percent by 2015. Approximately $7 billion needs to be spent by 2015 on scientific research to address climate change, energy production, and health care in poor countries, Sachs writes.

For people familiar with the history of foreign aid, this simply sounds like more of the same failed policy that development “experts” have been pushing for decades. Since 1960 Africa has been the constant recipient of development aid from the West, but standards of living are no better than before. There are now several governmental and quasigovernmental agencies specifically tasked with helping lift poor countries out of poverty. The U.S. government alone has spent over $500 billion in development aid. Sadly, there’s little evidence that any of these international welfare programs have done anything for sick and hungry people. As economist Peter Boone concluded, “Aid does not significantly increase investment and growth, nor benefit the poor as measured by improvements in human development indicators, but it does increase the size of government.”

If foreign aid fails to bring about growth, what will? According to MIT economists Daron Acemoglu and Simon Johnson and Berkeley political scientist James Robinson, “Economic institutions encouraging economic growth emerge when political institutions allocate power to groups with interests in broad-based property rights enforcement, when they create effective constraints on power-holders, and when there are relatively few rents to be captured by power-holders.” Douglass North made much the same point in his 1993 Nobel Prize lecture: “Institutions form the incentive structure of a society and the political and economic institutions, in consequence, are the underlying determinant of economic performance.” In short, a constitutionally limited government that respects property rights and promotes the rule of law is the best foundation for economic growth.

Unsurprisingly, the world’s poorest countries fail to provide these basic functions. Law, instead of being a tool that provides security and reliability, is arbitrary and selectively enforced. The right of property is nonexistent, and trade, often the engine of growth, is tightly controlled by the state. In much of Africa, for example, high barriers to trade are the norm. As one World Bank study found, “African tariffs are more than three times higher than those in the developing countries with the highest growth rates and more than five times higher than those in OECD countries.”

With all the book’s failings, however, the optimistic message should not be discarded. Sachs is correct that we have the tools and the knowledge to end extreme poverty. But the world’s leaders—and one of its better-known economists—are not interested in the one proven recipe for economic progress. Instead of heeding Sachs’s advice, policymakers would do better with that of Adam Smith, who in 1755 wrote that “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.”

Re-Thinking Green: Alternatives to Environmental Bureaucracy

agardner — Thu, 01 Mar 2007 08:00:00 +0000

Independent Institute • 2005 • 440 pages • $22.95 paperback

Readers of The Freeman don’t need to be reminded that freedom works better than coercion, but when I hike a wilderness trail I sometimes think there might be some small role for government in protecting the environment. If you’re inclined to drift in that direction, Re-Thinking Green provides the antidote. Robert Higgs and Carl Close have collected 22 articles that cover the gamut of environmental issues—population, global warming, endangered species, coastal management, urban planning, air pollution, and energy. The common theme is the explanation of how the good intentions of environmental groups, policy makers, and bureaucracies fail to produce improvements in the environment. Since it isn’t possible to do justice to each chapter, I have chosen three examples to provide the reader a flavor of this gem of a book.

Elephants occupy a special place in most of our hearts, and they’re especially appealing to children. Think of Babar and Dumbo. Environmental groups have converted many to their cause by describing in vivid detail the road to elephant extinction. As a result, the 1989 international ban on the ivory trade was celebrated as a great environmental victory. Yet this ban was passed over scientific and economic objections by leading conservationists who demonstrated that it would harm elephant populations. How did this harmful ban pass in the face of scientific and economic evidence?

William Kaempfer and Anton Lowenberg’s article, “The Ivory Bandwagon: International Transmission of Interest-Group Politics,” provides the answer. The crux of their analysis is that environmental groups observed that the “save the elephant” crusade brought in truckloads of money and busloads of new members. Therefore, leaders of those organizations turned a deaf ear to the scientific and economic evidence and joined the competition for funding and membership. All the better if elephant populations suffered—just more evidence of the need for activism.

Energy has been a national concern for decades, and when gasoline topped $3 a gallon in 2006 it became a national obsession. The media often provide the public with a melodrama featuring environmental groups protecting pristine wilderness from being despoiled by greedy, profit-hungry oil companies.

In “To Drill or Not to Drill: Let the Environmentalists Decide,” Dwight Lee argues that the incentives provided by private property rights help us to solve the conflict over drilling without the good-guys-against-bad-guys melodrama. Lee notes that an environmental group such as the Audubon Society opposes drilling in the Alaska Arctic National Wildlife Refuge (ANWR) because it is publicly owned land; for Audubon, the risk of an oil spill is a cost not balanced by any benefit.

On the other hand, give the Audubon Society private property rights and its incentives and behavior change. Proof of this proposition need not rest on economic theory because the Audubon Society owns 26,000 acres in Louisiana called the Rainey Wildlife Sanctuary. This area also happens to have deposits of oil and natural gas, and the Society allows production on its property. It has concluded that an estimated $25 million in annual royalties is worth the small chance of environmental damage. Lee notes that environmentalists’ “adamant verbal opposition to drilling in ANWR is a poor reflection of what they would do if they owned even a small fraction of the ANWR territory containing oil.”

The lessons learned by the collapse of the Soviet and Eastern European communist systems, due in large part to the failures of central planning, is lost on advocates of “smart growth.” Randal O’Toole notes in “Is Urban Planning ‘Creeping Socialism’?” that our urban areas are experiencing socialist planning on a grand scale through the use of extreme forms of zoning regulation. Planners and their political allies want more power to force the rest of us to live urban lifestyles of their choosing. Smart-growth advocates press local officials to require high-density and “affordable” housing. Autos in these centrally planned smart-growth cities are nearly regulated out of existence. Limits on parking, narrow streets, and an end to new road construction are designed to increase traffic congestion and encourage (read: force) people onto public transit.

In the final analysis, smart growth is a threat to individual freedom because it’s an attempt to use government coercion to reverse two great liberating trends of the twentieth century: increased individual mobility provided by inexpensive autos and the desire for increased privacy provided by larger homes and lots.

Re-Thinking Green is the indispensable handbook to consult the next time you need to win an environmental debate.